Commercial Law Part 18

HOMICIDE.--Homicide is the killing of a human being, and is divided into excusable, felonious, and justifiable homicide. The distinction between excusable and justifiable homicide is very slight and perhaps of little utility. Where either exists, a homicide takes place under such circ.u.mstances that the party cannot strictly be said to have committed the act wilfully and intentionally, or if he does commit it with full intention, under such circ.u.mstances of duty as to render the act performed not a felonious homicide. A felonious homicide is committed wilfully and under such circ.u.mstances as to render it punishable. Murder is the wilful killing of any person with malice aforethought. In some States, by legislative enactments, murder is divided into degrees, as murder in the first degree and murder in the second degree. The penalty for murder in the first degree is death, or in a State where capital punishment is abolished, life imprisonment. There are various other distinctions between these two forms of murder which must be ascertained from the statutes themselves.

MANSLAUGHTER.--Manslaughter is the unlawful killing of another without malice, either express or implied. Manslaughter is also frequently divided into different degrees, and the punishment varies accordingly. A reference to the State statutes is necessary, as in murder, to know what the local law is.

BURGLARY.--Burglary, as a common law offense, is the breaking and entering of a dwelling house of another, in the night time, with the intent to commit a felony therein, whether the felony be actually committed or not. But in most jurisdictions the offense has been extended by statute so as to include breaking and entries which were not burglary at common law. Unless changed by statute, it must be committed in the night time, and there must be both a breaking and an entering.

Breaking a window, taking a pane of gla.s.s out, or bending the nails, is a breaking. Cutting a wire netting on a screen door is also a breaking. In such cases a screen door is not to be considered as a mere protection against flies and mosquitoes, but as a part of the building.

As to whether opening a door or a window, already partly open, const.i.tutes a breaking, the cases are in conflict. Without the intent to commit a felony, breaking and entering is a bare trespa.s.s, which would not be a crime. The felonious intent must exist at the time of the breaking and entering. Hence, if it can be proved satisfactorily to a jury, that a man broke into a house for a night's lodging only, he would not be guilty of burglary. As in homicide, reference must be made to the local statutes for the actual definition of burglary and its punishment in that jurisdiction.

FORGERY.--Forgery is the false making of an alteration of a writing to the prejudice of another man's right. Forgery may be committed of any writing, which, if changed, would operate as the foundation of another man's liability. Hence a check may be forged, an a.s.signment of a legal claim, an indors.e.m.e.nt on any negotiable doc.u.ment, an acceptance of a bill of exchange, a letter of recommendation, a railroad pa.s.s or railroad ticket. The penalty for forgery and various other acts of which it may consist, are so purely statutory as to make any further comment useless.

LARCENY.--Larceny is the felonious taking of the property of another, without his consent and against his will, with the intent to convert it to the use of the taker. The taking must be with criminal intent, but not necessarily for the sake of gain, although the property must be of some value, however slight. The taking must be against the consent of the owner, and if the consent is given, although obtained by fraud, the crime is not larceny. Larceny relates only to personal property. Hence the statement made falsely concerning A: "you are a thief. You stole my marle" (marle being a kind of earth), is not slander, because it is not a charge of a crime involving moral turpitude, as real property is not the subject of larceny. Larceny is generally divided into petty larceny and grand larceny, the difference between the two being generally the amount involved, which varies with the local legislation.

ROBBERY.--Robbery, at common law, is the taking, with intent to steal, of personal property in possession of another, from his person or in his presence, by violence or by putting him in fear. In a majority of jurisdictions, statutes have been enacted defining robbery substantially in accord with the common law. It is not necessary that the property taken should be the property of the person from whom it is taken. As in other crimes, there must be a criminal intent, and so where, in an indictment, the offense was charged as robbery, but as proved was, at most, an improper and rude act, and intended only as a joke, it was held that no robbery had been committed.

CHAPTER XIV

Miscellaneous

INSOLVENT DEBTORS--"GRAB LAW."--When a debtor is insolvent there are several things that he may do. In the first place he may do nothing. He may let his creditors try to get any money out of him if they can, and in general let the creditors take the laboring oar. Where there is no bankruptcy law prevailing, either State or Federal--and that was the situation in many of the States of the Union prior to the pa.s.sage of the present National bankruptcy law--a debtor might get along that way for a long time. That is one thing he might do.

COMPOSITION WITH CREDITORS.--The second thing the debtor may conceivably do is to try to make a composition with his creditors. Though it is the law that receiving a smaller sum will not discharge a liquidated and undisputed debt for a larger amount, even if it is so agreed, an exception is made in the case of a composition where a number of creditors agree that each of them will take a smaller sum for his claim.

The debtor may try to get his creditors to do that, and occasionally he succeeds.

GENERAL a.s.sIGNMENTS.--A third thing which he may do is to make a general a.s.signment of all his property to trustees in trust to pay his creditors ratably. Such an a.s.signment is not valid in Ma.s.sachusetts, though in most States it would be, if free from fraudulent incidents. In Ma.s.sachusetts it would not prevent his creditors, or any one of them, from attaching his property just as if it had not been a.s.signed, but if creditors a.s.sent to the a.s.signment then, to the extent of their claims, the a.s.signment becomes valid. In other States the a.s.sent of creditors is presumed if the a.s.signment is not fraudulent, and therefore without any actual a.s.sent the situation is the same as in Ma.s.sachusetts after a.s.sent of all the creditors.

FRAUDULENT INCIDENTS IN GENERAL a.s.sIGNMENTS.--In every State a general a.s.signment under certain circ.u.mstances will be regarded as fraudulent against creditors. Such a conveyance may be treated as void by the creditors, and the property conveyed seized by them as if the debtor had made no conveyance. Some of these incidents which may make a general a.s.signment fraudulent may be noted. If the a.s.signor was solvent when the conveyance was made, the transaction is fraudulent, for if he has sufficient a.s.sets to pay his debts, the only object the a.s.signment can have is to prevent them from being paid at once, and compel the creditors to wait until the a.s.signees under the deed realize upon the property, that the debtor holds, at better advantage than if a forced sale were made at once. If the a.s.signees are given unlimited power to continue business it is also fraudulent, since the business would in effect be carried on at the risk of the debtor. The debtor being insolvent will lose nothing if the business proves unprofitable whereas if profitable there may be a surplus after the payment of the debts. A provision authorizing continuance of business so far as is necessary to dispose of property on hand, or to work up raw material on hand, is generally upheld. A provision authorizing sales upon credit is often, though not uniformly, held fraudulent, since it permits the a.s.signees to defer the settlement of the estate. The most important provisions likely to be attacked as fraudulent, however, are provisions in regard to preferences. Aside from bankruptcy statutes, it is lawful for a debtor who has insufficient means to pay all of his creditors, to pay some in full, though this results in the total exclusion of others. Accordingly a general a.s.signment of a debtor's property on a trust, that the a.s.signees shall pay in full certain named creditors and pay the remaining creditors ratably out of the residue, has generally been upheld though statutes in some States have altered the law in this respect. A kind of preference which is generally deemed fraudulent, however, is one which is made conditional on the creditors giving the debtor a discharge. A general a.s.signment, unlike a bankruptcy law, or a composition, does not free the debtor from liability for so much of his debt as remains unpaid. Debtors have sometimes sought to avoid this result by making a general a.s.signment of their property in trust for ratable distribution among such creditors as should give the debtor a full release and discharge of all claims. Such a provision, attempting, as it does, to impose as a condition of a creditor's sharing, that he should take his share in full satisfaction of his claim, is almost universally held to make a general a.s.signment fraudulent. Under the bankruptcy law, a general a.s.signment may within four months be set aside by bankruptcy proceedings; but a creditor who has once a.s.sented to a general a.s.signment cannot thereafter join in a bankruptcy pet.i.tion against that debtor.

BANKRUPTCY.--The fourth and most important way, however, now, of settling the estates of insolvent persons is provided by statute. The Federal Const.i.tution gives Congress power to pa.s.s uniform laws on the subject of bankruptcy throughout the United States, and the Supreme Court has held that when the Federal Government has not taken advantage of this privilege given by the Const.i.tution, States have power themselves to enact bankruptcy laws. In some States there were such laws, but in many there were not. The Federal law now supersedes all State laws on the subject. It was pa.s.sed in 1898, and under that law the debtor may either become a bankrupt by his own voluntary pet.i.tion, or his creditors may pet.i.tion him into bankruptcy if he commits what is called an "act of bankruptcy." This is true, at least, if the debtor is an individual, or is a moneyed business or commercial corporation (except railroads, insurance companies, and banking corporations). When corporations of the excepted cla.s.s become insolvent, their affairs are settled by still a fifth method--receivership. A special privilege, also, is given to wage earners and farmers. They may, if they choose, become voluntary bankrupts, but are not liable to involuntary proceedings.

PEt.i.tIONS IN BANKRUPTCY.--Suppose a debtor wishes to become bankrupt himself. He files a pet.i.tion in the United States District Court, which is the court of bankruptcy jurisdiction, and is immediately adjudicated a bankrupt. If his creditors want to make him a bankrupt it is necessary that three of them, having claims amounting to not less than $500 in the aggregate, should join, unless there are less than twelve creditors in all. In that event one creditor only may pet.i.tion. This pet.i.tion must set forth (1) the creditors' claims, (2) the fact that the debtor has committed an act of bankruptcy, and (3) the fact that he owes debts aggregating $1,000 or more. However slight his indebtedness, if he cannot pay it, a man may be a voluntary bankrupt, but he must owe at least $1,000 to be liable to involuntary proceedings.

ACTS OF BANKRUPTCY--FRAUDULENT CONVEYANCES.--Now what are the acts of bankruptcy which render a debtor liable to a pet.i.tion by his creditors?

In the first place a fraudulent conveyance is an act of bankruptcy.

Reference to a fraudulent conveyance by general a.s.signment has been made; but there are many kinds of fraudulent conveyances. If a debtor who is insolvent, or who is made insolvent through a gift made by himself, should give away a portion of his property, that would be a fraudulent conveyance, irrespective of the debtor's intent, because the necessary effect of the gift would be to hinder, delay and defraud his creditors. It would be a fraudulent conveyance for a debtor to seek to conceal his property from his creditors by putting it in the hands of some kind friend to hold for him until his creditors should cease to be so troublesome as at the present time. It would be a fraudulent conveyance for a man who is pressed by creditors to turn himself into a corporation for business purposes, and a.s.sign all his property to that corporation. This transfer to a corporation, even though done openly, would necessarily hinder and delay his creditors.

PREFERENCES.--As has already been said, paying one creditor to the exclusion of others is not a fraudulent conveyance, but it is a preference, and a preference is a second act of bankruptcy. Either for the debtor to give a preference himself or to allow a creditor to get a preference, by legal proceedings, is an act of bankruptcy. Any transfer made by an insolvent debtor, to pay or to secure in whole or in part a previously existing debt, is a preference.

GENERAL a.s.sIGNMENTS.--A general a.s.signment, whether fraudulent or not, is an act of bankruptcy. The consequence is, therefore, that if a debtor makes a general a.s.signment, his creditors have the choice of letting it stand and having the estate settled under the general a.s.signment, or of setting it aside and having bankruptcy proceedings.

RECEIVERSHIPS.--Still another act of bankruptcy is the appointment of a receiver on account of insolvency. There, also, the creditors virtually have an option of letting the receivership stand and having the receiver take charge of the distribution of the a.s.sets, or of pet.i.tioning the debtor into bankruptcy and having the bankruptcy court take charge.

ADMISSION OF INABILITY TO PAY DEBTS.--One further act of bankruptcy is an admission by the debtor of his inability to pay his debts and his willingness to be adjudicated a bankrupt. An act of bankruptcy can form the basis of a pet.i.tion only within four months after its commission.

INSOLVENT DEBTORS USUALLY COMMIT ACTS OF BANKRUPTCY.--Now an insolvent debtor cannot very well avoid committing one of these acts of bankruptcy. He can avoid making a fraudulent conveyance, but he will find it pretty hard to avoid making a preference. He need not, it is true, pay any of his debts, and it is not a preference to pay money out for present consideration, or to transfer property for present consideration, as to make a mortgage for a new loan; but it will be hard for him to prevent creditors from getting a preference by legal proceedings, at least if the debtor has any a.s.sets at all; for if the debtor does not pay any of his creditors, some of his creditors will sue him, get execution, and endeavor to levy it on the debtor's property.

PROCEDURE AFTER ADJUDICATION.--If a debtor has once been adjudicated a bankrupt, it makes no difference whether it was on a voluntary pet.i.tion or an involuntary pet.i.tion; the matter goes on in both cases the same way. The first thing, after the adjudication, is, that the referee, a sort of subordinate judge, requires the bankrupt to submit schedules of his a.s.sets and of his creditors. The debtor is induced to make these schedules as complete as possible, for the following reasons: if the schedule of a.s.sets is knowingly incomplete, the debtor is committing a crime and is likely to be shut up in jail. If the schedule of his creditors is incomplete, any creditor who is left out or whose address is so incorrectly given that the creditor does not get notice of the proceedings in time to prove his claim, is not affected by the discharge; and as the debtor wants a discharge from as many debts as possible, he, of course, will make his schedule of creditors as complete as possible. From this schedule of creditors, the referee sends notices out to all the creditors to meet and choose the trustee. The creditors meet and choose a trustee, who then endeavors to collect the a.s.sets of the estate, and under the direction of the court, pays dividends from the a.s.sets to the creditors.

PROPERTY WHICH THE TRUSTEE GETS.--The question may be asked: "What property does the trustee get?" He gets all tangible property that the debtor could transfer at the moment of his bankruptcy. He gets intangible property, patents, trademarks, copyrights, seats on the stock exchange, and good-will of a business, with the exception that the debtor still retains the right to carry on his old business himself, in the future, in his own name. The trustee gets rights of action of the bankrupt, except personal rights of action, as they are called. These consist of rights of action for personal injuries, as for a.s.sault, or for personal injury by negligence. A right of action for breach of promise of marriage also would not pa.s.s to the trustee in bankruptcy.

Not only does a trustee get this tangible and intangible property, but he gets also a right to recover any property fraudulently conveyed by the bankrupt, which is not in the hands of a bona fide purchaser, even if the fraudulent conveyance was made years before, provided the statute of limitations has not completely run against it. Any preference, also made within four months before the filing of the pet.i.tion in bankruptcy, may be recovered from the preferred creditor, if he had reasonable cause to believe, when he received it, that he was getting a preference, but not otherwise. The trustee in bankruptcy gets the debtor's life insurance policies, except in so far as they are made exempt by statute.

Life-insurance policies, in favor of a beneficiary other than the insured himself, are exempt, though if the premiums were paid by the debtor while insolvent, the premiums so paid within the past six years may be recovered, and the beneficiary would in effect have to pay those premiums back in order to hold the policy. Even if the policy runs to the insured himself, in his own name, he has the privilege, under the bankruptcy act, to redeem it from the trustee in bankruptcy by paying its cash surrender value. Property acquired by the bankrupt, after the beginning of bankruptcy proceedings, does not pa.s.s to the trustee. The bankrupt's property pa.s.ses free of attachment or judgment liens, secured by creditors within four months prior to the beginning of bankruptcy proceedings. This has no bearing on a case, where, prior to bankruptcy, money has been actually collected by legal proceedings, but only to cases of seizure under legal proceedings which are still pending at the time the pet.i.tion is filed. If a debtor becomes bankrupt, within four months after his property is attached, the attachment is dissolved. If the debtor does not become bankrupt until after four months, the attachment is a valid lien on the property attached, and so far as the property is sufficient to pay the creditor, he can collect his claim from it, even though the debtor becomes bankrupt before the creditor finally gets judgment and collects his claim.

PROOF OF CLAIMS.--The trustee collects all this property and tries to reduce it to cash, as fast as he can, and while this is going on, creditors will also be proving their claims. It is only claims which exist at the time of filing the pet.i.tion which are provable, but the debts need not be due at the time of the bankruptcy; it is only essential that they shall be in existence. Interest is added or rebated, as the case may be, to the date of filing the pet.i.tion. That is, if you have a non-interest-bearing note falling due July 1, and the debtor becomes bankrupt May 1, the face of the note will be proved less a rebate of two months' interest to May 1, because the present value of the note on May 1 is what is provable. On the other hand, if the note had been due on April 1, interest would be added up to the date of filing the pet.i.tion, and if the note was an interest-bearing note, of course the interest would be provable up to May 1, even if the note did not fall due until July 1 or later. Debts, arising subsequently to the date of filing the pet.i.tion, must be enforced against the bankrupt's a.s.sets acquired after his bankruptcy. Claims for tort are not provable, that is, claims for injuries to person or property not arising out of contact. But a judgment for tort, obtained before the filing of the pet.i.tion, is provable. There has been a good deal of trouble in regard to what are called contingent claims. The commonest instance is the indorser's liability on a note which is not yet due when the indorser becomes bankrupt. At the time of filing the pet.i.tion, the indorser's liability is contingent on the possibility that the maker may not pay the note at maturity, and that notice of dishonor will be given to the indorser. Creditors, who have received a preference, cannot prove claims unless they have surrendered, within four months of the bankruptcy, any preference which they have received with reasonable cause to believe that it was a preference. Secured creditors can realize on their security and then prove for the balance of their claims. A few claims are given priority over others and paid in full before any dividend to other creditors. The most important claims of this sort are the wages of workmen, clerks or servants earned within three months of the bankruptcy and not exceeding the sum of $300.

LEASES.--Leases belonging to the bankrupt pa.s.s to the trustee in bankruptcy, if he wants them, but the trustee in bankruptcy need not take any kind of property which seems more burdensome than beneficial to him, and as a trustee would have to pay, the rent under a lease in full, if he took it, he frequently will prefer to abandon it. The landlord can prove for rent, which is already accrued, but he cannot prove for rent which has not already accrued, even though part of the period for which the rent is claimed has elapsed, unless there is a special covenant in the lease. If the trustee in bankruptcy a.s.sumed the lease, then, of course, the landlord would look to the trustee for the rest of the term.

If the trustee did not a.s.sume the lease, the landlord would have his option of doing either of two things: he could leave the bankrupt in the premises and have a right of action against him for the rent, from time to time, as it accrued, or he could eject the tenant; but if he ejected the tenant he could not hold him for rent. Generally he would eject a bankrupt tenant rather than let him stay.

SET-OFF.--Set-off may be made by a debtor of the estate who also has a claim against the estate. He does not have to prove his claim, taking a dividend on it and then paying, in full, the debt which he owes to the estate. He may set one off against the other, but he is not allowed to acquire claims for the purpose of set-off within four months prior to bankruptcy. Otherwise, one owing money to an insolvent debtor, could buy up at a discount claims against the debtor, equal in amount to his indebtedness to the bankrupt.

EXAMINATION AND DISCHARGE OF BANKRUPT.--The bankrupt may be examined by any creditor with a view to the disclosure of his a.s.sets. This is a most important right. Finally, if in every respect, he obeys the bankruptcy law, the debtor gets a discharge. Grounds for refusing him a discharge are, that he has made a fraudulent conveyance; that he has obtained credit by false representation; that he has failed to keep books of account for the purpose of concealing his financial condition; that he has committed an offence punishable by the bankruptcy law, as making a false oath or refusal to disclose his property or to submit to examination; and finally a debtor who has already been discharged in bankruptcy within the previous six years cannot, as a voluntary bankrupt, again obtain a discharge. These are reasons for refusing a discharge altogether, but even though a discharge is granted, certain liabilities are not discharged. Claims for obtaining property by false pretences, or for false representations, are not discharged. Claims for defalcation or embezzlement, as a public officer or as a fiduciary, and claims for wilful and malicious injury to the property of another, are not discharged. Nor are taxes or claims for alimony or for the support of a wife or dependent children.

COMPOSITION IN BANKRUPTCY.--At common law it was necessary to have the consent of all a debtor's creditors in order to make the composition operative as against all of them. In bankruptcy there is a special provision for composition, and with the approval of the court, a composition may be declared binding, not only as against those who have a.s.sented to it, but as against all creditors having provable claims, if a majority in number and amount of the creditors, taking part in the bankruptcy proceedings, a.s.sent to the discharge.

INSURANCE.--Insurance is a contract whereby, for an agreed premium, one party undertakes to compensate the other for loss on a specified subject from specified perils. Policies of insurance are as various as the contracts which they cover. In 1779, Lloyd's adopted a standard form of marine policy, which, with some changes, is in practically universal use in the British world. A standard form of fire policy has been adopted by many of the fire insurance companies in the United States.

POLICY PROVISIONS.--Certain terms occur frequently in insurance law, with which one should be familiar. A valued policy is one upon which a definite valuation is put, by agreement of both parties, on the subject matter of the insurance written on the policy; for example, a policy "insuring the S.S. George Washington, valued at $1,000,000." An open policy, on the other hand, is one in which a definite sum is written on the face of the policy, but instead of agreeing as to the value of the property insured, indicates the limit of recovery in case of the destruction of the property. Floating policies are such as cover articles which cannot be designated with certainty, as for example, a constantly changing stock of goods. In life insurance there are many kinds of policies. Probably the most common is the regular life, under which the insured pays certain fixed premiums throughout life, and the beneficiary receives the amount of the policy only upon the death of the insured. Life insurance policies in which the investment feature is prominent, are generally called endowment policies, and they require the insured to pay a certain premium, annually, for a certain number of years. If the insured dies before premium payments cease, under the terms of the policy, the beneficiary receives the full amount of the policy. If the insured lives beyond the stated period, he is ent.i.tled to receive the amount written on the face of the policy or he may be allowed to receive a paid-up policy for some specified sum. A policy of reinsurance is simply a contract made by one insurance company with another, whereby the first reinsures with the second some individual risk which it has itself accepted and insured.

ELEMENTS OF CONTRACT.--In order that the contract of insurance shall be valid, it must possess all the essential elements of the ordinary contract. Although there is a certain element of chance in an insurance contract, it is always held that it is not in the nature of a gambling contract. A peculiar feature of this contract is that it is one of the utmost good faith, and requires that each party shall disclose to the other all material facts in his knowledge that may affect the making of the contract.

INSURABLE INTEREST.--An essential element in the law of insurance is that of insurable interest. By this term we mean that interest of the insured, which is exposed to injury by reason of the peril insured against. Such interest does not necessarily need to be a legal right, but only such as to justify a reasonable expectation of financial benefit, which will be derived by the continued existence of the person or property insured. While it is difficult to define accurately an insurable interest in property, Section 2546 of the California Civil Code defines it thus: "Every interest in property, or any relation thereto, or liability in respect thereof, of such a nature that a contemplated peril might directly d.a.m.nify the insurer, is an insurable interest." In life insurance, an insurable interest is requisite, but this interest, if existing at the time the policy is issued, is sufficient, although such interest subsequently terminates. Every person has an insurable interest in his own life, or he may procure insurance on the life of another, when so related to that other, either by reason of blood, marriage, or commerce, that he has well-grounded expectation of deriving benefit from that other's life, or suffering detriment through its termination. It is well settled that a creditor has an insurable interest in the life of his debtor. The courts are not clear as to just how much this interest is, but it will not be allowed to greatly exceed the sum of the debt. The relationship between the insured and the insurer is governed, to a very large extent, by the law of agency.

SURETYSHIP AND GUARANTY.--Suretyship has been defined as an accessory agreement by which one binds himself for another who is already bound. A surety is a person who is liable to perform any act, that his princ.i.p.al is bound to perform, in the event that his princ.i.p.al fails to perform as agreed. Where there is more than one surety, the parties are known as co-sureties. The distinction between the contract of suretyship and that of guaranty is not altogether clear, and frequently not observed by the courts. So far as the distinction can be defined, we may say that if the parties undertake to pay money, or to do some other agreed act, in case the princ.i.p.al fails to perform his part, then they are sureties. On the other hand, if they a.s.sume performance, only in the event that the princ.i.p.al is unable to perform, then they are guarantors. The principles which apply to both, are, in many respects, similar. The terms used by the parties are not necessarily conclusive as to whether it is a suretyship or guaranty relationship. For example, in the case of Saint v. Wheeler, etc., Mfg. Co., 95 Ala. 362, where a contract was under seal by which the parties "guarantee," along with one of their number, to pay absolutely and irrespective of solvency or insolvency, all damages which might result, etc., it was held that the contract was one of suretyship, and not of guaranty, although they had used the express term "guarantee"

in the language of the contract.

QUALIFICATION OF A SURETY.--A surety may be distinguished from an indorser in that the undertaking of the surety is absolute, whereas that of the indorser is conditional. The Negotiable Instruments Act provides that a general indorser "engages that on due presentment, it (the instrument) shall be accepted or paid, or both, as the case may be, according to its tenor, and that if it be dishonored, and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to pay it." Hence, if an indorser is not notified, or if the instrument is not protested, if that is necessary, he is discharged.

PRINc.i.p.aL AND SURETY.--Ordinarily, the relationship of princ.i.p.al and surety is entered into under the terms of a contract, the chief object of which is the creation of the relationship. As a general rule, any person who is capable of making a contract may be surety. Formerly, it was sometimes said that an infant was absolutely unqualified to make a contract of this kind, but now his contracts of suretyship are held to be voidable, the same as his other contracts. In some states a married woman is still prevented by statute from becoming a surety for her husband. Like ordinary contracts, a contract of suretyship must be supported by sufficient consideration. It is ordinarily a collateral engagement to pay a debt of another, and hence, comes under the section of the Statute of Frauds which requires a contract to answer for the "debt, default, or miscarriage of another," to be in writing.

SURETYSHIP LIABILITY.--The general extent of the suretyship liability is measured by the contract of the princ.i.p.al, which he guarantees. If no cause of action can be maintained against the princ.i.p.al on the contract, it follows necessarily that the surety is not liable. The tendency of the courts is to favor the surety. His obligation is ordinarily a.s.sumed without any pecuniary compensation, and it is accordingly said that his liability is "strictissimi juris," (strictly construed by the law). A surety has the right, then, to insist upon the very letter of his contract, and if there is a reasonable doubt as to whether his contract requires the doing of certain acts or not, that doubt should be resolved by the court in favor of the surety. Consequently, a surety will not ordinarily be held liable for any default of the princ.i.p.al, which occurred prior to the surety's contract to be such. The death of the surety does not necessarily terminate his liability, and his personal representatives will be responsible for the carrying out of his contract, especially where the contract reads that the surety "binds his heirs, executors and administrators."

SURETY'S OBLIGATION UNDER NEW CONTRACT.--It frequently happens that the princ.i.p.al's contract is not completed, and a renewal is necessary. The question arises whether the surety's obligations are continued under the new contract, the same as under the old. The principle which the courts apply is that if the renewal amounts to an entirely new contract, then the surety's obligation is at an end. But if the renewal is simply a part of the original contract, and does not call for any new contract, his obligation continues under such renewal. As the contract between the princ.i.p.al and surety is of a more or less confidential character, the law requires, as we have mentioned in insurance, the exercise of the utmost good faith on the part of the princ.i.p.al. Hence, if a surety, before entering into his contract, applies to the princ.i.p.al for information about any material matter pertaining to the contract, the princ.i.p.al is bound to give full information as to every fact within his knowledge, and if he does anything to deceive the surety, he vitiates the contract. Another application of the same principle is found in the rule that the princ.i.p.al must not do any act injurious to the surety or inconsistent with his rights. Consequently, if the princ.i.p.al makes any arrangement with his princ.i.p.al debtor, by which the risk of the surety is materially increased, or the terms of the contract are altered or varied or the time of payment is extended, the surety in any of these cases would be released from any liability unless he is consulted and gives his a.s.sent to such changes in his contract. It is necessary that the new contract, which the princ.i.p.al makes, be a valid contract in order to release the surety. Hence, if the princ.i.p.al makes a contract extending the time of the payment on the obligation six months, and that is all there is to the contract, such extension agreement would be invalid because of lack of consideration, and the surety in such case would not be discharged from his liability under the old contract. If the obligation which the surety undertakes to pay is a promissory note, an agreement by the princ.i.p.al to extend the time of payment, would not, of itself, release the surety, there being no consideration. A part payment made by the maker, before the note was due, for which an extension of time to pay the remainder is granted, would be binding, because such part payment, before a note is due, const.i.tutes good consideration for an agreement to extend the time to pay the balance, and consequently the surety is discharged.

NEGLIGENCE OF THE CREDITOR.--It is generally true that the creditor is under no obligation to be diligent in the pursuit of the debtor.

Consequently, a mere negligence of the creditor, to sue or otherwise attempt to collect a claim against his debtor, although there is a surety for the creditor, does not relieve the surety of his liability.

Mere delay, then, in proceeding against the princ.i.p.al debtor, does not release the surety, unless there is between the creditor and princ.i.p.al debtor a valid and binding agreement, under which a delay does prejudice the surety.

DISCHARGE OF SURETY.--A surety is discharged by the payment or performance, by the princ.i.p.al, of the condition in the agreement. It is even held that the surety is discharged if a tender of payment has been made to the princ.i.p.al, after the debt is due, and it is refused by him.

In such a case, the tender amounts practically to a payment of the debt and a new loan creating a new contract. It sometimes occurs that the creditor has collateral security for the payment of the debt, or secures control of money or property of the debtor and which he may lawfully apply to the debtor's obligations under certain circ.u.mstances. The princ.i.p.al may voluntarily surrender or dispose of these securities. In such a case, the surety is discharged from liability to the extent of the value of the securities disposed of or surrendered. Of course, the surety is not discharged where the princ.i.p.al takes additional securities, or if some securities are given up and sufficient are retained by the princ.i.p.al to pay the debt, the surety is not relieved and cannot complain, for the reason that he has not been injured.

RIGHTS OF SURETY.--It is a well established rule of law that where the surety is obliged to make good on his contract he is ent.i.tled to relief, the law implying a promise on the part of the princ.i.p.al to reimburse the surety for any damages which he suffers. Of course, this a.s.sumes that the surety was legally bound to pay the debt. If he pays it because it is a moral obligation or for any other reason which the law does not recognize as legally binding, he is not able to compel the princ.i.p.al to reimburse him.

RIGHT OF CONTRIBUTION.--One of the peculiar remedies, which the courts of equity have developed, is that of contribution. This right is frequently used in the law of suretyship. When one of two or more sureties, for the same obligation, has paid more than his share of the debt, he is ent.i.tled to be reimbursed for the excess by his co-sureties.

This right is known as the right of contribution. As has been said before, a surety, if he pays when he is not legally bound to do so, must stand the loss himself; and the same is true where he is one of several co-sureties. Thus, if one co-surety pays a debt, which is barred by the statute of limitations, he would not, in that case, be ent.i.tled to contribution from his other co-sureties.

SURETY COMPANIES.--Surety companies conduct such a large business at the present time that a word should be said about them in connection with this topic. The surety company is a corporation, and its powers are, of course, defined by its charter, and the laws of the State in which it is incorporated. In general, surety companies are authorized to guarantee performance of contracts and to execute bonds and undertakings required by the courts. One tendency is noticeable in recent years. The kind of suretyship, we have been referring to, is generally that in which the surety is an individual, who undertakes his task for no consideration, and for that reason, as we have said, the courts construe the contract of suretyship strictly in favor of the surety. More and more, now, the practice of the individual becoming a surety is decreasing, and in his place the surety companies offer their services in a more satisfactory manner, under modern business conditions, but with the striking difference, that the surety company offers its services only for pay, which will net the company a profit. Hence, the rule that the contract should be construed strictly in favor of the surety does not fit the case of the surety company which is paid for its services. In the case of the American Surety Co. v. Paulu, 170 U. S. 133, and in many other cases, the rule is laid down, that the contract will be construed against the surety company and in favor of the indemnity which the obligee has reasonable grounds to expect. So, it has been held that a surety company will not be relieved on its contract, by an extension of time to the princ.i.p.al, and that there is no presumption that the surety was injured by the extension unless the injury is actually proved.

PATENTS.--The policy of encouraging monopolies, while generally frowned upon, finds two exceptions in the law of patents and copyrights.