DOE

SURETYSHIP AT "LAW MERCHANT"

OES the "law merchant" include any of the doctrines of suretyship, and can any incident of suretyship attach to a negotiable instrument?

In its report to the Conference of Commissioners on Uniform State Laws at the Washington meeting in 1914, the Committee on Uniformity of Judicial Decisions in Cases Arising Under Uniform Laws discusses at some length the failure of courts to make uniform application of the provisions of the Uniform Negotiable Instruments Act.' It finds that this failure has been due principally to lack of knowledge of the "law merchant," quotes from a number of decisions giving judicial sanction to the purpose of the uniform statute, and summarizes:

"With all due respect to the learning of the lawyers and the judges of our country candor calls upon us, in the performance of the duty of writing this report, to call attention to the evidence furnished by these decisions of cases under the Uniform Negotiable Instruments Law, that many of the counsel therein and many of the judges in their opinions are more imbued with the spirit of the common law than with the spirit of the 'Law Merchant.' The word 'surety' is not to be found even once in the uniform statute under consideration, yet counsel, in their briefs and arguments, as well as judges in their opinions, speak constantly of certain parties to the cases as being sureties. It is a common law term, unknown to the 'Law Merchant.' This carrying over into the field of the 'Law Merchant' the use of terms of the common law shows that the lawyers and judges have not learned to think in terms of the 'Law Merchant' when dealing with questions under the 'Law Merchant,' but think and therefore reason as if they were still dealing with questions under the common law. It is this obliteration or ignoring of the distinction between two different systems that leads the judges in many of these cases, including some above cited, to speak of 'the common law of negotiable instruments,' meaning the 'Law Merchant.' We do not speak of the common law of equity, nor of the common law of admiralty. The 'Law Merchant,' like equity, is not a part of the common law; it is a

1 I AM. BAR ASS'N. J. 24-49.

separate system of law. As Bigelow says in 'The Law of Bills, Notes and Checques' p. 5:

"The mischief lies in the mistaken notion implied, that the "Law Merchant" is a sort of poor relation of the common law, subject to it wherever its own language is not plain. Such instances, in other words, overlook the fact that the "Law Merchant" is an independent parallel system of law, like equity or admiralty. The "Law Merchant" is not even a modification of the common law; it occupies a field over which the common law does not and never did extend.'

“... These are but stray samples of the evidence furnished by an examination of early statutes and early cases on bills and notes in the states of our union, that show an ignorance of the principles of the 'Law Merchant' out of which some have not yet entirely emerged. To secure uniformity in decisions under the Uniform Negotiable Instruments Act there must be more intimate knowledge of the 'Law Merchant.' "2

The foregoing views the conference, approving the report, made its own. This insistence upon a uniformity which shall confine itself strictly to the language of the Uniform Act, and which by its operation will eliminate suretyship from the "law merchant" as expressed in the uniform statute, obtains some additional emphasis from the address of President Charles Thaddeus Terry of the conference at its 1915 meeting,3 and from a prize essay by Mr. Jacob Sicherman of the Buffalo Law School, reprinted by request of the conference in a recent issue of the American Bar Association Journal. Such insistence seems to proceed upon the triple hypothesis that suretyship was unknown to the "law merchant," that the Uniform Act, codifying the "law merchant," likewise excludes it, and that whether it be found in the "law merchant" or not, the Uniform Act excludes and abrogates it by failing to include it. To consider, with due respect to the conference and to the eminent text-writer its committee quotes, what soundness these views possess, is the object of this discussion.

Upon these views the first and most obvious commentary is suggested by the reference to the "law merchant" as in all respects separate from and unmodified by the common law. That the custom of merchants, within its limited field, was at one time independ

2 I AM. BAR ASS'N. J. 41-43.

3 40 Reports of THE AMERICAN BAR ASSOCIATION, 919-48.

♦ "Construction of Clause in Uniform State Laws Providing for Uniformity of Interpretation," 2 AM. BAR ASS'N. J. 60-79.

ent of, or even to some extent coördinate with the common law may or may not be true. It is distinct from the latter at least to this extent, that the custom of merchants, devised by the cosmopolitan traders of the Middle Ages, was in both inception and growth less local in scope than the common law, and has always been administered, for the sake of that uniformity in commercial transactions at which the Uniform Act itself aims, generally and not locally. But to say that it ever did or now does constitute a separate system corresponding to admiralty or equity is to go farther than even Chancellor Kent 5 and others who have viewed the "law merchant" as lying outside the common law have ever gone. Such statement, if made in earnest, rests upon a misconception of the principles of the "law merchant" fully as profound as that of the courts to whose "ignorance" and lack of uniformity the conference cites us. On the contrary, the "law merchant," long before the first suggestion of a Uniform Negotiable Instruments Act, had been incorporated into and become part of the great body of common-law rights and remedies. Even Blackstone so defines it:

"The second branch of the unwritten laws of England are particular customs, or laws which affect only the inhabitants of particular districts. "To this head may most properly be referred a particular system of customs used only among one set of the king's subjects, called the custom of merchants, or lex mercatoria: which, however different from the general rules of the common law, is yet engrafted into it, and made a part of it; being allowed, for the benefit of trade, to be of the utmost validity in all commercial transactions; for it is a maxim of law, that 'cuilibet in sua arte credendum est.' "6

In another portion of his work there appears a discussion of negotiable instruments and of the "rules of common law" in connection therewith, an error on Blackstone's part almost as deplorable as that of the courts who have been criticised for discussing the "common law of negotiable instruments." No more than any other law of custom has the "law merchant" ever arisen to the dignity of procedure, process, or tribunal of its own; and, in the present state of the law at least, a court of law merchant would be an anomaly as great as a "common law of equity" or a "common law of admiralty." In short, it is inaccurate to say that the cus7 2 Id., 467-70.

3 KENT, COMM. 2.

6

I BL., COMM. 74-75.

See the quotation from the conference report, ante.

tom of merchants, however controlling in commercial transactions, is a separate system of law, or that the common law does not extend to it, exactly as it would be inaccurate to say of any other set of customs, become law through long observation and usage, that it is separate from or unmodified by the legal system into which it has been incorporated and of which it has become a part.

9

There is nothing, then, in the relation of the "law merchant" to the other parts of our legal system, to deny suretyship a place in it. A more fatal flaw in the objection to such suretyship, however, is the fact that the effect of the Uniform Negotiable Instruments Act has not been to remove suretyship from the law of negotiable instruments, nor even to correct an erroneous judicial impression, based upon "ignorance of the principles of the law merchant," that suretyship ever had a place in such law. In this connection it is unnecessary to examine the decisions holding that certain parties to negotiable instruments are "sureties" or "in effect sureties," 10 or the cases equally numerous holding that certain parties may be proved sureties by evidence aliunde, even if the instrument itself does not indicate such relation." Nor is it necessary to trace any adoption or transference of the relation from one "legal system" into another. The courts' use of the term in connection with commercial paper being admitted, the question is whether or not such use has any basis in logic. To examine contracts of suretyship and negotiable instruments and, testing them by their resemblances, determine as nearly as possible on first principles whether or not any incidents of the one might in the natural course of things be expected to attach to the other, is the more rational method of approaching this question.

To do this, we need a major premise. What is a contract of surety

For example: Deering v. Lord Winchelsea, 2 B. & P. 270 (1800); Good v. Martin, 95 U. S. 90 (1877); Guild v. Butler, 127 Mass. 386 (1879); Flour City Nat. Bank v. McKay, 86 Hun 15, 33 N. Y. Supp. 365 (1895); Morehead v. Bank, 130 Ky. 414, 419, 113 S. W. 501, 23 L. R. A. (N. S.) 141 (1908).

10 Lock Haven State Bank v. Smith, 85 Hun 200, 32 N. Y. Supp. 999 (1895); Byers v. Coal Co., 106 Mass. 131 (1870); Gunnis v. Weigley, 114 Pa. St. 191, 6 Atl. 465 (1886).

11 Denton v. Peters, L. R. 5 Q. B. 475 (1870); Good v. Martin, supra; Patch v. Washburn, 16 Gray (Mass.) 82 (1860); Pursifull v. Banking Co., 97 Ky. 154, 30 S. W. 203 (1895); Oriental Financial Corporation v. Overend, L. R. 7 Ch. 142 (1876), aff'd L. R. 7 H. L. 348 (1874); Bailey v. Edwards, 4 B. & S. 761 (1864); Coulter v. Richmond, 59 N. Y. 478 (1875).

ship, and what are its primary characteristics? The answer appears, roughly stated, in the Statute of Frauds: ". . . a promise to answer for the debt, default, or miscarriage of another," though this definition is perhaps too general, as including also guaranty. Lord Selborne, after classifying by itself technical suretyship i.e., the agreement to constitute for a particular purpose the designated relation of principal and surety - defines suretyship in the general sense as the relation which arises where, without any such technical contract of suretyship, there is a primary and secondary liability of two persons for the same debt, the debt being, as between the two, that of one only and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid.12 In other words, a surety is a party who will have to pay or perform if the party who really ought to pay or perform fails to do so, yet whose obligation so to perform is as to the obligee immediate and primary, not dependent upon any exhaustion of remedy against the principal debtor.

Obligations similar to this one, it needs no searching examination to see, are imposed by certain contracts very frequently made with reference to commercial paper. Such is the obligation of the "anomalous" or "irregular" indorser - the signer not otherwise a party, who puts his name on the back of the instrument before delivery. Such also is that of the "accommodation" party, who signs as maker, acceptor, drawer, or indorser, not as a recipient of value, but merely to lend credit to and for the "accommodation" of the party to whom the consideration actually runs. Obviously the undertaking of both the anomalous and the accommodation party is to pay the instrument if the party actually responsible does not, this obligation being as to the holder absolute, in that the latter is not required first to exhaust his remedy against the party actually responsible, yet as between the credit-lender and the actual recipient of value strictly the latter's obligation. Even the ordinary indorser's contract has in it something of this element, and like that of the accommodation or anomalous party suggests to the mind, by

12 Duncan, Fox & Co. v. North & South Wales Bank, 6 App. Cas. 1, 11 (1880). De Colyar adopts this definition of suretyship (or "guarantees") generally. LAW OF GUARANTEES AND OF PRINCIPAL AND SURETY, 3 ed., 65-161; 12 ENCY. BRIT., II ed., 652. Mr. Chief Justice Cooley, in Smith v. Shelden, 35 Mich. 42, 47 (1876), uses almost identical language.