Supreme Court of Canada
Union Investment Co. v. Wells, (1908) 39 S.C.R. 625
Date: 1908-02-18
The Union Investment Company (Plaintiffs) Appellants;
and
Martin W. J. Wells and Others (Defendants) Respondents.
1907: October 24, 25; 1908: February 18.
Present: Sir Charles Fitzpatrick C.J. and Davies, Idington, Maclennan and Duff JJ.
ON APPEAL FROM THE COURT OF KING'S BENCH FOR MANITOBA.
Bills and notes—Instalments of interest—Transfer after default to pay interest—"Overdue" till—Notice—Holder in good faith—Bills of Exchange Act—Common law rule.
Where interest is made payable periodically during the currency of a promissory note, payable at a certain time after date, the note does not become overdue within the meaning of sections 56 and 70 of the "Bills of Exchange Act." merely by default in the payment of an instalment of such interest.
The doctrine of constructive notice is not applicable to bills and notes transferred for value.
Judgment appealed from reversed, Idington and Maclennan JJ. dissenting.
Appeal per saltum from the judgment of Macdonald J., at the trial, in the Court of King's Bench for Manitoba, dismissing the plaintiffs' action with costs. The action was brought by the appellants, the; holders of a note made by the defendants, respondents, in favour of a firm of horse-dealers, of Columbus, Ohio, doing business there under the name and style of McLaughlin Bros., for part of the price of a stallion sold to the defendants by an agent named
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Hitchcock, and indorsed by the payees to the plaintiffs. The note was dated 5th March, 1903, and made payable on 1st March, 1905, with interest at the rate of six per cent, per annum, such interest being payable annually. At the time of the transfer of the note to the plaintiffs, a short time before the principal would become due, there was an instalment of the interest past due and unpaid, but there was no evidence that the note had been presented for payment of such interest when it fell due at the end of the first year after the date of the note. The defendants, by their pleadings, contended that Hitchcock had obtained the note by fraud, that the stallion was not sound and fit according to warranty and that the plaintiffs took the note, at the time of the indorsement, with knowledge of the fact that it had become dishonoured by default in payment of the overdue instalment of interest and subject to equities.
The appeal was brought direct to the Supreme Court of Canada, from the decision of the trial judge, by consent of the parties, and the questions at issue thereon are fully discussed in the judgments now reported.
Ewart K.C. for the appellants.
Hudson for the respondents.
The judgment of the court was delivered by
Duff J.—The substantial question which this appeal presents for decision is whether or not the promissory note upon which the action was brought was, at the time it was transferred to the appellants, who
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were the plaintiffs in the action, an overdue note within the meaning of sections 56 and 70 of the "Bills of Exchange Act."
The note in question was dated the 5th March, 1903, and by it the respondents, who were the defendants in the action, promised to pay to McLaughlin Bros., or order, at the Canadian Bank of Commerce, Gilbert Plains, Man., on the 1st March, 1905, the sum of $875.00 with interest annually at 6%. After the first of the periodical payments of interest, thus provided for, had fallen due, the note was transferred to the appellants. There is no evidence that it was presented for the payment of this sum, which in fact was never paid.
The learned trial judge held that the respondent's signature to the instrument was obtained through the fraud of the payee, and I see no sufficient reason to disturb this finding. I think, however, that the plaintiffs, who acquired the note for value in the usual course of business, have satisfied the onus upon them to shew that in taking it they acted in good faith.
Moreover, there was no evidence that the plaintiffs had any knowledge of the fact that the interest had not been paid, and assuming that the note had been dishonoured within the meaning of section 72 of the "Bills of Exchange Act" (which even admitting that default in the payment of interest alone would constitute such dishonour does not on the evidence appear since there is nothing to shew that the note, which as we have seen was payable at a particular place, was ever presented there or at all, for the payment of interest), the appellants, therefore, could not be said, in acquiring it, to have taken a dishonoured note with notice of its character. It follows
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that, subject to the answer to be given to the question I have stated, the title of the appellants as that of holders in due course is not affected by the fraud of their transferor.
To come then to the question whether this note, in the circumstances, was an overdue note, within the meaning of the "Bills of Exchange Act," when it came into the hands of the appellants.
The literal truth is, of course, that a single payment of interest reserved by the note was overdue, while in respect of the principal and the remaining payment of interest the note was not overdue. And the question is which of these circumstances is to determine the category into which the instrument falls—that of instruments which are "overdue" within the meaning of the Act or that of current instruments?
The Act itself furnishes no express definition of term "overdue"; but it contains expressions and even enactments not easily to be reconciled with the view that the circumstance alone of a payment of interest being in default is a sufficient ground for referring the instrument by which it is payable to the class comprised within that description. Section 23 (2) enacts that
where a bill is accepted or indorsed when it is overdue it shall as regards the acceptor who so accepts or any indorser who so indorses it, he deemed a bill payable on demand.
The legislature could not have intended that after default in respect of a single payment of interest and before the maturity of the principal payable under it the indorsement of a bill should have the effect as regards the principal or as regards interest not yet payable of changing the character of the bill into that
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of a bill payable on demand. Section 142 also leads to singular results upon the respondents' reading of the words in question. But regarding the question as one of statutory construction merely the most formidable obstacle in the respondents' way appears to be the language of sections 70 and 71—the sections in which the legislature has expressly defined the legal characteristics of "overdue" bills and notes. In these sections the term "overdue" seems to be used as convertible with "after maturity." Now it is true that as the legislature has not expressly defined the meaning of the term "overdue" so neither has it defined the equivalent expression; but construing the words in the ordinary sense I do not think the phrase "after maturity" is applicable to the state of the note in question here. In the ordinary sense of the words a mercantile document providing for the payment of principal and interest in respect of which the time for the payment of the principal should not have arrived would not be said to be "at maturity." And I do not think there is any special mercantile sense of the words—known at all events to the law—in which that description would fit such a state of such an instrument. See United States v. Pacific Ry. Co.. As a question of statutory interpretation then, if one were obliged to determine the question upon the words of the Act alone I should have a great difficulty in adopting the view advanced by the respondents. But I do not think the question is one of statutory construction only. Section 10 provides that:
The rules of the common law of England including the law merchant save in so far as they are inconsistent with the express provisions of this Act shall apply to (bills of exchange, promissory notes and cheques.
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The express provisions of the Act do not in my judgment afford a clear guide upon the question; and it is I think one of the questions for the determination of which this section directs us to have recourse to the common law of England.
The learned trial judge following what he considered to be the decision of the full court of Manitoba in Moore v. Scott has held that the circumstance that default had been made in respect of a payment of interest at the time the note was acquired by the appellants was sufficient to bring it within the class of "overdue" instruments. It is conceded that—if we except the decision referred to, which it will be necessary to notice particularly later—there is no English decision and no Canadian decision of a superior court which is directly in point. One must consequently reach one's conclusion through an examination of the principles of the common law applicable to circumstances of the case, and it is, I think, very necessary that from the outset we should keep in mind some of the most elementary of those principles.
The characteristics which the law recognizes as marking negotiable instruments are, first, such instruments when payable to bearer or indorsed in blank are transferable from hand to hand so that the right to maintain an action upon the instrument passes by delivery of the instrument only, and secondly, a person taking such an instrument in good faith and for value acquires a title to it and that which it represents as against the whole world. (See, e.g., London Joint Stock Bank v. Simmons
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, per Lord Halsbury at page 207 citing Bowen L.J., and per Lord Herschell, at page 221 and in Bechuanaland Exploration Go. v. London Trading Bank, at page 666, per Kennedy J.; Foster v. Pearson, at page 855, per Parke B.)
These attributes the courts have always recognized as indispensable, to instruments forming part of the commercial currency. "The true reason" (why money cannot be followed), said Lord Mansfield in Miller v. Race,
is on account of the currency of it; it cannot- be recovered after it has passed into currency; * * * the true owner cannot recover it after it has been paid away on a bona fide and valuable consideration.
Therefore because bank notes
are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind which gives them the credit and currency of money to all intents and purposes,
he held it to be necessary
for the purposes of commerce that their currency should be established and secured
and that the owner from whom they had been stolen could not follow bank notes into the hands of a bona fide holder for value. So in Wookey v.Pole, it was held that Exchequer bills in which the blank for the name of the payee was not filled up were subject to the same rule. In the course of an elaborate judgment Holroyd J. emphasizing the distinction between money and securities representing money and other forms of property, said, at page 9:
In Peacock v. Rhodes, Lord Mansfield says, "The holder of a bill of exchange or promissory note is not to be considered
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in the light of an assignee of the payee. An assignee must take the thing assigned subject to all the equity to which the original party was subject. If this rule applies to bills and promissory notes it would stop their currency." * * * * These authorities shew that not only money itself may. pass and the right to it may, arise by currency alone but further that these mercantile instruments which entitle the bearer of them to money may also pass, and the right to them may arise in the like manner by currency or delivery. These decisions proceed upon the nature of the property (viz. money) to which such instruments give the right and which is itself current; and give to the holders merely as such the right to receive the money or specify them as the person entitled to recover it.
Now the rule governing "overdue" instruments, namely, that such an instrument
can be negotiated subject only to any defect of title affecting it at its maturity and thenceforward no person who takes it can acquire or give a better title than that which had the person from whom he took it (sec. 10),
—though seemingly an exception to the rule governing currency of negotiable instruments, grew naturally out of the application to overdue instruments of the, custom of merchants upon which the rules of the law merchant relating to negotiable instruments were originally based—rules which, to quote the language of Cockburn C.J. in Goodwin v. Robarts,
are neither more nor less than the usages of merchants * * * * ratified by the decisions of courts of law, which upon such usages being proved before them have adopted them as settled law with a view to the interests of trade and public convenience.
The rule in question was originally a rule of evidence only. See Taylor v. Mather, and the argument of Erskine in Boehm v. Sterling in 1797, at page 427, The first reported case in which it was enunciated as a rule of law was Brown v. Davies, decided shortly
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after the retirement of Lord Mansfield. The grounds of that decision are thus stated in the judgment of Buller J. at pages 82 and 83:
There is this distinction between bills indorsed before and after they become due. If à note indorsed be not due at the time it carries no suspicion whatever on the face of it, and the party receives it on its own intrinsic credit but if it is overdue, though I do not say that by law it is not negotiable yet certainly it is out of the common course of dealing, and does give rise to suspicion. Still stronger ought that suspicion to be when it appears on the face of the note to have been noted for non-payment; which was the case here. But generally when a note is due, the party receiving it takes it on the credit of the person who gives it to him. Upon this ground it was that, in the case in Cornwall, I held that the defendant, who was the maker, was entitled to set up the same defence . that he might have done against the original payee; and the same doctrine has often been ruled at Guildhall. A fair indorsee can never be injured by this rule; for if the transaction be a fair one, he will be still entitled to recover. But it may be a useful rule to detect fraud whenever that has been practised (upon Lord Kenyon's appearing to dissent from the generality of the doctrine held by Mr. Justice Buller, he proceeded to observe) my Lord thinks I have gone rather too far in something that I have said, but it is to be observed that I am speaking of cases where the note has been indorsed before it became due, when I consider it as a note newly drawn by the person indorsing it.
And in the very latest judicial statement of it which has come under my notice the rule is put upon the precise grounds upon which it was rested by Buller J. in 1789.
In London and County Banking Co, v. Groome in 1881, at page 292, Lord Field (then Field J.) said:
That the holder of an overdue bill or note payable at a fixed date (appearing of course upon it) is in the position suggested is established beyond all doubt; and the reason of the rule is that inasmuch as these instruments are usually current only during the period before they become payable, and their negotiation after that period is out of the usual and ordinary course of dealing, that circumstance is sufficient of itself to excite so much suspicion that, as
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a rule of law, the indorsee must take it on the credit of and can stand in no better position than the indorser: Brown v. Davies.
That, I think, with great respect, is an entirely accurate statement of the grounds upon which the rule is based.
Is this case then within the principle of this rule?
It will not do to say that the rule applies to all bills and notes which in any sense of the word may be described as "overdue." We must test each case by the answer to the question whether the instrument is such an instrument as the principle of the rule applies to and whether it is "overdue" in the sense in which the term is used in the decisions upon which the rule is founded. A case which is not within the principle of a decision is not governed by it, and we certainly have no authority by extending the principle of the decisions, to impose fresh restrictions upon the currency of negotiable instruments. The rule is based on. the fact that by the custom of merchants certain instruments do not after maturity pass as mercantile currency; and, in form, it is put as expressing a conclusive presumption that a person taking such an instrument after maturity takes it with a suspicion concerning the title of the person from whom he receives it; and, consequently, cannot, of course, claim the rights of a bona fide holder. That is only bringing the law relating to such instruments into conformity with the mercantile usage upon which the negotiability of them originally rested. But such a principle obviously fails of application to instruments which are of such a character and in such a state that, in respect of them, no such presumption can generally arise; and, that, in
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respect of them also, it could not be generally affirmed that the negotiation of them as a part of the currency of the country is outside the usual course of dealing.
First, then, is there, in the case of the negotiation of such instruments as those in question here, after default in the payment of interest and before maturity of the principal, any ground upon which such a presumption can, in the absence of any notice of such a default, be based?
The instruments which were the subjects of the observations in the cases referred to are there said to carry suspicion on the face of them because a bill which on the face of it is overdue and consequently ought not to be in circulation comes to an intended taker tainted with suspicion. But a bill not on its face overdue carries no suspicion because intending indorsees cannot from the face of the bill alone know that it ought not to be in circulation. This is the substance of the observation of Parke B., at page 165, in Cripps v. Davis:
The reason why the party who takes an overdue bill or note takes it with all its equities, is because, on the face of it, it carries suspicion; that does not apply to the case of a bill or note payable on demand.
Now it is not argued here that the fact of the time fixed for the payment of interest being passed when the note was negotiated was in itself a circumstance of suspicion within this principle; that would lead to a conclusion which nobody accepts, viz.: that whether the interest be in default or not in default the moment the date fixed for such payment is past the instrument is overdue within the rule. What then is the
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circumstance of suspicion? The failure to meet the obligation to pay? But that does not appear on the face of the instrument. And obviously the failure to pay the interest can be regarded as such a circumstance only on the hypothesis that the law imposes upon the person taking such an instrument after the time for such a payment is passed, the duty to inquire whether the payment has been made; and not only that, but to ascertain at his peril whether it has been made. I own it seems to one to be abundantly clear that an instrument the negotiation of which is regulated by such a rule of law is not in the full sense of the term a negotiable instrument—that is to say, it is not negotiable as the commercial currency of the country is generally; and in particular, it is not negotiable as bills of exchange and promissory notes before maturity are negotiable. Consider the position, in this view, of an intending taker. If there has been a default he can acquire only such a title as his transferor can give him; and if (as must often happen) it should be impossible to ascertain this with certainty he would (obviously) be put upon an investigation of the title of his transferor. But it is the absence of the necessity of such an investigation which is the very thing that distinguishes current negotiable instruments from other classes of personal property; a distinction, as we have seen, the result of commercial necessity which requires that such instruments when taken in the ordinary course of business may, as regards title, be taken with absolute confidence and without any of the doubt and suspicion which must follow the adoption of the rule contended for in cases to which it applies.
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In London Joint Stock Go. v. Simmons Lord Herschell said, at page 221:
One word I would say upon the question of notice and being put upon inquiry. I should be sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments.
Again are there any satisfactory grounds upon which one can affirm that the negotiation of such instruments in such circumstances, to use the words of Buller J.,
is out of the ordinary course of dealing and does give rise to suspicion?
Given the absence of notice of default on the face of the instrument I do not know on what ground that can be maintained.
Municipal and other debentures so framed as to be promissory notes and nothing but promissory notes bearing interest periodically do, as everybody knows, so circulate. Nor do I suppose it has ever been suggested that everybody taking such a debenture is put at his peril upon the inquiry whether there is in point of fact an instalment of interest overdue and unpaid; and still less whether there has ever been in the history of the instrument a day's default in the payment of such an instalment. And it is to be observed that this last mentioned inquiry is that which the proposed rule would impose upon an intending taker; for it could hardly be argued that' the character of such instruments — as negotiable or non-negotiable — is changed from time to time according as interest is paid or in arrear. An instrument once stamped with the character "overdue" must, I think, retain that character; it is obvious that any other principle
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would lead to unspeakable confusion. And it is hardly, I think, open to question that in the case of instruments of the character referred to, any rule imposing the burden of inquiry into the circumstances of every preceding payment of interest would in practice destroy the. Commercial currency of them. In point of fact when payable to bearer or indorsed in blank, to use the language of Malins V.C. in Re Imperial Land 00., at page 487, "They pass as freely as bank notes."
It would appear, therefore, that the application of the rule in the manner proposed cannot be justified upon the grounds upon which the rule itself is based.
I come now to those decisions that are precisely in point; and it will be convenient first to deal with the decisions of the American courts. It is here again to be observed that we are applying the law merchant. And while it is true that we have to administer the law merchant which is a part of the law of England, and have no authority to, administer anything but the law of England, yet it is also true that, as in its broad features, the law merchant was much the same in all commercial countries, it is the practice of English judges when the point for decision is a question arising upon the law merchant and is also one upon which English authority is wanting, to have recourse to the law of other commercial countries. Examples may be found in Lord Mansfield's judgment in Luke v. Lyde, and in the judgment of Mr. Justice Willes in Dakin v. Oxley. The weight to be attached to a rule of law of a
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foreign country is increased when the principles of the law there administered upon the subject in question are professedly (as the decisions of the Supreme Court of the United States on this subject are) a development of the law merchant, as recognized by the common law of England.
There are some branches of the law merchant in which the American courts have professedly departed from the common law and in such cases their decisions cannot afford us a guide; but where that is not so, unless at all events it appears to proceed upon principles at variance with the accepted principles upon which courts administering the law of England are accustomed to act, one must, of course, regard a decision of the Supreme Court of the United States upon a point of commercial law not covered by authority in England or Canada as no small evidence of the soundness of the conclusion at which one has one's self arrived.
Although the decisions of the American courts are, of course, not binding on us yet the sound and enlightened views of American lawyers in the administration and development of the law,—
said Cockburn C.J. in the course of a judgment in Scaramanga & Co. v. Stamp, at page 303, dealing with a question of Maritime law
—a law, except so far as altered by statutory enactment, derived from a common source with our own—entitle those decisions to the utmost respect and confidence on our part.
The doctrine which is affirmed uniformly in the decisions of the Supreme Court of the United States on the question before us is that a negotiable instrument
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reserving periodical payments of interest is not, within the rule of commercial law, regarded as over- due merely because default has been made in respect of such a payment.
This doctrine is thus stated in one of the latest of the cases, Morgan v. United States at pages 500 and 502:
The title of the purchaser of overdue negotiable paper, such as a bill of exchange or a promissory note, stands on the same footing as if it. had been dishonoured by a refusal to accept or pay and had been put under protest. When transferred after it has become due, although not reduced to the rank of an ordinary chose in action, the legal title to which cannot pass by assignment or delivery, it carries on its face the presumption which discredits it and deprives it of that immunity which, while the time for payment was still running, was secured to it in favour of a bona fide purchaser for value without actual notice of any defect, either in the obligation or the title. This was put by Mr. Justice Buller in Brown v. Davies, on the ground that to take an overdue note or bill was "out of the common course of dealing." Ordinarily a note or bill when due becomes functus officio, because it was made to be paid at maturity, and if it fails of its intended operation and effect, the presumption is that it is owing to some defect which has furnished a sufficient reason to the party apparently chargeable for not having punctually performed his obligation. In the strong language of Lord Ellenborough in Tinson v. Francis, "after a bill or note is due it comes disgraced to the indorsee." No such presumption, in our opinion, arises to affect the title of a holder of the bonds of the United States, such as those now in question, acquired by a bona fide purchaser for value prior to the date fixed in the bonds themselves for their ultimate payment; .
*******
While it has been held that a note, the principal of which is payable by instalments, is overdue when the first instalment is overdue and unpaid and is thereby subject' to all equities between the original parties, Vinton v. King, yet it is said by the Supreme Judicial Court of Massachusetts in National Bank v. Kirby "we are referred to no case in which it has been held that failure to pay interest, standing alone, is to be regarded sufficient in Jaw to throw such discredit upon the principal security upon which it is due as
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to subject the holder, to the full extent of the security, to antecedent equities."
"To hold otherwise," said this court in Cromwell v. County of Sac "would throw discredit upon a large class of securities issued by municipal and private corporations having years to run, with interest payable annually or semi-annually." And the doctrine was re-affirmed in Railway Co. v. Sprague.
It is quite true that the opposite appears to have been held in New York and Minnesota at an early date; that is to say, it has been held that notice of default in the payment of interest is equivalent to notice of dishonour. But I do not know that it has been held that default in payment of interest alone imparts to the instrument in respect of which it occurs the character of an overdue instrument; and in any case it is plain that these decisions run counter to the main stream of American authority; Long Island Loan & Trust Co. v. Columbus, Chicago & Indiana Central Rway. Co. in 1895, at page 457.
It is argued, however, that the decisions of the Supreme Court of the United States are expressly based upon principles and reasoning which a court administering the law of England cannot adopt.
It is said first that the decisions proceed upon the principle that interest is a mere incident of the principal while the settled doctrine of the English law is that interest reserved by a contract always constitutes a debt distinct from and independent of the principal.
And, secondly, that broadly speaking the law administered by the Supreme Court of the United States in relation to the incidents of negotiability differs so widely from the law of England that the decisions of that court cannot be safely resorted to for assistance
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in the determination of questions arising upon such instruments. In support of these contentions the respondents rely upon the judgments of Howell C.J., and Perdue J., in Moore v. Scott a case which (while it is unnecessary to say that the judgments referred to deserve the most attentive examination) cannot be regarded as an authority upon the point in question by reason of the fact that two out of four judges who took part in the decision expressly declined to give an opinion upon it.
To take the second of these contentions first. The learned Chief Justice of Manitoba in the case referred to at page 501, put it thus:
That case (Cromwell v. County of Sac. shews how widely the American differs from the English law on this subject. In speaking of the rights of a holder in due course the learned judge uses the following language, "Mere suspicion that there may be a defect of title in its holder or knowledge of circumstances which would excite suspicion as to his title in the mind of a prudent man is not sufficient to impair the title of the purchaser. That result will only follow where there has been bad faith on his part." This cannot be the law under the English and Canadian codes.
Now it is to be observed that the learned judge [in Cromwell v. Sac Co. is stating a rule of law, not a proposition compounded of a rule of law and an inference of fact. And he states the law to be that in the case he puts the existence in fact of good faith or bad faith is the test that is to be applied; and the "suspicion" which is the subject of his observation is on the face of it a suspicion not inconsistent with the existence of good faith. So under the "Bills of Exchange Act" in England or Canada, as under the common law the rule of law is absolute that the question in every such case is the question of fact—did the
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taker acquire the instrument in good faith or bad faith? Given facts exciting suspicion, i.e., actual suspicion arising from facts known or believed to exist and either an absence of inquiry or an inquiry which does not remove the suspicion and you have a state of facts which is obviously incompatible with good faith; but it would be going a long way to lay down as a proposition of law that "mere suspicion"—a speculative surmise that something might be wrong without any objective basis—could never in any circumstances be consistent with honesty. And, even so, that is a somewhat narrow ground on which to rest the opinion that the American law on this subject has departed widely from the law of England. Had the point been material I have no doubt that Field J. would have agreed with the observation of Lord Herschell in London Joint Stock Bank v. Simmons, at page 221.
If there be anything which excites the suspicion that there is something wrong in the transaction, the taker of the instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicions aside without further inquiry.
To come then to the contention that the decisions of the Supreme Court of the United States upon this question proceed upon views of the legal nature of the contracts under which interest is reserved in such instruments that are radically at variance with the principles of English law on the subject. Now it is quite true the judgment of Field J. in Cromwell v. County of Sac contains this observation,
The interest stipulated for was a mere incident of the debt.
But it is a mistake to suppose as appears to have been assumed by some of the learned judges in
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Moore v. Scott that this observation implies any such identification of the debt arising from the con-tract for the payment of interest with that arising from the contract respecting the principal as would prevent a separate action for the interest or postpone the commencement of the period of prescription in respect of the interest until the maturity of the principal. On both these points the law had long before, in that court, been settled in the opposite sense in respect of the class of instruments in dispute in the case then under consideration, Clark v. Iowa City. In truth the observation was directed not to any contention that in such cases the two contracts are independent, but on the contrary to a contention that the instrument in question contained but one promise embracing the principal and interest; that in law the debt was a single entire debt; and that anything which dishonours any of the parts of the instrument dishonours the whole. This somewhat technical reasoning was in substance that upon which the American decisions were based in which it was held that de- fault in payment of a single instalment of the principal payable by the terms of a promissory note impresses the note with the character of an "overdue" instrument: Vinton v. King; Newell v. Gregg; and see per Parke B. in Oridge v. Sherborne, at page 378; and the purpose of the argument was to bring the case of a default in respect of a payment of interest within the principle of those decisions. For the rejection of the technical argument ample justification
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on technical grounds is to be found in the decisions in Rudder v. Price, at page 555; Herries v. Jamieson, at p. 556; Dickenson v. Harrison, and Attwood v. Taylor (à). And it would be entirely at variance with the views of English lawyers from the time of Lord Mansfield to the time of Lord Halsbury broadly to affirm that (where by the same instrument payment of both principal and interest is provided for) the obligation in respect of the interest is always to be attributed to a contract wholly independent of the contract respecting the principal. What the relation is between the obligation for the payment of principal and that for the payment of interest is always on the last resort a question of the construction of the particular document out of which the obligations arise; Economic Life Assurance Society v: Usborne, at p. 149; and upon the terms of the document it is to be determined whether, for a given purpose, the two obligations are to be regarded as wholly independent or as integral parts of a single obligation or as bearing to one another the relation of principal and accessory. In the absence of special words the course of the decisions in England prior to the decision of the House of Lords in Economic Life Assurance Society v. Usborne, was to regard the contract for interest as for many purposes "ancillary," "subsidiary," "incidental"; as "following the nature" of the principal; Hollis v. Palmer, per Tindal C. J., at pp. 267 and 268, per Vaughan J., at p. 270, and in Bingham's report of the same case, per Bosanquet J., at page 718; Clark v. Alexander,
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per Tindal C.J., at page 165; Florence v. Drayson, per Cockburn C.J. and Cresswell J., at pages 589 and 590; Florence v. Jenings; Lowry v. Williams, per FitzGibbon L.J., at pages 282 and 283; Ex parte Fewings. If then for the purpose of fixing the character of a commercial instrument—in respect of being overdue or current within the commercial rule—one be obliged/ disregarding broader considerations, to determine as between the contract for principal and that for the payment of interest contained in it which the law regards as the principal and which the accessory; if one be compelled to resort to such artificial tests; then although law of England furnishes no positive rule applicable to the case yet the weight of argument would seem to incline in favour of the view that the character of the instrument should be determined by reference to that which, for many other purposes, is commonly regarded as the principal obligation. And this appears to have been the view of Field J.
For these reasons I think the criticisms referred to miss their aim. But the true answer is that the decisions in question rest on much broader grounds. The true ratio of them is indicated in the passage already quoted from the judgment in Morgan v. United States; and will be found, on a careful examination, to be simply this: that inasmuch as the grounds upon which the rule relating to overdue instruments is founded do not justify the application of it by reason only of a default in respect of a periodical payment of interest, so to apply it, would in effect
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be to introduce a new rule restricting the currency of negotiable instruments which would greatly impair if it would not entirely destroy—the negotiable character of a large class of such instruments now universally regarded and treated as a part of the commercial currency of the country. For the reasons I have given these grounds seem to me to be sound grounds—in conformity with the principles acted upon by English courts for over a century.
Of the views expressed in the judgments in Moore v. Scott, to which I have already referred at some length, and in an admirably clear and forcible judgment of the late Judge McDougall, of the York County Court, in Jennings v. Napanee Brush Co., it is perhaps sufficient to say that my reasons for thinking that these views should not be accepted will, without a more systematic discussion of them, be apparent from the foregoing; although I wish to be understood distinctly as neither approving nor disapproving the actual decision in either of those cases.
There remains the question whether, as regards the unpaid interest itself, the note should for the purposes of the rule in question be regarded as an overdue note. Against the affirmative of these views there is a strong prima facie case in the obvious inconvenience and confusion to which the adoption of it would in practice give rise. And although in strict theory there is something to be said in favour of it, I think it must be rejected.
"The object of the law merchant," said Byles J. in Swan v. North British Australasian Co.,
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as regards bills and notes made or become payable to bearer is to secure their circulation: therefore honest acquisition confers title. To this despotic but necessary principle the ordinary rules of the common law are made to bend.
So the governing factor in the consideration of this question is that the instrument is a current negotiable instrument up to the time of the maturity of the principal; and it would, I think, be incompatible with the full recognition of this character of the instrument to hold that the title to interest not paid when due does not follow the title to the instrument itself.
For the purpose of clearness I will attempt to summarize the ground upon which I think this case ought to be decided.
The doctrine of constructive notice is not applicable to current bills and notes transferred for value, but in all cases when the good faith of the holder is in issue the question is a question of fact to be determined on the circumstances of the particular case; and on the evidence here the plaintiffs should be held to be holders for value in good faith.
Upon the question whether the note sued upon was overdue when it was acquired by the plaintiffs, as a clear rule upon that question cannot be gathered from the express, provisions of the "Bills of Exchange Act" we must under section 10 of that Act have recourse to the common law for the purpose of arriving at the rule to be applied. The grounds upon which those decisions are based in which the rule limiting the currency of overdue instruments has been enunciated and applied do not in my judgment justify the application of the rule to a bill or note in respect of which the principal is not yet due, merely because a payment of interest is in default.
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Moreover, for the reasons given, the plaintiffs cannot in taking the note sued upon be said to have taken a dishonoured note with notice of its dishonour.
Idington J. (dissenting).—This is an appeal per saltum, by leave of Mr. Justice Mathers, from the trial judge who dismissed the action to recover the amount of a promissory note he had found on the facts to have been obtained by fraud.
It is conceded the appellants are holders for value.
The note was given in the following form:
$875.00 Gilbert Plains, Man., March 5th, 1903.
March 1st, 1905, after date, for value received, we jointly and severally promise to pay McLAUGHLIN BROS., or order, Eight Hundred and Seventy-Five Dollars at the Canadian Bank of Commerce, with interest at six per cent, per annum, interest payable annually.
for the price of a stallion alleged to have been sold to a syndicate of whom twelve signed.
It was concluded by us all at the close of the argument of the appellant's counsel that the circumstances were such that the payees if suing could not recover.
The question remains whether or not the appellants can hold any higher position.
They took it on the 11th of February, 1905, knowing only that the business of payees was that of horse dealers and assuming therefrom that the note represented some dealing in horses.
It appears that they made no inquiries. The interest for the first year was then and had been past due for nearly a year. They sue for this interest as well as the principal and interest for the time since the end of the first year.
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It is claimed that, the interest being for the first year overdue and unpaid when the appellants took, they cannot claim to have taken in due course, so as to deprive thé makers of the right to set up all the equities attached to the note, that they might have set up if payees had been suing. Can it be said that. the yearly interest being overdue for nearly a year, the note is overdue within the meaning of sections 56 and 70 of the "Bills of Exchange Act?"
I do not think that the codification of the law in that Act was of such a nature as to either extend or restrict the meaning of the word "overdue" in this connection.
Nor do I find any help from a comparison of the use of the word "overdue" in these sections and in other parts of the Act or from a reference to the use of the word "interest" where it occurs in the Act.
At first I was disposed to think the use of the words "interest payable annually" unwarranted by the defining section 28 which seems to imply that the interest is to be the whole interest. But I think it must be taken when severed as in this note into annual payments of interest as if of annual instalments and, if need be to maintain the necessary quality of being for a sum certain, be treated as an instalment.
No case in England and only the cases of Moore v. Scott, and Jennings v. Napanee Brush. Co., in Canada, deal with the point. The decisions in both these cases are against the appellants' view. The matter is well reasoned out in each. The first is from the appellate court of Manitoba. The second is by the late Judge McDougall, of the County Court of the
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County of York, in Ontario, whose opinions were always worthy of great consideration. As usual with him, he referred to and presented fully the opinion he combatted and then proceeded with his own exposition of the law.
I prefer his reasoning to that which proceeds as some American cases do upon the basis of the interest being but an incident of the contract.
It is as I have already found an instalment.
Is an overdue and unpaid instalment enough to bring a bill or note within the meaning of "overdue" in the Act and in the law as it stood before it was codified by this Act?
I think it is. It seems to contain all the elements that formed the foundation for the rule.
Brown v. Davies is one of the earliest reported cases on the subject.
In 1789, Kenyon C.J. being of opinion that unless knowledge was brought home to the plaintiff the defence of its previous payment as against a payee could not be put up as against the indorser.
It was stated in argument of that case that Mr. Justice Buller had in another case Banks v. Colwell said that it had been repeatedly ruled at Guildhall that wherever it appears that a bill or note has been indorsed over, some time after it is due, which is out of the usual course of trade, that circumstance throws such a suspicion upon it that the indorsee must take it upon the credit of the indorser and must stand in the situation of the person to whom it was payable. In his judgment in the case just argued, Buller J. stated:
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But if it is overdue though I do not say that by law it is not negotiable yet certainly it is out of the common course of dealing and does give rise to suspicion.
Again he says:
A fair endorsee can never be injured by the rule; for if the trans-. action be a fair one he will be entitled to recover. But it may be a useful rule to detect fraud whenever that has been practised.
In a foot-note there is a case of Taylor v. Mather mentioned.
In this Buller J. said:
I have always left it to the jury upon the slightest circumstance to presume that the indorsee was acquainted with the fraud.
As Lord Ellenborough put it in the case of Tinson v. Francis,
After a bill or note is due it comes disgraced to the indorsee.
This language is just as applicable to a bill or note of which one or more instalments is due as if the whole were due. Especially is this so whenever as here the indorsee buys the overdue interest as part of his purchase. His suing for it surely entitles us in the absence of explanation to assume the appellant did so.
It is a broken contract.
It could be presented and protested. It could be sued upon and judgment be recovered for that which is due. See the case of Oridge v. Sherborne.
If suit were brought by the payee and a defence of fraud set up that defence would when adjudicated upon determine conclusively the same question between the same parties as to the rest of the note. See Black River Savings Bank v. Edwards.
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In the case of Vinton v. King a Massachusetts Supreme Court decision, it was expressly held that an instalment of principal having fallen due and remained unpaid the note was overdue, and taken by a later indorsee subject to all the equities attaching to the note. Indeed, Mr. Daniels' work on Negotiable Securities (5 ed.), p. 781, broadly lays it down that an overdue instalment of a bill or note renders it an overdue bill or note within the rule.
This principle has been applied elsewhere. Indeed, I cannot find it has been very seriously questioned.
An overdue instalment is universally held in, and I think the preponderance of authority in the United States is that default in payment of interest is just as effective to constitute the instrument an overdue bill or note as is default as to both principal and interest maturing on the same date.
The distinction made between instalments of principal and instalments of interest is I think essentially unsound.
It proceeds upon undue stress being laid upon what is said as to interest being only an incident of the debt.
I agree to the fullest extent with the reasoning of the late Judge McDougall in the Jennings Case cited above.
To say that an instalment of one hundred dollars being overdue is fatal, but one of a thousand dollars of interest of no effect, seems to me trying to make a distinction without a difference, when we have regard to the reason for the rule.
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The radical error is in treating the interest as something incidental to and not part of the contract.
It arises, I suspect, from the radical difference of the point of view interest is looked upon in the United States as distinguished from that obtaining in England.
Sedgwick deals with this at page 430, Vol I., of the 8th edition of his work on Damages as follows:
Sec. 292: Difference between English and American law.
In the American courts interest is allowed as damages more liberally than in England. The leading difference seems to grow out of a different consideration of the nature of money. The American cases look upon the interest as the necessary incident, the natural growth of the money, and therefore incline to give it with the principal, which the English courts treat it as something distinct and independent, and only to be had by virtue of some positive agreement or statute.
Adopting the English point of view as we ought I see no difficulty in treating interest as any other instalment overdue.
No point seemed to be made of the presumption or inference relative to the knowledge or want of knowledge of the appellants, when taking the note, of the non-payment of the year's interest which I find was overdue and unpaid.
I have considered it and concluded that in the absence of any explanation the suing for it must be attributable to some knowledge or assumption of knowledge that cannot now be denied by the appellants.
One thing we must always bear in mind in dealing with questions such as this arising upon negotiable securities and the promissory note form especially; and it is this that the transferability of the original contract, so operating as to defeat the rights of the
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original parties to the contract, by creating a new contract as it were with a third party unknown, is an invasion by the law merchant, and the statutes ex- tending the same, of the general law of contract and ought not to be extended further than well recognized authority or custom or statute carries it.
A curious condition of things is accidentally disclosed by seeking for authority amongst American cases. It is that in the case of First National Bank of St Paul v. County Commissioners of Scott County it appears the courts of the state where the note, in question here, was transferred, have treated overdue interest as if principal.
I suppose I am debarred on principle from recognizing this foreign law as a fact whilst asked to consider it as a means of general instruction. It only adds one more to the many unexplained things that appear. It shews how things in a law suit are left to chance, without the application of that industry that ought to be supplied to minimize perchance the realm of chance.
Having our attention called to debentures and their coupons as analogous negotiable instruments and the conflicting decisions anent the same, I desire to say that there may be a distinction between them and bills or notes arising from their respective differences of origins and the different modes of commercial handling of the same or the custom of their markets, and hence I would desire to be understood as reserving any opinion anent the same till the occasion arise. For example, the coupons are often severed from the contract for principal.
I cannot find under the circumstances of this case
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authority or reason to warrant me in adding, to the point of overdue interest, any weight arising from the suspicions, if any, caused by the alteration of the rate of interest on the note.
The note was admitted and that must be taken to cover the need for explanation of the alteration, and leave the note in that regard as "regular on the face of it." At least that is my present impression. Perhaps I am mistaken and it should be held to fail in this regard to get any support from the Act.
Is the pencil indorsement of the horse being returned such evidence of that fact as should be held to impeach the good faith of the appellants? Is it to be inferred that this had been indorsed before coming to appellants?
In the view I have taken of the case it is unnecessary for me to decide. Indeed, if I felt this should be decided I would be inclined under all the circumstances to grant a new trial to ascertain the fact with costs to abide the event of such issue.
Having regard to the foundation upon which the rule as to, overdue notes rests-, the current of such authority as there is, on the point, the probable conformity thereto in practice, and the undesirability of disturbing the same, I think, the appeal fails and should be dismissed with costs.
Maclennan J (dissenting).—I agree in the opinion of Mr. Justice Idington.
Appeal allowed with costs.
Solicitors for the appellants: Fisher, Wilson & Ewart.
Solicitors for the respondents: Hudson, Howell, Ormond & Marlatt.
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