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Negotiable Instruments and the Federal Common Law of Commerce

Judges also applied the new contract doctrines to the law of negotiable instruments. A negotiable instrument is a document by which one party promises to pay either money or goods to another, called the bearer. A check written on your bank account is a negotiable instrument, but commercial contracts--called commercial paper in the legal vernacular--were the most important form of antebellum negotiable instruments. They circulated as currency, because specie (gold and silver) was in short supply and paper currency was often unsound. The most perplexing area of the law of negotiable instruments involved the right of assignment. This word simply means that the instrument, which was prepared by the first person and represents a debt, is given to a third person, who can collect on it in payment of an obligation owed by the person giving it to him. The negotiation of commercial paper was vital to the web of commercial agents and the trading network they controlled.

The long-term pattern was toward full negotiability of commercial paper and the establishment of a uniform set of principles to govern its flow. In 1800 only five states provided for full negotiability, but by the Civil War every state had accepted that position. The federal courts were particularly important in molding this uniformity, and the role of Justice Joseph Story was especially significant. 51 Story was the nation's leading authority on negotiable instruments, a position he claimed through his influential treatise, Commentaries on the Law of Promissory Notes ( 1845).

Story delivered the opinion of the Supreme Court in Swift v. Tyson ( 1842), a ease that developed the federal common law of commerce. Swift involved the application of a New York court decision that held that a person could not give a bill of exchange (a document drawn on the account of one person and given to another for something received of value) to satisfy a preexisting debt. In essence, a bill of exchange could not be assigned. The New York law limited the circulation of commercial paper and produced great uncertainty for people engaged in commercial dealings.

Justice Story used Swift as an opportunity to begin the development of uniform rules for the negotiability of commercial paper where the parties were in diversity--

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that is, where they were from different states. To do so, he had to resolve the question of the basis on which federal court judges ruled. Was the Federal District Court sitting in New York obliged to follow the common law of that state on a commercial law question? Or, could it decide on some other basis? Section 34 of the Judiciary Act of 1789 provided that "the laws of the several states . . . shall be regarded as rules of decision in trials at common law in the courts of the United States, in cases where they apply." 52 What this meant was unclear, because "law" could be a statute or a court ruling. Story decided that the word "law" in the 1789 act meant the "positive statutes of the state, and the construction thereof adopted by the local tribunals, and . . . rights and titles to real estate." Negotiable paper was not real property and it lay outside local control, when the parties were from different states. Therefore, Story said, federal judges in commercial cases were free to turn for their decisions to "the general principles and doctrines of commercial jurisprudence." 53



Story aimed to replace the indeterminacy in commercial law with a unified body of rules promulgated by federal courts that could be broadly applied. The decision was a milestone in the rising authority of the federal courts and law. While the Supreme Court rejected a federal common law of crimes as an inappropriate interference with the states and with individual rights, it proved willing, in the face of a chaotic marketplace, to develop a federal common law of commerce.

Antebellum judges shaped the market economy through their interpretation of the law of contract. The Supreme Court, for example, broadened the meaning of a contract, first in holding in Fletcher v. Peck ( 1810) that a grant made by a state was a contract and then in Dartmouth College v. Woodward ( 1819) that a charter granted by a state was a contract. Along with state judicial decisions, the law of contract became a utilitarian device that fostered technological development, gave stability and uniformity to commercial dealings, and hastened the growth of a national market economy. But the "will theory" of contract law also opened a great divide between traditional precepts of morality and equity on the one hand, and objective formal rules on the other.

 

Tort

The same issues of economic efficiency and moral conduct appeared in tort law. A tort is a civil wrong. Judges employ legal principles associated with it to distribute the costs of accidents among social interests. Accidents associated with the advent of new technology, such as the application of steam power to transportation by railroad and steamboat, created potentially debilitating costs. One way to reduce those costs in an already capital-scarce economy was to relieve risk-taking entrepreneurs of responsibility for them. The victims of accidents produced by the machinery of the Industrial Revolution, on the other hand, suffered both physical damage (and often death) and financial loss, both in earning power and in the costs of regaining their health. Historians differ sharply about which of these groups--capitalists or victims--benefited from judicial mediation of disputes among them rising out of accidents, but the courts seem to have maintained something of a middle ground in tort law (as they did in other areas of antebellum law).

Tort law in the United States only began to develop as a separate body of law

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during the 1840s. Until then most tort principles had been considered a part of the law of contract. The first major treatise was not published until 1859, with Francis Hilliard's The Law of Torts, or Private Wrongs. The case law only swelled after the Civil War, when industrialization had its fullest impact. Still, antebellum developments were significant, both as a precursor of the future and as evidence of assumptions that judges of that era held about the proper relationship of law to economic growth.

The establishment of the fault principle was the most important tort law development before the Civil War. The English common law followed the doctrine of strict or absolute liability, which meant that all a plaintiff (the injured party) had to do was show that the defendant had committed the injury. There was no attempt to assess blameworthiness. Judges also accepted through the action of "trespass on the case" that an injury could be done on an indirect basis. Trespass on the case meant that if a person could be shown to have indirectly caused an accident he was just as responsible as if he had directly caused it. Absolute liability placed the burden, and hence the costs of the accident, squarely on the person who perpetrated it, whether or not he did so either intentionally or indirectly.

Antebellum judges, however, reexamined the meaning of tort liability within the context of a market economy dependent on new and often dangerous forms of technology and a society in which strangers increasingly came into contact with one another. The fault standard replaced strict liability. Brown v. Kendall ( 1850), decided by Lemuel Shaw, was the leading case. The defendant, in attempting to break up a fight between two dogs, inadvertently damaged the eye of the plaintiff. The plaintiff sued on the basis of absolute liability. Shaw concluded that this traditional standard was no longer applicable, finding that the plaintiff had to "show either that the [defendant's] intention was unlawful, or that the defendant was in fault; for if the injury was unavoidable, and the conduct of the defendant free from blame, he will not be liable." Shaw held that the defendant was required only to exercise a standard of "ordinary care," which meant the degree of care that a prudent person would exercise. 54

Shaw virtually created a new field of law. He introduced the principle of blameworthiness: that there could be no liability without fault. Injured people could no longer win damages merely by showing that a person had perpetrated the injury. They had to show as well that the action had been negligent. Furthermore, Shaw permitted a defendant to escape liability if he could show that his act had not directly caused the accident.

Shaw's decision contained another innovation: the idea of contributory negligence. Under it a plaintiff could not collect damages if he was in any way responsible for (if he contributed to) the accident. The plaintiff's own negligence, even if slight, acted as a barrier to his recovery.

The results of this prodefendant bias were stark, even chilling, in the area of employer-employee relations. Traditionally, the English common law had placed an employee in the position of a servant for whom his employer (as his master) was responsible for all of his civil wrongs. New technology, the factory system, and expanding markets undermined this relationship by creating both physical and psychological distance between employer and employee.

Courts accepted the new reality of the workplace through the fellow-servant rule and the doctrine of assumption of risk. As with the law of labor organization, the

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emerging law of industrial accidents favored capital over labor, augmenting the costs of accidents on the work force through these doctrines. They were found in an English case, Priestly v. Fowler ( 1837), and accepted into American law shortly thereafter. In Murray v. South Carolina Railroad ( 1841), the South Carolina Supreme Court overturned a jury verdict given to a fireman on a railroad line who had lost a leg in an accident. But the leading case was Farwell v. Boston and Worcester Railroad ( 1842), decided by Lemuel Shaw, who limited the labor conspiracy doctrine the same year in Commonwealth v. Hunt. The same insistence on a competitive marketplace that prompted Shaw to accept labor organization also explains his insistence that risk-taking capitalists not be fettered by what he considered an unreasonable level of liability for their actions.

Farwell involved an engineer whose right hand was crushed when the engine tipped over on him as a result of another employee improperly throwing a switch. Shaw, for a unanimous court, invoked the fellow-servant rule and the doctrine of assumption of risk to deny Farwell any recovery. A person "takes upon himself," Shaw wrote, "the natural and ordinary risks and perils" of a job when he hires on. 55 Farwell, Shaw argued, should have realized that he was assuming the risk of just such an injury. Furthermore, because the employer was removed from the direct supervision of Farwell, the engineer had two choices: he could warn the employer of any potential danger or he could quit. Shaw's opinion placed the costs of the accident on the victim--except under the most demanding standards--rather than on the corporation and its management. Farwell, of course, could sue his fellow servant, but such a person was unlikely to have the resources necessary to pay full compensation. Shaw freed some capital for further business investment and, thereby, provided through the law an indirect subsidy for early industrial expansion.

The thesis that courts used the fault standard to subsidize capital development must be advanced with care. Gary Schwartz, for example, has found that for the jurisdictions of New Hampshire and California, the trial and appellate judges often showed great solicitude for the victims of accidents, especially passengers. There was a longstanding common law rule that public carriers were fully responsible for the safety of the passengers they transported. "Railroad passengers," he found, "were only rarely denied a recovery on account of contributory negligence." 56 The judiciary was also sensitive to the victims of boiler explosions. In Spencer v. Campbell ( 1845), the Pennsylvania Supreme Court rejected a defense plea that any negligence in the explosion of an engine at a grain elevator was due to the plaintiff's own negligence. The court ruled that the owner of a public trade or business, which required the use of a steam engine, owed a duty to the public it served to be responsible for any injury resulting from its deficiency. The case became a precedent for future lawsuits involving boiler explosions.

The U.S. courts continued to apply the doctrine of absolute liability to ultrahazardous activities, although the fault principle was regularly applied to actvities, such as steamboats and trains, that had perilous accident records. The New York Court of Appeals in 1852 decided the leading American case of absolute liability. Thomas v. Winchester involved a drug manufacturer who had provided a potentially fatal poison, belladonna, instead of extract of dandelion to a druggist. The druggist then sold the compound to the plaintiff. The case was important because a decade earlier an English court, in Winterbottom v. Wright ( 1842), had held that an action for damages could

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only be brought if there was a direct connection (i.e., privity of contract) between the plaintiff and defendant. Arguably, in Thomas v. Winchester, the plaintiff, whose wife had nearly died, was not in privity of contract with the drug manufacturer.

The New York court decided otherwise. It held that the production of drugs was so inherently dangerous that manufacturer responsibility extended into the marketplace. The court likened the role of the drug manufacturer to "[t]he owner of a loaded gun who puts it into the hands of a child by whose indiscretion it is discharged" and thus is "liable for the damage occasioned by the discharge." 57

Antebellum judges devised rules that shaped the law of tort for the remainder of the nineteenth century and well into the twentieth. They accepted that some injuries would go uncompensated and that a fault standard (removed from jury supervision) would facilitate economic development by insulating entrepreneurs from the costs of accidents. Tort principles fell with special harshness on the growing industrial work force, although judges in cases involving public transportation accidents showed some solicitude to passengers.

 


Date: 2015-01-29; view: 1092


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