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banks are obliged to bring into the clearing house the sums which they have respectively lost; and shortly afterward the gaining banks come and receive from the officers of the clearing house, out of the funds thus furnished by the losers, the amounts of their respective gains. In this manner the business of settling the daily balances and exchanges between the several banks is accomplished with extraordinary rapidity, accuracy, and cheapness. The computation of how much each bank has brought in against others and of how much the others have brought in against it, is performed by skilful clerks in a very few minutes. So soon as it is finished an officer of each bank takes from its drawer or box all the checks against it which have been placed therein by the other banks and carries them back to his own bank to be examined, for the purpose of seeing whether or not any of them must be dishonored by reason of want of funds of the drawer. The casting of the balances at the clearing house is not of course, as it would be impossible that it should be, binding upon any bank as to the genuineness or the honoring of the checks which are placed in its drawer and which purport to be honestly drawn upon it by depositors having funds. A time is therefore set within which each bank is expected to examine all such checks and to return such as it refuses to pay. The computation already made at the clearing house is not affected by the repudiation in this manner of checks by any bank. But each check before being placed in the box of the drawee bank is marked, for the purpose of identification, with the name of the bank presenting it through clearing; therefore the bank on which it is drawn and which refuses to pay it is able at once to send it back to the bank which brought it in and to demand a repayment of its amount to be made. If the repayment is refused for any reason the question lies wholly between the two banks, and the one on which the check was drawn has no means of satisfaction afforded by the clearing house, but must bring its suit directly at law.
A clearing house may be legally incorporated; but more commonly it is a mere private association organized among the banks to suit their own requirements and convenience. Of course the authority of such an association must be very limited. In the absence of special legislation it is impotent by its own arbitrary and original power to alter any obligation of the common law. Neither has it any authority to bind banks, which are not parties to the association, by any by-laws, rules, or usages which it may see fit to establish. Some of the regulations of the clearing house are embodied in by-laws, others are simple rules or usages which are adopted and tacitly acquiesced in by the members. There is no legal distinction between these two classes. When once the rule or usage has been established by satisfactory proof it is as binding as the formal by-law. The only practical difference is in the greater difficulty which must be experienced in proving with accuracy the existence and extent of the unexpressed custom.
The by-laws, rules, and usages are binding only upon members of the association. No outside bank is under any degree of obligation to observe them. But on the other hand no outside bank can have any remedy against any member of the association for a breach of them. They are in the nature of a contract to which the outsider is no party. The duty of adhering to them runs from each of the members to each and all the rest, but to no other person or corporation; at least unless any special and peculiar course of dealing between any member and any outside individual has operated to place that member under an express and exceptional obligation to the outsider to adhere in all matters in which he is interested to the regulations of the clearing house. Generally, “ those who are not bound by such usages, and have not contracted with reference to them, have no right to avail themselves of them to create an obligation against those who are parties to their adoption and bound by them inter sese only.” But if any bank or person not a member of the association can show that, by virtue either of an express or an implied understanding, he did contract with a member “in reference to " such usages, he may hold the bank to the fulfilment of this special contract.
If any person or bank employs a member of the association to transact any business, such employer is neither bound by the rules, nor entitled to take advantage of and enforce them as against other members, by reason of the fact that the agent is a member. The fact of the agency does not “ bring the case within the operation of the rule, that the principal is entitled to the benefit of the contract of the agent, while transacting the business of the principal. This is undoubtedly true as to all the legal rights acquired by the agent for the benefit of the principal; but ” the clearing-house rules are “a mere laborsaving usage, designed for the exclusive benefit of the agent, the adoption of which could not affect the principal without his assent."
The foregoing principles were laid down in a very satisfactory opinion delivered by the Chief Justice of the Supreme Court of New Jersey ;1 and the facts of the case in support and explanation of which they were enunciated, are well worth a brief recital. The plaintiff deposited in the Bank of Commerce in New York city, a check drawn on the defendant bank, which was situated in New Jersey. The defendant, of course, was not itself a member of the New York clearing house; but it had as its agent in New York city the Ocean Bank, and it was wont to receive and pay checks drawn upon it through that bank. That bank was a member of the clearing house, and used its facilities in transacting the business of the defendant bank. The check in question came from the Bank of Commerce through the clearing house to the Ocean Bank. The rules of the clearing house required that any check which was not to be honored must be returned before ten o'clock A.M. of the day following that on which it was received through clear. ing; otherwise the bank on which it was drawn would be held
1 Overman v. Hoboken City Bank, 1 Vroom, 61; 2 id. 563.
to pay it. If, therefore, this check had been drawn directly on the Ocean Bank, that bank must either have returned it before ten o'clock of the next day, or it must, according to the rules, have paid it. It was returned a whole day later than this limit with the statement that it could not be paid since the defendant had no funds of the drawer's. The plaintiff, who had lost the amount of the check by the intermediate failure of the drawer, sought to hold the defendant on the ground that since its agent was a member of the clearing house, and was uniformly wont to adhere to its rules and use its facilities in transacting the defendant's business, therefore the defendant was itself answerable for the agent's breach of such rules, and was itself liable to suffer for such breach according to the terms prescribed by those rules. Besides laying down the doctrines stated in the three preceding paragraphs which directly militated against any recovery by the plaintiff, the court further criticised the very sufficiency of the rule or usage which he set up, even if it could be applicable at all to the defendant bank, to cover the circumstances of this case. For the usage appeared to be that where a check is presented at the clearing house “ to a bank against which the said check was drawn” then it must be returned within the prescribed time, or paid by such bank. But the proof in this case showed a presentation not "to the bank against which the check was drawn” but to an agent. is an essential difference. For such a purpose the agent does not represent the principal. The usage, if contemplating a presentation to the principal may be reasonable, and very unreasonable if extending to the agent. The plaintiff has failed to bring his case within the usage.” The soundness of these
" remarks will be seen at once if we suppose the employing bank, the defendant in this case, instead of being close at hand in New Jersey, to have been situated in Boston or Chicago or Philadelphia. The New York agent cannot possibly know the state of the accounts of the depositors in its principal's books. It cannot properly agree or refuse to pay checks drawn upon
66 This to pay
it, and some days must be consumed in the intercommunication, meantime the twenty-four hour rule, which appears to be arbitrary, would have concluded the distant bank from refusing
the check long before that bank was aware that such a check had been drawn. The practical reductio ad absurdum is obvious.
A case has very lately been decided in Massachusetts 1 which arose between two banks, both members of the clearing house. The rule on which it was based was embodied in a formal vote or article of the association ; in the words following, to wit: “Whenever checks are sent through the clearing house, which are not good, they shall be returned by the banks receiving the same to the banks from which they were received, as soon as it shall be found that said checks are not good, and in no case shall they be returned after one o'clock.” The plaintiff bank returned the check, as dishonored, to the defendant bank, which had presented it at clearing; but the messenger carrying the check did not arrive at the rooms of the defendant bank until five or seven minutes after one o'clock. The defendant bank, on the ground that the return was made too late, under the rule, refused to take back the check or to refund its amount. It did not appear, however, that the position or relations of the defendant bank to the drawer had undergone any change in the few minutes that had elapsed since one o'clock. It would have been no worse off if it had consented to receive back the check at five minutes after one than it would have been had it been obliged under the rule to receive it back at five minutes before one. The court took the view that the articles of association were in the nature of a contract between the members. If the plaintiff had not kept the check so long that it would at common law be held to have adopted it and assumed to pay it, the power to refuse to pay it, and to return it, still existed, and could be affected by the rule of the Clearing
1 Merchants' National Bank v. Eagle National Bank, Massachusetts, 101 Mass. (not yet printed).