An instrument to be negotiable "must contain an unconditional promise or order."
(1) In general.
A promissory note must contain an absolute promise, a bill or check an absolute order, to make them negotiable. And the absoluteness of the promise or order must appear from the language of the instrument, not from extrinsic circumstance.
(2) Reference to transaction or consideration as affecting absolute character of promise or order.
Bills, notes and checks sometimes refer more or less extensively to the transaction to which they relate, and the question presents itself whether such references are to be construed as making the promise or order conditional. In this connection it should be first noted that the absolute character of the obligation as drawn does not prevent defenses from being set up as between the parties where the contract for which the instrument was given is violated or the consideration in any manner fails. For instance, if one gives his promissory note to another for services to be rendered by that other, the note is not negotiable unless drawn as an absolute promise to pay, yet nevertheless if the payee sues, the defense of non-performance can be successfully interposed as a defense. But as against a purchaser from the payee the defense cannot be made as explained in another part of this book.
But the negotiable instruments law proceeds upon the theory that it is the making of the promise or order absolute in form "which (with the other requirements) indicates the intention of the maker or drawer that the obligation shall have negotiability. For if he makes it conditional, there is a tying up of the obligation with the conditions of the transaction which negatives the idea of negotiability.
Is a reference to the consideration or transaction a qualification of the promise or order? Does such reference impair the requirement that the promise or order must be unconditional? If the maker writes upon the note that it is "given for a horse this day purchased from the payee" does this in itself destroy absoluteness of the promise?
If the reference to the consideration or transaction is a mere recital by way of identification, it does not impair negotiability 17
It will be clearly seen upon reflection that a reference to the consideration or transaction in connection with which the instrument arose cannot hinder negotiability, provided, it is by way of mere recital and does not impose conditions of performance or otherwise. The reason is that when any person purchases negotiable paper, he must assume that there was a transaction in connection with which it was given, and a consideration for which it was given. If he knows in fact that there was no consideration he should not purchase. If he goes upon the general presumption that there is a consideration, it cannot detract from the situation that he be informed definitely what the consideration was. This should strengthen rather than weaken the case. If he buys a note, suppose he is told upon the face of the note that it was given for goods purchased. Here the general presumption of consideration to which he is entitled, is intensified into a particular item of information.18 But he is no more informed by this fact that there is anything wrong with the note than he would be, were such notation not made. Therefore a mere recital of the actual consideration should have no effect upon the negotiability of the instrument.
17. Id. SEC. 3.
Example 9. Siegel, Cooper & Co., merchants of Chicago, contracted with one D. Dalziel, for street car advertising to be placed by him, and gave in consideration for his undertaking the following note:
"Chicago, Mar. 5, 1887. "300
| On July 1, 1887, we promise to pay to D. Dalziel, or order, the sum of three hundred dollars, for the privilege of one framed advertising sign, size ............x............
inches, one end of each of 159 street cars of North Chicago City Railway Co., for a term of three months from May 15, 1887.
Siegel, Cooper & Co."
Dalziel sold the note for value on the day he received it to the bank. The work was never done. In a suit by the bank against Siegel, Cooper & Co.,19 defendant claimed that the note was nonnegotiable by reason of the recital of the consideration, but the court held that it was a mere recital in no way qualifying the absoluteness of the promise to pay, and the note was therefore negotiable. If the note had said "subject to performance by payee," it would have been nonnegotiable.
It appears by the above case that though the reference to the transaction shows that it is executory, the note is still negotiable. It follows that it is negotiable if the recital shows a completed transaction.
18. Hereth et al. v. Meyer, 33 Ind. 511.
19. Siegel v. Bank, 131 111. 569.
In case of recitals showing a retention of title by the payee of the goods for which the instrument is given, the rule is the same, although there is some variance of authority on this point. But the provision must not qualify the promise or make it in any sense conditional.
Example 10. A note otherwise negotiable in form but retaining the title for purposes of security to property bought by the maker and for which the note was given is negotiable.20
By statute in some jurisdictions, certain notes given for certain considerations must so state upon their face, and are then to be purchased subject to any defenses that may exist. Thus, under local laws, chattel mortgage notes, notes given for patent rights, etc., may be subject to special statutory considerations, that limit their negotiability.
If the reference to the transaction is in form conditional the instrument is not negotiable.
The cases above described in which there is a mere recital of, or reference to, the consideration must be carefully distinguished from cases in which the payment of the instrument is in any way conditional upon or made subject to performance of the consideration. The promise to pay must be absolute. Any verbiage qualifying the obligation renders the note nonnegotiable. There must be an absolute promise to pay.
Example 11. A note reading "12 months after date we promise to pay to ourselves or order $321.25 for value received and subject to a policy" held not to be negotiable.21
20. Welch v. Owenby, 175 Pac. (Okla.) 746; Chicago Ry. Equipment Co. v. Merchant's Bank, 136 U. S. 268; Mott v. Havana Nat. Bank, 22 Hun. (N. Y.) 354; contra, Sloan v. McCarty, 134 Mass. 245.
(3) Indication of particular fund, account, credit, etc., as effecting absolute character of promise or order.
Bills, notes and checks sometimes indicate a fund, an account, or other item. This is naturally more particularly true of bills of exchange in which the drawer refers the drawee to a source of his reimbursement upon his honor of the paper. Does the indication of a fund destroy negotiability?
If the indication of the fund, account, credit, etc., does not qualify the obligation to pay its presence has no effect upon the negotiability of an instrument otherwise correctly drawn.
It is permissible in negotiable instruments to refer to a fund or to an account, or to the fact of a credit in the drawer's favor, out of which the drawee may or is directed to reimburse himself or debit the drawer, provided, the intention is that the obligation is such at all events, regardless of the existence of the fund, account or credit, or of its sufficiency, that is to say, provided the obligation is drawn upon the drawer's general credit, and is payable at all events, and not drawn upon the credit of a fund, account or credit.
Example 12. A bill of exchange directing the drawee to pay to the payee or order a specified sum of money "on account of contract between you and the Snyder Planing Mill Co." is negotiable.22 It is an absolute obligation and the reference to the fund is for book-keeping or identification or similar purpose.
21. Amer. Exch. Bk. v. Blanchard, 7 Allen, 333; Mott v. Bank, 22 Hun. 354.
22. First Nat. Bk. v. Lightner, 74 Kan. 736; Alger v. Scott, 54 N. Y..14; Brill v. Tuthill, 81 N. Y. 454, 37 Am. Rep. 454.
If there is an indication of a fund out of which payment is to be made the obligation is not negotiable regardless of the fact of existence or sufficiency of such fund.
A note, bill or check payable out of a particular fund is not negotiable for there may be no such fund, or it may be insufficient. The obligation is therefore in form conditional. The existence of the fund and the sufficiency thereof do not change this rule, for a negotiable instrument must be negotiable on its face and not by the force of extrinsic facts. If payable out of a fund it is drawn on the credit thereof and is not negotiable.
Example 13. An order reading as follows: " Starkey, New York, Jan. 6, 1869. To A., You will please pay to M. or order $2000 on demand and deduct the same from my share of the profits of our partnership business in malting," was held not to be negotiable.23
The court said in the above case: "The true test would seem to be whether the drawee is confined to the particular fund, or whether, though a specified fund is mentioned, he would have the power to charge the bill up to the general account of the drawer if the designated fund should turn out to be insufficient. In the final analysis of each case, it must appear that the alleged bill of exchange is drawn on the general credit of the drawer."
Example 14. A promise to pay "out of the profits on the East 40th Street Job" is nonnegotiable.24
23. Munger v. Shannon, 61 N. Y. 251.
24. Meany v. Pool & McCord, 136 N. Y. 610.