Story Case

Ray McDonald sold a wagon to George Clark, representing it to be made out of the best hickory wood. Clark gave in part payment a note as follows:

"$50. Oct. 1, 1914.

I promise to pay to Ray McDonald, in sixty days, the sum of fifty dollars.

(Signed) George Clark."

McDonald indorsed this note to Guy Stebbins, who paid value for it. When the note became due, Clark refused to pay the full amount, claiming that the wagon was not as McDonald had represented it. Stebbins contended that this defense could not be held against him, since he is a bona fide purchaser, for value, of a negotiable note. Is this correct?

Ruling Court Case. Gerard Vs. La Coste, Volume 1 Dallas' Pennsylvania Reports, Page 194

A bill was drawn "payable to Basse and Sayer." It did not contain the usual words "or order," or "or bearer," or any other words of negotiability. It was drawn upon and accepted by La Coste. After acceptance, it was transferred for value to Gerard. Suit was brought by Gerard, in his own name, against La Coste, the acceptor. The question presented was whether this is a bill of exchange which, by the Law Merchant, is indorsable, so as to enable the indorsee to maintain an action on it against the acceptor in his own name. It was contended by La Coste that it was not a bill of exchange because it contained no words of negotiability.

Decision: A bill of exchange or a note must contain some words of negotiability, in order to be a negotiable instrument. The usual words used are "order," or "bearer." These words, by Law Merchant, were necessary to authorize the one to whom it is made payable to indorse to some third person. An instrument without such words is only assignable and not negotiable. The bill in question contained no words of negotiability and Gerard cannot sue upon it in his own name. The court said: "There is certainly no precise form of words necessary to constitute a bill of exchange, yet, from the earliest time to the present, merchants have agreed upon nearly the same form, which contains few or no superfluous words - terms of negotiability appearing to make part of it." Judgment was given for La Coste.

Ruling Law. Story Case Answer

The words "to order" or "to bearer" are known as words of negotiability. It was from these or similar words that the courts implied the authority that the instrument might be transferred to any person. These or similar words have always been held necessary in a valid negotiable instrument. It is not necessary that the precise words above mentioned should be used. The following are also sufficient: "To A or order," "to the order of A," "to bearer," "to A and his assigns." It is held also that words written across the instrument: "This instrument is and shall be negotiable" will make the instrument fully negotiable.

The note in the Story Case is not a negotiable note. Therefore, Stebbins did not take it by negotiation but by assignment, and any defense effective against McDonald can be used against his assignee, Stebbins.