Story Case

Frank Williams sold to Fred Fowler, trustee of the Guild estate, bonds which he had fraudulently acquired. Fowler gave Williams the following note in part payment:

"$500. December 14, 1914.

I will pay Frank Williams, or order, out of the Guild Estate Investment Fund, the sum of five hundred dollars, payable in ninety days.

(Signed) Fred Fowler, Trustee." Williams indorsed and negotiated this note to Lawrence Wren, who paid value. Later, Fowler discovered the fraud of Williams and refused to pay anything on the note. Wren maintained that he was the taker of a negotiable note for value and therefore the defense effective against Williams is not effective against the indorser of the note. Fowler contended that Wren was merely an assignee, since the note was payable out of a particular fund and not negotiable. Who is correct?

Ruling Court Case. Hartley Vs. Wilkinson, Volume 4 Maule And Sel-Wyn's English Reports, Page 5

The following instrument, drawn by Wilkinson and others, was the cause of dispute: "£25.

We jointly and severally promise to pay Mr. Foster, or order, the sum of twenty-five pounds, being the amount of the purchase money of a quantity of fir belonging to Mr. Hartley."

This was signed by the defendant Wilkinson and others. It was indorsed by Foster to Hartley, who sues. On it was also written the following: "This note is given on condition if any dispute shall arise between Mr. Hartley and Lady Wray, respecting the fir, the note to be valid." It was shown that this indorsement was upon the note before it was signed by the defendants; and, for this reason, it was contended that it was not a negotiable note, and that an action could not be maintained upon it, because the money was not absolutely payable, but that it depended upon a contingency whether a dispute should exist between Mr. Hartley and Lady Wray.

Decision: Because negotiable paper is designed to pass from hand to hand in the manner of money, business convenience demands that the engagement to pay, contained in negotiable paper, shall be absolute, and free from conditions. Because the payment of this note depended upon a contingency, it is not a negotiable instrument and suit cannot be brought upon it by Hartley.

Lord Ellenborough, Chief Justice, said: "How can it be said that this note is a negotiable instrument for the payment of money absolutely, when it is apparent that the party taking it must inquire into an extrinsic fact in order to ascertain if it is payable? By the indorsement, the party takes nothing more than a contingent benefit, dependent upon the happening or not of a particular dispute about the property."

Judgment was given for Wilkinson and others.

Ruling Law. Story Case Answer

We have established that a bill must contain order to pay; and that a note must contain a promise to pay.

This order and promise must be unconditional, must be obligations to pay under all circumstances. If either is coupled with a condition which may relieve the person of the duty to pay, the paper is a simple contract and not a negotiable instrument. Certainty is the key-note of negotiability; consequently, conditional orders or promises are fatal to the negotiability of an instrument.

A note which is made payable out of a particular fund is not negotiable, because it may happen that the fund will be exhausted before the time for payment has arrived. But an order or promise to pay, the amount of which is to be charged to a certain account, is not bad if the obligation to pay is absolute and is not contingent upon the existence of any definite sum of money. The Negotiable Instruments Law provides that an unqualified order or promise to pay is unconditional within the meaning of the act, though coupled with (1) an indication of a particular fund out of which reimbursement may be made, or a particular account to be debited with the amount; (2) or a statement of the transaction which gives rise to the instrument. Since the note in the Story Case must be paid out of the Guild Estate Investment Fund, payment is contingent upon the existence of that fund and, therefore, the note is not negotiable. Fowler is correct and his defense against Wren will be sustained.