This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
Contracts for the payment of money with interest frequently contain provisions to the effect that if the instrument is not paid at maturity it shall bear a higher rate after maturity than before maturity; and they frequently contain provisions to the effect that in case of default a higher rate of interest from date until maturity shall be paid than has been agreed upon in case the instrument is paid at maturity. Whether such provisions affect the negotiability of the instrument is a question upon which there has been a division of authority. On the one hand, such a contract provides a means for determining the amount which is actually due at any one time and such amount can be ascertained with certainty. On the other hand, under such provisions it is not possible to tell, when the contract is made, what amount will be due upon it when action is brought, since it is impossible to tell in advance whether it will be paid at maturity or not. For this reason it has been urged that the amount is not certain and that the contract is therefore not negotiable. The same objection, however, might be urged to any negotiable instrument which is to bear interest after maturity. It is never possible to tell whether a negotiable instrument will be discharged at maturity, and accordingly it is impossible to tell for what amount judgment will ultimately be rendered upon a note which bears interest after maturity.
A provision that the instrument shall bear a higher rate after maturity if it is not paid at maturity, is held in many jurisdictions not to make the contract non-negotiable.1 A provision for increasing the rate of interest in the event of certain specified defaults is held to be void and hence not to destroy negotiability.2
1 United States. De Hass v. Dibert, 70 Fed. 227, 30 L. R. A. 189.
Kansas. Clark v. Skeen, 61 Kan. 526, 78 Am. St. Rep. 337, 49 L. R. A. 190, 60 Pac. 327.
Massachusetts. Towne v. Rice, 122 Mass. 67.
North Dakota. Hollinshead v. Stuart, 8 N. D. 35, 42 L. R. A. 659, 77 N. W 89.
Oklahoma. Citizens' Savings Bank v. Landis, 37 Okla. 530, 132 Pac. 1101 [which was approved in Charles City Security Trust & Savings Bank v.
Gleichmann. 50 Okla. 441, L. R. A. 1915F, 1203, 150 Pac. 908, which latter case overruled Bracken v. Fidelity Trust Co., 42 Okla. 118, L. R. A. 1915B, 1216, 141 Pac. 6, and Randolph v. Hudson, 12 Okla. 516, 74 Pac. 946]; Union National Bank v. Mayfield, - Okla. - , 174 Pac. 1034.
South Dakota. Merrill v. Hurley, 6 S. D. 592, 55 Am. St. Rep. 859, 62 N. W. 958.
2 Kendall v. Selby, 66 Neb. 60, 103 Am. St. Rep. 697, 92 N. W. 178.
In some jurisdictions, a provision that default at maturity should increase the rate from the date of the instrument has been held not to make it non-negotiable.3 A provision for a specified rate of interest and for a reduction in such rate of interest in case the note is paid at maturity,4 or, which is in effect the same thing, a provision for a certain rate of interest from date and for a specified rebate in case such instrument is paid at maturity,5 or a provision that interest shall run from a certain period after the date of the note if it is paid at maturity, but that it shall run from date if not paid at maturity,6 is held in many jurisdictions not to affect the negotiable character of the instrument. In other jurisdictions a provision for a higher rate of interest after maturity has been held to make the instrument non-negotiable on the theory that it is not certain whether such condition ever will be fulfilled.7 A provision for a specified rate of interest and for the reduction in such rate of interest in case the note is paid at maturity,8 or in case it is paid before-maturity,9 renders the instrument non-negotiable in some jurisdictions.10 A provision for interest upon unpaid interest at a higher rate than the interest upon the principal, does not render the instrument non-negotiable.11
3 Crump v. Berdan, 97 Mich. 293, 37 Am. St. Rep. 345, 56 N. W. 559; Smith v. Crane, 33 Minn. 144, 53 Am. Rep. 20, 22 N. W. 633; Hope v. Barker, 112 Mo. 338, 34 Am. St. Rep. 387, 20 S. W. 567; Charles City Security Trust & Savings Bank v. Gleichmann, 50 Okla. 441, L. R. A. 1915F, 1203, 150 Pac. 908 [following, Citizens' Savings Bank v. Landis, 37 Okla. 530, 132 Pac. 1101; overruling, Bracken v. Fidelity Trust Co., 42 Okla. 118, L. R. A. 1915B, 1216, 141 Pac. 6, and Randolph v. Hudson, 12 Okla. 516, 74 Pac. 946, and assuming that the same principle applies to provisions for increasing rate of interest for the period before maturity in case of ultimate default as to provisions for increasing the rate after maturity]; Union National Bank v. May field, - Okla. - , 2 A. L. R. 135, 174 Pac. 1034.
4 Parker v. Plymell, 23 Kan. 402; Farmers' Loan & Trust Co. v. Planck, 98 Neb. 225, L. R. A. 1915E, 564, 152 N. W. 390; Union National Bank v. Mayfield, - Okla. - , 174 Pac. 1034; Barker v. Sartori, 66 Wash. 260, 119 Pac. 611.
"Clearly these words do not destroy the negotiability of the paper. They do not leave uncertain either the fact, the time, or the amount of payment. Indeed, up to and including the maturity of the notes, they are entirely without force. They become operative only after the notes are dishonored and have ceased to be negotiable, and then there is no uncertainty in the manner or extent of their operation. They create, as it were, a penalty for non-payment at maturity, and a penalty the amount of which is definite, certain, and fixed." Parker v. Plymell, 23 Kan. 402 [quoted in, Union National Bank v. Mayfield, - Okla. - , 174 Pac. 1034].
5 Farmers' Loan & Trust Co. v. Planck, 98 Neb. 225, L. R. A. 1915E, 564, 152 N. W. 390; Security Trust & Savings Bank v. Gleichmann, 50 Okla. 441, L. R. A. 1915F, 1203, 150 Pac. 908.
6 Security Trust & Savings Bank v. Gleichmann, 50 Okla. 441, L. R. A, 1915F, 1203, 150 Pac. 908.
7 Cornish v. Woolverton, 32 Mont. 456, 108 Am. St. Rep. 508, 81 Pac. 4.
8 Union National Bank v. Mayfield, - Okla. - , 169 Pac. 626 [following, Randolph v. Hudson, 12 Okla. 516, 74 Pac. 946, and First National Bank v. Watson (Okla.), 155 Pac. 1152, and overruling Security Trust & Savings