Court Opinion

ID: 3249514
Source: CourtListenerOpinion
Date Created: 2016-07-05 16:20:50.169359+00
Date Added: 2024-06-11T13:40:28.322820
License: Public Domain

This case has had careful consideration on application for rehearing. The rights of parties involved bring this duty in all cases where difficult questions are involved, or division and doubt arise as to the correctness of the views first expressed. The large place of commercial paper in the daily transactions of business, and consequent need of uniformity and clarity in the law defining negotiable instruments with the relations of parties thereto, have led to the enactment of a Uniform Negotiable Instruments Law by most, if not all, the states. The uniform construction of this law, in keeping with sound principle, is helpful to the end in view. This court would contribute to this much to be desired result.
Dealing with paper having on its face a reference clause to some related contract, the essential inquiry is: Does such reference clause import that the obligation to pay is made subject to the terms of the related contract, or is it merely "a statement of the *Page 263 
transaction which gives rise to the instrument"? Our leading case of Strand Amusement Co. v. Fox, supra, dealt with the phrase "as per contract," written on the margin of the note. This court said:
"Our review of the reported cases, including many not noted above, would seem to show that the conclusion in most cases is made to depend upon the collocation of the reference clause with a particular part of the note and its relation thereto. If it is so placed in relation to the promise to pay as to clearly qualify that promise, by subjecting it to the terms of some other contract referred to, negotiability is denied."
Accordingly, the court, by majority decision, held that the reference clause involved, by reason of its "detachment physically and grammatically from the essential part of the note," would be construed as explanatory merely, and not as qualifying the promise to pay. Since this case was reported and annotated in 14 A.L.R. 1121 et seq., it has been cited and quoted in decisions of several states. Among these is International Finance Corporation v. Calvert Drug Co.,144 Md. 303, 124 A. 891, 33 A.L.R. 1162, with supplemental note.
This case involved liability on a trade acceptance. In the face of the draft appeared: "The obligation of the acceptor hereof arises out of the purchase of goods from the drawer." The drawer was "Reolo, Inc." The acceptance of the Calvert Drug Company was in these words: "Accepted for payment as per Reolo, Inc. Contract for amount and date as shown here." Said the Maryland court:
"The expression 'as per' is said in the Oxford Dictionary to mean 'according to; as stated or indicated by.' Giving it that meaning, which is in accord with common usage, the acceptance would mean, 'Accepted for payment according to the Reolo contract.' 'According to' means 'in agreement with,' and the true meaning of the phrase could therefore be stated in these words: 'Accepted for payment in agreement with the terms of the Reolo contract.' Obviously, as so used, they were intended to qualify the phrase 'Accepted for payment,' because they could have related to nothing else. If the acceptance was in accordance with, or in agreement with, the terms of the Reolo contract, it must have depended upon those terms, and the phrase 'as per Reolo contract' was not a mere statement intended to identify the transaction in connection with which it was used. An illustration of a mere identifying phrase is found in the same paper in the words, 'The obligation of the acceptor hereof arises out of the purchase of goods from the drawer,' which merely states the origin of the transaction. * * * And it is far more reasonable to assume that, when a business man qualified his acceptance of a bill of exchange by the use of the words 'as per contract,' he intended the words to make the draft depend upon the contract, than to assume that he thereby intended merely to identify the transaction in connection with which the acceptance was given. * * * To hold that the words 'according to the terms of the Reolo contract' do not make the acceptance conditional, but that the words 'subject to the conditions of the Reolo contract' do, would be, in our opinion, to exalt form above substance. How could the expression 'according to the terms of the Reolo contract' mean anything different from 'subject' to those terms, and how could the draft be 'subject to the terms of the contract,' without being in agreement with them and dependent upon them?"
This is a well-considered case, wherein many authorities are reviewed and the confused state of the law pointed out. "Accepted for payment" are words of execution as applied to drafts, the equivalent of "promise to pay" or "given," as used in a promissory note. The acceptance meant the same as a promissory note "given for goods purchased from the payee as per contract between him and the maker." Thus considered, that case is practically on all fours with the case at bar.
Another recent case is Utah Lake Irrigation Co. v. Allen,64 Utah, 511, 231 P. 818, 37 A.L.R. 651, with supplemental note at page 655. In that case was written on the margin of the note: "This note is part of agreement dated January 19, 1921." The court said:
"It is generally held that a statement on the face or in the body of a promissory note, similar to and in effect like the statement on the note in question in this case, does not affect or destroy the negotiability of such an instrument, when negotiable in form."
In support of this holding the usual line of cases was cited and reviewed, among them our Fox Case.
The reference clause in this Utah case expressly declares it is only a part of the agreement between the parties. What words could more aptly show the obligations of the parties are to be gathered from the entire contract, of which the note is only a part? How can a paper be a part of an agreement, unless it is subject to the terms of the whole? To our thinking this case is an entire departure from sound principles of construction. It virtually strikes out all reference clauses as meaningless, unless the conditions of the related contract are set forth in the face of the note. Everywhere, so far as our search goes, it is declared that, no matter how brief the reference clause, if it shows the obligation of the maker is subject to or burdened with the terms of a related contract, the negotiability of the paper is to be determined as if the entire contract was written into the note.
In strong contrast with this Utah case is the state of the law as recently declared by the Supreme Court of Massachusetts. In National Bank v. Wentworth, 218 Mass. 30, 105 N.E. 626, the clause "value received as per terms of contract" was held not to impair the negotiable quality of the note. The holding was placed upon the ground that, by their position, the words "as per * * * contract" *Page 264 
might lead an indorsee to understand they were not to be disconnected and applied to an outstanding agreement, but referred solely to the consideration, the "value received." In Waterbury-Wallace Co. v. Ivey, 99 Misc. Rep. 260,163 N.Y. S. 719, and in First National Bank v. Badham, 86 S.C. 170,68 S.E. 537, 138 Am. St. Rep. 1043, similar clauses were involved.
In Central Nat. Bank v. Hubbel (Mass.) 154 N.E. 551, decided the present year, the holding is aptly stated in the headnote as follows:
"Note containing statement that it was 'one of a series * * * given * * * as per contract for certain apparatus, it is hereby agreed that the ownership and title to certain apparatus remain in [payee] until this note is fully paid, * * *' held not negotiable."
The court, speaking by Rugg, C. J., said:
"These words, in conjunction with the rest of the instrument, import a reference to the contract, and render the promise contingent upon its fulfillment."
Nat. Bank of Newbury v. Wentworth, supra, was held distinguishable.
These recent cases from the courts of Massachusetts and Maryland indicate a trend of opinion toward basic principles, not always observed and leading to much confusion on the subject. The real test is: Does the reference clause show there is an existing contract in accordance with which, or in agreement with which, the note is given? If so, he who sees the note discovers at once that it is not the full agreement of the parties, and must govern himself accordingly.
Looking at the reference clause before us: "This note * * * is given * * * as per contract" means this "promise to pay" is made "as per contract." "Covering balance of purchase price of retort plant as per contract" means "covering amount payable as per contract of purchase." True, the reference clause, grammatically speaking, does not refer back to the first paragraph in the paper. But it brings forward that paragraph into the reference clause. "This note" — the above note, the above promise to pay — is "given" — is made "as per contract" — in agreement with a contract of purchase between the parties. There is a marked difference between a mere statement of the transaction identifying the consideration for the paper and a reference clause of this character.
"Given" to cover "purchase price" of described property identifies the transaction. It does not indicate that another instrument is in existence as part of that transaction. When this appears, a different case is presented. The issue here must not be confused with the rights of a holder in due course of paper admittedly negotiable. When the maker issues such paper, a courier without luggage, inviting its passage into the channels of business, the holder in due course is protected. He may have notice that the consideration is executory, and still take the paper for value, if he knows of no failure of consideration, or other facts giving his purchase the elements of bad faith.
But the question here is negotiability vel non. It is sometimes declared that the law favors a construction in favor of negotiability. Dealing with paper given in advance for something to be delivered thereafter as per contract, such rule is of questionable application. It can hardly be said that a business man is presumed to issue an unconditional promise in such case. Negotiable paper issued in such case invites imposition, and even fraud, as every experienced practitioner has had occasion to observe. It is much like paying in advance. The presence in the channels of trade of negotiable paper representing no consideration of value to the maker is a hurt to business.
The fundamental right to make contracts not violative of law or public policy is a highly favored one. We agree with the Maryland court that a reference clause, showing the note is given in connection with the purchase of property which the parties have chosen to reduce to writing, and declaring the note is "given as per such contract," should be treated as contractual, not merely descriptive, as matter of substance, not form.
If this suit, for example, was by the payee against the maker, would we receive parol evidence that the note was unconditional, and not subject to the terms of the contract, or would we hold that the note itself, by a reference clause giving the subject-matter, the date, and the parties, was conclusive that the two were one contract; the obligation of the note being made subject to the terms of the contract? If the note means that when given, it continues so to do. It is misleading to speak of a related contract of this character as "collateral" or "extraneous." The written contract of purchase is naturally expected to set forth the terms and conditions of the deal, and the note the evidence of debt to accrue pursuant thereto. The two are one contract. The purpose of the reference clause is to keep them so; to prevent the passage of the note into the channels of business as commercial paper with its incidents. We think business men fully understand the meaning of such references, and it is for the courts to give effect to them. There can be no harmony of decision until a sound basis of reason is reached and applied. The large number of decisions on this question by divided courts is impressive.
As further supporting these views, we cite Hubbard v. Wallace, 201 Iowa, 1143, 208 N.W. 730, 45 A.L.R. 1065; Chicago Trust  Sav. Bank v. Chicago Title  T. Co., 190 Ill. 404,60 N.E. 586, 83 Am. St. Rep. 138; Lane Co. v. Crum (Tex.Com.App.) 291 S.W. 1084; *Page 265 
Continental Bank  T. Co. v. Times Pub. Co., 142 La. 209,76 So. 612, L.R.A. 1918B, 632. This Louisiana case is not overruled by the later case of Tyler v. Whitney-Central Trust Sav. Co., 157 La. 249, 102 So. 325, but distinguished by a process of reasoning not entirely conclusive. Indeed, the Continental Bank Case is clarified and approved in First State Bank, etc., v. Crain, 157 La. 427, 102 So. 513, 38 A.L.R. 347.
ANDERSON, C. J., and THOMAS, J., concur in this dissent.
               On Application for Rehearing by Appellants.