A promissory note is a legal instrument, in which one party promises in writing to pay
a determinate sum of money to the other, either at a fixed or determinable future time or
on demand of the payee, under specific terms.
If the promissory note is unconditional and readily salable, it is called a negotiable
instrument.
Referred to as a note payable in accounting, or commonly as just a "note", it is internationally
defined by the Convention providing a uniform law for bills of exchange and promissory notes,
although regional variations exist.
Bank note is frequently referred to as a promissory note: a promissory note made by a bank and
payable to bearer on demand.
Mortgage notes are another prominent example.
Overview The terms of a note usually include the principal
amount, the interest rate if any, the parties, the date, the terms of repayment and the maturity
date.
Sometimes, provisions are included concerning the payee's rights in the event of a default,
which may include foreclosure of the maker's assets.
Demand promissory notes are notes that do not carry a specific maturity date, but are
due on demand of the lender.
Usually the lender will only give the borrower a few days' notice before the payment is due.
For loans between individuals, writing and signing a promissory note are often instrumental
for tax and record keeping.
A promissory note alone is typically unsecured, but these may be used in combination with
security agreements such as mortgage, in which case they are called mortgage notes.
International law Definition and usage of promissory notes are
internationally established by the Convention providing a uniform law for bills of exchange
and promissory notes, signed in Geneva in 1930.
Article 75 of the treaty stated that a promissory note shall contain:
the term "promissory note" inserted in the body of the instrument and expressed in the
language employed in drawing up the instrument an unconditional promise to pay a determinate
sum of money; a statement of the time of payment;
a statement of the place where payment is to be made;
the name of the person to whom or to whose order payment is to be made;
a statement of the date and of the place where the promissory note is issued;
the signature of the person who issues the instrument.
United States law
In the United States, a promissory note that meets certain conditions is a negotiable instrument
regulated by article 3 of the Uniform Commercial Code.
Negotiable promissory notes called mortgage notes are used extensively in combination
with mortgages in the financing of real estate transactions.
One prominent example is the Fannie Mae model standard form contract Multistate Fixed-Rate
Note 3200, which is publicly available.
Promissory notes, or commercial papers, are also issued to provide capital to businesses.
However, Promissory Notes act as a source of Finance to the company's creditors.
The various State law enactments of the Uniform Commercial Code define what is and what is
not a promissory note, in section 3-104(d): Thus, a writing containing such a disclaimer
removes such a writing from the definition of negotiable instrument, instead simply memorializing
a contract.
British law History
Historically, promissory notes have acted as a form of privately issued currency.
Flying cash or feiqian was a promissory note used during the Tang dynasty.
Flying cash was regularly used by Chinese tea merchants, and could be exchanged for
hard currency at provincial capitals.
According to tradition, in 1325 a promissory note was signed in Milan.
There's constance of promissory notes being issued in 1384 between Genova and Barcelona,
although the letters themselves are lost.
The same happens for the ones issued in Valencia in 1371 by Bernat de Codinachs for Manuel
d'Entença, a merchant from Huesca, amounting a total of 100 florins.
In all these cases, the promissory notes were used as a rudimentary system of paper-money,
for the amounts issued could not be easily transported in metal coins between the cities
involved.
Ginaldo Giovanni Battista Strozzi issued an early form of promissory note in Medina del
Campo, against the city of Besançon in 1553.
However, there exists notice of promissory notes being in used in the Mediterranean commerce
well before that date.
Difference from IOU Promissory notes differ from IOUs in that
they contain a specific promise to pay along with the steps and timeline for repayment
as well as consequences if repayment fails.
IOUs only acknowledging that a debt exists.
In common speech, other terms, such as "loan", "loan agreement", and "loan contract" may
be used interchangeably with "promissory note" but these terms do not have the same legal
meaning.
Difference from loan contract A promissory note is very similar to a loan
- each is a legally binding contract to unconditionally repay a specified amount within a defined
time frame - but a promissory note is generally less detailed and rigid than a loan contract.
For one thing, loan agreements often require repayment in installments, while promissory
notes typically do not.
Furthermore, a loan agreement usually includes the terms for recourse in the case of default,
such as establishing the right to foreclose, while a promissory note does not.
Also, while a loan agreement requires signatures from both the borrower and the lender, a promissory
note only requires the signature of the borrower.
Negotiability Negotiable instruments are unconditional and
impose few to no duties on the issuer or payee other than payment.
In the United States, whether a promissory note is a negotiable instrument can have significant
legal impacts, as only negotiable instruments are subject to Article 3 of the Uniform Commercial
Code and the application of the holder in due course rule.
The negotiability of mortgage notes has been debated, particularly due to the obligations
and "baggage" associated with mortgages; however, in mortgage notes are often determined to
be negotiable instruments.
In the United States, the Non-Negotiable Long Form Promissory Note is not required.
See also
References