![Burma 1926 Promissory Note](https://upload.wikimedia.org/wikipedia/commons/4/43/Burma_1926_Promissory_Note.jpg)
A promissory note, sometimes referred to as a note payable, is a
legal instrument
Legal instrument is a legal term of art that is used for any formally executed written document that can be formally attributed to its author, records and formally expresses a legally enforceable act, process, or contractual duty, obligation, or ...
(more particularly, a financing instrument and a
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
instrument), in which one party (the ''maker'' or ''issuer'') promises in writing to pay a determinate sum of
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
to the other (the ''payee''), either at a fixed or determinable future time or on demand of the payee, under specific terms and conditions.
Overview
The terms of a note usually include the
principal amount, the
interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
if any, the parties, the date, the terms of repayment (which could include interest) and the
maturity date
Maturity or immaturity may refer to:
* Adulthood or age of majority
* Maturity model
** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization
* Development ...
. Sometimes, provisions are included concerning the payee's rights in the event of a
default, which may include
foreclosure
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
Formally, a mortg ...
of the maker's assets. In foreclosures and contract breaches, promissory notes under CPLR 5001 allow creditors to recover prejudgement interest from the date interest is due until liability is established. 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.
Terminology
The term note payable is commonly used in
accounting
Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
(as distinguished from
accounts payable
Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payable ...
) or commonly as just a "note", it is internationally defined by the ''Convention providing a uniform law for bills of exchange and promissory notes'', but regional variations exist. A
banknote
A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand.
Banknotes w ...
is frequently referred to as a promissory note, as it is made by a bank and payable to bearer on demand.
Mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan.
Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s are another prominent example.
If the promissory note is unconditional and readily saleable, it is called a
negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
.
[Whaley DJ. (2012)]
Mortgage Foreclosures, Promissory Notes, and the Uniform Commercial Code
''Western State University Law Review''
LexisNexis entry
/ref>
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.
Promissory notes may be used in combination with security agreement
A security agreement, in the law of the United States, is a contract that governs the relationship between the parties to a kind of financial transaction known as a secured transaction. In a secured transaction, the Grantor (typically a borrower bu ...
s. For example, a promissory note may be used in combination with a mortgage
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
, in which case it is called a mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan.
Mortgage notes are a written promise to repay a specified sum of money plus interest ...
.
Loan contracts
In common speech, other terms, such as "loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
", "loan agreement
A loan agreement is a contract between a borrower and a lender which regulates the mutual promises made by each party. There are many types of loan agreements, including "facilities agreements," "revolvers," " term loans," "working capital loans." ...
", and "loan contract" may be used interchangeably with "promissory note". The term "loan contract" is often used to describe a contract that is lengthy and detailed.[
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. However, a promissory note is generally less detailed and less 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.
]
Difference from IOU
Promissory notes differ from IOU
An IOU (Abbreviation, abbreviated from the phrase "I owe you") is usually an informal document acknowledging debt. An IOU differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as th ...
s 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 acknowledge that a debt exists.
Negotiability
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
s 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
In commercial law, a holder in due course (HDC) is someone who takes a negotiable instrument in a value-for-value exchange without reason to doubt that the instrument will be paid. If the instrument is later found not to be payable as written, a h ...
rule.[ The negotiability of ]mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan.
Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s has been debated, particularly due to the obligations and "baggage" associated with mortgages; however, in mortgages notes are often determined to be negotiable instruments.[
In the United States, the Non-Negotiable Long Form Promissory Note is not required.
]
Use as financial instruments
Promissory notes are a common financial instrument in many jurisdictions, employed principally for short time financing of companies. Often, the seller or provider of a service is not paid upfront by the buyer (usually, another company), but within a period of time, the length of which has been agreed upon by both the seller and the buyer. The reasons for this may vary; historically, many companies used to balance their books and execute payments and debts at the end of each week or tax month; any product bought before that time would be paid only then. Depending on the jurisdiction, this deferred payment period can be regulated by law; in countries like France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
, Italy
Italy ( it, Italia ), officially the Italian Republic, ) or the Republic of Italy, is a country in Southern Europe. It is located in the middle of the Mediterranean Sea, and its territory largely coincides with the homonymous geographical re ...
or Spain
, image_flag = Bandera de España.svg
, image_coat = Escudo de España (mazonado).svg
, national_motto = ''Plus ultra'' (Latin)(English: "Further Beyond")
, national_anthem = (English: "Royal March")
, i ...
, it usually ranges between 30 and 90 days after the purchase.
When a company engages in many of such transactions, for instance by having provided services to many customers all of whom then deferred their payment, it is possible that the company may be owed enough money that its own liquidity position (i.e., the amount of cash it holds) is hampered, and finds itself unable to honour their own debts, despite the fact that by the books, the company remains solvent. In those cases, the company has the option of asking the bank for a short-term loan, or using any other such short-term financial arrangements to avoid insolvency
In accounting, insolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet i ...
. However, in jurisdictions where promissory notes are commonplace, the company (called the ''payee'' or ''lender'') can ask one of its debtors (called the ''maker'', ''borrower'' or ''payor'') to ''accept'' a promissory note, whereby the maker signs a legally binding agreement to honour the amount established in the promissory note (usually, part or all its debt) within the agreed period of time. The lender can then take the promissory note to a financial institution (usually a bank, albeit this could also be a private person, or another company), that will exchange the promissory note for cash; usually, the promissory note is cashed in for the amount established in the promissory note, less a small discount.
Once the promissory note reaches its ''maturity date'', its current holder (the bank) can execute it over the emitter of the note (the debtor), who would have to pay the bank the amount ''promised'' in the note. If the maker fails to pay, however, the bank retains the right to go to the company that cashed the promissory note in, and demand payment. In the case of unsecured promissory notes, the lender accepts the promissory note based solely on the maker's ability to repay; if the maker fails to pay, the lender must honour the debt to the bank. In the case of a secured promissory note, the lender accepts the promissory note based on the maker's ability to repay, but the note is secured by a thing of value; if the maker fails to pay and the bank reclaims payment, the lender has the right to execute the security.
Use as private money
Thus, promissory notes can work as a form of private money. In the past, particularly during the 19th century, their widespread and unregulated use was a source of great risk for banks and private financiers, who would often face the insolvency of both debtors, or simply be scammed by both.
History
Code of Hammurabi Law 100 stipulated repayment of a loan
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that d ...
by a debtor
A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
to a creditor
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property ...
on a schedule
A schedule or a timetable, as a basic time-management tool, consists of a list of times at which possible tasks, events, or actions are intended to take place, or of a sequence of events in the chronological order in which such things are i ...
with a maturity date
Maturity or immaturity may refer to:
* Adulthood or age of majority
* Maturity model
** Capability Maturity Model, in software engineering, a model representing the degree of formality and optimization of processes in an organization
* Development ...
specified in written
Writing is a medium of human communication which involves the representation of a language through a system of physically inscribed, mechanically transferred, or digitally represented symbols.
Writing systems do not themselves constitute h ...
contractual term
A contractual term is "any provision forming part of a contract". Each term gives rise to a contractual obligation, the breach of which may give rise to litigation. Not all terms are stated expressly and some terms carry less legal gravity as th ...
s. Law 122 stipulated that a depositor
A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below.
...
of gold
Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile met ...
, silver
Silver is a chemical element with the Symbol (chemistry), symbol Ag (from the Latin ', derived from the Proto-Indo-European wikt:Reconstruction:Proto-Indo-European/h₂erǵ-, ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, whi ...
, or other chattel/movable property for safekeeping must present all articles and a signed contract of bailment
Bailment is a legal relationship in common law, where the owner transfers physical Possession (law), possession of personal property ("chattel") for a time, but retains ownership. The owner who surrenders custody to a property is called the "ba ...
to a notary
A notary is a person authorised to perform acts in legal affairs, in particular witnessing signatures on documents. The form that the notarial profession takes varies with local legal systems.
A notary, while a legal professional, is disti ...
before depositing the articles with a banker
A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
, and Law 123 stipulated that a banker was discharged of any liability from a contract of bailment if the notary denied the existence of the contract. Law 124 stipulated that a depositor with a notarized contract of bailment was entitled to redeem the entire value of their deposit, and Law 125 stipulated that a banker was liable
In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines given by government agencie ...
for replacement of deposits stolen
Stolen may refer to:
* ''Stolen'' (2009 Australian film), a 2009 Australian film
* ''Stolen'' (2009 American film), a 2009 American film
* ''Stolen: The Baby Kahu Story'' (2010 film), a film based on the real life kidnapping of baby Kahu Durie ...
while in their possession
Possession may refer to:
Law
* Dependent territory, an area of land over which another country exercises sovereignty, but which does not have the full right of participation in that country's governance
* Drug possession, a crime
* Ownership
* ...
.
In China during the Han Dynasty
The Han dynasty (, ; ) was an imperial dynasty of China (202 BC – 9 AD, 25–220 AD), established by Liu Bang (Emperor Gao) and ruled by the House of Liu. The dynasty was preceded by the short-lived Qin dynasty (221–207 BC) and a warr ...
promissory notes appeared in 118 BC and were made of leather. The Romans may have used promissory notes in 57 AD as a durable lightweight substance as evidence of a promise in that time has been found in London among the Bloomberg tablets
The Bloomberg tablets are a collection of 405 preserved wooden tablets that were found at the site of the Bloomberg building in the City of London, financial district of London. Excavations of the site took place between 2010 and 2013, after whi ...
.
Historically, promissory notes have acted as a form of privately issued currency
A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins.
A more general def ...
. Flying cash Flying cash (), or ''Feipiao'', was a type of paper negotiable instrument used during China's Tang dynasty invented by merchants but adopted by the state. Its name came from their ability to transfer cash across vast distances without physically tra ...
or ''feiqian'' was a promissory note used during the Tang dynasty
The Tang dynasty (, ; zh, t= ), or Tang Empire, was an Dynasties in Chinese history, imperial dynasty of China that ruled from 618 to 907 AD, with an Zhou dynasty (690–705), interregnum between 690 and 705. It was preceded by the Sui dyn ...
(618 – 907). Flying cash was regularly used by Chinese tea merchants, and could be exchanged for hard currency at provincial capitals. The Chinese concept of promissory notes was introduced by Marco Polo to Europe.
According to tradition, in 1325 a promissory note was signed in Milan
Milan ( , , Lombard: ; it, Milano ) is a city in northern Italy, capital of Lombardy, and the second-most populous city proper in Italy after Rome. The city proper has a population of about 1.4 million, while its metropolitan city h ...
. However, according to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub
Ibrahim ibn Yaqub ( ar, إبراهيم بن يعقوب ''Ibrâhîm ibn Ya'qûb al-Ṭarṭûshi'' or ''al-Ṭurṭûshî''; he, אברהם בן יעקב, ''Avraham ben Yaʿakov''; 961–62) was a tenth-century Hispano-Arabic, Sephardi Jewish t ...
, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver. Around 1150 the Knights Templar
, colors = White mantle with a red cross
, colors_label = Attire
, march =
, mascot = Two knights riding a single horse
, equipment ...
issued promissory notes to pilgrims, pilgrims deposited their valuables with a local Templar preceptory before embarking, received a document indicating the value of their deposit, then used that document upon arrival in the Holy Land to retrieve their funds in an amount of treasure of equal value.
Around 1348 in Gorlitz, Germany, the Jewish creditor Adasse owned a promissory note for 71 marks. There is also evidence of promissory notes being issued in 1384 between Genoa
Genoa ( ; it, Genova ; lij, Zêna ). is the capital of the Italian region of Liguria and the List of cities in Italy, sixth-largest city in Italy. In 2015, 594,733 people lived within the city's administrative limits. As of the 2011 Italian ce ...
and Barcelona
Barcelona ( , , ) is a city on the coast of northeastern Spain. It is the capital and largest city of the autonomous community of Catalonia, as well as the second most populous municipality of Spain. With a population of 1.6 million within ci ...
, 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
Huesca (; an, Uesca) is a city in north-eastern Spain, within the autonomous community of Aragon. It is also the capital of the Spanish province of the same name and of the comarca of Hoya de Huesca. In 2009 it had a population of 52,059, almo ...
(then part of the Crown of Aragon
The Crown of Aragon ( , ) an, Corona d'Aragón ; ca, Corona d'Aragó, , , ; es, Corona de Aragón ; la, Corona Aragonum . was a composite monarchy ruled by one king, originated by the dynastic union of the Kingdom of Aragon and the County of B ...
), 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
Medina del Campo is a town and municipality of Spain located in the autonomous community of Castile and León. Part of the Province of Valladolid, it is the centre of a farming area.
History
Medina del Campo grew in importance thanks to its fairs ...
(Spain
, image_flag = Bandera de España.svg
, image_coat = Escudo de España (mazonado).svg
, national_motto = ''Plus ultra'' (Latin)(English: "Further Beyond")
, national_anthem = (English: "Royal March")
, i ...
), against the city of Besançon
Besançon (, , , ; archaic german: Bisanz; la, Vesontio) is the prefecture of the department of Doubs in the region of Bourgogne-Franche-Comté. The city is located in Eastern France, close to the Jura Mountains and the border with Switzerl ...
in 1553. However, there exists notice of promissory notes being in used in Mediterranean commerce well before that date.
In 2005, the Korean Ministry of Justice and a consortium of financial institutions announced the service of an electronic promissory note (eNote) service, after years of development, allowing entities to make promissory notes (notes payable) in business transactions digitally instead of on paper, for the first time in the world.
In the United States, eNotes were made possible as a result of the Electronic Signatures in Global and National Commerce Act
The Electronic Signatures in Global and National Commerce Act (ESIGN, , ) is a United States federal law passed by the U.S. Congress to facilitate the use of electronic records and electronic signatures in interstate and foreign commerce by ensur ...
in 2000 and the Uniform Electronic Transactions Act
The Uniform Electronic Transactions Act (UETA) is one of the several United States Uniform Acts proposed by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Forty-nine states, the District of Columbia, and the U.S. Virgin ...
(UETA). An eNote must meet all the requirements to be a written promissory note.[
]
International law
In 1930, under the League of Nations, a ''Convention providing a uniform law for bills of exchange and promissory notes'' was drafted and ratified by eighteen nations. 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 (maker).
Worldwide
England and Wales
United States
In the United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
, a promissory note that meets certain conditions is a negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, whose payer is usually named on the document. More specifically, it is a document contemplated by or consisting of a ...
regulated by article 3 of the Uniform Commercial Code
The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States through UC ...
. Negotiable promissory notes called mortgage note In the United States, a mortgage note (also known as a ''real estate lien note'', ''borrower's note'') is a promissory note secured by a specified mortgage loan.
Mortgage notes are a written promise to repay a specified sum of money plus interest ...
s are used extensively in combination with mortgages
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
in the financing of real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
transactions. One prominent example is the Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
model standard form contract
A standard form contract (sometimes referred to as a ''contract of adhesion,'' a ''leonine contract'', a ''take-it-or-leave-it contract'', or a '' boilerplate contract'') is a contract between two parties, where the terms and conditions of the co ...
Multistate Fixed-Rate Note 3200, which is publicly available. Promissory notes, or commercial paper
Commercial paper, in the global financial market, is an unsecured promissory note with a fixed maturity of rarely more than 270 days. In layperson terms, it is like an " IOU" but can be bought and sold because its buyers and sellers have some ...
s, 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
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
.
See also
*Bond (finance)
In finance, a bond is a type of security under which the issuer ( debtor) owes the holder ( creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well a ...
*Credit card
A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's accrued debt (i.e., promise to the card issuer to pay them for the amounts plus the o ...
*Government bond
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity date ...
*Letter of credit
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exp ...
*Notes receivable
Notes receivable represents claims for which formal instruments of credit are issued as evidence of debt, such as a promissory note. The credit instrument normally requires the debtor to pay interest
In finance and economics, interest is pa ...
*Student loan
A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest r ...
* Warrant (of Payment)
References
{{DEFAULTSORT:Promissory Note
Legal documents
Negotiable instrument law
Securities (finance)
Interest-bearing instruments
de:Schuldscheindarlehen
fr:Billet à ordre