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A promissory note, sometimes referred to as a note payable, is a legal instrument (more particularly, a financing instrument and a debt 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 Principal may refer to: Title or rank * Principal (academia), the chief executive of a university ** Principal (education), the office holder/ or boss in any school * Principal (civil service) or principal officer, the senior management level ...
amount, the interest rate if any, the parties, the date, the terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the payee's rights in the event of a
default Default may refer to: Law * Default (law), the failure to do something required by law ** Default (finance), failure to satisfy the terms of a loan obligation or failure to pay back a loan ** Default judgment, a binding judgment in favor of e ...
, which may include foreclosure 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 "language ...
(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 promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes were originally issue ...
is frequently referred to as a promissory note, as it is made by a bank and payable to bearer on demand. Mortgage notes 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 agreements. For example, a promissory note may be used in combination with a mortgage, in which case it is called a mortgage note.


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 de ...
", "
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 ( 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 the time of ...
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 ho ...
rule. The negotiability of mortgage notes 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, Italy or Spain, 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 ins ...
. 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 de ...
by a debtor to a creditor 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 ...
with a maturity date 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 ...
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 t ...
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 belo ...
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 meta ...
,
silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical ...
, 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 of personal property ("chattel") for a time, but retains ownership. The owner who surrenders custody to a property is called the "bailor" and the ind ...
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, 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 agen ...
for replacement of deposits stolen 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 *Per ...
. 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 war ...
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. 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 defi ...
. Flying cash or ''feiqian'' was a promissory note used during the
Tang dynasty The Tang dynasty (, ; zh, t= ), or Tang Empire, was an imperial dynasty of China that ruled from 618 to 907 AD, with an interregnum between 690 and 705. It was preceded by the Sui dynasty and followed by the Five Dynasties and Ten Kingdo ...
(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 has ...
. However, according to a travelogue of a visit to Prague in 960 by Ibrahim ibn Yaqub, 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 The Poor Fellow-Soldiers of Christ and of the Temple of Solomon ( la, Pauperes commilitones Christi Templique Salomonici), also known as the Order of Solomon's Temple, the Knights Templar, or simply the Templars, was a Catholic military order, ...
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 sixth-largest city in Italy. In 2015, 594,733 people lived within the city's administrative limits. As of the 2011 Italian census, the Province of G ...
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 (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 ...
), 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 ( Spain), 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 Switzerlan ...
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 in 2000 and the Uniform Electronic Transactions Act (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, 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 U ...
. 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 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 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.


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 * Government bond *
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 e ...
* Notes receivable * Student loan * Warrant (of Payment)


References

{{DEFAULTSORT:Promissory Note Legal documents Negotiable instrument law Securities (finance) Interest-bearing instruments de:Schuldscheindarlehen fr:Billet à ordre