Promissory notes are negotiable instruments like checks: a promise by one person (or company) to pay another. Unlike checks, promissory notes are flexible on how, when and under what circumstances money will be paid. This flexibility makes promissory notes one of the building blocks of commercial financing, and useful for many kinds of business transactions.
So what are the basic hallmarks of a promissory note? A promissory note is a unique, very specific kind of contract. For example:
- A promissory note is valid, even if written on a cocktail napkin, but must be IN WRITING (other kinds of contracts may be verbal in some circumstances)
- A promissory note promises the payment of money – no services
- A promissory note is proof that a debt exists. In other words, if a person fails to pay the debt specified in a promissory note, no other evidence of a breach of contract is necessary to enforce that debt
- A promissory note typically will be enforced by a court according to its terms – courts (with a few exceptions) will not interpret those terms
- Why is a promissory note so different from a garden variety contract? And why use a promissory note instead of some other kind of contract?
Attorneys call a promissory note “commercial paper”, because it is governed by the Uniform Commercial Code. Checks and loans are the kinds of commercial paper most people are familiar with. Strictly speaking, checks are actually a unique kind of promissory note, which are payable immediately to ANY bearer. A promissory note, unlike a check is only payable upon its own terms. Therefore, a promissory note is a much more flexible kind of payment arrangement than a check, and more enforceable and, therefore, valuable than other “generic” contracts.
In future “Promissory Note Pointer” blogs, we’ll explore the specifics of promissory notes, how to use them to your advantage in business, and how to ensure they’re as enforceable and useful as possible.
If you have any questions about promissory notes or other business financing tools, please contact David Closson, attorney and the head of our Business Law Group, at [email protected].