Promissory Note

Promissory Note: The Written Promise to Pay

A promissory note is the simplest of the negotiable instruments: a written, unconditional promise by one person to pay a specified sum of money to another, either on demand or at a fixed or determinable future time. Unlike the bill of exchange (which is an order to a third party to pay) and the cheque (which is a bill of exchange drawn on a banker), the promissory note involves only two parties — the maker, who promises, and the payee, to whom the promise is made. Its simplicity is its strength: the instrument crystallises a debt into a written, transferable, enforceable promise.

Statutory Definition and Essential Elements

Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as 'an instrument in writing (not being a bank-note or a currency-note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument'. The essential elements are: (a) it must be in writing; (b) it must contain an unconditional undertaking to pay — a conditional promise ('I will pay if my crop succeeds') is not a promissory note; (c) it must be signed by the maker; (d) the maker must be a certain person; (e) the payment must be of a certain sum of money; (f) the payee must be a certain person or the bearer; and (g) it must be payable on demand or at a fixed or determinable future time. Bank-notes and currency-notes are excluded because they are money itself, not instruments for the payment of money.

Negotiability and Enforcement

A promissory note payable to a named person 'or order' or 'or bearer' is a negotiable instrument: it may be transferred by endorsement and delivery (in the case of an 'order' instrument) or by mere delivery (in the case of a 'bearer' instrument). The transferee, if a holder in due course, takes the instrument free from prior defects in title. The maker's liability on a promissory note is primary and absolute — upon maturity or demand, the maker must pay, and failure to do so entitles the holder to sue. The Negotiable Instruments Act presumes, until the contrary is shown, that the instrument was made or drawn for consideration, that the parties had capacity to contract, and that the instrument was accepted within a reasonable time. These presumptions shift the evidentiary burden to the maker who seeks to resist payment, making the promissory note a powerful instrument of debt recovery in Indian commercial practice.

“A promissory note is a debt made portable — a promise lifted from the conversation of the parties and set down in writing, signed, and made transferable. He who signs it has bound himself to pay, and the law, presuming consideration and capacity, will enforce the promise against him with scarcely a hearing unless he can show cause. The instrument is the merchant's record and the creditor's proof.”