More secure than a contract

Though not legal tender, a promissory note has the same utility, and  as it is an unconditional promise to pay subject to the fulfilment of a promise, it has substantial advantages over a contract, and offers far greater enforceable security for one’s debts.

Ray Thapar analyzes this unique negotiable instrument

A promissory note (PN) is a negotiable instrument that although is not legal tender has the same utility. Moreover, as it is an unconditional promise to pay subject to the fulfillment of a promise, it has substantial advantages over a contract, and offers far greater enforceable security for one’s debts than a contract.

In Canada, the Bill of Exchange Act governs promissory note transactions. The law stipulates that for a note to be valid, it has to be signed by the promisor, and it cannot contain any words that limit the promise to pay or impose conditions that are variance with the provisions of the Bill of Exchange Act.

For the note to be honoured, it has to be presented by the holder to the promisor. It is payable to the person holding it or to a person specified in it, and may be payable on demand or at a future date either fixed or determinable. It may be transferred to another person and the holder of the note may become a holder in due course; this ultimate holder will be free from defenses that may apply to the original holder.

The promisor, who has the primary liability, has to pay according to the tenor of the note. The holder of the note can endorse it, and the promisor cannot deny the holder the right of endorsement. The endorsers have secondary liability. Endorsement means either accepting responsibility for paying, or to make the note payable to someone other than the payee.

To be enforceable, a note must be presented to the promisor at the place specified in the note or at the promisor’s place of business or residence. Unless specifically waived, the note must be presented for payment promptly on maturity or the promisor or endorser will be discharged.

When not paid upon presentment, the promissory note is considered dishonoured. Where liability for a note has been enforced, the note must be presented for payment at the place specified in the note in order to render the endorser of the note liable. If no time is specified, it will be deemed payable on demand. The Limitation Act sets a six-year limitation on demand notes.

It is important to draft the note properly because if not drafted properly, the note may lose its status as a negotiable instrument. A properly drafted note can be an effective mechanism to ensure hassle free payment.