Promissory Notes: An Unconditional Promise to Pay (UCC Article 3, UCC Article 9 and UK Bills of Exchange Act 1882)
1. Introduction
Promissory notes have long been fundamental instruments in commerce and finance. At their core, they are simple documents – written promises to pay a specified sum of money.
Yet over centuries, a complex body of law has developed around promissory notes, balancing the need for free transferability in commerce with the protection of parties from fraud and other risks.
In the United States, the law of promissory notes is largely governed by the Uniform Commercial Code (UCC), particularly Articles 3 and 9.
In common law jurisdictions like England (governed by the Bills of Exchange Act 1882), similar principles apply with some differences in application.
This article provides a comprehensive analysis of promissory notes, focusing on U.S. law under the UCC and integrating relevant common law aspects.
It examines the definition and nature of promissory notes, their historical evolution, the UCC framework (Articles 3 and 9), their role in secured transactions and commercial lending, the common law perspective under the Bills of Exchange Act, key case law, drafting and enforcement considerations, and the associated risks and pitfalls.
1.1 What are Promissory Notes?
A promissory note is a written, unconditional promise to pay a certain sum of money to a designated party or bearer. It is a two-party instrument: one party (the maker or issuer of the note) promises to pay a sum to the other party (the payee or holder).
Unlike a bill of exchange or cheque, which involves three parties and an order to a third party (typically a bank) to pay, a promissory note involves a direct promise from the debtor to the creditor.
Promissory notes are negotiable instruments if they meet certain criteria, meaning they can be transferred to others and the holder in due course can obtain rights to payment largely free of prior defences.
In everyday terms, common examples of promissory notes include the note you sign when taking out a bank loan or a mortgage, corporate debt instruments referred to as “notes,” or even an IOU – “I Owe You” (though a mere IOU usually lacks the formal promise language required for negotiability).
1.2 Formal Characteristics of Promissory Notes
Under U.S. law, the UCC Article 3 provides the formal requirements for a note to be a negotiable instrument.
In particular, UCC 3-104 defines a negotiable instrument as a written and signed promise or order to pay a fixed amount of money (with or without interest) that:
- Is payable to order or to bearer
- Is payable on demand or at a definite time, and
- Does not include any other undertakings or instructions by the maker except as permitted (such as a provision about collateral, a confession of judgment clause, or a waiver of certain legal protections).
A “note” in UCC terminology refers to an instrument that is a promise to pay (as opposed to a “draft” which is an order to pay).
For example, a note might read: “On June 30, 2027, I promise to pay to the order of ABC Corporation the sum of $50,000 with 5% annual interest. – [Signed, Maker].”
This contains a clear promise, a sum certain ($50,000 plus specified interest), a definite time for payment, and is payable to order, thus meeting the requirements of negotiability under the UCC.
1.3 Nature and Function of Promissory Notes
Promissory notes serve as evidence of debt and a contractual obligation to pay. They formalise a credit arrangement in writing, which provides certainty and enforceability.
If the promissory note is negotiable, it carries the special quality that it can be transferred (by endorsement and delivery, or by delivery alone if payable to bearer) so that the new holder can enforce it.
This quality makes promissory notes function as commercial paper – they can circulate in the financial market as substitutes for money or as instruments for financing.
For instance, banks or lenders can discount or sell promissory notes to investors, thereby providing liquidity.
In the context of secured transactions, the promissory note often represents the principal obligation of the borrower, while separate agreements (like security agreements or mortgages) provide collateral for that obligation.
The holder of a valid promissory note has the right to payment under the terms of the note and can sue the maker if they fail to pay when due.
1.4 Parties and Terminology in Promissory Notes
The maker (also called the issuer) is the person who promises to pay. The payee is the person to whom payment is promised. If a note is made payable to “bearer,” then whoever holds the note (the bearer) is entitled to payment. If made payable “to order” of a specific payee, then the payee may endorse (indorse) the note to someone else’s order, turning that person into the new holder.
An endorsement is typically a signature on the back of the note (or an allonge) with or without instructions (e.g., a blank endorsement turns an order paper into bearer paper, while a special endorsement names a new payee).
Once negotiated, the person in possession of the note, if properly endorsed, is the holder and potentially a holder in due course if they meet certain conditions (discussed later).
The maker’s obligation is to pay the note according to its terms at the time it was issued (UCC 3-412). If the maker does not pay as promised (a default or dishonour of the note), the holder can pursue legal remedies on the note.
In summary, a promissory note is a contractual debt instrument characterised by a written promise to pay money. Its simplicity is bolstered by legal formalities that, if observed, grant the instrument negotiability, allowing it to circulate in commerce.
2. Historical Background and Evolution of Promissory Notes
2.1 Early Origins of Promissory Notes
The use of promissory notes in commerce dates back many centuries, evolving alongside other negotiable instruments like bills of exchange.
In medieval trade and early modern finance, merchants needed flexible credit instruments to facilitate commerce without the physical exchange of coin each time.
Bills of exchange (orders drawn typically by a seller on a buyer to pay a sum to a third party, often used in international trade) emerged first.
Promissory notes – which are simpler promises to pay – also appeared, but their wide acceptance as “negotiable” instruments (freely transferable with the transferee gaining independent rights) developed later.
Common law originally was skeptical of transferring debt obligations. At common law in England, a debt obligation couldn’t be assigned to a third party without the debtor’s consent (a doctrine stemming from medieval restrictions on assignment of choses in action).
However, the mercantile practice of endorsing bills of exchange to transfer them was eventually recognised by courts through the Law Merchant and seminal decisions in the 17th and 18th centuries.
2.2 Legal Recognition of Promissory Notes
By the late 1600s and early 1700s, English merchants were also using promissory notes as substitutes for money. A critical turning point was the Promissory Notes Act 1704 (also known as Queen Anne’s Act) in England, which for the first time explicitly made promissory notes negotiable (similar to bills of exchange).
This Act provided that notes in writing, payable to order or bearer, could be transferred and enforced by the transferee in their own name, just like bills. The Act essentially put promissory notes on the same legal footing as bills of exchange.
After 1704, English courts solidified the negotiability of promissory notes. A famous English case, Miller v Race (K.B. 1758), although involving a banknote, articulated the principle that an innocent purchaser of a negotiable instrument for value (a bona fide holder) takes it free of defects in title.
Lord Mansfield in Miller v Race reasoned that negotiable instruments (like bank notes or endorsed notes) function as currency in commerce, and therefore a person who acquires them in good faith and for value should hold title free and clear of prior claims – a foundation of the holder in due course doctrine.
2.3 Codification in the 19th Century
The law governing bills and notes in England was eventually codified in the Bills of Exchange Act 1882. This Act (which remains in force in the UK and many Commonwealth countries, sometimes with minor amendments) brought together rules for bills of exchange, cheques, and promissory notes.
It provided formal definitions and rules for these instruments, largely reflecting the existing common law and mercantile practice.
Under the 1882 Act, promissory notes are clearly defined and many principles (like what constitutes an unconditional promise, the requirements for sum certain, endorsement, delivery, holder in due course, etc.) are spelled out.
This codification greatly influenced other jurisdictions. For example, common law countries like Canada, Australia, and others adopted similar or identical provisions for negotiable instruments.
Key principles such as the “sum certain in money,” “unconditional promise in writing,” “payable on demand or at a fixed time,” and rules about transfer and enforcement trace their lineage to the Bills of Exchange Act and earlier English jurisprudence.
2.4 Development of Promissory Note in the United States
In the U.S., the evolution took a somewhat parallel path, albeit with local innovations. Before the UCC, American states adopted the Uniform Negotiable Instruments Law (NIL) around the turn of the 20th century (circa 1896-1920).
The NIL was a uniform law that codified negotiable instruments rules very similar to the English Bills of Exchange Act, aiming for consistency across states. It defined promissory notes and provided for their negotiability, endorsement, presentment, etc.
With the creation of the Uniform Commercial Code in the 1940s and 1950s, the NIL was superseded by UCC Article 3 (Commercial Paper). The original UCC Article 3 (1952) modernised some language and concepts but kept much of the substance of negotiable instruments law.
It was revised in 1990 (Revised Article 3) to clarify certain issues (like negotiated instruments payable to an office, clarification of what constitutes notice of defence, etc.).
The UCC has been adopted in every U.S. state, making the law of promissory notes largely uniform nationally.
One notable aspect of the UCC’s evolution is the integration with other Articles, particularly Article 9 for security interests, reflecting the reality that notes often serve as collateral or are themselves secured by collateral.
2.5 Promissory Notes in Modern Commerce
Throughout the 20th century and into the 21st, promissory notes remain ubiquitous in commercial and financial transactions. In consumer and commercial lending, whenever a loan is made, typically the borrower signs a promissory note evidencing the obligation.
In the era of securitization and secondary loan markets, notes (especially mortgage notes) are endorsed and transferred between financial institutions, invoking the same principles of negotiability that merchants used centuries ago.
There have been modern developments – for example, consumer protection regulations now limit the extent of holder in due course rights for notes arising from consumer credit sales (the U.S. Federal Trade Commission’s Holder Rule in the 1970s curtailed holder in due course status in certain consumer transactions to prevent consumers from losing defences when their installment sale contracts were sold).
Additionally, the advent of electronic promissory notes has prompted legal adaptation, such as the concept of “transferable records” in the Uniform Electronic Transactions Act (UETA) allowing electronic notes that can emulate negotiability.
Nonetheless, the core legal DNA of promissory notes remains rooted in principles developed through the historical journey from the Law Merchant, through the Bills of Exchange Act, to the Uniform Commercial Code.
3. Promissory Note Legal Framework under the UCC
Two Articles of the UCC are especially relevant to promissory notes:
- Article 3, which governs negotiable instruments (including promissory notes as a category of negotiable instrument), and
- Article 9, which governs secured transactions (including security interests in promissory notes and the sale of promissory notes).
Together, these provide a comprehensive scheme for the use of promissory notes in commercial settings – Article 3 focuses on the rights and liabilities on the instrument itself, while Article 9 addresses using the note as collateral or selling the note.
3.1 UCC Article 3: Negotiable Instruments (Promissory Notes)
3.1.1 Scope of Article 3 Applicable to Promissory Notes
UCC Article 3 governs negotiable instruments, which include drafts (like checks) and notes. A promissory note, being a promise to pay, falls squarely under Article 3 as long as it meets the definition of a negotiable instrument (UCC 3-104).
It’s important to note that Article 3 applies to negotiable instruments. If a written promise to pay fails to meet negotiability requirements (for example, it’s not payable to order/bearer, or it includes extra undertakings beyond what’s allowed), then it is not governed by Article 3 (it becomes a normal contract subject to common contract law, though it might still be an “instrument” in a broader sense of evidence of debt).
Assuming the note is negotiable, Article 3 provides the rules for enforcement, transfer, and the rights of holders.
3.1.2 Requirements for Negotiability Applicable to Promissory Notes
As introduced earlier, UCC 3-104 lays out the criteria: a signed writing, containing an unconditional promise to pay a fixed amount of money, payable to order or bearer, on demand or at a definite time, with no other promises except permitted ones.
UCC 3-106 further explains what counts as an “unconditional” promise – for instance, a promise is still unconditional even if it refers to an underlying contract or states the consideration, as long as it doesn’t make payment expressly conditional on something.
Including phrases about collateral (e.g., “this note is secured by a security agreement…”) or an acceleration clause or a waiver of legal exemptions does not destroy negotiability. For example, a note that says “This note is secured by a lien on equipment per Security Agreement dated Mar. 1, 2025” is still an unconditional promise to pay; reference to collateral is expressly allowed (and common in practice) and under UCC 3-106 does not make the promise conditional.
What would make a promise conditional is language like “I promise to pay X unless some event occurs” or “subject to the terms of contract #123” (if the payment obligation is thereby made contingent on the other contract’s terms).
3.1.3 Holder and Transfer (Promissory Note)
Under Article 3, any person in possession of a negotiable note that is payable to bearer, or in possession of a note payable to an identified person and that person is the one in possession (or it has been properly endorsed to them), is a holder (UCC 1-201(b)(21)(A) generally defines holder, and UCC 3-201 on negotiation).
Transfer of a promissory note can occur by negotiation – if the note is payable to order, it requires the endorsement (indorsement) of the current holder and delivery to the new holder; if it’s payable to bearer, transfer can be by delivery alone.
A holder of a note has the right to enforce it (UCC 3-301 states that the person entitled to enforce an instrument includes the holder of it, among others like a non-holder with rights of a holder).
This means if Alice is the payee of a note and she endorses it to Bob, Bob as the new holder can demand payment from the maker at maturity.
3.1.4 Holder in Due Course (HDC) and Promissory Notes
One of the most significant doctrines in negotiable instruments law is the Holder in Due Course rule, codified in UCC 3-302 through UCC 3-305.
A holder in due course is a holder who takes the instrument for value, in good faith, and without notice that it is overdue, has been dishonoured, or that there are any claims or defences against it.
In other words, a holder in due course is an innocent purchaser of the note. The benefit of being a holder in due course is that the holder takes the note free from most defences that the maker could have raised against the original payee.
Specifically, UCC 3-305 limits the defences that can be asserted against aa holder in due course to so-called “real defences” (also known as universal defences) such as: fraud that voids the instrument (fraud in the factum, e.g. signing something that one didn’t realise was a promissory note due to trickery), forgery, discharge in bankruptcy, minority (if it makes the contract void or voidable under state law), illegality or incapacity that renders the obligation void, and certain instances of duress.
Other defences, often termed “personal defences” or “contract defences” – such as ordinary misrepresentation, breach of contract, failure of consideration, or set-off between the original parties – cannot be used against a holder in due course.
For example, if a business issues a promissory note to a supplier in payment for goods and the supplier later assigns the note to a bank, the maker (business) generally cannot refuse to pay the bank by alleging the supplier delivered defective goods (a breach of contract defence), provided the bank is a holder in due course (took the note in good faith, paid value, and was unaware of any dispute).
This holder in due course principle is a cornerstone that gives negotiable notes their commercial credibility – a subsequent holder can trust that if they acquire the note properly, they will get paid, even if there were problems between the original parties.
It encourages the free flow of credit. However, as noted, this has been curtailed in consumer transactions by other laws: e.g., the FTC Holder Rule (outside the UCC) effectively prevents transferees of certain consumer notes from being free of consumer defences, by mandating a clause preserving defences. But in commercial contexts, the holder in due course doctrine is generally intact.
3.1.5 Obligations and Enforcement of Promissory Notes
The maker of a promissory note has the primary liability to pay the instrument. Under UCC 3-412, the maker must pay the note according to its terms at the time it was issued (or if it was incomplete then, as completed under UCC 3-115).
If the note is payable on a fixed date and the date comes, the holder may present it for payment. If the note is a demand note, the holder may demand payment at any time (or after a reasonable time if not demanded earlier).
If the maker fails to pay, the holder can sue on the note. Because a promissory note is a negotiable instrument, a lawsuit can be brought as an action for the amount due on the instrument, and the instrument itself is typically proof of the obligation.
Many jurisdictions have procedures to streamline lawsuits on notes (for example, some states have “confession of judgment” clauses in notes or allow summary judgment more readily when an instrument is clear and there’s no defence).
Other parties might appear in the context of notes – an endorser (indorser) of a note, for instance, who signs their name on the back to negotiate it, can become secondarily liable to pay if the maker doesn’t (similar to a guarantor).
But in straightforward loan situations, usually the maker is the main liable party and endorsements are just for transfer of ownership rather than adding liability (unless the endorsement is without recourse or special forms).
3.1.6 Presentment, Dishonour, and Notice
Article 3 also sets out certain formal processes: presentment (UCC 3-501) is a demand for payment to the maker at the due date (or for a demand note, when demanding). If the maker doesn’t pay, the instrument is dishonoured.
If there were endorsers who could be liable, timely notice of dishonour must be given to them to hold them liable.
In practice, for a single-maker single-payee note held by the payee or an assignee, these steps are not as ritualised as in the case of checks; often notes explicitly waive presentment and notice of dishonour so that the holder can proceed directly against the maker without those formalities.
3.1.7 Alteration and Forgery
The UCC also covers what happens if a promissory note is altered or a signature is forged (UCC 3-407, UCC 3-403, etc.). In general, a material alteration (like changing the amount) without the consent of the party can discharge the party as to the alteration, and a forged maker’s signature means the purported maker isn’t liable at all (because it’s not genuinely their promise).
A transferee who innocently takes a forged or altered note may have limited rights (possibly a holder in due course can enforce an altered note according to its original terms, per UCC 3-407). These issues, while detailed, underscore the importance of the integrity of the instrument.
3.2 UCC Article 9: Security Interests in Promissory Notes
While Article 3 deals with the rights on the instrument, Article 9 of the UCC deals with using the promissory note as property — specifically, as collateral or as an item to be sold/assigned.
Article 9 (Secured Transactions) governs any transaction that creates a security interest in personal property by contract, as well as the sale of certain types of assets including promissory notes.
In commercial lending, it is very common that one promissory note (a borrower’s note) might serve as collateral for another obligation, or that a lender will take a security interest in a pool of notes or receivables.
3.2.1 Promissory Notes as Collateral (Instruments)
Under Article 9, a promissory note is classified typically as an “instrument” or sometimes specifically referred to as a “promissory note” in certain provisions.
The UCC 9-102(a)(47) defines “instrument” generally as a negotiable instrument (under Article 3) or any other writing that evidences a right to the payment of money and is not itself a security agreement or lease, and is of a type that is in the ordinary course of business transferred by delivery with any necessary endorsement.
Essentially, this covers negotiable promissory notes and even some non-negotiable notes that are commonly transferable.
Additionally, UCC 9-102(a)(65) explicitly defines “promissory note” for Article 9 purposes as “an instrument that evidences a promise to pay a monetary obligation, does not evidence an order to pay, and does not contain an acknowledgment by a bank that it has received a deposit (which would be a certificate of deposit).”
This technical definition distinguishes promissory notes from drafts and from certificate of deposits. In effect, for Article 9, any typical loan note is a “promissory note” and thus an “instrument.”
3.2.2 Attachment of Security Interest in Promissory Notes
When, for example, a business borrows money from a lender and as part of the collateral, pledges a promissory note it owns (perhaps the business holds a note from a third party receivable), a security interest is created in that note.
Under Article 9, for the security interest to attach (become enforceable against the debtor who pledged it), three main requirements must be met (UCC 9-203)
- a security agreement authenticated by the debtor (or the creditor’s possession of the collateral pursuant to an agreement).
- The secured party gives value (the loan).
- The debtor has rights in the collateral (the debtor owns the note or has authority to pledge it).
Once attached, the security interest in the promissory note gives the secured party rights in that note as collateral.
3.2.3 Perfection of Security Interest in Promissory Notes
To be effective against third parties (like other creditors or a bankruptcy trustee), the secured party should perfect the security interest.
There are two common ways to perfect a security interest in a promissory note (instrument) under Article 9: filing a financing statement or possession. Filing a UCC-1 financing statement that describes the collateral (e.g., “all promissory notes owned by the debtor” or specifically identifying the note) in the appropriate state public filing office will perfect the interest (UCC 9-312(a) generally allows filing for instruments).
However, Article 9 also gives special importance to possession for certain collateral like instruments: a security interest in an instrument can be perfected by the secured party taking possession of the original note (UCC 9-313).
In fact, if the promissory note is a negotiable instrument, taking possession not only perfects the security interest but also puts the secured party in the position to be a holder (potentially a holder in due course if other conditions are met).
Possession is often the preferred method for notes that are negotiable because it can protect the secured party from a later purchaser acquiring the note and becoming a holder in due course ahead of them.
If a creditor merely files a financing statement but leaves the debtor in possession of a negotiable note, there’s a risk: the debtor might transfer that note to someone else who takes as a holder in due course without knowledge of the prior interest, potentially cutting off the secured party’s claim.
To guard against that, prudent lenders will hold the physical notes (or have a custodian hold them) when notes are collateral.
3.2.4 Priority and Rights of Secured Parties vs Purchasers Over Promissory Notes
Article 9 has detailed priority rules. Generally, a perfected security interest in a promissory note will have priority over unperfected interests. Among perfected interests, usually first to file or perfect has priority (UCC 9-322).
However, there is a special rule for purchasers of instruments who qualify as holders in due course or similar – under UCC 9-330(d), a purchaser of an instrument who gives value and takes possession of it in good faith and without knowledge that the purchase violates another’s security interest has priority over an earlier perfected security interest by a method other than possession.
This essentially means that a buyer who takes the note as a holder in due course can gain priority over a party who only perfected by filing.
Thus, again, taking possession is crucial for a secured lender – by holding the note, they not only perfect, but any transfer to a third party becomes impossible without their consent.
In effect, Article 9’s priority rules reinforce the Article 3 holder in due course doctrine in the context of conflicting claims on a promissory note.
3.2.5 Security Interests In Promissory Notes vs. Security Interests Evidenced By Promissory Notes
It’s important to distinguish two contexts:
- A security interest in a promissory note (e.g., a lender has a lien on a note as an asset), and
- A security interest evidenced by a promissory note (e.g., a borrower signs a promissory note to a lender and also grants the lender collateral such as inventory – here the note is the evidence of the debt, and the inventory is collateral).
Article 9 is concerned with (a). However, there is interplay: If a note is itself secured by other collateral (like a mortgage note secured by real property, or a note secured by a lien on equipment), what happens when that note is transferred?
Both Article 9 and traditional principles say “the mortgage follows the note.” UCC 9-203(g) (formerly UCC 9-203(h) in some versions) explicitly codifies that the attachment of a security interest in a right to payment (such as a promissory note) also carries a security interest in any collateral securing that right.
In plainer terms, if a lender takes a security interest in a promissory note that is secured by a mortgage, the lender automatically obtains a corresponding interest in the mortgage.
Likewise, if a bank sells a mortgage promissory note to another bank, the mortgage securing that note automatically follows to the new owner, even if the mortgage assignment paperwork isn’t immediately done.
This rule implements in secured transactions law the principle long recognised in case law (e.g., the U.S. Supreme Court in Carpenter v. Longan, 83 U.S. 271 (1872) famously stated “the note and mortgage are inseparable; the former as essential, the latter as an incident”).
Thus, Article 9 ensures that one cannot own or have a lien on the note without the benefit of its collateral – preventing situations where the note is held by one party and the security by another in a way that would prejudice enforcement.
3.2.6 Sales of Promissory Notes
Article 9 also treats the sale of promissory notes as within its scope (UCC 9-109(a)(3)). This means that even outright sales of notes are treated similarly to collateralised transactions for purposes of perfection and priority.
For example, when a finance company sells a batch of loan notes to another entity, technically that is a sale (the buyer becomes the new owner of the notes).
However, to avoid any uncertainties and to provide public notice, Article 9 requires that such sales be perfected (usually by filing or possession) just like security interests.
This way, if the seller were to go bankrupt or purport to sell the same notes twice, there’s a clear way to determine priorities. Practically, most purchasers of notes also take possession, which both perfects their interest and gives them the notes in hand to enforce.
3.2.7 Rights and Enforcement for Secured Party Holding a Note
If a secured party has a security interest in a promissory note (as collateral) and the debtor (who pledged it) defaults on the underlying obligation, the secured party can enforce its remedies under Article 9.
One key remedy is that the secured party can step into the debtor’s shoes and enforce the promissory note against its maker.
For instance, suppose Company A pledges a promissory note made by X (where X owes money on that note to Company A) as collateral to secure a loan from Bank B. If Company A defaults on its loan to Bank B, Bank B can seize the promissory note (if it isn’t already in B’s possession) and then demand payment from X on that note. Bank B can either collect payments directly or sell the note to someone else as part of foreclosure.
Under UCC 9-607, a secured party after default is entitled to notify an account debtor or obligor on an instrument (like the note’s maker) to make payment to the secured party. Also, under UCC 9-610, the secured party may dispose of the note (sell it) in a commercially reasonable manner to apply the proceeds to the debt.
3.2.8 Interaction with Article 3
When enforcing a note as a secured party, the secured party also has to comply with Article 3 requirements if they want to be a holder in due course or simply a holder.
Usually, the secured party will have the note endorsed to them or endorsed in blank so that they become the holder and can sue on it.
If a note is in the secured party’s possession but still payable to the debtor, the secured party may need a proper endorsement to enforce it in its own name (UCC 3-301, UCC 3-203).
Many security agreements include an irrevocable power of attorney authorising the secured creditor to endorse notes or related collateral to itself in the event of default, precisely to enable enforcement.
4. Promissory Note Common Law Perspective: The Bills of Exchange Act 1882
To fully appreciate promissory notes, one should also consider the common law framework, particularly as codified in statutes like the Bills of Exchange Act 1882 in the UK (and similarly in many other common law jurisdictions).
The Bills of Exchange Act (often abbreviated as BEA 1882) remains the foundational law for promissory notes in England, Wales, and Northern Ireland (Scotland has its own law but similar principles, and many Commonwealth countries have similar Acts).
While the U.S. UCC has diverged in some ways (especially with Article 9), the core principles governing notes under the Bills of Exchange Act are very much aligned with those under UCC Article 3, owing to their common origin. Here we examine the core principles of the common law approach and highlight key differences in application compared to U.S. law.
4.1 Core Principles of Promissory Notes and Application under the Bills of Exchange Act 1882
4.1.1 Definition of Promissory Notes under the Bills of Exchange Act
The Bills of Exchange Act 1882 provides a formal definition of a promissory note in section 83(1): “A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.”
This definition closely mirrors the elements required for negotiability as we saw under the UCC: it emphasises an unconditional promise, writing, signature, time of payment (demand or fixed/future time), a sum certain, and payable to a specified person or bearer. All these elements ensure the instrument is clear, standalone, and transferable.
The Act further notes (in section 83(2)) that an instrument in the form of a note payable to the maker’s own order is not a note until endorsed by the maker.
This addresses a quirky situation: if someone makes a note payable to “my own order,” they must endorse it to actually make it operative as a note (essentially turning it into an endorsement in blank or to a third party).
Additionally, section 83(3) of the Act states that a note is not invalid merely because it contains also a pledge of collateral security. This again aligns with the permissibility of collateral clauses under UCC 3-104 and UCC 3-106 (i.e., referencing collateral or including a collateral pledge does not void negotiability).
4.1.2 Relationship to Bills of Exchange
The Bills of Exchange Act treats promissory notes in many ways like bills of exchange. A bill of exchange (which includes checks) is an order by one party (drawer) to another (drawee, often a bank) to pay a sum to a payee, whereas a note is a promise to pay by the maker.
The Act’s first sections mostly deal with bills, but then later sections (sections 83-89) deal specifically with notes, often by stating how the provisions for bills apply to notes with necessary modifications. For example, concepts like delivery, endorsement, and holder in due course apply to notes as well.
One difference: in a note, since the maker corresponds to the acceptor of a bill, the maker’s liability is primary; there is no need for acceptance as with a bill (a bill needs acceptance by the drawee to be effective, except a check).
A promissory note is thus a simpler instrument – it’s a promise that is effective upon delivery to the payee.
4.1.3 Holder in Due Course and Rights of Holders
The Bills of Exchange Act sets out the holder in due course doctrine in terms that preceded and strongly influenced the UCC.
Under the Act (section 29), a holder in due course is a holder who has taken the instrument complete and regular on its face, before it was overdue, in good faith and for value, and without notice of any defect in title or prior dishonor.
Section 30 then provides that a holder in due course takes the instrument free from equities and defences enforceable against prior parties, except for certain real defences (e.g., if the instrument was obtained by fraud, duress, or force and fear, or if the maker was incapable, or if the instrument is void by statute, etc.).
These principles are essentially identical to the holder in due course provisions of UCC 3-302 and UCC 3-305, showing the common lineage.
Thus, under common law, if John issues a promissory note to Mary, and Mary negotiates it to Nigel who qualifies as a holder in due course, Nigel can enforce the note against John even if John had some claim against Mary, say that Mary never delivered goods John bought – John’s remedy would have to be against Mary, not a defence to paying Nigel.
4.1.4 Liabilities and Enforcement
The Bills of Exchange Act outlines that the maker of a promissory note, by making it, engages that he will pay it according to its tenor (section 89, by reference to maker’s position akin to an acceptor of a bill).
The maker’s liability is absolute provided the note is duly presented (if a time note, on the due date, or if a demand note, when demand is made). If a note is dishonoured (not paid), the holder can sue the maker.
Historically under UK law, an unpaid note could lead to an action in debt or a claim for the instrument’s amount.
Notably, in the UK, there’s a tradition that a promissory note could be stamped (stamp duty) – historically, notes and bills required stamps, and an unstamped note might not be enforceable unless properly stamped later with penalty.
Modern times have mostly abolished stamp duties on ordinary promissory notes in many jurisdictions, but high-value documents might still have requirements; this is more a historical footnote in common law practice.
Endorsers of a note (if the note has been endorsed to others) incur liability similar to endorsers of a bill – they guarantee payment to later holders if the maker defaults, provided proper notice of dishonour is given to them.
5.1.5 Deliverability and Inchoate Instruments
The 1882 Act says a promissory note is inchoate (incomplete) until delivery to the payee or bearer (Section 83(1) implies the note must be delivered to take effect).
This matches the general principle that just writing and signing a note isn’t enough; one must deliver it to the intended person for it to become effective (this distinguishes it from a draft, where acceptance by drawee might be needed).
4.2 Common Uses of Promissory Notes in Common Law Jurisdictions
In England and similar jurisdictions, promissory notes historically were used in a variety of settings, such as financing trade or personal borrowing.
However, over time, cheques (which are technically bills of exchange drawn on a bank payable on demand) became far more prevalent for transactions than promissory notes.
Nevertheless, promissory notes still appear in contexts like certain credit arrangements, international trade finance (e.g., notes arising from sale of goods on credit), or simply as convenient IOUs between parties that want a document that can be transferred.
The law treats them seriously; for example, an unpaid promissory note can form the basis of a summary judgment application (in some jurisdictions, under procedures for debt instruments) since it represents a clear acknowledgment of debt.
4.3 International Influence of Promissory Notes
The common law principles in the Bills of Exchange Act also influenced international conventions, such as the Geneva Conventions on Bills of Exchange and Promissory Notes (1930) which many civil law countries adopted (though the UK and US did not adopt those, they followed their own laws). But the concepts – unconditional promise, holder in due course, etc. – are widespread.
In summary, the Bills of Exchange Act 1882 encapsulates the common law perspective: A promissory note must have certain form to be negotiable, and if it does, it enjoys the attributes of negotiability – transfer by endorsement or delivery, enforcement by holders including holders in due course, and a set of rules that maximise its credit function.
The Act’s longevity (still largely unchanged today) is a testament to the robustness of those rules.
4.5 Enforcement of Promissory Notes in International or Cross-Border Situations
If a promissory note is being enforced across borders (say a U.S. lender enforcing a note against a foreign borrower or vice versa), issues of jurisdiction, choice of law, and the applicability of conventions like the Hague Convention on Choice of Court Agreements might come into play.
However, fundamentally, a promissory note will usually be recognised as a debt instrument in many jurisdictions.
Under English law, for example, a foreign promissory note could be enforced in English courts if jurisdiction is proper, potentially by treating it akin to any contract or as a negotiable instrument if compliant with the 1882 Act.
Many countries have adopted rules analogous to holder in due course; for instance, the Geneva Convention (for civil law countries) or local Bills of Exchange statutes.
In essence, enforcing a promissory note is often more straightforward than litigating a complex contract dispute because the note is a distilled promise to pay. Courts generally treat notes with a degree of seriousness – a maker’s signature on a note is prima facie proof of an obligation.
5. Selected Case Law on Promissory Note
To illustrate how these principles play out, it is useful to examine a few key cases from both U.S. law (UCC context) and common law (Bills of Exchange Act or earlier) that interpret promissory notes.
These cases highlight the practical application of legal rules regarding negotiability, the holder in due course doctrine, and the inseparability of notes and their collateral.
5.1 Miller v Race (1758) 97 E.R. 398, King’s Bench, England: Establishing Protection for Holders in Due Course
This famous English case did not involve a promissory note per se, but a banknote (a bank’s promissory note payable to bearer, essentially an early form of paper money).
A banknote payable to bearer was stolen and then passed to a good-faith holder (Race), who gave value for it. The original owner (Miller), from whom it was stolen, sued to recover it or its value. Lord Mansfield held that the good-faith purchaser (Race) had the better claim.
The court recognised that such instruments pass in commerce as currency, and that if an innocent holder who acquired the note for value were subject to claims by prior owners (here, the theft victim), it would undermine confidence in using notes in commerce.
Miller v Race thus established the doctrine that later became known as the holder in due course rule: a bona fide purchaser takes the instrument free of prior claims. Although involving a banknote, the principle was soon applied to bills of exchange and promissory notes generally.
This case is foundational; it shows the common law origin of the idea that negotiable instruments are exceptions to the usual rule that no one can transfer better title than they have (nemo dat quod non habet).
Negotiable instruments, by custom and then law, became an exception – one could indeed transfer better title (e.g., a thief has no title but can give good title to an holder in due course).
The spirit of Miller v Race is enshrined in the Bills of Exchange Act 1882 sections 29-30 and in UCC 3-305, protecting holder in due course’s from personal defences and claims of ownership.
5.2 Carpenter v Longan, 83 U.S. 271 (1872): “The Note and Mortgage are Inseparable”
In that case, a borrower (Longan) executed a promissory note to a lender (Carpenter) and secured it with a mortgage on property. The note was later assigned to another party, but there was a question of whether the mortgage had also been effectively assigned.
When a dispute arose, the Supreme Court famously stated: “The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity.”
In effect, the Court held that a transfer of the promissory note automatically transfers the collateral (the mortgage) to the transferee of the note, and conversely one cannot transfer the mortgage without the debt – if someone tried to, the mortgage would just follow the debt anyway.
The case ruled that in secured transactions, the promissory note is the central asset, and the security (here, the mortgage) cannot exist independently as a claim in someone else’s hands.
This principle prevents separations that could force a debtor to pay the wrong person or allow double recovery. Carpenter v Longan’s rule has been universally followed in American law (except in some odd quirks where statutes require formal assignment of mortgages for recording purposes – but even then, the equitable principle stands).
As mentioned earlier, UCC 9-203(g) essentially codified this: a security interest in a note includes a security interest in the note’s collateral. The case is often cited in modern foreclosure contexts to affirm that the foreclosing party must hold the note; and if they do, they have the mortgage by operation of law.
5.3 Unico v Owen, 232 A.2d 405 (N.J. 1967): Limiting Holder in Due Course in Consumer Context (common law evolution)
This is a notable case from a state supreme court (New Jersey) just before the widespread adoption of the FTC Holder Rule. In Unico, a consumer purchased goods on credit and signed a promissory note and installment contract, which the seller immediately assigned to a finance company.
The goods turned out to be unsatisfactory, and the question was whether the finance company was a holder in due course, which would cut off the consumer’s defences.
The New Jersey court, applying the Uniform Negotiable Instruments Law (pre-UCC law) and general principles, refused to allow the holder in due course protection in that situation, reasoning that the entire transaction was pre-arranged (the seller and finance company were effectively one system) and it would be unfair to strip the consumer of defences.
Unico v Owen is significant because it exemplifies a judicial policy decision to protect consumers even when a negotiable instrument is involved.
It foreshadowed the Federal Trade Commission’s Holder in Due Course Rule (1976), which now mandates that consumer credit contracts (when assigned) preserve the consumer’s defences.
While Unico itself is not a UCC Article 3 case (it was just before UCC or at least before UCC had changed anything), it’s often cited in discussions about the limits of the holder in due course doctrine.
The case concluded that the context of the note (consumer vs commercial) can affect how courts apply negotiability principles.
5.4 National Bank of Commerce v All American Assurance Co., 583 S.W.2d 471 (Ark. 1979): Example of Negotiability Requirements
This case (from Arkansas’s Supreme Court) provides an example of how strictly the courts can enforce the formal requirements of a negotiable instrument under the UCC.
The question was whether a certain instrument was a negotiable promissory note. It lacked words of negotiability (“to order or to bearer”).
The court held that because the instrument was not payable to order or bearer, it was not a negotiable instrument under UCC 3-104, and therefore the plaintiff could not be a holder in due course and took it subject to defences. The maker of the note (actually an insurance premium finance note) had a defense of failure of consideration.
Because the instrument was deemed non-negotiable, the maker’s defence was valid against the assignee bank. This case highlights a simple but crucial point: if you want the benefits of negotiability and holder in due course, the instrument must conform to the statutory definition.
A small omission like failing to include “pay to the order of ___” (and instead just saying “pay ___”) can change the legal outcome.
It reinforces the importance of careful drafting of promissory notes (something we will discuss further in the drafting section).
After this case and similar ones, many practitioners became very precise in ensuring the negotiability language is present in promissory notes intended to be negotiable.
5.5 Bishopsgate Motor Finance Corp Ltd v Transport Brakes Ltd [1949] 1 KB 322 (UK): Fraud and the Holder in Due Course
In this English case (after the Bills of Exchange Act was law), a fraudulent actor obtained a check and then a promissory note in a fraudulent sale of a car and sold the note to a finance company. The finance company sought to enforce the note as a holder in due course.
The court considered whether the finance company was a holder in due course given the fraud. It held that since the finance company took the note in good faith and without notice of the fraud, it was a holder in due course and could enforce the note, even though the original issuance of the note was procured by fraud by the intermediary.
The case is often cited for the proposition that personal fraud by an intermediary (fraud in the inducement) is a defence that is cut off by an holder in due course (as opposed to fraud in factum, where the signer didn’t know what they were signing, which would be a real defence).
This case, thus, mirrors the principles found in UCC 3-305: distinguishing real vs personal defences, and showing that a holder in due course prevails over personal defences like fraudulent inducement.
6. Conclusion and Future Considerations
6.1 Conclusion
Promissory notes distill a credit transaction into a tangible (or electronic) promise to pay, which, when properly structured as a negotiable instrument, carries the weight of centuries of legal development favouring predictability and transferability.
Under U.S. law, the Uniform Commercial Code provides a robust framework that governs both the instrument itself (Article 3) and its use as collateral or as an item of commerce (Article 9).
The common law perspective, exemplified by the Bills of Exchange Act 1882 in the UK, aligns closely on fundamental principles, ensuring that a promissory note in London functions much like one in New York, with the differences largely in the procedural and peripheral aspects.
In secured transactions, promissory notes serve as the function, linking personal obligations with property rights, evidenced by the maxim “the mortgage follows the note.”
Case law, from Miller v Race to Carpenter v Longan and beyond, highlights how courts have consistently enforced the special attributes of promissory notes – protecting good-faith holders and maintaining the note’s dominance in any secured arrangement.
6.2 Future Considerations
As we look to the future, several trends and considerations emerge:
6.2.1 Digital Transformation of Promissory Notes
The world is moving from paper to digital. Traditional promissory notes have been paper-based, with possession of the original being key.
Now, digital or electronic promissory notes (sometimes called eNotes) are becoming more common, especially in mortgage lending and fintech platforms.
Laws like the Uniform Electronic Transactions Act (UETA) and the federal E-SIGN Act in the U.S. provide a framework for transferable records, which are essentially the electronic equivalent of paper negotiable instruments.
These laws allow an electronic record to be treated with the same attributes (including negotiability) if certain criteria (like a single authoritative copy that can be transferred and tracked) are met. Similarly, international efforts, such as the UNCITRAL Model Law on Electronic Transferable Records (2017), aim to facilitate electronic negotiable instruments globally.
Future legal development will likely refine how concepts like “possession” and “endorsement” are applied in a digital environment.
Courts have already handled cases about electronic notes in foreclosures, generally upholding them if the system ensures uniqueness and reliable transfer.
Stakeholders in commercial lending should stay abreast of these technologies – while they increase efficiency (no risk of losing a piece of paper, instant transfer), they introduce cybersecurity and authentication considerations.
6.2.2 Blockchain and Smart Contracts for Promissory Notes
Relatedly, blockchain technology offers the possibility of creating promissory notes as smart contracts or tokens on a distributed ledger. This could conceivably provide a tamper-evident record of transfers and an automated payment system.
The legal status of a blockchain-based promissory note would likely be evaluated under existing negotiable instrument principles (is there a single authoritative “original”? perhaps the chain itself serves that function).
Already some projects exist for “smart” promissory notes that automatically execute payment or default remedies.
The UCC has been considering digital assets (see the recent UCC amendments for controllable electronic records in 2022, which might indirectly cover some forms of digital notes).
In the future, we might see promissory notes issued and traded entirely on platforms with minimal human paperwork, but always backed by the enduring legal principles of Article 3 and the BEA adapted to new media.
6.2.3 Continued Harmonization vs Divergence Regarding Promissory Notes
The principles between common law (BEA) and UCC are largely harmonized, but one divergence is in secured transactions approach (Article 9 vs various national secured transactions laws).
There’s a global trend toward modernising secured transactions law (inspired by Article 9 or the UNCITRAL Model Law on Secured Transactions).
As more countries adopt notice filing systems and explicit rules for assets like promissory notes, cross-border transactions will become easier.
For example, Canada’s provinces have PPSA statutes similar to Article 9; some other common law jurisdictions have started to modernise.
Conversely, in some places the age-old rules still apply. Businesses dealing internationally should be mindful that while a note might be negotiable everywhere, taking a security interest in it or enforcing it might involve different procedures abroad.
7. Frequently Asked Questions about Promissory Notes
7.1 Can A Promissory Note Be Handwritten, Or Must It Be Typed?
A promissory note can indeed be handwritten and still be legally valid if it contains all the essential elements of the agreement, such as the amount owed, the interest rate, repayment terms, and the parties’ signatures.
The handwritten or typed format does not inherently determine its validity. However, a typed note can offer clearer legibility and a more professional appearance, potentially reducing ambiguities or misunderstandings.
7.2 How Do I Record A Promissory Note On My Financial Statements?
Recording a promissory note on financial statements depends on whether you are the borrower (maker) or the lender (payee).
If you are the borrower, the promissory note represents a liability. Upon issuance, you would record the note as a long-term liability unless it is due within one year, in which case it is a current liability.
You would debit (increase) the asset account you received (e.g., cash) and credit (increase) “Notes Payable” for the borrowed amount. Over time, as you pay interest or reduce the principal, you would adjust these amounts.
If you are the lender, the note is an asset. Upon issuance, you would record the note as a receivable. You would debit (increase) “Notes Receivable” and credit (decrease) the asset given (e.g., cash). As the borrower pays you back or earns interest, you would adjust your asset and interest income accounts.
7.3 Can a promissory note be discharged in bankruptcy?
A promissory note can be discharged in bankruptcy, but the specifics depend on the jurisdiction and type of bankruptcy filed.
In the U.S., for instance, if a debtor files for Chapter 7 bankruptcy and obtains a discharge, most personal loans represented by promissory notes are typically dischargeable, meaning the debtor is no longer legally required to pay them.
However, certain debts, like some tax obligations, alimony, child support, and student loans, are exceptions and may not be easily discharged. If the note is secured by collateral, the lender may still have rights to the collateral, even if the underlying debt is discharged.
7.4 Is it necessary to notarize a promissory note?
Notarizing it is not universally necessary for it to be valid. It is generally considered legally binding once it is signed by the parties involved.
However, getting it notarized can provide additional validation, confirming the signatures’ authenticity and the parties’ willingness to enter into the agreement.
Some jurisdictions or specific circumstances might require or recommend notarization to prevent disputes or for record-keeping.
