Promissory Note: Meaning, Essentials and Illustrations (Section 4)

The promissory note is the simplest negotiable instrument: one person, in writing, promises to pay money to another. It has only two original parties, the maker and the payee, and it is widely used for personal loans, business borrowing and as security for credit. This note sets out the statutory definition in Section 4, works through each essential element with the statutory illustrations, and explains the related rules on stamping and bearer notes.

1. The Statutory Definition

The maker is the person who promises to pay; the payee is the person to whom payment is to be made (Section 7). Section 5, which defines a bill of exchange, adds three explanatory paragraphs on what counts as "conditional", a "certain sum" and a "certain person"; these expressly apply to Section 4 as well (Section 3 below).

2. The Statutory Illustrations

Section 4 carries eight illustrations. A signs instruments in the following terms:

• (a) "I promise to pay B or order Rs. 500." A promissory note.
• (b) "I acknowledge myself to be indebted to B in Rs. 1,000, to be paid on demand, for value received." A promissory note: the words "to be paid on demand" supply the undertaking to pay.
• (c) "Mr. B, I.O.U. Rs. 1,000." Not a promissory note: a mere acknowledgment of debt contains no promise to pay.
• (d) "I promise to pay B Rs. 500 and all other sums which shall be due to him." Not: the sum is uncertain.
• (e) "I promise to pay B Rs. 500, first deducting thereout any money which he may owe me." Not: the sum is uncertain.
• (f) "I promise to pay B Rs. 500 seven days after my marriage with C." Not: the marriage may never happen, so the promise is conditional.
• (g) "I promise to pay B Rs. 500 on D's death, provided D leaves me enough to pay that sum." Not: payment depends on a contingency.
• (h) "I promise to pay B Rs. 500 and to deliver to him my black horse on 1st January next." Not: the promise is not to pay money only.

3. The Essentials

In writing

An oral promise, however clear, is not a promissory note. Any durable writing will do, in any language and in pen, print or typescript.

An express undertaking to pay

There must be a promise to pay, not just an acknowledgment of a debt (illustrations (b) and (c)). No particular words are needed, but the document read as a whole must contain an undertaking to pay. Whether a document is a promissory note, a receipt, a bond or an acknowledgment is a question of construction of its terms.

Unconditional

The undertaking must not depend on an uncertain event (illustrations (f) and (g)). Under Section 5, a promise is not conditional merely because payment is due on the lapse of a certain period after an event which, according to the ordinary expectation of mankind, is certain to happen, although its timing is uncertain. A note payable "three months after the death of D" is therefore valid; one payable "after my marriage" is not.

Signed by the maker

The maker's signature, by hand, thumb impression, mark or an authorised agent, completes the instrument. A note is not complete until delivered (Section 46). Where the maker's name appears only in the body and the document is unsigned, there is no note.

Certain maker and certain payee

Both parties must be ascertainable from the instrument. Under Section 5, a payee is a "certain person" even if misnamed or described only by designation (for example, "the Secretary of the X Society"), provided it is clear who is meant.

A certain sum of money only

The amount must be fixed or ascertainable from the instrument (illustrations (d) and (e)), and payment must be in money only (illustration (h)). Under Section 5 the sum remains certain although it includes future interest, is payable at an indicated rate of exchange or according to the course of exchange, or the instrument provides that on default in an instalment the balance falls due.

Not a bank-note or currency-note

Bank-notes and currency-notes are themselves promises to pay, but they are money, governed by the Reserve Bank of India Act, 1934, and are excluded from the definition.

4. Bearer Notes and the RBI Act

Section 4 contemplates a note payable to bearer, but Section 31 of the Reserve Bank of India Act, 1934 forbids anyone other than the Reserve Bank or the Central Government (as the Act allows) to make or issue a promissory note payable to bearer on demand (Section 31(1)), and, notwithstanding the NI Act, any promissory note expressed to be payable to the bearer at all (Section 31(2)). In practice, therefore, private promissory notes must be made payable to a named payee or to his order (Topic 55).

5. Stamping

• Duty payable: promissory notes are chargeable with stamp duty under the Indian Stamp Act, 1899; the rates for notes and bills are fixed by Parliament.
• Effect of no stamp or a short stamp: under Section 35 of the Stamp Act an instrument not duly stamped is inadmissible in evidence. For promissory notes and bills, the defect cannot be cured by paying a penalty, so an unstamped note cannot be sued on as a note.
• Suit on the original consideration: where the lender can prove the underlying loan independently of the note, a suit on the original debt may still lie.

6. Liability and Use

The maker of a note is the primary debtor. Under Section 32 he is bound to pay according to the apparent tenor of the note at maturity, and he is not entitled to notice of dishonour. A note may be made by two or more persons jointly, or jointly and severally. Notes are also commonly taken as collateral security for loans, in which case the creditor's rights are shaped by the terms of the security as well as the note (Topics 17 and 43).

7. Related Topics and Provisions

• Bill of exchange (Topic 7)
• Comparison of note, bill and cheque (Topic 9)
• Liability of drawer, drawee and maker (Topic 17)
• Stamp duty and the RBI Act restriction (Topic 55)