Area of Law: Business Law
Answer # 0309
Promissory NoteRegion: Ontario Answer # 0309
What is a Promissory Note?
A promissory note is a legal document where one party makes an unconditional promise to pay a certain sum of money to the other party. A promissory note can be made payable on demand, at a specific period of time, or upon an event that is certain to occur. In Canada, promissory notes are governed by the federal Bills of Exchange Act.
Why are Promissory Notes used?
Typically, promissory notes are used in connection with short term financing, and business loans. They are usually unsecured. For the note to be legally valid, the note must be signed by the borrower and must include language that clearly shows the borrower promises to pay a defined amount.
Is a Promissory Note the same as a Loan Agreement?
Promissory notes are not the same as loan agreements. A promissory note is considered a ‘negotiable instrument’. This means that the note is similar to currency in that it may be transferred to a third party by simply delivering it to them. As a negotiable instrument, a promissory note may be payable to the party specified in the note or to a third party who is holding the note. Unlike signing multiple copies of a loan agreement, if a borrower puts their original signature on 2 promissory notes, then the borrower will be responsible to pay the amount twice.
What information do Promissory Notes include?
Promissory notes often include many different features, such as:
- the principle amount outstanding
- the interest rate, (fixed or floating), and the basis for calculation
- names of lenders or borrowers (individuals, corporations, partnerships etc.)
- date of payment (‘term note’), or if payable on Demand (‘demand note’)
A demand promissory note is a note that must be paid when the lender ‘demands’ payment. This is typically done through a written demand for payment by the lender to the borrower. The borrower will then be obligated to pay the amount outstanding within a reasonable amount of time, typically a few days.
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