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negotiable-instruments:promissory-note

Promissory note - Meaning and Essential elements

Section 4: A “promissory note” is 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

Illustrations A signs instruments in the follomng terms

  • (a) “I promise to pay B or order Rs 500”.
  • (b) “I acknowledge myself to be indebted to B in Rs 1,000, to be paid on demand, for value received”.
  • (c) “Mr B, I.O.U Rs 1,000”.
  • (d) “I promise to pay B Rs 500 and all other sums which shall be due to him”.
  • (e) “I promise to pay B Rs 500, first deducting thereout any money which he may owe me”.
  • (f) “I promise to pay B Rs 500 seven days after my marnage with C”.
  • (g) “I promise to pay B Rs 500 on D's death, provided D leaves me enough to pay the sum”.
  • (h) “I promise to pay B Rs 500 and to deliver to him my black horse on the 1st January next”.

The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes.

The section defines a promissory note and lays down the essential elements that go to the making of such a note. The definition is exhaustive and excludes from its category instruments which do not comply with the conditions mentioned therein. In order that a document shall be a promissory note within the meaning of section 4 it must also be intended by the parties to be a promissory note and it must be intended to be negotiable and pass from hand to hand . To determine the character of the document the court should look to the provisions of the documents and not to the description given to it by the parties. A hand note is a piomissory note within the meaning of this section. A hundi wherein the maker is himself the acceptor and which contains a promise and not an order to pay is a promissory note.

The essential elements of a promissory note are:

  1. It must be an instrument in writing — not being a bank note or a currency note
  2. The instrument must contain an unconditional undertaking to pay.
  3. The instrument must be signed by the maker.
  4. The undertaking to pay must be to pay a certain sum of money only.
  5. The payment is to be made to the person in whose favour it is executed or to the order of such person or to the bearer of the instrument.

If any one of these elements be lacking the instrument cannot be regarded as a promissory note.

Instrument in writing

The contract must be reduced to writing which includes typewriting, printing and lithography etc. It may be so done in a paper, book or parchment. An oral contract to pay a certain sum to a person satisfying all the other elements noted above cannot, for obvious reasons, be treated as a promissory note. The writing may be ink or pencil.

Since it is required to be reduced to writing Section 92 of the Evidence Act is attracted by this condition. The terms of a promissory note purporting to be an absolute engagement to pay on demand cannot, under the provisions of the Evidence Act, Sec 92, be varied by a contemporaneous oral agreement constituting an undertaking on the part of the plaintiff not to enforce the note by suit till the happening of a certain event or implying that the legal obligation of payment is to be postponed to, or made conditional upon the happening of a certain event. Proviso (3) does not permit the terms of a written contract to be varied by a contemporaneous oral agreement, but having regard to illustrations (b) and (j), its proper meaning is that a contemporaneous oral agreement to the effect that a written contract was to be of no force or effect at all and that it was to impose no obligation at all until the happening of a certain event may be proved.

Unconditional undertaking to pay

Payment in the mercantile world cannot depend on contingencies which may or may not happen.Uncertainty is bound to affect trade and commerce to develope and facilitate which, the promotes, bills of exchange and cheques are resorted to. The undertaking to pay must, therefore, be unconditional and the promise to pay must be express. Use of the word “promise” in the instrument is not necessary, if the promise to pay can be gathered either from express words used in the instrument or by necessary implication, the instrument is a pronote. Intention to make a pronote need not be indicated.

A promise to pay on the happening of an event which, in the ordinary course, is bound to happen is not a conditional promise nor is a note made payable through another marfatdar aconditional one. The real test is, it is submitted, whether the amount piomised will be made payable at all events or not, so that even if the promise to pay is made dependent on events which must, in the normal order of things and ordinary course of human conduct, happen, it is a promissory note. Therefore, a promise to pay “when able” or “at my convenience” or “as soon as possible” is a conditional promise and not a pronote.

A mere acknowledgment of receipt of money or of indebtedness or an admission that the executant is accountable to the other party will not constitute the document into a promissory note for the simple reason that there is no unconditional promise to pay. According to some decisions an acknowledgment of debt with a promise to pay was regarded as a promissory not but in such cases the promise to pay was to be an express promise and not an implied promise arising out of the acknowledgment. But this is no longer a good law and it has been recently held that a receipt for money, even if coupled with, a promise to pay is not a promissory note.

An account may not be a pronote or even a mere acknowledgment. A balance in an account with “balance due” does not imply a promise to pay , but a balance struck, after accounting, in favour of a particular person does.

A clause to pay interest at a certain rate on failure to pay the pincipal amount on a specified date, is not repugnant in a pronote, but a clause to sue for any interest becoming due, on failure to pay interest annually, is repugnant to it. A note will be none the-less a pronote because it contains recital of the transaction out of which it arises or because collateral security is given, if there is nothing to qualify the promise. A note containing a promise to pay another a fixed sum every month is bad as vague and indefinite. Similarly a document containing a piomise to pay interest at a certain rate for money of another or a mere acknowledgment of debt purporting to be an on demand note with promise to pay interest , or a document where a person writes to another that he will be liable for payment of the principal and interest due on a promissoiy note executed by his brother and that he will pay the whole amount after a certain time is not a pronote.

Signed by the maker

Execution is completed when the maker puts his signature in the note. Signature is an essential condition so that if the maker writes out the whole body of the note with his name therein but does not sign it, it is not a promissory note. The signature includes thumb mark, initials or any other mark and may be in any part of the document and it may be in pencil, ink, lithograph stamp or even in printing, if these are adopted by the maker. In case the executant is able to write, his mark will not be sufficient. A pronote executed by a person under the authority of a marksman is valid even though the marksman has affixed his mark thereto. Signing of the document will not of itself give rise to any contractual relationship. A person may sign a pronote and keep it to himself without incurring any obligation. When such a document is tendered by him to the payee and is accepted by the latter, there arises the contract between them.

Payment of a certain sum of money only

The promise to pay must be a promise to pay money alone and not any other thing even in addition and it must be a definite sum of money payable under the promise. If the amount promised to be paid is uncertain or if there is a promise to pay not only a definite sum of money but something, say, paddy in addition, the instrument will not be a pronote. But the sum does not become uncertain because in addition to the amount specified in the instrument there is a promise to pay future interest at a stipulated rate.

When, however, one promises to pay another a definite sum and all fines according to rates or after deducting any money which may be due by the latter to the former or when one acknowledges a debt to another for a certain amount but only promises to pay interest at a stipulated rate, the instrument offends against the law of certainty.

To determine whether the amount is certain or not the test is if the amount payable can be gathered from, the instrument itself without reference to any other thing. If it can be gathered from the instrument, it is certain, otherwise not. From what has been stated above it would appear that stipulation to pay a certain amount with annual interest at a certain rate is not repugnant to negotiable instiuments.

Promisor and Promisee to be certain

Certainty is of the essence of a pronote. It is to be certain not about the amount alone but also as regards the person by whom and to whom the payment is to be made. Where an instrument executed by one peison to another contains an unconditional promise to pay a certain sum of money to the latter who is sufficiently indicated, the instrument is a pronote. Where a pionote was made in favour of a person described by his office it is one made in favour of a ceitain person. If from the description of the maker sufficient indication follows about his identity the maker is certain. Where in a document the maker described himself as the honorary manager of a temple it was held that the description did not offend against the section and did not affect his personal liability. A note made payable to either of two persons or to several individuals is a pronote.

The name of a person or a firm to be charged upon a negotiable instrument should be clearly stated on the face or back of the document. It is not sufficient that the principals name should be “in some way” disclosed, it must be disclosed in such a way that, on any fair interpretation of the instrument, his name will appear as the real name of the person liable on the document. So where a promissory note was executed by R, described as son of P, who with the other members of his family constituted a joint family firm and there was no reference in the document to the firm of P, the firm was not held liable on the document.

When two or more persons make a note they may be jointly or severally liable according to the tenor of the document. Ordinarily, when the makers jointly and severally promise to pay, the note is joint and several. A note will be deemed to be a joint and several note although it begins with “I promise” but is signed by two or more persons. But a note beginning with “we promise” and signed by two or more persons is only a joint note and not a joint and several note. If there was an understanding that two persons would jointly execute a note and only one signed it and the other did not, the note may not be enforcible against the executant , its enforcibility would depend on the intention of the parties and the circumstances of the case.

If a partner executes a pronote in which he describes himself in the body of the note as a partner but signs it without any further designation, he does not indicate that he does not intend to make himself personally liable and, therefore, the liability is his and not of the other partners. A pronote not made payable to any other person than the payee, that is, not made payable to order or bearer is not a negotiable instrument. Without these words the note becomes non-negotiable but remains enforcible by the payee alone. It may be assigned like an ordinary chose in action and the assignee can recover the amount without having the special privileges of the holder of a negotiable instrument free from defects.

To pay to a third party on behalf of the payee but on third party's order cannot be treated as payment to payee or his order as required by the section. A document cannot be taken to be a promissory note payable to bearer if the person to whom the money is to be paid or that it is to be paid to the bearer be not expressly stated. A note executed in favour of an institution which has no judicial status is void and unenforcible.

Consideration

The promise to pay made in the promissory note must be for lawful consideration. When the defendant executant has not received any consideration for the promissory note, the instrument does not create any obligation between the holder and the defendant. But where there was an agreement between A and B that A would pay B a certain amount if C did not execute a relinquishment of his exproprietary rights under section 15 (2) of Agia Tenancy Act and C executed a sale deed in favour of A but did not apply for surrender of his expropnetary rights within the prescribed period and B sued on the piomissory note it was held that A was liable as the consideration for the pronote was legal.

A promisor executed a pronote believing that the security given to the promisee by the real debtors was sufficient and denied liability for payment. In the absence of any inducement by the promisee he was held liable under the note1).

Bank Notes or Currency Notes and Government Promissory Notes

The definition specifically excludes Bank Notes or Currency Notes from the category of pronotes under this Act. Though these instruments contain promise to pay a definite sum and are practically promissory notes they are not treated as such because they are regarded as cash money. The holder is entitled to payment without edorsement. But Government Promissory Notes fall within the scope of this section and have all the incidents of a negotiable instrument.

Similarly Improvement Trust debentures and war bonds are negotiable.

Form

No particular form is prescribed for a promissory note, provided, the essential ingredients described above are there. It is not necessary to put the words “on demand” in the pronote as a matter of form. Non mention of the date of execution does not make the instrument invalid and independent evidence of the date is admissible. A pronote may be antedated or post dated. Mention of the place of execution is unnecessary except for determining the forum, and parties are free to insert in the instrument as place of execution any place even other than where it is actually executed

Can instrument be split up

When an instrument is found to be insufficiently stamped though incidentally it may amount to a receipt or an acknowledgment of liability. What the Court should consider is whether it is primarily a promissory note. If the recitals show that it is primarily meant to be promissory note then the stamp affixed to it must be taken to have been affixed as a promissory note and not as a receipt or acknowledgment of liability. Where the instrument as a whole is insufficiently stamped it would not be proper to allow it to be split up into two portions and to regard the duty paid on it as having been paid on the portion which it suits the plaintiffs to retain although the primary purpose of the document is contained in the other portion. If, however, there are any recitals in a document which, as such, are not chargeable with duty, then it may be possible to use such recitals as evidence for an entirely different and independent matter.

Stamp

Revenue stamps of requisite value under the Indian Stamp Act should be affixed. An unstamped or under stamped promissory note is inadmissible in evidence and no claim can be founded on the documents although, under certain conditions, a suit will lie on the original consideration. Use of a wrong stamp may not warrant a dismissal of the suit. Thus, a suit on a promissory note executed on March, 28, 1934, was not dismissed merely because it was affixed with revenue Stamps the use of which was made compulsory by the Government from April 1, 1934, but which were available before,, specially when the defendant admitted his liability.

It is necessary to cancel all the stamps as it has been held by some High Courts that where all the stamps are not cancelled the document is not admissible and no decree can be passed on the basis of a note inadmissible in evidence for want of cancellation of stamp.

Mode of Cancellation

A person may cancel an adhesive stamp by writing on or across the stamp his name or initials or the name or initials of his firm with the true date of his writing or in any other effectual manner. Drawing lines across the stamp was in some cases held to be effective cancellation, but in another case drawing of two parallel lines was held insufficient.

The question whether or not a stamp has been effectively cancelled is one of fact to be decided by the examination of the stamp itself and no general rule of what would constitute effective cancellation can be laid down.

1)
See also consideration under Section 9

Created on 2021/01/25 08:28 by LawPage • Last modified on 2021/01/25 08:34 by LawPage