Definition and Basic Elements of Promissory Note

Definition: A promissory note is a written and unconditional undertaking where the signatory (debtor) commits to pay a specified amount to a designated person (creditor) on a certain date or on demand. It is considered a debt instrument and explicit acknowledgment of financial obligation, differing from a cheque in being a direct commitment rather than a payment order to a bank. Used in commercial and personal transactions as proof of debts and loans.

A promissory note consists of essential elements that must all be present for it to be legally valid, and the absence of any element deprives it of its status as a promissory note. These elements ensure clarity of obligation and protect the rights of both parties:

Basic Elements:

• The words "Promissory Note": Explicit mention of the phrase in the body of the note in the language it's written in
• Payment Undertaking: Clear formula such as "I undertake to pay" or "I commit to pay" without conditions
• Amount: Specified in figures and words to avoid forgery and manipulation
• Payee: Name of the person or entity to whom payment is due
• Maturity Date: Specific date for payment or phrase "on demand"
• Place of Payment: Address or city specified for payment (optional)
• Date and Place: Date and place of issuing the note
• Signature: Debtor's signature (note maker) with name clearly written

Parties to Promissory Note and Their Roles

A promissory note includes two basic parties, and may include additional parties in some cases:

Main Parties:

• Maker (Debtor): The person who signs the note and undertakes to pay. Bears full responsibility for paying the amount on the specified date, and faces legal procedures in case of non-payment

• Payee (Creditor): The person designated to receive the amount. Has the right to demand payment upon maturity and file a lawsuit in case of non-payment

• Guarantor (Optional): Additional person who guarantees payment of the note in case the maker is unable. Becomes obligated to pay if the original debtor cannot pay

• Endorsee (In case of endorsement): The person to whom the note is transferred by endorsement, acquiring the same rights as the original payee to demand payment

Responsibilities: Maker commits to payment, payee holds the note and claims rights, guarantor pays when maker defaults, and endorsee enjoys collection rights.

Provisions and Conditions of Promissory Note

A promissory note is subject to comprehensive legal and Sharia provisions that regulate all its aspects from issuance to collection. These provisions aim to ensure the rights of all dealing parties, provide legal protection for creditors, and organize trading and execution processes fairly and transparently:

Main Provisions:

Legal Force and Obligation: A promissory note is a legally binding commercial paper that gives its holder the right to direct execution without need for prior court judgment. The maker is absolutely responsible for paying the note's value on maturity date, and the payee has the right to immediate claim and execution on the debtor's assets.

Formal Conditions and Requirements: All basic elements must be present: the words "promissory note" explicitly, clear payment undertaking, amount in figures and words, payee's name, maturity date or "on demand", date and place of issuance, and maker's signature. Deficiency in any element affects legal validity.

Endorsement and Trading Provisions: Transferable by endorsement to others unless explicitly prohibited, with all rights transferring to the endorsee. The endorser bears responsibility for guaranteeing payment along with the original maker, and the new payee has the right to recourse against all signatories.

Guarantee and Surety System: Guarantors or sureties can be added who bear joint responsibility with the maker. Surety must be explicit and written, and the creditor has the right to claim the full amount from any obligor without specific order.

Maturity and Payment Rules: The note becomes due on the specified date or immediately if "on demand". Payment place is specified in the note, otherwise considered the place of issuance. Currency is clear and specified with possibility of partial payment by parties' agreement.

Compensation and Expenses: The payee has the right to claim compensation for actual damage resulting from delay, and reasonable legal expenses, without usurious interest. The debtor bears collection costs and legal procedures.

Note Termination and Expiry: The note expires by full payment of the amount, or by amicable settlement between parties, or by agreed cancellation, or by passage of limitation period (3 years from maturity date). Limitation expiry doesn't cancel the debt but converts it to natural obligation.

Endorsement of Promissory Note and Its Types

Definition of Endorsement: Endorsement is a legal procedure whereby the holder of a promissory note can transfer ownership and all rights arising from it to another person. This is done by writing and signing on the back of the note or on a paper attached to it (allonge). This procedure transfers to the transferee the right to claim the amount and execute on the debtor's assets, making them legal owner of the note with all its guarantees and rights.

Types of Endorsement:

Named Endorsement: Includes clearly writing the transferee's name with endorser's signature and endorsement date. This type accurately identifies the new payee and prevents any confusion or manipulation in identity. The transferee becomes legitimate owner of the note and can endorse it to a third party or collect its value directly.

Blank Endorsement: Limited to endorser's signature only without specifying transferee's name, making the note tradeable to any holder. This type increases trading ease but carries higher risks in case of loss or theft, where anyone holding the note can claim its value.

Restrictive Endorsement (For Collection): Specifies endorsement purpose such as "for collection only" or "by agency". In this case, the transferee doesn't become actual owner of the note but agent for the endorser in collecting the amount. They can take collection procedures but must deliver the amount to the original endorser, and cannot endorse the note to a third party except within their agency scope.

Conditions for Valid Endorsement:

Endorsement must be written and signed by the endorser, undivided (for the complete amount), and not conditional. The note must originally be endorsable and this not explicitly prohibited, and the endorser must be legally competent to act.

Difference Between Promissory Note and Other Commercial Papers

Promissory notes differ from other commercial papers in several fundamental aspects related to their legal nature and usage method. The following table shows the main differences between promissory note, cheque, and bill of exchange:

Comparison Aspect	Promissory Note	Cheque	Bill of Exchange
Definition	Written payment undertaking by debtor	Payment order to bank upon sight	Payment order from drawer to drawee
Number of Parties	Two parties (maker and payee)	Three parties (drawer, drawee, and payee)	Three parties (drawer, drawee, and payee)
Legal Nature	Payment undertaking	Payment order	Payment order
Validity Period	3 years from maturity	6 months from issuance	As agreed
Timing	Deferrable	Immediately due	Deferrable
Prior Balance	Not required	Required in bank	Not required
Acceptance	Not required	Not required	Required from drawee
Purpose	Proving debts and loans	Immediate payment	Trade and credit
Guarantee	Maker's liability	Bank balance	Drawee's acceptance
Endorsement	Endorsable	Endorsable	Endorsable
Usage	Personal and commercial transactions	Daily payments	Domestic and foreign trade
Execution	Executive instrument	Direct claim	Executive instrument after acceptance