Q&As

What is the difference between a promissory note and an IOU?

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Published on LexisPSL on 02/05/2017

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • What is the difference between a promissory note and an IOU?
  • What is a promissory note?
  • What is an IOU?
  • Enforceability

What is the difference between a promissory note and an IOU?

What is a promissory note?

Under English law, promissory notes are negotiable instruments that represent an unconditional promise by one party to pay another party, in accordance with the terms of the instrument. In essence, a promissory note is a written promise by a debtor to pay a specific sum on a prearranged date. The Bills of Exchange Act 1882 (BEA 1882) sets out the requirements for a valid promissory note:

'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 the bearer' (BEA 1882, s 83(1)).'

There is no specific form of words required to be used when creating a promissory note, but the key characteristics are:

  1. payment is unconditional—payment cannot be subject to any conditions or requirements whether set out in the instrument or referenced externally

  2. in money—promissory notes are for payment in money and cannot include an agreement to perform any other acts

  3. the sum due is certain—the amount due cannot be qualified or contingent in any way and must be able to be determined from the instrument itself (note that if interest must be paid

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