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Drafting 101 — A Lawyer’s Guide To Drafting An Enforceable Promissory Note
In it simplest terms, a promissory note is a written promise to repay a loan or debt under specific terms - usually at a stated time, through a specified series of payments, or upon demand. A promissory note will clearly identify the parties, the amount of the obligation, and if necessary, the consideration for the obligation, that is, what the debtor has already received or will receive in return for signing the note. The note will also include the terms of repayment, whether that be in one lump sum or at stated intervals, and, if applicable, the interest rate which will apply. It may also include an "acceleration clause" which will make the entire amount of the note due if a payment is missed.
What follows is a specific guide to drafting key provisions found in most promissory notes.
Paragraph 1: Identifies the Parties, Sum, and the Repayment Terms
The first paragraph of a typical promissory note should begin by listing the parties involved (promissor and promissee), the sum demanded, and the date when or intervals at which the sum must be repaid. The first paragraph may also include the consideration for the debt. This can be a general provision such as "for value received", or could spell out the services or goods that were the subject of the note, if applicable (i.e. legal services, medical services, etc.).
For example, the first paragraph of a typical promissory note might read:
"For value received, John Doe, on behalf of himself, individually, promises to pay to Jane Smith & Associates, Inc., without offset, the principal sum of $3,500.00, on or before the 15th day of June, 2008, for technology consulting services rendered to the undersigned, that remain unpaid to April 31, 2008."
A demand promissory note is a variation of a promissory note which calls for the payment of the sum "on demand" by the promissee, as opposed to calling for payment on a certain date or at certain intervals. The first paragraph of a demand promissory note might be drafted to read:
"For value received, John Doe, on behalf of himself individually promises to pay to Jane Smith & Associates, Inc., without offset, on demand, the principal sum of $3,500.00, for technology consulting services rendered to the undersigned, that remain unpaid to April 31, 2008." [Italics Mine.]
Paragraph 2: Interest rate
The second paragraph might list the interest rate involved. For instance:
"No interest shall be charged unless there is a default, in which event interest will be charged at the rate of 7% per annum."
Paragraph 3: Waiver of Protest and Agreement to Pay Collection Costs
The note should include a provision whereby the promissor acknowledges and waives his right to protest the note. This provision might read:
"The Undersigned hereby waives diligence, presentment, protest, and notice of every kind. In the event a default occurs and this note is placed in the hands of an attorney for collection, the Undersigned promises to pay reasonable attorney's fees and costs in the collection of this note whether or not suit is commenced or judgment is entered."
Paragraph 4: Applicable Law
The note should be drafted to address the applicable law.
"This note is subject to and will be interpreted by California State law and the Undersigned agrees that California is a convenient forum for all disputes that may arise hereunder and that California courts shall have exclusive jurisdiction over any dispute hereunder."
Paragraph 5. Modifications
"This promissory note may not be modified orally and may only be modified in writing."
Paragraph 6: Release of all Claims
A promissory note will typically include a release of all claims provision, for example:
"The payment of this promissory note is the consideration for technology consulting services already provided by Jane Smith & Associates, Inc., and all claims held by Jane Smith shall be waived and released upon full tender of payment under the terms of this note."
Finally, be sure to include signature lines for all parties involved in the transaction.
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