Promise her anything...

Hal hfinney at
Tue Mar 22 09:41:36 PST 1994

A few days ago I said I'd look up the legal requirements on promissory notes.
This was to see whether digital cash or similar instruments could implement
digital promissory notes.

I found a book of legal forms for a variety of situations, and one set of
forms dealt with promissory notes.  Here are some of the comments about the
sample notes below.


"All of our notes are negotiable - that is, they can be sold.  To understand
what this means, think of what happens when you write a check.  Your check
means that you owe the face amount of the check to the person you have made
it out to (the payee) and that your bank will pay this debt when the check
is presented to it.  The original payee of your check can either collect the
amount directly or, as is common, endorse the check to someone else.  This
new owner can then collect the amount from your bank or endorse the check
to someone else.  In other words, the check can pass freely from person to
person (that is, be negotiated) until it is presented to your bank for payment.

"Promissory notes can similarly be negotiated, assuming they contain the
following provisions and magic words:
 "names of the lender and borrower, and borrower's address
 "a statement that the debt is payable 'to the order of' the lender (promisee)
 "a specified principal sum to be paid and the specific rate of interest,
  if any
 "the address where the payments are to be made
 "the city where and date when the note is signed and
 "the signature of the debtor (promisee)

"All the notes set out in this book contain this basic information.  Although
we told you in Chapter 1 that you could alter our contracts to your
satisfaction, taking out any of these clauses will probably render the note
non-negotiable (though still valid).

"In fact, it is unlikely that negotiability will be important to very many
readers, as most will never transfer their note.  However, should one of the
parties die, become mentally ill, or otherwise not be able to pay or collect
the debt, the fact that the note is negotiable increases the chance that it
will be paid.  Why?  Because institutions in the business of purchasing
uncollected notes and collecting onthem may be willing to buy it.  If you
alter a note but want to have it remain negotiable, make sure it still
contains the elements listed above."

The promissory note in the book also has a clause regarding attorney fees.
I will eliminate it here which implies that each party simply pays his own
attorney fees.  It simplifies the note.

Here is the note.  The form is not important, but the information present

    For value received, I individually promise to pay to the order of
    ____________ $___________ on _____________ at _______________________.
    Date:                      _________________________
    Location (City or County): _________________________
    Name of Borrower:          _________________________
    Address of Borrower:       _________________________
    Signature of Borrower:     _________________________
In considering how this could be presented in electronic form, the
basic information could be provided in a digitally signed message.  The
thrust of the legal discussion about the note is to make sure it can be
enforced in court if the borrower doesn't pay.  Digital signatures have
not, as far as I know, been tested yet in court, so lenders would not
currently have the protections with a digital promissory note that they
would have with a written one.

These notes also do not seem to lend themselves to anonymous transactions
very well.  The original note must contain the name of both borrower and
lender.  And I believe that if the note is sold, it must be endorsed over
to the buyer like a check.  So not only does the note record the names of
its owners, it also shows a trail of previous owners.  In general, this does
not seem to be an approach which would protect privacy.

I imagine it is possible for a person to create a "bearer" promissory note,
where he will pay back some loan to whomever presents the note.  In normal
circumstances, though, no lender would want to lend in exchange for such a
note, since the regular promissory note gives him more protection.  It's not
clear, too, how enforceable such a note would be, especially if presented by
someone not the original lender, say if the original lender contested the
note (claiming it was stolen or such).

The one loose end I did pick up from this reading was the general topic of
negotiable instruments.  These are financial papers which can be sold.  Per-
haps among the great variety of such instruments there would be some more
suitable to digital implementation using the anonymous-transfer technology.


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