Are Promissory Notes the Same as Bills of Exchange?
Although both promissory notes and bills of exchange have played critical roles in financing—particularly in international trade—they are fundamentally distinct financial instruments. Each carries unique features, legal obligations, and treatment under international trade law.
These instruments continue to serve as reliable mechanisms for cross-border financing, particularly when parties need a flexible, independent, and negotiable means of ensuring payment or credit.
Legal Recognition and International Framework
The 1988 United Nations Convention on International Bills of Exchange and International Promissory Notes (adopted by UNCITRAL) offers a globally recognized legal framework for the use and enforceability of these instruments in international transactions. The Convention emphasizes:
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The independence of these instruments from underlying contracts (e.g., sales agreements),
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Their negotiability, and
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Uniform treatment of obligations across jurisdictions that adopt the Convention.
📘 This convention is also referred to as the “Multilateral Convention on International Bills of Exchange and Promissory Notes (1988).”
It remains a foundational legal reference point in global trade finance.
Key Characteristics and Differences
| Feature | Promissory Note | Bill of Exchange |
|---|---|---|
| Definition | A written promise by the maker to pay a specified amount to a named party. | A written order by the drawer directing another party (the drawee) to pay. |
| Parties Involved | Two: Maker and Payee | Three: Drawer, Drawee, and Payee |
| Acceptance Required? | No – the maker is the principal debtor. | Yes – the drawee (usually a bank) must accept the bill to be bound. |
| Negotiability | Yes – transferable by endorsement or delivery. | Yes – freely negotiable under UCP 600 and applicable conventions. |
| Used In | Mostly loans, credit arrangements, or financial obligations. | Commonly used in trade transactions, including deferred payment for goods. |
| Security | May be unsecured or supported by additional instruments. | Can be guaranteed or confirmed by banks (primary liability if accepted). |
| Independence from Contracts | Yes – independent from any underlying transaction, as per the 1988 Convention. | Yes – operates independently of the sales contract or agreement. |
| Applicable Laws | National promissory note law or UNCITRAL 1988 Convention (if adopted). | Governed by UCP 600, ISBP, and national/international laws like the 1988 Convention. |
| Enforceability | Legally binding once signed and delivered. | Legally binding after proper issuance and acceptance. |
Illustrative Use Case
Imagine a seller agrees to deliver goods to a buyer with payment due in 180 days. The buyer may issue a bill of exchange drawn on their bank, which the bank accepts—thus taking on primary payment liability. This instrument then functions as a secure, bank-guaranteed obligation, independent from the purchase contract.
Alternatively, the buyer could issue a promissory note, promising to pay the seller at a future date without needing third-party acceptance, though the risk is higher without a bank guarantee.
Negotiation and Transfer
Both instruments are negotiable and may be endorsed or assigned to third parties:
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A valid endorsement must be:
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In writing,
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Signed by the indorser,
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On the instrument itself,
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For the entire amount stated.
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A holder in due course (one who receives the instrument before maturity, in good faith, and without notice of defect) acquires a clear title and enforceable rights.
Delivery and Contract Completion
"Delivery" of the instrument may be actual (physical handover) or constructive (legally inferred). For the contract to remain valid:
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The acceptor or maker must acknowledge and sign the instrument.
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Endorsements, if applicable, must be complete and compliant.
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The instrument must match the value and terms agreed upon in the transaction.
Payment Obligations
Once the instrument is presented, the acceptor (bill of exchange) or maker (promissory note) is obligated to make payment:
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Payment may be made directly to the holder or via an intermediary such as a collecting bank.
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Once accepted and paid, the instrument discharges the debtor’s legal obligation.
Conclusion
While they share common features such as negotiability and enforceability, promissory notes and bills of exchange are legally and structurally different tools in trade finance. Understanding their proper use—and their treatment under international conventions like the UNCITRAL 1988 Convention—is vital for secure and successful global trade.
✅ Both instruments offer flexibility, legal certainty, and international recognition when properly structured and used in compliance with standard practice.
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