Bills of exchange, promissory notes and checks share one thing in common. They're all documents representing an agreement for one party to pay a definite sum of money to a second party. Furthermore, the parties understand the documents hold value and are sometimes traded to a third or fourth party.
To understand the differences between the three, it helps to know a few related terms. As the name suggests, a promissory note represents a promise to pay a certain amount to a payee. Payee refers to the party being paid. "Maker" is the legal term for the person who signs a promissory note. The person who writes the check for a bill of exchange or promissory note is the drawer, while the payer is the "drawee." If it comes from a bank, the bill of exchange gets called a bank draft.
Promissory Note Example
The maker or drawer, and the payee, are the parties involved in a promissory note. A mortgage contract is a common contemporary form. The homeowner promises to repay a particular amount according to specific terms outlined in the promissory note. While two people, say a husband and wife, may sign the note, they're considered one party in contract terms. Both are equally liable to fulfill the terms of the note.
Bill of Exchange
A bill of exchange is used in commerce and acts as a payment order. They're transferable, meaning a third party can take ownership of the bill. Bills of exchange are used between trading partners. For example, when a supplier sells merchandise to a store, a bill of exchange may accompany the shipment detailing the amount due. The document will instruct the merchant to accept the terms, write "accepted" on the bill, and return it to the supplier as an agreement to pay on the assigned date.
A common check is a draft drawn on a bank or financial institution and payable on demand. The process is simple. You write a check to someone, who then sends it to a bank or organization that pays them out of your account. Unlike promissory notes and bills of exchange, checks are not accompanied by written terms. However, laws often require them to be honored by the account holder.
- Columbia University: UCLA Law Review -- Searching for Negotiability in Payment and Credit Systems
- Cornell University Law School: UCC - Uniform Commercial Code, 3-104 Negotiable Instrument
- Federal Reserve Bank of Cleveland: Reconsidering the Application of the Holder in Due Course Rule to Home Mortgage Notes
- Nolo: Understanding Promissory Notes for Small Businesses