Summary
When is a promissory note enforceable?
When a company incurs a debt but does not have enough cash to pay, it may issue a promissory note to memorialize the debt in writing. If you want to get paid in the future, it’s important to make sure your promissory note isn’t unenforceable.
For instance, if a person provides services to a start-up company that is unable to pay because it is low on cash, the start-up can issue a promissory note. The note indicates the monetary value of the person’s services and the date said value is to be paid by. Presumably, the note would be issued in conjunction with the services provided or monies loaned. The note is valid and enforceable because it is given contemporaneously in exchange for the services provided.
In order for a promise to be enforceable as a contract in New York, the promise must be supported by valid consideration. Consideration is defined as either a bargained for gain or advantage to the promisee or a bargained for legal detriment or disadvantage to the promisor.
When a Promissory Note Is Past Consideration and
The Exception to the Rule
However, some companies may have similar obligations for services provided or monies loaned but wait years before issuing a promissory note. The writing occurs some time later; days, months or years.
For example, say a person provided accounting services to a startup without funds. Two years later, the startup, still without cash, wants to acknowledge the amount due. It issues a promissory note for $50,000.00 to the person for “past work on the company’s behalf.” That is all that the note states, nothing more. In New York, such a promissory note would be considered unenforceable because the note was for “past consideration” and did not include specifics of the accounting services (consideration) provided.
Companies desiring to issue promissory notes to acknowledge past debts must be aware of the terms necessary to make such a note enforceable.
There is an exception to the rule in New York that would make the tender of a promissory note for past consideration enforceable. If the promissory note specifically states the past consideration, and the consideration is proven to have been performed and valid in time it was provided, then the note is enforceable. In other words, if the promissory note states in its terms: “In 2017, Joe Smith provided accounting services valued at $50,000.00 and this promissory note is being issued to Joe Smith in exchange thereof,” it would be enforceable in New York. That is assuming that Joe Smith actually provided the accounting services in 2017.
While you may feel comforted by a promissory note, unless the note contains the aforesaid required terms, you may be left with an unenforceable promissory note, and no means of compensation for the services rendered. If you’ve received a promissory note or are looking to collect an outstanding debt, contact Frank, Frank, Goldstein and Nager for a consultation.
