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. The note is valid and enforceable because it is given 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
However, some companies may have similar obligations for services provided but wait years before issuing a promissory note. 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.”
In New York, such a promissory note would be considered unenforceable because it is “past consideration.” Past consideration is not valid consideration in New York because the promise of the note was not induced by the consideration. Companies desiring to issue promissory notes to acknowledge past debts may not be aware of the terms necessary to make such a note enforceable.
The Exception to the Rule
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. As long as 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.