Define and distinguish Promissory Note and Bill of Exchange.

The Promissory Note

Section 4 of the Negotiable Instruments Act, 1881 defines a promissory note as "an instrument in writing, not being a bank note or a currency note, containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument."

The promissory note is, in its very essence, a promise — a direct, unilateral engagement by the maker to pay. There are only two necessary parties: the maker, who gives the promise, and the payee, to whom the promise is made. The maker's liability is primary and absolute; he binds himself unconditionally. As the Andhra Pradesh High Court explained in Bahadurrinisa Begum v Vasudev Naick (AIR 1967 AP 123), the essential requisites of a promissory note are four in number: (i) an unconditional undertaking to pay, (ii) the sum must be a certain sum of money, (iii) payment must be to the order of a certain person or to the bearer, and (iv) the maker must sign it. Beyond satisfying these four requirements, the instrument must pass three further tests — the promise to pay must be the substance of the instrument, nothing else in it must be inconsistent with that character, and the parties must have intended it to be a promissory note.

The illustrations appended to Section 4 illuminate the boundaries of this definition with practical clarity. The instrument "I promise to pay B or order Rs. 500" (Illustration a) is a clean promissory note. But "I promise to pay B Rs. 500, first deducting thereout any money which he may owe me" (Illustration e) is not — because the promise to pay has been made conditional. The Supreme Court in Javer Chand v Pukhraj Surana (AIR 1961 SC 1655) confirmed that once an instrument is admitted in evidence, it is not open to the court to revisit its nature as a promissory note.

The Bill of Exchange

Section 5 of the Act defines a bill of exchange as "an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument."

Unlike the promissory note, the bill of exchange involves three parties: the drawer, who creates the instrument and gives the order; the drawee, upon whom the order is drawn; and the payee, who is entitled to receive the money. The drawee becomes the acceptor upon accepting the bill, and it is upon acceptance that the primary liability to pay fastens on him. Until acceptance, the drawee is a mere stranger to the instrument. The drawer's obligation, by contrast, is only conditional — he becomes liable as a surety if the drawee, after acceptance, fails to pay. As the court observed in Bahadurrinisa Begum v Vasudev Naick, the maker of a promissory note unconditionally undertakes to pay, whereas the drawer of a bill of exchange gives an unconditional order directing a certain other person to pay.

An essential character of a bill of exchange is that it must contain an order to accept or to pay — without such a direction to pay, the document will not be a bill of exchange or a hundi, as settled in several decisions. The order must be imperative in nature. A mere request — such as "I will be highly obliged if you make it convenient to pay" — would not constitute a bill of exchange, though the addition of words like "please" or "kindly" before an otherwise clear order would not invalidate the instrument.

Points of Distinction

The differences between the two instruments are deep and structural, touching the very nature of the obligations they create.

The most significant distinction — and the one that carries the greatest commercial consequence — lies in the structure of liability. In a promissory note, the maker is the principal debtor from the moment of execution. In a bill of exchange, the person originally liable is the acceptor; the drawer steps in only if the acceptor fails. As Section 4's commentary in several cases makes clear, this structural difference also determines how the Act applies them: "the maker of a note is deemed to correspond with the acceptor of a bill, and the first indorser of a note is deemed to correspond with the drawer of an accepted bill payable to the drawer's order."

It is also worth noting that where an instrument is capable of being construed either as a promissory note or a bill of exchange, Section 17 of the Act gives the holder an election to treat it as either — and once made, that election is irreversible. The Supreme Court applied this principle in Punjab and Sind Bank v Vinkar Sahakari Bank Ltd (AIR 2001 SC 3641), holding that a holder who had elected to treat the instrument as a cheque could not thereafter resile from that position.