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The Legal Stop is a straightforward online business using information technology for the public good. We aim to make the provision of legal services accessible and transparent for people and businesses alike. We provide affordable and transparent diverse legal services on a fixed fee basis. Our services include: Fixed Fee Legal Services, Fixed Fee Document Drafting and Legal and Business Document Templates.

What makes a promissory note valid?

When an individual or corporation lends someone a sum of money, a promissory note can be used, effectively like an IOU, to document the terms of the loan. Promissory notes are used for anything from informal loans between friends to much larger business loans.

Even among friends, when significant sums of money are involved, it is wise to have a formal agreement. Circumstances sometimes change, meaning the repayment of the loan may not happen in the way the lender (or borrower) expects.

In these moments having a valid promissory note is essential if the lender wishes to take legal action to reclaim their money. However, in order to enforce it, you will need to be certain that your promissory note is valid.

What is a promissory note?

A promissory note is a legally binding document between a lender and borrower agreeing the terms of repayment of a loan. Although the complexity will vary depending on the type of loan, typically a promissory note is a fairly straightforward document which is less extensive than a Loan Agreement. For loans that are less secure, perhaps to an unknown party, a Loan Agreement provides more comprehensive terms, so may be preferable for added security.

A promissory note will usually include:

  • The names of the lender and borrower
  • The borrower’s address
  • The amount to be borrowed
  • The date that the note is issued
  • The term of the loan period
  • Whether the amount due is payable on demand
  • Details around any interest and interest rates
  • Details about any collateral

How the loan is repaid can vary. The borrower may pay in regular instalments throughout the loan period, or pay it all as a lump sum at the end. It is common for the borrower to pay interest on the amount they borrow, although not always. The interest rate is agreed upon between the lender and borrower, and would generally be higher if there is no collateral provided.

Does it need to be in writing?

Since a promissory note is an agreement between two parties, it does not necessarily have to be in writing. A verbal agreement is still seen as binding. However, it will be extremely difficult to enforce the terms of the agreement in court unless they are in written form. Therefore, as a lender, if there is any uncertainty around the repayment of the loan, it is advisable to draw up a promissory note in writing.

Who needs to sign?

The signature of the borrower is obligatory in order to make the written promissory note valid. Whether or not the lender also signs will depend on the level of trust involved and the type of loan. However, without the borrower’s signature the document would be unenforceable.

Why might a promissory note be considered invalid?

For a promissory note to be enforceable, the terms and conditions should generally be fair and balanced between the two parties. If the terms are seen to weigh heavily in favour of one party, or if there is evidence that the borrower signed any of the terms under duress, there is a greater likelihood that they will not be enforced by the court.

Is it governed by the Consumer Credit Act?

If your promissory note is over £30.00 and is considered a commercial agreement – for example from a lender who regularly gives out loans as part of their daily business – the note will normally be governed by the Consumer Credit Act. Under this Act, your promissory note will need to comply with certain regulations in order to be valid, such as providing an annual percentage rate (APR) for interest. 

How do you enforce a promissory note?

Promissory notes can be either secured or unsecured, and this will decide how the note can be enforced in the event of non-repayment.

If the borrower is required to provide collateral for the loan, this can be seized and sold by the lender to claim back all or part of the debt. If the collateral does not cover the full amount of the note, or if the promissory note is unsecured, it is more complex for the lender to reclaim the outstanding amount. Initially they can try to negotiate directly with the borrower, or instruct a debt collection agency. Ultimately though, they may need to take the borrower to court to enforce the terms of their agreement.

The Difference Between Agency, Distribution and Franchise Agreements

As a manufacturer or supplier, a business may choose to sell their product by means of an agent, distributor or franchise. All three effectively serve as a middleman between supplier and final customer, but their relationships to the supplier are each unique. There is often confusion around the difference between agency, distribution and franchise agreements.

This article seeks to explain the nature of each, how they differ, and why you may prefer one relationship (and therefore agreement) over another.

Agency Agreements

With an Agency Agreement, a business appoints a third party to sell their products on their behalf. At no point does the agent purchase the products themselves. Instead they market the product in exchange for commission – generally a percentage of the final sale value. The commission is typically paid to the agent once the purchase has been made or the contract signed.

Since the agent’s role is to work on the supplier’s behalf, any sales contract exists between supplier and final customer alone. The agent is paid directly by the supplier and therefore assumes no liability from the sale. They do, however, represent the supplier’s brand and company values so their actions reflect directly on the supplier.

Advantages of an agency agreement:

  • Maintaining an element of control over the end contract.
  • Benefiting from the agent’s established trade connections within a local area or new market.
  • Saving the time and expense of managing marketing and sales operations internally.
  • Ability to fix resale prices without breaching UK and EU competition law.

Disadvantages of an agency agreement:

  • A degree of ongoing supervision will be required, which may be challenging where the agent is overseas.
  • The agent’s actions are directly attributed to the supplier since they are acting on their behalf.
  • The supplier retains all contractual liability for the product or any contract the agent has entered into on their behalf.

Distribution Agreements

Rather than entering into contracts with end users directly, many suppliers use distributors to sell their products. The distributor purchases the product from the supplier at a wholesale rate and then markets and sells the product using their own trade name.

Although the two parties work closely together, the distributor is a separate entity which operates in its own right. Therefore the supplier has less control over the distributor’s activities, aside from any terms set out in the distribution agreement. The distributor has autonomy over their own profit margins and is not required to pay any service fees, unlike a franchisee. Likewise, the supplier is not liable for the distributor’s actions, and the distributor takes on a level of risk and liability associated with the stock.

A Distribution Agreement will set out the rights and responsibilities for both supplier and distributor. This will cover terms such as competition and exclusivity terms, as well as conditions for termination of the contract or dispute resolution. The distributor may be required to reach a minimum order level, as well as maintaining minimum stock levels of goods and spare parts.

Advantages of Distribution:

  • Use of distributor’s local knowledge.
  • Sale in bulk orders rather than individual sales to the end user.
  • The distributor takes on the risk associated with holding stock and liability towards the end user.
  • No liability for the distributor’s acts, as they trade under a separate name.

Disadvantages of Distribution:

  • Competition and exclusivity terms may restrict the supplier’s ability to separately market their own product in certain territories.
  • Loss of control over how products are marketed.

Franchise Agreements

In a franchise agreement, a franchisee purchases the right to use the franchisor’s brand and expertise in order to sell the goods and services. The franchisee makes regular payments to the franchisor in return for access to their branding and knowledge. This is not to be confused with a license agreement, whereby a supplier licences out the intellectual property rights to their product, allowing the licensee to make use of the product for commercial gain.

The relationship between the two parties is far closer than that of a supplier and distributor, since the franchisor has a higher level of control over the activities of the franchised business. The franchisee is typically required to open a premises using the franchisor’s branding, and the franchisor may carry out inspections and impose requirements to ensure their brand is being adequately represented. Equally, the franchisor has a responsibility to provide training and support to the franchisee, as well as maintaining the brand value to ensure it continues to benefit the franchisee.

Advantages of Franchises

  • The Franchisee gains a ready-made business model.
  • The franchisee benefits from the franchisor’s brand, knowledge and resources.
  • Franchisor is guaranteed regular ongoing payments from franchisee.

Disadvantages of Franchises

  • The supplier has a responsibility to maintain the brand value and provide ongoing support.
  • Regular inspections and supervisions may be required to ensure the quality of the brand is maintained by the franchisee.

Before entering into an agreement

Understanding the difference between agency, distribution and franchise agreements is essential to building a successful sales strategy, particularly if you are trying to break into new markets. Each relationship has distinct advantages over the others but the level of supervision and duty of care required varies widely.

It is highly advisable to seek legal advice before entering into any of these agreements and our legal experts are always happy to assist. You can get in touch with us here to give us details of your enquiry.