The risk of using the promissory note as a form of advance payment in Spain

In Spain, it is still common for a work or services commissioner to pay for them by using instruments known as pagarés or promissory notes. The issuers of these promissory notes often act in the belief that, in the event that the work or services are not completely or incorrectly finished, they can ask their bank without any major problem to refuse the promissory note when it is presented for payment. Nonetheless, this operation entails a serious risk of which the issuer of the promissory note is often unaware of, the endorsement.

Endorsement means that the person to whom the promissory note was issued has passed it on to a third party in payment of debts he owes to the latter. Thus, after endorsement, the third party can claim the payment of the determined amount from the signatory of the promissory note.

In this case, it will be of little use for the issuer of the promissory note to order their bank not to process the payment because the work or services had not been completed or were incorrectly completed.

These circumstances, which as a rule could be used to refuse payment to the person to whom the promissory note was addressed, are not applicable to the person in favour of whom it was endorsed (the third party), the signatory being obliged to pay the third party. If he refuses to pay, the third party can then claim the amount through a judicial summary proceeding (known as juicio cambiario) which will enable rapid seizure of the signatory’s assets. The signatory would then have the unpleasant surprise of having to pay the third party even though the person to whom he originally issued the promissory note never completed the work or services for which he was employed to do so.

In conclusion, and so as to avoid this risk, it is advisable to consider other forms of payment, or to extend promissory notes with the mention no a la orden (not to order) the goal of which is precisely to prevent endorsement in favour of third parties unrelated to the original contractual relationship.

This article is not considered as legal advice

Mariano Jiménez

Managing partner of the firm, Mariano Jiménez specialises in the areas of Litigation and Arbitration in business, labour or civil matters. Working languages: Spanish, German and English. For any further enquiries please Contact us