The risk of using the promissory note as a form of advance payment in Spain
In Spain, it is still common for a commissioner of works or services to pay for them by using instruments known as pagarés (promissory notes). The issuers of these promissory notes often act in the belief that, in the event that the works or services are not completely or correctly finished, they can ask their bank without major problems 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: 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 his bank not to process the payment because the works or services have not been completed or were not completed correctly.
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 summary judicial 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 works or services for which he was employed.
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.
Mariano Jiménez
