Define: Demand Note

Demand Note
Demand Note
Quick Summary of Demand Note

A demand note is a type of promissory note that is payable on demand by the lender. It is a short-term borrowing instrument that does not have a fixed maturity date. The borrower is required to repay the loan whenever the lender requests it. Demand notes are often used in business transactions or for short-term financing needs.

Full Definition Of Demand Note

A demand note is a financial instrument used in various contexts, such as loans, investments, or commercial transactions. It is a type of promissory note that differs from traditional promissory notes primarily in its repayment terms. This document will provide a comprehensive legal overview of demand notes, discussing their definition, characteristics, legal enforceability, and usage in British law.

Definition and Characteristics of Demand Notes

A demand note is a written promise to pay a specified sum of money to a designated party upon demand. Unlike term loans or installment loans, where repayment schedules are fixed, a demand note allows the lender to request full repayment at any time. Key characteristics include:

  1. Payable on Demand: The principal and interest (if applicable) are due immediately upon the lender’s request.
  2. No Fixed Maturity Date: Unlike fixed-term loans, demand notes do not have a set maturity date.
  3. Flexibility: They offer flexibility for both borrowers and lenders in terms of repayment and investment periods.
  4. Interest Rates: Demand notes may or may not carry an interest rate. If they do, it can be fixed or variable.

Legal Enforceability of Demand Notes

The enforceability of demand notes hinges on several legal principles, predominantly rooted in contract law and negotiable instruments law. In the UK, the Bills of Exchange Act 1882 is particularly relevant.

  1. Contractual Agreement: A demand note constitutes a binding contract between the lender and the borrower. The essential elements of a contract—offer, acceptance, consideration, and intention to create legal relations—must be present.
  2. Negotiable Instrument: Under the Bills of Exchange Act 1882, a demand note is considered a negotiable instrument. This classification means the note can be transferred to third parties, who can then demand repayment.
  3. Demand for Payment: The note must clearly state that repayment is due upon demand. This clarity ensures that the borrower is aware of the potential for immediate repayment requests.
  4. Written and Signed: To be enforceable, a demand note must be in writing and signed by the borrower. This requirement satisfies Statute of Frauds 1677, which mandates written evidence for certain types of contracts.

Usage in Different Contexts

Demand notes can be utilised in various financial and commercial settings. Their flexibility makes them suitable for short-term borrowing, business transactions, and personal loans.

  1. Short-term Loans: Demand notes are ideal for short-term borrowing needs, providing immediate access to funds without long-term commitments.
  2. Business Transactions: Businesses might use demand notes for transactions where payment terms are uncertain or where flexibility is required.
  3. Personal Loans: Individuals may use demand notes for personal loans between friends or family, allowing for repayment when convenient without the pressure of fixed schedules.

Legal Framework and Requirements

The legal framework governing demand notes in the UK is primarily based on common law principles and statutory regulations. Key legal requirements include:

  1. Clarity and Precision: The terms of the demand note must be clear and precise, outlining the amount, interest rate (if any), and the conditions under which repayment can be demanded.
  2. Good Faith: The parties involved must act in good faith. The lender should not demand repayment arbitrarily or in a manner that causes undue hardship to the borrower.
  3. Notice of Demand: While a demand note is repayable on demand, it is generally accepted practice to provide reasonable notice to the borrower. This notice period allows the borrower to arrange for the repayment without facing sudden financial strain.

Interest and Usury Laws

Interest terms on demand notes must comply with applicable usury laws, which set maximum permissible interest rates to prevent exploitation.

  1. Setting Interest Rates: The interest rate should be clearly stated in the note. It can be fixed or variable, depending on the agreement between the parties.
  2. Usury Regulations: The UK does not have a specific statutory cap on interest rates; however, the Unfair Terms in Consumer Contracts Regulations 1999 and the Consumer Credit Act 1974 provide mechanisms to challenge excessively high rates.
  3. Transparency: Full disclosure of interest rates and any additional charges is mandatory to ensure transparency and fairness in the agreement.

Default and Enforcement

In the event of a default, where the borrower fails to repay upon demand, the lender has legal recourse to enforce the note.

  1. Legal Action: The lender can initiate legal proceedings to recover the owed amount. The court will examine the demand note and related circumstances to determine the enforceability of the demand.
  2. Defence Against Enforcement: The borrower may present defences such as lack of consideration, duress, or misrepresentation. These defences can potentially invalidate the demand note or reduce the amount recoverable.
  3. Remedies: If the court rules in favour of the lender, remedies may include a judgement for the owed amount, interest, and legal costs. The lender may then pursue enforcement actions such as garnishment or asset seizure.

Role of Negotiability and Transferability

Demand notes, being negotiable instruments, can be transferred to third parties. This transferability allows the holder of the note to sell or endorse it to another party.

  1. Endorsement and Transfer: The original lender can endorse the note to a third party, who then gains the right to demand repayment. This transfer must be done in writing and signed by the original lender.
  2. Holder in Due Course: The third party, if they meet certain conditions, can become a holder in due course. This status grants them rights free from many defences that could be raised against the original lender.
  3. Implications of Transfer: Borrowers must be aware that the obligation to repay does not diminish with the transfer of the note. The new holder can demand repayment under the same terms.

Legal Precedents and Case Law

Several legal precedents and case law examples illustrate the enforcement and challenges associated with demand notes in the UK.

  1. Case Law Examples: Courts have upheld the enforceability of demand notes, provided they meet the legal requirements. For instance, in cases where the demand for payment was made unreasonably or without proper notice, courts have sometimes ruled in favour of the borrower.
  2. Precedent on Good Faith: The principle of good faith plays a critical role. Courts have invalidated demand notes where the lender’s conduct was deemed to be in bad faith or unconscionable.

Practical Considerations

When drafting and using demand notes, several practical considerations can enhance their effectiveness and reduce potential legal disputes.

  1. Clear Terms: Clearly define all terms, including the principal amount, interest rate, repayment conditions, and any penalties for non-payment.
  2. Record-keeping: Maintain accurate records of all transactions and communications related to the demand note. This documentation can be crucial in resolving disputes.
  3. Legal Advice: Seek legal advice when drafting or signing a demand note to ensure compliance with applicable laws and to understand the rights and obligations of each party.


Demand notes are versatile financial instruments that offer significant flexibility to both lenders and borrowers. Their legal enforceability in the UK is well supported by contract law and the principles governing negotiable instruments. However, careful attention to drafting, clarity of terms, and adherence to legal requirements is essential to ensuring their effectiveness and preventing disputes.

In summary, demand notes are powerful tools in financial and commercial transactions, providing a balance between immediate liquidity for lenders and flexible repayment options for borrowers. Understanding their legal framework and practical implications can help parties navigate their use effectively and securely.

Demand Note FAQ'S

A demand note is a legal document that outlines the terms of a loan agreement between a lender and a borrower. It is called a “demand” note because the lender can demand repayment of the loan at any time.

The key features of a demand note include the loan amount, interest rate, repayment terms, and the lender’s right to demand repayment at any time.

A promissory note is a legal document that outlines the terms of a loan agreement between a lender and a borrower, but it has a fixed repayment date. A demand note, on the other hand, allows the lender to demand repayment at any time.

Yes, a demand note can be secured by collateral, such as real estate or personal property. This provides the lender with additional security in case the borrower defaults on the loan.

If the borrower defaults on a demand note, the lender can demand immediate repayment of the loan and take legal action to recover the debt. The lender may also seize any collateral that was used to secure the loan.

Yes, a demand note can be transferred to another party through a process called assignment. The new party becomes the legal owner of the note and has the right to demand repayment from the borrower.

Yes, a demand note is a legally binding document and can be enforced in court if necessary. The lender can sue the borrower for repayment of the loan and any associated damages.

Yes, a demand note can be cancelled or modified if both the lender and borrower agree to the changes. Any changes should be documented in writing and signed by both parties.

The statute of limitations for enforcing a demand note varies by state, but it is typically between three and six years. After this time period, the lender may no longer be able to sue the borrower for repayment.

While it is not required to have a lawyer create a demand note, it is recommended to ensure that the document is legally binding and enforceable. A lawyer can also provide guidance on the terms of the loan agreement and any potential legal issues.

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This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 10th June 2024.

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