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Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Click your mouse
anywhere on the
screen when you are
ready to advance the
text within each slide.
After the starburst appears behind the blue
triangles, the slide is completely shown.
You may click one of the blue triangles to
move to the next slide or the previous slide.
Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
“The law is not the place for the artist
or the poet. The law is the calling of
the thinkers.”
Oliver Wendell Holmes,Jr.
Supreme Court Justice
23
Essentials of Business Law -- 4th Edition
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license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Signature liability – liability of someone
who has signed a document.
 Warranty liability -- liability of someone
who has received payment.
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Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
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 Negotiable instruments are issued to
fulfill a contract.
 The instruments create a second
contract to pay the debt created by the
first agreement.
 Once an instrument is accepted in
payment for a debt, the debt is
suspended until the instrument is paid
or dishonored.
Essentials of Business Law -- 4th Edition
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23
 In a signature liability, to whom is
the signer liable?
• To the holder of the instrument.
• To anyone to whom the shelter rule
applies (non-holder with the rights of
a holder).
• A holder who has lost the instrument.
23
Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Someone with primary liability must pay
unless he has a valid defense.
 Someone with secondary liability must
pay only if the person with primary
liability does not pay.
 The holder of an instrument must first
try to get payment from the party with
primary liability before making demands
against a party with secondary liability.
Essentials of Business Law -- 4th Edition
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23
 Presentment – holder demands
payment.
 Dishonor – if payment is not received
when due or demanded, the instrument
is considered dishonored.
 Notice of Dishonor – notice is given to
the party with secondary liability when
the instrument is dishonored.
Essentials of Business Law -- 4th Edition
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23
 The maker is primarily liable.
 The drawer of a check has secondary
liability.
 The bank (drawee) is not liable to the
holder and owes no damages to the
holder for refusing to pay the check.
 Indorsers are secondarily liable.
• See next slide for more detail.
Essentials of Business Law -- 4th Edition
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23
 Indorsers are not liable if:
• they write the words “without recourse” next
to their signature on the instrument,
• a bank certifies the check,
• the check is presented for payment more
than 30 days after the indorsement, or
• the check is dishonored and the indorser is
not notified within 30 days.
23
Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 An accommodation party (sometimes
called a co-signer or guarantor) is
someone who adds her signature to an
instrument in a capacity other than
issuer, acceptor or indorser, in order to
be liable for the instrument.
 An accommodation party has the same
liability to the holder as the person for
whom she signed.
Essentials of Business Law -- 4th Edition
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23
 To avoid personal liability when signing
an instrument, an agent must:
• indicate that she is signing as an agent and
• give the name of the principal.
 The principal is liable if the agent signs
correctly, the agent signs just her own
name, or the agent signs only the name
of the principal.
Essentials of Business Law -- 4th Edition
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23
 The culprit is always liable.
 The drawee bank is liable if it pays a check
on which the drawer’s name is forged.
The bank can recover from the payee only
if the payee had reason to suspect the
forgery.
 In any other case of wrongdoing, a person
who first acquires an instrument from a
culprit is ultimately liable to anyone else
who pays value for it.
Essentials of Business Law -- 4th Edition
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23
 When someone transfers an
instrument, she warrants that:
•
•
•
•
She is the holder of the instrument,
All signatures are authentic and authorized,
The instrument has not been altered,
No defense can be asserted against her,
and
• As far as she knows the issuer is solvent.
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Essentials of Business Law -- 4th Edition
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 One who violates transfer warranty
rules is liable for the value of the
instrument, plus expenses and interest.
 Transfer warranties flow to all
subsequent holders in good faith who
have indorsed the instrument.
 Transfer warranties for bearer paper
only extend to the first transferee.
Essentials of Business Law -- 4th Edition
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23
 Warranty claims must be made within
30 days of discovering the breach or
damages may be reduced.
 Transfer warranties apply only if the
transfer is made for consideration; if
given as a gift, no warranties apply.
23
Essentials of Business Law -- 4th Edition
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 Holder
• Under signature liability, holder cannot
make a claim until indorser or drawer has
been notified that the instrument was
presented and dishonored.
• Under the transfer warranty rules, the
holder need not wait.
23
Essentials of Business Law -- 4th Edition
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 A forged signature
• Invalid; creates no signature liability for
person whose name was signed.
• Receiver may recover under transfer
warranty rules.
 Bearer paper
• Signature liability rules do not apply; bearer
paper can be negotiated simply by delivery;
no indorsement is required.
• Transfer warranties do apply, but only to
first transferree.
th
Essentials of Business Law -- 4 Edition
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23
 Apply to someone who demands
payment for an instrument from the
maker, drawee, or anyone else liable.
 Presenter warrants that:
• She is a holder,
• The check has not been altered, and
• She has no reason to believe the drawer’s
signature is forged.
 Anyone who presents a promissory
note for payment warrants only that he
is a holder of the instrument.
Essentials of Business Law -- 4th Edition
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23
 Conversion Liability
• Conversion means that (1) someone has
stolen an instrument or (2) a bank has paid
a check that has a forged indorsement.
 Imposter Rule
• If someone issues an instrument to an
imposter, then any indorsement in the
name of the payee is valid as long as the
person (a bank, say) who pays the
instrument does not know of the fraud.
Essentials of Business Law -- 4th Edition
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23
 Fictitious Payee Rule
• If an instrument is issued to a person who
does not exist, any indorsement in the
name of the payee is valid as long as the
payer does not know of the fraud.
 Employee Indorsement Rule
• If an employee with responsibility for
issuing instruments forges an instrument,
any indorsement in the name of the payee
is valid as long as the payer does not know
of the fraud.
Essentials of Business Law -- 4th Edition
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23
 Anyone negligent in creating or paying an
unauthorized instrument is liable to an
innocent third party.
 Anyone careless in paying an
unauthorized instrument is liable despite
the three rules (impostor rule, fictitious
payee rule and employee indorsement
rule).
 Anyone careless in allowing a forged or
altered instrument to be created is also
liable.
Essentials of Business Law -- 4th Edition
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23
 Bouncing a check
• Writing a check on an account with insufficient
funds is illegal, but usually only has a monetary
penalty if the funds are deposited quickly.
 Check Kiting
• An illegal scheme where checks are passed
between overdrawn accounts at two banks,
earning interest at one bank before reversing
the process to “repay” the other account.
 Forgery
• Creating a fake document or passing on a
known fake document is illegal.
Essentials of Business Law -- 4th Edition
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23
 Discharge means that liability on an
instrument terminates.
By Payment
By Cancellation
By Alteration
By Agreement
By Certification
 Discharge of an indorser or
accommodation party
• Article 3 provides that virtually any change
in an instrument that harms an indorser or
accommodation party also discharges them
unless they consent to the change.
Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
23
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Essentials of Business Law -- 4th Edition
© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.