Chapter 24:
Liability, Defenses, and
Discharge
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 1
Signature Liability
• A person cannot be held
contractually liable on a
negotiable instrument unless
his or her signature appears
on the instrument.
• The signatures on a
negotiable instrument
identify those who are
obligated to pay it.
• If it is unclear who the signer
is, parol evidence can
identify the signer.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 2
Signature Defined
• Any name, word, or mark
used in lieu of a written
signature.
• Any symbol that is:
– Handwritten, typed, printed,
stamped, or made in almost
any other manner, and
– Executed or adopted by a
party to authenticate a writing
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 3
Signers of instruments sign in many
different capacities, including:
• A maker of notes
and certificates
of deposit
• An indorser who
indorses an
instrument
• A drawer of drafts
and checks
• An agent who
signs on behalf of
others
• A drawee who
certifies or
accepts checks
and drafts
• An
accommodation
party
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 4
Primary Liability
• Makers of promissory notes and
certificates of deposit have
primary liability for the instrument.
• Maker unconditionally promises to
pay the amount stipulated in the
note when due.
• Makers are absolutely liable to
pay the instrument, subject only to
certain real defenses.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 5
Secondary Liability
• Drawers of checks and drafts and
unqualified indorsers of negotiable
instruments have secondary
liability on the instrument.
• This liability is similar to that of a
guarantor of a simple contract.
• It arises when the party primarily
liable on the instrument defaults
and fails to pay the instrument.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 6
Secondary Liability (continued)
• Unqualified indorsers have
secondary liability.
• Qualified indorsers have no
secondary liability.
– They have expressly disclaimed
liability.
• Secondary liability arises from an
instrument being:
– Properly presented
– Dishonored.
– Notice being timely given to person
who is secondarily liable.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 7
Accommodation Party
• A party who signs an instrument
and lends his or her name (and
credit) to another party to the
instrument.
• The accommodation party is
obliged to pay the instrument in
the capacity in which he or she
signs.
– Accommodation Maker – primarily
liable
– Accommodation Indorser –
secondarily liable
• Liability of accommodation party:
– Guarantee of payment
– Guarantee of collection
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 8
Other Signatures
• Agents may sign representing
principal.
– Principal bound if agent signs
either or both names.
– Agent not liable if it shows that
they signed on behalf of
principal.
– Agent liable if only his name
and cannot show that parties
intended to bind principal.
• Unauthorized signatures do
not bind principal.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 9
Forged Indorsement
The Imposter Rule
The Fictitious Payee Rule
• A rule that says if an • A rule that says that a
imposter forges the
drawer or maker is
indorsement of the
liable on a forged or
named payee, the
unauthorized
drawer or maker is
indorsement of a
liable on the
fictitious payee.
instrument and
bears the loss.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 10
Warranty Liability
• The law implies certain
warranties on transferors of
negotiable instruments.
• Warranty liability is imposed
whether or not the transferor
signed the instrument.
• There are two types of
implied warranties:
– Transfer Warranties
– Presentment Warranties
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 11
Transfer Warranties
•
Any person transferring an
instrument for consideration
warrants that:
1. The transferor has good title to
the instrument or is authorized
to obtain payment or
acceptance on behalf of one
who does have good title.
2. All signatures are genuine or
authorized.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 12
Transfer Warranties (continued)
3. The instrument has not been
materially altered.
4. No defenses of any party are
good against the transferor.
5. The transferor has no
knowledge of any insolvency
proceeding against the
maker, the acceptor, or the
drawer of an unaccepted
instrument.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 13
Presentment Warranties
• Any person who presents a draft or check
for payment or acceptance makes the
following warranties to a drawee or
acceptor who pays or accepts the
instrument in good faith:
1. The presenter has good title to the instrument or is
authorized to obtain payment or acceptance of
the person who has good title.
2. The instrument has not been materially altered.
3. The presenter has no knowledge that
the signature of the maker or drawer is
unauthorized.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 14
Defenses
• The creation of negotiable
instruments may give rise to a
defense against its payment.
• There are two general types
of defenses:
– Universal Defenses
– Personal Defenses
• A holder in due course (HDC)
takes the instrument free
from personal defenses but
not real defenses.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 15
Universal Defenses
Universal Defenses
Effect
1.
2.
3.
4.
5.
6.
7.
8.
Real defenses can be raised
against a holder in due course
Minority
Extreme duress
Mental incapacity
Illegality
Discharge in bankruptcy
Fraud in the inception
Forgery
Material alteration
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 16
Personal Defenses
Personal Defenses
1.
2.
3.
4.
5.
6.
Effect
Breach of contract
Personal defenses cannot be
raised against a holder in
Fraud in the inducement
due course
Mental illness that makes a contract
voidable instead of void
Illegality of a contract that makes the
contract voidable instead of void
Ordinary duress or undue influence
Discharge of an instrument by payment or
cancellation
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 17
Discharge
• Actions or events that relieve
certain parties from liability
on negotiable instruments.
• There are three methods of
discharge:
1. Payment of the instrument
2. Cancellation
3. Impairment of the right of
recourse
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 18
Impairment of the Right of
Recourse
• Certain parties (holders,
indorsers, accommodation
parties) are discharged from
liability on an instrument if the
holder:
1. Releases an obligor from liability,
or
2. Surrenders collateral without the
consent of the parties who
would benefit by it
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
19 - 19