By Richard A. Mann & Barry S. Roberts Business Law and the Regulation of Business Chapter 27: Liability of Parties By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Contractual Liability A. Signature B. Liability of Primary Parties C. Liability of Secondary Parties D. Termination of Liability II. Liability Based on Warranty A. Warranties on Transfer B. Warranties on Presentment

Contractual Liability Liability on the Instrument – no person has contractual liability on an instrument unless her signature appears on it.

Contractual Liability

Signatures A signature may be made by the individual herself or by her authorized agent. Authorized– an agent who executes a negotiable instrument on behalf of his principal is not liable if the instrument is executed properly and as authorized. Unauthorized–forgeries and signatures made by an agent without power; generally not binding on the person whose name appears but are binding on the unauthorized signer.

Liability of Primary Parties Primary Liability – absolute obligation to pay a negotiable instrument. Makers – the maker guarantees that he will pay the note according to its original terms. Acceptors – a drawee has no liability on the instrument until she accepts it; she then becomes primarily liable.

Acceptors Acceptance – a drawee's signed engagement to honor the instrument. Certification – acceptance of a check by a bank. Effect of Acceptance – when a draft is accepted by a bank the drawer and all prior indorsers are discharged from contractual liability.

Liability of Secondary Parties Secondary (Conditional) Liability – obligation to pay a negotiable instrument that is subject to conditions precedent. Indorsers and Drawers – if the instrument is not paid by a primary party and if conditions are satisfied, indorsers and drawers are secondarily liable unless they have disclaimed their liability or have a valid defense. Disclaimer by Secondary Parties – a drawer (except of a check) or indorser may disclaim liability by a qualified drawing or indorsing (“without recourse”).

Conditions Precedent to Liability Drawer – liability is generally only contingent upon dishonor and does not require notice. Indorser – liability is contingent upon dishonor and notice of dishonor.

Liability for Conversion Tort Liability – conversion occurs (1)­when a drawee refuses to return a draft that was presented for acceptance, (2)­when any person refuses to return an instrument after he dishonors it, or (3)­when an instrument is paid on a forged indorsement.

Termination of Liability Effect of Discharge – potential liability of parties to the instrument is terminated upon: Discharge Performance Tender of Payment – for interest, costs, and attorney's fees Cancellation Renunciation Liability Based on Warranty

Warranties on Transfer Parties Warrantor – any person who transfers an instrument and receives consideration gives the transferor's warranties. Beneficiary – if the transfer is by delivery, the warranties run only to the immediate transferee; if the transfer is by indorsement, the warranties run to any subsequent holder who takes the instrument in good faith.

Warranties on Transfer Parties Entitled to Enforce All Signatures Are Authentic & Authorized No Alteration No Defenses No Knowledge of Insolvency

Liability on Transfer + + + Transfer by Indorsement Transferor’s Warranties + Indorser’s Liability Pay to John Doe /s/Lilli Justin Subsequent Holders Subsequent Holders Transfer by Qualified Indorsement Modified Transsferor’s Warranties Indorser’s Liability + Pay to John Doe without recourse /s/Lilli Justin Subsequent Holders Transfer without Indorsement Transferor’s Warranties + Indorser’s Liability Pay to John Doe Subsequent Holders

Warranties on Presentment Parties Entitled to Enforce No Alteration Genuineness of Drawer's Signature

Liability Based on Warranty 1. Entitled to enforce 2. No alterations 3. No knowledge that signature of drawer is unauthorized Presenter’s Warranties (PW) PW PW PW Issues Indorses Indorses Presents Drawer P H1 H2 Drawee $ $ $ TW TW TW Transferor’s Warranties (TW) 1. Entitled to enforce 2. All signatures authorized and authorized 3. No alterations 4. No defenses 5. No knowledge of insolvency proceedings