1. 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

2. 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

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

4. Contractual Liability

5. 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.

6. 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.

7. 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.

8. 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”).

9. 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.

10. 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.

11. 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

12. 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.

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

14. 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

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

16. Liability Based on Warranty
1. Entitled to enforce No alterations 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 All signatures authorized and authorized No alterations No defenses No knowledge of insolvency proceedings