LIABILITIES OF PARTIES TO NEGOTIABLE INSTRUMENT

The main aim of this project would essentially be to look in to the liability of
parties to a Negotiable Instruments. But before moving on to the liabilities, a brief
on the parties and their capacity to capacity of parties to contract is required. The
parties to a negotiable instrument, namely, the maker, drawer, drawee and the
payee, enter in to a contract among themselves.

It is therefore very essential that they should have a capacity to enter in to a valid
contracts. Section 26 of the Negotiable Instrument Act, states that

“Every person capable of contracting , according to the law to which he is subject,

may bind himself and be bound by the making, drawing, acceptance, endorsement,
delivery and negotiations of a promissory note, bill of exchange or a cheque”.

S.11 of the Indian Contract Act, states the requirements of parties to contract. Thus
as per this section, any person who is of a sound mind, above the age of majority
and not disqualified form entering in to contract by any Act, is competent to enter
in to valid contract.

1.1 Liability of drawer of bill or a cheque

Essentially the liability of the parties to a ‘negotiable instrument’ has it statutory

provisions under Sections 30, 32 and 35 of the Negotiable Instruments Act 1881.

The first section in this aspect to be analyzed, would be S.30 of the Act, which
provides for the Liability of the drawer of the bill or a cheque.

The ‘drawer’ of the cheque, essentially, as defined by S.7 of the Act, is “The maker
of a bill of exchange or Cheque”

Thus Section 30 of the Act, goes on to define the liability of the drawer of a bill or
cheque
“The drawer of a bill of exchange or cheque is bound in case of dishonour by the
drawee or acceptor thereof, to compensate the holder, provided due notice of
dishonour has been give to, or received by, the drawer as hereinafter provided”

The important thing to be noted here is that the liability of the drawer here arises
only in case of dishonor of the cheque or a bill of exchange and nothing prior to it.
A bill of exchange it is seen is dishonored by non-acceptance or by non-payment,
but on the other hand, a cheque, is dishonored by non-payment only.

As soon as this bill or exchange or a cheque has been dishonored by non-

acceptance by the drawee, it is seen that the holder of the has the right to recourse
against the drawer. The drawee, as per Section 7 of the Act, is “the person directed
to pay”

It also has to be noted that the drawer, becomes liable only when the bill of
exchange or the cheque has been dishonored by the drawee.

But unlike the bill of exchange, it has to be noted that in case of dishonor of a
cheque, the drawer remains liable thereto, even if the cheque is not presented by
the holder to the drawer bank. Another aspect that needs to be looked in to before
the drawer can be held liable, is the fact that ‘due and sufficient prior notice of
dishonor’, has been given.

But again taking Section 98  in to consideration, no notice is required if the

provision of this section are being taken in to consideration. It has to be noted that
the service of this notice, may be oral or written or may even be faxed  , but it is a
must.

So then would a drawer ever be criminally liable?. The answer to this came later
on in the Banking, Public Financial Institutions and Negotiable Instruments Laws
(Amendment) Act 1988, which was further modified by the Negotiable
Instruments (Amendment and Miscellaneous Provisions) Act, 2002As per this act,
the dishonor of cheques due to the insufficiency of funds, was deemed to be an
offence for which the drawer could be punished with an imprisonment for a term
up to a year or with a fine up to twice the amount of the cheque or with both. More
specifically Section 138-142, were inserted which deal with these offences.
Another section to be noted here, is Section 31 of the Act, that deals with the
liability of the drawee of the cheque . As per this section, “The drawee of a cheque
having sufficient funds of the drawer in his hands properly applicable to the
payment of such cheque must pay the cheque when duly required so to do, and, in
default of such payment, must compensate the drawer for any loss or damage
caused by such default.”

Section 32 of the Act, deals with the liability of the maker of the note and the
acceptor of the bill. As per this section, “In the absence of contract to the contrary,
the maker of a promissory note and the acceptor before maturity of a bill of
exchange are bound to pay the amount thereof at maturity according to the
apparent tenor of the note or acceptance respectively, and the acceptor of a bill of
exchange at or after maturity is bound to pay the amount thereof to the holder on
demand.

In default of such payment as aforesaid, such maker or acceptor is bound to

compensate any party to the note or bill for any loss or damage sustained by him
and caused by such default.”

Here, it has to be noted that the maker of a promissory note and the acceptor of a
bill of exchange are the principle debtors and their liability on the instrument, is
absolute and unconditional. The first part of this section, deals with the liability of
the maker of a note and the second part with the consequences on default.

The crux of this section can summed up as. This section essentially puts the maker
if the note and the acceptor of the bill on the same footing. It makes both liable as
principle debtor. Besides this, it can be seen that a bill may be accepted before the
maturity or at or after maturity. An acceptor of the bill, it is seen before maturity is
bound to pay the amount at maturity and an acceptor at or after maturity shall have
to pay the amount to the holder on demand.

It is however not that there is of difference between the liability of the maker of the
note and the acceptor of the bill. The maker of the note, it is seen is bound to pay
the amount according to the apparent tenor of the note. That he, as he makes it
himself, he cannot change its terms and shall have to abide by the tenor of the note.
But on the other hand, it is seen that the acceptor of the bill, is liable to pay the
amount according to the apparent tenor of his acceptance. That is to say, if the
acceptor accepts the bill, he is required to honor the bill as per his qualified
acceptance and not according to the tenor of the bill.

This cane very simply be illustrated by the following example. If A, draws a bill of
Rs.10,00 on B, to be paid after a year and B, gives his acceptance to pay the
amount after 18 months, B is liable to pay after 18 moths and not a year.

It ahs to be noted that in case of a promissory note signed by two or more

promisors and the consideration has been received by only one of them,
irrespective of any reason, all the promisors shall be equally liable for the amount
of the promissory note.

It also has to be noted that Sections 78, 41 42 and 88 of the Act, also deal with the
liability of the maker of the note and the acceptor of a bill

1.2 Liability of the endorser

This is provided for under Section 35 of the Act, which states that

“In the absence of a contract to the contrary, whoever indorses and delivers a
negotiable instrument before maturity, without in such endorsement, expressly
excluding or making conditional his own liability, is bound thereby to every
subsequent holder, in case of dishonour by the drawee, acceptor or maker, to
compensate such holder for any loss or damage caused to him by such dishonor,
provided due notice of dishonour has been given to, or received by, such endorser
as hereinafter provided.

Every endorser after dishonour is liable as upon an instrument payable on

demand.”
Before moving on further, it is pertinent to study Section 15 of the Act in relevance
to the term ‘endorsement’ and also to define an ‘endorser’. As per Section 15 of
the Act, which defines endorsement,

“When the marker or holder of an negotiable instrument signs the same, otherwise
than as such maker, for the purpose of negotiation, one the back or face thereof or
on a slip of paper annexed thereto, or so signs for the same purpose a stamped
paper intended to be completed as a negotiable instrument, he is said to indorse the
same, and is called the endorser.”

It is seen that in order to invoke Section 35, firstly and most importantly, there has
to be an endorsement of an instrument, which has to be delivered to the endorsee.
It has to be noted that it either of this act does not occur, the liability of the
endorser does not arise.

Secondly, this section again puts the endorser of the cheque on the same footing as
the drawer of a bill/cheque or maker of a note. In the sense that it confers upon him
the same levels of liability.

The idea behind this concept of endorsement is essentially on the belief that the
bill, cheque or note, will be duly accepted or honored by the drawee or the maker.
On the failure of this event happening, the liability of the endorser occurs. So
essentially, it is seen that the role of the endorser is pretty much equivalent tot that
of a surety, who undertakes the performance by the acceptor of the bill.

It is seen that immediately on the dishonor of an instrument, the older of the

instrument, gets an inherent right to sue to endorser at once, which can in no way
be challenged. In fact the holder stands in a rather advantageous position as he is in
a better position to sue either parties, the drawer for non-compliance or the
endorser for failure to ensure compliance on the part of the drawer
Then again it has to be noted that the liability of an endorser arises only when there
is an absence of a contract to the contrary. As mentioned in the section itself, the
endorser may save himself from liability by either excluding his liability thereon
by endorsing sans recourse or by making his liability conditional. If these acts have
been adhered to, the endorser would save himself the trouble of being liable.

An aspect which need to be looked in to is to when the endorsers liability is

discharged?. In order to answer this, Section 36 of the Act which deals with the
liability of prior parties to holder in due course, needs to be looked in to first. This
Section states that “Every prior party to a negotiable instrument is liable thereon to
a holder in due course until the instrument is duly satisfied.”

Section 40 of the act also needs to be looked in to, which states that “Where the
holder of a negotiable instrument, without the consent of the endorser, destroys or
impairs the endorser’s remedy against a prior party, the endorser is discharged
from liability to the holder to the same extent as if the instrument had been paid at
maturity.”

Conclusion

The essence of this liabilities being imposed upon the parties, is nothing by an act
to being upon greater sense of responsibilities on the part of the parties. The
Sections provided here, are rather comprehensive and cover a rather broad range of
parties to a negotiable instrument, and also impose penal sanctions on them, if they
turn offenders. Although prior to the various amendments, there was no criminal
liability imposed on parties, the amendment of 2002, imposed upon a greater sense
of responsibility as it brought upon more stringent measures to counter the
offending parties.