Chapter 27:

Liability of Parties to
Negotiable Instruments

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Learning Objectives
Discuss the liability of negotiable instruments
based on signatures.
Understand conditional liability.
Distinguish between presentment, dishonor,
and protest.
Describe the liability of secondary parties.
Recognize excuses for failure to perform
conditions precedent.
Discuss the discharge of liability.

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27.1a In General
Liability on commercial paper results from
signatures on the instrument.
Signature of a maker, drawer, or acceptor on the face of the
instrument.
Endorsement on the back.
Liability varies, based on the capacity of the
signer.
Signature generally must be genuine or
signed by an authorized agent.

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27.1b Capacity of the Signature
Where a person signs usually indicates
capacity or status.
• Makers and drawers usually sign in the lower
right-hand corner.
• Endorsers sign on the back of an instrument.
• A drawee places signature of acceptance on the
face.
- When the signature does not reveal the
obligation of the party who signs, the signature
is an endorsement.

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27.1c Agency Principles (Slide 1 of 2)
General principles of the law of agency are applicable to commercial
paper.
Principal is bound when authorized agent signs the principal’s name.
If the agent is not authorized to sign, the principal is not bound
unless:
Principal ratifies the signature
Principal is estopped from asserting lack of authority.

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27.1c Agency Principles (Slide 2 of 2)
• Agent who fails to bind his/her principal because of lack of
authority will usually be personally liable to third parties.

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 Exceptions: Impostors and
27.1d

Fictitious Payees (Slide 1 of 2)

An exception to the general rule that
signatures are genuine arises when an
instrument is made payable to an imposter or
to a fictitious person.
Imposter situation: one poses as a payee
Fictitious payee situation: name of payee
provided to drawer but has no intent for payee
to have an interest

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 Exceptions: Impostors and
27.1d

Fictitious Payees (Slide 2 of 2)

Revisions to Article 3 holds the drawer liable
rather than the drawee.
Exception does not apply to:
Instruments that have been diverted and forged by
employee
Check is stolen.
In both of these situations, the liability would be on
the drawee who accepted the forged instrument.

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27.1e Classification of Parties
Primary parties
• Makers of notes and acceptors of drafts
• Incurred an obligation to pay
• Parties who will actually pay the instrument
• Payor banks of checks are primary parties
Secondary parties
• Drawers of drafts, drawers of checks, and
endorsers of any instrument
• Do not expect to pay the instrument

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27.1f Liability of Primary Parties (Slide 1 of 2)
Maker’s Liability
• If a maker signs an incomplete note, a holder can enforce the note
against the maker in due course.
• If an instrument is materially altered after it is made, the maker has a
real defense in the absence of negligence.

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27.1f Liability of Primary Parties (Slide 2 of 2)
Acceptor’s Liability
• Drawee of a check or draft is not liable until acceptance.
• Acceptor is primarily liable after acceptance.
• Party presenting a draft for acceptance is entitled to an unqualified
acceptance by the drawee.

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 Introduction to
27.2a

Conditional Liability
Conditional liability
• Used to describe the secondary liability that
results from the status of parties as drawers or
endorsers
• Certain conditions precedent must be fulfilled to
establish liability.
- Presentment
- Dishonor
- Notice of dishonor
- Protest

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27.3b Accommodation Parties
One who signs an instrument for the
purpose of lending name and credit to
another party to an instrument.
May sign as an endorser, maker, acceptor,
co-maker, or as a co-acceptor
Liable in the capacity in which he/she signed
As an endorser, this party does not endorse
to negotiate but to lend credit.
An accommodation party is a surety.

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27.3c Guarantors
Parties are identified by the nature of the language accompanying their
signatures.
Payment guarantors
If the instrument is not paid when due, guarantor
will pay it.
Collection guarantors
Becomes liable only after the holder has reduced a
claim against the maker
Guarantor’s liability is based on the primary
party’s failure to pay alone.

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27.3d Drawers
Drawer is liable to pay if the drawee refuses to pay a properly drawn
draft.
• Drawers are parties to the underlying contract.
• Drawer’s contract
• Anytime a person signs a negotiable draft as a drawer, that party
implicitly makes a promise.

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27.3e Endorsers (Slide 1 of 2)
An endorser implicitly creates a contract of liability with the endorsement.
Endorser’s contract is based on the conditional
liability of the endorser as a secondary party.
Unreasonable delay in presentment being made or
in notice of dishonor being delivered: The
endorsers are discharged from liability.
Endorsers may endorse “without recourse.”

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27.3e Endorsers (Slide 2 of 2)
Parties promise to the primary party that the
endorsers have good title to the instrument
and no knowledge of the maker’s or drawer’s
signature being forged, and that the instrument
is not materially altered.
Endorsers become unconditionally liable to
pay the endorsed instrument under certain
circumstances.
Endorsers warrant to holders

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27.3f Transferors Without Endorsement
Transferors who do not endorse, but who simply deliver the bearer
paper, still make the unconditional warranties.
These warranties bind the transferor only to the immediate transferee
and not to subsequent holders.

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27.3g Forgeries
A bank that pays on a forged signature of the
drawer cannot charge drawer.
A bank paying on the forged signature of an
endorser must return the instrument to the party
whose name was forged.
In the event of the forged signature of a drawer,
the bank cannot collect from the party receiving
payment unless that party is the forger or the
party dealt with the forger negligently.

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27.3h Double Forgeries
If the drawer’s signature and endorsement are forged, loss falls on the
drawee.
If the drawer’s signature is forged, it is irrelevant whether the payee is
real or fictitious and whether the endorsement is forged, missing, or
otherwise defective.

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 Excuses for Failure to Perform
27.4a

Conditions Precedent
An unexcused delay discharges parties of the
conditions precedent.
Performance of the conditions precedent is
entirely excused if the party to be charged has
waived the condition.
Performance of the conditions precedent is
excused if the party to be charged has
dishonored the instrument or has
countermanded payment.

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27.4b Discharge of Liability
Certification of a check at the request of a
holder discharges all prior parties.
Payment usually discharges a party’s liability.
A holder canceling the instrument
A holder agrees not to sue one party or agrees
to release collateral.
A prior party reacquires an instrument.
Fraudulent and material alteration of an
instrument

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