Liability Of Various Parties

You have studied about various parties to a bill of exchange, promissory note and cheque. Now you should study the liability of various parties.


Liability of the Drawer of a Bill

Section 30 gives the holder of a dishonoured bill a right of action against the drawer. In addition to the drawer, the acceptor and the intermediate endorsers are also liable to the holder. But a drawee who has not accepted the bill is not liable. This means that the plaintiff cannot get a personal decree against persons who are not parties to the instrument and with whom there is no privity of contract in relation to the plaintiff.

The contract of the drawer of a bill, unlike that of the acceptor, is only a conditional contract. The drawer only undertakes to pay the amount of the bill in case of dishonour either by non-acceptance or non-payment. So, there is no demand or debt until the bill is dishonoured. But when the bill is dishonoured and notice of dishonour given (whatever may be the real account between the drawer and the drawee), the drawer becomes immediately liable to the holder for the amount. The drawer undertakes that the bill would be accepted by the drawee within a reasonable time within the business hours, provided it is presented at the place of business or the usual residence of the drawee. Of course, the drawer is not a surety for acceptance, because the drawee does not become liable until he accepts. Therefore, unless and until the drawee accept the bill, there is no debt for which drawee can be held responsible. It means that there is no principal for whom the drawer can stand surety. Therefore, when there is no acceptance, the liability of the drawer is as a principal debtor under an implied contract of indemnity. His undertaking is conditional only, and his liability does not arise unless: a) the instrument is dishonoured by non-acceptance or non-payment, and b) he gets notice of it.

Where a bill is stolen in transit and presented to the drawee and the drawee pays it without detecting the forgery of indorsement, the drawer’s liability is discharged and he ceases to be liable.

When the drawee is declared as insolvent, the holder may treat the bill as dishonoured without presenting it for acceptance and may sue the drawer before the date of maturity.

Section 30 requires that the notice of dishonour should be given to the drawer, to give the holder a cause of action. With the notice of dishonour, the liability of the drawer could arise because even where a bill has been stolen in transit but paid by the drawee without detecting forgery of the indorsement, the drawer is discharged. The purpose of notice is to make a person aware of fact, and hence a suit should not fail on the narrow technicality that facts regarding notice have been imperfectly stated in the plaint.


Liability of the Drawee of a Cheque

In the case of a cheque, the drawee (bank) having sufficient funds of the drawer in the account, must pay the cheque when duly required to do so. In default of such payment, the drawee must compensate the drawer for any loss or damage caused by such default.

Where the cheque is for an amount greater than that in the hands of the banker, the banker is under no obligation to honour the cheque, not even to the extent of money in his hands. However, it is different in case if there is a contract (as in the case of an over-draft) between the banker and the customer to honour the cheque even without sufficient funds. Consequently, it has been held that a banker’s obligation to honour his customer’s cheque may be extended by an agreement to allow the customer to overdraw to a certain limit. But such agreement should be supported by a valid consideration, and in the absence of any such agreement, a banker is not liable for dishonouring his customer’s overdrafts.

Relation between Banker and Customer: In the absence of any contract to the contrary, the relation between a banker and customer is that of a debtor and creditor. Money paid into account of customer, even though by mistake, becomes amount of the customer, and the bank cannot reverse the entry of credit nor can it pay back the amount to the person having deposited it. The case is different where money is handed over to bank for remitting it to another place, but the bank does not transfer it on that day, but suspends payment the same day. In such cases, the money remains as property of the person depositing it and make him entitled to preferential treatment.


Liability of Banker for Wrongful Payment of Cheques: A banker, who pays away a customer’s money without the customer’s authority, cannot debit the customer with the amount so paid.


Liability of Banker to Holder: There is no direct contract between the holder of a cheque and the banker on whom the cheque is drawn. A cheque does not operate as an assignment of funds which a customer may have in the hands of a banker. When a cheque is dishonoured, the remedy of a holder of the cheque is against the drawer and the banker is not liable to the holder.


Cheques sent for Realization: When a customer deposits a cheque with his banker for realization, the banker is only an agent of the customer for collection. Before actually realising the money of that cheque, if the bank credits the amount of that cheque to his customer, such entry in the pass book will show that the bank is a debtor to the customer to the extent of the amount thus credited. Later on, the banker can prove that the entry was a mistake, unless, on the belief of such entry, the customer has changed his position. If the customer has changed his position on the belief of such entry, the bank may be stopped from pleading that it is not liable for the amount of such entry.


Duty of Banker regarding Bills: When a customer accepts a bill payable by his bankers, it is an authority to the banker to pay it. In the case of a cheque, he is protected against the consequences of a forged indorsement, whereas in the case of a bill he is not. In the absence of special agreement, there is no obligation for the bank to accept his customer’s bills nor he is bound to pay a bill other than cheque drawn on him by the customer.


Compensation for Dishonouring a Cheque: Where a banker dishonours a cheque without any justification, he is liable to the drawer and not the payee. Thus, for a wrongful dishonour of a cheque the drawee is liable to the drawer and not to the payee. The amount of compensation recoverable by the drawer of a cheque from the bank in case of dishonour is not limited to the actual pecuniary loss sustained by reason of the dishonour.


Liability of the Maker of a Note and Acceptor of a Bill

“In the absence of a 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”.


Liability of Maker of a Promissory Note: Section 32 deals with the liability of the maker of a promissory note and of the acceptor of a bill of exchange. By executing a promissory note in favour of a certain person the maker of the note becomes a debtor and his liability for the whole amount is absolute. Where the maker of an instrument payable on demand, before any demand is made by the payee, pays its amount without getting the instrument back, and the note is indorsed by the payee to a third person who has no knowledge of the fact of payment, the endorsee is entitled as a holder in due course, to sue the maker of the instrument.


Drawee not Liable until Acceptance: The liability of the drawee arises only when he accepts the bill. The holder cannot sue the drawee for refusing to accept. In the event of dishonour by non-acceptance, the holder can proceed only against the drawer and previous endorsers.


Liability of an Acceptor: The liability of the acceptor of a bill of the maker of a note is absolute and unconditional. By accepting the bill, the acceptor agrees that he will pay according to the tenor of his acceptance. Similarly, the maker of a note, by making it, agrees that he will pay according to its tenor. The acceptor and the maker being the parties primarily liable on the bill or note, their liability is absolute, and no notice of dishonour is necessary to charge them.

The acceptor of a bill and the maker of a note are the principal debtors, and presentment for payment is not necessary to charge them. Their liability is independent of presentment. A drawee of a bill is under no legal obligation to accept the bill and thereby incur liability. So long as he does not accept a bill, no liability attaches to him.

Liability of Endorser

“In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity without, in such indorsement, 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 dishonour, provided due notice of dishonour has been given to, or received by, such endorser as herein after provided. Every endorser after dishonour is liable as upon an instrument payable on demand’’ (section 35).

The application of this section is confined to instruments which are indorsed before maturity, and since a promissory note is payable on demand only at maturity, this section does not apply to such an instrument.

After the dishonour, the endorser is liable upon an instrument payable on demand because his liability is similar to that of the maker. It is clear that the liability under this section arises out of indorsement and not on the instrument. But to create the endorser’s liability, mere indorsement is not enough. It must be accompanied by delivery of possession. The right of the endorsee to sue is dependent on the indorsement, which forms part of the cause of action, and which confers jurisdiction upon the court where the indorsement is made, to entertain and try the case against the endorser and drawer. If a person delivers a bill to another without indorsing his own name upon it, he does not subject himself to the obligation of law and cannot be sued upon the bill either by the person to whom he delivers it or by any other.


Liability of Prior Parties to Holder in Due Course

Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied (section 36). The expression “prior party” means the maker or drawer, the acceptor and the intervening endorser. The acceptor would be a “prior party” within the meaning of this section though he has signed the acceptance after the bill has come into the hands of the holder in due course.

An endorser will not be liable under this section to a holder in due course, if he has, by express words in the indorsement, excluded his liability on the instrument.

This section lays down that every party to a negotiable instrument preceding the holder in due course is liable to him until it is satisfied or discharged. The holder of a bill can bring an action as if he were an agent for all or any of the persons who are parties to it, and this right vests in him by virtue of the inclorsement in his favour.

A negotiable instrument can always be negotiated until it has been paid up or satisfied. But where payment is made before maturity and such payment is not shown on the instrument, it may still be negotiated, because such payment cannot be considered as payment in due course. An instrument before payment or satisfaction can always be negotiated, except by the maker of a note or the drawer or acceptor of a bill, at or after maturity.

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