Negotiable Instruments Law Lecture 3: Liability, Warranties, and Discharge

Parties' Liability

Maker/Drawer: The maker of a note or the drawer of a check is primarily liable for the instrument. This means they are obligated to pay the instrument when it becomes due, according to its terms.

Endorser/Indorser: An endorser is secondarily liable. They only become liable if the maker/drawer defaults on the instrument, and proper presentment and notice of dishonor have been given.

Acceptor: An acceptor is a drawee (such as a bank) who has agreed to pay a draft. By accepting the draft, they become primarily liable for its payment.

Transfer and Presentment Warranties

Transfer Warranties: These warranties arise when an instrument is transferred for consideration. The transferor warrants that they have good title, the signatures are authentic, there are no material alterations, there are no known defenses, and they have no knowledge of insolvency.

Presentment Warranties: These warranties arise when an instrument is presented for payment or acceptance. The presenter warrants that they have good title, there are no material alterations, and they have no knowledge that the signature of the maker/drawer is unauthorized.

Disclaimers: Transfer warranties can be disclaimed by specific language on the instrument, such as "without recourse." Presentment warranties cannot be disclaimed on checks, but can be disclaimed on other instruments.

Who they Protect: These warranties protect subsequent holders of the instrument by ensuring that they are receiving a valid and enforceable instrument.

Discharge

Payment in Full: An instrument is discharged when it is paid in full by the party primarily liable.

Tender of Payment: If a tender of payment is made by the party primarily liable and refused by the holder, the instrument is discharged to the extent of the tender.

Cancellation: An instrument can be discharged by intentional cancellation by the holder, such as by writing "void" across its face.

Reacquisition: If the instrument is reacquired by a prior party who was discharged, they are no longer liable on the instrument, and intermediate parties are also discharged.

Exam Pitfalls

Confusion with Contract Disclaimers: Students may incorrectly apply contract disclaimer principles to negotiable instruments. It's important to remember that specific rules govern disclaimers of warranties on negotiable instruments.

Failure to Recognize Discharge Events: Students may overlook certain events that can discharge an instrument, such as tender of payment or reacquisition. Understanding these events is crucial to determining liability on an instrument.

Forgetting Notice Requirements: For secondary parties to be liable, they must be given proper notice of dishonor. Students often forget this requirement, assuming that secondary liability always attaches.

Overlooking the Importance of Presentment: Proper presentment of the instrument is crucial for holding parties liable. Students may fail to recognize the significance of presentment and dishonor in determining liability.

Misunderstanding Accommodation Parties: An accommodation party is someone who signs an instrument to provide credit for another party. Students often struggle with the liability of accommodation parties, which differs from that of other parties.

Incorrectly Applying the Shelter Rule: The shelter rule allows a transferee to acquire the rights of their transferor, even if the transferor had a defective title. Students may misapply this rule, assuming that it always applies regardless of the circumstances.

Confusing the Types of Liability: Students often confuse primary and secondary liability, as well as the liability of different parties on the instrument. Understanding the distinctions between these types of liability is essential.

Neglecting the Role of Consideration: Consideration is a key element in the transfer of negotiable instruments. Students may overlook the importance of consideration, assuming that transfer always occurs regardless of consideration.

Misinterpreting