Please fill out the contact form below and we will reply as soon as possible. Discussion Question What do you think about the system of primary and secondary liability on a negotiable instrument? Academic Research. Close Expand. They are required to pay by the terms of the instrument itself, and their liability is unconditional.
The obligation is owed to a person entitled to enforce the note or to an indorser that paid the note. The acceptance must be written on the draft by some means—any means is good. So the holder—whether a payee or an indorsee—can look only to the bank, not to the drawer, for payment. Uniform Commercial Code, Section b. If the drawee varies the terms when accepting the draft, it is liable according to the terms as varied. Uniform Commercial Code, Section a iii.
Unlike primary liability, secondary liability is conditional, arising only if the primarily liable party fails to pay. The parties for whom these conditions are significant are the drawers and the indorsers. By virtue of UCC Sections and , drawers and indorsers engage to pay the amount of an unaccepted draft to any subsequent holder or indorser who takes it up, again, if this is the conditional part the 1 the instrument is dishonored and, in some cases, 2 notice of dishonor is given to the drawer or indorser.
Most commonly, if a check bounces, the person who wrote it is liable to make it good. Under UCC Section , an indorser promises to pay on the instrument according to its terms if it is dishonored or, if it was incomplete when indorsed, according to its terms when completed. We have alluded to the point that secondary parties do not become liable unless the proper conditions are met—there are conditions precedent to liability i.
The conditions are slightly different for two classes of instruments. For an accepted draft on a nonbank, or for an indorser, the conditions are 1 presentment, 2 dishonor, and 3 notice of dishonor.
Conversion is relevant here because if an instrument is presented for payment or acceptance and the person to whom it is presented refuses to pay, accept, or return it, the instrument is converted. An instrument is also converted if a person pays an instrument on a forged indorsement: a bank that pays a check on a forged indorsement has converted the instrument and is liable to the person whose indorsement was forged.
There are various permutations on the theme of conversion; here is one example from the Official Comment:. A check is payable to the order of A. A indorses it to B and puts it into an envelope addressed to B. The envelope is never delivered to B. Because the check was never delivered to B, the indorsee, B has no cause of action for conversion, but A does have such an action. A is the owner of the check.
B never obtained rights in the check. If A intended to negotiate the check to B in payment of an obligation, that obligation was not affected by the conduct of Thief. To hold secondary parties responsible , they must be properly notified of the dishonor.
There are certain time frames involved, the most rigid being with banks. Notice can be given in any reasonable fashion, and also so noted on the instrument NSF.
Accommodation parties can also be held primarily or secondarily responsible on instruments. The party could be an accommodation maker on behalf of the maker or accommodation indorser on behalf of the payee , depending on the style of signature. In each case, the party is lending their credit to the transaction. Agent Signatures : recall an agent agrees to represent or act on behalf of another person generally called the principal. In such a case, the principal, rather than the agent, will be liable on the instrument.
For example: Aronson, by Sammy, Agent. Aronson is the principal, Sammy the agent — Aronson is bound, assuming Sammy had the authority. However, an unauthorized signature will bind the person whose name is forged if that person ratifies, or affirms, the obligation. The drawee of a draft or check has primary liability to the holder, an individual who has lawfully acquired possession and is entitled to payment, upon acceptance of the instrument by the drawee.
A draft is accepted for payment when the acceptance is indicated by the drawee. Certification of an instrument, such as a check, is its acceptance by a bank guaranteeing that payment will be forthcoming.
A drawee is liable to the drawer if the drawee refuses to pay a draft or check that is properly drawn and presented because such action constitutes a noncompliance of the drawee's contractual obligation to the drawer.
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