1. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. and the Legal Environment, 10 th edition by Richard A. Mann & Barry S. Roberts Essentials of Business Law and the Legal Environment, 10 th edition by Richard A. Mann & Barry S. Roberts

2. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Topics Covered Chapter 27: Liability of Parties I. Contractual Liability A. Signature B. Liability of Primary Parties C. Liability of Secondary Parties D. Termination of Liability II. Liability Based on Warranty A. Warranties on Transfer B. Warranties on Presentment

3. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Contractual Liability n Liability on the Instrument – no person has contractual liability on an instrument unless her signature appears on it.

4. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Contractual Liability

5. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Signatures n A signature may be made by the individual herself or by her authorized agent. n Authorized– an agent who executes a negotiable instrument on behalf of his principal is not liable if the instrument is executed properly and as authorized. n Unauthorized–forgeries and signatures made by an agent without power; generally not binding on the person whose name appears but are binding on the unauthorized signer.

6. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Liability of Primary Parties n Primary Liability – absolute obligation to pay a negotiable instrument. n Makers – the maker guarantees that he will pay the note according to its original terms. n Acceptors – a drawee has no liability on the instrument until she accepts it; she then becomes primarily liable.

7. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Acceptors n Acceptance – a drawee's signed engagement to honor the instrument. n Certification – acceptance of a check by a bank. n Effect of Acceptance – when a draft is accepted by a bank the drawer and all prior indorsers are discharged from contractual liability.

8. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Liability of Secondary Parties n Secondary (Conditional) Liability – obligation to pay a negotiable instrument that is subject to conditions precedent. n Indorsers and Drawers – if the instrument is not paid by a primary party and if conditions are satisfied, indorsers and drawers are secondarily liable unless they have disclaimed their liability or have a valid defense. n Disclaimer by Secondary Parties – a drawer (except of a check) or indorser may disclaim liability by a qualified drawing or indorsing (“without recourse”).

9. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Conditions Precedent to Liability n Drawer – liability is generally only contingent upon dishonor and does not require notice. n Indorser – liability is contingent upon dishonor and notice of dishonor.

10. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Liability for Conversion n Tort Liability – conversion occurs (1)­ when a drawee refuses to return a draft that was presented for acceptance, (2)­when any person refuses to return an instrument after he dishonors it, or (3)­when an instrument is paid on a forged indorsement.

11. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Termination of Liability n Effect of Discharge – potential liability of parties to the instrument is terminated upon: –Discharge –Performance –Tender of Payment – for interest, costs, and attorney's fees –Cancellation –Renunciation –Liability Based on Warranty

12. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Warranties on Transfer Parties n Warrantor – any person who transfers an instrument and receives consideration gives the transferor's warranties. n Beneficiary – if the transfer is by delivery, the warranties run only to the immediate transferee; if the transfer is by indorsement, the warranties run to any subsequent holder who takes the instrument in good faith.

13. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Warranties on Transfer Parties n Entitled to Enforce n All Signatures Are Authentic & Authorized n No Alteration n No Defenses n No Knowledge of Insolvency

14. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Liability on Transfer Pay to John Doe /s/Lilli Justin Transfer by Indorsement Transferor’s Warranties Indorser’s Liability Subsequent Holders + Pay to John Doe without recourse /s/Lilli Justin Transfer by Qualified Indorsement Modified Transferor’s Warranties Indorser’s Liability Subsequent Holders + Pay to John Doe Transfer without Indorsement Transferor’s Warranties Subsequent Holders Indorser’s Liability +

15. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Warranties on Presentment Parties n Warrantor – all people who obtain payment or acceptance of an instrument as well as all prior tranferors give the presenter's warranties. n Beneficiary – the presenter's warranties run to any person who in good faith pays or accepts an instrument.

16. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. n Entitled to Enforce n No Alteration n Genuineness of Drawer's Signature Warranties on Presentment Parties

17. Copyright © 2010 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. Liability Based on Warranty 1. Entitled to enforce 2. No alterations 3. No knowledge that signature of drawer is unauthorized Presenter’s Warranties (PW) PH1H1 H2H2 IssuesIndorses Presents $ TW 1. Entitled to enforce 2. All signatures authorized and authorized 3. No alterations 4. No defenses 5. No knowledge of insolvency proceedings Transferor’s Warranties (TW) PW TW $$ DrawerDrawee