The maker's contract is to pay the note, according to its tenor, to the payee, or his transferee. He cannot deny the payee's existence or his then capacity to indorse. His liability is primary.
The maker's liability is to pay the instrument according to its tenor. Of course, if he has defenses he may set them up where that is allowable according to the principles hereinbefore discussed. He engages to pay primarily. By this we mean that no one else is to be resorted to before the maker's liability will accrue.
He engages to pay the amount of the note. It is no defense that the holder did not pay the face value.125
The drawer's contract is that if the bill be not accepted or paid, according to its tenor, to the payee therein, or his transferee, he, the drawer, will pay it, provided the necessary steps be taken to charge him. He cannot deny the payee's existence or his then capacity to indorse. His liability is secondary. He may by apt words negative his liability.
A bill is drawn as an order on someone else. If that other on whom it is drawn does not accept, he may thereby incur a liability to the drawer if he thereby break his contract, but does not incur any to the payee or other holder, unless he has accepted. A refusal by the drawee to accept, gives the holder immediate right of recourse to the drawer. Because the holder must apply to the drawee for acceptance or payment before he can resort to the drawer, the drawer's liability is said to be secondary.
124. Nego. Instru. Law, Sec 60-69.
125. See SEC. 78, infra.
A person, firm, or corporation upon whom a bill or check is drawn cannot be made liable thereupon unless there is acceptance. But to the drawer there may be a liability for failure to accept or failure to pay, if such failure amounts to a breach of contract.
One cannot be made liable by reason of the fact that a check or bill has been drawn upon him. His failure to honor such check or bill may indeed amount to a breach of a previous contract upon his part to honor it when drawn, but his liability in that event is only to the drawer and only upon the previous contract not upon the instrument.
When a bank refuses to honor a check when there are sufficient funds to cover its amount, that constitutes a breach of the implied contract that the bank will honor checks drawn upon it when there are funds to pay it and the drawer can have damages.
It has been held that in such a case the drawer is entitled only to nominal damages, unless he proves substantial damages actually accruing;126 but other cases have held that there is a presumption of damages, and substantial damages may be obtained without actual proof thereof.127
126. Clark v. Bank, 83 N. Y. Suppl. 447.
127. Schaffner v. Ehrman, 139 111. 109.
The acceptor of a bill of exchange contracts to pay it according to the tenor of his acceptance. He cannot deny the existence of the drawer or the payee, or the capacity of the first to draw, the second to indorse the instrument, or the genuineness of the drawer's signature. His liability is primary.
(1) The Uniform Act.
Section sixty-two of the Uniform Act provides: "The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits, 1. The existence of the drawer, and the genuineness of his signature, and his capacity and authority to draw the instrument, and
2. The existence of the payee and his then capacity to indorse." The acceptor's liability is a primary liability.
(2) Liability of acceptor where drawer's name is forged.
The right of an acceptor to defend on the ground that the drawer's name was forged has been a subject of some dispute; but his liability on such paper to a holder in due course is established by the weight of authority and seems to follow beyond question from the Uniform Act above quoted which provides that by acceptance he admits the genuineness of the signature of the drawer, and consistently with this view is the result that if an acceptor or drawee has paid forged paper he cannot recover it back. Price vs. Neal 128 is the classic case on this point, and the prevailing view is that the Uniform
128. 3 Burrows (Eng.) 1354.
Act adopts the same view.129 This applies to checks as to other bills of exchange.
(3) Liability of acceptor of bill or check where amount raised.
Some cases have held that an acceptor can defend that he accepted a raised bill or check,130 but the other view is that such a defense is not good against a holder in due course.131 This view is contrary to the weight of authority, but seems to be the view adopted by the language of the act above quoted, although this has been denied.132
(4) Acceptor does not admit genuineness of indorsements.
It is not provided by the Act or held by the cases that an acceptor admits genuineness of indorsements. If a drawee accepts or pays to a holder whose claim of title contains a forged indorsement, he may make this point against such holder.133
An unqualified indorser warrants (1) the capacity of prior parties; (2) the genuineness of the instrument; (3) the genuineness of his title thereto; (4) that the instrument will not be dishonored by non-acceptance (if bill) or non-payment; and undertakes that if for any of these reasons or otherwise the instrument is unpaid at maturity he will pay the amount thereof to the holder provided proper steps are taken to charge him. His liability is secondary.134
129. National Bank v. First Nat. Bk., 141 Mo. Ap. 719; Berg-strom v. Ritz-Carlton Co., 157 N. Y. S. 959.
130. Espy v. Cincinnati First Nat. Bk., 85 U. S. 604.
131. Cherokee Nat. Bk. v. Union Trust Co., 33 Okla. 342.
132. McLendon v. Bk. of Advance, 188 Mo. Ap. 417, 174 S. W. 203.
133. Holt v. Ross, 54 N. Y. 472, 13 Am. Rep. 615.
A special or blank indorsement may be, and usually is, unqualified. The indorser's liability is secondary, that is, he need not answer unless the party primarily liable fails to pay, and then only in case the proper steps of presentment, notice, etc., are taken to charge him; unless such procedure is excused or waived.
The indorser may be thought of as having a dual liability - that of a warrantor and that of a guarantor.
As a warrantor he undertakes
(1) That prior parties have capacity to contract;
(2) That the instrument is genuine; and
(3) That the indorser's title is good;
As an indorser he undertakes that the instrument will be accepted or paid, or both, as the case may be, according to its tenor, and if not, and the proper steps are taken to charge him, he will pay the amount to the holder or to any subsequent indorser, who may be compelled to pay it.
Or in other words, as a vendor of paper he warrants that it is what it seems to be; as an indorser he engages that it will be paid.
Example 54. M makes a note to P who indorses to I who indorses to H. H presents the paper at maturity to M for payment. M is solvent but does not pay. M gives notice to I. I must pay the amount to H and may look to his recourse against P, who in turn can sue M. H may hold P, or ignoring all indorsements may sue M.
134. Nego. Instru. Act, SEC. 66.
Example 55. As a warrantor in the above case I warrants that the note is valid and subsisting; that H, P and M have capacity to contract; that the instrument and all indorsements thereon are not forgeries; and that his own title to the paper is good.
In case the instrument, being payable to bearer, is negotiated by mere delivery, that is, without indorsement, there is a warranty as set out below.
" (1) That the instrument is genuine and in all respects what it purports to be;
(2) That he has good title to it;
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless."135 These warranties (i. e. of one who negotiates by mere delivery) extend only to the immediate transferee.
If one who transfers paper whose title might pass by mere delivery puts his indorsement thereon, he becomes liable as any indorser.
The contract of a qualified indorser is the same as that set forth in the section above, except that it extends in favor of all succeeding holders.
The contract of a qualified indorser (one who indorses "without recourse," or similar words) is that of a warrantor only. His qualification eliminates the liability of the indorser, as is the intention thereof. But he still remains liable to subsequent holders upon his warranty.
135. Id. SEC. 65.
Example 56. M makes a note to order of P. P indorses "without recourse" to H. If M is a minor and does not pay on that ground, H can hold P upon the warranty.136 If M, however, being an adult, does not pay merely for financial reasons, H cannot hold P.
An irregular indorser (that is, one who not being otherwise a party to the instrument indorses before delivery) contracts according to the following rules:
"If the instrument is payable to the order of a third person, he is liable to the payee and all subsequent parties;
" If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all parties subsequent to the maker or drawer;
"If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee."137
Such an indorser is also called an "anomalous" indorser.
"As respects one another indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that as between or among themselves they have agreed otherwise." 138
Example 57. M makes a note payable to A, which is by A indorsed to B, and by B to C, and by C to D.
137. Nego. Instru. Act, SEC. 64.
138. Id. SEC. 68.
In order to hold any one except M, D must present the note to M for payment at maturity and save his rights against the indorsers by notice. He then may sue A, or B, or C. If he sues B, B may sue A, but not C.