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Chapter 26Liability, Defenses, and DischargeSee Separate Lecture Outline SystemINTRODUCTIONThis chapter examines the liability of the parties who sign the instrument and the warranty liability ofthose who transfer instruments and present instruments for payment. You might explain to your students thatthe focus is on liability on the instrument itself or on the warranties connected with transfer or presentment ofthe instrument, as opposed to liability on the underlying contract. This chapter includes a review of some of thedefenses that parties may have against payment on negotiable instruments and some of the ways in whichparties can be discharged from liability.ADDITIONAL RESOURCES—AUDIO & VIDEO SUPPLEMENTSThe followingaudio and video supplementsrelate to topics discussed in this chapter—251
252 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, ELEVENTH EDITIONPowerPoint SlidesTo highlight some of this chapter’s key points, you might use the Lecture Review PowerPoint slidescompiled for Chapter 26.
CHAPTER 26: LIABILITY, DEFENSES, AND DISCHARGE 253CHAPTER OUTLINEI.Signature LiabilityEvery party—except a qualified indorser—who signs a negotiable instrument is either primarily orsecondarily liable for payment of the instrument when it comes due.ADDITIONAL BACKGROUND—Signature Liability—RevisedSignature liability is the essence of negotiable instrument law. Once it is established that a partysigned an instrument, the UCC defines that party’s liability.An authorized agent or representative may sign for a party. Under the unrevised UCC, the courtsdiffered as to when signatures by agents or representatives gives rise to their personal liability. Gen-erally, an agent or representative was personally liable on his or her signature if the princi pal was notnamed or the agent or representative did not sign in a representative capacity [UCC 3–403(2)]. Thesame was true if the instrument named the principal but did not show that the agent or representativesigned in a representative capacity, or the principal was not named but the agent or representative indi-cated that he or she signed in a representative capacity.Basically, revised Article 3 retains the same principles when a holder in due course (HDC) is in-volved. That is, an agent or representative is liable on an instrument to an HDC who had no notice thatthe agent or representative was not intended to be liable. As to others, however, an agent or rep-resentative can escape liability if he or she can prove that the original parties did not intend the agentor representative to be liable on the instrument [UCC 3–402(b)(2)]. Although this is a subtle difference, it emphasizes the importance of agents or representatives’signatures and HDC status. Organizations that require more than one signature on a check should bealerted that the signature of the organization is considered unauthorized if one of the required signa-tures is lacking [UCC 3–403(b)].A.