Chapter 26 Business law Notes - Chapter 26 Liability Defenses Discharge There are two kinds of liability associated with negotiable instruments

Chapter 26 Business law Notes - Chapter 26 Liability...

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Chapter 26 Liability, Defenses, & Discharge There are two kinds of liability associated with negotiable instruments. Signature Liability relates to signatures on instruments. - Those who sign negotiable instruments are potentially liable for payment of the amount stated on the instrument. Warranty Liability in contrast, extends to both signers and non-signers. - A breach of warranty can occur when the instrument is transferred or presented for payment. NOTE: The focus is on liability on the instrument itself or on warranties connected with the transfer or presentment of the instrument as opposed to liability on any underlying contract. Signature Liability - The key to liability on a negotiable instrument is a signature. - The UCC defines a signature as any name, word, mark, or symbol executed or adopted by a person with the present intention to authenticate a writing. - A signature can be made manually or by use of any device or machine. - The general rule is as follows: “A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person” - This means that every person, except a qualified indorser (one who indorses “without recourse”- undertakes no obligation to pay) who signs a negotiable instrument is either primarily or secondarily liable for payment of that instrument when it comes due. Primary Liability - A person who is primarily liable on a negotiable instrument is absolutely required to pay the instrument – unless, of course, he has valid defense to payment. Liability is immediate when the instruments is signed or issued. No action by the holder of the instrument is required. Marker’s and Acceptor’s are primarily liable. Maker’s - The maker of a promissory note promises to pay the instrument according to its terms. - It is the makers promise to pay that renders the instrument negotiable. - If the instrument was incomplete when the maker signed it, the maker is obligated to pay it according to either its stated terms or terms that were agreed on and later filled in to complete the instrument. Acceptor’s - An acceptor is a drawee that promises to pay an instrument when it is presented later for payment. - When a drawee accepts a draft (usually by writing “accepted” across its face), the drawee becomes primarily liable to all subsequent holder of the instrument
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- In other words, the drawee’s acceptance is a promise to pay that places the drawee in virtually the same position as the maker of a promissory note. - A drawee that refuses to accept a draft that requires the drawee’s acceptance (such as a trade acceptance) has dishonored the instrument (Dishonor of an instrument occurs when payment or acceptance of the instrument, whichever is required, is refused even though the instruement is presented in a timely and proper manner,) - Acceptance of a check is called certification - Certification is not necessary on checks. If it does not certify a check, however, the
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