Liability of Indorsers; Parties as Principal and Surety (Sections 35 to 40)

Each time an instrument is indorsed and delivered, a new party is added who stands behind it. The indorser promises every later holder that the instrument will be paid, and that he will make good the loss if it is not. Sections 35 to 40 define the indorser's liability, make all prior parties liable to a holder in due course, arrange the parties as principal debtors and sureties, and protect indorsers when the holder impairs their remedies.

1. Liability of an Indorser (Section 35)

Section 35, Negotiable Instruments Act, 1881

In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without, in such indorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such indorser as hereinafter provided.

Every indorser after dishonour is liable as upon an instrument payable on demand.

To every subsequent holder: not only the immediate indorsee, but every later holder.
Conditional on dishonour and notice: the indorser pays only if the drawee, acceptor or maker dishonours, and only if due notice of dishonour is given (Topic 30).
Exclusion: an indorser may exclude or make conditional his liability by express words, for example "sans recours" or "without recourse to me" (Section 52; Topic 23).
After dishonour: an indorsement made after dishonour makes the indorser liable as on an instrument payable on demand.

2. Liability to a Holder in Due Course (Section 36)

Section 36, Negotiable Instruments Act, 1881

Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied.

All prior parties, maker, drawer, acceptor and indorsers, remain liable to a holder in due course until the instrument is paid. The holder may sue any or all of them, subject to the requirement of notice of dishonour for parties whose liability depends on it.

3. Principal Debtors and Sureties (Sections 37 and 38)

Under Section 37, the maker of a note or cheque, the drawer of a bill until acceptance, and the acceptor are principal debtors; all other parties are sureties for them. Section 38 then arranges the sureties among themselves:

Section 38, Negotiable Instruments Act, 1881

As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party.

Illustration. A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.

The result is a chain of liability. The holder can sue any party; a party who pays can recover from every party prior to him, but not from those after him. The ultimate burden falls on the acceptor (or maker), and if he cannot pay, on the drawer, then on each indorser in order.

4. Suretyship Protections (Section 39)

Section 39, Negotiable Instruments Act, 1881

When the holder of an accepted bill of exchange enters into any contract with the acceptor which, under section 134 or 135 of the Indian Contract Act, 1872, would discharge the other parties, the holder may expressly reserve his right to charge the other parties, and in such case they are not discharged.

Contract Act rules apply: because the other parties are sureties, the general rules of suretyship apply. Under Section 134 of the Contract Act, a surety is discharged by a contract between the creditor and principal debtor that releases the principal debtor; under Section 135, by a composition with, a promise to give time to, or a promise not to sue, the principal debtor.
Reservation of rights: Section 39 allows the holder to make such an arrangement with the acceptor while expressly reserving his rights against the other parties, who are then not discharged.
Indemnity: a surety who pays may recover from the principal debtor (Section 145, Contract Act) and is subrogated to the holder's rights (Section 140, Contract Act).

5. Impairing the Indorser's Remedy (Section 40)

Section 40, Negotiable Instruments Act, 1881

Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

For example, if the holder releases the acceptor, or cancels the drawer's name, without the indorser's consent, the indorser loses his right to recover from that party if he pays. Section 40 therefore discharges the indorser to the same extent. The rule parallels Section 139 of the Contract Act, under which a surety is discharged by any act or omission of the creditor that impairs his eventual remedy against the principal debtor.

⚠ Key point

An indorser who indorses and delivers before maturity, without excluding liability, must compensate every subsequent holder on dishonour, provided due notice is given (Section 35). Every prior party is liable to a holder in due course until the instrument is satisfied (Section 36). The maker, the drawer of a cheque, the drawer of a bill until acceptance, and the acceptor are principal debtors; others are sureties (Section 37), and among sureties each prior party is principal to each later one (Section 38). Suretyship rules apply, but the holder may reserve his rights when dealing with the acceptor (Section 39). A holder who impairs an indorser's remedy against a prior party discharges that indorser to the same extent (Section 40).

6. Related Topics and Provisions

Liability of drawer, drawee and maker (Topic 17)
Kinds of indorsement (Topic 23)
Discharge from liability (Topic 28)
Notice of dishonour (Topic 30)