Drawer or Maker Liability to Pay Negotiable Instrument
Who is obligated to pay the instrument?
Written by Jason Gordon
Updated at December 1st, 2020
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What is drawer or maker liability for a negotiable instrument?
A drawer of a draft orders that at third-party drawee pay a specific amount to a payee who presents the instrument. The drawer, as creator of the instrument, is liable if the drawee dishonors (refused to pay) the draft. Likewise, a maker of a note is liable to a holder who presents the note for payment. If a maker or drawer wrongfully refuses to pay the instrument, any person entitled to enforce the instrument or any indorser who paid the instrument may sue for wrongful dishonor.
Example: Harry writes a check drawn of First Bank to Ira. If First Bank refuses to pay the check, Ira may present it to Harry for payment. If Harry writes a note to Ira, he is liable to pay the note when validly presented by a holder. In either situation, if Harry refuses to pay the draft or note, Ira may sue for performance. If Ira transfers the instrument to a later holder, the holder would be able to sue if Harry fails to pay. If Ira or a later holder received payment on the instrument from a previous holder or transferor of the instrument, the individual paying the instrument may seek reimbursement or payment from Harry.
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Discussion: How do you feel about the ability of any holder or payor of an instrument to seek payment of an instrument from the maker or drawer? What objective does these rules serve?
Practice Question: Ida issues a promissory note to Jim. Jim negotiates the note to Kyle. Kyle presents the note for payment and Ida refuses payment. What are the rights of Ida and Kyle in this situation?