Warrantor Liability on Negotiable Instrument - Damages
What is Warranty Liability?
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To what extent is a warrantor liable for damages suffered by a holder of a dishonored note or draft?
An individual presenting a draft or note for payment that is dishonored may recover damages from a prior warrantor of the instrument. That is, a person receiving an instrument in good faith and subject to warranties may recover from the warrantor an amount equal to the loss suffered as a result of the dishonor. The holder may recover the amount payable on the instrument, plus expenses and loss of interest incurred as a result of the dishonor.
Note: The amount of potential recovery from a warrantor is limited if the claimant received partial payment of the instrument. For example, a drawee receiving presentment warranty may recover from a warrantor damages for breach of warranty equal to the amount paid by the drawee, less the amount the drawee received or is entitled to receive from the drawer because of the payment, plus any expenses and loss of interest resulting from the breach.
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Discussion: Do you agree with the principle that an individual enforcing an instrument against a warrantor should be able to receive expenses and losses from the dishonor? Should the rights of the warrantor be balanced against the rights of the claimant? Why or why not?
Practice Question: Pam is the holder of a check for $5,000 that she received from Tom. Pam presents the check to First Bank and it is dishonored. Pam seeks to enforce the instrument against Tom based upon transferor warranty. She incurs $350 in court fees in an effort to enforce the instrument. What amount may Pam recover from Tom?