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When are the warranties of a negotiable instrument discharged?
Transferor, indorser, and presenter liability is discharged by any manner that would effectively discharge a party’s obligation on a contract at common law. These provisions may relieve the obligation of a payor or payee, but could still subject transferors or indorsers to liability.
• Note: Indorser and accommodation party liability may be discharged by the same means that a surety’s liability is discharged.
• Example: Valid payment discharges the obligations of payor of a negotiable instrument. Other methods include tender of payment and refusal, cancellation or renunciation of the obligations, material and fraudulent alteration of the instrument, certification, acceptance varying a draft, reacquisition, and, in some cases, unexcused delay in giving notice of presentment or dishonor.
• Discussion: Why do you think payment of a negotiable instrument relieves that party’s warranty liability? Would it be fair to subject a payor to double liability for payment of an instrument? Why or why not?
• Practice Question: Leon receives a promissory note made by Raymond as part of a contract. Leon transfers the note, which is subsequently transferred numerous times before it comes to Linda. Linda submits the instrument to Raymond for payment and it is dishonored. Linda seeks to enforce the instrument against Leon. Leon pays the instrument? What is Leon’s remaining responsibility on the instrument? Under what situations would Raymond be relieved from his obligation to pay Raymond on the instrument?