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When is an individual (including businesses) liable for a representative signing a negotiable instrument?
If a representative (an agent) signs a commercial instrument on behalf of a the represented person or business (the principal), the principal is bound and made liable by the representative signing either the principal’s name or the agent’s name. The representative is not liable on the instrument if:
• the form of the signature shows unambiguously that the signature is made on behalf of the represented person, and
• the instrument identifies the represented person.
This standard goes beyond the contract law standards for agent authority and principal liability.
• Note: Special rules apply for promoters of business entities that do not yet exist.
• Discussion: Why do you think the standard for holding a principal liable for an agent’s signature on a negotiable instrument is more broad than under agency law? Do you think an agent should have the ability to subject a principal to liability in the context of negotiable instruments? Why or why not? Should any additional regulations or other protections apply in this scenario?
• Practice Question: Marshal is an agent of Clayton. Marshal signs a promissory note on behalf of Clayton and transfers it to Travis. What procedures must Travis have followed to make Clayton responsible for Marshal’s actions?