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Chapter 19 Liability and Discharge

Learning Objectives

After reading this chapter, you should understand the following:

  1. The liability of an agent who signs commercial paper
  2. What contract liability is imposed when a person signs commercial paper
  3. What warranty liability is imposed upon a transferor
  4. What happens if there is payment or acceptance by mistake
  5. How parties are discharged from liability on commercial paper

In Chapter 16 "Nature and Form of Commercial Paper", Chapter 17 "Negotiation of Commercial Paper", and Chapter 18 "Holder in Due Course and Defenses", we focused on the methods and consequences of negotiating commercial paper when all the proper steps are followed. For example, a maker gives a negotiable note to a payee, who properly negotiates the paper to a third-party holder in due course. As a result, this third party is entitled to collect from the maker, unless the latter has a real defense.

In this chapter, we begin by examining a question especially important to management: personal liability for signing company notes and checks. Then we look at the two general types of liability—contract and warranty—introduced in Chapter 17 "Negotiation of Commercial Paper". We conclude the chapter by reviewing the ways in which parties are discharged from liability.