Section 38 NI Act: Prior party a principal in respect of each subsequent party

Negotiable Instruments Act, 1881

Section 38 NI Act at a Glance

Section 38 NI Act governs the relationship among parties who are liable as sureties on a negotiable instrument. Unless there is a contract to the contrary, each prior party is liable as a principal debtor in respect of each subsequent party.

Section 38 NI Act Bare Act Text

38. Prior party a principal in respect of each subsequent party.

As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party.

Illustration

A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.

Section 38 NI Act in Simple Words

Section 38 NI Act explains how liability is ordered among the parties who are sureties on a negotiable instrument under Section 37 NI Act. In the absence of a contract to the contrary, as between the parties who are liable as sureties, each prior party is also liable on the instrument as a principal debtor in respect of each subsequent party.

The Illustration to Section 38 NI Act shows how this rule operates across a chain of indorsements. In the Illustration, A draws a bill payable to A's own order on B, and B accepts the bill. A afterwards indorses the bill to C, C indorses it to D, and D indorses it to E.

The Illustration states three results from this chain. First, as between E and B, B is the principal debtor, and A, C, and D are B's sureties. Second, as between E and A, A is the principal debtor, and C and D are A's sureties. Third, as between E and C, C is the principal debtor, and D is C's surety.

When Section 38 NI Act Applies

  • Two or more parties are liable as sureties on a negotiable instrument under Section 37 NI Act.
  • There is no contract to the contrary.
  • As between those sureties, each prior party is liable on the instrument as a principal debtor in respect of each subsequent party.

Example of Section 38 NI Act

Harpreet in Belagavi draws a bill of exchange for ₹50,000 payable to Harpreet's own order on Salim, and Salim accepts the bill. Harpreet then indorses the bill to Neha, Neha indorses it to Venkat, and Venkat indorses it to Gurpreet, with no contract to the contrary. Under Sections 37 and 38 NI Act, as between Gurpreet and Salim, Salim is the principal debtor and Harpreet, Neha, and Venkat are Salim's sureties. As between Gurpreet and Harpreet, Harpreet is the principal debtor and Neha and Venkat are Harpreet's sureties, and as between Gurpreet and Neha, Neha is the principal debtor and Venkat is Neha's surety.

When Section 38 NI Act Does Not Apply

  • There is a contract to the contrary between the parties.

FAQs on Section 38 NI Act

What is Section 38 NI Act?▼

Section 38 NI Act sets the rule of liability among parties who are sureties on a negotiable instrument. In the absence of a contract to the contrary, each prior party is liable on the instrument as a principal debtor in respect of each subsequent party.

In the Illustration to Section 38 NI Act, who is the principal debtor and who are the sureties as between E and A?▼

As between E and A, A is the principal debtor, and C and D are A's sureties.

In the Illustration to Section 38 NI Act, who is the principal debtor and who is the surety as between E and C?▼

As between E and C, C is the principal debtor, and D is C's surety.

Can the rule in Section 38 NI Act be modified by agreement?▼

Yes. Section 38 NI Act applies in the absence of a contract to the contrary.

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Disclaimer: This is for informational purposes only. Always consult a qualified advocate for legal advice.

Sources: Bare Act Text, Negotiable Instruments Act, 1881 (India Code) ·