Section 35 of the Negotiable Instruments Act,1881.
In the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without, in such indorsement, expressly excluding or making conditional his own liability, is bound thereby to every subsequent holder, in case of dishonour by the drawee, acceptor or maker, to compensate such holder for any loss or damage caused to him by such dishonour, provided due notice of dishonour has been given to, or received by, such indorser as hereinafter provided. Every indorser after dishonour is liable as upon an instrument payable on demand.
This section deals with the liability of the person who indorses and delivers a negotiable instrument before maturity and, therefore, has no application to the indorser of a promissory note payable on demand because no question of “before maturity” can arise in the case of such promissory notes. It does not govern the extent and nature of the liability of the indorser of a note payable on demand. The liability under this section arises out of the indorsement and not on the instrument itself, but indorsement alone is not sufficient, it must be followed by delivery to complete the contract. The right of suit by the indorsee depends on the indorsement which forms part of the cause of action and which, therefore, confers jurisdiction upon the court of the place where the indorsement is made to try the the case not only against the indorser but also against the drawer. Therefore, a transferor of a negotiable instrument by mere delivery is not liable to a subsequent holder nor can he, in case of dishonour, make the prior parties liable.
Not only should the indorsement be followed by delivery before maturity of the instrument but there should be dishonour of the instrument by the drawee, acceptor or the maker and the notice of such dishonour to the indorser must be proved before the indorser is made liable for any loss or damage. These conditions precedent to the liability of the indorser must be fulfilled before any relief can be decreed against him. Unreasonable delay in presenting the note for payment or in serving the notice after dishonour will discharge the indorser. The indorser, in case of dishonour, is bound to pay the amount due on the instrument with compensation for loss or damage to the holder. What compensation will be payable will be determined under the provisions of section 117 of the Act.
The indorser by his indorsement undertakes the final responsibility of payment in case of dishonour by the acceptor or drawee after due presentation provided he has notice of dishonour. His position is like that of a surety and he can be sued immediately by the holder in default of acceptance by the drawee or of payment by the drawer or acceptor and neither the drawer nor the acceptor need be impleaded in the suit and the plaintiff has a right to sue the indorser alone even when he is a guarantor at his option and the decree against the one is no bar to a suit against another. It has been held in a Calcutta case that a decree in which the liability of the indorser was made conditional upon failure to realise the amount from the drawer and the acceptor is illegal. The indorser is bound by his indorsement notwithstanding any previous alteration of the instrument. Payment has, therefore, to be made according to the tenor of the instrument at the time of the indorsement. The indorser is also not permitted to deny, in a suit by a subsequent holder, the signature, or the capacity to contract of any prior party to the instrument. As the liability of the indorser arises out of the indorsement and not on the instrument, limitation against him, will, therefore, run from the time of the indorsement and will not be affected by any part payment by the maker to keep the instrument alive against him.
This ordinary rule of liability is, however, subject to any contract to the contrary that may be arrived at between the parties by which the indorser may expressly stipulate to exclude his own liability by adding “Sans Recourse” or make his liability a conditional one on the happening of a certain event. Even if it is not expressly stated such intention to exclude his personal liability may be inferred from the nature of the transaction, as when a note executed by a third party in favour of X was endorsed by the latter in favour of his son as part of his share in partition, the indorsement by the father created no liability of the father on default of payment by the maker. Oral evidence of an agreement limiting the liability of the indorser is admissible.
While the indorsement of a negotiable note creates an obligation between the indorser and the immediate indorsee and all subsequent holders, the indorsement of a non-negotiable note by the payee creates an obligation between him and the person in whose favour the indorsement is originally made and not between him and any other subsequent holder. The simple reason is that the note not being negotiable there can be no privity of contract except between the payee and this endorsee and, therefore, no consequential obligation and liability, as under this Act, between the indorser and the other subsequent holders can arise.