Understanding Warranty Liability In Depth

Along with any liability that might be incurred by putting one's signature on a negotiable instrument, a given party might incur liability simply by taking certain actions with regard to that instrument. This liability does not need any official confirmation from notices or other documents, and in fact, arises from the acts taken themselves. Any party anticipating some form of action with a negotiable instrument should be aware of these liabilities, as a damaged party might seek damages from the acting party for having breached one of these warranties, even though the acting party did not have an awareness that these warranties were in place.

Transfer Warranties

Whenever any party transfers a negotiable instrument, that transferor makes certain warranties regarding that instrument. These warranties are designed to protect the transferee from any wrongdoing or fraudulent action on the part of the transferor with the side effect that in some instances the transferor could be held accountable for the actions of prior transferors in regard to the most recent transferee. In other words, the transferee could seek damages from the transferor even though the transferor himself took no wrong action because of the warranties which the transferor made through the act of transference alone.
These warranties are also set up because no transferee can pursue damages for warranty violations from transferors further down the line of transference; each transferee can only pursue damages from his or her direct transferor. The transfer warranties include, among others, warranties to the effect that the transferor bears authority to enforce the negotiable instrument, that the signatures on the instrument are all authentic and authorized, and that the instrument has not been altered improperly. For more information on these transfer warranties and their exact stipulations, click the link.

Presentment Warranties

Presentment warranties crop up only when a negotiable instrument is presented for payment or acceptance, and as such, primarily presentment warranties surround draft negotiable instruments. In the same way that the transferor makes warranties to the transferee, the presenter of a negotiable instrument makes warranties to the presentee. As the presentee is likely the drawee of the draft, or another party that will make payment upon the negotiable instrument to the presenter, these warranties are designed to protect the paying party from any potential for fraud or damage.
These liabilities are somewhat less stringent than transfer warranties, if only because most fraudulent actions will require some form of transference before the negotiable instrument is actually presented. Those forms of fraud that would go straight to presentment are defended against with presentment warranties.
Presentment warranties include warranties to the effect that the presenter is officially authorized to enforce the instrument he or she is presenting for payment, that the instrument has not been improperly or illegitimately altered, and that the signature of the drawer on the negotiable instrument is legitimate. Follow the link to learn more about presentment warranties and how the presenter might be held liable for damages.

NEXT: Watch Out for Unauthorized Signatures!