Section 37 and Section 38 of Negotiable Instruments Act 1881: Principal Debtors and Sureties

Sections 37 and 38 of the Negotiable Instruments Act, 1881 form part of Chapter III dealing with parties to notes, bills and cheques. They explain who is treated as the principal debtor and how liability operates among parties who stand in the position of sureties.

In brief: Section 37 identifies the maker, drawer or acceptor who is principally liable on the instrument in the circumstances stated by the section. Section 38 then regulates the relationship among the other parties who are liable as sureties, making each prior party a principal debtor in relation to each subsequent party, unless there is a contract to the contrary.

Section 37 - Maker, drawer and acceptor principals

Statutory provision:
The maker of a promissory note or cheque, the drawer of a bill of exchange until acceptance, and the acceptor are, in the absence of a contract to the contrary, respectively liable thereon as principal debtors, and the other parties thereto are liable thereon as sureties for the maker, drawer or acceptor, as the case may be.

Meaning and effect of Section 37

Section 37 fixes the primary relationship between the parties liable on a negotiable instrument. Subject to any contract to the contrary, the person identified by the section as the principal debtor bears the primary liability, while the other parties liable on the instrument stand as sureties in relation to that principal debtor.

A maker is the person who makes a promissory note. A drawer is the person who makes or draws a bill of exchange or cheque. An acceptor is the drawee who has signed assent upon a bill and delivered it or given notice of that signing as required by the Act. These expressions should be read with the definitions contained in the Negotiable Instruments Act, 1881.

The words "in the absence of a contract to the contrary" are important. They recognize that the parties may, where legally permissible, regulate their inter se liability by agreement. In the absence of such an agreement, the statutory allocation under Section 37 applies.

Section 38 - Prior party a principal in respect of each subsequent party

Statutory provision:
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.

Meaning and effect of Section 38

Section 38 deals with the internal order of liability among parties who, under Section 37, are liable as sureties. As between those parties, an earlier or prior party is treated as a principal debtor in relation to a later or subsequent party. This statutory rule helps determine the relative responsibility of parties where the instrument has passed through successive indorsements.

Illustration under Section 38

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.

How Sections 37 and 38 work together

Section 37 first identifies the principal debtor for the negotiable instrument and treats the other liable parties as sureties. Section 38 then determines the relative position of those surety parties among themselves. Consequently, the order in which parties became liable on the instrument can affect their rights and obligations against one another.

Related provisions

The liability rules in Sections 37 and 38 should be read with the surrounding provisions of Chapter III, including Sections 35 and 36 on liability of an indorser and prior parties and Sections 39 and 40 on suretyship and discharge of an indorser's liability.

This page explains the statutory provisions for general legal information. The application of these provisions depends on the instrument, endorsements, contractual terms and facts of the particular case.