Sections 39 and 40 of the Negotiable Instruments Act, 1881: Suretyship and Discharge of Indorser's Liability

Sections 39 and 40 form part of Chapter III of the Negotiable Instruments Act, 1881, which deals with parties to notes, bills and cheques. These provisions regulate the effect of certain acts of a holder on the liability and remedies of other parties to a negotiable instrument.

At a glance: Section 39 permits a holder, in the circumstances stated in the section, to reserve expressly the right to charge other parties. Section 40 protects an indorser where the holder, without the indorser's consent, destroys or impairs the indorser's remedy against a prior party.

Section 39 - Suretyship

Statutory rule: When the holder of an accepted bill of exchange enters into a contract with the acceptor which, under Section 134 or Section 135 of the Indian Contract Act, 1872, would discharge the other parties, the holder may expressly reserve the right to charge those other parties. If that right is expressly reserved, those parties are not discharged.

Meaning and legal effect of Section 39

Section 39 deals with the relationship between the holder, the acceptor of a bill of exchange and other parties who may otherwise obtain the benefit of a discharge under the law of suretyship. The provision allows the holder to preserve recourse against those other parties by making an express reservation of rights.

The section must be read with Sections 134 and 135 of the Indian Contract Act, 1872. Section 134 concerns discharge of a surety by release or discharge of the principal debtor, while Section 135 concerns discharge where the creditor compounds with, gives time to, or agrees not to sue the principal debtor, subject to the statutory rules and exceptions.

Essential elements of Section 39

For Section 39 to operate, there must be an accepted bill of exchange; the holder must enter into the relevant contract with the acceptor; that contract must be of a kind that would otherwise discharge the other parties under Section 134 or 135 of the Indian Contract Act; and the holder must expressly reserve the right to charge those other parties.

Section 40 - Discharge of indorser's liability

Statutory rule: Where the holder of a negotiable instrument, without the consent of the indorser, destroys or impairs the indorser's remedy against a prior party, the indorser is discharged from liability to the holder to the same extent as if the instrument had been paid at maturity.

Meaning and purpose of Section 40

An indorser who may have to pay the holder ordinarily has remedies against prior parties. Section 40 prevents the holder from prejudicing those remedies and then enforcing liability against the indorser as though the prejudice had not occurred. The discharge is linked to the extent to which the indorser's remedy has been destroyed or impaired.

When can an indorser claim discharge?

The provision applies where the holder acts without the indorser's consent and the act destroys or impairs the indorser's remedy against a prior party. The statutory consequence is discharge of the indorser's liability to the holder to the same extent as if the instrument had been paid at maturity.

Illustration to Section 40

A is the holder of a bill of exchange payable to the order of B. The bill bears successive blank indorsements by B, Peter Williams, Wright and Co., and John Rozario. A sues John Rozario but, without John Rozario's consent, strikes out the indorsements of Peter Williams and Wright and Co. By removing those prior indorsements, A impairs John Rozario's remedy against prior parties. Under the statutory illustration, A cannot recover from John Rozario.

Difference between Sections 39 and 40

Section 39 is concerned with preserving the holder's rights against other parties when the holder makes a qualifying arrangement with the acceptor and expressly reserves recourse. Section 40 works in the opposite direction: it protects an indorser when the holder, without consent, prejudices the indorser's recourse against a prior party.

Related provisions

These sections are best understood with the rules governing liability of parties in Chapter III, particularly Sections 35 and 36 on liability of an indorser and prior parties, and Sections 37 and 38 on principal debtors and the position of prior parties.

Legal text should be read with the current bare Act and the facts of the particular instrument and transaction. The official India Code text is linked in the resources section.