Negotiable Instruments Act, Section 37

Negotiable Instruments Act, Section 37: Maker, Drawer and Acceptor as Principal Debtors

Section 37 of the Negotiable Instruments Act, 1881 clarifies the nature of liability of various parties to a negotiable instrument and distinguishes between those who are primarily liable and those who are secondarily liable. 

The provision establishes who is to be regarded as the principal debtor and who stands in the position of a surety, in the absence of any agreement to the contrary.

1. Absence of Contract to the Contrary

The section begins with the phrase “in the absence of a contract to the contrary.” 

This indicates that the rule stated in this section applies unless the parties have expressly agreed to modify or alter their respective liabilities.

If no special arrangement exists, the statutory classification of liability governs the relationship among the parties to the instrument.

2. Maker of a Promissory Note as Principal Debtor

In the case of a promissory note, the maker is the person who undertakes an unconditional promise to pay a certain sum of money to the payee or holder.

Under Section 37, the maker is liable as a principal debtor, meaning that he bears primary responsibility for payment of the instrument.

The holder is entitled to demand payment directly from the maker at maturity, without first proceeding against any other party.

The maker’s liability is direct and absolute, subject only to the terms of the instrument.

3. Drawer of a Bill of Exchange Until Acceptance

In the case of a bill of exchange, before acceptance, the drawer is treated as the principal debtor. 

Since the bill has not yet been accepted by the drawee, the drawer stands as the person primarily responsible for ensuring payment.

However, once the bill is accepted, the position changes and the acceptor becomes the principal debtor while the drawer’s liability becomes secondary.

Thus, until acceptance, the drawer holds the position of principal debtor.

4. Acceptor as Principal Debtor

After acceptance of a bill of exchange, the drawee becomes the acceptor and assumes primary liability by agreeing to pay the specified amount at maturity.

The holder may directly proceed against the acceptor for payment at maturity, as the acceptor’s obligation is primary and independent, similar to that of the maker of a promissory note.

5. Other Parties as Sureties

Section 37 further provides that all other parties to the instrument are liable as sureties for the maker, drawer, or acceptor, as the case may be.

This includes indorsers, the drawer after acceptance of the bill, and any other secondary party, whose liability arises only if the principal debtor defaults. 

In such circumstances, they may be called upon to pay, and upon payment, they acquire rights of recourse against the principal debtor.

6. Nature of Principal and Surety Relationship

By designating certain parties as principal debtors and others as sureties, the law establishes a hierarchy of liability.

The principal debtor bears the primary and immediate responsibility for payment, while the sureties become liable only upon the default of the principal debtor. 

If a surety pays the debt, he is entitled to recover the amount from the principal debtor, thereby ensuring clarity in the allocation of responsibility among the parties to a negotiable instrument.