Negotiable Instruments Act, Section 38

Negotiable Instruments Act, Section 38: Prior Party a Principal in Respect of Each Subsequent Party

Section 38 of the Negotiable Instruments Act, 1881 further explains the nature of liability among parties who are treated as sureties under Section 37. 

While Section 37 distinguishes between principal debtors and sureties, Section 38 clarifies the relationship among the sureties themselves and determines how liability is structured between prior and subsequent parties.

1. Context of Surety Liability

Under Section 37, parties other than the maker, drawer (before acceptance), and acceptor are generally treated as sureties. 

These include indorsers and other secondary parties who have signed the negotiable instrument after the principal debtor.

However, when there are multiple such parties, questions arise regarding their inter se liability, that is, their liability among themselves. Section 38 resolves this issue.

2. Absence of Contract to the Contrary

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

This means that the rule laid down in this section applies unless the parties have expressly agreed to arrange their liabilities differently.

If there is no special agreement altering the position, the statutory rule governs their mutual obligations.

3. Prior Party as Principal Debtor in Relation to Subsequent Party

Section 38 states that as between parties who are liable as sureties, each prior party is regarded as a principal debtor in respect of each subsequent party.

This means that although several parties may appear to be sureties in relation to the holder, the law treats the earlier party in the chain as primarily liable to a later party.

4. Practical Effect of the Rule

The effect of this provision becomes evident when a subsequent party pays the amount due on the instrument. 

If a later indorser is compelled to pay the holder, he is entitled to recover the amount from any prior party, who is treated as a principal debtor in relation to him.

This ensures a clear right of recourse and prevents confusion regarding contribution or reimbursement among multiple sureties.

5. Purpose of the Provision

The objective of Section 38 is to establish a logical order of responsibility among parties in the chain of negotiation. Since negotiable instruments often pass through several hands, each indorser effectively guarantees payment to subsequent holders.

By treating each prior party as a principal debtor in relation to later parties, the law ensures fairness and facilitates recovery by a party who has discharged the liability.

6. Relationship with Section 37

While Section 37 identifies who is the principal debtor in relation to the holder, Section 38 determines the hierarchy of liability among the sureties themselves.

In other words, the maker or acceptor remains the principal debtor toward all parties, while among indorsers and other secondary parties the earlier signer is treated as the principal in relation to later signers, thereby creating a structured chain of liability reflecting the sequence of endorsements.