Now broadly speaking there are four parties to a negotiable instrument:

1) Drawer;
2) Drawee (he becomes acceptor on signifying his assent);
3) Payee;
4) Endorser

Liability of parties:

Liability of drawer: The drawer of a bill exchange or a cheque is bound, in case of dishonor by the drawee or acceptor thereof to compensate the holder provided due notice off dishonor has been given to ,or received by the drawer.

The drawer or maker of a promissory note is personally responsible to the holder thereof. His liability is however, conditional i.e. on the failure of the drawee to accept the bill, the drawer will be liable to the holder. In a bill of exchange before the acceptance thereof, the drawer is primarily liable. After acceptance the drawer’s liability is secondary i.e. he is liable only when the acceptor fails to pay. On dishonor by the drawee, the drawer becomes immediately liable and the holder need not wait till maturity of the bill. The liability of a drawer arises only when he has received the notice of dishonor from the holder. Omission of the notice would discharge the drawer from the liability on the negotiable instrument Drawer may exclude his liability by adding the words without recourse on the instrument.

Liability of a maker of promissory note and acceptor of a bill: In the absence of a contract to the contrary the maker of a promissory note and the acceptor before maturity of a bill of exchange are bound to pay the amount thereof at maturity according to the apparent tenor of the note or acceptance respectively.

The acceptor of the bill of exchange at or after maturity is bound to pay the amount thereof to the holder on demand. In default of such payment as aforesaid such maker or acceptor is bound to compensate any party to the note or bill for any loss or damage sustained by him and caused by such default.

The maker of a promissory note and acceptor of a bill are primarily responsible for the payment due on the instrument. Their liability is absolute ad unconditional .The money must be paid at or after maturity to the holder on demand. No notice of dishonor is necessary to the maker of a note and acceptor of a bill. Both the maker of the note and acceptor of the bill should deliver the note or the bill to the payee or to the holder. The maker of a note cannot make his liability conditional. Acceptor may however, give a qualified acceptance and to that extent his liability is limited.

Compensation: In default of payment, the maker of the note and the acceptor of the bill are liable to the holder to pay compensation for loss or damage sustained by the holder in accordance with the provisions of section 117 of the Act. Where the endorsee has not paid amount of hundi to endorser, he is not entitled to compensation from the acceptor for loss sustained by default in payment of hundi since endorsee has not sustained any loss.

Liability of acceptor in case of forged endorsement: An acceptor of a bill of exchange already indorsed is not relieved from liability by reason that such an endorsement is forged, if he knew of had reason to believe the endorsements is forged, when he accepted the bill. In Mercantile bank of India v Mascarenhas – it was held that forging can convey no title even to the holder in due course.

The effect of this section is that if drawee has no knowledge of forging while accepting the bill, he is relieved from liability. However, if he has knowledge that the endorsement is forged and yet he accepts the bill, he cannot plead forgery after such acceptance. He will be liable to pay the amount to the holder and also to the real owner.

Liability of acceptor for a bill drawn in a fictitious name: In a fictitious instrument both the drawer ad the payee are fictitious persons. I such a case, acceptor is liable acceptor is liable to holder in due courses who has taken the instrument without knowledge that the drawer was a fictitious person. Acceptor is, therefore not liable to a person who has acquired the instrument with the knowledge or with reasonable belief that the drawer is a fictitious person.