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

Negotiable Instruments Act • Official Statutory Text & Practice Guide

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Act 1881
Section 37 All 148 Sections of Negotiable Instruments Act Section 39

Legal Commentary & Landmark Judgments: Section 38

Section 38 establishes that as between the parties liable to an instrument, each prior party is liable as a principal debtor in respect of each subsequent party.

  • Sequential Suretyship Chain: In a chain of indorsements, each indorser is a principal debtor to the indorsers who follow them.
  • Right of Indemnity: Any subsequent indorser who pays the instrument steps into the shoes of the holder and can recover the entire amount from any prior party.
  • Protection Against Circuity of Action: Prevents circular lawsuits by establishing an unyielding statutory order of financial accountability.
Key Landmark Precedents:
  • Central Bank of India v. Gopinathan Nair (AIR 1970 Ker 74): Examined the cascading sequence of indemnity under Section 38 among discounting banks, customers, and drawers.
  • National Bank of India v. Silke: Held that prior parties cannot resist repayment to a subsequent party who was compelled to satisfy the holder's decree.
Courtroom Practice & Strategic Litigation Guidance:

When defending an intermediate indorser who has been sued by a discounting bank, file a Third-Party Notice under CPC Order VIIIA or an immediate cross-suit against the prior indorser and maker under Section 38.

Section 37 All 148 Sections of Negotiable Instruments Act Section 39