Chapter III - Parties to Notes, Bills and Cheques
Section 38
Section 38: Prior party as principal against a subsequent party
Section 38 explains the relationship among the parties already described as sureties: a prior party is also a principal debtor in relation to each subsequent party, unless a contrary contract applies.
On this page
Need advice on Section 38?
This article is for general information. Refer to the Negotiable Instruments Act, 1881 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
As between the parties so liable as sureties, each prior party is, in the absence of a contract to the contrary, also liable thereon as a principal debtor in respect of each subsequent party.
Illustration: A draws a bill payable to his own order on B, who accepts. A afterwards indorses the bill to C, C to D, and D to E. As between E and B, B is the principal debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor, and C and D are his sureties. As between E and C, C is the principal debtor and D is his surety.
Key rule and applicability
Read the provision with section 37 and identify the order of parties. The same party’s position can differ depending on which two parties’ relationship is being examined.
Limits and related provisions
Do not assign one permanent label to a party without specifying the relationship. The rule operates among the parties so liable as sureties, and a contract to the contrary can change the default position.
Hypothetical business example
Hypothetical: an indorsed bill passes from a supplier to two successive financiers. In assessing recourse between those parties, the later financier identifies each earlier party and analyses the pairwise relationship rather than treating all indorsers identically.
Practical decision flow
Read section 37 to identify the parties liable as sureties.
Arrange the relevant parties in chronological order.
For the particular claim, compare the prior and subsequent party and check any contrary contract.
Practical checklist
Do
- Read section 37 to identify the parties liable as sureties.
- Arrange the relevant parties in chronological order.
- For the particular claim, compare the prior and subsequent party and check any contrary contract.
Avoid
- Do not assign one permanent label to a party without specifying the relationship. The rule operates among the parties so liable as sureties, and a contract to the contrary can change the default position.
Glossary
- Subsequent party
- A party later in the relevant instrument chain.
- Relationship between parties
- The specific pair of parties whose respective liabilities are being considered.
Frequently asked questions
Can someone be a surety in one relationship and principal in another?
Yes. Section 38 explains that relationship-dependent allocation among the stated parties.
Does the rule apply despite a contrary contract?
The statutory default is expressly subject to a contract to the contrary.
Why does the order of indorsements matter?
It helps identify which party is prior and which is subsequent for the particular relationship.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026