B, the payee of a negotiable instrument, also held the instrument. B transfers the instrument to C but in order to exclude personal liability endorses the instrument with the inscription 'without recourse'. C endorses the instrument to D who endorses it to E. State the rights of E as against C and D.

The Foundation: What a "Without Recourse" Indorsement Means

When B, the payee and holder of a negotiable instrument, indorses it to C with the inscription "without recourse," the legal effect is precisely what section 52 of the Negotiable Instruments Act, 1881 declares — B incurs no personal liability whatsoever upon that indorsement. The first illustration to that section crystallizes the principle in the plainest terms: the indorser of a negotiable instrument who signs his name adding the words "without recourse" incurs no liability. B has effectively transferred the instrument while stepping entirely outside the chain of indorsers' liability. He is, so to speak, a postmaster who has passed on a parcel but refused to guarantee its delivery.

The Chain of Liability After B's Exit

Once the instrument passes from B to C, the subsequent parties — C, D, and E — stand in the ordinary positions that the law assigns them. C indorses to D, and D indorses to E. Neither of these two indorsements carries any "without recourse" qualification. They are, therefore, plain and unconditional indorsements governed by section 35 of the Act.

Section 35 lays down that whoever indorses and delivers a negotiable instrument before maturity, without expressly excluding or making conditional his own liability, is bound to every subsequent holder to compensate such holder in case of dishonour by the maker, drawee or acceptor, provided that due notice of dishonour has been given. C and D made no such qualification. They indorsed fully and unconditionally.

E's Rights Against C

E holds the instrument as the last indorsee. C is a prior indorser who indorsed without any exclusion of liability. Section 36 provides that every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. E, having acquired the instrument through a chain of regular indorsements and being a holder, is entitled to look to every prior indorser for payment upon dishonour by the maker or acceptor.

E can therefore sue C upon dishonour of the instrument, subject to the condition that due notice of dishonour has been given to C in accordance with sections 93 and 95 of the Act. C's position as an indorser is that of a surety for the principal debtor, and upon dishonour, he becomes liable to every subsequent holder — including E — to compensate for the loss sustained.

E's Rights Against D

D stands in precisely the same position. D indorsed to E without restriction, thereby undertaking under section 35 to be answerable to E upon dishonour. Section 38 of the Act makes the relationship between the parties inter se clear: each prior party is, in the absence of a contract to the contrary, liable thereon as a principal debtor in respect of each subsequent party. As between E and D, D is the principal debtor and must compensate E. As between E and C, C is the principal debtor. E may, at his option, proceed against either or both.

What E Cannot Do: Claim Against B

Here lies the critical limitation. E cannot proceed against B on the strength of B's "without recourse" indorsement. Section 52 is absolute in its protection of B — the words of exclusion in B's indorsement are a complete shield. No holder, whether an immediate party or a remote indorsee like E, can fasten liability upon B as an indorser. E's rights do not reach behind C to B. Whatever cause of action E may have, it is confined to C and D.

The Second Part of Section 52: When B Reacquires the Instrument

Section 52 contains a provision of remarkable symmetry in its second paragraph — if a person who indorses "without recourse" subsequently becomes the holder of the instrument again, all intermediate indorsers become liable to him. The second illustration to the section illustrates this: if C indorses to D, D to E, and E somehow transfers back to B, then B — though free of any prior liability because of his "without recourse" indorsement — can now hold C, D, and E liable to him. The "without recourse" clause only strips B of indorser's liability to others; it does not deprive him of his rights as a holder when the instrument returns to his hands. But this is a different situation from the one before us, and is instructive only as it illustrates the broader logic of section 52.

Summary of E's Position

To state the final position plainly: E can sue both C and D for the recovery of the amount upon dishonour of the instrument. Both C and D are prior parties who indorsed unconditionally and are therefore liable under sections 35, 36, and 38. E cannot, however, sue B, because B's "without recourse" indorsement is a valid contractual exclusion of liability under section 52, and no holder — however innocent — can override it. The instrument, as it passed from C onwards, carried full liability for C and D but carried no tail of liability back to B. E thus has two defendants available to him — C and D — but not the original payee B.