Capacity of Parties under Negotiable Instruments Act

A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881. This is a significant law that governs all means of negotiable instruments in India. The act establishes a regulatory framework for promissory notes, bills of exchange, and cheques. The act was enacted to provide uniform legal regulations to cover all aspects of negotiable instruments in India. Several times, the act has been amended to make sure that it is in line with changing business practices and new judgments.

According to Section 26 of the Negotiable Instruments Act, 1881, “Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery, and negotiation of a promissory note, bill of exchange, or cheques.” However, a minor may draw or endorse any instrument, and this will bind all parties except himself.

Geeky Takeaways:

• A negotiated instrument is a signed document that promises a particular payment to a specified person or holder of the instrument.
• The Negotiable Instruments Act, 1881 is the governing act to provide a regulatory framework for all types of negotiable instruments.
• It is important to understand the capacity of the parties while making, drawing, accepting, and endorsing any negotiable instrument, as the rights, obligations, and eligibility differ from case to case.
• The capacity to incur liability as a party to a bill has the same scope as in the case of the capacity to contract.

Capacity of Parties under Negotiable Instruments Act, 1881

The parties to the negotiable instrument must possess the capacity to contract. They should be of the age of majority, have a sound mind, and not be disqualified by the law from making any contract. It may also be understood that the capacity to incur liability as a party to a bill has the same scope as in the case of the capacity to contract. In general, if the party doesn’t have the contractual capacity, he or she cannot be held liable to pay the holder of a negotiable instrument. In a case where any one or more parties to a negotiable instrument are not eligible to contract about their contractual capacity, the agreement will remain void. However, this does not reduce the liability of other competent parties to the contract. As per the Negotiable Instruments Act 1881, the legal position of various parties are as follows:

1. Minor

A minor doesn’t have contractual capacity in contracts for negotiable instruments. If he enters into any agreement, he will not incur any liability. Section 26 mentions that a minor may draw, endorse, deliver, and negotiate a negotiable instrument to bind all parties except himself. However, it is worth noting that the law does not bar minors from getting benefits from the entered agreement. In the case of a negotiable instrument, if a minor is engaged in drawing, making, accepting, or endorsing any instrument, he will not become liable to the holder of the instrument for making any kind of payment.

But the holder of such a negotiable instrument can hold all other parties liable for payment to him except the minor, and the instrument will remain legally binding on all other parties to the contract. Although the minor doesn’t incur liability by accepting a bill of exchange and drawing a promissory note, he can be a payee or endorsee. Thus, it can be concluded that the minor cannot originate a title, but he can serve as a channel between parties to pass it on.

2. Insolvent

In the case where a person is declared insolvent by the court, all their property is transferred to an officially appointed assignee or receiver and such appointments are made by the court. As per the court, an insolvent person is not competent to draw, accept, or endorse any negotiable instrument until the order of discharge is obtained by such person from the court. If the endorser of the negotiable instrument is a payee or endorsee to a holder in due course, the endorsement would be valid against all the prior parties of the instrument except the insolvent person.

3. Joint Stock Company

A company is an artificial person in the eyes of the law. Once a company gets the certificate of incorporation, it takes on its own identity and becomes a legal entity. The company can enter into a contract, file a valid lawsuit, and be sued. However, being a separate legal entity, the country has no physical existence, and therefore the company exercises all these rights through its authorized officials and office bearers. It is worth noting that the Memorandum of Association is the supreme document, and all the rights of authorized officials to make a contract are limited by the Memorandum of Association. Although a company cannot incur liability under a negotiable instrument unless expressly or impliedly permitted by its MoA, it can always acquire rights under it.

The authorized official of the company can draw, accept, and endorse negotiable instruments, but within the limits of this document. However, if the authorized official issues a negotiable instrument beyond the scope of authority limited by the memorandum of association, such instrument will be considered void. And even a holder, in due course, cannot make the company liable for such instruments.

4. Agent

Section 27 of the Negotiable Instrument Act has established that “a person capable of contracting may make, draw, accept indorse, deliver, and negotiate a bill, note, or cheques either by himself or through a duly authorized agent acting on his behalf.” The agent’s main job is to bring a third party into a contractual relationship with his or her principal. As soon as the agent brings another person into a contractual relationship with his or her principal, the role of the agent is over. Therefore, the agent can legally bind his principal through the transactions on a negotiable instrument, but such an act must have been done within the given authority of the principal.

However, it is worth noting that general authority does not authorize the agent or accept an agent to draw a promissory note on behalf of the principal. An authority to draw an instrument does not mean an authority to accept an instrument. Likewise, the authority to accept an instrument does not mean the authority to endorse such instruments. Section 28 of the Negotiable Instrument Act states that “an agent who signs his name on a promissory note, bill of exchange, or cheque without indicating that he signs as an agent is personally liable for the instrument.” The agent is required to make it clear that he is signing as an agent and if this is not followed, he shall be held personally liable for that transaction on an instrument.

5. Legal Representative

A Legal Representative is a person who legally inherits the property of a deceased person or who represents the estate of such a person. The legal representative is entitled to recover the amount of the instrument due to the deceased, and such a legal representative may also give a valid discharge.

In this case, Section 29 of the Negotiable Instrument establishes that “a legal representative of a deceased person who signs his name on a promissory note, bill of exchange, or cheque is personally liable thereon unless he expressly limits his liability to the extent of the assets received by him as such. He may also exclude him from liability by adding the word ‘without recourse on without recourse to one personally’ on the instrument. In case he fails to do so, he shall be personally liable.” Even in a case where the payee is a dead person, in ignorance of his death, the legal representative can enforce such a payment. Even a notice of dishonor can be given to a legal representative.

Conclusion

The framework for all types of negotiable instruments is governed by the Negotiable Instruments Act, 1881. The act discusses all types of negotiable instruments, their features, benefits, etc. The act also discusses the capacity of parties who can enter into a contract for a negotiable instrument, and the parties to the negotiable instrument must possess the capacity to contract. They should be of the age of majority, have a sound mind, and not be disqualified by the law from making any contract. If the party doesn’t have the contractual capacity, he or she cannot be held liable to pay the holder of a negotiable instrument, so this makes the capacity of the parties an important aspect that is to be known by the parties to identify and threaten, as the remedies available in these cases are either not available or are limited.

Frequently Asked Questions (FAQs)

1. What is a Negotiable Instrument?

Answer:

A negotiable instrument is a signed document that promises a particular payment to a specified person or holder of the instrument. In India, negotiable instruments are governed under the umbrella of the Negotiable Instruments Act, 1881.

2. Why is it important to understand the capacity of parties under a Negotiable Instrument?

Answer:

The capacity of the parties is an important aspect that is to be known by the parties to identify and threaten, as the remedies available in these cases are either not available or are limited. The capacity to incur liability as a party to a bill has the same scope as in the case of the capacity to contract.

3. Can a minor be liable under the Negotiable Instrument Act?

Answer:

A minor doesn’t have contractual capacity in contracts for negotiable instruments. If he enters into any agreement, he will not incur any liability. If a minor is engaged in drawing, making, accepting, or endorsing any instrument, he will not become liable to the holder of the instrument for making any kind of payment.

4. Can a legal representative enforce the instrument in the event of death?

Answer:

In a case where the payee is a dead person, in ignorance of his death, the legal representative can enforce such a payment. Even a notice of dishonor can be given to a legal representative.

5. Can an insolvent person sign a negotiable instrument?

Answer:

As per the court, the insolvent person cannot draw, accept, or endorse any negotiable instrument until the order of discharge is obtained by such person from the court. If the indorser of the negotiable instrument is a payee or indorsee to a holder in due course, the indorsement would be valid against all the prior parties of the instrument except the insolvent person.