Competence of a Person to be a Party to a Negotiable Instrument

Section 26 states that “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, indorsement, delivery and negotiation of a promissory note, bill of exchange or cheque”.

The contractual capacity of a person enables him to become a party to an instrument. Capacity means competence to contract so as to bind oneself. Authority, on the other hand, means ability to contract on behalf of another so as to bind the other. Capacity to contract is governed by law whereas authority is found in the act of the parties.




As you know, there is no bar in the Contract Act disqualifying a person from becoming a promisee or payee. So, a person incapable of contracting cannot bind himself but may bind others under certain circumstances. The same principle holds good in the case of negotiable instruments also. When some of the parties to a negotiable instrument are capable of contracting and others are not, the capable parties are bound while incapable parties are not. Let us now discuss the provisions of law regarding the different cases of incapacity with regard to negotiable instruments.

Minor: As you know, a person domiciled in India is a minor until he has completed his eighteenth year unless, before the completion of the eighteenth year, a guardian has been appointed for his person or property or both by court of Justice, or before the completion of the eighteenth year, the Court of Wards has assumed superintendence of his property, in both the cases minority continues until the person has completed his twenty-first year. Though he may have completed 18 years, the effect of appointment is not nullified by virtue of subsequent death of the guardian or the cancellation of order of guardianship prior to attainment of majority

According to section 26, “a minor may draw, indorse, deliver and negotiate a negotiable instrument so as to hold all parties, except himself, liable.” Thus, a minor cannot bind himself by drawing, indorsing, delivering and negotiating an instrument, and the instrument will be valid and binding on all parties except the minor.

 

Partnership Firm: The partner of a trading firm had an implied authority to draw, accept or negotiate negotiable instruments. But in the case of a non-trading firm a partner cannot do so unless he has an express authority to that effect. In both the cases, however, liability must be incurred in the name of the firm so as to bind all the partners of the firm.

 

Insolvent: An insolvent does not have the contractual capacity to draw, make, accept or indorse any negotiable instrument which would make his estate liable. He can, however, validly indorse an instrument of which he is the payee or endorsee to a holder-in-due-course.

 

Agent: A person who is competent to make, draw, or accept a negotiable instrument himself may also do so through an agent. An agent can execute a negotiable instrument, so as to bind the principal, only in the capacity for which he has been specially and expressly authorised. Mere authority to carry on business or to make and receive payments does not amount to authority to negotiate instruments.

 

Company: A joint stock company or a corporation can be a party to a negotiable instrument if it is authorised so by its Memorandum or Articles of Association. However, a trading joint stock company has an implied power to draw, accept or negotiate negotiable instruments.

 

Legal Representatives: Legal representative of a deceased person can deal with the negotiable instrument belonging to the deceased to the extent as the deceased could have done. He should limit the liability to the extent of the assets inherited by him from the deceased. However, by adding the words such as “without recourse” or “without recourse to me personally” to his signature, a legal representative can avoid his personal liability.

 

Alien Enemies: An alien enemy is a person who is resident in a country with which the Government has declared war. A bill drawn to or indorsed by an alien enemy cannot be enforced even after peace is concluded.

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