Parties and Their Liability: Complete Notes (Part D)

Part D covers who can be bound by an instrument and how each party is liable: capacity and agency, the drawer, drawee and maker, acceptance, indorsers as principal and surety, forgery and fictitious parties, and interest and compensation. This consolidated note covers Topics 16 to 21.

16. Capacity, Agents and Legal Representatives

Every person capable of contracting may be bound (Section 26). A minor may draw, indorse, deliver and negotiate so as to bind all parties except himself; a corporation acts only as its own law allows (Section 22, Companies Act, 2013). A person may be bound by a duly authorised agent acting in his name, but general authority does not include accepting or indorsing, and authority to draw does not include indorsing (Section 27). An agent who signs without indicating that he signs as agent is personally liable (Section 28), and a legal representative who signs is personally liable unless he limits liability to the estate's assets (Section 29).

17. Drawer, Drawee and Maker

Drawer (Section 30): must compensate the holder on dishonour, if due notice is given.
Drawee bank (Section 31): must pay a duly presented cheque when it holds sufficient funds properly applicable, and on default must compensate the drawer, not the holder.
Maker and acceptor (Section 32): must pay according to the apparent tenor at maturity, or on demand if accepted at or after maturity.
Principal and surety (Section 37): the maker, the drawer of a cheque, the drawer of a bill until acceptance, and the acceptor are principal debtors; the rest are sureties. A drawer damaged by unreasonable delay in presenting a cheque is discharged to that extent (Section 84).

18. Acceptance

Acceptance is the drawee's signed assent on the bill, complete on delivery or notice (Section 7). Only the drawee, a drawee in case of need or an acceptor for honour can accept (Section 33), and non-partner drawees accept only for themselves (Section 34). A qualified acceptance is conditional, partial, local, varies the time, or is not signed by all non-partner drawees. The holder may treat it as dishonour; if he acquiesces without consent, previous parties are discharged unless they assent on notice (Section 86).

19. Indorsers, Principal and Surety

An indorser must compensate every subsequent holder on dishonour, given due notice, unless he excluded liability (Section 35). Every prior party is liable to a holder in due course until satisfaction (Section 36). Among sureties, each prior party is principal to each later one (Section 38). Suretyship discharge rules apply, but the holder may reserve his rights when dealing with the acceptor (Section 39), and a holder who impairs an indorser's remedy discharges him to that extent (Section 40).

20. Forgery and Fictitious Parties

A forged signature is a nullity, and no one becomes a holder of an order instrument through a forged indorsement. An acceptor who knew or had reason to believe an indorsement was forged remains liable (Section 41), and the acceptor of a bill drawn in a fictitious name is liable to a holder in due course claiming under an indorsement in the same hand (Section 42). Indian law has no fictitious payee rule like the English Act (Vagliano). Indorsers cannot deny prior signatures (Section 122). Banks are protected against forged indorsements (Sections 85, 85A and 131) but not a forged drawer's signature (Canara Bank v. Canara Sales Corporation, 1987).

21. Interest and Compensation

A specified rate runs from the date of the instrument (Section 79); otherwise 18 per cent runs from the date payment was due, despite any outside agreement, and against an indorser from notice of dishonour (Section 80), with Section 34 CPC governing interest after a date the court fixes. On dishonour, the holder recovers the amount due with expenses, at the current exchange rate where places differ; a paying indorser recovers with 18 per cent interest; and a re-exchange bill may be drawn (Section 117).

⚠ Key point

Part D in one line: capacity follows contract law with special rules for minors, corporations, agents and legal representatives; the maker and acceptor pay outright, the drawer and indorsers pay on dishonour after notice, and each prior party is principal to each later one; qualified acceptances and impaired remedies discharge parties; forgery passes no title; and interest runs at the agreed rate or 18 per cent.

22. The Topics of This Part

Topic 16: capacity, agents and legal representatives (Sections 26 to 29); Topic 17: drawer, drawee and maker (Sections 30 to 32); Topic 18: acceptance (Sections 33, 34 and 86); Topic 19: indorsers, principal and surety (Sections 35 to 40); Topic 20: forgery and fictitious parties (Sections 41 and 42); Topic 21: interest and compensation (Sections 79, 80 and 117).