Negotiable Instruments Act, Section 26

Negotiable Instruments Act, Section 26: Capacity to Make, Draw, Accept and Negotiate Promissory Notes, Bills of Exchange and Cheques

Section 26 of the Negotiable Instruments Act, 1881 lays down the legal principles governing the capacity of persons to make, draw, accept, endorse, deliver, or negotiate promissory notes, bills of exchange, and cheques. 

The section clarifies who is legally competent to bind himself through such instruments and also specifies certain exceptions in respect of minors and corporations.

1. General Rule – Capacity Based on Law of Contract

The primary rule under Section 26 is that every person who is capable of entering into a contract under the law to which he is subject may bind himself and be bound by negotiable instruments.

In other words, the capacity to deal in promissory notes, bills of exchange, and cheques is determined by the law governing contractual capacity. A person who is legally competent to contract may:

A person may make a promissory note, draw a bill of exchange or cheque, accept a bill of exchange, endorse an instrument, deliver it, or negotiate it further. 

By performing such acts, the person undertakes legal obligations and becomes bound according to the nature of the liability assumed.

2. Meaning of Binding Oneself

To bind oneself under a negotiable instrument means to undertake legal liability. 

For instance, the maker of a promissory note promises to pay the specified amount, the drawer of a bill of exchange directs payment and may become liable upon dishonour, and the acceptor assumes primary liability to pay at maturity. 

An endorser may incur secondary liability if the instrument is dishonoured, and therefore capacity under Section 26 enables a person to assume enforceable financial obligations.

3. Position of a Minor

Section 26 specifically addresses the position of a minor by providing that although a minor is not competent to contract under general contract law and cannot be personally bound by contractual obligations, certain acts relating to negotiable instruments may still be performed by the minor.

A minor may draw, endorse, deliver, and negotiate a negotiable instrument, but such acts do not bind the minor personally. 

Nevertheless, all other parties to the instrument remain bound according to their respective liabilities.

This means that while a minor can participate in the circulation of negotiable instruments, he cannot be held personally liable upon them. 

His involvement does not invalidate the instrument; rather, it only protects him from personal liability.

4. Effect of Minor’s Participation

When a minor draws or endorses a negotiable instrument, the instrument remains valid and enforceable against other parties who are competent to contract. 

The law thereby protects commercial certainty while simultaneously safeguarding minors from contractual liability.

5. Position of Corporations

The section further clarifies that nothing contained in it shall be interpreted as granting corporations an automatic right to make, endorse, or accept negotiable instruments.

A corporation can engage in such acts only if it is empowered to do so under the law for the time being in force. This means that:

The authority of a corporation depends upon its governing statute, memorandum of association, articles of association, or other applicable law.

If the law confers power to issue or deal in negotiable instruments, the corporation may validly do so.

If no such power exists, the corporation cannot rely upon Section 26 to assume such authority.

Thus, the section preserves the principle that a corporation’s powers are limited to those legally conferred upon it.