Section 27 to 29 of the Negotiable Instruments Act deals with the authority and liabilities of agents and legal representatives. For the better understanding of the concept, this note is divided into three subheadings, dealing with each section respectively.
Section 27 of Negotiable Instruments Act,1881.
Agency:Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorised agent acting in his name. A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal. An authority to draw bills of exchange does not of itself import an authority to indorse.
Section 27 deals with the question of authority of one person to enter into a contract on behalf of another so as to bind him. The scope of this section is to be distinguished from that of section 26 which deals with the capacity, i.e, the lawful power, of one person to contract to bind himself. The authority dealt with in the present section is the act of parties while capacity is a creation of law. The authority referred to in this section must be the authority of a person capable of contracting within the meaning of section 26 so as to bind him. Want of capacity is incurable while want of authority can be cured by ratification. The previous section deals with the legal competence of the principal to contract to bind himself and the want of capacity will make the whole contract void, while the present section deals with the power given to the agent to enter into a contract on behalf of a principal so as to bind the latter. Any defect in, or the total absence of, such authority can be cured by the principal ratifying the contract made by the agent. While the principal must have the capacity to contract, the agent need not have such capacity as he is a mere instrument for bringing the principal into legal relationship with third parties. A minor or an insolvent or ward of court i.e, persons who are disqualified to contract on their own behalf, may act as an agent of the principal.
An agent is a person employed to do an act for another, or to represent another in his dealings with third persons. A person who is competent to do an act himself may as well have it done by an agent. Thus, a person may authorise another to execute a promissory note for him and it is valid although he does not put his mark thereto, if the agent has authority to sign. An agent may put his own signature on the instrument making it clear that he does so on behalf of the principal. As pointed out before, any person including those who are incapable of contracting themselves can become an agent.
An agency may be created by express words, written or spoken, or it may be implied from the circumstances of the case, or from the established custom of a trade. The authority of an agent may be general or special. In the case of special agency the agent is circumscribed by the limits of actual authority. In the case of general agency the principal is bound by all the acts done by the agent in course of his employment provided they are within the scope of general authority even if such acts be against the private instructions of the principal. When the authority is expressly conferred in writing such authority should be strictly construed.
Where the payee of a note gave a power of attorney to an agent to sell, endorse or to assign, it was held that the agent had authority to endorse away the note by way of security for a loan made to him. An agent who has authority to draw a bill has not necessarily the authority to endorse or accept it. A power to discharge or satisfy a debt does not carry with it power to execute or endorse a note. But a power to sign notes jointly with others implies a power to make a note for accommodation of another. A general power as to management and to do all lawful acts of all kinds or to act as a mercantile agent does not authorise the agent to draw bills or endorse them for his principal as he is outside the scope of his employment. General power given to the manager of a silk factory does not authorise him to draw or accept notes for the company. Though the title of the endorsee depends upon the authority of the agent endorsing the instrument it cannot be made to depend upon the purposes for which the agent performs his act under the power.
Having regard to the prevalence of benami transactions in this country, that is, to the practice of acquiring property or rights in the name of another the use of the words entitled in his own name in the defenition of holder is most significant and they were inserted by the legislature for the purpose of preventing any one from claiming the rights of a holder under the Act on the ground that the ostensible holder was only a Benamidar. In the case of instruments intended to be negotiable and to pass from hand to hand, usage and policy alike required that the real contract should appear on the face of the instrument. Therefore, the name of the principal must be disclosed in the instrument and the agent should affix his signature on behalf of the principal to avoid his personal liability. An undisclosed principal is not recognised in the case of a negotiable instrument. Where a note is executed or endorsed by an agent on behalf of a principal who is specifically mentioned in the instrument as liable, the principal alone is liable. If the principal is not mentioned in the instrument as the person liable, the note cannot be enforced against him and the agent will be personally liable.
The name of the person or firm to be charged upon a negotiable instrument should be clearly stated on the face or on the back of the document. It is not sufficient that the principal's name should be in some way disclosed, it must be disclosed in such a way that on any fair interpretation of the document he appears as the real person liable on it. So where a promissory note was executed by R described as the son of P who with the other members of the family constituted a joint family firm and there was no reference to the firm of P, the firm was not made liable.1) Unless an executant of a promissory note clearly indicates thereon, either by an addition to his signature or otherwise, that he executes it as an agent of another or that he does not intend thereby to incur personal responsibility he is personally liable. Merely describing oneself in the note as the holder of a power of attorney from another does not show that the power included a power to sign promissory notes or that the note was signed in pursuance of the power The agent may put his own signature on the instrument making it clear that he does so on behalf of the principal and the latter alone will be bound. Instead of the name of the principal the agent may according to the prevailing practice, use the name of the firm over his signature indicating that the transactions are those of the firm. But the mere addition of the words agent or manager or Secretary or Managing proprietor or Superintendent of Treasury after the signature is insufficient to exclude the personal liability of the signatory as they are merely to be regarded as designatio persona. Where a note ran as I the undersigned promise to pay, etc., and was signed by a person described as agent of another, or where a trustee borrowed money on his personal security for a temple it was held that he was personally liable. Where the directors of a company executed a negotiable instrument on behalf of the company adding to their signatures the word Directors it was held that they were personally liable and the stamp of the company at the top did not show that it was signed in a representative character.
Even if an executant described himself as the managing director in the body of the note but affixed his signature without describing himself as such, he was held personally liable. Similarly guardians, trustees or manager's cannot bind their wards or the trust properties by notes signed by them. If two or more persons are authorised to bind their principal by their joint action, all of them must sign in order to bind the principal. It has been stated before that an undisclosed principal has no place in the Negotiable Instruments Act, therefore, in an action on a bill of exchange or a promissory note a person whose name properly appears as party to the instrument cannot show that he was in reality acting for an undisclosed principal. The provisions of the Indian Contract Act do not alter the rule as to negotiable instrument as, having regard to the fact that these instruments are in constant circulation like cash, it would be dangerous to allow a party to show that he is not, but an undisclosed principal is, bound by it. It will introduce the dangerous element of uncertainty prejudicially affecting trade and commerce. But where an agent is induced to sign on the representation that the principal (not disclosed) will alone be liable, he will not be personally liable to the person who so induced him although his liability to a bona fide holder for value continues. Where, however, a promisor executed a promissory note with the object of concealing the debt of a third party and thereby deceiving the promisee, it was held that the promisee did not induce the promisor to believe that he would not be liable upon the written contract, the plaintiff was entitled, under section 28 of the Act to sue the defendant upon the note.
The agent should act within the scope of the authority conferred on him. If he acts without authority or in excess of the authority conferred on him his act is wholly inoperative unless it is ratified by the principal or unless the person against whom it is to be enforced is estopped from questioning the authority. If the agent acts within his apparent authority but abuses it, his abuse of authority will not affect a bona fide holder. Mala fides of an agent will not affect a holder in due course but will affect a holder with notice. Where authority is exceeded the signature is wholly inoperative and the payee cannot recover from the principal even the amount for which the agent had authority.
It is the general rule relating to negotiable instruments that the name of the party to be bound by instruments must appear on such instruments either as maker, acceptor or indorser. To this general rule there are exceptions. Thus a person is bound as a party to a negotiable instrument though he has not signed it as such, as where a person is a partner in a firm and the name of the firm appears on the bill or note. Under the provisions of the Indian Contract Act the signature of the firm is deemed to be the signature of all the partners including dormant and secret ones and all partners are liable under the bill or the note. Each partner has a general authority to raise funds and do all acts necessary for and incidental to the carrying on of the partnership business. Therefore, when one partner, for such purpose, signs as such in the ordinary course of business, or the name of the firm appears on the face of the bill the firm is liable but if the partner does not sign as such or the firm's name does not appear on the face of the bill the firm is not liable even though the bill is drawn up for the benefit of the firm.
Everyone of the partners in a mercantile firm of ordinary trading partnership is liable upon a bill drawn by a partner in the recognised trading name of the firm for a transaction incidental to the business of the firm, although his name does not appear on the face of the instrument and although he is a sleeping and a secret partner. Each partner of a trading firm has a prima facie authority to bind his co-partners by drawing, accepting or endorsing a negotiable instrument even though it is not done for the partnership and the partners will be bound even when such implied authority has been cancelled but not to the knowledge of the transferee or holder. No such indorsement made in fraud of the co-partners and that too to the knowledge of the holder will bind the firm.
But a partner has no such implied authority in a non-traing firm, eg, a railway company, a gas company, a firm of solicitors or auctioneers, a mining company. Their partners have no implied authority to draw, accept, or indorse negotiable instruments unless expressly authorised to do so on behalf of the firm. A banking company is a trading firm.
A promissory note was executed by two out of three partners. They did not sign the note as partners of the firm but the liability of the firm was disclosed in the note. Even there, the firm was not bound and the partner who had not joined was not made liable. In some other cases it has been held that the agency need not be disclosed in the signature if the name of the firm is sufficiently disclosed in the body of the instrument. The liability of the partners is joint, and not joint and several , and no partner can bind the firm by a joint and several note without the consent of the other partners. But under section 25 of the Indian Partnership Act2) every partner is liable jointly with all the other partners and also severally for all acts of the firm done while he is a partner. But the partners of a trading firm can enter into an agreement between them by which one or more partners have no power to make or endorse notes in the name of the firm although such agreement will not affect the rights of a bona fide holder for value without notice.
It may be noted that though, in the absence of any indication to bind the firm, the firm is not liable on a note executed by one partner in his name alone, the other partners of the firm will be personally liable, not on the note, but, on the consideration, when the debt is for price of goods supplied to the firm.
The manager of a joint Hindu family is not its agent but represents the family in all its dealings with outsiders and on a negotiable instrument drawn by its manager the other members would be liable. It is another exception to the rule of undisclosed principal not being bound and the rule is founded on Hindu law and not on the law of agency. When the debt is incurred for family purposes a pronote by the manager will bind other members who cannot plead want of authority of the manager, but the liability of other members is not personal and extends only to their share in the family property. To make the other members liable on the negotiable instrument itself drawn by the manager the claim should be founded also on the original debt and not only on the promissory note as such. If, therefore, the original debt is time-barred but not the note, it is submitted, money will not be recoverable from the other members. In the light of these decisions it was held that the indorsee of a note executed by the managing member could not recover from the other members as indorsement was not assignment of actionable claim. But since then it has been held that such an indorsee can recover from the other members if the debt has been incurred for the family and the onus of proving the existence of family necessity, but not the actual application of the money, lies on the plaintiff. The manager must be acting as such , but if he has ceased to act as such he cannot bind the other members by acknowledging a time-barred debt.
The term 'Karta’ means head and, therefore, the eldest in the family. If, therefore, the executant is a younger member, the other members will not be bound in the absence of proof of his express or implied authority to sign on behalf of the family. It is to be observed that the views set forth above are not wholly reconcilable. If the other members of the family are to be made liable on the original debt and not on the note as such, then certainly the indorsee of such an instrument cannot recover anything from the other members as indorsee, unless, of course, indorsement means assignment of an actionable claim.
The manager has authority to incur debt on behalf of the family even though he may have drawn the bill or note unconnected with family business or in fraud thereof and the minor members of the family are also liable for the same. But where the manager executes the note in his own name and not in the name of the firm the other members cannot be made liable on it in the absence of proof that the money was required for the benefit of the family or for family business.
The ordinary law of agency laid down in section 226 of the Indian Contract Act is applicable to negotiable instruments. A trustee of a temple or mutt is not an agent contemplated under this section and a person who executes a note as a trustee is personally liable on it as he executes it on behalf of a principal who is incapable of entering into a contract. A loan incurred on personal security for the purpose of a mutt cannot be charged against the trust property but remains a personal debt. Nor, when a trustee borrows money for the benefit of the mutt without consulting his co-trustees, can the same be recovered from the mutt property. The head of a mutt who has not contracted himself out of personal liability is personally liable for the loan although he describes himself as such head. When the Karnavan of a Tarwad does not sign a note as Karnavan no decree can be passed against the Tarwad property unless the note is executed for necessity and the same is alleged and proved.
Guardians of minors are agents contemplated under this section and, therefore, can act for a principal who is incapable of entering into a contract Under the Hindu law a guardian can bind the minor for a debt incurred for family necessity or for his benefit. The question of the personal liability of a guardian will depend on whether he has definitely and unequivocally excluded his personal responsibility by appropriate words in the instrument itself. Thus, where for the minor’s father’s debt, a guardian executes a note stating 'I shall pay’ he is personally liable. If the guardian has not executed the note as a guardian the court has no right to go into that question.
Section 28 of the Negotiable Instruments Act,1881.
Liability of agent signing: An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to sign upon the belief that the principal only would be held liable.
A negotiable instrument must be free from all kinds of uncertainty and should on the face of the instrument show who are liable on it. The name of the person or firm to be charged upon a negotiable instrument must be so stated in the document itself as to make it clear on any fair interpretation thereof that he is the person liable on it. Where the maker of the instrument does not indicate that he has signed as an agent nor is there anything to show in the body of the document itself that the executant did not thereby incur personal liability, the executant is personally liable. The section applies to instruments written in English as also in Vernaculars. What the section requires, to avoid his personal liability, is only an indication, not in the signature, but anywhere in the body of the instrument, that the executant signs as an agent of a named principal. The words should be sufficiently unequivocal to indicate that the agent has not made himself personally liable. Mere addition of the word agent over his signature will not exclude personal liability as it is a mere description. The usual test is if the form of the instrument necessarily implies that the agent did not intend to incur personal liability.
Where a person induces an agent to sign an instrument in a form which does not clearly exclude personal liability he is estopped from taking advantage of his own act and from making the agent personally liable. Such inducement must be clear.
The section has no application where the suit is brought on the original consideration and not on the promissory note and in such a case the suit will be maintainable against the principal as well.
Section 29 of the Negotiable Instruments Act,1881.
Liability of legal representative signing: A legal representative of a deceased person who signs his name to a promissory note, bill of exchange or cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such.
This section deals with the liability of legal representatives on a negotiable instrument. The language of this section is different from that of section 28 in that there must be express words limiting the liability and such liability can only be limited to the extent of the assets of the deceased in their hands. Where section 29 specifically applies to a given set of facts the principle of section 28 cannot be invoked. The position of the agent under section 28 is better than that of the legal representatives in section 29. Under section 28 it is sufficient to indicate that personal liability is excluded, i.e the agent's liability may be altogether excluded, while under section 29 it can be limited only to the extent ot the assets of the deceased in their hands and that too can only be done by express words. Their liability cannot be excluded altogether. But in the absence ot express words limiting the liability to the assets of the deceased in their hands, the legal representatives may be personaly liable. They must definitely exclude their own liability.
Merely signing as executor does not take away his personal liability as the word executor is only descriptive or decorative. Where a promissory note is not signed by an executor as such no decree can be passed against the estate and the executor will be only personally bound. In the absence of necessity to borrow for the estate, the executor cannot bind the estate. A Hindu widow having a limited estate is the legal representative of the deceased husband and can endorse a note standing in his favour to pass a good title to the indorsee. If the holder once chooses to sue the defendant as executor he cannot enforce personal liability.