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NEGOTIATION AND ENDORSEMENT

(Negotiable Instrument act,1881)

ACKNOWLEDGEMENT
We would like to thank our Business law sir Mr. Sachin Joshi for giving us the following topic for our presentation, and also for guiding us how to do our project. The following information was taken from various sites and a few textbooks, before it was typed for the presentation.

 NEGOTIATION:
Negotiation is a dialogue between two or more people or parties, intended to reach an understanding, resolve point of difference, or gain advantage in outcome of dialogue, to produce an agreement upon courses of action, to bargain for individual or collective advantage, to craft outcomes to satisfy various interests of two persons or parties involved in negotiation parties. Negotiation is a process where each party is involved in negotiating tries to gain an advantage for themselves by the end of the process.

NEGOTIATION UNDER THE NEGOTIABLE INSTRUMENTS ACT, 1881


When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person thereof, the instrument is said to be negotiated. By negotiation, the third party is put in possession of the instrument and becomes a holder thereof, entitling him to receive the payment due thereon. Negotiation gives special rights to the owner in due course. Transfer of a negotiable instrument is affected in any one of the following two ways:I. II. By Negotiation By Assignment

Transfer by negotiation is governed by the Negotiable Instruments Act. Transfer by assignments is governed by The Transfer of Property Act .

I.

TRANSFER BY NEGOTIATION.

Negotiation can take place by two ways: 1) By Delivery. 2) By Endorsement and Delivery. 1) Negotiation by Delivery:-A promissory note, a bill of exchange or cheque payable to bearer is negotiable by delivery thereof. No endorsement is required . The transferee becomes the holder thereof. The effect of such a transfer is that as transferor does not put his signature on the instrument, he is not liable either to an immediate party or subsequent holder in case of the instrument being dishonoured. The transferee therefore cannot recover any amount from the transferor. A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in certain event, is not negotiable (except in the hands of a holder for value without the notice of the condition) unless such event happens .Therefore, an instrument is not negotiable when delivered with a condition that is to take effect on happening of a certain event .This exception however, does not apply to a holder in due course who has taken the instrument for value without notice of such a condition. Illustrations: 1)A the holder of a negotiable instrument payable to bearer gives it to Bs agent to keep for B. The instrument has been negotiated. A the holder of a negotiable instrument payable to bearer which is in the hand of As banker, who is at the time the banker of B, directs the banker to transfer the instrument to Bs credit in the bearers account with B .The banker does so and accordingly now possesses the instrument as Bs agent .The instrument has been negotiated and B has become the holder of it.

Kinds of delivery 1) Actual 2) Constructive 3) Conditional or for some special purpose. 1) Actual-takes place when the instrument changes hands physically.eg - 1) of illustrations. 2) Constructive-takes place when the instrument is delivered to the agent or servant of the endorsees on his behalf or when the endorser, after endorsement, holds the instrument as an agent of the endorsee. 3) Conditional-When an instrument is delivered conditionally or for special purpose only, the property in it does not pass to the transferee (even though it is endorsed to him) ,unless the conditions are fulfilled. But where it is negotiated to a holder in due course, other parties to it cannot escape liability on the ground that it was delivered conditionally or for a special purpose only.

2)Negotiation by endorsement and delivery -A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof. Where instrument payable to order is transferred merely be delivery it is deemed to be assigned and not negotiated. It should be noted that both negotiation of the bearer and order instruments by delivery or by delivery and endorsement are effective when the instruments is not obtained by unlawful conditions.

II.

TRANSFER BY ASSIGNMENT.

When a person transfers his right to receive the payment of a debt assignment of debt takes place. Thus when the holder of an instrument transfers it to another so as to confer a right on the transferee to receive the payment of an instrument, transfer by assignment takes place.

DISTINCTION

BETWEEN NEGOTIATION AND ASSIGNMENT :

NEGOTIATION

ASSIGNMENT

1. Consideration is presumed. 2. The title of the transferee (i.e. the holder in due course) is better than that of the transferor. 3. Notice of transfer to the debtor by the transferee is not necessary. The acceptor of a bill and the maker of a note are liable on maturity to the holder in due course of the instrument. 4. Instruments payable to the bearer are negotiated by mere delivery and instruments payable to order are negotiated by endorsement and delivery. .

1. Consideration must be proved. 2. The title of the assignee is subject to the defects and equities to the title of the assignor. 3. An assignment does not bind the debtor until notice of the assignment had been given by the assignee to the debtor has, expressly or implacably assented to it.

4. An assignment can only be made in writing-either on the instrument itself or in a seperate document transferring to the assignee the transferors right to the instrument.

 WHEN IS AN INSTRUMENT NEGOTIATED?


An instrument is negotiated when transferee is constituted the holder of it. Delivery is the important aspect of negotiability. It constitutes an essential characteristic of negotiable instrument. The making, acceptance or indorsement of a promissory note, bill of exchange or a cheque is completed by delivery, actual or constructive. Delivery, therefore, to an agent or any person with an intention to pay and pass the property in the instrument would be sufficient to transfer the property in the instrument to the payee and constitute the payee holder thereof. As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorized by him in that behalf. As between such parties and any holder of the instrument other than the holder in due course, it may be shown that the instrument was delivered conditionally or a special purpose only and not for purpose of transferring absolutely the property therein ( Sec.46).

 EFFECT OF NEGOTIATION:
When the instrument has been transferred by negoti ation, the holder who has taken it value gets good title to the instrument notwithstanding any defect in the title of the transferor, except in the case of forgery, because forgery is nullity and conveys no title. Even if the title of any prior indorsee is defective by virtue of fraud, coercion or misrepresentation, the ultimate holder who has taken the instrument in good faith without knowledge of any defect existing gets a good title. This characteristic that a transferee obtains a better title than the transferor when instrument is transferred by negotiation is attache d only to a holder in due course. Negotiation, therefore, passes a better title to the transferee than the transferor when the holder is a holder in due course .

 ENDORSEMENTS:
An endorsement in simple words is a signature on a Commercial Paper or document. An endorsement on a negotiable instrument, such as a check or a pro missory note, has the effect of transferring all the rights represented by the instrument to another individual. Thus it is signing a negotiable instrument for the purpose of negotiation. The person who effects an endorsement is called an endorser and the person to whom negotiable instrument is transferred are called the endorsee. The ordinary manner in which an individual endorses a check is by placing his or her signature on the back of it, but it is valid even if the signature is placed somewhere else, such as on a separate paper, known as an allonge*1 which provides a space for a signature. The term endorsement is also spelled indorsement & is defined in sec.14 of the act.

DEFINTION OF ENDORSEMENT:
Endorsement is the act of the owner or payee* 2 signing his/her name to the back of a check, bill of exchange, or other negotiable instrument so as to make it pa yable to another or cashable by any person. It can also be defined as the act of pledging or committing support to a program, proposal, or candidate. An endorsement may be made after a specific direction ("for deposit only"), called a qualified endorsement, or with no qualifying language, thereby making it payable to the holder, called a blank endorsement.

 FEATURES OF ENDORSEMENT:
y Endorsements are the addenda* 1 which, though not a part of the original, become its integral and legal part when attached. y Endorser guarantees that he or she is the lawful owner of the instrument. y Endorser knows of no defect in it. y Endorser has received it in good faith for value received. y Endorser legally capable of transferring it to another party in the normal course of business. y To endorse a promissory note* 2 as a third-party means the endorser guarantees payment in case the principal borrower defaults. y To endorse a contract confirms approval of its contents and terms. y If more than one person is listed on the check as a Payee, then the requirements depend on how the names are written .

 ESSENTIALS FOR A VALID ENDORSEMENT:The instrument of a promissory note, bill of exchange or a cheque is completed by delivery, actual or constructive. Delivery to be effectual must be made by the party endorsing the instrument, or by a person authorized by him in that behalf (sec. 46). Endorsement constitutes a contract between the endorser and endorsee. Endorser can be liable to the endorsee if the is complete. Endorsement is complete only when -

1. The holder writes and/ or sings on the face or on the back of the instrument or
on a separate slip of paper; or a stamped paper; 2. The instrument is delivered to the endorsee; 3. The instrument is endorsed and delivered with an intention to transfer the property in the instrument. 4. The endorsement must be entire instrument, partial is not valid.

5. Where the negotiable instrument is payable to more endorsees or payees who are not partners, all must endorse unless the one endorsing has the authority to endorse for others. 6. An endorsement may be made on blank or special. It may also be restrictive. 7. Where in negotiable instrument is payable to order, the payee or endorsee is wrongly designated, or his name is mis-spelt, he should sign the instrument though he may add, if he thinks fit, his proper signature. 8. Where there are two or more endorsee on an endorsement, each endorsement is deemed to have been made in the order which it appears on the instrument until contrary proved.

In Brind v. Hampshire ( 1836-1 M & W . 364;373), it has been held that until the delivery of the instrument, the contract of the endorser is incomplete and may be revoked at any time. Forged endorsement gives no title.

 WHO MAY ENDORSE AND NEGOTIATE??


The maker or holder of the negotiable instrument may endorse, otherwise than such a maker. Every sole maker drawer or payee or endorsee or of several joint makers, drawers, payee or endorsees of a negotiable instrument may, if negotiability of such an instrument has not been restricted or excl uded endorse and negotiate the same . The maker or drawer shall endorse or negotiate any instrument only when he is lawful possession or is holder thereof. Similarly a payee or endorsee shall endorse or negotiate an instrument when he is the holder thereof. Therefore a thief cannot endorse an instrument.
.

ILLUSTRATIONS: A bill drawn payable to A endorses it to B , the endorsement not containing the words or order or any equivalent words. B may negotiate the instrument

Instrument may thus be negotiated by endorsement by all or any of the following person: 1. Sole maker, when the instrument made is drawn payable to his own order. 2. Drawer, when the instrument is made or drawn payable to his own order. 3. Payee or endorsee 4. All the several joint makers, drawers, payees or endorsees. 5. A partner of a trading firm may endorse on the behalf of the firm.

6. By all the payees or endorsees, who are not partners, unless one endorsee has been has been authorized by all payees of endorees .
A stranger cannot endorse a negotiable ins trument. If he so endorses, he may be held liable as surety or guarantor . Instrument that is negotiated by endorsement: A promissory note, a bill of exchange or a cheque payable to order is negotiated by the holder by endorsement and delivery thereof (sec. 48). Explanation: nothing in this section enables the maker or drawer to endorse or negotiate an instrument, unless he is in lawful possession or holder thereof; or enable a payee or endorsee to endorse or negotiate an instrument unless he is the holder thereof The payee of the negotiable instrument is the rightful person to make the first endorsement. Thereafter the instrument maybe endorsed by any person who has become the holder of the instrument.

 EFFECT OF ENDORSEMENT:
a. The endorsement of an instrument, followed by delivery to the transfer to the endorsee the property in the instrument with right of further negotiation that is the endorser may endorse the instrument to some other person. b. A holder of an instrument deriving the title from a holder in due course has right thereon of the holder in due course (sec.53).
ILLUSTRATION: B signs the following endorsement on different negotiable instruments payable to bearer:

   

Pay the content to C only . Pay C for my use . Pay C or order or the account of B . The within must be credited to C .

These endorsements excluded the right of further negotiation by C.

 Pay C .  Pay C value in account with the Oriental Bank .  Pay the contents to C being part of consideration in a certain deed of assignment executed by C to the endorser and others .
These endorsement does not exclude the right of further negotiation by C.

Endorsement thus assure 1. Transfer of ownership in the instrument to the endorsee; 2. Right of further negotiation to any one; 3. Gives the right of action to the endorsee against all parties whose names appear on the instrument; and 4. That the instrument was genuine and all the prior endorsements are genuine .

It is a fundamental principle of law relating to the negotiable instrument that no one whose name does not appear on the instrument can be held liable thereon as there is no privity of contract bet ween the endorsee and the maker or acceptor( Chavali Kameswara v. Mahankali Rajaratnam & Ors. AIR 1977 AP 60). It must be noted that the above effect results when the endorsement is unconditional. Endorsement can be also conditional .
There are five kinds of endorsements recognized:
1. Blank endorsement (general endorsement) 2. Conditional endorsement 3. Restrictive endorsement 4. Special endorsement (full endorsement) 5. Qualified endorsement 6. Endorsement sans recourse 7. Facultative endorsement

Theres also an accommodation endorsement, which is the guarantee given by one person to induce a bank or other lender to grant a loan to a different person. It is also the banking practice where one bank endorses the acceptances of another bank, for a fee, making appropriate for purchase in acceptance market

 KINDS OF ENDORSEMENT:
THERE ARE SEVEN KINDS OF ENDORSEMENT 1. Blank endorsement (general endorsement): In order for a check to be cashed or further negotiated, endorsement. With a blank endorsement, the payee (person to whom the check is made payable) signs his/her name as it appears on the face of the check. If the person's name is misspelled on the face of the check, the person endorses exactly as the name is misspelled and then signs again with the correct spelling If there are more than one payee is identified on the check, the form of a blank endorsement depends on how the payees are listed. If the check is p ayable to A and B, then both A and B must endorse the check. If the check is payable to A OR B, then either A or B must endorse the check. A blank endorsement is the most common type of endorsement and is the least restrictive in that it does not limit negotiability. Any other person can further negotiate a check with a blank endorsement. Prior to cashing a check, the check casher should confirm the identity of the person presenting the check, verify that person is the named payee, and then obtain a blank endorsement. it mu it must be

properly endorsed. A "blank" endorsement is the most common type of check

2. Conditional Endorsement: A "conditional" endorsement is one of the ways in which a check may be endorsed. This type of endorsement places a limit or restriction upon the time when a check can be paid. For example, Larry Smith has written a check payable to John Doe. John Doe conditionally endorses the check as "Payable to Billy Cooper upon satisfactory completion of drywall job, (signed) John Doe." For this item, a condition must be met in order for the check to be negotiated further, i.e. Billy Cooper must have satisfactorily completed the drywall job. A check casher would most likely want to avoid taking this item. The potential risks for this item include: * Bad Maker * Maker has insufficient funds * Endorsement by John Doe was forged * Condition not met If the condition was not met, the check casher would have liability to John Doe. Banks do not typically cash such items and will.

3. Restrictive Endorsement: A restrictive endorsement restricts or limits negotiability. "For deposit only" is the most common form of restrictive endorsement and is used to prevent further negotiation of the check. For example, a check payable to John Doe signed by John Doe, i.e. a "blank" endorsement, can be cashed or deposi ted by anyone holding the item in the event that it is lost or stolen. A "blank" endorsement makes the item like cash.

By placing "For deposit only" after the blank endorsement, further negotiation of the item is restricted. One of the ways in which chec k cashers minimize their risk of loss is by placing their own restrictive endorsement on cashed checks after the payee has endorsed the item. It is unlikely that there would be a reason for a check casher to accept any check with a restrictive endorsement for cashing. Example: Pay to B. Sd/-A.

4. Special Endorsement (full endorsement): A "special" endorsement allows a payee to make a check payable to another person or entity. For example, if John Doe, the payee, wants to make the check p ayable to his wife, Susan Doe, he would write "Pay to the order of Susan Doe," on the back of the check and then endorse it. A check casher shouldn't normally cash such an item unless the payee is present and identified. For example, how do you know that the special endorsement is legitimate? What if the Does are in the process of obtaining a divorce? The endorsement of John could potentially be a forgery. You could take a loss and then be forced into seeking restitution from Susan.

5. Qualified Endorsement: A qualified endorsement limits the responsibility of the endorser.

With a qualified endorsement, the endorser will not assume any responsibility for paying the check if it is returned for any reason. The payee adds words such as "without recourse" to the back of the check. The qualified endorsement does not destroy the negotiability of the instrument. Qualified endorsement is one directing is to paid to a specific person or to be otherwise restricted, such as an indication of for deposit only. If no qualifying language accompanies the signature, it is called a blank endorsement and payable to holder. Check cashers should not accept such items.

6.Endorsement sans Recourse: Is also called endorsement Sansfrais. It could also be taken as part of conditional endorsement. Here the endorser of the negotiable instrument by express words excludes his liability in the event of dishonor. Example: Pay X, without recourse to me. Sd/-Y or Pay X, sans Recourse. Sd/-Y.

7. Facultative Endorsement: The endorser while endorsing waives some rights he is entitled to. example: Pay B or order. Notice of dishonor waived. Sd/-A.

 NEGOTIATION BACK:
According to the section 90: If a bill of exchange which has been negotiated is, at or after maturity held by the acceptor in his own right, all the right to action thereon extinguished .

 MEANING:
When an endorser excludes his liability and subsequently the instrument comes back in his hand, that is the instrument is negotiated back to him, by virtue of which he again becomes the holder of the instrument, all the intermediate parties will be liable to him. He however, cannot sue any of the intermediate party to whom he previously liable by reason of his prior endorsement. The object to this is t o prevent circuity of action. One cannot sue a person to whom he is liable. There is no principle by which a man can be at the same time, without recourse the holder can enforce payment against all the intermediate parties. This is called Negotiation back.
ILLUSTRATION: A bill is drawn payable to A. A endorses it to B, B to C to D to E, E back to B. the endorsement by E to B is a negotiation back . Now, since B has taken back the negotiable instrument, he cannot sue the prior party, E, D, OR C. But B can sue A, because A is prior to B s original endorsement. In the above example, there would be no circuity of action, if B, in his original endorsement, had signed san recourse , or without recourse , as indicated below: A. B. C. D. E. Endorses to B. (San recourse) to C. Endorses to D. Endorses to E. Endorses again to B.

B. has now taken the instrument . In the above example, B could sue E, D, C, because of his endorsement san recourse , and also who is the party even prior to B s original endorsement.