Negotiation and Endorsement - Meaning, Kinds and Rules relating to endorsement

Negotiable Instruments Act' 1881 Notes
Business Laws Notes B.Com 1st & 2nd Sem CBCS Pattern 

Negotiation and Endorsement Meaning

Negotiation refers to the act of transferring a negotiable instrument by one person to another with a view to convey the title or ownership to the other. It can be done by mere delivery and by endorsement and delivery.

The term “Endorsement” of a negotiable instrument means writing of a person’s name of the back of the instrument for the purpose of negotiation. According to Section 15 of the Negotiable Instrument Act, 1881, “When the maker or holder of a negotiable instrument sings his name, otherwise than such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto he is said to have endorsed the instrument.” The person who puts his signature is called the “endorser” and the person in whose favour it is being endorsed in called the “endorsee”.

Endorsement of negotiable instruments can be made only by the following parties of to the instrument:

a)       The Payee b) The holder c) The drawer of a bill of exchange d) The endorsee e) The maker.

Different kinds of endorsement with their respective significance are explained below:

a)       Blank or General Endorsement: An endorsement is said to be blank or general, if the endorser sings on the back or on the face of the instrument without specifying the name of any endorsee. The effect of his endorsement makes the instrument payment to bearer even though originally it was payable to order. For example, a cheque payable to Mr. X or order and Mr. X endorse the cheque to Mr. Y by simply affixing his signature. The effect of this endorsement makes the instrument payable to bearer even though originally it was payable to order.

b)      Full or Special Endorsement: If an endorser signs his name and adds a direction to pay the amount mentioned in the instrument to or to the order of a specified persons, such an endorsement is said to be a full or special endorsement.  For example, “Pay to Mr. X or order” S/d Mr. Y is an example of full endorsement. Here Mr. Y is the endorser and he has mentioned the name of the endorsee – Mr. X.

c)       Conditional Endorsement: An endorsement is conditional or qualified if it limits or neglects the liability of the endorser.  For example, “Pay to Mr. X on his marriage” s/d Mr. Y is a conditional endorsement. In case of conditional endorsement, the liability of the endorser and the rights of the endorsee becomes conditional on the happening of a particular event.

d)      Restrictive Endorsement: An endorsement is said to be Restrictive, when it prohibits or restrictive the future negotiability of the instrument, it merely entitles the holder of the instrument to receive the amount on the instrument for a specified purpose. For example, “Pay to Mr. X only” s/d Mr. Y. This endorsement confers all the rights of an endorser to the endorsee except the right of negotiation.

e)      San Recourse endorsement and San frais endorsement: In San recourse endorsement, the endorser by his expressed words excludes his own liability and in San frais endorsement, the holders have no right against the endorser if the instrument is dishonoured. For example, ”Pay to Mr. X or order – Notice of dishonour waived.” These types of endorsement are generally used to avoid personal liability.

f)        Facultative endorsement: In such type of endorsement, the endorser by his express words increases his liability or give up some of his rights under the negotiable instruments Act.

g)       Partial Endorsement: When the endorser intends to transfer to the endorsee only a part of the amount of instrument by endorsement, the endorsement is said to be partial. Such type of endorsement is legally invalid. For example, when a cheque of Rs. 10,000 is endorsed for Rs. 5000 is an example of partial endorsement.

h)      Forged endorsement: When a negotiable instrument is endorsed with the forged signature of the endorser, the endorsement is called forged endorsement.

The rules and regulations regarding endorsement may be summarised as follows:

a)       Signature of the endorser: A regular endorsement implies signature of the holder of the negotiable instrument himself or his duly authorised agent on its face or back for the purpose of negotiation.

b)      Spelling: The endorser must sign his name in the exact spelling as appearing on the negotiable instrument.

c)       Prefixed and suffixes to be excluded: Endorsement need not contain the complementary Prefixes or Suffixes e.g. Mr., Mrs., Shri, Smt etc.

d)      Sign in Ink: Endorsement in pencil or by a rubber stamp is usually not accepted.

e)      Endorsement by a married woman: In the case of married women, the name of her husband must also be mentioned in the endorsement.

f)        Endorsement by illiterate person: An illiterate person can make a valid endorsement by putting his thumb impression on the instruments in the presence of a witness.

g)       Endorsement by companies, firms: In case of joint stock companies, firms, associations etc., the endorsement should be made by persons who are dully authorised to sign on behalf of these institutions.

h)      Delivery of the instrument: An endorsement must be completed by delivery of the instrument.

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