Chapter 24 NEGOTIATION AND

ASSIGNMENT

A negotiable instrument can be transferred from one party

to another by negotiation or assignment. Negotiation can be
effected by endorsement and delivery in case of order
instruments, or by mere delivery in case of bearer
instruments. Conversely, assignment takes place by means
of a written and registered deed under the provisions of the
Transfer of Property Act.
Learning Objectives

Negotiation Modes of
Negotiation:
& Delivery; Negotiation
Negotiation Assignment
Assignment Endorseme Back
Distinguished nt
 NEGOTIATION

Negotiation enables the holder to enforce the instrument in his own

name. It can be effected by endorsement and delivery (in respect of order
instruments), or by delivery alone (in respect of bearer instruments).
When a promissory note, bill of exchange, or cheque is transferred to any
person so as to make that person the holder thereof, the instrument is
said to be negotiated. [Section 14]
Thus, for negotiation to take place, the following two conditions must be
satisfied.
1. The negotiable instrument is passed from one person to another, and
2. The transfer is made in such a manner that it renders the transferee the
holder of the instrument.
Hence, merely transfer of a negotiable instrument does not automatically
result in negotiation. The substance of negotiation lies in the fact that it is
made with the intention of passing the ownership or title of the
instrument. A delivers a cheque amounting Rs 5,000 to B and requests him
to keep it in his safe custody. Such a transfer of cheque is not a negotiation
of the cheque to B. In this case, the transfer of (possession) of the cheque
to B makes him a bailee only, and not the holder (title) of the cheque.
 ASSIGNMENT

Negotiation is not the exclusive means by which an instrument can be

transferred. A bill of exchange, cheque, or a promissory note can be
transferred by assignment as well.

Unlike negotiation, assignment refers to transfer of title or ownership of a

negotiable instrument by means of a written and registered document
(under the provisions of the Transfer of Property Act). The Negotiable
Instruments Act recognizes the transfer of negotiable instruments by
assignment. It must, however, be remembered that when the transfer is
made by assignment, unlike negotiation, the assignee has only those
rights which the assignor possessed.
 Negotiation And Assignment Distinguished

S. No. Point of Difference Negotiation Assignment

1. Mode of transfer Negotiation can be effected by Mode of transfer is not so light.

mere delivery or endorsement Assignment is done always by

followed by delivery. writing, usually by executing a

separate document signed by the

transferor.

2. Consideration Consideration is normally Consideration is not presumed in

presumed in case of negotiation. case of assignment. The assignee

The burden of proof, lies on the has to prove that he has obtained

opposite party. the instrument for value. Contd.

 .Negotiation And Assignment Distinguished

3. Title In case of negotiation the Assignee of an actionable

transferee as a holder-in-due- claim takes it subject to the

course, takes the instrument free defects that may exist in the

from any defects in the title of the title of the transferor.

transferor.

4. Notice of In case of transfer by endorsement, In case of transfer by assignment,

Transfer if the debtor e.g., maker, payee etc. is notice of transfer must be given to

not given any notice, he will be still the debtor by the transferee.

liable to pay the amount on maturity. Contd.

 .Negotiation And Assignment Distinguished

5. Relevancy Negotiation is relevant Assignment is usually done in

chiefly in case of negotiable case of other documents but

instruments may be done in respect of

negotiable instrument as

well.

6. Suit against A transferee can sue the third An assignee cannot do so.

third party party in his own name. .

7. Governing Transfer by negotiation is Transfer of negotiable

Act regulated by the Negotiable instruments by means of

Instruments assignment is regulated by

Act, 1881. Transfer of Property Act.

 MODES OF NEGOTIATION

1. Negotiation by Mere Delivery . A negotiable instrument payable to bearer can be

negotiated by mere delivery of the instrument. It may, however, be noted that the
delivery of the instrument must not only be actual but also voluntary. Thus, a person
who finds or obtains a bearer instrument through theft, fraud or offence is not the
holder of the same for the sole reason that the instrument has not been delivered to
him voluntarily. However, if a thief or finder of a lost bearer instrument delivers the
same to another person for consideration, the latter will be entitled to recover the
amount thereon as a holder-in-due-course if s/he receives the same bona fide (in good
faith) and before maturity.
Example 1. A the holder of a cheque for Rs 5,000 payable to bearer, delivers it to Bs
agent to keep it on behalf of his principal i.e., B. The instrument has been negotiated to
B so as to make him the holder. This amounts to the negotiation of the cheque by
simple delivery.
Example 2. C steals a bearer cheque for Rs 2,000 from As drawer. In this case although
C is currently in the possession of the cheque made payable to bearer, yet he is not
entitled to the instrument as a holder as there is no voluntary delivery of cheque from
A to C. If C, however, delivers the cheque to a third party for consideration, the
subsequent holder will be entitled to recover the amount due thereon provided that he
obtains the same in good faith and before maturity. Therefore, in the latter case though
the instrument so negotiated is stolen one but the person who has obtained the
instrument from C in this manner can sue in his own name against A and C in the
capacity of a holder-in-due-course. Contd.
 MODES OF NEGOTIATION

2. Negotiation by Endorsement and Delivery. Endorsement means and involves the signing of a
negotiable instrument for the purpose of transferring the right, title and interest therein to
another person. An instrument payable to order can be negotiated by endorsement
followed by delivery thereof. If it is delivered without endorsement, it is merely assigned
and not negotiated and the holder thereof is not entitled to the rights of a holder-in-due-
course and he cannot negotiate it to a third party. Interestingly, a mere endorsement on
the instrument does not amount to negotiation, unless there is a delivery of the same.

X drew a cheque payable to Y or order and delivered the same to him. Y later on endorsed
the cheque in favour of Z but kept it in his table drawer. Subsequently, Y died and Z
discovered the cheque. In this case, Z does not become the holder of that cheque, as the
negotiation was incomplete for lack of delivery of the cheque to him.

Negotiation of instrument by endorsement and delivery is, however, effective only

where the instrument in question has not been obtained by theft, fraud etc. and for
unlawful consideration. [Section 58]
Contd.
 Form of Endorsement

Normally, signing ones name on the back of an instrument makes

an endorsement. But it may also be made on the face (on the space
available) of the instrument. If the back of the instrument is already
full of endorsements, further endorsement may be signed on a slip
of paper attached thereto. Such a slip is called Allonge and
becomes part of the instrument. No particular form of
words/language is necessary for an endorsement. The word
endorsement desirably be written on the instrument and must be
signed by the endorser. However, a simple signature of the
endorser without any additional word - is enough endorsement
and alone constitutes a valid endorsement of the instrument.
 Kinds of Endorsement
Depending on the way the endorsements are made on the instruments, they are classified as
follows :
1. Blank or general endorsement . An endorsement is said to be blank or general when
the endorser merely puts his signature on the back of the instrument, and the instrument so
endorsed becomes payable to bearer, even though originally it was made payable to order.
The effect of a blank endorsement is that the instrument can be further negotiated by its
simple delivery, as long as the endorsement continues to be in blank.
2. Full or special endorsement. An endorsement is said to be special or in full where the
endorser signs his name and adds a direction to pay the instrument to, or to the order of a
specified person. Such an endorsement is generally made in the form of Pay to X or order or
Pay to X followed by the signature of the endorser. A blank endorsement can also be turned
into a special one by the addition of an order making the bill payable to the transferee or his
order. A bill made payable to A or A or order, and endorsed by A as pay to the order of B
would be considered specially endorsed and B may endorse it further.
3. Restrictive endorsement. The endorsement may, by express words, restrict or
exclude such right, or may merely constitute the endorsee an agent to endorse the
instrument or to receive its contents for the endorser or for some other specified persons.
Examples of restrictive endorsements
Pay A only
Pay the contents to A only
Pay A for my use
Pay A or order for the account of B. Here B is the endorser. Contd.
 .Kinds of Endorsement

4. Partial endorsement . A partial endorsement is one which purports to transfer to the

endorsee only a part of the amount payable or which purports to transfer, the bill to
two or more endorsees severally. X holds a bill for Rs 5,000 and endorses the same as
Pay Y or order Rs 2,500. The endorsement is partial and invalid. However, there is an
exception to this general rule. Where an instrument has been paid in part, the fact of
the part payment may be endorsed on the instrument and it may then be negotiated
for the residue. For example, a bill may be endorsed validly by writing Pay Y or order,
being the unpaid residue of the bill.
5. Conditional or qualified endorsement . An endorsement, which limits or excludes the
liability of the endorser, is called conditional or qualified endorsements. It is different
from restrictive endorsement. The restrictive endorsement prohibits further
negotiability whereas conditional endorsement simply limits or negates the liability of
the endorser.
6. By sans recours endorsement A qualified endorsement may be made by adding the
French words sans recours which means without recourse to me, making it clear that
the endorser does not incur the liability of an endorser to the endorsee or subsequent
holders and they should not look to him in case of dishonour of instrument.
B, the holder of a bill, endorses it in favour of A by writing Pay A or order sans recours
or Pay A or order without recourse to me. In this case, B has disowned his liability. If
the instrument is dishonoured, A or any subsequent holder cannot ask B for payment of
the same. Contd.
 ..Kinds of Endorsement
7. Contingent endorsement If the holder while endorsing a negotiable instrument
makes his liability dependent upon the occurrence of a specified event, the
endorsee acquires no right to maintain an action for the recovery of the amount
until the condition is satisfied. If the condition becomes impossible to perform or
the conditions specified are not fulfilled, the endorsee gets no title to the
instrument, and cannot sue the endorser or any prior party thereto.
For example, it is mentioned in a bill, Pay B or order, if a certain ship arrives within
six months. In this case the right to receive payment is absolute and irrevocable if
the ship arrives within the stipulated time. Or, another bill mentions Pay B or
order on his marrying C. In such a case, the endorser shall not be liable until B
marries C.
8. Facultative endorsement. Contrary to sans recours endorsement, when the
endorser, by express words, abandons some of his rights or increases his liability
under the negotiable instrument, the endorsement is said to be facultative. He
may do so by giving up some of his rights, he is entitled to under the instrument.
For example,
X is the holder of a bill of exchange for Rs 5,000. He makes an endorsement on it
reading as Pay to Y or order, notice of dishonour waived. This is a facultative
endorsement as in this case X has given up his right to receive the notice in case of
dishonour of bill, but will remain liable to the endorsee for non-payment of the
instrument.