INTRODUCTION

When a promissory note, a bill of exchange or a cheque is transferred to any person, so as to

constitute that person the holder thereof, the instrument is said to be negotiated.
By negotiation, the third party puts in the possession of the instrument and is also made a
holder thereof to entitle him to receive the amount due thereon. We have seen above
negotiations means transfer. Negotiation gives special rights to the holder in due course.
Transfer of a negotiable instrument is affected in any one of the following two ways :
1. By negotiation; or
2. By assignment.
Transfer of negotiation is governed by the Negotiable Instrument Act.
With regard to endorsement, it is the mode of negotiating instrument. A negotiable instrument
payable otherwise than to bearer can be negotiated only by endorsement and delivery. An
endorsement is when the maker or holder of a negotiable instrument signs the same,
otherwise than as such marker. For the purpose of negotiation on the back or dace thereof or
on a slip of paper annexed thereto, he is said to endorse the same and is called the endorser.
The person to whom the instrument is endorsed is called the endorsee1.
The word endorsement is said to have been derived from Latin en means upon and
dorsum meaning the back. Thus usually the endorsement is on the back of the instrument
though it may be even on the face of it. Where no space is left on the instrument, the
endorsement may be made on a slip of paper attached to it. This attached slip of paper called
Allonge.
Objective :
The main objective of the researcher is to analyses the concept of negotiation and
endorsements under the negotiable instrument Act, 1881. Also, the researcher will critically
analyse its merits and shortcomings in detail.

Hypothesis :
1 Section 15 of the Act.
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The researcher believes that the endorsements and negotiations have different meanings. In
law of negotiable instruments such as checks and securities,, endorsements is an act of the
owner or payee signing his/her name to the back of a check, bill of exchanged or other
negotiable instrument so as to make it payable to another or cashable by any person. It is also
sometimes referred to as indorsement. An accommodation endorsement is the guarantee
given bby one person (or legal entity) to induce a bank or other lender to grant a loan to a
different person (or legal entity). It is also the banking practice whereby one bank endorses
the acceptance of another bank, for a fee, making them appropriate for purchase in the
acceptance market.

Research Methodology:
The researcher intends to adopt doctrinal method of researcher for the purpose of this
research work.

Source of Data:
Both Primary as well as Secondary sources of data are used for the research work.The
following secondary sources of data have been used in the project

Articles
Books
Websites

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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.By Negotiation

II. By Assignment
Transfer by negotiation is governed by the Negotiable Instruments Act and 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.

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I.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-takes place when the instrument changes hands physically.

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.
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I.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.

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 therein2.

2 Section 46 of the Act.

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 EFFECT OF NEGOTIATION:
When the instrument has been transferred by negotiation, 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 attached 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.

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ENDORSEMENT
Section 15 defines endorsement as follows:
When the maker or holder of a negotiable instrument signs the same, otherwise than as such
maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper
annexed thereto or so signs for the same purpose a stamped paper intended to be completed
as a negotiable instrument, he is said to have endorsed the same and is called endorser.
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 promissory 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,which provides a space for a signature.
The term endorsement is also spelled indorsement & is defined in Section.14 of the Act.

DEFINTION OF ENDORSEMENT
Endorsement is the act of the owner or payee signing his/her name to the back of a check, bill
of exchange, or other negotiable instrument so as to make it payable to another or cashable by
any person3. It can also be defined as the act of pledging or committing support to a
program, proposal, or candidate.

3 Section 15 of the Act.

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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
1. Endorsements are the addenda*1 which, though not a part of the original, become
2.
3.
4.
5.

its integral and legal part when attached.

Endorser guarantees that he or she is the lawful owner of the instrument.
Endorser knows of no defect in it.
Endorser has received it in good faith for value received.
Endorser legally capable of transferring it to another party in the normal course of

business.
6. To endorse a promissory note*2 as a third-party means the endorser guarantees
payment in case the principal borrower defaults.
7. To endorse a contract confirms approval of its contents and terms.
8. If more than one person is listed on the check as a Payee, then the requirements
depend on how the names are written.

ESSENTIALS OF ENDORESEMENTS
An endorsement in order to operate as mode of negotiation must comply with the following
conditions, namely4:
1. It must be written on the instrument itself and be signed by the endorser. The simple
signature of the endorser, without additional words, is sufficient. An endorsement written on
an allonge is deemed to be written on the instrument itself.
2. The endorsement must be of the entire instrument. A partial endorsement, that is to say, an
endorsement, which purports to transfer to the endorsee a part only of the amount payable, or
which purports to transfer the instrument to two or more endorsees severally (i.e. separately),
does not operate as a negotiation of the instrument.
4 ICSI,Banking Law and Practice, Module III, pp. 106-108, available at
http://www.icsi.in/Study%20Material
%20Professional/NewSyllabus/ElectiveSubjects/BL.pdf (accessed on 27th March,
2016).
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3. Where a negotiable instrument is payable to the order of two or more payees or endorsees
who are not partners, all must endorse unless the one endorsee has authority to endorse for
the others.
4. Wherein a negotiable instrument payable to order, the payee or endorsee is wrongly
designated or his name is misspelt, he should sign the instrument in the same manner as given
in the instrument. Though, he may add, if he thinks fit, his proper signature.
5. Where there are two or more endorsements on an instrument, each endorsement is deemed
to have been made in the order in which it appears on the instrument, until contrary is
provided.
6. An endorsement may be made in blank or special. It may also be restrictive.
In Brind v. Hampshire5, 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 excluded 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.6
ILLUSTRATIONS:
5 ( 1836-1 M & W . 364;373).
6 Supra fn 4.
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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.

EFFECT OF ENDORESEMENT
The endorsement of a negotiable instrument followed by delivery transfers the endorsed
property therein with the right of further negotiation (Section 50). Thus the endorsee acquires
property or interest in the instrument as its holder. He can also negotiate it further. (His right
can, of course, be restricted by the endorser in case of a restrictive endorsement.)
Section 50 also permits that an instrument may also be endorsed so as to constitute the
endorsee an agent of the endorser.
(1) to endorse the instrument further, or
(2) to receive its amount for the endorser or for some other specified person.

Thus it can be said that

I. 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.
II. A holder of an instrument deriving the title from a holder in due course has right thereon of
the holder in due course7.
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.

7 Section 50 of the Act.

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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 between the endorsee and the maker or acceptor8.
It must be noted that the above effect results when the endorsement is unconditional.
Where a negotiable instrument is endorsed for any of the above purposes, the endorse
becomes its holder and property therein is passed on the endorsee. In Kunju Pillai and Others
vs. Periasami9 the High Court held that a holder of a negotiable instrument, who secures the
same by endorsement, does not lose the right of his action by reason of the death of the
original payee. In Mothireddy vs. Pothireddy10 the Andhra Pradesh High Court also held that
the right based on the endorsement having made for a specific purpose, namely, collection of
the amount, will be valid till that purpose is served. The ordinary law regarding agency does
not, therefore, apply in such cases.

8 Chavali Kameswara v. Mahankali Rajaratnam & Ors., AIR 1977 AP 60.

9 1969 II. M.I.J. 148.
10 A.I.R. 1963, A.P. 313.
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TYPES OF ENDORESMENTS
According to the N.I. Act, 1881 endorsement may take any of the following forms:
1. Endorsement in blank or general endorsement.
In case of an endorsement in blank, the payee or endorser does not specify an endorsee and
he simply signs his name11.
In the case of an endorsement in blank, the person making it signs on the back of the
negotiable instrument his name only. He does not make any mention of the name of the
endorsee. Such an endorsement makes an order on the instrument to be payable to the bearer
and the property in it can be transferred by mere delivery.
2. Endorsement in full or special endorsement.
When the payee or endorser specifies the person to whom or to whose order the instrument is
to be paid, the endorsement is called special endorsement or endorsement in full. The
specified person i.e. the endorsee then becomes the payee of the instrument. It is an
endorsement in which the person signing adds direction to pay the amount to or to the order
of a specified person, for instance, a bill is payable to the order of Nyagol. Nyagol signs on
the back of the bill thus: Nyagol. This is an endorsement in blank. However, if in the above
case Nyagol signs after putting these words Pay to Korir, it becomes an endorsement in
full.
3. Restrictive endorsement.
An endorsement is restrictive when it prohibits further negotiation of a negotiable instrument.
Sec. 50 of the NI Act 1881states. The endorsement may, by express words, restrict of
exclude the right to negotiable or pay constitute the endorsee an agent to endorse the
instrument or to receive its contents for the endorser or for some other specified person.
For example, if B endorses an instrument payable to barer as follows, the right of C to further
negotiate is excluded
Pay the contents to C only
11 Section 16, of the N.I.Act.
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 Pay C for my use

4. Partial endorsement.
If only a part of the amount of the instrument is endorsed, it is a case of partial endorsement.
An endorsement which purports to transfer to the endorsee only a part of the amount payable,
or which purports to transfer the instrument to two or more endorsees severally, is not valid.
5. Conditional endorsement.
If the endorser of a negotiable instrument, by express words in the endorsement, makes his
liability or the right of the endorsee to receive the amount due thereon, dependent on the
happening of a specified event, although such event may never happen, such endorsement is
called a conditional endorsement12. Such an endorser gets the following rights:
He may make his liability on the instrument conditional on the happening of a particular
event. He will not be liable to the subsequent holder if the specified event does not take place
to the instrument even before the particular event takes place.
For example, pay C if he returns from London. Thus C gets the right to receive payment
only on the happening of a particular event, i.e. if he returns from London.
A conditional endorsement may be in any of the following forms:
Sans recourse:
In this case the endorser expressly excludes his own liability for dishonour of the instrument
towards the endorsee or any other subsequent holder. This can be done by writing the words
sans recourse or without recourse to me after the name of the endorsee.
Facultative:
If the endorser, by express words increases his liability or gives up some of his rights under
the negotiable instrument, the endorsement is termed facultative. For instance,Pay C or order
Notice of dishonour waived.
Sans frais:
Where the endorser does not want the endorsee or any subsequent holder of the instrument to
incur any expense on his account on the instrument, the endorsement is known as sans frais.

12 Section 53 of N.I. Act.

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 Liability dependent upon a contingency:

The endorser may make the endorsement in such a way that his liability is depends upon
happening of a specified event which may never happen. For instance,Pay C or order on his
marriage with B. It becomes the duty of the drawee in such a case to see that the instrument
is paid to C or his order when the specified event has happened

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NEGOTIATION BY ENDORSEMENT
Negotiation means transfer of an instrument from one person to another person so as to
constitute that person the holder of the instrument. It involves the transfer of right, title, and
interest of a person in a negotiable instrument to another so as to give a good title to the
transferee and make him the holder thereof.
There are major two modes of Negotiation. Negotiation may be effected by transferring a
negotiable instrument with or without endorsement to another person. Instruments payable to
bearer can be transferred by mere delivery, while instruments payable to the order of a person
are transferable by delivery and endorsement.

Delivery:

Is the voluntary transfer of the possession of the instrument. It should be given voluntarily
and with the intention of transferring ownership of the instrument to the person to whom it is
delivered.

Endorsement:

Means writing of a persons name on the back of the instrument for the purposes of
negotiation. When the maker or holder of a negotiable instrument signs his name, otherwise
than such maker, for purposes of negotiation, on the back or the face thereof or on a slip of
paper annexed thereto he is said to have endorsed 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
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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 endorsees.

A stranger cannot endorse a negotiable instrument. 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.

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CONCLUSION

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BIBLIOGRAPHY
Primary Sources;
The Negotiable Instrument Act, 1881.
The Banking Regulation Act, 1949.

Secondary Sources
M. L. Tannan, Tannans Banking, Law and Practice in India, 21st Edition, 2007:
Wadhwa and Company, Nagpur.
R.K.Bangia,Banking Law and Negotiable Instrument Act, 2nd Edition [Reprint],
2005: Allahabad Law Agency.
S.N. Gupta, The Banking Law, 5th Edition, Universal Law Publishing Co., 2010:
New Delhi.
ICSI, Banking Law and Practice, Module III, available at
http://www.icsi.in/Study%20Material
%20Professional/NewSyllabus/ElectiveSubjects/BL.pdf (accessed on 27th March,
2016).

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