- Types/Modes of Negotiation
- Importance of delivery in Negotiation
- Negotiation back
- Instrument obtained by Unlawful Means or Unlawful Consideration
- Difference between negotiation and assignment
- Case Law
The Negotiable Instruments Act, 1881 (hereinafter referred to as the Act) is a statute which regulates the working of instruments which can be negotiated for an amount. It lays down the frame work as to how an instrument can be transferred from one person to another and then be enforced.
The transfer of a negotiable instrument happens by way of either negotiation or assignment. Further a negotiable instrument is negotiated by delivery or endorsement and delivery.
Sec 14 of the Act states that a negotiable instrument such as promissory note, bill of exchange or a cheque is said to be negotiated when the negotiable instrument is transferred to some other person so as to make him the holder of the instrument.
By way of negotiation the person who transfers the instrument gets a right to recover the amount which is mentioned in the instrument. He can also enforce this right by filing a suit in a court of law against the parties who are liable to make the payment.
The transfer of a negotiable instrument which is payable to bearer can be effected by just the delivery of the instrument. In case the instrument is payable to order then it can be negotiated by way of delivery and endorsement.
The negotiation must be done with the intention of transferring the title or ownership of the instrument to the transferee.
Sec 51 of the Act contemplates that every maker, drawer, payee or endorsee can negotiate an instrument provided he has the lawful possession or is a holder.
Types/Modes of Negotiation
There are two types of transfer by negotiation:
Negotiation by delivery
Sec 47 of the act contemplates that a promissory note, bill of exchange or a cheque which is payable to the bearer are negotiable by delivery subject to the provisions of sec 58 of the Act.
However there is an exception to this rule. A promissory note, bill of exchange or a cheque which is delivered on a condition that it is not to take effect subject to the happening of a certain event, then in that case it is not negotiable unless that certain event happens or takes place.
Illustration: C is a holder of a negotiable instrument which is payable to bearer. He delivers this to Z’s agent to keep for B. The instrument now gets negotiated once the delivery happens.
Thus it can be seen that an instrument gets negotiated by mere delivery. It is not necessary that the signature of the transferor is required. The transferee becomes the holder by mere possession of the instrument. Thus the delivery is important.
The various conditions for negotiation by delivery are:
- The instrument must be payable to the bearer;
- The instrument must be delivered;
- This is subject to provisions of Sec 58.
Negotiation by endorsement and delivery
Sec 15 of the act contemplates that when the maker or holder of an instrument only signs his name the endorsement is called to be ‘in blank’.
However, if he writes a direction to pay a sum of money which is mentioned in the instrument to or to the order of a specific person, the endorsement is said to be ‘in full’. The person so specified is called the endorsee of the instrument. The endorsee is regulated by the law which is applicable on a payee.
Sec 48 contemplates that a promissory note, bill of exchange or a cheque which is payable to order are negotiable by the holder by endorsement and delivery subject to the provisions of sec 58 of the Act.
Sec 58 of the act deals with the instruments which are obtained by unlawful means or unlawful consideration. The types of such instruments are:
- Which are lost;
- Obtained by means of fraud, or offence, unlawful means or unlawful consideration.
The conditions for endorsement for the purposes of sec 48 are:
- There must be a promissory note, bill of exchange or a cheque which is payable to order;
- It must be endorsed;
- By delivery;
- subject to the provisions of sec 58 of the Act.
Importance of delivery in Negotiation
A delivery of an instrument means that an instrument is voluntarily transferred from one person to another. The underlying principle behind delivery is to pass the ownership in the instrument to the transferee so as to make him the holder of the instrument.
The delivery of an instrument can be
In this the negotiable instrument is handed directly from one person to another.
In this the delivery happens without passing over the actual possession. Rather, the instrument is delivered to the servant, agent or clerk of the transferee who holds the instrument on behalf of the transferee.
In this the transfer of the possession happens only when a certain condition is fulfilled. Once the particular or specified condition is met the transfer gets effectuated.
Therefore, delivery has to happen with the intention of passing over the ownership of the instrument to the person. A delivery is an essential condition in order to complete any contract on a negotiable instrument. Mere signing and writing the instrument does not make it operative.
If an endorser after he has negotiated again becomes the holder of the instrument before its maturity, it is said that the instrument is negotiated back to that holder. When the instrument comes back to the original endorser during the course of negotiation the intermediate endorsers are not liable to the holder who gets the instrument back.
- Illustration: A is a holder of an instrument. He endorses it to C, who further endorses it to F. F endorses it back to A. Here it is said that the instrument is negotiated back to A. A cannot file a suit against C and F because C and F are not liable to A. In a negotiation back all the intermediary endorsers are discharged from their liability.
The rule that the holder in due course can sue all the prior parties to the instrument does not apply. There is an exception although. If an instrument is negotiated back to a previous party then the holder can enforce payment against all the intermediaries to whom the holder was not liable as a prior party.
- Illustration: E is a payee of a bill and he endorses it to R and expressly excludes his liability. R endorses it to M who in turn endorses it to J. If the bill is negotiated back to E then he can recover the amount from R, M or J or all of them or any one of them.
Instrument obtained by Unlawful Means or Unlawful Consideration
Sec 58 of the act contemplates that when a negotiable instrument has been lost or has been obtained by way of fraud or an offence or unlawful consideration then no person who is in possession or endorsee cannot claim the amount from the maker, acceptor or holder unless such a possessor is a holder in due course.
Sec 58 provides instruments that are obtained by:
- An offence like theft
A person who has obtained the instrument through theft cannot enforce the payment nor can he retain it from the party from whom it was stolen. If he negotiates:
- Bearer Instrument: An instrument which is payable to bearer is negotiable by mere delivery to a transferee who without the notice of theft acquires a good title not only against the thief but also any previous party. However, the thief does not acquire any title against the owner or any party.
- Order Instrument: A stolen instrument payable to order does not confer a good title to the person who acquires it from a thief. The negotiation will be void.
- Fraud and unlawful consideration
An instrument acquired by fraud or unlawful consideration vitiates all transactions.
Difference between Endorsement and Assignment
|The person who is the transferee gets the instrument free from defects of the previous owner||The assignee of the debt has to take it with all the defects which may exist in the title of the person who assigns him
|The presumption provided by sec 118 (g) of the Act provides for presumptions as to the consideration which is provided for the instrument||There are no presumptions in favour of an assignee|
|Negotiation of instrument does not require any other formality except for delivery in bearer instrument and endorsement and delivery in order instrument||Assignment requires the execution of a document which is signed by the transferor. It also requires payment of stamp duty as per the provisions of the Transfer of Property Act, 1882 (Sec 130)
|No notice is required to be given to a debtor||An assignment does not bind the debtor unless a notice of assignment has been given to him and he expressly or impliedly provides his assent
|No stamping is required for negotiation||Stamping is required for assignment|
- In the case of Gaddam Venkataraju v Andhra Bank 2000 (3) ALD 87, it was held that sec 47 of the Act stipulates that a cheque payable to the bearer is negotiable by delivery thereof whereas sec 48 of the act stipulates that a cheque (payable to order) is negotiable by the holder by endorsement and delivery thereof.
- In the case of Jang Bahadur Singh v Chander Bali Singh AIR 1939 All 279, it was held that for a promissory note to be payable to order, there must be negotiation by endorsement and delivery. If the promissory note was payable to bearer then the delivery would be sufficient as is provided by sec 47 of the act.
- In the case of N.Gopinathan v Sivadasan AIR 2007 (NOC) 2022 Kerala, it was held that a cheque to the ‘payee’ or the ‘payee or order’ can be endorsed in favour of another. A cheque which is in favour of the payee or bearer can be negotiated by way of simple delivery. A cheque which is payable to a bearer becomes payable to anyone who is bearing it.
- It was further held that even if the cheque was addressed to the ‘payee’ alone, or ‘payee or order’ or ‘payee or bearer’ it may validly come into the hands of another by negotiation i.e. by endorsement and delivery or delivery simplicitor. A cheque in favour of the bearer can be negotiated by the bearer by valid delivery to another.
- In the case of Ahuja Nandkishore Dongre v. State Of Maharashtra 2007 CriLJ 115, it was held that a cheque is a negotiable instrument which can be negotiated by appropriate endorsement and delivery. If instead of the Courts at the place where the bank on which the cheque was drawn, the Courts at the place where the cheque was presented were to have jurisdiction, drawers of the cheque would be subjected to a risk.
Thus it can be concluded that a person who is in possession of a negotiable instrument lawfully can get it negotiated by transferring the instrument. There are two modes of transferring the instrument. If the negotiable instrument is a promissory note, bill of exchange or a cheque which is payable to the bearer then they are negotiable by delivery.
Whereas when the negotiable instrument is a promissory note, bill of exchange or a cheque which is payable to order then they are negotiable by the holder by endorsement and delivery. In both the above mentioned modes the transfer or mode is subject to the provisions of sec 58 of the Act as discussed above.