Modes Of Negotiation

As you know, there are two modes of negotiating a negotiable instrument. Instruments payable to bearer can be transferred by mere delivery whereas instruments payable to the order of a person are transferable by indorsement and delivery.

Thus, the two modes of negotiation are:

1) delivery, and 2) indorsement and delivery.

Let us now understand these two modes in detail.

 


Delivery

Section 47 states that “subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof’’. “Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect in a certain event, is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.’’

Examples:

a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep it for B. The instrument has been negotiated.

b) ‘A’ is the holder of a negotiable instrument payable to bearer. The instrument is in the hands of A’s banker, who is at the time also the banker of ‘B’. ‘A’ directs the banker to transfer the instrument to B’s credit in the banker’s account with B. The banker does so, and accordingly now possesses the instrument as B’ agent. The instrument has been negotiated and ‘B’ has become the holder of it.

Instrument Payable to Bearer: Section 47 deals with the negotiation of an instrument payable to bearer. The expression ‘instrument payable to bearer, includes not only an instrument which is expressed to be so payable. but also, one which is indorsed in blank, though originally payable to order. Even if the blank indorsement is followed by an indorsement in full, the instrument continues to be payable to bearer, as regards all parties prior to the endorser in full.

Section 47 has to be read subject to the provisions of section 58 of this Act, which lays down the circumstances under which a holder becomes disentitled to recover on the negotiable instrument or to negotiate it (you will study this later in this unit). Section 47 lays down that an instrument payable to bearer may be negotiated by mere delivery without the formality of an indorsement, and the person to whom such instrument is delivered becomes the holder and entitled to sue in his own name. The two requirements that have to be fulfilled before a document can be considered negotiable have already been noted.

Position of a Transferor by Delivery: Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it, he is not liable on the instrument.

By negotiating a bill, it is presumed that the transferor being a holder for value confirms to his immediate transferee that the bill is what it purports to be, that he has a right to transfer it and at the time of transfer he is not aware of any fact which renders it valueless. The transfer by delivery of negotiable instrument payable to bearer amounts to sale of the instrument just like a sale of goods, and the liabilities of the transferor are like those of a vendor of goods. Therefore, he is liable to the immediate transferee, like the seller of goods for breach of the warranties which are implied in the sale of goods. He is presumed to assure that the instrument that he transfers is not a forged one, that it is unaltered and is what it purports to be on the face of it. If anything, such as the figure of the amount of a bill transferred by delivery, turns out to have been altered before delivery and the amount is increased by such alteration, the immediate transferee is entitled to recover from the transferor the difference between the amount paid and the original amount of the note.

 

Indorsement

In order to operate as a negotiation, an indorsement must comply with the following conditions:

1) It must be written on the bill itself and be signed by the endorser. The simple signature of the endorser on the bill, without any additional words, is sufficient. An endorsement written on a slip of paper attached to the instrument is deemed to be written on the bill itself.

2) A partial indorsement (an indorsement which purports to transfer the bill to two or more endorsees severally) does not operate as a negotiation of the bill. It must be an indorsement of the entire bill.

3) Where a bill is payable to the order of two or more payees or endorsees who are not partners, all must indorse, unless the one indorsing has authority to indorse for the others.

4) In a bill payable to order, where the payee or endorsee is wrongly designated or his name is misspelt, he may indorse the bill as therein described, adding his proper signature.

5) Where there are two or more indorsements on a bill, each indorsement is deemed to have been made in the order in which it appears on the bill until the contrary is proved.

6) An indorsement may be made as blank or special indorsement. It may also contain terms making it restrictive.

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