Negotiation
by Asok Nadhani
3.1
Negotiation
Negotiation
means transfer of the title of Negotiable Instrument to another person.
Negotiable
Instrument can be transferred by the following ways :
−
Negotiation
−
Assignment
3.2
Transfer by Negotiation
When
an Instrument is transferred by one party to another, so as to make the
transferee the holder thereof, the instrument is said to be negotiated
(Sec. 14).
e.g.
C gives a cheque to D to keep it in safe custody, the cheque is not negotiated
since the property in the cheque is not transferred to D. [L.Parsotam v. L. Bankey Lal, T.N. Seshachalam
Naidu v. Venkatachalam Chetty]
1.
Delivery of Instrument: A bearer instrument
may be negotiated by mere delivery (Sec. 47). Ex. 3.1
2.
Negotiation by endorsement and delivery: An instrument payable to order is
negotiable by the holder by endorsement and delivery thereof (Sec. 48). [Chaitram v.Mohanlal], [Dena Bank v. Madhya Pradesh
National Textiles Corporation Ltd.], Ex. 3.2
A negotiable
instrument may be negotiated (except by the maker, drawee or acceptor after
maturity) until payment or satisfaction thereof by the maker, drawee or
acceptor at or after maturity, but not after such payment or satisfaction (Sec.
60).
3.2.1
Delivery of instrument
Voluntary
delivery of Instrument with intention of passing the property is essential to
complete negotiation. Acceptance, endorsement of a promissory note, bill, or a
cheque is complete only by delivery, which may be actual or constructive. (Sec.
46) Ex. 3.3
The legal
representative of a deceased person cannot negotiate by delivery only a
promissory note, bill of exchange or cheque payable to order and indorsed by
the deceased but not delivered. (Sec. 57).
3.2.2
Kinds of Delivery
−
Actual
−
Constructive,
−
Conditional
a.
Actual : When the
instrument is delivered physically to another person. Ex. 3.4
b. Constructive: When the instrument is delivered to an
agent or a servant of the endorsee or when the indorser, after endorsement,
holds the instrument as an agent of the indorsee. Ex. 3.5
c. Conditional: Where a condition or a special purpose
is stated in the time of delivery, the property in it does not pass to the
transferee (even though it is indorsed to him) unless the condition is
fulfilled. But in case of holder in due course, the other party remains liable
though it was delivered conditionally or for a special purpose only.
3.3
Transfer by Assignment
When
a holder of an Instrument transfers his right to another person to receive the
payment of the instrument, such type of transfer is referred as transfer by
Assignment (which in fact amount to Transfer of Debt). Such ‘assignment’ is not
dealt under Negotiable instruments Act.
3.4
Distinction between Negotiation and Assignment
|
Negotiation
|
Assignment
|
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1. Consideration
is presumed.
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1. 1. Consideration must be proved.
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2. The title of
the transferee (i.e., the holder in due course) is better than that of the
transferor.
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2. The title of
the assignee is subject to the defects which existed in the title of the assignor.
|
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3. Notice
of negotiation is not required to be given to any party to the Instrument.
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3. Notice
of Assignment must be given to the debtor in order to complete the
assignment.
|
|
4. Instruments
payable to bearer are negotiated by mere delivery while instruments payable
to order are negotiated by endorsement and delivery.
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4. Assignment
can only be made in writing.
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3.5 Indorsement
i. Indorsement
means signing a negotiable instrument for the purpose of negotiation (Sec. 15).
Indorsement along with the delivery completes a negotiation.
ii. The
person who signs the instrument is called the 'indorser'.
iii. The
person to whom the instrument is indorsed is called the 'indorsee'.
iv. Usually indorsement
is made by signing ones name at the back of the instrument. It may be made on
attached (if the back is full). Paper called ‘Allonge’ which becomes a part of
the instrument.
3.5.1
Who may Indorse (sec. 51)
The
first indorsement of an instrument can be made by the payee (or payees jointly
as the case may be). Subsequent endorsements may be made by a person who
becomes the holder or the holders jointly or by a maker or drawer (only if he
is a holder).
3.5.2
Essentials of valid Indorsement
The
essential elements of a valid indorsement are as follows:
i. In writing: Writing can be
made on the face or back of the Instrument. If no space is left on the
instrument, a separate slip of paper can be attached to the instrument for this
purpose, called 'allonge'.
ii.
Signed: The indorsement is valid only if it is signed by
the indroser.
iii.
By the indorser or holder: A person who is entitled to the Instrument only can
indorse.
iv.
Delivered: The indorsement is completed only after
delivery of the instrument with the intention of passing the property in
it to the indorsee.
v.
Validity: It must be an indorsement
of the entire bill. A partial indorsement does not operate as a valid indorsement.
vi.
Making: The bill may be
made either by the indorser merely signing his name on the instrument or by any
words showing an intention to indorse or transfer the instrument to a specified
person.
3.5.3
Kinds of Indorsement
i. Blank
or general indorsement
ii. Full
or special indorsement
iii.
Indorsement in blank followed by full
iv.
Restrictive indorsement
v. Partial
indorsement
vi.
Conditional indorsement.
3.5.3.1 Blank or General Indorsement
If the holder just signs an instrument without
specifying the name of the indrosee, it is called as blank indrosement [Sec.
16 (1)]. This type of indrosement
converts an order instrument into a bearer one (Sec. 54) and is negotiated
by mere delivery. Ex. 3.6
3.5.3.2
Full or Special Indorsement
In this type of indrosement, the name of the
indrosee is specified (e.g., Pay to Ram Narayan, or Pay to Ram Narayan or
Order).
Note:
Conversion of blank indorsement into
full : In an instrument indorsed in blank, the holder, without signing for
himself, just writes the name of another person above indorser’s signature, it
is converted into an indorsement in full. In such case
the holder does not incur responsibility of an indorser (Sec. 49). Ex. 3.7
3.5.3.3 Indorsement in blank followed
by indorsement in full
If
an instrument indorsed in blank is subsequently indorsed in full, it remains
payable to bearer and negotiable by delivery as against all the parties prior
to the indorser in full. In such case the amount of the instrument cannot be
claimed by the indorser in full except by the person to it has been indorsed in
full, or one who derives title through such person. (Sec. 55) Ex. 3.8
3.5.3.4
Restrictive Indorsement
If an
indorsement contains some word which expressly takes away the right of the indorsee
to further negotiate the instrument, such indorsement is referred as
Restrictive Indorsement (e.g 'Pay the contents to S only).
3.5.3.5
Partial Indorsement
If,
by way of indorsement only a part of the amount is purported to be transferred,
such indorsement is called as partial indorsement. A partial indorsement is
invalid for the purpose of negotiation.
But
where the amount in an instrument has been partly paid, a note to that effect
may be made on the instrument which may then be negotiated for the balance
(Sec. 56). Ex.3.9, Ex. 3.10
3.5.3.6
Conditional Indorsement
Where
indorsement is made subject to some condition, it is called as conditional indorsement,
which may be classified as follws:
Sans
Recourse indorsement
Liability
dependent on Contingency
Facultative
Indorsement
Sans
Frais Indorsement
3.5.3.6.1
'Sans Recours' Indorsement
Sans
Recours means ‘without any remedy’. Here the indorser excludes his
liability to the indorsee on the instrument (e.g, Pay X or order without recourse to me' or 'Pay X or order sans recours').
In case of dishonour, the holder cannot make an indorser liable, even though
the holder is a holder in due course. (Sec 52, para 2)
3.5.3.6.2
Contingent Indorsement
An
indrosement whereby the indorser makes his liability dependent upon a
contingency (e.g. ‘Pay X or order only after the goods has been consigned’). In
such case, the liability of the holder as an indorser would arise only upon the
happening of the contingent event specified.
3.5.3.6.3
Facultative Indorsement
An
indorsement whereby the indorser waives some of his right (Pay X or order,
notice of dishonour waived').
3.5.3.6.4
'Sans frais' Indorsement
Sans
frais' means without expense. By
such indorsement, the indorser puts a condition that no expenses should be
incurred on account of the bill.
3.5.4
Cancellation of Indorsement
The
indorser is discharged from liability where the holder without the consent of
the indorser, cancels or destroys or impairs indorser's remedy against a prior
party (Sec. 40). Ex.3.11 (a), (b)
3.5.5
Negotiation back
i. If
in the due course of negotiation, an instrument comes back in the hands of a
person who is already a party of such instrument, it is called ‘Negotiation
back’. In such a case, the holder cannot sue such parties to whom he was
previously liable as an indorser, but can enforce payment to those parties to
whom he was not previously liable. 'Ex.3.12, 3.13
ii. If negotiation is made by a party by way of ’sans recourse’
endorsement and if it is negotiated back to such party, then all the parties
will continue to be liable to such a party.
3.5.6 Effect of Indorsement
i.
Transfers the property of an instrument to the indorsee.
ii.
Indorsee acquires a right to negotiate the
instrument to anyone as per his choice.
iii.
Indorsee gets the right of action for recovery
against all the parties whose name appears on the instruments. (Sec.50)
3.6
Instruments obtained by unlawful means
i. Stolen
Instruments
ii. Instruments
obtained by coercion or fraud
iii. Instruments
obtained for an unlawful consideration
iv. Forged
instruments.
v. Forged
endorsement.
vi. Instruments
without consideration
vii. Lost
Instruments
3.6.1
Stolen instruments
Acquiring
an Instrument by theft disallows any person from enforcing any payment or from
retaining it against the party from whom he has stolen it. However if he acquires
any payment on it, the true owner can recover the amount due on the instrument
from him.
3.6.2
Instruments obtained by coercion or fraud
Any
contract, including those on negotiable instruments obtained by coercion or
fraud cannot recover anything, when sued on the instrument. However, coercion
or fraud cannot in general be set up against a holder in due course or a
holder deriving title from such holder.
3.6.3
Instruments obtained for an unlawful consideration (sec. 58)
An
Instrument obtained for an unlawful consideration creates no obligation between
the parties thereon. But a holder in due course obtains a good title to an
instrument which was originally made or drawn or subsequently negotiated for an
unlawful consideration.
3.6.4
Forged instruments
Forgery
can be termed as falsification or alteration of a writing with an intention to
prejudice the rights of another (like Falsely writing the name of anther
person, Signing the name of a fictitious person etc). Ex. 3.15
A
person who has paid money by mistake on a forged signature may recover it from
the person to whom he has paid it (Sec. 72 of the Indian Contract Act,
1872).This rule applies to all, even to a holder in due course. Ex. 3.14
3.6.5
Forged Indorsement
In
case of forged Indorsement a person cannot acquire the rights of a holder in
due course nor any title to the instrument even though if he takes it in good
faith and for value. Ex.3.16(a), (b), (c)
In
case of blank indorsement mere delivery is enough to derive a title as it
becomes payable to bearer. The transferee can sue any of the parties to the
bill overlooking the forgery. Ex.3.17
3.6.6
Instruments without consideration (sec.43)
An
instrument made, drawn, accepted, indorsed, or transferred without
consideration (or for a consideration which fails) creates no obligation of
payment between the parties to the transaction. As between immediate parties,
the defendant can plead absence of consideration.
Holder
acquiring an instrument for consideration (and other
subsequent holder deriving the title) can claim or recover the amount due from
the transferor or from any prior party
thereto. So, subsequent holders having title can recover the amount from any or
all of the prior parties once the instrument gets into |he hands of a holder in due course. Ex. 3.18
1.
Partial absence or failure of
money-consideration:
When there is a partial absence or failure of
money-consideration on an instrument, the immediate parties cannot recover more
than actual consideration. But this rule does not apply to a holder in due
course (Sec. 44). Ex. 3.19
2.
Partial failure of non- monetary
consideration: Sometimes,
there may be a partial absence or failure of consideration other than money on
an instrument. If the part failed is capable of being ascertained in terms of
money without a collateral inquiry, the sum due to immediate party is
proportionately reduced. If such ascertainment cannot be made without a
collateral inquiry, the holder can recover the full amount (Sec. 45).
3.6.7
Lost Instruments
When
an instrument is lost before it becomes due, following rules apply :
i. Notice to
prior parties: Notice of loss should be given to the prior parties by the owner so to
prevent them from taking it up without proper inquiry. Public
advertisement of the loss should also be given.
ii. No title:
The finder of the lost bill acquires no title to it. The
rightful owner is entitled to recover it from the finder.
iii. Application
to the drawee: The
party who has lost the instrument must make an application to the drawee
to make payment on due date. If the application is dishonoured, he must give
notice of dishonour to all the parties liable or else he will lose his remedy
against the drawer and indorsers.
iv. Duplicate
copy of bill: The holder may apply to the drawer for a duplicate bill after
providing indemnity and may compel the drawer to issue a duplicate bill, if the
drawer refuses to give (Sec. 45-A).
v. Indemnity: When an instrument cannot be produced at the
time of payment, the liable party can refuse to pay or can ask for a guarantee
against any further claim thereon against him (Sec. 81).
vi. Payment in
due course: The holder in the course gets
discharged where the finder obtains payment. But the true owner can recover
damages from the finder
vii. Rights of
holder in due course: In case of a lost bill payable to bearer or blank endorsement, if finder
negotiates it for value, the holder in due course acquires a valid title and is
entitled to retain it and compel payment from the parties liable thereon.
viii. Effect of
forgery: In any act of
forgery, finder confers no title to any person, not even to the genuine
transferee for value.
Ex: 3 Examples
Negotiation by delivery of Instrument
Ex. 3.1 F, the holder
of a bearer instrument, delivers to G in payment of a liability. In this case,
the instrument has been negotiated. [Ref.
3.2(1)]
Negotiation by endorsement and delivery
Ex. 3.2 G is the
holder of an instrument payable to bearer which is in the hands of G’s
banker
who is also the banker of H. The banker transfers the instrument to H as per
G’s direction. So, the instrument has been transferred to H by negotiation. H
is the holder of the instrument and the Banker is in its possession as agent of
H. [Ref. 3.2(2)]
Delivery
of Instrument
Ex.
3.3 X made
a promissory note payable to Y for Rs.10000 and kept with him. X dies and the
note was found and was delivered to Y. Y cannot sue upon the note. [Ref. 3.2.1]
Actual
Delivery of Instrument
Ex.
3.4 D, the holder of
an instrument payable to bearer, delivers it to E. [Ref. 3.2.2(a)]
Constructive
Delivery of Instrument
Ex.
3.5 M is the holder of an instrument. The instrument is in hands
of M’s banker, who transfers it to N’s credit as per instruction of M and holds
it as Agent of N. This is a constructive negotiation. N is now holder of the
instrument. [Ref. 3.2.2(b)]
Blank
or General Endorsement
Ex.
3.6 Shyam signs on the back of the bill payable at his order. This is an
endorsement in blank by Shyam [Ref.3.5.3.1]
Full
or special Endorsement
Ex.
3.7 O writes the
word 'Pay to Q or order’ over the signature of P, who previously indorsed the
bill to O in blank. O is not liable as an indorser but the writing
operates as an endorsement in full from P to Q [Ref.3.5.3.2]
Endorsement
in blank followed by an endorsement in full
Ex.
3.8 F, the holder of a note payable to order, indorses in blank
and negotiates to G. G negotiates it by delivery to H. H indorses it in full to
I or order. I negotiates it by delivery to J. J cannot recover from I nor from
H because J does not derive title from H, but J can recover from F or any party
prior to F. [Ref.3.5.3.3]
Partial Endorsement
Ex. 3.9 X, the holder
of a bill for Rs.6000, ‘payable to X or order’ X endroses it to Y for Rs4000
and to Z for Rs.2000.The endorsement is invalid as neither Y nor Z can sue or
endorse. [Ref. 3.5.3.5]
Ex.
3.10 X is the holder of a bill for Rs.5,000. He
indorses it thus:
'Pay Y or order Rs.2 500.' This Is a partial endorsement and is invalid for the
purpose of negotiation [Ref. 3.5.3.5]
Cancellation
of Endorsement
Ex.3.11
(a) Q is the holder of a bill, payable to the order of R. R
endorses to S, who in turn endorses to T, who again endorses it to U .
(b) Q
puts his bill in suit against S and strikes out, without U’s consent, the endorsement
by S & T. Q is not entitled to receive anything from U [Ref. 3.5.4]
Negotiation
back
Ex.3.12 M makes a note payable to P or order P endroses the
note to Q who in turn endroses it to R, R to S, and in the way S to Q resulting
in negotiation back. The intermediate parties (R, S) is discharged, and M
regains his original position and cannot sue other parties, for
that would only lead to circuity of action. [Ref. 3.5.5
(i)]
Negotiation
back
Ex.3.13 M makes a note payable to P at order. P endroses
the note to Q who in turn endroses it to R under a sans recourse endrosement,
who in turn endroses to S, and in the same way S to Q resulting in negotiation
back. The intermediate parties (R, S) are not discharged, [Ref. 3.5.5 (i)]
Forged
Instruments
Ex.
3.14 A bill is payable to Harish Chandra or
order. At. maturity another person with the same name Harish Chandra wrongfully
takes the possession of the bill who has no claim on it. The acceptor pays him
on his signature. The bill is not discharged as the acceptor remains liable to
the Harish Chandra who is the owner of the bill. [Ref. 3.6.4]
Ex. 3.15 D
forges Es signature on a note for Rs5000, F a holder, takes it for
authentic acquires no title to the note [Ref.
3.6.4]
Forged Endorsement
Ex.3.16 (a) A bill is
indorsed 'Pay Akbar Ali or order'. Akbar Ali must indorse the bill, and if his
signature is forged, the bill Is worthless.
(b)
A bill is payable to 'E or order' was stolen. E's endorsement was forged and
was indorsed to F who takes it In good faith and for value. F acquires
no title to the bill. He can neither recover nor give a valid discharge for it.
(c) X
drew cheques in favour of Y. X's accountant forged Ys endorsement
and negotiated the cheques to Z, who took them in good faith and for value. Z
received payment on the cheques.X can recover the amount from Z, as Z
aquires no title upon such act. The forgery causes a break in the chain
of transference of title. [Ref. 3.6.5]
Ex.
3.17 A bill
is indorsed 'Akbar Ali or order'. Ali, indorses the bill in blank. It comes
into the hands of X. X passes it on to Y by simple delivery. Y forges X's endorsement and
transfers it to Z. As Z, the holder, does not derive his title through the
forged endorsement of X, but through the endorsement of Ali which is genuine,
he can sue any of the parties to the bill without taking notice of X's forged endorsement.
[Ref. 3.6.5]
Instrument
without consideration
Ex.
3.18 G, the holder of a bill, transfers it to H,
without consideration. H transfers it to I without
consideration. I transfers it to J for value.
J transfers it to K without consideration. The immediate
parties are : G & H, H and I, I and J, and J and K. H, I,
and K cannot recover the amount from their
immediate prior parties, i.e. G, H, and J respectively because of absence of
consideration.
K can
recover the amount of the bill from G, H and I in the same manner as J
would have done because J is a holder for value. The fact that K gave no
value for the bill and that G received none, makes no difference. But as
between K and J, K has got no right as against J because as
between these two immediate parties, no consideration passed from K to J. [Ref. 3.6.6]
Partial
absence or failure of money - consideration
Ex. 3.19 X draws
a bill on Y for Rs.1000 payable to the order of X. Y accepts the bill,
but the bill gets dishonoured due to non payment. X sues Y on the bill. Y
proves that the acceptance was for Rs.800 as Rs.200 was for an
accommodation to X (the plaintiff), then X can recover only Rs.800. But if the
bill gets into the hands of a holder in due course, he can recover the full amount
of Rs.1000. [Ref. 3.6.6(1)]
For more details, refer
to Business & Corporate Laws by Asok Nadhani, BPB Publications, www.bpbonline.com,
bpbpublications@gmail.com
