The Negotiable Instrument Act was introduced in the year 1881. The Act facilitates the settlement of payments in business. The Act provides a legal framework for rules related to negotiable instruments as well as capacity and liabilities of parties to the instrument. Another striking feature of the Act is that it ensures legal protection to various mercantile instruments.
A negotiable instrument is a document that includes a ‘promise to pay’ a certain sum to the bearer of the respective document. The objective of such document is to transfer the specific amount of money to the assigned person. The Finance Ministry is the nodal agency that regulates the system of negotiable instruments. According to section 13 (i) of the Negotiable Instruments Act, a negotiable instrument includes a promissory note, bill of exchange or cheque.
The Negotiable Instruments Act of 1881 was drafted in 1866 by the Third Indian Law Commission. Objections were raised by the various mercantile communities, consequently the bill had to be re- drafted in 1877. After a sufficient period of time and criticism by the courts, the bill was revised by a Select Committee. In 1880 by the Order of the Secretary of State, the bill had to be referred to a New Law Commission. Prior to the enactment of this act, the provision of the English Negotiable Instrument Act was applicable in India.
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
Negotiable Instruments provide a distinctive identity, which are as follows:
- Easy to transfer- Negotiable Instruments are a convenient method to transfer money.
- Written- Negotiable Instruments should be in written form.
- Definite Time- The period for the order of payment must be definite.
Section 15 of the Negotiable Instruments Act of 1881 characterizes Endorsement. In literal sense, the term ‘endorsement’ means, writing on back of an instrument. Consequently, endorsement is the act of signing a negotiable instrument with the intent of negotiation.
The person who effects an endorsement is called an endorser. The person to whom a negotiable instrument is transferred is called an endorsee.
Essentials of Valid Endorsement:
The following are essentials of a valid endorsement-
- Place – The endorsement must be on the instrument. It can be either on the front or back side of the instrument. In case there is no space left on the instrument, a separate paper may be affixed to it. Such an attachment is called ‘allonge’ and should be in ink.
- Holder- The endorsement can only be made by the holder of the instrument.
- Intent to transfer- The endorsement may be made by the endorser either by signing his name on the instrument or by any words showing the intent to transfer or endorse the instrument to a specific individual.
- Delivery- The delivery of instrument must be done by the endorser or by someone on his behalf.
- Entire Bill- The endorsement should be an entire bill. A partial endorsement does not operate as a valid endorsement.
TYPES OF ENDORSEMENT
Blank or General Endorsement:
Meaning- An endorsement is blank or general when the endorser signs his name only and it becomes payable to the bearer, in accordance to Section16 (i) . Such type of endorsement specifies no endorsee. The effect of a blank endorsement is to convert the order instrument into a bearer instrument which may be transferred merely by delivery, as mentioned in Section 54.
Example- A bill is payable to X. X endorses the bill simply by affixing his signature. This is an endorsement in blank by X.
Special of Full Endorsement:
Meaning- An endorsement in full is one where the endorser not only puts his signature on the instrument but also mentions the name of the person to whom the payment has to be made.
Conversion of blank to full endorsement- As per Section 49, the holder of a negotiable instrument may without signing his own name, convert the blank endorsement into an endorsement in full by mentioning above the endorsers signature a direction to pay to any other person as endorsee.
Example- X is the holder of bill endorsed by Y in blank. X writes above Y’s signature, “pay to Z or order”. X is not liable as endorser but the writing operates as an endorsement in full from Y to Z.
Meaning- It is a kind of endorsement which either by express words restricts or prohibits further negotiation of the bill. The endorsement expresses that it is not a complete and unconditional transfer of the instrument but it is a mere authority to the endorsee to deal with the bill as expressed in Section 50.
Example- “Pay to Z only” or “Pay to X on account of Y” or “Pay to Y for my use”.
Meaning- A partial endorsement is one which allows transferring to endorsee only a partial amount of the sum payable on the instrument. In this endorsement amount may be transferred to two or more endorsees severally. This has been defined in Section 56.
Example- X is the holder of a bill for Rupees 1000. He endorses it saying, “pay to Y or order Rupees 500”.
Meaning- Section 52 states that if the endorser of a negotiable instrument, by express words in the endorsement, makes his liability dependent on the happening of a specified event, such endorsement is called a conditional endorsement. Such an endorsement limits the liability of the endorser.
Example- “Pay X or order on his marriage” or “Pay Y on the arrival of ABC Ship”.
Forms- An endorsement may be made conditional in any of the following forms;
( i) Sans Recourse Endorsement– An endorser may express by words to exclude his own liability on the negotiable instrument to the endorsee or any subsequent holder in case of dishonor of the instrument.
(ii) Facultative Endorsement– An endorser in such type of endorsement expressly gives up some of his rights under the negotiable instrument. For instance, Pay X or order, notice of dishonor is waived.
(iii) Sans Frais Endorsement– In this kind of endorsement an endorser does not want the endorsee or any holder of the instrument to incur any expense on his account.
EFFECTS OF ENDORSEMENT
- Transfer- The property in instrument is transferred from endorser to endorsee.
- Right to negotiate- The endorsee gets the right to negotiate the instrument.
- Right to sue- The endorsee gets the right to sue in his own name to all other parties.
Author: Arisia K,