Third-year Law Notes & Flashcards

INTRODUCTION

Negotiable instruments play an essential role in commercial and financial transactions by providing a convenient and secure method for transferring money and credit. The Negotiable Instruments Act, 1881 governs the legal framework relating to negotiable instruments in India. It defines various instruments such as promissory notes, bills of exchange, and cheques, and prescribes the rights, duties, and liabilities of the parties involved.

In any negotiable instrument, several parties may be involved depending on the nature of the instrument and the stage of negotiation. These parties include the drawer, drawee, acceptor, payee, holder, endorser, and endorsee. Their roles and responsibilities are defined under the Act to ensure certainty and trust in commercial dealings. Apart from identifying the parties, the Act also regulates the processes of negotiation, assignment, delivery, and endorsement, which facilitate the transfer of these instruments from one person to another.

PARTIES TO NEGOTIABLE INSTRUMENTS

Parties to bill of exchange

Drawer: The maker of a bill of exchange is called the 'drawer'.

Drawee: The person directed to pay the money by the drawer is called the 'drawee'.

Acceptor: After a drawee of a bill has signed his assent upon the bill, or if there are more parts than one, upon one of such parts and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the 'acceptor'.

Payee: The person named in the instrument, to whom or to whose order the money is directed to be paid by the instrument is called the ‘payee'. He is the real beneficiary under the instrument. Where he signs his name and makes the instrument payable to some other person, that other person does not become the payee.

Indorser: When the holder transfers or indorses the instrument to anyone else, the holder becomes the 'endorser'.

Indorsee: The person to whom the bill is indorsed is called an 'endorsee'.

Holder: A person who is legally entitled to the possession of the negotiable instrument in his own name and to receive the amount thereof, is called a 'holder'. He is either the original payee, or the endorsee. In case the bill is payable to the bearer, the person in possession of the negotiable instrument is called the 'holder'.

Drawee in case of need: When in the bill or in any endorsement, the name of any person is given, in addition to the drawee, to be resorted to in case of need, such a person is called 'drawee in case of need'. In such a case it is obligatory on the part of the holder to present the bill to such a drawee in case the original drawee refuses to accept the bill. The bill is taken to be dishonoured by non-acceptance or for non-payment, only when such a drawee refuses to accept or pay the bill.

Acceptor for honour: In case the original drawee refuses to accept the bill or to furnish better security when demanded by the notary, any person who is not liable on the bill, may accept it with the consent of the holder, for the honour of any party liable on the bill. Such an acceptor is called 'acceptor for honour'.

Parties to a Promissory Note

Maker: He is the person who promises to pay the amount stated in the note. He is the debtor.

Payee: He is the person to whom the amount is payable i.e. the creditor.

Holder: He is the payee or the person to whom the note might have been indorsed.

The endorser and endorsee (the same as in the case of a bill).

Parties to a Cheque

Drawer: He is the person who draws the cheque, i.e., the depositor of money in the bank.

Drawee: It is the drawer's banker on whom the cheque has been drawn.

Payee: He is the person who is entitled to receive the payment of the cheque.

The holder, endorser and endorsee (the same as in the case of a bill or note).

NEGOTIATION

Negotiation may be defined as the process by which a third party is constituted the holder of the instrument so as to entitle him to the possession of the same and to receive the amount due thereon in his own name.

According to section 14 of the Act,
“when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder thereof, the instrument is said to be negotiated."

The main purpose and essence of negotiation is to make the transferee of a promissory note, a bill of exchange or a cheque the holder thereof.

Negotiation thus requires two conditions to be fulfilled, namely:

• There must be a transfer of the instrument to another person; and
• The transfer must be made in such a manner as to constitute the transferee the holder of the instrument.

Handing over a negotiable instrument to a servant for safe custody is not negotiation; there must be a transfer with an intention to pass title.

Case Law

In Kundan Lal Rallaram v. Custodian, Evacuee Property (1961) 1 SCR 633, the Supreme Court observed that possession of a negotiable instrument raises a presumption that the holder is a holder in due course unless the contrary is proved.

MODES OF NEGOTIATION

Negotiation may be effected in the following two ways:

1. Negotiation by delivery (Sec. 47)

Where a promissory note or a bill of exchange or a cheque is payable to a bearer, it may be negotiated by delivery thereof.

Example:
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.

2. Negotiation by endorsement and delivery (Sec. 48)

A promissory note, a cheque or a bill of exchange payable to order can be negotiated only by endorsement and delivery.

Unless the holder signs his endorsement on the instrument and delivers it, the transferee does not become a holder. If there are more payees than one, all must endorse it.

ASSIGNMENT

Bills, notes and cheques represent debts and as such have been held to be assignable without endorsement.

Transfer by assignment takes place when the holder of a negotiable instrument sells his right to another person without endorsing it. The assignee is entitled to get possession and can recover the amount due on the instrument from the parties thereto.

Of the two methods of transfer of negotiable instruments discussed, transfer by negotiation is recognised by the Negotiable Instrument Act.

NEGOTIATION AND ASSIGNMENT DISTINGUISHED

The various points of distinction between negotiation and assignment are as below:

• Negotiation requires delivery only to constitute a transfer, whereas assignment requires a written document signed by the transferor.
• Consideration is always presumed in the case of transfer by negotiation. In the case of assignment consideration must be proved.
• In case of negotiation, notice of transfer is not necessary, whereas in the case of assignment notice of the transfer must be given by the assignee to the debtor.
• The assignee takes the instrument subject to all the defects in the title of the transferor. If the title of the assignor was defective the title of the assignee is also defective. However, in case of negotiation the transferee takes the instrument free from all the defects in the title of the transferor.
• In case of negotiation a transferee can sue the third party in his own name. But an assignee cannot do so.

Case Law

In, ICDS Ltd. v. Beena Shabeer and Anr. MANU/SC/0669/2002 the Supreme Court emphasised the importance of negotiability and recognised the right of the holder of a negotiable instrument to recover the amount in his own name.

IMPORTANCE OF DELIVERY IN NEGOTIATION

Delivery is a voluntary transfer of possession from one person to another.

Delivery is essential to complete any contract on a negotiable instrument whether it be contract of making endorsement or acceptance. The property in the instrument does not pass unless the delivery is fully completed.

Section 46 of the Act provides that a negotiable instrument is not made or accepted or endorsed unless it is delivered to a proper person.

For instance, if a person signs a promissory note and keeps it with himself, he cannot be said to have made a promissory note; only when it is delivered to the payee that the promissory note is made.

Delivery may be actual or constructive.

ENDORSEMENT

The word 'endorsement' in its literal sense means writing on the back of an instrument. But under the Negotiable Instruments Act it means the writing of one's name on the back of the instrument or any paper attached to it with the intention of transferring the rights therein.

Thus, endorsement 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 by endorsement is called the endorsee.

ESSENTIALS OF A VALID ENDORSEMENT

The following are the essentials of a valid endorsement:

• It must be on the instrument.
• It must be made by the maker or holder of the instrument.
• It must be signed by the endorser.
• It must show intention to transfer.
• It must be completed by delivery of the instrument.
• It must be an endorsement of the entire bill.

WHO MAY ENDORSE

The payee of an instrument is the rightful person to make the first endorsement. Thereafter the instrument may be endorsed by any person who has become the holder of the instrument.

(Sec. 51)

CLASSES OF ENDORSEMENT

An endorsement may be:

• Blank or general
• Special or full
• Partial
• Restrictive
• Conditional

(a) Blank or General Endorsement

When the endorser merely signs on the instrument without mentioning the name of the person in whose favour the endorsement is made.

This converts the instrument into a bearer instrument.

(b) Special or Full Endorsement

When the endorsement specifies the name of the person to whom the instrument is payable.

Example:

“Pay A or order” followed by the signature.

Conversion of Endorsement in Blank into Endorsement in Full

Section 49 allows conversion of blank endorsement into full endorsement without the holder becoming liable as endorser.

(c) Partial Endorsement

Section 56 provides that a partial endorsement transferring only a part of the amount is invalid for negotiation.

(d) Restrictive Endorsement

Section 50 recognises endorsements restricting further negotiation.

Example:

“Pay C for my use”.

Conditional or Qualified Endorsement

A conditional endorsement makes the liability dependent on a condition.

Examples include:

• Sans recourse endorsement
• Facultative endorsement
• Sans frais endorsement

Important Case Law

In, Laxmi Dyechem v. State of Gujarat and Ors. MANU/SC/1030/2012 the Supreme Court discussed liabilities arising out of dishonour of negotiable instruments and emphasised the statutory scheme of the Negotiable Instruments Act.

EFFECTS OF ENDORSEMENT

The legal effect of negotiation by endorsement and delivery is:

• To transfer property in the instrument
• To vest the right of further negotiation
• To allow the holder to sue in his own name

CANCELLATION OF ENDORSEMENT

Section 40 provides that if the holder destroys or impairs the endorser’s remedy against prior parties, the endorser is discharged from liability.

NEGOTIATION BACK

Negotiation back occurs when an endorsee again becomes the holder of the instrument.

In such a case he cannot sue intermediate endorsers, though he may further negotiate the instrument.

CONCLUSION

Negotiable instruments form an important part of commercial transactions as they facilitate the easy transfer of money and credit in business dealings. The Negotiable Instruments Act, 1881 clearly defines the various parties involved and establishes rules relating to negotiation, assignment, delivery, and endorsement. These provisions ensure certainty, security, and trust in financial transactions.

The concepts of endorsement and negotiation enable the smooth circulation of negotiable instruments, allowing them to function effectively as substitutes for money in commercial activities. Judicial decisions have further clarified the rights and liabilities of the parties involved, thereby strengthening the legal framework governing negotiable instruments. Consequently, negotiable instruments continue to play a vital role in promoting efficiency and reliability in modern trade and commerce.

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