Negotiation and Assignment

Meaning

Easy transferability is one of the important characteristics of a negotiable instrument. An instrument may be transferred:
1. By assignment, or
2. By negotiation.

Transfer by Assignment

A negotiable instrument can also be transferred by assignment. Assignment means transfer of ownership by a written document under the provisions of the Transfer of Property Act, 1882.

Example:

A executed a promissory note in favour of B. B sold this note by assignment under a sale deed to C. C sued A to recover the amount. A contended that since C was not a holder in due course, no suit was maintainable.

The Court held, although C was not a holder in due course, yet he is a holder within the meaning of Sec. 8 as he is in possession of the note and as an assignee, entitled to recover the amount in his own name. Hence an instrument can be transferred by assignment. But a transferee acquires only those rights which the transferor had at the time of assignment and no more.

Transfer by Negotiation (Sec. 47):

When a note, bill or cheque is transferred to any person, so as to make that person holder of the instrument, the instrument is said to be negotiated.

Mode of negotiation or how negotiation is effected?

(i) Negotiation by delivery (Sec.47) The transfer of a negotiable instrument payable to bearer can be effected by mere delivery.
Example:

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

(ii) Negotiation by endorsements and delivery (Sec. 48). A negotiable instrument, payable to order, is negotiable by the holder, by indorsement and delivery thereof.
Example:

A holds a cheque payable to order. A signs on the back of the cheque and writes ‘Pay B’. Therefore, A delivers the cheque to B. It is negotiation by indorsement and delivery.
Significance or Importance of the Term ‘Delivery’:

The term ‘delivery’ is very important in negotiation: Delivery here means actual or constructive delivery with an intention of transferring property in the instrument. If the instrument is executed but is not delivered, there is no negotiation.

Example:

(a) A person executed a promissory note but died before delivering it to the payee.
The promissory note was found in his papers and it was delivered to the indorsee. There is no negotiation and payee cannot recover the amount.

(b) Similarly, when an instrument payable to bearer was accidentally lost and picked up by a passer-by X, the passer-by did not acquire any title. However, if he transfers it, say, to Mr. Y. who takes it for value and in good faith, he (Y) will acquire a good title to the instrument.

TRANSFER OF INSTRUMENTS

Assignment: Under general contract principles, a negotiable instrument may be transferred to an assignee, who then holds the instrument with all the rights of the Assignor.

Negotiation: Transfer of an instrument in such a form that the transferee becomes a holder, who has at least the same rights in the instrument as the transferor, and may have more rights than the transferor.

Negotiating Order Instruments: An order instrument may be negotiated by delivery with any necessary endorsements.

Negotiating Bearer Instruments: Unlike an order instrument, a bearer instrument need not be indorsed to transfer the payee’s rights to the transferee. All that is required is delivery to the new bearer.

INDORSEMENTS

Indorsement: A signature, with or without additional words or statements (e.g., “for deposit only,” “payable to Jane Smith,” “payable from acct. # 000001,” etc.), made by the indorser in order to transfer his or her rights to the
indorsee.

Blank Indorsement: An indorsement that specifies no particular indorsee and can consist of a mere signature.

Special Indorsement: An indorsement that indicates the specific person to whom the indorser intends to make the instrument payable — i.e., the indorsee.

Qualified Indorsement: An indorsement which disclaims any contract liability on the instrument (e.g., “without recourse”).

Restrictive Indorsement: Any indorsement on a negotiable instrument that requires the indorsee to comply with certain instructions regarding the funds involved.

Indorsement for Deposit or Collection: “For deposit only.”

Effect of Negotiation

Negotiation involves transfer of ownership of the instrument from its holder to the other person. When the instrument has been transferred by negotiation the holder who has taken it for value gets good title to the instrument notwithstanding any defect in the title of the transferor, except in the case of forgery because forgery conveys no title.

Thus, where the title of any prior endorser is defective by virtue of fraud, coercion or misrepresentation, the bona fide holder who has taken the instrument, in good faith gets a good title. Negotiation thus conveys a better title to the transferee than the transferor, when the holder is a holder in due course.