Endorsement Under Negotiable Instruments Act, 1881

In this article we have discussed about the Concept of Endorsement Under Negotiable Instruments Act, 1881, including meaning, effect, kinds, significance and liability of endorser.

 

1. Introduction:

 

In the realm of negotiable instruments, endorsement holds a crucial role in facilitating the transfer of ownership and ensuring the smooth flow of financial transactions. Governed by the Negotiable Instruments Act (NI Act), endorsement is a concept that provides legal recognition to the transfer of rights and responsibilities associated with negotiable instruments like promissory notes, bills of exchange, and cheques. In this article, we delve into the concept of endorsement, its significance, types, and implications within the legal framework.

 

2. Understanding Endorsement:

 

Endorsement refers to the act of signing, usually on the reverse side, a negotiable instrument to transfer the rights and title of the instrument to another party. Essentially, endorsement serves as a formal mechanism to transfer the ownership of the instrument from the endorser (original holder) to the endorsee (new holder). It transforms the instrument into a negotiable instrument, allowing it to be freely negotiated and enabling further endorsements until the instrument is eventually presented for payment.

 

3. Persons who can Endorse

 

Section 51 of the Negotiable Instruments Act, 1881 provides that every sole maker, drawer, payee or endorser or all of several joint makers, drawers, payees or endorsees may endorse and negotiate the instrument.

 

4. Effect of Endorsement

 

Section 50 lays down that the endorsement of a negotiable instrument followed by delivery transfers to the endorsee the property therein with the right of further negotiation. This means that the endorsement-

 

(a) transfers to the endorsee the property in the bill,

(b) vests in him the right of action against all parties whose names appear on instrument, and

(c) gives him a right of further negotiating the instrument to any one he pleases.

 

However, the endorsement may, by express words, restrict or exclude such right or may merely constitute the endorsee an agent to endorse the instrument, or to receive its contents for the endorser, or for some other specified person

 

5. Kinds of Endorsements

 

Endorsement may be of the following kinds.

 

(a) Endorsement in blank - If the endorser signs only his name on the back of the instrument for the purpose of negotiating it, it is an endorsement in blank. [Section 16]

(b) Endorsement in full - If the endorser adds to his signature the name of a person whom or to whose order, he wants the instrument to be paid, it is an endorsement in full. [Section 16]

(c) Restrictive endorsement - An endorsement of a negotiable instrument makes the endorsee owner of the instrument and confers upon him the right of further negotiation. But if this right of further negotiation is restricted or excluded by express words, it is called 'restrictive' endorsement. [Section 50]

(d) Conditional endorsement - If the endorser inserts any condition in the endorsement, it is called a conditional endorsement. [Section 52]

(e) Partial endorsement - Although an instrument cannot be endorsed to transfer only a part of the amount appearing to be due on the instrument but where such amount has been partly paid a note to that effect may be endorsed on the instrument, which may then be negotiated for the balance. Such an endorsement is called a partial endorsement. [Section 56].

 

6. Liabilities of Endorser

 

The endorser of a negotiable instrument by means of endorsement impliedly promises as follows-

 

(a) The endorser promises that on due presentment the instrument shall be accepted and paid according to its tenure, and that if it be dishonoured, he would compensate the holder or a subsequent endorser who is compelled to pay it, provided notice of dishonour is duly given to him.

(b) The endorser is precluded from denying to a holder in due course the genuineness or regularity in all respects of the drawer's signature and all previous endorsements.

(c) The endorser is precluded from denying to his immediate or subsequent endorsee that the bill was, at the time of his endorsement a valid and subsisting bill and that he had then a good title thereto.

(d) Where a person signs an instrument otherwise than as a drawer or acceptor, he thereby incurs the liability of an endorser to a holder in due course. But in order to incur this liability the bill must be regular in every respect and properly negotiated.

 

7. Significance of Endorsement:

 

1. Transfer of Ownership: Endorsement facilitates the transfer of ownership of negotiable instruments from one party to another without the need for formal assignments. This is essential in cases where parties want to sell, pledge, or otherwise transfer their interests in these instruments.
2. Negotiability: An endorsed negotiable instrument becomes payable to the bearer or the endorsee, making it transferable by mere delivery or endorsement, ensuring liquidity and ease of trade.
3. Liability: The endorser may also assume liability to the endorsee, guaranteeing the payment of the instrument in case of dishonor by the acceptor or maker.
4. Proving Title: An endorsed instrument serves as evidence of the title and ownership of the endorsee. It provides a trail of endorsements that can be used to establish the chain of ownership.

 

8. Conclusion:

 

Endorsement is a cornerstone of the negotiable instruments framework, providing flexibility, liquidity, and security to commercial transactions. Its role in transferring ownership, enabling negotiation, and establishing legal rights underscores its significance in modern commerce. As businesses and individuals engage in financial activities, a clear understanding of endorsement types and implications is essential to ensure the proper execution of transactions within the legal parameters outlined by the Negotiable Instruments Act.

FAQ (Frequently Asked Questions)

 

1. Can a drawer escape from his liability?

 

Ans: Yes, a drawer can limit or exclude his liability by inserting in the bill an express stipulation to that effect.

 

2. Which section of the Negotiable Instruments Act, 1881, describes about the ‘Endorsement’?

 

Ans: Section 15.

 

3. Which is not considered as ‘Negotiable Instrument’ as per the NI Act, 1881?

 

Ans: Currency Notes.