Notes on Negotiable Instruments.

What is meant by negotiation?

Section 191, of the Negotiable Instruments Law provides that, negotiation is the
transfer of the instrument, from one person to another, so as to constitute the transferee
as the holder thereof.

How is negotiation effected?

Negotiation is effected, depending on the type of the instrument involved.

1. An order instrument, is negotiated by endorsement, completed by

delivery.
2. A bearer instrument, is negotiated by mere delivery.

What is an endorsement?

According to Section 30, of the Negotiable Instruments Law, an endorsement is a

transaction, effected by writing on the instrument, or on an attached paper thereto, also
called as an allonge, of ones own name and signature, specifying to whom, or to whose
order the instrument is to be payable.

What are the types of endorsements?

The kinds of endorsements are:

1. Special;
2. Blank;
3. Restrictive;
4. Conditional;
5. Qualified;

A special endorsement, specifies the person to whom, or to whose order, the

instrument is to be payable. The legal effect is that, for the subsequent negotiations, the
instrument requires the endorsement of the person so specified.
 A blank endorsement, does not specify to whom, or to whose order, the
instrument is payable. The legal effect that, the instrument is payable to bearer. If the
instrument is an order instrument, it is now converted to a bearer instrument; thus
payable to the bearer. It remains as a bearer instrument, even if a subsequent endorser,
endorses it specially.

Note that a bearer instrument, may be converted to an order instrument, and

converted again as a bearer instrument. When this happens, it becomes final. This is the
Deans favorite question. Bearer order bearer end of cycle. Order bearer end of
cycle.

A restrictive endorsement is one that:

1. Prohibits further negotiation;

2. Constitutes the endorsee as the agent of the endorser;
3. Constitutes the endorsee as the trustee of the endorser;

If a restrictive endorsement prohibits further negotiation, the instrument ceases

to be negotiable.

A conditional endorsement renders payment of the instrument conditional, by

the happening, or non-happening of an event. The legal effect is that, the party required
to pay, may disregard the condition, and go ahead and pay. However, the person to
whom payment has been made, must hold the payment in trust, and wait for the
payment to happen, or not to happen. If the event does, or does not happened, the
trustee must return the money, or its proceeds.

A qualified endorsement, is one where the endorser negatives personal liability,

by writing, without recourse, or sans recourse on the instrument. The legal effect is that,
the endorser becomes a mere assignor, of the title to the instrument. The negotiability is
not impaired.

Under Section 40, of the Negotiable Instruments Law, what is meant by a fictitious
person? Is this to be interpreted literally?

No, a person is still involved. However, that person does not have any right to the
instrument. This is what is meant by fictitious.
What determines whether a person is fictitious?

What is material in determining whether a person is fictitious, or not is the

intention of the maker.

What is an endorsement in blank?

Section 34, of the Negotiable Instruments Law provides that, an indorsement in

blank specifies no endorsee, and an instrument so indorsed is payable to bearer, and
may be negotiated by delivery.

Under Section 40, of the Negotiable Instruments Law, special endorsers may be held
liable, even if the instrument is a bearer instrument. Why?

Special endorsers are held liable, because of the accumulation of secondary

contracts. The endorsements made by these people, are contracts in and of themselves.
Thus, they may be held liable.

Under Section 38, of the Negotiable Instruments Law, to whom does the phrase,
without recourse, or sans recourse, refer to?

They are in reference to the qualified endorser. Thus, the holder has no recourse
against the qualified endorser.

Under Section 39, of the Negotiable Instruments Law, what is the reason why the
condition may be disregarded by the person making payment?

The reason is the relativity of contracts. The payor is a not a party to the principal
contract, which is why he may disregard the condition, and pay before it happens.

Remember that what is conditional here is the endorsement, and not the
payment. If the payment is conditional, then the instrument is not negotiable.

Do all kinds of restrictive endorsements, destroy the negotiability of an instrument?

 No, negotiability is limited only by the restrictive endorsement that prohibits
further endorsement.