Page 167 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes Effects of Endorsement

The legal effect of negotiation by endorsement and delivery is:
(i) to transfer property in the instrument from the endorser to the endorsee.
(ii) to vest in the latter the right of further negotiation, and

(iii) a right to sue on the instrument in his own name against all the other parties (Section 50).
Cancellation of Endorsement

When the holder of a negotiable instrument, without the consent of the endorser destroys or
impairs the endorser's remedy against prior party, the endorser is discharged from liability to
the holder to the same extent as if the instrument had been paid at maturity (Section 40).

Negotiation Back

'Negotiation back' is a process under which an endorsee comes again into possession of the
instrument in his own right. Where a bill is re-endorsed to a previous endorser, he has no
remedy against the intermediate parties to whom he was previously liable though he may
further negotiate the bill.

A negotiable instrument is a piece of paper which entitles a person to a sum of money and which
is transferable from one person to another by mere delivery or by endorsement and delivery.
The characteristics of a negotiable instrument are easy negotiability, transferee gets good title,
transferee gets a right to sue in his own name and certain presumptions which apply to all
negotiable instruments. There are two types of negotiable instruments:
(a) Recognised by statute: Promissory notes, Bill of exchange and cheques; and
(b) Recognised by usage: Hundis, Bill of lading, Share warrant, Dividend warrant, Railway
receipts, Delivery orders etc. The parties to bill of exchange are drawer, drawee, acceptor,
payee, indorser, indorsee, holder, drawee in case of need and acceptor for honour. The
parties to a promissory note are maker, payee, holder, indorser and indorsee while parties
to cheque are drawer, drawee, payee, holder, indorser and indorsee.
Negotiation of an instrument is a process by which the ownership of the instrument is transferred
by one person to another. There are two methods of negotiation: by mere delivery and by
endorsement. In its literal sense, the term 'indorsement' means writing on an instrument but in
its technical sense, under the Negotiable Instrument Act, it means the writing of a person's name
on the face or back of a negotiable instrument or on a slip of paper annexed thereto, for the
purpose of negotiation. A bill may be dishonoured by non-acceptance (since only bills require
acceptance) or by non-payment, while a promissory note and cheque may be dishonoured by
non-payment only. Noting means recording of the fact of dishonour by a notary public on the
bill or paper or both partly. Protest is a formal notarial certificate attesting the dishonour of the
bill. The term 'discharge' in relation to negotiable instrument is used in two senses, viz.,
(a) discharge of one or more parties from liability thereon, and
(b) discharge of the instrument.

Self Assessment

State whether the following statements are true or false:

6. A negotiable instrument does not require the signature of its maker.

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