The act of a person who is a holder of a negotiable instrument in signing his or her name on the back of that instrument, thereby transferring title or ownership is an endorsement. An endorsement may be in favour of another individual or legal entity. An endorsement provides a transfer of the property to that other individual or legal entity. The person to whom the instrument is endorsed is called the endorsee. The person making the endorsement is the endorser. Let us discuss the Endorsement of Instruments here in detail.
Endorsement of Instruments
Types of Endorsement
- Blank Endorsement – Where the endorser signs his name only, and it becomes payable to bearer.
- Special Endorsement – Where the endorser puts his sign and writes the name of the person who will receive the payment.
- Restrictive Endorsement – Which restricts further negotiation.
- Partial Endorsement – Which allows transferring to the endorsee a part only of the amount payable on the instrument.
- Conditional Endorsement – Where the fulfilment of some conditions is required.
1. Blank Endorsement or General Endorsement
An endorsement is blank or general where the endorser signs his name only, and it becomes payable to bearer. Thus, where a bill is payable to “Ram or order”, and he writes on its back “Ram”, it is an endorsement in blank by Ram and the property in the bill can pass by a mere presentation.
Learn more about the Classification of Negotiable Instruments Act here in detail.
2. Special or Full Endorsement
An endorsement “in full” or a special endorsement is one where the endorser puts his signature on the instrument as well as writes the name of a person to whom order the payment is to be made.
A bill made payable to Ram or order, and endorsed “pay to the order of Shyam” would be specially endorsed and Shyam endorses it further. We can turn a blank endorsement into a special one by adding an order making the bill payable to the transferee.
3. Restrictive Endorsement
An endorsement is restrictive which restricts the further negotiation of an instrument.
Example of restrictive endorsement: “Pay to Mrs. Geeta only” or “Pay to Mrs Geeta for my use” or “Pay to Mrs Geeta on account of Reeta” or “Pay to Mrs. Geeta or order for collection”.
4. Partial Endorsement
An endorsement partial is one which allows transferring to the endorsee a part only of the amount payable on the instrument. This does not operate as a negotiation of the instrument.
Example: Mr. Mohan holds a bill for Rs. 5,000 and endorses it as “Pay Sohan or order Rs. 2500”. The endorsement is partial and invalid.
5. Conditional or Qualified Endorsement
Where an endorser negotiates an instrument and again becomes its holder, we know it as negotiation back to that endorser. After negotiation back, none of the intermediary endorsees are then liable to him.
For example, Ram, the holder of a bill endorses it to Bala, Bala endorses to Kala, and Kala to Lala, and endorses it again to Ram. Ram, being a holder in due course of the bill by the second endorsement by Lala, can recover the amount thereof from Bala, Kala, or Lala and himself being a prior party is liable to all of them.
Therefore, Ram having been relegated by the second endorsement to his original position, cannot sue Bala, Kala, and Lala. Where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all the intermediate endorsers are liable to him. “the italicized portion of the above Section is important”.
An illustration will make the point clear. Ram is the payee of a negotiable instrument. He endorses the instrument ‘sans recourse’ to Bala, Bala endorses to Kala, Kala to Lala, and Lala again endorses it to Ram.
In this case, Ram is not only reinstated in his former rights but has the right of an endorsee against Bala, Kala, and Lala.
Negotiation of Lost Instrument or that Obtained by Unlawful Means
When a negotiable instrument has been lost or has been obtained from a maker, acceptor or holder by means of fraud, or for an unlawful act, no possessor or endorsee, is entitled to receive the amount due thereon from such maker, acceptor, or holder from any party prior to such holder.
He cannot do so unless such possessor or endorsee is, or some person through whom he claims was, a holder in due course.
Solved Question on Endorsement of Instruments
What is forged Endorsement?
If an instrument is endorsed in full, we cannot negotiate it except by an endorsement signed by the person to whom or to whose order the instrument is payable.
This is so because the endorsee obtains title only through his endorsement.
Thus, if an instrument is negotiated by means of a forged endorsement, the endorsee acquires no title even though he is a purchaser for value and in good faith, as the endorsement is a nullity.
Forgery conveys no title. But where the instrument is a bearer instrument or has been endorsed in blank, it can be negotiated by mere delivery, and the holder derives his title independent of the forged endorsement. Also, he can claim the amount from any of the parties to the instrument.
For example, a bill is endorsed, “Pay A or order”. A endorses it in the blank, and it comes into the hands of B, who simply delivers it to C. C forges B’s endorsement and transfer it to D.
Here, D, as the holder does not derive his title through the forged endorsement of B, but through the genuine endorsement of A. Thus, he can claim payment from any of the parties in spite of the intervening forged endorsement.