Negotiation means transfer of the title of Negotiable Instrument to another person.

Negotiable Instrument can be transferred by the following ways :

  • Negotiation
  • Assignment

Transfer by Negotiation

When an Instrument is transferred by one party to another, so as to make the transferee the holder thereof, the instrument is said to be negotiated (S. 14).

e.g. C gives a cheque to D to keep it in safe custody, the cheque is not negotiated since the property in the cheque is not transferred to D. [L.Parsotam v. L. Bankey Lal, T.N. Seshachalam Naidu v. Venkatachalam Chetty]

  1. Delivery of Instrument:  A bearer instrument may be negotiated by mere delivery (S. 47). Ex. 3.1
  2. Negotiation by endorsement and delivery: An instrument payable to order is negotiable by the holder by endorsement and delivery thereof (S. 48). [Chaitram v.Mohanlal], [Dena Bank v. Madhya Pradesh National Textiles  Corporation Ltd.].

A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after such payment or satisfaction (S. 60).

Delivery of instrument  

Voluntary delivery of Instrument with intention of passing the property is essential to complete negotiation. Acceptance, endorsement of a promissory note, bill, or a cheque is complete only by delivery, which may be actual or constructive. (S. 46)

The legal representative of a deceased person cannot negotiate by delivery only a promissory note, bill of exchange or cheque payable to order and indorsed by the deceased but not delivered. (S. 57).

Kinds of Delivery

  1. Actual : When the instrument is delivered physically to another person.
    1. Constructive: When the instrument is delivered to an agent or a servant of the endorsee or when the indorser, after endorsement, holds the instrument as an agent of the indorsee.
    1. Conditional:Where a condition or a special purpose is stated in the time of delivery, the property in it does not pass to the transferee (even though it is indorsed to him) unless the condition is fulfilled. But in case of holder in due course, the other party remains liable though it was delivered conditionally or for a special purpose only.

Transfer by Assignment

When a holder of an Instrument transfers his right to another person to receive the payment of the instrument, such type of transfer is referred as transfer by Assignment (which in fact amount to Transfer of Debt). Such ‘assignment’ is not dealt under Negotiable Instruments Act.

Distinction between Negotiation and Assignment

Consideration is presumed.1.  Consideration must be proved.
The title of the transferee (i.e., the holder in due course) is better than that of the transferor.The title of the assignee is subject to the defects which existed in the title of the assignor.
Notice of negotiation is not required to be given to any party to the Instrument.Notice of Assignment must be given to the debtor in order to complete the assignment.
Instruments payable to bearer are negotiated by mere delivery while instruments payable to order are negotiated by endorsement and delivery.Assignment can only be made in writing.


  1. Indorsement means signing a negotiable instrument for the purpose of negotiation (S.15). Indorsement along with the delivery completes a negotiation.
  2. The person who signs the instrument is called the ‘indorser’.
  3. The person to whom the instrument is indorsed is called the ‘indorsee’.
  4. Usually indorsement is made by signing ones name at the back of the instrument. It may be made on attached (if the back is full). Paper called ‘Allonge’ which becomes a part of the instrument.

 Who may Indorse (s. 51)

The first indorsement of an instrument can be made by the payee (or payees jointly as the case may be). Subsequent endorsements may be made by a person who becomes the holder or the holders jointly or by a maker or drawer (only if he is a holder).

Essentials of valid Indorsement

The essential elements of a valid indorsement are as follows:

  1. In writing: Writing can be made on the face or back of the Instrument. If no space is left on the instrument, a separate slip of paper can be attached to the instrument for this purpose, called ‘allonge’.
  2. Signed: The indorsement is valid only if it is signed by the indroser.
  3. By the indorser or holder: A person who is entitled to the Instrument only can indorse.
  4. Delivered: The indorsement is completed only after delivery of the instrument with the intention of passing the property in it to the indorsee.
  5. Validity: It must be an indorsement of the entire bill. A partial indorsement does not operate as a valid indorsement.
  6. Making: The bill may be made either by the indorser merely signing his name on the instrument or by any words showing an intention to indorse or transfer the instrument to a specified person.

Kinds of Indorsement

  1. Blank or general indorsement
  2. Full or special indorsement
  3. Indorsement in blank followed by full
  4. Restrictive indorsement
  5. Partial indorsement
  6. Conditional indorsement.

Blank or General Indorsement

If the holder just signs an instrument without specifying the name of the indrosee, it is called as blank indrosement [S. 16 (1)]. This type of indrosement converts an order instrument into a bearer one (S. 54) and is negotiated by mere delivery.

Full or Special Indorsement

In this type of indrosement, the name of the indrosee is specified (e.g., Pay to Ram Narayan, or Pay to Ram Narayan or Order).

Note: Conversion of blank indorsement into full : In an instrument indorsed in blank, the holder, without signing for himself, just writes the name of another person above indorser’s signature, it is converted into an indorsement in full. In such case the holder does not incur responsibility of an indorser (S. 49).  

Indorsement in blank followed by indorsement in full

If an instrument indorsed in blank is subsequently indorsed in full, it remains payable to bearer and negotiable by delivery as against all the parties prior to the indorser in full. In such case the amount of the instrument cannot be claimed by the indorser in full except by the person to it has been indorsed in full, or one who derives title through such person. (S. 55)

Restrictive Indorsement

If an indorsement contains some word which expressly takes away the right of the indorsee to further negotiate the instrument, such indorsement is referred as Restrictive Indorsement (e.g ‘Pay the contents to S only).

Partial Indorsement

If, by way of indorsement only a part of the amount is purported to be transferred, such indorsement is called as partial indorsement. A partial indorsement is invalid for the purpose of negotiation.

But where the amount in an instrument has been partly paid, a note to that effect may be made on the instrument which may then be negotiated for the balance (S. 56).

Conditional Indorsement

Where indorsement is made subject to some condition, it is called as conditional indorsement, which may be classified as follws:

  • Sans Recourse indorsement
  • Liability dependent on Contingency
  • Facultative Indorsement
  • Sans Frais Indorsement

‘Sans Recours’ Indorsement

Sans Recours means ‘without any remedy’. Here the indorser excludes his liability to the indorsee on the instrument (e.g, Pay Xor order without recourse to me’ or ‘Pay Xor order sans recours’). In case of dishonour, the holder cannot make an indorser liable, even though the holder is a holder in due course. (s. 52)

Contingent Indorsement

An indrosement whereby the indorser makes his liability dependent upon a contingency (e.g. ‘Pay X or order only after the goods has been consigned’). In such case, the liability of the holder as an indorser would arise only upon the happening of the contingent event specified.

Facultative Indorsement

An indorsement whereby the indorser waives some of his right (Pay X or order, notice of dishonour waived’).

‘Sans frais’ Indorsement

Sans frais’ means without expense.By such indorsement, the indorser puts a condition that no expenses should be incurred on account of the bill.

Cancellation of Indorsement

The indorser is discharged from liability where the holder without the consent of the indorser, cancels or destroys or impairs indorser’s remedy against a prior party (S. 40).

Negotiation back

  1. If in the due course of negotiation, an instrument comes back in the hands of a person who is already a party of such instrument, it is called ‘Negotiation back’. In such a case, the holder cannot sue such parties to whom he was previously liable as an indorser, but can enforce payment to those parties to whom he was not previously liable.
  1. If negotiation is made by a party by way of ’sans recourse’ endorsement and if it is negotiated back to such party, then all the parties will continue to be liable to such a party.

Effect of Indorsement

  1. Transfers the property of an instrument to the indorsee.
  2. Indorsee acquires a right to negotiate the instrument to anyone as per his choice.
  3. Indorsee gets the right of action for recovery against all the parties whose name appears on the instruments. (s.50)

Instruments obtained by unlawful means

  1. Stolen Instruments
  2. Instruments obtained by coercion or fraud
  3. Instruments obtained for an unlawful consideration
  4. Forged instruments.
  5. Forged endorsement.
  6. Instruments without consideration
  7. Lost Instruments

Stolen instruments

Acquiring an Instrument by theft disallows any person from enforcing any payment or from retaining it against the party from whom he has stolen it. However if he acquires any payment on it, the true owner can recover the amount due on the instrument from him.

Instruments obtained by coercion or fraud

Any contract, including those on negotiable instruments obtained by coercion or fraud cannot recover anything, when sued on the instrument. However, coercion or fraud cannot in general be set up against aholder in due course or a holder deriving title from such holder.

Instruments obtained for an unlawful consideration (s. 58)

An Instrument obtained for an unlawful consideration creates no obligation between the parties thereon. But a holder in due course obtains a good title to an instrument which was originally made or drawn or subsequently negotiated for an unlawful consideration.

Forged instruments

Forgery can be termed as falsification or alteration of a writing with an intention to prejudice the rights of another (like Falsely writing the name of anther person, Signing the name of a fictitious person etc).

A person who has paid money by mistake on a forged signature may recover it from the person to whom he has paid it (S. 72 of the Indian Contract Act, 1872). This rule applies to all, even to a holder in due course.

Forged Indorsement

In case of forged Indorsement a person cannot acquire the rights of a holder in due course nor any title to the instrument even though if he takes it in good faith and for value.   

In case of blank indorsement mere delivery is enough to derive a title as it becomes payable to bearer. The transferee can sue any of the parties to the bill overlooking the forgery.

Instruments without consideration (s.43)

An instrument made, drawn, accepted, indorsed, or transferred without consideration (or for a consideration which fails) creates no obligation of payment between the parties to the transaction. As between immediate parties, the defendant can plead absence of consideration.

Holder acquiring an instrument for consideration (and other subsequent holder deriving the title) can claim or recover the amount due from the transferor or from any prior party thereto. So, subsequent holders having title can recover the amount from any or all of the prior parties once the instrument gets into |he hands of a holder in due course.

  1. Partial absence or failure of money-consideration:  When there is a partial absence or failure of money-consideration on an instrument, the immediate parties cannot recover more than actual consideration. But this rule does not apply to a holder in due course (s. 44).
  2. Partial failure of non- monetary consideration: Sometimes, there may be a partial absence or failure of consideration other than money on an instrument. If the part failed is capable of being ascertained in terms of money without a collateral inquiry, the sum due to immediate party is proportionately reduced. If such ascertainment cannot be made without a collateral inquiry, the holder can recover the full amount (s. 45).

Lost Instruments

When an instrument is lost before it becomes due, following rules apply :

  1. Notice to prior parties: Notice of loss should be given to the prior parties by the owner so to prevent them from taking it up without proper inquiry. Public advertisement of the loss should also be given.
  2. No title: The finder of the lost bill acquires no title to it. The rightful owner is entitled to recover it from the finder.
  3. Application to the drawee: The party who has lost the instrumentmust make an application to the drawee to make payment on due date. If the application is dishonoured, he must give notice of dishonour to all the parties liable or else he will lose his remedy against the drawer and indorsers.
  4. Duplicate copy of bill: The holder may apply to the drawer for a duplicate bill after providing indemnity and may compel the drawer to issue a duplicate bill, if the drawer refuses to give (s. 45-A).
  5. Indemnity:  When an instrument cannot be produced at the time of payment, the liable party can refuse to pay or can ask for a guarantee against any further claim thereon against him (s. 81).
  6. Payment in due course: The holder in the course gets discharged where the finder obtains payment. But the true owner can recover damages from the finder
  7. Rights of holder in due course: In case of a lost bill payable to bearer or blank endorsement, if finder negotiates it for value, the holder in due course acquires a valid title and is entitled to retain it and compel payment from the parties liable thereon.
  8. Effect of forgery: In any act of forgery, finder confers no title to any person, not even to the genuine transferee for value.


Negotiation by delivery of Instrument

Ex. 3.1 F, the holder of a bearer instrument, delivers to G in payment of a liability. In this case, the instrument has been negotiated.

Negotiation by endorsement and delivery

Ex. 3.2 G is the holder of an instrument payable to bearer which is in the hands of G’s

banker who is also the banker of H. The banker transfers the instrument to H as per G’s direction. So, the instrument has been transferred to H by negotiation. H is the holder of the instrument and the Banker is in its possession as agent of H.

Delivery of Instrument

Ex. 3.3 X made a promissory note payable to Y for Rs.10000 and kept with him. X dies and the note was found and was delivered to Y. Y cannot sue upon the note.

Actual Delivery of Instrument

Ex. 3.4 D, the holder of an instrument payable to bearer, delivers it to E.

Constructive Delivery of Instrument

Ex. 3.5 Mis the holder of an instrument. The instrument is in hands of M’s banker, who transfers it to N’s credit as per instruction of M and holds it as Agent of N. This is a constructive negotiation. N is now holder of the instrument.

Blank or General Endorsement

Ex. 3.6 Shyam signs on the back of the bill payable at his order. This isan endorsement in blank by Shyam

Full or special Endorsement

Ex. 3.7 O writes the word ‘Pay to Q or order’ over the signature of P, who previously indorsed the bill to O in blank. O is not liable as an indorser but the writing operates as an endorsement in full from P to Q

Endorsement in blank followed by an endorsement in full

Ex. 3.8 F, the holder of a note payable to order, indorses in blank and negotiates to G. G negotiates it by delivery to H. H indorses it in full to I or order. I negotiates it by delivery to J. J cannot recover from I nor from H because J does not derive title from H, but J can recover from F or any party prior to F.

Partial Endorsement

Ex. 3.9 X, the holder of a bill for Rs.6000, ‘payable to X or order’ X endroses it to Y for Rs4000 and to Z for Rs.2000.The endorsement is invalid as neither Y nor Z can sue or endorse.

Ex. 3.10  X is the holder of a bill for Rs.5,000. He indorses it thus: ‘Pay Y or order Rs.2 500.’ This Is a partial endorsement and is invalid for the purpose of negotiation

Cancellation of Endorsement


(a) Qis the holder of a bill, payable to the order of R. R endorses to S, who in turn endorses to T, who again endorses it to U .

(b) Q puts his bill in suit against S and strikes out, without U’s consent, the endorsement by S & T. Q is not entitled to receive anything from U [Ref. 3.5.4]

Negotiation back

Ex.3.12 M makes a note payable to P or order P endroses the note to Q who in turn endroses it to R, R to S, and in the way S to Q resulting in negotiation back. The intermediate parties (R, S) is discharged, and M regains his original position and cannot sue other parties, for that would only lead to circuity of action.

Ex.3.13 M makes a note payable to P at order. P endroses the note to Q who in turn endroses it to R under a sans recourse endrosement, who in turn endroses to S, and in the same way S to Q resulting in negotiation back. The intermediate parties (R, S) are not discharged.

Forged Instruments

Ex. 3.14 A bill is payable to Harish Chandra or order. At. maturity another person with the same name Harish Chandra wrongfully takes the possession of the bill who has no claim on it. The acceptor pays him on his signature. The bill is not discharged as the acceptor remains liable to the Harish Chandra who is the owner of the bill.

Ex. 3.15 D forges E’s signature on a note for Rs.5000, F a holder, takes it for authentic acquires no title to the note.

Forged Endorsement

Ex.3.16 (a) A bill is indorsed ‘Pay Akbar Ali or order’. Akbar Ali must indorse the bill, and if his signature is forged, the bill Is worthless.

(b) A bill is payable to ‘E or order’ was stolen. E’s endorsement was forged and was indorsed to F who takes it in good faith and for value. F acquires no title to the bill. He can neither recover nor give a valid discharge for it.

(c) X drew cheques in favour of Y. X’s accountant forged Ys endorsement and negotiated the cheques to Z, who took them in good faith and for value. Z received payment on the cheques. Xcan recover the amount from Z, as Z aquires no title upon such act. The forgery causes a break in the chain of transference of title.

Ex. 3.17 A bill is indorsed ‘Akbar Ali or order’. Ali, indorses the bill in blank. It comes into the hands of X. X passes it on to Y by simple delivery. Y forges X’s endorsement and transfers it to Z. As Z, the holder, does not derive his title through the forged endorsement of X, but through the endorsement of Ali which is genuine, he can sue any of the parties to the bill without taking notice of X’s forged endorsement.

Instrument without consideration

Ex. 3.18 G, the holder of a bill, transfers it to H, without consideration.  H transfers it to I without consideration.  I transfers it to J for value.   J transfers it to K without consideration.   The immediate parties are : G & H, H and I, I and J, and J and K. H, I, and K cannot recover the amount from their immediate prior parties, i.e. G, H, and J respectively because of absence of consideration.

K can recover the amount of the bill from G, H and I in the same manner as J would have done because J is a holder for value. The fact that K gave no value for the bill and that G received none, makes no difference. But as between K and J, K has got no right as against J because as between these two immediate parties, no consideration passed from K to J.

Partial absence or failure of money – consideration

Ex. 3.19 X draws a bill on Y for Rs.1000 payable to the order of X. Y accepts the bill, but the bill gets dishonoured due to non payment. X sues Y on the bill. Y proves that the acceptance was for Rs.800 as Rs.200 was for an accommodation to X (the plaintiff), then X can recover only Rs.800. But if the bill gets into the hands of a holder in due course, he can recover the full amount of Rs.1000.

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