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Effect of Indorsement

Section 50 of the Negotiable Instruments Act,1881.

The indorsement of a negotiable instrument followed by delivery transfers to the indorsee the property therein with the right of further negotiation; but the indorsement may, by express words, restrict or exclude such right, or may merely constitute the indorsee an agent to indorse the instrument, or to receive its contents for the indorser, or for some other specified person.

Illustrations. B signs the following indorsements on different negotiable instruments payable to bearer:—

(a) “Pay the contents to C only.”
(b) “Pay C for my use.”
(c) “Pay C or order for the account of B.”
(d) “The within must be credited to C.”

These indorsements exclude the right of further negotiation by C.

(e) “Pay C.”
(f) “Pay C value in account with the Oriental Bank.”
(g) “Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the indorser and others.”

These indorsements do not exclude the right of further negotiation by C.

Not only does indorsement followed by delivery of a negotiable instrument pass the property in the instrument to the endorsee but it also passes to him the right to negotiate the instrument further unless, that right is expressly or impliedly restricted by the indorsement. The indorser has the power to restrict the right of further negotiation.

Therefore, an unconditional indorsement coupled with an unconditional delivery passes the property in the instrument to the endorsee who can, under the provisions of this Act, recover the amount from the acceptor or the indorser and those above him on dishonour, and can, if he likes, further negotiate it. As has been stated before, delivery must be coupled with indorsement to complete the contract. Without delivery the negotiation is not complete. To constitute a person a holder he must have possession, actual or constructive, of the document. Without possession of the instrument he cannot enforce his rights against other parties nor can a person maintain an action having already endorsed the instrument in favour of another.

Thus, where A issues a cheque in favour of B, who endorses it in favour of C, who again, in his turn, endorses it in favour of D by an unrestricted indorsement, a suit by C against A to recover the amount, on the cheque being dishonoured, does not lie.

The indorsee can recover from all persons whose names appear on the instrument and not from persons whose names do not appear on the instrument but who are in law liable for the debt, in other words, no person whose name does not appear on the instrument can be sued on a negotiable instrument. The name of the person or a firm to be charged upon a negotiable document should be clearly stated on the face or on the back of the document, so that the responsibility is made plain and can be instantly recognised as the document passes from hand to hand. The indorsee cannot sue on the original consideration but can sue on the instrument as such, as indorsement does not pass the right to the consideration but only the right to the amount specified in the bill or note, for himself and in his own name. Therefore, when the managing member of an undivided Hindu family executed a promissory note the indorsee could not sue the other members of the family on the note but could proceed only against the maker of the note or his legal representative. In some cases it was held that where the debt on the promissory note was incurred by one member of the family for the purpose of the whole family for which all the other members were also in law, liable, the indorsee of such a note could maintain an action against all the members of the family including those whose names did not appear on the instrument, if it could be proved that the debt was incurred for the benefit of all. In view of the later decision of the Privy Council already referred to, this appears to be no longer good law.

Restrictive endorsement

Generally, indorsement, followed by delivery, vests in the indorsee of a note the right to further negotiate it, if the form of the note in its inception does not bar such negotiation or if further negotiation is not restricted by the indorsement. This section applies to instruments payable to bearer or to order including cheques and is not limited to negotiable instruments payable to order. An indorsement which expressly either restricts or prohibits further negotiation of an instrument or which expressly states that it is not an absolute or unconditional transfer of the instrument but is only an authority to the indorsee to deal with it as an agent of the indorser, as directed in the indorsement, is a restrictive endorsement.

Plain words should be used to restrict negotiation. A cheque only crossed with the direction “account payee” is not sufficient to restrict negotiation. As will appear from illustrations (f) and (g) to this section an indorsement containing only a statement about the consideration is not a restrictive endorsement. But if an instrument payable to a certain person oi bearer is endorsed by the payee to a specified person it is a valid restrictive indorsement. Where one endorses and delivers a note to his son or agent it will be a question of fact to be decided from the particular circumstances of the case whether the property in the instrument has passed by such indorsement. A bill may be endorsed to another for collection or deposited with him for some special purpose and the indorsement cannot go beyond the directions expressed in the indorsement. Such indorsements restrict further negotiation and donot pass legal title to the amount. The relation between the indorser and the indorsee in such cases is like that of the principal and agent. Except against a holder in due course it is always permissible to prove, in case of conditional delivery, or delivery for a special purpose, that the indorsement was never to pass the property in the instrument absolutely to the indorsee. As between the indorser and the immediate indorsee the terms will be binding although the terms on which the indorsement and delivery are made need not be expressly stated on the instrument. The reason is that in regard to his immediate indorsee the liability of an indorser arises out of the contract between them which is founded not merely on the indorsement itself, but also upon the delivery to the indorsee and upon the intention with which the delivery is made and accepted, as proved by words spoken or written by the parties and the circumstances, such as the usages of the place, and the course of dealings between the parties, under which the delivery takes place.

The illustrations to the section give instances when the indorsement is restrictive and when not. A restrictive indorsee can maintain an action in his own name against all parties whom his indorser could sue but has not the right to negotiate the instrument unless expressly authorised to do so by the indorsement. Where, however, a restrictive indorsement authorises further negotiation all subsequent indorsees take the instrument with the same rights and liabilities of the first indorsee under the restrictive instrument.

Thus, where A indorses a bill as 'Pay B or order for my use’ and B endorses it to C who recovers the amount at maturity. A can recover the amount of the bill from C for C received the amount at maturity for use of A as expressly stated on the instrument. C in such a case is bound to pay the money even after the death of the indorser.

Rights of the restrictive endorsee

As already stated the relationship between the indorser and the endorsee for collection is one of principal and agent. The endorsee for collection is a holder under section 8 but has no title to the bill as owner and is a mere agent for collection. If the amount, the endorsee is authorised to collect, is paid to the indorser the endorsee cannot recover. Where the amount has not been so paid he can recover even by a suit in his name but he will be liable to render account for the amount recovered. Where from the terms of indorsement accountability cannot be inferred between the endorser and the indorsee the endorsement is not for collection and, therefore, the endorsee alone can recover and has the right of suit. The restricted endorsee takes the instrument with all the rights of the indorser except the right of negotiation, and, therefore, in a suit by the endorsee all defences available against the indorser are available against him.

The indorsee for collection does not lose his right of suit on the indorser’s death but if he returns the note to the indorser he ceases to be a holder and in case the amount on the note is due the indorser, to whom the note has been returned, can sue for the amount without a re-indorsement in his favour. If a transferee of a bill returns the bill to the indorser as useless without any re-indorsement he will be deemed to have abandoned his right as a transferee and cannot acquire a right to sue on it without fresh consideration even if the bill comes to his hand. An endorsee for collection may realise the money out of the assets of the maker in the hands of his sons after his death. A bill endorsed for collection in favour of A can be re-endorsed in favour of C which automatically cancels the previous indorsement. A payee is competent to strike out an indorsement made by him without consideration in favour of one of the makers and sue on the note.

What are not restrictive endorsements

Instances of what are not restrictive indorsements are to be found in illustrations e, f, g, added to the section. It is obvious that a mere statement in the indorsement about its consideration is not a restrictive one.