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Negotiation : Meaning and Distinction with Transfer

Section 14 of Negotiable Instruments Act

When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated


This section defines negotiation. A chose in action which includes a promissory note, a bill of exchange or a cheque is transferable in two ways, eg: under the Transfer of Property Act by a deed and under the provisions of this Act. While the Transfer of Property Act applies to all classes of documents covered under the general term, chose in action, the provisions of this Act apply only to promissory notes, bills of exchange and cheques payable to order or bearer. It, therefore, follows that when a promissory note, bill or cheque payable to order or bearer is transferred to a person by endorsement or delivery or by both as laid down in this Act the instrument is said to be negotiated as distinct from transfer by a document under the T.P Act. Thus, if the instrument is payable to 'bearer’ it can be negotiated by mere delivery, no endorsement being necessary. If it is an instrument payable to order the transfer can be effected by endorsement and delivery. When such a transfer is effected the transferee is constituted, a holder of the instrument. The payee or the endorsee is a holder by negotiation.

Difference between ordinary transfer and negotiation

While the Act does not prohibit transfer of negotiable instruments otherwise than by negotiation and the equitable title to the instrument may be transferred by the holder in possession by a deed or by the order ot the court, transfer under this Act has the effect of conferring upon the holder in due course such special rights and privileges as the ordinary transferee of a chose in action does not enjoy as he takes it free from all the detects of its previous holder, and it entitles the transferee to the possession of the document and to recover the amount due thereon in his own name. But the provisions laid down in this Act must be strictly followed to entitle the transferee to the special privileges of a holder in due course. Therefore, if a bill payable to order is transferred by mere delivery and not by endorsement and delivery as this Act requires, the bill cannot be said to be negotiated and such transfer will have the effect of a transfer under the ordinary law passing only the right, title, and interest of the transferor. An endorsement on a note to pay X or order as per accounts attached without recourse, is a negotiation and not an assignment of the instrument. It will, thus, be seen that the difference in the legal effect of transfer under this Act and of that under the ordinary law is considerable. It is, however, to be noted that a document is negotiable, if by the custom of the money market it is transferable like cash. A delivery order may or may not be negotiable, the question depends upon the conditions attached to it and the usage of trade under which it is issued.

Collateral Securities

There is a conflict of opinions as to the legal effect of transfer or negotiation on collateral securities i.e, whether securities deposited for the debts due on a promissory note pass along with the transfer or negotiation of the promissory note. In some cases it was held that the securities passes along with the debt. But these decisions have not been followed in later cases and it has been held that the endorsee for value of a negotiable instrument, the amount of which is secured by a mortgage by deposit of title deeds, cannot claim to enforce the mortgage without a registered conveyance of the mortgage securities.