Notes and Articles for Law students

User Tools

Site Tools


negotiable-instruments:negotiation-by-delivery

Negotiation by delivery

Section 47 of the Negotiable Instruments Act,1881.

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.

Exception: A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.

Illustrations

(a) A, the holder of a negotiable instrument payable to bearer, delivers it to B’s agent to keep for B. The instrument has been negotiated.

(b) A, the holder of a negotiable instrument payable to bearer, which is in the hands of A’s banker, who is at the time the banker of B, directs the banker to transfer the instrument to B’s credit in the banker’s account with B. The banker does so, and accordingly now possesses the instrument as B’s agent. The instrument has been negotiated, and B has become the holder of it.

The section is to be read subject to section 58 which lays down the circumstances which disentitle a holder to recover on or to negotiate an instrument. It lays down how instruments payable to bearer are to be negotiated. Negotiation of such instrument can be effected by delivery alone, endorsement being unnecessary. Therefore, the person to whom an instrument payable to bearer is delivered becomes the holder and is entitled to sue in his own name. Part delivery does not complete the contract. Payable to bearer in this section means that an instrument is expressly made payable to bearer or that it becomes so by operation of law as, when an instrument originally made payable to order has the last indorsement as an indorsement in blank, when the payee is a fictitious or non-existing person. It may be submitted that both this section and the next following section seem to be superfluous in view of paragraphs 4 and 5 of the preceding section.

Position of the transferor by delivery

The effect of transfer by delivery of a negotiable instrument payable to bearer amounts to a sale of the instrument like the sale of goods and the liabilities of the transferor are similar to those of a seller of goods. As in such transfer endorsement is not necessary, his name obviously is not on the instrument, that is to say, he is not a party to the instrument and as he does not lend his credit to the instrument he is not liable to the transferee upon the instrument as such. He is, however, liable to the immediate transferee, like the seller of goods, for breach of the warranties which are necessarily implied in the sale of goods. He warrants that the instrument which he passes is not a forged one, that it is unaltered and is what it purports to be on the face of it. If that the parties to the instruments are competent to enter into the contract, that he has a good title to the instrument and has the right to transfer it, that he is not cognisant of any fact making the instrument valueless, i.e , that he is not aware of the bankruptcy of the parties, discharge of the instrument or of its becoming void or defunct.

It would appear that negotiation by mere delivery entitles only the immediate party to recover in case of a breach of any of the implied warranties specified above and no subsequent holder can maintain an action against the transferor either on the instrument or on the breach of warranties as there is no privity of contract between them. It is clear that if the holder of a bill sent it to the market without endorsing his name upon it, neither morality nor the laws of this country will compel him to refund the money for which he sold it if he did not know, at the time he sold it, that it was not a good bill. The transferor of an instrument by mere delivery is thus in a much better position than that of a transferor by endorsement and delivery who makes himself a party to the instrument and liable to pay its value to a subsequent holder in due course in case of dishonour.

Created on 2021/02/16 06:00 by LawPage • Last modified on 2021/02/16 06:00 by LawPage