When a promissory note, a bill of exchange or a cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated.
By negotiation the third party is put in the possession of the instrument and is also made a holder thereof to entitle him to receive the amount due thereon. We have seen above negotiation means transfer. Negotiation gives special rights to the holder in due course. Transfer of a negotiable instrument is affected in any one of the following two ways:
1) by negotiation ; or 2) by assignment
Transfer by negotiation is governed by the Negotiable Instruments Act, transfer by assignments is governed by the Transfer of Property Act.
When is an instrument negotiated?
An instrument is negotiated when transferee is constituted the holder of it. Delivery is the important aspect of negotiability. It constitutes an essential characteristic of negotiable instrument. The making acceptance or endorsement of a promissory note, bill of exchange or a cheque is completed by delivery actual or constructive. Delivery therefore to an agent or any person with an intention to pay and pass the property in he instrument would be sufficient to transfer the property in the instrument to the payee and constitute the payee holder thereof.
In Bhawanji v Devji it has been held that the contract on a negotiable instrument until delivery remains incomplete and revocable. Actual delivery constitutes actual change of possession. Constructive delivery on the other hand is without change of actual or physical possession. However, delivery for a specific purpose with a condition that it shall be returned constitutes the holder a bailee or agent and not the owner thereof.
As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument or by a person authorized by him in that behalf. As between such parties and any holder of the instrument other than the holder in due course it may be shown that the instrument was delivered conditionally or for special purpose only and not for purpose of transferring absolutely the property therein.
Negotiation by delivery of bearer instruments
A promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof. Therefore, bearer instruments are transferable by mere deli very without endorsement. The transferee becomes the holder thereof. The effect of such a transfer is that as transferor does not put his signature on the instrument, he is not liable either to an immediate party or subsequent holder in case of the instrument being dishonored. The transferee therefore cannot recover any amount from the transferor.
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 the notice of the condition) unless such event happens. Therefore, an instrument is not negotiable when delivered with a condition that it is to take effect on happening of a certain event. This exception however, does not apply to a holder in due course who has taken the instrument for value without notice of such a condition.
1) A the holder of a negotiable instrument payable to bearer it to B’s agent to keep for B. The instrument has been negotiated.
2) ‘A’ the holder of a negotiable instrument payable to bearer which is in the hand 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 bearer’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.
Negotiation by endorsement and delivery of order instruments
A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof. Where instrument payable to order is transferred merely be delivery it is deemed to be assigned and not negotiated. It should be noted that both negotiation of bearer and order instruments by delivery or by delivery and endorsement are effective when the instruments is not obtained by unlawful considerations.