Explain and distinguish: (a) Negotiable and Assignment, (b) Bearer and Order Negotiable Instrument, (c) Drawee in case of need.

These three concepts — negotiation and assignment, bearer and order instruments, and the drawee in case of need — occupy distinct but interconnected spaces in the architecture of the Negotiable Instruments Act, 1881. Each deserves careful examination on its own terms before one can appreciate what sets it apart from its counterpart.

(a) Negotiation and Assignment

There are two ways in which a negotiable instrument can pass from one hand to another: by negotiation, as recognised under Sections 14, 47, and 48 of the Act, and by assignment as an ordinary chose-in-action under Section 130 of the Transfer of Property Act, 1882. Though both are methods of transfer, they rest on fundamentally different legal footings and produce very different legal consequences.

Negotiation, as defined in Section 14, occurs when an instrument is transferred to a person so as to constitute that person the holder thereof. For a bearer instrument, this is accomplished by mere delivery; for an order instrument, it requires indorsement followed by delivery. The magic of negotiation lies in what it bestows upon the transferee. A transferee who qualifies as a holder in due course under Section 9 takes the instrument completely free from any defects of title in the hands of his transferor. He is not haunted by the personal disputes, frauds, or failures of consideration that may have afflicted prior parties. He acquires a title that can, in appropriate circumstances, be better than the title of the person who transferred it to him.

Assignment, on the other hand, is governed by the general law of contracts and Section 130 of the Transfer of Property Act. An assignment must be in writing, signed by the assignor, and notice must be given to the debtor. Critically, the assignee steps only into the shoes of his assignor — he takes the instrument subject to all the equities and defences that existed between the original parties. If the original instrument was tainted by fraud or failure of consideration, the assignee inherits that taint; he cannot escape it by claiming good faith. As was settled in Mohammad v Rango Rao (ILR 24 Mad 654), an assignee acquires only the rights of his assignor and no more.

The differences between the two modes of transfer may be set out thus:

Negotiation v Assignment

The Calcutta High Court captured the essence of this distinction succinctly in Kamalakant Gopalji v Madhavji Vaghji (AIR 1935 Bom 343) — under an assignment the assignee acquires only the right, title and interest of the assignor, whereas under negotiation the indorsee may acquire all the rights of a holder in due course.

(b) Bearer and Order Negotiable Instruments

Section 13 of the Act distinguishes between two great classes of negotiable instruments based on the manner in which they are made payable — and this distinction determines the very mode of their negotiation.

A bearer instrument is one that is expressed to be payable to the bearer, or one on which the only or last indorsement is an indorsement in blank. Such an instrument passes from hand to hand like currency — by mere delivery, without any signature of the transferor. Section 47 declares simply: "a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof." The simplicity of this mode is both its strength and its risk. The transferor, having not signed the instrument, incurs no liability upon it — he is not an indorser and therefore cannot be held on the instrument if it is later dishonoured. As was observed in Gaddam Venkataraju v Andhra Bank (2001 2 BC 543), a payee who discounts a cheque without endorsing it is not liable if the cheque is dishonoured.

An order instrument is one expressed to be payable to a specified person or order, or one which is expressed to be payable to a particular person and does not contain words prohibiting transfer. Prior to the Negotiable Instruments (Amendment) Act, 1919, the words "or order" had to be expressly inscribed on the instrument. The Amendment, however, transformed this position — Explanation I to Section 13 now provides that an instrument payable to a particular person, which does not contain words prohibiting transfer, shall be deemed payable to order. The Bombay High Court's earlier decision in Dossabhai v Virchand (21 Bom LR 1), which had held a cheque with "bearer" struck out as non-negotiable, was precisely the mischief the 1919 amendment was designed to correct.

An order instrument must be negotiated by indorsement and delivery under Section 48. The consequence of this requirement is significant: the indorser adds his name to the instrument, thereby incurring personal liability. If the instrument is dishonoured, the holder can proceed against the indorser. In Anil Kumar S. v N. Ramakrishna Kartha (AIR 2009 NOC 1541 Ker), the Kerala High Court held that in respect of a cheque payable to order, delivery alone — without indorsement — is wholly insufficient to constitute the transferee a holder in due course.

The distinction can be succinctly stated:

(c) Drawee in Case of Need

This concept has been examined in detail in our earlier discussion, but it bears revisiting briefly in context. The drawee in case of need is defined in the second paragraph of Section 7: "When in the bill or in any indorsement thereon the name of any person is given in addition to the drawee to be resorted to in case of need, such person is called a drawee in case of need."

He is, in essence, a contingency mechanism built into the bill of exchange. The drawer, anticipating that the primary drawee might refuse acceptance, names an additional person — the drawee in case of need — who stands ready to step in. His name may appear in the bill itself or in any subsequent indorsement by an indorser. Unlike the original drawee, who must accept the bill before he incurs liability, the drawee in case of need has no obligation at all until the contingency actually arises — that is, until the primary drawee dishonours the bill.

Section 115 of the Act makes a critical point: a bill containing the name of a drawee in case of need is not treated as dishonoured until it has been presented to and refused by such drawee as well. The holder is therefore obliged — not merely permitted — to approach this person before calling upon the drawer. In Bahadur Chand Prabh Dial v Gulab Rai Nanak Chand (AIR 1929 Lah 577), the Lahore High Court held that failure to present to the drawee in case of need entirely discharged the drawer from liability. Section 116 then provides that, once the contingency arises, the drawee in case of need may accept and pay the bill without previous protest — a liberalisation unique to Indian law that facilitates swift commercial resolution.