What is endorsement? Explain different kinds of endorsement.

Endorsement is one of the most vital concepts in the law of negotiable instruments — it is, at once, the method by which an instrument payable to order travels from hand to hand in commerce, and the mechanism by which each successive holder assumes the responsibilities of a prior party. To understand endorsement thoroughly, one must begin with the statutory definition, and then trace through the various forms it takes, each carrying different legal consequences.

The Statutory Definition: Section 15

Section 15 of the Negotiable Instruments Act, 1881 provides that when the maker or the holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, he is said to indorse the same, and is called the indorser. The language of the section is deliberately broad. Endorsement ordinarily means writing on the back of an instrument — from the Latin in dorso, meaning "on the back" — but the law does not confine it to the reverse side. An endorsement on the face of an instrument is perfectly valid, and no particular form of words is necessary. The simple signature of the holder on the instrument is sufficient to constitute an endorsement, provided it is made for the purpose of negotiation. In Sivaramakrishna v Moideen (1910 ILR 33 Mad 34), the court held that no specific words are required — it is the writing of one's name on the instrument with the intent to transfer that constitutes the endorsement.

It is equally important to note that an endorsement, by itself, is incomplete without delivery. The contract of the endorser on the bill or note is incomplete and revocable until the instrument is delivered with the intention of passing property in it. As Maule J. eloquently stated, the liability of an endorser arises out of the written endorsement, the delivery of the bill, and the intention with which that delivery is made — all three elements together constitute the complete act of endorsement.

Who May Endorse

Section 51 of the Act answers this question with clarity. Every sole maker, drawer, payee or indorsee — or all of several joint makers, drawers, payees or indorsees — of a negotiable instrument may indorse and negotiate it, provided the negotiability of the instrument has not been restricted or excluded. A stranger who signs on the back of an instrument is not an endorser in the technical sense — he incurs no liability as an endorser to parties other than those in immediate relation with him, though he may be held liable as a guarantor to his immediate party. It must also be remembered that where an instrument is payable to two joint payees who are not partners, all of them must join in the endorsement; where one payee endorses without the authority of the other, the endorsement is not effective to constitute the transferee a holder of the instrument.

The Concept of the Allonge

When an instrument passes through many hands and no room remains on the back of the instrument for further endorsements, a separate slip of paper may be annexed to it. This slip is known in banking practice as the allonge. Endorsements written on the allonge are as valid and effective as those written on the instrument itself. In Joseph Sartho v G. Gopinathan (2009 CrLJ 367 Kerala), the Division Bench of the Kerala High Court explained the nature of the allonge with reference to Section 15 and Section 56, affirming that the law places no ceiling on the number of endorsements a negotiable instrument may carry.

Kinds of Endorsement

The Act recognises several distinct kinds of endorsement, each producing different legal effects. Understanding them is essential for a student who wishes to appreciate how negotiable instruments function as instruments of credit and commerce.

Endorsement in Blank (Section 54)

An endorsement in blank is one where the endorser simply signs his name on the instrument without specifying any endorsee. No additional words are required. The critical legal effect of an endorsement in blank — spelt out in Section 54 — is that it converts the instrument from one payable to order into one payable to bearer. Once a negotiable instrument is endorsed in blank and delivered, any person in possession of it becomes entitled to receive payment, and the instrument may be further negotiated by mere delivery, without the need for any further endorsement. This was illustrated by the courts thus: a bill payable to "William Smith or order," once endorsed in blank by Smith with his simple signature, becomes payable to bearer and may be passed on by mere delivery to any subsequent holder.

A holder of an instrument endorsed in blank enjoys an important privilege under Section 49. Without signing his own name, he may convert the blank endorsement into a full endorsement by writing above the endorser's signature a direction to pay to a specific person. The beauty of this provision is that the holder who exercises this right does not thereby incur the responsibilities of an endorser — the conversion is treated as continuing the endorsement of the original endorser, not as a fresh endorsement by the converter.

Endorsement in Full or Special Endorsement

An endorsement in full — also called a special endorsement — is one where the endorser not only signs his name but also specifies the name of the person to whom or to whose order the instrument is to be paid. For instance, "Pay to X or order" followed by the endorser's signature is a special endorsement. The legal effect is the reverse of a blank endorsement: the instrument remains payable to order, and the person named (the endorsee) must further endorse it before it can be negotiated to anyone else. The endorsee named in a special endorsement cannot simply deliver the instrument to a third party — he must himself endorse it, for only then does the transferee acquire the rights of a holder.

Restrictive Endorsement (Section 50)

Section 50 of the Act deals with the effect of endorsement, and it expressly recognises that an endorsement may restrict or exclude the right of further negotiation. A restrictive endorsement is one which either prohibits further negotiation of the instrument, or which expresses that the endorsement is merely an authority to deal with the instrument as directed — not a transfer of ownership.

The illustrations to Section 50 are instructive. Endorsements such as "Pay the contents to C only," "Pay C for my use," or "Pay C or order for the account of B" are restrictive — they exclude the right of C to further negotiate the instrument. A restrictive endorsement constitutes the endorsee substantially an agent of the endorser. The endorsee acquires the right to receive payment and to sue any party thereto, but he cannot transfer the instrument to another person with a title any better than his own — unless the restrictive endorsement authorises further transfer, in which case all subsequent endorsees take the instrument with the same rights and subject to the same liabilities as the first endorsee under the restrictive endorsement. The Madras High Court confirmed in Rahmath Bi v Angappa Raja (1969 2 Mad LJ 518) that where an instrument is endorsed "for collection," the endorsee has the locus standi to file an insolvency petition against the maker on the basis of non-payment, even though the endorsement was for collection only.

Conditional Endorsement (Section 52)

Section 52 recognises the remarkable flexibility that the law extends to an endorser, by allowing him to insert conditions in his endorsement that a drawer or acceptor cannot introduce into the instrument itself. An endorser may, by express words, do one of three things: he may exclude his own liability entirely, he may make his liability conditional upon the happening of a specified event, or he may make the endorsee's right to receive payment dependent upon a specified event.

The clearest form of conditional exclusion of liability is the endorsement sans recours — "without recourse" — or equivalent expressions such as "pay A or order at his own risk." Illustration (a) to Section 52 states plainly: where an endorser adds the words "Without recourse" to his signature, he incurs no liability on the instrument. The Andhra Pradesh High Court examined this in Mangati Ganta Avadhani v Kopuri Sreenivasa Rao (2007 CrLJ 2901), where a cheque was endorsed by the accused bearing the words sans recours. The court held that such an endorsement made by the accused himself, without the knowledge of the complainant, and not mentioned in the reply to the statutory notice, could not be used to quash criminal proceedings under Section 138 — the object of the Act being to prevent the issuance of cheques without adequate funds.

Facultative Endorsement

A facultative endorsement is one where the endorser, while transferring the instrument, waives some right to which he would ordinarily be entitled — most commonly the right to receive notice of dishonour. The law generally requires that notice of dishonour must be given to every endorser before he can be held liable on the instrument. But an endorser may, by inserting appropriate words in his endorsement, expressly waive this requirement, thereby enlarging his liability and making it easier for the holder to enforce his rights against the endorser without the formality of notice. Though not as commonly litigated as the other types, the facultative endorsement is a significant commercial device that reflects the flexibility negotiable instruments law extends to the contracting parties.

The Effect of Endorsement: Section 50

The overarching effect of an unconditional endorsement, followed by delivery, is beautifully captured in Section 50 of the Act. It transfers to the endorsee the property in the instrument with the right of further negotiation, vests in him the right of action against all parties whose names appear on the instrument, and entitles him to sue them in his own name. However — and this is a point of considerable legal importance — the endorsee can sue the prior parties only on the instrument itself, and not on the original underlying consideration, unless he is also the assignee of the original debt. The instrument and the original transaction are treated, in law, as separate relationships, and the endorsee's rights are measured by the instrument alone.

To constitute the transferee a holder in due course — and thus to give him the fullest protection the law affords — both endorsement and delivery are indispensable. The Karnataka High Court in Anil Kumar S. v N. Ramakrishna Kartha (AIR 2009 NOC 1541 Kerala) decisively held that mere delivery of a cheque payable to order, without endorsement in favour of the transferee, does not make him a holder in due course. Without the endorsement, the transferee acquires only the rights of an assignee of a chose in action — subject to all defences — and the carefully constructed edifice of negotiability, which is the very genius of the law of negotiable instruments, does not come into play.