Model Answer
0 min readIntroduction
Negotiable instruments, such as cheques, bills of exchange, and promissory notes, are crucial to commercial transactions. The concepts of "negotiation" and "endorsement" are fundamental to the transfer of these instruments. Endorsement allows the transfer of rights, while negotiation signifies the complete transfer of title and liability. This contrasts with 'ordinary assignment,' a broader legal concept. Understanding these distinctions is vital for appreciating the mechanics of commercial law and the rights and obligations of parties involved. This answer will delineate these concepts and highlight their key differences, particularly concerning the transfer of liabilities.
Negotiation and Endorsement Explained
Negotiation refers to the transfer of a negotiable instrument from one person (the transferor) to another (the transferee) in such a manner as to give the transferee the rights of the transferor. This transfer can be either by delivery (in case of instruments payable to bearer) or by endorsement and delivery (in case of instruments payable to order).
Endorsement is the signing of the back of a negotiable instrument by the holder, either to transfer it to another person or to operate it as an order to pay the amount mentioned therein to a specified person. Section 13 of the Negotiable Instruments Act, 1881, deals with endorsement.
There are different types of endorsements: blank, full, partial, and conditional. A blank endorsement makes the instrument payable to bearer, while a full endorsement specifies the payee. Partial endorsement restricts the negotiability of the instrument. Conditional endorsements impose conditions on the transferee's rights.
Ordinary Assignment: A Comparison
Ordinary assignment, governed by general contract law principles, is a broader term. It involves the transfer of contractual rights, but *not* necessarily contractual obligations, from one party (the assignor) to another (the assignee). Unlike negotiation, assignment doesn't necessarily involve a negotiable instrument.
The critical difference lies in the transfer of liabilities. In negotiation, the transferee takes the instrument subject to all liabilities and defenses available to the transferor. With ordinary assignment, the assignor may retain certain liabilities or disclaim them explicitly in the assignment agreement. Section 38 of the Indian Contract Act, 1872 governs assignment.
Key Differences: Negotiation vs. Ordinary Assignment
| Feature | Negotiation (with Endorsement) | Ordinary Assignment |
|---|---|---|
| Instrument Type | Negotiable instruments (cheques, bills, promissory notes) | Any contractual right |
| Transfer of Liabilities | Transferee takes instrument with all liabilities and defenses. | Liabilities can be transferred or retained by the assignor, depending on the agreement. |
| Formalities | Requires endorsement and delivery (or delivery alone for bearer instruments). Section 13, NI Act, 1881 | Generally requires a written agreement. Section 38, Contract Act, 1872 |
| Negotiability | Maintains negotiability (can be further negotiated). | Does not necessarily maintain negotiability. |
| Legal Framework | Negotiable Instruments Act, 1881 | Indian Contract Act, 1872 |
Case Study: Dishonoured Cheque
Consider a scenario where 'A' endorses a cheque to 'B'. 'B' then endorses it to 'C'. If the cheque is dishonoured due to insufficient funds, 'C' can sue 'B', who can then sue 'A', and so on, as 'C' has taken the instrument subject to all liabilities. This demonstrates the transfer of liabilities inherent in negotiation.
Example: Assignment of Loan
A bank assigns a loan portfolio to another financial institution. The original bank (assignor) might retain certain servicing responsibilities and liabilities related to defaults, while the assignee assumes responsibility for collecting payments. This exemplifies ordinary assignment where liabilities are explicitly allocated.
Conclusion
In conclusion, while both negotiation and ordinary assignment involve the transfer of rights, they differ significantly in their scope and implications. Negotiation, specifically through endorsement, is unique to negotiable instruments and automatically transfers all associated liabilities. Ordinary assignment is a broader concept applicable to contractual rights and allows for more flexibility in allocating liabilities. Understanding these distinctions is crucial for navigating commercial transactions and ensuring clarity regarding the rights and responsibilities of all parties involved.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.