Indorsement — Kinds, Effect, Forged Indorsement

An indorsement is, in the language of Section 15 of the Negotiable Instruments Act, 1881, the signature of the maker or holder of a negotiable instrument, made for the purpose of negotiation, on the back, the face, or on a slip of paper annexed to the instrument. That single signature, however, can take a number of distinct forms, and each form carries a distinct legal consequence. Section 16 names the two basic forms — indorsement in blank and indorsement in full. Section 50 recognises the restrictive indorsement. Section 52 admits the conditional and qualified indorsements, and within them the sans recours, the contingency-based, the facultative, and the sans frais varieties. Section 56 prohibits the partial indorsement except for a noted residue. The chapter closes on the doctrine that no honest signature, however many times indorsed, can rescue a chain of title that began with a forged indorsement.

The exam-aspirant's task is to fix four things for each kind of indorsement: the section that authorises it, the form in which it is written, the legal effect upon the indorsee's rights and the indorser's liability, and the consequence for the further negotiability of the paper. The mechanics of how an indorsement is completed by delivery, and the contrast between negotiation by delivery and negotiation by indorsement and delivery, are dealt with in the chapter on negotiation by delivery and indorsement; this chapter is concerned with the taxonomy and its consequences.

Indorsement in blank — Section 16(1)

An indorsement in blank — also called a general indorsement — is one that specifies no indorsee. It consists of the bare signature of the indorser. The classic example: a bill is payable to the order of Jonathan Jones; Jonathan Jones signs his name on the back. That is an indorsement in blank.

The legal effect of a blank indorsement on order paper is governed by Section 54: a bill or note originally payable to order, when indorsed in blank, becomes payable to bearer, except in the case of a crossed cheque. The crossed cheque is excepted because the crossing under Section 123 is itself a direction to the paying bank to credit only an account, and the bearer character would defeat that direction; the position is dealt with in the chapter on crossing of cheques. For all other instruments, the consequence is that, so long as the indorsement continues in blank, the property in the instrument passes by mere delivery, exactly as if the paper had been a bearer instrument from the start. The early common-law statement of the rule, in Peacock v. Rhodes (1781) 2 Dougl 633, is still the canonical text: there is no difference between a note indorsed in blank and one payable to the bearer; they both go by delivery, and possession proves property in both cases.

The blank indorser, however, remains liable as an indorser to a subsequent holder, in the absence of words excluding his liability. The bearer character of the paper changes the mode of transfer but does not erase the names that the chain of indorsements has placed on the back of the bill.

Indorsement in full — Section 16(2)

An indorsement in full — also called a special indorsement — is one that specifies, in addition to the signature of the indorser, the person to whom or to whose order the instrument is payable. The form is: 'Pay Jonathan Jones or order, [signature of indorser]', or 'Pay to Jones, [signature]'. No specific form of words is required; it is enough that the writing contains a direction of the kind contemplated by the section.

The effect of an indorsement in full is two-fold. First, the instrument can be paid only to the named indorsee, and the chain of title now requires his further indorsement to move the paper onward. Second, the paper remains payable to order, even if it had previously been bearer; the indorsement in full preserves the order character of the paper as against parties claiming through the indorser in full. Under Section 49, the holder of an instrument indorsed in blank may, without signing his own name, convert the indorsement in blank into one in full by writing above the indorser's signature a direction to pay any other person as indorsee — and because the converter has not signed, he does not, by that act, incur the liability of an indorser.

Section 55 — Indorsement in blank followed by indorsement in full

Section 55 deals with a paper that, having been indorsed in blank, is afterwards indorsed in full. The Act says that the amount cannot be claimed from the indorser in full except by the person to whom it has been indorsed in full, or by one who derives title through such person. The illustration: A is the payee of a bill, indorses in blank to B; B indorses in full to C; C, without indorsing, transfers to D. D may receive payment from the drawer or acceptor, or sue A, who indorsed in blank, but D cannot sue B or C, because B and C indorsed in full and only the indorsee in full or his successor in title can claim against them. The doctrinal point is that the bearer character of the paper, once acquired by the blank indorsement, survives a later indorsement in full as against parties prior to the in-full indorser, while the in-full indorser's liability is confined to those in his own line of title. The same Section 55 logic explains why a downstream party in the chain may have differential rights against different indorsers.

Restrictive indorsement — Section 50

The second part of Section 50 admits the restrictive indorsement: the indorser, while indorsing, may restrict or exclude the right of the indorsee to further transfer the instrument, or constitute the indorsee an agent to indorse the instrument or receive its contents for the indorser or some other specified person. The illustrations to the section give the form, drawn from the long history of the NI Act of 1881: 'Pay the contents to C only', 'Pay C for my use', 'Pay C or order for the account of B', 'The within must be credited to C'. Each of these excludes further negotiation by C; the paper has come, in commercial language, to the end of its life.

The illustrations also give the negative cases. 'Pay C', 'Pay C value in account with the Oriental Bank', 'Pay the contents to C, being part of the consideration in a deed of assignment' do not exclude further negotiation by C. The test is whether the words on the paper restrict, in terms or by necessary implication, the indorsee's right to transfer; if they do not, the indorsement, though it may identify a payment instruction, is not restrictive.

The legal consequence of a restrictive indorsement is that the relations between the indorser and the restrictive indorsee are substantially those of principal and agent. The indorsee gets the right to receive payment of the bill and to sue any party that the indorser could have sued, but he cannot transfer his rights to any other person unless he is expressly authorised to do so. The bill has reached the end of its negotiability; the last indorsee is the person who is to sue upon it. The indorsement of an instrument for collection is treated as restrictive in this sense, and the agent or trustee in whose name the legal title is vested may sue upon the paper notwithstanding that he has no beneficial interest in its proceeds (Kunjan Pillai v. Peria Swami (1969) 2 MLJ 148).

Conditional and qualified indorsement — Section 52

Section 52 confers on the indorser the power to insert, by express words, a stipulation negating or limiting his own liability, or making his liability — or the right of the indorsee to receive the amount due — depend upon the happening of a specified event, although the event may never happen. The conditional indorsement, in this sense, is in contrast to the restrictive indorsement: the restrictive form caps the negotiability of the paper, the conditional form qualifies the indorser's liability or the indorsee's right.

Section 52 generates four sub-varieties.

Sans recours indorsement

The first sub-variety is the sans recours indorsement, by which the indorser excludes his own liability. The form is: 'Pay A or order without recourse to me', or 'Pay A or order sans recours', or 'Pay A or order at his own risk'. Under such an indorsement, the indorser incurs no liability on the bill. Illustration (a) to Section 52 captures the rule: the indorser who signs his name on the bill, adding 'without recourse', incurs no liability. The sans recours form is a commercial choice taken when the indorser is unwilling to underwrite the credit of the prior parties — it is common, for example, when an indorsement is made to an institutional collector who knows the credit risks better than the indorser does.

Liability dependent upon a contingency

The second sub-variety makes the indorser's liability dependent upon the happening of a specified event which may never happen. The indorser's liability arises only on the happening of the event, and is extinguished if the event becomes impossible or the conditions specified are not fulfilled. The indorsee, however, may sue the prior parties even before the event happens, because his right against the prior parties is not, in this sub-variety, conditional.

Right of indorsee dependent upon a contingency

The third sub-variety makes the right of the indorsee to receive the amount on the instrument depend on the happening of a specified event. The contrast with the second sub-variety is sharp: in this case the indorsee himself cannot sue prior parties before the event has happened, because his right is contingent. The distinction tracks the same drafting discipline that separates a pronote, a bill, and a cheque by the precise wording of the obligation on the paper. In the second sub-variety the indorsee can; in the third he cannot. The drafting test is whether the conditioning words attach to the indorser's liability or to the indorsee's right.

Facultative indorsement

The fourth sub-variety is the facultative indorsement. Here the indorser, by express words, abandons some right or increases his own liability under the instrument. The most common example is a waiver of the holder's duty of presentment for acceptance, or of notice of dishonour. An indorsement in the form 'Pay A or order. Notice of dishonour waived' is a facultative indorsement: the indorser, by these words, takes upon himself the consequences that would otherwise have accrued from the holder's omission. The contrast with the sans recours indorsement is exact: the sans recours indorser limits his liability; the facultative indorser enlarges it.

Sans frais indorsement

A separate, narrower form is the sans frais indorsement, by which the indorser signals that he does not want the indorsee or any subsequent holder to incur expenses on his account on the instrument — including the costs of noting and protest after dishonour. It is, in commercial terms, a cap on costs rather than on liability — relatively rare in modern practice but still recognised by the Act.

Partial indorsement — Section 56

Section 56 prohibits the partial indorsement. No writing on a negotiable instrument is valid for the purpose of negotiation if it purports to transfer only a part of the amount appearing to be due on the instrument. The reason is the indivisibility of the obligation on the paper: the bill is one and entire, and a transfer of part only would oblige the maker or acceptor to recognise multiple holders for fragments of the same debt — a result the Act forecloses.

The first illustration: A is the holder of a bill for Rs 1,000; A indorses 'Pay B or order Rs 500'; the indorsement is a partial indorsement and invalid for the purpose of negotiation. The rule is consistent with the wider principle that the obligation on a bill of exchange is one and entire. The second: C, the holder of a bill for Rs 100, indorses it 'Pay Rs 50 to D or order, and Rs 50 to E or order'; the indorsement is invalid; neither D nor E can sue or further indorse.

The single statutory exception, in the closing limb of Section 56, is part-payment. Where the amount on the instrument has already been partly paid, the part-payment may be noted on the paper, and the residue may then be indorsed and negotiated. The form of the residue indorsement is: 'Pay A or order Rs 500, being the unpaid residue of the bill.' The doctrinal foundation is that the residue, once part of the obligation has been discharged, is the entirety of what remains due, and a transfer of that entirety is not a partial indorsement at all.

Negotiation back — Section 60

Where an indorsement is made back to a prior party already on the chain, Section 60 governs the position. The prior party, on negotiation back, is remitted to his former position and may further negotiate the paper, but he cannot enforce, by suit, payment against any intermediate party to whom he was previously liable by reason of his prior indorsement, because the law does not permit circuity of action. The prior party may, however, strike off the indorsements of intermediate parties and re-negotiate the bill. Where the prior indorsement was 'without recourse', the prior party can sue the intermediate parties, because his prior indorsement made him no surety to them.

Forged indorsement — Section 85 and the rule in Vagliano

The doctrinal heart of indorsement law is the rule that a forged indorsement creates no title. The reasoning is that the chain of title on a negotiable instrument moves by genuine indorsements; a forged signature, in the language of the Act, is wholly inoperative; the property in the instrument remains in the person who was the holder at the time when the forged signature was placed on it. There can therefore be no holder in due course under a forged indorsement, even if the indorsee is a transferee for value, in good faith, and without notice. A holder in due course is protected when there is a defect of title; he is not protected when there is no title at all (Thorappa v. Umedmal 25 Bom LR 604).

The settled illustration is the order-paper case. A bill is payable to 'A or order'; A indorses to B; C forges B's indorsement and transfers to D. D acquires no title to the bill, cannot recover on it, and cannot give a valid discharge. The same result follows if A's indorsement is forged and B's is genuine: any forged link in the chain breaks the chain. The position is different where the bill is drawn payable to bearer and the forgery is of an indorsement that was not essential to pass title; in that case, the holder may still claim under the bearer character of the paper. The position is also different where the person whose indorsement is forged is, by some doctrine of estoppel, prevented from setting up the forgery; there, the indorsee may have, as against him, the rights of a holder in due course.

The Indian rule is the same as the English. The leading English case is Bank of England v. Vagliano Brothers (1891) AC 107: Vagliano used to accept bills drawn on him by a foreign agent payable to a foreign firm; his clerk obtained Vagliano's acceptance on certain false bills purporting to be drawn by the foreign agent and payable to the same foreign firm; the clerk then indorsed in the name of the foreign firm and obtained payment from the Bank of England. Vagliano argued that the bills were fictitious. The House of Lords held that the Bank of England was a holder in due course and protected. The decision is, in Indian terms, less about the forged signature and more about the doctrine that, where the named payee is fictitious or non-existing, the bill is treated as payable to bearer and the bank, having paid in good faith, is discharged.

The Indian decision on the same point is Firm Kalka Prasad Ram Charan v. Kunwar Lal Thapar AIR 1957 All 104: a demand draft for Rs 4,000 payable to the plaintiff came into the wrong hands; a forged indorsement purporting to be made by the plaintiff was placed on it; the draft was transferred to a firm which got it cashed; the court held that the firm did not get any title to the draft and was bound to pay the amount to the owner. The case is the canonical Indian authority for the rule that a forged indorsement conveys no title even to a transferee in good faith and for value.

Irregular indorsement — Arab Bank v. Ross

An indorsement may fail not because it is forged but because it is irregular — that is, the signature does not match the name on the face of the bill. In Arab Bank Ltd. v. Ross (1952) 1 All ER 709, a bill was drawn in favour of 'AB & Co.' but indorsed 'AB' without the words 'Co.'. The court held that the indorsement was irregular and that the indorsee was not a holder in due course, although he might be a holder for value. The point is that the indorsee under an irregular indorsement is on notice of an apparent defect on the face of the paper; he therefore lacks the good-faith ingredient required for the privileges of holder in due course status. The remedy is for the indorser to sign as the name appears on the bill and write the correct spelling within brackets after the indorsement.

Section 85 — protection of the paying banker

The rigour of the no-title rule is moderated, in the cheque context, by Section 85. The drawee bank that pays in due course on a cheque payable to order, on an indorsement which purports to be by or on behalf of the payee, is discharged, even if the indorsement turns out to be a forgery. Section 85(1) is therefore a statutory exception to the rule that a forged indorsement passes no title — confined, however, to the paying banker and conditional on payment in due course. Section 85(2) carries the rule 'once a bearer cheque, always a bearer cheque': a banker is discharged by payment in due course of a bearer cheque to the holder, notwithstanding any indorsement on the cheque that purports to restrict or exclude further negotiation. The drawee bank's protection is thus the principal statutory carve-out from the strict Vagliano rule, and it is the statutory bridge between the law of indorsement and the law of payment in due course under Section 10.

Liability of the indorser — Sections 35 and 36

The indorsement, considered from the indorser's side, fixes a contingent liability on every signing party. Section 35 declares that, in the absence of a contract to the contrary, whoever indorses and delivers a negotiable instrument before maturity, without expressly excluding or making conditional his liability, is bound, to every subsequent holder, in case of dishonour by the drawee, acceptor, or maker, to compensate that holder for any loss or damage caused by the dishonour, provided due notice of dishonour has been given to or received by the indorser. Section 36 then declares that every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied. The two sections together build the indorser's liability into the basic architecture of capacity and liability of parties, and they are the reason why the choice between an unconditional and a sans recours indorsement is a commercially significant one.

Drawing the chapter together

The Act admits seven distinct kinds of indorsement: blank, full, restrictive, conditional, sans recours, facultative, and the partial indorsement of a paid residue. Each is the subject of an identifiable section: 16 and 54 for the blank and the bearer-character consequences, 16 and 49 for the indorsement in full and its conversion, 50 for the restrictive form, 52 for the conditional and qualified family, 56 for the prohibition on partial indorsement and the residue exception. A forged indorsement, however, is not a kind of indorsement at all; it is the absence of one. The chain of title moves through genuine signatures of persons in lawful possession; a forged link breaks the chain, and no transferee, however bona fide, however much he has paid, becomes a holder in due course. The single statutory mitigation is Section 85, which protects the paying banker on a forged indorsement of a cheque payable to order if the bank pays in due course; that protection is the price the law pays for the commercial currency of the cheque.

Three propositions are worth committing to deep memory. First, the form of the indorsement determines the mode of further transfer: blank indorsement makes order paper movable by delivery; full indorsement keeps it payable to order. Second, restrictive indorsement and conditional indorsement do different work — the first caps the paper's negotiability, the second qualifies the indorser's liability or the indorsee's right. Third, forgery breaks the chain of title and Section 85 alone protects the paying banker from the consequences of having paid against a forged signature. These three lines, mastered together, are the doctrinal spine of the law of indorsement under the Negotiable Instruments Act, 1881.

Frequently asked questions

What is the difference between an indorsement in blank and an indorsement in full?

An indorsement in blank consists of the bare signature of the indorser and specifies no indorsee — under Section 54, it makes the bill or note payable to bearer except in the case of a crossed cheque. An indorsement in full specifies, in addition to the indorser's signature, the person to whom or to whose order the paper is payable; it preserves the order character of the paper and requires that named indorsee's further indorsement to move the paper onward. Section 49 lets the holder of a paper indorsed in blank convert the indorsement into one in full without himself signing.

Does a forged indorsement convey title to a transferee who takes in good faith and for value?

No. A forged signature is wholly inoperative; the property in the instrument remains in the person who was the holder when the forgery was placed on the paper. There can be no holder in due course under a forged indorsement, even if the indorsee took the paper in good faith and for value. The Indian authority is Firm Kalka Prasad Ram Charan v. Kunwar Lal Thapar AIR 1957 All 104, and the rule is that a holder in due course is protected against a defect of title but not against an absence of title. The single statutory mitigation is Section 85, which discharges the paying banker.

What is a sans recours indorsement and how does it differ from a facultative indorsement?

A sans recours indorsement, authorised by Section 52, is one by which the indorser excludes his own liability — the form is 'Pay A or order without recourse to me'. The indorser incurs no liability as an indorser. A facultative indorsement, on the other hand, is one by which the indorser increases his liability or abandons some right — the most common form is 'Pay A or order. Notice of dishonour waived', which dispenses with the holder's duty to notify the indorser of dishonour. The two are mirror images: the sans recours indorser limits his liability; the facultative indorser enlarges it.

Can a partial indorsement ever be valid?

Section 56 declares any writing that purports to transfer only a part of the amount due on the instrument to be invalid for the purpose of negotiation. The single statutory exception is part-payment: where the amount on the instrument has already been partly paid, the part-payment may be noted on the paper and the residue may then be indorsed and negotiated. The form is 'Pay A or order Rs 500, being the unpaid residue of the bill'. The residue, once part of the obligation is discharged, is the entirety of what remains due, and a transfer of that entirety is not a partial indorsement at all.

Why was the indorsee in Arab Bank v. Ross not held to be a holder in due course?

Because the indorsement was irregular — the bill was drawn in favour of 'AB & Co.' but indorsed merely 'AB', without the words 'Co.'. The mismatch was apparent on the face of the paper, and an indorsee taking under a visibly irregular indorsement is on notice of a defect; he therefore lacks the good-faith ingredient required for holder-in-due-course status. The court held that he might be a holder for value but not a holder in due course. The case is the standard authority on the distinction between an irregular indorsement, which goes to good faith, and a forged indorsement, which goes to title itself.

How does Section 85 sit with the rule that a forged indorsement creates no title?

Section 85 is the statutory exception, confined to the paying banker. Under Section 85(1), if a cheque payable to order purports to be indorsed by or on behalf of the payee, the drawee bank is discharged by payment in due course, even if the indorsement turns out to be a forgery. Under Section 85(2), the banker is discharged by payment in due course of a bearer cheque to the holder, notwithstanding any later indorsement that purports to restrict negotiation — the rule 'once a bearer cheque, always a bearer cheque'. The protection runs only to the paying banker and only on payment in due course.