NEGOTIATION and Modes of negotiation

Negotiation may be defined as the process by which a third party is
constituted the holder of the instrument so as to entitle him to the
possession of the same and to receivethe amount due thereon in his own
name. According to section 14 of the Act, ‘when a promissory note, bill of
exchange or cheque is transferred to any person so as to constitute that
person the holder thereof, the instrument is said to be negotiated.’ The
main purpose and essence of negotiation is to make the transferee of a
promissory note, a bill of exchangeor a cheque the holder there of.

Negotiation thus requires two conditions to be fulfilled, namely:

1. There must be a transfer of the instrument to another
person; and

2. The transfer must be made in such a manner as to
constitute the transferee the holder of the instrument.
Handing over a negotiable instrument to a servant for safe custody
is not negotiation; there must be a transfer with an intention to pass
title.

Modes of negotiation

Negotiation may be effected in the following two ways:

1. Negotiation by delivery (Sec. 47): Where a promissory note
or a bill of exchange or a cheque is payable to a bearer, it
may be negotiated by delivery thereof.
Example: A, the holder of a negotiable instrument payable to
bearer, delivers it to B’s agent to keep it for B. The
instrument has been negotiated.

2. Negotiation by endorsement and delivery (Sec. 48): A
promissory note, a cheque or a bill of exchange payable to
order can be negotiated only be endorsement and delivery.
Unless the holder signs his endorsement on the
instrument and delivers it, the transferee does not become
a holder. If there are more payees than one, all must
endorse it.