Indorsement: Meaning, Kinds and Effect (Sections 15, 16, 49, 50, 52 and 54 to 56)

An indorsement is the signature by which the holder of an instrument transfers it, usually written on the back (in dorso, "on the back", which gives the word its origin). The form of the indorsement decides who may next claim payment, whether the instrument can be negotiated further, and whether the indorser himself is liable. This note explains the definition, the kinds of indorsement and their legal effect.

1. Meaning (Section 15)

Section 15, Negotiable Instruments Act, 1881

When the maker or 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, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the "indorser".

Who indorses: the maker or holder, signing otherwise than as maker.
Purpose: the signature must be made for the purpose of negotiation. A signature on the back for identification only is not an indorsement.
Where: on the back or face of the instrument, or on a slip of paper annexed to it (an allonge), used when there is no room left for further indorsements.
Inchoate instruments: signing a stamped paper intended to be completed as a negotiable instrument is also an indorsement.

2. Blank and Full Indorsements (Sections 16, 49, 54 and 55)

Section 16, Negotiable Instruments Act, 1881

(1) If the indorser signs his name only, the indorsement is said to be "in blank", and if he adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the indorsement is said to be "in full"; and the person so specified is called the "indorsee" of the instrument.

(2) The provisions of this Act relating to a payee shall apply with the necessary modifications to an indorsee.

Blank (general) indorsement: the indorser signs his name only. The instrument becomes payable to bearer, even if originally payable to order (Section 54), and passes by delivery. Section 54 is subject to the rules on crossed cheques.
Full (special) indorsement: the indorser directs payment to, or to the order of, a named indorsee, for example "Pay C or order, B". The indorsee must indorse to negotiate further.
Conversion (Section 49): the holder of an instrument indorsed in blank may, without signing his own name, write above the indorser's signature a direction to pay a named person, converting the blank indorsement into a full one. He does not incur an indorser's liability by doing so.
Blank followed by full (Section 55): where an instrument indorsed in blank is later indorsed in full, the amount cannot be claimed from the indorser in full except by the person to whom it was indorsed in full, or one who derives title through him.

3. Restrictive Indorsements (Section 50)

Under Section 50, an indorsement followed by delivery transfers the property in the instrument with the right of further negotiation. But the indorsement may, by express words, restrict or exclude that right, or make the indorsee merely an agent to indorse or to receive payment for the indorser or another person. The statutory illustrations show the line:

Restrictive (no further negotiation): "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".
Not restrictive: "Pay C"; "Pay C value in account with the Oriental Bank"; "Pay the contents to C, being part of the consideration in a certain deed of assignment executed by C to the indorser and others".

The difference is that the restrictive examples either use exclusive words ("only"), or show that the indorsee is to receive the money for someone else's benefit. Merely stating the consideration or naming the indorsee without "or order" does not restrict negotiation (see also Section 51, Illustration).

4. Conditional and Qualified Indorsements (Section 52)

Section 52, Negotiable Instruments Act, 1881

The indorser of a negotiable instrument may, by express words in the indorsement, exclude his own liability thereon, or make such liability or the right of the indorsee to receive the amount due thereon depend upon the happening of a specified event, although such event may never happen.

Where an indorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate indorsers are liable to him.

Sans recours ("without recourse"): the indorser excludes his own liability. Illustration (a): an indorser who adds "without recourse" incurs no liability on the indorsement.
Negotiation back: illustration (b): A, payee and holder, indorses "without recourse" to B; B indorses to C; C indorses back to A. A is reinstated in his former rights and has an indorsee's rights against B and C, because he excluded his own liability to them.
Conditional indorsement: the indorser's liability, or the indorsee's right to payment, is made to depend on a specified event, for example "Pay C on his marriage with D". The indorser is liable only if the event happens.
Sans frais and facultative indorsements: in practice an indorser may also write "sans frais" (no expenses to be incurred on his account) or waive some of his rights, such as notice of dishonour (compare Section 98(a); Topic 30).

5. Partial Indorsement (Section 56)

Section 56, Negotiable Instruments Act, 1881

No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance.

An indorsement transferring only part of the amount, such as "Pay C Rs. 5,000" on a bill for Rs. 10,000, is invalid for negotiation, because it would split one instrument into several claims. If part has been paid, the payment may be noted on the instrument and the balance negotiated.

6. Practical Points

Joint payees must all indorse, unless one is authorised to sign for the others (Section 51).
Misspelt payee: a payee whose name is misspelt may indorse in the form in which it appears and add his correct signature.
Agents and companies: an agent or officer should indorse so as to show he signs for the principal, such as "for X Ltd., A, Director", to avoid personal liability (Section 28; Topic 16).
Banking practice: banks examine indorsements on order cheques for regularity, because a paying bank is protected only if the indorsement purports to be the payee's (Section 85; Topic 35).

⚠ Key point

An indorsement is the signature of the maker or holder, otherwise than as maker, for the purpose of negotiation, on the instrument or an allonge (Section 15). A blank indorsement (signature only) makes the instrument payable to bearer (Sections 16 and 54), and the holder may convert it into a full indorsement without liability (Section 49). An indorsement may restrict or exclude further negotiation by express words (Section 50); may exclude the indorser's liability (sans recours) or make it conditional (Section 52); but cannot transfer part of the amount, though the balance may be negotiated after part payment is noted (Section 56).

7. Related Topics and Provisions

Negotiation (Topic 22)
Who may negotiate (Topic 24)
Liability of indorsers (Topic 19)
Paying banker (Topic 35)