Negotiability Compared with Assignment

There are two ways to transfer the right to receive money owed by another. The general method is assignment: the creditor transfers the debt, an actionable claim, under the Transfer of Property Act, 1882. The special method, available only for negotiable instruments, is negotiation. The differences between them explain why negotiable instruments are so useful in commerce, and why the law treats them as a class apart.

1. Assignment of Actionable Claims

• Actionable claim (Section 3, TPA): a claim to any unsecured debt, or to a beneficial interest in movable property not in the claimant's possession, which the civil courts recognise as affording grounds for relief.
• Mode (Section 130, TPA): the transfer must be effected by an instrument in writing signed by the transferor; on its execution the transferor's rights vest in the transferee.
• Notice to the debtor: the debtor is bound only after express notice of the transfer; a debtor who pays the original creditor before notice is discharged.
• Subject to equities (Section 132, TPA): the transferee takes subject to all the liabilities and equities to which the transferor was subject when the transfer was made.
• Negotiable instruments excluded (Section 137, TPA): the chapter on actionable claims does not apply to stocks, shares, debentures, instruments which are for the time being by law or custom negotiable, or mercantile documents of title to goods.

2. Negotiation

• Mode: delivery for a bearer instrument, indorsement and delivery for an order instrument (Sections 47 and 48; Topic 22).
• No notice: the person liable need not be told; he pays whoever presents the instrument as holder.
• Better title: a holder in due course takes free from defects in the title of prior parties and from most defences between them (Sections 9, 53 and 58; Topic 13).
• Presumptions: consideration, date, time of transfer and holder in due course status are presumed (Section 118).
• Suit in own name: the holder sues all prior parties in his own name.
• No stamp on transfer: negotiation needs no separate stamped instrument of transfer.

3. Point-by-point Comparison

• Form of transfer: assignment needs a signed written instrument; negotiation needs only delivery, or indorsement and delivery.
• Notice to debtor: essential for assignment; unnecessary for negotiation.
• Title of transferee: an assignee takes subject to equities; a holder in due course takes free of defects and equities.
• Consideration: an assignee must prove consideration if disputed; a holder of a negotiable instrument has the benefit of a presumption.
• Further transfer: an assignee may reassign by another written instrument; a holder negotiates again by indorsement or delivery.
• Governing law: assignment under the Transfer of Property Act; negotiation under the NI Act, which displaces the TPA for negotiable instruments (Section 137, TPA).

4. When an Instrument Is Assigned Rather Than Negotiated

• Non-negotiable instruments: a note or bill "Pay A only", or with words prohibiting transfer, cannot be negotiated, but the right to the money may be assigned under the TPA (Section 13; Topic 3).
• Order instrument delivered without indorsement: the transferee does not become a holder; he acquires only the transferor's rights, in the nature of an assignment (Topic 22).
• "Not negotiable" crossing: a cheque so crossed remains transferable, but the transferee takes no better title than the transferor, which is the assignment position (Section 130; Topic 34).
• Overdue or dishonoured instruments: a holder who takes after maturity, or after dishonour with notice, has only his transferor's rights (Section 59), again resembling an assignee.

5. Related Topics and Provisions

• Meaning and features of negotiable instruments (Topic 3)
• Holder in due course (Topic 13)
• Negotiation (Topic 22)