Negotiation: Meaning, Delivery and Methods (Sections 14 and 46 to 48)

Negotiation is the process that gives negotiable instruments their name. It is the transfer of an instrument in such a way that the transferee becomes its holder, able to sue on it in his own name and, if he is a holder in due course, free from defects in earlier titles. This note explains the definition in Section 14, the central role of delivery under Section 46, and the two methods of negotiation: by delivery alone for bearer instruments and by indorsement and delivery for order instruments.

1. Meaning of Negotiation (Section 14)

Section 14, Negotiable Instruments Act, 1881

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 test is the result of the transfer: the transferee must become a holder within Section 8, entitled in his own name to possession and to recover (Topic 12). A transfer that does not achieve this, such as handing an order cheque to someone without indorsing it, or transferring through a forged indorsement, is not a negotiation, though it may operate as an assignment of rights under the general law (Topic 56).

2. Delivery (Section 46)

Section 46, Negotiable Instruments Act, 1881

The making, acceptance or indorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive.

As between parties standing in immediate relation, delivery to be effectual must be made by the party making, accepting or indorsing the instrument, or by a person authorised by him in that behalf.

As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only, and not for the purpose of transferring absolutely the property therein.

Delivery completes the contract: signing is not enough. A note written and signed but kept in the maker's drawer creates no liability; it is the delivery that makes the maker, acceptor or indorser liable.
Actual or constructive: delivery may be physical handing over, or constructive, as where the instrument is held by an agent or banker who agrees to hold it for the transferee.
By the right person: between immediate parties, delivery must be made by the party himself or someone he authorised. An instrument stolen from the drawer's desk has not been delivered by him.
Conditional or special purpose delivery: between immediate parties, and against any holder who is not a holder in due course, it may be shown that the instrument was delivered conditionally (for example, to take effect only if a contract is signed) or for a special purpose (for example, for collection or as security). A holder in due course is not affected by such conditions.

3. Negotiation by Delivery (Section 47)

Section 47, Negotiable Instruments Act, 1881

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to bearer is negotiable by delivery thereof.

Exception. A promissory note, bill of exchange or cheque delivered on condition that it is not to take effect except in a certain event is not negotiable (except in the hands of a holder for value without notice of the condition) unless such event happens.

Bearer instruments pass by mere delivery, without any indorsement. An instrument is payable to bearer if expressed to be so, or if its only or last indorsement is in blank (Sections 13 and 54).
Illustration (a): A, the holder of a bearer instrument, delivers it to B's agent to keep for B. The instrument has been negotiated.
Illustration (b): A's bearer instrument is held by A's banker, who is also B's banker. A directs the banker to transfer it to B's credit; the banker does so and now holds it as B's agent. The instrument has been negotiated and B is its holder.
Conditional delivery: an instrument delivered on condition that it is not to take effect except on a certain event is not negotiable until the event happens, except in the hands of a holder for value without notice of the condition.
Subject to Section 58: a person claiming through a finder or thief gets no title unless he or someone before him was a holder in due course (Topic 15).

⚠ Note

A person who negotiates a bearer instrument by delivery alone, without indorsing it, does not sign it and so is not liable on the instrument to later holders. He remains answerable to his immediate transferee under the general law, for example if the instrument was not genuine or he had no title.

4. Negotiation by Indorsement (Section 48)

Section 48, Negotiable Instruments Act, 1881

Subject to the provisions of section 58, a promissory note, bill of exchange or cheque payable to order, is negotiable by the holder by indorsement and delivery thereof.

Order instruments require two steps: the holder's indorsement and delivery to the indorsee.
By the holder: only the holder (the payee or a valid indorsee) can negotiate. Indorsement by anyone else, including a forger, transfers nothing (Topic 20).
Indorsement without delivery: if the holder indorses but dies before delivering, his legal representative cannot complete the negotiation by delivery alone (Section 57; Topic 24).
Delivery without indorsement: the transferee of an order instrument who receives it without indorsement is not a holder. He acquires the transferor's rights under the general law and must obtain the transferor's indorsement to become a holder.

5. Negotiation Compared with Assignment

Negotiation is quick, needs no notice to the debtor and, in favour of a holder in due course, cuts off earlier defects. An assignment of the debt represented by the instrument, by a written transfer under the Transfer of Property Act, 1882, is possible even for a non-negotiable instrument, but the assignee takes subject to all equities and the debtor is bound only after notice (Topic 56).

⚠ Key point

An instrument is negotiated when it is transferred so as to make the transferee its holder (Section 14). Making, acceptance and indorsement are completed by delivery, actual or constructive; between immediate parties and against holders who are not holders in due course, conditional or special purpose delivery may be shown (Section 46). Bearer instruments are negotiated by delivery alone, subject to the exception for conditional delivery (Section 47); order instruments by the holder's indorsement and delivery (Section 48). Both are subject to Section 58: no title through a finder or thief unless a holder in due course intervenes.

6. Related Topics and Provisions

Holder (Topic 12)
Kinds of indorsement (Topic 23)
Who may negotiate (Topic 24)
Negotiability compared with assignment (Topic 56)