The method used for negotiation depends on the nature of the instrument at the time the negotiation takes place. An instrument payable to the order of a named payee and endorsed in blank becomes a bearer instrument. In other words, using a blank endorsement on an order instrument converts it into a bearer instrument. Such an instrument may subsequently be negotiated by mere delivery.

For example, a bill of exchange issued to Admasu Tena or order may be endorsed in blank by Admasu simply by placing his signature on the back of the instrument. Admasu may then negotiate it to another person by mere delivery. The holder of the instrument can then simply transfer it to another subsequent holder by delivery.

The rule of converting an order instrument into bearer by blank endorsement is stated in Articles 726, 749, 825, and 845 of the Commercial Code. A holder who receives an order instrument may transfer the instrument to a third party without filling up the blank and without endorsing. This holder has two other options to negotiate the instrument endorsed in blank.

The holder may fill up the blank either with their own name or with the name of some other person. This must be done above the signature of the original endorser. If the original endorsement was simply the signature of Admasu Tena, the holder may write "Pay to Juhar Mume" above that signature. In this case, because a specific person has been named, the instrument is again converted from bearer to order. Juhar can then negotiate it only through another endorsement.

Alternatively, the holder may write the name of a third person in the blank, such as "Pay to Tiruneh Ayalew." In this scenario, the holder who actually filled the blank can transfer the instrument to Tiruneh by delivery. At that stage, the instrument is still bearer, but the moment it is delivered to Tiruneh Ayalew, it is converted into an order instrument.

The second option available to the holder who receives an instrument through blank endorsement is either re-endorsing it in blank or to some other person. If a blank endorsement is followed by another blank endorsement, the instrument remains a bearer instrument. However, if the holder endorses it to a specific person, they have used a special endorsement, which converts the instrument from bearer back to an order instrument.

When considering an instrument originally issued as bearer, the code does not clearly state whether it can be converted into an order instrument for all types of paper. Article 848, which governs cheques, expressly states that an endorsement on a bearer cheque shall not convert the instrument into an order cheque. Instead, it only makes the endorser liable to the holder in whose favor the cheque was endorsed.

Review Questions

Question 28 Abebe Mola is the holder of a bearer Bill of exchange and a promissory note. On both instruments, he writes "Pay to Zinabu Tigabu" followed by his signature, and then negotiates them to Zinabu. Can Zinabu Tigabu negotiate these instruments to another person by mere delivery? Why or why not?

Conversion of Transferable Securities

Article 720 of the general part of the Commercial Code provides a rule regarding the conversion of a bearer negotiable instrument into one in a specified name and vice versa. This provision is primarily applicable to transferable securities, such as share certificates, rather than commercial instruments like cheques or bills of exchange.

Within this limited scope, an instrument in a specified name may be converted to bearer at the request and expense of the holder. This process does not apply to commercial instruments, as there is no "request" or "expense" involved in their conversion. A holder of a share certificate in a specified name must request the issuing company and pay a fee to change its status. Similarly, a bearer security may be converted into an instrument in a specified name. This distinction is supported by Article 325 of the code, which specifically addresses the nature of shares.