If an instrument is an order instrument, the payee or the holder is required to endorse it for a valid negotiation. Endorsement is the placing of a signature, sometimes with additional notation, on the back of a negotiable instrument to transfer or guarantee the instrument or to acknowledge payment. This definition provides a comprehensive view of the process. The signature is usually placed on the back of the instrument or on a separate paper firmly attached to it, known as an allonge. Its object may be the transfer of ownership to another person, a guarantee, or an acknowledgment of payment, such as an endorsement by the holder in favor of the drawee.

A simple signature may be sufficient to constitute an endorsement; however, additional notations like the name of the subsequent holder, the date, or other valid statements may be included. The person who transfers a negotiable instrument by endorsement is the endorser, and the person specified by the endorser to receive the rights is the endorsee.

For example, if a cheque is issued to a specific person, they have two options to enforce their rights. They can present it to the bank to collect the cash, or they can negotiate it to another person. If they simply sign it and deliver it to a third party, that party becomes entitled to collect payment. In this scenario, the original payee is the endorser and the third party is the endorsee.

One primary purpose of an endorsement is to effect the negotiation of an order instrument. Endorsement transfers all the rights of the endorser to the endorsee, including the right to further negotiation, unless that right is restricted or excluded by express words. The Commercial Code provides rules governing the forms, types, and effects of endorsement. The special rules applicable to bills of exchange, promissory notes, and cheques largely mirror the general provisions.

Formal Requirements for Valid Endorsement

According to Articles 725, 748, 825, and 844, a valid endorsement must be written on the instrument and signed by the maker. As a principle, the law does not strictly require the signature to be on the back; it can technically be on the face of the instrument. However, in the specific case of a blank endorsement—where the endorser signs without specifying a payee—the signature must be placed on the back or on an attached slip.

In general practice, endorsements are placed on the back because the face of the instrument contains the drawer's signature. Placing an endorsement on the face could create confusion regarding whether the signature belongs to the drawer, the payee, or a subsequent holder. The clean space on the back makes it difficult for an endorser to later deny their signature.

Unconditionality and Totality

The requirement that a promise or order must be unconditional for an instrument to be negotiable also applies to endorsements. An endorsement must be unconditional. If a condition is attached, it does not make the instrument or the endorsement void; rather, the condition itself is treated as having no effect.

Furthermore, an endorsement must transfer the entire right arising from the instrument. An endorser cannot endorse the instrument for only a portion of the stated sum. Any partial endorsement is considered null and void under the law.

Capacity and Parties to Endorsement

A party bound by a commercial instrument must have contractual capacity. For instance, an endorsement by a minor does not create a legal obligation against them. However, the instrument remains valid and negotiable between the other parties. If a bill is negotiated to a minor who then endorses it to another person, the minor is not liable, but the instrument remains effective among the other competent parties.

Generally, the maker, drawer, payee, or endorsee can negotiate an instrument. A maker or drawer does not typically endorse an instrument at the initial stage of issuance; they simply deliver it to the payee. However, they may validly endorse an instrument if they receive it back from a holder through a subsequent negotiation.

In the case of a bill of exchange, it may be endorsed in favor of the drawee regardless of whether the drawee has accepted it. For cheques, an endorsement to the drawee bank typically acts as a receipt and discharges the obligation, unless the endorsement is made to a branch other than the one responsible for payment.

Review Questions

Question 17 What practical problems do you see in permitting endorsement to the drawee of a Bill of exchange? Unlike Article 746(3), which expressly permits endorsement on a bill of exchange to a drawer, Article 843(4) does not specify if endorsement to a drawer is possible on a cheque. Does this mean a holder cannot endorse the instrument to the drawer of a cheque? Why?

Question 18 While partial endorsements are generally void, there is a specific possibility where a partial endorsement may be considered valid. In what circumstance does this occur? (Refer to Articles 775 and 859).

Question 19 It is noted that a drawer cannot endorse a bill or cheque at the initial stage of issuance. However, there is one instance where the drawer may do so at the time of drawing but before delivery to a payee. What is that instance?

Question 20 A Bill of exchange was endorsed and delivered to a person whose name was misspelled by the endorser. Does this constitute a valid endorsement? If so, how should the endorsee sign their name when re-endorsing it to another person?

Question 21 Beyond transferring all rights arising from the instrument, what are the other legal effects of an endorsement? Consider the concepts of cover and the creation of obligations.