There are two primary modes for the transfer of a negotiable instrument: assignment and negotiation.

Transfer by Assignment

Normally, a bilateral contract between two parties produces effects only between those two parties. However, one party may freely transfer the rights arising out of the contract to a third party who is an outsider to the original agreement. This mode of transferring rights is known as assignment. The party making the assignment is the assignor, whereas the party receiving it is the assignee.

Article 1962 of the Civil Code expressly allows a creditor to assign their rights to a third party even without the consent of the debtor. Transfer by assignment gives the assignee only those rights the assignor possesses. In other words, the assignee takes only those rights that the assignor originally had. The fact that no better title is transferred through assignment is what basically distinguishes assignment from negotiation. The lack of a better title also implies that the assignee’s rights are subject to any defenses that the debtor had against the assignor, as per Article 1966.

Comparison of Assignment and Negotiation

When comparing the provisions of the Civil Code regarding the assignment of rights (Articles 1962–1967) with the rules applicable to negotiation in the Commercial Code, several key differences emerge. While assignment is governed by general contract law and leaves the transferee in the same legal position as the transferor, negotiation is a specialized process designed for the fluid movement of commercial paper. In negotiation, the transferee can often acquire a status that protects them from personal defenses existing between the original parties.

Transfer by Negotiation

The Commercial Code provides the rules for negotiation but does not explicitly define the term. According to the Uniform Commercial Code, negotiation is the transfer of an instrument in such a form that the transferee becomes a holder. Similarly, under other legal systems, when a promissory note, bill of exchange, or cheque is transferred to a person so as to constitute that person the holder, the instrument is said to be negotiated.

A person is a holder if they are in possession of an instrument that is either payable to bearer or made payable to an identified person and they are that identified person. For example, if an employer gives an employee a cheque payable to that employee or order, the employee is the holder. If that employee then purchases an item and uses the cheque as payment by endorsing it (writing on the back "pay to seller X" and signing) and delivering it, they have negotiated the cheque. If the employee simply signs the back without naming a transferee, it becomes a bearer instrument, and the next person in possession becomes the holder.

Unlike an assignment, a transfer by negotiation can make it possible for a holder to receive more rights in the instrument than the prior possessor had. A holder who receives these greater rights is known as a holder in due course.

Negotiating Order Instruments

A commercial instrument becomes an order instrument if it is payable to a specified person or order, payable to the order of a specified person, or simply payable to a specified person. Examples include "Pay Ali Yusuf or order," "Pay to the order of Ali Yusuf," or "Pay to Ali Yusuf."

The formal requirement for negotiating an order instrument is straightforward: it is negotiated through endorsement followed by delivery by the holder. This rule is summarized in Article 724(1) of the Commercial Code. The special provisions applicable to bills of exchange, promissory notes, and cheques restate this rule without modification.

Negotiating Bearer Instruments

A bearer instrument is one that does not specify a payee or is payable to anyone in possession of the instrument. Examples include instruments drawn as "Pay," "Pay cash," "Pay Ali Yusuf or bearer," or "Pay bearer."

A bearer instrument is negotiated by mere delivery. While the code does not explicitly define delivery, it is understood that for the purpose of negotiation, delivery must be voluntary, physical, and performed with the intention of transferring ownership. If an instrument is handed over for safe custody or for a specific limited purpose, such as to a lawyer for filing a suit, the delivery does not amount to negotiation.

Negotiating an Instrument in a Specified Name

Articles 722 and 723, which discuss instruments in a specified name, are generally not applicable to commercial instruments like cheques or bills of exchange. These provisions are better suited for transferable securities, such as registered shares.

According to Article 723, an instrument in a specified name may be transferred either by entering the name of the transferee in both the instrument and in a register held by the issuer, or by delivering a new instrument specifying the name in both locations. The person in possession is deemed the holder only if their name is specified simultaneously in the instrument and the register. This requirement of registration is incompatible with the nature of commercial instruments, which must circulate freely without the need for formal registration during transfer.