Types of Endorsement - Et Banking Law

Generally, there are four categories of endorsement: blank, special, qualified, and restrictive.

Blank Endorsement

A blank endorsement names no specific payee, which makes the instrument payable to the bearer and negotiable by delivery only. It consists of a mere signature. For example, a cheque payable to "Abera Tilahun or order" can be endorsed in blank simply by having Abera’s signature written on the back.

A blank endorsement on an order instrument converts it into a bearer instrument. In the example above, Abera Tilahun can negotiate the cheque to any person by simple delivery after signing it. The person who receives it can, in turn, negotiate it to a subsequent third party by delivery.

Under the Commercial Code, an instrument may be endorsed in blank in two ways. The first and most common is a mere signature without the name of an endorsee, as per Articles 725, 748, 825, and 844. The second method is by writing "to bearer" followed by the signature of the endorser, as seen in Articles 725, 747, 825, and 843.

Question 22 If Abera Tilahun uses a blank endorsement to negotiate a cheque to Almaz Fisseha by delivery, who is the endorser and who is the endorsee? If Almaz Fisseha then negotiates the cheque by delivery to Gemechu Alemayhu, who are the parties in that transaction?

Special Endorsement

A special endorsement identifies the specific person to whom the endorser intends to make the instrument payable. This names the endorsee, and no special words of negotiation are required. For example, a cheque issued to Ali Hussein may be endorsed with the phrase "Pay to [Name]" followed by Ali's signature.

Qualified Endorsement

A qualified endorsement passes title to the holder but limits the endorser’s liability to later holders if the instrument is dishonored. Typically, this is done by writing the words "without recourse" or "sans recourse" over the signature. Generally, an endorser impliedly promises to pay the holder if the drawer or maker defaults. A qualified endorsement allows the endorser to disclaim this liability.

For example: Pay to Geremew Haile Without recourse (Signature of Dawit Zergaw)

Qualified endorsements are often used by persons acting in a representative capacity, such as agents, to absolve themselves from personal liability. An instrument with a qualified endorsement can still be further negotiated. If it is a special qualified endorsement, it remains an order instrument requiring endorsement and delivery. If it is a blank qualified endorsement, it becomes a bearer instrument negotiable by delivery alone.

Restrictive Endorsement

A restrictive endorsement specifies the purpose of the endorsement or the specific use of the instrument. It does not necessarily prohibit further negotiation. Common types include:

Endorsement for deposit: Using phrases like "For deposit only" or "For deposit to my account at Commercial Bank of Ethiopia."
Endorsement for collection: Using phrases like "For collection only" or "Pay any bank."
Endorsement for the benefit of another: For example, "Pay to Almaz, tutor for minor Alemu."

The person who takes an instrument with a restrictive endorsement must apply any value given for the instrument consistently with the instructions in the endorsement.

Forged, Unauthorized, Misspelled, and Multiple Endorsements

The Commercial Code provides rules to ensure the correct negotiation of instruments, but practical problems can arise through unlawful means or errors.

Forged or Unauthorized Endorsement

A forged or unauthorized signature does not make the instrument itself invalid. Instead, it has effect only between the party who placed the signature and the remaining parties. This means there is a valid negotiation only between the person who placed the forged endorsement and subsequent parties.

For example, if a cheque is stolen and the thief forges the payee's signature to negotiate it to a third party, the original payee has no obligation to that third party. however, if the third party acquired the cheque in good faith and for value, they may be able to enforce rights against the thief and the drawer. Under Article 860, a bank is generally not liable to the drawer for payment on a forged endorsement, as the bank is not legally obligated to verify the signatures of the endorsers, only that of the drawer and the last endorsee.

Question 26 Identify the articles in the Commercial Code that share a similar meaning with the principle that a minor may negotiate an instrument to bind all parties except themselves. Compare the Ethiopian approach with other legal standards regarding the status of a minor in negotiable instruments.

Misspelled Endorsement

The Commercial Code does not explicitly address misspelled names. Ideally, an endorsement should be identical to the name on the instrument. In practice, a payee whose name is misspelled is still considered a holder. They may endorse the instrument using the misspelled name, their correct name, or both. The most common professional practice is to sign the misspelled name as it appears and then sign the correct name immediately below it. In Ethiopia, provided the identity can be verified, such errors should not invalidate the transfer, as the law seeks to encourage the free flow of commerce.

Multiple Payees

When an instrument is payable to multiple people, the requirement for endorsement depends on how they are listed. If the instrument uses the word "or" (alternative payees), the endorsement of only one person is required. If the instrument uses the word "and" (joint payees), the endorsement of all named parties is necessary for negotiation.

Under Ethiopian civil law, there is a presumption against solidarity among joint creditors (Article 1910). This implies that each joint payee may require the drawee to pay only their share of the amount. A drawee paying the full amount to only one joint payee might remain liable to the others. However, if there is an express agreement or agency relationship, payment of the total sum to one joint payee may be valid against all.

Question 27 Based on general contract principles: a) Do the provisions of the Commercial Code allow partial payment to one of the joint payees? b) Does the code allow endorsement by one of the joint payees regarding only their share? c) Which of these scenarios creates a greater obstacle for the easy transferability of negotiable instruments? Support your views with relevant code provisions.