Indorsement of a Negotiable Instrument - Explained
What is Indorsement of Commercial Paper?
Written by Jason Gordon
Updated at April 6th, 2023
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What is indorsement of a negotiable instrument?
Indorsement, sometimes written as Endorsement, of an instrument means signing it. The indorsement signifies that the individual signing the instrument certifies certain things about it to the primary parties liable on the instrument (maker or drawer) and to any subsequent holder of the document.
Note: Indorsement indicates that the instrument is payable in accordance with its terms. If the instrument proves not to be payable in accordance with its terms, this can lead to liability for the indorser.
If paper being negotiated is order paper (as apposed to bearer paper), the paper must be indorsed by the person to whom the paper is payable prior to transfer to another holder. Indorsement by the payee may change the paper from order to bearer paper (and vice versa), as well as put other limiting characteristics on the instrument. A payee may indorse the instrument to make it bearer paper or have a special/restrictive/qualified/anonymous indorsements to limit the rights of the future holder of the paper.
Note: Indorsement of an instrument by an imposters and fictitious payee does not destroy a negotiation.
Indorsement is not always required for negotiation of the instrument. No indorsement is required to negotiate commercial paper if the paper in possession of the transferor is bearer paper. As such, the mere transfer of possession is a negotiation. In this case, even involuntary transfer (such as when the paper is lost or stolen) or voidable transfer (such as from an infant, through fraud, duress, misrepresentation, etc.) are sufficient to constitute negotiation.
Note: When an instrument is made payable to two payees with the words "to A and B, signatures of both are required to negotiate it. Agency rules regarding actual and apparent authority apply to the indorsers.
Next Article: Types of Indorsement of Negotiable Instrument Back to: COMMERCIAL PAPER
Discussion Question
Why do you think order paper requires the indorsement of a holder to negotiate the instrument? Why do you think the same rule does not apply to bearer paper? Does it surprise you that indorsement entails a certification or warranty that the paper is payable?
Practice Question
Terry makes a promissory note that is payable to Dan or order. He then transfers the note to Dan. What must Dan do in order to transfer the note to Arnie?
Related Topics
- Commercial Paper (Intro)
- What is Commercial Paper?
- Negotiable Instrument
- What are the common types of commercial paper?
- Promissory Note
- Cashier's Check
- Convenience Check
- Certified Check
- Substitute Check
- Bill of Exchange
- Bank Draft Definition
- Sight Draft Definition
- Bankers Acceptance
- Who is a Holder of a negotiable instrument?
- Commercial Paper Funding Program
- What is Negotiability and why is it important?
- What is required for commercial paper to be negotiable?
- Sum Certain (Contracts)
- Inflation Adjustment Clause
- When does commercial paper contain an Unconditional promise to pay?
- Backup Line of Credit
- What is Payable on Demand or Payable on Time?
- What is Order Paper and Bearer Paper?
- Bearer Form
- How is a payee identified on the negotiable instrument?
- What rules does the court apply in determining negotiability?
- How is commercial paper negotiated to a holder?
- What is Transfer of a negotiable instrument?
- What is Indorsement of a negotiable instrument?
- What are the various types of indorsement?
- Bank Endorsement
- Blank Endorsement
- Accommodation Endorsement
- How does a holder receive payment on a negotiable instrument?
- Who is potentially liable on (or obligated to pay) a negotiable instrument?
- When is an individual liable for a representative signing a negotiable instrument?
- What rules apply if a holder loses a negotiable instrument?
- When is payment of a negotiable instrument overdue?
- What effect does a negotiable instrument have on the underlying obligation?
- What is a holder in due course?
- What are the requirements for a holder to become a holder in due course?
- Receive an instrument for value?
- Receive an instrument in good faith?
- Receive an instrument without notice of a valid defense?
- How does discharge of the Underlying Obligation affect a holder in due course?
- What is the Shelter Rule?
- Can you limit a transferee from becoming a holder in due course?
- Personal Defenses?
- Real Defenses?
- What is a Claim in Recoupment?
- What are the rights of a holder in due course if the instrument involves a consumer transaction?
- What happens if a negotiable instrument is Forged?
- What happens if a negotiable instrument is Stolen?
- Guaranty or Guarantee
- Letter of Guarantee
- Personal Guarantee
-
What is the role of a Guarantor or Surety of a negotiable instrument?
-
Surety
- Cosign
- Accommodation Paper Definition
- Secondary Liability
- Avalize Definition
- What is an Accord & Satisfaction?
- What is primary and secondary liability on an instrument?
- What is Drawer or Maker Liability for a negotiable instrument?
- What is Transferor Warranty of a negotiable instrument?
- What is Indorser Warranty of a negotiable instrument?
- What is Presentment Warranty of a negotiable instrument?
- What is a warrantors liability for a dishonored note or draft?
- What is the time limitation for warranty of a negotiable instrument?
- When are the warranties of a negotiable instrument discharged?