There are two kinds of endorsements. First, the person wishing to transfer the cheque may simply sign the back of the cheque. This is known as 'endorsement in blank' and converts the cheque from an order cheque to a bearer cheque.
Secondly, the person wishing to transfer the cheque may write on the back of the cheque 'pay X or order' followed by their own signature. This is known as a special endorsement and the cheque remains an order cheque with the named endorsee as the new holder.
Endorsement has other consequences. A person who endorses a cheque also makes promises to later holders. The most important of these promises is that the bank will pay the cheque and, if it does not, the endorser will pay. In effect, the endorser adds her or his credit to the cheque. Stopping a cheque does not end the drawer's liability, and the drawer may be sued by any holder of the cheque, or by any later endorser who has been forced to pay.
The ordinary rule for the transfer of personal property is that the transferee of the property can take no better title than that of the transferor. That rule, designed to protect original ownership, does not apply to negotiable instruments. It is possible for a holder to obtain a good title even when the transferor has no title.
A 'holder in due course' is a holder who has taken a negotiable cheque in good faith and for value, with no notice of any defect in title of the transferor, and the cheque itself is 'complete and regular on the face of it'. The effect of being a 'holder in due course' is that the holder takes the cheque free of any defects in title of her or his predecessor.
By comparison, when a person takes a crossed cheque which bears the words 'not negotiable' written between the lines (or a cheque simply marked with two parallel lines across it), they shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom they took it had. In other words, there is no such thing as a holder in due course of a cheque which is crossed and marked 'not negotiable'.
The words 'not negotiable' between two lines does not stop a cheque from being transferred. Both bearer cheques and order cheques may be transferred from person to person in the same way that cheques without the marking may be transferred. But if the cheque is lost or stolen, the person who lost it or the person from whom it was stolen still retains ownership of the cheque and may raise the fact that it was lost or stolen as a defence against anyone who attempts to claim on the cheque.
As an example, consider if a cheque is given by the drawer D to the payee P as payment for goods and the cheque is stolen by T and handed to a grocer G as payment for groceries. These variations of the example show how the ownership of a cheque may be changed to the detriment of an earlier holder where the cheque is:
- an uncrossed bearer cheque - G becomes the holder (owner) in due course and is entitled to the cheque. Neither D nor P may complain
- an uncrossed order cheque - T must forge P's endorsement to transfer the cheque to G. G has no right to the cheque as ownership cannot be acquired through the forged endorsement
- crossed and marked 'not negotiable' - G obtains no rights to the cheque as T had no rights.
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