Thursday, August 27, 2020

Meaning, form and effects of Endorsement of commercial instruments under Ethiopian law

 Meaning, form and effects of  Endorsement of commercial instruments under Ethiopian law

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 gives a very comprehensive meaning of endorsement. The signature is usually placed on the back of the instrument or an a separate paper firmly attached to it (allonge). It’s object may be transfer of ownership to another person or as indicated in the definition endorsement may also be for the purpose of guarantee or it may be to acknowledge payment, for example in case of endorsement by the holder in favor of the drawee.

A simple signature may be sufficient to constitute endorsement; however additional notation like the name of the subsequent holder, date or any other additional valid statements may be included. The person who transfers a negotiable instrument by endorsement is known as endorser. The person whose name is specified by the endorser and who receiver right from the instrument is called the endorsee.

Example

The following is cheque is issued to Abera Tilahun 

Abera Tilahun has two options to enforce his rights arising out of the cheque. He can present it to Dashen Bank and collect Br 600 in cash. Alternatively he may negotiate it to another person. If he simply puts his signature and deliver to Almaz Fisseha. (endorsed it to Almaz Fisseha), she will be the one entitled to collect payment from the Bank. In this case Abera Tilahun is the endorser and Almaz Fisseha is the endorsee.

One purpose of an endorsement is to effect the negotiation of order instrument. Endorsement transfers all the rights of the endorser to the endorsee, including the right to further negotiation, but the right to further negotiation may be restricted or excluded by express words.

The commercial code without defining the term endorsement provides rules governing forms, types and effects of endorsement in the general part and in the special part. The special rules applicable to endorsement of Bill of exchange, promissory note and cheque are more or less repetition of the general part. Actually, there is no need for providing different categories of rules governing endorsement. All these rules could have been drafted in one section of the commercial code.

Article 725(1)748(1),825(1) & 844(1) all provide the form of a valid endorsement. For a valid endorsement it has to be written on the instrument and signed by the maker. As a principle, the provisions do not impose an obligation on the endorser to place his signature on the back of the instrument, it should simply be on the instrument, meaning it could be on the face or on the back. However in one Exceptional circumstance the rule is modified and the law requires the endorser to put his endorsement on the back of the instrument or on a slip affixed there of. This is when the endorser uses a blank endorsement i.e. puts his signature without specifying the payee. (see Article 748(2) & 825(1)(a),844(2).

In general, endorsement on a Bill of exchange, promissory note or cheque may be either on the face, on the back or on a slip attached to it. But if the type of endorsement used by the endorser is a blank endorsement, he can not put his signature on the face of the instrument.  If it is on the back,  because the back of the instrument will be clean or indicate only successive endorsements it will be clean or indicate only successive endorsement it will be difficult for the endorsee to deny his signature. Signature on the face of the instrument may belong to the Drawer, making it doubtful to determine whether it belongs to the drawer (maker) payee or subsequent holder. In practice to avoid such doubtful cases it is usually written on the back of the instrument.

The unconditionality  requirement to promise or order for the negotiability of the instrument is similarly applicable to endorsements. An endorsement must be unconditional. But, unconditional endorsement does make neither the instrument nor the endorsement void. Only the condition to which the endorsement is made subject becomes of no effect [(Articles 725(4),747(1),825(1)(a) and 843(1)] An endorsement transfers all the rights arising out of the instrument. The endorser can not endorse for part of the money stated in the instrument. Any partial endorsement is null and void (Articles 725(5),747(2),825(1)(a),843(2)]

One more element regarding the validity of endorsement is related to the party who can stand as an endorser. Generally a party to be bound by a commercial instrument should have a contractual capacity. This means, for instance, a minor can not issue an instrument as a drawer or maker. This is equally applicable to his capacity as an endorser. An endorsement by a minor does not created any obligation against him. However, the instrument still retains its negotiability and will be valid as between the other parties to the instrument.

Example

A Bill of exchange is issued in favor of Ketema or order. Then Ketema negotiates it in favor of Ababu who is a minor. This minor in turn endorses and delivers it to Fatuma. Ababu does not have any obligation towards the endorsee or any of the other parties. But the instruments still retains it’s negotiability and is effective as between all the parties save Ababu.

Assuming all the parties have contractual capacity, The maker, drawer, payee or endorsee and if there are several makers, drawers, payees or endorsees, all of them  can negotiate an instrument. The maker or drawer, could not normally endorse an instrument at the initial stage of issuance.

Example

Dinku issues a promissory note to Dalcha or order. At this stage any endorsement by Dinku to Dalcha or any other person is of no effect. He has to only deliver the note to the payee i.e. Dalcha. The maker or Drawer may endorse an instrument provided they have received it back through endorsement from the holder. In a bill of exchange and a promissory note endorsement may be validly made to the Drawer or maker [(Articles 746(3),825(1)(a)] there is no corresponding provision which specifically allows endorsement to the drawer of a cheque (again a drafting mistake)

An endorsement to the drawee discharges the obligation arising from the instrument and is considered as a receipt. This is typically the rule with regard to cheques (Art 843(4)]. Exceptionally an endorsement to a drawee bank will be valid as endorsement if endorsement is to Branch other than the paying Branch.

If the instrument is a Bill of exchange, there is no limitation upon endorsement to the drawee. The Bill may be endorsed in favor of the drawee whether he has accepted or not. [(Art 746(3)]

Question

What practical problems do you see in permitting endorsement to the drawee of a Bill of exchange? Unlike Article 746(3) (which is also applicable to promissory note by way of Art 825(1)(a)] which expressly permits endorsement on a bill of exchange to a drawer, Art 843(4)does not give us a hint as to whether endorsement to a drawer is possible on a cheque. Does it mean that holder cannot endorse the instrument to the drawer of a cheque? Why?

Question

An endorsement which purports to transfer only a part of the amount due on a negotiable instrument, is valid. There is one possibility in which a partial endorsement may be valid. In what circumstance does a partial endorsement become valid? (see art. 775 and 859)

Question

It has been said that the drawer of a Bill of exchange or cheque can not endorse it at the initial stage of issuance of the instrument. In one instance the drawer may do so, at the time of drawing the instrument but before delivering to any payee. What is that instance?

Question

A Bill of exchange was endorsed as ‘pay to Danacew Atnafu’ and delivered to “Dagnachew Atnafu”. Clearly the name of the endorsee was misspelled by the endorser. Does this constitute a valid endorsement to Dagnachew Atnafu? If yes how should the endorsee write his name, while re-endorsing it to anther person?

Question

One of the effects of endorsement is transferring all the rights arising out of the instrument. (Articles 726(1),749(1),825(1)(a),845(1)]. what  are the other effects of endorsement? Explain

Hint:

cover (see Article 845(1) and 800) by the way is article 800 applicable to promissory notes? If not is there is any justification?

create obligation (see Art 727,750,825(1)(a),846)

 

No comments:

Post a Comment

Cancellation of Contracts

   Cancellation of Contracts Cancellation is another remedy for non-performance. Cancellation brings an already existing contract to an end....