There are two modes for the transfer of a negotiable instrument. The first one is through Assignment and the second one is through negotiation.
Transfer by Assignment
Normally, a bilateral contract between two parties produces effect only as between the two parties. However, one of the parties may freely transfer the rights arising out of the contract to another 3rd party, who is an outsider to the contract. Such mode of transferring rights is known as Assignment. Shortly stated assignment is the transfer of rights to a third person. The party making the assignment is the assignor, where as the party receiving the assignment is the assignee.
Art 1962 of the civil code expressly allows the creditor to assign his right 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. No transfer of better title also implies that the assignee’s rights are subject to defenses that the debtor had against the assignor (Art 1966 civil code)
Transfer by negotiation
The commercial code apart from providing the rules of negotiation does not define the term negotiation. According to the uniform commercial code negotiation is the transfer of an instrument in such form that the transferee (the person to whom the instrument is transferred) becomes a holder. Similarly according to Indian law, when a promissory note, bill of exchange or cheque is transferred to any person so as to constitute that person the holder there of, the instrument is said to be negotiated.
A person is said to be a holder if he is in possession of an instrument (1) that is payable to bearer or (2) that is made payable to an identified person and he is that identified person. For example when Haramaya Unievsrity issues and delivers a cheque to his employee, payable to “Almaz Tilahun or order”, Almaz is the holder of the cheque because she is in possession of an instrument payable to an identified person (Almaz Tilahun) and she is that person. Almaz may then purchase a TV set from a seller, and use the cheque as a mode of payment by endorsing (write on the back of the cheque as “pay to seller X” and sign) and deliver it to the seller X. This means she has negotiated the cheque to seller X. Seller X is now a holder of the cheque, because he is in possession of a cheque payable to an identified person(seller X) and he is that identified person. On the other hand, Almaz while endorsing may simply write her name on the back of the cheque (without indicating the transferee) and deliver it to seller X. still Almaz has negotiated the cheque, and seller X is the holder because he is in possession of a cheque payable to bearer. (A simple signature by the payee converts the instrument from order to Bearer.)
If the cheque was initially issued as Bearer or is converted from order to bearer by endorsement, it could simply be transferred by delivery. Assume Almaz delivers a bearer cheque to Hana, Hana now becomes a holder because she is in possession of an instrument payable to Bearer.
As a principle a transfer by negotiation creates a holder who, at the very least, receives the rights of the previous possessor. 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 greater rights is known as a holder in due course.
Generally, there are two known methods of negotiating an instrument so that the receiver becomes a holder. The method used depends on whether the instrument is order instrument or bearer instrument. The special part of the code dealing with commercial instruments provides only these two methods of negotiation. Contrary to this, the general part classifies negotiable instruments as Bearer, order and in a specified name (Art 719). As a result a third method of negotiation is provided for instrument in a specified name. (Art 722 & 723.) For two reasons, it can be concluded that, the method of transfer of “in a specified name instrument” is not applicable to commercial instruments.
Firstly, the law expressly considers Bills of exchange, promissory note and cheque issued in a specified name without the words “or to order” as order instruments. Then it clearly stipulates that such instruments will be negotiated though the same rules of negotiation applicable to any other order instruments (Art 746(2), 825(1)(a),833(1) secondly, The requirement of “registration of instrument” referred to in Art, 723, can not in any way be applicable to commercial instruments, which by their very nature do not need any registration for their transfer. . Art 723 has not been mentioned in the special part dealing with commercial instrument making the general provisions inapplicable to the special provisions. For this reasons the applicability of article 722 & 723 should be limited to only one form of negotiable instruments i.e. transferable securities ( see also article 341 which governs transfer of shares, which is a typical form of transferable securities.)