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Information > Financial Terms > This page Endorsement The writing on
the back of a negotiable or other instrument.
The endorsement of a check, bill of exchange, or note consists
of words, qualifying nor not, followed by the signature of the endorser,
who may be the payee, drawee, accommodation endorser, or holder, or simply
the signature alone thereof. Endorsement
is the means, plus delivery, by which order instruments are negotiated
to another person. Negotiation
consists of the transfer of title to and rights in an instrument from
one person to another so that the transferee becomes the legal holder.
If the instrument is payable to bearer, it is negotiable by delivery
alone; if payable to order, it is negotiated by the endorsement of the
holder completed by delivery. An endorsement
must be written on the instrument itself or upon a paper attafched thereto,
called an ALLONGE. An endorsement
must be an endorsement for the full amount of the instrument, but where
the instrument has been paid in part, it may be endorsed as to the remainder.
There is no limit to the number of endorsements that may be made
on a negotiable instrument, except where negotiability has been destroyed. There are five
kinds of endorsements recognized in the Uniform Commercial Code: 1.
Endorsement in blank, also known as general endorsement.
If the instrument is payable to A.B. See, the endorsement
in blank is his simple signature without additional words, i.e.,
"A.B. See." It specifies no particular endorsee, and thereafter is payable
to bearer and may be negotiated by delivery alone. It is a common form of endorsement, but has the objection
that if the instrument is lost or stolen, it may be more easily negotiated
by the finder or thief to a holder in due course, the latter as
such then having superior rights as against the original owner.
The holder may convert an endorsement in blank into a special
endorsement. An endorsement in blank is an unqualified
endorsement, and thus the endorser thereof makes all the warranties to
all subsequent holders in due course specified in Section 3-417, Uniform
Commercial Code. 2.
Special endorsement, also known as direct endorsement and endorsement
in full. This endorsement
specifies the person to whom or to whose order the instrument is payable,
and the endorsement of such endorsee is necessary to the further negotiation
of the instrument. If
an instrument is payable to A.B. See, the special endorsement is "Pay
to Adam Smith, A.B. See." This is the most proper form of unqualified endorsement and
offers the owner the greatest protection from both a legal and a practical
standpoint. Without
Adam Smith's endorsement, the instrument cannot be negotiated except by
forgery, and forgery is a "real" defense against a subsequent holder in
due course. A special endorsement is an unqualified endorsement,
and the endorser thereof makes all the warranties to all subsequent holders
in due course detailed in Section 3-417 of the Uniform Commercial Code. 3.
Conditional endorsement.
This is an infrequent form of endorsement in which the endorser
imposes some condition upon the transferee, e.g., "Pay Adam Smith upon
the satisfactory performance of his contract, (signed) A.B. See,"
or "Pay Adam Smith or order if I am elected to the City Council,
(signed) A.B. See." Where
an endorsement is conditional, a party required to pay the instrument
may disregard the condition and made payment to the endorsee or
his transferee, whether the condition has been fulfilled or not; but any
person to whom an instrument so endorsed is negotiated will hold
the same, or the proceeds thereof, subject to the rights of the
person endorsing conditionally. The conditional endorsement is an unqualified
endorsement dependent upon the condition's fulfillment, and the endorser
thereof thus makes all the warranties, if the condition is fulfilled,
specified in Section 3-417, Uniform Commercial Code.
Qualified endorsements are of two types and constitute the endorser
a mere assignor of title to the instrument: 4.
Qualified endorsement "Without Recourse," or words of similar import. The qualified 5.
Restrictive endorsement.
A restrictive endorsement is a blank or special endorsement
accompanied by words which either (1) prohibit the further negotiation
of the instrument; or (2) constitute the endorsee the agent of the
endorser; or (3) vest the title in the endorsee in trust for or
to the use of some other person.
The endorsement "Pay Adam Smith for collection, (signed)
A.B. See" constitutes the endorsee the agent of the endorser for the
specified purpose. The third
type, "Pay Adam Smith in trust for John Jones, (signed) A.B. See,"
is rare. A restrictive
endorsement confers upon the endorsee the rights to (1) receive payment
of the instrument; (2) bring any action thereon that the endorser could
bring; (3) transfer his rights as such endorsee, where the form of the
endorsement authorizes him to do so.
All subsequent endorsees acquire only the title of the first endorsee
under the restrictive endorsement. The restrictive
endorser is a qualified endorser, and makes the limited warranties found
in Section 3-417, Uniform Commercial Code. For further details
and incidents of endorsements, see Article 3, Part 2 of the Uniform Commercial
Code. A restrictive
endorsement confers upon the endorsee the rights to (1) receive payment
of the instrument; (2) bring any action thereon that the endorser could
bring; (3) transfer his rights as such endorsee, where the form of the
endorsement authorizes him to do so.
All subsequent endorsees acquire only the title of the first endorsee
under the restrictive endorsement. The restrictive
endorser is a qualified endorser, and makes the limited warranties found
in Section 3-417, Uniform Commercial Code. For further details
and incidents of endorsements, see Article 3, Part 2 of the Uniform Commercial
Code.
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