What are the Effects of Negotiation?

(a) Payable to bearer:

Where the stolen instrument is payable to bearer and the thief indorses it by delivery, the transferee, if he is a holder in due course, will acquire a good title.

(b) Payable to order:

Where the stolen instrument is payable to order, a thief cannot transfer it unless he forges the signature of the payee. A forgery does not convey any title, hence even a holder in due course will not acquire a good title.

Instruments obtained by fraud :

So far as a person other than a holder in due course is concerned, he does not acquire any title. However, in case the instrument is payable to bearer and reaches the hands of a holder in due course, he acquires a good title to the instrument. But in case the instrument in payable to order and the signature of the payee are forged, even the holder in due course will not acquire any title.

Instruments obtained for unlawful consideration :

A negotiable instrument given for unlawful consideration, creates no obligation between the parties, e.g. a note given for bribery. The position is more or less the same as discussed in above cases.

Instruments obtained without consideration (Sec. 43) :

The position is the same even when there is partial failure of consideration. Where a party obtain an instrument without, if a holder in due course gets the instrument be acquires a good title and any party claiming thereafter, also gets a good title as it is purged of its defects.

Forged Instruments :

An instrument is forged when it is made falsely or its writing is altered fraudulently.

Example:

A indorses a bill to B “Pay B or order” and signs it. B erases the words “pay B or order” and thereby converts the special endorsement into a blank endorsement. This bill is a forged instrument.

It should be noted that a man’s signatures of his own name may amount to forgery.

Example:

One Ram Lai picks up a bill of exchange, payable to another Ram Lai. He indorses the bill, intending to cause it to be believed that it was indorsed by the real Ram Lai to whose order it was payable. Ram Lai has committed forgery.

A forgery is a nullity and does not convey any title :

Even a holder in due course is not an exception. In case of forgery there is an absence of title as against defect of title. When an instrument passes through the hands of a holder in due course, it is purged of all defects. In case of forgery there is no defect of title but complete absence of title. Hence, forgery does not convey any title even to a holder in due course.

Example:

A forged the signature of B on a cheque. Later on, he transferred the cheque to C, C takes it bona fide and for value. Although C is a holder in due course, yet he does not acquire any title.