Commercial Paper

An endorsement is the process of signing the back of a paper, thereby imparting the rights that the signer had in the paper to another person. The number of times an instrument may be endorsed is unlimited. There is no requirement that the word "order" be embodied in the endorsement. Four principal kinds of endorsements exist: special, blank, restrictive, and qualified.

An endorsement that clearly indicates the individual to whom the instrument is payable is a special endorsement.

A paper containing a blank endorsement is one that has the signature of the payee but no specific endorsee is designated. A check that is made payable to the order of X is endorsed in the blank when X signs it. Once endorsed, it becomes bearer paper and is negotiable by anyone who physically holds it. A blank endorsement is changed into a special endorsement if certain words are written above the endorsee's signature, such as "pay to the order of Y."

A qualified endorsement is one wherein liability is disclaimed by the endorser through inclusion of a phrase preceding his or her signature. Ordinarily, an unqualified endorser's liability may be either secondary, whereby the endorser is bound to pay if the individual expected to pay defaults and certain conditions are met or by WARRANTY, by which the endorser incurs liability upon ALTERATION OF THE INSTRUMENT. To disclaim secondary liability, the endorser can include the words "without recourse," thereby relieving himself or herself of any responsibility to pay it.

Attorneys who are the recipients of checks drawn in settlement of the claims of their clients commonly sign their clients' checks with qualified endorsements. This type of check is ordinarily made payable to the lawyer and client jointly. It is generally endorsed by the lawyer WITHOUT RECOURSE and given to the client. The attorney then is not liable if the client does not receive the money promised by the terms of the check.

A restrictive endorsement is conditional and attempts to prevent subsequent transfer of the document. The language of the endorsement indicates that the instrument is intended for limited use, such as "for deposit only," or specifies that the paper is meant for the benefit of the endorser or another individual, as in "Pay X in trust for Y." The condition imposed by a restrictive endorsement must be satisfied before payment can be properly made.

However, an endorsement that tries to prohibit further transfer of an instrument will not succeed. If a check says "Pay X only," it is still completely negotiable upon its endorsement by X.