Can the Endorsement of a Bill of Exchange Be Prohibited?

Both the drawer and the indorsers may, by inserting an appropriate clause on the bill of exchange, prohibit its further endorsement. Such a prohibition does not affect the legal validity of the instrument itself.

The prohibition may be effected by including phrases such as “not to be endorsed”, “endorsement prohibited”, or “not payable to order” on the face of the bill.

The legal consequences of an endorsement prohibition differ depending on whether it is imposed by the drawer or by an indorser. If the drawer prohibits endorsement, the bill can no longer be transferred by endorsement. In such a case, the transfer of the bill becomes possible only through assignment of receivables (cessio), similar to the transfer of registered securities (Turkish Commercial Code [“TCC”] Art. 681/2).

Why, then, would a drawer prefer transfer through assignment rather than by endorsement?
The primary reason lies in the rules on personal defenses. In the case of transfer by endorsement, personal defenses may, as a rule, not be raised against a subsequent bona fide holder of the instrument (TCC Arts. 687, 778/1-a, 818/1-e). By contrast, in transfers made by way of assignment, the drawer may assert all personal defenses against the transferee, regardless of whether the transferee is a subsequent third party (Turkish Code of Obligations [“TCO”] Art. 188). (For instance, the drawer may raise against every subsequent assignee claims such as non-delivery of the goods forming the basis of the bill, defective or partial delivery, or that payment has already been made without recovering the original instrument.)

If the prohibition is introduced by an indorser, the possibility of transfer by endorsement does not cease altogether. However, any subsequent holder who acquires the bill by endorsement cannot hold the indorser who inserted the prohibition clause liable (TCC Art. 685/2).