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Without Recourse Definition
Without recourse doesn’t have one single meaning. Usually, this phrase is used when the person who buys a negotiable instrument such as promissory note knows about the risks related to non-payments. Also, it refers to a financial approach where the highest probable liability of the dealer is restricted to the warranties in reference to how qualitative an installment contract is.
A Little More on What is Without Recourse
Without Recourse Financing
One can extend financing either with or without recourse. When financing is done using recourse, the lender or the financial institution lending the money can ask the borrower to pay the due amount, in case, he or she is unable to receive payment or instalments from the borrowing party. For instance, if an exporter obtains finance from a financial institution. If the importer is unable to pay him or her the amount owing on the given date, the financial institution can ask the exporter for making the due payment.
On the other side, without recourse financing takes place when the lending party bears the risk of default by the obligor. In this case, the exporter who is on the borrowing side holds no obligation in case the importer fails to make the payment or becomes bankrupt. The lending party accepts these risks in the without recourse financing, and is unable to collect payments or acquire assets of the parties who are not a part of the debt agreement.
Sales Without Recourse
Without recourse refers to the non-involvement of any liability in future. When a seller and a buyer enter into a sales contract, it outlines the rights and duties of the parties involved by mentioning if the sale falls in with recourse or without recourse category. A sale with recourse makes the seller liable for the product or goods sold in case it appears to be defective or fails to meet the expectations of the buyer. It is the ultimate right of the buyer to ask for recourse from the seller in case the product is below standards. In such cases, the buyer will either receive a product replacement of equivalent value or a refund from the seller.
Sales without recourse refers to the situation when the buyer holds himself or herself liable for any risks related to the product purchased. Therefore, he or she won’t have any recourse against the seller in case the product turns out to be defective. The buyer of the product accepts the liability or responsibility associated with the product, and will not receive any compensation, product replacement, or refund for the defective or inferior quality product.
Without Recourse in the Banking Industry
The term ‘without recourse’ exempts the prospective holder of a negotiable instrument such as a check from any liability. The holder of the instrument considers the risk of default associated with the financial instrument that could lead to a liability. In case of endorsement of a signed check having the words ‘without recourse’ written on it, exempts the endorser from the liability in case the check gets declined by the bank due to inadequate amount of funds.
Let’s take an example where Alice gives a check to Bob. Bob, being the payee, endorses the check in order to make payment to Maggi for his debts. For endorsing the check, he pens his name or signature on the back of the check, and this makes the check negotiable. It gives permission for transferring the amount of money that the check orders. Also, Bob writes ‘without recourse’ on the check’s back.This means that Bob, being the endorser, is not liable for the payment of check if it gets bounced because of inadequate funds. In case, the bank where Alice’s account is, doesn’t make payment to Maggie’s bank account because of not having enough funds, Maggie won’t have the right to ask for payment from Bob.
Without Recourse in Secondary Market for Loans
The ‘without recourse’ has its own significance in the secondary market. Here, the seller offering loans in the form of securities or certificates of deposit doesn’t have to cover the investor or the buyer for any risks involved. So, if an investor incurs any loss on his investment, the seller is not accountable to cover those losses. This approach is applicable to asset-based lending contract where the seller is not hindered from charging back the invoices that are not paid by the debtor.
References for “Without Recourse”
Academic research for “Without Recourse”
The use of loan sales and standby letters of credit by commercial banks, James, C. (1988). The use of loan sales and standby letters of credit by commercial banks. Journal of Monetary Economics, 22(3), 395-422.