Without Recourse
Candlefocus EditorWhen a promissory note or financial instrument has been sold without recourse, it typically means that the holder of the note or instrument does not have a personal obligation to pay, even if the borrower defaults on the loan. The lender, therefore, cannot seek any more money from the endorser or previous payer should the borrower fail to meet its obligations. In essence, this means the buyer of the note or instrument assumes full responsibility for any losses incurred due to nonpayment.
In sales agreements, the buyer of a promissory note or financial instrument that has been sold without recourse assumes full credit risk. This reality is sometimes referred to as the ‘caveat emptor’ or ‘let the buyer beware’ situation as the seller of the instrument is not responsible for any risk of default or loss.
Although the seller is released from future claims in a without recourse sale, they may wish to consider collateralizing the loan to mitigate the losses that can be incurred if the borrower defaults. Examples of collateral might include real estate, automobile, household items or investments.
The term ‘without recourse’ is often seen in secondary markets when notes and financial instruments are being sold or transferred. In some cases, without recourse indicates that claims or actions should not be pursued either with or without the previous endorser. In the event that the seller of the note or instrument intends no responsibility for its payment, the instrument should be stamped or endorsed “without recourse.”
It is important to remember that when a promissory note or financial instrument has been sold without recourse, it releases the seller from any legal obligation, and the buyer may need to look for other options such as collateral or legal action in order to recover their losses in the event of default.