Accommodation Paper

Accommodation paper is a type of negotiable instrument signed by a party—without receiving value: to facilitate another party in obtaining money or credit.
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Definition

Accommodation Paper refers to a negotiable instrument (such as a bill of exchange, promissory note, or check) signed by a party—who does not receive any direct value for signing—as the maker, drawer, acceptor, or endorser. The primary purpose of the accommodation paper is to enable another party to obtain money or credit. This signing party is known as the accommodation party, while the party benefiting from this act is termed the accommodated party.

Examples

  1. Promissory Note: John signs a promissory note as the maker to help his friend Alex obtain a bank loan. John does not receive any financial gain from this action.
  2. Endorsed Check: Sarah endorses a check for her colleague Emma so Emma can cash it, without receiving any payment or benefit from Emma.
  3. Co-Signed Loan Agreement: David co-signs a loan agreement for his sister Maria to help her secure the loan, despite not having any personal interest in the loan amount.

Frequently Asked Questions

Q1: What is the legal liability of the accommodation party? A1: The accommodation party is legally liable for the instrument, essentially guaranteeing payment or performance. If the accommodated party fails to fulfill the obligation, the accommodation party must do so.

Q2: Can an accommodation party reclaim the amount paid? A2: Yes, the accommodation party can seek reimbursement from the accommodated party for any payments made on their behalf.

Q3: Does the accommodation paper affect the credit score of the accommodation party? A3: Yes, since the accommodation party is legally obligated to the instrument, it can impact their credit score if the accommodated party defaults.

Q4: Is accommodation paper common in business transactions? A4: While it is less common in modern business due to the availability of less risky financial products, accommodation paper is still used in certain situations requiring personal assurances.

  1. Negotiable Instrument: A signed document promising a sum of payment to a specified person or the bearer. Common forms include checks, promissory notes, and bills of exchange.
  2. Maker: The person who creates and signs a promissory note, committing to pay the amount specified.
  3. Drawer: The individual who writes and signs a draft or check, instructing a payer to pay a third party.
  4. Acceptor: The party (usually a bank) that agrees to pay the amount specified on a bill of exchange upon presentation.
  5. Endorser: Someone who signs their name on the back of a negotiable instrument to transfer ownership or guarantee payment.

Online References

Suggested Books for Further Studies

  1. “Negotiable Instruments and Payments Systems” by Linda J. Rusch & Stephen L. Sepinuck
  2. “The Law of Negotiable Instruments” by James S. Rogers
  3. “Banking and Negotiable Instruments” by Mark Gillen

Fundamentals of Accommodation Paper: Business Law Basics Quiz

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Accommodation Party
Accommodation Endorser, Maker, or Party