Holder in Due Course

20/07/2020 3 By indiafreenotes

Holder in Due Course is a legal term to describe the person who has received a negotiable instrument in good faith and is unaware of any prior claim, or that there is a defect in the title of the person who negotiated it.

For example; A third-party check is a holder in due course.

The 3rd party who gets the check is not aware of any prior issues with a check, such as it was overdue, dishonored when presented for payment, had any claims against it.

Holder in Due Course called protected holder or bona fide holder for value.

So Holder in Due Course means;

  • If payment is not made on a negotiable instrument when it is due, the holder can use the court system to enforce the instrument.
  • Various parties, including both signers and non-signers, may be liable for it.
  • Accommodation parties (i.e., guarantors) can also be held liable.

The holder of a negotiable instrument means any person entitled in his name to the possession thereof and to receive or recover the amount due thereon from the parties thereto.

A person is called the holder of a negotiable instrument if the following conditions are satisfied:

  • He must be entitled to the possession of the instrument in his name and under a legal title.
  • He must be entitled to receive or recover the amount from the parties concerned in his name.
  • The holder in due course is a particular kind of holder. The holder of a negotiable instrument is called the holder in due course if he satisfied the following conditions;
  • The negotiable instrument must have the holder in due course. The negotiable instrument must be regular and complete in all respects.
  • He obtained the instrument for valuable consideration.
  • He becomes the holder of the instrument before its maturity before the amount mentioned in it becomes payable.
  • He has no cause to believe that any defect existed in the title of the person from whom he derived his title.

Rights of Holder in Due Course

The rights of a holder in due course of a negotiable instrument are qualitatively, as matters of law, superior to those provided by ordinary species of contracts:

  • The rights to payment are not subject to set-off, and do not rely on the validity of the underlying contract giving rise to the debt (for example if a cheque was drawn for payment for goods delivered but defective, the drawer is still liable on the cheque).
  • No notice need be given to any party liable on the instrument for transfer of the rights under the instrument by negotiation. However, payment by the party liable to the person previously entitled to enforce the instrument “counts” as payment on the note until adequate notice has been received by the liable party that a different party is to receive payments from then on.
  • Transfer free of equities the holder in due course can hold better title than the party he obtains it from (as in the instance of negotiation of the instrument from a mere holder to a holder in due course)
  • Negotiation often enables the transferee to become the party to the contract through a contract assignment (provided for explicitly or by operation of law) and to enforce the contract in the transferee-assignee’s own name. Negotiation can be affected by endorsement and delivery (order instruments), or by delivery alone (bearer instruments). In addition, the rights and obligations accruing to the transferee can be affected by the rule of derivative title, which does not allow a property owner to transfer rights in a piece of property greater than his own.