Holder in due course
Encyclopedia
The Holder in Due Course (HDC) doctrine is a rule in commercial law
that protects a purchaser of debt
. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.
of service. C is insulated from any remedy A receives against B. A is still obligated to pay the original obligation to C.
, a Holder in Due Course must have given value in good faith without notice of any previous dishonour in taking the bill, which appears to be complete and regular. Using the previous example, to qualify as someone who has given value in good faith without notice, C should have provided consideration
to B in exchange for the transfer of the right to payment. He also must not have been aware of any defect in the right to payment. Then, if C fits the requirements of a HDC, he will take the bill free from any defect in title. , such as any dispute between A and B.
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. [U.C.C. §3-602(b)]
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 effected by indorsement 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.
Commercial law
Commercial law is the body of law that governs business and commercial transactions...
that protects a purchaser of debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.
Example
Suppose A promised to pay money to B in exchange for services. B then transferred the right to payment to C. C is then insulated from any consequence arising from a conflict between A and B. Suppose A sues B for non-performanceNon-performing loan
A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms....
of service. C is insulated from any remedy A receives against B. A is still obligated to pay the original obligation to C.
Requirements
In the context of negotiable instrumentsNegotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
, a Holder in Due Course must have given value in good faith without notice of any previous dishonour in taking the bill, which appears to be complete and regular. Using the previous example, to qualify as someone who has given value in good faith without notice, C should have provided consideration
Consideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
to B in exchange for the transfer of the right to payment. He also must not have been aware of any defect in the right to payment. Then, if C fits the requirements of a HDC, he will take the bill free from any defect in title. , such as any dispute between A and B.
Rights of an HDC are superior to other contract rights
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. [U.C.C. §3-602(b)]
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 effected by indorsement 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.