Recourse Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Recourse, written in plain English, along with examples of how it is used.

What is Recourse?

(n) Recourse is the option, remedy or right a person holding a cheque, bill of exchange, Demand note, promissory note or other financial instruments have on the issuer of such instruments, to demand payment against such documents

History and Meaning of Recourse

Recourse is a legal term used in the banking and finance sector that refers to the right of a lender, holder of a promissory note, or other types of financial instruments to demand payment from the borrower or issuer of the note. It serves as a way to protect financial institutions from default and to ensure they can recoup any losses.

In the past, recourse was a common practice used by banking institutions to extend credit to businesses and individuals, and to support the economic development of countries. It also helped to foster trust between lenders and borrowers, as both parties understood the consequences of non-payment. Today, while recourse is still widely used, it is often included in contracts as a last resort, with the preference being non-recourse arrangements that limit the lender's ability to demand payment.

Examples of Recourse

  1. An investor buys a promissory note from a company and includes a recourse clause in the contract. If the company fails to pay back the debt on time, the investor can demand payment from the company, even if it means seizing property or assets as collateral.

  2. A bank extends a loan to a borrower but requires that they provide a personal guarantee as recourse in case of default. The borrower agrees to guarantee the loan and will be liable to pay back the amount owed if they fail to repay the loan.

  3. A seller of goods agrees to sell on credit to a buyer but requires a promissory note with recourse. Under this agreement, if the buyer fails to pay for the goods as agreed, the seller can demand payment from the buyer or the issuer of the promissory note.

Legal Terms Similar to Recourse

  1. Non-Recourse: An arrangement that limits the rights of the holder of a promissory note to demand payment only to the assets used as collateral for the loan.

  2. Unconditional Guarantee: A legal agreement where a third party guarantees payment of a promissory note, regardless of the ability of the issuer to repay the loan.

  3. Suretyship: An agreement where a third party takes responsibility for the payment of a promissory note if the issuer defaults on the loan.