What Is a Waiver of Demand?
Let me explain to you what a waiver of demand is—it's a legal agreement from a party who has endorsed a check or a bank draft. This agreement states that if the original issuer defaults, you as the endorser will step in and honor that check or draft on their behalf.
You should know that waivers of demand can be expressed or implied, and they can come in written or verbal forms. If there's a default, the bank involved has the right to charge you, the endorser, any applicable penalties or fees.
Key Takeaways
- A waiver of demand is a legal agreement that makes the endorser of a check or draft responsible if it defaults.
- As the endorser, you could also be on the hook for any fines and penalties that come up.
- These waivers can be issued explicitly or implicitly, and in some places, they can even be verbal.
How Waivers of Demand Work
When a check or bank draft is written, there are typically three parties: the drawer, who writes it; the payee, who receives it; and the drawee, whose account the funds come from.
If a check or draft has a waiver of demand, it means you as the endorser have accepted legal responsibility for it. If the drawer defaults, you'll have to honor the check and cover any fees or penalties incurred.
In banking terms, a waiver of demand can also mean a bank giving up its right to formal notification when presenting short-term negotiable debt like drafts or banker's acceptances to a Federal Reserve Bank for rediscounting. Here, the Federal Reserve sees the bank's endorsement as a 'waiver of demand, notice, and protest' if the original issuer defaults on the debt.
Real World Example of a Waiver of Demand
Consider this scenario: John writes a check to pay Kevin for some goods. John is the drawer, Kevin is the payee, and John's bank is the drawee.
If you endorse that check by signing the back, you're executing a waiver of demand. That means if John's check bounces due to insufficient funds or any other reason, you'll be responsible for honoring it.
In the same way, you'd also be liable for any fees or penalties from the bounced check. The bank would send John a 'bad check notice' about the bounce and any penalties, but you'd be the one covering them.
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