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
- 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.
- Endorsed Check: Sarah endorses a check for her colleague Emma so Emma can cash it, without receiving any payment or benefit from Emma.
- 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.
- 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.
- Maker: The person who creates and signs a promissory note, committing to pay the amount specified.
- Drawer: The individual who writes and signs a draft or check, instructing a payer to pay a third party.
- Acceptor: The party (usually a bank) that agrees to pay the amount specified on a bill of exchange upon presentation.
- 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
- “Negotiable Instruments and Payments Systems” by Linda J. Rusch & Stephen L. Sepinuck
- “The Law of Negotiable Instruments” by James S. Rogers
- “Banking and Negotiable Instruments” by Mark Gillen
Fundamentals of Accommodation Paper: Business Law Basics Quiz
### What is the primary purpose of accommodation paper?
- [ ] To provide investment returns.
- [ ] To secure property ownership.
- [x] To enable another party to obtain money or credit.
- [ ] To reduce the accommodation party's liabilities.
> **Explanation:** Accommodation paper is signed to enable another party (the accommodated party) to obtain money or credit without granting direct financial value to the party signing the instrument.
### Who is legally responsible if the accommodated party defaults?
- [ ] Only the accommodated party.
- [x] The accommodation party.
- [ ] The issuing bank.
- [ ] Any financial institution involved.
> **Explanation:** The accommodation party assumes legal responsibility for the instrument if the accommodated party defaults.
### Can the accommodation party reclaim the amount paid?
- [x] Yes, from the accommodated party.
- [ ] No, they cannot.
- [ ] Only from the bank.
- [ ] Only through legal action.
> **Explanation:** The accommodation party can seek reimbursement from the accommodated party for any payments they make on their behalf.
### What impact can accommodation paper have on the credit score of the accommodation party?
- [x] It can impact the credit score if there is a default.
- [ ] It has no impact.
- [ ] It improves the credit rating.
- [ ] Only influences business transactions but not credit.
> **Explanation:** Since the accommodation party is legally liable, a default by the accommodated party can negatively impact the accommodation party's credit score.
### In modern business, how common is the use of accommodation paper?
- [ ] Extremely common.
- [ ] The most preferred financial instrument.
- [x] Less common due to the availability of less risky financial products.
- [ ] Only used in personal transactions.
> **Explanation:** Modern businesses often use other financial products with fewer associated risks than accommodation paper.
### What is a negotiable instrument?
- [x] A signed document promising a sum of payment to a specified person or the bearer.
- [ ] An oral agreement for payment.
- [ ] A type of banknote.
- [ ] A verbal promise to pay.
> **Explanation:** A negotiable instrument is a signed document that promises a sum of payment to the specified person or bearer, such as a check, promissory note, or bill of exchange.
### Does accommodation paper require the provision of value to the signing party?
- [ ] Yes, it always involves direct financial benefits.
- [x] No, the signing party does not receive direct financial value.
- [ ] Only if both parties agree.
- [ ] Only in commercial transactions.
> **Explanation:** The accommodation party signs without receiving any direct financial value, the primary motive being to help the accommodated party obtain funds or credit.
### What is an example of accommodation paper?
- [ ] A company issuing dividends.
- [x] A person signing a promissory note to help a friend secure a loan.
- [ ] An employee receiving a bonus.
- [ ] A landlord signing a rental agreement.
> **Explanation:** A promissory note signed by someone to help another person secure a loan is an example of accommodation paper.
### What term describes the person who creates and signs a promissory note?
- [x] Maker
- [ ] Drawer
- [ ] Acceptor
- [ ] Endorser
> **Explanation:** The maker creates and signs a promissory note, committing to the payment specified.
### Which party is primarily benefiting from the accommodation paper?
- [ ] The accommodation party.
- [x] The accommodated party.
- [ ] The banking institution.
- [ ] The government.
> **Explanation:** The accommodated party benefits by obtaining money or credit through the signed accommodation paper.
Thank you for delving into the intricate world of accommodation papers and testing your knowledge with our quizzes. Continue to expand your understanding in the field of business law!
