Waiver Of Demand What It Is How It Works Example
Waiver Of Demand: What It Is, How It Works, Example
What Is a Waiver of Demand?
A waiver of demand is a legal agreement given by a party who has endorsed a check or a bank draft. It states that, should the original issuer default, the endorser will take responsibility for honoring that check or draft.
Waivers of demand can be expressed or implied, and can come in written or verbal forms. The affected bank reserves the right to charge applicable penalties or fees to the endorser in the event of default.
Key Takeaways
– A waiver of demand is a legal agreement causing the endorser of a check or draft to become responsible in the event of default.
– The party endorsing the check can also be responsible for fines and penalties incurred.
– Waivers of demand can be issued explicitly or implicitly and can be conveyed verbally in some jurisdictions.
How Waivers of Demand Work
Typically, there are three parties involved when a check or bank draft is written: the drawer, the payee, and the drawee. The drawer is the original writer of the check or draft, the payee is the party to whom the check or draft is written, and the drawee is the party from whose account the funds will be withdrawn.
If a check or draft carries a waiver of demand, then the endorser has accepted legal responsibility for its fulfillment. Should the drawer default, then the endorser will take responsibility for honoring the check and paying any fees or penalties incurred.
In the context of banking, the term waiver of demand can also refer to a bank’s waiver of its right to formal notification when it presents short-term negotiable debt instruments such as drafts or banker’s acceptances to a Federal Reserve Bank for rediscounting. In such instances, the Federal Reserve considers the bank’s endorsement as a "waiver of demand, notice, and protest" if the original issuer defaults on its debt obligation.
Real World Example of a Waiver of Demand
To illustrate, suppose John writes a check to pay for goods purchased from Kevin. In this situation, John is the drawer, Kevin is the payee, and John’s bank is the drawee.
If another party endorses John’s check, then that party is executing a waiver of demand. Accordingly, the endorser would be responsible for honoring John’s check if it bounces due to insufficient funds or any other reason.
Similarly, the waiver of demand would cause the endorser to become responsible for any fees or penalties triggered by the bounced check. In that scenario, the bank would send John a "bad check notice" indicating that the check bounced and informing him of any applicable penalties.
