No recourse: Overview, definition, and example
What is no recourse?
"No recourse" is a legal term used in contracts and financial agreements that limits the ability of one party to seek compensation or take legal action against another party in certain circumstances. In a no recourse agreement, if a specific event occurs (such as a default or breach), the party suffering the loss cannot pursue the other party's assets or seek further remedies beyond what is specified in the agreement. The term is commonly used in financing arrangements, such as loans, where the lender agrees to provide funds but has limited options to recover the loan in the event of non-payment.
For example, a lender may provide a loan to a borrower with a "no recourse" clause, meaning the lender cannot claim repayment from the borrower’s personal assets if the borrower defaults on the loan.
Why is no recourse important?
No recourse is important because it defines the extent to which a party can be held liable for a contract breach or failure to meet financial obligations. It provides a degree of protection to the party providing the funds or assets, allowing them to limit their exposure to risk. For businesses, a no recourse clause can offer an added layer of security when lending or entering into agreements, as it limits liability and outlines the extent of responsibility in the event of a dispute or default.
For the borrower or other party receiving funds, no recourse terms can make it easier to obtain financing or enter into agreements without putting personal assets at risk.
Understanding no recourse through an example
Imagine a company that borrows money from a bank to finance a project. The loan agreement includes a no recourse clause, which means that if the company fails to repay the loan, the bank can only recover the funds from the collateral specified in the contract (such as the project itself). The bank cannot pursue the company’s other assets, such as cash or property, in the event of default.
In another example, an investor purchases bonds with a no recourse clause, meaning the investor cannot pursue the issuer’s other assets if the bond issuer defaults. The investor’s recourse is limited to any collateral securing the bond or the terms agreed upon in the bond agreement.
An example of a no recourse clause
Here’s how a no recourse clause might look in a contract:
“In the event of default, the Lender’s sole remedy shall be limited to the collateral specified in this Agreement. The Lender shall have no recourse against the Borrower’s other assets, and the Borrower shall not be liable for any amount in excess of the collateral value.”
Conclusion
No recourse clauses help define the limits of liability in contracts and financial agreements, offering protection to the parties involved by clearly stating the extent of their obligations and rights. By including a no recourse clause, businesses can reduce the risk of excessive claims and ensure that recovery options are clearly outlined in the event of a breach or default.
For businesses, understanding and utilizing no recourse terms can help mitigate financial risk and provide certainty about the extent of responsibility in case of legal or financial issues.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.