What is a Waiver Of Demand
A waiver of demand is an agreement by the party that has endorsed a check or draft to accept legal responsibility, without being formally notified, should the original issuer of the check or draft default. In other words, the payee of a bank draft or check takes on responsibility for the draft or check that he or she has endorsed. The waiver of demand may be express or implied; it may also be oral or written unless oral waivers are specifically prohibited by law. The waiver of demand acknowledges that a bank draft or check is valid to the extent that the payee has faith in the issuer of that draft or check. If the draft or check does not clear, the waiver of demand allows the bank to post a penalty to the payee’s account.
BREAKING DOWN Waiver Of Demand
Waiver of demand also refers 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.
How Waivers of Demand Work
When a check or bank draft is written, three parties are usually involved. These are the drawer, or original writer of the check; the payee, to whom the check or draft is written; and the drawee, the person or institution to whom the draft or check is addressed and who is asked to pay the amount specified. When Rob writers a check to John, Rob is the drawer, John is the payee, and Rob’s bank, which will be paying the check, is the drawee.
When John endorses the back of the check, he is executing a waiver of demand and accepting responsibility for the check if it bounces due to insufficient funds or for another reason. This may be the most common example of a waiver of demand. When John endorses the check to his bank, he becomes liable to his bank if the check doesn’t clear. The drawer, Rob, is liable to John in this case. The waiver of demand allows John’s bank to penalize him if Rob’s check doesn’t clear. The bank will send John a Bad Check Notice to let him know that Rob’s check bounced and what the penalty will be.