Restrictive Endorsement: Definition, Examples, Check, Cost

What is an Endorsement?

The term endorsement refers to signing a negotiable instrument to transfer the rights in the future. It includes writing a party’s name on the back of that instrument or other documents attached to it. Usually, there are two parties to an endorsement. The endorser is the party who affects an endorsement. On the other hand, the one receiving the instrument after the transfer is called the endorsed.

Essentially, an endorsement represents the signature to authorize the transfer of a negotiable instrument. It may also involve funds and other financial transactions. Similarly, the term also applies in the field of insurance. There, it refers to an amendment that modifies and adds something to the original policy. There are several types of endorsement, including a restrictive endorsement.

What is a Restrictive Endorsement?

A restrictive endorsement allows one party to restrict the usage of a financial instrument. Effectively, it removes the negotiability from that instrument. Therefore, the underlying item no longer remains negotiable. The endorsee within this endorsement cannot transfer that instrument to another party. With the restrictive endorsement, an endorser limits how the endorsed uses the underlying item.

A restrictive endorsement may limit usage in various ways. Sometimes, it may happen expressively when the endorser specifies the intention for the underlying instrument. Consequently, it prohibits further negotiation on that instrument. As stated above, that instrument no longer meets the definition of a negotiable instrument.

A restrictive endorsement may also express that it does not constitute a complete transfer of an instrument. In this case, this endorsement provides authority to the endorsee to follow a specific path with that item. In both cases, the underlying principle for the restrictive endorsement remains the same. It effectively limits how the endorsed can use the involved instrument.

How does a Restrictive Endorsement work?

One of the most common forms of restrictive endorsement is a check that includes a restriction. Usually, this restriction allows the payer to limit how the payee uses it. With this endorsement, the payer may prohibit the payee from depositing the check to their account. For example, the payer may include the phrase “For Deposit Only” to ensure the restrictive endorsement applies to that check.

Usually, a restrictive endorsement allows the payer to have more control over the instrument in a transaction. Companies may use it as a part of their internal controls to prohibit any unidentified or unauthorized usage of their bills. Most companies use it to settle debt and protect against future disputes. However, it may create issues for the payee and may not be an ideal choice for suppliers.

Overall, a restrictive endorsement allows the payer more control over a check. However, it may also cause issues with the supplier due to the restriction placed on the usage. Both parties must reach a mutual agreement on restricting the use of the underlying instrument for the best results.

Conclusion

An endorsement is a signature on a negotiable instrument with the intention of transferring it. It may come in various types, including a restrictive endorsement. Primarily, this type of endorsement limits the use of an instrument or check. One of its common examples includes a “For Deposit Only” check, which confines a check holder to deposit the amount in their account only.

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