The creation of a recourse claim

In our practice we regularly assist clients who have a recourse claim against a counterparty. Often that counterparty is a former spouse, partner or business relation and the client wants to take recourse against such a party. But what does 'recourse' actually mean?

Joint and several liability

In practice, it regularly occurs that two parties are jointly and severally bound towards a third creditor. Think for example of the situation where two partners start a business together and approach a bank for financing. Often both partners then jointly and severally bind themselves towards the bank for the full loan provided by the bank. This also happens, for example, when two partners or spouses decide to buy a home together and approach a lender for financing of that home. Usually both partners then bind themselves jointly and severally for the full mortgage loan.

What is recourse?

If one of the jointly and severally liable debtors has paid more than their share to the creditor, that debtor can take recourse against the other debtor(s) for the excess paid. So recourse means: recovering from another party what you paid on their behalf.

When does a recourse claim arise?

A recourse claim arises when you, as a jointly and severally liable debtor, have paid more to the joint creditor than your share in the internal relationship. In principle, the internal distribution is equal, unless parties have agreed otherwise.

Conclusion

If you have paid more than your share in a joint debt, you may be able to take recourse against your co-debtor. It is important to properly record the internal distribution agreements and to act quickly if recourse is necessary.