Shelter Rule
Shelter Rule
Shelter Rule
of a holder in due course to a holder who does not have the status of a holder in due course? Briefly
explain.
Answer. Under the shelter principle, a person who does not qualify as a holder in due course can,
nonetheless, acquire the rights and privileges of a holder in due course if he derives his title to the
instrument through a holder in due course. However, a person who previously held the instrument cannot
improve his position by later reacquiring it from a holder in due course if the former holder was a party to
fraud or illegal activity affecting the instrument or had notice of a claim or defense against the instrument.
(2008 Bar Question)
an HDC, then the transferee will have the same rights as an HDC as given to him under the shelter
principle.
The shelter principle is not actually solely focused on negotiable instruments and their place in
commercial law. In actuality, the reason that the shelter principle is effective in terms of negotiable
instruments is because negotiable instruments have been designed to fall under the same provisions as
other forms of contract law.
The shelter principle affects the transfer of real property just as much as it matters in terms of negotiable
instruments. In real property transfers, the role of an HDC is essentially that of a bona fide purchaser and
the shelter principle provides the same basic protections: that a new purchaser will receive the same status
as the transferor.
The reason for the shelter principle in property law in general is that it helps to expedite the use and resale
of property, instead of letting such use and resale become held up by litigation. The same reasoning
applies to negotiable instruments and the shelter principle's effects of creating holders through an HDC.