Accommodation Party: Legal Duties, Risks, and Protections
Learn what an accommodation party is, their legal obligations, risks, and rights, plus how they differ from an accommodated party in loans and credit deals. 6 min read updated on August 08, 2025
Key Takeaways
- An accommodation party is someone who signs a negotiable instrument or loan agreement to guarantee repayment for another party, without receiving direct benefits.
- They can be referred to as a guarantor, surety, co-signer, or accommodation maker, depending on the transaction.
- Commonly required when the borrower’s creditworthiness is insufficient or when better loan terms are desired.
- Legal obligations can arise in various forms, including signing as maker, acceptor, or endorser of a promissory note or check.
- Accommodation parties may provide collateral, but they are released from liability if the collateral is mishandled or damaged.
- Any material changes to the terms of accommodation without their consent can discharge their obligations, except in specific situations.
- Risks are significant, as they may be fully liable for repayment if the borrower defaults.
An accommodation party is a legal term used in commercial transactions. It refers to an individual who has agreed to act as guarantor to assist another's access to a loan or credit extension. You will also find the accommodation party referred to as:
- Guarantor
- Third-party guarantor
- Surety
- Accommodation maker (when signing a promissory note)
- Co-signatory
What Are You Agreeing to As an Accommodation Party?
Essentially, you're agreeing to lend your own good credit rating to the financial agreement of another. It can involve some personal risk. You're agreeing to take on responsibility for another person's debt if they fail to pay. You would normally only do this for a friend, relative or business associate. There is no benefit to the accommodation party: this means no payment and no compensation. The accommodation party is liable should the accommodated party (the person requiring the accommodation party) default.
Legal Status and Obligations of an Accommodation Party
Under the Uniform Commercial Code (UCC), an accommodation party is legally bound in the same capacity as the person they are accommodating. This means if you sign as a maker, you have the same liability as the primary borrower; if you sign as an endorser, you are liable as an endorser. Importantly, the law does not require the lender to first attempt collection from the borrower before pursuing the accommodation party, unless the written agreement specifies otherwise.
Accommodation parties are considered to have “lent their credit” to the borrower and are not presumed to have received any consideration for signing. However, they still have rights, such as the ability to seek reimbursement from the accommodated party after payment and to assert defenses available under applicable contract and negotiable instrument laws.
When Would an Accommodation Party Be Required?
An accommodation is necessary if an individual's creditworthiness is unsatisfactory to the person offering the terms: car purchase loans and mortgages are common examples. Business transactions, including corporate borrowing, can also require an accommodation party.
If the original borrower is incapable of paying or defaults on their loan, then the loan holder will expect the accommodation party to assume responsibility for the repayment. It is then up to the co-signer to recoup the money from the original borrower.
It's also possible to use an accommodation party to obtain better loan terms. In this instance, the borrower would not be considered ineligible for a loan, but they can enhance their application with the support of an accommodation party.
Distinction Between Accommodation Party and Accommodating Party
The terms “accommodation party” and “accommodating party” are sometimes used interchangeably but have distinct meanings in commercial law. The accommodation party is the one providing the guarantee—essentially the helper—while the accommodated party (sometimes referred to as the accommodating party in casual usage) is the person or entity receiving the benefit of that guarantee. Confusing these terms can lead to misunderstandings in legal documents and court proceedings, so clarity in drafting and communication is essential.
What Happens When You Act As Accommodation Party?
Everyone signs a document known as an accommodation paper that sets out the agreement terms, stating that the guarantor assumes financial responsibility for the loan if the borrower defaults. It may also outline requirements of the lender to try and recoup the money from the borrower before resorting to the accommodation party.
You can sign accommodation papers as the person agreeing to pay, the acceptor of the draft, or the endorser of the papers. You are agreeing to pay the loan and to indemnify the accommodation party against losses incurred.
Forms of Signature in Accommodation Transactions
An accommodation party’s liability often depends on how they sign the instrument:
- As Maker: You are directly liable for repayment of the entire obligation.
- As Indorser: You agree to pay if the borrower defaults and certain conditions are met, such as notice of dishonor.
- As Acceptor: Common in drafts, you agree to honor payment when due.
The UCC presumes that an accommodation party signs without compensation. However, even without personal gain, they are treated as a primary obligor in the capacity in which they signed, unless the instrument clearly limits liability.
Collateral in an Accommodation
Collateral refers to an object rather than credit. If a loan is secured by collateral provided by the accommodation party and the holder of the loan then damages it, the accommodation party is no longer liable for the cost of the damage on the loan. Similarly, if the collateral does not belong to the accommodation party and it is damaged by the loan holder, the guarantor is no longer responsible for the sum required to repair the item. Burden of proof is on the accommodation party.
Damaging collateral can alter the terms of accommodation including:
- Failure to keep the item in its original state.
- Releasing collateral without providing replacement of equal value.
- Failing to look after the collateral in order to maintain value (i.e., a car.)
- Failing to comply with the law when disposing of collateral.
Release and Discharge of an Accommodation Party
An accommodation party can be released from liability under several circumstances, including:
- Material alteration of the original contract terms without their consent.
- Extension of payment terms or other changes to obligations that increase their risk, unless they agreed in writing to remain liable.
- Impairment of collateral, such as failure to maintain or protect pledged security, which may reduce or eliminate their obligation to the lender.
Courts often examine whether the lender acted in good faith and preserved the accommodation party’s right to seek reimbursement from the borrower. If those rights are impaired, the accommodation party’s liability may be reduced proportionally or discharged entirely.
Can the Terms of Accommodation Be Altered?
Yes, but tread carefully. If changes are to be made, then you must ensure everyone involved signs off on them, particularly if the sum of money is to be altered. If the individual holding the loan agrees to change the obligations on repayment, excluding repayment extension, then the changes mean the guarantor is no longer required to act as guarantor.
If you are a lender inheriting a modified loan, ensure you contact everyone involved to prevent a financial loss.
The accommodation party will not be discharged from duty if:
- They agreed to the change that they now claim is the basis of wanting to give up responsibility.
- The document, or a separate agreement, prevent them being discharged from responsibility.
A case in Indiana saw a dispute over a change to mortgage details for a building project. The original paperwork was signed by three companies and four individuals for the sum of $300,000. Over time, it emerged that a further $50,000 was required. Some of the original signers agreed to sign a second note to include this additional money but they then defaulted. Those who only signed the first note claimed they hadn't known about the second and that they were simply accommodation parties to the first loan and as such should no longer be obligated to pay as the second note discharged them of responsibility. The court agreed with them.
Although accommodation parties are common enough, it is not an undertaking to accept without due care as the personal risk can be high.
Frequently Asked Questions
-
What is the main difference between an accommodation party and an accommodated party?
The accommodation party guarantees the obligation, while the accommodated party is the primary borrower who benefits from that guarantee. -
Can an accommodation party be sued before the borrower?
Yes. Unless the agreement specifies otherwise, lenders can pursue the accommodation party directly without first suing the borrower. -
Does an accommodation party have any rights after paying the debt?
Yes. They can seek reimbursement from the borrower and may enforce any collateral securing the loan. -
What happens if the loan terms change without the accommodation party’s consent?
Material changes can discharge the accommodation party from liability unless they agreed in writing to remain bound. -
Is collateral always required from an accommodation party?
No. Collateral is optional and depends on the lender’s requirements, but if provided, its impairment can release the accommodation party from liability.
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