How does the shelter principle embodied in the Negotiable Instruments Law operate to give the rights

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)

Shelter Principle Defined

The shelter principle refers to the principle that a party which does not and cannot qualify as a holder in
due course (HDC) with regard to a given negotiable instrument can actually still obtain those rights and
privileges if that party obtained the instrument through an HDC. In other words, if an HDC at some point
possessed the negotiable instrument, then every possessor of that negotiable instrument after that point
will have access to the same rights and privileges.
The reasoning behind this shelter principle is actually a core reasoning of negotiation and basic
ownership. Every time a negotiable instrument transfers to a new possessor, that new possessor is always
accorded at least the rights of the previous possessor, the transferor. This means that if the transferor is an
HDC, then the HDC's rights and privileges are passed along with the negotiable instrument.
This might, at first glance, seem counter-intuitive and entirely against the point of an HDC. After all, if
the shelter principle allows for parties to simply "inherit" the rights of an HDC through transfer of
ownership of a negotiable instrument, then it nullifies the restrictive measures placed upon HDCs in
commercial law. While this may be true, keeping the shelter principle is important for the functioning of
negotiable instruments in general.
The shelter principle allows any given HDC to dispose of a negotiable instrument with much greater ease,
thereby increasing the overall flow of commerce. Without the shelter principle, then potential purchasers
of a negotiable instrument might not be interested in doing so, as any one of those purchasers might not
fulfill the requirements for becoming an HDC.
The shelter principle does allow a new holder to ignore the requirements for becoming an HDC. If a new
holder received the negotiable instrument as a gift from an HDC, for example, then that new holder would
still qualify as a holder through an HDC, even though that new holder was not taking the negotiable
instrument for value.
This would also cover situations in which the transferee received notice of other claims or defenses
regarding the negotiable instrument. So long as the transferee is receiving the negotiable instrument from

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.