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What Is Under Reserve
In law, under reserve is a phrase used to indicate that the person or company is going to do something without affecting any legal rights.
For example, a client may accept the delivery of goods “under reserve”.
In other words, the client is accepting the goods but will inspect the goods at a later date for defects or conformity to the order.
If there are any issues that are discovered after the delivery was accepted under reserve, the client has preserved its rights under the law or contract to have the issues resolved.
The phrase “under reserve” is typically used to indicate that you are “reserving your rights” or you are not “foregoing” any rights you may have.
Typically, doing something under reserve requires that you expressly inform the other party of your intention.
For instance, if you are accepting the goods under reserve, you should make sure that your acceptance document should indicate that you are acting with the reservation of your right.
Generally, phrases like “without prejudice” or “under protest” are used to indicate a reservation of some kind.
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Under Reserve Definition
How do you define under reserve?
To understand the meaning of under reserve, it’s worth defining the meaning of “reserve”.
One meaning of “reserve” is to indicate that you are “holding over” something or you are “retaining” something.
In essence, when you are issuing a reserve or making a reservation, you are retaining your rights to something.
Now, when you say “under reserve” in business, you are doing (or not doing something) while expressing your intention of not waiving any legal rights you may have.
For example, a company may choose to pay an invoice that it deems incorrectly issued to avoid interest costs and various penalties.
The payment can be made under reserve.
In other words, the company is paying the invoice but does not want the act of paying the invoice to represent an acceptance of the invoice or its validity.
Under Reserve In Contracts
You may have seen contracts drafted where the under reserve phrase is used throughout.
For example, a stock purchase agreement may include a clause where it states “the shares are transferred under reserve of the company’s rights to exercise its buyback rights”.
In this example, the “under reserve” phrase is used to make reference to a contractual right that must be observed or should prevail over another right.
The author is looking to make it clear that the share transfer should not affect the company’s right to buy back the shares at some future point in time.
Another example is issuing a loan under reserve to obtain audited financial statements.
This means that the lender is agreeing to issue the loan conditional on obtaining the borrower’s audited financial statement.
In this example, the under reserve phrase is making reference to an essential condition required by a contracting party.
When you see under reserve in a contract, it’s important that you carefully read the provision in question to understand its precise meaning within the context of the provision.
If you are not sure about your contract, make sure to consult a qualified attorney for advice.
Performance or Acceptance Under Reserve
In certain business transactions, a party may choose to perform a contractual obligation or accept the delivery of goods under reserve.
For example, a business partner delivers the goods to a client and the client accepts the goods under reserve.
This means that although the client is accepting the delivery of the goods, it is not waiving its contractual or legal rights to ask for the defective goods to be replaced or returned.
Another party may choose to perform its contractual obligations under reserve.
This means that a contracting party executes its obligations without waiving its rights.
For example, a company has provided services to a client who has not paid its invoices.
The service company performs its contractual obligations by completing the project to respect the contractual milestones to avoid various penalties and fees while it sorts out its differences with the client to get paid.
This is a case where a party performs its obligations under reserve where it is not waiving its rights to claim any unpaid service fees.
Related article:
- UCC 1-308 on Performance or Acceptance Under Reservation of Rights
- Accord and satisfaction
Takeaways
So there you have it folks!
What does under reserve mean in business?
In general, under reserve refers to an instance when a person or company acts or refrains from acting without intending to compromise its legal rights or to indicate a condition.
For example, a client may accept a project under reserve of doing further quality tests or an investor may accept to fund a company under reserve of doing further due diligence.
Now that you know the meaning of under reserve and how it’s used in business, good luck with your transaction!
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