What it means
When you write a cheque or authorise a payment, your bank is generally obliged to pay it if the account has enough funds and the instruction is valid. To dishonor an item means to refuse to pay it.
That is perfectly proper when funds are short, the signature is wrong or a lawful stop order is in place. It becomes wrongful when none of those reasons applies.
Typical causes are bank errors such as posting a deposit to the wrong account, freezing an account by mistake or miscalculating the balance. The customer's payment bounces, and the payee is told that the funds were not available.
The damage can be far wider than the item itself. A bounced payment may cost a business a supplier's trust, trigger late fees, lose an early-payment discount or even cause a contract to be cancelled.
For this reason, laws in many places, including the Uniform Commercial Code in the United States, let the customer recover losses that were caused by the wrongful refusal. Proof matters.
The customer usually has to show that the account held sufficient funds, that the payment was properly presented, and that the specific losses were caused by the dishonor. Losses that are speculative or too remote are generally not recoverable, though a business customer may be able to claim more than an individual.
In practice, the first steps are to contact the bank, get written confirmation of what happened, and tell the payee quickly. Most cases are resolved by the bank correcting the error and reimbursing fees and proven losses.
Where the amounts are large, a formal complaint or legal action may follow.
In practice
Real-world examples.
Example
A cafe owner pays a flour supplier by cheque, and the bank wrongly returns it marked "insufficient funds" after misposting a deposit. The supplier puts the cafe on cash-only terms for a month. The owner asks the bank to cover the extra costs and the damage to the relationship.
Example
A small engineering firm's payroll payment is rejected because the bank freezes its account by mistake. Employees are paid late, and two threaten to leave. The firm documents the delay and claims the resulting costs from the bank.
Example
A freelance designer's rent cheque is dishonoured because of a bank system fault, even though her balance is healthy. The landlord charges a late fee. The bank refunds the fee and apologises in writing.
Formula
Calculation
Recoverable damages = Sum of proven losses caused by the wrongful dishonor
Worked example: a business writes a $20,000 cheque to a supplier, and its account holds $35,000. The bank wrongly refuses the cheque because of an internal posting error. The supplier charges a $40 returned-payment fee, adds a $150 late-payment penalty, and withdraws a 2% early-payment discount.
Lost discount = $20,000 x 2% = $400.
Total recoverable losses = $40 + $150 + $400 = $590.
The business should also ask the bank to refund any fees the bank itself charged. Larger claims, such as lost orders, require stronger evidence.Case study
Seen in the real world.
This is an illustrative case with fictional names. Tidewater Imports is an invented trading company that writes a $50,000 cheque to an overseas freight agent to release a container of goods. The account balance is $80,000, but the bank wrongly rejects the cheque after a system update misapplies an old hold on the account.
The freight agent refuses to release the container until payment clears. Tidewater has to pay $1,800 in storage charges, and a customer cancels a $12,000 order because the goods arrive late. Tidewater collects evidence: bank statements, the returned cheque, the agent's invoices and the customer's cancellation email.
The bank accepts that the dishonor was its error and reimburses the storage charges and its own fees. The cancelled order is disputed because the bank argues the loss was too remote, and the matter is settled by negotiation. The illustrative lesson is to keep clear records from the first day.
Watch out
Common mistakes.
- Assuming every bounced payment is the customer's fault. If funds were available and the instruction was valid, the bank may be at fault.
- Failing to keep evidence. Without statements, notices and invoices, proving what was lost becomes very difficult.
- Claiming every possible loss. Courts and banks usually reject losses that are speculative or too distant from the dishonor.
Questions
People also ask.
Can a bank ever refuse a payment legitimately?
Yes, for example when funds are short, an item is stale or a valid stop order exists. Wrongful dishonor only arises when none of those valid reasons applies.
Does it apply only to cheques?
The idea covers other payment orders as well, though the exact rules depend on the type of instrument and the local law. Always check the account agreement.
Can a business claim for damage to its reputation?
Some places allow it, particularly for business customers, but it must be proven and is often hard to value. Advice from a lawyer is sensible before making such a claim.
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