QS Study

A bank’s failure to honor a valid negotiable instrument such as a cheque or draft that has been presented to it for payment. If the cheque is valid and there are sufficient funds in the account to cover it, a bank’s failure to honor it within the time period stipulated by the Uniform Commercial Code would constitute wrongful dishonor. If a bank pays a check subject to a stop payment order and then dishonors other checks that would have been paid if the stop order had been followed, it may be liable to its customer for wrongful dishonor.

Cheques are a form of payment that is recorded by accountants on your receivables ledger. While you may record the payment instantly upon receipt, there will be a lag time between when you record the payment and when the check clears the bank and is posted to your account. Wrongful dishonor refers to a bank’s failure to honor a valid negotiable instrument, such as a check or draft that has been presented to it for payment. Likewise, a financial institution will not be accountable for any checks it dishonors because the Internal Revenue Service or a judgment creditor has attached a customer’s account.

A payer bank is liable to its customer for damages caused by wrongful dishonor of an instrument. Liability is limited to actual damages proved and may include potential consequential damages. However, a bank might dishonor an instrument if honoring it would generate an overdraft of the customer’s account, unless the bank has a preexisting concurrence to admiration that customer’s overdrafts, for example, through overdraft protection.

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