Definition
Dishonor is the refusal or failure to pay or accept a negotiable instrument, such as a check or bill of exchange, when it is presented for payment or acceptance. This refusal can occur either because the party responsible for payment lacks the necessary funds, disputes the validity of the instrument, or decides not to honor the payment for another reason.
Examples
- Unfunded Check: John writes a check for a service he received, but upon presentation, it is returned by the bank due to insufficient funds in John’s account. This check is said to be dishonored.
- Disputed Invoice: A company issues a bill of exchange to a supplier, but disputes arise regarding the quality of goods received. When the supplier presents the bill for payment, the company refuses to accept it due to the dispute, thus dishonoring it.
- Bankrupt Business: A small business issues a promissory note to a creditor, but files for bankruptcy before the note is due. The note is dishonored when presented because the business cannot make the payment.
Frequently Asked Questions
Q: What are the legal consequences of dishonoring a negotiable instrument?
A: The holder of a dishonored negotiable instrument can seek legal remedies, including suing for the payment amount, along with additional charges for damages and interest.
Q: Can a dishonored check affect my credit rating?
A: Yes, repeated incidents of dishonored checks can negatively impact your credit rating and result in additional penalties from your bank.
Q: Is there any difference between dishonoring and bouncing of a check?
A: While often used interchangeably in a colloquial sense, “bouncing” typically refers specifically to a check returned for insufficient funds, whereas “dishonoring” encompasses all forms of refusal to pay or accept a negotiable instrument.
- Negotiable Instrument: A signed document that promises a sum of payment to a specified person or the assignee. Examples include checks, promissory notes, and bills of exchange.
- Presentment: The act of formally presenting a negotiable instrument to the responsible party (drawee, acceptor, or maker) for payment or acceptance.
- Endorsement: A signature or instructions written on the back of a negotiable instrument, transferring rights to another party.
- Holder in Due Course: A party that has acquired a negotiable instrument in good faith and for value, and thus has certain greater protections under the law.
Online Resources
Suggested Books for Further Studies
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“Negotiable Instruments and Payment Systems” by Wayne K. Lewis
This textbook offers an in-depth exploration of the laws governing negotiable instruments and practical issues related to payment systems.
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“The Law of Negotiable Instruments” by James S. Rogers
A comprehensive guide covering historical development, statutory laws, and case laws related to negotiable instruments.
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“Business Law: Text and Cases” by Kenneth W. Clarkson, Roger LeRoy Miller, and Frank B. Cross
Detailed discussions and real-world examples of business law topics, including dishonor of negotiable instruments.
Fundamentals of Dishonor: Business Law Basics Quiz
### What is a negotiable instrument?
- [ ] A non-transferable document.
- [ ] A legal tender.
- [x] A signed document promising payment to a specified person.
- [ ] A type of insurance policy.
> **Explanation:** A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. Examples include checks and promissory notes.
### When is a negotiable instrument said to be dishonored?
- [ ] When it is accepted but unpaid.
- [ ] When it is lost in transit.
- [x] When payment is refused upon presentation.
- [ ] When it is endorsed by someone who is not the payee.
> **Explanation:** A negotiable instrument is said to be dishonored when the responsible party refuses to make payment upon its due presentation.
### What can a holder of a dishonored check do?
- [ ] Write off the loss as a bad debt.
- [x] Seek legal remedies, including suing for the payment amount.
- [ ] Automatically debit the issuer's account.
- [ ] Transfer the debt to a third party without re-endorsement.
> **Explanation:** The holder of a dishonored check can seek legal remedies, including suing for the payment amount along with any additional charges for damages and interest.
### Which term refers to the act of formally presenting a negotiable instrument for payment?
- [ ] Dishonorment
- [x] Presentment
- [ ] Endorsement
- [ ] Amortization
> **Explanation:** "Presentment" refers to the act of formally presenting a negotiable instrument to the responsible party for payment or acceptance.
### Which of the following is not a type of negotiable instrument?
- [ ] Check
- [ ] Promissory Note
- [ ] Bill of Exchange
- [x] Mortgage
> **Explanation:** A mortgage is a loan secured by real estate and is not a negotiable instrument. Examples of negotiable instruments include checks, promissory notes, and bills of exchange.
### What protection does a holder in due course have?
- [ ] No special protections.
- [ ] Limited protection depending on the institution.
- [x] Greater protections under the law, including enforcement of payment regardless of certain defenses.
- [ ] Full exemption from all liabilities.
> **Explanation:** A holder in due course has greater legal protections and can enforce payment despite certain defenses that might be raised against the original holder.
### What must be present for a promissory note to be considered negotiable?
- [x] It must include an unconditional promise to pay a specified amount.
- [ ] It must be signed by three separate parties.
- [ ] It must be issued by a financial institution.
- [ ] It must be payable only at a specified place.
> **Explanation:** For a promissory note to be considered negotiable, it must include an unconditional promise to pay a specified amount and meet other statutory requirements.
### What is an endorsement?
- [ ] Declaring a negotiable instrument as invalid.
- [ ] Rejecting a negotiable instrument.
- [x] A signature or instructions written on the back of a negotiable instrument transferring rights.
- [ ] Filing a lawsuit for payment.
> **Explanation:** An endorsement is a signature or instructions written on the back of a negotiable instrument that signifies the transfer of rights to another party.
### When can a check be dishonored for insufficient funds?
- [ ] Only when the issuer has no bank account.
- [x] When the funds in the issuer's account are not sufficient to cover the check amount.
- [ ] When the check is over a year old.
- [ ] When the check is not properly endorsed.
> **Explanation:** A check can be dishonored for insufficient funds when the issuer's account does not have enough money to cover the check amount.
### What is one possible consequence of issuing a dishonored check?
- [x] Penalties and legal actions.
- [ ] Immediate cancellation of all bank accounts.
- [ ] Increase in credit score.
- [ ] Automatic payment enforcement.
> **Explanation:** Issuing a dishonored check can lead to penalties and legal actions, and can negatively impact the credit score of the issuer.
Thank you for planning to enhance your understanding of the intricacies of business law and taking our challenging quiz on the honor and dishonor of negotiable instruments. Keep striving for excellence in your legal knowledge!
