What is dishonour?

Dishonour is defined as the act of refusing to fulfil contractual obligations or pay a charge.

When a seller fails to deliver the products as promised or when a customer fails to pay for goods obtained, the transaction is considered dishonoured.

A party might breach a contract by changing the specifications, making late payments for goods, or failing to perform its contractual obligations. A party is considered to be dishonoured if it has betrayed an agreement or pledge. Breach of contract can occur when a contractual duty is not met.

Understanding dishonour

When a payment instrument or negotiable instrument has been dishonoured or refused, the holder of the instrument issues a notice of dishonour to the endorser or drawer.

A negotiable or payment instrument is a document that guarantees the payment of a quantity of money on demand or at a certain period, with the payer typically identified on the paper. 

An example of dishonour is when a cheque bounces due to a lack of cash. The cheque will be returned unpaid, accompanied by a notice of dishonour, to inform the drawer that the payment has been dishonoured or refused. The notice must state the bill, note or instrument being dishonoured and notify all required parties. The notification can be given orally or in writing, but it must be formal and given within a reasonable amount of time.

When one party breaks a contract, the other party may terminate its responsibilities. In addition, a penalty or payment for the unpaid negotiable instrument may also arise due to dishonouring a contract.

In some situations, dishonouring a contract may make the liable party accountable for any remaining cash payable under the contract’s terms.

In the case of a returned or bounced cheque, the bank or institution from where the instrument was drawn may charge a fee. For example, most banks charge a fee if a cheque is paid on an account with insufficient money or if an account is overdrawn.