Legal Definitions - notice of dishonor

A notice of dishonor is a formal communication informing a person who has endorsed a financial instrument (such as a check, promissory note, or bill of exchange) that the instrument has not been paid or accepted when it was presented for payment or acceptance.

In simpler terms, if you sign the back of a check or another financial document to transfer it to someone else (this is called endorsing it), you might become secondarily responsible for its payment if the original payer fails to pay. The person who now holds the instrument must send you a notice of dishonor to legally hold you accountable. This notice serves as proof that the primary party defaulted and that the holder intends to seek payment from you as the endorser.

• Example 1: Bounced Check

  Imagine Alex writes a check to Brenda. Brenda then signs the back of the check (endorses it) and gives it to Chris as payment for a service. When Chris tries to deposit the check, Alex's bank informs him that there are insufficient funds, and the check "bounces." For Chris to legally pursue Brenda for the money, he must provide Brenda with a notice of dishonor, informing her that Alex's check was not paid. This notice makes Brenda, as the endorser, potentially liable for the amount if Alex doesn't pay.

• Example 2: Unpaid Promissory Note

  Sarah lends money to Tom, and Tom signs a promissory note, promising to repay the loan by a specific date. Sarah later needs cash and sells the promissory note to Maria, signing the back of the note to transfer ownership (endorsing it). When the due date arrives, Tom fails to pay Maria. To hold Sarah responsible for the debt as the endorser, Maria must send Sarah a notice of dishonor, informing her that Tom did not pay the promissory note as agreed. Without this notice, Maria might not be able to legally demand payment from Sarah.

• Example 3: Commercial Bill of Exchange

  A company called "Global Imports" purchases goods from an overseas supplier, "Pacific Exports." Global Imports issues a bill of exchange, which is an order to their bank to pay Pacific Exports a certain amount on a future date. Pacific Exports then endorses this bill of exchange and uses it to pay their own manufacturer, "Asian Components." When Asian Components presents the bill of exchange to Global Imports' bank on the due date, the bank refuses to pay because Global Imports has declared bankruptcy. To hold Pacific Exports responsible for the payment as the endorser, Asian Components must promptly send Pacific Exports a notice of dishonor, informing them that the bill of exchange was not honored by the bank. This notice is essential for Asian Components to then seek payment from Pacific Exports.