Question

a. What is a stop-payment order? b. How long are stop-payment order(s) effective? c. Does a bank have any liability when they properly dishonor a check for insufficient funds? Explain.

Answer 1

What is stop payment order?

Ans:

• A stop payment is a request to cancel a payment before it has been processed, for example by cancelling a check before it has been deposited.
• There are many reasons why a stop payment might be requested, including cancellations of goods or services, or human error in writing the wrong amount on a check.
• Issuing a stop payment order often costs the bank account holder a fee for the service.
• A stop payment request can expire if the check or payment isn't found by the bank.

How long are stop-payment order(s) effective?

A stop-payment order is effective for six months, but it lapses after 14 calendar days if the original order was oral and was not confirmed in a record within that period. A stop-payment order may be renewed for additional six-month periods by a record given to the bank within a period during which the stop-payment order is effective.

Q.) Does a bank have any liability when they properly dishonor a check for insufficient funds?

Article 4, Section 402 of the UCC states that a bank wrongfully dishonors a negotiable instrument, such as a check or draft, if it refuses payment even though the instrument is properly payable, meaning that it has been authorized by the customer and is in accordance with the bank’s agreement with that customer.

However, a bank may dishonor an instrument if honoring it would create an overdraft of the customer’s account, unless the bank has a preexisting agreement to honor that customer’s overdrafts, for example, through overdraft protection.

A bank may choose to dishonor an instrument due to insufficient funds at any time between the receipt of that instrument and the time that the payor bank returns the instrument or gives notice of dishonor. Only one such determination is necessary. However, if the bank later decides to reevaluate that decision to dishonor, it should use the customer’s account balance as it stands at that later time in its reevaluation.

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