diff --git a/e2e/tests/transfer/forwarding_test.go b/e2e/tests/transfer/forwarding_test.go
index f7a2c33c15f..6bb21f49042 100644
--- a/e2e/tests/transfer/forwarding_test.go
+++ b/e2e/tests/transfer/forwarding_test.go
@@ -289,3 +289,74 @@ func (s *TransferForwardingTestSuite) TestChannelUpgradeForwarding_Succeeds() {
 		s.Require().Equal(expected, actualBalance.Int64())
 	})
 }
+
+// TestFailedForwarding tests the scenario in which the packet is sent from
+// A to C (through B) but it can't reach C (we use an invalid address).
+func (s *TransferForwardingTestSuite) TestFailedForwarding() {
+	t := s.T()
+	ctx := context.TODO()
+
+	testName := t.Name()
+	t.Parallel()
+	relayer := s.CreateDefaultPaths(testName)
+	chains := s.GetAllChains()
+
+	chainA, chainB, chainC := chains[0], chains[1], chains[2]
+
+	chainADenom := chainA.Config().Denom
+
+	chainAWallet := s.CreateUserOnChainA(ctx, testvalues.StartingTokenAmount)
+	chainAAddress := chainAWallet.FormattedAddress()
+
+	chainBWallet := s.CreateUserOnChainB(ctx, testvalues.StartingTokenAmount)
+
+	chainCWallet := s.CreateUserOnChainC(ctx, testvalues.StartingTokenAmount)
+
+	channelAtoB := s.GetChainAChannelForTest(testName)
+	channelBtoC := s.GetChannelsForTest(chainB, testName)[1]
+
+	s.Require().NoError(test.WaitForBlocks(ctx, 1, chainA, chainB), "failed to wait for blocks")
+
+	t.Run("native IBC token transfer from chainA to invalid address through B", func(t *testing.T) {
+		inFiveMinutes := time.Now().Add(5 * time.Minute).UnixNano()
+		forwarding := transfertypes.NewForwarding(false, transfertypes.NewHop(channelBtoC.PortID, channelBtoC.ChannelID))
+		resp := s.Transfer(ctx, chainA, chainAWallet, channelAtoB.PortID, channelAtoB.ChannelID, testvalues.DefaultTransferCoins(chainADenom), chainAAddress, testvalues.InvalidAddress, clienttypes.ZeroHeight(), uint64(inFiveMinutes), "", forwarding)
+		s.AssertTxSuccess(resp)
+	})
+
+	t.Run("tokens are escrowed", func(t *testing.T) {
+		actualBalance, err := s.GetChainANativeBalance(ctx, chainAWallet)
+		s.Require().NoError(err)
+
+		expected := testvalues.StartingTokenAmount - testvalues.IBCTransferAmount
+		s.Require().Equal(expected, actualBalance)
+	})
+
+	t.Run("start relayer", func(t *testing.T) {
+		s.StartRelayer(relayer, testName)
+	})
+
+	t.Run("packets are relayed", func(t *testing.T) {
+		s.AssertPacketRelayed(ctx, chainA, channelAtoB.PortID, channelAtoB.ChannelID, 1)
+	})
+
+	t.Run("token transfer amount unescrowed", func(t *testing.T) {
+		actualBalance, err := s.GetChainANativeBalance(ctx, chainAWallet)
+		s.Require().NoError(err)
+
+		expected := testvalues.StartingTokenAmount
+		s.Require().Equal(expected, actualBalance)
+	})
+
+	t.Run("balances for B and C have not changed", func(t *testing.T) {
+		chainBIBCToken := testsuite.GetIBCToken(chainADenom, channelAtoB.Counterparty.PortID, channelAtoB.Counterparty.ChannelID) // IBC token sent to chainB
+		chainBBalance, err := testsuite.GetChainBalanceForDenom(ctx, chainB, chainBIBCToken.IBCDenom(), chainBWallet)
+		s.Require().NoError(err)
+		s.Require().Zero(chainBBalance)
+
+		chainCIBCToken := testsuite.GetIBCToken(chainBIBCToken.IBCDenom(), channelBtoC.Counterparty.PortID, channelBtoC.Counterparty.ChannelID) // IBC token sent to chainC
+		chainCBalance, err := testsuite.GetChainBalanceForDenom(ctx, chainC, chainCIBCToken.IBCDenom(), chainCWallet)
+		s.Require().NoError(err)
+		s.Require().Zero(chainCBalance)
+	})
+}
diff --git a/e2e/testsuite/testsuite.go b/e2e/testsuite/testsuite.go
index 090028687f9..bda4fb3e73d 100644
--- a/e2e/testsuite/testsuite.go
+++ b/e2e/testsuite/testsuite.go
@@ -564,25 +564,20 @@ func (s *E2ETestSuite) createWalletOnChainIndex(ctx context.Context, amount, cha
 // GetChainANativeBalance gets the balance of a given user on chain A.
 func (s *E2ETestSuite) GetChainANativeBalance(ctx context.Context, user ibc.Wallet) (int64, error) {
 	chainA := s.GetAllChains()[0]
-
-	balanceResp, err := query.GRPCQuery[banktypes.QueryBalanceResponse](ctx, chainA, &banktypes.QueryBalanceRequest{
-		Address: user.FormattedAddress(),
-		Denom:   chainA.Config().Denom,
-	})
-	if err != nil {
-		return 0, err
-	}
-
-	return balanceResp.Balance.Amount.Int64(), nil
+	return GetChainBalanceForDenom(ctx, chainA, chainA.Config().Denom, user)
 }
 
 // GetChainBNativeBalance gets the balance of a given user on chain B.
 func (s *E2ETestSuite) GetChainBNativeBalance(ctx context.Context, user ibc.Wallet) (int64, error) {
 	chainB := s.GetAllChains()[1]
+	return GetChainBalanceForDenom(ctx, chainB, chainB.Config().Denom, user)
+}
 
-	balanceResp, err := query.GRPCQuery[banktypes.QueryBalanceResponse](ctx, chainB, &banktypes.QueryBalanceRequest{
+// GetChainBalanceForDenom returns the balance for a given denom given a chain.
+func GetChainBalanceForDenom(ctx context.Context, chain ibc.Chain, denom string, user ibc.Wallet) (int64, error) {
+	balanceResp, err := query.GRPCQuery[banktypes.QueryBalanceResponse](ctx, chain, &banktypes.QueryBalanceRequest{
 		Address: user.FormattedAddress(),
-		Denom:   chainB.Config().Denom,
+		Denom:   denom,
 	})
 	if err != nil {
 		return 0, err