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Unable to mail route between Exchange 2003 and Exchange Online (O365) SMTP 5.4.6

ISSUE

When attempting to email any mailbox which is hosted in O365 where a hybrid (co-existence) configuration has been deployed with an on-premise Exchange 2003 organisation you receive NDR email messages and event log errors are raised as follows:
 
EVENT LOG:
 
Event Type: Error
Event Source: MSExchangeTransport
Event Category: NDR
Event ID: 3020
Date:  12/13/2011
Time:  11:12:28 AM
User:  N/A
Computer: SERVER
Description:
A non-delivery report with a status code of 5.4.6 was generated for recipient x-ex;/O=EXCHANGE/OU=External (FYDIBOHF25SPDLT)/cn=Recipients/cn=61338b4fc700481296869bdf761c0edb (Message-ID <3DA1FDF3A7EA5C4DBD3E3F0AE3553B81788AFB@server.domain.local>).  
Cause: A forward loop was detected by the categorizer. This is a common hosting configuration problem caused when someone uses the provisioning tool to create a contact in one organization unit and creates a user in a different organization user that share the same e-mail address.   
Solution: Verify that you do not have a user in organizational unit and a contact in a different organizational unit that have the same e-mail address. 
Data:
0000: 46 05 04 80               F..€   

 
Email NDR:
 
Subject:               Test
Sent:     13/12/2011 11:39
 
The following recipient(s) could not be reached:
 
ADMIN1 on 13/12/2011 11:39
A configuration error in the e-mail system caused the message to bounce between two servers or to be forwarded between two recipients. Contact your administrator.
<server.domain.local #5.4.6>

 

Resolution

 This error normally occurs because the email policy for the service domain in Exchange 2003 has been misconfigured.
 
To resolve the issue run through the following:

  1. In Exchange System Manager, navigate to Administrative Groups > Recipients > Recipients Policies
  2. Open the Recipient policy which contains the service domain name (normally in Default Policy)
  3. Select the E-Mail Addresses (Policy tab) edit the SMTP addresses used by the service domain name (I.E service.domain.com, %g.%s@service.domain.com)
  4. Uncheck This Exchange Organization is responsible for all mail delivery to this address.
  5. Click OK and Close Exchange System Manager

Wait for AD and the Email Policy to synchronise
Then confirm that emails can now be sent to O365

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