If the Klensin Standards Track [Page 19] RFC 5321 SMTP October 2008 recipient is known not to be a deliverable address, the SMTP server returns a 550 reply, typically with a string such as "no such user - " and the mailbox name (other circumstances and reply codes are possible).
Will the entire transaction be canceled? "Transaction" in the name of this a section implies yes, but what if all the recipients are valid?
See replies below but the answer is no; an RCPT command is specified for each recipient in the mail data, these RCPT commands will be evaluated in sequence,, and any SMTP (error) notifications will be sent to the address in the MAIL FROM command (which is not necessarily the same as the mail data's From: header).