What is a Discharge?

Discharge is the release from

further liability, obligation, or
from the binding efect of the
negotiable instrument.
What is the efect of a
discharge of a negotiable
instrument?
1) As to the paper
(instrument), it puts an end to
it as a contractual obligation.
2) As to the parties to the
instrument, it operates as a
release of some or all of them
from further obligation and
liability under the instrument.
How is a negotiable
instrument discharged?
In Section 11 of the !I", a
negotiable instrument may be
discharged in any of the
follo#ing #ays$
1) %y payment in due course
by or on behalf of the
principal debtor.
2) %y payment in due course
by the party accommodated,
#here the instrument is made
or accepted for his
accommodation.
&) %y the intentional
cancellation of the instrument
by the holder.
') %y any other act #hich #ill
discharge a simple contract or
the payment of money.
() )hen the principal debtor
becomes the holder of the
instrument at or after
maturity in his o#n right.
What constitutes payment
in due course?
In Section **, there is
payment in due course #hen
it is made$
a) at maturity date of the
instrument or after the
maturity date of the
instrument
b) to the holder of the
instrument
c) in good faith
d) #ithout notice that his
title is defecti+e
In addition, it must be by or
on behalf of the principal
debtor or the accommodated
party #here the instrument is
made or accepted for his
accommodation.
Can there be payment of
the instrument is paid by
another instrument?
!o. According to Article 12'
of the !e# ,i+il ,ode, there is
payment only$
a) #hen the instrument
is encashed- or
b) the +alue of the
instrument is impaired
through the fault of the oblige.
Who may pay the
instrument to have the
efect of the discharge?
1) by a primary party . maker,
acceptor,
2) by a surety of a primary
party
&) by a person on behalf of
the principal debtor under the
principles of the la# on
agency
/hus, a principal debtor may
not necessarily be the person
#ho is indicated as the person
primarily liable in the
instrument.
An accommodated party may
be the principal debtor e+en if
he signed merely as a
secondary party.
Will a payment of a party
secondarily liable
discharge the instrument?
!o. Section 121 states, that
0#hen the instrument is paid
by a party secondarily liable
thereon, it is not discharged.
What is the efect of
payment by a party
secondarily liable?
A party secondarily liable, #ho
pays the instrument,
a) is remitted to his
former rights as regards all
prior parties-
b) he may stri1e out his
o#n and all subse2uent
indorsements (striking out
of indorsement)- and
c) negotiate the
instrument.
Eceptions!
1) )hen it is payable to
the order of a third person
and has been paid by the
dra#er- or
2) )here it is made or
accepted for accommodation
and has been paid by the
party accommodated.
Why is striking out of
indorsements allowed?
It is allo#ed because
indorsement of the paying
party as #ell as those
subse2uent indorsements
after his 3rst indorsement, are
not necessary for this title,
since there is no more any
need of enforcing payment
against him as a prior party.
"ayment by the Drawer
If the instrument is payable to
the order of a third person,
the dra#er is the person
ultimately liable on the
instrument e+en if the
accepted (dra#ee.acceptor)
#ill pay the payee.
"ayment by #hird "ersons
A third person #ho one #ill
pay for or in behalf of the
ma1er and not one #ho
intends to ha+e nay right o+er
the instrument.
If payment is one #ho intends
to ac2uire a right o+er the
instrument, such person is an
assignee or a holder, as the
case may be.
/he ,i+il ,ode recogni4es a
situation #here a third person
#ill pay for and in behalf of
the principal debtor. Although
the creditor is not bound to
accept payment from a third
person, the creditor is not
prohibited from doing so.
(Article 12&5.12&*, ,i+il
,ode).
%ut #hoe+er pays for another
may demand from the debtor
#hat he has paid, e6cept that
if he paid #ithout the
1no#ledge of or against the
#ill of the debtor, he can
reco+er only insofar as the
payment has been bene3cial
to the debtor (Article 12&5,
,i+il ,ode).
#o whom shall payment be
made to have the efect of
discharging the
instrument?
7ayment should be made to
the holder.
What is the efect of
payment to the payee who
is not the holder of the
instrument?
7ayment to the payee #ho
already negotiated the
instrument #ill not discharge
the same.
What is the efect of
payment to a possessor of
an order instrument which
was not indorsed?
/here is no payment in due
course if payment #as made
to a possessor of an order
instrument #hich #as not
indorsed because the
possessor is not a holder.
$ood %aith of the Holder
7ayment must be made in
good faith and #ithout notice
that the holder8s title is
defecti+e.
&enunciation
9nder Section 122 of the !I",
the holder may e6pressly
renounce his rights against
any party to the instrument
before, at, or after the
maturity of the instrument.
/he renunciation must be
absolute and unconditional in
order for the instrument to be
discharged.
Cancellation
/o discharge the instrument,
the cancellation must be
intentional. /his may be
efected by destroying the
instrument, either by tearing
it up, burning it, or #riting the
#ord 0cancelled0 on the
instrument.
/he la# does not re2uire
cancellation to be in #riting.
What is the efect of
unintentional cancellation?
9nder Section 12& of the !I",
a cancellation made
unintentionally or under a
mista1e or #ithout the
authority of the holder is
inoperative'
%ut #here an instrument or
any signature thereon
appears to ha+e been
cancelled, the burden of proof
lies on the party #ho alleges
that the cancellation #as
made unintentionally or under
a mista1e or #ithout authority.
What are other acts that
may discharge a simple
contract or payment of
money?
In Article 12&1 of the ,i+il
,ode, an obligation is
e6tinguished through any of
the follo#ing acts$
1) payment or performance
2) loss of the thing due
&) condonation or remission of
the debt
') confusion or merger of the
rights of creditor and debtor
() compensation
5) no+ation
:) annulment or rescission
*) ful3llment of a resolutory
condition
) prescription
/here are other grounds for
e6tinguishment of obligation
else#here in the ,i+il ,ode.
When "rincipal Debtor
(ecomes the Holder
)urrender of the
*nstrument
/he instrument must be
surrendered to the payor
#hene+er discharge is by
payment by or in behalf of the
principal debtor, payment by
the accommodation party, by
renunciation or by any other
ground that discharges simple
contracts.
If the instrument is not
surrendered, it may fall in the
hands of a holder in due
course #ho may ha+e the
right to enforce the
instrument despite the
pre+ious payment that #as
made.
When will persons
secondarily liable on the
instrument discharged?
In Section 12;, persons
secondarily liable on the
instrument are discharged$
1) by any act #hich
discharges the instrument
2) by the intentional
cancellation of his signature
by the holder
&) by the discharge of the
prior party
') by a +alid tender or
payment made by a prior
party
() by a release of the principal
debtor unless the holder8s
right of recourse against the
party secondarily liable is
e6pressly reser+ed.
5) by any agreement binding
upon the holder to e6tend the
time of payment or to
postpone the holder8s right to
enforce the instrument, unless
the right of recourse against
such party is e6pressly
reser+ed.
Discharge of "rior "arties
/he cancellation of an
indorsement of a person
secondarily liable by the
intentional cancellation of his
signature by the holder may
result in the discharge of
other parties.
Section '* of the !I" pro+ides
that the indorser #hose
indorsement is struc1 out, and
all indorsers subse2uent to
him, are thereby relie+ed from
liability on the instrument.
What is meant by tender
of payment?
/ender of payment is the act
by one #hich produces and
ofers to a person holding a
claim or demand against him
the amount of money #hich
he considers and admits to be
due, in satisfaction of such
claim or demand #ithout any
stipulation or condition.
&elease of the "rincipal
Debtor
<elease of the principal debtor
discharges the instrument and
the persons secondarily liable
ha+e no more right of
recourse against the principal
debtor.
Eception!
=o#e+er, #here the release
#as made #ith reser+ation of
the right of recourse against
the principal debtor, the
persons secondarily liable are
not discharged.
Etension of #erm
An agreement to e6tend the
term of payment entered into
#ith the principal debtor
releases the persons
secondarily liable, because
the assurance of the dra#er
and the indorsers is payment
according to the tenor of the
instrument.
/he rule is similar to the rule
in >uaranty and Suretyship.
Article 2; pro+ides that an
e6tension granted to the
debtor by the credit #ithout
the consent of the guarantor
e6tinguishes the guaranty.
What is the efect of
etension of term to the
accommodation parties?
/he accommodation party is
still liable for the #hole
obligation and such e6tension
does not release him because
as far as the holder for +alue
is concerned he is solidarily
liable as co.debtor.