Professional Documents
Culture Documents
A. DISCHARGE
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course
by or on behalf of the principal debtor;
(b) By payment in due course
by the party accommodated, where the instrument is made or
accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of money;
(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own
right.
B. by payment in due course
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon
in his own name; and payment to him in due course discharges the instrument.
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due
course, a negotiable instrument is subject to the same defenses as if it were non-negotiable. But a
holder who derives his title through a holder in due course, and who is not himself a party to any
fraud or illegality affecting the instrument, has all the rights of such former holder in respect of all
parties prior to the latter.
notes: PAYMENT - most usual way of discharging a bill or note. Payment should be in money -- "order
is to pay a sum of money"
- if the parties should agree to discharge the instrument by a renewal note , it would be
DISCHARGED NOT BY PAYMENT STRICTLY but by novation or agreement, which modes expressly
recognized in 119 (d).
- payment made by / on behalf of the principal, otherwise it would constitute a purchase or
negotiation and the instrumetn would remain outstanding.
- principal debtor - maker and acceptor
- although a feawee is not a party until he accepts te instrument and payment by him is literally not
a discharge under sec 119, he fulfills the representation made by the drawer aand by the indorsers
and therefore PAYMENT BU HIM WILL ALSO DISCHARGE the instrument.
- payment by the accommodated party if the instruent is made or accepted for his accommodation
is actually payment by the principal debtor.
- payment by an indorser at maturity not on behaf of the principal debtor but in discharge of his own
liability, does not discharge the instrument but constitutes the indorsee a HOLDER of the instrument
, which still remains to be a continuing obligation against the primary party.
- neither does payment by the drawer discharge the instrument.
Principal debtor: primary party- for example - if an accommodation party like a guaranty or surety,
since he is not the principaldebtor, payment by him DOES NOT discharge the instrument.
WHEN CHECK DEEMED PAID BY DRAWEE BANK:
- if the holder presents check over the counter of the drawee bank, it is clear that the check is paid
or discharged as soon as the older receives the amount in his own account in the drawee bank
- in such a case, in the absence of any other agreement between the parties, if the bank credits the
amount of the check to the depositor's account, it is equivalent to paying the money to the
depositor. Check discharged.
- also when the drawee bank charges the check to the account of the drawer, it shows its intention
to honor the check and it will be deemed paid whether or not a credit entry has been made to the
holder.
- however entry of a credit by the clearing house does not constitute payment and the drawee bank
still has the right to reject the check when it reaches it from the clearing house.
TO WHOM MADE: to be in "due course", payment must be made to the holder whether he is the
beneficial owner or merely a non-beneficial owner or merely a non beneficial owner under a
restrictive indorsement.
- Payment to one of several payees or indorsees in the alternative discharges the instrument
- but payment to one of several joint payees or joint indorsers is not a discharge unless the party
receiving payment has authority from the others t receive payment on their behalf.
- payment to a prior holder will NOT discharge the instrument unless he is authorized by the present
holder either expressly, impliedly, or by estoppel, to receive payment in his behalf.
AT OR AFTER MATURITY: payment must be made to holder A/AM --> if paid before, and the
instrument is negotiated to a HDC, the latter may recover on the instrument.
IN GOOD FAITH AND WITHOUT NOTICE: if the payer at the time he pays knows that the holder's title
is defective, payment by him even at or after maturity will not be payment in due course under sec
88
- he can still BE MADE LIABLE BY THE TRUE OWNER of the instrument
- however, if the payor did not know or did not have notice of the defective title, his payment will
operate as a discharge.
- thus if the instrument is payable to bearer and was stolen from the payee, the maker or acceptor
who pays without knowledge of such loss pays in due course
the original holder from whom it was stolen cannot subsequently claim payment against the maker
or acceptor, on the ground that he is the real owner of the instrument.
- as far as the maker is concerned the instrument was discharged upon his payment. The remedy of
the original holder is against the thief.
- IF THE PARTY DEMANDING PAYMENT is a HDC and the defct in the instrument or in title does not
give rise to a real defense, the maker or acceptor is liable to pay and if he does pay, it is still
payment in due course, although the latter may have known of the infirmity.
- any party prejudiced by such payment will have a remedy against the guillty party.
- the maker or acceptor must satisfy himself when the instrument is presented to him for payment,
that the holder traces his title through genuine indorsemens; no right can pass by it and payment by
him will not effect a discharge of the instrument.
C. BY INTENTIONAL CANCELLATION
119 (C)
Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally or under
a mistake or without the authority of the holder, is inoperative but where an instrument or any
signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges
that the cancellation was made unintentionally or under a mistake or without authority.
- Where the holder of a note intentionally tears it up and throws it in the waste basket; intentionally
stamping "paid" is presumptively evidence of discharge, which however may be rebutted by
contrary proof.
- if the cancellation is made without authority, or madde unintentionally or by mistake or thru fraud,
it is inoperative.
- the burden of proving this however is on the person claiming its effectiveness, because
cancellation is presumed intentional.
- cancellation need not be supported by consideration in order to operate as a discharge of the
instrument. And it is effective even without notice to the primary party
D. ANY OTHER ACT WHICH WILL DISCHARGE INST
E. BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT
SEC 119 (e) When the principal debtor becomes the holder of the instrument at or after maturity in
his own right.
- reacq must be at or after maturity, otherwise no discharge will be effected and the instrument may
be further negotiated. This par deals with reacq by principal debtor of a kind which should result in a
discharge BUT which is not discharged by payment, or by renunciation governed by NIL 119 (a) p. in
DC by principal debtor, and 122 (express renunciation by holder)
- ex: if he reacq it as an agent of another, he does not do so in his own right; nor is it if he reacquires
it as a pledge from the holder
F. BY RENUNCIATION OF HOLDER
Sec. 122. Renunciation by holder. - The holder may expressly renounce his rights against any party
to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his
rights against the principal debtor made at or after the maturity of the instrument discharges the
instrument. But a renunciation does not affect the rights of a holder in due course without notice. A
renunciation must be in writing unless the instrument is delivered up to the person primarily liable
thereon.
OTHERS:
release of principal debtor
- 120 (e) refers to release of principal debtor --> by the creditor and not by operation of law, like a
judgement for the maker in an unsuccessful suit by the indorsee against him
- reservations of the right of recourse cannot be implied from acts and conduct of the holder but
should be express --> previous rulings
- a strictly literal interpretation of the law may result in inequity.
- Under such interpretation knowledge or consent f the indorsee is immaterial. ALthough the
indorser consents to the release of the principal debtor, if the holder does not expressly reserve his
rights against such inodrser, the latter will also be released.
- obviously the holder will seek the consent of the indorser to the release because he wants to retain
his rights against the indorser in spite of such release.
- but if after obtaining such consent , the holder fails to make an express reservation of his rights
against the consenting indorser, the indorser will be released contrary to holder's intention and
expectation.
- it is for this reason that literal interpretation should be avoided and hold that consent to a release
preserves the liability of the party giving it.
extension of time of payment
120 (f) By any agreement binding upon the holder to extend the time of payment or to postpone
the holder's right to enforce the instrument unless made with the assent of the party secondarily
liable or unless the right of recourse against such party is expressly reserved.xxx
- the agreement is one between holder and the principal debtor! NOT OTHER PARTIES LIKE
INDORSERS
- this is in harmony with the rule that an extension granted to the debtor by the creditor without the
consent of the guarantor extinguishes the guaranty. The drawer and indorsers are indeed
gurarantors of the maker and the acceptor.
- the agreement to extend the time of payment must be binding on the holder in order to operate as
a discharge of secondary parties
- thus if it is not supported by a consideration, secondary parties remain liable.
- this req more properly applies to an extension given BEFORE due date of the instrument
- if the extension is given at or after maturity, there is a DISHONOR of the instrument and unless
notice is given to the secondary parties within thte time presrcibed by law, they will be discharged!!
- this would be true whether or not the agreement to extend is binding on the holder because in
EITHER CASE, there will be a FAILURE to pay the instrument on its DUE date, entitling the secondary
parties to notice of such dishonor -- by non payment.
- however, where presentment and notice have been WAIVED by an indorser, a binding EXTENSION
given by the holder at or after maturity woud DISCHARGE such indorser,
unless he assents to the extension, or the holder's right of recourse against him is expressly
reserved. (waiver of right to notice)
- and if despite the waiver, notice of dishonor is given to him, this should be considered as an
express reservation of the holder's right of recourse against him.
- the use of RENEWAL NOTES - to effect an extension is common. However this does not always
operate to discharge the indorser -->
if the old note is RETAINED and the renewal note is taken merely as COLLATERAL security, then the
indorser IS NOT DISCHARGED
if the old note is surrendered and the renewal note bears a future date of payment , there is in effect
an extension of time of payment and the indorsers will be discharged.
- the consent to an extension may be given either before or after the time of extension.
By taking a qualified acceptance
Sec. 142. Rights of parties as to qualified acceptance. - The holder may refuse to take a qualified
acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored
by non-acceptance. Where a qualified acceptance is taken, the drawer and indorsers are discharged
from liability on the bill unless they have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto. When the drawer or an indorser receives
notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder
or he will be deemed to have assented thereto.
- the rule of reacq by a secondary party : reacq does NOT discharge THE INSTRUMENT! and that the
reacquirer may renegotiate the same ---THIS RULE DOES NOT APPLY where the instrument is payable
to the order of a THIRD person and the drawer has paid it
> this exception may operate unjustly because it would deny the drawer who pays the instrument
the right to sue the acceptor. It has then been suggested that this excepton should refer only to the
reacquirer's RIGHT TO RENEGOTIATE (cannot renegotiate if reacquired by 2ndry party) and not apply
to the rule that the instrument is not discharged
> thus the rule is payment by the drawer will not discharge the instrument but he may NOT
RENEGOTIATE the same.
- Another exception recognized by Sec 121 is that where payment is made by a secondary party
who is the principal debtor , the instrument is discharged.
> this rule is similar to 119 a and b. Thus the principal debtor has not right to sue the
accommodation maker or acceptor.
- if the one who pays and reacquires the instrument is an accommodation indorser, the clause
"remitted to his fromer rights" SHOULD NOT APPLY TO HIM..
> if he is remiited to his former rights, he would not have the right of recourse except from the
accommodated party, since he gave no value for the instrument; but if he gave value for the
instrument at the time of his reacq, he should be allowed to recover! and teh application of
remittane to former rights would be unjust.
> all that this clause was intended to accomplish was to prevent any reacquiring paryt from holding
any liable party to whom the reacquiring party himself was liable.
> the clause has the same meaning as the rule expressed in Sec 50.