DISCHARGE OF

NEGOTIABLE INSTRUMENTS
LAW ON NEGOTIABLE INSTRUMENTS CHAPTER 8
7:30-8:30
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.
Discharge of the instrument

– a release of all parties whether

primary or secondary, from the
obligations arising under the
instrument rendering it without force
and effect and, consequently, no longer
negotiable.
Methods for discharge of instrument

1. Payment by principal debtor

2. Payment by accommodated party

3. Intentional cancellation of instrument by holder

4. Any act which discharges a contract

5. Reacquisition by principal debtor in his own right

Principal debtor

Refers to the person ultimately bound to pay the debt,

whether he is a party to the instrument or not, or whether
he appears to be liable primarily or secondarily in the
instrument.

Payment by the principal debtor

In order to discharge the instrument, the payment must

be:

1. A payment in due course

2. And by the principal debtor
 If the payment is made before the date of
maturity, the instrument is not discharged as the
payment is not in due course. This will be a
negotiation back to the principal debtor who can
renegotiate the instrument. However, if the
instrument is payable “on or before” a certain date,
payment before the day fixed, extinguishes the
instrument.
Payment made by accommodated party

Payment made in due course by the accommodated

party discharges the instrument. But if payment is
made by the accommodation party, the instrument is
not discharged, the instrument can still be
negotiated, or the party paying may proceed against
the accommodated party and ask reimbursement
based on an implied interest.
Payment by party secondarily liable

A) By indorsers: Payment by an indorser cancels only his

own liability and those who are obligated after him
(subsequent parties). All parties prior to him are liable
to paying indorser, and such indorser may cancecl
indorsements subsequent to his own and reissue the
same, and it will be valid against the prior parties.

B) By the drawer: Payment by the drawer of an accepted

bill does not discharge the instrument so as to release
the acceptor from liability to the drawer unless the
acceptance is for the accommodation of the drawer. But
such payment will discharge the liability of an indorser.
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:

(a) By any act which discharges the instrument;

(b) By the intentional cancellation of his signature by the holder;

(c) By the discharge of a prior party;

(d) By a valid tender or payment made by a prior party;

(e) By a release of the principal debtor unless the holder's right of recourse
against the party secondarily liable is expressly reserved;

(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.
Acts discharging
instrument

If the instrument is
discharged it follows that
the parties secondarily
liable, namely: the
drawer and the indorsers
are also discharged.
Intentional cancellation of his signature by the
holder

Example:

I promise to pay P or order P10,000

Sgd. M

P negotiates it to A, A to B, B to C, C to D, holder. If
D cancels the signature of B, B and C are discharged
from their obligation, but not P and A.
Discharge of prior parties

Example:
I promise to pay P or order P10,000

Sgd. M
P negotiates it to A, A to B, B to C, C to D to E, holder. IF E
cancels the signature of C, D is also discharged because C is
a prior party to D. Accordingly, the rule states that the
discharge of a prior party discharges parties subsequent
thereto. The reason is obvious in the sense that if
subsequent parties are not discharged and they were
required to pay, they cannot ask reimbursement from prior
parties discharged by the holder.
Discharge by operation of law not included

The discharge of a prior party referred to herein

must be one that arises from the act of the holder.
This does not include the following:

a. Discharge by reason of bankruptcy

b. Discharge of a party not given due notice of
dishonor
c. Discharge by the statute of limitations
Valid tender of payment

Example:
I promise to pay P or order P10,000

Sgd. M
In the above example, if B tenders payment to D, and the
latter refuses to accept the payment without justification, B
and C are discharged. The non-payment of the instrument
will then be due to the holder’s fault.
Release of the principal debtor

In the previous example, if D releases M, the maker,

the persons secondarily liable, namely: P, A, B and C
are also discharged because of the folowing reasons:

a) The instrument is discharged

b) The indorsers are deprived of their right of
recourse against M.
Extension of time

In the same illustration, if the note is payable on

June 30, 2018 and D extended the time for payment
to June 30, 2019 and on this latter date M (maker)
becomes insolvent, P, A, B and C are also discharged
of their obligations, unless:

1. The extension was consented to by parties

secondarily liable, or
2. The holder reserves his right of recourse against
the party secondarily liable.
Sec. 121. Right of party who discharges instrument. -
Where the instrument is paid by a party secondarily liable
thereon, it is not discharged; but the party so paying it is
remitted to his former rights as regard all prior parties,
and he may strike out his own and all subsequent
indorsements and against negotiate the instrument,
except:

(a) Where it is payable to the order of a third person and

has been paid by the drawer; and

(b) Where it was made or accepted for accommodation

and has been paid by the party accommodated.
R is the drawer of a bill addressed to W, the drawee, and payable
to the order of P. The bill is accepted by W ang indorsed by P, A, B
and C in succession.

If A pays the bill, it is not discharged, but it discharges him and B

and C to whom he is personally liable. But he “is remitted to his
former rights as regards all prior parties” R and P, and he may
strike out his indorsement to B as well as the indorsement of C
and renegotiate the instrument. Of course, A’s right to sue R and P
and to renegotiate may be exercised even without cancelling
intervening indorsements.

If the bill is paid by R, the case would come under subsection (a)
and so R cannot further negotiate the bill. If P is an
accommodated party to P pays, neither can he renegotiate the bill
as his case would fall under subsection (b).
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.
Renunciation defined

It is the act of surrendering a right or claim without

recompense but it can be applied with equal
propriety to the relinquishment of a demand upon an
agreement supported by a consideration. This term
includes the release of a claim by virtue of an accord
and satisfaction as well as gratuitous waiver of
liability.
Effect of renunciation by the holder of an instrument

The holder may expressly renounce his rights

against any party to the instrument before, at, or
after 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 primary liable thereon.
Effect of renunciation against principal debtor

It operated to discharge the instrument and all

parties thereto, but it will not affect the rights of
holder in due course without notice
Effect of renunciation against party secondarily
liable

The instrument is not discharged. But the party

obtaining the renunciation as well as the parties
subsequent to him are discharged.
Example:

D is the holder of an instrument made by M and indorsed

in succession by P,A,B and C.

If D renounces his rights against B, then B and C are

discharged. If D makes the renunciation in favor of M, the
instrument is discharged as well as all the parties.

Now, if D, after he has made the renunciation, negotiated

the instrument to E, a holder in due course without notice,
E can still enforce the instrument because under the law
“a renunciation does not affect the rights of a holder in
due course without notice”.
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.
Cancellation defined

Cancellation signifies not only the drawing of criss-

cross lines but also tearing, obliterations, erasures,
or burning. It may be made by any other means by
which the intention to cancel the instrument may be
evident.
When cancellation is inoperative

1. When made unintentionally

2. When made under mistake
3. When made without authority of the holder

Cancellation, however, is presumed to be

intentional. Hence, the burden is on the holder
claiming its ineffectiveness to overcome the
presumption by contrary evidence.
Sec. 124. Alteration of instrument; effect of. -
Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to
the alteration and subsequent indorsers.
But when an instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce payment thereof according to its original
tenor.
Meaning of material alteration

Material alteration refers to any change in the

instrument which affects the liability of the parties
in any way as specified in Section 125, or changes
the contract of the parties in any respect.

Any other alteration is immaterial and, therefore,

inoperative to affect the liability of any party to the
instrument prior to the alteration. Thus, adding
words implied by law or making marginal figures to
make them correspond to the sum written in words
is not a material alteration.
Effect of alteration of instrument

This section has reference to physical alterations of the

instrument. So, an extension of time given by the holder of
a note to the principal maker without the consent of a
surety co-maker is not an alteration.

(1) Alteration by a party – the effect of a material

alteration by the holder is to discharge the instrument and
all prior parties thereto who did not give their consent to
such alteration. Since no distinction is made, it does not
matter whether it is favorable or unfavorable to the party
making the alteration or to the interests of prior parties or
whether innocently or fraudulently made.
The law makes certain exceptions as to the effect of
material alteration. It does not discharge the
instrument against:

a. A party who has made the alteration

b. A party who authorized or assented to the
alteration
c. Indorsers who indorsed subsequent to the
alteration
Example:

M makes a promissory note for P3,000 payable to P or order. P

negotiates the note to A who, with the consent of P, raises the
amount to P8,000 and thereafter indorses it to B, B to C and C to D
under circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it as

against M even for the original tenor. A however, would be liable to
D for P8,000 as he is the party who himself made the alteration
although D is not a holder in due course. Moreover, as indorser, A
warrants that the instrument is genuine and in all respects what it
purports to be.

P would also be liable to D for P8,000 as he authorized or assented

to the alteration. Likewise, B and C would be liable to D for P8,000 as
they are subsequent indorsers.
(2) Alteration by stranger

When the material alteration of the instrument is

made by a stranger, it is called spoliation. Spoliation
has the same effect as alteration. Although section
124 does not make any distinction, American courts
hold that spoliation has no effect upon the
instrument if the original meaning can be
ascertained.
(3) Right of holder in due course

A material alteration avoids the instrument in the hands of

one who is not a holder in due course as against any prior
party who has not assented to the alteration. But if an
altered instrument is negotiated to a holder in due course,
he may enforce payment thereof according to its original
tenor regardless of whether the alteration was innocent or
fraudulent.
Sec. 125. What constitutes a material alteration. - Any
alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment:

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

(f) Or which adds a place of payment where no place of

payment is specified, or any other change or addition which
alters the effect of the instrument in any respect, is a
material alteration.
Thank you
for
listening