Study Guide and Lecture notes:

Secs. 119 to 125

1) Memorize the 5 instances when an instrument is discharged.

Sec. 119. Instrument; how discharged. - A negotiable instrument is

discharged:chanroblesvirtuallawlibrary
(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.

a) Take note of the meaning of “principal debtor”

Person who is obligated to the creditor/Primarily liable to the

creditor

b) Refer to Art. 1231 on extinguishment of obligations in the Civil

Code, particularly Sec. 1, 1232 to 1251, which applies
suppletorily.

General Provisions

Article 1231. Obligations are extinguished:

(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment,
rescission, fulfillment of a resolutory condition, and prescription, are
governed elsewhere in this Code. (1156a)

SECTION 1
Payment or Performance
Article 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)
Article 1233. A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. (1157)
Article 1234. If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. (n)
Article 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with. (n)
Article 1236. The creditor is not bound to accept payment or performance by
a third person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid,
except that if he paid without the knowledge or against the will of the debtor,
he can recover only insofar as the payment has been beneficial to the debtor.
(1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in
his rights, such as those arising from a mortgage, guaranty, or penalty.
(1159a)
Article 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the
debtor's consent. But the payment is in any case valid as to the creditor who
has accepted it. (n)
Article 1239. In obligations to give, payment made by one who does not
have the free disposal of the thing due and capacity to alienate it shall not be
valid, without prejudice to the provisions of article 1427 under the Title on
"Natural Obligations." (1160a)
Article 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. (1162a)
Article 1241. Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has
redounded to the benefit of the creditor. Such benefit to the creditor need not
be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that
the third person had authority to receive the payment. (1163a)
Article 1242. Payment made in good faith to any person in possession of the
credit shall release the debtor. (1164)
Article 1243. Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid. (1165)
Article 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more
valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted
by another act or forbearance against the obligee's will. (1166a)
Article 1245. Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law of
sales. (n)
Article 1246. When the obligation consists in the delivery of an indeterminate
or generic thing, whose quality and circumstances have not been stated, the
creditor cannot demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation and other
circumstances shall be taken into consideration. (1167a)
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses
required by the payment shall be for the account of the debtor. With regard to
judicial costs, the Rules of Court shall govern. (1168a)
Article 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestations in which the
obligation consists. Neither may the debtor be required to make partial
payments.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter. (1169a)
Article 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or
other mercantile documents shall produce the effect of payment only when
they have been cashed, or when through the fault of the creditor they have
been impaired.
In the meantime, the action derived from the original obligation shall be held
in the abeyance. (1170)
Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary. (n)
Article 1251. Payment shall be made in the place designated in the
obligation.
There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be at
the moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
(1171a)

c) Know the effect on payment of an accommodated party.

The accommodated party, whatever his participation

may appear to be in the instrument, is actually the
principal debtor. Hence, payment by the accommodated
party will discharge the instrument.

d) Know the cancellation of the instrument and the requirement of

“intentional cancellation”.

The cancellation must be intentionally done, by the holder

thereof. Cancellation may be done in writing the word cancelled
or paid on the face of the instrument. There is also cancellation
when the 9instrument is torn up, burned, mutilated, or
destroyed. The presumption is that the cancellation is
intentional.

e) Know the effect on discharge of the grant of extension of time

to the holder.

To release parties secondarily liable, the extension of time for

payment must be a binding contract made by the holder with
the principal debtor, supported by valuable consideration and
for a definite period.

2) Determine the instances when persons secondarily liable are

discharged.
 Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:chanroblesvirtuallawlibrary
(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.

a) Discharge by operation of law is not included, it must be an act

of the holder.
b) Release or discharge is always with value.

3) Know the forms and time of renunciation.

 
FORM OF RENUNCIATION
     It must be in writing and must be express
 
TIME FOR MAKING RENUNCIATION
1.    Before maturity
2.    At maturity
3.    After maturity

4) Know the meaning of cancellation.

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.

MEANING OF 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
 5) Know the forms of alterations and take note of its effect on the
rights of a holder in due course.

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.
 

RIGHTS OF ONE NOT HOLDER IN DUE COURSE

•      Where an instrument has been materially altered, it is avoided in the

hands of one who is not a holder in due course as against a prior party who
has not assented to the alteration
 

WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE

COURSE

1.    A party who has made the material alteration

2.    A party who has authorized the material alteration

3.    A party who has assented to the material alteration

4.    Any subsequent indorsers
 

RIGHTS OF HOLDER IN DUE COURSE

•      He may enforce the instrument in its original tenor

•      He  could  recover  the  altered  tenor  to  any  party  who  has  made,
authorized  or  assented  the  alteration,  or  any  subsequent  indorser  of
the instrument
 
NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT
ALTERATION
 

RIGHT TO COLLECT ORIGINAL CONSIDERATION

•      When the alteration wasn't fraudulently done, the holder may recover the
original consideration
 
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE
RIGHT TO HAVE HIS ACCOUNT DEBITED WITH CORRECT AMOUNT
ONLY
 
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND
MUST NOTIFY  THE  COLLECTING  BANKS  WITHIN  24  HOURS  OF 
ALTERATION  OF CHECKS 

(a) There is no distinction between an fraudulent or intentional

alteration.

6) Know when there is a valid tender of payment.

Tender of Payment and Consignation. Article 1256. If the creditor

to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility
by the consignation of the thing or sum due.

7) Know the right of the party that discharges and instrument.

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:chanroblesvirtuallawlibrary
(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.

8) Know the effect of the renunciation of a holder, its forms and time.

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.

A renunciation of debt evidenced by a negotiable instrument

must be made by a written declaration to that effect. If oral, it
should be accompanied by a surrender of instrument to the
person primarily liable thereon.

. Renunciation by a holder discharges an instrument when:

1. it is absolute and unconditional
2. made in favor of a person primarily liable
3. made at or after maturity of the instrument
 4. in writing or the instrument is delivered up to the person primarily
liable (Sec. 122 NIL)

1.    Applies only to renunciation by the unilateral act of the holder

without consideration and in cases where the instrument is not
delivered up to the person intended to be released
2.    Renunciation—act of surrendering a right or claim without
recompense but  it  can  be  applied  with  equal  propriety  to  the 
relinquishing  of  a demand upon an agreement supported by a
consideration

9) Know the instance when there is a material alteration.

 
Sec. 125. What constitutes a material alteration. - Any alteration which
changes:chanroblesvirtuallawlibrary
(a) The date;
 
(b) The sum payable, either for principal or interest;
 
(c) The time or place of payment:chanroblesvirtuallawlibrary
 
(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.

For reference:

DISCHARGE OF NEGOTIABLE INSTRUMENTS

 
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.  
 

PAYMENT BY PRINCIPAL DEBTOR

•      In order to discharge the instrument, the payment must be a payment in

due course, and second, a payment made by the principal debtor
•      If payment is made before the date of maturity, the instrument is not
discharged as the payment is not in due course
•      Where payment is made by a party who is not a primary obligor or an
accommodation party, his payment only conceals his own liability and those 
who  are  obligated  after  him.    All  prior  parties  primarily  or secondarily
liable on the bill, are liable to such a payer, and the payer may  cancel 
indorsements  subsequent  to  his  own  and  reissue  the paper, and it will
be valid as against the prior parties
 

PAYMENT BY THIRD PERSONS

•      If payment is made by a third person, the instrument is not discharged

because payment is not made by the person principally liable
•      Not any one who desires may pay the instrument and then recover of
the maker.  He must be a person who has in some way made himself liable
for the payment of the instrument.
•      Exception:  where  an  instrument  has  been  protested  and  someone
voluntarily  makes  payment  supra  protest  or  for  honor.    And  if  the
instrument   was   to   give   money   in   payment,   the   instrument   is
discharged.
 

SUMMARY OF DISCHARGE BY PAYMENT

1.    Payment  by  a  person  ultimately  liable,  whatever  his  position  in  the
paper, is a discharge of the instrument
2.    Payment   by   an   accommodation   party   isn’t   a   discharge   of   the
instrument,   whatever   his   position   thereon   and   whether   the
indorsement be regular or anomalous
3.    Payment by the drawer or indorser is not a discharge of the instrument
 
PRINCIPAL DEBTOR
•      Person ultimately bound to pay the debt
 

PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER

1.    When they actually have been cashed or

2.    When, through the fault of the creditor, they have been impaired
•      A creditor isn’t bound to accept a check in satisfaction of his demand
because  a  check,  even  if  good  when  offered,  doesn’t  meet  the
requirements of legal tender
 

WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK

•      It is the general rule that an object to a tender must, to be available to

the creditor, be made in good time and that the grounds for objection must be
specified; and that an objection to tender on one ground is a waiver of all
other objections which could have been made at that time
•      It is ordinarily required of one to whom payment is offered in the form of
a check, that he makes his objection at the time of the offer of by check
instead of an offer of payment in money
•      Reason for the rule—to afford the debtor the opportunity to secure the
specific money which the law prescribes shall be accepted in payment of
debts
 

PAYMENT BY ACCOMMODATED PARTY

•      The  one  ultimately  liable  on  the  accommodation  instrument  is  the
latter
•      Hence,  his  payment  in  due  course  discharges  the  instrument  as  if
payment was made by the principal debtor under paragraph (a)
 

INTENTIONAL CANCELLATION

•      The cancellation must be intentional and made by the holder

•      There  must  be  an  intention  to  cancel  a  negotiable  instrument  by 
the holder  thereof  as  such  intention  is  an  essential  element  of 
discharge on a negotiable instrument and a negotiable note in a torn
condition is presumed cancelled by the holder thereof
 

WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE

DEBTOR DISCHARGE THE INSTRUMENT?

•      No, according to the majority view

•      Because while it isn’t  omitted in Section 120, it  is omitted in Section
119
•      Shows the legislative intent to that an extension of time by the holder will
not discharge the instrument
 

PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

•      Reacquisition must be by the principal debtor and in his own right at or
after the date of maturity
•      In his own right—not in a representative capacity
 

WHEN INSTRUMENT REACQUIRED BEFORE MATURITY

•      A  reacquisition  by  the  principal  debtor  in  his  own  right  but  before
maturity will not discharge the instrument
•      It will merely be a negotiation back to the principal debtor
 
DISCHARGE BY OPERATION OF LAW 

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. 
 

EFFECT OF SECTION 120 IS A SURETYSHIP

•      Generally the courts regard this provision as exclusive, as a complete

codification  of  the  law  of  discharge  of  secondary  parties  by  the  six
methods therein set forth
 

ACTS THAT DISCHARGE INSTRUMENT

•      Any  of  the  acts  that  will  discharge  an  instrument  under  Section 
119 will  discharge  a  party  secondarily  liable  thereon,  such  as  payment 
in due course by the maker.  This will discharge the indorsers in the note.
 
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED

1.    Discharge by reason of bankruptcy

2.    Discharge of a party not given due notice of dishonor
3.    Discharge by the statute of limitations
 

VALID TENDER OF PAYMENT

•      If  D  an  indorser  validly  tenders  payment  and  F  unjustifiably refuses
to do accept, D is discharged
•      Tender  of  payment:  act  by  which  one  produces  and  offers  to  a
person  holding  a  claim  or  demand  against  him  the  amount  of money
which he considers and admits to be due, in satisfaction of
such claim or demand without any stipulation or condition
 

RELEASE MUST BE ACT OF HOLDER

 
RELEASE MUST BE FOR VALUE
 

EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR

•      General rule is that he is not discharged by the holder’s release of the
principal  debtor  even  if  the  release  be  made  with  knowledge  or  true
relation   of   the   parties   and,   conversely,   the   release   of   the
accommodation  maker  or  acceptor  doesn’t  discharge  the  principal
debtor through the latter occupies the position of a party secondarily liable on
the instrument
 

EXTENSION OF TIME

•      If the holder agrees to extend the time of payment, the indorsers are
discharged
•      However,  where  the  extension  of  time  is  consented  to  by  the 
party secondarily  liable,  he  is  not  discharged.    Also,  where  the  holder
expressly reserves his  right of recourse against the party  secondarily liable,
the latter is not discharged.
 

REQUISITES OF AGREEMENT FOR EXTENSION OF TIME

1.    It must be a binding contract, supported by valuable consideration and

for a definite period
2.    It  must  be  made  with  the  principal  debtor  and  not  with  a  third
party
 
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. 

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.
 

APPLICATION OF SECTION 122

1.    Applies only to renunciation by the unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to the
person intended to be released
2.    Renunciation—act of surrendering a right or claim without recompense
but  it  can  be  applied  with  equal  propriety  to  the  relinquishing  of  a
demand upon an agreement supported by a consideration
 
FORM OF RENUNCIATION
     It must be in writing and must be express
 
TIME FOR MAKING RENUNCIATION
1.    Before maturity
2.    At maturity
3.    After maturity
 

WHEN RENUNCIATION DISCHARGES INSTRUMENT

1.    Renunciation  discharges  the  instrument  when  it  is  absolute  and
unconditional
2.    It is made in favor of the person primarily liable 
3.    It is made at or after maturity
 
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.
 

MEANING OF 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 the authority of the holder
 
BURDEN  OF  PROOF  IS  UPON  THE  PERSON WHO  CLAIMS  THAT 
THE CANCELLATION IS INOPERATIVE