CHAPTER 9 DISCHARGE
— Where the instrument is paid by a party
1. CONCEPT
DISCHARGE
 Release from further liability, obligation, or from the binding effect of the negotiable
instrument.
 As to the paper itself, it puts an end to it as a contractual obligation.
 As to the parties to the instrument, operates as a release of some or all of them from further
obligation and liability under the instrument although the instrument may not be discharge, as
where only part of the obligors are released. Then again release of the instrument may be
accomplished by a release of all the parties to it.
2. HOW DISCHARGE
SECTION 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 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.
2.01 PAYMENT IN DUE COURSE
1st paragraph of Section 119 is reiterated in Section 51: the holder of a negotiable instrument may sue
therein in his own name and payment to him in due course discharges the instrument.
SECTION 88.What Constitutes Payment in Due Course.
Payment is made in due course when it is made at or after the maturity of the instrument to the holder
thereof in good faith and without notice that his title is defective.
The following must concur in order that there may be payment in due course:
a) It must be made by or in behalf of the principal debtor or the accommodated party where the
instrument is made or accepted for his accommodation
b) Payment must be made to the holder
c) Payor must be in good faith and without notice that his title is defective
d) Payment must be made at or after maturity date of the instrument
Payment cannot be made by delivering another negotiable instrument.
Art1249: delivery of a negotiable instrument does not produce the effect of payment unless the same is
encashed or the value thereof was impaired through the fault of the oblige
a. By Whom made.
Payment may operate as discharge of liability if it is made by the following parties:
a) By a primary party, i.e: maker or acceptor if he is not a surety for a principal debtor who signed
as a secondary party
b) If the primary party is a surety for a principal debtor who signed as a secondary party, then a
payment by the secondary party, who is also the principal debtor, will discharge the instrument
c) A payment on behalf of the principal debtor discharges the instrument under principles of the
law of agency
The principal debtor may not necessarily be the person who is indicated as the person primarily liable in
the instrument.
An accommodated party may be the principal debtor even if he signed merely as a secondary party.
1. PAYMENT BY PERSON SECONDARILY LIABLE.
Payment by the secondary party who is not the accommodated party will not discharge the instrument.
SECTION 121.Right of Party Who Discharges Instrument.
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 again
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.
2. STRIKING OUT INDORSEMENT
 Is allowed because indorsement of the paying party as well as the indorsement after his first
indorsement are not necessary for his title.
 Those subsequent indorsers can enforce payment against him as a prior indorser.
3. ACCOMODATED PARTY.
 Payment by the accommodated party will discharge the instrument because the accommodated
party is the principal in the case contemplated by the 2nd par of Section 122.
 The person who made or accepted the instrument is only a surety of the accommodated party.
4. DRAWER
 Payment by the drawer also discharge the instrument under the First par of Section 121.
 If the instrument is payable to the order of a 3rd person, the drawer is the person who is
ultimately liable on the instrument even if the acceptor will pay the payee.
 The acceptor will have no right of recourse against the drawer only of he already received the
amount of the bill from the drawer or if he is in possession of an amount due to the drawer or if
he is otherwise obligated to the drawer.
 In those cases, the drawer is still permitted to recover what he is paid to the holder, that is, the
is permitted to enforce the obligation or to seek reimbursement from the acceptor.
 Example: Page 441.
5. PAYMENT BY 3RD PERSONS
 If the person paid the holder of the instrument with the intention of acquiring title over the
instrument, the payor cannot be considered of a 3rd person
 A 3rd person – one who will pay for or in behalf of the maker and not one who intends to have
any right over the instruments
 Payment is made by one who intends to acquire a right over the instrument, such person is an
assignee or a holder as the case may be.
 The CC recognizes a situation where a 3rd person will pay for and in behalf of the principal
debtor. Although a creditor is not bound to accept payment from a 3rd person, the creditor is not
prohibited from doing so.
 Whoever pays for another may demand from the debtor what he has paid except that he paid
without the knowledge or against the will of the debtor, he can recover only insodar as the
payment has been beneficial to the debtor.
b. To whom.
 Payment should be made to the HOLDER.
 Payment to the payee who already negotiated the instrument will not discharge the same
 No payment in due course if it was made to a possessor of an order instrument which was not
indorsed because the possessor is not a holder.
 RULE: where a note is presented by stranger, without a legal transfer, the presumption is that
it was lost, stolen or otherwise improperly circulated.
 to indorse negotiable instruments to agents for collection; and if the bill or note is unendorsed
in blank, or specially to the party having it in possession, it might be that the owner had
withheld his indorsement for the very purpose of preventing collection by a person not entitled
to receive the money; and if this were so, the presumption of agency will be rebutted.
 Authority to receive payment of a bill or note payable to order of the principal and not indorsed
by him, cannot be presumed from the mere possession by the assumed agent.
  But where the bill or note is made payable to bearer or is indorsed in blank, its apparently
lawful possession by one whose real relation is not known, may be sufficient evidence of title
if not of agency to sustain a payment to him.
 Possession when coupled with the other facts or acts indicating agency to manage, control or
deal with securities, may be very potent evidence of authority to receive payment.
GOOD FAITH OF PAYOR
Additional requirement in Section 88: payor must be made in good faith and without notice that the
payor’s title is DEFECTIVE.
 Rightful holder who may have been unlawfully deprived of the instrument may still enforce
payment against the payor who paid with notice of the defect in the holder’s title.
RENUNCIATION
SECTION 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 requires the ff:
1. Unless the instrument is delivered, it must be expressly provided for in writing
2. It must be absolute and unconditional
CANCELLATION
 Intentional cancellation of the instrument discharges the latter.
 This may be effected by destroying the instrument either :
o by tearing it up,
o burning it or
o writing the word “cancelled” on the instrument.
 The law does not require cancellation to be in writing
 There is cancellation if the agent of the holder burned the note with the knowledge and
consent of the said holder.
 The rule roots in the unitary concept of a debt fused into the written evidence thereof.
 Destruction of the physical res itself by the owner destroys the legal relations which it imbues
 Unintentional cancellation does not discharge the instrument.
 It can therefore be established that the cancellation was unintentional or the result of a mistake.
SECTION 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.
ACTS THAT DISCHARGE SIMPLE CONTRACT
ART 1231: obligation is extinguished through any of the ff:
1. Payment or performance
2. Loss of the thing due
3. Condonation or remission of the debt
4. Confusion or merger of the rights of creditor and debtor
5. Compensation
6. Novation
7. Annulment or rescission
8. Fulfillment of a resolutory condition
9. Prescription
*enumeration in 1231 is not exclusive because there are other grounds that are provided for in other
provisions of the NCC and some other special laws.
*withdrawal of funds is not one of the grounds for extinguishment of a simple contract.
STATE INVESTMENT HOUSE VS CA:
 The intentional cancellation contemplated under par (c) is that cancellation affected by
destroying the instrument either by tearing it up, burning it or writing the word “cancelled” on
the instrument.
 The act of destroying the instrument must also be made by the holder of the instrument
intentionally.
 Since MOULIC failed to get back possession of the post-dated checkes, the intentional
cancellation of the checks is altogether impossible.
 None of the modes in 1231 is applicable in the instant case as Section 199 contemplates of a
situation where the holder of the instrument is the creditor while its drawer is the debtor.
 MOULC may not unilaterally discharge herself from her liability by the mere expediency of
withdrawing her funds from the drawer bank. She is thus liable as she has not legal basis to
excuse herself from liability on the checks to a GDC.
NOVATION
 May extinguish an obligation in proper cases.
 Replacement pf a check by another check will not necessarily extinguish the obligation
covered by the first check.
NYCO SALES CORPORAITON VS CA FINANCE CORPORATION
 Only 2 ways which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation by another which substitutes the same
1. Novation must be explicitly stated and declared in unequivocal terms as novation is
never presumed
2. The old and the new obligation must be incompatible on every point
 The test of incompatibility is whether or not the 2 obligations can stand together, each one
having its independent existence.
 If the cannot, they are incompatible and the latter obligation novates the first.
SALAZAR VS JY BROTHERS MARKETING CORPORATION
 Acceptance of a replacement check will not extinguish the obligation covered by the 1st check.
 Respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential
Bank check, did not result to novation as there was no express agreement to establish that
petitioner was already discharged from his liability to pay respondent the amount of
P214,000.00 ay payment for the 300 bags of rice.
 Novation is never presumed, there must be an express intention to novate.
PRINCIPAL DEBTOR BECOMES THE HOLDER
 Instrument is discharged when the principal debtor becomes the holder of the instrument at or
after maturity date in his own right.
 “in his own right” -exclude a case where a maker acquired the instrument in a purely
representative capacity.
 The note is not discharged when the maker becomes the holder, example, as executor or
administrator.
The maker is discharged even if he acquired the instrument through an agent who did not disclose his
principal .
SURRENDER OF THE INSTRUMENT
 The instrument must be surrendered to the payor whenever discharge is by :
o Payment by or in behalf of the principal debtor,
o Payment by the accommodated party
o By renunciation or
o By any other ground that discharges simple contracts.
 If the instrument is not surrendered, it may fall in the hands of a HDC who may have the right
to enforce the instrument despite the previous payment that was made.
STATE INVETSMENT HOUSE VS CA:
 The drawer was made liable even if he returned the jewelry for which the check in question
was issue.
 Nevertheless, the instrument was not deemed discharge as to the HDC who was without notice
of such fact.
 Example: the payee agreed to accept goods from the maker in payment of the obligation
covered by a negotiable note that is payable on demand.
 The goods were delivered by the maker to the payee who promised to send him the note.
 The payee did not return the note and instead indorsed the instrument to another person who is
a HDC.
 Court: payment of the maker did not discharge the instrument as against the holder explaining
 The acts which will discharge a simple contract for payment of money, in order to effect a
discharge of negotiable paper, within the contemplation of subsection 4 must therefor
necessarily be limited to such acts as to relate to and effect the holder of the paper demanding
payment for it.
 It does not include a holder for value in due course. Negotiable paper, in the hands of such
holder, is not discharged by payment made to his transferor either before or after the transfer.
SECTION 122.Renunciation by Holder.
xxx renunciation does not affect the rights of a holder in due course without notice. Xxx
 Discharge of instrument by renunciation before maturity will not be effective to a HDC who is
not aware of such renunciation
DISCHARGE OF PERSONSS SECONDARIY LIABLE
SECTION 120.When Persons Secondarily Liable on, 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 of 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.
 (b) to (f) of Section 120 apply only to parties who on the face of the instrument itself are
secondarily liable and not to the parties primarily liable thereon, even if they be only sureties or
for a co-maker or accommodation makers,
 A maker who is only an accommodation maker is not discharged by any of the grounds
provided for in Section 120.
DISCHARGE OF PRIOR PARTY ( b and c)
Cancellation of an indorsement of a person secondarily liable in par b of 120 may result in the discharge
of other parties.
SECTION 48.Striking Out Indorsement.
The holder may at any time strikeout any indorsement which is not necessary to his title. The indorser
whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on
the instrument.
 The stipulation contemplated under Section 48 is covered by par © of 120 which provides that
discharge of prior party discharges a person secondarily liable.
 Majority view: discharge under par (c ) of 120 means discharge by some act of the creditor. It
does not include discharge by operation of law.
 It does not include:
1. Discharge by bankruptcy or insolvency
2. Discharge through prescription
3. Failure to give notice of dishonor.
TENDER OF PAYMENT (par d)
 Produces and offers to a person holding a claim or demand against him the amount of money
which he considers or admits to be due, in satisfaction of such claim or demand without any
stipulation or condition.
 The rule is only fair because it is the fault of the holder that he did not receive payment
 If he accepted the tender of payment by a prior party, the subsequent would have been
discharged.
RELEASE OF PRINCIPIAL DEBTOR (par e)
 Discharges the instrument and the person secondarily liable has no more right of recourse
against the principal debtor.
 Where the release was made with reservation of the right of recourse against the principal
debtor, the persons secondarily liable are not discharged.
 The effect of reservation is the implied reservation of their right of recourse against the maker.
 The reservation of par 3 of 120 will not release the secondary parties only if they acceded to
the release of the principal debtor
 If the release was done without their consent, they cannot be made liable because the drawer
and the general indorsers engage to pay only if the instrument is “dishonored and the
necessary proceedings on dishonor be duly taken”
 If there is not dishonor, they cannot be made liable.
 It is believed that the supposed implied reservation of the right of recourse against the maker is
inconsistent with the provisions of the NIL because it will thereby remove the conditions for
the secondary liability to operate
EXTENSION OF TERM (par f)
 An agreement to extend the term of payment entered into with the principal debtor releases the
persons secondarily liable.
 The assurance of the drawer and the indorsers is payment according to the tenor of the
instruments
 An agreement to extend the time of payment varies the original undertaking of the secondary
parties
 The rule is similar to the rule in Guaranty and Suretyship.
 Art 2079: an extension granted to the debtor by the creditor without the consent of the
guarantor extinguished the guaranty.
a. accommodation party
 the liability of the accommodation party remains not only primary but also unconditional to
a holder for value such that even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the latter is still liable for the
whole obligation and such extension does not release him because as far as the holder for value
is concerned, he is solidary co-debtor.
 If the accommodated party is principal debtor, Section 120(f) should still apply:
 The accommodation indorser or drawer should still be considered discharged.
 The liability of the accommodation party should still be in accordance with the applicable rules
in the NIL, that is , if the accommodation party is a general indorser, his liability will be treated
as if he is an ordinary general indorers.
 It would be unfair if a different rule will be applied to a person who did not receive any
consideration for the instrument.
 An extension of time extended to the maker ( who is the accommodated party) should benefit
the accommodation parties such that he is discharge from his obligation pursuant to Section
120 (f).