Sections 119-125

Pablo, Palmera and Peeden

Nego - Discharge

What is discharge?
Release from further liability
1. AS TO THE PAPER ITSELF: the end of a contractual obligation
2. AS TO THE PARTIES: the release of some or all of them from further obligation and
liability under the instrument

Q: Is there such a thing as partial discharge? Yes, as when the instrument (i.e.: the contractual
obligation it represents) is not yet discharged, and only part or some of the obligors are released.

The methods for the discharge of a negotiable instrument provided in Section 119 are
exclusive

(a) By payment in due course by or on behalf of the principal debtor;

What is meant by payment in due course?

Payment is said to have been made in due course when it is made at or after maturity date of the
instrument to the holder thereof in good faith and without notice that his title is defective (sec.88)

Next:

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.

Who are principal debtors?

Namely, PN the principal debtor is the maker if it is a BOE the principal debtor is the acceptor
and if it is a check the principal debtor is the drawee bank that accepts.

The payment by a stranger will not discharge the instrument unless he acts on behalf of the
debtor or intends for his payment to discharge rather than to buy the instrument.

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 endorsements subsequent to his own and reissue the paper, and it will be valid
as against the prior parties.

PAYMENT BY THIRD PERSONS

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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.

Question:
Why does payment by the party accommodated where the instrument is made or accepted
for his accommodation discharge the instrument?

Because the payment is in effect one made by the principal party (since the accommodating party
acts as surety for the accommodated party, payment by the latter is actually payment by the
principal debtor which discharges the instrument)

Intentional cancellation is presumed When an instrument appears to have been cancelled, the
burden of proof lies on the party who alleges that the cancellation of the instrument was made
unintentionally or under mistake or without authority. A cancellation made unintentionally, or
under mistake or without authority is inoperative and will not discharge the instrument.

How does cancellation takes place ?

By writing or stamping “cancelled,” “paid,” or any similar word on, by drawing a cross across
the face of the instrument or By burning, tearing, or otherwise destroying the instrument.

Intentional cancellation is presumed.

When an instrument appears to have been cancelled, the burden of proof lies on the party who
alleges that the cancellation of the instrument was made unintentionally or under mistake or
without authority. A cancellation made unintentionally, or under mistake or without authority is
inoperative and will not discharge the instrument

Discharge of the instrument can also be made by any other act which discharges a simple
contract for the payment of money.

What are the modes of extinguishing an obligation under Art. 1232?

Discharge of the instrument can also be made by any other act which discharges a simple
contract for the payment of money.

A: 1. Compensation- takes place when 2 persons in their own right are debtors and creditors of
each other.
2. Novation- this takes place when an obligation is extinguished
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a. By changing the object or the principal condition
b. By substituting the person of the debtor
c. By subrogating a 3rd person in the rights of the creditor

3. Renunciation, remission, or condonation

What are the modes of extinguishing an obligation under Art. 1231?

A: 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 resolutory condition
9. Prescription

The final method of discharge is when the principal debtor becomes the holder at or after
maturity in his own right.
So if the holder of a note is the owner of it at maturity then the duty to pay and duty to receive
payment are merged in the same person and they cancel each other provided that the maker is the
holder at maturity in his own right.

Reacquisition must be by the principal debtor and in his own right at or after the date of maturity.

Reacquisition by principal debtor in his own right. — In order that there will be discharge under
subsection (e), the reacquisition must be: (a) by the principal debtor, (b) in his own right, and (c)
at or after the date of maturity. When the principal debtor becomes the holder of the instrument
in his own right, the instrument is discharged because of the merger in his person of the
characters of creditor and debtor. (Art. 1275, Civil Code.)

In his own right—not in a representative capacity. So, if the debtor reacquires the instrument as
the. agent of another or as pledge from the holder, or as administrator of the intestate estate of the
holder, he does not do so in his own right. The reacquisition must be "at or after maturity"
otherwise no discharge will be effected because the debtor, on reacquiring the instrument, can re-
negotiate the same under Section 50.

Section 120 applies only to parties secondarily liable on the instrument.

If the secondary is discharged it does not necessarily mean that the instrument is discharged. It
may mean that only the secondary party and subsequent party may be discharged.

Why will the discharge of the instrument operate to discharge the secondary parties?
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If the instrument is discharged under sec. 119, it ceases to have force and effect. Hence, all
parties, primary or secondary, will also be discharged since there is no instrument to be liable on.
But the discharge of the secondary parties does not necessarily bring about the discharge of the
instrument.

— If the instrument is discharged under Section 119, it ceases to have force and effect. Hence,
all parties, whether primarily or secondarily liable, will also be discharged. But a discharge of a
secondary party does not effect a discharge of the instrument itself.

Intentional cancellation of signature. — If the holder intentionally strikes out the signature of a
person secondarily liable, the effect is to discharge him from liability on the instrument as if he
has never been a party to the same. And no consideration is necessary to support such discharge.

When will cancellation of the signature work as a discharge?

It is only when the signature of the indorser is intentionally cancelled by the holder that the
former is discharge as if he has never been a party to the instrument. If there was a mistake in the
appreciation of facts, there is no intentional cancellation. But, once an indorsement is canncelled,
there is prima facie presumption of intention cancel. Also, the right of the holder to cancel the
signature of an indorser is subject to the limitation that the indorserment is not necessary to the
holder’s title.

Note:
The right to strike out the signature is subj to a limitation that the endorsement is not necessary to
the holders title but in case of instruments negotiable by mere delivery. Because even there is no
endorsement it is still payable to the bearer.

Aside from the indorser’s discharge, what further effect will the cancellation have?

The discharge of a party by intentional cancellation of his signature also operates as a discharge
of parties subsequent to the party discharge. The reason for the rule is that the discharge deprives
a subsequent party of a right of recourse against the party discharged by the holder.

What is the effect of discharge by prior party through an act of the holder?

A: When a prior party is discharged, parties subsequent to him will likewise be discharged
because they lose their right of recourse against such prior party.

For subsequent parties to be discharged of a prior party, such prior party should not have been
discharged by operation of law. (i.e. by bankruptcy, insolvency, prescription, failure to give
notice of dishonor)
Ex

The intentional cancellation of D’s signature also discharges E, as D is a prior party to E • And
according to this paragraph, the discharge of a prior party discharges parties subsequent thereto.
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A valid tender of payment made by a prior party, if accepted, would result in the discharge of
said party and necessarily of all parties subsequent to him. (subsection [c].).

Example:

- If D an indorser validly tenders payment and F unjustifiably refuses to do accept, D is

discharged. It is the fault of the holder under this circumstance that he was not paid, thereby
discharging the secondary parties.

This refers to a valid tender of payment made by a prior party which was refused by the holder
without justifiable reason. Such tender would not only discharge the party who made it, but also
those subsequent to him since they have no one to proceed against upon the discharge of the
prior party.

What is tender of payment?

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.

Example:

If the payment being tendered by A amounts to P10,000.00 consisting of 100 pieces of P100.00
bills and H refused to accept the payment, the tender of payment is valid since all bills are legal
tender up to any amount. Thus, the tender which was refused will discharge not only but also
parties subsequent to him.

The release of the principal debtor discharges the instrument and, therefore, all the secondary
parties are also discharged. Moreover, with the release of the principal debtor, subsequent parties
lose their right of recourse against him.

Exception:
Such, however, would not be the case if the holder reserved his right of recourse against the said
subsequent parties, for then the effect of the reservation by the holder of his right is the implied
reservation by the subsequent parties of their right of recourse against the principal debtor. This
reservation of the right of recourse must be express. Hence, it cannot be implied from acts and
conduct.

Ex:
If the holder says that I release A the party primarily liable except that I expressly reserved my
right to go after endorser B. Hence, B cannot be discharged..

Example:
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If the holder F discharges A maker, the parties secondarily liable, B, C, D, E are also discharged,
as this discharges the instrument and two, it deprives them of their right of recourse against A
maker.

But if on releasing A, F reserves his right of recourse against the indorsers, then they are not
discharged. The effect of such reservation is the implied reservation of their right of recourse
against A. In other words, while the holder cannot hold A liable, he can hold B, C, D, and E
liable, but they in turn can hold A liable should any of them be made to pay F. This reservation
of the right of recourse cannot be implied from acts and conduct but must be express.

The 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.

NOTE: In order that a party secondarily liable is discharged, the agreement that is binding upon
the holder to extend the time of payment, or to postpone the holder’s right to enforce the
instrument, must be one between the holder and the principal debtor.

Subsection (f) is consistent with the rule that an extention granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. (Art. 2079, Civil Code.) But the
mere failure on the part of the holder to demand payment does not of itself constitute an
extension of time referred to herein. (Ibid.;see Clark vs. Sellner, 42 Phil. 388 [1921].)

However, a party secondarily liable is not discharged by such agreement in the following cases:

1. When the extension of time for payment is assented to by the party secondarily liable

Because the extension modified the contract so he has the right to object but if he consents then
the extension or postponement will not bind the 2ndary part liable.

2. When the right to proceed against the parties secondarily liable has been expressly reserved.

REQUISITES OF AGREEMENT FOR EXTENSION OF TIME

1. It must be a binding contract, supported by valuable consideration and for a definite period
3. It must be made with the principal debtor and not with a third party.

What are the effects of payment by party secondarily liable?

A: 1. Instrument is not discharged

2. Party alleging is remitted to his former rights as regards all prior parties
3. He may strike out his own indorsement and all subsequent indorsements
4. He may again negotiate the instrument, except in the following:

a. Where it is payable to the order of a third person and has been paid by the drawer
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b. Where it was made or accepted for accommodation and has been paid by the party
accommodated.

The first effect: instrument is not discharged but it discharges D.

Second effect: D is remitted to his former rights against parties prior to him, such as A, B and C.
If D was formerly a holder in due course, even if at the time of payment he had already notice of
defects of title, he can enforce his rights against any of them free from defenses, as he is remitted
to his former rights. But it is a well-known rule of law that if the original payee of a note
unenforceable for lack of consideration repurchases the instrument after transferring it to a
holder in due course, the paper again becomes subject in the payee’s hands to the same defenses
to which it would have been subject if the paper had never passed through the hands of a holder
in due course.

Third effect: D can strike out his indorsement and the subsequent indorsements of E and F

Fourth effect: D can renegotiate the instrument

Another example:

M, the maker. Issued an order instrument to P, the payee. P indorsed the instrument to A who
indorsed it to B. B negotiated the instrument to C. Later, C indorsed the instrument to A. A is
remitted to his former rights, meaning, it is as if he is in his original position; it his as if he went
back to the earlier situation when the instrument was negotiated to him by P. Consequently, his
subsequent indorsement to A after he took the instrument from P as well as the indrosements of
B and C are all disregarded and can be stricken out.

Q: How about payment by the drawer?

A: It will discharge the instrument under Sec. 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 he
acceptor will pay the payee.

What is the effect of payment by the accommodated party?

A: It will discharge the instrument because the accommodated party is the principal in the cases
contemplated by the second paragraph of Sec. 122. The person who made or accepted the
instrument is only a surety of the accommodated party.

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.
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Renunciation
What is renunciation?

It is the 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.

Sec. 122 applies only to renunciation by the unilateral act of the holder without consideration.

Basically, Sec. 122 deals with express renunciation only.

Renunciation

What form does renunciation take?

• It must
be in writing.
• Surren
der of the instrument to the person primarily liable thereon.

When does renunciation take place?

1.     Before maturity.
2.     At maturity.
3.     After maturity.

When does renunciation discharge a negotiable 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.

What are the effects of renunciation?

A renunciation in favor of the principal debtor may be effected at or after maturity. The effect
of the renunciation is to discharge the instrument and all parties thereto, provided the
renunciation is made absolutely and unconditionally.

A renunciation in favor of a secondary party may be made by the holder before, at, or after
maturity of the instrument. The effect of the renunciation is to discharge only such secondary
party and all parties subsequent to him but the instrument itself remains in force.

A renunciation does not affect the rights of a holder in due course without notice. If the
renunciation is made before maturity of the instrument, it runs the risk of being negotiated later
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so as to gain new life in the hands of a holder in due course since renunciation is only a personal
defense.

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

What is cancellation?

Signifies not only the drawing of crisscross 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 can cancellation be inoperative?

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

Burden of Proof?

The burden of proof is upon the person who claims that the cancellation is inoperative.

Why is this so?

There is a presumption that cancellation is intentionally made.

Sec. 124, NIL

Effect of Material Alteration
An alteration is said to be material if it alters the effect of the instrument . It means an
unauthorized change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or other change to
an incomplete instrument relating to the obligation of a party. 

What is Material Alteration?

Effect in the instrument that is materially altered

➢  No
right can be acquired on the instrument.
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Except as against to the party who: 
1. made the alteration.
2. authorized the alteration
3. assented to the alteration
4. or it's subsequent indorsers

Effect in the instrument that is materially altered

However, if the instrument falls under the hands of a holder in due course, it can enforce
payment to it's original tenor.
Sec. 124, NIL
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.
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 the interests of prior parties, or whether it is innocently or
fraudulently made.

So even if instrument has been altered although innocently, it is discharged but the innocent
party can sue upon the original debt for which it has been given. 

EXAMPLE #1:

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, then B to C, and C to D, under circumstances which make D not a holder in
due course.

EXAMPLE #2
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Where a promissory note made for P5,000, payable to P was altered in the amount by P or
subsequent holder to P9,000;
Effect if negotiated to a person who is NOT a holder in due course;

Sec. 125, NIL

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.

The enumerated instances are not exclusive in view of the last part of the above section
which reads “any other change or addition which alters the effect of the instrument in
any respect.”

The enumeration in Section 125 NOT exclusive

• Unaut
horized change in an instrument that purports to modify in any respect the obligation
of a party;

• Unaut
horized addition of words or numbers;

• Other
change to an incomplete instrument relating to the obligations of a party;

• Substit
ution of the words: “or bearer” for “or order” 
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• Writin
g the words “protest waived” above a blank indorsement

Other Examples of Material Alteration in an Instrument

• Erasur
e of the words “without recourse” above the signature of the indorser

• The
insertion of the words "Agent, Phil. National Bank," which converts the bank from
a mere drawee to a drawer and therefore changes its liability, constitutes a material
alteration of the instrument

One which changes the items which are required to be stated under Sec. 1 of NIL

Other Examples of Material Alteration in an Instrument

•Adding words implied by law or making marginal figures to make them correspond to
the sum written in words 

•A serial number is an item which is not an essential requisite for negotiability under
Sec. 1 of NIL , and which does not affect the rights of the parties, hence its alteration is
not material. 

•An extension of time given by the holder of a note to the principal maker without the
consent of a surety co-maker, because alteration refers to physical alteration.