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
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 – a release of all parties, whether primary or
secondary, from obligation arising thereunder. It renders the
instru WITHOUT FORCE and EFFECT, and can NO LONGER BE
NEGOTIATED.
WAYS OF DISCHARGING THE Instrument (SEC. 119 OF NIL)
IS THE LIST ABOVE EXCLUSIVE?
NO. We can add some more ways of discharging an NIL:
1. When judgement is obtained on a bill/ note.
2. Discharge in bankruptcy (court declaration is a must)
WAYS OF DISCHARGING THE INSTRUMENT:
(A) BY PAYMENT IN DUE COURSE BY OR ON BEHALF OF THE
PRINCIPAL DEBTOR
WHAT KIND OF PAYMENT WILL DISCHARGE A NI?
Payment in due course.
WHEN IS PAYMENT CONSIDERED IN DUE COURSE?
1. Made ay or after maturity date
2. Made to the holder or his authorized rep
3. Made by the principal debtor or his authorized rep
4. Made in good faith and without notice that the
holder’s title is defective
WHO PAYS UNDER THIS ITEM? The principal debtor himself or
any one authorized by him to pay on his behalf. It could be his
authorized agent.
PRINCIPAL DEBTOR – a person ultimately bound to pay the
debt.
Could be the maker in a PN or drawee in BOE. Can be the
accommodated maker and accommodated acceptor.
IS DRAWER A PRINCIPAL DEBTOR?
AS A RULE, NO, since he is a party 2nd liable.
HOWEVER, if drawee does not accept the instru, then DRAWER
may be considered the principal debtor.
ILLUSTRATION: A makes a note payable to B or order on Jan 20
2018. B negotiated it to C – D – E – F. On Jan 15 2018, A won
lottery and paid F. Was A’s payment in due course?
ANS: NO. It was not paid at or after maturity date.
IF E, THE IMMEDIATE TRANSFEROR WON THE LOTTERY AND
DECIDED TO PAY F AT MATURITY. IS IT A PAYMENT IN DUE
COURSE?
ANS: No. E is not the principal debtor. He is only a party 2nd
liable since he is an indorser.
WHAT IF INSTRU WAS PAID BY A 3RD PERSON, IS IT
DISCHARGED?
NO. Except when 3rd person is an authorized agent of the
principal debtor.
NIL states that discharge is effected if there is payment in due
course by or on behalf of the principal debtor.
WHAT IF 3RD PERSON PAYS THE INSTRU W/ HIS OWN MONEY.
CAN WE PRESUME IT AS DISCHARGED?
NO. The presumption is he BOUGHT it and not paid it off. He
purchased it, then he is now the creditor/ holder of instru.
WILL PAYMENT OF THE ACCOMMODATION PARTY
DISCHARGE THE INSTRU?
NO. the accommodation party is not a principal debtor. In fact,
the accommodation party is not primarily liable.
As far as it is concerned, discharge will only be effected by if
payment is made by the accommodated party, nut only if it
was made or accepted for his accommodation.
WILL PAYMENT MADE BY INDORSER OR REFEREE IN CASE OF
NEED DISCHARGE INSTRU?
No, they are not principal debtors.
IF INSTRUMENT IS PAID BY DRAWER, WILL IT BE
DISCHARGED?
As a rule, no.
HOWEVER, if instru is not accepted by drawee, then drawer
will be the party primarily liable. Hence, his payment will
discharge the instru.
IF THE PRINCIPAL DEBTOR PAYS A NI USING ANOTHER NI
(CHECK), WILL IT DISCHARGE THE FORMER?
It shall only produce the effect of payment, hence, discharges
the instru, when it is accepted and encashed, or when through
fault of creditor, it has been impaired.
(B) BY PAYMENT IN DUE COURSE BY THE PARTY
ACCOMMODATED, WHERE THE INSTRUMENT IS MADE
OR ACCEPTED FOR ACCOMMODATION;
UNDER THIS ITEM, WHAT KIND OF PAYMENT WILL
DISCHARGE A NI?
Payment in due course.
WHO PAYS UNDER THIS ITEM?
The accommodated party where the instru is made or
accepted for his accommodation.
Simply put, the one that pays is either the accommodated
MAKER or ACCEPTOR. That is bec an accommodated M/A is a
PRINCIPAL DEBTOR.
(C) BY THE INTENTIONAL CANCELLATION THEREOF BY THE
HOLDER;
WHAT IS BEING CANCELLED UNDER THIS ITEM?
The instrument itself.
WHO CANCELS IT? The HOLDER.
CAN IT BE CANCELLED ON BEHALF OF THE HOLDER?
The law is silent, but it is suggested that it can be cancelled also
by the AUTHORIZED REPRESENTATIVE OF THE HOLDER.
FOR THE INSTRU TO BE DISCHARGED BY CANCELLATION,
WHAT ARE THE REQS:
1. Cancellation must be intentional
2. Cancellation must be done by holder
WAYS OF CANCELLING
- Tearing the instrument
- Burning the instrument
- Writing across the instru the words “cancelled”
- The like
ILLUSTRATION: A makes a note payable to order of B. B
negotiated it to C – D – E – F. A found the instru on F’s desk and
with intention of cancelling it, he burns it into ashes. Is it valid?
ANS: NO. A is the drawer. Although it is intentional, it must be
the holder who cancels it.
WHAT IF HOLDER F INADVERTLY TORE NOTE INTO PIECES?
STILL NO. Although cancellation is done by holder, it was not
intentional.
WHAT IF F, UNDER A MISTAKEN BELIEF THAT NOTE WAS
ALREADY PAID, INTENTIONALLY WROTE ON THE INSTRU THE
WORD “CANCELLED”
No. Although it was done by the holder and the act done
appears to be intentional, it still is not intentional in a strict
sense because it is a mistaken belief. Had F known that it was
not yet paid, he would not have cancelled it.
(D) BY ANY OTHER ACT WHICH WILL DISCHARGE A SIMPLE
CONTRACT FOR THE PAYMENT OF MONEY;
WHAT IS BEING REFERRED TO IN ITEM D?
Simply refers to Article 1231 of the Civil Code under Chapter 4
(Extinguishment of Obligations).
MODES OF EXTINGUISHING A CONTRACT?
1. By payment or performance
2. By loss of thing due
3. By condonation or remission of debt
4. By the confusion or merger of rights of creditor and debtor
5. By compensation
6. By novation
*Here, NIL states that the NI is discharged if any of the causes
in Art. 1231 for the payment of money exists, considering that
an NI is likewise an obligation for payment of money.
CONDONATION/ REMISSION – cancellation of debt
CONFUSION/ MERGER – mode of extinguishment of obligation
herein the characters/ qualities of creditor and debtor are
merged in same person. (debtor becomes the creditor)
COMPENSATION – if something, such as money, is given or
received as payment or reparation, for a debt
NOVATION – the act of replacing an obligation to perform,
with another obligation; or adding an obligation to perform; or
replacing a party to an agreement with a new party.
(E) WHEN THE PRINCIPAL DEBTOR BECOMES THE HOLDER
OF THE INSTRUMENT AT OR AFTER MATURITY IN HIS
OWN RIGHT.
FOR THE INSTRU TO BE DISCHARGED BY THE REACQUISITION
OF THE PRINCIPAL DEBTOR, WHAT ARE THE REQS:
1. Reacquisition must be by the principal debtor
2. It must be his own right
3. It must be at or after date of maturity
REACQUISITION – means that the one who reacquires the
instru must be acting not in a representative capacity/ agent of
another. He must reacquire it for himself and through his own
will.
ILLUSTRATION A: A makes the note payable to B or order. B
negotiated it to C – D – E – F. A purchases the note to F as an
instruction of his principal X. Was the note discharged by
reacquisition?
ANS: NO. It must be a reacquisition made by the principal
debtor himself. Here, A the maker, acted as agent.
ILLUSTRATION B: A makes the note payable to B or order. B
negotiated it to C – D – E – F. At the time of maturity, D
reacquires the instrument in his own right. Was the note
discharged?
ANS: No, since the one who reacquired is not a principal
debtor. D is only an indorser, party 2nd liable.
WHAT IS THE CONSEQUENCE IF THE PRINCIPAL DEBTOR
REACQUIRES THE INSTRU BEFORE MATURITY DATE?
It does not discharge the instrument. Instead, it will merely
constitute as a negotiation back to him who may:
1. Renegotiate the instrument
2. Cancel the indorsements subsequent to him
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SEC. 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.
WHO ARE PARTIES BEING REFERRED TO?
Parties 2nd liable (drawer, indorser, accommodating party/
drawer/ indorser, and referee in case of need)
IS THE INSTRU LIKEWISE DISCHARGED UPON HAPPENING OF
EVENTS IN SEC. 120
YES, the instrument is discharged as far as ITEM A is concerned.
NO, it is not discharged in totality as far as ITEMS B-F are
concerned. Here, only parties 2nd liable are discharged and not
the instru.
(A) BY ANY ACT WHICH DISCHARGES THE INSTRUMENT
WHAT ACTS ARE BEING REFERRED TO HERE?
Simply refers to the 5 items enumerated in Sec. 119.
(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.
(B) BY THE INTENTIONAL CANCELLATION OF HIS SIGNATURE
BY THE HOLDER
WHOSE SIGNATURE IS BEING INTENTIONALLY CANCELLED
HERE UNDER THIS ITEM, THE ONE REFERRED AS “HIS”
Signature of party 2nd liable.
ILLUSTRATION: A makes a note payable to B or order. B
negotiated it to C – D – E – F. F intentionally cancelled the
signature of D. Is the instru discharged?
ANS: NO. What was cancelled was the signature of D, a party
2nd liable.
Aside from D, who else are discharged by intentional
cancellation of signature of D?
ANS: E, a party subsequent to D (not the holder) is likewise
discharged. (Item C)
SHOULD INTENTIONAL CANCELLATION BE SUPPORTED WITH
VALUABLE CONSIDERATION?
NO need. Consideration is not necessary to discharge a party
2nd liable by intentional cancellation.
(C) BY THE DISCHARGE OF A PRIOR PARTY
WHAT DOES ITEM C MEAN?
It means that when a PRIOR PARTY is discharged, all his
SUBSEQUENT PARTIES (not the holder) are discharged as well.
Negotiation : A – B – C – D – E. Indorser B was discharged.
Hence, indorsers C – D should likewise be discharged.
*Discharge must not be affected by operation of law.
REASON FOR THE RULE
When PRIOR party is discharged, his SUBSEQUENT parties lose
their right to exercise their right of recourse (reimbursement)
against that party.
To be FAIR, the law sanctions their discharge together with
their prior party who was directly discharged by some means.
ILLUSTRATION: A makes a note payable to B or order.
Negotiated to C – D – E – F. F intentionally cancelled signature
of C. Who are discharged?
ANS: C is discharged (item b). D and E are also discharged
(parties subsequent to C, item C),
To whom can F now ask payment?
A the maker, the party primarily liable.
If dishonored, only recourse is B, the remaining party 2nd liable.
(D) BY A VALID TENDER OF PAYMENT MADE BY A PRIOR
PARTY
TENDER OF PAYMENT – when payment had been produced
and offered to a person holding a claim or demand thereto at
the time it was due or thereafter.
WILL TOP ALONE DISCHARGE THE PARTY MAKING IT?
If based on Sec. 120 (item d), yes.
HOWEVER, TOP will only produce the effect of legal payment
if it is followed by consignation.
CONSIGNATION – the deposit of the thing due whenever the
creditor cannot accept or refuses to accept payment.
CAN THERE BE TOP BEFORE MATURITY DATE?
None, since TOP can only be valid if it is made at or after MD.
In fact, creditor has ALL the right to refuse a premature TOP for
purposes of accrual of interest and the possible imposition of
penalties, charges and the like.
WHO ARE DISCHARGED WHEN THERE IS VALID TOP?
The party who made the TOP will be discharged will ALL his
subsequent parties.
ILLUSTRATION: A makes a note payable to B or order. B
negotiated it o C-D-E-F. At maturity, D tenders payment to F
and latter refuses it w/o valid grounds. Who are discharged by
the act of D tendering payment to the holder who refused to
accept the same?
ANS: D is discharged (sec. 120[d]) – valid tender of payment by
a prior party
E is discharged as well (sec.120[e]) – by discharge of a prior
party
What if holder accepted the TOP of D, what is the effect?
ANS: Item d of Sec. 120 is not applicable.
Instead, the payment will be valid but still does not discharge
the instrument since D is not the principal debtor.
(E) BY A RELEASE OF THE PRINCIPAL DEBTOR, UNLESS THE
HOLDER'S RIGHT OF RECOURSE AGAINST THE PARTY
SECONDARILY LIABLE IS EXPRESSLY RESERVED
WHAT DOES RELEASE MEAN?
When the principal debtor is relieved from his obligation to
pay. However, such release must be a VOLUNTARY act of the
holder, and not operation of law.
WHO RELEASES THE PRINCIPAL DEBTOR? The HOLDER.
WHAT DOES THIS MEAN: “UNLESS THE HOLDER'S RIGHT OF
RECOURSE AGAINST THE PARTY SECONDARILY LIABLE IS
EXPRESSLY RESERVED”?
When holder releases the principal debptor, it follows that
parties 2nd liable are likewise discharged.
However, that will not be the case if the holder has EXPRESLSY
RESERVED his right to ask payment from a party 2nd liable.
WHAT DHOULD CHARACYERIZE THE HOLDER’S
RESERVATUON OF HIS RIGHT OF RECOURSE?
It must be EXPRESSED,
IF PRINCIPAL DEBTOR HAS BEEN RELEASED BUT HOLDER HAS
EXPRESSLY RESERVED HIS RIGHT OF RECOURSE AGAINST
PARTIES 2ND LIABE, TO WHOM CAN LATTER ASK FOR
REIMBURSEMENT?
Still to the principal debtor, despite release,
REASON FOR THE RULE
The paying party is given the right to ask reimbursement from
the principal debtor since the EXPRESS RESERVATION of the
holder’s right of recourse carries with it an implied reservation
that the party 2nd liable who paid can ask reimbursement from
the principal debtor.
ILLUSTRATION: A makes a note payable tp B or order. B
negotiated it to C-D-E-F. F releases A from liability. What is the
effect?
ANS: A, the maker, is discharged. Hence, all parties subsequent
to him, namely: B, C, D, E are discharged.
Why are they discharged when it is only a who was released?
Because they are deprived of their right of recourse against A.
IS THE RULE ABSOLUTE? No. There are exceptions:
The parties 2nd liable may not be discharged if holder has
EXPRESSLY RESERVED his right of recourse against them.
Assuming after f released a from liability, f expressed his
reserve right against c.
ANS: Maker A, as well as indorsers B, D, and E are discharged
To whom can f ask for payment? ONLY TO C.
Assuming c paid f. To whom can c ask for reimbursement?
ANS: C can still ask reimbursement from A, the party primarily
liable, since the express reservation made by F carries with it
an implied reservation for C to ask reimbursement frpm
principal debtor A, despite release,
FOR RELEASE TO BE VALID, WHAT ARE THE REQS:
1. It must be made by holder and not by operation of law
2. It must be for value
(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
TWO INSTANCES WHICH DISCHARGE PARTIES 2ND LIABLE
1. Extension of time of payment
2. Postponement of holder’s right to enforce the instru
*However, the agreement either to extend or postpone must
be binding upon the holder, which is entered into involving the
principal debtor.
AS LONG AS THESE TWO ARE PRESENTS, ARE PARTY 2ND
LIABLE DISCHARGED?
NO, there are exceptions:
1. Party 2nd liable ASSENTED to such
extension/postponement = NOT DISCHARGED
2. The right of recourse of the holder is expressly reserved
against the party 2nd liable. = NOT DISCHARGED
ILLUSTRATION: A makes a note payable to B or order. B
negotiated it to C – D – E – F. On date of maturity, F and A
agreed to EXTEND the time of payment. What is the effect?
ANS: As a rule, parties 2nd laible are discharged.
Assuming the agreement to extend was likewise stipulated
that d and e are amenable to such extension.
ANS: By assenting to such, D and E will not be discharged,
On the date of extended maturity, a dishonored the bill. To
whom can f enforce payment?
ANS: To D and E ONLY.
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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 regards 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.
IF ANY OF THESE PARTIES PAY THE INSTRUMENT, IS THE
INSTUMENT DISCHARGED?
AS A RULE, NO. Only the payment made by the principal debtor
discharges the instrument.
HENCE, WHEN A PARTY 2ND LIABLE PAID THE INSTRU, WHAT
ARE HIS RIGHTS OVER THE INSTRU?
1. He is remitted to his former rights against parties prior to
him
2. He may strike out his own and all subsequent
indorsements
3. He may renegotiate the instru
DOES THAT MEAN THAT WHEN PARTY 2ND LIABLE PAYS THE
INSTRU, HE CAN ALWAYS RENEGOTIATE IT?
This rule is not absolute. The party 2nd liable who paid can NO
LONGER RENEGOTIATE IF:
1. The one who paid is the drawer and the instru is payable
to the order of a third person
2. The instru was made or accepted for his accommodation,
and the party accommodated was the one who paid the
instrument
ILLUSTRATION A: A made a note payable to B or order. B
indorsed it to C – D – E – F. Suppose D, the indorser, pays the
note. Is it discharged?
ANS: No.
So what could D do with the instry which is not yet
discharged?
ANS: D can renegotiate it. He may strike of his and subsequent
indorsement; namely E. He can also remit to his former rights,
hence, he can become holder/ creditor as far as A,B. and C are
concerned.
ILLUSTRATION B: A drew a bill against X payable to B or order.
B indorsed it to C – D. D took it in good faith and for value on
Dec. 1 2018. D further indorsed it to E – F – G. On Dec. 20, 2018,
G enforced payment but drawee X validly refuses due to
absence of consideration. D paid despite such knowledge of
defect. Can D now ask reimbursement from A?
ANS: It appears that A can raise a personal defense of absence
of consideration against D since D, upon payment, know the
defense hence NHIDC.
However, Section 121 states that a party 2nd liable who paid
the instru is remitted to his former rights. D’s former right was
when the instru was indorsed to him on Dec. 1, 2018. Hence,
even if D is not a HIDC on Dec. 18, 2018, his payment remitted
him to his former right as HIDC.
A can no longer raise personal defense and D can validly ask
for reimbursement.
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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.
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 canceled the burden of proof lies on the party who
alleges that the cancellation was made unintentionally, or
under a mistake or without authority.
RENUNCIATION – a gratuitous waiver of liability.
WHO IS ALLOWED TO RENOUNCE ONE’S LIABILITY?
The HOLDER.
WHOSE LIABILITY MAY BE RENOUNCED BY HOLDER?
Any party to the instrument.
WHEN CAN HOLDER RENOUNCE?
Before, at, or even after maturity date.
WILL RENUNCIATION MADE BY HOLDER DISCHARGE THE
INSTRUMENT?
NOT ALL KINDS of renumeration. Only when it was made:
1. At or after maturity
2. The same is absolute and unconditional
3. It involves the principal debtor
WHAT FORM IS REQUIRED IN VALIDLY RENOUNCING ONE’S
LIABILITY
It must be in WRITING.
However, if such renunciation is relayed to the principal debtor
or party primarily liable, requirement in writing is not
necessary. Oral renunciation will suffice.
WHAT IF HOLDER RENOUNCED ONE’S LIABILITY, THE
NEGOTIATED THE INSTRU TO A HIDC. WILL RENOUNCIATION
BIND HIDC?
NO. The HIDC has no knowledge or notice of any discharge of
the instru or any party. HENCE, as for the HIDC, none yet is
discharged. He can still ask payment from party whose liability
was previously renounced by former holder.
ILLUSTRATION: A drew a bill against X payable to the order of
B. B indorsed it to C – D – E – F. Suppose F absolutely and
unconditionally renounces his rights against D before maturity
date. What is the effect of such renunciation?
ANS: It discharges D and E.
However, if F further negotiated the instrument to G, HIDC.
When G asked for payment, X dishonored the bill. Can G
enforce payment against either D or E who were already
discharged?
ANS: YES. Since G is a HIDC, he has no notice of such
renunciation. Hence, for him, no one is yet discharged.

CANCELLATION – one of the ways of discharging the

instrument either by:
- Tearing it off
- Burning it
- Writing the word “CANCELLED” across the instrument
- And the like

WHEN IS CANCELLATION CONSIDERED INOPERATIVE OR NOT

BINDING?
1. Made unintentionally
2. Made through mistake
3. Made without authority from or by the holder

WHAT IF THERE IS A DISAGREEMENT WHETHER THE INSTRU

HAS BEEN CANCELLED OR NOT, WHO HAS THE BURDEN OF
PROOF?
The burden of proof lies on the party who insists that the
cancellation was made unintentionally, through mistake, or
without authority.

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