Discharge of Instruments

Discharge of Instruments
1. Concept of Discharge
The word “discharge” is used in the Negotiable Instruments Law in reference

both to the instrument itself and to the parties to it.
Sec. 119. Provides for discharge of the instrument by specified methods and Sec
120 provides for discharge of persons secondarily liable also by specified
methods.
2. How Instrument Discharged
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 in due course
Sec. 88. What constitutes payment in due course. - Payment is made in due course when it is
made at or after the maturity of the payment to the holder thereof in good faith and without
notice that his title is defective.
A. Payment by principal debtor. - The general rule is that when an instrument upon which
several are liable, some primarily and some secondarily, if it is satisfied by him who is
primarily liable, a complete discharge results. It no longer has legal existence.
Under Art. 1236, payment by a stranger will not discharge the instrument unless the
payment is for the debtor.
Art. 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.
For the payment to produce the effect of discharging the instrument under subsection
(a), it must be made:
A. By or on behalf of the principal debtor;
B. At or after its maturity;
C. To the holder thereof; and
D. in good faith and without notice that the holder's title is defective.
B. Payment by accommodated party.- As between the accommodation party and the

accommodated party, the latter is the real debtor. Hence, payment by the accommodated party
is actually payment by the principal debtor and this is true whether he appears as a party to the
instrument or not.
C. Intentional cancellation of instrument by holder. — To effect a discharge of the

instrument, the cancellation must:
a. be intentionally done;
b. by the holder thereof.
Cancellation may be done by writing the word "cancelled" or "paid" on the face of the
instrument.
There is also cancellation when the instrument is torn up, burned, mutilated or
destroyed. The presumption is that the cancellation is intentional.
D. Any act which discharges a contract. - As to other acts of discharging contracts in general
for the payment of money, the law on obligations and contracts and other existing legislations
will apply.
Under Art. 18 of the Civil Code, provisions of the civil code shall only be suppletory in
matters which are governed by the Code of Commerce and special laws.
Under Art. 1231 of the Civil Code, obligations are extinguished:

1. By payment of performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debts;
4. By the confusion or merger of the rights of creditor and debtor;
5. By compensation;
6. By novation.
Other causes of extinguishing of obligations such as annulment,

rescission, fulfillment of a resolutory condition and prescription are governed elsewhere
in this Code.
E. 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.
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.
Note: Section 120 applies only to parties secondarily liable on the instrument.
A. Any act which discharges 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.
B. 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.
C. Discharge of prior party by act of holder. — The discharge of a party as by intentional

cancellation of his signature (subsection [b].) also operates as a discharge of parties
subsequent to the party discharged. 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. "Prior party" is not limited to prior indorsers but includes as well principal debtors
within its meaning.
D. Valid tender of payment. — "Tender of payment" means the 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.
E. Release of the principal debtor by act of holder. — 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. 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.
F. Extension of time of payment. — The phrase "agreement binding on the holder"

means agreement binding on the holder made with the principal debtor. Hence, an
agreement by the due holder with a third party to extend the time of payment does not
discharge the indorsers.
The agreement to extend the time of payment does not discharge a party secondarily
liable: (a) where the extension of time is consented to by such party; and (b) where the
holder expressly reserves his right of recourse against such 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.
Effect of reacquisition by prior party.
Payment at or after maturity by a party secondarily liable does not discharge the
instrument. It only cancels his own liability and that of parties subsequent to him.
Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back
to a prior party, such party may, subject to the provisions of this Act, reissue and further
negotiable the same. But he is not entitled to enforce payment thereof against any intervening
party to whom he was personally liable.
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 a 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 the
instrument to the person primarily liable thereon.
The mere expression of an intention or desire to renounce is not enough. Thus, where
the holder of a demand note being in articulo mortis instructed his nurse to write a
memorandum to the effect that the note should be destroyed as soon as it could be
found, it was held that there was no renunciation under the law.
Effect of renunciation
1. 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,
2. 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.
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 of an instrument is not limited to the writing of the word "cancelled" or "paid" or the
drawing of criss cross lines across the instrument. It includes tearing, erasure, obliteration, or
burning. It may be made by any other means by which the intention to cancel the instrument
may be evidenced.

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Discharge of Instruments

The word “discharge” is used in the Negotiable Instruments Law in reference

2. How Instrument Discharged

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

Payment in due course

B. Payment by accommodated party.- As between the accommodation party and the

C. Intentional cancellation of instrument by holder. — To effect a discharge of the

Under Art. 1231 of the Civil Code, obligations are extinguished:

Other causes of extinguishing of obligations such as annulment,

Sec. 120. When persons secondarily liable on the instrument are

A. Any act which discharges instrument. — If the instrument is discharged under

B. Intentional cancellation of signature. — If the holder intentionally strikes out the

C. Discharge of prior party by act of holder. — The discharge of a party as by intentional

F. Extension of time of payment. — The phrase "agreement binding on the holder"

Sec. 121. Right of party who discharges instrument. - Where the

Effect of reacquisition by prior party.

A renunciation of a debt evidenced by a negotiable instrument must be made by a

Sec. 123. Cancellation; unintentional; burden of proof. — A

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