CHAPTER VIII DISCHARGE OF NEGOTIABLE INSTRUMENT

Sec. 119.

Instrument; how discharged.

— A negotiable instrument is discharged —

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

It must be remembered that the holder is not bound to accept payment by check or other negotiable
instrument because it does not meet the requirements of a legal tender.

(b) By payment in due course by the party accommodated, where the instrument is made or accepted
for accommodation;

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) By the intentional cancellation thereof by the holder;

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) By any other act which will discharge simple contract for the payment of money;

Obligations are extinguished: (1) By payment or 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.

(e) When the principal debtor becomes the holder of the instrument at or after maturity in his own
right.

the reacquisition must be: (a) by the principal debtor, (b) in his own right "In his own right" means not in
a representative capacity., 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

Sec. 120. When person secondarily liable on the instrument are discharged.

—A person secondarily liable on the instrument is discharged: A maker even though he be a surety for
a co-make, an accommodation co-maker, and an accommodation acceptor are not persons secondarily
liable within this section

(a) By any act which discharges the instrument;

(b) By the intentional cancellation of his signature by the holder;

— 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. (McCormick v. Shea, 99 N.Y. Supp. 467.) However,
the right of a holder to cancel the signature of an indorser is subject to the limitation that the
indorsement is not necessary to the holder's title.

(c) By the discharge of a prior party;

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) 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;

The release of the principal debtor discharges the instrument and, therefore, all the secondary parties
are also discharged.

EXAMPLE: Suppose M is the maker of an instrument payable to the order of P who indorsed it to A, by A
to B, and by B to C, the present holder. If C releases M, the maker P, A, and B, the persons secondarily
liable, are likewise discharged. But if C, iii releasing M, expressly reserved his right against the parties
secondarily 322 THE NEGOTIABLE INSTRUMENTS LAW Sees. 106-107 liable, then they are not
discharged. By such reservation, it is understood that the right of recourse of P, A, and B against M are
also 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.

Hence, an agreement by die holder with a third party to extend the time of payment does not discharge
the indorsers. (Brosemer v. Brosemer,, 162 N.Y. Supp. 1067.) To be binding, the agreement must be
supported by a valuable consideration and for a definite period.

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.

EXAMPLE: R is the drawer of a bill addressed to W, the drawee, and payable to the order of P. The bill is
accepted by W and indorsed by P, A, B, and C in succession. If A pays the bill, it is not discharged, but it
discharges him and B, and C to whom he is personally liable. But he "is remitted to his former rights as
regards all prior parties" R and P, and he may strike out his indorsement to B as well as the indorsement
of C and renegotiate the instrument. Of course, A's right to sue R and P and to renegotiate may be
exercised even without cancelling intervening indorsements. If the bill is paid by R, the case would come
under subsection (a) and so R cannot further negotiate the bill. If P is an accommodated party and P
pays, neither can he renegotiate the bill as his case would fall under subsection (b).

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.

Section 122, when read together with Sections 119 and 120, applies only to renunciation by a unilateral
act of the holder a release without consideration. On the other hand, Section 119(e) would cover the
case of an oral renunciation supported by a consideration; so an oral release without consideration is
ineffective.

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, (see Sec.
120[c].)

(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.

EXAMPLE: D is the holder of an instrument made by M and indorsed in succession by P, A, B, and C. If D

renounces his rights against B, then B and C are discharged. If D makes the renunciation in favor of M,
the instrument is discharged as well as all the parties. Now, if D, after he has made the renunciation,
negotiates the instrument to E, a holder in due course without notice, E can still enforce the instrument
because under the law "a renunciation does not affect the rights of a holder in due course without
notice."

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.
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. Burden is on the holder claiming its
ineffectiveness to overcome the presumption by contrary proof.

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.

(1) Alteration by a party. — 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

without regard to the motive or the purpose of the party making it. So that, where the 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

exceptions as to the effect of material alteration. It does not discharge the instrument as against: 1) a
party who has made the alteration, 2) a party who authorized or assented to the alteration, and 3)
indorsers who indorsed subsequent to the alteration.

EXAMPLE:

M makes a promissory note for P3,000.00 payable to P or order. P negotiates the note to A who, with
the consent of P, raises the amount to P8,000.00 and thereafter indorses it to B, B to C, and C to D,
under circumstances which make D not a holder in due course.

The note is discharged as against M; hence, D cannot enforce it as against M even for the original tenor.
A, however, would be liable to D for P8,000.00 as he is the party who himself made the alteration
although D is not a holder in due course. Moreover, as indorser, A warrants that the instrument is
genuine and in all respects what it purports to be. (Sees. 65 and 66.)

P would also t»e liable to D for P8,000.00 as he authorized or assented to the alteration.

Likewise, B and C would be liable to D for P8,000.00 as they are subsequent indorsers.

Alteration by a stranger. — When the material alteration of the instrument is made by a stranger, it is
called spoliation. In England, spoliation has the same effect as alteration. Although Section 124 does not
make any distinction, American courts hold that spoliation has no effect upon the instrument if the
original meaning can be ascertained.

3) Right of holder in due course. — A material alteration avoids the instrument in the hands of one who
is not a holder in due course as against any prior party who has not assented to the alteration. But if an
altered instrument is negotiated to a holder in due course, he may enforce payment thereof according
to its original tenor regardless of whether the alteration was innocent or fraudulent, (see Sec. 62.)

EXAMPLE: In the example given, if D were a holder in due course, he could enforce the instrument
against M for P3,000.00, its original tenor, (see Sec. 14.) Of course, D can recover from P, A, B, or C
P8,000.00 should M dishonor the instrument.

Sec. 125. What constitutes a material alteration.

— Any alteration which changes —

(a) The date;

—A change in the date of the instrument whether it hastens or postpones the time of payment is
material, so also a change in the date from which interest is to run.

- change in the date of indorsement is not material where the date is not necessary to fix the maturity of
the instrument

(b) The sum payable, either for principal or interest;

change in the amount of the principal or interest whether increasing or reducing

alteration of the marginal figures of an instrument is not material when the sum stated in words in the
body remains unchanged

(c) The time or place of payment;

change in the marginal notation of the date of maturity of an instrument in order of correct an obvious
mistake is not

inserts a place of payment where none is specified is material.

(d) The number or the relations of the parties;

The addition of a comaker (Fairley v. Falcar, 214 N.W 538.); the addition of the word "surety" after the
name of a co-maker (Eastman Nat. Bank v. Naylon, 268 Pac. 78.); or the word "trustee" after the name
of the payee (Mechanics Am. Nat. Bank v. Helmbacker, 201 S.W. 383.); the erasure of the payee's name,
and the insertion of the name of another person (Alford v. Delatte, 137 So. 500.) or just leaving a space
blank (Stove v. Sargent, 107 N.E. 1014.); the erasure of words "agent for P" in a check payable to "X,
agent P", leaving X's name (Union Tool Co. v. Farmers' and Merchants' Nat. Bank, 218 Pac. 424.); the
erasure of the word "or" (St. John's Congregation v. Merchants' Nat. Bank, 165 N.W 491.); and the
insertion of the words "Agent, Phil. National Bank" after the check was transferred by the payee, which
converts the Bank from a mere drawee to a drawer, and therefore, changes its liability (Montinola v.
Phil. National Bank, 88 Phil. 178 [1951].), are examples of the alterations which change the number or
relations of the parties.
(e) The medium or currency in which payment is to be made;

Any change in the medium or currency in which payment is to be made is a material alteration like the
insertion of die words "in current funds" (Angle v. M.W. Mutual Life Ins. Co., 92 U.S. 330.), or the words
"in gold coins" (Wills v. Wilson, 3 Ore. 308.) or when a note payable in pesos, Philippine currency, is
changed by making it appear as payable in American dollars.

(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.

Under the last paragraph, the substitution of the words "or bearer" for "or order" (Builders Lime &
Cement Co. v. Weymer, 151 N.W. 100.); writing the words "protest waived" above a blank indorsement
(Sawyer State Bank v. Sutherland, 162 N.W. 966.); and the erasure of the words "without recourse"
above the signature of an indorser (Waltham State Bank v. Tuttle, 199 N.W. 970.) likewise constitute
material alterations as they.alter the effect of the instrument. A change in the pronoun "I" to "We" in a
promissory note is a material alteration since it changes the obligation from solidary to a joint one.

any of the matters mentioned or any other change which alters the effect of the instrument in any
respect constitutes a material alteration. Any other alteration is immaterial and will not discharge the
instrument

ACCEPTANCE

Sec. 132. Acceptance; how made, etc. —

The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. The
acceptance must be in writing and signed by the drawee. It must not express that the drawee will
perform his promise by any other means than the payment of money.

Acceptance applies only to bills of exchange and not to promissory notes. It may be (1) actual or (2)
constructive,

there can be no "acceptance" of a check which is a demand instrument.

Unless and until he accepts, the drawee is not bound in any way as a party to a bill and the payee or
other holder has no recourse against him even if it is shown that he had funds in his hands belonging to
the drawer sufficient to cover the bill, and ought, in justice to the drawer, to have paid the bill. The
object of acceptance then, is to bind the drawee and make him an actual party liable to the instrument.

(2) By accepting a bill, the drawee admits everything essential to its validity. Accordingly, want or
failure of consideration cannot be shown in a suit by the payee against the acceptor. The presumption is
that every bill of exchange is drawn on account of some indebtedness from the drawee to the drawer,
and that the acceptance is an appropriation of the funds of the latter in the hands of the former. This
rule is not unjust for it is the duty of the drawee to ascertain before accepting a bill whether he owes the
drawer something which is exclusively within his knowledge but which the payee would have no means
of knowing.

(3) Until the bill has been accepted, the drawer is the principal debtor. Upon acceptance, the bill, in
effect, becomes a note. The drawee assumes the liability of the maker and the drawer, that of the first
indorser. As long as a commercial paper conforms with the definition of a bill of exchange, the paper is
considered a bill of exchange. The nature of acceptance is important only in the determination of the
kind of liabilities of the parties involved but not in the determination of whether a commercial paper is a
bill of exchange or not. (The Phil. Bank of Commerce vs. Aruego, 102 SCRA 530 [1980].)

Formal requisites of acceptance.

actual acceptance, to be valid, must be in writing signed by the drawee and must contain an express or
implied promise to pay money. It is necessary that the acceptance be delivered or made known to the
holder.

Acceptance made orally is not binding on the drawee. Thus, acceptance by telephone is not an
acceptance. It was held, however, that acceptance by telegram is valid.