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DISCHARGE
CONCEPT
Discharge means release of all the parties, whether primary or secondary, from the
obligation arising thereunder. It renders the instrument without force and effect, and
consequently, it can no longer be negotiated.
“As to the paper itself, it puts an end to it as a contractual obligation. As to the
parties to the instrument, it operates as a release of some or all of them from further
obligation and liability under the instrument although the instrument may not be
discharged, as where only part of the obligor are released. Release of the instrument may
be accomplished by release of all the parties to it”.
WAYS OF DISCHARGING A 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;
(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.
List not exclusive. Some more ways of discharging a negotiable instrument are:
(f) when a judgement is obtained on a bill or note;
(i) Discharge in bankruptcy ( there must first be a court declaration of
bankruptcy)

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

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

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good faith and without notice that his title is defective.

Elements of Payment in Due Course:
1. Must be made by the principal debtor or his authorize representative( or
the accommodated party where the instrument is made or accepted for
his accommodation);
2. Payment must be made to the holder or his authorize representative;
3. The payor must be in good faith and without notice that his title is
defective; and
4. Payment must be made at or after maturity date of the instrument;
Article 1249. CC.
ARTICLE 1249. xx xx
The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
XX XX
WHO MAKES PAYMENT IN DUE COURSE?
The following parties makes payment:
1. The person primarily liable on the instrument e.g., maker, acceptor ( only if the
acceptor is not the surety for principal debtor who signed as a secondary party); or
2. If the primary party is a surety for a principal debtor who signed as a secondary
party, then a payment made by the secondary party, who is also the principal
debtor, will discharge the instrument; or
3. A payment by the authorized agent of the principal debtor.
Note: the principal debtor may not be the person indicated as the person primarily liable
in the instrument. An accommodated party may be a principal debtor even if he signed
merely as a secondary party.
PAYMENT OF PARTY SECONDARILY LIABLE
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

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(b) Where it was made or accepted for accommodation and has been paid by
the party accommodated.
PRINCIPAL DEBTOR – the person ultimately bound to pay the debt.
Note: the drawer is not a principal debtor since a drawer is only a party secondarily
liable. A drawer may be considered a principal debtor if and only when the drawee
DOES NOT ACCEPT the instrument. The drawee does not become a party to the
instrument and the drawer becomes the person ultimately bound to pay the debt.
STRIKING OUT INDORSEMENT – it is allowed under Sec 121 because
indorsement of the paying party as well as the indorsement after his first
indorsement are not necessary for his title.
DRAWER
General rule: payment made by a drawer does not discharge the instrument
unless he becomes the person primarily liable to pay the debt by virtue of the due
dishonor of the drawee ( dishonor must be pursuant to Article 19 of the CC).
The following circumstances allow the drawer to have a right of recourse to
the drawee:
1. If the drawee already received the amount of the bill from the drawer
2. If he is in possession of an amount due to the drawer
3. If he is otherwise obligated to the drawer
PAYMENT BY THIRD PERSON
Third Person – one who will pay for or in behalf of the makes and not one
who intends to have any right over the instrument.
General rule: No.
Exception: when that third person is an authorized agent of the principal
debtor. The NIL expressly states that discharge is effected if there is a payment in
due course by or behalf of the principal debtor.
Article 1236.xx xx
Whoever pays for another may demand from the debtor what he has paid except
that if he paid without the knowledge or against the will of the debtor, he can
recover only insofar as the payment has been beneficial to the debtor.
Presumption when third person pays the instrument with his own money – the
presumption is that he bought it and not paid it off. He now becomes the creditor/holder
of the instrument ( in certain occasions, the assignee).

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PAYMENT OF INDORSER OR REFEREE IN CASE OF NEED – does not fucking

discharge the instrument because they are not the principal debtors. They are parties
secondarily liable who, if compelled to pay by the holder, will have a right of
recourse/reimbursement from the principal debtor.
PRESUMPTION WHERE NOTE PRESENTED BY STRANGER– where a note is
presented by a Stanger, without legal transfer, the presumption is that it was lost, stolen,
or otherwise improperly circulated.
 The aforementioned presumption is applied if the bill or note is unendorsed in
blank or specially to the party having in possession.
 Possession when coupled with other facts or acts indicating agency to manage,
control or deal with the securities, may be very potent evidence of authority to
receive payment.
WHAT IF THE PRINCIPAL DEBTOR PAYS A NI USING ANOTHER NI?
It shall only produce the effect of payment, hence discharges the instrument, when
it is accepted AND encashed, or when through the fault of the creditor, it has been
impaired e.g., Evangelist vs. Screenex.

(b) By payment in due course by the party accommodated, where the

instrument is made or accepted for his accommodation;
ACCOMMODATED PARTY—payment made by the accommodated party will
discharge the instrument because the accommodated party is the principal ( Par.
2,Sec 122 NIL). The person who made or accepted the instrument is only a surety
of the accommodated party.
NOTE: payment of the accommodation party does not discharge the instrument as
the accommodation party is not the principal debtor but a mere surety. Discharge
will only be effected if payment is made by the accommodated party, but only if it
was made or accepted for his accommodation.
WHO PAYS UNDER THIS ITEM?
The accommodated party where the instrument is made or accepted for his
accommodation.
1. The accommodated maker
2. The accommodated acceptor

(c) By the intentional cancellation thereof by the holder.

CANCELLATION – one of the ways of discharging the instrument either y tearing

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the instrument off, burning it, writing across the instrument the word cancelled,
etc.
 The instrument is being cancelled by the holder
 It is suggested that it can also be cancelled by the authorize
representative of the holder – the authorized agent
REQUISITES OF CANCELLATION TO DISCHARGE THE INSTRUMENT
1. Cancellation must be intentional
2. Cancellation must be done by the holder ( or his authorized representative)
WAYS OF CANCELLING
1. Destroying the instrument e.g., tearing it up, burning it,
2. Writing the word “cancelled” on the instrument.
The law does not require cancellation to be in writing
 There is cancellation when the agent of the holder burned the note
with the knowledge and consent of the holder.
 LEGAL CONCEPT INVOLVED – destruction of the physical res
itself by the owner destroys the legal relations which it imbues.
UNINTENTIONAL CANCELLATION
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.
Instances when cancellation is considered inoperative or not binding
1. When it is made unintentionally
2. Made through mistake; or
3. Made without authority from or by the holder.
BURDEN OF PROOF – the burden of proving whether the instrument has been
cancelled or not lies on the party who insists that the cancellation was made
unintentionally, through mistake or without authority.

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(d) By any other act which will discharge a simple contract for the payment
of money;
Article 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and prescription, are governed elsewhere in
this Code.
The NIL states that the negotiable instrument is discharged if any of the
causes of extinguishment of obligation for payment of money is present.
Note: a negotiable instrument is an obligation for payment of money. Likewise, it
is a contract for the payment of money.
The enumeration set in article 1231 is not exclusive because there are other
grounds that are provided for in other provisions of the New Civil Code (CC) and
other special laws (SIHI vs. CA 😊).
REMEMBER: withdrawal of funds is not a mode of extinguishment of obligation,
if done with bad faith, it is punished by the law.
CONDONATION(REMISSION)— the cancellation of a debt
CONFUSION(MERGER)— mode of extinguishment of obligation wherein the
characters/qualities of creditor and debtor are merged in the same person. An
obligation is extinguished if the debtor also becomes the creditor since one cannot
claim against himself.
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.
Note: in the case of Amenar Salazar v. J.Y. Brothers Marketing Corporation, the
supreme court held that replacement of a check by another check (even if the

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replacement check is a crossed check) will not extinguish the obligation under the
first check unless and until the replacement check is accepted and encashed.
CIRCUMSTANCES WHERE OF NOVATION ARISES
1. Novation must be explicitly stated ad declared in unequivocal terms as
novation is never presumed;
2. The old and the new obligations must be incompatible on every point.
Test of incompatibility – whether the two obligations can stand together, each
having its independent existence. If they cannot, they are incompatible, and the
latter obligation novates the first.
PRESCRIPTION –
ANNULMET—
RESCISSION—
FULFILLMENT OF A RESOLUTORY CONDITION—

(e) When the principal debtor becomes the holder of the instrument at or
after maturity in his own right.
REQUISITES FOR DISCHARGE OF INSTRUMENTS DUE TO
REACQUISITION OF THE PRINCIPAL DEBTOR
1. Reacquisition must be made by the principal debtor;
2. It must be in his own right;
3. It must be at or after date of maturity.
DEFINITION:
After negotiating the instrument to another person’s, the one who made or
issued the instrument gets hold of it or posses it once more at a latter period.
“IN HIS OWN RIGHT”
The one who reacquires the instrument must be not be acting withing
representative capacity or as an agent of another person. He must reacquire it for
himself and through his own will.
Note: the maker is discharged even if he acquired the instrument through an agent
who did not disclose his principal.
CONSEQUENCE IF THE PRINCIPAL DEBTOR REACQUIRES THE
INSTRUMENT BEFORE MATURITY DATE?
It does not discharge the instrument. Instead, it will merely constitute as a

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negotiation back to him who may;

1. Renegotiate the instrument; or
2. Cancel the indorsements subsequent to him.
SURRENDER OF THE INSTRUMENT
The instrument must be surrendered to the payor whenever discharge is by
payment by or on behalf of the principal debtor, payment by the accommodated
maker or acceptor, by renunciation or by any other ground that discharges simple
contracts.
If the instrument is not surrender, it may fall in the hands of a holder in due
course who may have the right to enforce the instrument despite the previous
payment that was made e.g., SIHI v. CA.
In SIHI v. CA, the drawer was made liable even if she returned the jewelry
for which the check in question was issued. The instrument was not deemed
discharged as to the holder in due course who was without notice of such fact.
DISCHARGE OF PERSONS SECONDARILY LIABLE
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.
PARTIES SECONDARILY LIABLE

1. Drawer
2. Indorser
3. Accommodating party
4. Accommodated drawer

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5. Accommodated indorser
6. Referee in case of need
7. Etc.

The instrument is discharged upon the happening of (a). But for items (b) to
(f), only the parties secondarily liable are discharged and not the instrument itself.

(a) By any act which discharges the instrument;

Refers to the five items enumerated in Section 119.
(b) By the intentional cancellation of his signature by the holder;
“his” – refers to the signature of the party secondarily liable.
SHOULD INTENTIONAL CANCELLATION UNDER THIS ITEM BE
SUPPORTED BY A VALUABLE CONSIDERATION FOR IT TO BE
CONSIDERED A VALID DISCHARGE?
No need. Consideration is not necessary to discharge a party secondarily
liable by intentional cancellation.
(c) By the discharge of a prior party;
The discharge of a prior party discharges a person secondarily liable. Sec. 120 (c)
contemplates discharge by some act of the creditor. It does not include discharge
by operation of law. Therefore, it does not include the ff;
1. Discharge by bankruptcy or insolvency;
2. Discharge through prescription; and
3. Failure to give notice of dishonor.
It means that when a prior party is discharged, all his subsequent parties are
discharged as well, save for the holder of course.
Note: if discharge is by operation of law, this rule does not apply.
REASON FOR THE RULE: when a prior party is discharged, his subsequent
parties LOSE THEIR RIGHT TO EXERCISE THEIR RIGHT OF RECOURSE
(reimbursement) against that party. Hence, to be fair, the law sanctions their
discharge together with their prior party who was directly discharged by some
other means.

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SECTION 48. Striking out indorsement. - The holder may at any time strike out
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.
(d)By a valid tender or payment made by a prior party;
TENDER OF PAYMENT – the act by one which 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.
There is 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.
Tender of payment alone discharges the party making it. However, it 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.

Note: there can be no tender of payment before maturity of the instrument. It can
only be valid if it is made at or after the maturity of the obligation. The creditor has
all the right to refuse a premature tender of payment for purposes of accrual of
interest and the possible imposition of penalties, charges and the like.

PARTY DISCHARGED WHEN THERE IS A VALID TENDER OF PAYMENT

The party who made the tender of payment together with all his subsequent
parties.
(d )By a release of the principal debtor unless the holder's right of recourse
against the party secondarily liable is expressly reserved;
RELEASE – when the principal debtor is relieved from his obligation to pay.
Such release my be a voluntary act of the holder and not be operation of law.
WHO RELEASES THE PRINCIPAL DEBTOR?
The holder (creditor)
“UNLESS THE HOLDER’S RIGHT OF RECOURSE AGAINST THE PARTY

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SECONDARILY LIABLE IS EXPRESSLY RESERVED”

General Rule. – when the holder releases the principal debtor, it follows that the
parties secondarily liable are likewise discharged.
Exception.— if the holder expressly reserved his right to ask payment from the
pary secondarily liable. The holder can ask payment from the party secondarily
liable whom he expressly reserved his right to ask payment although the principal
debtor is released from liability. The RESERVATION OF THE HOLDER’S
RIGHT must always be EXPRESSED.
RULE.—When the holder released the principal debtor from liability, the express
reservation of the holder’s right of recourse against a party secondarily liable
caries with the an IMPLIED reservation that the party secondarily liable who paid
can ask reimbursement from the principal debtor.
Commentary of Aquino: the reservation in subsection (e ) and (f) 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 endorsers engaged to pay ONLY IF the
instrument is DISHONORED and the necessary proceedings of dishonor be duly
taken.
REQUISITES FOR VALID RELEASE UNDER SEC. 120 ( E)
1. It must be made by the holder and not by operation of law;
2. 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 THE PARTIES SECONDARILY
LIABLE:
1. Extension of Time of payment; or
2. Postponement of the holder’s right to enforce the instrument.
NOTE: the agreement must be binding upon the holder, which entered into
involving the principal debtor.

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EXCEPTIONS:
Despite the presence of any of the two instances mentioned, parties
secondarily liable will not be discharged if;
1. The party secondarily liable assented to such extension or postponement; or
2. The right of recourse of the holder is expressly reserved against the party
secondarily liable.
REASON – the assurance of the drawer and the indorsers is payment according to
the tenor of the instrument. An agreement to extend the time of payment varies the
original undertaking of the secondary parties.

RIGHT OF PARTY SECONDARILY LIABLE WHO DISCHARGES THE

INSTURMENT
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.
PARTIES SECONDARILY LIABLE:
(a) Drawer; or
(b) Indorser(s); or
(c) Immediate transferor.
General Rule – payment of these parties does not discharge the instrument. Only
payment made by the principal debtor discharges the instrument.
RIGHTS OF A PARTY SECONDARILY LIABLE WHO PAID THE
INSTRUMENT
1. He is remitted to his former rights against parties prior to him;
2. He may strike out his own and all subsequent indorsements; and
3. He may renegotiate the instrument.

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EXCEPTIONS
The party secondarily liable who paid can no longer renegotiate if:
1. The one who paid is the drawer and the instrument is payable to the order
of a third person; and
2. The instrument was made or accepted for his accommodation, and the
party accommodated was the one who paid the instrument.
Note: personal defense is not a valid defense against HIDC. Real defense will
bar the HIDC from demanding payment for the instrument.

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.
RENUNCIATION – a gratuitous waiver of liability.
WHO IS ALLOWED TO RENOUCE? It must be the holder
WHOSE LIABILITY IS RENOUNCED? Any party to the instrument
WHEN CAN THE HOLDER RENOUNCE A PARTY’S LIABILITY? – Before,
at or even after maturity date of the instrument
WILL RENUNCIATION MADE BY A HOLDER DISCHARGE THE
ISNTRUMENT?
Not all kinds of renunciation. Only when it was made:
1. At or after maturity;
2. In writing or the instrument is delivered to the person primarily liable;
3. The same is absolute and unconditional; and
4. It involves the principal debtor.
FORM REQUIRED IN VALIDLY RENOUNCING ONE’S LIABILITY
Must be in WRITING. Exception, if it is relayed PERSONALLY to the
party primarily liable, the requirement of in writing is not necessary. ORAL
communication will suffice. ( This means that the instrument was delivered up to
the person primarily liable).

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NOTE: renunciation does not affect a holder in due course who has no knowledge
or notice of any discharge of the instrument or any party.
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 – one of the ways of discharging the instrument either tearing
the instrument off, burning it, writing across the instrument he word canceled,
and the like.
WHEN IS CANCELLATION CONSIDERED INOPERATIVE OR NOT
BINDING?
When it is:
1. Made unintentionally
2. Made through mistake; or
3. Made without authority from or by the holder.
WHAT IF THERE IS A DISAGREEMENT FROM OR BY THE HOLDER
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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