DISCHARGE OF INSTRUMENTS
is for the debtor
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
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
WHAT is discharge?
Discharge of an instrument means a release
of all parties, whether primary or secondary,
from the obligations arising thereunder. It
renders the instrument without force and
effect and, consequently, it can no longer be
negotiated.
Who is discharged?
Discharge of the instrument obviously
includes discharge of the person or
persons primarily liable on it and a
person secondarily liable on an
instrument is also discharged by an act
which discharges the instrument.
How: Methods of Discharge
1. Payment by principal debtor.
GR: 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.
XPN: Payment by a stranger
XPN to XPN: Payment by a stranger
Requisites for payment to discharge the
instrument:
it must be made:
(a) by or on behalf of the principal debtor
(b) at or after its maturity
(c) to the holder thereof
(d) in good faith and without notice that the
holder's title is defective.
1. Principal debtor- person ultimately
bound to pay the debt and not necessarily to
the "person primarily liable" on the
instrument. (Note: Payment by
accommodation party will not discharge
since he is not primarily liable)
2. 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.
3. Intentional cancellation of instrument
by holder.
To effect, it must be:
(a) be intentionally done;
(b) by the holder thereof
Note: 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.
4. Any act which discharges a contract.
(1) By payment or performance;
(2) (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.
Note: while the various causes of
discharging a simple contract such as
payment, condonation, etc. will operate to
discharge the instrument as between the
immediate parties, they will not in the
hands of a holder in due course.
5. Reacquisition by principal debtor in
his own right
Reacquisition must be:
(a) by the principal debtor
(b) in his own right, and
(c) at or after the date of maturity.
Reason: the instrument is discharged
because of the merger in his person
of the characters of creditor and
debtor
Note: "In his own right" means not
in a representative capacity
Sec. 120. When person 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 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
1. Any act which discharges instrument
-A discharge of a secondary party does not
effect a discharge of the instrument itself
2. Intentional cancellation of signature
Effect: it discharges person secondarily
liable from liability on the instrument as if
he has never been a party to the same.
Limitation of holder: the indorsement is
not necessary to the title of the holder.
3. Discharge of prior party by act of holder
Reason: discharge deprives a subsequent
party of a right of recourse against the party
discharged by the holder
This applies only to discharge by the act of
the holder and not to discharges by operation
of law, or a discharge by the statute of
limitations, or a discharge of a party for
failure of the holder to give him notice of
dishonor.
4. Valid tender of payment
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.
The holder's refusal without any justifiable
reason to accept a valid tender of payment
made by a prior party should discharge the
subsequent parties.
It stops the running of interest and relieves
the party making the tender from subsequent
liability for costs and attorney's fees in case
of litigation.
5. 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.
The release of the principal debtor,
subsequent parties lose their right of
recourse against him.
XPN: 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. (must
be express and not implied)
6. Extension of time of payment
an agreement by die holder with a
third party to extend the time of
payment does not discharge the
indorsers.
HOW THE INSTRUMENT IS
DISCHARGED
1. 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 instrument to the holder thereof in good
faith and without notice that his title is
defective.
Requisites of payment in due course:
(1) Payment must be made at or after
date of maturity
 Payment before maturity does
not discharge the instrument
anymore than if it were
merely discounted
 If the instrument is
renegotiated to a holder in
due course, the latter may
recover on the instrument
(2) Payment must be made to the holder
GR: maker of a note is not
discharged when he pays the payee
who is no longer the holder because
he has already transferred the note to
a holder in due course
XPN: it is shown that he was
authorized by the holder to receive
payment
Remedy: the remedy of the maker is
against the one who received the
payment
(3) Payment must be made in good faith
and without notice that the holder's
title is defective
 if there is a forged
indorsement (see Sec.
23.), it is a nullity and
no right passes by it
and payment by him
does not operate as a
discharge of the
instrument.
PAYMENT IN DUE COURSE
a. Principal debtor- person ultimately
bound to pay the debt and not necessarily to
the "person primarily liable" on the
instrument. (Note: Payment by
accommodation party will not discharge
since he is not primarily liable)
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. Payment by person secondarily
liable (Sec. 121 NIL);right of party
who discharges instrument
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.
Effect: it cancels his own liability and
discharges those who are subsequent to him.
With regard to prior parties, primay or
secondary, if the party so paying was
formerly a holder in due course, he may
recover from prior parties as such a holder
even though at that time he already had
notice of defenses.
d. To whom must payment be made
Payment must be to the holder.
Payment to a payee who already
negotiated the instrument will not
discharge the instrument because he
is no longer the holder, the same is
true when payment is made to a
possessor to whom the instrument
was not indorsed.
2. Renunciation by Holder (Sec. 22
NIL)
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.
3. Intentional 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.
Unlike renunciation, the law does not
require cancellation to be in writing.
Thus, there is cancellation if the agent of
the holder burned the note with the
knowledge and consent of the said
holder.
a. Rule in case of unintentional
cancellation (Sec. 123 NIL)
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
 Presumption: Cancellation, however, is
presumed to be intentional.
Burden of Proof: burden is on the
holder claiming its ineffectiveness to
overcome the presumption by contrary
proof.
Note: Cancellation is not limited to the
writing of the word "cancelled" or "paid"
or the drawing of crisscross 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.
Cancellation is inoperative when
made:
(1) unintentionally, or
(2) by mistake or through fraud, or
(3) without authority
4. Any act that discharges simple
contracts (Art. 1231 NCC)
Civil Code, Art. 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.
Spouses Zoilo J. Abella and Gregoria S.
Abella vs. Spouses Grace Abella and Alden
Abella
Facts:
Zoilo Abella extended a loan of 800,000 to
his nephew’s wife, Grace in 2002, which
was paid in installment. Grace issued 3 post-
dated checks in the amount of 100, 000
each. The subject of this case is the 3rd check
issued by the respondent.
Zoilo and his wife claimed that the 3rd check
remained unpaid despite the follow ups,
even if they had returned possession of the
3rd check to Grace, resulting in the filing of
action for collection of sum of money and
damages.
Grace contended that the last check was
exchanged with cash personally given to
Zoilo.
The RTC dismissed Zoilo’s complaint o the
ground that the petitioner failed to establish
their claim with preponderance of evidence,
which was affirmed by the RTC and CA
Issue: Whether the instrument is discharged
Held:
Yes. Once the existence of an indebtedness
is duly established by evidence, the burden
of showing with legal certainty that the
obligation has been discharged by payment
rests on the debtor.
Thus, while it is true that "one who pleads
payment has the burden of proving it”. The
burden of showing the discharge of the
obligation by the debtor only arises once the
existence of indebtedness is duly established
by evidence. Here, petitioners failed to show
that respondents are still indebted to them.
Section 119(e) of the Negotiable
Instruments Law provides that a
negotiable instrument like a check may be
discharged by any other act which will
discharge a simple contract for the
payment of money, such as when the
principal debtor becomes the holder of
the instrument at or after maturity in his
own right. In order that there will be
discharge under subsection (e), the
reacquisition must be: (1) by the principal
debtor; (2) in his own right; and (3) at or
after the date of maturity.
First, it is undisputed from the records that
respondents, as the debtors in the present
case, reacquired the third check. Second, the
reacquisition by respondents was clearly in
their own right and not in a representative
capacity, such as being an agent of another
or as a pledge from the petitioners who, in
fact, freely gave it to them. Third, the
maturity date of the check was on January
30, 2006 and the reacquisition was made
after the said date.
5. Principal debtor becomes holder
(Sec 119 e)
a. An instrument is discharged when the
principal debtor becomes the holder of
the instrument at or after maturity date in
his own right.
b. “In his own right” has been construed
to exclude a case where a maker acquires
the instrument in a purely representative
capacity. Thus, the note is not discharged
when the maker acquires it as agent of
another.
c. Nor is it discharged when the maker
becomes the holder for example, as
executor or administrator.
d. HOWEVER, the maker is discharged
even if he acquired the instrument
through an agent who did not disclose
his principal.
D. Discharge of 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.
E. Tender of Payment
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].) It is but just,
therefore, that the holder's refusal
without any justifiable reason to accept a
valid tender of payment made by a prior
party should discharge the subsequent
parties. (Sec. 70.) The refusal to accept
the tender does not operate to discharge
the debt but the tender stops the running
of interest and relieves the party making
the tender from subsequent liability for
costs and attorney's fees in case of
litigation
F. Release of Principal Debtor
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. (Phoenix
v. Nat. Bank, 166S.W.830.) As under
subsection (c), the release of the
principal debtor must be by the act of the
holder and not by operation of law like a
judgment for the maker in an
unsuccessful suit by the indorsee against
him.
G. Extension of Term
The phrase "agreement binding on the
holder" means agreement binding on the
holder made with the principal debtor.
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. (Cape Charles Bank v. Farmer's
Mut. Exch,, 92 S.E. 918.) 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].) 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
H. Payment for Honor (Sec. 171-177
NIL)
Sec. 171. Who may make payment for
honor. — Where bill has been protested
for non-payment, any person may
intervene and pay it supra protest for the
honor of any person liable thereon or for
the honor of the person for whose
account it was drawn
Sec. 172. Payment for honor; how
made.—The payment for honor supra
protest in order to operate as such and
not as a mere voluntary payment must be
attested by a notarial act of honor which
may be appended to the protest or form
an extension to it.
Sec. 173. Declaration before payment
for honor. — The notarial act of honor
must be on a declaration made by the
payer for honor or by his agent in that
behalf declaring his intention to pay the
bill for honor and for whose honor he
pays.
Sec. 174. Preference of parties offering
to pay for honor. — Where two or more
persons offer to pay a bill for the honor
of different parties, the person whose
payment will discharge most parties to
the bill is to be given the preference.
Sec. 175. Effect on subsequent parties
where biii is paid for honor. — Where
a bill has been paid for honor, all parties
subsequent to the party for whose
honorit is paid are discharged, but the
payer for honor is subrogated for, and
succeeds to, both the rights and duties of
the holder as regards the party for whose
honor he pays and all parties liable to the
latter.
Sec. 176. Where holder refuses to
receive payment supra protest—
Where the holder of a bill refuses to
receive payment supra protest, he loses
his right of recourse against any party
who would have been discharged by
such payment.
Sec. 177. Rights of payer for honor. —
The payer for honor, on paying to the
holder the amount of the bill and the
notarial expenses incidental to its
 dishonor, is entitled to receive both the
bill itself and the protest.
Right of party who discharges instrument
(Sec. 121 NIL)
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.
Prudential Bank vs Court of Appeals
Facts:
Leticia Tupasi-Valenzuela opened
Savings Account in the Valenzuela Branch
of petitioner Prudential Bank, with
automatic transfer of funds from the savings
account to the current account.
Leticia Tupasi-Valenzuela deposited in her
savings account a check in the amount of
P35,271.60, drawn against the Philippine
Commercial International Bank (PCIB).
Taking into account that deposit and a series
of withdrawals, Leticia Tupasi-Valenzuela
had a total deposits of P36,770.41, with
Prudential Bank.
Leticia Tupasi-Valenzuela issued a post-
dated check in the amount of P11,500.00 in
favor of one Belen Legaspi. It was issued to
Legaspi as payment for jewelry which
private respondent had purchased. Legaspi,
who was in jewelry trade, endorsed the
check to one Philip Lhuillier, a businessman
also in the jewelry business. When Lhuillier
deposited the check in his account with the
PCIB, Pasay Branch, it was dishonored for
being drawn against insufficient funds.
Upon her return from the province, Leticia
Tupasi-Valenzuela was surprised to learn of
the dishonor of the check. She went to the
Valenzuela Branch of Prudential Bank to
inquire why her check was dishonored and
was told that there was no need to review
her passbook since the ledger was the best
proof that her account has no sufficient
funds.
It was found out that the check in the
amount of P35,271.60 deposited by Leticia
Tupasi-Valenzuela was credited in her
savings account only after a period of 23
days. So the P11,500.00 check was
redeposited by Lhuillier on June 24, 1988,
and properly cleared on June 27, 1988.
Issue: Whether or not the Court of
Appeals has erred and gravely abused its
discretion in awarding moral and exemplary
damages and attorney's fees to be paid by
Prudential Bank to Leticia Tupasi-
Valenzuela
Held:
No. Admittedly, as found by both the
respondent appellate court and the trial
court, petitioner bank had committed a
mistake. It misposted private respondent's
check deposit to another account and
delayed the posting of the same to the proper
account of the private respondent. The
mistake resulted to the dishonor of the
private respondent's check.
In cases decided by the Supreme Court, it
ruled that “In every case, the depositor
expects the bank to treat his account with
the utmost fidelity, whether such account
consists only of a few hundred pesos or of
millions. The bank must record every
single transaction accurately, down to the
last centavo, and as promptly as possible.
This has to be done if the account is to
reflect at any given time the amount of
money the depositor can dispose of as he
sees fit, confident that the bank will
deliver it as and to whomever he directs.
A blunder on the part of bank, such as the
dishonor of a check without good reason,
can cause the depositor not a little
embarrassment if not also financial loss
and perhaps even civil and criminal
litigation. The point is that as a business
affected with public interest and because of
the nature of its functions, the bank is under
obligation to treat the account of its
depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship”.
J. Surrender of instrument upon discharge
The instrument must be surrendered to the
payor whenever discharge is by payment by
or in behalf of the principal debtor, payment
by the accommodated party, by renunciation
or by any other ground that discharges
simple contracts. If the instrument is not
surrendered, 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.
State Investment House vs CA
Facts:
Nora Moulic issued to Corazon
Victoriano, as security for pieces of
jewellery to be sold on commission, two
postdated checks in the amount of fifty
thousand each. Thereafter, Victoriano
negotiated the checks to State Investment
House, Inc. When Moulic failed to sell the
jewellry, she returned it to Victoriano before
the maturity of the checks. However, the
checks cannot be retrieved as they have been
negotiated. Before the maturity date Moulic
withdrew her funds from the bank contesting
that she incurred no obligation on the checks
because the jewellery was never sold and the
checks are negotiated without her
knowledge and consent. Upon presentment
of for payment, the checks were dishonoured
for insufficiency of funds.
STATE sued to recover the value of the
checks plus attorney's fees and expenses of
litigation. The trial court dismissed the
Complaint as well as the Third-Party
Complaint, and ordered STATE to pay
MOULIC P3,000.00 for attorney's fees,
which the CA affirmed. Hence, this petition.
Issue:
Whether the post-dated checks merely
issued as security is a ground for the
discharge of the instrument
Held:
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.
Obviously, MOULIC may only invoke
paragraphs (c) and (d) as possible grounds
for the discharge of the instrument. But, the
intentional cancellation contemplated under
paragraph (c) is that cancellation effected by
destroying the instrument either by tearing it
up, burning it, or writing the word
"cancelled" on the instrument. The act of
destroying the instrument must also be made
by the holder of the instrument intentionally.
Since MOULIC failed to get back
possession of the post-dated checks, the
intentional cancellation of the said checks
is altogether impossible.

On the other hand, the acts which will

discharge a simple contract for the payment
of money under paragraph (d) are
determined by other existing legislations
since Sec. 119 does not specify what these
acts are, e.g., Art. 1231 of the Civil
Code7 which enumerates the modes of
extinguishing obligations. Again, none of
the modes outlined therein is applicable in
the instant case as Sec. 119 contemplates of
a situation where the holder of the
instrument is the creditor while its drawer is
the debtor. In the present action, the payee,
Corazon Victoriano, was no longer
MOULIC's creditor at the time the jewelry
was returned.

Correspondingly, MOULIC may not

unilaterally discharge herself from her
liability by the mere expediency of
withdrawing her funds from the drawee
bank. She is thus liable as she has no legal
basis to excuse herself from liability on her
checks to a holder in due course.