MODULE LAW ON NEGOTIABLE INSTRUMENTS

CHAPTER 7-DISCHARGE

Learning Objectives:

1. Understand discharge of instruments.

2. Distinguish the liability of parties to discharged instruments.
3. Determine the rights of the party.
4. Understand the renunciation.

I. DISCHARGE

A. DISCHARGE OF NEGOTIABLE INSTRUMENT

What is discharge?

It is the 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.

What are the methods for discharge of instrument?

1. Payment by principal debtor:

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a. By or on behalf of principal debtor

b. At or after its maturity
c. To the holder thereof
2. In good faith and without notice that the holder’s title is defective
3. Payment by accommodated party
4. Intentional cancellation of instrument by the holder (by expressly stating it in the
instrument or when the instrument is torn up, burned or destroyed)
5. Any act which discharges a simple contract for the payment of money under Art.
1231 of the NCC specifically remission, novation, and merger.

Note: Loss of the negotiable instrument will not extinguish liability; compensation is not
available so long as an obligation is evidenced by a negotiable instrument. (Commercial
Law Review, Villanueva, 2009ed)

Reacquisition by principal debtor in his own right. Reacquisition must be:

1. By the principal debtor

2. In his own right
3. At or after date of maturity (instrument is discharged; if made before, it may be
renegotiated) (Sec. 119)

II. DISCHARGE OF PARTIES SECONDARILY LIABLE

What are the methods of discharge of secondary parties?

1. Any act which discharges the instrument;

2. Intentional cancellation of his signature by the holder
3. Discharge of prior party which may be made when signature is stricken out
4. Valid tender of payment by a prior party;
5. Release of the principal debtor, unless holder expressly reserves his right of
recourse against the said subsequent parties

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6. Extension of time of payment, unless:

7. Extension is consented to by such party
8. Holder expressly reserves his right of recourse against such party. (Sec. 120)

What are the effects of payment by persons secondarily liable?

1. Instrument is not discharged

2. It only cancels his own liability and that of the parties subsequent to him
3. GR: Instrument may be renegotiated
4. XPN:
 Where it is payable to the order of a third person, and has been paid by
the drawer; and
 Where it is paid by the accommodated party

Note: (a) and (b) has the same effect as payment by the party primarily liable.

5. Person paying is remitted to his former rights (as regards prior parties) and he
may strike out his own and all subsequent indorsements. (Sec. 121)

III. RIGHT OF A PARTY WHO DISCHARGED INSTRUMENT

What are the rights of a party who discharged the instrument?

1. GR: The party so discharging the instrument 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.
2. XPN: Where it is payable to the order of a third person, and has been paid by the
drawee; &
3. It was made or accepted for accommodation, and has been paid by the party
accommodated.

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IV. RENUNCIATION

What is renunciation?

The act of surrendering a claim or right with or without recompense (a personal

defense).

How is renunciation by holder made?

1. Must be written
2. If oral, the instrument must be surrendered to the person primarily liable. (Sec.
122)

What are the effects of renunciation?

1. Made in favor of principal debtor made at or after the maturity (made absolutely
and unconditionally) of the instrument – discharges the instrument (Sec. 122)
2. Made in favor of a secondary party may be made by the holder before, at or after
maturity – discharges only the secondary parties and all subsequent to him (Sec.
122)
3. Renunciation does not affect the rights of a holder in due course without notice.
(Sec. 120)

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What is the rule regarding cancellation of an instrument?

It is presumed intentional. It is inoperative if unintentional, or under a mistake or

without the authority of the holder. But where an instrument or any signature appears to
have been cancelled, burden of proof lies on the party who alleges that the cancellation
was made unintentionally, or under a mistake or without authority. (Sec. 123)

V. MATERIAL ALTERATION

CONCEPT

What is a material alteration?

Any change in the instrument which affects or changes the liability of the parties
in any way.

What constitutes a material alteration?

Any alteration which changes the:

1. Date
2. Sum payable, either principal or interest;
3. Time or place of payment

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4. Number or relations of the parties

5. Medium or currency in which payment is to be made; or
6. Adds a place of payment when no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect. (Sec.
125)

Note: The change in the date of indorsement is not material where the date is not
necessary to fix the maturity of the instrument.

To know more information about CHAPTER 7-DISCHARGED

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=N5X_87BE78c

To know more information about Chapter 7-Renunciation

PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=0Re2e7R9Yss

REFERENCE:

Law on Negotiable Instruments

Author: Hector S. De Leon
Hector S. De Leon, Jr.

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