Notes on Negotiable Instruments Law.

What is discharge of a negotiable instrument?

Discharge means release from further liability:

1. As to the paper itself it is the end of the contractual obligation.

2. As to the parties it is the release of some or all of them from further
obligation and liability under the instrument.

Is there such a thing as partial discharge of the negotiable instrument?

Yes, there is partial discharge of the instrument when the contractual obligation
behind the negotiable instrument persists, but some or only part of the obligors are
released.

Suppose that all the obligors are released. What happens to the instrument?

When all of the obligors are released, the instrument is released or discharged as
well.

How is an instrument discharged?

The negotiable instrument is discharged by:

1. By payment in due course, by or on behalf of the principal debtor;

2. By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
3. By the intentional cancellation thereof, by the holder;
4. By any other act which will discharge a simple contract, for the
payment of money.
5. When the principal debtor, becomes the holder of the instrument, at or
after the maturity in his own right.

What is payment in due course?

 According to Section 88 of the Negotiable Instruments Law, payment in due
course is payment made at or after the maturity date of the negotiable instrument, to the
holder thereof, in good faith and without notice that his title is defective.

Payment, as provided by Article 1249 of the New Civil Code, means payment in
money. Mere delivery of another negotiable instrument does not produce the effect of
payment.

What is the effect of payment by a secondary party?

When payment is made by a secondary party, the negotiable instrument is not

discharged, but such party is remitted to his former rights, with regards to prior parties.
That is, he becomes a holder again, and not just an endorser. He may strike out his own
and all subsequent endorsements, and re-negotiate the instrument.

Section 121 provides the following exceptions:

1. When the instrument is payable to the order of a third person, and

payment was made by the drawer;
2. Where it was made or accepted for accommodation, and has been paid
by the party accommodated.

Why is a prior party who reacquires the instrument, permitted to strike out the
endorsements?

The re-acquisition of the negotiable instrument produces the effect of remitting

the endorser to the rights of a holder. He is free to strike out his endorsement and the
other subsequent endorsements, because these are not necessary to his title.

Why does the payment made by an accommodated party discharge the instrument?

The accommodated partys payment discharges the instrument, because the

payment is in effect, one made by the principal party. The accommodating party merely
acts as a surety for the accommodated party. Thus, payment by the accommodated
party is tantamount to payment made by the principal debtor, discharging the
instrument.
Why does payment made by the drawer, discharge the instrument under Section 121
of the Negotiable Instruments Law?

The drawer is the party ultimately liable, in case the instrument is drawn payable
to the order of a third person.

Suppose the third person who paid actually did so, with the intention of acquiring
title over the instrument. Is the instrument discharged?

No, in this case, the payor is not considered a third person, within the meaning of
Section 119 of the Negotiable Instruments Law. The payor is either a holder, or an
assignee.

Note that payment should only be made to the holder of the instrument.

Is it possible for a payor who has previously made payment, be made to pay again?

Yes, the rightful holder who may have been unlawfully deprived of the
instrument, may still enforce payment against a payor, who previously paid with the
knowledge of the defect in the previous holders title.

How does cancellation discharge the instrument?

Intentional cancellation discharges the negotiable instrument. If the cancellation

is by mistake or by accident, it does not discharge the negotiable instrument. It is
intentional when the holder writes, cancelled on the negotiable instrument, or tears it
up or burns it.

What are the acts which discharge simple contracts?

Contracts are discharged by:

1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission of the debt;
 4. Confusion or merger of the rights of the creditor and debtor;
5. Compensation;
6. Novation;
7. Annulment or rescission;
8. Fulfillment of a resolutory condition;
9. Prescription.

How are parties secondarily liable, released from the negotiable instrument?

Parties who are secondarily liable are released from the negotiable instrument by:

1. By any act which discharges the instrument;

2. By the intentional cancellation of his signature by the holder;
3. By the discharge of a prior party;
4. By valid tender of payment;
5. By a release of the principal debt, unless the holders right of recourse
against the party secondarily liable, is expressly reserved.
6. By any agreement, binding upon the holder, to extend the time of
payment, or to postpone the holders right to enforce the instrument,
unless made with the consent of the party secondarily liable, or unless
the right of recourse is expressly reserved.

Note that the discharge of instruments can be found in Article 1231 of the New
Civil Code.

An endorser whose endorsement is struck out, and all the endorsers subsequent
to him, are relieved from the liability in the negotiable instrument. Discharge here, is
limited to the discharge by some act of the creditor. It excludes discharge by operation
of law, as in bankruptcy, insolvency or mere failure to give notice of dishonor.

When the holder of the instrument refuses valid tender of payment, it discharges
the parties secondarily liable.

The release of the principal debtor, discharges the instrument, and persons
secondarily liable lose their right of recourse, against the principal debtor. The exception
is when the right of recourse is expressly reserved.

The agreement to extend the period for payment, or to postpone payment,

necessarily affects the original undertaking of the persons secondarily liable. The
assurance of the drawer, and the endorsers, is to pay according to the tenor of the
instrument. The exceptions are:

1. The extension was made with the consent of the parties

secondarily liable;
2. The right of recourse against the parties secondarily liable, is
expressly reserved.