Study Guide and Lecture notes:
Secs. 119 to 125
1) Memorize the 5 instances when an instrument is discharged.
Sec. 119. Instrument; how discharged. - A negotiable instrument is
discharged:chanroblesvirtuallawlibrary
(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.
a) Take note of the meaning of “principal debtor”
Person who is obligated to the creditor/Primarily liable to the
creditor
b) Refer to Art. 1231 on extinguishment of obligations in the Civil
Code, particularly Sec. 1, 1232 to 1251, which applies
suppletorily.
General Provisions
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. (1156a)
SECTION 1
Payment or Performance
Article 1232. Payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. (n)
Article 1233. A debt shall not be understood to have been paid unless the
thing or service in which the obligation consists has been completely
delivered or rendered, as the case may be. (1157)
Article 1234. If the obligation has been substantially performed in good faith,
the obligor may recover as though there had been a strict and complete
fulfillment, less damages suffered by the obligee. (n)
Article 1235. When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with. (n)
Article 1236. The creditor is not bound to accept payment or performance by
a third person who has no interest in the fulfillment of the obligation, unless
there is a stipulation to the contrary.
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.
(1158a)
Article 1237. Whoever pays on behalf of the debtor without the knowledge or
against the will of the latter, cannot compel the creditor to subrogate him in
his rights, such as those arising from a mortgage, guaranty, or penalty.
(1159a)
Article 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the
debtor's consent. But the payment is in any case valid as to the creditor who
has accepted it. (n)
Article 1239. In obligations to give, payment made by one who does not
have the free disposal of the thing due and capacity to alienate it shall not be
valid, without prejudice to the provisions of article 1427 under the Title on
"Natural Obligations." (1160a)
Article 1240. Payment shall be made to the person in whose favor the
obligation has been constituted, or his successor in interest, or any person
authorized to receive it. (1162a)
Article 1241. Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has
redounded to the benefit of the creditor. Such benefit to the creditor need not
be proved in the following cases:
(1) If after the payment, the third person acquires the creditor's rights;
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor's conduct, the debtor has been led to believe that
the third person had authority to receive the payment. (1163a)
Article 1242. Payment made in good faith to any person in possession of the
credit shall release the debtor. (1164)
Article 1243. Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid. (1165)
Article 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more
valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted
by another act or forbearance against the obligee's will. (1166a)
Article 1245. Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law of
sales. (n)
Article 1246. When the obligation consists in the delivery of an indeterminate
or generic thing, whose quality and circumstances have not been stated, the
creditor cannot demand a thing of superior quality. Neither can the debtor
deliver a thing of inferior quality. The purpose of the obligation and other
circumstances shall be taken into consideration. (1167a)
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses
required by the payment shall be for the account of the debtor. With regard to
judicial costs, the Rules of Court shall govern. (1168a)
Article 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestations in which the
obligation consists. Neither may the debtor be required to make partial
payments.
However, when the debt is in part liquidated and in part unliquidated, the
creditor may demand and the debtor may effect the payment of the former
without waiting for the liquidation of the latter. (1169a)
Article 1249. The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the
currency which is legal tender in the Philippines.
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.
In the meantime, the action derived from the original obligation shall be held
in the abeyance. (1170)
Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should supervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary. (n)
Article 1251. Payment shall be made in the place designated in the
obligation.
There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be at
the moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in
delay, the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
(1171a)
c) Know the effect on payment of an accommodated party.
The accommodated party, whatever his participation
may appear to be in the instrument, is actually the
principal debtor. Hence, payment by the accommodated
party will discharge the instrument.
d) Know the cancellation of the instrument and the requirement of
“intentional cancellation”.
The cancellation must be intentionally done, by the holder
thereof. Cancellation may be done in writing the word cancelled
or paid on the face of the instrument. There is also cancellation
when the 9instrument is torn up, burned, mutilated, or
destroyed. The presumption is that the cancellation is
intentional.
e) Know the effect on discharge of the grant of extension of time
to the holder.
To release parties secondarily liable, the extension of time for
payment must be a binding contract made by the holder with
the principal debtor, supported by valuable consideration and
for a definite period.
2) Determine the instances when persons secondarily liable are
discharged.
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:chanroblesvirtuallawlibrary
(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.
a) Discharge by operation of law is not included, it must be an act
of the holder.
b) Release or discharge is always with value.
3) Know the forms and time of renunciation.
FORM OF RENUNCIATION
It must be in writing and must be express
TIME FOR MAKING RENUNCIATION
1. Before maturity
2. At maturity
3. After maturity
4) Know the meaning of 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.
MEANING OF CANCELLATION
Signifies not only the drawing of criss-cross lines but also tearing,
obliterations, erasures or burning
It may be made by any other means by which the intention to cancel the
instrument may be evident
5) Know the forms of alterations and take note of its effect on the
rights of a holder in due course.
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.
RIGHTS OF ONE NOT HOLDER IN DUE COURSE
• Where an instrument has been materially altered, it is avoided in the
hands of one who is not a holder in due course as against a prior party who
has not assented to the alteration
WHERE INSTRUMENT NOT AVOIDED AS TO HOLDER NOT IN DUE
COURSE
1. A party who has made the material alteration
2. A party who has authorized the material alteration
3. A party who has assented to the material alteration
4. Any subsequent indorsers
RIGHTS OF HOLDER IN DUE COURSE
• He may enforce the instrument in its original tenor
• He could recover the altered tenor to any party who has made,
authorized or assented the alteration, or any subsequent indorser of
the instrument
NO DISTINCTION BETWEEN FRAUDULENT AND INNOCENT
ALTERATION
RIGHT TO COLLECT ORIGINAL CONSIDERATION
• When the alteration wasn't fraudulently done, the holder may recover the
original consideration
WHERE DRAWEE BANK PAYS ALTERED AMOUNT, DRAWER HAS THE
RIGHT TO HAVE HIS ACCOUNT DEBITED WITH CORRECT AMOUNT
ONLY
BANKS ARE BOUND BY THE 24-HOUR CLEARING HOUSE RULE AND
MUST NOTIFY THE COLLECTING BANKS WITHIN 24 HOURS OF
ALTERATION OF CHECKS
(a) There is no distinction between an fraudulent or intentional
alteration.
6) Know when there is a valid tender of payment.
Tender of Payment and Consignation. Article 1256. If the creditor
to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility
by the consignation of the thing or sum due.
7) Know the right of the party that discharges and 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 regard all prior parties, and he
may strike out his own and all subsequent indorsements and against
negotiate the instrument, except:chanroblesvirtuallawlibrary
(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.
8) Know the effect of the renunciation of a holder, its forms and time.
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.
A renunciation of debt evidenced by a negotiable instrument
must be made by a written declaration to that effect. If oral, it
should be accompanied by a surrender of instrument to the
person primarily liable thereon.
. Renunciation by a holder discharges an instrument when:
1. it is absolute and unconditional
2. made in favor of a person primarily liable
3. made at or after maturity of the instrument
4. in writing or the instrument is delivered up to the person primarily
liable (Sec. 122 NIL)
1. Applies only to renunciation by the unilateral act of the holder
without consideration and in cases where the instrument is not
delivered up to the person intended to be released
2. Renunciation—act of surrendering a right or claim without
recompense but it can be applied with equal propriety to the
relinquishing of a demand upon an agreement supported by a
consideration
9) Know the instance when there is a material alteration.
Sec. 125. What constitutes a material alteration. - Any alteration which
changes:chanroblesvirtuallawlibrary
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment:chanroblesvirtuallawlibrary
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(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.
For reference:
DISCHARGE OF NEGOTIABLE INSTRUMENTS
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.
PAYMENT BY PRINCIPAL DEBTOR
• In order to discharge the instrument, the payment must be a payment in
due course, and second, a payment made by the principal debtor
• If payment is made before the date of maturity, the instrument is not
discharged as the payment is not in due course
• Where payment is made by a party who is not a primary obligor or an
accommodation party, his payment only conceals his own liability and those
who are obligated after him. All prior parties primarily or secondarily
liable on the bill, are liable to such a payer, and the payer may cancel
indorsements subsequent to his own and reissue the paper, and it will
be valid as against the prior parties
PAYMENT BY THIRD PERSONS
• If payment is made by a third person, the instrument is not discharged
because payment is not made by the person principally liable
• Not any one who desires may pay the instrument and then recover of
the maker. He must be a person who has in some way made himself liable
for the payment of the instrument.
• Exception: where an instrument has been protested and someone
voluntarily makes payment supra protest or for honor. And if the
instrument was to give money in payment, the instrument is
discharged.
SUMMARY OF DISCHARGE BY PAYMENT
1. Payment by a person ultimately liable, whatever his position in the
paper, is a discharge of the instrument
2. Payment by an accommodation party isn’t a discharge of the
instrument, whatever his position thereon and whether the
indorsement be regular or anomalous
3. Payment by the drawer or indorser is not a discharge of the instrument
PRINCIPAL DEBTOR
• Person ultimately bound to pay the debt
PAYMENT BY CHECK OR OTHER NEGOTIABLE PAPER
1. When they actually have been cashed or
2. When, through the fault of the creditor, they have been impaired
• A creditor isn’t bound to accept a check in satisfaction of his demand
because a check, even if good when offered, doesn’t meet the
requirements of legal tender
WAIVER OF OBJECTION TO TENDER OF PAYMENT BY CHECK
• It is the general rule that an object to a tender must, to be available to
the creditor, be made in good time and that the grounds for objection must be
specified; and that an objection to tender on one ground is a waiver of all
other objections which could have been made at that time
• It is ordinarily required of one to whom payment is offered in the form of
a check, that he makes his objection at the time of the offer of by check
instead of an offer of payment in money
• Reason for the rule—to afford the debtor the opportunity to secure the
specific money which the law prescribes shall be accepted in payment of
debts
PAYMENT BY ACCOMMODATED PARTY
• The one ultimately liable on the accommodation instrument is the
latter
• Hence, his payment in due course discharges the instrument as if
payment was made by the principal debtor under paragraph (a)
INTENTIONAL CANCELLATION
• The cancellation must be intentional and made by the holder
• There must be an intention to cancel a negotiable instrument by
the holder thereof as such intention is an essential element of
discharge on a negotiable instrument and a negotiable note in a torn
condition is presumed cancelled by the holder thereof
WILL AN EXTENSION OF TIME GRANTED BY THE HOLDER TO THE
DEBTOR DISCHARGE THE INSTRUMENT?
• No, according to the majority view
• Because while it isn’t omitted in Section 120, it is omitted in Section
119
• Shows the legislative intent to that an extension of time by the holder will
not discharge the instrument
PRINCIPAL DEBTOR ACQUIRES INSTRUMENT
• Reacquisition must be by the principal debtor and in his own right at or
after the date of maturity
• In his own right—not in a representative capacity
WHEN INSTRUMENT REACQUIRED BEFORE MATURITY
• A reacquisition by the principal debtor in his own right but before
maturity will not discharge the instrument
• It will merely be a negotiation back to the principal debtor
DISCHARGE BY OPERATION OF LAW
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.
EFFECT OF SECTION 120 IS A SURETYSHIP
• Generally the courts regard this provision as exclusive, as a complete
codification of the law of discharge of secondary parties by the six
methods therein set forth
ACTS THAT DISCHARGE INSTRUMENT
• Any of the acts that will discharge an instrument under Section
119 will discharge a party secondarily liable thereon, such as payment
in due course by the maker. This will discharge the indorsers in the note.
DISCHARGE BY OPERATION OF LAW IS NOT INCLUDED
1. Discharge by reason of bankruptcy
2. Discharge of a party not given due notice of dishonor
3. Discharge by the statute of limitations
VALID TENDER OF PAYMENT
• If D an indorser validly tenders payment and F unjustifiably refuses
to do accept, D is discharged
• Tender of payment: act by which one 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
RELEASE MUST BE ACT OF HOLDER
RELEASE MUST BE FOR VALUE
EFFECT OF RELEASE ON ACCOMMODATION MAKER OR ACCEPTOR
• General rule is that he is not discharged by the holder’s release of the
principal debtor even if the release be made with knowledge or true
relation of the parties and, conversely, the release of the
accommodation maker or acceptor doesn’t discharge the principal
debtor through the latter occupies the position of a party secondarily liable on
the instrument
EXTENSION OF TIME
• If the holder agrees to extend the time of payment, the indorsers are
discharged
• However, where the extension of time is consented to by the
party secondarily liable, he is not discharged. Also, where the holder
expressly reserves his right of recourse against the party secondarily liable,
the latter is not discharged.
REQUISITES OF AGREEMENT FOR EXTENSION OF TIME
1. It must be a binding contract, supported by valuable consideration and
for a definite period
2. It must be made with the principal debtor and not with a third
party
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.
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.
APPLICATION OF SECTION 122
1. Applies only to renunciation by the unilateral act of the holder without
consideration and in cases where the instrument is not delivered up to the
person intended to be released
2. Renunciation—act of surrendering a right or claim without recompense
but it can be applied with equal propriety to the relinquishing of a
demand upon an agreement supported by a consideration
FORM OF RENUNCIATION
It must be in writing and must be express
TIME FOR MAKING RENUNCIATION
1. Before maturity
2. At maturity
3. After maturity
WHEN RENUNCIATION DISCHARGES INSTRUMENT
1. Renunciation discharges the instrument when it is absolute and
unconditional
2. It is made in favor of the person primarily liable
3. It is made at or after maturity
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.
MEANING OF CANCELLATION
Signifies not only the drawing of criss-cross lines but also tearing,
obliterations, erasures or burning
It may be made by any other means by which the intention to cancel the
instrument may be evident
WHEN CANCELLATION IS INOPERATIVE
1. When made unintentionally
2. When made under mistake
3. When made without the authority of the holder
BURDEN OF PROOF IS UPON THE PERSON WHO CLAIMS THAT
THE CANCELLATION IS INOPERATIVE
