HOW IS A NI DISCHARGED? (SEC.

119)
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 maturity in his own right.

WHAT ARE THE REQUISITES OF PAYMENT IN DUE COURSE?

1. Payment be made at or after date of maturity
2. Payment must be to the holder
3. Payment must be made by the debtor in good faith and without notice that the holder’s title is defective

WHAT ARE THE MODES OF EXTINGUISHING AN OBLIGATION/CONTRACT?

1. Payment or performance
2. Loss of the thing due
3. Compensation
4. Confusion or merger
5. Condonation or remission of debt
6. Novation

PAYMENT BY THE PRINCIPAL DEBTOR

1. It must be payment in due course
2. Made by the principal debtor

WHO IS A PRINCIPAL DEBTOR?

A person ultimately bound to pay the debt. Not just maker or drawee but also an accommodated party.

Illustration:
A makes a note payable to B on November 30, 2013. B negotiated the note to C, D, E then F. On November 5,
2013, A won Lotto and decided to pay F.

Questions:
Was there a payment in due course?
None
Is the instrument already discharged by the payment of A, a principal debtor?
No
Of course as a holder, you will accept the payment. What will you do then?
Present the instrument for payment then surrender it after it has already been paid.
As the maker who paid, you are now holding the bill, what can you do with it?
You can renegotiate it.
What if it was C who won the Lotto and paid F on November 5, 2013. Is the instrument discharged?
No
Of course you will accept the payment. What will you do then?
Present the instrument for payment then surrender it after it has already been paid.
As an indorser who paid, you are now the holder of the bill, what can you do with it?
Renegotiate it and prior parties remain as parties to the instrument while C can cancel the indorsement of his
subsequent parties.

PAYMENT BY THIRD PERSON

Is the instrument discharged?
No
So what is the presumption if a non-party pays the instrument with his own money?
He bought it and not paid it off; unless he is an agent
Payment by the accommodation party, discharged?
No
-It is the accommodated party who is the principal debtor
-If paid by the accommodation party, he is not discharged and still has to enforce the instrument against the party
he accommodated for reimbursement
-But still it depends whether if accommodated party’s liability is primary or secondary (only if it was made or
accepted for his accommodation)
Payment by drawer, indorser, discharged?
No
Payment by a referee in case of need, discharged?
No
Payment by check or a NI?
No. Shall produce the effect of payment only when it is accepted and encashed or when through the fault of the
creditor, it has been impaired

CANCELLATION
Requisites?
1. Intentional
2. Made by the holder
Ways of cancelling?
Tearing, burning, writing across the instrument the word “cancelled”

Illustration:
A makes a note payable to B. B negotiated it to C, D, E then F. A found the note on F’s desk and with the intention
of canelling it, burns it.

Questions:
Is the note discharged?
No
Same set of facts but it was the agent of F who burned it, discharged?
Yes provided he was authorized
Same set of facts but F inadvertently tore the note into pieces, discharged?
No
Same set of facts but F under a mistaken belief that it was already paid, intentionally wrote the word
“cancelled” on the instrument, discharged?
No
On the date of maturity, party liable cannot pay hence holder gave him an extension of time to pay,
discharged?
No

PRINCIPAL DEBTOR ACQUIRES INSTRUMENT

Requisites:
1. Reacquisition must be by the principal debtor;
2. In his own right;
3. At or after date of maturity

In his own right, what does it mean?

Not in a representative capacity

Illustration:
A makes a note payable to B and the latter negotiated it to C, D, E then F. A buys the note from F under
authorization from his (A) principal, X.
Questions:
Is the note discharged?
No

When instrument is reacquired before maturity?

No discharge, it will merely constitute as a negotiation back to the principal debtor who may renegotiate the
instrument and may cancel the indorsements subsequent to him

Illustration:
A makes a note payable to B on January 1, 2014. B negotiated it to C, D, E then F. On November 1, 2013, A, the
principal debtor, acquired the instrument in his own right.

Questions:
Is the instrument discharged?
No
What can A do then?
May renegotiate and cancel the indorsements of B, C, D and E.

DISCHARGE BY OPERATION OF LAW

-judgment is obtained on a bill or a note
-discharge in bankruptcy

WHEN PERSONS SECONDARILY LIABLE ARE DISCHARGED? (SEC. 120)

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 a valid tender of payment made by a prior party;
5. By a release of the principal debtor unless the holder’s 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 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.

BY ANY ACT WHICH DISCHARGES THE INSTRUMENT

Sec. 119

INTENTIONAL CANCELLATION
A makes a note payable to B and the latter negotiated it to C, D, E then F.
Let’s say holder F intentionally cancelled the signature/indorsement of an indorser (ex. D), that indorser is
discharged.
Is consideration necessary to discharge by intentional cancellation?
No

DISCHARGE OF PRIOR PARTY

Same facts, holder intentionally cancelled C’s indorsement, in that case, D and E are also discharged, that is, the
subsequent parties of the party who had been discharged are discharged as well
Rationale:
Because if D or E was made to pay by F, they would not be able to exercise their right of recourse against C.

DISCHARGE BY OPERATION OF LAW

Not included
VALID TENDER OF PAYMENT BY A PRIOR PARTY
Same set of facts, D validly tendered payment to F but the latter refused without any justification. In that case, D is
discharged.
Who is also discharged?
E also since a prior part had been discharged
What does valid tender of payment mean?
When payment had been produced and offered to a person holding a claim or demand thereto at the time it was
due or thereafter
Can there be a valid tender of payment before date of maturity?
Yes but creditor can validly refuse for interest, etc. purposes

RELEASE OF PRINCIPAL DEBTOR

A makes a note payable to B and the latter negotiated it to C, D, E then F. F releases A from liability.
What is the effect?
Parties secondarily liable are discharged.
Why?
Because they are deprived of their right of recourse against A, and that this discharges the instrument
Is the rule absolute?
No
If holder reserved his right against parties secondarily liable, to whom will they ask reimbursement if they
pay since A is already discharged?
Such reservation includes an implied reservation that when parties secondarily liable pay, they can ask
reimbursement from A
Can there be an implied reservation?
No, express only.
Release, requisites?
It must be by the holder and not by operation of law and it must be for value
Releases of an accommodation party, parties secondarily liable are discharged?
No, accommodation party is not a principal debtor

EXTENSION OF TIME
A makes a note payable to B and the latter negotiated it to C, D, E then F. F agrees to extend the time of payment.
What is the effect?
Parties secondarily liable are discharged
Is the rule absolute?
No
Requisites of extension?
It must be a binding contract supported by a valuable consideration and it must be made with the principal debtor
and not with a third party

RIGHT OFPARTY WHO DISCHARGES THE INSTRUMENT

Where the instrument is paid by a party secondarily liable, is it discharged?
No
But what are his rights after paying?
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. Again negotiate the instrument
There is an exception, but it only applies to the right to renegotiate or to all?
No, 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

Illustration:
A draws a bill drawn against X and payable to the order of B and the latter indorsed it to C, D, E then F. Suppose
that D, an indorser, pays the bill
What are the effects?
1. The instrument is not discharged but it discharges D, the party paying;
2. D is remitted to his former rights against prior parties to him (C, B and A) (So even if at the time of
payment, D is not a HIDC because he knew of some defects of the instrument, but before he was a HIDC,
he was remitted to his former rights, so he can enforce the instrument free from personal defenses)
3. D can strike out his indorsement and subsequent indorsements (E and F)
4. D can renegotiate the instrument

RENUNCIATION BY HOLDER
What is the difference by renunciation and release/discharge
Renunciation is a gratuitous waiver of liability (hence without valuable consideration)
Form of renunciation?
Must be express and in writing, except when the instrument is delivered to person primarily liable, renunciation may
be oral
Time for making renunciation?
Before, at or after maturity
When renunciation discharges the instrument?
1. If it is absolute and unconditional;
2. It is made in favour of the person primarily liable;
3. It is made at or after maturity.

EFFECTS OF RENUNCIATION TO A HOLDER IN DUE COURSE

Illustration:
A draws a bill drawn against X and payable to the order of B and the latter indorsed it to C, D, E then F. Suppose F
absolutely renounces his rights against X.
What is the effect?
It discharges the instrument
But F negotiated the instrument further to G, who took the instrument in good faith and for value without
being notified of such renunciation. Can G enforce the instrument against X?
Yes
PROTEST
When protest necessary?
1. When foreign bill is dishonoured by non-acceptance;
2. Where foreign bill is dishonored by non-payment, it not having been previously dishonoured by non-
acceptance
3. Where the bill contains a referee in case of need, it must be protested for non-payment before it is presented
for payment to the referee in case of need
When is it merely optional?
1. Where bill is lost or destroyed or wrongly detained from the person entitled to hold it
2. When it was previously protested for non-acceptance, protest for non-payment is optional

HOW PROTEST MADE

1. Must be annexed to the bill or must contain a copy thereof;
2. Notarized
3. And must specify the ff.:
a. The time and place of presentment
b. The fact that presentment was made and the manner thereof
c. The cause or reason for protesting the bill
d. The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be
found
Reasons for requiring protest?
For uniformity in international transactions because most countries require it
When protest be made?
On the day of its dishonour, unless delay is excused
Place where making protest?
-As a rule, it must be at the place where bill is dishonoured. Except where the bill is payable at a place other than
the residence of the drawee
-Where the residence of the drawee and place of payment are different , it may be protested at either place
WAREHOUSE RECEIPTS LAW
Warehouse Receipt
A document of title which is issued by a warehouseman.

Warehouseman
A person lawfully engaged in the business of storing goods for profit

Negotiability of Warehouse Receipts

A receipt in which it is stated that the goods received will be delivered: a)to the bearer; or b)to the order of any
person named in such receipt is a negotiable receipt

Formalities
Prescribed in Sections 2 and 3 of the WRL. However, the absence of any of the provisions will not necessarily
invalidate the recipt

Negotiation of Warehouse Receipts

A bearer document of title is not always a bearer document in the sense that a special indorsement has the effect of
converting the bearer instrument into an order instrument

Effect of an Order Warehouse Receipt which was Only Delivered

a. Transferee acquires title against the transferor;
b. There is no direct obligation of the warehouseman
c. The transferee can compel the transferor to complete the negotiation by indorsing the instrument. The
negotiation takes effect on the date of the indorsement only

Effects of Negotiating a Warehouse Receipt

Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner of the
goods. Negotiation carries with it both the title to and possession of the property. And in negotiating, the transferee
acquires the following rights: a)such title to the goods as the person negotiating the receipt to him had or had ability
to convey to a purchaser in good faith for value; b)such title to the goods as the depositor or person to whose order
the goods were to be delivered by the term of the receipt had or had ability to convey to a purchaser in good faith
for value; c)the direct obligation of the warehouseman to hold possession of the goods for him according to the
terms of the receipt as fully as if the warehouseman had contracted directly with him

Who may Negotiate a Warehouse Receipt

1. By the owner thereof;
2. By any person to whom the possession or custody of the receipt has been entrusted by the owner, if, by the
terms of the recipt, the warehouseman undertakes to deliver the goods to the order of the person to whom
the possession or custody of the receipt has been entrusted, or if, at the time of such entrusting, the receipt
is in such form that it may be negotiated by delivery
*Hence, even a thief can negotiate the receipt but it should be in such a form that he need not forge any
signature and only if it is a bearer warehouse receipt

Warranties
If the warehouseman failed to deliver the goods, the indorser or one who negotiates for value shall not be liable to
the bona fide purchaser. He does not guarantee the performance of the obligation of the warehouseman as the case
may be

As regards the transferor (negotiating by indorsement or delivery), he warrants that: a)the receipt is genuine; b)he
has a legal right to negotiate or transfer it; c)that he has knowledge of no fact which should impair the validity or
worth of the receipt; d)that he has a right to transfer the title to the goods and that the goods are merchantable or
fit for a particular purpose
Non-Negotiable Receipts
A non-negotiable receipt shall have plainly placed upon its face by the warehouseman issuing it ‘non-negotiable.’ In
case of failure to do so, a holder of the receipt who purchased it for value supposing it to be negotiable, may, at his
option, treat such receipt as imposing upon the warehouseman the same liabilities he would have incurred had the
receipt been negotiable

Rights of Transferee of a Non-Negotiable Receipt

1. Acquires the title of the goods subject to the terms of any agreement with the transferor;
2. Acquires the right to notify the warehouseman of the transfer to him of such receipt and thereby to acquire
the direct obligation of the warehouseman to hold possession of the goods for him according to the terms
of the receipt
*Prior to the notification, the title of the transferee to the goods and the right to acquire the obligation of the
warehouseman may be defeated by a)the levy of an attachment or execution upon the goods by a creditor of the
transferor or 2)by a notification of the warehouseman by the transferor or a subsequent purchaser from the
transferor of a subsequent sale of the goods by the transferor

Warehouseman’s Defenses for Non-Delivery or Misdelivery

1. Loss or destruction of the goods without the fault of the bailee (warehouseman);
2. Failure to satisfy the bailee’s lien;
3. Failure to surrender the negotiable document of title;
4. Lack of willingness to sign acknowledgment;
5. Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property or
possession in the goods, not to make such delivery;
6. The bailee has no information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods;
7. Delivery to a claimant with a better right;
8. Attachment or levy of the goods by a creditor where the document is surrendered or its negotiation is
enjoined or the document is impounded;
9. Where the document of title is attached by a creditor;

Warehouseman’s Lien
1. All lawful charges for storage and preservation of the goods;
2. All lawful claims for money advanced;
3. All reasonable charges and expenses for notice, and advertisements of sale
*It is necessary however that the charges that are present at the time of the issuance of the receipt must be so
stated in the receipt with the amounts thereof specified, otherwise, the warehouseman shall have no lien

Loss of Lien
1. By surrendering possession thereof;
2. By refusing to deliver the goods when a demand is made with which he is bound to comply

Attachment or Levy
Goods represented by a warehouse receipt can not, while in the possession of the warehouseman, be attached by
garnishment or otherwise, or be levied upon under an execution unless the recipt be first surrendered to the
warehouseman or its negotiation enjoined
TRUST RECEIPTS LAW
BACKGROUND
A background that issues a letter of credit has the right to ask for reimbursement from the applicant-buyer. This
obligation to pay the issuing bank may also be secured by trust receipts. Under the law, the bank becomes the
entruster of the goods while the buyer-importer is the entrustee. The goods will in effect be released by the bank to
the buyer by the delivery of the document of title/bill of lading covering the goods. The buyer as entrustee is
obligated to sell the goods and to apply the proceeds thereof to the payment of the loan extended by the entruster-
bank. The buyer will only get the balance of the proceeds of the sale after making such application.

TRUST RECEIPT
A security transaction intended to aid in financing importers or dealers in merchandise by allowing them to obtain
delivery of goods under certain covenants

Sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments for
profit

Usually, the entruster releases the goods to the entrustee so that the latter may sell the goods. However, the purpose
is not limited to sale. Hence, the goods may also be released for other purposes substantially equivalent to the
following: a)the sale or the procurement of their sale; b)the manufacture or processing with purpose of ultimate
sale; c)the loading, unloading, shipment or transhipment or otherwise dealing with them in a manner preliminary or
necessary to their sale

The entrustee may still be criminally liable under the Trust Receipts Law even if the goods that were released by
virtue of the trust receipts were not resold but were used for his own use

No agency relationship is established when the entrustee executes the trust receipt. However, an entrustee’s breach
will make him liable for estafa.

PARTIES
Entrustee – the person having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor-in-interest of such person for the purpose or purposes specified in the trust receipt
agreement

Entruster – the person holding title over the goods, documents, or instruments subject of a trust receipt
transaction, and any successor-in-interest of such person

OBLIGATIONS OF THE PARTIES

Entruster releases the possession of the goods to the entrustee upon the latter’s execution of the trust receipt

Entrustee binds himself 1)to hold the goods in trust for the entrustor; 2)sell or otherwise dispose of the goods and
to turn over to the entrustor the amount still owing; 3)to return the goods if unsold

NATURE OF ENTRUSTER’S TITLE

Since the interest of the entruster is a mere security interest: 1)the entruster shall not, merely by virtue of such
interest, be responsible as principal or as vendor under any sale or contract to sell made by the entrustee; 2)the
entrustee bears the loss of the goods after delivery to him

Entrustee is not the owner of the property. Hence, the entrustee cannot mortgage the property. However, it is
believed that the entrustee is still the owner and the entruster acquires only security interest. The entrustee cannot
mortgage the property not because he is not the owner but because he does not have free disposal of the property
to be mortgaged.
NOVATION OF AGREEMENT
It extinguishes the obligation under the existing trust receipt. Hence, the liability for breach would be purely civil in
nature and no criminal liability can be imposed
LETTERS OF CREDIT
An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or
other demands for payment upon compliance with the conditions specified in the credit

1)It must be issued in favour of a definite person and not to order; 2)be limited to a fixed and specified amount or
to one or more undetermined amount but with maximum limit stated exactly

PARTIES
Buyer – one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the
document of title

Issuing Bank – the bank issuing the letter of credit which undertakes to pay the seller upon receipt of the draft and
proper documents of titles and to surrender the documents to the buyer upon reimbursement

Unless expressly provided, the liability of the issuing bank is solidary with the buyer-applicant

Seller – one who, in compliance with the contract of sale, ships the goods to the buyer and delivers the documents
of title and draft to the issuing bank

Advising (Notifying) Bank – maybe utilized to convey to the seller the existence of the credit

Confirming Bank – a bank which will lend credence to the letter of credit issued by a lesser known issuing bank;
the confirming bank is directly liable to pay the seller-beneficiary

Paying Bank – a bank which undertakes to encash the drafts drawn by the exporter/seller

Negotiating Bank – instead of going to the place of the issuing bank to claim payment, the buyer may approach a
negotiating bank to have the draft discounted

INDEPENDENT CONTRACTS
There are at least three (3) distinct and independent contracts involved in a letter of credit namely: 1)the contract of
sale between the buyer and the seller; 2)the contract of the buyer with the issuing bank; 3)the letter of credit proper

INDEPENDENCE PRINCIPLE
Contracts involved in a letter of credit arrangement are to be maintained in a state of perpetual separation

A direct consequence of the independence principle is the rule that banks only deal with documents and not with
goods, services or obligations to which they relate

EXCEPTION ON THE INDEPENDENCE PRINCIPLE

The exception is when there is fraud or forgery in the underlying transaction or the tender documents

KINDS OF LETTERS OF CREDIT

Confirmed LC – whenever the beneficiary stipulates that the obligation of the opening bank shall also be made the
obligation of another bank to himself

Irrevocable LC – a definite undertaking on the part of the issuing bank where the provisions contained in the
credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with

Revolving LC – one that provides for renewed credit

Back to Back LC – a credit with indentical documentary requirements and covering the same merchandise as
another letter of credit

Standby LC – a security arrangement for the performance of certain obligations. It can be drawn against only if
another business transaction is not performed
BULK SALES LAW
When is a Sale Considered a Sale in Bulk?
1. There is a sale, transfer, mortgage or disposition other than in the ordinary course of trade and the regular
prosecution of the business
2. The sale is of all or substantially all of the business or trade
3. When the sale is of all or substantially all of the fixtures and equipment used in business

Purpose
It seeks toprevent the defrauding of creditors by the secret sale or disposal in bulk of all or substantially all of a
merchant’s stock of goods

Formalities Required
a. The sale in bulk to be accompanied by sworn statement of the vendor/mortgagor listing the names and
addresses of and amounts owing to creditors
b. The sworn statement shall be furnished to the buyer
c. The seller is required to prepare an inventory of stock to be sold
d. The seller is required to notify the creditors of projected sale at least 10 days before such sale

When Formalities Need Not be Complied With

a. Sale is made in the ordinary course of business
b. There is a waiver from all the creditors and must be written
c. Sale is by virtue of a judicial order
d. Those sold by assignee in insolvency or those beyond the right of creditors
e. When properties are exempt from execution

Effects of Violation of Bulk Sale Law

a. Sale in bulk is void as to creditors (but valid between parties)
b. Purchaser holds property in trust for seller
c. Purchaser is liable to seller’s creditors for properties forming part of bulk, and already disposed by him
DOCUMENT OF TITLE
Includes any bill of lading, dock warrant, quedan or warehouse receipt for delivery of goods, or any other document
used in the ordinary course of business in the sale or transfer of goods, as proof of possession or control of the
goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive either by
indorsement or by delivery, goods represented by such document

Bill of Lading
A document that serves as evidence of receipt of goods for shipment issued by a common carrier

Quedan
A warehouse receipt that covers sugar

Dock Warrant
A warrant given by dock owners to the owner of merchandise imported and warehoused on the dock, upon the
faith of the bills of lading as a recognition of his title to the goods

Functions of Documents of Title

1. It is a contract
2. Evidence of receipt of goods
3. Represents the goods and therefore operates as transferrable document that carries with it control over the
goods. It is used to pass title to the goods. It can be a negotiable document of title.