Discharge of Negotiable Instruments
Promissory note /
Pages: 8 (2939 words) /
Published: Nov 22nd, 2014
Explain how the liability of a party to pay an instrument is normally discharged.
Discharge of Liability
The obligation of a party to pay an instrument is discharged (1) if he meets the requirements set out in Revised Article 3 or (2) by any act or agreement that would discharge an obligation to pay money on a simple contract. Discharge of an obligation is not effective against a person who has the rights of a holder in due course of the instrument and took the instrument without notice of the discharge [3–601].
The most common ways that an obligor is discharged from his liability are:
1.Payment of the instrument.
2.Cancellation of the instrument.
3.Alteration of the instrument.
4.Modification of the principal’s obligation that causes loss to a surety or impairs the collateral.
5.Unexcused delay in presentment or notice of dishonor with respect to a check (discussed earlier in this chapter).
6.Acceptance of a draft [3–414(c) or (d); 3–415(d)]; as noted earlier in the chapter, a drawer is discharged of liability of a draft that is accepted by a bank (e.g., if a check is certified by a bank) because at that point the holder is looking to the bank to make the instrument good.
1.Discharge by Payment
Generally, payment in full discharges liability on an instrument to the extent payment is (1) by or on behalf of a party obligated to pay the instrument and (2) to a person entitled to enforce the instrument. For example, Arthur makes a note of $1,000 payable to the order of Bryan. Bryan indorses the note “Pay to the order of my account no. 16154 at First Bank, Bryan.” Bryan then gives the note to his employee, Clark, to take to the bank. Clark takes the note to Arthur, who pays Clark the $1,000. Clark then runs off with the money. Arthur is not discharged of his primary liability on the note because he did not make his payment consistent with the restrictive indorsement. To be discharged, Arthur has to pay the $1,000 into Bryan’s