This section is from the book "American Commercial Law Series ", by Alfred W. Bays. Also available from Amazon: American commercial law series.
MEANING OF TERM "DISCHARGE." A contract is discharged when it loses its force and effect as a legal obligation.
A discharged contract is one which for some reason is no longer in force. It has lost its former legal effect. A paper may express a promise to pay money, yet the promise may be without any life in it, and not be expressive of any legal obligation. This may be true because the promise has been performed, or for other reasons that we will note.
Discharge may be (1) by payment in due course by or for the debtor; (2) by payment of accommodation paper by accommodated party; (3) by intentional cancellation by holder; (4) by the acquisition of the paper at or after maturity by the principal debtor.
(1) By payment in due course by or for the principal debtor.
Payment by the maker or acceptor is the most usual method of discharging a note or bill. Assuming that there are no accommodation parties, but that the party primarily liable on the paper pays it when it becomes mature or after its maturity this discharges it and it thereafter becomes only so much waste paper so far as any legal obligation is concerned. One who pays such paper ought, of course, as a matter of ordinary precaution, to see that it is cancelled and given to him. And we have seen that one who pays negotiable paper must take care that he is paying it to the holder.
150. Id. Secs. 119-125.
If a party secondarily liable upon an instrument pays it, the instrument is not discharged
(2) By payment in case of accommodation paper by the party accommodated.
The real debtor may not be the maker or acceptor. One may have become maker of a note or acceptor of a bill for the accommodation of another, that is, in order to lend him credit. Such accommodator is liable just as a surety or guarantor is liable, although the creditor may know it is not really his debt. In such a case it is the real debtor's duty to pay the debt and if the accommodating party pays it, he may sue the party whom he has accommodated. If the real debtor pays the instrument, then it is discharged.
(3) By intentional cancellation by holder.
If a cancellation is by the holder with the intention of destroying the instrument, as such, it destroys it, but if the cancellation is unintentional, or under a mistake or by anyone without authority, the instrument is not destroyed.
(4) By acquisition of the instrument by the principal debtor, at or after maturity.
If one makes a note and at or after its maturity buys it from the holder that is the same thing as paying it so far as discharging the instrument is concerned.
A party secondarily liable is discharged (1) by an act that discharges the instrument; (2) by intentional cancellation of his signature by the holder; (3) by a valid tender of payment by a prior party; (4) by release of the principal debtor without express reservation of right against party secondarily liable; (5) by extension of time of payment without reserving right against the party secondarily liable; (6) by failure of the holder to take the proper steps to hold him.
A party secondarily liable is discharged by a failure of a holder, as we have seen, to take the proper steps to fix his liability. In such a case the instrument itself is not discharged; it still continues as a bill, note or check, as the case may be, and the parties primarily liable may be sued upon it.
So in other ways a party secondarily liable may be discharged though the instrument continues in force. One is a valid tender of payment by a prior party. This does not discharge the instrument. One who owes money on a note is not allowed to escape his liability if he may succeed in making a tender which is not accepted. Tender of money under a debt due must be kept good. But such tender does discharge a party secondarily liable. This debt is not really his. He is to be held only in case the party does not pay who ought to pay. Consequently his rights are strictly guarded, and if a tender is made to such holder which such holder ought to have accepted, such secondary party may say that he will not be held for a failure of the party primarily liable to pay when the holder might once have had payment of his debt.
Such tender, however, must be a valid tender. A tender in something not "legal tender," or a tender of the wrong amount or a tender before the instrument was due, would not be good tenders, and would not discharge.
If the holder releases the principal debtor, this will discharge the party secondarily liable, unless at the time the release is made there is an express reservation made by the holder of his rights against the party secondarily liable.
The same may be said of a contract to extend the time of payment. A mere failure to sue, or a mere unenforceable agreement, which is too indefinite to amount to a contract or is without consideration, and which therefore could not be enforced by the debtor, would not release the party secondarily liable, if his liability had been duly fixed by the taking of the proper steps.
A payment by a party secondarily liable does not discharge the instrument, but such party is put in his former position and may assert his rights against prior parties, or again negotiate the paper.
A party secondarily liable may pay the paper without discharging it, because it yet has to be paid by the party primarily liable. Thus suppose A makes a note to B, who indorses to C, who indorses to D. D being unable at maturity to secure payment by A, or any other party, C, in order to avoid suit, pays it. He now stands in the same situation as though he had not indorsed it, and may sue the prior parties as he could have done before indorsement. Or, striking out his indorsement to D, he may negotiate it to E, and thus make himself again secondarily liable if the instrument cannot be enforced byE.
If an instrument is altered in any material respect it releases all parties who did not authorize or assent thereto except that an innocent purchaser for value may enforce it as it was before the alteration.
If an instrument is materially altered, it releases those who do not authorize or assent to such alteration except as far as innocent purchasers are concerned, and these may enforce the instrument as it was in its original form. We have already noted what is a material alteration, and have considered how one by a negligent drawing of paper may estop himself to say that it is altered as against innocent parties.
A holder may expressly renounce his rights against any party either by so stating in writing or delivering up the instrument.
One may renounce rights against any party or may renounce all rights upon the instrument. If he does so, the party or the instrument, as the case may be, is discharged. The discharge must be in writing, or in case of renunciation of rights against the principal debtor, it may be by delivery up of the instrument.