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Negotiable Instruments Law
Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

Article 3 Commercial Paper(Continue)

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Part 6 Discharge

Section 3-601.  Discharge of Parties.

(1)  The extent of the discharge of any party from liability on an instrument is governed by the sections on

(a)     payment or satisfaction (Section 3-603); or

(b)     tender of payment (Section 3-604); or

(c)     cancellation or renunciation (Section 3-605); or

(d)     impairment or right of recourse or of collateral (Section 3-606); or

(e)     reacquisition of the instrument by a prior party (Section 3-208); or

(f)       fraudulent and material alteration (Section 3-407); or

(g)     certification of a check (Section 3-411); or

(h)     acceptance varying a draft (Section 3-412); or

(i)       unexcused delay in presentment or notice of dishonor or protest (Section 3-502).

(2)  Any party is also discharged from his liability on an instrument to another party by any other act or agreement with such party which would discharge his simple contract for the payment of money.

(3)  The liability of all parties is discharged when any party who has himself no right of action or recourse on the instrument

(a)     reacquires the instrument in his own right; or

(b)     is discharged under any provision of this Article, except as otherwise provided with respect to discharge for impairment of recourse or of collateral (Section 3-606).

Section 3-602.  Effect of Discharge Against Holder in Due Course.

No discharge of any party provided by this Article is effective against a subsequent holder in due course unless he has notice thereof when he takes the instrument.

Section 3-603.  Payment or Satisfaction.

(1)  The liability of any party is discharged to the extent of his payment or satisfaction to the holder even though it is made with knowledge of a claim of another person to the instrument unless prior to such payment or satisfaction the person making the claim either supplies indemnity deemed adequate by the party seeking the discharge or enjoins payment or satisfaction by order of a court of competent jurisdiction in an action in which the adverse claimant and the holder are parties.  This subsection does not, however, result in the discharge of the liability

(a)     of a party who in bad faith pays or satisfies a holder who acquired the instrument by theft or who (unless having the rights of a holder in due course) holds through one who so acquired it; or

(b)     of a party (other than an intermediary bank or a payor bank which is not a depositary bank) who pays or satisfies the holder of an instrument which has been restrictively endorsed in a manner not consistent with the terms of such restrictive endorsement.

(2)  Payment of satisfaction may be made with the consent of the holder by any person including a stranger to the instrument.  Surrender of the instrument to such a person gives him the rights of a transferee (Section 3-201).

Section 3-604.  Tender of Payment.

(1)  Any party making tender of full payment to a holder when or after it is due is discharged to the extent of all subsequent liability for interest, costs and attorney's fees.

(2)  The holder's refusal of such tender wholly discharges any party who has a right of recourse against the party making the tender.

(3)  Where the maker or acceptor of an instrument payable otherwise than on demand is able and ready to pay at every place of payment specified in the instrument when it is due, it is equivalent to tender.

Section 3-605.  Cancellation and Renunciation.

(1)  The holder of an instrument may even without consideration discharge any party

(a)     in any manner apparent on the face of the instrument or the endorsement, as by intentionally canceling the instrument or the party's signature by destruction or mutilation, or by striking out the party's signature; or

(b)     by renouncing his rights by a writing signed and delivered or by surrender of the instrument to the party to be discharged.

(2)  Neither cancellation nor renunciation without surrender of the instrument affects that title thereto.

Section 3-606.  Impairment of Recourse or of Collateral.

(1)  The holder discharges any party to the instrument to the extent that without such party's consent the holder

(a)     without express reservation of rights releases or agrees not to sue any person against whom the party has to the knowledge of the holder a right of recourse or agrees to suspend the right to enforce against such person the instrument or collateral or otherwise discharges such person, except that failure or delay in effecting any required presentment, protest or notice of dishonor with respect to any such person does not discharge any party as to whom presentment, protest or notice of dishonor is effective or unnecessary; or

(b)     unjustifiably impairs any collateral for the instrument given by or on behalf of the party or any person against whom he has a right of recourse.

(2)  By express reservation of rights against a party with a right of recourse the holder preserves

(a)     all his rights against such party as of the time when the instrument was originally due; and

(b)     the right of the party to pay the instrument as of that time; and

(c)     all rights of such party to recourse against others.


Part 7 Advice of International Sight Draft  

Section 3-701.  Letter of Advice of International Sight Draft.

(1)  A "letter of advice" is a drawer's communication to the drawee that a described draft has been drawn.

(2)  Unless otherwise agreed, when a bank receives from another bank a letter of advice of an international sight draft, the drawee bank may immediately debit the drawer's account and stop the running of interest pro tanto.  Such a debit and any resulting credit to the account covering outstanding drafts leaves in the drawer full power to stop payment or otherwise dispose of the amount and creates no trust or interest in favor of the holder.

(3)  Unless otherwise agreed and except where a draft is drawn under a credit issued by the drawee, the drawee of an international sight draft owes the drawer no duty to pay an unadvised draft but if it does so and the draft is genuine, may appropriately debit the drawer's account.

Part 8 Miscellaneous

Section 3-801.  Drafts in a Set.

(1)  Where a draft is drawn in a set of parts, each of which is numbered and expressed to be an order only if no other part has been honored, the whole of the parts constitutes one draft, but a taker of any part may become a holder in due course of the draft.

(2)  Any person who negotiates, indorses or accepts a single part of a draft drawn in a set thereby becomes liable to any holder in different holders in due course to whom different parts have been negotiated the holder whose title first accrues has all rights to the draft and its process.

(3)  As against the drawee the first presented part of a draft drawn in a set is the part entitled to payment, or if a time draft to acceptance and payment.  Acceptance of any subsequently presented part renders the drawee liable thereon under subsection (2).  With respect both to a holder and to the drawer payment of a subsequently presented part of a draft payable at sight has the same effect as payment of a check notwithstanding an effective stop order (Section 4-407).

(4)  Except as otherwise provided in this section, where any part of a draft in a set is discharged by payment or otherwise the whole draft is discharged.

Section 3-802.  Effect of Instrument on Obligation for Which It Is Given.

(1)  Unless otherwise agreed, where an instrument is taken for an underlying obligation

(a)     the obligation is pro tanto discharged if a bank is drawer, maker or acceptor of the instrument and there is no recourse on the instrument against the underlying obligor; and

(b)     in any other case the obligation is suspended pro tanto until the instrument is due or if it is payable on demand until its presentment.  If the instrument is dishonored, action may be maintained on either the instrument or the obligation; discharge of the underlying obligor on the instrument also discharges him on the obligation.

(2)  The taking in good faith of a check which is not postdated does not of itself so extend the time on the original obligation as to discharge a surety.

Section 3-803.  Notice to Third Party.

Where a defendant is sued for breach of an obligation for which a third person is answerable over under this Article, he may give the third person written notice of the litigation, and the person notified may then give similar notice to any other person who is answerable over to him under this Article.  If the notice states that the person notified may come in and defend and that if the person notified does not do so he will in any action against him by the person giving the notice be bound by any determination of fact common to the two litigations, then unless after seasonable receipt of the notice the person notified does come in and defend he is so bound.

Section 3-804.  Lost, Destroyed or Stolen Instruments.

The owner of an instrument which is lost, whether by destruction, theft or otherwise, may maintain an action in his own name and recover from any party liable thereon upon due proof of his ownership, the facts which prevent his production of the instrument and its terms.  The court may require security indemnifying the defendant against loss by reason of further claims on the instrument.

Section 3-805.  Instruments Not Payable to Order or to Bearer.

This Article applies to any instrument whose terms do not preclude transfer and which is otherwise negotiable within this Article but which is not payable to order or to bearer, except that there can be no holder in due course of such an instrument.  

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