An Overview of Obligation Discharges

A negotiable instrument creates an obligation between the parties who have signed the instrument. The main
form of obligation is between the primarily liable party and the holder of the
negotiable instrument, but because of the nature of liability, secondarily
liable parties still have some element of obligation linking them to the
negotiable instrument.

In general, every party has some slight element of
obligation connected to the negotiable instrument until those obligations are
discharged somehow. The discharge of such obligations revolves around
essentially “ending” the negotiable instrument in some fashion, by
dealing with it either through cancellation or payment.

Payment or Tender of Payment

Payment of the negotiable instrument is the main way to
discharge all obligation of all parties from the instrument. If the primarily
liable party tenders payment equal to the value of the negotiable instrument to
the holder of the instrument, then all obligations are discharged, as the negotiable instrument has been paid.

But there are some nuances to the tender of payment as a
means of discharge for the negotiable instrument, primarily because payment can
come in different amounts and forms and can be exchanged between different
parties. For example, one party might tender payment for part of the negotiable
instrument, trying to pay off part of a promissory note. Another example might
include one endorser on a check attempting to pay off his or her own obligation
regarding the check, which would still potentially leave other parties obligated. Furthermore, the party receiving payment
might not accept the payment, for whatever reason, which would seemingly
prevent the obligation from being discharged.

Fortunately, the Uniform Commercial Code deals with all
such issues in different ways. The overriding point of the Uniform Commercial
Code with regard to payment is that it is the duty of the payer to only tender
payment and not necessarily to ensure that such payment is accepted. As long as
payment is tendered, obligation will be discharged to the same value of the
payment. For more information on payment as a means to discharge obligation in
a negotiable instrument, click the link.

Cancellation or Surrender

The second way of discharging obligation from a
negotiable instrument is to cancel the instrument. Whereas payment can be made
by the liable parties, the only party that can cancel the instrument is the
holder of the instrument. Such cancellation would require genuine intent on the
part of the holder to cancel the instrument.

It could take any number of possible forms, from
physically destroying the negotiable instrument, to writing a message across
its face, but each form requires intent. If, for instance, the negotiable instrument were destroyed by chance or
mistake, then it would not cancel the instrument or discharge the instrument’s
obligations. The holder also reserves the right to cancel the obligations of
some endorsers on the instrument by crossing out their signatures, or the
holder can surrender the instrument to an obligated party in order to similarly
discharge that party’s obligations.

If the instrument were to be stolen, however, then it
would
not count as a cancellation because, again, cancellation requires intent on the part of the holder. To learn
more about cancellation of a negotiable instrument and how it removes the
obligation of involved parties, follow the link.

Method of Payment or Tender of Payment

One of the methods to discharge any debt originating from a negotiable instrument is the tender of payment for that instrument. This would seem to be a fairly obvious method of discharging the negotiable instrument, as payment would, essentially, be simply fulfilling the conditions of the negotiable instrument.

But it is possible in some cases for the party to whom tender of payment is made to choose not to accept that payment. In such a case, the Uniform Commercial Code (UCC) provides for specific rules as to exactly what happens to any debt or obligation to pay the negotiable instrument.

Essentially, any payment, no matter what size, paid on a negotiable instrument will always result in some form of discharge of obligation. If, for instance, Alan had given Quinn a promissory note with the agreement that Alan would make a payment of $100 to Quinn by a date 3 months from the note’s issuance, then Alan would have an obligation to make a payment of $100 to Quinn.

If Alan then gave Quinn $50 in an attempt to pay off part of that obligation, then according to the Uniform Commercial Code, $50 of that $100 debt would be discharged. If Quinn refused to accept the tender of payment made by Alan, then legally $50 of the debt would still be discharged regardless of the fact that Quinn refused to accept the payment.

In other words, the obligation of the payer to make tender of payment ends with that tender of payment; it does not extend to ensuring that the payment is accepted. Furthermore, if interest were involved, then the party providing tender of payment would not be required to pay any interest on the payment amount after the due date of the loan.

There is no law requiring acceptance of payment when tender of payment is made; hence the rules in the UCC concerning payment and its discharge of debt. In the end, the main point of the UCC in this matter is that as long as the primarily liable party is ready, willing, and able to make payment of the appropriate amount by or at the appropriate time in the appropriate ways, then it does not matter whether or not that tender of payment is accepted, as the obligation of the primarily liable party will have been discharged.

Tender of payment, when made from the primarily liable party to the holder of the negotiable instrument, will discharge all debt from all parties involved if that payment is made in full, regardless of whether or not the holder accepts payment. This covers situations in which the issuer of a promissory note fully pays the note’s holder, and situations in which the drawee of a draft pays the current holder in good faith.

If, however, any tender of payment is made by a party other than the primarily liable party, or is made to any party other than the current holder, then the rules on exactly which parties will have been discharged will change.

Tender of payment made by any party other than the primarily liable party will discharge the obligations of that party and any subsequent party, and no one else. Thus, such tender of payment would essentially protect the payer without discharging all the obligation surrounding the negotiable instrument.