the same bank for $500,000.

00 in favor of H
Bank, a foreign bank to purchase outboard
motors. Likewise, Ricardo executed a Surety
Agreement in favor of AC Bank.

LETTERS OF CREDIT
Definition and Nature
DEFINITION

Letters of credit (L/C) are those issued by

one merchant to another, or for the
purpose of attending to a commercial
transaction (Art. 567, Code of Commerce).
A letter of credit is one whereby one person
requests some other person to advance
money or give credit to a third person,
and promises that he will repay the same
to the person making the advancement, or
accept the bills drawn upon himself for the
like amount (Campos, Notes and Selected
Cases on Negotiable Instruments Law).
A written instrument whereby the writer
requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee (Transfield
Philippines v. Luzon Hydro, 2004).
An engagement by a bank or other
person made at the request of a customer
that the issuer shall honor drafts or other
demands of payment upon compliance
with the conditions specified in the credit
(Prudential Bank v.
Intermediate Appellate Court, 1992).
PURPOSE
Its purpose is to substitute for, and support,
the agreement of the buyer-importer to pay
money under a contract or other
arrangement, but does not necessarily
constitute as a condition for the perfection of
such arrangement (Reliance
Commodities, Inc. v. Daewoo Industrial Co.,
Ltd., 1993)
Letters of Credit: Mortgage (2005)
Ricardo mortgaged his fishpond to AC Bank to
secure a P1 Million loan. In a separate
transaction, he opened a letter of credit with
1

The outboard motors arrived and were

delivered to Ricardo, but he was not able to
pay the purchase price thereof.
a) Can AC Bank take possession of the
outboard motors? Why?
b) Can AC Bank also foreclosed the mortgag
over the fishpond? Explain. (5%)
Suggested answer:
a) No, for AC Bank has no legal standing,
much less a lien, on the outboard motors
Insofar as AC Bank is concerned, it has
privity with the person of Ricardo under
the Surety Agreement, and a lien on the
fishpond based on the real estate
mortgage constituted therein.
Yes, but only to enforce payment of the
principal loan of P1 Million secured by the re
estate mortgage on the fishpond.

ESSENTIAL REQUISITES OF LETTERS OF

CREDIT
(1) Issued in favor of a definite person and
not to order.
(2) Limited to a fixed and specified
amount, or to one or more undetermined
amounts, but within a maximum the limit
of which has to be stated exactly.
Those which do not have one of these
conditions shall be mere letters of
recommendation. (Art. 568, Code of
Commerce)

NATURE
(1) Financial device L/Cs are developed by
merchants as a convenient and relatively sa
mode of dealing with sales of goods to satis
the seemingly irreconcilable interests of a
seller, who refuses to part with his goods
before he is paid, and a buyer, who
wants to have control of the goods befo
paying. (Bank of America,
NT&SA v. Court of Appeals, 1993)

A letter of credit is one of the modes of

payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign
Exchange Rules and Regulations," dated
13 April 1993, by which commercial banks
sell foreign exchange to service payments
for, e.g., commodity imports (Reliance
Commodities v. Daewoo, 1993).
(2) Composite of three distinct contracts
An L/C transaction involves three distinct
but intertwined relationships:
(a) First Contract between the party
applying for the L/C
(buyer/importer/account party) and the party
for whose benefit the L/C is issued
(seller/exporter/beneficiary).
(b) Second Contract between the buyer and
the issuing bank. This contract is sometimes
called the "Application and Agreement" or the
"Reimbursement Agreement".
(c) Third Contract between the issuing bank
and the seller, in order to support the
contract, under (a) above (Reliance
Commodities v. Daewoo, 1993).
Letter of Credit: Certification from
Consignee (1993)
BV agreed to sell to AC, a Ship and
Merchandise Broker, 2,500 cubic meters of
logs at $27 per cubic meter FOB. After
inspecting the logs, CD issued a purchase
order.
On the arrangements made upon instruction
of the consignee, H&T Corporation of LA,
California, the SP Bank of LA issued an
irrevocable letter of credit available at sight in
favor of BV for the total purchase price of the
logs. The letter of credit was mailed to FE
Bank with the instruction to forward it to the
beneficiary. The letter of credit provided that
the draft to be drawn is on SP Bank and that
it be accompanied by, among other things, a
certification from AC, stating that the logs
have been approved prior shipment in
accordance with the terms and conditions of
the purchase order.

Before loading on the vessel chartered by A

the logs were inspected by custom inspecto
and representatives of the Bureau of Forest
who certified to the good condition and
exportability of the logs. After the loading w
completed, the Chief Mate of the vessel
issued a mate receipt of the cargo which
stated that the logs are in good condition.
However, AC refused to issue the required
certification in the letter of credit. Because
the absence of certification, FE Bank refuse
to advance payment on the letter of credit.
1) May Fe Bank be held liable under the lett
of credit? Explain.
2) Under the facts above, the seller, BV,
argued that FE Bank, by accepting the
obligation to notify him that the
irrevocable letter of credit has been
transmitted to it on his behalf, has
confirmed the letter of credit.
Consequently, FE Bank is liable under th
letter of credit. Is the argument tenable?
Explain.
Suggested Answer:
1) No. The letter or credit provides as a
condition a certification of AC. Without
such certification, there is no obligation o
the part of FE Bank to advance payment
the letter of credit.
No. FE Bank may have confirmed the letter
credit when it notified BV, that an irrevocab
letter of credit has been transmitted to it on
its behalf. But the conditions in the letter of
credit must first be complied with, namely
that the draft be accompanied by a
certification from AC. Further, confirmation
a letter of credit must be expressed.

TYPES OF LETTERS OF CREDIT

AS TO THE TYPE OF THE MAIN
CONTRACT
(1) Commercial L/C The main transactio
involves a contract of sale. The credit is
payable upon the presentation by the seller
documents that show he has taken
affirmative steps to comply with the sales
agreement. The beneficiary of a commercia
credit must demonstrate by documents tha

he has performed his contract (Transfield

Philippines v. Luzon Hydro, 2004).
(2) Standby L/C Used in non-sale
settings. The credit is payable upon
certification of a party's nonperformance of
the agreement. The creditor-beneficiary of
the standby credit must certify that the
debtor-applicant has not performed the
principal obligation. (Transfield Philippines v.
Luzon Hydro, 2004).
AS TO REVOCABILITY
(1) Revocable L/C One which can be
revoked by the issuing bank without the
consent of the buyer and seller
(2) Irrevocable L/C One which the
issuing bank cannot revoke without the
consent of the buyer and seller (Feati Bank
and Trust Co. v. CA, 1991)
AS TO THE OBLIGATION ASSUMED BY
CORRESPONDENT BANK
(1) Unconfirmed L/C One which continues
to be the obligation of the issuing bank
(2) Confirmed L/C One which is supported
by the absolute assurance to the
beneficiary that the confirming bank will
undertake the issuing bank's obligation
as its own according to the terms and
conditions of the credit (Feati Bank and
Trust Co. v. CA, 1991)

Parties to a Letter of
Credit
RIGHTS AND OBLIGATIONS OF THE
PARTIES
There are at least three parties to a letter of
credit:

(a) to pay the seller upon receipt of

the draft and proper documents of
title; and
(b) to surrender the documents to the
buyer upon reimbursement.

The obligation of the issuing bank to pay th

seller is direct, primary, absolute, definite a
solidary with the buyer, in the absence of
stipulation in the letter of credit (MWSS
Daway, 2004).

(3) Seller/Importer/Beneficiary one who

ships the goods to the buyer in
compliance with a contract of sale an
delivers the documents of title and
draft to the issuing bank to recover
payment.

Depending on the transaction, the numbe

of parties to the letter of credit may be
increased. Thus, the different types of
correspondent banks:

(4) Advising/Notifying Bank the bank whic

conveys to the seller the existence of the
credit.

The bank assumes no liability except to not

and/or transmit to the seller the existence o
the letter of credit. A notifying bank is no
a privy to the contract of sale between
the buyer and the seller, its relationship is
only with that of the issuing bank and n
with the beneficiary to whom he assumes n
liability.

The bank may suggest to the seller its

willingness to negotiate, but this fact alone
does not imply that the notifying bank
promises to accept the draft drawn under th
documentary credit (Feati Bank and Trust C
v. CA, 1991).

(1) Buyer/Exporter/Account Party one

who procures the letter of credit and
obliges himself to reimburse the issuing
bank upon receipt of documents of title.

(5) Confirming Bank the bank which lends

credence to the letter of credit issued by
lesser known issuing bank.

(2) Issuing Bank the bank which

undertakes:
3

The bank assumes a direct obligation to the

seller and its liability is a primary one as
if the bank itself had issued the letter of
credit (Feati Bank and Trust Co. v. CA, 1991).

payment independent of any breach of t

main contract and precludes the issuing
bank from determining whether the main
contract is actually accomplished or not.

(6) Negotiating Bank the bank which

discounts the draft presented by the
seller.

Under this principle, banks assume no

liability or responsibility for the form,
sufficiency, accuracy, genuineness,
falsification or legal effect of any document
or for the general and/or particular conditio
stipulated in the documents or
superimposed thereon, nor do they assum
any liability or responsibility for the
description, quantity, weight, quality,
condition, packing, delivery, value or
existence of the goods represented by any
documents, or for the good faith or acts
and/or omissions, solvency, performance o
standing of the consignor, the carriers, o
the insurers of the goods, or any other pers
whomsoever (Transfield Philippines v. Luzo
Hydro, 2004; Bank of America, NT&SA v.
Court of Appeals, 1993).

The bank buys or discounts a draft under

the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
negotiation, it has no liability with respect to
the seller but after negotiation, a contractual
relationship will then prevail between the
negotiating bank and the seller (Feati Bank
and Trust Co. v. CA, 1991).
(7) Paying Bank the bank which
undertakes to encash the drafts drawn by
the seller.
Letters of Credit: Liability of a
confirming and notifying bank (1994)
In letters of credit in banking transactions,
distinguish the liability of confirming bank
from a notifying bank.
Suggested Answer:
In case anything wrong happens to the letter
of credit, a confirming bank incurs liability for
the amount of the letter of credit, while a
notifying bank does not incur any liability.
Letters of Credit: Liability of a Notifying
Bank (2003)
a) What liability, if any is incurred by an
advising or notifying bank in a letter of
credit transaction?
Suggested Answer:
It incurs no liability unless it is also the
negotiating bank.

Basic Principles of
Letter of Credit
DOCTRINE OF INDEPENDENCE
The principle of independence assures the
seller or the beneficiary of prompt
4

The concept of guarantee vis-a-vis the

concept of an irrevocable credit are
inconsistent with each other. In the first
place, the guarantee theory destroys the
independence of the bank's responsibility
from the contract upon which it was opened
In the second place, the nature of both
contracts is mutually in conflict with each
other. In contracts of guarantee, the
guarantor's obligation is merely collateral a
it arises only upon the default of the
person primarily liable. On the other hand,
an irrevocable credit the bank undertakes a
primary obligation. (Feati v. CA, 1991)

The independent nature of the letter of cred

may be:
(1) Independent in toto - the credit is
independent from the justification aspec
and is a separate obligation from the
underlying agreement;
(2) Only as to the justification aspect like in
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying

agreement. (Transfield Philippines v. Luzon

Hydro, 2004; Bank of America, NT&SA v.
Court of Appeals, 1993).
FRAUD EXCEPTION PRINCIPLE
The principle that limits the application of the
independence principle only to instances
where it would serve the commercial function
of the credit and not when fraud attends the
transaction.
In the case of Transfield Philippines v. Luzon
Hydro, 2004, the petitioner alleged
misrepresentation as constituting fraud. The
Court, however, made no ruling as to whether
the same indeed constitutes fraud.
The case asserts that the "fraud exception"
exists when the beneficiary, for the purpose
of drawing on the credit, fraudulently
presents to the confirming bank,
documents that contain, expressly or by
implication, material representations of fact
that to his knowledge are untrue. In such a
situation, petitioner insists, injunction is
recognized as a remedy available to it.
Citing Dolan's treatise on letters of credit,
petitioner argues that the independence
principle is not without limits and it is
important to fashion those limits in light of
the principle's purpose, which is to serve
the commercial function of the credit. If it
does not serve those functions, application of
the principle is not warranted, and the
common law principles of contract should
apply. (Transfield Phils. v. Luzon Hydro, 2004)
DOCTRINE OF STRICT COMPLIANCE
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must
strictly conform to the terms of the letter of
credit.
Otherwise, the issuing bank or the concerned
correspondent, bank is not obliged to perform
its undertaking under the contract.
5

The tender of documents by the beneficiary

(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated
under the letter of credit, as when it
accepts a faulty tender, acts on its own risk
and it may not thereafter be able to recover
from the buyer or the issuing bank, as the
case may be, the money thus paid to the
beneficiary (Feati v. CA, 1991).

Letters of Credit: Three Distinct Contra

Relationships (2002)
Explain the three (3) distinct but intertwined
contract relationships that are indispensable
in a letter of credit transaction.
Suggested Answer:
The three (3) distinct but intertwined contra
relationships that are indispensable in a lett
or credit transaction are:
1) Between the applicant/buyer/importer an
the beneficiary/seller/exporter the
applicant/buyer/importer is the one who
procures the letter of credit and obliges
himself to reimburse the issuing bank
upon receipt of the documents of title,
while the beneficiary/seller/exporter is th
one who in compliance with the contract
sale ships the goods to the buyer and
delivers the documents of title and draft
the issuing bank to recover payment for
the goods. Their relationship is governed
by the contract of sale.
2) Between the issuing bank and the
beneficiary/seller/exporter The issuing
bank is the one that issues the letter of
credit and undertakes to pay the seller
upon receipt of the draft and proper
documents of title and to surrender the
documents to the buyer upon
reimbursement. Their relationship is
governed by the terms of the letter of
credit issued by the bank.

Between the issuing bank and the

applicant/buyer/importer Their relationshi
is governed by the terms of the application
and agreement for the issuance of the lette
of credit by the bank.

TRUST RECEIPTS LAW

Concept of Trust Receipt
Transaction
A Trust Receipt Transaction is any
transaction by and between an entruster
and another person as entrustee, whereby
the entruster, who owns or holds absolute
title or security interests over certain
specified goods, documents or instruments,
releases the same to the possession of
the entrustee upon the latter's execution
and delivery to the entruster of a signed
document called a trust receipt [Sec. 4,
PD 115 (Trust Receipts Law)].
A Trust Receipt is a written or printed
document signed by the entruster wherein
the entrustee binds himself:
(1) to hold the designated goods, documents
or instruments in trust for the entruster;
and
(2) to sell or otherwise dispose of the goods,
documents or instruments with the
obligation to turn over to the entruster
the proceeds thereof to the extent of
the amount owing to the entruster or as
appears in the trust receipt or the goods,
documents or instruments themselves if
they are unsold or not otherwise disposed
of, in accordance with the terms and
conditions specified in the trust receipt
(Sec. 4)
Trust Receipts Law (2003)
PB & Co., Inc., a manufacturer of steel and
steel products, imported certain raw
materials for use by it in the manufacture of
its products. The importation was effected
through a trust receipt arrangement with AB
Banking Corporation. When it applied for the
issuance by AB Banking Corporation of a
letter of credit, PB & Co., Inc., did not make
any representation to the bank that it would
6

be selling what it had imported. It failed to

pay the bank. When demand was made upo
it to account for the importation, to return t
articles, or to turn-over the proceeds of the
sale thereof to the bank, PB & Co., Inc., also
failed. The bank sued PB & Co.s President
who was signatory of the trust receipt for
estafa. The President put up the defense th
he could not be made liable because there
was no deceit resulting in the violation of th
trust receipt. He also submitted that there
was no violation of the trust receipt because
the raw materials were not sold but used by
the corporation in the manufacture of its
products. Would those defenses be
sustainable? Why?
Suggested Answer:
No, the defenses are not sustainable. The la
of deceit should be sustained because the
mere failure to account for the importation,
return the articles constitutes the abuse of
confidence in the crime of estafa. The fact
that the goods arent sold but are used in th
manufacture of its products is immaterial
because a violation of the trust receipts law
happened when it failed to account for the
goods or return them to the Bank upon
demand.

LOAN/SECURITY FEATURE
A letter of credit-trust receipt arrangement
endowed with its own distinctive features a
characteristics. Under that set-up, a bank
extends a loan covered by the letter of cred
with the trust receipt as a security for the
loan. In other words, the transaction involv
a loan feature represented by the letter of
credit, and a security feature which is in
the covering trust receipt. A trust receipt,
therefore, is a security agreement, pursuan
to which a bank acquires a "security interes
in the goods (Vintola v. IBAA, 1987)

A trust receipt arrangement does not involv

a simple loan transaction between a credito
and debtor-importer. Apart from a loan
feature, the trust receipt arrangement ha
a security feature that is covered by the
trust receipt itself.

That second feature is what provides the

much needed financial assistance to our
traders in the importation or purchase of
goods or merchandise through the use of
those goods or merchandise as collateral for
the advancements made by a bank. The title
of the bank to the security is the one sought
to be protected and not the loan which is
a separate and distinct agreement (People v.
Nitafan, 1992)
OWNERSHIP OF THE GOODS,
DOCUMENTS
AND INSTRUMENTS UNDER A TRUST
RECEIPT
Entrustee is the factual owner of the goods,
documents and instruments (Prudential Bank
v. NLRC). Entruster is the real owner of the
goods, documents and instruments.
A trust receipt transaction, within the
meaning of this Decree, is any transaction
whereby the entruster, who owns or holds
absolute title or security interests over
certain specified goods, documents or
instruments... (Sec. 4)
Note: Security Interest means a property
interest in goods, documents or instruments
to secure performance of some obligations of
the entrustee or of some third persons to the
entruster and includes title, whether or not
expressed to be absolute, whenever such
title is in substance taken or retained for
security only.
Accordingly, in order to secure that the
banker shall be repaid at the critical point
that is, when the imported goods finally
reach the hands of the intended vendee
the banker takes the full title to the
goods at the very beginning; he takes it as
soon as the goods are bought and
settled for by his payments or
acceptances in the foreign country, and he
continues to hold that title as his
indispensable security until the goods are
sold.

[I]n a certain manner, (trust receipt

contracts) partake of the nature of a
conditional sale as provided by the Chattel
Mortgage Law, that is, the importer
becomes absolute owner of the imported
merchandise as soon as he has paid its pric
The ownership of the merchandise continue
to be vested in the owner thereof or in
the person who has advanced payment,
until he has been paid in full, or if the
merchandise has already been sold, the
proceeds of the
sale should be turned over to him by the
importer or by his representative or
successor in interest. (Prudential Bank v
NLRC, 1995)

Note: In the earlier cases of Vintola v. IBAA

(1987) and Abad v. Court of Appeals (1990)
the Supreme Court held that the entrustee
becomes the absolute owner of the good
documents and instruments, the entruste
being a mere security holder.

Rights of the
Entruster

VALIDITY OF THE SECURITY INTEREST

AS AGAINST THE CREDITORS OF THE
ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE
The entruster shall have the following rights
(1a) Right to the proceeds from the sale
of the goods, documents or instrument
released under a trust receipt to the
entrustee to the extent of the amou
owing to the entruster or as appears in
the trust receipt; OR
(1b) Right to the return of the goods,
documents or instruments in case of no
sale; AND
(2) Right to the enforcement of all other
rights conferred on him in the trust rece
provided such are not contrary to the
provisions of the TRL.
(3) Right to cancel the trust and take
possession of the goods, documents or

instruments subject of the trust or of the

proceeds realized therefrom at any
time upon default or failure of the
entrustee to comply with any of the terms
and conditions of the trust receipt or any
other agreement between the entruster
and the entrustee.
(4) Right to sell the goods, documents or
instruments at public or private sale at
least five days notice to the defaulting
entrustee of the intention to sell.
(5) Right to purchase the goods, documents
or instruments at a public sale.
(6) Right to recover the deficiency from the
entrustee should the proceeds of the sale
not be sufficient (Sec. 7)
Trust Receipts Law: Acts and Omissions;
Covered(2006)
What acts or omissions are penalized under
the Trust Receipts Law?
Suggested Answer:
The Trust Receipts Law (P.D. No. 115) declares
that failure to turn over goods or proceeds
realized from sale thereof, is a criminal
offense under Art. 315(1)(b) of Revised Penal
Code. The law is violated whenever the
entrustee or person to whom trust receipts
were issued fails to: (a) return the goods
covered by the trust receipts; or (b) return the
proceeds of the sale of said goods.
Trust Receipts Law: Acts and Omissions;
Covered
Is lack of intent to defraud a bar to the
prosecution of these acts or omissions?
Suggested Answer:
No. The Trust Receipts Law is violated
whenever the entrustee fails to: (1) turn over
the proceeds of the sale of the goods, or (2)
return the goods covered by the trust receipts
if the goods are not sold. The mere failure to
account or return gives rise to the crime
which is malum prohibitum. There is no
requirement to prove intent to defraud.

Obligation and Liability

of the Entrustee
8

OBLIGATIONS OF THE ENTRUSTEE

(1) To hold the goods, documents or
instruments in trust for the entruster and
shall dispose of them strictly in accordan
with the terms and conditions of the trus
receipt;
(2) To receive the proceeds in trust for the
entruster and turn over the same to t
entruster to the extent of the amount
owing to the entruster or as appears
on the trust receipt;
(3) To insure the goods for their total value
against loss from fire, theft, pilferage or
other casualties;
(4) To keep said goods or proceeds
thereof whether in money or whatever
form, separate and capable of
identification as property of the entruste
(5) To return the goods, documents or
instruments in the event of non-sale or
upon demand of the entruster; and
(6) To observe all other terms and
conditions of the trust receipt not
contrary to the provisions of the TRL. (Se
9)

LIABILITIES OF THE ENTRUSTEE

(1) Liability for Loss - The risk of loss shall
be borne by the entrustee. Loss of
goods, documents or instruments whic
are the subject of a trust receipt,
pending their disposition, irrespective of
whether or not it was due to the fault o
negligence of the entrustee, shall not
extinguish his obligation to the
entruster for the value thereof (Sec. 10
(2) Liability for failure to turn over proceeds
of sale or to return The failure shall
constitute the crime of estafa,
punishable under Art. 315 (b) of the
Revised Penal Code (Sec. 13)

Note: Penal sanction if offender is a

corporation: If the violation or offense is
committed by a corporation, partnership,
association or other juridical entities, the
penalty shall be imposed upon the
directors, officers, employees or other

officials or persons therein responsible for

the offense, without prejudice to the civil
liabilities arising from the criminal offense
(Sec. 13)
Trust Receipts Law: Liability for estafa
(1991)
Mr. Noble, as the President of ABC Trading Inc.
executed a trust receipt in favor of BPI Bank
to secure the importation by his company of
certain goods. After release and sale of the
imported goods, the proceeds from the sale
were not turned over to BPI. Would BPI be
justified in filing a case for estafa against
Noble?
Suggested Answer:
BPI would be justified in filing a case for
estafa under PD 115 against Noble. The fact
that the trust receipt was issued in favor of a
bank, instead of a seller, to secure the
importation of the goods did not preclude the
application of the Trust Receipt Law (PD 115).
Under the law, any officer or employee of a
corporation responsible for the violation of a
trust receipt is subject to the penal liability
thereunder.
Alternative Answer:
The filing of a case for estafa under the penal
provisions of the RPC would not be justified. It
has been held in Sia vs. People (161 s 655)
that corporate officers and directors are not
criminally liable for a violation of said Code.
Two conditions are required before a
corporate officer may be criminally liable for
an offense committed by the corporation, viz:
1. There must be a specific provision of
law mandating a corporation to act or
not to act; and
2. There must be an explicit statement in
the law itself that, in case of such
violation by a corporation, the officers
and directors thereof are to be
personally and criminally liable
therefore.
These conditions are not met in the penal
provision of the RPC on trust receipt.
Remedies Available
9

(1) In case of default or failure of the

entrustee to comply with the trust rece
agreement - Entruster may cancel the
trust receipt agreement, take
possession of the goods, documents,
instruments, and sell the same at an
private or public sale at least five da
from notice of intention to sell to the
entrustee.

The proceeds of any such sale, whether

public or private, shall be applied (a) t
the payment of the expenses thereof;
(b) to the payment of the expenses of re
taking, keeping and storing the goods
documents or instruments; (c) to the
satisfaction of the entrustee's
indebtedness to the entruster (Sec. 7)

(2) In case of loss of the goods,

documents, instruments -Entruster ma
claim damages from the entrustee
(Sec.10)
(3) In case of failure to turn over
proceeds of the sale of the goods,
documents or instruments or to return th
same in case of non-sale - Entruster
may file a criminal complaint for esta
(Art. 315 (b) of the Revised Penal
Code) against the entrustee (Sec. 13)

Trust Receipts Law: Liability for Estafa

(1997)
A buys goods from a foreign supplier using
credit line with a bank to pay for the goods.
Upon arrival of the goods at the pier, the
bank requires A to sign a trust receipt befor
A is allowed to take delivery of the goods. T
trust receipt contains the usual language. A
disposes of the goods and receives paymen
but does not pay the bank. The bank files a
criminal action against A for violation of the
Trust Receipts Law. A asserts that the trust
receipt is only to secure his debt and that a
criminal action cannot lie against him
because that would be violative of his
constitutional right against imprisonment f
non-payment of a debt. Is he correct?
Suggested Answer:

No. Violation of a trust receipt is criminal as it

is punished as estafa under Art. 315 of the
RPC. There is a public policy involved which is
to assure the entruster the reimbursement of
the amount advance or the balance thereof
for the goods subject of the trust receipt. The
execution of the trust receipt or the use
thereof promotes the smooth flow of
commerce as it helps the importer or buyer of
the goods covered thereby.

Warehousemans Lien
A warehouseman shall have a lien on goods
deposited or on the proceeds thereof in his
hands:
(1) For all lawful charges for storage and
preservation of the goods;
(2) For all lawful claims for money
advanced, interest, insurance,
transportation, labor, weighing, coopering
and other charges and expenses in relation
to such goods;
(3) For all reasonable charges and expenses
for notice, and advertisements of sale; and
(4) For sale of the goods where default
had been made in satisfying the
warehouseman's lien (Sec. 27)
Notes:
(1) General rule: A warehouseman shall
have lien only for charges for storage
of goods subsequent to the date of the
receipt.
(2) Exception: When the receipt expressly
enumerated other charges provided under
Sec. 27 even though the amounts thereof
are not stated in the receipt. (Sec. 30)
However, whether a warehouseman has or
has not a lien upon the goods, he is
entitled to all remedies allowed by law to a
creditor against a debtor for the collection
from the depositor of all charges and
advances which the depositor has
expressly or impliedly contracted with the
warehouseman to pay (Sec. 32).
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(1) Against what property the lien may be

enforced:
(a) Against all goods, whenever deposite
belonging to the person who is liable
debtor for the claims in regard to whic
the lien is asserted, and
(b) Against all goods belonging to
others which have been deposited
any time by the person who is
liable as debtor for the claims in
regard to which the lien is asserted
such person had been so entrusted w
the possession of goods that a pledge
of the same by him at the time of th
deposit to one who took the good
in good faith for value would have bee
valid (Sec. 28)
(2) Satisfaction of the lien by sale: In
accordance with the terms of a notice s
given, a sale of the goods by auction ma
be had to satisfy any valid claim of
the warehouseman for which he has a
lien on the goods.

Bill of Lading (1998)

1. What do you understand by a bill of
lading?
2. Explain the two-fold character of a bill o
lading.
Suggested Answer:
1. A bill of lading may be defined as a writt
acknowledgement of the receipt of good
and an agreement to transport and to
deliver them at a specified place to a
person named therein or on his order.
2. A bill of lading has a two-fold character,
namely, (a) it is a receipt of the goods to
be transported; and (b) it constitutes a
contract of carriage of the goods.

Delivery of Goods: Requisites (1998)

Luzon Warehousing Co. received from Pedro
200 cavans of rice for deposit in its
warehouse for which a negotiable receipt w
issued. While the goods were stored in said
warehouse, Cicero obtained a judgment
against Pedro for the recovery of a sum of
money. The sheriff proceeded to levy upon
the goods on a writ of execution and directe

the warehouseman to deliver the goods. Is

the warehouseman under obligation to
comply with the sheriffs order?
Suggested Answer:
No. There was a valid negotiable receipt as
there was a valid delivery of 200 cavans of
rice for deposit. In such case, the
warehouseman (LWC) is not obliged to deliver
the 200 cavans of rice deposited to any
person, except to the one who can comply
with Sec. 8 of the Warehouse Receipt Law,
namely:
1. Surrender the receipt of which he is a
holder;
2. Willing to sign a receipt for the delivery
of the goods; and
3. Pays the warehousemans liens that is,
his fees and advances, if any.
The sheriff cannot comply with these
requisites especially the first, as he is not the
holder of the receipt.
Delivery of the Goods (1991)
When is a warehouseman bound to deliver
the goods, upon a demand made either by
the holder of a receipt for the goods or by the
depositor?
Suggested Answer:
The warehouseman is bound to deliver the
goods upon demand made either by the
holder of the receipt for the goods or by the
depositor if the demand is accompanied by:
1. An offer to satisfy the warehousemans
lien;
2. An offer to surrender the receipt, if
negotiable, with such indorsements as
would be necessary for the negotiation
thereof;
3. And readiness and willingness to sign
when the goods are delivered if so
requested by the warehouseman (Ssc. 8
Warehouse Receipts Law).
Garnishment or Attachment of Goods
(1999)
A Warehouse Company received for
safekeeping 1000 bags of rice from a
merchant. To evidence the transaction, the
Warehouse Company issue a receipt
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expressly providing that the goods be

delivered to the order of said merchant.
A month after, a creditor obtained judgmen
against the said merchant for a sum of
money. The sheriff proceeded to levy on the
rice and directed the Warehouse Company t
deliver to him the deposited rice.
a) What advise will you give the Warehouse
Company? Explain.
b) Assuming that a week prior to the levy, t
receipt was sold to a rice mill on the bas
of which it filed a claim with the sheriff.
Would the rice mill have better rights to
the rice than the creditor? Explain your
answer.
Suggested Answer:
a) The 1000 bags of rice were delivered to
the Warehouse Company by a merchant,
and a negotiable receipt was issued
therefor. The rice cannot thereafter, whil
in the possession of the Warehouse
Company, be attached by garnishment o
otherwise, or be levied upon under an
execution unless the receipt be first
surrendered to the warehouseman, or its
negotiation enjoined. The Warehouse
Company cannot be compelled to deliver
the actual possession of the rice until the
receipt is surrendered to it or impounded
by the court.
b) Yes. The rice mill, as a holder for value o
the receipt, has a better right to the rice
that the creditor. It is the rice mill that ca
surrender the receipt which is in its
possession and can comply with the othe
requirements which will oblige the
warehouseman to deliver the rice, name
to sign a receipt for the delivery of the
rice, and to pay the warehousemans lien
and fees and other charges.

Negotiable Documents of Title (1992)

For a cargo or machinery shipped from
abroad to a sugar central in Dumaguete,
Negros Oriental, the Bill of Lading (B/L)
stipulated to shippers order, with notice o
arrival to be addressed to the Central. The
cargo arrived at its destination and was
released to the Central without surrender of

the B/L on the basis of the latters

undertaking to hold the carrier free and
harmless from any liability.
Subsequently, a Bank to whom the central
was indebted, claimed the cargo and
presented the original of the B/L stating that
the Central had failed to settle its obligation
with the Bank.
Was there misdelivery by the carrier to the
sugar central considering the non-surrender
of the B/L? Why?
Suggested Answer:
There was no misdelivery by the carrier since
the cargo was considered consigned to the
Sugar central per the Shippers Order
(Eastern Shipping Lines v CA, 190 s 512).
Alternative Answer:
There was misdelivery. The B/L was a
negotiable document of title because it was
to the Shippers Order. Hence, the common
carrier should have delivered the cargo to the
Central only upon surrender of the B/L. The
non-surrender of the B/L will make it liable to
holders in due course.
Ownership of Goods Stored (1992)
To guarantee the payment of a loan obtained
from a bank, Raul pledged 500 bales of
tobacco deposited in a warehouse to said
bank and endorsed in blank the warehouse
receipt. Before Raul could pay for the loan,
the tobacco disappeared from the warehouse.
Who should bear the loss, the pledgor or the
bank? Why?
Suggested Answer:
The pledgor should bear the loss. In the
pledge of a warehouse receipt the ownership
of the goods remain with depositor or his
transferee. Any contract or real security,
among them a pledge, does not amount to or
result in an assumption of risk of loss by the
creditor. The Warehouse Receipts Law did not
deviate from this rule.
Right to the Goods (2005)
Jojo deposited several cartoons of goods with
SN Warehouse Corporation. The
corresponding warehouse receipt was issued
to the order of Jojo. He endorsed the
12

warehouse receipt to EJ who paid the value

the goods deposited. Before EJ could
withdraw the goods, Melchor informed SN
Warehouse Corporation that the goods
belonged to him and were taken by Jojo
without his consent. Melchor wants to get th
goods, but EJ also wants to withdraw the
same.
1) Who has a better right to the goods? Wh
2) If SN Warehouse Corporation is uncertain
as to who is entitled to the property, wha
is the proper recourse of the corporation
Explain.
Suggested Answer:
1) EJ has a better right to the goods, being
covered by a negotiable document of titl
namely the warehouse receipts issued to
the order of Jojo. Under the Sales
provision of the Civil Code on negotiable
documents of title, and under the provisi
of the Warehouse Receipts Law, when
goods deposited with the bailee are
covered by a negotiable document of titl
the endorsement and delivery of the
document transfers ownership of the
goods to the transferee. By operation of
law, the transferee obtains the direct
obligation of the bailee to hold the goods
in his name (Art. 1513, Civil Code; Sec.
41, Warehouse Receipts Law). Since EJ is
the holder of the warehouse receipt, he
has the better right to the goods. SN
Warehouse is obliged to hold the goods i
his name.
2) SN Warehouse can file an INTERPLEADER
to compel EJ and Melchor to litigate
against each other for the ownership of
the goods. Sec. 17 of the Warehouse
Receipts Law states, If more than one
person claims the title or possession of t
goods, the warehouseman may, either a
defense to an action brought against him
for non-delivery of the goods or as an
original suit, whichever is appropriate,
require all known claimants to interplead

Unpaid Seller: Negotiation of the Recei

(1993)

A purchased from S 150 cavans of palay on

credit. A deposited the palay in Ws
warehouse. W issued to A a negotiable
warehouse receipt in the name of A.
Thereafter, a negotiated the receipt to B who
purchased the said receipt for value in good
faith.
1) Who has a better right to the deposit, S,
the unpaid vendor or b, the purchaser of
the receipt for value and in good faith?
Why?
2) When can the warehouseman be obliged
to deliver the palay to A?
Suggested Answer:
1) B has a better right than S. The right of the
unpaid seller, S, to the goods was defeated
by the act of A in endorsing the receipt to
B.
2) The warehouseman can be obliged to
deliver the palay to A if B negotiates back
the receipt to A. In that case, A becomes a
holder again of the receipt, and A can
comply with Sec. 8 of the Warehouse
Receipt Law.
Validity of stipulations excusing
warehouseman from negligence (2000)
S stored hardware materials in the bonded
warehouse of W, a licensed warehouseman
under the General Bonded Warehouse Law
(Act 3893 as amended). W issued the

13

corresponding warehouse receipt in the form

he ordinarily uses for such purpose in the
course of his business. All the essential term
required under Section 2 of the Warehouse
Receipts law (Act 2137 as amended) are
embodied in the form. In addition, the recei
issued to S contains a stipulation that W
would not be responsible for the loss of all o
any portion of the hardware materials
covered by the receipt even if such loss is
caused by the negligence of W or his
representatives or employees. S endorsed
and negotiated the warehouse receipt to B,
who demanded delivery of the goods. W
could not deliver because the goods were
nowhere to be found in his warehouse. He
claims he is not liable because of the freefrom-liability clause stipulated in the receipt
Do you agree with Ws contention? Explain.
Suggested Answer:
No, I do not agree with the contention of W.
The stipulation that W would not be
responsible for the loss of all or any
portion of the hardware materials covere
by the receipt even if such loss is caused
by the negligence of W or his
representative or employees is void. The
law requires that a warehouseman shoul
exercise due diligence in the care and
custody of the things deposited in his
warehouse.