CODE OF COMMERCE

December 5, 2001
Commerce defined as the branch of human activity the purpose of which is to brin
g products to the consumer by means of exchange or the operations which tends to
supply and extend them to him habitually with intent of gain the proper time an
d place and in good quantity and quality.
The merchant is the middleman between the consumer and manufacturer. There are
three characteristics of commerce:
1) rapidity - because in commercial transactions time is of the essence
2) habitually does not cover isolated transactions
3) intent of gain
Article 1.
Number 1 refers to individuals. Number 2 refer to companies created under the
Corporation Code or under the provisions on Partnership in the New Civil Code.
Examples of individuals who habitually devotes themselves as merchants.
Buada (?) v. Posadas this fellow loaned money about 5 times, court said that is
not habitual.
Lastimoso v. Noliente a person chartered a vessel and sank, what is his liabilit
y? The court said that he is not a common carrier, so he is only required to exe
rcise the due diligence of a good father of the family, and not the extraordinar
y diligence of common carriers.
Antham Consolidated case a foreign company bought copra, the seller was not able
to deliver and after 2 more negotiations to allow the seller to comply, the lat
ter was sued. The defendant-seller raised that defense that the foreign company-
plaintiff is doing business without a license and therefore cannot sue. The cou
rt said this is not doing business because this is an isolated transaction there
is only one contract. The other 2 negotiations are simply extensions of time to
allow the seller to comply with his obligation.
Jack comments: The conclusion is correct but the reasoning is wrong because buy
ing does not constitute doing business, but it is selling that constitutes doing
business where you derive profits.
A merchant must do business in his own name. A ship captain is not a merchant e
ven if he performs acts of commerce like entering into a charter party, because
he is doing so in behalf of the ship owner.
A merchant need not devote his full time to commerce, in De Guzman case, even if
it is only a sideline, he is a merchant.
The act must not merely be incidental to the practice of a profession. Where a
pharmacist concocts a medicine prescribed by a physician and charges the custome
r for the cost of the materials, the pharmacist is not engaged in business becau
se it is merely incidental to the practice of her profession.
Article 2.
Acts of commerce, whether specified in the Code or not, should be governed first
by the Code of Commerce, and in their absence, by commercial customs, and lastl
y, by civil law. Notice in the hierarchy, customs take precedence over civil la
w because of the progressive character of commerce. For centuries, negotiable
instruments are governed mostly by customs rather than law. But civil law can a
lso supplement the Code of Commerce - the Code does not contain provisions on ex
tinguishment of obligations or damages.
In Mendoza v. PAL, Mendoza leased the film Ang Himala ng Birhen to be shown in Nag
a City during the Peafrancia festival. PAL delivered the film after the festiva
l, so Mendoza sued PAL for unrealized profits. The court said in breach of cont
ract you cannot recover consequential damages if the debtor was not in bad faith
, unless you specifically informed the debtor of the peculiar circumstance that
would give rise to consequential damages. Since Mendoza did not inform PAL that
this is a religious film to be shown during the religious festival, he cannot r
ecover consequential damages in consonance with the provisions of the Civil Code
on damages.
Acts of commerce include those contained in the Code and all other analogous act
s. Example, entering into a charter party. The reason why the law did not enum
erate what are the acts of commerce because commerce is very progressive (you ca
nnot foresee how commerce develops). Commerce is usually ahead of the law which
intended to regulate it.
Commercial law the whole body of substantive jurisprudence applicable to the rig
hts, intercourse and relations of persons engaged in commerce, trade, or mercant
ile pursuits.
Sources of commercial law.
A. Direct or principal sources
1. commercial legislation
2. contracts
3. commercial usages and practices
4. civil law
5. judicial decisions
B. Indirect sources
1. natural law
2. scientific law
3. explanatory notes and preamble to laws
4. foreign commercial legislation and case law
Article 3.
This is merely evidentiary. It does not lay down the requisites of engaging in
commerce but it tells you that this will create a presumption of an intention to
engage in commerce. Example, by registering the business name with DTI (Busines
s name law). In a case, a Japanese corporation was sued in the Phil, it claime
d that it is not doing business here. The court said it leased office space at
the Luneta Hotel and even sent officers here. Even if it was an isolated transa
ction, it indicated an intention to habitually engage in business hence it can b
e sued.
Article 4.
Note that the age to have legal capacity is now 18 years and not 21 years, under
R.A. 1609.
He must also have free disposition of his property. A person who is convicted o
f a crime punishable by reclusion perpetua carries with it the accessory penalty
of civil interdiction hence he cannot engage in business.
Article 5.
A minor here can engage into business:
1. To continue the business already started by their parents. If the minors are
not allowed to continue the lucrative business, that will be prejudicial to thei
r interests.
2. Through a guardian
3. If the person is a foreigner, and the law of their country allows him to enga
ge in commerce, applying the conflict of law rules that the nationality rules de
termines the capacity to act.
Under R.A. 7192, women can now engage in commerce and enter into contracts witho
ut disqualification or limitation.
Title Two. Commercial Registries
Article 16.
Foreign corporations and partnerships can engage business here provided they get
a license from the SEC. In case of insurance companies, they need a certificate
of authority from the Insurance Commission, banks need a license from the Monet
ary Board.
Various offices of registries: SEC, Maritime Industry Authority, Register of Dee
ds, etc.
Title Three. Bookkeeping of Commerce
This is now more covered by the NIRC (revenue code). A taxpayer must keep a jou
rnal and a ledger, but if his gross quarterly receipts do not exceed P5,000 he c
an keep a simplified set of books. In the case of corporations and partnerships
, if their gross income exceed P25,000 quarterly their books must be audited by
an independent CPA.
The NIRC also requires that the books must be kept for 3 years. In case of corp
orations, the Corporation Code requires them to keep records of all business tra
nsactions, minutes of meeting of BOD and stockholder, and stock and transfer boo
k.
The SEC can examine the records of corporations and partnership, the BIR can exa
mine the records of taxpayers, the Commission of Audit can audit public utilitie
s and private companies which receive public funds. The insurance commissioner
examines the insurance companies once a year. The superintendent of banks has s
upervisors assigned to every bank and examines it once a year. Various regulato
ry agencies of public utilities also examine the records of public utilities.
Under the corporation law, stockholder and directors have the right to inspect t
he corporate records and under Article 1806 of the NCC, partners have the right
to examine the books of account of the partnership.
Article 48.
This article lays down certain evidentiary rules regarding keeping of books.
Number 1. This is admission against interest. The entries in the books of merch
ants maybe used as evidence against them.
Number 2. If the books of 2 merchants conflict. Where one book is kept in acco
rdance with law while the other is not kept in accordance with law, the books ke
pt in accordance with law will prevail.
Number 3. If one merchant does not present his books, while the other merchant p
resents his books and are kept in accordance with law, the one who presents his
books will prevail, unless the reason for failure to produce is caused by a fort
uitous event like they are burned during a fire.
Number 4. If both books are kept in accordance with law and they conflict, the
court will decide from the basis of the rules of preponderance of evidence by ta
king into consideration the totality of the evidence presented by both sides.
Chapman v. Garcia the partnership was engaged in lumber business but was dissolv
ed due to the death of one of the partners. In the winding up of the affairs, o
ne of the partners continued the business. The widow of the husband claimed the
share of the deceased husband in the assets of the partnership. One partner co
untered that said deceased partner owed the partnership unpaid amounts of lumber
s purchased. The proof presented was the entries in the books but were not post
ed regularly. They were posted several months afterwards, the court said that s
ince the entries were not kept properly, the books cannot be used as evidence ag
ainst the estate of that deceased partner.
Article 50.
Commercial contracts. They are governed:
1. Code of commerce
2. Special law if its the appropriate law like Insurance code
3. Civil code to be applied in a suppletory manner to other special laws.
This is not the same as in Article 2. This what is involved is an act of commerc
e, you apply Article 2, but if it is a commercial contract, you apply Article 50
.
Article 51.
Generally, commercial contracts are valid regardless of their form. But if the
contract amount involved is more that 1,500 pesetas (P300), testimonial evidence
is not sufficient. It is like the Statutes of Frauds there must be something in
writing.
Article 52.
An exception to Article 51.
Number 1 contracts which according to the Code or special law must be reduced in
writing or require formality for their efficacy, example: Negotiable instrument
s.
Number 2 lays down a conflict of law rule
Article 53.
Contracts that are illegal cannot be enforced.
Article 54. Contracts entered into by correspondence shall be perfected from th
e moment an answer is made accepting the offer or the conditions by which the la
tter may be modified.
In commercial transactions, since time is of the essence, the contract is perfec
ted from the moment the acceptance is sent, even if it has not yet been received
by the offeror. The offeror can no longer withdraw the offer or change the ter
ms of his offer. (Theory of manifestation)
In civil law, when a contract in entered into by correspondence, it will be perf
ected only upon receipt by the offeror of the unconditional acceptance of the of
feree. (Theory of cognition)
Correspondence includes all kinds like telegrams, radiogram, telex, fax, e-mail.
Article 55.
Contracts in which an agent intervenes shall be perfected when the offeree shall
have accepted the agent s offer. If the agent was informed that the offer has be
en accepted even if the principal has not been informed, the contract has been p
erfected.
Article 56.
In commercial contracts in which a penalty is imposed, the injured party may dem
and either specific performance or payment of the penalty and recourse to one of
these alternative remedies will extinguish the obligation unless the contrary i
s stipulated. When the law provides that the election of one of the remedies wi
ll bar resort to the other remedy, it presupposes that the remedy chosen was EFF
ECTIVE. Example, in a charter party agreement, when the charterer sues for spec
ific performance and the vessel sank, the remedy chosen is not effective, so he
can fall back to the other remedy payment of liquidated damages.
Article 57.
Commercial contracts should be complied with in good faith.
Article 58.
If there is a conflict between the copies of the contract in possession of the t
wo contracting parties, and an agent or broker intervenes, the one kept by the a
gent or broker will prevail.
Article 59.
When there is DOUBT, first apply the Code of Commerce. If you cannot resolve it
, then apply customs. If still there is doubt - the Civil Code. If still it c
annot be resolved, then the doubt shall be resolved in favor of the DEBTOR. You
have that debtor principle that the debtor s assumption of an obligation is not p
resumed. The imposition of obligation is not presumed. And so the doubt shall b
e resolved in favor of the debtor.
Article 60.
This is similar to the civil code. How to compute period:
Days = 24 hours
Month - if specific month named, then number of days in that month will be con
sidered. Example. January, so 31 days
- if not named, civil code, it has 30 days
Year = 365 days
Article 61.
General rule: Grace periods are not recognized because in commercial transaction
s, time is of the essence.
Exceptions:
1. When the contract provides for a grace period. Like a charter party may prov
ide for a grace period
2. When it is based on a provision of law. In the Insurance Code, there is a pro
vision providing a grace period of 30 days to pay the premium for life insurance
policies.
Article 62.
Obligations that do not have a period fixed by the parties or by the Code, it sh
all be demandable 10 days after it was contracted.
In Civil Law, if the parties contemplated a period for the obligation but they d
id not stipulated as to the duration of the period, you have to file first a cas
e in court, asking the court to fix the period in the light of the circumstances
. So the court will have to decide what the parties contemplated in the light o
f the circumstances.
In the Code of Commerce, where time is of the essence, it is the law that fixes
the period of 10 days after the contract was signed in case the parties failed t
o provide for such period.
Diego v. Antonio this case was decided under the old civil code. De Antonio got
a loan which was a commercial loan. So when Diego sued Antonio, the latter sai
d that the loan was not yet due because it is an obligation without a period fix
ed. The court should first to fix the period. The court said that such is not
necessary because this is a commercial loan. Therefore according to Article 62,
the law fixes the period. That became due on the 10th day after the loan was c
ontracted.
Article 63.
In contracts where the period for its performance was fixed wither by stipulatio
n or by law, the obligor will be in delay on the day after the date of maturity
that is on the following day.
In civil law, general rule is that even if a contract provides for a period, unl
ess a demand is made, the obligor does not incur in delay.
In commercial law, that is not so, no demand is needed. The moment the period t
o perform the obligation lapses, the following day, the obligor is in delay. It
is because time is of the essence.
Of course, before a party to a contract maybe guilty of delay, the other party m
ust have complied with his contract, or must be ready to comply with his obligat
ion. Like in civil law, in reciprocal obligations, the party does not incur in
delay if the other party has not complied with his corresponding obligation.
? ? ?
10 December 2001 Lecture
Jenny R. Santiago
LETTERS OF CREDIT
Code of Commerce:
Art. 567 Letters of credit are those issued by one merchant to another or for th
e purpose of attending to a commercial transaction. (p. 75 of Agbayani)
(Note: According to Villanueva, the Code of Commerce on Letters of Credit are ob
solete. Modern letters of credit are strictly bank-to-bank transactions. Useless
mag-codal in short. Jack just gave the basic principles of the subject in his l
ecture).
? Definition A letter of credit is an instrument issued by a bank in behalf of a
customer authorizing a beneficiary to draw a draft/s which will be honored on p
resentation to the bank if drawn in accordance with the terms and conditions spe
cified in the letter of credit.
? Underlying Idea of a Letter of Credit Roughly at least 85% of importations are
financed by letters of credit. The underlying idea of a letter of credit is to
ensure certainty of payment. Seller is assured of payment because the bank inter
venes and makes the commitment to pay. The idea behind it is like your credit ca
rd. You walk into a department store and they sell to you on credit although you r
e a total stranger because you show your credit card, which means that the bank
which issued the credit card tells the seller that it will pay the goods being b
ought.
? Governing Rules Letters of credit are governed by the Uniform Customs on Docum
entary Credits issued by the International Chamber of Commerce.
? A basic principle in letters of credit is that the bank deals with documents o
nly. Aside from certain conditions, the seller will be required to submit certai
n documents together with the draft that he will draw in order to collect. Thes
e documents shall be negotiated and agreed upon between the buyer and the seller
. Normally, the seller would have to submit together with the draft a bill of la
ding, packing list, commercial invoice. As banks deal with documents only, they
are not qualified to deal with goods. They re not competent to deal with a thousan
d and one type of goods. They will act on the basis of the documents only.
BPI vs De Reny Fabrics
De Reny Fabrics imported dyes. It applied for a letter of credit for its payment
with BPI.Upon submission of the required documents by the seller, BPI paid the
seller. When the crates arrived, it was found that they did not contain dyes, b
ut chalk. De Reny Fabric thus refused to pay.
HELD: No! BPI as a bank deals with documents only. So long as the seller submitt
ed the documents required, the bank has to pay, and the customer has to reimburs
e the bank. The bank will not guarantee that the goods as delivered by the selle
r comply with the terms and conditions of the contract. Just like your credit ca
rd, if it turns out that the appliance you bought was defective, you cannot sue
the bank which issued the card. You still have to pay the bank. It s up to you to
run after the department store which sold the appliance to you.
Litton vs PNB
The crates discovered to contain old cigarettes. Same ruling as De Reny Fabrics
case.
Phil. Banking Corp. vs Chua Tiep Seng
The letter of credit provided that in order to collect, the seller must submit a
n on-board bill of lading, stating that the goods are already loaded on the vess
el. Upon it submission, the bank paid. It turned out, however, that the bill of
lading was forged. Buyer refuses to pay.
HELD: No! The bank does not guarantee the genuineness of the documents submitted
by the seller. Provided the bank acted in good faith, the buyer must still reim
burse the bank.
Landmark decision by the Court of Appeals, New York
The importer applied for a letter of credit for goods he imported from India. Wh
en the crates arrived they contained rubbish!
HELD: A preliminary injunction may be issued to stop payment, for this is a case
of out and out fraud. What was shipped by the seller was garbage.
But if you re talking about goods not meeting the specifications, you cannot enjoi
n payment, as when you order brand new steel plates from Russia, and what was de
livered was mere 2nd-hand steel plates from some dismantled factory in Russia. I
n this case you cannot enjoin payment.
? Fraud in Letters of Credit It s possible to commit fraud because the seller can
submit forged or false documents. To minimize the risk, seller can be required t
o submit a certification by a reputable surveyor who will say that he examined t
he goods and found them to be in accordance with the specifications. But then ag
ain, you can always prepare an air-tight contract, but if the other party does n
ot intend to fulfill the contract, he s going to break it. A forged surveyor s certi
fication, for instance, may be submitted.
? Letters of Credit are interpreted strictly.
For example:
1. In an American case, the letter of credit required that the seller must submi
t an invoice for pine lumber. But in the invoice, it was written pine timber. That s
not the same.
2. Also in a case where the letter of credit specified Italian marble, and the inv
oice indicated just marble, bank can refuse to pay.
3. Where a letter of credit was issued for the importation of noodles, and the i
nvoice said woodle, the bank can refuse to pay, because bank doesn t know. It might
think that a woodle is some exotic food coming from Timbuktu.
? Procedure when with Discrepancy Seller, to collect, will draw a bill of exchan
ge, addressed to the bank which issued the letter of credit. Then he will submit
the documents required. But typographical errors can happen. When the bank rece
ives the documents, the bank will now forward that to the buyer. In the cover le
tter, the bank will state the discrepancies that they discovered, and will ask t
he buyer if he agrees to waive the discrepancy. If the buyer waives, bank will p
ay. If he refuses, bank will not pay.
Cojack case
Mrs. Cora Jacob made native bags. Buyer ordered P3million worth of bags from her
, to be sold to Hawaii. Buyer inspected the bags and found the quality impressiv
e. Buyer applied for a letter of credit to pay, which stated that among the docu
ments to be submitted to collect was a commercial invoice issued by Cojac, the nam
e of Mrs. Jacob s business. However in the invoice, the buyer deliberately misspel
led Cojac, by adding a k. So when Mrs. Jacob submitted the invoice, the bank refus
ed to pay, claiming discrepancy. The bank asked the buyer if it will waive the d
iscrepancy. The buyer refused. The bank dishonored the letter of credit. Later,
the buyer offered to pay only P1million to Mrs. Jacob.
Feati Bank vs CA
A naive seller sold logs to an American buyer. The letter of credit required tha
t to collect, the seller must submit a certification by the buyer saying that he
has inspected the goods and found them to be in accordance with the terms and c
onditions of the contract. The buyer took delivery of the logs, and was actually
able to resell them. However, he refused to issue the certification. The Seller
submitted a certfication from the Bureau of Forest.
HELD: That is not what is required by the letter of credit! Since the required c
ertification from the buyer was not produced, seller cannot collect.
? Red Clause This phrase means that the beneficiary can get payment in advance alt
hough the goods being sold has not yet been delivered. In the old days, the Amer
ican companies would produce mink coats, so they would send their representative
s to China to buy the skins and fur from the hunters in the mountains. Since the
se hunters only accepted cash, the manufacturers would apply for letters of cred
it, where the beneficiaries would be their representatives who will buy the furs
in the mountains. The letter of credit would allow the beneficiary to collect t
he money in advance although he has not yet shipped the skin and the fur. So why
red? Because in those days, the said clause was written in red ink. This is com
mon in sugar trading. An American company will buy sugar here. Company will open
a letter of credit with the trader as beneficiary, who will in turn buy from th
e sugar central. If the beneficiary fails to deliver the goods, that s just too ba
d. Buyer will have to reimburse the bank.
? Evergreen Clause This phrase means that the bank commits to continue renewing th
e letter of credit. So why evergreen? Because it s always fresh. For instance, a f
oreign corporation not doing business in the Phils sues here asking for a provis
ional remedy. The court required it to post a bond. Surety will go, E teka muna,
you re not doing business here! Supposing we pay huh, how will we get reimburseme
nt from you?! You re not here! We need security! Get a stand-by letter of credit!
Bank will then issue the letter of credit, telling the surety, Ok, if you submit
a certification that you have been held liable, together with that draft, we wi
ll pay. Now it s possible that the case drags on beyond the expiration date of the
letter of credit. Surety will then say, Bank, make an undertaking that you wil
l keep renewing the letter of credit until the case has been finally decided! Th
e bank will then use an evergreen clause.
Feati Bank vs. CA
The letter of credit was issued in California, and Feati Bank was the correspond
ent bank, so it was the one who received the telex and notified the seller about
the letter of credit. Seller sued Feati Bank.
HELD: No! The notifying bank is not liable. It will only be jointly and severall
y liable with the opening bank if it confirmed the letter of credit.
? A letter of credit may be revocable or irrevocable. Usually the beneficiary in
sists that it should be an irrevocable letter of credit for certainty of payment
. If revocable, which is very very rare, the bank can revoke it anytime, without
need of notifying the beneficiary.
Phil. Virginia Tobacco Administration Case
Phil Tobaccco sold tobacco to someone, who paid through a domestic letter of cre
dit. Buyer sued, and obtained a court order ordering the bank not to pay the sa
id beneficiary, and instead turn over the proceeds to the buyer.
HELD: That order is void! It goes against the inherent nature of an irrevocable
letter of credit.
? Revolving letter of credit is automatically renewed. It may be revolving as t
o month, as when the bank every month makes available P50,000. It may also be r
evolving as to amount as when the bank makes available P50,000, subject to renew
al upon consumption of the entire amount in a month. It may be cumulative, as wh
en you used up only P40,000 of the alloted P50,000 for the month, in the next mo
nth, another P50,000 shall be available, plus the amount which was not used up.
? A letter of credit is a contract with a stipulation for the benefit of a 3rd p
erson. It is a contract between the customer who applied for it and the bank whi
ch issued it for the benefit of the beneficiary of the letter of credit.
? A letter of credit is a primary, absolute and unconditional obligation. It is
not an accessory obligation.
Philamlife Case
A couple took a housing loan from Philamlife. Philamlife, dissatisfied with the
real estate mortgage executed by the spouses, required them to get a stand-by le
tter of credit. Insular Bank of Asia in America issued the letter of credit, agr
eeing to pay upon presentment of Philamlife of a certification that the spouses
had defaulted on the loan. Philamlife later drew a draft and submitted the certi
fication. Insular Bank refused to pay the entire face amount of the letter of cr
edit, claiming that it was told by the spouses that some payments have been made
. It thus insists that the said payments should be deducted from the amount due.
HELD: No! A letter of credit is not an accessory obligation. It is supposed to b
e independent of the underlying transaction which gave rise to its issuance. Tha
t s why the bank will have to pay even if there be a deficiency or defect in the g
oods. The couple thus would have to reimburse the bank. Their remedy would be to
run after Philamlife for reimbursement of overpayment. But meanwhile, they woul
d have to reimburse the bank.
Bank of America vs. CA
A Philippine company sold rope to a buyer in Thailand. To pay for it, the buyer
applied for a letter of credit from a bank in Thailand. The correspondent bank i
n RP was Bank of America and so it notified the seller here that a letter of cre
dit had been opened in the Thai bank. The seller thus drew a bill of exchange to
collect, and then they indorsed it to Bank of America, which credited them the
proceeds right away. But when the bill of exchange was presented, the Thai Bank
dishonored it, saying that the letter of credit is fake. Bank of America sued th
e beneficiary to recover.
HELD: Bank of America liable! Under negotiable instruments law, the drawer warra
nts that the bill of exchange will be paid.
? Marginal Deposits In the old days, the marginal deposits was one of the tools
used by the Central Bank to reduce the demand for dollars. For example, it was t
hen required that for every letter of credit, marginal deposit of say 30% must b
e given to the bank. But now, banks do not require marginal deposits unless the
financial standing of the customer is in bad shape.
? Stipulation on Bank s Lien on Applicant s Property Whenever you apply for any tran
saction in the bank, there is a usually a stipulation in the application giving
the bank the right of lien on money or property you own which it may have in its
possession.
PNB Case
Somebody applied for a letter of credit in the Phil. National Bank, having the s
aid stipulation in the appliaction. PNB has the right to set-off or demand reimb
ursement with any deposit. Later, the applicant assigned his time deposit to a 3
rd party. When the amount fell due, the question was who has a better right to c
ollect the money, assignee or PNB?
HELD: PNB! It had lien on the deposit. The assignee merely stepped into the shoe
s of the assignor, and so it must honor the lien.
TRUST RECEIPTS
The letters of credit usually go hand in hand with trust receipts. Since the goo
ds will normally be consigned to the bank, the bank will require the buyer to si
gn a trust receipt to take delivery of the goods.
PD 115: Trust Receipts Decree (p. 669 of Agbayani, I just reproduced the partic
ular provisions Jack read in class)
Sec. 3 (j) Trust Receipt shall refer to the written or printed document signed by
the entrustee in favor of the entruster containing terms and conditions substant
ially complying with the provisions of the Decree. No further formality of execu
tion or authentication shall be necessary to the validity of a trust receipt.
Sec. 4 What Constitutes a Trust Receipt Transaction-
A trust receipt transaction, within the meaning of this Decree, is any transacti
on by and between a person referred to in this Decree as the entruster, and anot
her person referred to in this Decree as the entrustee, whereby the entruster, w
ho owns or holds absolute title or security interests over certain specified goo
ds, documents or instruments, releases the same to the possession of the entrust
ee upon the latter s execution and delivery to the entruster of a signed document
called the trust receipt wherein the entrustee binds himself to hold the designate
d goods, documents or instruments in trust for the entruster and to sell or othe
rwise 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, instruments them
selves if they are unsold or not otherwise disposed of, in accordance with the t
erms and conditions specified in the trust receipt, or for other purposes substa
ntially equivalent to anyone of the following: xxx
Allied Banking Corp. Case
Philippine Blooming Mills imported some materials and applied for a letter of cr
edit from a bank. When the equipment arrived, the president signed a trust recei
pt in favor of the bank. The bank was not paid. The bank filed a criminal case a
gainst the president. The President insists that the equipment delivered, which
were installed in the factory, was not covered by the letter of credit, as they
were not materials which they manufacture into finished products.
HELD: Covered! Sec. 4 of the Trust Receipts Law says to sell or otherwise dispose
. Installation in the factory is a case of otherwise disposed.
Untitled Case
Client of the bank bought purchased goods. It later applied for credit facilitie
s from the bank. The application for credit had nothing to do with the purchases
. The bank required the applicant to sign a trust receipt for the goods which he
had purchased. When the bank was not paid, it sought to collect payment.
HELD: No! The transaction is not covered by the Trust Receipts Law because the b
ank did not acquire any lien or title to the goods. They were purchased independ
ent of the applicant s transaction with the bank.
? Trust Receipts Used also in Domestic Transactions. Trust receipts are used for
both domestic and international transactions. For instance, Toyota Bel-Air will
buy 20 cars from Toyota Motors. It borrows money from Filinvest to pay. Filinve
st will then require the buyer to sign a trust receipt for the cars. Should they
be able to sell the car, proceeds shall be used to pay back Filinvest. If not,
they will turn over the cars.
Vintola Case
A couple were involved in exporting Puka Shells. They borrowed from a bank and e
xecuted a trust receipt over the shells they were intending to export. They fail
ed to export them. So they went to the bank and said, Since we are holding these
Puka Shells in trust for you, here they are, help yourselves,we don t owe you any
more.
HELD: NO! In a trust receipt transaction, the title really belongs to the truste
e. This is just a security arrangement. The bank does not own the Puka Shells. T
he borrower cannot compel the bank to accept the Puka Shells as payment.
Sec. 7 Rights of the Entruster (par 2) xxx The entruster may cancel the trust a
nd take possession of the goods, documents or instruments subject of the trust o
r of the proceeds realized therefrom at any time upon default or conditions of t
he trust receipt or any other agreement between the entruster and the entrustee,
and the entruster in possession of the goods, documents or instruments may, on
or after default, give notice to the entrustee of the intention to sell, and may
, not less than five days after serving or sending of such notice, sell the good
s documents or instruments at public or private sale, and the entruster may, at
a public sale, become a purchaser. xxx
PNB Case
PNB repossessed the goods covered by the trust receipt. The loan was also secur
ed by a real estate mortgage. PNB sought to foreclose the mortgage. The borrower
opposed the foreclosure, claiming that PNB already got back the goods.
HELD: No! The bank merely has a lien on the goods. To realize it, it must forecl
ose. Otherwise it will be pactum comissorium. Since the bank has not foreclosed,
payment not having been made, it can still foreclose the real estate mortgage.
Sec. 8 Entruster not responsible on sale by entrustee- The entruster holding a s
ecurity interest shall not, merely by virtue of such interest or having given th
e entrustee liberty of sale or other disposition of the goods, documents or inst
ruments under the terms of the trust receipt transaction, be responsible as prin
cipal or as vendor under any sale or contract to sell made by the entrustee.
If Toyota Bel-Air sells a car, and it turns out it s a lemon, the buyer can run af
ter Filinvest(see above example).
Sec. 9 Obligations of the Entrustee- The entrustee shall:
(1) hold the goods, documents or instruments in trust for the entruster and shal
l dispose of them strictly in accordance with the terms and conditions of the tr
ust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to th
e entruster or as appears on the trust receipt;
(3) insure the goods for their total value against loss from fire, theft, pilfer
age or other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form, separ
ate and capable of identification as property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or upon
demand of the entruster; and
(6) observe all other terms and conditions of the trustee not contrary to the pr
ovisions of this Decree.
Sec. 10 Liability of entrustee for loss-
The risk of loss shall be borne by the entrustee. Loss of goods, documents or in
struments which are the subject of a trust receipt , pending their disposition,
irrespective of whether or not it was due to the fault or negligence of the entr
ustee, shall not extinguish his obligation to the enruster for the value thereof
.
Sec. 11 Rights of purchaser for value and in good faith
Any purchaser of goods from an entrustee with right to sell, or of documents or
instruments through their customary form of transfer, who buys the goods, docume
nts or instruments for value and in good faith from the entrustee, acquires said
goods, documents or instruments free from the entruster s security interest.
Sec. 12 Validity of entruster s security interest as against creditors
- The entruster s security interest in goods, documents or instruments pursuant to
the written terms of a trust receipt shall be valid as against all creditors of
the entrustee for the duration of the trust receipt agreement.
WAREHOUSE RECEIPTS LAW
(The early part of the lecture was not included in the tape perhaps because the
recorder was turned on a little late. But don t worry, there s nothing much to miss
. It s all in the handout given to us.
Negotiable or Non-Negotiable Warehouse Receipts
If the warehouse receipt says it is to be delivered to order or to bearer
, then it is negotiable. Now if the warehouse receipt is one where the goods ar
e deliverable to bearer or under, a stipulation that it is not negotiable will b
e void. Now if it is not negotiable then it must plainly state to be non-negoti
able. Usually they would print in red letters across NON-NEGOTIABLE coz if the wa
rehouseman fails to do that and somebody believed in good faith that it was nego
tiable, then he will be protected and the receipt will be treated as negotiable.
Duplicate Copies
Now if there are duplicate copies of the warehouse receipt, which is usua
lly the case, then the word DUPLICATE shall be plainly worded on the face of the d
uplicate copies otherwise the person who suffered damages because he bought a du
plicate warehouse receipt and it did not indicate that it was a duplicate copy b
ut he thought that it was the original receipt, well he could sue the warehousem
an for damages.
Obligations of the Warehouseman
Now, there are two basic obligations of a warehouseman: to deliver the goods
and to safeguard the goods.
1. To Deliver the Goods
Now, so, as a rule the warehouseman is required to deliver the goods. Now th
e demand for the delivery of the goods is accompanied by three things:
1. an offer to pay any lien which the warehouseman may have, like a lien for sto
rage fees;
2. an offer to surrender the warehouse receipt if it is negotiable coz otherwise
 if he does not surrender that and it continues circulating, somebody could clai
m the goods and deliver the goods again; and
3. a readiness and willingness to sign an acknowledgment that he has received th
e goods.
Now if the warehouseman refuses to deliver the goods then the burden is on hi
m to show that he has a just cause to refuse to deliver the goods. Now the ware
houseman will be discharged from liability if he delivers the goods to the follo
wing three people:
1. the person lawfully entitled to the goods, or his agent
2. the person entitled to the delivery under the non-negotiable receipt or who h
as authority from the person who is entitled to the delivery of the goods. So i
f it s a non-negotiable receipt, then the person to whom the goods are supposed to
be delivered or someone to whom he gave a special power of attorney.
3. if it is a negotiable warehouse receipt, and the goods are deliverable to bea
rer or to order but it was indorsed, then the person in possession of the receip
t
So if the warehouseman wrongfully delivers the goods to someone who is not en
titled to possession, then he will be liable for damages to the person lawfully
entitled to the delivery.
Now as a general rule, the warehouseman cannot refuse to deliver the goods be
cause a third person is claiming to be entitled to the goods. However the wareh
ouseman may withhold delivery until he has some reasonable opportunity to invest
igate the validity of the claim of the third person or to file an action for int
erpleader. Of course, that s the safest cause of action for him to take, to file
an action for interpleader. Likewise, the warehouseman will be excused from del
ivering the goods if the goods were sold earlier to satisfy his lien coz he was
not paid the storage fees, and he foreclosed his lien. Or, if the goods were so
ld coz they were perishable or hazardous.
Now, time and again, you will notice that a warehouse receipt is not like a n
egotiable instrument. For instance, if there is an alteration in the warehouse r
eceipt, even if it was unauthorized, made with a fraudulent intent, the warehous
eman is still liable but he is liable on the basis of the original terms of the
warehouse receipt.
If the warehouse receipt is negotiable and it was lost, well to get delivery,
you have to file a case in court and get a court order ordering the warehousema
n to deliver the goods upon proof of the loss of the receipt and posting of a bo
nd to protect the warehouseman from liability because the warehouse receipt is s
till outstanding. Because if that warehouse receipt, which is negotiable was ne
gotiated, the person who took it in good faith and for value, then he can file a
claim against that bond.
This was asked in the bar exams before: If the warehouse receipt is negotiab
le, and a creditor wants to levy on the goods, he must first ask that the indors
ement or renegotiation be enjoined because it could be negotiated to someone who
could take it in good faith and for value. So he must freeze the warehouse rec
eipt by asking that renegotiation be enjoined and/or that the warehouse receipt
be surrendered. So the injunction there will be in aid of attachment of the goo
ds. Until this is done, the warehouseman cannot be compelled to deliver the goo
ds.
Again as a rule the warehouseman cannot refuse to deliver the goods on the gr
ound that he owns the goods. As a rule, the bailee cannot assert title to the g
oods entrusted to him. However, there are two exceptions:
1. if he acquired title to the goods coz they were transferred to him like if th
ey were covered by negotiable warehouse receipt and the receipt was indorsed to
him, or
2. he has an unpaid lien and he foreclosed his lien and he bought the goods duri
ng the auction sale
In those two cases, he can assert title to the goods as a ground to refuse to de
liver the goods.
Now if the goods are covered by a negotiable warehouse receipt and the wa
rehouseman delivers the goods without asking for the surrender of the warehouse
receipt and that falls into the hands of a buyer in good faith and for value, th
en as I said, he d be liable for damages to that person. Or if he delivered only
a part of the goods, he should cancel the warehouse receipt and issue a new one
for the balance of the goods or indicate on the receipt that there has been a pa
rtial delivery. Again, if he fails to comply with this, a buyer in good faith a
nd for value will be protected and could hold him liable for damages.
Now if it turned out when the crates are opened, they are empty or the wa
rehouse receipt says there are crates containing fruits and when they opened, th
ey contained rocks, well the warehouseman will be liable if the contents do not
correspond to what is in the warehouse receipt. Now to escape liability what he
should do is to indicate a statement stating that the crates are alleged to cont
ain coz when you say alleged that it is what is alleged but I do not guarantee th
at they really contain fruits and not rocks.
2. To Safeguard the Goods
Now the second obligation of a warehouseman is the safekeeping of the goods.
And if the goods are lost, it is presumed that he is at fault. In fact that is
also in the Civil Code, obligations and contracts. However if the loss was due
to a fortuitous event, he will not be liable. Like during the battle for the l
iberation of Manila, the Japanese burned Manila especially in Ermita, Malate, Bi
nondo. And so the loss due to the fire will be due to a fortuitous event.
And the warehouseman must segregate the goods of the different depositors unl
ess they are authorized either by stipulation or by practice or by custom to com
mingle goods which are fungible, then he may commingle them and then each deposi
tor will own on a pro-rata basis a portion of the common mass. So if there is p
artial loss, let s say because of a rain, sacks of rice which were deposited were
commingled, and because of the rain, some of the sacks were spoiled and damaged,
everybody will share proportionately in the loss.
Warehouseman s Lien
Now a warehouseman has a lien on the goods for all lawful charges but he
should indicate in the receipt the charges for which he is claiming a lien. Tha
t s why the court said in one case where the warehouseman was claiming handling fe
es but there was no indication in the warehouse receipt that he has a claim for
handling fees, so he can t claim to have lien for handling fees or for transportat
ion. Now that s why the court has said the warehouseman may refuse to deliver the
sugar covered by a negotiable warehouse receipt if it indicates that he has a c
laim for storage fees and his claim for storage fees has not been paid.
Satisfying the Warehouseman s Lien
Now so how does the warehouseman satisfy his lien? Well he will foreclose
his lien having notice to the person for whose account he is holding the goods
and to any other person who he knows has a claim in the goods. He must give the
m at least ten days from receipt of the notice to pay. If he is not paid then h
e may proceed to foreclose his lien. Notice of the sale must be published once a
week for two consecutive weeks in a newspaper of general circulation in the pla
ce where the sale will be held. If there is no newspaper in the place, then the
advertisement should be posted in at least six conspicuous places at least ten
days before the sale. If he does not comply with this publication requirement t
he sale will be void. So if the sale pushes through then the warehouseman shoul
d deduct the expenses for the sale and apply the balance to the amount he is cla
iming. And if there s any excess, the excess will be given to the person to whom
the goods would have been delivered. So another instance where the goods may be
sold is when they are perishable or hazardous that they might damage other prop
erties, so the warehouseman after notifying the owner to remove the goods and th
e owner does not do so may sell the goods in public or private sale without need
of notice. If he s unable to sell then he may dispose of them in any manner, so
he may donate them to any charitable institution.
Loss of Warehouseman s lien
Now a warehouseman may lose his lien, remember the lien is a retaining li
en, if he surrenders the goods, he loses his lien. Or he refuses to deliver the
goods when the person is entitled to the goods because he s offering to pay the l
ien, to surrender the warehouse receipt, and to sign an acknowledgment, but the
warehouseman refuses so he loses his lien. So you have that PNB case where a su
gar central sold the sugar and issued a negotiable warehouse receipt to the buye
r. Then the buyer pledged the sugar to somebody else. Now the warehouseman ref
used to deliver the sugar to this pledgee on the ground that since the buyer to
pay it in full for the sugar it was still the owner of the sugar. The court sai
d that is wrong. The fact that the buyer did not pay you does not mean that the
buyer did not acquire title. Title passed in the delivery and therefore you do
not have a valid excuse for not delivering the goods and when the ground you ar
e invoking for not delivering the goods is not justified, under the law you lose
your lien. So the warehouseman lost his lien over the sugar.
Negotiation of Warehouse Receipts
Now if the receipt is negotiable like if it is deliverable to bearer, to
negotiate it, it is enough to deliver the receipt. If deliverable to order, the
n you indorse and deliver. Now if the goods are deliverable to order and was in
dorsed in blank, then it becomes deliverable to bearer. Now a negotiable wareho
use receipt may be indorsed, may be negotiated by the owner of the receipt or by
a person to whom he entrusted the possession of the negotiable warehouse receip
t, if at the time he entrusted it, it was in such a form as to be negotiable by
delivery.
Now you see a warehouse receipt is not like a negotiable instrument. The
person to whom it is negotiated will only acquire whatever title the person ind
orsing it had. And the law says the validity of the negotiation of a warehouse
receipt is not impaired by the fact that the negotiation was a breach of duty by
the person who negotiated it. Or that the owner was induced by fraud, mistake
or duress to entrust the possession of the receipt to such a person if it was ne
gotiated to a person who took it in good faith and for value. That s why I told y
ou earlier that in this case of PNB this Noah s Ark, in Makati along Pasig River,
issued a warehouse receipt for sugar then they sold the sugar and indorsed the n
egotiable warehouse receipt. The buyer now pledged the sugar with PNB as collat
eral for a loan. Noah s Ark was claiming that the buyer did not pay us in full, w
e retain title to the goods so the pledge is not valid. But the court said no.
Under the law even if the negotiation was made because of fraud, the person to
whom it was indorsed would acquire valid title if he acquired it in good faith a
nd for value.
Now if the goods are covered by a negotiable receipt and the owner sold o
r mortgaged or pledged them twice and he remained in possession of the receipt,
that s why he was able to sell the receipt a second time or this case of double sa
le, the second buyer will be protected. Of course with the fault of the first bu
yer coz he did not get the warehouse receipt. Likewise if the goods are covered
with a negotiable warehouse receipt, a lien of the seller as an unpaid seller w
ill not defeat the right of a buyer in good faith and for value. Now if the war
ehouse receipt is not negotiable it may be assigned and the assignee will only a
cquire whatever rights the assignor had. But if the receipt is negotiable and t
he goods are deliverable to order, and the owner transferred the receipt without
indorsing it, so the transferee can compel the transferor to indorse the wareho
use receipt but negotiation will take effect only on the date the indorsement is
made.
Warranties
Now a person who negotiates a warehouse receipt warrants certain things. The
se are like the warranties of an indorser in the Negotiable Instruments Law. He
warrants:
1. that the receipt is genuine
2. that he has a legal right to negotiate or to transfer it
3. he has no knowledge of any fact that will impair the validity of the receipt
4. that he has the right to transfer title to the goods a
5. that the goods are merchantable or fit for a particular purpose
But a warehouse receipt is not like a negotiable instrument, if the warehouse
man does not deliver the goods, the holder can t run after the indorser. In negot
iable instruments, if the maker or acceptor does not pay, the holder can run aft
er the indorsers. That is not true in warehouse receipts coz the holder cannot
run after the person who indorsed it to him.
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(Code of Commerce, Letters of Credit, Trust Receipts & Warehouse Receipts)