CODE OF COMMERCE

December 5, 2001
Commerce defined as the branch of human activity the purpose of which is to bring 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 and place and in good quantity and quality.
The merchant is the middleman between the consumer and manufacturer.
characteristics of commerce:

There are three

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 liability? The court said
that he is not a common carrier, so he is only required to exercise the due diligence of a good father
of the family, and not the extraordinary 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 latter was sued. The defendant-seller
raised that defense that the foreign company-plaintiff is doing business without a license and
therefore cannot sue. The court 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 buying 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 even 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 customer for the cost of the materials, the
pharmacist is not engaged in business because 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 lastly, by civil law. Notice in the
hierarchy, customs take precedence over civil law because of the progressive character of
commerce. For centuries, negotiable instruments are governed mostly by customs rather than law.
But civil law can also supplement the Code of Commerce - the Code does not contain provisions on
extinguishment of obligations or damages.

In Mendoza v. PAL, Mendoza leased the film Ang Himala ng Birhen to be shown in Naga City during
the Peafrancia festival. PAL delivered the film after the festival, so Mendoza sued PAL for
unrealized profits. The court said in breach of contract 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 recover 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 acts. Example,
entering into a charter party. The reason why the law did not enumerate what are the acts of
commerce because commerce is very progressive (you cannot 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 rights, intercourse
and relations of persons engaged in commerce, trade, or mercantile pursuits.
Sources of commercial law.
A. Direct or principal sources
1.
2.
3.
4.
5.

commercial legislation
contracts
commercial usages and practices
civil law
judicial decisions

B. Indirect sources
1.
2.
3.
4.

natural law
scientific law
explanatory notes and preamble to laws
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 (Business name law). In a case, a Japanese corporation
was sued in the Phil, it claimed 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 transaction, it
indicated an intention to habitually engage in business hence it can be 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 of 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 their interests.
2. Through a guardian
3. If the person is a foreigner, and the law of their country allows him to engage in commerce,
applying the conflict of law rules that the nationality rules determines the capacity to act.
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Under R.A. 7192, women can now engage in commerce and enter into contracts without
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 Monetary Board.
Various offices of registries: SEC, Maritime Industry Authority, Register of Deeds, etc.
Title Three. Bookkeeping of Commerce
This is now more covered by the NIRC (revenue code). A taxpayer must keep a journal and a
ledger, but if his gross quarterly receipts do not exceed P5,000 he can 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 corporations, the
Corporation Code requires them to keep records of all business transactions, minutes of meeting of
BOD and stockholder, and stock and transfer book.
The SEC can examine the records of corporations and partnership, the BIR can examine the records
of taxpayers, the Commission of Audit can audit public utilities and private companies which receive
public funds. The insurance commissioner examines the insurance companies once a year. The
superintendent of banks has supervisors assigned to every bank and examines it once a year.
Various regulatory agencies of public utilities also examine the records of public utilities.
Under the corporation law, stockholder and directors have the right to inspect the 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 merchants maybe used as
evidence against them.
Number 2. If the books of 2 merchants conflict. Where one book is kept in accordance with law
while the other is not kept in accordance with law, the books kept in accordance with law will prevail.
Number 3. If one merchant does not present his books, while the other merchant presents 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 fortuitous 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 taking into consideration the totality of
the evidence presented by both sides.
Chapman v. Garcia the partnership was engaged in lumber business but was dissolved due to the
death of one of the partners. In the winding up of the affairs, one 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 countered that said deceased partner owed the partnership unpaid
amounts of lumbers purchased. The proof presented was the entries in the books but were not
posted regularly. They were posted several months afterwards, the court said that since the entries
were not kept properly, the books cannot be used as evidence against the estate of that deceased
partner.
Article 50.
Commercial contracts. They are governed:
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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 commerce, 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 instruments.
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 the moment an
answer is made accepting the offer or the conditions by which the latter may be modified.
In commercial transactions, since time is of the essence, the contract is perfected 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 terms of his offer. (Theory of manifestation)
In civil law, when a contract in entered into by correspondence, it will be perfected only upon receipt
by the offeror of the unconditional acceptance of the offeree. (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
agents offer. If the agent was informed that the offer has been accepted even if the principal has
not been informed, the contract has been perfected.
Article 56.
In commercial contracts in which a penalty is imposed, the injured party may demand either specific
performance or payment of the penalty and recourse to one of these alternative remedies will
extinguish the obligation unless the contrary is stipulated. When the law provides that the election
of one of the remedies will bar resort to the other remedy, it presupposes that the remedy chosen
was EFFECTIVE. Example, in a charter party agreement, when the charterer sues for specific
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 two contracting parties,
and an agent or broker intervenes, the one kept by the agent or broker will prevail.
Article 59.
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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 cannot be resolved, then the doubt shall
be resolved in favor of the DEBTOR. You have that debtor principle that the debtors assumption of
an obligation is not presumed. The imposition of obligation is not presumed. And so the doubt shall
be resolved in favor of the debtor.
Article 60.
This is similar to the civil code. How to compute period:
Days
Month
Year

= 24 hours
- if specific month named, then number of days in that month will be
considered. Example. January, so 31 days
- if not named, civil code, it has 30 days
= 365 days

Article 61.
General rule: Grace periods are not recognized because in commercial transactions, time is of the
essence.
Exceptions:
1. When the contract provides for a grace period.
period

Like a charter party may provide for a grace

2. When it is based on a provision of law. In the Insurance Code, there is a provision 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 shall be demandable 10
days after it was contracted.
In Civil Law, if the parties contemplated a period for the obligation but they did not stipulated as to
the duration of the period, you have to file first a case 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 of 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 to 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 said that the loan was not yet due
because it is an obligation without a period fixed. 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 contracted.
Article 63.
In contracts where the period for its performance was fixed wither by stipulation 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, unless 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 to 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 must have complied
with his contract, or must be ready to comply with his obligation. 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.
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10 December 2001 Lecture
LETTERS OF CREDIT
Code of Commerce:
Art. 567 Letters of credit are those issued by one merchant to another or for the purpose of
attending to a commercial transaction. (p. 75 of Agbayani)
(Note: According to Villanueva, the Code of Commerce on Letters of Credit are obsolete.
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 lecture).

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 presentation to the bank if drawn in
accordance with the terms and conditions specified 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 intervenes and makes the commitment to pay. The idea
behind it is like your credit card. You walk into a department store and they sell to you on credit
although youre 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 bought.

Governing Rules Letters of credit are governed by the Uniform Customs on Documentary Credits
issued by the International Chamber of Commerce.

A basic principle in letters of credit is that the bank deals with documents only. Aside from
certain conditions, the seller will be required to submit certain documents together with the draft
that he will draw in order to collect. These 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 lading, packing list, commercial invoice. As banks deal with documents only, they
are not qualified to deal with goods. Theyre not competent to deal with a thousand 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, but chalk. De Reny Fabric thus refused to pay.
HELD: No! BPI as a bank deals with documents only. So long as the seller submitted the documents
required, the bank has to pay, and the customer has to reimburse the bank. The bank will not
guarantee that the goods as delivered by the seller comply with the terms and conditions of the
contract. Just like your credit card, 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. Its 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 an on-board bill of lading,
stating that the goods are already loaded on the vessel. Upon it submission, the bank paid. It turned
out, however, that the bill of lading was forged. Buyer refuses to pay.
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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 reimburse 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. When 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 youre talking about goods not meeting the specifications, you cannot enjoin payment, as
when you order brand new steel plates from Russia, and what was delivered was mere 2 nd-hand
steel plates from some dismantled factory in Russia. In this case you cannot enjoin payment.

Fraud in Letters of Credit Its possible to commit fraud because the seller can submit forged or
false documents. To minimize the risk, seller can be required to submit a certification by a
reputable surveyor who will say that he examined the goods and found them to be in accordance
with the specifications. But then again, you can always prepare an air-tight contract, but if the
other party does not intend to fulfill the contract, hes going to break it. A forged surveyors
certification, 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 submit an invoice for
pine lumber. But in the invoice, it was written pine timber. Thats not the same.
2. Also in a case where the letter of credit specified Italian marble, and the invoice indicated
just marble, bank can refuse to pay.
3. Where a letter of credit was issued for the importation of noodles, and the invoice said
woodle, the bank can refuse to pay, because bank doesnt 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 exchange, 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 receives the documents, the bank will now
forward that to the buyer. In the cover letter, the bank will state the discrepancies that they
discovered, and will ask the buyer if he agrees to waive the discrepancy. If the buyer waives,
bank will pay. 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 impressive. Buyer applied for a letter of
credit to pay, which stated that among the documents to be submitted to collect was a commercial
invoice issued by Cojac, the name of Mrs. Jacobs business. However in the invoice, the buyer
deliberately misspelled Cojac, by adding a k. So when Mrs. Jacob submitted the invoice, the bank
refused to pay, claiming discrepancy. The bank asked the buyer if it will waive the discrepancy. 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 that 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 conditions 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.

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HELD: That is not what is required by the letter of credit! Since the required certification from the
buyer was not produced, seller cannot collect.

Red Clause This phrase means that the beneficiary can get payment in advance although the
goods being sold has not yet been delivered. In the old days, the American companies would
produce mink coats, so they would send their representatives to China to buy the skins and fur
from the hunters in the mountains. Since these hunters only accepted cash, the manufacturers
would apply for letters of credit, 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 the
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 common 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 the sugar central. If the beneficiary fails to deliver the goods, thats
just too bad. Buyer will have to reimburse the bank.

Evergreen Clause This phrase means that the bank commits to continue renewing the letter of
credit. So why evergreen? Because its always fresh. For instance, a foreign corporation not
doing business in the Phils sues here asking for a provisional remedy. The court required it to
post a bond. Surety will go, E teka muna, youre not doing business here! Supposing we pay
huh, how will we get reimbursement from you?! Youre not here! We need security! Get a standby 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 will pay. Now its
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 will keep renewing the letter of credit until the
case has been finally decided! The bank will then use an evergreen clause.
Feati Bank vs. CA
The letter of credit was issued in California, and Feati Bank was the correspondent 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 severally liable with the opening
bank if it confirmed the letter of credit.

A letter of credit may be revocable or irrevocable. Usually the beneficiary insists 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 credit. Buyer sued,
and obtained a court order ordering the bank not to pay the said 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 to month, as when

the bank every month makes available P50,000. It may also be revolving as to amount as when
the bank makes available P50,000, subject to renewal upon consumption of the entire amount in
a month. It may be cumulative, as when you used up only P40,000 of the alloted P50,000 for the
month, in the next month, 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 person. It is a contract
between the customer who applied for it and the bank which issued it for the benefit of the
beneficiary of the letter of credit.

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 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 letter of credit. Insular Bank of Asia in
America issued the letter of credit, agreeing 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
certification. Insular Bank refused to pay the entire face amount of the letter of credit, 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 be independent of the
underlying transaction which gave rise to its issuance. Thats why the bank will have to pay even if
there be a deficiency or defect in the goods. The couple thus would have to reimburse the bank.
Their remedy would be to run after Philamlife for reimbursement of overpayment. But meanwhile,
they would 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 in RP was Bank of America and so it notified
the seller here that a letter of credit 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 the beneficiary to recover.
HELD: Bank of America liable! Under negotiable instruments law, the drawer warrants 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 then required that for every letter of
credit, marginal deposit of say 30% must be 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 Banks Lien on Applicants Property Whenever you apply for any transaction 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 said stipulation in the
appliaction. PNB has the right to set-off or demand reimbursement with any deposit. Later, the
applicant assigned his time deposit to a 3rd party. When the amount fell due, the question was who
has a better right to collect the money, assignee or PNB?
HELD: PNB! It had lien on the deposit. The assignee merely stepped into the shoes 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 goods will normally be
consigned to the bank, the bank will require the buyer to sign a trust receipt to take delivery of the
goods.
PD 115: Trust Receipts Decree
provisions Jack read in class)

(p. 669 of Agbayani, I just reproduced the particular

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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 substantially
complying with the provisions of the Decree. No further formality of execution or
authentication shall be necessary to the validity of a trust receipt.
Sec. 4 What Constitutes a Trust Receipt TransactionA trust receipt transaction, within the meaning of this Decree, is any transaction by and
between a person referred to in this Decree as the entruster, and another person referred
to in this Decree as the 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 latters execution and delivery to
the entruster of a signed document called the trust receipt wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster
and 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, instruments
themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially equivalent
to anyone of the following: xxx
Allied Banking Corp. Case
Philippine Blooming Mills imported some materials and applied for a letter of credit from a bank.
When the equipment arrived, the president signed a trust receipt in favor of the bank. The bank was
not paid. The bank filed a criminal case against 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 facilities 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 bank did not
acquire any lien or title to the goods. They were purchased independent of the applicants
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. Filinvest 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 executed a trust
receipt over the shells they were intending to export. They failed 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 dont owe you anymore.
HELD: NO! In a trust receipt transaction, the title really belongs to the trustee. This is just a security
arrangement. The bank does not own the Puka Shells. The borrower cannot compel the bank to
accept the Puka Shells as payment.

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Sec. 7 Rights of the Entruster (par 2) xxx The entruster may 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 conditions of the 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 goods 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 secured 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 foreclose. 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 security
interest shall not, merely by virtue of such interest or having given the entrustee liberty of
sale or other disposition of the goods, documents or instruments under the terms of the
trust receipt transaction, be responsible as principal 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 its a lemon, the buyer can run after 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 shall
dispose of them strictly in accordance with the terms and conditions of the trust
receipt;
(2)
receive the proceeds in trust for the entruster and turn over the same to the
entruster or as appears on the trust receipt;
(3)
insure the goods for their total value against loss from fire, theft, pilferage or other
casualties;
(4)
keep said goods or proceeds thereof whether in money or whatever form, separate
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 provisions
of this Decree.
Sec. 10 Liability of entrustee for lossThe risk of loss shall be borne by the entrustee. Loss of goods, documents or instruments
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 entrustee, 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, documents or
instruments for value and in good faith from the entrustee, acquires said goods,
documents or instruments free from the entrusters security interest.
Sec. 12 Validity of entrusters security interest as against creditors

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- The entrusters 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 dont worry, theres nothing much to miss. Its 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 are deliverable to bearer or under, a stipulation
that it is not negotiable will be void. Now if it is not negotiable then it must plainly state to be nonnegotiable.
Usually they would print in red letters across NON-NEGOTIABLE coz if the
warehouseman fails to do that and somebody believed in good faith that it was negotiable, 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 usually the case, then the
word DUPLICATE shall be plainly worded on the face of the duplicate copies otherwise the person
who suffered damages because he bought a duplicate warehouse receipt and it did not indicate that
it was a duplicate copy but he thought that it was the original receipt, well he could sue the
warehouseman 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 the 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 storage 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 claim the goods and deliver the
goods again; and
3. a readiness and willingness to sign an acknowledgment that he has received the goods.
Now if the warehouseman refuses to deliver the goods then the burden is on him to show that he
has a just cause to refuse to deliver the goods. Now the warehouseman will be discharged from
liability if he delivers the goods to the following 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 has authority
from the person who is entitled to the delivery of the goods. So if its 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 bearer or to order but
it was indorsed, then the person in possession of the receipt
So if the warehouseman wrongfully delivers the goods to someone who is not entitled to
possession, then he will be liable for damages to the person lawfully entitled to the delivery.

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Now as a general rule, the warehouseman cannot refuse to deliver the goods because a third
person is claiming to be entitled to the goods. However the warehouseman may withhold delivery
until he has some reasonable opportunity to investigate the validity of the claim of the third person
or to file an action for interpleader. Of course, thats the safest cause of action for him to take, to
file an action for interpleader. Likewise, the warehouseman will be excused from delivering 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 sold coz they were perishable or hazardous.
Now, time and again, you will notice that a warehouse receipt is not like a negotiable instrument.
For instance, if there is an alteration in the warehouse receipt, even if it was unauthorized, made
with a fraudulent intent, the warehouseman 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 warehouseman to deliver the goods upon proof of the
loss of the receipt and posting of a bond to protect the warehouseman from liability because the
warehouse receipt is still outstanding. Because if that warehouse receipt, which is negotiable was
negotiated, 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 negotiable, and a creditor
wants to levy on the goods, he must first ask that the indorsement 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 receipt 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 goods. Until this
is done, the warehouseman cannot be compelled to deliver the goods.
Again as a rule the warehouseman cannot refuse to deliver the goods on the ground that he
owns the goods. As a rule, the bailee cannot assert title to the goods entrusted to him. However,
there are two exceptions:
1. if he acquired title to the goods coz they were transferred to him like if they 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 during the auction
sale
In those two cases, he can assert title to the goods as a ground to refuse to deliver the goods.
Now if the goods are covered by a negotiable warehouse receipt and the warehouseman
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, then as I said, hed 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 partial
delivery. Again, if he fails to comply with this, a buyer in good faith and 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 warehouse receipt
says there are crates containing fruits and when they opened, they 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 contain coz when you say alleged that it is what is alleged but I do not guarantee that
they really contain fruits and not rocks.
2. To Safeguard the Goods

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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 liberation of Manila, the Japanese burned Manila especially in Ermita, Malate, Binondo.
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 unless they are
authorized either by stipulation or by practice or by custom to commingle goods which are fungible,
then he may commingle them and then each depositor will own on a pro-rata basis a portion of the
common mass. So if there is partial loss, lets 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.
Warehousemans 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. Thats why the court said in one case where
the warehouseman was claiming handling fees but there was no indication in the warehouse receipt
that he has a claim for handling fees, so he cant claim to have lien for handling fees or for
transportation. Now thats 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 claim for storage fees
and his claim for storage fees has not been paid.
Satisfying the Warehousemans 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 them at least ten days from receipt of the notice to
pay. If he is not paid then he 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 place 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 the sale will be void. So if the sale pushes through then the warehouseman
should deduct the expenses for the sale and apply the balance to the amount he is claiming. And if
theres 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 properties, so the warehouseman after notifying the owner
to remove the goods and the owner does not do so may sell the goods in public or private sale
without need of notice. If hes unable to sell then he may dispose of them in any manner, so he
may donate them to any charitable institution.
Loss of Warehousemans lien
Now a warehouseman may lose his lien, remember the lien is a retaining lien, 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 hes offering to pay the lien, 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 sugar central sold the sugar and issued a negotiable warehouse receipt to the
buyer. Then the buyer pledged the sugar to somebody else. Now the warehouseman refused 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 said 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 are 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.

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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, then you indorse and deliver. Now if the goods are
deliverable to order and was indorsed in blank, then it becomes deliverable to bearer. Now a
negotiable warehouse 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 receipt, 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 indorsing 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 negotiated to a person
who took it in good faith and for value. Thats why I told you earlier that in this case of PNB this
Noahs Ark, in Makati along Pasig River, issued a warehouse receipt for sugar then they sold the
sugar and indorsed the negotiable warehouse receipt. The buyer now pledged the sugar with PNB as
collateral for a loan. Noahs Ark was claiming that the buyer did not pay us in full, we 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 and for value.
Now if the goods are covered by a negotiable receipt and the owner sold or mortgaged or
pledged them twice and he remained in possession of the receipt, thats why he was able to sell the
receipt a second time or this case of double sale, the second buyer will be protected. Of course with
the fault of the first buyer 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 will not defeat
the right of a buyer in good faith and for value. Now if the warehouse receipt is not negotiable it
may be assigned and the assignee will only acquire whatever rights the assignor had. But if the
receipt is negotiable and the goods are deliverable to order, and the owner transferred the receipt
without indorsing it, so the transferee can compel the transferor to indorse the warehouse 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. These 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 warehouseman does not
deliver the goods, the holder cant run after the indorser. In negotiable instruments, if the maker or
acceptor does not pay, the holder can run after 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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