LETTERS OF CREDIT- Negotiable Instruments

NATURE AND IMPORTANCE

> A letter of credit is a financial device developed by merchants as a
convenient and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of the seller, who refuses
to part with his goods before he is paid, and a buyer, who wants to have
control of the goods before paying
> To break the impasse, the buyer may be required to contract a bank to
issue a letter of credit, the issuing bank can authorize the seller to
raw drafts and engage to pay them upon their presentment
simultaneously with the tender of documents required by the letter of
credit. The buyer and seller agree on what documents are to be
presented for payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer
> Once the letter of credit is established, the seller ships the goods to the
buyer and in the process secures the required shipping documents
and documents of title. To get paid, the seller executes a draft and presents
it together with the required documents to the issuing bank
> The issuing bank redeems the draft and pays cash to the seller if it
finds that the documents submitted by the seller conform with what the letter of
credit requires. The bank then obtains possession of the documents upon paying the
seller. The transaction is completed when
the buyer reimburses the issuing bank and acquires the documents entitling
him to the goods. The seller gets paid only if he delivers the
documents of title over the goods while the buyer acquires the said
documents and control over the goods only after reimbursing the bank.

INDEPENDENCE PRINCIPLE
> What characterizes letters of credit, as distinguished from other
accessory contract, is the ENGAGEMENT OF THE ISSUING BANK TO
PAY THE SELLER ONCE THE DRAFT AND THE REQUIRED SHIPPING
DOCUMENTS ARE PRESENTED TO IT. In turn, this arrangement
ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT OF ANY
BREACH OF THE MAIN SALES CONTRACT.

LAWS GOVERNING A LETTER OF CREDIT TRANSACTION

> Uniform Customs and Practice for Documentary Credits (UCP) issued by the
International Chamber of Commerce

PARTIES TO A LETTER OF CREDIT TRANSACTION

1. Buyerprocures the letter of credit and obliges himself to reimburse the
issuing bank upon receipt of the documents of title. He is the one initiating the operation
of the transaction as buyer of
the merchandise and also of the credit instrument. His contract with the bank
which is to issue the instrument and is represented
by the Commercial Credit Agreement form which he signs,
supported by the mutually made promises contained in the agreement
2. Opening bankusually the buyers bank which issues the letter of
credit and undertakes to pay the seller upon receipt of the draft and proper
documents of titles to surrender the documents to the
buyer upon reimbursement. As it is the one issuing the
instrument, it should be a strong bank, well known and well regarded in
international trading circles.
3. Sellerin compliance with the contract of sale, ships the goods to
the buyer and delivers the documents of title and draft to the issuing bank to
recover payment. He is also the beneficiary of the credit instrument because the
instrument is addressed to him and
is in his favor. While the bank cannot compel the seller to ship the goods
and avail of the benefits of the instruments, however, the seller may recover from the
bank the value of his shipment is made within the terms of the instrument, even though he
hasnt given the bank any direct consideration for the banks promises
contained in the instrument
4. Correspondent bank/advising bankto convey to the seller the
existence of the credit or a confirming bank which will lend credence to the
letter of credit issued by the lesser known issuing bank or paying bank which undertakes
to encash the drafts drawn
by the exporter. Furthermore, another bank known as the
negotiating bank may be approached by the buyer to have the draft
discounted instead of going to the place of the issuing bank to claim payment

RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT TRANSACTIONS

> If the beneficiary is to be advised by the issuing bank by cable, the
services of an ADVISING OR NOTIFYING BANK must always be utilized
> The responsibility of the NOTIFYING BANK is merely to convey or
transmit to the seller or beneficiary the existence of the credit. However, if the
beneficiary requires that the obligation of the issuing bank shall also be made the
obligation of the bank to himself, there is
what is known as a CONFIRMED COMMERCIAL CREDIT and the bank
notifying the beneficiary of the credit shall become a CONFIRMING BANK. In
this case, the liability of the confirming bank is primary and it is as if the credit were
issued by the issuing and confirming banks jointly, thus giving the beneficiary or a holder
for value of drafts drawn under the credit, the right to proceed against either or both banks,
the moment the credit instrument has been breached.
> The paying bank on which the drafts are to be drawn it may be the
issuing bank or the advising bank. If the beneficiary is to draw and
receive payment in his own currency, the advising bank may be indicated as
the paying bank also. When the draft is to be paid in this
manner, the paying bank assumes no responsibility but merely pays
the beneficiary and debits the payment immediately to the account
which the issuing bank has with it. IF THE ISSUING BANK HAS NO
ACCOUNT WITH THE PAYING BANK, the paying bank reimburses itself by drawing a bill
of exchange on the issuing bank, in dollars, for the equivalent of the local currency paid to
the beneficiary, at the buyeing
rate for dollar exchange. The beneficiary is entirely out of the transaction
because his draft is completely discharged by the payment, and the credit arrangement
between the paying bank and issuing bank
doesnt concern him.
> If the draft contemplated by the credit instrument, is to be drawn on
the issuing bank or on other designated banks not in the city of the
seller, any bank in the city of the seller which buys or discounts the
draft of the beneficiary becomes a negotiating bank. As a rule, whenever, the
facilities of an advising or notifying bank are used, the
beneficiary is apt to offer his drafts to the advising bank for
negotiation, thus giving the advising bank the character of a
negotiating bank becomes an endorser and bona fide holder of the
drafts and within the protection of the credit instrument. It is also
protected by the drawers signature, as the drawers contingent
liability, as drawer, continues until discharged by the actual payment of the bills of
exchange.

LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS

> A commercial bank which departs from what has been stipulated under the letter of
credit, as when it accepts a faulty tender, acts on its own
risk, and it may not thereafter be able to recover from the buyer or
issuing bank, as the case may be, the money thus paid to the beneficiary
> In the case of a discounting arrangement, wherein a negotiating bank pays the draft of a
beneficiary of a letter of credit in order to save such beneficiary from the hardship of
presenting the documents directly to
the issuing bank, the negotiating bank can seek reimbursement of
what has been paid to the beneficiary who as drawer of the draft
continues to assume a contingent liability thereon. Thus, the negotiating bank
has the ordinary right of recourse against the seller or beneficiary in the event of dishonor
by the issuing bank.

PROTOTYPE EXPORT TRANSACTION

1. PROFORMA INVOICEall the particulars for the proposed shipment
which are then known to the buyer
2. PRICE QUOTATION FAS AND CIFFAS stands for free along side
which means that the seller will be responsible for the cost and
risks of the goods along side an overseas vessel at the stated location: the
buyer bears the costs and risks from that point. CIF
on the other hand means cost, freight and insurance, that in
exchange for this stated price, the seller undertakes not only to
supply the goods but also to obtain and pay for insurance and bear the freight
charges to the stated pointy.
3. BUYERS PURCHASE ORDER
4. LETTER OF CREDIT
a. One way for a seller to be assured of payment is to ship goods under a negotiable bill
of lading and arrange for a
bank in buyers city to hold the bill of lading until the
buyer pays the draft in the usual foreign sale this
arrangement for securing payment of the price is not adequate
b. In some situations, sellers may need assurance of payment even before the
time of payment. This problem
arises in contracts which call for the manufacture of goods to the buyers
specifications.
c. Although the proforma invoice may not specify, the seller
will expect the letter of credit to be confirmed by the
local bank in its location. But why does a local bank
confirm rather than issue a letter of credit? The bank that issues the letter of
credit needs assurance that it will be reimbursed by the buyer, on whose behalf it pays the
seller. The buyers bank can take steps to minimize or
remove the hazards. It will receive the negotiable bill of
lading controlling the goods which will provide security
for the customers obligation to reimburse the bank; in addition, the buyers own
bank can judge in the light of
its knowledge of his financial standing whether added security is needed and can
insist on such security before it issues the letter of credit
d. To meet the sellers letter of credit requirements, the buyer will request its
bank to arrange for the issuance of a letter of credit which will comply with the terms of the
proforma invoice. The buyer will then sign a detailed
application and agreement for commercial credit prepared by the bank. The
issuing bank, after approving the buyers credit standing transmits a letter of credit by
cable to the confirming bank. This confirming bank will then deliver to seller a
document advising the latter that the issuing bank opened a letter of credit in its favor and
adding the confirming banks confirmation. In this arrangement, the seller is
assured of payment of its sight drafts drawn on the confirming bank in the amount of the
total amount of the sale, provided it presents the
documents called for in the letter of credit. An examination of the letter of
credit will also reveal that the bill of lading is to be consigned to the order of the buyers
bank, thereby giving the bank control over the goods,
with the consequent security for its claim against the buyer.
5. ACCEPTANE; SHIPMENT
a. On the receipt of the confirmed letter of credit, the seller will send the order
acknowledgment. This document will repeat the
description and price of the goods which has
also appeared on the proforma invoice and states the number and expiration
date of the letter of credit.
b. Further, the arrival of the letter of credit is the go-signal for the seller to send the
goods. The seller then prepares
the COMMERCIAL INVOICE which provides a complete
record of the transaction and is an important source of
information to such interested parties as a bank
discounting a draft or an underwriting extending issuance.
c. As the time of shipment approaches, the seller will contact its forwarder
and give its shipping instructions. It
will inform that to comply with the requirements of the
letter of credit, the bill of lading must be made to the order of the issuing
bank. It will also send copies of the commercial invoice, a packing list, and a Shippers
export declaration. When the forwarder receives these
documents, he takes over all further documentation as
the agent of the shipper, the latter merely has to
dispatch the goods from the factory in accordance with the forwarders
instructions.
d. The seller will then send the truck to the pier where they
are delivered to the ocean carriers receiving clerk who
signs the dock receipt. The dock receipt is a form supplied by the ocean
carrier which contains information
relevant to the shipping of the bearings such as the number of the pier, and the
name of the ship. The
dock receipt is NON-NEGOTIABLE and serves as a temporary receipt for the
goods until they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo. When the goods are
loaded on board, the steamship line issues a bill of lading which, to comply with the letter
of credit, is CONSIGNED TO ORDER OF THE ISSUING BANK. The bill of lading is
initially prepared by the forwarder on
a form supplied by the ocean carrier, it sets forth the
markings and numbers of the packages, description of the goods, and the number
and weight of the packages. On its dorsal side, it will state that the goods are received
for shipment, but a statement FREIGHT PREPAID ON
BOARD is initiated by a representative of the steamship line after loading. The
forwarder then delivers the bill of lading and the commercial invoice to the seller.
6. INSURANCE
7. PAYMENT; THE DRAFT.
a. The confirming bank stated in their letter that the estimated CIF price would
be available by your drafts on us at sight when accompanied by the listed documents
b. Seller accordingly draws a sight draft on the confirming
bank. The sight draft together with the commercial
invoice, insurance certificate, full set of bills of lading,
and the packing list are presented to the confirming
bank. When the bank receives these documents, it
issues its bank draft to sellers order and transmits the
documents by air mail to issuing bank, which will
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyers
bank well ahead of the ocean shipment. The time for release of the documents
to buyer and reimbursement to
the bank will depend upon the arrangement which was
made between the bank and buyer when the letter of
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able
to reimburse the bank until the goods arrive and he
resells the goods. In this event, the issuing bank may need to take further
steps to secure its claim against the buyer.

STANDBY LETTERS OF CREDIT OR GUARANTEES

HISTORY AND PURPOSE

> Sometime ago, it is common in international dealings to require the
furnishing of a cash deposit as security, but with the expansion of
international trade this became prohibitively expensive for the
counterparty and in due course gave way to a more convenient safeguard, the
provision of a written undertaking by a bank in favor of the buyer or employer payable on
demand
> Demand guarantees as substitute for cash are designed to provide the
beneficiary with a speedy monetary remedy against the counterparty
to the underlying contract and to that end are primary in form and
documentary in character.
> The demand guarantee is expressed to be payable solely on
presentation of a written demand and any other specified documents. Accordingly, any
demand within the maximum amount stated must in principle be paid by the guarantor,
regardless whether the underlying
contract has in fact been broken and regardless of the loss actually suffered
by the beneficiary

A CONCISE DEFINITION: DEMAND GUARANTEES

> Undertaking given for payment of a stated or maximum sum of money
on presentation to the party giving the undertaking of a demand or
payment and such other documents as may be specified in the
guarantee within the period and in conformity with the other conditions of
the guarantee
> Procured by the seller in favor of the buyer for the latter to be paid in case the seller
doesnt comply with contract provisions. The economic burder is upon the party who
breaches the contract

> Employed typically in construction contracts and contracts for international

sale of goods
> Demand guarantees are intended to safeguard the other party against
non-performance or late or defective performance by the supplier or contractor

GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD PARTY)

GUARANTEES
> Involves a minimum of three parties
1. Account party/principalparty to the underlying contract
whose performance is required to be covered by the guarantee and who
gives instruction for its
2. Issuer/guarantorthe bank or other party issuing the guarantee on behalf
of the customer the principal
3. The beneficiarythe other party to the underlying contract, in whose favor the
guarantee is issued
> Usually the guarantee in the 3-party structure is the principals bank and
carries on business in the same country as the principal, whilst the beneficiary carries on
business in a foreign country
> Known as direct guarantees because the guarantee is issued to directly
by the principals bank, not by the local bank in the beneficiarys country

PRINCIPAL TYPES OF DEMAND GUARANTEES

1. Tender or bid guarantee
a. Where tenders are invited it is often a condition of consideration of the
tender that the tenderer undertakes to sign the contract if its awarded to him, to procure
the issue of any performance or other guarantee required by the guarantee and not to
modify or withdraw his tender in the meantime
b. Purposesafeguard the beneficiary against breach of such an undertaking
c. If the tenderer is successful and fails to sign the contract
and to furnish the requisite performance or other guarantee, or withdraws his
tender before its expiry, the beneficiary can call upon the guarantor to pay a specified
sum designed to compensate him for the trouble and
expense he suffered in reawarding the contract, as well as any additional cost of
the contract
2. Performance guarantee
a. Guarantee of the central performance of the contract from commencement
to completion
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the
parties which precede and follow the central
performance, and there may be distinct segments of liability to be covered within
that performance
3. Advance payment or repayment guarantee
a. Underlying contract may entitle the principal to payment of stated sums in advance of
performance
b. The advance payment guarantee is designed to secure the beneficiarys
right to repayment of the advance if the performance to which it relates is not furnished
4. Retention guarantee
a. Construction contracts usually provide for stage payments against
architects or engineers certificate and for a specified percentage of the amount certified
in each certificate to be retained by the employer for a specified period of time as
safeguard against defects
b. The employer may be willing to release such retention
moneys against a retention guarantee securing
repayment of the released retention moneys if defects are later found or if the
contractor fails to complete the contract
5. Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion
part of the retention moneys are to be retained for a specified period to co
ver the cost of any defects or malfunction which become manifest during that
period

GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT

> Not all guarantees are meant to be in favor of a party in the underlying contract
> For example are customs guarantees which are issued to the customs
to cover any duty that may become payable when imported goods which
would be exempt from duty if reexported within a specified time are not in fact reexported
within that time

THE LEGAL NATURE OF A DEMAND GUARANTEE

> A demand guarantee is an abstract payment undertaking that is, a
promise of payment which, though intended to preserve the
beneficiary from loss in connection with the underlying transaction is
detached from the underlying contract between principal and
beneficiary and is in form a primary undertaking between the guarantor and
beneficiary which becomes binding solely by virtue of its issue
> A secondary guarantee is both secondary in form and intent. The intention
of the parties is that the guarantor will be called upon to pay
only if the principal defaults in performance, and then only to the extent of the
principals liability and subject to any defenses available to the principal
> A documentary credit is both primary in intent and form. The parties to the underlying
contract intend that the bank issuing the credit is a
to be the first port of call for payment, and this is the effect of the
agreement between them. Whereas in the case of a suretyship
guarantee, the beneficiary cannot look to the guarantor without
establishing default by the principal, the reverse is true of the
documentary credit. The parties have designated payment by the bank as the
primary payment method and only if it fails without fault on the part of the beneficiary is
entitled to >
DEMAND GUARANTEE STANDS BETWEEN THE SURETYSHIP
GUARANTEE AND THE DOCUMENTARY CREDITSECONDARY IN
INTENT AND PRIMARY IN FORM. Performance is due in the first
instance from the principal, and the guarantee is intended to be resorted to
only if the principal has failed to perform. But though this is the intent of the parties, the
guarantee isnt in form linked to default
under the underlying contract, nor there is any question of
performance to hold the beneficiary harmless up to the agreed maximum; and
the sole condition of the guarantors payment liability is
the presentation of a demand and other documents specified in the guarantee
in the manner of and within the period of the guarantee
> THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING
CONTRACT AND IF DEMAND IS DULY PRESENTED, PAYMENT MUST BE
MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY
PERFORMED THE CONTRACTIN THE ABSENCE OF ESTABLISHED
FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NON-PAYME
NT

STANDBY LETTERS OF CREDIT

> Undertaking primary in form but intended to be used only as a fallback in the event of
default by the principal under the underlying contract
> Standby credit in legal perspective is simply another term for demand guarantees
> The standby credit has developed into an all-purpose financial support
instrument embracing a much wider range of uses than the normal
demand guarantee. Thus, standby credits are used to support
financial and non-financial obligations of the principal and to provide credit
enhancement for the primary financial undertaking

KEY ELEMENTS IN A DEMAND GUARANTEE

1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any agreement for
reduction or increase
4. The currency of payment
5. The documents, if any, to be presented for the purpose of a demand or
of reduction or expiry
6. The expiry date or other expiry provisions as well as any agreement for
extension
> Where it is intended that the guarantee shall not commence until
presentation of a particular document, this fact should be specified
> Direct guarantee: principal, guarantor, and beneficiary should be identified
> Indirect guarantee: principal, instructing party, beneficiary, and
counter-guarantee
> Central to the demand guarantee is its documentary character: the rights and
obligations it creates are to be determined solely from the
terms of the guarantee and from any document presented in accordance
with the guarantee, without the need to ascertain external facts

DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS

> Guarantors commitment to the beneficiary arises solely by virtue of the issue
of the guarantee and his duty to pay is conditioned only on
presentation of demand and other specified documents in conformity with the
terms and within the duration of the guarantee
> Principal is not concerned with the contract between the guarantor and beneficiary
> Beneficiary has no concern with the contract between the principal and guarantor
> The relationship of principal and guarantor has an internal
mandatethe guarantor is obliged to act in accordance with the terms of th
e contract, failing which he may forfeit his right to reimbursement but
those terms are of no concern to the beneficiary, whose right to payment
depends solely on his acting on conformity with the terms of the guarantee
> In indirect contracts, there is an additional mandate which has 2 facetsthe
mandate from the instructing party to the guarantor as to
the issue of the guarantee, which the guarantor as mandatory must
comply with if he accepts the instruction; and two, the counter-guarantee
which the guarantor exacts from the instructing party as a precondition of issuing the
guarantee and which is separate from the mandate
1. Abstract character of the payment undertakingbinding
solely by virtue of issue of the guarantee, subject to the beneficiary not
rejecting it
2. Independence of the guarantee from the underlying transaction
> Guarantee is separate from that contract and the
rights and obligations created by the guarantee are
independent of those arising under the underlying contract
> In the absence of established fraud by the
beneficiary, the guarantor is not entitled to refuse
payment and the principal is not entitled to have
payment restrained merely because of a dispute between the principal and
beneficiary
3. Independence of the guarantee from the principal-guarantor
relationshipthe guarantee is separate from the contract
between the principal and the guarantor is not entitled to invoke a breach of that
contract
4. Documentary character of guaranteeamount and duration of the duty to pay, the
conditions of payment and termination of
payment obligation depend solely on the terms of the guarantee itself and
presentation of required documents
5. Requirement of compliance of the demand with the terms of the guarantee
6. Guarantors duty of examination limited to apparent good order of the
document
7. Guarantors duty limited the exercise of good faith and reasonable care
8. Independence of counter-guarantee from guarantee
9. Independence of counter-guarantee from mandate received from instructing
party
Section 1. This Act shall be known by the short title of "BONDED WAREHOUSE ACT."

Sec. 2. As used in this Act, the term "warehouse" shall be deemed to mean every building, structure, or
other protected inclosure in which rice is kept for storage. The term "rice" shall be deemed to mean either
palay in bundles, or in grains, or clean rice, or both. "Person" including corporation or partnership or two
or more persons having joint or common interest; "warehouseman" means a person engaged in the
business receiving rice for storage; and "receipt" means any receipt issued by a warehouseman for rice
delivered to him. For the purpose of this Act, the business of receiving rice for storage shall include (1) any
contract or transaction wherein the warehouseman is obligated to return the very same rice delivered to
him or pay its value;(2) any contract or transaction wherein the rice delivered is to be milled for and on
account of the owner thereof; (3) any contract or transaction wherein the rice delivered is commingled
with the rice delivered by or belonging to other persons and the warehouseman is obligated to return the
rice of the same kind or pay its value.

Sec. 3. No person shall engage in the business of receiving rice for storage without first securing a license
therefore from the Director of the Bureau of Commerce and Industry. Said license shall be annual and shall
expire on the thirty-first day of December.

Sec. 4. Any person applying for a license to engage in the business of receiving rice for storage shall set
forth in the application the place or places where the business and warehouse are to be established or
located and the maximum quantity of rice to be received. The application shall be accompanied by a cash
bond or a bond secured by real estate or signed by a duly authorized bonding company, the amount of
which shall be fixed by the Director of the Bureau of Commerce and Industry at not less than thirty-three
and one third percent of the market value of the maximum quantity or rice to be received. Said bond shall
be so conditioned as to respond for the market value of the rice actually delivered and received at any time
the warehouseman is unable to return the rice or to pay its value. The bond shall be approved by the
Director of the Bureau of Commerce and Industry before issuing a license under this Act, to satisfy himself
concerning the sufficiency of such bond, and to determine whether the warehouse for which such license
is applied for is suitable for the proper storage of rice.

Sec. 5. Whenever the Director of the Bureau of Commerce and Industry shall determine that a bond
approved by him, is or any cause, has become insufficient, he may require an additional bond or bonds to
be given by the warehouseman concerned, conforming with the requirements of the preceding section,
and unless the same be given within the time fixed by a written demand therefor the license of such
warehouse may be suspended or revoked.

Sec. 6. Every person licensed under this Act to engage in the business of receiving rice for storage shall
insure the rice so received and stored against fire.

Sec. 7. Any person injured by the breach of any obligation to secure which a bond is given, under the
provisions of this Act, shall be entitled to sue on the bond in his own name in any court of competent
jurisdiction to recover the damages he may have sustained by such breach. Nothing contained herein shall
except any property of assets of any warehouseman from being sued on in case the bond given is not
sufficient to respond for the full market value of the rice received by such warehouseman.

Sec. 8. Every warehouseman licensed under this Act shall receive for storage, so far as his license and the
capacity of his warehouse permit, any rice, of the kind customarily stored therein by him, which may be
tendered to him in a suitable condition for warehousing, in the usual manner and in the ordinary and usual
course of business, without making any discrimination between persons desiring to avail themselves of
warehouse facilities.

Sec. 9. Every warehouseman licensed under this Act shall keep a complete record of the rice received by
him, of the receipts issued therefor of the withdrawals, of the liquidations and of all receipts returned to
and cancelled by him. He shall make reports to the Director of Bureau of Commerce and Industry
concerning his warehouse and the conditions, contents, operations, and business thereof in such form and
at such time as the said Director may require, and shall conduct said warehouse in all other respects in
compliance with this Act and the rules and regulations made in accordance therewith.

Sec. 10. The Director of Bureau of Commerce and Industry shall from time to time make such rules and
regulations as he may deem necessary for the efficient execution of the provisions of this Act.

Sec. 11. Any person engaging in the business of receiving rice for storage in violation of Section three of
this Act shall be deemed guilty of misdemeanor, and upon conviction thereof shall be punished by
imprisonment of not less than one month or by a fine of not more than five thousand pesos, or both, in the
discretion of the court.

Sec. 12. Any warehouseman licensed under this Act receiving a quantity of rice greater than that specified
in his application and license, shall, upon conviction, be fined double the market value of the rice so
received in excess of the quantity of rice he is authorized to receive.

Sec. 13. Any person entering into connivance or combination with any warehouseman that is not licensed
under this Act, with the purpose of evading the provisions of section three of this Act, shall be deemed
guilty of misdemeanor, and upon conviction thereof, shall be fined not more than two hundred pesos or
imprisonment for not more than one months, or both, in the discretion of the court.

Sec. 14. The Director of the Bureau of Commerce and Industry may, after opportunity for hearing has been
afforded to the license concerned, suspend or revoke any license issued to any warehouseman, conducting
a warehouse under this Act, for any violation or failure to comply with any provision of this Act or of the
rules and regulations made by virtue thereof.

Sec. 15. This Act shall not be applicable to cooperative marketing associations of rice producers organized
under Act Numbered Three Thousand Four Hundred and Twenty-five known as the "Cooperative Marketing
Law," provided such associations shall not receive, for storage, rice from non-members which is greater in
quantity than one-half of the total quantity of rice received from members, at any time.

Sec. 16. If any clause, sentence, or paragraph, or part of this Act shall, for any reason, be adjusted by any
court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the
remainder thereof, but shall be confined in his operation to the clause, sentence, paragraph or part thereof
directly involved in the controversy in which such judgment shall have been rendered.

Sec. 17. This Act shall take effect on January First, nineteen hundred and thirty-two.