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LETTERS OF CREDIT- Negotiable Instruments the buyer upon reimbursement.

As it is the one issuing the


instrument, it should be a strong bank, well known and well
NATURE AND IMPORTANCE 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
> A letter of credit is a financial device developed by
the issuing bank to recover payment. He is also the beneficiary of
merchants as a convenient and relatively safe mode of dealing with
the credit instrument because the instrument is addressed to him
sales of goods to satisfy the seemingly irreconcilable interests of the
and is in his favor. While the bank cannot compel the seller
seller, who refuses to part with his goods before he is paid, and
to ship the goods and avail of the benefits of the instruments,
a buyer, who wants to have control of the goods before paying
however, the seller may recover from the bank the value of his
> To break the impasse, the buyer may be required to contract a
shipment is made within the terms of the instrument, even though
bank to issue a letter of credit, the issuing bank can authorize
he hasnt given the bank any direct consideration for the banks
the seller to raw drafts and engage to pay them upon
promises contained in the instrument
their presentment simultaneously with the tender of documents
4. Correspondent bank/advising bankto convey to the seller
required by the letter of credit. The buyer and seller agree on
the existence of the credit or a confirming bank which will lend
what documents are to be presented for payment, but
credence to the letter of credit issued by the lesser known issuing
ordinarily they are documents of title evidencing or attesting to
bank or paying bank which undertakes to encash the drafts drawn
the shipment of the goods to the buyer
by the exporter. Furthermore, another bank known as the
> Once the letter of credit is established, the seller ships the
negotiating bank may be approached by the buyer to have the
goods to the buyer and in the process secures the required shipping
draft discounted instead of going to the place of the issuing bank to
documents and documents of title. To get paid, the seller
claim payment
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 RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT
conform with what the letter of credit requires. The bank then TRANSACTIONS
obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing > If the beneficiary is to be advised by the issuing bank by
bank and acquires the documents entitling him to the goods. The cable, the services of an ADVISING OR NOTIFYING BANK must
seller gets paid only if he delivers the documents of title over the always be utilized
goods while the buyer acquires the said documents and control
over the goods only after reimbursing the bank. > 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
INDEPENDENCE PRINCIPLE of the issuing bank shall also be made the obligation of the bank to
himself, there is what is known as a CONFIRMED COMMERCIAL
> What characterizes letters of credit, as distinguished from CREDIT and the bank notifying the beneficiary of the credit
other accessory contract, is the ENGAGEMENT OF THE ISSUING shall become a CONFIRMING BANK. In this case, the liability of the
BANK TO PAY THE SELLER ONCE THE DRAFT AND THE confirming bank is primary and it is as if the credit were issued by
REQUIRED SHIPPING DOCUMENTS ARE PRESENTED TO IT. In the issuing and confirming banks jointly, thus giving the beneficiary
turn, this arrangement ASSURES THE SELLER OF PROMPT or a holder for value of drafts drawn under the credit, the right to
PAYMENT, INDEPENDENT OF ANY BREACH OF THE MAIN SALES proceed against either or both banks, the moment the credit
CONTRACT. instrument has been breached.

> The paying bank on which the drafts are to be drawn it may
LAWS GOVERNING A LETTER OF CREDIT TRANSACTION 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
> Uniform Customs and Practice for Documentary Credits (UCP)
to be paid in this manner, the paying bank assumes no
issued by the International Chamber of Commerce
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
PARTIES TO A LETTER OF CREDIT TRANSACTION PAYING BANK, the paying bank reimburses itself by drawing a bill of
exchange on the issuing bank, in dollars, for the equivalent of the
1. Buyerprocures the letter of credit and obliges himself to local currency paid to the beneficiary, at the buyeing rate for dollar
reimburse the issuing bank upon receipt of the documents of title. exchange. The beneficiary is entirely out of the transaction
He is the one initiating the operation of the transaction as buyer of because his draft is completely discharged by the payment, and the
the merchandise and also of the credit instrument. His credit arrangement between the paying bank and issuing bank
contract with the bank which is to issue the instrument and is doesnt concern him.
represented by the Commercial Credit Agreement form which > If the draft contemplated by the credit instrument, is to be drawn
he signs, supported by the mutually made promises contained on the issuing bank or on other designated banks not in the
in the agreement city of the seller, any bank in the city of the seller which buys
2. Opening bankusually the buyers bank which issues the letter or discounts the draft of the beneficiary becomes a negotiating
of credit and undertakes to pay the seller upon receipt of the bank. As a rule, whenever, the facilities of an advising or notifying
draft and proper documents of titles to surrender the documents to bank are used, the beneficiary is apt to offer his drafts to the
advising bank for negotiation, thus giving the advising bank buyers own bank can judge in the light of its knowledge of his
the character of a negotiating bank becomes an endorser and financial standing whether added security is needed and can insist
bona fide holder of the drafts and within the protection of the on such security before it issues the letter of credit
credit instrument. It is also protected by the drawers d. To meet the sellers letter of credit requirements, the buyer
signature, as the drawers contingent will request its bank to arrange for the issuance of a letter of credit
liability, as drawer, continues until discharged by the actual payment which will comply with the terms of the proforma invoice. The
of the bills of exchange. 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
LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS 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
> A commercial bank which departs from what has been stipulated
confirming banks confirmation. In this arrangement, the seller is
under the letter of credit, as when it accepts a faulty tender, acts on
assured of payment of its sight drafts drawn on the confirming bank
its own risk, and it may not thereafter be able to recover from
in the amount of the total amount of the sale, provided it
the buyer or issuing bank, as the case may be, the money thus
presents the documents called for in the letter of credit.
paid to the beneficiary
An examination of the letter of credit will also reveal that the bill of
> In the case of a discounting arrangement, wherein a negotiating
lading is to be consigned to the order of the buyers bank, thereby
bank pays the draft of a beneficiary of a letter of credit in order to
giving the bank control over the goods, with the consequent
save such beneficiary from the hardship of presenting the
security for its claim against the buyer.
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 5. ACCEPTANE; SHIPMENT
liability thereon. Thus, the negotiating bank has the ordinary right a. On the receipt of the confirmed letter of credit, the seller will
of recourse against the seller or beneficiary in the event of dishonor send the order acknowledgment. This document will repeat the
by the issuing bank. 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.
PROTOTYPE EXPORT TRANSACTION
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
1. PROFORMA INVOICEall the particulars for the proposed COMMERCIAL INVOICE which provides a complete record of the
shipment which are then known to the buyer transaction and is an important source of information to such
interested parties as a bank discounting a draft or an
2. PRICE QUOTATION FAS AND CIFFAS stands for free along underwriting extending issuance.
side which means that the seller will be responsible for the c. As the time of shipment approaches, the seller will contact
cost and risks of the goods along side an overseas vessel at its forwarder and give its shipping instructions. It will inform that
the stated location: the buyer bears the costs and risks from that to comply with the requirements of the letter of credit, the bill
point. CIF on the other hand means cost, freight and of lading must be made to the order of the issuing bank. It will
insurance, that in exchange for this stated price, the seller also send copies of the commercial invoice, a packing list, and a
undertakes not only to supply the goods but also to obtain Shippers export declaration. When the forwarder receives
and pay for insurance and bear the freight charges to the stated these documents, he takes over all further documentation as
pointy. the agent of the shipper, the latter merely has to dispatch the
goods from the factory in accordance with the forwarders
3. BUYERS PURCHASE ORDER 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
4. LETTER OF CREDIT dock receipt. The dock receipt is a form supplied by the ocean
a. One way for a seller to be assured of payment is to ship goods carrier which contains information relevant to the shipping of the
under a negotiable bill of lading and arrange for a bank in buyers bearings such as the number of the pier, and the name of the ship.
city to hold the bill of lading until the buyer pays the draft in The dock receipt is NON-NEGOTIABLE and serves as a temporary
the usual foreign sale this arrangement for securing payment of receipt for the goods until they are loaded on board.
the price is not adequate e. The ocean carrier is soon ready to receive the cargo. When
b. In some situations, sellers may need assurance of payment the goods are loaded on board, the steamship line issues a bill of
even before the time of payment. This problem arises in contracts lading which, to comply with the letter of credit, is CONSIGNED TO
which call for the manufacture of goods to the buyers ORDER OF THE ISSUING BANK. The bill of lading is initially prepared
specifications. by the forwarder on a form supplied by the ocean carrier, it
c. Although the proforma invoice may not specify, the seller will sets forth the markings and numbers of the packages,
expect the letter of credit to be confirmed by the local bank in description of the goods, and the number and weight of the
its location. But why does a local bank confirm rather than packages. On its dorsal side, it will state that the goods are received
issue a letter of credit? The bank that issues the letter of credit for shipment, but a statement FREIGHT PREPAID ON BOARD is
needs assurance that it will be reimbursed by the buyer, on whose initiated by a representative of the steamship line after loading.
behalf it pays the seller. The buyers bank can take steps to The forwarder then delivers the bill of lading and the commercial
minimize or invoice to the seller.
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 6. INSURANCE
7. PAYMENT; THE DRAFT. > Demand guarantees are intended to safeguard the other party
a. The confirming bank stated in their letter that the estimated against non-performance or late or defective performance by
CIF price would be available by your drafts on us at sight when the supplier or contractor
accompanied by the listed documents

b. Seller accordingly draws a sight draft on the confirming GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD
bank. The sight draft together with the commercial invoice, PARTY) GUARANTEES
insurance certificate, full set of bills of lading, and the packing
list are presented to the confirming bank. When the bank > Involves a minimum of three parties
receives these documents, it issues its bank draft to sellers 1. Account party/principalparty to the underlying contract
order and transmits the documents by air mail to issuing bank, whose performance is required to be covered by the
which will guarantee and who gives instruction for its
reimburse the confirming bank. 2. Issuer/guarantorthe bank or other party issuing the
c. The documents, sent by airmail, will reach the buyers bank guarantee on behalf of the customer the principal
well ahead of the ocean shipment. The time for release of the 3. The beneficiarythe other party to the underlying contract, in
documents to buyer and reimbursement to the bank will depend whose favor the guarantee is issued
upon the arrangement which was made between the bank and > Usually the guarantee in the 3-party structure is the
buyer when the letter of principals bank and carries on business in the same country as the
credit was initially established. principal, whilst the beneficiary carries on business in a foreign
d. If the buyer plans to resell the goods, he may not be able to country
reimburse the bank until the goods arrive and he resells the > Known as direct guarantees because the guarantee is issued to
goods. In this event, the issuing bank may need to take further directly by the principals bank, not by the local bank in the
steps to secure its claim against the buyer. beneficiarys country

STANDBY LETTERS OF CREDIT OR GUARANTEES PRINCIPAL TYPES OF DEMAND GUARANTEES

HISTORY AND PURPOSE 1. Tender or bid guarantee


a. Where tenders are invited it is often a condition of
> Sometime ago, it is common in international dealings to consideration of the tender that the tenderer undertakes to sign the
require the furnishing of a cash deposit as security, but with contract if its awarded to him, to procure the issue of any
the expansion of international trade this became prohibitively performance or other guarantee required by the guarantee and not
expensive for the counterparty and in due course gave way to to modify or withdraw his tender in the meantime
a more convenient safeguard, the provision of a written b. Purposesafeguard the beneficiary against breach of such an
undertaking by a bank in favor of the buyer or employer payable on undertaking
demand c. If the tenderer is successful and fails to sign the contract and
> Demand guarantees as substitute for cash are designed to provide to furnish the requisite performance or other guarantee, or
the beneficiary with a speedy monetary remedy against the withdraws his tender before its expiry, the beneficiary can call upon
counterparty to the underlying contract and to that end are the guarantor to pay a specified sum designed to compensate
primary in form and documentary in character. him for the trouble and
> The demand guarantee is expressed to be payable solely expense he suffered in reawarding the contract, as well as any
on presentation of a written demand and any other specified additional cost of the contract
documents. Accordingly, any demand within the maximum amount
stated must in principle be paid by the guarantor, regardless 2. Performance guarantee
whether the underlying contract has in fact been broken and a. Guarantee of the central performance of the contract from
regardless of the loss actually suffered by the beneficiary commencement to completion
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the
A CONCISE DEFINITION: DEMAND GUARANTEES parties which precede and follow the central
performance, and there may be distinct segments of liability to
> Undertaking given for payment of a stated or maximum sum of be covered within that performance
money on presentation to the party giving the undertaking of a
demand or payment and such other documents as may be 3. Advance payment or repayment guarantee
specified in the guarantee within the period and in a. Underlying contract may entitle the principal to payment of
conformity with the other conditions of the guarantee stated sums in advance of performance
> Procured by the seller in favor of the buyer for the latter to be paid b. The advance payment guarantee is designed to secure the
in case the seller doesnt comply with contract provisions. The beneficiarys right to repayment of the advance if the performance
economic burder is upon the party who breaches the contract to which it relates is not furnished
4. Retention guarantee
a. Construction contracts usually provide for stage
> Employed typically in construction contracts and contracts payments against architects or engineers certificate and for a
for international sale of goods 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 STANDBY LETTERS OF CREDIT
moneys against a retention guarantee securing repayment
of the released retention moneys if defects are later found or if > Undertaking primary in form but intended to be used only as a
the contractor fails to complete the contract fallback in the event of default by the principal under the underlying
5. Maintenance or warranty guarantee contract
a. Construction contracts usually provide that on completion part
of the retention moneys are to be retained for a specified
> Standby credit in legal perspective is simply another term for
period to cover the cost of any defects or malfunction which
demand guarantees
become manifest during that period
> 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
GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT to support financial and non-financial obligations of the
principal and to provide credit enhancement for the primary
> Not all guarantees are meant to be in favor of a party in the financial undertaking
underlying contract
> For example are customs guarantees which are issued to the
customs to cover any duty that may become payable when KEY ELEMENTS IN A DEMAND GUARANTEE
imported goods which would be exempt from duty if reexported
within a specified time are not in fact reexported within that time
1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any
THE LEGAL NATURE OF A DEMAND GUARANTEE agreement for reduction or increase
4. The currency of payment
> A demand guarantee is an abstract payment undertaking that 5. The documents, if any, to be presented for the purpose of
is, a promise of payment which, though intended to a demand or of reduction or expiry
preserve the beneficiary from loss in connection with the 6. The expiry date or other expiry provisions as well as any
underlying transaction is detached from the underlying agreement for extension
contract between principal and beneficiary and is in form a > Where it is intended that the guarantee shall not commence
primary undertaking between the guarantor and beneficiary which until presentation of a particular document, this fact should be
becomes binding solely by virtue of its issue specified
> A secondary guarantee is both secondary in form and > Direct guarantee: principal, guarantor, and beneficiary should
intent. The intention of the parties is that the guarantor will be be identified
called upon to pay only if the principal defaults in performance, > Indirect guarantee: principal, instructing party, beneficiary,
and then only to the extent of the principals liability and subject and counter-guarantee
to any defenses available to the principal > Central to the demand guarantee is its documentary
> A documentary credit is both primary in intent and form. The character: the rights and obligations it creates are to be determined
parties to the underlying contract intend that the bank issuing the solely from the terms of the guarantee and from any
credit is a to be the first port of call for payment, and this is document presented in accordance with the guarantee, without
the effect of the agreement between them. Whereas in the the need to ascertain external facts
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 DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS
designated payment by the bank as the primary payment method
and only if it fails without fault on the part of the beneficiary is
> Guarantors commitment to the beneficiary arises solely by
entitled to > DEMAND GUARANTEE STANDS BETWEEN THE
virtue of the issue of the guarantee and his duty to pay is
SURETYSHIP GUARANTEE AND THE DOCUMENTARY CREDIT
conditioned only on presentation of demand and other specified
SECONDARY IN INTENT AND PRIMARY IN FORM. Performance
documents in conformity with the terms and within the duration of
is due in the first instance from the principal, and the
the guarantee
guarantee is intended to be resorted to only if the principal has
> Principal is not concerned with the contract between the
failed to perform. But though this is the intent of the parties, the
guarantor and beneficiary
guarantee isnt in form linked to default under the underlying
> Beneficiary has no concern with the contract between the
contract, nor there is any question of performance to hold
principal and guarantor
the beneficiary harmless up to the agreed maximum; and the
> The relationship of principal and guarantor has an internal
sole condition of the guarantors payment liability is the
mandatethe guarantor is obliged to act in accordance with
presentation of a demand and other documents specified in the
the terms of the contract, failing which he may forfeit his right
guarantee in the manner of and within the period of the guarantee
to reimbursement but those terms are of no concern to the
beneficiary, whose right to payment depends solely on his acting
> THE GUARANTOR HAS NO CONCERN WITH THE on conformity with the terms of the guarantee
UNDERLYING CONTRACT AND IF DEMAND IS DULY PRESENTED, > In indirect contracts, there is an additional mandate which
PAYMENT MUST BE MADE DESPITE ALLEGATIONS BY THE has 2 facetsthe mandate from the instructing party to the
PRINCIPAL HAS FULLY PERFORMED THE CONTRACTIN THE guarantor as to the issue of the guarantee, which the guarantor
ABSENCE OF ESTABLISHED FRAUD OR OTHER EVENT as mandatory must comply with if he accepts the instruction;
CONSTITUTING GROUND FOR NON-PAYMENT and two, the counter-guarantee which the guarantor exacts from
the instructing party as a precondition of issuing the guarantee and society, do hereby order and decree and make as part of the law of
which is separate from the mandate the land the following:
1. Abstract character of the payment undertakingbinding
solely by virtue of issue of the guarantee, subject to the Section 1. Short Title. This Decree shall be known as the Trust
beneficiary not rejecting it Receipts Law.
2. Independence of the guarantee from the underlying
transaction
Section 2. Declaration of Policy. It is hereby declared to be the policy
> Guarantee is separate from that contract and the rights and
of the state (a) to encourage and promote the use of trust receipts
obligations created by the guarantee are independent of those
as an additional and convenient aid to commerce and trade; (b) to
arising under the underlying contract
provide for the regulation of trust receipts transactions in order to
> In the absence of established fraud by the beneficiary, the
assure the protection of the rights and enforcement of obligations of
guarantor is not entitled to refuse payment and the principal is
the parties involved therein; and (c) to declare the misuse and/or
not entitled to have payment restrained merely because of a
misappropriation of goods or proceeds realized from the sale of
dispute between the principal and beneficiary
goods, documents or instruments released under trust receipts as a
3. Independence of the guarantee from the principal-guarantor
criminal offense punishable under Article Three hundred and fifteen
relationshipthe guarantee is separate from the contract
of the Revised Penal Code.
between the principal and the guarantor is not entitled to
invoke a breach of that contract
4. Documentary character of guaranteeamount and duration of Section 3. Definition of terms. As used in this Decree, unless the
the duty to pay, the conditions of payment and termination of context otherwise requires, the term
payment obligation depend solely on the terms of the
guarantee itself and presentation of required documents (a) "Document" shall mean written or printed evidence of
5. Requirement of compliance of the demand with the terms of title to goods.
the guarantee
6. Guarantors duty of examination limited to apparent good (b) "Entrustee" shall refer to the person having or taking
order of the document possession of goods, documents or instruments under a
7. Guarantors duty limited the exercise of good faith and trust receipt transaction, and any successor in interest of
reasonable care such person for the purpose or purposes specified in the
8. Independence of counter-guarantee from guarantee trust receipt agreement.
9. Independence of counter-guarantee from mandate received
from instructing party
(c) "Entruster" shall refer to the person holding title over
the goods, documents, or instruments subject of a trust
------------------------------------------------------------------------------------------- receipt transaction, and any successor in interest of such
person.
PRESIDENTIAL DECREE No. 115 January 29, 1973
(d) "Goods" shall include chattels and personal property
PROVIDING FOR THE REGULATION OF TRUST RECEIPTS other than: money, things in action, or things so affixed to
TRANSACTIONS land as to become a part thereof.

WHEREAS, the utilization of trust receipts, as a convenient business (e) "Instrument" means any negotiable instrument as
device to assist importers and merchants solve their financing defined in the Negotiable Instrument Law; any certificate
problems, had gained popular acceptance in international and of stock, or bond or debenture for the payment of money
domestic business practices, particularly in commercial banking issued by a public or private corporation, or any certificate
transactions; of deposit, participation certificate or receipt, any credit or
investment instrument of a sort marketed in the ordinary
WHEREAS, there is no specific law in the Philippines that governs course of business or finance, whereby the entrustee,
trust receipt transactions, especially the rights and obligations of the after the issuance of the trust receipt, appears by virtue of
parties involved therein and the enforcement of the said rights in possession and the face of the instrument to be the
case of default or violation of the terms of the trust receipt owner. "Instrument" shall not include a document as
agreement; defined in this Decree.

WHEREAS, the recommendations contained in the report on the (f) "Purchase" means taking by sale, conditional sale, lease,
financial system which have been accepted, with certain mortgage, or pledge, legal or equitable.
modifications by the monetary authorities included, among others,
the enactment of a law regulating the trust receipt transactions; (g) "Purchaser" means any person taking by purchase.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the (h) "Security Interest" means a property interest in goods,
Philippines, by virtue of the powers vested in me by the documents or instruments to secure performance of some
Constitution, as Commander-in-Chief of all the Armed Forces of the obligations of the entrustee or of some third persons to
Philippines, and pursuant to Proclamation No. 1081, dated the entruster and includes title, whether or not expressed
September 21, 1972, and General Order No. 1, dated September 22, to be absolute, whenever such title is in substance taken
1972, as amended, and in order to effect the desired changes and or retained for security only.
reforms in the social, economic, and political structure of our
(i) "Person" means, as the case may be, an individual, against the buyer, general property rights in such goods,
trustee, receiver, or other fiduciary, partnership, documents or instruments, or who sells the same to the
corporation, business trust or other association, and two buyer on credit, retaining title or other interest as security
more persons having a joint or common interest. for the payment of the purchase price, does not constitute
a trust receipt transaction and is outside the purview and
(j) "Trust Receipt" shall refer to the written or printed coverage of this Decree.
document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying Section 5. Form of trust receipts; contents. A trust receipt need not
with the provisions of this Decree. No further formality of be in any particular form, but every such receipt must substantially
execution or authentication shall be necessary to the contain (a) a description of the goods, documents or instruments
validity of a trust receipt. subject of the trust receipt; (2) the total invoice value of the goods
and the amount of the draft to be paid by the entrustee; (3) an
(k) "Value" means any consideration sufficient to support a undertaking or a commitment of the entrustee (a) to hold in trust
simple contract. for the entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in the
trust receipt; and (c) to turn over the proceeds of the sale of the
Section 4. What constitutes a trust receipt transaction. A trust
goods, documents or instruments to the entruster to the extent of
receipt transaction, within the meaning of this Decree, is any
the amount owing to the entruster or as appears in the trust receipt
transaction by and between a person referred to in this Decree as
or to return the goods, documents or instruments in the event of
the entruster, and another person referred to in this Decree as
their non-sale within the period specified therein.
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 The trust receipt may contain other terms and conditions agreed
upon the latter's execution and delivery to the entruster of a signed upon by the parties in addition to those hereinabove enumerated
document called a "trust receipt" wherein the entrustee binds provided that such terms and conditions shall not be contrary to the
himself to hold the designated goods, documents or instruments in provisions of this Decree, any existing laws, public policy or morals,
trust for the entruster and to sell or otherwise dispose of the goods, public order or good customs.
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to Section 6. Currency in which a trust receipt may be denominated. A
the entruster or as appears in the trust receipt or the goods, trust receipt may be denominated in the Philippine currency or any
documents or instruments themselves if they are unsold or not foreign currency acceptable and eligible as part of international
otherwise disposed of, in accordance with the terms and conditions reserves of the Philippines, the provisions of existing law, executive
specified in the trust receipt, or for other purposes substantially orders, rules and regulations to the contrary notwithstanding:
equivalent to any of the following: Provided, however, That in the case of trust receipts denominated in
foreign currency, payment shall be made in its equivalent in
1. In the case of goods or documents, (a) to sell the goods Philippine currency computed at the prevailing exchange rate on the
or procure their sale; or (b) to manufacture or process the date the proceeds of sale of the goods, documents or instruments
goods with the purpose of ultimate sale: Provided, That, in held in trust by the entrustee are turned over to the entruster or on
the case of goods delivered under trust receipt for the such other date as may be stipulated in the trust receipt or other
purpose of manufacturing or processing before its agreements executed between the entruster and the entrustee.
ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the Section 7. Rights of the entruster. The entruster shall be entitled to
entrustee has complied fully with his obligation under the the proceeds from the sale of the goods, documents or instruments
trust receipt; or (c) to load, unload, ship or tranship or released under a trust receipt to the entrustee to the extent of the
otherwise deal with them in a manner preliminary or amount owing to the entruster or as appears in the trust receipt, or
necessary to their sale; or to the return of the goods, documents or instruments in case of non-
sale, and to the enforcement of all other rights conferred on him in
2. In the case of instruments, the trust receipt provided such are not contrary to the provisions of
this Decree.
a) to sell or procure their sale or exchange; or
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds
b) to deliver them to a principal; or
realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the
c) to effect the consummation of some trust receipt or any other agreement between the entruster and the
transactions involving delivery to a depository or entrustee, and the entruster in possession of the goods, documents
register; or 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
d) to effect their presentation, collection or or sending of such notice, sell the goods, documents or instruments
renewal at public or private sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any such sale, whether public
The sale of goods, documents or instruments by a person or private, shall be applied (a) to the payment of the expenses
in the business of selling goods, documents or instruments thereof; (b) to the payment of the expenses of re-taking, keeping
for profit who, at the outset of the transaction, has, as and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the Section 14. Cases not covered by this Decree. Cases not provided for
entruster for any deficiency. Notice of sale shall be deemed in this Decree shall be governed by the applicable provisions of
sufficiently given if in writing, and either personally served on the existing laws.
entrustee or sent by post-paid ordinary mail to the entrustee's last
known business address. Section 15. Separability clause. If any provision or section of this
Decree or the application thereof to any person or circumstance is
Section 8. Entruster not responsible on sale by entrustee. The held invalid, the other provisions or sections hereof and the
entruster holding a security interest shall not, merely by virtue of application of such provisions or sections to other persons or
such interest or having given the entrustee liberty of sale or other circumstances shall not be affected thereby.
disposition of the goods, documents or instruments under the terms
of the trust receipt transaction be responsible as principal or as Section 16. Repealing clause. All Acts inconsistent with this Decree
vendor under any sale or contract to sell made by the entrustee. are hereby repealed.

Section 9. Obligations of the entrustee. The entrustee shall (1) hold Section 17. This Decree shall take effect immediately.
the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and
Done in the City of Manila, this 29th day of January, in the year of
conditions of the trust receipt; (2) receive the proceeds in trust for
Our Lord, nineteen hundred and seventy-three.
the entruster and turn over the same to the entruster to the extent
of the amount owing 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 trust receipt not contrary to the provisions of this
Decree.

Section 10. Liability of entrustee for loss. The 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 entruster
for the value thereof.

Section 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 entruster's security interest.

Section 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.

Section 13. Penalty clause. The failure of an entrustee to turn over


the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.