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PRESIDENTIAL DECREE No.

115 January 29, 1973

PROVIDING FOR THE REGULATION OF TRUST RECEIPTS TRANSACTIONS

WHEREAS, the utilization of trust receipts, as a convenient business device to assist importers and
merchants solve their financing problems, had gained popular acceptance in international and domestic
business practices, particularly in commercial banking transactions;

WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions, especially
the rights and obligations of the parties involved therein and the enforcement of the said rights in case
of default or violation of the terms of the trust receipt agreement;

WHEREAS, the recommendations contained in the report on the financial system which have been
accepted, with certain modifications by the monetary authorities included, among others, the enactment
of a law regulating the trust receipt transactions;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces of the Philippines, and
pursuant to Proclamation No. 1081, dated September 21, 1972, and General Order No. 1, dated
September 22, 1972, as amended, and in order to effect the desired changes and reforms in the social,
economic, and political structure of our society, do hereby order and decree and make as part of the law
of the land the following:

Section 1. Short Title. This Decree shall be known as the Trust Receipts Law.

Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a) to encourage and
promote the use of trust receipts as an additional and convenient aid to commerce and trade; (b) to
provide for the regulation of trust receipts transactions in order to assure the protection of the rights
and enforcement of obligations of the parties involved therein; and (c) to declare the misuse and/or
misappropriation of goods or proceeds realized from the sale of goods, documents or instruments
released under trust receipts as a criminal offense punishable under Article Three hundred and fifteen
of the Revised Penal Code.

Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires, the term

(a) "Document" shall mean written or printed evidence of title to goods.


(b) "Entrustee" shall refer to the person having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in interest of such person for
the purpose or purposes specified in the trust receipt agreement.
(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.
(d) "Goods" shall include chattels and personal property other than: money, things in action, or
things so affixed to land as to become a part thereof.
(e) "Instrument" means any negotiable instrument as defined in the Negotiable Instrument Law;
any certificate of stock, or bond or debenture for the payment of money issued by a public or
private corporation, or any certificate of deposit, participation certificate or receipt, any credit
or investment instrument of a sort marketed in the ordinary course of business or finance,
whereby the entrustee, after the issuance of the trust receipt, appears by virtue of possession
and the face of the instrument to be the owner. "Instrument" shall not include a document as
defined in this Decree.
(f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal or
equitable.
(g) "Purchaser" means any person taking by purchase.
(h) "Security Interest" means a property interest in goods, documents or instruments to secure
performance of some obligations of the entrustee or of some third persons to the entruster and
includes title, whether or not expressed to be absolute, whenever such title is in substance taken
or retained for security only.
(i) "Person" means, as the case may be, an individual, trustee, receiver, or other fiduciary,
partnership, corporation, business trust or other association, and two more persons having a
joint or common interest.
(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 this Decree. No further formality of execution or authentication shall be necessary
to the validity of a trust receipt.
(k) "Value" means any consideration sufficient to support a simple contract.

Section 4. What constitutes a trust receipt transaction. A 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 entrustee, whereby the entruster, who owns or holds
absolute title or security interests over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter's execution and delivery to the entruster of a
signed document called a "trust receipt" 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, documents
or instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms
and conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the
following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b) to
manufacture or process the goods with the purpose of ultimate sale: Provided, That, in the case
of goods delivered under trust receipt for the purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the goods whether in its original or
processed form until the entrustee has complied fully with his obligation under the trust receipt;
or (c) to load, unload, ship or tranship or otherwise deal with them in a manner preliminary or
necessary to their sale; or

2. In the case of instruments,

a) to sell or procure their sale or exchange; or


b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository or
register; or
d) to effect their presentation, collection or renewal

The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the
buyer, general property rights in such goods, documents or instruments, or who sells the same
to the buyer on credit, retaining title or other interest as security for the payment of the
purchase price, does not constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form, but every
such receipt must substantially contain (a) a description of the goods, documents or instruments 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 undertaking or a commitment of the entrustee (a) to hold in trust 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 goods, documents or instruments
to the entruster to the extent of the amount owing to the entruster or as appears in the trust receipt or
to return the goods, documents or instruments in the event of their non-sale within the period specified
therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in addition to those
hereinabove enumerated provided that such terms and conditions shall not be contrary to the
provisions of this Decree, any existing laws, public policy or morals, public order or good customs.

Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be denominated in
the Philippine currency or any foreign currency acceptable and eligible as part of international reserves
of the Philippines, the provisions of existing law, executive orders, rules and regulations to the contrary
notwithstanding: Provided, however, That in the case of trust receipts denominated in foreign currency,
payment shall be made in its equivalent in Philippine currency computed at the prevailing exchange rate
on the date the proceeds of sale of the goods, documents or instruments held in trust by the entrustee
are turned over to the entruster or on such other date as may be stipulated in the trust receipt or other
agreements executed between the entruster and the entrustee.

Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, 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 the trust receipt provided such are not contrary to the provisions of this Decree.

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 failure of the entrustee to
comply with any of the terms and conditions of the trust receipt or any other agreement between the
entruster and the entrustee, 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. The proceeds of any such sale,
whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the
payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to
the satisfaction of the entrustee's indebtedness to the entruster. The entrustee shall receive any surplus
but shall be liable to the entruster for any deficiency. Notice of sale shall be deemed sufficiently given if
in writing, and either personally served on the entrustee or sent by post-paid ordinary mail to the
entrustee's last known business address.

Section 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.

Section 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 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.

Section 14. Cases not covered by this Decree. Cases not provided for in this Decree shall be governed by
the applicable provisions of existing laws.

Section 15. Separability clause. If any provision or section of this Decree or the application thereof to
any person or circumstance is held invalid, the other provisions or sections hereof and the application of
such provisions or sections to other persons or circumstances shall not be affected thereby.

Section 16. Repealing clause. All Acts inconsistent with this Decree are hereby repealed.

Section 17. This Decree shall take effect immediately.


LETTER OF CREDIT; DEFINITION AND NATURE OF LETTER OF CREDIT

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of
debt therefor to the addressee. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004, [Tinga])

In Metropolitan Waterworks and Sewerage System vs. Daway , we have also defined a letter of credit as
an engagement by a bank or other person made at the request of a customer that the issuer shall honor
drafts or other demands of payment upon compliance with the conditions specified in the credit.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a
letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet
strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising
in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as
an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable. (supra)

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documents and is thus a commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly
paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security arrangements, they are not
converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented. (Metropolitan Waterworks and Sewerage System vs.
Daway, G.R. No. 160732, June 21, 2004 [Azcuna])

LETTERS OF CREDIT; PARTIES TO A LETTER OF CREDIT; RIGHTS AND OBLIGATIONS OF PARTIES

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the
letter of credit from the issuing bank, the party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the
letter of credit, can be rest assured of being empowered to call on the letter of credit as a security in case
the commercial transaction does not push through, or the applicant fails to perform his part of the
transaction. It is for this reason that the party who is entitled to the proceeds of the letter of credit is
appropriately called beneficiary. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004, [Tinga])
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank. (Feati Bank & Trust Company vs. CA, G.R. No.
94209, April 30, 1991, [Gutierrez, Jr.])
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National
Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then prevail between the negotiating bank and the
seller. (Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking,
p. 293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol. 1,
p. 77)
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its
relationship is only with that of the issuing bank and not with the beneficiary to whom he assumes no
liability. It follows therefore that when the petitioner refused to negotiate with the private respondent,
the latter has no cause of action against the petitioner for the enforcement of his rights under the letter.
(See Kronman and Co., Inc. v. Public National Bank of New York, supra)
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it
will undertake the issuing banks obligation as its own. Verily, the loan agreement it entered into cannot
be categorized as an emphatic assurance that it will carry out the issuing banks obligation as its own.
(supra)
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship between
the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty
toward the person for whose benefit the letter is written to discount or purchase any draft drawn
against the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving
bank and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is
justified. (supra)
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar
to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to notify
the beneficiary. It does not undertake any assurance that the issuing bank will perform what has been
mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions of the
issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable
for its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced to
pay the amount under the letter. As we have previously explained, there was a failure on the part of the
private respondent to comply with the terms of the letter of credit. (Feati Bank & Trust Company vs. CA,
G.R. No. 94209, April 30, 1991, [Gutierrez, Jr.])

LETTERS OF CREDIT; DEFINITION AND NATURE OF LETTERS OF CREDIT


In commercial transactions, 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 a 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.[1]The use of credits in commercial transactions serves to reduce the
risk of nonpayment of the purchase price under the contract for the sale of goods. However, credits are
also used in non-sale settings where they serve to reduce the risk of nonperformance. Generally, credits
in the non-sale settings have come to be known as standby credits.[2] (Transfield Philippines, Inc. vs.
Luzon Hydro Corporation, et al., G.R. No. 146717, November 22, 2004, [Tinga])

Definition and Nature of Letter of Credit

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of
debt therefor to the addressee.[3] (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No.
146717, November 22, 2004, [Tinga])

In Metropolitan Waterworks and Sewerage System vs. Daway[4], we have also defined a letter of
credit as an engagement by a bank or other person made at the request of a customer that the issuer
shall honor drafts or other demands of payment upon compliance with the conditions specified in the
credit.[5]

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is
to recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a
letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking, yet
strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising
in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as
an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional, yet the draft
presented under it is often negotiable.[6] (supra)

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documents[7]and is thus a commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly
paid in the amount specified in the letter.[8]They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security arrangements, they are not
converted thereby into contracts of guaranty.[9]What distinguishes letters of credit from other
accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other
required shipping documents are presented to it.[10]They are definite undertakings to pay at sight once
the documents stipulated therein are presented. (Metropolitan Waterworks and Sewerage System vs.
Daway, G.R. No. 160732, June 21, 2004 [Azcuna])