CODE OF COMMERCE

December 5, 2001
Commerce – defined as the branch of human activity the purpose of which is to bring products to the consumer by means
of exchange or the operations which tends to supply and extend them to him habitually with intent of gain the proper
time and place and in good quantity and quality.
The merchant is the middleman between the consumer and manufacturer. There are three characteristics of commerce:
1) rapidity - because in commercial transactions time is of the essence
2) habitually – does not cover isolated transactions
3) intent of gain

Article 1.
Number 1 refers to individuals.
Number 2 refer to companies created under the Corporation Code or under the provisions on Partnership in the New Civil
Code.
Examples of individuals who habitually devotes themselves as merchants.
Buada (?) v. Posadas – this fellow loaned money about 5 times, court said that is not habitual.
Lastimoso v. Noliente – a person chartered a vessel and sank, what is his liability? The court said that he is not a common
carrier, so he is only required to exercise the due diligence of a good father of the family, and not the extraordinary
diligence of common carriers.
Antham Consolidated case – a foreign company bought copra, the seller was not able to deliver and after 2 more
negotiations to allow the seller to comply, the latter was sued. The defendant-seller raised that defense that the foreign
company-plaintiff is doing business without a license and therefore cannot sue. The court said this is not doing business
because this is an isolated transaction – there is only one contract. The other 2 negotiations are simply extensions of time
to allow the seller to comply with his obligation.
Jack comments: The conclusion is correct but the reasoning is wrong because buying does not constitute doing business,
but it is selling that constitutes doing business where you derive profits.
A merchant must do business in his own name. A ship captain is not a merchant even if he performs acts of commerce
like entering into a charter party, because he is doing so in behalf of the ship owner.
A merchant need not devote his full time to commerce, in De Guzman case, even if it is only a sideline, he is a merchant.
The act must not merely be incidental to the practice of a profession. Where a pharmacist concocts a medicine
prescribed by a physician and charges the customer for the cost of the materials, the pharmacist is not engaged in
business because it is merely incidental to the practice of her profession.
Article 2.
Acts of commerce, whether specified in the Code or not, should be governed first by the Code of Commerce, and in their
absence, by commercial customs, and lastly, by civil law. Notice in the hierarchy, customs take precedence over civil law
because of the progressive character of commerce. For centuries, negotiable instruments are governed mostly by
customs rather than law. But civil law can also supplement the Code of Commerce - the Code does not contain provisions
on extinguishment of obligations or damages.
In Mendoza v. PAL, Mendoza leased the film “Ang Himala ng Birhen” to be shown in Naga City during the Peñafrancia
festival. PAL delivered the film after the festival, so Mendoza sued PAL for unrealized profits. The court said in breach of
contract you cannot recover consequential damages if the debtor was not in bad faith, unless you specifically informed
the debtor of the peculiar circumstance that would give rise to consequential damages. Since Mendoza did not inform
PAL that this is a religious film to be shown during the religious festival, he cannot recover consequential damages in
consonance with the provisions of the Civil Code on damages.
Acts of commerce include those contained in the Code and all other analogous acts. Example, entering into a charter
party. The reason why the law did not enumerate what are the acts of commerce because commerce is very progressive
(you cannot foresee how commerce develops). Commerce is usually ahead of the law which intended to regulate it.
Commercial law – the whole body of substantive jurisprudence applicable to the rights, intercourse and relations of
persons engaged in commerce, trade, or mercantile pursuits.
Sources of commercial law.
A. Direct or principal sources
1. commercial legislation
2. contracts
3. commercial usages and practices
4. civil law
5. judicial decisions

B. Indirect sources
1. natural law
2. scientific law
3. explanatory notes and preamble to laws
4. foreign commercial legislation and case law

Article 3.
This is merely evidentiary. It does not lay down the requisites of engaging in commerce but it tells you that this will create
a presumption of an intention to engage in commerce. Example, by registering the business name with DTI (Business
name law). In a case, a Japanese corporation was sued in the Phil, it claimed that it is not doing business here. The court
said it leased office space at the Luneta Hotel and even sent officers here. Even if it was an isolated transaction, it
indicated an intention to habitually engage in business hence it can be sued.
Article 4.
Note that the age to have legal capacity is now 18 years and not 21 years, under R.A. 1609.
He must also have free disposition of his property. A person who is convicted of a crime punishable by reclusion perpetua
carries with it the accessory penalty of civil interdiction – hence he cannot engage in business.
Article 5.
A minor here can engage into business:
1. To continue the business already started by their parents. If the minors are not allowed to continue the lucrative
business, that will be prejudicial to their interests.
2. Through a guardian
3. If the person is a foreigner, and the law of their country allows him to engage in commerce, applying the conflict of
law rules that the nationality rules determines the capacity to act.
Under R.A. 7192, women can now engage in commerce and enter into contracts without disqualification or limitation.
Title Two. Commercial Registries
Article 16.
Foreign corporations and partnerships can engage business here provided they get a license from the SEC. In case of
insurance companies, they need a certificate of authority from the Insurance Commission, banks need a license from the
Monetary Board.
Various offices of registries: SEC, Maritime Industry Authority, Register of Deeds, etc.
Title Three. Bookkeeping of Commerce
This is now more covered by the NIRC (revenue code). A taxpayer must keep a journal and a ledger, but if his gross
quarterly receipts do not exceed P5,000 he can keep a simplified set of books. In the case of corporations and
partnerships, if their gross income exceed P25,000 quarterly their books must be audited by an independent CPA.
The NIRC also requires that the books must be kept for 3 years. In case of corporations, the Corporation Code requires
them to keep records of all business transactions, minutes of meeting of BOD and stockholder, and stock and transfer
book.
The SEC can examine the records of corporations and partnership, the BIR can examine the records of taxpayers, the
Commission of Audit can audit public utilities and private companies which receive public funds. The insurance
commissioner examines the insurance companies once a year. The superintendent of banks has supervisors assigned to
every bank and examines it once a year. Various regulatory agencies of public utilities also examine the records of public
utilities.
Under the corporation law, stockholder and directors have the right to inspect the corporate records and under Article
1806 of the NCC, partners have the right to examine the books of account of the partnership.
Article 48.
This article lays down certain evidentiary rules regarding keeping of books.
Number 1. This is admission against interest. The entries in the books of merchants maybe used as evidence against
them.
Number 2. If the books of 2 merchants conflict. Where one book is kept in accordance with law while the other is not
kept in accordance with law, the books kept in accordance with law will prevail.
Number 3. If one merchant does not present his books, while the other merchant presents his books and are kept in
accordance with law, the one who presents his books will prevail, unless the reason for failure to produce is caused by a
fortuitous event like they are burned during a fire.
Number 4. If both books are kept in accordance with law and they conflict, the court will decide from the basis of the
rules of preponderance of evidence by taking into consideration the totality of the evidence presented by both sides.
Chapman v. Garcia – the partnership was engaged in lumber business but was dissolved due to the death of one of the
partners. In the winding up of the affairs, one of the partners continued the business. The widow of the husband claimed
the share of the deceased husband in the assets of the partnership. One partner countered that said deceased partner
owed the partnership – unpaid amounts of lumbers purchased. The proof presented was the entries in the books but
were not posted regularly. They were posted several months afterwards, the court said that since the entries were not
kept properly, the books cannot be used as evidence against the estate of that deceased partner.
Article 50.
Commercial contracts. They are governed:
1. Code of commerce
2. Special law – if its the appropriate law like Insurance code
3. Civil code – to be applied in a suppletory manner to other special laws.
This is not the same as in Article 2. This what is involved is an act of commerce, you apply Article 2, but if it is a
commercial contract, you apply Article 50.
Article 51.
Generally, commercial contracts are valid regardless of their form. But if the contract amount involved is more that 1,500
pesetas (P300), testimonial evidence is not sufficient. It is like the Statutes of Frauds – there must be something in writing.
Article 52.
An exception to Article 51.
Number 1 – contracts which according to the Code or special law must be reduced in writing or require formality for their
efficacy, example: Negotiable instruments.
Number 2 – lays down a conflict of law rule
Article 53.
Contracts that are illegal cannot be enforced.
Article 54. Contracts entered into by correspondence shall be perfected from the moment an answer is made accepting
the offer or the conditions by which the latter may be modified.
In commercial transactions, since time is of the essence, the contract is perfected from the moment the acceptance is
sent, even if it has not yet been received by the offeror. The offeror can no longer withdraw the offer or change the terms
of his offer. (Theory of manifestation)
In civil law, when a contract in entered into by correspondence, it will be perfected only upon receipt by the offeror of the
unconditional acceptance of the offeree. (Theory of cognition)
Correspondence includes all kinds like telegrams, radiogram, telex, fax, e-mail.
Article 55.
Contracts in which an agent intervenes shall be perfected when the offeree shall have accepted the agent’s offer. If the
agent was informed that the offer has been accepted even if the principal has not been informed, the contract has been
perfected.
Article 56.
In commercial contracts in which a penalty is imposed, the injured party may demand either specific performance or
payment of the penalty and recourse to one of these alternative remedies will extinguish the obligation unless the
contrary is stipulated. When the law provides that the election of one of the remedies will bar resort to the other
remedy, it presupposes that the remedy chosen was EFFECTIVE. Example, in a charter party agreement, when the
charterer sues for specific performance and the vessel sank, the remedy chosen is not effective, so he can fall back to the
other remedy – payment of liquidated damages.
Article 57.
Commercial contracts should be complied with in good faith.
Article 58.
If there is a conflict between the copies of the contract in possession of the two contracting parties, and an agent or
broker intervenes, the one kept by the agent or broker will prevail.
Article 59.
When there is DOUBT, first apply the Code of Commerce. If you cannot resolve it, then apply customs. If still there is
doubt - the Civil Code. If still it cannot be resolved, then the doubt shall be resolved in favor of the DEBTOR. You have
that debtor principle that the debtor’s assumption of an obligation is not presumed. The imposition of obligation is not
presumed. And so the doubt shall be resolved in favor of the debtor.
Article 60.
This is similar to the civil code. How to compute period:
Days = 24 hours
Month - if specific month named, then number of days in that month will be considered. Example.
January, so 31 days
- if not named, civil code, it has 30 days
Year = 365 days

Article 61.
General rule: Grace periods are not recognized because in commercial transactions, time is of the essence.
Exceptions:
1. When the contract provides for a grace period. Like a charter party may provide for a grace period
2. When it is based on a provision of law. In the Insurance Code, there is a provision providing a grace period of 30 days
to pay the premium for life insurance policies.
Article 62.
Obligations that do not have a period fixed by the parties or by the Code, it shall be demandable 10 days after it was
contracted.
In Civil Law, if the parties contemplated a period for the obligation but they did not stipulated as to the duration of the
period, you have to file first a case in court, asking the court to fix the period in the light of the circumstances. So the
court will have to decide what the parties contemplated in the light of the circumstances.
In the Code of Commerce, where time is of the essence, it is the law that fixes the period of 10 days after the contract was
signed in case the parties failed to provide for such period.
Diego v. Antonio – this case was decided under the old civil code. De Antonio got a loan which was a commercial loan. So
when Diego sued Antonio, the latter said that the loan was not yet due because it is an obligation without a period fixed.
The court should first to fix the period. The court said that such is not necessary because this is a commercial loan.
Therefore according to Article 62, the law fixes the period. That became due on the 10 th day after the loan was
contracted.
Article 63.
In contracts where the period for its performance was fixed wither by stipulation or by law, the obligor will be in delay on
the day after the date of maturity – that is on the following day.
In civil law, general rule is that even if a contract provides for a period, unless a demand is made, the obligor does not
incur in delay.
In commercial law, that is not so, no demand is needed. The moment the period to perform the obligation lapses, the
following day, the obligor is in delay. It is because time is of the essence.
Of course, before a party to a contract maybe guilty of delay, the other party must have complied with his contract, or
must be ready to comply with his obligation. Like in civil law, in reciprocal obligations, the party does not incur in delay if
the other party has not complied with his corresponding obligation.

10 December 2001 Lecture

LETTERS OF CREDIT

Code of Commerce:
Art. 567 – Letters of credit are those issued by one merchant to another or for the purpose of attending to a commercial
transaction. (p. 75 of Agbayani)

(Note: According to Villanueva, the Code of Commerce on Letters of Credit are obsolete. Modern letters of credit are
strictly bank-to-bank transactions. Useless mag-codal in short. Jack just gave the basic principles of the subject in his
lecture).

 Definition A letter of credit is an instrument issued by a bank in behalf of a customer authorizing a beneficiary to
draw a draft/s which will be honored on presentation to the bank if drawn in accordance with the terms and
conditions specified in the letter of credit.

 Underlying Idea of a Letter of Credit Roughly at least 85% of importations are financed by letters of credit. The
underlying idea of a letter of credit is to ensure certainty of payment. Seller is assured of payment because the bank
intervenes and makes the commitment to pay. The idea behind it is like your credit card. You walk into a department
store and they sell to you on credit although you’re a total stranger because you show your credit card, which means
that the bank which issued the credit card tells the seller that it will pay the goods being bought.

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

 A basic principle in letters of credit is that the bank deals with documents only. Aside from certain conditions, the
seller will be required to submit certain documents together with the draft that he will draw in order to collect.
These documents shall be negotiated and agreed upon between the buyer and the seller. Normally, the seller would
have to submit together with the draft a bill of lading, packing list, commercial invoice. As banks deal with documents
only, they are not qualified to deal with goods. They’re not competent to deal with a thousand and one type of
goods. They will act on the basis of the documents only.

BPI vs De Reny Fabrics

De Reny Fabrics imported dyes. It applied for a letter of credit for its payment with BPI.Upon submission of the required
documents by the seller, BPI paid the seller. When the crates arrived, it was found that they did not contain dyes, but
chalk. De Reny Fabric thus refused to pay.
HELD: No! BPI as a bank deals with documents only. So long as the seller submitted the documents required, the bank has
to pay, and the customer has to reimburse the bank. The bank will not guarantee that the goods as delivered by the seller
comply with the terms and conditions of the contract. Just like your credit card, if it turns out that the appliance you
bought was defective, you cannot sue the bank which issued the card. You still have to pay the bank. It’s up to you to run
after the department store which sold the appliance to you.

Litton vs PNB
The crates discovered to contain old cigarettes. Same ruling as De Reny Fabrics case.

Phil. Banking Corp. vs Chua Tiep Seng

The letter of credit provided that in order to collect, the seller must submit an on-board bill of lading, stating that the
goods are already loaded on the vessel. Upon it submission, the bank paid. It turned out, however, that the bill of lading
was forged. Buyer refuses to pay.
HELD: No! The bank does not guarantee the genuineness of the documents submitted by the seller. Provided the bank
acted in good faith, the buyer must still reimburse the bank.

Landmark decision by the Court of Appeals, New York

The importer applied for a letter of credit for goods he imported from India. When the crates arrived they contained
rubbish!
HELD: A preliminary injunction may be issued to stop payment, for this is a case of out and out fraud. What was shipped
by the seller was garbage.

But if you’re talking about goods not meeting the specifications, you cannot enjoin payment, as when you order brand
new steel plates from Russia, and what was delivered was mere 2 nd-hand steel plates from some dismantled factory in
Russia. In this case you cannot enjoin payment.

 Fraud in Letters of Credit It’s possible to commit fraud because the seller can submit forged or false documents. To
minimize the risk, seller can be required to submit a certification by a reputable surveyor who will say that he
examined the goods and found them to be in accordance with the specifications. But then again, you can always
prepare an air-tight contract, but if the other party does not intend to fulfill the contract, he’s going to break it. A
forged surveyor’s certification, for instance, may be submitted.

 Letters of Credit are interpreted strictly.

For example:
1. In an American case, the letter of credit required that the seller must submit an invoice for pine lumber. But in
the invoice, it was written “pine timber.” That’s not the same.
2. Also in a case where the letter of credit specified “Italian marble,” and the invoice indicated just “marble,” bank
can refuse to pay.
3. Where a letter of credit was issued for the importation of noodles, and the invoice said “woodle,” the bank can
refuse to pay, because bank doesn’t know. It might think that a woodle is some exotic food coming from
Timbuktu.

 Procedure when with Discrepancy Seller, to collect, will draw a bill of exchange, addressed to the bank which issued
the letter of credit. Then he will submit the documents required. But typographical errors can happen. When the
bank receives the documents, the bank will now forward that to the buyer. In the cover letter, the bank will state the
discrepancies that they discovered, and will ask the buyer if he agrees to waive the discrepancy. If the buyer waives,
bank will pay. If he refuses, bank will not pay.

Cojack case
Mrs. Cora Jacob made native bags. Buyer ordered P3million worth of bags from her, to be sold to Hawaii. Buyer inspected
the bags and found the quality impressive. Buyer applied for a letter of credit to pay, which stated that among the
documents to be submitted to collect was a commercial invoice issued by “Cojac,” the name of Mrs. Jacob’s business.
However in the invoice, the buyer deliberately misspelled Cojac, by adding a “k.” So when Mrs. Jacob submitted the
invoice, the bank refused to pay, claiming discrepancy. The bank asked the buyer if it will waive the discrepancy. The buyer
refused. The bank dishonored the letter of credit. Later, the buyer offered to pay only P1million to Mrs. Jacob.

Feati Bank vs CA
A naive seller sold logs to an American buyer. The letter of credit required that to collect, the seller must submit a
certification by the buyer saying that he has inspected the goods and found them to be in accordance with the terms and
conditions of the contract. The buyer took delivery of the logs, and was actually able to resell them. However, he refused
to issue the certification. The Seller submitted a certfication from the Bureau of Forest.
HELD: That is not what is required by the letter of credit! Since the required certification from the buyer was not
produced, seller cannot collect.

 “Red Clause” This phrase means that the beneficiary can get payment in advance although the goods being sold has
not yet been delivered. In the old days, the American companies would produce mink coats, so they would send their
representatives to China to buy the skins and fur from the hunters in the mountains. Since these hunters only
accepted cash, the manufacturers would apply for letters of credit, where the beneficiaries would be their
representatives who will buy the furs in the mountains. The letter of credit would allow the beneficiary to collect the
money in advance although he has not yet shipped the skin and the fur. So why red? Because in those days, the said
clause was written in red ink. This is common in sugar trading. An American company will buy sugar here. Company
will open a letter of credit with the trader as beneficiary, who will in turn buy from the sugar central. If the
beneficiary fails to deliver the goods, that’s just too bad. Buyer will have to reimburse the bank.

 “Evergreen Clause” This phrase means that the bank commits to continue renewing the letter of credit. So why
evergreen? Because it’s always fresh. For instance, a foreign corporation not doing business in the Phils sues here
asking for a provisional remedy. The court required it to post a bond. Surety will go, E teka muna, you’re not doing
business here! Supposing we pay huh, how will we get reimbursement from you?! You’re not here! We need security!
Get a stand-by letter of credit! Bank will then issue the letter of credit, telling the surety, Ok, if you submit a
certification that you have been held liable, together with that draft, we will pay. Now it’s possible that the case drags
on beyond the expiration date of the letter of credit. Surety will then say, Bank, make an undertaking that you will
keep renewing the letter of credit until the case has been finally decided! The bank will then use an “evergreen
clause.”

Feati Bank vs. CA

The letter of credit was issued in California, and Feati Bank was the correspondent bank, so it was the one who received
the telex and notified the seller about the letter of credit. Seller sued Feati Bank.
HELD: No! The notifying bank is not liable. It will only be jointly and severally liable with the opening bank if it confirmed
the letter of credit.

 A letter of credit may be revocable or irrevocable. Usually the beneficiary insists that it should be an irrevocable letter
of credit for certainty of payment. If revocable, which is very very rare, the bank can revoke it anytime, without need
of notifying the beneficiary.

Phil. Virginia Tobacco Administration Case

Phil Tobaccco sold tobacco to someone, who paid through a domestic letter of credit. Buyer sued, and obtained a court
order ordering the bank not to pay the said beneficiary, and instead turn over the proceeds to the buyer.
HELD: That order is void! It goes against the inherent nature of an irrevocable letter of credit.

 Revolving letter of credit is automatically renewed. It may be revolving as to month, as when the bank every month
makes available P50,000. It may also be revolving as to amount as when the bank makes available P50,000, subject
to renewal upon consumption of the entire amount in a month. It may be cumulative, as when you used up only
P40,000 of the alloted P50,000 for the month, in the next month, another P50,000 shall be available, plus the amount
which was not used up.

 A letter of credit is a contract with a stipulation for the benefit of a 3 rd person. It is a contract between the customer
who applied for it and the bank which issued it for the benefit of the beneficiary of the letter of credit.

 A letter of credit is a primary, absolute and unconditional obligation. It is not an accessory obligation.

Philamlife Case
A couple took a housing loan from Philamlife. Philamlife, dissatisfied with the real estate mortgage executed by the
spouses, required them to get a stand-by letter of credit. Insular Bank of Asia in America issued the letter of credit,
agreeing to pay upon presentment of Philamlife of a certification that the spouses had defaulted on the loan. Philamlife
later drew a draft and submitted the certification. Insular Bank refused to pay the entire face amount of the letter of
credit, claiming that it was told by the spouses that some payments have been made. It thus insists that the said
payments should be deducted from the amount due.
HELD: No! A letter of credit is not an accessory obligation. It is supposed to be independent of the underlying transaction
which gave rise to its issuance. That’s why the bank will have to pay even if there be a deficiency or defect in the goods.
The couple thus would have to reimburse the bank. Their remedy would be to run after Philamlife for reimbursement of
overpayment. But meanwhile, they would have to reimburse the bank.

Bank of America vs. CA

A Philippine company sold rope to a buyer in Thailand. To pay for it, the buyer applied for a letter of credit from a bank in
Thailand. The correspondent bank in RP was Bank of America and so it notified the seller here that a letter of credit had
been opened in the Thai bank. The seller thus drew a bill of exchange to collect, and then they indorsed it to Bank of
America, which credited them the proceeds right away. But when the bill of exchange was presented, the Thai Bank
dishonored it, saying that the letter of credit is fake. Bank of America sued the beneficiary to recover.
HELD: Bank of America liable! Under negotiable instruments law, the drawer warrants that the bill of exchange will be
paid.

 Marginal Deposits In the old days, the marginal deposits was one of the tools used by the Central Bank to reduce the
demand for dollars. For example, it was then required that for every letter of credit, marginal deposit of say 30% must
be given to the bank. But now, banks do not require marginal deposits unless the financial standing of the customer is
in bad shape.

 Stipulation on Bank’s Lien on Applicant’s Property Whenever you apply for any transaction in the bank, there is a
usually a stipulation in the application giving the bank the right of lien on money or property you own which it may
have in its possession.

PNB Case
Somebody applied for a letter of credit in the Phil. National Bank, having the said stipulation in the appliaction. PNB has
the right to set-off or demand reimbursement with any deposit. Later, the applicant assigned his time deposit to a 3 rd
party. When the amount fell due, the question was who has a better right to collect the money, assignee or PNB?
HELD: PNB! It had lien on the deposit. The assignee merely stepped into the shoes of the assignor, and so it must honor
the lien.

TRUST RECEIPTS

The letters of credit usually go hand in hand with trust receipts. Since the goods will normally be consigned to the bank,
the bank will require the buyer to sign a trust receipt to take delivery of the goods.

PD 115: Trust Receipts Decree (p. 669 of Agbayani, I just reproduced the particular provisions Jack read in class)

Sec. 3 (j) “Trust Receipt” shall refer to the written or printed document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying with the provisions of the Decree. No further formality of
execution or authentication shall be necessary to the validity of a trust receipt.

Sec. 4 What Constitutes a Trust Receipt 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 the entrustee, whereby the entruster,
who owns or holds absolute title or security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latter’s execution and delivery to the entruster of a signed
document called the “trust receipt” wherein the entrustee binds himself to hold the designated goods, documents or
instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster or as
appears in the trust receipt or the goods, instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes substantially equivalent
to anyone of the following: xxx

Allied Banking Corp. Case

Philippine Blooming Mills imported some materials and applied for a letter of credit from a bank. When the equipment
arrived, the president signed a trust receipt in favor of the bank. The bank was not paid. The bank filed a criminal case
against the president. The President insists that the equipment delivered, which were installed in the factory, was not
covered by the letter of credit, as they were not materials which they manufacture into finished products.
HELD: Covered! Sec. 4 of the Trust Receipts Law says “to sell or otherwise dispose.” Installation in the factory is a case of
“otherwise disposed.”

Untitled Case
Client of the bank bought purchased goods. It later applied for credit facilities from the bank. The application for credit
had nothing to do with the purchases. The bank required the applicant to sign a trust receipt for the goods which he had
purchased. When the bank was not paid, it sought to collect payment.
HELD: No! The transaction is not covered by the Trust Receipts Law because the bank did not acquire any lien or title to
the goods. They were purchased independent of the applicant’s transaction with the bank.

 Trust Receipts Used also in Domestic Transactions. Trust receipts are used for both domestic and international
transactions. For instance, Toyota Bel-Air will buy 20 cars from Toyota Motors. It borrows money from Filinvest to pay.
Filinvest will then require the buyer to sign a trust receipt for the cars. Should they be able to sell the car, proceeds
shall be used to pay back Filinvest. If not, they will turn over the cars.

Vintola Case
A couple were involved in exporting Puka Shells. They borrowed from a bank and executed a trust receipt over the shells
they were intending to export. They failed to export them. So they went to the bank and said, Since we are holding these
Puka Shells in trust for you, here they are, help yourselves,we don’t owe you anymore.
HELD: NO! In a trust receipt transaction, the title really belongs to the trustee. This is just a security arrangement. The
bank does not own the Puka Shells. The borrower cannot compel the bank to accept the Puka Shells as payment.

Sec. 7 Rights of the Entruster (par 2) – xxx The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds realized therefrom at any time upon default or
conditions of the trust receipt or any other agreement between the entruster and the entrustee, and the entruster in
possession of the goods, documents or instruments may, on or after default, give notice to the entrustee of the intention
to sell, and may, not less than five days after serving or sending of such notice, sell the goods documents or instruments
at public or private sale, and the entruster may, at a public sale, become a purchaser. xxx

PNB Case
PNB repossessed the goods covered by the trust receipt. The loan was also secured by a real estate mortgage. PNB
sought to foreclose the mortgage. The borrower opposed the foreclosure, claiming that PNB already got back the goods.
HELD: No! The bank merely has a lien on the goods. To realize it, it must foreclose. Otherwise it will be pactum
comissorium. Since the bank has not foreclosed, payment not having been made, it can still foreclose the real estate
mortgage.

Sec. 8 Entruster not responsible on sale by entrustee- The entruster holding a security interest shall not, merely by
virtue of such interest or having given the entrustee liberty of sale or other disposition of the goods, documents or
instruments under the terms of the trust receipt transaction, be responsible as principal or as vendor under any sale or
contract to sell made by the entrustee.

If Toyota Bel-Air sells a car, and it turns out it’s a lemon, the buyer can run after Filinvest(see above example).

Sec. 9 Obligations of the Entrustee- The entrustee shall:

(1) hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in
accordance with the terms and conditions of the trust receipt;
(2) receive the proceeds in trust for the entruster and turn over the same to the entruster or as appears on the trust
receipt;
(3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties;
(4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as
property of the entruster;
(5) return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and
(6) observe all other terms and conditions of the trustee not contrary to the provisions of this Decree.

Sec. 10 Liability of entrustee for 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 enruster for the value thereof.
Sec. 11 Rights of purchaser for value and in good faith –
Any purchaser of goods from an entrustee with right to sell, or of documents or instruments through their customary
form of transfer, who buys the goods, documents or instruments for value and in good faith from the entrustee,
acquires said goods, documents or instruments free from the entruster’s security interest.

Sec. 12 Validity of entruster’s security interest as against creditors

- The entruster’s security interest in goods, documents or instruments pursuant to the written terms of a trust receipt
shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement.

WAREHOUSE RECEIPTS LAW

(The early part of the lecture was not included in the tape perhaps because the recorder was turned on a little late. But
don’t worry, there’s nothing much to miss. It’s all in the handout given to us.

Negotiable or Non-Negotiable Warehouse Receipts

If the warehouse receipt says it is to be delivered to order or to bearer, then it is negotiable. Now if the
warehouse receipt is one where the goods are deliverable to bearer or under, a stipulation that it is not negotiable will be
void. Now if it is not negotiable then it must plainly state to be non-negotiable. Usually they would print in red letters
across “NON-NEGOTIABLE” coz if the warehouseman fails to do that and somebody believed in good faith that it was
negotiable, then he will be protected and the receipt will be treated as negotiable.

Duplicate Copies
Now if there are duplicate copies of the warehouse receipt, which is usually the case, then the word
“DUPLICATE” shall be plainly worded on the face of the duplicate copies otherwise the person who suffered damages
because he bought a duplicate warehouse receipt and it did not indicate that it was a duplicate copy but he thought that
it was the original receipt, well he could sue the warehouseman for damages.

Obligations of the Warehouseman

Now, there are two basic obligations of a warehouseman: to deliver the goods and to safeguard the goods.

1. To Deliver the Goods

Now, so, as a rule the warehouseman is required to deliver the goods. Now the demand for the delivery of the goods
is accompanied by three things:
1. an offer to pay any lien which the warehouseman may have, like a lien for storage fees;
2. an offer to surrender the warehouse receipt if it is negotiable coz otherwise if he does not surrender that and it
continues circulating, somebody could claim the goods and deliver the goods again; and
3. a readiness and willingness to sign an acknowledgment that he has received the goods.

Now if the warehouseman refuses to deliver the goods then the burden is on him to show that he has a just cause to
refuse to deliver the goods. Now the warehouseman will be discharged from liability if he delivers the goods to the
following three people:
1. the person lawfully entitled to the goods, or his agent
2. the person entitled to the delivery under the non-negotiable receipt or who has authority from the person who
is entitled to the delivery of the goods. So if it’s a non-negotiable receipt, then the person to whom the goods
are supposed to be delivered or someone to whom he gave a special power of attorney.
3. if it is a negotiable warehouse receipt, and the goods are deliverable to bearer or to order but it was indorsed,
then the person in possession of the receipt

So if the warehouseman wrongfully delivers the goods to someone who is not entitled to possession, then he will be
liable for damages to the person lawfully entitled to the delivery.

Now as a general rule, the warehouseman cannot refuse to deliver the goods because a third person is claiming to be
entitled to the goods. However the warehouseman may withhold delivery until he has some reasonable opportunity to
investigate the validity of the claim of the third person or to file an action for interpleader. Of course, that’s the safest
cause of action for him to take, to file an action for interpleader. Likewise, the warehouseman will be excused from
delivering the goods if the goods were sold earlier to satisfy his lien coz he was not paid the storage fees, and he
foreclosed his lien. Or, if the goods were sold coz they were perishable or hazardous.

Now, time and again, you will notice that a warehouse receipt is not like a negotiable instrument. For instance, if
there is an alteration in the warehouse receipt, even if it was unauthorized, made with a fraudulent intent, the
warehouseman is still liable but he is liable on the basis of the original terms of the warehouse receipt.

If the warehouse receipt is negotiable and it was lost, well to get delivery, you have to file a case in court and get a
court order ordering the warehouseman to deliver the goods upon proof of the loss of the receipt and posting of a bond
to protect the warehouseman from liability because the warehouse receipt is still outstanding. Because if that warehouse
receipt, which is negotiable was negotiated, the person who took it in good faith and for value, then he can file a claim
against that bond.

This was asked in the bar exams before: If the warehouse receipt is negotiable, and a creditor wants to levy on the
goods, he must first ask that the indorsement or renegotiation be enjoined because it could be negotiated to someone
who could take it in good faith and for value. So he must freeze the warehouse receipt by asking that renegotiation be
enjoined and/or that the warehouse receipt be surrendered. So the injunction there will be in aid of attachment of the
goods. Until this is done, the warehouseman cannot be compelled to deliver the goods.

Again as a rule the warehouseman cannot refuse to deliver the goods on the ground that he owns the goods. As a
rule, the bailee cannot assert title to the goods entrusted to him. However, there are two exceptions:
1. if he acquired title to the goods coz they were transferred to him like if they were covered by negotiable
warehouse receipt and the receipt was indorsed to him, or
2. he has an unpaid lien and he foreclosed his lien and he bought the goods during the auction sale
In those two cases, he can assert title to the goods as a ground to refuse to deliver the goods.

Now if the goods are covered by a negotiable warehouse receipt and the warehouseman delivers the goods
without asking for the surrender of the warehouse receipt and that falls into the hands of a buyer in good faith and for
value, then as I said, he’d be liable for damages to that person. Or if he delivered only a part of the goods, he should
cancel the warehouse receipt and issue a new one for the balance of the goods or indicate on the receipt that there has
been a partial delivery. Again, if he fails to comply with this, a buyer in good faith and for value will be protected and
could hold him liable for damages.

Now if it turned out when the crates are opened, they are empty or the warehouse receipt says there are crates
containing fruits and when they opened, they contained rocks, well the warehouseman will be liable if the contents do
not correspond to what is in the warehouse receipt. Now to escape liability what he should do is to indicate a statement
stating that “the crates are alleged to contain” coz when you say alleged that it is what is alleged but I do not guarantee
that they really contain fruits and not rocks.

2. To Safeguard the Goods

Now the second obligation of a warehouseman is the safekeeping of the goods. And if the goods are lost, it is
presumed that he is at fault. In fact that is also in the Civil Code, obligations and contracts. However if the loss was due
to a fortuitous event, he will not be liable. Like during the battle for the liberation of Manila, the Japanese burned Manila
especially in Ermita, Malate, Binondo. And so the loss due to the fire will be due to a fortuitous event.

And the warehouseman must segregate the goods of the different depositors unless they are authorized either by
stipulation or by practice or by custom to commingle goods which are fungible, then he may commingle them and then
each depositor will own on a pro-rata basis a portion of the common mass. So if there is partial loss, let’s say because of a
rain, sacks of rice which were deposited were commingled, and because of the rain, some of the sacks were spoiled and
damaged, everybody will share proportionately in the loss.

Warehouseman’s Lien
Now a warehouseman has a lien on the goods for all lawful charges but he should indicate in the receipt the
charges for which he is claiming a lien. That’s why the court said in one case where the warehouseman was claiming
handling fees but there was no indication in the warehouse receipt that he has a claim for handling fees, so he can’t claim
to have lien for handling fees or for transportation. Now that’s why the court has said the warehouseman may refuse to
deliver the sugar covered by a negotiable warehouse receipt if it indicates that he has a claim for storage fees and his
claim for storage fees has not been paid.

Satisfying the Warehouseman’s Lien

Now so how does the warehouseman satisfy his lien? Well he will foreclose his lien having notice to the person
for whose account he is holding the goods and to any other person who he knows has a claim in the goods. He must give
them at least ten days from receipt of the notice to pay. If he is not paid then he may proceed to foreclose his lien. Notice
of the sale must be published once a week for two consecutive weeks in a newspaper of general circulation in the place
where the sale will be held. If there is no newspaper in the place, then the advertisement should be posted in at least six
conspicuous places at least ten days before the sale. If he does not comply with this publication requirement the sale will
be void. So if the sale pushes through then the warehouseman should deduct the expenses for the sale and apply the
balance to the amount he is claiming. And if there’s any excess, the excess will be given to the person to whom the goods
would have been delivered. So another instance where the goods may be sold is when they are perishable or hazardous
that they might damage other properties, so the warehouseman after notifying the owner to remove the goods and the
owner does not do so may sell the goods in public or private sale without need of notice. If he’s unable to sell then he
may dispose of them in any manner, so he may donate them to any charitable institution.

Loss of Warehouseman’s lien

Now a warehouseman may lose his lien, remember the lien is a retaining lien, if he surrenders the goods, he
loses his lien. Or he refuses to deliver the goods when the person is entitled to the goods because he’s offering to pay the
lien, to surrender the warehouse receipt, and to sign an acknowledgment, but the warehouseman refuses so he loses his
lien. So you have that PNB case where a sugar central sold the sugar and issued a negotiable warehouse receipt to the
buyer. Then the buyer pledged the sugar to somebody else. Now the warehouseman refused to deliver the sugar to this
pledgee on the ground that since the buyer to pay it in full for the sugar it was still the owner of the sugar. The court said
that is wrong. The fact that the buyer did not pay you does not mean that the buyer did not acquire title. Title passed in
the delivery and therefore you do not have a valid excuse for not delivering the goods and when the ground you are
invoking for not delivering the goods is not justified, under the law you lose your lien. So the warehouseman lost his lien
over the sugar.

Negotiation of Warehouse Receipts

Now if the receipt is negotiable like if it is deliverable to bearer, to negotiate it, it is enough to deliver the receipt.
If deliverable to order, then you indorse and deliver. Now if the goods are deliverable to order and was indorsed in blank,
then it becomes deliverable to bearer. Now a negotiable warehouse receipt may be indorsed, may be negotiated by the
owner of the receipt or by a person to whom he entrusted the possession of the negotiable warehouse receipt, if at the
time he entrusted it, it was in such a form as to be negotiable by delivery.

Now you see a warehouse receipt is not like a negotiable instrument. The person to whom it is negotiated will
only acquire whatever title the person indorsing it had. And the law says the validity of the negotiation of a warehouse
receipt is not impaired by the fact that the negotiation was a breach of duty by the person who negotiated it. Or that the
owner was induced by fraud, mistake or duress to entrust the possession of the receipt to such a person if it was
negotiated to a person who took it in good faith and for value. That’s why I told you earlier that in this case of PNB this
Noah’s Ark, in Makati along Pasig River, issued a warehouse receipt for sugar then they sold the sugar and indorsed the
negotiable warehouse receipt. The buyer now pledged the sugar with PNB as collateral for a loan. Noah’s Ark was
claiming that the buyer did not pay us in full, we retain title to the goods so the pledge is not valid. But the court said no.
Under the law even if the negotiation was made because of fraud, the person to whom it was indorsed would acquire
valid title if he acquired it in good faith and for value.

Now if the goods are covered by a negotiable receipt and the owner sold or mortgaged or pledged them twice
and he remained in possession of the receipt, that’s why he was able to sell the receipt a second time or this case of
double sale, the second buyer will be protected. Of course with the fault of the first buyer coz he did not get the
warehouse receipt. Likewise if the goods are covered with a negotiable warehouse receipt, a lien of the seller as an
unpaid seller will not defeat the right of a buyer in good faith and for value. Now if the warehouse receipt is not
negotiable it may be assigned and the assignee will only acquire whatever rights the assignor had. But if the receipt is
negotiable and the goods are deliverable to order, and the owner transferred the receipt without indorsing it, so the
transferee can compel the transferor to indorse the warehouse receipt but negotiation will take effect only on the date
the indorsement is made.
Warranties
Now a person who negotiates a warehouse receipt warrants certain things. These are like the warranties of an
indorser in the Negotiable Instruments Law. He warrants:
1. that the receipt is genuine
2. that he has a legal right to negotiate or to transfer it
3. he has no knowledge of any fact that will impair the validity of the receipt
4. that he has the right to transfer title to the goods a
5. that the goods are merchantable or fit for a particular purpose

But a warehouse receipt is not like a negotiable instrument, if the warehouseman does not deliver the goods, the
holder can’t run after the indorser. In negotiable instruments, if the maker or acceptor does not pay, the holder can run
after the indorsers. That is not true in warehouse receipts coz the holder cannot run after the person who indorsed it to
him.