I.

Letters of Credit
A. Definition and Nature of Letter of Credit
A Letter of Credit is any arrangement, however named or described, whereby a bank,
acting upon the request of its client or on its own behalf, agrees to pay another against
stipulated documents provided that the terms of the credit are complied with.
While a Letter of Credit is a security arrangement, the liability of the bank that issued the
LOC is neither that of a surety nor a guarantor, the liability of the issuing bank is primary
and solidary. And the issuing bank is not entitled to the benefit if excussion.
A LOC is not a negotiable instrument because it does not comply with requisites of
negotiability under the Negotiable Instruments Law. For instance, a LOC does not
contain an unconditional promise or order to pay a sum certain in money. The
undertaking of the bank to pay the beneficiary is conditioned on the submission of the
stipulated documents and compliance with the terms of the credit.
B. Parties to a Letter of Credit
1. Rights and Obligations of Parties
The parties to a LOC and their respective rights and obligations are as follows:
a) Account party / Applicant

Is either the importer or the buyer in a commercial LOC or the

obligor or debtor in a standby LOC. He agrees to pay the bank that
issued the LOC, the commission or charges and to reimburse the
issuing bank the amounts duly paid under the LOC;

Has no obligation to reimburse the issuing bank if the latter pays

without the stipulated documents or in case of discrepant
document; and

Has the right to have the marginal deposit deducted from the
principal obligation under the LOC and to have the interest
computed only on the balance and not on the face value thereof.

b) Issuing Bank

Undertakes to pay the beneficiary upon the latters submission of

stipulated documents or compliance with the credit despite any
breach in the main contract underlying the LOC;

After due payment, issuing bank is entitle to reimbursement as a

matter of right. Reimbursement includes debiting the bank account
of the applicant, if any;

The failure of the beneficiary to present the draft to the applicant

does not affect the right of the issuing bank to reimbursement; and

Issuing bank which paid the beneficiary of an expired LOC can

recover payment from the applicant which obtained the goods from
the beneficiary to prevent unjust enrichment.

c) The Beneficiary
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Is the one entitled to payment from the issuing bank after

submission of stipulated documents and compliance with the terms
of the credit;

Has a prestation to do under the main contract but his failure to

fulfill hi obligation under the main contract does not negate his
right to payment from the issuing bank as long as he is able to
submit the required documents and comply with the terms of the
credit without prejudice to his liability against the account party
under the law on contract and damages;

There can also be additional parties depending on the need to

engage a correspondent bank.

d) Advising / Notifying Bank

Determines the apparent authenticity of the LOC and notifies the

beneficiary of the LOC issuances;

Does not guarantee the genuineness or due execution of the LOC.

It is not liable for damages even if the LOC turns out to be
spurious provided that the spurious character of the LOC is not
apparent on the face of the instrument; and

Has no obligation to pay the beneficiary unless it is also the paying

or confirming bank.

e) The Confirming Bank

Lends credence to the LOC issued by a lesser known bank as if it

were the one that issued the LOC;

Its obligation is similar to the issuing bank. Thus, beneficiary may

tender documents to the confirming bank and collect payment;

Collects fees for such engagement and obtains reimbursement from

the issuing bank.

f) The Negotiating Bank

Becomes a party to the LOC transaction after it buys the draft

drawn by the beneficiary and becomes holder thereof;

As holder, it has the right to payment from the bank primarily

liable on the draft (either issuing bank or the confirming bank);

If the party primarily liable on the LOC (issuing bank or

confirming bank) refuses to honor the draft, the negotiating bank
has the right to proceed against the drawer thereof.

C. Basic Principles of Letter of Credit

1. Doctrine of Independence
Under this principle, the applicant cannot enjoin the payment of the
obligation of the issuing bank under the LOC based on any irregularity or
non-performance of an obligation.
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 By this doctrine, the relationship among:

The issuing bank and the beneficiary;
The issuing bank and the applicant; and
The beneficiary and the applicant
while interrelated, are separate, distinct and independent of one another.
Thus, in determining the obligation of the issuing bank to pay the
beneficiary, the issuing bank has no obligation to verify whether or not the
main contract has been fulfilled or not.
2. Fraud Exception Principle
Under this principle, the beneficiary may be enjoined from collecting on
the LOC if the following elements are present:
a. There is fraud on the part of the beneficiary;
b. Fraud must be in relation to the independent purpose or character
of the credit; and
c. Unless the beneficiary is restrained, the applicant shall suffer grave
and irreparable injury.
3. Doctrine of Strict Compliance
Under this doctrine, the documents that the beneficiary should submit to
the issuing bank or confirming bank must strictly conform to the
documents stipulated.
If there is discrepancy, the issuing bank is not liable to pay. If it pays
despite discrepant documents, it pays at its own risk and cannot obtain
reimbursement from the applicant.
It is not a question of whether or not it is fair or equitable to require
submission of documents, but whether or not the documents were agreed
upon in which case, all such documents must be submitted.

II. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction
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Q: What is a Trust Receipt?

A: Trust Receipt is a transaction between the entruster and the entrustee whereby the
entruster who owns or holds absolute title or security interest over certain goods,
documents and instruments, releases the same to the possession of the entrustee upon the
latters execution and delivery of a trust receipt wherein the entrustee binds himself to
hold the designated goods, documents and instruments in trust for the entruster and to sell
or otherwise dispose of the goods 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 to
return them to the entruster in case of non-sale.
1. Loan/Security Feature
A trust receipt has loan and security features.
The entruster (bank) extends the loan to the entrustee (importer and retail
dealers) to finance the importation or acquisition of goods or instruments
in favor of the entrustee who may not be able to obtain credit except thru
utilization of the merchandise imported or purchased.
The security feature is in the covering trust receipt which secures the
indebtedness.
Q: When is a transaction considered a loan even though denominated as a trust
receipt?
A: The following are the instances when a transaction is considered a loan even
though denominated as a trust receipt:
a. If the entrustee is already the owner or in possession of the goods before
delivery of the loan and execution of the trust receipt agreement, the
transaction shall be considered a simple loan even though the parties may
have denominated the agreement as one of trust receipt. To be in the
nature of the trust receipt, the entruster should have financed the
acquisition or importation of the goods. The funds should have been
delivered before or simultaneously with delivery of the goods;
b. If the goods subject of the trust receipt are not intended for sale or resale;
and
c. Sale of goods by a person in the business of selling goods, for profit, who
at the outset of the transaction has as against the buyer general property
rights in such goods and the seller agrees to hold the proceeds of the sale
of such goods to his creditor under a supposed trust receipt transaction
Q: D owns 100 sacks of rice which he sold to B. D obtained a loan from C
secured by the proceeds of the sale of the rice from B which D agrees to hold in
trust for C. D and C denominated their transaction as one of trust receipt. Is such
transaction a trust receipt within the ambit of the trust receipt law?
A: No. There is no trust receipt, notwithstanding the label, if goods offered as
security for loan accommodation are goods owned and sold by the seller who, at
the outset of the transaction, has against the buyer general property rights over
such goods.

2. Ownership of the Goods, Documents and Instruments under a Trust Receipt

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 Entrustee is the factual owner of the goods, documents and instruments

(Prudential Bank vs. NLRC). Entruster is the real owner of the goods,
documents and instruments.
Note: Secuity 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, whether such title is in substance taken or
retained for security only.
Accordingly, in order to secure that the banker shall be repaid at the
critical point that is, when the imported goods finally reach the hands of
the intended vende the banker takes the full title to the goods at the very
beginning; he takes it as soon as the goods are bought and settled for by
his payments or acceptances in the foreign country, and he continues to
hold that title as his indispensable security until the goods are sold.
Q: Who is the owner of the goods under trust receipt?
A: The entrustee. If under the trust receipt, the bank is made to appear as owner, it
was but a legal fiction than fact for if it were really so, it could dispose of the
goods in any manner that it wants which it cannot do so. To consider the bank the
owner would be to disregard the loan feature thereof.
The entrustee, however, cannot mortgage the goods because one of the requisites
of a valid mortgage is that the mortgagor must be the absolute owner of the
property mortgaged or must have free disposal thereof. Entrustee is not the
absolute owner of the goods under trust receipt nor has free disposal therof.
The entruster likewise is not responsible as principal or vendor under any sale or
contract to sell made by the entrustee.
B. Rights of the Entruster
Q: What are the rights of the ENTRUSTER?
A: The rights of the ENTRUSTER are the following: ECS

To be entitled to the proceeds of the sale of the goods under trust receipt to the
extent of the amount owing to him or the return of the goods in case of non-sale;

To cancel the trust and take possession of the goods or of the proceeds realized
therefrom at any time upon default by the entrustee; and

To sell the goods with at least five day notice to the entrustee and apply the
proceeds in payment of the obligation. Entrustee is liable to pay deficiency, if any.

1. Validity of the Security Interest as Against the Creditors of the

Entrustee/Innocent Purchasers for Value
Q: Who has a better right over the goods subject of the trust receipt, the creditors
of the entrustee or the entruster?
A: The entrusters security interest in the goods under trust receipt shall be valid
as against all creditors of the entrustee for the duration of the trust receipt
agreement. Thus, the security interest of the entruster over the goods under the
trust receipt is superior over the monetary claims of the laborers of the entrustee.
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Q: What about between the entruster and the innocent purchaser for value?
A: The innocent purchaser for value of the goods sold by the entrustee has a better
right than the entruster. He acquires title to the goods free from the security
interest of the entruster.
C. Obligation and Liability of the Entrustee
Q: What are the obligations of the ENTRUSTEE?
A: The obligations of the ENTRUSTEE are the following: HIRRKO
a. To hold the goods, documents or instruments in trust for the entruster and to
dispose of them strictly in accordance with the terms of the trust receipt;
b. To insure the goods for their total value against loss from fire, theft, pilferage or
other casualties;
c. To receive the proceeds in trust for the entruster and turn over the same to the
entruster to the extent of the obligation to the entruster;
d. To return the goods, documents or instruments in the event of non-sale or upon
demand of the entruster;
e. To keep said goods or proceeds thereof separate and capable of identification as
property of the entruster; and
f. To observe all other terms and conditions of the trust receipts not contrary to law.
Q: Are all obligations of the entrustee criminal in nature?
A: No, only the failure of the entrustee to deliver the proceeds of the sale of the goods or
instruments subject of the trust receipt up to the extent of the amount owing to the
entruster or failure of the entrustee to return the goods in case of non-sale. Such violation
constitutes estafa.
Under recent jurisprudence, however, the penal sanction under the trust receipts law does
not apply in case the goods are not intended for sale or resale such as when they are for
actual use.
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or
Instruments
Q: What is the effect of payment or delivery of the proceeds of the sale or
disposition of goods, documents or instruments on the liability of the entrustee?
A: Full payment of the loan or delivery of the sale proceeds equivalent to the full
amount of the obligation extinguishes both criminal and civil liabilities of the
entrustee.
2. Return of Goods, Documents or Instruments in Case of Sale
Q: What is the effect of the return of goods, documents or instruments in case of
non-sale on the liability of the entrustee?
A: The return of the goods, documents or instruments in case of non-sale
extinguishes only the criminal liability of the entrustee unless he pays in full his
loan obligation. The return of the goods and the consequent acquittal of the
entrustee in the criminal case does not bar the filing of a separate civil action to
enforce the civil liability of the entrustee.
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Q: Who bears the risk of loss of goods, documents or instruments in a trust

receipt?
A: The risk of loss shall be borne by the entrustee. Loss of the goods under trust
receipt, pending their disposition, irrespective of whether or not it was due to the
fault of negligence of the entrustee, shall not extinguish the his obligation to the
entruster for the value thereof.
The principle of res perit domino (when the thing is lost, the owner bears the loss)
will not apply against the entruster.
3. Liability for Loss of Goods, Documents or Instruments
Q: What is the effect of the loss or surrender by the entrustee or repossession by
the entruster of the goods under trust receipt?
A: The following are the effects:
a. The loss of the goods subject of the trust receipt regardless of the cause
does not extinguish the civil liability of the entrustee up to the extent of
the amount owing to the entruster;
b. The return of the goods may extinguish the criminal liability but not the
civil liability of the entrustee unless the goods are sold and proceeds
thereof applied in full payment of the loan;
c. The repossession of the goods by the entruster in case of default by the
entrustee does not extinguish the civil liability of the entrustee unless the
goods are sold and proceeds applied in payment of the obligation;
d. In all of the foregoing cases, the civil obligation of the entrustee remains
until the loan granted by the entruster to finance the acquisition of the
goods is fully paid and satisfied;
e. In one case, the Supreme Court ruled that the repossession of the goods in
case of default of the entrustee does not prevent the entruster from
foreclosing any mortgage on the property which the entrustee or surety
offered as additional security for the loan.
Q: May a civil action for the collection of the loan be instituted independently of
the criminal action for violation of the trust receipts law or after the acquittal by
entrustee in the criminal action due to his surrender of the goods to the entruster?
A: Yes, because the loan feature of a trust receipt is distinct from its security
features. What the entrustee does with the goods, as security for the loan,
determines his criminal liability.
For instance, the return of the goods may extinguish his criminal liability but until
the loan is paid, his civil obligation remains.
The civil action of the entrustee is based on ex-contractu while the criminal action
is based on ex-delictu.
The two actions may proceed independently of each other despite the failure of
the entruster to make reservation in the criminal action.
Q: What are the instances where there is no criminal liability despite execution of
a trust receipt agreement?
A: The following instances are:
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a. The transaction is not a trust receipt within the contemplation of the trust
receipt law;
b. Surrender of the goods to the entruster;
c. Non-delivery of the goods to the entrustee;
d. Compromise agreement before the filing of the criminal information for
violation of the trust receipts law;
e. Cancellation of the trust and taking of possession by the entruster; and
f. Loss of the goods due to force majeure.
4. Penal Sanction if Offender is a Corporation
Q: Upon whom does the law impose liability if the offender is a corporation?
A: If the violation is committed by a corporation, the criminal liability shall be
imposed upon the directors, officers, employees or other officials or persons
therein responsible for the offense without prejudice to civil liabilities arising
from the criminal offense.
The officer of the corporation who signed a trust receipt cannot hide behind the
cloak of the separate legal personality of the corporation and cannot avoid
criminal prosecution even though he had no physical possession of the goods nor
benefitted from the trust receipt transaction. The law makes him liable for such
corporate act without prejudice to the civil liability of the corporation and/or
directors/officers responsible for the violation.
The director or officer of the corporation or an agent who signed the trust receipt
in behalf of the corporation shall be criminally liable but not civilly liable unless
he assumes personal liability.
D. Remedies Available
Q: What are the remedies available to the entruster in case of violation of the trust receipt
agreement?
A: The remedies available are the following:
a. File a criminal action for estafa in case of failure of the entrustee to deliver the
proceeds of the sale of the goods under trust receipt up to the extent of his
obligation to the entruster. The civil action may be instituted in the criminal action
or separately filed independently of the criminal action. The criminal action is
based on ex-delictu for violation of the law while the civil action is based on excontractu for violation of the trust receipt agreement;
b. Cancel the trust and take possession of the goods at any time upon default of the
entrustee. After repossession, the entruster may sell the goods upon at least five
day notice to the entrustee and apply the proceeds in payment of the obligation.
The entrustee is liable for deficiency or entitle to excess, if any; and
c. If a surety secures the obligation of the entrustee in addition to the trust receipt,
the law does not obligate the entuster to cancel the trust or take possession of the
goods. He can proceed against the surety. The options belong to the entruster.
E. Warehousemans Lien
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Q: What is a warehousemans lien?

A: A warehousemans lien is a right of a warehouseman to retain goods until all storage
charges have been paid.
Q: What claims are included in the warehousemans lien?
A: A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his
hands, for:
a. All lawful charges for storage and preservation of the goods;
b. All lawful claims for money advanced, interest, insurance, transportation, labor,
weighing, coopering and other charges and expenses in relation to such goods;
and
c. All reasonable charges and expenses for notice, and advertisements of sale, and
for sale of the goods where default had been made in satisfying the
warehousemans lien.
It is necessary, however, that the charges that are present at the time of the issuance of the
receipt, must be so stated in the receipt with the amounts thereof specified. If the existing
charges are not stated, the warehouseman shall have no lien thereon. He shall have a lien
only for charges for storage of goods subsequent to the date of the receipt unless the
receipt expressly enumerated other charges for which a lien is claimed.
Q: What are the properties that are subject to lien?
A: The following are the properties:
a. Against all goods, whenever deposited, belonging to the person who is liable as
debtor for the claims in regard to which the lien is asserted; and
b. Against all goods belonging to others which have been deposited at any time by
the person who is liable as debtor for the claims in regard to which the lien is
asserted if such person had been so entrusted with the possession goods that a
pledge of the same by him at the time of the deposit to one who took the goods in
good faith for value would have been valid.
Q: How can the loss of lien be effected?
A: Loss of lien can be effected:
a. By surrendering possession thereof; or
b. By refusing to deliver the goods when a demand is made with which he is bound
to comply.