LETTERS OF CREDIT

Definition and Nature

DEFINITIONLetters of credit (L/C) are those issued by one merchant to another, or for the purpose of attending to a commercial transaction (Art. 567, Code of Commerce).

A letter of credit is one whereby one person requests some other person to advance money or give credit to a third person, and promises that he will repay the same to the person making the advancement, or accept the bills drawn upon himself for the like amount (Campos, Notes and Selected Cases on Negotiable Instruments Law).

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 v. Luzon Hydro, 2004).

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 (Prudential Bank v. Intermediate Appellate Court, 1992).

PURPOSEIts purpose is to substitute for, and support, the agreement of the buyer-importer to pay money under a contract or other arrangement, but does not necessarily constitute as a condition for the perfection of such arrangement (Reliance Commodities, Inc. v. Daewoo Industrial Co., Ltd., 1993)

Letters of Credit: Mortgage (2005)Ricardo mortgaged his fishpond to AC Bank to secure a P1 Million loan. In a separate transaction, he opened a letter of credit with the same bank for $500,000.00 in favor of HS Bank, a foreign bank to purchase outboard motors. Likewise, Ricardo executed a Surety Agreement in favor of AC Bank.

The outboard motors arrived and were delivered to Ricardo, but he was not able to pay the purchase price thereof.a) Can AC Bank take possession of the outboard motors? Why?b) Can AC Bank also foreclosed the mortgage over the fishpond? Explain. (5%)Suggested answer:a) No, for AC Bank has no legal standing, much less a lien, on the outboard motors. Insofar as AC Bank is concerned, it has privity with the person of Ricardo under the Surety Agreement, and a lien on the fishpond based on the real estate mortgage constituted therein.Yes, but only to enforce payment of the principal loan of P1 Million secured by the real estate mortgage on the fishpond.

ESSENTIAL REQUISITES OF LETTERS OF CREDIT(1) Issued in favor of a definite person and not to order.(2) Limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly.Those which do not have one of these conditions shall be mere letters of recommendation. (Art. 568, Code of Commerce)

NATURE(1) Financial device L/Cs are 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. (Bank of America, NT&SA v. Court of Appeals, 1993)

A letter of credit is one of the modes of payment, set out in Sec. 8, Central Bank Circular No. 1389, "Consolidated Foreign Exchange Rules and Regulations," dated 13 April 1993, by which commercial banks sell foreign exchange to service payments for, e.g., commodity imports (Reliance Commodities v. Daewoo, 1993).(2) Composite of three distinct contracts An L/C transaction involves three distinct but intertwined relationships:(a) First Contract between the party applying for the L/C (buyer/importer/account party) and the party for whose benefit the L/C is issued (seller/exporter/beneficiary). (b) Second Contract between the buyer and the issuing bank. This contract is sometimes called the "Application and Agreement" or the "Reimbursement Agreement".(c) Third Contract between the issuing bank and the seller, in order to support the contract, under (a) above (Reliance Commodities v. Daewoo, 1993).

Letter of Credit: Certification from Consignee (1993)BV agreed to sell to AC, a Ship and Merchandise Broker, 2,500 cubic meters of logs at $27 per cubic meter FOB. After inspecting the logs, CD issued a purchase order.

On the arrangements made upon instruction of the consignee, H&T Corporation of LA, California, the SP Bank of LA issued an irrevocable letter of credit available at sight in favor of BV for the total purchase price of the logs. The letter of credit was mailed to FE Bank with the instruction to forward it to the beneficiary. The letter of credit provided that the draft to be drawn is on SP Bank and that it be accompanied by, among other things, a certification from AC, stating that the logs have been approved prior shipment in accordance with the terms and conditions of the purchase order.

Before loading on the vessel chartered by AC, the logs were inspected by custom inspectors and representatives of the Bureau of Forestry, who certified to the good condition and exportability of the logs. After the loading was completed, the Chief Mate of the vessel issued a mate receipt of the cargo which stated that the logs are in good condition. However, AC refused to issue the required certification in the letter of credit. Because of the absence of certification, FE Bank refused to advance payment on the letter of credit.1) May Fe Bank be held liable under the letter of credit? Explain.2) Under the facts above, the seller, BV, argued that FE Bank, by accepting the obligation to notify him that the irrevocable letter of credit has been transmitted to it on his behalf, has confirmed the letter of credit. Consequently, FE Bank is liable under the letter of credit. Is the argument tenable? Explain.Suggested Answer:1) No. The letter or credit provides as a condition a certification of AC. Without such certification, there is no obligation on the part of FE Bank to advance payment of the letter of credit.No. FE Bank may have confirmed the letter of credit when it notified BV, that an irrevocable letter of credit has been transmitted to it on its behalf. But the conditions in the letter of credit must first be complied with, namely that the draft be accompanied by a certification from AC. Further, confirmation of a letter of credit must be expressed.

TYPES OF LETTERS OF CREDITAS TO THE TYPE OF THE MAIN CONTRACT(1) Commercial L/C The main transaction involves a contract of sale. The credit is payable upon the presentation by the seller of documents that show he has taken affirmative steps to comply with the sales agreement. The beneficiary of a commercial credit must demonstrate by documents that he has performed his contract (Transfield Philippines v. Luzon Hydro, 2004).(2) Standby L/C Used in non-sale settings. The credit is payable upon certification of a party's nonperformance of the agreement. The creditor-beneficiary of the standby credit must certify that the debtor-applicant has not performed the principal obligation. (Transfield Philippines v. Luzon Hydro, 2004).

AS TO REVOCABILITY(1) Revocable L/C One which can be revoked by the issuing bank without the consent of the buyer and seller (2) Irrevocable L/C One which the issuing bank cannot revoke without the consent of the buyer and seller (Feati Bank and Trust Co. v. CA, 1991)

AS TO THE OBLIGATION ASSUMED BY CORRESPONDENT BANK(1) Unconfirmed L/C One which continues to be the obligation of the issuing bank(2) Confirmed L/C One which is supported by the absolute assurance to the beneficiary that the confirming bank will undertake the issuing bank's obligation as its own according to the terms and conditions of the credit (Feati Bank and Trust Co. v. CA, 1991)

Parties to a Letter of Credit

RIGHTS AND OBLIGATIONS OF THE PARTIESThere are at least three parties to a letter of credit:

(1) Buyer/Exporter/Account Party one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of documents of title.

(2) Issuing Bank the bank which undertakes:(a) to pay the seller upon receipt of the draft and proper documents of title; and(b) to surrender the documents to the buyer upon reimbursement.

The obligation of the issuing bank to pay the seller is direct, primary, absolute, definite and solidary with the buyer, in the absence of stipulation in the letter of credit (MWSS v. Daway, 2004).

(3) Seller/Importer/Beneficiary one who ships the goods to the buyer in compliance with a contract of sale and delivers the documents of title and draft to the issuing bank to recover payment.

Depending on the transaction, the number of parties to the letter of credit may be increased. Thus, the different types of correspondent banks:

(4) Advising/Notifying Bank the bank which conveys to the seller the existence of the credit.

The bank assumes no liability except to notify and/or transmit to the seller the existence of the letter of credit. 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.

The bank may suggest to the seller its willingness to negotiate, but this fact alone does not imply that the notifying bank promises to accept the draft drawn under the documentary credit (Feati Bank and Trust Co. v. CA, 1991).

(5) Confirming Bank the bank which lends credence to the letter of credit issued by a lesser known issuing bank.

The bank assumes a direct obligation to the seller and its liability is a primary one as if the bank itself had issued the letter of credit (Feati Bank and Trust Co. v. CA, 1991).

(6) Negotiating Bank the bank which discounts the draft presented by the seller.

The bank 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 (Feati Bank and Trust Co. v. CA, 1991).

(7) Paying Bank the bank which undertakes to encash the drafts drawn by the seller.

Letters of Credit: Liability of a confirming and notifying bank (1994)In letters of credit in banking transactions, distinguish the liability of confirming bank from a notifying bank.Suggested Answer:In case anything wrong happens to the letter of credit, a confirming bank incurs liability for the amount of the letter of credit, while a notifying bank does not incur any liability.

Letters of Credit: Liability of a Notifying Bank (2003)a) What liability, if any is incurred by an advising or notifying bank in a letter of credit transaction?Suggested Answer:It incurs no liability unless it is also the negotiating bank.

Basic Principles of Letter of Credit

DOCTRINE OF INDEPENDENCEThe principle of independence assures the seller or the beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank from determining whether the main contract is actually accomplished or not.

Under this principle, banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any other person whomsoever (Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993).

The concept of guarantee vis-a-vis the concept of an irrevocable credit are inconsistent with each other. In the first place, the guarantee theory destroys the independence of the bank's responsibility from the contract upon which it was opened. In the second place, the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor's obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable credit the bank undertakes a primary obligation. (Feati v. CA, 1991)

The independent nature of the letter of credit may be:(1) Independent in toto - the credit is independent from the justification aspect and is a separate obligation from the underlying agreement;(2) Only as to the justification aspect like in a commercial letter of credit or repayment standby, which is identical with the same obligations under the underlying agreement. (Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA v. Court of Appeals, 1993).

FRAUD EXCEPTION PRINCIPLEThe principle that limits the application of the independence principle only to instances where it would serve the commercial function of the credit and not when fraud attends the transaction.

In the case of Transfield Philippines v. Luzon Hydro, 2004, the petitioner alleged misrepresentation as constituting fraud. The Court, however, made no ruling as to whether the same indeed constitutes fraud.

The case asserts that the "fraud exception" exists when the beneficiary, for the purpose of drawing on the credit, fraudulently presents to the confirming bank, documents that contain, expressly or by implication, material representations of fact that to his knowledge are untrue. In such a situation, petitioner insists, injunction is recognized as a remedy available to it.

Citing Dolan's treatise on letters of credit, petitioner argues that the independence principle is not without limits and it is important to fashion those limits in light of the principle's purpose, which is to serve the commercial function of the credit. If it does not serve those functions, application of the principle is not warranted, and the common law principles of contract should apply. (Transfield Phils. v. Luzon Hydro, 2004)

DOCTRINE OF STRICT COMPLIANCEThe settled rule in commercial transactions involving letters of credit requires that the documents tendered by the seller must strictly conform to the terms of the letter of credit.

Otherwise, the issuing bank or the concerned correspondent, bank is not obliged to perform its undertaking under the contract.

The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender, acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary (Feati v. CA, 1991).

Letters of Credit: Three Distinct Contract Relationships (2002)Explain the three (3) distinct but intertwined contract relationships that are indispensable in a letter of credit transaction.Suggested Answer:The three (3) distinct but intertwined contract relationships that are indispensable in a letter or credit transaction are:1) Between the applicant/buyer/importer and the beneficiary/seller/exporter the applicant/buyer/importer is the one who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title, while the beneficiary/seller/exporter is the one who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment for the goods. Their relationship is governed by the contract of sale.2) Between the issuing bank and the beneficiary/seller/exporter The issuing bank is the one that issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title and to surrender the documents to the buyer upon reimbursement. Their relationship is governed by the terms of the letter of credit issued by the bank.

Between the issuing bank and the applicant/buyer/importer Their relationship is governed by the terms of the application and agreement for the issuance of the letter of credit by the bank.

TRUST RECEIPTS LAW

Concept of Trust ReceiptTransaction

A Trust Receipt Transaction is any transaction by and between an entruster and another person 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 [Sec. 4, PD 115 (Trust Receipts Law)].

A Trust Receipt is a written or printed document signed by the entruster wherein the entrustee binds himself:(1) to hold the designated goods, documents or instruments in trust for the entruster; and(2) 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 (Sec. 4)

Trust Receipts Law (2003)PB & Co., Inc., a manufacturer of steel and steel products, imported certain raw materials for use by it in the manufacture of its products. The importation was effected through a trust receipt arrangement with AB Banking Corporation. When it applied for the issuance by AB Banking Corporation of a letter of credit, PB & Co., Inc., did not make any representation to the bank that it would be selling what it had imported. It failed to pay the bank. When demand was made upon it to account for the importation, to return the articles, or to turn-over the proceeds of the sale thereof to the bank, PB & Co., Inc., also failed. The bank sued PB & Co.s President who was signatory of the trust receipt for estafa. The President put up the defense that he could not be made liable because there was no deceit resulting in the violation of the trust receipt. He also submitted that there was no violation of the trust receipt because the raw materials were not sold but used by the corporation in the manufacture of its products. Would those defenses be sustainable? Why?Suggested Answer:No, the defenses are not sustainable. The lack of deceit should be sustained because the mere failure to account for the importation, or return the articles constitutes the abuse of confidence in the crime of estafa. The fact that the goods arent sold but are used in the manufacture of its products is immaterial because a violation of the trust receipts law happened when it failed to account for the goods or return them to the Bank upon demand.

LOAN/SECURITY FEATUREA letter of credit-trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set-up, a bank extends a loan covered by the letter of credit, with the trust receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods (Vintola v. IBAA, 1987)

A trust receipt arrangement does not involve a simple loan transaction between a creditor and debtor-importer. Apart from a loan feature, the trust receipt arrangement has a security feature that is covered by the trust receipt itself. That second feature is what provides the much needed financial assistance to our traders in the importation or purchase of goods or merchandise through the use of those goods or merchandise as collateral for the advancements made by a bank. The title of the bank to the security is the one sought to be protected and not the loan which is a separate and distinct agreement (People v. Nitafan, 1992)

OWNERSHIP OF THE GOODS, DOCUMENTSAND INSTRUMENTS UNDER A TRUST RECEIPTEntrustee is the factual owner of the goods, documents and instruments (Prudential Bank v. NLRC). Entruster is the real owner of the goods, documents and instruments.

A trust receipt transaction, within the meaning of this Decree, is any transactionwhereby the entruster, who owns or holds absolute title or security interests over certain specified goods, documents or instruments... (Sec. 4)Note: 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.

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 vendee 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.

[I]n a certain manner, (trust receipt contracts) partake of the nature of a conditional sale as provided by the Chattel Mortgage Law, that is, the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. The ownership of the merchandise continues to be vested in the owner thereof or in the person who has advanced payment, until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him by the importer or by his representative or successor in interest. (Prudential Bank v. NLRC, 1995)

Note: In the earlier cases of Vintola v. IBAA (1987) and Abad v. Court of Appeals (1990), the Supreme Court held that the entrustee becomes the absolute owner of the goods, documents and instruments, the entruster being a mere security holder.

Rights of the Entruster

VALIDITY OF THE SECURITY INTERESTAS AGAINST THE CREDITORS OF THE ENTRUSTEE/INNOCENT PURCHASERS FOR VALUEThe entruster shall have the following rights:(1a) Right 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(1b) Right to the return of the goods, documents or instruments in case of non-sale; AND(2) Right to the enforcement of all other rights conferred on him in the trust receipt provided such are not contrary to the provisions of the TRL.(3) Right to 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.(4) Right to sell the goods, documents or instruments at public or private sale at least five days notice to the defaulting entrustee of the intention to sell.(5) Right to purchase the goods, documents or instruments at a public sale.(6) Right to recover the deficiency from the entrustee should the proceeds of the sale not be sufficient (Sec. 7)

Trust Receipts Law: Acts and Omissions; Covered(2006)What acts or omissions are penalized under the Trust Receipts Law?Suggested Answer:The Trust Receipts Law (P.D. No. 115) declares that failure to turn over goods or proceeds realized from sale thereof, is a criminal offense under Art. 315(1)(b) of Revised Penal Code. The law is violated whenever the entrustee or person to whom trust receipts were issued fails to: (a) return the goods covered by the trust receipts; or (b) return the proceeds of the sale of said goods.

Trust Receipts Law: Acts and Omissions; CoveredIs lack of intent to defraud a bar to the prosecution of these acts or omissions?Suggested Answer:No. The Trust Receipts Law is violated whenever the entrustee fails to: (1) turn over the proceeds of the sale of the goods, or (2) return the goods covered by the trust receipts if the goods are not sold. The mere failure to account or return gives rise to the crime which is malum prohibitum. There is no requirement to prove intent to defraud.

Obligation and Liabilityof the Entrustee

OBLIGATIONS OF THE ENTRUSTEE(1) To 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) To 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) To insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4) To keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as property of the entruster; (5) To return the goods, documents or instruments in the event of non-sale or upon demand of the entruster; and (6) To observe all other terms and conditions of the trust receipt not contrary to the provisions of the TRL. (Sec. 9)

LIABILITIES OF THE ENTRUSTEE(1) Liability 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 (Sec. 10)(2) Liability for failure to turn over proceeds of sale or to return The failure shall constitute the crime of estafa, punishable under Art. 315 (b) of the Revised Penal Code (Sec. 13)

Note: Penal sanction if offender is a corporation: If the violation or offense is committed by a corporation, partnership, association or other juridical entities, the penalty 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 (Sec. 13)

Trust Receipts Law: Liability for estafa (1991)Mr. Noble, as the President of ABC Trading Inc. executed a trust receipt in favor of BPI Bank to secure the importation by his company of certain goods. After release and sale of the imported goods, the proceeds from the sale were not turned over to BPI. Would BPI be justified in filing a case for estafa against Noble?Suggested Answer:BPI would be justified in filing a case for estafa under PD 115 against Noble. The fact that the trust receipt was issued in favor of a bank, instead of a seller, to secure the importation of the goods did not preclude the application of the Trust Receipt Law (PD 115). Under the law, any officer or employee of a corporation responsible for the violation of a trust receipt is subject to the penal liability thereunder.Alternative Answer:The filing of a case for estafa under the penal provisions of the RPC would not be justified. It has been held in Sia vs. People (161 s 655) that corporate officers and directors are not criminally liable for a violation of said Code. Two conditions are required before a corporate officer may be criminally liable for an offense committed by the corporation, viz:1. There must be a specific provision of law mandating a corporation to act or not to act; and2. There must be an explicit statement in the law itself that, in case of such violation by a corporation, the officers and directors thereof are to be personally and criminally liable therefore.These conditions are not met in the penal provision of the RPC on trust receipt.

Remedies Available

(1) In case of default or failure of the entrustee to comply with the trust receipt agreement - Entruster may cancel the trust receipt agreement, take possession of the goods, documents, instruments, and sell the same at any private or public sale at least five days from notice of intention to sell to the entrustee.

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 (Sec. 7)

(2) In case of loss of the goods, documents, instruments -Entruster may claim damages from the entrustee (Sec.10)(3) In case of failure to turn over proceeds of the sale of the goods, documents or instruments or to return the same in case of non-sale - Entruster may file a criminal complaint for estafa (Art. 315 (b) of the Revised Penal Code) against the entrustee (Sec. 13)

Trust Receipts Law: Liability for Estafa (1997)A buys goods from a foreign supplier using his credit line with a bank to pay for the goods. Upon arrival of the goods at the pier, the bank requires A to sign a trust receipt before A is allowed to take delivery of the goods. The trust receipt contains the usual language. A disposes of the goods and receives payment but does not pay the bank. The bank files a criminal action against A for violation of the Trust Receipts Law. A asserts that the trust receipt is only to secure his debt and that a criminal action cannot lie against him because that would be violative of his constitutional right against imprisonment for non-payment of a debt. Is he correct?Suggested Answer:No. Violation of a trust receipt is criminal as it is punished as estafa under Art. 315 of the RPC. There is a public policy involved which is to assure the entruster the reimbursement of the amount advance or the balance thereof for the goods subject of the trust receipt. The execution of the trust receipt or the use thereof promotes the smooth flow of commerce as it helps the importer or buyer of the goods covered thereby.

Warehousemans Lien

A warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands:(1) For all lawful charges for storage and preservation of the goods;(2) For all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods;(3) For all reasonable charges and expenses for notice, and advertisements of sale; and(4) For sale of the goods where default had been made in satisfying the warehouseman's lien (Sec. 27)

Notes:(1) General rule: A warehouseman shall have lien only for charges for storage of goods subsequent to the date of the receipt.(2) Exception: When the receipt expressly enumerated other charges provided under Sec. 27 even though the amounts thereof are not stated in the receipt. (Sec. 30)

However, whether a warehouseman has or has not a lien upon the goods, he is entitled to all remedies allowed by law to a creditor against a debtor for the collection from the depositor of all charges and advances which the depositor has expressly or impliedly contracted with the warehouseman to pay (Sec. 32).

(1) Against what property the lien may be enforced:(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 of 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 (Sec. 28)(2) Satisfaction of the lien by sale: In accordance with the terms of a notice so given, a sale of the goods by auction may be had to satisfy any valid claim of the warehouseman for which he has a lien on the goods.

Bill of Lading (1998)1. What do you understand by a bill of lading?2. Explain the two-fold character of a bill of lading.Suggested Answer:1. A bill of lading may be defined as a written acknowledgement of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named therein or on his order.2. A bill of lading has a two-fold character, namely, (a) it is a receipt of the goods to be transported; and (b) it constitutes a contract of carriage of the goods.

Delivery of Goods: Requisites (1998)Luzon Warehousing Co. received from Pedro 200 cavans of rice for deposit in its warehouse for which a negotiable receipt was issued. While the goods were stored in said warehouse, Cicero obtained a judgment against Pedro for the recovery of a sum of money. The sheriff proceeded to levy upon the goods on a writ of execution and directed the warehouseman to deliver the goods. Is the warehouseman under obligation to comply with the sheriffs order?Suggested Answer:No. There was a valid negotiable receipt as there was a valid delivery of 200 cavans of rice for deposit. In such case, the warehouseman (LWC) is not obliged to deliver the 200 cavans of rice deposited to any person, except to the one who can comply with Sec. 8 of the Warehouse Receipt Law, namely:1. Surrender the receipt of which he is a holder;2. Willing to sign a receipt for the delivery of the goods; and3. Pays the warehousemans liens that is, his fees and advances, if any.The sheriff cannot comply with these requisites especially the first, as he is not the holder of the receipt.

Delivery of the Goods (1991)When is a warehouseman bound to deliver the goods, upon a demand made either by the holder of a receipt for the goods or by the depositor?Suggested Answer:The warehouseman is bound to deliver the goods upon demand made either by the holder of the receipt for the goods or by the depositor if the demand is accompanied by:1. An offer to satisfy the warehousemans lien;2. An offer to surrender the receipt, if negotiable, with such indorsements as would be necessary for the negotiation thereof;3. And readiness and willingness to sign when the goods are delivered if so requested by the warehouseman (Ssc. 8 Warehouse Receipts Law).

Garnishment or Attachment of Goods (1999)A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the Warehouse Company issue a receipt expressly providing that the goods be delivered to the order of said merchant.A month after, a creditor obtained judgment against the said merchant for a sum of money. The sheriff proceeded to levy on the rice and directed the Warehouse Company to deliver to him the deposited rice.a) What advise will you give the Warehouse Company? Explain.b) Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the sheriff. Would the rice mill have better rights to the rice than the creditor? Explain your answer.Suggested Answer:a) The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a negotiable receipt was issued therefor. The rice cannot thereafter, while in the possession of the Warehouse Company, be attached by garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the warehouseman, or its negotiation enjoined. The Warehouse Company cannot be compelled to deliver the actual possession of the rice until the receipt is surrendered to it or impounded by the court.b) Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice that the creditor. It is the rice mill that can surrender the receipt which is in its possession and can comply with the other requirements which will oblige the warehouseman to deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the warehousemans liens and fees and other charges.

Negotiable Documents of Title (1992)For a cargo or machinery shipped from abroad to a sugar central in Dumaguete, Negros Oriental, the Bill of Lading (B/L) stipulated to shippers order, with notice of arrival to be addressed to the Central. The cargo arrived at its destination and was released to the Central without surrender of the B/L on the basis of the latters undertaking to hold the carrier free and harmless from any liability.Subsequently, a Bank to whom the central was indebted, claimed the cargo and presented the original of the B/L stating that the Central had failed to settle its obligation with the Bank.Was there misdelivery by the carrier to the sugar central considering the non-surrender of the B/L? Why?Suggested Answer:There was no misdelivery by the carrier since the cargo was considered consigned to the Sugar central per the Shippers Order (Eastern Shipping Lines v CA, 190 s 512).Alternative Answer:There was misdelivery. The B/L was a negotiable document of title because it was to the Shippers Order. Hence, the common carrier should have delivered the cargo to the Central only upon surrender of the B/L. The non-surrender of the B/L will make it liable to holders in due course.

Ownership of Goods Stored (1992)To guarantee the payment of a loan obtained from a bank, Raul pledged 500 bales of tobacco deposited in a warehouse to said bank and endorsed in blank the warehouse receipt. Before Raul could pay for the loan, the tobacco disappeared from the warehouse.Who should bear the loss, the pledgor or the bank? Why?Suggested Answer:The pledgor should bear the loss. In the pledge of a warehouse receipt the ownership of the goods remain with depositor or his transferee. Any contract or real security, among them a pledge, does not amount to or result in an assumption of risk of loss by the creditor. The Warehouse Receipts Law did not deviate from this rule.

Right to the Goods (2005)Jojo deposited several cartoons of goods with SN Warehouse Corporation. The corresponding warehouse receipt was issued to the order of Jojo. He endorsed the warehouse receipt to EJ who paid the value of the goods deposited. Before EJ could withdraw the goods, Melchor informed SN Warehouse Corporation that the goods belonged to him and were taken by Jojo without his consent. Melchor wants to get the goods, but EJ also wants to withdraw the same.1) Who has a better right to the goods? Why?2) If SN Warehouse Corporation is uncertain as to who is entitled to the property, what is the proper recourse of the corporation? Explain.Suggested Answer:1) EJ has a better right to the goods, being covered by a negotiable document of title, namely the warehouse receipts issued to the order of Jojo. Under the Sales provision of the Civil Code on negotiable documents of title, and under the provision of the Warehouse Receipts Law, when goods deposited with the bailee are covered by a negotiable document of title, the endorsement and delivery of the document transfers ownership of the goods to the transferee. By operation of law, the transferee obtains the direct obligation of the bailee to hold the goods in his name (Art. 1513, Civil Code; Sec. 41, Warehouse Receipts Law). Since EJ is the holder of the warehouse receipt, he has the better right to the goods. SN Warehouse is obliged to hold the goods in his name.2) SN Warehouse can file an INTERPLEADER to compel EJ and Melchor to litigate against each other for the ownership of the goods. Sec. 17 of the Warehouse Receipts Law states, If more than one person claims the title or possession of the goods, the warehouseman may, either as a defense to an action brought against him for non-delivery of the goods or as an original suit, whichever is appropriate, require all known claimants to interplead.

Unpaid Seller: Negotiation of the Receipt (1993)A purchased from S 150 cavans of palay on credit. A deposited the palay in Ws warehouse. W issued to A a negotiable warehouse receipt in the name of A. Thereafter, a negotiated the receipt to B who purchased the said receipt for value in good faith.1) Who has a better right to the deposit, S, the unpaid vendor or b, the purchaser of the receipt for value and in good faith? Why?2) When can the warehouseman be obliged to deliver the palay to A?Suggested Answer:1) B has a better right than S. The right of the unpaid seller, S, to the goods was defeated by the act of A in endorsing the receipt to B.2) The warehouseman can be obliged to deliver the palay to A if B negotiates back the receipt to A. In that case, A becomes a holder again of the receipt, and A can comply with Sec. 8 of the Warehouse Receipt Law.

Validity of stipulations excusing warehouseman from negligence (2000)S stored hardware materials in the bonded warehouse of W, a licensed warehouseman under the General Bonded Warehouse Law (Act 3893 as amended). W issued the corresponding warehouse receipt in the form he ordinarily uses for such purpose in the course of his business. All the essential terms required under Section 2 of the Warehouse Receipts law (Act 2137 as amended) are embodied in the form. In addition, the receipt issued to S contains a stipulation that W would not be responsible for the loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of W or his representatives or employees. S endorsed and negotiated the warehouse receipt to B, who demanded delivery of the goods. W could not deliver because the goods were nowhere to be found in his warehouse. He claims he is not liable because of the free-from-liability clause stipulated in the receipt. Do you agree with Ws contention? Explain.Suggested Answer:No, I do not agree with the contention of W. The stipulation that W would not be responsible for the loss of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of W or his representative or employees is void. The law requires that a warehouseman should exercise due diligence in the care and custody of the things deposited in his warehouse.9