mercantile-law-proper.pdf
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LETTERS OF CREDIT
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
1UNIVERSITY OF SANTO TOMAS
LETTERSOFCREDIT
I. DEFINITION/CONCEPTQ:WhatisLetterofCredit(LC)?
A: It is any arrangement, however named or
described,whereby
abank
(issuing
bank),
acting
at the request and on the instructions of a
customer (applicant) or on its own behalf, binds
itselfto:
1. Pay to the order of, oraccept andpay
drafts drawn by a third party
(Beneficiary),or
2. Authorize another bank to pay or to
acceptandpaysuchdrafts,or
3. Authorizes another bank to negotiate,
againststipulateddocument(s),
Provided, the terms and conditions of the credit
are
complied
with.(Art.
2,
Uniform
Customs
&
PracticeforDocumentaryCredits.)
Note: They are in effect absolute undertakings to
pay the money advanced or for the amount for
which the credit is given on the faith of the
instrument.
Q:WhatisthedurationofLC?
A:
1. Upontheperiodfixedbytheparties;or
2. Ifnoneisfixed:
a. 6 months from its date if used in
thePhilippines;
b. 12 months if used abroad (Art
572,ibid).
Q:WhatarethekindsofLC?
A:
COMMERCIALLETTERS
OFCREDIT
STANDBYLETTERSOF
CREDIT
Involvecontractsofsale.Involvenonsale
transactions.
Payableupon
presentationby
the
sellerbeneficiaryof
documentsthatshowhe
hasperformedhis
contract.
Payableupon
certificationbythe
beneficiaryofthe
applicantsNON
performanceofthe
agreement.(Transfieldv.
LuzonHydroCorp.,G.R.
No.146717,Nov.22,
2004)
Q: Is irrevocable letter of credit and confirmed
letterofcreditsynonymous?
A: An irrevocable letter of credit is not
synonymous withaconfirmed letterofcredit. In
an irrevocable letter of credit, the issuing bank
may not, without the consent of the beneficiary
and
the
applicant,
revoke
its
undertaking
under
the letter, whereas, in a confirmed letter of
credit,thecorrespondentbankgivesanabsolute
assurancetothebeneficiarythatitwillundertake
the issuingbanksobligationas itsownaccording
to the terms and condition of the credit.
(PrudentialBankandTrustCompanyv. IAC,G.R.
No.74886,Dec.8,1992)
Q:Canacourtorderthereleasetotheapplicant
the proceeds of an irrevocable letter of credit
withouttheconsentofthebeneficiary?
A:No,suchorderviolates the irrevocablenature
ofthe
letter
of
credit.
The
terms
of
an
irrevocable
letter of credit cannot be changed without the
consentoftheparties,particularlythebeneficiary
thereof. (Phil.VirginiaTobaccoAdministrationv.
DeLosAngeles,G.R.No.L27829,Aug.19,1988)
II.GOVERNINGLAWQ: What is the law governing letter of credit
(LC)?
A: It is the Uniform Customs and Practice (UCP)
for documentary Credits for International
Chamber of Commerce governs the Letters of
credit(Metropolitan
Waterworks
vs.
Daway,
G.R.
No.160723,July21,2004).
Articles567to572of theCodeofCommerceon
Letters of Credit are obsolete. However, in the
absence of any provision in the Code of
Commerce, commercial transaction shall be
governed by the usages and customs generally
observed.(Sec.2,CodeofCommerce)
III. NATUREOFLETTEROFCREDITQ:WhatisthenatureandpurposeofLC?
A: To ensure certainty of payment. The seller is
assuredofpaymentbecausethebank intervenes
and makes the commitment to pay. This
addressesproblemsarisingfromsellersrefusalto
part with his goods before being paid and the
buyers refusal to part with his money before
acquiringthegoods,thus,facilitatingcommercial
transactions.
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
2
Q:WhataretheessentialconditionsofLC?
A:
1. Issued infavorofadefinitepersonandnottoorder.
Note: The Uniform Commercial Practice for
DocumentaryCredits
allows
letters
of
credit
to
bepayabletoorder
2. Limited to a fixed or specified amount,ortooneormoreamounts,butwithamaximumstatedlimit.(Article568,Ibid)
Note:Ifanyoftheseessentialconditionsisnotpresent,theinstrumentismerelyconsideredasaletterofrecommendation.
Q: In case the buyer was not able to pay its
obligation under the letter of credit, can the
banktakepossessionoverthegoodscoveredby
thesaid
letter
of
credit?
A: No. The opening of a Letter of Credit did notvest ownership of the goods in the bank in theabsenceofa trustreceiptagreement.A letterofcredit is a mere financial device developed bymerchants as a convenient and relatively safemodeofdealingwiththesalesofgoodstosatisfythe seemingly irreconcilable interests of a seller,who refuses to part with his goods before he ispaid,andabuyer,whowants tohavecontrol ofthe goods before paying. (Transfield Philippines,Inc.v.LuzonHydroCorporation,G.R.No.146717,
Nov.22,2004)
IV.PARTIESTOALETTEROFCREDIT
Q: Who are the parties to a Letter of Credit
transaction?
A:
1. Applicant/Buyer/Importer procurestheletterofcredit,purchasesthegoodsand obliges himself to reimburse theissuing bank upon receipt of thedocumentstitle.
2. Issuing Bank One which, whether a
payingbank
or
not,
Issues
the
letter
of
credit and undertakes to pay the sellerupon receipt of the draft and properdocuments of title from the seller andto surrender them to the buyer uponreimbursement.
3. Beneficiary/Seller/Exporter In whosefavor the instrument is executed. Onewhodeliversthedocumentsoftitleand
draft to the issuing bank to recoverpayment.
The number of parties may be increased.Modern letters of credit usually involvebanktobank transactions. The followingadditionalpartiesmaybe:
1. Advising/notifying bank Thecorrespondent bank (agent) of theissuing bank through which it advisesthebeneficiaryoftheLC.
2. Confirming bank bank which, upontherequestofthebeneficiary,confirmstheLCissued.
3. Payingbankbankonwhichthedraftsare to be drawn, which may be theissuingbankoranotherbanknot inthecityofthebeneficiary.
4. Negotiating bank bank in the city ofthebeneficiarywhichbuysordiscountsthe drafts contemplated by the LC, ifsuch draft is to be drawn on theopening bank not in the city of thebeneficiary.
Q:WhatarethestagesofLC?
A:
1. Contractofsalebetweenthebuyerandseller
2. ApplicationforLCbythebuyerwiththe
bank
3. IssuanceofLCbythebank4. Shippingofgoodsbytheseller5. Execution of draft and tender of
documentsbytheseller6. Redemption of draft (payment) and
obtaining of documents by the issuingbank
7. Reimbursement to the bank andobtainingofdocumentsbythebuyer
A.RIGHTSANDOBLIGATIONSOFPARTIES
Q:Explainthethree(3)distinctbut intertwined
contractrelationships
that
are
indispensable
in
a
letterofcredittransaction.
A:
1. Between the applicant/buyer/importerandthebeneficiary/seller/exporterTheapplicant/buyer/importeristheonewhoprocures the letter of credit while thebeneficiary/seller/exporter is the one
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LETTERS OF CREDIT
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
3UNIVERSITY OF SANTO TOMAS
who in compliance with the contract of
sale ships the goods to the buyer and
deliversthedocumentsoftitleanddraft
to the issuing bank to recover payment
for the goods. Their relationship is
governedbythecontractofsale.
2. Betweenthe
issuing
bank
and
the
beneficiary/seller/exporter The issuing
bank is theone that issues the letterof
credit and undertakes to pay the seller
upon receipt of the draft and proper
documents of title. On the other hand,
the beneficiary/seller/exporter
surrendersdocumentoftitletothebank
incompliance with the terms of the LC.
Their relationship is governed by the
termsoftheLC.
3. Between the issuing bank and the
applicant/buyer/importer The
applicant/buyer/importer
obliges
himself to reimburse the issuing bank
upon receipt of the documents of title.
Their relationship is governed by the
termsoftheapplicationfortheissuance
oftheletterofcreditbythebank.(2002
BarQuestion)
Q:Isanissuingbankaguarantor?
A: No, the concept of guarantee visavis the
conceptofirrevocableLCisinconsistentwitheach
other. LCs are primary obligations and not
security contracts and while they are security
arrangements,
they
are
not
converted
thereby
intocontractsofguaranty.(MWSSv.Hon.Daway,
G.R.No. 160732,June21,2004)
Q:Whenisthebankentitledtoreimbursement?
A: Once the issuing bank shall have paid the
beneficiaryafterthe latterscompliancewiththe
terms of the LC. Presentment for acceptance to
thecustomer/applicantisnotaconditionsinequa
non for reimbursement. (PrudentialBank v. IAC,
G.R.No.74886,Dec.8,1992)
Q:Whatistheconsequenceofpaymentuponan
expiredLC?
A: An issuing bank which paid the beneficiary of
an expired letter of credit can recover the
payment from the applicant which obtained the
goods from the beneficiary to prevent unjust
enrichment.(RodzssenSupplyCo.v.FarEastBank
andTrustCo,G.R.No.109087,May9,2001)
Q: Should the marginal deposit made by the
customer, in possession of the bank be first
deducted from the principal indebtedness
beforecomputingtheinterest?
A: Yes, since it is supposed to be returned upon
compliance with his obligation. Indeed, it would
be
onerous
to
compute
interest
and
other
charges on the face value of the letter of credit
which the issuing bank issued, without first
creditingorsettingoffthemarginaldepositwhich
theimporterpaidtoit.Requiringtheimporterto
pay the interest on the entire letter of credit
without deducting first his marginal deposit
wouldbeaclearcaseofunjustenrichmentbythe
bank.(Abadv.CA,G.R.42735,Jan.22,1990)
Q:Whataretheliabilitiesofcorrespondent
banks?
A:
ROLE LIABILITYNotifying/Advising
Servesasanagentof
theissuingbank;
Warrantstheapparent
(Appearanceto
unaidedsenses)
authenticityofthe
LetterofCredit.(Bank
ofAmericaNT&SAv.
CA,G.R.No. 105395,
Dec.10,1993)
Doesnotincurany
obligationmorethan
justnotifyingthe
seller/beneficiaryofthe
openingoftheLCafter
ithasdeterminedits
apparentauthority.
(BankofAmericaNT&
SAv.CA,G.R.No.
105395,Dec.10,1993)
Notliablefordamages
unlessthedocumenton
itsfaceismanifestly
fake.
Confirming
Lendscredencetothe
LCissuedbyalesser
knownbank.
Directobligation,asifit
istheonewhichissued
theLC.
Negotiating
Buysthesellersdraft
andlateronsellsthe
drafttotheissuing
bank.
Dependsonthestageof
negotiation,thus:
1.Beforenegotiation
Noliabilitywithrespect
totheseller.Merely
suggestsitswillingness
tonegotiate.
2.Afternegotiation A
contractualrelationship
willthenarise,making
thebankliable.
Paying
Mayeitherbethe
issuingbankorany
otherbankintheplace
ofthebeneficiary.
Directobligation.
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USTGOLDENNOTES2011
4MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
V. BASICPRINCIPLESOFLETTEROFCREDIT
A.DOCTRINEOFINDEPENDENCE
Q:Whatistheindependenceprinciple?
A: The relationship of the buyer and the bank is
separateand
distinct
from
the
relationship
of
the
buyerandsellerinthemaincontract;thebankisnot required to investigate if the contractunderlying the LC has been fulfilled or notbecause in transactions involving LC, banks dealonly with documents and not goods (BPI v. DeReny Fabric Industries, Inc., L2481, Oct. 16,
1970).Ineffect,thebuyerhasnocourseofactionagainsttheissuingbank.
Q: What is the effect of the buyers failure to
procureanLCtothemaincontract?
A: The LC is independent from the contract of
sale.
Failure
of
the
buyer
to
open
the
Letter
of
Credit does not prevent the birth of the SalesContract. (RelianceCommodities, Inc. v.DaewooIndustrial Co. Ltd., G.R. No. 100831, Dec. 17,
1993) The opening of the LC is only a mode ofpayment. The LC is not an essential requisite tothecontractofsale.
Q:InacontractofloansecuredbyastandbyLC,
can the partial payments made on the loan be
added in computing the issuing banks liability
underitsownstandbyletterofcredit?
A: No, although these payments could result in
thereduction
of
the
actual
amount,
which,
could
ultimatelybecollectedfromtheissuingbank,thelatters separate undertaking under its letters ofcreditremain.This isbecausethe letterofcreditis an absolute and primary undertaking which isseparate and distinct from the contractunderlying it. (InsularBankofAsia&America v.IAC,Nov.17,1988)
B.FRAUDEXCEPTIONPRINCIPLE
Q: What is the exception to the independence
principle?
A:The
Fraud
exception
rule.
It
provides
that
the
untruthfulness of a certificate accompanying ademand for payment under a standby letter ofcredit may qualify as fraud sufficient to supportan injunction against payment. (Transfield v.LuzonHydro,G.R.No.146717,Nov.22,2004)
C.DOCTRINEOFSTRICTCOMPLIANCE
Q:Whatisthedoctrineofstrictcompliance?
A: The documents tendered by theseller/beneficiary must strictly conform to theterms of the letter of credit. The tender of
documentsmust
include
all
documents
required
by the letter. Thus, a correspondent bank whichdepartsfromwhathasbeenstipulatedundertheLCactsonitsownriskandmaynotthereafterbeable to recover from the buyer or the issuingbank,asthecasemaybe,themoneythuspaidtothebeneficiary.(FeatiBankandTrustCompanyv.CA,G.R.No.940209,Apr.30,1991)
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WAREHOUSE RECEIPTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
5
WAREHOUSERECEIPTSLAW
(ACT2137ASAMENDED)
I. NATUREANDFUNCTIONSOFAWAREHOUSERECEIPT
Q:Whatisawarehousereceipt?
A: A written acknowledgment by the
warehouseman that he has received and holds
certaingoodsthereindescribedinhiswarehouse
for the person towhom thedocument is issued.
The warehouse receipt has twofold functions,
that is, it is a contract and a receipt. (Telengtan
Bros.& Sons v. CA,G.R.No. L110581, Sept 21,
1994)
Q: Distinguish Warehouse Receipts Law from
DocumentsOfTitleunderCivilCode.
A:
WAREHOUSERECEIPTS
LAW
DOCUMENTSOF
TITLE
UNDERCIVILCODE
Warehousereceipts
issuedbywarehouses,
whetherpublicor
private,bondedornot.
Otherreceiptsof
documentsissuedin
bailmentcontractsother
thanwarehousereceipts
(CivilCode15071520)
Q:Whoisawarehouseman?
A:Aperson,naturalorjuridical,lawfullyengaged
inthebusinessofstoringofgoodsforprofit.(Sec.
58,WRL)
Q:What
is
awarehouse?
A: The building or place where goods are
depositedandstoredforprofit.
Q:Whomayissuewarehousereceipt?
A:
1. A warehouseman, whether public or
private,bondedornot.(Sec.1)
2. A person authorized by a
warehouseman.
Q:What istheformofawarehousereceiptand
whatare
its
essential
terms?
A: It need not be in particular form but must
embodywithinitswrittenorprintedterms:
1. Thelocationofthewarehouse
2. Thedateoftheissue
3. Theconsecutivenumberofthereceipt
4. A statement whether the goods
received will bedelivered to bearer, to
a specified person or to a specified
personorhisorder
5. Fees
6. Adescriptionofthegoods
7. Thesignatureofthewarehouseman
8. If the receipt is issued for goods of
whichthewarehouseman istheowner,
either
solely
orjointly
or
in
common
withothers,thefactofsuchownership;
and
9. Astatementoftheamountofadvances
made and of liabilities incurred for
whichthewarehousemanclaimsa lien.
(Sec.2)
Q:Whataretheeffectsofomissionofanyofthe
essentialterms?
A:
1. A warehouseman shall be liable to any
person injured thereby for all damages
causedby
the
omission
2. Validityofreceiptnotaffected
3. Negotiabilityofreceiptsnotaffected
4. Contract is converted to ordinary
deposit. (Gonzalesv.GoFiong&Luzon
Surety Co., G.R. No. 91776, Aug. 30,
1958)
Q:What istheeffectwhenthegoodsdeposited
areincorrectlydescribed?
A: Itdoesnotmake thereceipt ineffectivewhen
the identity of the goods is fully established by
evidence. Thus, the indorsement and delivery
shall
constitute
sufficient
transfer
of
the
title
of
the goods. (American Foreign Banking Corp. v.
Herridge,G.R.No.L21005,Dec.20,1924)
GR: Warehouseman shall be liable for
damages for nonexistence or
misdescription of goods at the time of its
issue.
XPN:Whenthegoodsaredescribedbased
on:
1.Seriesorlabelsuponthem
2.Statementthatthegoodsareofcertain
kind.
Q:Whattermsmayandmaynotbeinserted?
A:Awarehousemanmayinsertinareceiptissued
by him any other terms and conditions provided
thatsuchtermsandconditionsshallnotbe:
1. Contrary to the Warehouse Receipts
Law.(Sec.3)
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
6
2. Terms reducing the required diligenceofthewarehouseman.(Ibid.)
3. Contraryto law,morals,goodcustoms,publicorderorpublicpolicy.
4. Those exempting the warehousemanfrom liability for misdelivery or for notgivingstatutorynoticeincaseofsaleof
goods.
5. Those exempting the warehousemanfromliabilityfornegligence.
A.TOWHOMDELIVERED
Q:Towhomshouldthegoodsbedelivered?
A:
1. To the person lawfully entitled to thepossessionofthegoods,orhisagent;
2. Tothepersonentitledtodeliveryundera nonnegotiable instrument or withwrittenauthority;or
3. To
the
lawful
order
of
a
negotiable
receipt. (person in possession of anegotiablereceipt)(Sec.9)
B.KINDS
Q:Whatarethekindsofwarehousereceipt?
A:
1. Negotiablewarehousereceipt2. Nonnegotiablewarehousereceipt
Q:Whatisanegotiablewarehousereceipt?
A:It
is
areceipt
in
which
it
states
that
the
goods
receivedwillbedeliveredtothebearerortotheorder of any person named in such receipt (Sec.5). It is negotiated by either delivery orindorsementplusdelivery.
Note:Noprovisionshallbe inserted inanegotiablereceipt that it is nonnegotiable. Such provision, ifinserted, shall be void. A negotiable warehousereceipt cannot be converted into nonnegotiable.(Sec.5)
Q:Whomaynegotiate?
A:
1. Theownerthereof;or2. Anypersontowhom thepossessionor
custody of the receipt has beenentrustedbytheowner,if,bythetermsofthereceipt,thegoodsaredeliverabletotheorderofthepersontowhomthepossession or custody of receipt hasbeen entrusted or in such form that itmaybenegotiatedbydelivery.(Sec.40)
Q:Whathappensiftheindorsementisnecessary
butthenegotiablereceiptwasonlydelivered?
A:
1. Thetransfereeacquirestitleagainstthetransferor
2. There is no direct obligation of the
warehouseman;and
3. The transferee can compel thetransferor to complete the negotiationby indorsing the instrument.Negotiation takes effect as of the timewhentheindorsementisactuallymade.
Q: In case the signature of an owner of a
negotiable receipt was forged and the forger
whonow holds thenegotiable receipt wasable
towithdrawthegoodsfromthewarehouseman.
What are the rights of the owner of the
negotiablereceipt?
A:
If
under
the
terms
of
the
negotiable
warehouse receipt, the goods are deliverable tothe depositor or to his order, the owner of thesaid negotiable receipt may proceed against thewarehouseman and/or the holder. Without thevalid indorsement of theowner to the holderorinblank,thewarehousemanisliabletotheownerforconversion inthemisdelivery.If,however,bythe terms of the negotiable warehouse receipt,the goods are deliverable to bearer (eitherbecause it is so expressed in the warehousereceipt or because of a blank indorsement by apersontowhoseorderthegoodsaredeliverable)the owner may only proceed against the holder.
The
warehouseman
is
not
liable
for
conversion
where the goods are delivered to a person inpossessionofabearernegotiableinstrument.
Q: What is the rule when more than one
negotiablereceiptisissuedforthesamegoods?
A: A warehouseman shall be liable for alldamagescausedbyhisfailuretodosotoanyonewho purchased the subsequentreceipt for valuesupposing it to be an original, even though thepurchasebeafterthedeliveryofthegoodsbythewarehouseman to the holder of the originalreceipt(Sec.6).
Note: The word duplicate shall be plainly placeduponthefaceofeverysuchreceipt,exceptthefirstoneissued.(Sec.6.
Q: What are the warranties on a warehouse
receipt?
A: A person who, for value, negotiates ortransfers a receipt by indorsement or delivery,
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WAREHOUSE RECEIPTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
7
including one who assigns for value a claim
secured by a receipt, unless a contrary intention
appearswarrants:
1. Receiptisgenuine
2. Legalrighttonegotiateortransferit
3. No knowledge of defects that may
impair the validity or worth of the
receipt
4. That he has a right to transfer title to
the goods and that the goods are
merchantable or fit for a particular
purpose whenever such warranties
would have been to transfer without a
receipt of goods represented thereby.
(Sec.44)
Note: The indorsee does not guarantee that the
warehousemanwillcomplywithhisduties.(Sec.45)
Acreditorreceivingthewarehousereceiptgivenasa
collateralmakesnowarranty.(Sec.46)
Q:Whatisanonnegotiablewarehousereceipt?
A:It isareceipt inwhich itstatesthatthegoods
received delivered to the depositor or to any
otherspecifiedperson.(Sec.4)
Q:Whatisrequiredinanonnegotiablereceipt?
A: Itshallhaveplainlyplaceduponitsfacebythe
warehouseman issuing it nonnegotiable, or
notnegotiable.(Sec.7)
Note:Failuretomarknonnegotiableshallmakeit
negotiable
(if
the
holder
purchased
it
for
valuesupposingittobenegotiable).
Q:Howisittransferred?
A: A nonnegotiable warehouse receipt may be
transferred by its delivery to the transferee
accompanied bya deed of assignment, donation
orotherformoftransfer.
Q:Whatistheeffectofindorsement?
A: Even if the receipt is indorsed, the transferee
acquiresnoadditionalright(Sec.39)
C.DISTINCTIONBETWEENANEGOTIABLEINSTRUMENTANDANEGOTIABLE
WAREHOUSERECEIPT
Q: Distinguish negotiable instrument from a
negotiablewarehousereceipt.
A:
NEGOTIABLE
INSTRUMENT
NEGOTIABLE
WAREHOUSERECEIPT
Contains an
unconditional promise
topay asumcertain in
money.
Does not contain an
unconditional promise to
pay a sum certain in
money.
Thesubject
is
money.
The
subject
is
merchandise.
Thenegotiable
instrumentistheobject
ofvalue.
Thewarehousereceiptis
nottheobjectofvalue.
Intermediateparties
becomesecondarily
liable.
Intermediatepartiesare
notliableforthe
warehousemansfailure
todeliverthegoods.
D.RIGHTSOFAHOLDEROFANEGOTIABLE
WAREHOUSERECEIPTASAGAINSTA
TRANSFEREEOFANONNEGOTIABLE
WAREHOUSERECEIPT
Q: Distinguish the rights of a holder of a
negotiablewarehousereceiptfromtherightsof
a transferee of a nonnegotiable warehouse
receipt.
A:SeeAppendixA.
Q: Coco was issued by a warehouseman a
negotiable receipt for safekeeping by the latter
ofhisgoods.CanthejudgmentcreditorofCoco
levy by execution the goods covered by the
negotiablereceipt?
A:
The
goods
cannot,
while
in
the
possession
ofthe warehouseman, be attached by garnishment
or otherwise, or be levied upon under an
executionunless thereceiptbe first surrendered
to the warehouseman, or its negotiation
enjoined. The warehouseman cannot be
compelledtodelivertheactualpossessionofthe
goods until the receipt is surrendered to it or
impoundedbythecourt.
Q: Assuming that prior to the levy, the receipt
wassoldtoYoyoonthebasisofwhichhefileda
claim with the sheriff. Would Yoyo have better
rights to the goods than the creditor? Explain
youranswer.
A:Yes.Yoyo,asaholderforvalueofthereceipt,
hasabetterrighttothegoodsthanthecreditor.
It isYoyothatcansurrenderthereceiptwhich is
in its possession and can comply with the other
requirements which will oblige the
warehouseman to deliver the goods, namely, to
signareceiptforthedeliveryofthegoods,andto
paythewarehouseman'sliensandfeesandother
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8/262
USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
8
charges.(1999BarQuestion)
Q: Bon took the goods of Angela without her
consent and deposited the same with a
warehouseman. The latter issued to Bon a
negotiablereceipt which she indorsed for value
to Ryan. Between Angela and Ryan, who has
betterright
over
the
goods?
Why?
A:Ryanhasbetterrighttothegoods.Thegoodsare covered by a negotiable warehouse receiptwhich was indorsed to Ryan for value. ThenegotiationtoRyanwasnot impairedbythefactthat Bon took the goods without the consent ofAngela, as Ryan had no notice of such fact.Moreover,Ryanisinpossessionofthewarehousereceipt and only he can surrender it to thewarehouseman.(Sec.8,WRL)
Q: What is the proper recourse of the
warehouseman if he is uncertain as to who is
entitledto
the
goods?
Explain.
A:Sincethere isaconflictingclaimofownershipor title, the warehouseman should file acomplaint in interpleader requiring Ryan andAngela to interplead. The matter involves a
judicialquestionastowhoseclaimisvalid.(2005BarQuestion)
Q:Whatistherulewhereawarehousereceiptis
transferredtosecurepaymentofa loanbyway
ofpledgeormortgage?
A: The pledgee or mortgagee does not
automaticallybecome
the
owner
of
the
goods
but
merely retains the right to keep and with theconsentoftheownertosellthemsoastosatisfythe obligation from the proceeds for the simplereasonthatthetransactionisnotasalebutonlyamortgage or pledge. Likewise, if the property islost without the fault or negligence of themortgageeorpledgee,thensaidgoodsaretoberegarded as lost on account of the real owner,mortgagor orpledgor. (PNBv.Sayo,Jr.,G.R.No.129198,July9,1998)
Q: Does the nonpayment by the original
depositors of the purchase price render the
furthernegotiation
of
the
receipt
invalid?
A: No, the negotiation of the warehouse receiptby the buyer of goods purchased from anddeposited to the warehouseman is valid even ifthe warehouseman who issued the negotiablewarehousereceiptwasnotpaidbythebuyer.Thevalidityofthenegotiationcannotbe impairedbythe fact that the owner/warehouseman was
deprivedofthepossessionofthesamebyfraud,mistakeor conversion. (PNBv.NoahsArkSugarRefinery,G.R.No.107243,Sept.1,1993)
II. DUTIESOFAWAREHOUSEMAN
Q: What are the obligations of a
warehouseman?
A:
1. To takecare of the goods entrusted tohissafekeeping
2. To deliver them to the holder of thereceipt or the depositor providedthere is demand by the depositoraccompaniedbyeither:a. An offer to satisfy the
warehousemanslienb. Anoffertosurrenderthereceipt,if
negotiable with such
indorsements
as
would
be
necessary for the negotiation ofthereceipts;or
c. A readiness and willingness tosign, when the goods aredelivered, an acknowledgementthatthey have been delivered, ifsuch signature isrequestedbythewarehouseman(Sec.8);and
3. To keep the goods separate from thegoods of other depositors, except ifauthorizedbyagreementorbycustom,fungible goods may be mingled with
other
goods
of
the
same
kind
and
grade.
Q: When is the need for a demand by the
depositornotnecessary?
A: When the warehouseman has rendered itbeyondhispowertodeliverthegoods.
Q: When is refusal to deliver by the
warehousemanjustified?
A:
1. If the warehousemans lien is notsatisfied
by
the
claimants.
(Sec.
31)
2. Where the goods have already beensoldtosatisfythewarehousemans lienor because of their perishable orhazardousnature.(Sec.34)
3. If the warehouse receipt is negotiatedbacktohim.
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WAREHOUSE RECEIPTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
9
4. When the holder does not satisfy the
conditionsprescribedinSection8:
a. Nonsatisfaction of
warehousemanslien.
b. Failure to surrender warehouse
receipt.
c. Refusal
to
sign
the
acknowledgement receipt,
acknowledging the receipt of the
goodsfromthewarehouse.
5. Thefailurewasnotduetoanyfaulton
thepartofthewarehouseman:
a. Upon request by or on behalf of
the person lawfully entitled. (Sec.
10)
b. If he had information that the
delivery about to be made was to
onenotlawfullyentitled.(Ibid.)
c. Ifseveralpersonsclaimthegoods.
(Sec.17)
d. If the warehouseman needs
reasonable time to ascertain the
validity of the claim if someone
other than the depositor claims
titletothegoods.(Sec.18)
e. If the goods are lost, despite
ordinary care by the
warehouseman.
Q:Whatifthereceiptsarelostordestroyed?
A: A court of competentjurisdiction may order
thedeliveryofthegoodsonly:
a. Upon satisfactory proof of the loss or
destructionofthereceipt;and
b. Upon the giving of a bond with
sufficient sureties to be approved by
thecourt.(Sec.14)
Note: The delivery of the goods under an order of
the court shall not relieve the warehouseman from
liabilitytoapersontowhomthenegotiablereceipt
has been or shall be negotiated for value without
notice of the proceedings or of the delivery of the
goods.(Sec.14)
Q:
When
does
the
duty
to
insure
the
goods
arise?
A:
1. Wherethelawprovides
2. Where it was an inducement for the
depositortoenterintothecontract;
3. Establishedpractice;or
4. Where the warehouse receipt contains
arepresentationtothateffect.
Q:Whatisconversion?
A:Anunathorizedassumptionandexerciseofthe
right of ownership over goods belonging to
anotherthrough thealterationof theircondition
or the exclusion of the owners right. (Bouviers
LawDictionary)
Q: What are the instances where a
warehousemanisliableforconversion?
A:
1. Where the delivery is made to person
otherthanthoseauthorized
2. Evenifdeliveredtopersonsentitled,he
maystillbeliableforconversionifprior
todelivery:
a. He had been requested not to
makesuchdelivery;or
b. He
had
received
notice
of
the
adverse claim or title of a third
person.
Q:Givetheeffectsofalterationofthereceipton
theliabilityofthewarehouseman.
A:
1. Alteration immaterial whether
fraudulent or not, whether authorized
or not, the warehouseman is liable
on the altered receipt according to its
originaltenor
2. Authorizedmaterial
alteration
the
warehouseman is liable according to
thetermsofthereceiptasaltered
3. Material alteration innocently made
the warehouseman is liable on the
altered receipt according to its original
receipt
4. Material alteration fraudulently made
warehouseman isliable according to
the original tenor of the receipt to a
purchaser of the receipt for value
withoutnotice,andevento the alterer
and
subsequent
purchasers
with
noticeexcept that as regards to
the last two, thewarehousemans
liability is limitedonlytodeliveryashe
isexcusedfromanyliability
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
10
Q: What are the instances where a
warehousemaniscriminallyliableforhisacts?
A:
1. Issuance of receipts for goods notreceived.(Sec.50)
2. Issuance of receipt containing false
statement.(Sec.
51)
3. Issuance of duplicate negotiablewarehousereceiptnotmarkedassuch.(Sec.52)
4. Issuance of a negotiable warehousereceiptofwhichheisanownerwithoutstatingsuchfactofownership.(Sec.53)
5. Delivery of goods without obtainingnegotiablewarehousereceipt.(Sec.54)
6. Negotiation of receipt for mortgagedgoods.(Sec.55)
7. Issuance of warehouse receipts forgoodnotreceived.(Sec.50)
8. Comminglingofgoods.(Sec.24)
Q: What are the other acts for which
warehousemanisliable?
A:
1. Failure to stamp duplicate on copiesofnegotiablereceipt.(Sec.6)
2. Failure to place nonnegotiable ornotnegotiable on a nonnegotiablereceipt.(Sec.7)
3. Misdeliveryofgoods.(Sec.10)4. Failure to effect cancellation of a
negotiable receipt upon delivery of thegoods.(Sec.11)
5. Issuingreceipt
for
non
existing
goods
or
misdescribedgoods.(Sec.20)6. Failure to take care of the goods. (Sec.
21)
7. Failure to give notice in case of sale ofgoodstosatisfylien(Sec.33)orbecausethe goodsare perishableor hazardous.(Sec.34)
III. WAREHOUSEMANSLIEN
Q:Whatiscoveredbythewarehousemanslien
over the goods deposited or on the proceeds
thereof?
A:
1. Chargesforstorageandpreservationofthegoods(insuranceandothersmaybeincludedaslongasitisstipulated)
2. Money advanced, interest, insurance,transportation, labor, weighing,
coopering and other charges andexpensesinrelationtosuchgoods
3. Charges and expenses for notice, andadvertisements of sale, and for sale ofthe goods where default had beenmade insatisfyingthewarehousemans
lien.(Sec.
27)
Q: What are the remedies available to a
warehouseman to enforce his warehousemans
lien?
A:
1. By refusing to deliver the goods untilthelienissatisfied
2. By causing the extrajudicial sale of theproperty and applying the proceeds ofthevalueofthelien
Note:Where
the
sale
was
made
without
the publication required and before thetimeprovidedbylaw,suchsaleisvoidandthe purchases of the goods acquires notitletothem.
3. By filing a civil action for collection ofthe unpaid charges or by way ofcounterclaiminanactiontorecovertheproperty from him or such otherremedies allowed by law for theenforcement of a lien against personalproperty or to a creditor against hisdebtor, for the collection from the
depositor
of
all
the
charges
which
the
depositorhasboundhimselftopay.
Q: Against whose goods may the lien be
enforced?
A:
1. Goods belonging to the person who isliableasdebtor;and
2. Goods belonging to others which havebeen deposited at any time by thedebtor with authority to make a validpledge.(Sec.28)
Q:Howmaythewarehousemanlosehislien?
A:
1. Bysurrenderingpossessionthereof,or
2. Byrefusingtodeliverthegoodswhenademandismadewithwhichheisboundtocomply.(Sec.29)
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WAREHOUSE RECEIPTS LAW
11UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
Note:Whereanegotiablereceiptisissued,with the
exception of the charges for the storage or
preservation of goods for which a negotiable
receipt hasbeen issued,the lien exists only for
otherchargesexpressly enumerated in the receipt
so far as they arewrittenalthoughtheamountof
thesaidchargeisntstated.
Lossof liendoesnotmeanthatthewarehouseman
doesnothaveanyotherremedy.
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12/262
USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
12
TRUSTRECEIPTSLAW(P.D.115)
I. DEFINITION/CONCEPTOFATRUSTRECEIPT
TRANSACTION
Q:Whatisatrustreceipttransaction?
A:It
is
any
transaction
between
the
entruster
and
entrustee:
1. Whereby the entruster who owns orholdsabsolutetitleorsecurityinterestsover certain specified goods,documents or instrument, releases thesame to the possession of entrusteeupon the latters execution of a TRagreement.
2. Whereintheentrusteebindshimselftohold the designated goods in trust fortheentrusterand,incaseofdefault,to
sell
such
goods,
documents
or
instrument with the obligation to turnover to the entruster the proceeds totheextentoftheamountowingtoitorto turn over the goods, documents orinstrumentitselfifnotsold.(Sec.4,P.D.115)
Q:Whatisatrustreceipt(TR)?
A:ItisthewrittenorprinteddocumentsignedbytheentrusteeinfavoroftheentrustercontainingtermsandconditionssubstantiallycomplyingwiththeprovisionsofPD115.
Q:WhatarethetwoviewsregardingTR?
A:
1. Asacommercialdocument(Sec.4,P.D.115)
2. As a commercial transaction It is aseparate and independent securitytransaction intendedtoaid infinancingimportersandretaildealerswhodonothavesufficient funds. (Nacuv.CA,G.R.No.108638,Mar.11,1994)
Q:Are
LC
and
TR
negotiable
instruments?
A: Letters of credit and trust receipts are notnegotiable instrument, but drafts issued inconnection with letters of credit are negotiableinstruments. Hence, while the presumption ofconsideration under the negotiable instrumentlaw may not necessarily be applicable to trustreceipts and letters of credit, the presumption
that the drafts drawn in connection with theletters of credit have sufficient considerationapplies.(Leev.CA,G.R.No.117913,Feb.1,2002)
A.LOAN/SECURITYFEATURE
Q: What is the loan and security feature of the
trustreceipt
transaction?
A: A trust receipt arrangement is endowed withits own distinctive features and characteristics.Underthatsetup,abankextendsaloancoveredbytheLetterofCredit,withthetrustreceiptasasecurity for the loan. In other words, thetransaction involves a loan feature representedby the letter of credit, and a security featurewhich is in the covering trust receipt. A trustreceipt, therefore, is a security agreement,pursuant to which a bank acquires a "securityinterest"inthegoods.Itsecuresanindebtednessand there can be no such thing as securityinterest that secures no obligation. (Sps.Vintolavs. Insular Bank of Asia and America, G.R. No.
73271,May29,1987)
B.OWNERSHIPOFTHEGOODS,DOCUMENTS,
ANDINSTRUMENTSUNDERATRUSTRECEIPT
Q:Whoistheownerofthearticlessubjectofthe
TR?
A:Theentrustee.Atrustreceipthastwofeatures,the loan and security features. The loan isbrought about by the fact that the entruster
financed
the
importation
or
purchase
of
the
goodsunderTR.Untilandunlessthisloanispaid,theobligation topaysubsists. If the entrustee ismade to appear as the owner, it was but anartificialexpedient,moreoflegalfictionthanfact,for if it were really so, it could dispose of thegoods in any manner that it wants, which itcannotdo.Toconsidertheentrusteeasthetrueowner from the inception of the transactionwould be to disregard the loan feature thereof.(Rosario Textile Mills Corp. v. Home Bankers
Savings and Trust Company, G.R. No. 137232.
June29,2005)
II.RIGHTSOFTHEENTRUSTER
Q:Whoisanentruster?
A: A lender, financer or creditor. Person holdingtitle over the goods documents or instruments(GDI) subject of a trust receipt transaction;releasespossessionof thegoodsuponexecutionoftrustreceipt.(Sec.3[c])
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TRUST RECEIPTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
13
Q:Whataretherightsoftheentruster?
A:
1. To receive the proceeds from the sale
of the goods, documents, or
instruments to the extent of the
amountowingtohim
2. To the returnof thegoods,documents
orinstruments(GDI)incaseofnonsale
and enforcement of all other rights
conferredtohiminthetrustreceipt
3. May cancel the trust and take
possession of the goods, upon default
or failure of the entrustee to comply
withanyofthetermsandconditionsof
thetrustreceipt.(Sec.7,P.D.115)
A.VALIDITYOFTHESECURITYINTERESTAS
AGAINSTTHECREDITORSOFTHE
ENTRUSTEE/INNOCENTPURCHASERS
FOR
VALUE
Q:Asbetweentheentrusterandthecreditorsof
the entrustee, who has a better right over the
goods?
A: The entruster. His 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
durationofthetrustreceiptagreement.(Sec.12,
P.D.115)
Q: Who can defeat the rights of the entruster
overthegoods?
A:Apurchaser in good faith.He acquiresgoods,
documents or instruments free from the
entruster'ssecurityinterest.(Sec.11,P.D.115)
III.OBLIGATIONSANDLIABILITYOFTHE
ENTRUSTEE
Q:Whoisanentrustee?
A:Aborrower,buyer,importerordebtor.Person
to
whom
the
goods
are
delivered
for
sale
or
processing in trust, with the obligation to return
the proceeds of sale of the goods or the goods
themselvestotheentruster.(Sec.3[b])
Q:Whataretheobligationsandliabilititesofthe
entrustee?
A:
1. To hold good, documents and
instruments (GDI) in trust for the
entrusterandtodisposeofthemstrictly
inaccordancewiththetermsofTR;
2. Toreceive theproceedsof thesale for
theentrusterandtoturnoverthesame
to the entruster to the extent of
amountowing
to
the
entruster;
3. To insure GDI against loss from fire,
theft,pilferageorothercasualties.
4. To keep GDI or the proceeds thereof,
whether in money or whatever form,
separate and capable of identification
aspropertyoftheentruster;
5. To return GDI to the entruster in case
theycouldnotbesoldorupondemand
oftheentruster;and
6. To
observe
all
other
conditions
of
the
trustreceipts.(Sec.9,P.D.115)
A.PAYMENT/DELIVERYOFPROCEEDSOFSALEORDISPOSITIONOFGOODS,DOCUMENTSOR
INSTRUMENTS
Q: What is the order in the application of
proceedsortheTRtransactions?
A:
1. Expensesofthesale
2. Expensesderivedfromstoringthegoods
3. Principalobligation
Q:Istheentrusteeliableforthedeficiency?
A: Yes, but any excess shall likewise belong to
him.(Sec.7,P.D.115)
B.RETURNOFGOODS,DOCUMENTSORINSTRUMENTSINCASEOFNONSALE
Q:Whatistheobligationoftheentrusteeincase
the goods, documents or instruments were not
sold?
A: The entrustee should return the goods,
documents,or
instruments
to
the
entrustor.
(Sec.
4,P.D.115)
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
14
C.LIABILITYFORLOSSOFGOODS,DOCUMENTS
ORINSTRUMENTS
Q: Who shall bear the loss of goods which are
thesubjectofTR?
A: The entrustee. Loss of goods, documents or
instruments
which
are
the
subject
of
a
TR,
pendingtheirdisposition,irrespectiveofwhetherornotitwasduetothefaultornegligenceoftheentrustee, shall not extinguish his obligation totheentrusterforthevaluethereof.(Sec.10,P.D.115)
D.PENALSANCTIONIFOFFENDERISA
CORPORATION
Q: What acts or omissions are penalized under
theTRLaw?
A:
The
TR
Law
declares
the
failure
to
turn
over
goodsorproceedsrealizedfromsalethereof,asacriminal offense under Art. 315(l)(b) of RPC(estafa). The law is violated whenever theentrusteeorpersontowhomtrustreceiptswereissued fails to: (a) return the goods covered bythe trust receipts; or (b) return the proceeds ofthe sale of said goods. (Metropolitan Bank v.Tonda,G.R.No.134436,Aug.16,2000)
Q: Does P.D. 115 violate the prohibition in the
Constitution against imprisonment for non
paymentofadebt?
A:
No.
What
is
being
punished
is
the
dishonesty
andabuseofconfidenceinthehandlingofmoneyorgoodstotheprejudiceofanotherregardlessofwhetherthelatteristheownerornot.Itdoesnotseektoenforcepaymentofthe loan.Thus,therecan be no violation of a right againstimprisonmentfornonpaymentofadebt.(Peoplev.Nitafan,G.R.No.81559,Apr6,1992)
Q: Is lack of intent to defraud a bar to the
prosecutionoftheseactsoromissions?
A:No.Themerefailuretoaccountorreturngivesrise to the crime which is malum prohibitum.
There
is
no
requirement
to
prove
intent
todefraud (Ching v. Secretary of Justice, G.R. No.
164317, Feb. 6, 2006; Colinares v. CA, G.R. No.
90828,Sept.5,2000;Ongv.CA,G.R.No.119858,
Apr.29,2003)(2006BarQuestion)
Q:Whatistheeffectofinsufficiencyofproofof
deliveryofgoods?
A: Estafa cannot lie. (Ramos v. CA, G.R. No. L399225,Aug.21,1987)
Q:Whatwillhappentothecriminalactionifthe
entrusteecomplied
with
his
obligation
under
the
TRagreement?
A:
1. If compliance occurred before thecriminal charge there is no criminalliability.
2. Ifcomplianceoccurredafterthechargeeven before conviction the criminalactionwillnotbeextinguished.
Q: What is the penal sanction if offender is a
corporation?
A: The Trust Receipts Law recognizes theimpossibility of imposing the penalty ofimprisonment on a corporation. Hence, if theentrustee is a corporation, the law makes theofficers or employees or other personsresponsible for the offense liable to suffer thepenalty of imprisonment. The reason is obvious,corporations, partnerships, associations andother juridical entities cannot be put to jail.Hence, the criminal liability falls on the humanagent responsible for the violation of the TrustReceiptsLaw.(Ongvs.CA,G.R.No.119858,April29,2003)
IV.REMEDIESAVAILABLE
Q:Intheeventofdefaultbytheentrusteeonhis
obligationunderthetrustreceiptagreement, is
it absolutely necessary for the entruster to
cancel the trust and take possession of the
goodstobeabletoenforcehisrightthereunder?
A:Thelawusestheword"may"ingrantingtotheentruster the right to cancel the trust and takepossession of the goods. Consequently, theentrusteehasthediscretiontoavailofsuchrightor seek any alternative action, such as a thirdparty
claim
or
a
separate
civil
action
which
it
deemsbesttoprotect itsright,atanytimeupondefaultorfailureoftheentrusteetocomplywithany of the terms and conditions of the trustagreement.(SouthCityHomes,Inc.v.BAFinanceCorporation,G.R.No.135462,Dec.7,2001)
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TRUST RECEIPTS LAW
15UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
Q: Can the repossession of the goods by the
entrusterbeconsideredaspayment?
A:No,paymentwouldlegallyresultonlyafterthe
entruster has foreclosed on the securities, sold
thesameandappliedtheproceedsthereoftothe
entrusteesobligation.Sincethetrustreceipt isa
mere
security
arrangement,
the
repossession
by
the entruster cannot be considered payment of
the loan/advances given to the entrustee under
the letter of credit/trust receipt. (PNBv.Pineda,
G.R.No.46658,May13,1991)
Q. Earl failed to comply with his undertaking
underthetrustreceiptheissuedinfavorofABC
bank.Thebankfiledbothcriminalandcivilcases
against Earl. The court proceeded with the civil
caseindependentlyfromthecriminalcase.Isthe
court correct in proceeding independently
althoughacriminalcaseisalsoinstituted?
A:Yes,
the
complaint
against
Earl
was
based
on
the failure of the latter to comply with his
obligationasspelledoutintheTR.
Thisbreachof
obligation is separate and distinct from any
criminal liability for "misuse and/or
misappropriation of goods or proceeds realized
fromthesaleofgoods,documentsorinstruments
released under trust receipts", punishable under
Section13oftheTrustReceiptsLaw.Beingbased
onanobligationexcontractuandnotexdelicto,
thecivilactionmayproceedindependentlyofthe
criminal proceedings instituted against
petitioners regardless of the result of the latter.
(Sarmientov.CA,G.R.No.122502,Dec.27,2002)
Q. What is the effect of novation of a trust
agreement?
A. Where the entruster and entrustee entered
into anagreementwhichprovides forconditions
incompatible with the trust receipt agreement,
the obligation under the trust receipt is
extinguished. Hence, the breach in the
subsequent agreement does not give rise to a
criminal liability under P.D. 115 but only civil
liability.(PhilippineBankv.Ong,G.R.No.133176,
Aug.8,2002)
Q:
What
are
the
defenses
to
negate
criminal
liabilityoftheentrustee?
A:
1. Compliancewiththetermsofthe trust
receipteitherbypayment,returnofthe
proceedsorreturnofthegoods.
2. The transaction does not fall under PD
115. (Colinares v.CA,G.R.No.90828,
Sept. 5, 2000, Consolidated v. CA,G.R.
No.114286,Apr.19,2001)
Note:Inthesecases,theexecutionofaTR
was made after the goods covered by it
had
been
purchased,
making
the
buyer
the owner thereof. The transaction does
not involve a trust receipt but a simple
loaneventhoughthepartiesdenominate
thetransactionasoneofatrustreceipt.
3. Nonreceipt of the goods or where
proofofdeliveryofgoodscoveredbya
trust receipt to the accused is
insufficient. (Ramos v. CA, G.R. No. L
399225,Aug.21,1987)
4. Cancellation of the trust receipt
agreement and taking into possession
ofthe
goods
by
the
entruster.
Note:Mererepossessionofthegoodswill
extinguishcriminalliability.
5. Compromise by parties before filing of
information in court. (Ong v. CA, G.R.
No.119858,Apr.29,2003)
6. Novation before the filing of the
criminalcomplaint.
7. Loss of goods without fault of the
entrustee.
8. Consignment.
Q:Candeposits inasavingsaccountopenedby
the buyer subsequent to the TR transaction be
appliedtooutstandingobligationsunder theTR
account?
A:No,thereceiptofthebankofasumofmoney
without reference to the trust receipt obligation
does not obligate the bank to apply the money
received against the trust receipt obligation.
Neither does compensation arise because
compensation is not proper when one of the
debts
consists
in
civil
liability
arising
from
criminal. (Metropolitan Bank and Trust Co. v.
Tonda,G.R.No.134436,Aug.16,2000).
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
16
NEGOTIABLEINSTRUMENTSLAW
I.FORMSANDINTERPRETATION
Q: What are the elements of a negotiable
instrument?
A:
1. In writing and signed by the maker ordrawer
2. Contains an unconditional promise orordertopayasumcertaininmoney
3. Payable on demand, or at a fixed ordeterminablefuturetime
4. Payabletoorderortobearer(socalledbadgesofnegotiability)
5. If addressed to a drawee, he must benamed or otherwise indicated withreasonablecertainty.(Sec.1)
Note: A negotiable instrument need not follow the
exact
language
of
NIL,
as
long
as
the
terms
are
sufficient which clearly indicate an intention toconform to the requirements of the law. (Sec. 10)No.5appliesonlytobillsofexchange.Apromissorynotehasnodrawee.
A.REQUISITESOFNEGOTIABILITY
Q: What are the factors to determine the
negotiabilityoftheinstrument?
A:
1. Words that appear on the face ofnegotiableinstrument
2. Requirementsenumerated
in
Section
1
ofNIL3. Intention of the parties by considering
thewholeoftheinstruments
B.KINDSOFNEGOTIABLEINTRUMENTS
Q: What are the two kinds of negotiable
instrumentsunderthelaw?
A:
1. Promissory notes (PN) Anunconditionalpromise in writing madebyonepersontoanother,signedbythe
maker,engaging
to
pay
on
demand,
or
atafixedordeterminablefuturetime,asum certain in money to order or tobearer.(Sec.184)
2. Bill of exchange (BOE) Anunconditional order in writingaddressed by one person to anothersignedbythepersongivingit,requiringthe person to whom it is addressed to
pay on demand or at a fixed ordeterminablefuturetimeasumcertainin money to order or to bearer. (Sec.126)
Note:ChecksarespecialformofBOE.
Q:
Distinguish
promissory
note
from
a
bill
of
exchange.
A:
PROMISSORY
NOTE
BILLOF
EXCHANGE
Promisetopay
Ordertopay
Astonumberofparties
2originalparties
3parties
Astoliabilityofparties
Makerisprimarily
liable
Drawerissecondarily
liable
Astonumberof
presentmentsneeded
Only1
presentment(for
payment)isneeded
2
presentments(for
acceptance
andforpayment)are
generallyneeded
II.COMPLETIONANDDELIVERY
A.INSERTIONOFDATE
Q: Is the date essential to make an instrument
negotiable?
A:Thedate is notessential (Sec.6 [a]). Ifdated,
suchdateisdeemedaprimafacieproofthatitisthetruedateofthemaking,drawing,acceptanceorindorsementoftheinstrument.(Sec.11)
Q:Whenisdateimportant?
A: Date is important to determine maturity, aswhen:
1. Wheretheinstrumentispayablewithina specified period after date, or aftersight.
2. When the instrument is payable ondemand,dateisnecessarytodeterminewhether the instrumentwaspresentedwithinareasonabletimefrom issue,orfromthelastnegotiation.
3. When the instrument is an interestbearing one, to determine when theintereststartstorun.
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NEGOTIABLE INSTRUMENTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
17
Q:Whenmaydatebeinserted?
A:
1. Where an instrument expressed to be
payable at a fixed period after date is
issuedundated,or
2. Wheretheacceptanceofaninstrument
payable
at
a
fixed
period
after
sight
is
undated
Note:Anyholdermayinsertthereinthetruedateof
issue or acceptance, and the instrument shall be
payableaccordingly.(Sec.13)
Q:Whatistheeffectofinsertionofwrongdate?
A: Itdoesnotavoidthe instrument inthehands
of a subsequent holder in due course. In the
hands of a holder in due course, the date
inserted, even if wrong, is toberegarded as the
truedate(Sec.13).
Note: With respect to the person who inserted the
wrong date, however, the instrument is avoided.
(BankofHoustonv.Day,145Mo.Appl.410,122SW
756)
B.COMPLETIONOFBLANKS
Q: Whohastheauthoritytofilluptheblanksin
anincompletebutdeliveredinstrument?
A: The holder has a prima facie authority to
completeit.
A
signature
on
a
blank
paper
delivered
by
theperson making the signature in order that the
paper may be converted into a negotiable
instrumentoperatesasaprimafacieauthorityto
fillitupassuchforanyamount.(Sec.14)
Q:Whatismeantbymaterialparticular?
A: Any particular proper to be inserted in a
negotiableinstrumenttomakeitcomplete.
Q: What are the various situations involving
negotiableinstruments?
A:
1. Incompleteinstrument
a. Delivered
i. Withforgeryandalteration
ii. Without forgery and
alteration
b. Notdelivered
i. Withforgeryandalteration
ii. Without forgery and
alteration
2. Completeinstrument
a. Delivered
i. Withforgeryandalteration
ii. Without forgery and
alteration
b. Notdelivered
i. Withforgery
and
alteration
ii. Without forgery and
alteration
C.INCOMPLETEBUTDELIVEREDINSTRUMENTS
Q:Whenisaninstrumentincomplete?
A: When it is wanting in any material particular.
(Sec.14)
Q: When may a prior party be bound by an
incompletebutdeliveredinstrument?
A: If it is filled up strictly in accordance with the
authoritygivenandwithinareasonabletime.But
if any such instrument, after completion, is
negotiated to a holder in due course, it is valid
andeffectualforallpurposesinhishands,andhe
mayenforceitasifithadbeenfilledupstrictlyin
accordancewiththeauthoritygivenandwithina
reasonabletime.(Sec.14)
Q: Lorenzo signed several blank checks
instructing Nicky, his secretary, to fill them as
payment for his obligations. Nicky filled one
check with her name as payee, placed
P30,000.00thereon,
endorsed
and
delivered
it
to
Evelynaspaymentforgoodsthelatterdelivered
to the former. When Lorenzo found out about
thetransaction,hedirectedthedraweebankto
dishonor the check. When Evelyn encashed the
check, itwas dishonored. Is Lorenzo liable to
Evelyn?
A:Yes.Thiscovers thedeliveryofan incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was
prima facieauthorityon thepartofNicky to fill
upanyofthematerialparticularsthereof.Having
doneso,andwhenitisfirstcompletedbeforeitis
negotiatedto
aholder
in
due
course
like
Evelyn,
it
is valid for all purposes, and she may enforce it
within a reasonable time, as if it had been filled
upstrictlyinaccordancewiththeauthoritygiven.
(2006BarQuestion)
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
18
D.INCOMPLETEANDUNDELIVERED
INSTRUMENTS
Q: What is the rule when an instrument is
incompleteandundelivered?
A: Not valid against the party whose signature
wasplaced
before
delivery,
whether
the
holder
is
a holder in due course or not. With respect,however,toaholder induecourse,nondeliverymust be proved because as to him, there is aprimafaciepresumptionofdelivery.
Reason:Deliveryisessentialtovalidity.(Sec.15)
Q: What about the party whose signature was
placedafterdelivery?
A: Valid against the party whose signature wasplacedafterdeliverylikeanindorserbecausetheindorser warrants the instrument to be genuine
andin
all
respect
what
it
purports
to
be.
Q:CanaHolder induecourseholdamakerfor
instruments which are incomplete and
undeliveredsupposingthatthenotewasstolen,
filledup,andwassubsequentlynegotiated?
A: No. the law is specific that the instrument isnot a valid contract in the hands of any holder.Thephraseanyholder includesaholder induecourse.
E.COMPLETEBUTUNDELIVERED
Q:
What
is
the
effect
if
an
instrument
is
undelivered?
A: Itisincompleteandrevocableuntildeliveryoftheinstrumentforthepurposeofgivingiteffect.(Sec.16)
Q: Whatisdelivery?
A: Delivery refers to the transfer of possession,actual or constructive, from one person toanother(Sec.191),withtheintenttotransfertitletopayeeandrecognizehimasholderthereof.
Q:
Whenis
an
instrument
issued?
A: The instrument is deemed issued the firstdeliveryoftheinstrument,completeinform,toapersonwhotakesitasholder.(Sec.191)
Q:Canacreditorbank whowasthe payee ina
check fraudulently obtained by a third person
who subsequently encashed it sue the drawer
debtor, third person, and drawee bank for the
amountofthecheck?
A: No, the payee of a negotiable instrumentacquiresno interestwithrespecttheretountil itsdeliverytohim.Withouttheinitialdeliveryoftheinstrument from the drawer to the payee, there
can
be
no
liability
on
the
instrument.
(DevelopmentBankofRizalv.SimaWei,G.R.No.
85419,Mar.9,1993)
Q:What istheeffect ifthe instrument is inthe
possessionofaholderinduecourse?
A: Valid delivery is conclusively presumed. (Sec.16)
Q:Whatiftheinstrumentisinthepossessionof
apartyotherthanaholderinduecourse?
A: Possession of such party constitutes primafacie presumption of delivery but subject to
rebuttal.
Q: When is delivery made conditional or for a
specialpurpose?Provideexamples.
A: It depends upon whom the instrument isdelivered.Iftheinstrument lands inthehandsofaholder indue course (onewhodoesnot knowof the conditional delivery or of its specialpurpose), the instrumentwillbeas if there isnocondition.
To a holder not in due course, prior parties arenotboundbytheinstrument.
Note: The law contemplates that the condition isorally or verbally conveyed to the holder upondelivery,becauseoftherulethatthenegotiabilityisdeterminedonlyuponthefaceoftheinstrument.
Q: Whoareimmediateparties?
A:Personshavingknowledgeoftheconditionsorlimitations placed upon the delivery of aninstrument.Itmeansprivity,andnotproximity.
Q: Whoareremoteparties?
A:
Persons
without
knowledge
as
to
the
conditionsorlimitationsplaceduponthedeliveryof an instrument, even if he is the next partyphysically.
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NEGOTIABLE INSTRUMENTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
19
F.COMPLETEANDDELIVEREDINSTRUMENTS
Q: What are the rules when an instrument is
completeanddelivered?
A:
1. Without forgery and alteration, all
partiesare
bound.
2. With forged indorsement and/or
alteration
a. Orderinstruments
i. Orderpromissorynote
- Prior parties notbound.
Forged signature is
wholly inoperative (Sec.
23); unless estoppel sets
in with regard prior
parties(cutoffrule).
- Subsequent parties
bound.
ii. Orderbillofexchange
- Drawers account cannot
be charged by the
Drawee;
- Drawer has no cause of
action against collecting
bank, since the duty of
the latter is only to
payee;
- Draweecanrecoverfrom
collectingbank;
- Drawer not liable to the
collecting
bank.Collecting bank bears
loss (can recover from
personitpaid)
- Payee can recover from:
Drawer and Collecting
bank, but not from
Drawee unless with
acceptanceofthebill;
b. Bearerinstruments
i. Bearerpromissorynote
- Priorpartiesliable;
- Forged signatory not
liableto
party
not
holder
induecourse.
ii. Bearerbillofexchange
- Draweebankliable.
III.RULESONINTERPRETATION
Q: Whataretherulesofconstructionincaseof
ambiguitiesinanegotiableinstrument?
A:
1. Wordsprevailoverfigures
2. Interest
runs
from
the
date
of
the
instrument, if date from which interest
istorunisunspecified;ifundated,from
theissue
3. If undated, deemed dated on the date
ofissue
4. Writtenprovisionsprevailoverprinted
5. If there is doubt whether it is a bill or
note,theholdermaytreatitaseitherat
hiselection
6. Whennotclear inwhatcapacity itwas
signed,deemedsignedasanindorser
7. If"Ipromise topay"butsignedby two
or more persons,jointly and severally
liable.
IV.SIGNATURE
Q:Whoarethepersonsliableonaninstrument?
A:
GR:Onlypersonswhosesignaturesappearon
aninstrumentareliablethereon.(Sec.18)
XPN:
1. Personsigns in tradeorassumedname
(Sec. 18 [2]) Party who signed must
have
intended
to
be
bound
by
his
signature.
2. Principal is liable if a duly authorized
agentsigns inhisownbehalfdisclosing
the name of the principal and adding
wordstoshowhe ismerelysigning ina
representative capacity. (Sec. 19)
Authority may be given orally or in
writing (SPA, only an evidence of
authorityofanagenttothirdparties)
3. Incaseofforgery(Sec.23)
4. Acceptormakeshisacceptanceofabill
on
a
separate
paper
(Sec.
134)
5. Person makes a written promise to
accept the bill before it is drawn (Sec.
135)
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
20
A.SIGNINGINTRADENAME
Q: Isapersonsigningintradenameliable?
A: Yes. As a general rule, only persons whosesignatures appear on an instrument are liablethereon.Butonewhosignsinatradeorassumed
nameis
liable
as
ifhe
signed
his
own
name
(Sec.
18 [2]). It is necessary, however, that the partywho signed intended to be bound by hissignature.
B.SIGNATUREOFANAGENT
Q: What are the legal effects of an agents
signatureinanegotiableinstrument?
A: Provided that the requisites are compliedwith,thelegaleffectsofanagentssignatureinanegotiableinstrumentare:
1. Hissignaturewillbindhisprincipal
2. He
will
be
exempt
from
personal
liability
Q: Whataretherequisitestoexemptanagent
fromliability?
A:
1. Heisdulyauthorized2. He adds words to his signature
indicating that he signs asagent/representative
3. He discloses the name of hisprincipal.(Sec.20)
Q:What
is
meant
by
procuration?
A: Procuration is the act by which a principalgives power to another to act in his place as hecouldhimself(Finkv.Scott,143S.E.305)
Q: What is the effect of a signature by
procuration?
A: Itoperatesasnoticethattheagenthasbutalimited authority to sign and the principal isboundonly incase the agent in so signingactedwithintheactuallimitsofhisauthority.(Sec.21)
C.INDORSEMENTBYMINORORCORPORATION
Q: What are the effects of an infant or
corporationsindorsement?
A:
1. Notvoid. Theincapacityoftheinfantisnot a defense which can be availed ofby prior parties. However, it does not
destroy the right of such an infantindorsertodisaffirmundertherulesofinfancy
2. Passespropertytherein3. Voidable.Therefore,partiespriortothe
minor or corporation cannot escapeliability by setting up as defense the
incapacityof
the
indorsers.
4. A minor, however, may be held boundbyhissignatureinaninstrumentwherehe is guilty of actual fraud committedby specifically stating that he is ofage.(PNB v.CA,G.R.No. L34404,June25,
1980)
D.FORGERY
Q: Whatisforgery?
A:Forgeryisthecounterfeitmakingorfraudulentalterationofanywriting.
Q: Whenisthereforgery?
A: Signatureisaffixedbyonewhodoesnotclaimto act as an agent and who has no authority tobindthepersonwhosesignaturehehasforged.
Q: Whenistherewantofauthority?
A: Signatureisaffixedbyonewhopurportstobeanagentbuthasnoauthoritytobindtheallegedprincipal.
Q: Whatistheeffectwhenthereisforgery?
A:
GR: It does NOT render the instrument void.The signature is wholly inoperative, and noright to retain the instrument, or to give adischarge thereof, or to enforce paymentthereof against any party to it, is acquiredthroughorundersuchsignature.(Cutoffrule)
XPN:
1. Ifthepartyagainstwhomitissoughttoenforce such right is precluded fromsettingupforgeryorwantofauthority.(Sec.23)
2. Where
the
forged
signature
is
not
necessarytotheholderstitle, inwhichcase, the forgery may be disregarded(Sec.48)
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NEGOTIABLE INSTRUMENTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
21
Q: Can a payee sue the collecting bank for the
amountofthecheckswhenitmadepaymentof
the same under a forged endorsement in favor
oftheforger?
A: Yes, since the signature of the payee was
forged to make it appear that he had made an
indorsementin
favor
of
the
forger,
such
signature
should be deemed as inoperative and
ineffectual.The collecting bank grossly erred in
making payment by virtue of said forged
signature. The collecting bank is liable to the
payee and must bear the loss because it is its
legal duty to ascertain that the payees
endorsement was genuine before cashing the
check.(WestmontBankv.Ong,G.R.No.132560,
Jan.30,2002)
Q: Who are precluded from setting up the
defenseofforgery?
A:
1. Those who admit/warrant the
genuinenessofthesignature:indorsers,
persons negotiating by delivery and
acceptor;(Sec56)
2. Those who by their acts, silence, or
negligence,areestoppedfromclaiming
forgery;
3. A holder of a bearer instrument who
subsequently negotiates such
instrument with a prior forged
indorsement(forgedindorsementisnot
necessary to his title it being a bearer
instrument).
Q: Whataretherightsofthepartiesincasesof
forgedinstruments?
A:
1. Wherenotepayabletoorder:
1. Party whose signature was forged
is not liable to a holder, even a
HIDC
2. Indorsementiswhollyinoperative.
2. Wherenotepayabletobearer:
a. The party whose indorsement is
forged is liable to a HIDC, but not
toone
who
is
not
aHIDC
Reason: it can be negotiated by
meredelivery
b. Theonlydefenseavailable iswant
ofdeliverybutthisdefensecanbe
raised only againsta holdernot in
duecourse.
3. Where billpayable to order: The party
whose indorsement is forged is not
liable to any holder even a HIDC. The
forged indorsement is wholly
inoperative.
Q: A client indorsed a check with a forged
indorsement.
The
collecting
bank
indorsed
the
check with the drawee bank. What are the
liabilitiesoftheparties?
A:Thecollectingbank isboundby itswarranties
asan indorserandcannot set up the defense of
forgeryasagainstthedraweebank.
Thedraweebankisunderstrictliabilitytopaythe
checktotheorderofthepayee.Paymentundera
forged indorsement isnotto thedrawer'sorder.
Since the drawee bank did not pay a holder or
other person entitled to receive payment, it has
no right to reimbursement from the drawer.
(AssociatedBank
v.
CA,
G.R.
No.
107382,
Jan.
31,
1996)
Q: Whatistheremedyofthedraweebank?
A:Thedraweebankmaynotdebittheaccountof
the drawer but may generally pass liability back
through the collection chain to the party who
tookfromtheforgerand,ofcourse,totheforger
himself, if available. If the forgery is that of the
payee's or holder's indorsement, the collecting
bankisheldliable,withoutprejudicetothelatter
proceeding against the forger. Since a forged
indorsement is inoperative, the collecting bank
hadno
right
to
be
paid
by
the
drawee
bank.
The
former must necessarily return the money paid
by the latter because it was paid wrongfully.
(AssociatedBankv.CA,G.R.No.107382,Jan.31,
1996)
Q:What is the liabilityof thedraweebank and
thedrawer fortheamountpaidoncheckswith
forgedindorsements,ifthesamewasduetothe
negligence of both the drawee bank and the
drawer?
A:Thelossoccasionedbysuchnegligenceshould
bedividedequallybetweenthedrawer/depositor
andthe
drawee.
Q: Can a drawerdepositor who entrusted his
check books, credit cards, passbooks, bank
statementsandcancelledcheckstohissecretary
and who had introduced the secretary to the
bank for purposes of reconciliation of his
accounts hold the drawee bank liable for the
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USTGOLDENNOTES2011
MERCANTILELAWTEAM:
ADVISER:ATTY.AMADOE.TAYAG;SUBJECTHEAD:EARLM.LOUIEMASACAYAN;
ASST.SUBJECTHEADS:KIMVERLYA.ONG&JOANNAMAYD.G.PEADA;MEMBERS:MA.ELISAJONALYNA.BARQUEZ,ANGELIR.CARPIO,
ANTONETTET.COMIA,ALBANROBERTLORENZOF.DEALBAN,JOEBENT.DEJESUS,CHRISJARKACEM.MAO,ANNAMARIEP.OBIETA,
RUBYANNEB.PASCUA,FLORANGELAT.SABAUPAN,GIANFRANCESNICOLEC.VILCHES
22
amounts withdrawnbythesecretaryby forging
hissignatureonthechecks?
A: No, he is precluded from setting up theforgeryduetohisownnegligenceinentrustingtohis secretary his credit cards and check bookincluding the verification of his statements of
account.(Ilusorio
v.
CA,
G.R.
No.
139130,
Nov.
27,
2002)
Q:Canadrawer,fromwhomcheckswerestolen
but failed to reportthe same tothe authorities
or the drawee bank, recover the value of the
checks paid by the drawee bank on the forged
checkswhichwasstolenfromthedrawer?
A: No,thedrawercannotrecover.He istheonewhich stands to be blamed for itsnegligence/predicament.(SecurityBankandTrustCompany v. Triumph Lumber and Construction
Corp.,G.R.No.126696,Jan.21,1999)
Q: How is forgery proven and who has the
burdenofproof?
A:Forgery,asanyothermechanismoffraudmustbe proven clearly and convincingly, and theburden of proof lies on the party allegingforgery.(Chiang YiaMin v. CA,G.R.No. 137932,Mar.28,2001)
Q:Discuss the legal consequenceswhen abank
honorsaforgedcheck.
A: 1. When drawer's signature is forged
Draweebank by accepting the checkcannot set up the defense of forgery,because by accepting the instrument,the drawee bank admits thegenuinenessofsignatureofdrawer(BPIFamilyBank v.Buenaventura,G.R.No.
148196,Sept.30,2005;Sec.23,NIL).
Unless a forgery is attributable to thefault or negligence of the drawerhimself,theremedyofthedraweebankis against the party responsible for the
forgery.
Otherwise,
draweebank
bears
the loss. A draweebank paying on aforged check must be considered aspaying out of its funds and cannotcharge the amount to the drawer(SamsungConstructionCo.Phils,v. Far
East Bank, G.R. No. 129015, Aug. 13,
2004). If the draweebank has chargeddrawer'saccount,thelattercanrecoversuch amount from the draweebank
(Associated Bank v. CA, G.R. No.
107382, Jan. 31, 1996; BPI v. Case
Montessori Internationale, G.R. No.
149454,May28,2004).
However,thedrawermaybeprecludedor estopped from setting up the
defense
of
forgery
as
against
the
draweebank,whenitisshownthatthedrawerhimselfhadbeenguiltyofgrossnegligence as to have facilitated theforgery (Metropolitan Waterworks v.CA,G.R.No.L62943,July14,1986).
2. Drawee bank versus collecting bankWhen the signature of the drawer isforged, as between the draweebankand collecting bank, the draweebanksustains the loss, since the collectingbank does not guarantee the signatureof the drawer. The payment of the
check
by
the
drawee
bank
constitutes
the proximate negligence since it hasthe duty to know the signature of itsclientdrawer.(PhilippineNationalBankv.CA,G.R.No.L26001,Oct.29,1968).
3. Forged payee's signature Whendraweebank pays the forged check, itmustbeconsideredaspayingoutof itsfundsandcannotchargetheamountsopaidtotheaccountofthedepositor.Insuch case, the bank becomes liablesince its primary duty is to verify theauthenticity of the payee's signature(Traders
Royal
Bank
v.
Radio
Philippines
Network, G.R. No. 138510, Oct. 10,
2002;WestmontBankv.Ong,G.R.No.
132560,Jan.30,2002).
4. Forged endorsement Drawer'saccount cannot be charged, and ifcharged, he can recover from thedraweebank (Associated Bank v. CA,G.R.No.107382,Jan.31,1996).
Drawer has no cause of action againstcollecting bank, since the duty ofcollecting bank is only to the payee(Manila
Lighter
Transportation,
Inc.
v.
CA,G.R. No. L50373 Feb. 15, 1990).
Draweebank can recover from thecollecting bank (Great Eastern Life Ins.Co.v.Hongkong&ShanghaiBank,G.R.
No.18657,Aug.23,1922)becauseevenif the indorsement on the checkdepositedbythebank'sclientisforged,collecting bank is bound by its
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NEGOTIABLE INSTRUMENTS LAW
UNIVERSITY OF SANTO TOMAS
ACADEMICSCHAIR:LESTERJAYALANE.FLORESII
VICECHAIRSFORACADEMICS:KARENJOYG.SABUGO&JOHNHENRYC.MENDOZA
VICECHAIRFORADMINISTRATIONANDFINANCE:JEANELLEC.LEE
VICECHAIRSFORLAYOUTANDDESIGN:EARLLOUIEM.MASACAYAN&THEENAC.MARTINEZ
23
warranties as an indorser and cannot
set up defense of forgery as against
drawee bank (Associated Bank v. CA,
G.R.No.107382,Jan.31,1996).
Q: What are the kinds of fraud relating to a
negotiableinstrument?
A:
1. Fraud in the execution or fraud in
factumAperson,withoutnegligence,
has signed an instrument which was in
factanegotiableone,butwasdeceived
as to the character of the instrument
and without knowledge of it (real
defense).
2. Fraudintheinducementorsimplefraud
Relatestothequantity,quality,value
orcharacteroftheconsiderationofthe
instrument. Deceit is not in the
character
of
the
instrument
but
in
its
amountorterms(personaldefense).
Q: The drawers signature was forged. There is,
however, a provision in the monthly bank
statement that if the drawers signature was
forged, the drawer should report it within 10
days from receipt of the statement to the
drawee. The drawer, however failed to do so.
What will be its effect insofar as the drawers
rightisconcerned?
A:Thefailureofthedrawertoreporttheforgery
withintendaysfromreceiptofthemonthlybank
statement
from
the
drawee
bank
does
not
preclude the drawer from questioning the
mistakeofthedraweebankdespitetheprovision.
(BPIv.CASAMontessor,G.R.No.149454,May28,
2004)
Q: If forgerywascommittedbyanemployeeof
the drawer whose signature was forged, does
the relationship amount to estoppel such that
the drawer is precluded in recovering from the
draweebank?
A:Thebarefactthatthe forgerywascommitted
byanemployeeofthepartywhosesignaturewas
forgedcan
not
necessarily
imply
that
such
partys
negligence was the cause of the forgery in the
absence of some circumstances raising estoppel
againstthedrawer.(SamsungConstructionCo.v.
Far East Bank and Trust Company, G.R. No.
129015,Aug.13,2004)
V.CONSIDERATION
Q: Whatisconsideration?
A: It is an inducement to a contract that is the
cause,priceorimpellinginfluence,whichinduces
apartytoenterintoacontract.
Q:Whatisthepresumptionrecognizedbylawas
totheexistenceofconsideration?
A: Every negotiable instrument is deemedprima
facie to have been issued for a valuable
consideration.(Sec.24)
Q: Whatconstitutesvalue?
A: It is any consideration sufficient to suppo
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