Additional:

Credit Q & A:

What is a Letter of Credit (LC)?

It is any arrangement, however named or described, whereby a bank (issuing bank), acting at the request and on the
instructions of a customer (applicant) or on its own behalf, binds itself to:
1. Pay to the order of, or accept and pay drafts drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept and pay such drafts, or
3. Authorizes another bank to negotiate, against stipulated document(s),
Provided, the terms and conditions of the credit are complied with (Art. 2, Uniform Customs & Practice for
Documentary Credits.)
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.

In case the buyer was not able to pay its obligation under the letter of credit, can the bank take possession over
the goods covered by the said letter of credit?
No. The opening of a Letter of Credit did not vest ownership of the goods in the bank in the absence of a trust receipt
agreement. A letter of credit is a mere financial device developed by merchants as a convenient and relatively safe
mode of dealing with the 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. (Transfield
Philippines, Inc. v. Luzon Hydro Corporation, G.R. No. 146717, Nov. 22, 2004)

Can a court order the release to the applicant the proceeds of an irrevocable letter of credit without the consent
of the beneficiary?
No, such order violates the irrevocable nature of the letter of credit. The terms of an irrevocable letter of credit cannot
be changed without the consent of the parties, particularly the beneficiary thereof. (Phil. Virginia Tobacco Administration
v. De Los Angeles, G.R. No. L-­‐27829, Aug. 19, 1988)

Is irrevocable letter of credit and confirmed letter of credit synonymous?

An irrevocable letter of credit is not synonymous with a confirmed letter of credit. 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, the correspondent bank gives an absolute assurance to the beneficiary that it
will undertake the issuing bank’s obligation as its own according to the terms and condition of the credit. (Prudential
Bank and Trust Company v. IAC, G.R. No. 74886, Dec. 8, 1992)

What is the doctrine of strict compliance?

The documents tendered by the seller/beneficiary must strictly conform to the terms of the letter of credit. The tender
of documents must include all documents required by the letter. Thus, a correspondent bank which departs from what
has been stipulated under the LC acts on its own risk and 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 Bank and Trust Company v. CA, G.R.
No. 940209, Apr. 30, 1991)

What is the independence principle?

The relationship of the buyer and the bank is separate and distinct from the relationship of the buyer and seller in the
main contract; the bank is not required to investigate if the contract underlying the LC has been fulfilled or not because
in transactions involving LC, banks deal only with documents and not goods (BPI v. De Reny Fabric Industries, Inc., L-­‐
2481, Oct. 16, 1970). In effect, the buyer has no course of action against the issuing bank.
What is the exception to the independence principle?
The “Fraud exception rule.” It provides that the untruthfulness of a certificate accompanying a demand for payment
under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment. (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)

What is the effect of the buyer’s failure to procure a Letter of Credit to the main contract?
The Letter of Credit is independent from the contract of sale. Failure of the buyer to open the Letter of Credit does not
prevent the birth of the Sales Contract. (Reliance Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R. No. 100831, Dec.
17, 1993) The opening of the Letter of Credit is only a mode of payment. The LC is not an essential requisite to the
contract of sale.

What is a trust receipt transaction?

It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds absolute title or security interests over certain specified goods, documents
or instrument, releases the same to the possession of entrustee upon the latter’s execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the designated goods in trust for the entruster and, in case of default,
to sell such goods, documents or instrument with the obligation to turn over to the entruster the proceeds to the
extent of the amount owing to it or to turn over the goods, documents or instrument itself if not sold. (Sec. 4, P.D.
115)

What is a trust receipt (TR)?

It is the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions
substantially complying with the provisions of PD 115.

What is the loan and security feature of the trust receipt transaction?
A 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. It secures an indebtedness and there can be no such thing as security interest that secures no obligation.
(Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987)

Who is the owner of the articles subject of the TR?

The entrustee. A trust receipt has two features, the loan and security features. The loan is brought about by the fact that
the entruster financed the importation or purchase of the goods under TR. Until and unless this loan is paid, the
obligation to pay subsists. If the entrustee is made to appear as the owner, it was but an artificial expedient, more of
legal fiction than fact, for if it were really so, it could dispose of the goods in any manner that it wants, which it cannot
do. To consider the entrustee as the true owner from the inception of the transaction would be to disregard the loan
feature thereof. (Rosario Textile Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232. June 29,
2005)

What is the penal sanction if offender is a corporation?

The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a corporation. Hence,
if the entrustee is a corporation, the law makes the officers or employees or other persons responsible for the offense
liable to suffer the penalty of imprisonment. The reason is obvious, corporations, partnerships, associations and other
juridical entities cannot be put to jail. Hence, the criminal liability falls on the human agent responsible for the violation
of the Trust Receipts Law. (Ong vs. CA, G.R. No. 119858, April 29, 2003)

In the event of default by the entrustee on his obligation under the trust receipt agreement, is it absolutely
necessary for the entruster to cancel the trust and take possession of the goods to be able to enforce his right
thereunder?
The law uses the word "may" in granting to the entruster the right to cancel the trust and take possession of the goods.
Consequently, the entrustee has the discretion to avail of such right or seek any alternative action, such as a third party
claim or a separate civil action which it deems best to protect its right, at any time upon default or failure of the entrustee
to comply with any of the terms and conditions of the trust agreement. (South City Homes, Inc. v. BA Finance
Corporation, G.R. No. 135462, Dec. 7, 2001)

What is the effect of novation of a trust agreement?

Where the entruster and entrustee entered into an agreement which provides for conditions 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. (Philippine Bank v. Ong, G.R.
No. 133176, Aug. 8, 2002)

Can deposits in a savings account opened by the buyer subsequent to the TR transaction be applied to
outstanding obligations under the TR account?
No, the receipt of the bank of a sum of money 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).

JDS NOTES
8.17.19
There is formalities only for the sake of stipulated interest
5,000,000 given in 5 tranches every 2 years, the contract is unenforceable by reason of SOF
If its partially complied its, SOF no longer applies
What do you mean by consumable thing?
Why cant the bailee use the fruits in a commodatum?
Commodatum- least transmission of rights
Commodatum is a personal contract
How do you know that a commodatum is a precarium?
When can you demand the thing in a commodatum, refer to extinguishment of the contract page 22.
Art. 1163 applies in commodatum
Food of the carabao is to be borne by the bailees.
There can be compensation in commodatum by direct provision, 1287
Hidden defects-bailor must not be aware, but for the provision to apply, there must be knowledge.
When does natural obligations or soliutio indebiti apply? NO- there must be prescription and voluntary payment (with
knowledge), solution indebiti-mistake (CONSIDER BOTH)
There is still a usury law, but its suspended. It’s not repealed.
If its unconscionable, the court may reduce the interest.
Kinds of interest- conventional, compensatory, interest on interest

8.20.19
Benchmark of floating rate: Must be (1) agreed by the parties and must (2) not be dependent on the will of one of
the parties.

Article 1198- acceleration clause

Availability period-

Cross default- it is a provisions that puts a borrower in default if the borrower defaults on another obligation.

1. Monetary/Conventional-stipulated interest
When shall it accrue:
a. Delivery of the funds
2. Compensatory
a. Based on actual damages
b. Can you still collect even if there is no stipulation?
c. When will it start to run?
3. Interest on interest
4. Interest on judgment

Monetary interest 1956: if in writing and interest is stipulated: stipulated interest

If in writing but no specific interest stipulated: legal rate of 6%
Compensatory XPN to 1956: agreed, monetary rate, legal rate, computed from default
Interest
Interest on the XPN to 1956: 6% legal interest as per 2212 (unpaid monetary interest)
interest
Interest on Legal rate, finality to satisfaction
judgment

BEFORE CBC No. 799

12% interest rate

CBC No. 416
(1) loans;
(2) forbearance of any money, goods or credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or forbearance of any money,
goods or credits.

6% interest rate
Civil Code
Transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general.

Eastern Shipping
1. Loan, forbearance of money- 12% p. a. computed from judicial or extra-judicial demand
2. Breach of obligation, not constituting a loan or forbearance of money- 6% p. a. computed from judicial or
extra-judicial demand, if can be established certainly, otherwise, computed from finality of the decision.
3. Judgment awarding a sum of money- 12% p.a. computed from finality of the decision.

8.27.19

End
1) Monetary interest Finality of judgment
 2) Compensatory interest
3) Interest on interest
4) Interest on judgment Satisfaction of judgment sum

Parties may enter in a loan agreement even if the loan was in foreign currency.

-Stipulation of the parties will govern.

Loan is in US dollars, but you will pay only in peso.

So you cannot compel. If the agreement is to pay in US dollars you have to pay in US dollars. Unless it is impossible
to deliver such currency, then in the currency which is the legal tender in the Philippines.

For instance there is foreign currency emergency, and the BSP will suspend payment thru US Dollars.

Legal tender means such currency which in a given jurisdiction can be used for the payment of debts, public and
private, and which cannot be refused by the creditor.

The legal tender covers all notes and coins issued by the Bangko Sentral ng Pilipinas and guaranteed by the Republic
of the Philippines. The amount of coins that may be accepted as legal tender are:

1. One-Peso, Five-Pesos, 10-Pesos coins in amount not exceeding P1,000.00

2. 25 centavos or less – in amount not exceeding P100. 00 (BSP Circular No. 537, Series of 2006, July 18, 2005).

Finance charge

Amount to be financed

Total percentage of the afinance charged

If not disclosed the charges will be void, considered as illegal impositions.

What is the penalty to the creditor? Twice to finance charge given by the creditor

100-5,000 and an imprisonment of not less than 6 months

Double financial charge? Check sa law!

A deposit need not be a contract, it may be created by law or by judicial action, in that case, that is a judicial deposit.

Principal purpose=safekeeping

It may be onerous.

Art. 1965. A deposit is a gratuitous contract, except when there is an agreement to the contrary, or unless the
depositary is engaged in the business of storing goods.

Deposit, Onerous- bilateral

Deposit, Gratuitous-unilateral

Mutuum is always UNILATERAL, whether gratuitous or onerous.

Depositary has the obligation to safe keep and return.

Depositor is obliged to pay the depositary.

Contract to loan- reciprocal obligation, bilateral

Contract of loan- unilateral, mutuum is created when there is delivery of the object, not reciprocal oblgiation

9.7.2019

Obligations of a depositary

1. Keep the thing safely and to return it

2. Cannot deposit to a third person

3. Change the way of deposit

4. Collect interest from BICS (bonds, instruments, certificates, securities), preserve the their value and rights

5. May comingle grains or other articles of the same kind

6. Cannot use without express permission

7. Be liable to FE

8. Must return a thing closed and sealed if delivered also closed and sealed

9. Presumed to be authorized to open a locked box or receptacle if he was given a key

10. Returned with all its products, accessories and accessions

11. Cannot demand that the depositor proved its ownership

12. Advised the depositor if he discovered that the thing has been stolen

13. Return the same if he may have reasonable grounds to believe ta the thing has not been lawfully acquired

14. If solidary and thing is not divisible, 1212 and 1214 shall govern, return it only to the person designated

15. Return the thing to the place it was designated to be replaced

16. Return the thing upon demand

17. Deliver the sum or other thing to the depositor if the thing was lost by force majure or government

Right of depositor’s heir

Obligation of depositor

18. If depositors are not solidary, thee cannot demand more than his hare

Oyales: A contract of loan is unilateral

The delivery of the money by the creditor is not yet part of the contract of loan.

Capacity is necessary to demand the return of the thing. 1986 example, so the administrator can demand but not the
minor

-principle of double recovery

1984 contemplates a situation where the thing is stolen or unlawfully acquired.

Depositary can retain the thing with in the 30 day period

When can the depositary retain the thing:

1. Judicially attached

2. Opposition

3. 30-day

4. Right of retention

5. If demand is done by an incapacitated person you can also retain

Right of retention by depositary

Deposit-all damages

Commodatum-with respect only to hidden flaws

Gratuitous- “justifiable cause”

Onerous-as GR deposit cannot return immediately, XPN: 1984,’if the depositary has reasonable grounds to believe
that the thing has not been lawfully acquired by the depositor, the former may return the same

Can it be deposited to a 3rd person?

GR: you cannot transfer it to another depositary

XPN: there is an authorization

XPN to XPN: 3rd party who is manifestly unfit or careless

Can the depositary use the thing deposited?

GR: he cannot

XPN: stipulation or necessary for the preservation of the thing

Even if there is authority to use, the principal use must be for safekeeping

There can be no compensation. –ABSOLUTE RULE!

1992. if onerous it presumes na part na ang expenses for preservation of the thing, unless otherwise stipulated.

Commodatum:

Bailee- ordinary expenses for preservation and use

Bailor- extraodinary expenses with other qualifications mentioned in Art 1949

Depositor is obliged for the preservation of thing whether ordinary or extraordinary (must be gratuitous!)

Right of retention is broader in scope in a contract of deposit, unlike a bailee. In deposit, if you are not paid, you can
retain the thing but in commodatum, you really have to return the thing

BAILEE parang DEPOSITARY

BAILOR parang DEPOSITOR

The right of action must be assigned to you. Action to recover the price only but not the thing, because the 3rd
person was a buyer in GF.

Necessary deposit, you must be a transient. If 1 year ka na dun ,then that is a lease, not a deposit.

The reason why there is necessary deposit, because the law says so, by the operation of law.

Deposit- real, bilateral or unilateral, primary purpose is for safekeeping,you may be allowed to use (irregular) or you
may use it because it is necessary for the preservation,

XPN: reasonable grounds, unlawfully obtained

9.14.19

Triple V- voluntary deposit only

Durban: See is not a guest but just a visitor of the guest

There is right of retention in necessary deposit only in cases of hotel or inns

Bill of lading is a contract of carriage

The consignee in a bill of lading is the buyer, only the buyer can claim

The issuing bank if there is a valid presentment the issuing bank is primarily liable- that is the independence principle

Contention of contractor- that only the issuing bank can call on the letter of credit and not the LHC

The 3 requisites for enjoinment must be determined by te court, otherwise the independent principle be watered
down

Correspondent banks

-negotiating

-notifying

-confirming

Negotiating and confirming banks can be the same bank

HSBC: I will pay after Klokner pays me, is that a valid defense?

Guarantor- liability is subsidiary

Issuing bank of an LC- liability is primary, direct

9.28.19

Security interest is less than ownership in CC

But in trust receipts law, even if security interest lng, you can have absolute title

Colinares- goods are not intended for sale or resale

In allied bank- goods are not intended for sale or resale- what are the products?
Surety and guaranty are accessory contracts

1. The guarantor and the sub-guarantor has benefits of excussion

Counter guaranty

Drugnet clause

Benefit of excussion is unimpaired even if the co-guarantor is not impleaded.