Compiled SCL Transcription Midterms UPDATED

USC LAW EH 403 TRANSCRIPTIONS----Special Commercial Laws P a g e |1
Special Commercial Laws
AY 2010-2011
November 22, 2010
I. Letters of Credit
A. Definition and Nature
 Letters of credit (LCs) are governed by the Code of Commerce but the provisions under the
Code of Commerce are already obsolete. Modern LCs are strictly now bank to bank
transactions. Aside from the Code of Commerce, we now refer to the provisions under the
Uniform Customs and Practice (UCP) for documentary credits. This is base on the
International Chamber of Commerce. As you might have read in the cases, the provisions
under the UCP are cited in the jurisprudence. We refer to this one (UCP) aside from the
provisions in the Code of Commerce.
 What is a letter of credit?
 Under the Code of Commerce, it is simply defined as one issued by a merchant to

another merchant to govern commercial transactions. It does not tell us much
about a LC.
 So, we refer to jurisprudence on the definition on what is a letter of credit. In one

jurisprudence, it explains an LC well. It defines a letter of credit as financial device
developed by merchants as a convenient and relatively safe mode of dealing with
the sale of goods. Although it defines only one type of LC, that is a commercial letter
of credit because it talks about sale of goods. Now, under that scenario, in a
commercial LC governed in the sale of goods, the purpose of the LC is to reconcile
the seemingly irreconcilable interests of buyer and seller.
 Why are their (buyer and seller) interests seemingly irreconcilable?
o From the point of view of the seller, the seller does not want to part with
his goods unless he receives payment.
o On the part of the buyer, “I do not want to pay unless I am sure that I
receive the goods”.
o Therefore, there is a seemingly irreconcilable interest. So, what happens is

that we have a deadlock. Both of them do not want to give in.
 So, how do we reconcile their interests?
o We have the letter of credit. So, in that case, the moment there is a
deadlock, the buyer now would be required to contact a bank. Normally, it is
the bank of the buyer. The bank located in the locality of the buyer. The
buyer would be required to contact the bank. And you call this bank an
issuing bank. The purpose of going to an issuing bank is for the buyer to
apply for an LC. Because under the LC, the moment the issuing bank issues
an LC in favor of the seller. Once the issuing bank approves the LC and in fact
issues an LC, the issuing bank undertakes/ gives assurance to the seller to
pay. Once the LC is already established, the issuing bank or other banks
(later on we will discuss noh!), we call them correspondent banks, the
issuing or corresponding bank would now inform the seller, “hey seller,
there is an LC issued in your favor or open in your favor. Therefore, it is now
safe to ship your goods.” Now, the moment the LC established, the seller
would now be willing to ship the goods. Because under the LC, the issuing
bank undertakes to pay the seller. In what way will the seller be paid? The
seller will issue a draft.
o A draft is a form of a bill of exchange. It could be a check or any bill of

exchange. The seller will now issue drafts drawn against, normally, an issuing
bank or any bank indicated in the letter of credit. The moment the seller
issues a draft accompanied by documents of title or shipping documents, i.e.
commercial invoice, bill of lading etc. So, the seller will issue a draft.
Basically, the draft will say, a negotiable instrument, a bill of lading will say
“Pay to the order of seller the amount of, normally equivalent to the value
of the goods”. And the drawee bank would be the issuing bank. So, the seller
will present this draft together with the shipping documents to the issuing
bank. When the issuing bank sees the draft and the shipping documents, the
issuing bank would redeem the drafts. What do you mean by redeem? The
bank will pay. Ilisin niya ang draf, either a check or it will simply pay the
seller. So, in that case, the seller is assured of payment. Makadawat na siya
ug bayad. What happens now to the shipping documents? The shipping
documents will be forwarded to the issuing bank. What happens to the
buyer? If the buyer wants to obtain possession of the goods, the buyer
needs the shipping documents. In order for the buyer to recover these
documents of title, the buyer must reimburse the bank. So, it is only when
the buyer reimburses the bank that he gets the shipping documents. So,
basically, that completes your LC transaction.
o So, how does it reconcile the interest of the seller? Ako seller, I get
assurance from the issuing bank that I will be paid. On the part of the buyer,
I get assurance that ang akong gibayran naa na’y goods nga na-ship. So, in
effect, the LC assures certainty of payment and promptness of payment.
o magine if the seller and buyer are located in different localities like abroad.
Example, if you have a seller located in the US and the buyer is located in
Cebu. Now, of course, if I am the seller, I want to be assured from the
payment. I want to get the payment right away. Ngano man? During the
interval of time, from the time of shipment to the time of receipt of goods, a
lot of things could happen. One, the price could change. If the selling price is
denominated in a different currency. The foreign currency might fluctuate.
Two, by the time the goods are received by the buyer. The buyer could for
trivial reasons reject the shipment and that would cause considerable
hardship on the part of the seller. So, for those reasons, ako seller, I want to
get advantage of the position in the sense that I want to get prompt
payment. Diba ni-ship na gud ko sa akong goods, so gusto ko na makadawat
dayon ko ug payment. On the part of the buyer, I don’t want to part with my
money unless naa na ang goods. So, in effect, the letters of credit resolve
their seemingly irreconcilable interests.
o Let us have another example. This time this involves a correspondent bank.
So, seller. Mr. S and Mr. B. Now, Mr. B will contact an issuing bank. Let us say
BDO. Assuming that the seller is located abroad and the buyer is in Cebu. As
we said earlier normally, the issuing bank would notify the seller of the
existence of the LC but since the seller is located abroad. There is no BDO
branch abroad. So, there is no way for BDO to communicate to the seller the
existence of a LC. Normally, the issuing bank would contact of what we call a
correspondent bank. A correspondent bank is normally a bank of the seller.
Let us say that the correspondent bank is Bank of America. Between Bank of
America and BDO, there is an arrangement. There is an element of trust in
the sense that the issuing bank can request or make an order to the
correspondent bank to pay the seller under the LC. Why would the Bank of
America pay the seller? Because it trusts BDO. It works both ways. Bali ang
scenario. It is now the Bank of America who would request BDO to pay a
seller here in Cebu. Why would BDO do that? Because it also trusts Bank of
America. So, between the two banks, there is what we call element of trust.
The moment Mr. B applies with the issuing bank for an LC and it is approved,
the issuing bank will forward a copy of the LC together with the wire/ cable.
The wire/ cable is simply an instruction or a notice to the correspondent
bank that such LC is open. The moment the copy of the LC and the wire,
coming from the BDO is received by Bank of America, the Bank of America
will inform the seller that an LC has been issued in its favor. Next, the seller
would now ship the goods. As soon as the goods are shipped, of course, he
gets the documents of title; he will issue a draft drawn against the
correspondent bank. He will submit the draft together with the shipping
documents to the correspondent bank. When the documents are complete
pursuant to the letters of credit, the correspondent bank would be the
seller. Then, the correspondent bank will forward the documents to the
issuing bank. Between the correspondent bank and the issuing bank, there
is a settlement of payment. The correspondent bank will demand
reimbursement from the issuing bank. So, the issuing bank will pay the
correspondent bank. Now, here comes the issuing bank. In order for the
issuing bank to get reimbursement, it will inform the buyer that the shipping
documents are already in its possession. If the buyer wants to obtain
possession of the documents of title, it has to reimburse the issuing bank.
What if the buyer cannot pay the issuing ank? Then, he does not get the
documents of title unless they execute a trust receipt. But that’s a different
story. Does the issuing bank get anything from the LC? The issuing bank will
get charges. Nothing is free.  The correspondent bank (of notifying etc.)
gets commission fees or charges.
o (Question from hottie mommy cai :D) Is it necessary that the buyer has to
pay the issuing bank before the issuing bank can pay the correspondent
bank or it depends upon their agreement? Not necessarily that the buyer
has to pay before the issuing bank can pay the correspondent bank. In fact,
as you can see the correspondent bank advances payment to the seller.
Either it debits its account or maningil siya later on.
o (Question from Ludanish ;p) Who will check the quality of the goods? The
LC deals only with documents specified in the LC. It has nothing to do with
the goods, its quantity and quality. As we will discuss later on, the LC is
independent from the underlying transactions, i.e. contract of sale. Such
that if there are breaches in the contract of sale, the bank is not liable.
o (Question from hottie mommy cai :D) Does the telegraphic transfer equal to
LC? No, not necessarily. That is a good point  With the modern ways of
doing things, the banks have also evolve/ innovate offered other facilities
like telegraphic transfer of funds. The purpose of telegraphic transfer of
funds is only to assure promptness of payment. How does it work? Buyer
gives an instruction to its bank. It presupposes that he has an account with
that bank. It gives instructions to wire money to credit or to send money to
the account of the seller, to the bank nga naa’y account ang seller for
purposes of transferring funds. But does it give assurance on the buyer nga
nadawat na ang goods? That arrangement is good only if ang buyer and
seller dugay na ang ilang relationship, like suki na ba. There is an
established relationship wherein the buyer can wire the money even if he
has not yet received the shipping documents. What he addresses is the
promptness of payment. In an LC, it gives assurance to the buyer in sense
that he will only pay upon shipment of the documents. When I pay, the
goods are already shipped. But as to whether the goods were exactly the
goods that I ordered, that is a different story because the LC does not
guarantee that. So, a question was asked, how does it reconcile the
seemingly irreconcilable interest? (balik-balik!! @.@) it reconciles in the
sense that the buyer has an assurance that there were goods that were
shipped, but it does not assure him the quality and quantity of the goods.
o What is the reason, why the LC would not touch on that matter (quality and
quantity etc.)? If you require the bank to assure on the quality and quantity
of goods, no bank will be willing to issue an LC. Imagine the risk and
inconvenience that it would take. Second, it defeats the very purpose of an
LC which is the promptness of payment. How can there be promptness of
payment when the bank has to check whether the goods tally with those
described in the LC. The law also states that in case there is a breach in the
contract of sale, the parties is not without remedy. It something that has to
be reconciled between the buyer and the seller and not as far as the banks
are concerned.
Case: Prudential Bank vs. IAC

Contract of Sale
Philippine Rayon Mills Nissho Co.
(Buyer/Applicant) (Seller)
Trust
receipt
Prudential Bank Bank of Tokyo
(Issuing Bank) (Correspondent Bank)
Facts:
The buyer is the Philippine Rayon Inc. The seller is Nissho Co., which is based on Japan. Between the
buyer and the seller, there is a contract of sale. Take note that the contract of sale always precedes the
letters of credit. This is for the sale of textile machineries. The buyer wanted to buy textile machineries
from Nissho Co., which is located in Japan. To effect the payment, the seller was required to apply for an
LC with Prudential Bank, which is the issuing bank. Since the seller is located abroad, there is a need for
a correspondent bank, Bank of Tokyo. Nissho Co. shipped and delivered to Philippine Rayon Mills.
Philippine Rayon got hold of the machineries thru a trust receipt because Philippine Rayon did not
reimburse the issuing bank. Perhaps, wala siyay funds. The only way for Philippine Rayon to obtain
possession of the textile machineries and the shipping documents is to execute a trust receipt. Basically,
a trust receipt is an arrangement between the bank and the buyer wherein the ownership of the goods
is retained by the bank but the bank authorizes the buyer to have possession of the goods with an
understanding that the goods are held in trust for the bank. Such that the buyer could dispose of the
goods and apply the proceeds in payment of his debt to the bank but he holds the goods and the
proceeds in trust for the bank. That is a trust receipt. That’s a different story. Drafts were drawn because
that is how an LC works. A seller is required to issue drafts. In here, it was alleged that some of the drafts
were not accepted by Philippine Rayon. The drafts were issued by the seller and together with the
shipping documents; it was presented to the Bank of Tokyo. Bank of Tokyo paid Nissho Co. Then, as
reimbursement of Prudential Bank, it released the goods thru a trust receipt but it was not yet able to
obtain reimbursement from Philippine Rayon.
Issue:
The issue now here is WON Philippine Rayon is liable to Prudential Bank.
According to Philippine Rayon, it is not liable because the drafts were not accepted. So, is the acceptance
of the draft by Philippine Rayon necessary for Philippine Rayon to be considered liable to Prudential
Bank?
Ruling:
NO. Acceptance is not an indispensable requirement because Philippine Rayon is not the drawee. The
drawee here is Prudential Bank. Whether or not these are sight drafts (in NIL, there is no requirement of
acceptance), acceptance is not necessary because the drawee is Prudential Bank. By nature of a LC, the
one who undertakes to pay is the issuing bank. The moment the issuing bank pays the seller, Philippine
Rayon becomes liable. To require acceptance by Philippine Rayon, the issuing bank and the beneficiary
would be at the mercy of the buyer. Pwede ra siya mo-ingon na di ko mo-accept uy para dili ko ma-liable
even if he has already received the goods. That would be so unfair for the seller and the issuing bank.
The seller has already shipped the goods and for the issuing bank which has already paid the seller only
to realize later on that the buyer would refuse to pay by simply refusing to accept the drafts. But the
letters of credit do not work that way. LC does not require the acceptance of the buyer.
There has also been an issue here regarding Philippine Rayon’s liability on the trust receipt. Philippine
Rayon was held liable for estafa because it disposed the goods without the consent of the issuing bank.
And under the trust receipt law, if you dispose the proceeds or did not return the goods, you would be
liable for estafa.
Again, the point of this case is that in an LC, the drawee is not the buyer or the applicant but it is the
bank
Case: Bank of America NT & SA vs. CA
Inter-Resin ropes General Chemicals
(Seller) (Buyer; Thailand)
Bank of America LC Bank of Ayudhya
(Correspondent Bank) (Issuing Bank)
Drawer Negotiating Bank
Facts:
The seller is Inter-Resin and the buyer is General Chemicals, located in Thailand. There was allegedly a
contract of sale of ropes. The issuing bank is Bank of Ayudhya. The correspondent bank is Bank of
America. It just received thru registered mail an LC, purportedly issued by Bank of Ayudha in favor of
Inter-Resin. Bank of America upon receipt of mail informed Inter-Resin of the existence of an LC issued in
its favor. Upon investigation, it was found out that Bank of Ayudhya did not issue after all the LC, much
more that General Chemicals did not apply for that LC. In effect, the LC was fraudulent. But when Bank
of America discovered that it already paid Inter-Resin because it already shipped the goods since it
issued a draft and presented the draft together with the shipping documents to Bank of America .
Correspondingly, Bank of America paid Inter-Resin. And when Bank of America tried to seek
reimbursement from Bank of Ayudhya, Bank of Ayudhya refused payment. According to Bank of
Ayudhya, it did not issue such LC. Therefore, it can no longer go after Bank of Ayudhya. Diba in the
normal order of things, after paying Inter-Resin, where would the Bank of America go? Bank of Ayudhya
and then the Bank of Ayudhya would go to the buyer. But here, Bank of America cannot go after Bank of
Ayudhya.
Issue:
Can Bank of America go after Inter-Resin to recover what it paid under the fake or fraudulent LC?
For us to answer this, we have to determine what is the role of Bank of America? What obligations are
assumed by Bank of America? Whether it assumed the role of a confirming bank or merely an advising
or notifying bank? Does it matter?
 Yes because if Bank of America is just an advising or notifying bank, its obligation is only to notify
or inform. It does not undertake to pay. Does it warrant the genuineness and authenticity of the
LC?
 No, it does not. Its only obligation is to check the apparent authenticity. Apparent
simply means on the face lang without conducting rigorous examinations.
 But if Bank of America is a confirming bank, it lends credit to the LC, it assumes obligation of the
issuing bank. If it confirms the LC, it warrants that the LC is genuine and authentic. Therefore, it
cannot deny liability.
Ruling:
The Bank of America was merely an advising bank. It is an advising bank only because its obligation was
merely to inform the existence of the LC.
 What about that statement of the employee, Atty. Tanay (?), when it said “don’t worry, it is
good”, did it affect Bank of America’s liability?
 No. According to the case, it did not have the effect of novating the responsibilities
of Bank of America to that of a confirming bank.
 What about the fact that it accepted the shipping documents and paid? Did it make Bank of
America a confirming bank?
 No, mere acceptance of shipping documents and the fact that you paid does not
necessarily make you a confirming bank.
 So, when do you become a confirming bank?
 It must be expressly or clearly established that you really confirm the LC . Based on
the evidence submitted, it was not established. There must be a document expressly
stating that you inform the seller that you assume as a confirming bank. In the
documents submitted, the letter that was submitted by Bank of America to Inter-
Resin was merely a letter of advice. On the basis of that, SC said that it was just an
advising bank. In fact, Inter-Resin only paid advising fee, not confirming fee.
 What is the reason why we have a confirming bank?
 Sometimes, the issuing bank is not a well-known bank as far as the seller is
concerned. That is why the seller would require that there be a well-known bank
which would confirm the LC issued. It is up to that bank WON to assume such
obligation. Of course, it gets paid for acting as a confirming bank.
Going back to the case, Bank of America was merely a notifying bank. Can it recover from Inter-Resin?
YES!!!  because it is just an advising bank and being such, it did not warrant that it is genuine. It did not
warrant that you will be paid.
SC further said that when Inter-Resin issued a draft, it acted as a drawer. And here, Bank of America
acted aside from an advising bank, it acted independently as a negotiating bank. As a negotiating bank,
in effect, when the drawer indorses the draft to Bank of America, recall your NIL, if Bank of America
cannot go after the drawee, its right of recourse is to the parties secondarily liable. So, Bank of America
can go after Inter-Resin.
 Would it make a difference if Bank of America is a confirming bank?
 Yes. If Bank of America is a confirming bank, it cannot go after Inter-Resin. As a

confirming bank, it assumes that the LC is genuine. If you act as a confirming bank,
you’re good as an issuing bank. As an issuing bank, you accept the draft.
 Did the court need to resolve an issue WON ropes were actually shipped?
 No. It is not necessary. Because again, LC deals only with documents.
 A question was raised on why the fraud exception rule was not applied.
 In order for the fraud exception rule to apply, it must be fraud in the sense that the
documents submitted by the beneficiary under the LC, in order to avail of the LC,
were not genuine. Here, the shipping documents which were submitted were
genuine. Only that it turned out that the goods shipped were not actually ropes. But
it is not for the court, under the LC, to determine WON what were shipped were
ropes.
 The fraud exception rule would only apply if the documents submitted were not
genuine.
 It was not established in this case which company really issued the LC.
 What if Inter-Resin was really in good faith that it shipped real goods gyud? And then, Bank of
Ayudhya would refuse to reimburse Bank of America. Of course, Bank of America would go to
Inter-Resin, where would Inter-Resin now go?
 It can go after the buyer. It can recover the goods but there was no contract of sale
because General Chemicals did not really go into contract of sale. But of course, it
can recover the goods.
Case: MWSS vs. Daway
MWSS Concession agreement Maynilad
(obligee) (obligor)
Standby LC
Citicorp
(Issuing Bank)
Facts:
This is a concession agreement between MWSS and Maynilad. MWSS granted Maynilad a concession for
a period of 20 years to manage, operate, repair, decommission and refurbish the existing MWSS water
delivery and sewerage services in the West Zone Service Area. This is now the contract of sale. This
involves the concessionaire agreement. Maynilad is the obligor. It has the obligation to MWSS for the
payment of the foreign loan and the maintenance and refurbishment of the equipment and the payment
of concession fees. In order to facilitate the transaction, Maynilad opened a standby letter of credit in 3
foreign banks. One of which is Citicorp. Under the agreement, Maynilad (obligor) was required to put up
a performer’s bond. The purpose of the performance bond is to guarantee of Maynilad’s obligation to
MWSS. By way of performance bond, Maynilad opened a standby LC. As discussed earlier, this is
different from a commercial LC in that this covers non-sale transactions. There is a standby LC in favor of
MWSS. However, due to the depreciation of the peso, Maynilad wanted to find a way in order for it to
recover some of its losses. So, it filed a Notice of Force Majeure to MWSS. There were negotiations
wherein they wanted to add in the agreement that some scheme wherein some losses would be recover
by adjusting the exchange rates. However, despite some negotiations, Maynilad allege that MWSS failed
to comply with the obligation where it amended the concession agreement because still, the scheme for
the adjustments of the losses was not implemented. Because it was not able to resolve the scheme on
recovery for its loss, Maynilad filed a Notice of Event of Termination. Notice of Event of Termination
means that it will terminate the concession agreement prior to the arrival of the 20 year period. And
because of such notice, in effect, as far as MWSS is concerned, it means that you have failed to comply
with the obligation. Under a standby LC, the obligee can avail of the standby LC when the obligor fails to
perform the obligation, the moment there is non-performance. Diba lahi sa contract of sale, you can
avail the moment you perform or ship the goods. In a standby LC, you can avail the moment the obligor
fails to perform. So, Maynilad brought the claim to arbitration. There was arbitration. During the
arbitration, negotiation happened but the award became final wherein it held that MWSS is entitled to
the bond as damages due to Maynilad’s non-performance of its obligation. Then, it filed Notice to the
foreign banks, including Citicorp, for the availment of the LC. However, few days prior to the finality of
the arbitration panel’s award, Maynilad filed before the court for its rehabilitation. In effect, there is a
stay order directed against all creditors of the company under rehabilitation including claims arising from
guarantors and sureties who are not solidarily liable with the debtor. And according to Maynilad, it
includes the standby LC. This was the contention of Maynilad that because of the stay order, it does not
include the LC. Therefore, you and MWSS are enjoined from availing of the LC. In this case, the RTC
included in the stay order the standby LC in the bank thereby MWSS is enjoined from payment from
such.
Issue:
WON the standby LC is included in the stay order or the property of Maynilad which in turn will be
subject to the stay order of the court.
Ruling:
SC held that the available funds in the standby LC in the banks are not part of the stay order. It cannot be
made part of the standby order. MWSS can claim or avail such funds because, in effect, Citicorp bank is
directly and primarily liable to pay MWSS. As long as MWSS can show proof or documents that Maynilad
failed to perform its obligations.
Stay order covers claims by debtors or guarantors who are not solidarily liable with the debtor. So, we
have to determine what is the nature of an LC? What is an obligation of an issuing bank under the LC? Is
it solidary with Maynilad? Or is not solidary with Maynilad?
 If we say that it is solidary, then it is not covered by the stay order meaning MWSS
can still avail of the LC.
 If we say that it is NOT solidary, then, it is part of the stay order meaning MWSS
cannot avail of the LC.
To quote the Supreme Court, the participating banks obligation is solidary with respondent Maynilad in
that it is primary, direct, definite and absolute undertaking to pay and it is not conditioned upon the
prior exhaustion of the debtor’s assets. Therefore, MWSS can claim on the funds on the standby LC.
In fact, this case distinguished a guarantee and an LC.
 A guarantee is not solidary, it is collateral or secondary. The obligation of the

guarantor only comes in upon the default of the party primarily liable.
 While as an LC, the obligation of the issuing bank is primary, direct, definite,
absolute undertaking to pay since it is solidary, then, it is not part of the stay order.
But take note that this case is decided under the old interim Rules of Procedure for Corporate
Rehabilitation, the new Rules which took effect on 2009 specifically states that stay order does not
include LC. So, klaro na. Had the case been decided now, there would have been no issue.
B. Parties
 Who are the parties in a LC?
1. Seller/ beneficiary
 He is called the beneficiary because the LC is issued in his favor
2. Buyer/ applicant
 He is called the applicant because he is the one who applies for an LC
3. Issuing Bank/ Opening Bank
 It is called as such because it is the one who issues or opens an LC.
 Normally, the first 3 are the parties in a LC. But in international sales transactions, there
is what we call a correspondent bank
4. Correspondent Bank
 A correspondent bank could either act as an advising or notifying bank.
 Take note of the different roles assumed by the banks because their obligations,
responsibilities, liabilities would depend on the role that they assume.
 If you are just an advising or notifying bank, your obligation is simply to notify or
advise the seller of the existence of the LC. It does not undertake to pay but it does
not preclude the said bank from paying.
5. Confirming Bank
 It is a bank that confirms.
 A confirming bank undertakes or gives absolute assurance to the seller that that it
will pay. In effect, a confirming bank has the same as the issuing bank.
 The issuing bank or opening bank undertakes to pay.

USC LAW EH 403 TRANSCRIPTIONS----Special Commercial Laws P a g e | 10
 If you are a confirming bank, you give absolute assurance to the seller that you
undertake the issuing bank’s obligation. In short, you undertake to pay and
therefore, your obligation becomes direct, primary and solidary.
 It is very important that if you are the confirming bank, dako nga liability ang imong
gi-assume.
6. Paying Bank
 Of course, if you are a paying bank, you pay.
 Take note that the paying bank does not necessarily mean that you are a
confirming bank. You can be a paying bank but not necessarily that you pay the LC . If
you are the paying bank, you simply pay in cash or drafts. That is your only
obligation.
7. Negotiating Bank
 For instance, we have drafts or bills of exchange. Normally, these are negotiable
instruments. Now, sometimes, the LC will indicate that the drafts are drawn on a
particular bank. It specifies. Sometimes, that bank indicated in the LC as the drawee
bank is not located within the same locality as that of the seller. Like for example,
what is indicated in the LC that the drawee bank is located in New York. In order to
be paid, the seller will execute a draft and it has to present it in New York, where
the drawee bank/ paying bank is located. To save the seller from the trouble of going
to a paying bank, the seller will negotiate the draft. Negotiate in the sense that it will
have the draft discounted. If I am the seller, I will make a draft from the drawer.
Normally, I will present it to the drawee for acceptance and I get paid but layo man.
So, what I will instead negotiate or I will indorse it to a negotiating bank. And the
negotiating bank will go after the drawee bank.
 In one case, was it Bank of America?, diba in that case, Bank of America is the
advising and at the same time the negotiating bank. It was considered as an
indorser, it cannot go after the drawee but after the drawer.
 So, when it negotiates, it becomes a paying bank. An advising bank can also be a
paying bank.
C. Stages/ Perfection
 What are the stages in an LC?
1. Underlying contract
 Contract of sale for a commercial LC
 Service contracts or other agreements requiring performance of an

obligation if it is a standby LC.
o by the way, how do you distinguish a standby LC and commercial

LC?
Standby LC Commercial LC
Involves non-sale transactions Involves sale transactions
The obligee must present to the For the seller to recover, she
issuing bank or participating must submit drafts together with
bank documents or certification shipping documents or other
showing non-compliance or non-
performance of the obligation documents of title
The beneficiary must show non- For the beneficiary to avail of

performance. such LC, it must show the
performance.
2. Application by the Buyer of an LC
3. Issuance of the LC
4. Notification to the Seller of the Existence of an LC
5. Shipment of goods
6. Execution of the drafts and submission of the drafts to the bank
7. Payment of the Issuing Bank to the Seller
8. Redemption or Reimbursement of the Issuing Bank
 In those stages, when is the LC considered perfected?
 It is perfected the moment the correspondent bank or any participating bank

makes payment to the seller.
 It is not upon payment by the buyer, but upon payment of the bank to the seller.
This is when the LC is perfected, this is based on the case of Belman vs. Central
Bank.
 Is the opening of the LC necessary for the contract of sale?
 No, it is not among the requisites of a perfection of a contract of sale. Because

as we know, the contract of sale is perfected by the meeting of the minds since
it is a consensual contract.
BELMAN COMPAÑIA INCORPORADA vs CENTRAL BANK OF THE PHILIPPINES
FACTS:
Plaintiff Corporation applied to the Philippine National Bank for a letter of credit in the sum of $4,300,
United States currency, in favor of Getz Bros. & Co., San Francisco, California, U.S.A., to pay for such reams of
onion skin paper, and the PNB approved and granted the application for the letter of credit andthrough the
Crocker First National Bank, its correspondent U.S. paid to the payee the sum of $4,300, United States Currency.
On 26 April 1951 when the plaintiff paid its account to the PNB Manila, the defendant, pursuant to Republic Act
No. 601, as amended, assessed and collected from it 17% special excise tax on the amount in Philippine peso of
foreign exchange sold, amounting to P1,474.70 which the plaintiff paid to the defendant under protest for the
reason that as the letter of credit was approved and granted on 21 September 1950, or before 28 March 1951,
the date of the enactment or approval of Republic Act No. 601, as amended, the amount of foreign exchange
sold by the defendant bank by the letter of credit to the plaintiff corporation was not subject to such excise tax.
Plaintiff sought refund and was granted by lower court. Hence, this appeal.
ISSUE:
WON foreign exchange sold was subject to excise tax pursuant to RA 601.
HELD:
SC held foreign exchange sold was NOT subject to excise tax.
An irrevocable letter of credit granted by a bank, which authorizes a creditor in a foreign country to draw
upon a debtor of another and to negotiate the draft through the agent or correspondent bank or any bank in the
country of the creditor, is a consummated contract, when the agent or correspondent bank or any bank in the
country of the creditor pays or delivers to the latter the amount in foreign currency, as authorized by the bank in
the country of the debtor in compliance with the letter of credit granted by it. It is the date of the payment of
the amount in foreign currency to the creditor in his country by the agent or correspondent bank of the bank in
the country of the debtor that turns from executory to executed or consummated contract. It is not the date of
payment by the debtor to the bank in his country of the amount of foreign exchange sold that makes the
contract executed or consummated, because the bank may grant the debtor extension of time to pay such debt.
The contention of the appellee that as there was a meeting of the minds and of contracting parties as to price
and object of the contract 2 upon the approval or grant of an application for a letter of credit for an amount
payable in payable in foreign currency, the contract was a valid and executed contract of sale of foreign
exchange. True, there was such a contract in the sense that one party who has performed his part may compel
the other to perform his.3 Still until payment be made in foreign currency of the amount applied for in the letter
of credit and approved and granted by the bank, the same is not an executed or consummated contract. The
payment of the amount in foreign currency to the creditor by the bank or its agent or correspondent is necessary
to consummate the contract. Hence the date of such payment or delivery of the amount in foreign currency to
the creditor determines whether such amount of foreign currency is subject to the tax imposed by the
Government of the country where such letter of credit was granted.
It appearing that the draft authorized by the letter of credit applied for by the appellee and granted by
the appellant must be drawn and presented or negotiated in San Francisco, California, U.S.A., not later than 19
October 1950 it may be presumed that the payment of $4,300 in favor of Getz Bros., Inc. in San Francisco,
California, U.S.A., for the account of the appellee was paid by the Crocker First National Bank, as agent or
correspondent of the Philippine National Bank, on or before 19 October 1950. Such being the case, the excise tax
at the rate of 17% on the amount to be paid by the appellant in Philippine currency for the foreign exchange sold
is not subject to such tax, because Republic Act No. 601 imposing such tax took effect only on 28 March 1951.
Independent Contracts involved in a Letter of Credit
1. Contract of Sale
 This is especially true in a commercial LC
 In a Standby LC, it does not involve a contract of sale. It applies to non-sale transactions,
any other agreement basta dili sale. The purpose of a standby LC is to serve as a
performance bond meaning to guarantee the performance of the obligor of its
obligation.
 The contract of sale governs the relationship between the buyer and the seller.
2. Agreement between the application for LC
 The application for LC governs the relationship between the buyer and the bank
—the applicant and the issuing bank.
3. Letter of Credit
 The LC governs the relationship between the seller/ beneficiary and the issuing
bank or it could involve other banks
 These are the 3 independent contracts in an LC. Under the independence principle, these
contracts must be maintained in a state of perpetual separation.
Case: Keng Hua Paper products vs CA
Basically this case talks about bill of lading. But under this
case, this mentions of the three independent contracts

involved in the LC.
1. contract of sale
2. application for LC
3. LC proper.
This case simply means that these contracts are independent
and these should be maintained in PERPETUAL SEPARATION.
Similarly, a BILL OF LADING, aside from the contract of sale of
LC. And aside from the Bill of Lading, we also have the
CONTRACT FOR THE TRANSPORTATION OF GOODS. Both are
independent and separate from the contract of sale and the
LC itself.
Because the problem in this case was that there was a
difference between the quantities of the goods as against
the quantity stated in the bill of lading.
And Keng Hua was made to pay the demurrage and
surcharges based on the bill of lading.
So which would prevail? Is Keng Hua liable for the quantity
stated in the bill of lading or the quantity actually shipped?
Based on the quantity in the bill of lading.
Still apply the independence principle. Similar to the letters
of credit. The BoL is separate from that involving the contact
of transportation. In the same was that the letters of credit
is independent from the contract of sale.
Case: Transfield Phil. Inc. vs. Luzon Hydro Corp.
Turnkey Contract
Transfield Phil. Inc. Luzon Hydro Corp.
(obligor) (obligee)
Standby LC
Australia; New Zealand;

Security Bank
(Issuing Banks)
Facts:
This case involves a standby LC. Transfield Phil. Inc. (Transfield) is the obligor and Luzon Hydro Corp.
(LHC) is the obligee. The contract involved is a turnkey contract. Turnkey contract is basically, a
contractor does everything. From the time you deliver it, the only thing that the person who hired you is
to turn the key on and everything already works. That is my layman’s understanding of what a turnkey is
 All systems go.
To secure the performance of the obligation of Transfield, it opened 2 standby LCs with foreign banks
Australia and New Zealand, and with a local bank, Security Bank. We have 2 participating banks issued a
standby LC in favor of LHC.
Transfield sought for various extensions for the completion of the project. Under their contract, the
target completion date is very important. Time is of the essence. In here, as we have said, asked for
several extensions of time. However, LHC denied the extensions. This gave rise to series of litigations.
The extension of time asked by Transfield was not granted by LHC. As a result, a legal dispute arises
between the 2 of them. Because according to LHC, the extension of time is not valid. It is LHC’s belief
that Transfield is already in default. On the other hand, Transfield believe that the extension of time is
based on valid grounds. Since according to LHC, Transfield did not comply with its obligations, LHC
claimed for the 2 LC. Take note that Transfield already anticipated that since LHC did not agree, it will
avail of the LC. So, it sent notice to the bank. It warned that the banks should not release or allow LHC to
avail of the LC, since the dispute is still subject for resolution. If you allow LHC to avail of the LC, they will
be liable for liquidated damages. This is the warning given by Transfield. But despite that, as far as LHC is
concerned, Transfield is already in default. It issued drafts together with the certification stating that
Transfield is already in default. And the bank, notwithstanding the notice of Transfield, still allowed LHC
to avail of the LC, in fact paid LHC. The 2 issuing banks, because of the certification of LHC that Transfield
did not perform its obligation, paid LHC.
In this case, Transfield argued that LHC should return the proceeds of the 2 issuing banks pursuant to
the principle against unjust enrichment. Basically, Transfield is saying that LHC has no right yet to avail of
the LC. It will result to unjust enrichment if you allow LHC to avail. As far as Transfield is concerned, we
are not yet in default. In fact, that case is still pending for resolution, under arbitration.
Invoking the independence principle, LHC contended that its availment of the LC is not dependent on
the resolution of the dispute because under the independence principle, if it is a commercial LC, you can
invoke it in the sense that if I am the bank, the LC pertains only to the documents. The bank is precluded
from determining whether the underlying contract is accomplished or not. It is not for the bank to
determine whether the goods shipped actually tally with the goods or documents presented to the LC.
So regardless of whether there is a breach in the contract of sale, so long as the documents submitted by
the beneficiary to the bank are complete, then the bank is obliged to make a payment. So, meaning the
bank doesn’t mind the underlying contract. The LC is independent from the underlying transaction. As
applied here in a standby LC, the independence principle, it assures the seller of the prompt payment
independent of the breach of the main contract. It precludes the bank from determining whether the
main contract is actually accomplished or not. Therefore, invoking that principle, according to LHC, their
availment of the LC is not dependent on the resolution of the dispute, WON Transfield was in default. So
long as the documents are complied with, the bank is obliged to pay. That is the independence principle.
There was an issue again raised on who can invoke the independence principle. Both the issuing bank
and the beneficiary can invoke it. The very purpose of an LC is to guarantee promptness of payment, as
such it can be invoked by the issuing bank and the beneficiary. So here, LHC as the beneficiary has the
right to invoke the independence principle. And applying that, LHC need not wait for the settlement of
the dispute.
But there was another rule raised by Transfield. Although we have that independence principle, we also
have that fraud exception rule. This rule states that when the beneficiary has committed fraud in
representing the issuing bank the non-performance, in case of a standby LC, of the obligor, then, the
issuing bank is not entitled to pay the obligee. Fraud exception applies as far as the beneficiary is
concerned. When there is fraud on the part of the beneficiary. In availing of the LC, he submitted
fraudulent documents to the issuing bank to show that in the standby LC that there was default, where
in fact there is none. In case of a commercial LC, you submitted fraudulent shipping documents. So in
that case, the issuing bank may refuse payment. If it is fraudulent, in effect, the beneficiary did not
comply with the LC. What is the requirement of a LC? That you must submit genuine documents.
Issue:
So, is the fraud exception rule applicable in this case? Can Transfield raise the fraud exception principle?
Ruling:
According to the Court, for us to determine whether the documents submitted by LHC were fraudulent,
it goes back to issue of WON there was default or not, meaning the issue is intertwined with the main
issue on default. Since the issue of default was not submitted to Court, the Court said that it is not called
upon to issue, it cannot rule on the matter. The Court said, “This court is not called upon to rule upon
the issue of default such issue having been submitted by party to the jurisdiction of the arbitral (? dili
klaro) tribunal.”
Since such issue was not raised, the court cannot also rule. It cannot decide on WON fraudulent ba, or
WON in default ba.
 In case there is really fraud, what is the remedy of obligor, such when the obligor is able
to establish that the obligee submitted fraudulent documents?
 Injunction is the available remedy. In order to avail of this remedy, you must
establish that you have a clear and unmistakable right, invasion of this right,
material and substantial injury etc.
 But in this case, Transfield was not able to avail of the remedy of injunction. It
applied but it was not granted. It was not granted because it was not able to
establish those (enumerated above).
Therefore, LHC was able to avail of the LC. The court applied the independence principle. It said applying
the independence principle, the issuing bank is only obliged to determine WON the documents
submitted are correct or in accordance with the LC. Its obligation is simply to pay once the required
documents were presented by the beneficiary. It is not required to look beyond those documents. Or, to
determine WON LHC’s certification of default is genuine or fraudulent. The issuing bank has the right to
rely on what appears on the documents.
 What if it was established that Transfield was not in default, what happens to the LC?
 LHC will of course get the LC, it will get paid. But if later on the arbitration court
decides in favor of Transfield, and says that there really was no default, then,
Transfield can ask for reimbursement from LHC.
 The purpose of the LC is to guarantee, like a performance bond, if it is not an LC,

the nature of the performance bond is mohatag ka daan ug money but in case
wala la’y default, wala lang diperensiya sa imong trabaho, that performance
bond will be returned to you less damages suffered by the obligee. Parang
security deposit, to guarantee performance of the obligation.
Case: Feati bank vs CA
Axle was the buyer. Villaluz was the seller. There was a
contract of sale of logs. The issuing bank is Security Pacific
National Bank. The Correspondent bank was Feati Bank.
The LC specifically requires that aside from the shipping
documents, there must be a certification coming from
Christiansen that the logs shipped were as required.
So when Villaluz now submitted the documents to Feati, the
correspondent bank refused payment because not all the
documents required under the LC wee presented. There is
no certification from Christiansen.
So issue now is whether Feati, for refusing to pay the
seller/beneficiary can be held liable. Can the bank be held
liable?
No.
Why not?
STRICT COMPLIANCE RULE
What does this rule mean?
Under the strict compliance rule, it is required that the
documents submitted must strictly conform to the terms of
the LC. Therefore all the documents required must be
submitted. And a corresponding bank which departs from
the terms or from what is stipulated in LC, or accepts a
faulty tender, does it at its own risk. Therefore, he may not
be able to recover from the buyer or the issuing bank.
If Feati accepted he faulty tender, he is doing it at its own
risk. Later on, it cannot go to the issuing bank for
reimbursement and similarly the issuing bank cannot also go
after the buyer for payment. Thus the strict compliance rule.
To the letter gyud.
So therefore here, Feati is justified in refusing payment.
What about the contention that this is already an irrevocable
LC and therefore Feati has no right to refuse?
The court here made a distinction between an IRREVOCABLE
LC and a CONFIRMED LC. Is there a difference?
An LC can be irrevocable and at the same time confirmed.
Or it could be irrevocable but not confirmed.
Or it could be revocable and confirmed.
What do you mean by IRREVOCABLE LC?
An irrevocable LC is irrevocable in a sense that it cannot be
changed or amended or cancelled without the consent of all
parties especially of the beneficiary..
What is a CONFIRMED LC?
If the LC is confirmed, that means that we have a confirming
bank.
So if the LC is already confirmed, then that means that a
certain bank or a corresponding bank assumes the obligation
of that of the issuing bank.
It provides absolute assurance to the beneficiary that it will
pay or it will undertake the issuing bank’s obligation.
In this case, was the LC confirmed?
No. it was only an irrevocable LC but not a confirmed LC.
So therefore, Feati did not incur the obligation of a
confirming bank. At most, it is only a notifying or advising
bank.
But the court went on further and said, even if assuming that
assuming that Feati was a confirming bank, is Feati obliged
to pay the LC?
No. because the documents presented were not complete,
and applying the strict compliance rule, Feati was not bound
to or has the right to refuse payment.
If he pays, he does at his own risk.
Obligations of Parties in Letter of Credit
Case: BPI vs de Reny

Is the bank under obligation?
No.
So applying the independence principle, so long as the
documents required under the LC are genuine and
complete, it is now the obligatin of the bank to make
payment to the supplier/seller of the goods. And it does not
matter later on that it turned out that the goods shipped
does not tally with that what is indicated in the LC. It is
something to be dealt with between the buyer and the
seller. But the bank has nothing to do with it. The buyer as
the applicant of the LC has no right to refuse payment on
that basis.
So we apply here the independence principle.
Case: Insular bank of vs IAC

So the issuing bank… this one now involves a STAND BY LC to
guaranty performance by spouses Mendoza on its loan to
Philam Life. So the issuing bank here is bank of Asia and
America.
loan
Spouses Mendoza------------------>PhilAm
| stand by LC
IBAA
They had a loan with Philam. And there are sureties here. So
to guaranty the performance of the spouses’ obligation to
Philam, there were stand by LC.
The Mendozas already made partial payments of 290k to
Philam. The total amount of the loan was 600k.
When they failed to continue paying the amortization, Phiam
now called on the stand by LC, equivalent to the unpaid
amortization.
So they have a balance of 310k. When Philam called on the
stand by Lc, of course it issued drafts. It demanded now
from the issuing bank the balance.
But according to the issuing bank, they are no longer liable
because according to insular bank, they summed up all the
payments made by spouses Mendoza under the loan; they
have already fully paid. In fact according to IB, they
overpaid. Since the Mendoza’s have already overpaid the
loan, there is no reason for Philam to call upon the LC.
So the issue now here is WON the partial payments made by
Mendoza of its loan to Philam would have the effect of
reducing the liability of the issuing bank under the LC to the
Philam, the beneficiary of the LC.
Therefore, we have no more liability. Is that correct?
No.
We have discussed before; what is the nature of the bank’s
obligation under the LC? Is it similar to that of a guaranty?
No it is not.
Because in a guaranty, there is benefit of exhaustion. You are
only liable if the party primarily liable is unable to pay. That’s
the nature of guaranty
But the nature of LC is not similar to a guaranty. It is a
primary, direct, absolute and solidary obligation of the
issuing bank. Being such, the payments the payments made
by the Mendoza’s on it’s loan to Philam will not have the
effect of reducing the issuing bank’s liability.
As you said, a liability under the LC is a separate and
independent agreement. So meaning the issuing bank
cannot claim set off or compensation.
Although the effect in totality, if Mendoza has paid, Philam
has no right to call on the LC.
But in this case it was determined upon recomputation that
there was still a liability. So therefore Philam still has a right
to call on the LC.
So in short the obligation of the issuing bank as far as the
beneficiary is concerned is still up to 600k. You don’t deduct
payments.

December 6, 2010
Phil Virginia Case

The point here is that:
What is the effect of an irrevocable LC (ILC)? An ILC cannot be transferred or modified without the consent of the
parties, particularly the beneficiary.
Is an ILC the same as that of Confirmed LC? NO. It doesn’t mean that if the issuing bank issued an ILC, it is now
already considered as a Conforming Bank; because ILC is different from a confirmed LC. It could happen that you
may be irrevocable but you are unconfirmed.
So, what is the effect of a confirmed LC? It changes the nature of the obligation of the correspondent bank. The
moment a corresponding bank confirms a LC, its obligation becomes absolute. It incurs an obligation same as
that of the issuing bank.
Kinds of Letters of Credit

1. Irrevocable - cannot be changed or amended anytime without the consent of beneficiary.
2. Revocable - opposite of revocable. It can be changed or amended anytime.
3. Confirmed LC – (humana daw siya ug discuss ani!)
4. Unconfirmed LC - No confirming bank involved. The one who has the absolute obligation is the issuing bank.
Why is there a need for a LC to be confirmed?

Because, sometimes the issuing bank is not known to the seller or beneficiary. Thus, the LC has to be confirmed
by another bank top assume the obligation of the issuing bank. That another bank refers now to the confirming
bank.
5. Revolving LC - covers several transactions, unlike a typical LC (non-revolving) which covers only a particular
(one) transaction. Although, there may be several transactions, it involves only one issuing bank. Probably, the
credit limit is huge that is why it is allowed to cover several transactions. Example, A revolving LC, may involve
several importations, several guaranty of obligation.
6. Stand-By LC - What is the difference of Standby LC from a Commercial LC? You know that already. I WILL NOT
REPEAT IT AGAIN, I already discussed that! (Hahaha.)
7. Commercial LC
8. Back-to-Back LC - This simply means that if you have a seller here, and a buyer, the buyer is required to open a
LC in favor of the seller. In the same way, that the seller has purchases from the buyer. SO the seller also is
required to open a LC in favor of the buyer. So, Back-to-back LC.
For example, "ako naa ko'y purchases A. so, to pay A (seller), I am required to open a LC in favor of A (seller). In
the same way that A, as seller, has also purchases from me; so, I now become the seller. A is also required to
open a LC in my favor - back-to-back.
Important Things under the LC

1. Independence Principle
2. Fraud Exception Rule
3. Strict Compliance Rule
4. Obligations of the Parties
5. The purpose of a LC
TRUST RECEIPTS LAW (PD 115)
Under the declared policy, the law was enacted because the State has recognized the importance of Trust
Receipts (TR), particularly to importers. Although, TR does not apply alone to importations. Nonetheless, TR was
developed to assist importers who do not have enough funds to finance the importation, the purchase of the
goods, or those who cannot avail of any credit. Like when they cannot open a LC because, perhaps, they do not
have a credit standing, diba? Because, issuing banks do not usually issue LC if one has not yet established a good
credit standing. Mo-apply ni siya usually sa mga bag-o pa nag-start ug business, who has not yet established a
relationship with any bank. If you want to open a LC but the bank will not grant you an LC because, again, you
have not yet established a good credit standing.
But, through the use of TR the now may allow you to open a LC and would agree to finance your importation
using the same goods that you imported as a security of payment to the amount you owed to the bank. K?
But, that is just one aspect of a TR, to assist importers, to give financing to importers. But, in some cases, TR also
applies not only to importations but also to ordinary purchase of goods etc. Nonetheless, the development of TR
mainly focused on assisting importers.
Purposes of enacting PD 115:

1. To encourage and promote the use of TR as a convenient mode to facilitate commerce and trade.
Correspondingly, since the State encourages the use of TR, there is now a need for the State to regulate the use
of TR. Particularly, the rights and the obligations of the parties. Under the law, there are also Penal Provisions
which consider the "misuse" or "misappropriation" of the proceeds or goods released under the TR as a criminal
offense, constituting Estafa under RPC -A315.
How does a TR work?
How does the law define a TR? It is a security transaction, why does it become a security transaction?
Under the law, TR is a transaction between one person called, the entruster, wherein the entruster holds either
title or security interest over the goods, over documents and instruments. So, We have the entruster and the
entrustee. These are two main characters of a TR transaction.
Goods here refer to movable or personal property, except money, and of course, except real property.
Documents here refer to Document of Title (Ei. Bill of Lading, Shipping Documents, Commercial Invoice, etc.)
Instruments refer to all kinds of Negotiable Instruments. Also, includes Certificate of Stocks, Bonds, ect.
Take note that TR is not limited lang pala to goods. It also covers documents and instruments.
How does TR apply to instruments?

Like when you are issued a certificate of stocks "in trust" so that you can dispose the certificate of stocks and
apply the proceeds in payment, you turn over the proceeds to me. Or I can give you the negotiable instrument
'in trust" so that you can negotiate this then give to me the proceeds. It works same way as goods.
So, in your TR transaction one person is called the entruster, he either holds title to the goods, documents or he
holds security interest over the same. Then, he releases or transfers the possession these goods, documents or
instruments to a person called the entrustee, upon the entrustee’s execution or delivery of the TR instrument.
And by virtue of this TR, the entrustee undertakes the following obligation: “I hold these goods "in trust" for the
entruster, I undertake to sell or dispose these goods, or if I am not able to sell them, I shall turn over the goods,
documents or instrument."
Why is TR considered a Security Transaction?

TR acts as a security transaction in the sense that when the entruster releases possession of these goods,
documents or instruments to the entrustee, he has not yet received any payment. And this, TR serves as a
security, your guaranty that the entrustee will comply with the obligations under the trust receipts.
For example, if we relate this to a LC. Prior to a TR we have a LC, under the LC, we have a seller or a beneficiary.
The entrustee (buyer) here refers to the applicant of the LC or the buyer. "Do you follow?" ;D The entrustee
purchases or imports goods from the seller, the seller is paid through opening a LC. It is the issuing bank who
pays the seller.
After paying the seller (beneficiary), the seller turns over to the bank the shipping documents. In order for the
bank to turn over the documents to the buyer, the buyer has to pay the bank as to the amount it paid to the
seller, but if the buyer cannot pay the bank, what will the buyer do?
In order to obtain possession of the goods, the buyer shall execute a trust receipt, now the buyer becomes the
entrustee, and the bank becomes the entruster. Now, the entruster (bank) shall release the possession of the
goods, documents or instruments to the entrustee (buyer) in consideration of the TR that shall be executed in
favor of the bank. The TR shall serve as security that the entrustee shall pay the bank.
Under the TR, the entrustee binds himself to hold the goods in trust for the entruster, to turn over the proceeds
or to return the goods if unsold. But, for it to constitute a TR transaction there must be a trust receipt. This is
where a consignment differs from a TR transaction.
Buyer/Importer Bank
Applies for a LC to bank to finance her purchases from
the seller.
Bank Opens a LC having the seller as beneficiary. Bank then pays Seller
Seller the purchase price.
Seller Gives the goods, documents or instrument to the bank after Bank
the bank has paid the purchase money.
Entruster Entrustee
(Bank) Releases the goods, documents or instrument to the (Buyer/Importer)
Buyer/Importer under the TR agreement who assumed all the
obligation of an entrustee.
How does the law define a TR transaction?

It is a transaction whereby an entrustee, executes and delivers to the entruster a document called, trust receipt.
A consignment agreement is very common as well, but it does not however tantamount to a TR because in a
consignment, there is no TR executed. Mere consignment agreement alone, without executing a TR, is not a TR
transaction.
What is the effect if the consignee in a consignment agreement does not turn over the proceeds?
Is he liable PD 115?
No, because it is not a trust receipt agreement.
But, can you hold him liable for estafa?
Yes. PD 115 is only one of the modes of committing Estafa. It can still be estafa as long as there is abuse of trust,
there is deceit, and there is misappropriation. You look at your criminal law; you'll find that the elements here
are present.
In one of the cases, the court said that PD 115 is just one of the modes of committing estafa. You can still be
liable for estafa even if it is not under PD 115, as long as the elements are present. Not necessarily that it has to
be a TR transaction. Example, kung mangutang ka ug appliances, it is not a TR transaction, it is only an ordinary
sale on credit. Unsa man ang security sa seller? Diba, there is chattel mortgage. In such case, if you fail to return
the appliances, you may be held liable under estafa.
Because, the principle behind a TR transaction is that you release it "in trust" so that I can dispose it and apply
the proceeds therein to the loan. Whereas if it is only a purchase involving an ordinary seller and buyer, in which
the buyer buys the item on credit, but not necessarily covered under TR.
Why don't they cover it under TR? Because kung na'ay TR, meaning there is an obligation on the part of the
buyer to dispose it pa then apply the proceeds. But, in this case, wala naman, the buyer buys the appliance for
his own use, so a TR transaction may not be anymore necessary. But, instead, as a security, the seller requires
the buyer to execute a chattel mortgage.
So, for it to be considered as a TR transaction, it must conform to the definition to the law. Basically, there must
be a TR document.
Consignment v. TR
There is a confusion in how do we distinguish a TR transaction and an ordinary consignment on credit. Like when
you have an agent who sells your goods on consignment, or ang agent na imong gipa-baligya receives a
commission, is that a TR transaction? It could become a TR transaction if the agents are required to issue a TR.
(Note: Please look at Robles case)

In one case, there was a commission merchant of office equipments, he sells the office equipments and when
dili niya mabaligya, i-uli niya. It was considered a TR transaction. Why? Because there was a TR executed. It was
clearly indicated in the document that it was TR transaction.
The argument of Robles was that it was just an ordinary sale on trial basis, he insisted that: "on trial ra man ni, so
if dili mahalin, akong i-uli after 2 days".
But, the court said: No, it was very clear on the document that you signed. You are an intelligent man, you're a
college professor. Di ka ka-ingon na di ni TR transaction. You ought to know what transaction you have entered
into.
TR does not always involve importation

A TR can be in any form, provided that it must substantially contain the requirements mentioned under the law.
It could be in a form of an agreement, and it could also be in a very informal form. Example, naa ra'y gisuwat na
TR, then indicated ang names of entrustee and entruster, provided that it substantially contain the information
required under the TR Law.
What are these information?

a) description o f the goods, documents, or instruments
b) total invoice value of the goods, documents, or instruments (amount to be paid by the entrustee)
c) undertaking by the entrustee to:
1. To hold the goods in trust for the entruster. When you say "in trust" it means that there is a fiduciary obligation
in the part of the entrustee, that he is not really the owner of the goods, but rather, he holds it in trust for the
entruster.
2. To dispose of the m in a manner provided for in the trust receipt. The law mentions "to dispose", but to
dispose could either mean you sell it or you may process it or you manufacture. Like, for example, ang akong gi-
import kay raw materials. I could either sell right away these raw materials or I could either further process these
raw materials, manufacture these then later sell the finished product.
But, take note that the law states that even if the items (goods) covered in TR agreement already changed from
its original form, like when the goods released under by the entruster was "textile", it later on became RTWs
after you processed it. What do you think will happen to the security interest of the entruster? Asa naman ron
iyang security interest? It is now transferred to the finished product. So, the security interest of the entruster is
not lost whether the goods that were released in trust were already in its transformed form.
Example, to come up with this finished products, daghan ug raw materials (ei. ink and paper), each one is
entrusted under a different trust receipt. When it now becomes a finished product (magazine), what happens to
the security interest of the entrusters? IN this example, there are now 2 security interests belonging to different
entrusters. Nonetheless, the entrusters do not lose each of their security interests such that, each is still entitled
to the proceeds of the finished product in extent of the amount stipulated in the TR agreement.
3. To turn over the proceeds of the goods disposed to the entruster and if it is not sold, then return the goods
itself. Take note of these 3 undertakings. You hold it in trust to dispose the goods then turn over the proceeds,
and if unsold, to turn over the goods, documents or instruments itself that were released under the TR.
Can the parties add other terms and conditions in the TR?
Yes. Provided that they are not contrary to law. May provide for example, liquidated damages, interests, etc.
A TR could be in any form. It could be in a form of just a letter, it could be an agreement, it could be notarized or
not notarized, so long as it contains those important information.
Case: South City Homes v. B. A. Fiance

(please read the case kay interesting daw ni!)
Facts: This case gives us a glimpse of how these businesses do their transactions. Note: There is no involvement
of a LC in this case.
FMC is a car dealer, they sell cars on retail basis.
BA fianance - financing company.
CarCo - a car manufacturer.
FMC Executed TR in favor of CarCo to get cars without having to pay cash yet.
CarCo
Assigns the TR to BA Finance so that it could get immediate payment for

CarCo the cars delivered to FMC.
BA Finance
So, BAF now, has the right to collect from FMC based on the assignment of the TR executed between FMC and
CarCo.
So, the business here involves cars, meaning dako ug puhunan. So, what if na'ay mo-order ug sakyanan? For
example if I go to the FMC to buy a car, and FMC cannot afford to order it from the manufacturer (swerte lang if
mo-bayad ang buyer in cash, but mostly the purchases are on instalment. So, how does FMC purchase my order
now?
So, in this case, there is this arrangement called a wholesale automotive financing scheme wherein the car
manufacturer would supply cars to car dealers. Based on orders from customers, FMC would make an order for a
certain vehicles. CarCo here would supply these vehicles to FMC. CarCo is willing to release these vehicles
without receiving payments from FMC by virtue of the TR. Meaning, FMC can make orders from CarCo without
having to put up cash to acquire purchases. But, in order for CarCo to get immediate payment, under the TR,
kinahanglan pa mabaligya sa FMC so that CarCo shall be paid.
So, to get immediate payment, what CarCo did was to assign the TR executed by FMC together with the drafts to
BA finance. Now, by virtue of the assignment, BA finance will pay CarCo cash for the entire amount equivalent to
the TR. In effect, FMC will get supplies of cars without having to pay CASH!!! While CarCo, nahalinan siya on
CASH without having to worry for receivables and the trouble of collecting from FMC. (na-ngugat na ug lecture si
ma'am...gi-kataw-an pa jud! lo-uy pud ang buros.)
Si BA finance, unsa man ang makuha ni BA Finance? Di ba everyone is supposed to get something out of this
transaction? BAF gets margin. For example the value of the drafting of the TR is 1M, CarCo assigned the TR to
BAF for only 900K, so BAF gets the margin of 100K.
Question now, mo-sugot diay si CarCo na ang 1M kay himuon nalang ug 900K? Of course! CarCo will now have to
choose, it gets 900K now or 1M but payment is not certain. Of course, CarCo would choose to get the money
now. Para di na siya maglabad ug collect sa kwarta, probably 1 year from now, plus we also consider the time
value of money. Example, CarCo might need money now to use it for immediate benefit of its business. While
BAF gets the 100K margin, but siya pud ang mag-problema ug collect sa payment from FMC. With this
arrangement, everybody is happy! Business was GOOD...until FMC defaulted payment to BAF! :3
So, the effect of the assignment of TR from CarCo to BAF was that BAF now becomes the entruster. The
obligation of FMC was now assigned to BAF instead from CarCo. FMC now will pay the proceeds to BAF and if
unsold FMC shall return the cars to BAF. In short, CarCo was now out of the picture in the TR by virtue of the
assignment. As what happened in the case, FMC defaulted in payment. So, BAF sued FMC under the TR.
Issues:
1. Can securities guaranty future obligations? Yes.
2. Was there a novation when CarCo assigned the TR to BAF without the consent of FMC? Did it have the effect
of extinguishing the obligation of FMC by virtue of assignment as it did not consent to the assignment? No.
Assignment does not need the consent of the debtor. So, the assignment was valid and the obligation of FMC
was not extinguished.
3. Does BAF have a valid cause of action against FMC under the TR? Yes. According to FMC, before BAF can file a
case you must first demand for the return of the goods or in this case, the unsold motor vehicles. Because what
BAF did was file a case for collection of money against FMC without demanding for the return of the goods. Is
that contention correct? No, because if you look at Sec. 7 of the law (rights of the entruster), the law uses only
the word "may". SO, it is up to the entruster whether mo-cancel sa siya sa trust to take possession of the goods
Or it could also be that entruster would file dayon ug collection case against the entrustee. Is that clear?
Hmmmm?!!!
Now, what if the entruster opted to cancel the trust and take possession of the goods instead of filing a
collection case? Is the civil liability of the entrustee extinguished? Not necessarily. Once the goods are returned,
what is extinguished is only the criminal liability of failing to trun over the goods.
Kanus-a man diay ma-extinguish ang civil obligation sa entrustee?

It is only when the entruster takes possession of the goods AND sell these goods in a public or private sale and
then apply the proceeds in payment of the obligation. That is the only time na ma-extinguish ang iya obligation.
Meaning, the entrustee cannot simply say that: "sige, ibalik nalang ni nako nimo ang goods kay di nako ganahan
mamaligya. Ako na ni i-uli para wala nako utang nimo. In the sense that, the entrustee cannot return the goods
to the entruster if the entruster refuses to accept it. So, kung dili dawaton sa entruster, he can proceed to file a
civil action. The return of the goods does not by itself extinguish the obligation of the entrustee until and unless
the goods are disposed by the entruster and the proceeds are applied.
If the proceeds are more than enough to cover the amount of the loan, to whom the excess will go to?
Class: Entrustee.
Maam: You're clearly not reading the law (nangugat na pud!) it goes to the entruster.
Class: Huuuuuh?!!
Maam: Aw, entrustee diay! Hehehe. :P
The entrustee. But, is it fair that the surplus will go to the entrustee? Yes, because if you look at the purpose of
TR, supposedly the entrustee shall dispose it and it supposed to get profit out from such disposal. So, if there is
profit, it is only fair that it goes to the entrustee. But, if there is deficiency, the entruster may still go after the
entrustee. (Sec. 7 - The entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.)
However, if the entruster has already opted to take possession of the goods, he cannot anymore file at the same
a civil action against the entrustee.
Colinares Case: The entruster must first acquire the possession of the goods, document or instrument before it
releases such to the entrustee. Otherwise, it cannot be a TR transaction.
Facts: Colinares acquired construction materials from the seller. So, the material are already int he possession of
Colinares. To pay off his utang to the supplier, he availed of a loan from the bank. But, ang bank was very
scheming. Thinking that it was only an ordianry loan, so, he required Colinares to execute TR in order to secure
the loan.
That court said that it is no longer a TR transaction. Take note that, the acquisition of the goods was already
transferred to Colinares when he acquired a loan from the bank. So, when the bank required him to execute a TR
to secure the loan, it already contradicted the nature of a TR transaction. Because in a TR transaction, possession
of the goods is naa pa sa seller/entruster. It is only released to the entrustee by virtue of the TR. In here, the
entrustee is already in possession of the goods. So, the possession of the goods never came to the possession of
the goods.
So, dili na ni TR transaction. Dili pwede na naa na nimo ang goods, ayha mo-execute ka ug TR in favor of the bank
whom you acquired loan from to pay off the goods you purchased from the seller. This is just a simple loan. (read
daw kay interesting daw ni!)
Probably, what is allowed if you obtained first a loan from the bank and executed a TR in order for the bank to
pay off the purchase money to the seller and release it to you. There must be a TR between the buyer and the
bank first. This situation is just similar to LC, diba?
Cheng v. CA: TR is not a mere "side documents". It may also cover goods which are not intended for sale.
Facts: Cheng imported goods that were financed thru a LC. So, Allied Bank opened a LC in his favor and the
release of the goods was thru a TR. SO, Chan here was not able to pay and also wasn't able to account for the
goods. Thus, a case of estafa was filed against him. Cheng on the other hand files for the nullification of the TR
agreement. So, now he contends that the nullification of TR must be settled first before he may be prosecuted of
Estafa.
One thing in here is the statement of the court that the declaration of the nullity of the TR is not a prejudicial
question to the prosecution of estafa. Because, a TR, valid or not, the guilt of the accused can still be established
by other evidence. Not necessarily that the violation has to be done under PD 115. As what we have said that PD
115 is only one of the mode of committing estafa.
Another Important thing is that Cheng contended that the TR was only a "side document" - an additional
document in which it is not the main contract in their transaction. Court says, however, that you cannot just
consider a TR a side document. It is a security instrument, and by itself, you incur certain obligations.
Last contention of Cheng was that the transaction should not be covered by TR since the goods under the TR
were not intended for sale since the goods were used only in my construction firm.
Was he correct?
No. TR is not limited only to goods intended for sale. As discussed, it covers goods for manufacture or
processing, and even equipments used in businesses, etc. What is important is that these items were released
under the TR agreement. And, by virtue of the TR, you now have the obligation to turn over the proceeds or
return the goods itself if not sold. Failing that, then you are liable.
Nacu v. Ca
What happened here was that there was a first loan obtained which was secured by a real estate mortgage. After
the loan was paid, another parties (but Nacu spouses remained parties to both first and second loan) obtained
another loan. The loan was made thru a LC to pay for the purchase of machineries and equipments, and this
time, the second loan was secured by TR. Now, the bank is saying that the 2nd loan is as well secured by the real
mortgage owned by Nacu spouses.
But, court said NO. Not only because the loan consisted of different parties but also that the nature if a TR is that
it is a security transaction already. Thus, real estate mortgage is not anymore necessary. By virtue of the TR, since
it is already a security by itself, you go after nalang the TR, don't go after the real mortgage na. The bank should
go after the goods which were the machineries and equipments.
Is it possible for a TR to cover other things which may serve as a security loan covered in TR?
No, because it covers only the goods that were released under the TR. So, it cannot happen that a TR agreement
would include another security other than those goods released under the TR. Example, TR plus naa pa jud
chattel mortagage. In this case, the things under chattel mortgage cannot be covered by the TR agreement
because those things are already owned by you and were not released under the TR.
Side Note: In TR, there has to be goods, documents or instruments involved. Di man pwede na money lang ang
covered sa TR. Otherwise, it would amount to a simple loan.
Coverage of TR
1. Goods, documents, instruments which may or may not be obtained for the purposes of sale. It could include
machines and equipments used in the processing or manufacturing of raw materials.
Robles v. CA
Robles received goods (office equipments) under the TR. It was stated in the TR: "goods are released under the
TR executed in favor of Paramount Business Machines. Therein, Robles has the obligation to return. OR return
the goods in case they are not sold. To pay for the obligation, Robles issued a checked which however bounced.
Robles contended that what he executed was not a TR agreement. He said that what he signed was not a TR but
a mere formality to evidence that I received the goods. Further, he said that the transaction was only a sale on
trial basis for 2 days. Such that if it is not sold, I only have to return the goods and also if I cannot return the
same, my only obligation is civil liability, and not estafa.
Ruling: Court said that by virtue of the document you executed, it was very clear that it was a TR transaction. In
the document, the wordings state "in trust for" PBM xxx. So Klaro kaayo na TR to and not just a mere formality.
Therefore, Robles is liable under PD 115. Gikasab-an pa siya sa court in saying that "you are an intelligent man, a
college professor", you should have known what you have entered into.
Is TR a contract of adhesion?
YES, but you only apply the contract of adhesion rule if there are ambiguities. But, if the language of the law is
clear, it should be whatever is written in the stipulation that shall govern the party. When the language of the
contract is clear, it is not subject to interpretation.
In one case it was considered as a contract of adhesion since the TR was already prepared for by the bank. And
the customer merely signs it if he wants for the loan to be approved.
But, in this case contract of adhesion rule was not applied since, Robles was considered as a knowledgeable
man (a college professor) contracting a TR with PBM. Thus, the court considers that he should have known what
he was entering into.
What if in the same situation except that there was no TR executed?

It could just be a mere consignment, di ba? Then, he would not be liable under pD 115. But, can he still be sued
under estafa? Yes, as long as there is FRAUD. Again, PD 115 is only one way of committing estafa.
Parties to a TR
1. Entruster - seller, lender, the financier. He is the one who holds either title of goods, documents, or
instruments or has security interest over the same.
2. Entrustee - buyer, borrower, or it could be the importer. He is the one having or taking possession of the
goods released under the TR.
Rights and Obligations of the Parties
Entruster (Section7)
1. He is entitled to the proceeds of the sale of the goods released under the TR. To extent of the amount
owing to him or as what appears in the TR agreement.
2. He has the right to the return of the goods in case of non-sale adn the enforcement of all other rights.
3. He has the right to cancel the TR and take possession of all the goods. And, once in possession of the
goods, after giving notice to the entrustee, he may sell the goods under a public or private sale.
Can the entruster become the purchaser?

Yes. So, this only shows that the entruster is really not the owner of the goods but he only has security interest
over the goods.
4. The proceeds of the sale shall be applied:

a) to the payment of the expenses of the sale;
b) to the payment of the expenses of retaking, keeping and storing the goods, documents or instruments;
c) to the satisfaction of the entrustee's indebtedness to the entruster.
And if there is balance, then it shall be applied to the principal debt. The entrustee shall receive any surplus but
shall be liable to the entruster for any deficiency.
Extent of the Entruster's security Interest - What is a security interest of the entruster as against an innocent
purchaser for value?
Example: We have entruster and entrustee. But, the entrustee sold the goods released by virtue of the TR, to a
third party buyer - an innocent purchaser for value. And, assuming that after the sale the entrustee failed to
remit the proceeds to the entruster, can the entruster go after the buyer to enforce his lien over the goods? No,
based on justice and equity. In section 11, the law states:
"Section 11. Rights of purchaser for value and in good faith. Any purchaser of goods from an entrustee with right
to sell, or of documents or instruments through their customary form of transfer, who buys the goods,
documents, or instruments for value and in good faith from the entrustee, acquires said goods, documents or
instruments free from the entruster's security interest."
So, even in failure of the entrustee to remit the proceeds, the entruster could no longer go after the buyer. Why?
Because when the entrustee enters into a contract with the innocent purchaser for value, the one who is now
considered as the vendor is the entrustee. Such that, if there is now a break in the sale (ei. Warranty of hidden
defects), the third person-buyer could no longer go after the entruster because the entruster is not the vendor.
As far as the contract of sale is concerned, it is only between the entrustee as vendor and the buyer. So, vice
versa, buyer cannot go after the entruster and the entruster cannot go after the buyer.
It is one of the innovations PD 115, in the sense that although by legal fiction the entruster is the owner of the
goods, but in the case that the entrustee enters a contract of sale to a third person, he nonetheless has the right
to transfer title. Meaning, the third party buyer holds the goods free from the entruster's security interest.
What about as against creditors of entrustee?

It is preferred based on section 12.
Section 12. Validity of entruster's security interest as against creditors. The entruster's security interest in goods,
documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors
of the entrustee for the duration of the trust receipt agreement.
There was one case, X was an importer of gasoline from a foreign supplier. PNB opened a LC in favor of X. The
gasoline was released to X by virtue of a TR. Now, under the TR, X entered into a contract with T for the sale of
the g
asoline. With an agreement that whatever proceeds, T shall pay to PNB to comply with the TR agreement.
Now, a judgment creditor (Z) of X, filed a writ of attachment and execution. AS a result, the proceeds of the
gasoline in the hands of T was garnished by the sheriff. Now, PNB filed a case to recover the money garnished.
Issue: Who has the better rights ot the proceeds of the garnished money?
PNB - based on section 12, the rights of the entruster is preferred against all other creditors. Based also in
preference on credit under the Civil COde. Rights of the entruster is preferred against a judgment creditor since
the entruster's claim is specific, whereas the latter is general which directed to all the property of a debtor.
Obligation of the Entrustee

1. To hold the goods in trust for the entruster.
2. To receive the proceeds in the trust, and to turn over the same when unsold.
3. To insure the goods for their total value against loss from fire, thef, pilferage or other casualties
The entrustee has insurable interest over the goods since there is a risk of loss in his part. It would create a
liability in case of loss.
4. keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster;
5. return the goods, documents or instruments in the event of non-sale or upon demand of the entruster;
and
6. Observe all other terms and conditions of the trust receipt not contrary to the provisions of this Decree.
Basically, the entrustee has 2 alternative obligations:

a) Turn over the proceeds; or
b) Turn over the goods
Take note that these two alternatives refer to the obligation under the TR. So, if you choose to turn over, can you
do that? Yes, but it does not extinguish your civil liability. Only the criminal liability is extinguished.
Who bears the loss?

Section 10 -It is the entrustee, contrary to the RES PERIT DOMINO. So, if the goods were lost, does it extinguish
the liability of the entrustee? No, so louy siya noh? He bears the loss and at the same time his obligation shall
not be extinguished.
In one case, the goods held under trust were destroyed. So, the entrustee insisted that since the goods were lost
without his fault, his obligation now is extinguished. The court said, no. Under the law, you bear the loss with or
without your fault. Is that fair? Yes, that is why you are required to insure. So, that you may be indemnified in
case of loss.
Can a foreign TR be denominated in a foreign currency?

Yes. So, if the obligation is in US dollars, still it must be paid in Philippine currency.
In what exchange rate?
Exchange rate at the date the proceeds of the sale are turned over or whatever was indicated in the TR
agreement.
Does the entruster really own the goods released under the TR?
The entruster does not really own the goods but is considered only by legal fiction. But, in the definition of the
law, it states there that the entruster is someone who owns or holds title or has security interest.
When I am the owner of the goods, I give it to you so that you can sell it on consign or on commission. In that
case, the entruster owns the goods, he hlods title over it. But, in a case of a LC wherein the bank acts as an
entruster, the bank is not really the owner of the goods, but he only holds security interest over the goods. So,
for me, the entruster could either owns the goods or he could just hold security interest over the goods.
But, even if we say that the entruster owns the goods, however if something happens to the goods, it is not the
entruster who shall bear the loss, but the entrustee. This is contrary to the principle of RES PERIT DOMINO -
owner bears the loss.
But, they say that that is one of the innovations of PD 115. The entruster is considered not as the owner per se,
but nonetheless, he holds title over the goods by legal fiction. Another principle in PD 115 is that, although the
entruster is considered as the one who owns the goods, but when the entrustee enters into a contract of sale, it
the entrustee who is considered as the vendee and not the entruster.
But, as not to confuse us "noh?", let's just settle that the entruster holds title or security interest. And, that even
if he holds title, in case the goods are lost, it is the entrustee and not him (the entruster) who is liable.
December 13, 2010
Lets finish trust receipt so we can start with SRC.
Q: extent of security interest of the entruster as against purchaser for value?
A: 1. interest of entruster as against innocent purchaser for value= not preferred
2. interest of entruster as against other creditors = preferred
- as to liability:
1. goods under trust is lost- borne by entrustee (contrary to rule on res perit domino)
- currency in which trust receipt is denominated:
Under the law it can be denominated in Philippine currency or foreign currency
BUT: if denominated in foreign currency it has to be paid with Philippine currency using the exchange rate when
the proceeds of the trust receipt is to be turned over to the entruster or based on the date indicated in the
trust receipt
Q: when is an entrustee considered to have committed a breach under PD 115?
1. Fails to comply with the terms and conditions of the trust receipt or fails to turn over the proceeds
of the sale of the goods, documents or instruments
2. Failure to turn over the goods themselves if they are not sold
Note: the mere failure of the entrustee to turn over the proceeds of the sale of goods or failure to turn
over the goods themselves constitute the violation
It is not necessary to prove that the entruster suffered damage because it is mallum prohibitum: offense
against public order or public policy.
LIABILTY: entrustee commits breach
1. CRIMINAL LIABILTY (ESTAFA)
2. CIVIL LIABILITY- under art. 33 anyone who causes injury by reason of defamation, fraud or physical
injury shall be liable.
Q: if entrustee is subsequently acquitted of his criminal liability ?
A: the extinguish it does not dissolve entrustee civil liability
Note: in fact the entrustee cannot extinguish his civil obligation by just surrendering the goods to the entruster.
(di nako ganahan mo baligya ako na ni e.surrender) The mere return of the goods does not by itself relieve
entrustee of his civil liability.
Note: Civil liability of entrustee is extinguished only when the goods are returned and the entruster disposes the
goods in a public or private sale and the proceeds in payment of the debt. That is the only time his civil
obligation is extinguished
- If entrustee returns the goods only his criminal liability is extinguished not his civil liability.
Q: what if the violator is a corporation who will be liable?
A: the directors, officers, officials responsible for the offense plus civil liability.
Q: case : Tiumico vs. CA
- PD 115 penalizes not the non-payment of debt but the abuse of trust, dishonest, abuse of confidence for
failure to comply with the obligation under PD 115
- So it does not violate the constitutional provision of no person shall be imprisoned for non-payment of
debt.
Q: case: Culinares vs. CA –
- Whether the transaction was a simple loan or a trust receipt agreement.
- Entruster did not have possession of the goods from the very beginning not the entrustee. So it was held
to be a simple loan.
Note: letter of credit – covers the loan feature of the transaction
Trust receipt – covers the security of the transaction
- Even if liability is extinguished under trust receipt, there is still the civil liability for letters of credit.
Q: additional stipulations by parties in trust receipt?
A: parties can add other terms and conditions in a trust receipt such as interest, service charge, penalties. Valid
provided not contrary to law and such agreement is binding to the parties.
=====================================================================================
SECURTIES REGULATION CODE
Previously known as the revised securities act, SRC is also known as the “blue sky law”
Blue sky- because it intends to protect the public against unscrupulous promoters or individuals who stake
business claims, ventures with no real basis, and selling shares or interest to investors who are left holding
certificates which represents nothing but a claim in a square in the blue sky (like building a castle in the air). This
comes in several forms like fraud or scams.
- Take note of the purposes:
SEC. 2. Declaration of State Policy. – The State shall establish a socially conscious, free market that regulates
itself, encourage the widest participation of ownership in enterprises, enhance the democratization of wealth,
promote the development of the capital market, protect investors, ensure full and fair disclosure about
securities, minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market. To achieve these ends, this Securities Regulation Code is
hereby enacted.
1. establish a socially conscious, free market that regulates itself – intends to educate the public about the
risk involved, to raise awareness among the public
2. encourage the widest participation of ownership in enterprises – so that ownership in businesses shall
not be limited to individuals. No monopoly in business
3. enhance the democratization of wealth – equal distribution of wealth
4. promote the development of the capital market protect investors,
5. ensure full and fair disclosure about securities – transparency, so that the public will know what it will
get into.
6. minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and
practices which create distortions in the free market – refers to the prohibited acts under the SRC
note: SRC is a self executor law, even if the SEC has not issued rules and regulations, it does not affect the self
executor nature of the SRC!
The SRC contains regulatory controls, to achieve its objectives, to name a few:
1. requirement of registration of securities – before a promoter, issuer will be allowed to offer it for sale
2. registration of those engaged in the sale of securities – such as brokers, dealers, salesmen
3. expanded the power of the SEC – the body which is tasked to implement the SRC
- promulgate rules and regulations
- investigatory powers
- taking out some adjudicative power of SEC which was vested before under PD 902-A which gives SEC
power to decide cases involving intra-corporate controversy (now wala na), fraud scheme cases, petition
for suspension of payment or rehabilitation proceeding. – purpose: so that SEC can focus on its
regulatory powers.
Lets discuss now SEC the body tasked to enforce the SRC 50:00
1. nature- collegial body
2. composition- chairman and 4 commissioners total of 5
3. qualifications – (majority member of the Philippine bar not all)
“The Commissioners must be natural-born citizens of the Philippines, at least forty (40) years of age
for the Chairperson and at least thirty-five (35) years of age for the Commissioners, of good moral
character, of unquestionable integrity, of known probity and patriotism, and with recognized
competence in social and economic disciplines: Provided, That the majority of Commissioners,
including the Chairperson, shall be members of the Philippine Bar.”
- chairman – natural born citizen, at least 45, unquestionable integrity etc.
- commissioners- 35 years
4. appointed by the president for a term of 7 years
POWERS AND FUNCTIONS OF SEC (so many things right? (hehe) , basically regulatory powers)
- if ever it has adjudicatory power, they are in relation to or incidental to its regulatory powers
- what are the regulatory powers of the SEC?
SEC. 5. Powers and Functions of the Commission:
(a) Have jurisdiction and supervision over all corporations, partnerships or

associations who are the grantees of primary franchises and/or a license or
permit issued by the Government;
(b) Formulate policies and recommendations on issues concerning the securities

market, advise Congress and other government agencies on all aspects of the
securities market and propose legislation and amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to registration

statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure

compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing
agencies and other SROs(self regulatory organizations);
(f) Impose sanctions for the violation of laws and the rules, regulations and
orders issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue
opinions and provide guidance on and supervise compliance with such rules,
regulations and orders;
(h) Enlist the aid and support of and/or deputize any and all enforcement
agencies of the Government, civil or military as well as any private institution,
corporation, firm, association or person in the implementation of its powers and
functions under this Code;
(i) Issue cease and desist orders to prevent fraud or injury to the investing
public;
(j) Punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of and penalties prescribed by
the Rules of Court;
(k) Compel the officers of any registered corporation or association to call

meetings of stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in any
proceedings of the Commission and in appropriate cases, order the examination,
search and seizure of all documents, papers, files and records, tax returns, and
books of accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnerships or associations, upon any
of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the carrying
out of, the express powers granted the Commission to achieve the objectives
and purposes of these laws.
- A. Supervision of all corporations partnerships or associations who are the grantees of primary
franchises and/or a license or permit –note: corporations here only refers to “private corporations” way
labot public corporations
- B.. Formulate policies and recommendations on issues concerning the securities market – since they are
the agency tasked to enforce the SRC, they are presumed to have the expertise regarding this matters
- C.. Approve, reject, suspend, revoke or require amendments to registration statements…- (this may
sound boring, just take note of this.)
- D.. Regulate, investigate or supervise the activities of persons to ensure compliance
- E. Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs
-
- F. Impose sanctions for the violation of laws..
- G. Prepare, approve, amend or repeal rules, regulations and orders..
- H. Enlist the aid and support of and/or deputize any and all enforcement agencies..
- I. Issue cease and desist orders – take note, if any corporation is doing prohibited acts.
- J. Punish for contempt of the Commission, both direct and indirect.. – take note!
- K. Compel the officers of any registered corporation..
- L. Issue subpoena duces tecum and summon witnesses to appear in any proceedings – still under the
exercise of regulatory power.
- M. Suspend, or revoke, after proper notice and hearing the franchise- legacy topic, cancel or revoke or
advice the public from transacting any business from this particular corporation, after proper notice and
hearing.
- N. Exercise such other powers- catch all provision
Note: intra-corporate controversy, election cases, shifted with the regular court not with SEC
Q: can the SEC compel a corporation to declare dividends? Is it an exercise of regulatory power? Is it within their
exercise of supervisory power, regulatory power?
A: they cannot compel siguro, but they can penalize (in relation to prohibition on 100% URE of a corporation)
and also SEC may also stop the issuing of shares of stock, regulatory power na sya.
Now let’s go to the more important topic in SRC: CHAPTER III Registration of Securities (section 8)
SEC. 8. Requirement of Registration of Securities. – 8.1. Securities shall not be sold

or offered for sale or distribution within the Philippines, without a registration
statement duly filed with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each prospective purchaser.
Q: Purpose of registration of securities? (registration and approval before a security can be

offered and sold)
A:
(1)GIVE THE PUBLIC FULL AND ADEQUATE DISCLOSURE OF THE SECURITIES, AND THE ISSUER – - If you look at the
registration statement SEC requires full disclosure so that by virtue of this the public can make a better judgment
whether to invest in that company. Who are the people involve, are they of good standing all those are required
to be disclosed.
- with this registration statement, the public can decide on the feasibility of investing in such company, without
such registration statement the public has no idea on the standing etc. of the company.
(2) ASSURANCE TO THE PUBLIC THAT THIS COMPANY SELLING SECURITIES IS A LEGITIMATE ONE- not a fly by
Night Company.
Q: what are securities? ( know if it requires registration or not?)
A:
“SEC. 3.1. “Securities” are shares, participation or interests in a corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in
character. It includes:
(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of
deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar
instruments.
(f) Proprietary or non proprietary membership certificates incorporations; and
(g) Other instruments as may in the future be determined by the Commission.”
Q: what are included under DEBT INSTURMENTS?

A: any evidence of indebtedness, example bonds, debentures, promissory notes,
Q: what are bonds?
A: elaborate form of promissory notes.
Q: what are EQUITY INSTRUMENTS?
A: Proprietary or non proprietary membership certificates incorporations example?
Q: golf club shares, your shares in club ultima, in alta vista, in cebu country club, these are proprietary, non
proprietarymembership
Q: what are INVESTMENT CONTRACT?, requirements of investment contract (4)
A: 1. Investment in money 2. Common enterprise 3. Expectation of profit 4. Profits derived from efforts of
others.
Q: sample of DEREVATIVES?
A: options or warrants
Q: TRUST INTRUMENTS like?
A: certificates of assignment, participation, voting trust certificates.
- so basically these are the classification of securities.
Q: mam does this include GOCC’s shares of stock (donna asks)
A: they are securities but they are exempt because the issuer is the government, exempt securities, like treasury
bonds, they are securities but they are exempt security because the issuer is the government.
Rationale: because the issuer can be trusted.
Situation: X purchased a 10 hectare in SRP, and the project cost is 100M, it plans to raise 50% of the project cost
through the issuance of membership certificates, and under the membership certificates, if you are a holder, you
will be entitled to use all the facilities but you will not be entitled to the assets of the corporation nor will you be
entitled to the dividends.
Also you will be required to pay membership fees or monthly dues.
Q: if mr. X plans to sell this membership certificate, does he need to file a registration statement with the SEC?
before mr. X can advertise the sale of the membership certificate
So 1st question, are you selling a security?
Is it an equity instrument? – yes!!!! (proprietary and non proprietary certificates in corporation, just the same as
your club ultima shares, country club shares, aside from the red light district ha ^_^)
A: yes, registration required, non-proprietary lang siya because you are not entitled to the dividends, but you are
entitled to use the facilities, this falls under the EQUITY INSTRUMENT. So kinanglan sya ug registration statement.
CASE: for a better understanding of registration POWERHOMES UNLIMITED: domestic corporation, promotes
real estate (not the developer)
Gist: issue: WON SEC can issue cease and desist order, WON it is an investment contract?
A: lets analyze, what is the business of power homes – not the developer, only engages network marketing.
Unlike other network marketing, commissions are used to purchase a property.
- it is an investment contract SC used the “test to determine whether it is an investment contract”
- four elements : 1. Investment of money 2. Common enterprise 3. Expectation of profit 4. Primarily from the
efforts of others. (because this is an investment contract, registration with SEC required and the SEC was correct
in issuing a cease and desist order)
NEXT CASE: time share realty (wa ma assign) gr. 158941 Feb. 11 2008
FACTS: time shares engage in the selling of time shares (time shares- issued by corporations or resorts or hotels
wherein if you buy a time share, it gives you a right to stay in that hotel for a certain period of time, or day in a
specific year, you can use the facilities for free, murag prepaid accommodation pero lifetime.)
Timeshares are selling time share with laguna de boracay during OCT. 1996 but its registration statement was
approved by SEC only on 1998 two years.
- the problem here is, timeshare was selling even before the approval of the registration statement
ISSUE: whether or not the shares issued prior to the registration are valid and effective, and whether or not the
registration on 1998 had a RETROACTIVE EFFECT?
ANSWER: no retroactive effect, because the law is specific that no sale of security shall be made until unless a
registration statement is filed and approved, any sale made prior to that is null and void.
Contention of time share: it was registered as a corporation before 1996!
A: being registered as a corporation is just one of the so many requirement for the registration of securities that
is a separate requirement?
Note: registration is for every security you want to issue for example, you want to register stocks, or bonds, or
investment contract. The registration statement you obtained for the shares of stocks does not apply to the
investment contract or bonds that you intend to issue “EVERY SECURITY YOU WANT TO ISSUE”
- even in common stocks, if you registered to issue common stocks then you later on issue preferred stocks then
that’s another requirement for registration because as far as the preferred shares are concerned these are
unregistered securities.
EXAMPLE (IN THE IMPLEMENTING RULES) Na register na nimo (shares of stock 100M) but only 50M where sold.
The period to sell such shares expired, if you want to resell the remaining 50M you are even required to file an
“UPDATED REGISTRATION STATEMENT”
Q: what about pre-selling of condominium units, townhouse, subdivision? Is registration required?
- What are you selling? Securities? No, investment contract? Not even
A: no need for registration!
8.2. The Commission may conditionally approve the registration statement under
such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any
written communication, including any summary prospectus, shall be deemed not
to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in a Register of
Securities in which shall be recorded orders entered by the Commission with
respect to such securities. Such register and all documents or information with
respect to the securities registered therein shall be open to public inspection at
reasonable hours on business days.
8.5. The Commission may audit the financial statements, assets and other
information of a firm applying for registration of its securities whenever it deems
the same necessary to insure full disclosure or to protect the interest of the
investors and the public in general.
EXCEPTION TO THE REQUIRIMENT OF REGISTRATION (2) SECTION 9 exempt securities AND SECTION 10 exempt
transactions– securities which may be sold without the need for registration
SEC. 9. Exempt Securities. -
9.1. The requirement of registration under Subsection 8.1 shall not as a general rule
apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of the Philippines, or by

any political subdivision or agency thereof, or by any person controlled or supervised
by, and acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with which
the Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content of disclosures the Commission may
prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by

the proper adjudicatory body.
- Refers to the courts

(d) Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
- Any bank except if it pertains to the banks OWN shares of stock (because they are already under the
supervision of the BSP) it has to be a security OTHER than its own security, ex. When bank issues bonds.
- If bank issues its own shares of stock (bank being a stock corporation also) – must register. Other than
that? It can issue without the need of registration.
- so special ang treatment sa banks
9.2. The Commission may, by rule or regulation after public hearing, add to the
foregoing any class of securities if it finds that the enforcement of this Code with
respect to such securities is not necessary in the public interest and for the
protection of investors.
SEC. 10. Exempt Transactions. - 10.1. The requirement of registration under

Subsection 8.1. shall not apply to the sale of any security in any of the following
transactions:
- IN exempt transactions the security issued is NOT EXEMPT (otherwise exempt securities na
sya) only that the circumstances under which the securities are sold makes registration
unnecessary.
- perhaps the risk involve is not that great, if you look at enumeration of exempt transaction, the sale of
security are mostly isolated transaction, and does not involve a sale of security to the public or a general offer to
the public.
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or

trustee in insolvency or bankruptcy.
Q: example of a judicial sale?
A: foreclosure in a public auction.
(b) By or for the account of a pledge holder, or mortgagee or any other similar lien
holder selling or offering for sale or delivery in the ordinary course of business and
not for the purpose of avoiding the provisions of this Code, to liquidate a bona
fide debt, a security pledged in good faith as security for such debt.
Here, the same in judicial sale
(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner thereof, or by his representative for the
owner’s account, such sale or offer for sale, subscription or delivery not being made
in the course of repeated and successive transactions of a like character by such
owner, or on his account by such representative and such owner or representative
not being the underwriter of such security.
Does not involve the sale of new issued shares, and only involves an isolated transaction . (example sale in stock
exchange, kapila mana ma baligya, does not require new registration)
(d) The distribution by a corporation, actively engaged in the business authorized by

its articles of incorporation, of securities to its stockholders or other security holders
as a stock dividend or other distribution out of surplus.
Here, shares are not sold but you are declaring it as stock dividends. (no risk)
For example: if X corporation would increase its ACS from 100m to 200M the increase would be subscribed by
way of stock dividends.
Q: is there a need for X to file for a registration statement to cover for the issuance of the additional 100M
shares?
A: no, the issuance is an exempt transaction, it is subscribed by its existing stock holders by way of stock
dividends.
(e) The sale of capital stock of a corporation to its own stockholders exclusively,
where no commission or other remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock.
Take note: “its own stockholder exclusively” – the offer was made only to existing stock holder.
Note: in letter (e) sale made to a stock holder whereas in letter (k) it could be a sale not to an
existing stock holder.
(f) The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, where the entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single sale.
- Single purchaser at a single sale. For example XYZ bank plans to sell 100M 5 year term bonds and the bonds are
secured by a real estate in favor of Mr. A.
Question: is there a need for registration? Is it an exempt security? Is it an exempt transaction?
Answer: no, not an exempt security, but it is an exempt transaction (single purchaser and single sale)
Q: what if the following month the bank issued another 5 million worth of bond to Mr. B? does it qualify still in
letter f?
Answer: still exempt security because it is still a bond (other than shares of stock) issued by a bank!
Question: what if it was sold by a corporation?
Answer: no longer an exempt security! (libog ang interaction sa class)
Rationale: the law is trying to protect, offering it to the general public.
(g) The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under this Code or was, when sold, exempt from
the provisions of this Code, and that the security issued and delivered in exchange, if
sold at the conversion price, would at the time of such conversion fall within the
class of securities entitled to registration under this Code. Upon such conversion the
par value of the security surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange are sold.
What do we understand about letter g? here, its like convertible shares of stock (common to preferred)
example: if the holder of a common share is given the option to convert it into a preferred share, the law states
that in converting (common—preferred) it would qualify as an exempt transaction. After converting into
preferred shares and after the issuance of the preferred shares, no registration required. Because upon
conversion you will be issued new shares of stock and surrender the common shares.
here, there is no risk, you are an existing stock holder and the shares have been previously
registered but was just converted.
(h) Broker’s transactions, executed upon customer’s orders, on any registered
Exchange or other trading market.
Last, what do you understand? Brokers transaction, I believe that transaction in the stock exchange, kapila na ma
baligya, so every time in the trading there is a sale. It qualifies into an exempt transaction because these shares
have been previously registered. This is not a new offering of shares, in effect if you look at exempt transaction
not all sale requires registration. The circumstances you are selling the shares will qualify them as exempt
transaction (merry xmas see you next year.)
(i) Subscriptions for shares of the capital stock of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital stock
under the Corporation Code, when no expense is incurred, or no commission,
compensation or remuneration is paid or given in connection with the sale or
disposition of such securities, and only when the purpose for soliciting, giving or
taking of such subscriptions is to comply with the requirements of such law as to the
percentage of the capital stock of a corporation which should be subscribed before it
can be registered and duly incorporated, or its authorized capital increased.
(j) The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
Note: only 19 persons within a 12 month period, if sells it over 20, then it must be registered. However it does
not invalidate the sale from 1-19 because it is still an exempt transaction.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the

Philippines or any political subdivision thereof or managed by a bank or other
persons authorized by the Bangko Sentral to engage in trust functions;
(v) Investment company; or
(vi) Such other person as the Commission may by rule determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of assets
under management.
10.2. The Commission may exempt other transactions, if it finds that the
requirements of registration under this Code is not necessary in the public interest
or for the protection of the investors such as by reason of the small amount involved
or the limited character of the public offering.
10.3. Any person applying for an exemption under this Section, shall file with the
Commission a notice identifying the exemption relied upon on such form and at
such time as the Commission by rule may prescribe and with such notice shall pay to
the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the
maximum aggregate price or issued value of the securities.
RATIONALE (why registration is not required) : issuer can be trusted not to deceive the investor, or the issuer is
regulated, supervised or monitored by other government entity which is expected to perform the same function
as that of SEC as far as protecting the investor is concerned.
January 10, 2011
PROCEDURE FOR THE REGISTRATION OF SECURITIES
 What are the procedures for the registration of securities (see Sec. 12, SRC)?
1. filing of the following with the SEC:
a. sworn registration statement (standard pro forma form)
SIGNATORIES TO A REGISTRATION STATEMENT (see sec. 12.4)
-the same persons who will be held liable if there is something wrong with the registration
statement.
i. Chief Executive Officer
ii. Chief Operating Officer
iii. Chief Financial Officer
iv. Accounting Manager/Comptroller
v. Corporate Secretary
vi. Expert Opinion (signature is not mandatory)
b. attach the Resolution of the Board of Directors
c. prospectus- normally contains all the necessary information about the issuer or about
the business
d. other information that may be required (sangkatutak na annexes!)
2. Payment of filing pay—1/10 of 1% of the aggregate price of the securities that you are
going to offer for sale. [see Sec. 12.5(a)]
3. Publication – 2 newspapers of general circulation once a week for 2 consecutive weeks.

[Sec. 12.5 (b)]
 How long will the SEC issue an Order either approving or denying the application? (see sec. 12.6)
--within 45 days from the filing of the registration statement.
--TAKE NOTE! It is only upon the issuance of the Order by the SEC approving registration registration
statement does the issuer be allowed to sell the securities or offer them for sale. So any sale made prior to
the effectivity of the registration statement is considered NULL and VOID.
 Grounds of the SEC to reject/revoke the registration of securities. (Sec. 13)

(a) The issuer:
(i) Has been judicially declared insolvent;

(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant thereto, or any order of
the Commission of which the issuer has notice in connection with the offering for which a registration
statement has been filed;
(iii) Has been or is engaged or is about to engage in fraudulent transactions;
(iv) Has made any false or misleading representation of material facts in any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any requirement that the Commission may impose as a condition for
registration of the security for which the registration statement has been filed; or
(b) The registration statement is on its face incomplete or inaccurate in any material respect or includes any
untrue statement of a material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; or
(c) The issuer, any officer, director or controlling person of the issuer, or person performing similar functions,
or any underwriter has been convicted, by a competent judicial or administrative body, upon plea of guilty,
or otherwise, of an offense involving moral turpitude and/or fraud or is enjoined or restrained by the
Commission or other competent judicial or administrative body for violations of securities, commodities, and
other related laws.
--TAKE NOTE! Judicial or administrative body here includes decisions of a FOREIGN COURT.
 Grounds for the suspension of the sale of the securities.

--practically the same with that of revocation
SEC. 15. Suspension of Registration. - 15.1. If, at any time, the information contained in the registration
statement filed is or has become misleading, incorrect, inadequate or incomplete in any material respect, or
the sale or offering for sale of the security registered thereunder may work or tend to work a fraud, the
Commission may require from the issuer such further information as may in its judgment be necessary to
enable the Commission to ascertain whether the registration of such security should be revoked on any
ground specified in this Code. The Commission may also suspend the right to sell and offer for sale such
security pending further investigation, by entering an order specifying the grounds for such action, and by
notifying the issuer, underwriter, dealer or broker known as participating in such offering.
15.2. The refusal to furnish information required by the Commission may be a ground for the issuance of an
order of suspension pursuant to Subsection 15.1. Upon the issuance of any such order and notification to
the issuer, underwriter, dealer or broker known as participating in such offering, no further offer or sale of
any such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale
shall be void.
15.3. Upon issuance of an order of suspension, the Commission shall conduct a hearing. If the Commission
determines that the sale of any security should be revoked, it shall issue an order prohibiting sale of such
security.
Until the issuance of a final order, the suspension of the right to sell, though binding upon the persons
notified thereof, shall be deemed confidential, and shall not be published, unless it shall appear that the
order of suspension has been violated after notice. If, however, the Commission finds that the sale of the
security will neither be fraudulent nor result in fraud, it shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its status as a registered security as of the date of such
order of suspension.
 Amendments to the Registration Statement. (sec. 14)

SEC. 14. Amendments to the Registration Statement. - 14.1. If a registration statement is on its face
incomplete or inaccurate in any material respect, the Commission shall issue an order directing the
amendment of the registration statement. Upon compliance with such order, the amended registration
statement shall become effective in accordance with the procedure mentioned in Subsection 12.6 hereof.
14.2. An amendment filed prior to the effective date of the registration statement shall recommence the
forty-five (45) day period within which the Commission shall act on a registration statement. An amendment
filed after the effective date of the registration statement shall become effective only upon such date as
determined by the Commission.
14.3. If any change occurs in the facts set forth in a registration statement, the issuer shall file an
amendment thereto setting forth the change.
14.4. If, at any time, the Commission finds that a registration statement contains any false statement or
omits to state any fact required to be stated therein or necessary to make the statements therein not
misleading, the Commission may conduct an examination, and, after due notice and hearing, issue an Order
suspending the effectivity of the registration statement. If the statement is duly amended, the suspension
order may be lifted.
14.5. In making such examination the Commission or any officer or officers designated by it may administer
oaths and affirmations and shall have access to, and may demand the production of, any books, records or
documents relevant to the examination. Failure of the issuer, underwriter, or any other person to cooperate,
or his obstruction or refusal to undergo an examination, shall be a ground for the issuance of a suspension
order.
PRE-NEED PLANS
 What is a pre-need plan?

--contract which offer the performance of a future service or if not service for the
payment of a future amount in money
SEC.16. Pre-Need Plans. - No person shall sell or offer for sale to the public
any pre-need
--paying plan except
it in advance in accordance
in anticipation for with rulesneed.
a future and regulations which
the Commission shall prescribe. Such rules shall regulate the sale of pre-
need plans
--affects by, interest
public among other
that isthings,
why itrequiring the registration
is regulated by the stateof(particularly
pre-need the SEC)
plans, licensing persons involved in the sale of pre-need plans, requiring
disclosures to prospective plan holders, prescribing advertising guidelines,
providing for uniform accounting system, reports and record keeping with
respect to such plans, imposing capital, bonding and other financial
responsibility, and establishing trust funds for the payment of benefits
under such plans.
 Examples:
--insurance; educational plan; memorial plan
PROTECTION OF SHAREHOLDER INTERESTS
--deals with the protection of the rights of existing shareholders’ interest
1. Tender Offer Rule (Sec. 19)

 What is meant by tender offer?
--a publicly announced intention
--applies to any person or group of persons who intend to acquire equity

securities of a public company/corporation (meaning ownership or control over the corp.)
PUBLIC COMPANY- shares of stocks are listed in the Stock exchange
-with assets of more than 50M and with 200 or more stockholders
and at least 200 SH own at least 100 shares each.
-- any person or group of persons who intend to acquire equity securities of a

public company/corporation is required to make your intention public or made
known to all shareholders.
 Purpose of tender offer

--to protect minority shareholders against any scheme that will dilute the value of
their shares by giving them opportunity to sell their shares at the same price offered to
majority shareholders.
 When is the tender offer rule mandatory?

--single transaction – 35%
--creeping acquisition within 12 mos.– 35%
--although you acquire less than 35% but after the acquisition it would result to ownership of more than
51%
 How is it done?
--example you want to acquire only 70% since the tender offer rule requires that you have to make your
offer to all stockholders, so you have to buy from all the stockholders on a pro rata basis.
--example: 20 (shares of the minority) / 100 (total shares) x 70% (shares to be acquired)
--so the effect is that, even if you hold a minority share, you are given the opportunity to sell.
 Procedure for making the tender offer

1. file the declaration with the SEC
2. pay the filing fee
3. furnish the issuer a statement containing the info./declaration
4. publication- purpose is to give notice to all stockholders (including the minority)
--what if all the minority SH will sell, are you compelled to buy all? No. Again you do it in a pro rata basis.
--NOTE: what the law requires is only to give the minority stockholders the opportunity to sell. If they
would not, there is no problem with that.
 Transactions exempt from the tender offer rule. (see the IRR)
1. Tender Offer rule will not apply to any purchase from the UNISSUED SHARES.
REASON: a. the law grants the SH the pre-emptive right
b. the existing Stockholders are not selling their shares, only the unissued shares.
GR: tender offer rule not applicable in the purchase of unissued shares.
EXC: acquisition will not result to 50% or more ownership.
2. When there is an increase in authorized capital stock.

REASON: a. the law grants the SH the pre-emptive right
b. the existing Stockholders are not selling their shares, only the unissued shares.
3. Purchase of shares pursuant to a foreclosure proceeding.

REASON: what is purchased here is only the share subject of the foreclosure.
4. Privatization by the government.

5. When you acquired the shares pursuant to corporate rehabilitation.
6. When you acquired the shares in an open market.
7. When you acquired the shares pursuant to a merger or consolidation.
Case:
CEMCO HOLDINGS vs. National Life
FACTS:
BPI (20.21%) APP (29.59%) CEMCO (9%)
UCHD (60.51%) CEMCO (17.03%)
(non public corp.)
UCC
(Public Corporation)
-CEMCO acquired BPI and APP shares in UCHD thereby increasing its ownership in UCHD to 51%.
-Phil. National life Insurance (minority) was aggrieved. It claimed that no tender offer was made when CEMCO
acquired the shares of BPI and APP in UCHD.
-CEMCO on the other hand alleged that it is not required to tender offer because it did not acquire the shares of
UCC (a public corporation) but that of UCHD (a non public corp.
ISSUE: WON the tender offer rule is applicable.
RULING:
Yes.
Mandatory coverage of the tender offer rule does not only apply to direct acquisition of stocks but also to
indirect acquisition of stocks. RATIONALE: although CEMCO acquired less than 35% of UCHD, it is covered
because after the acquisition CEMCO’s ownership in UCC increased to more than 51%.
2. Proxy Rules (Sec. 28)
 What do you understand by proxy rule?

--applies to any stockholders’ meeting in a public company.
 REQUIREMENTS
1. must be in writing
2. signed by the stockholder or his duly authorized representative.
3. submitted/filed before the scheduled meeting.
4. valid only for the particular meeting. Provided that it is effective for a period not longer than 5 years.
5. If the broker or dealer acquires 10% of the shares by proxy, he shall submit a report identifying the
beneficial owner within ten (10) days after such acquisition, for its own account or customer, to the
issuer of the security, to the Exchange where the security is traded and to the Commission.
6. Broker can give a proxy provided that there is authorization from the customer.
3. Disclosure Rule (Sec. 23)
--more of a reportorial requirement
--applies to directors, officers and principal stockholders.
 When is it applicable?
--applicable only to public companies.
1. if you become a beneficial owner of at least 10% of the shares of a public
company or you are a director or officer of that company, you are required to file a statement with
the SEC.
PURPOSE: for disclosure because these will later on become a public document.
2. change of ownership- file a statement with the SEC within 10 days after the close of each
calendar month thereafter.
Prohibitions on Fraud, Manipulationn and Inside Trading (Sec. 24-27)
 Manipulation of Prices (Sec. 24)

--Why prohibit? Because it affects public interest. They say that the strength of our economy will
reflect in the prices of your stocks.
 Prohibited Acts/ Unlawful Activities
1. Manipulation of Security Prices
SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be unlawful for any person
acting for himself or through a dealer or broker, directly or indirectly:
(a) To create a false or misleading appearance of active trading in any listed security traded in an Exchange or
any other trading market (hereafter referred to purposes of this Chapter as “Exchange”):
(i) By effecting any transaction in such security which involves no change in the beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security with the knowledge that a
simultaneous order or orders of substantially the same size, time and price, for the sale or purchase of any
such security, has or will be entered by or for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.
NOTE: known as WASH SALE- you create an appearance of active trading but the truth is there is no
transfer of ownership. Or basically the buyer and the seller are just the same persons who connived to buy
and sell the shares for purposes of making it appear that there is active trading.
HOW WOULD IT MANIPULATE THE PRICE? If your stock is active on that day, it would create an
impression that your stocks are good and it will deceive the people to buy.
--the manipulation here refers to increase in price or decrease in price. What is key in wash sale is there
is no change of beneficial ownership.
(b) To effect, alone or with others, a series of transactions in securities that:
(i) Raises their price to induce the purchase of a security, whether of the same or a different class of the
same issuer or of a controlling, controlled, or commonly controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a different class, of the
same issuer or of a controlling, controlled, or commonly controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through manipulative devices such as marking
the close, painting the tape, squeezing the float, hype and dump, boiler room operations and such other
similar devices.
MARKING THE CLOSE- at the start of the day the stock is inactive but towards the close of the market it
becomes active.
PURPOSE: to make it appear that the stock ended good. Thus, making it appear that the stock is
good and increase its price the following day.
PAINTING THE TAPE- you engage in a series of transactions to give an impression of activities or price
movement in securities.
- the difference with wash sale is that in wash sale there is no change in
beneficial ownership.
-generally, stock exchange involves a series of transactions but it becomes

illegitimate when there is COLLUSION between the buyer and the seller.
SQUEEZING THE FLOAT- you take advantage of a shortage in securities by controlling demand side and
exploiting market advantage during such shortage in a way to create increase in prices. [analogous to the
Law of Supply and Demand]
HYPE AND DUMP- you constantly buy securities at a higher price and after establishing a very high price,
you dump the securities by selling it at a profit. [You create the hype by creating an artificial inflation or
increase in price and then sell it at a profit.]
BOILER ROOM OPERATIONS- used to describe the situation where there are several salesmen in a room
doing pressure sales talk to lure investors in the securities being offered.
NOTE: all manipulate the stock prices.
(c) To circulate or disseminate information that the price of any security listed in an Exchange will or is likely
to rise or fall because of manipulative market operations of any one or more persons conducted for the
purpose of raising or depressing the price of the security for the purpose of inducing the purchase or sale of
such security.
(d) To make false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the purchase or sale of
any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any security
traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless
otherwise allowed by this Code or by rules of the Commission.
2. Option Trading
 What is Option Trading? (Sec. 25)

--you give an option either to sell or to buy.
 Important terms
a. Put- option to sell
b. Call- option to buy
c. Straddle- option to buy or sell
NOTE: brokers are not allowed to engage in option trading.
SEC. 25. Regulation of Option Trading. – No member of an Exchange shall,

directly or indirectly endorse or guarantee the performance of any put, call,
straddle, option or privilege in relation to any security registered on a
securities exchange.
RATIONALE: to avoid the danger that the person to whom the option is given may abuse the option by acquiring
or exercising the option involving large number of shares for a certain period. When the person whom the
option was given will not exercise the option, it will in a way manipulate the market because the
seller cannot sell it to another within the agreed period.
EXC: registered warrants (right to exercise the warrant within a certain period) and convertible securities
(right to convert the securities within a certain period).
3. Fraudulent Transactions
 Fraudulent Transactions (Sec. 26)

SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person,
directly or indirectly, in connection with the purchase or sale of any
securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a
material fact of any omission to state a material fact necessary in order to
4. Inside Trading
 What is insider trading? (Sec. 27)

--it is insider trading when you either buy or sell securities while you are in possession of a
material information and that information is not yet made known to the public.
--You call that MATERIAL NON PUBLIC INFORMATION.
--it is disallowed because you are taking undue advantage of the information when you buy and sell
the shares.
 Who is an insider?
a. director, officer or a person controlling or under common control of the issuer (like a subsidiary or
holding company)
b. persons who by reason of their relationship or former relationship have access to any material or
significant information not made known to the public.
c. Government employees that have access to some material information not known to the public (e.g.
SEC, BFAD, IPO)
d. Persons who knew of a material information from an insider.
 What is a material non-public information?
27.2. For purposes of this Section, information is “material non-public “ if:
(a) It has not been generally disclosed to the public and would likely affect
the market price of the security after being disseminated to the public and
the lapse of a reasonable time for the market to absorb the information;
--PRESUMPTION UNDER THE SRC: if you buy and sell the shares after you acquire the information but before
the same is released to the public, it is presumed to be an insider trading.
 Instances not considered by law as insider trading.

1. if the insider could prove that the information was not gained by virtue of that relationship
(not because he was a director or officer).
2. If the insider would prove that the other party to the transaction knew of the information or
he has disclosed the information to the other party.
 Example: A, B, C and D are all directors of a public company—ABC.

A – Sept. 1, 2010 purchased 1000 shares
B - Sept. 1, 2010 purchased 1000 shares

- left for abroad on Sept. 30, 2010
C - Sept. 1, 2010 purchased 1000 shares
In a BOD meeting on Oct. 5, 2010 where only A and C attended they made a disclosure that they already
have a perfected mining claim on a particular area. On Nov. 5, 2010 A and C sold their shares. On Dec. 5,
2010 when he came back to the Philippines he also sold his share. Is A, B and C, liable for inside trading?
In Sept 1, 2010 when A, B and C bought the shares, is there insider trading?
--none because they are not in possession of any material non public information.
In Nov. 5, 2010 when A and C sold their shares, is there insider trading?
--yes, applying the presumption. They already possess the material un public information.
In Dec. 5, 2010 when B sold his shares, is there insider trading?
--none because at the time he sold his share, he did not have any information of a material unpublic
information.
NOTE: insider trading could applies not only when you sell your shares to earn profit but also when you sell
your shares because you know that the company is going down because you are taking undue advantage of
an information that is not known to the public.
 Unlawful to Communicate information (Sec. 27.3)
27.3. It shall be unlawful for any insider to communicate material non-

public information about the issuer or the security to any person who, by
virtue of the communication, becomes an insider as defined in Subsection
--NOTE: it also applies to tender offers.
5. Use of Extensive credit/ Margin Trading
 Use of Extensive Credit (Sec. 48.1)
SEC. 48. Margin Requirements. - 48.1. For the purpose of preventing the excessive use of credit for the
purchase or carrying of securities, the Commission, in accordance with the credit and monetary policies that
may be promulgated from time to time by the Monetary Board of the Bangko Sentral ng Pilipinas, shall
prescribe rules and regulations with respect to the amount of credit that may be extended on any security.
For the extension of credit, such rules and regulations shall be based upon the following standard:
An amount not greater than whichever is the higher of -
(a) Sixty-five per centum (65%) of the current market price of the security; or
(b) One hundred per centum (100%) of the lowest market price of the security during the preceding thirty-six
(36) calendar months, but not more than seventy-five per centum (75%) of the current market price.
However, the Monetary Board may increase or decrease the above percentages, in order to achieve the
objectives of the Government with due regard for promotion of the economy and prevention of the use of
excessive credit.
Such rules and regulations may make appropriate provision with respect to the carrying of undermargined
accounts for limited periods and under specified conditions; the withdrawal of funds or securities; the
transfer of accounts from one lender to another; special or different margin requirements for delayed
deliveries, short sales, arbitrage transactions, and securities to which letter (b) of the second paragraph of
this subsection does not apply; the bases and the methods to be used in calculating loans, and margins and
market prices; and similar administrative adjustments and details.
 What is Margin Trading?

--you bought shares without paying for the full purchase price. It is the broker who advanced the
purchase price and the security that is being acquired is made as a collateral.
--example: you bought shares at purchase price of 100 and you paid only 30. So the broker paid 70. The
30 is called the margin. The broker will recover the 70 upon the sale of the said security in the future
where the proceeds will be applied as payment of the debt.
--In a way the broker is extending you a credit.
 Limitation on the use of the credit.

--the credit extended by the broker is for an amount not greater than whichever is higher an
between:
a. 65% of the current market price of the security; or
EXAMPLE: current market price of the security is 100, so the broker can extend
credit to a maximum of 65.
b. 100% of the lowest market price of the security during the preceding 36 months but
not exceeding 75% of the current market price.
EXAMPLE: if the lowest market price for the security for the last calendar month is 70,
the higher between 65 and 70 is the extent of the credit but not to exceed 75%
of the current market price.
--RATIONALE: regulate the credit on which collection hinges on speculation.
Case:
ABACUS SECURITY vs. AMPIL
FACTS:
-Abacus is engaged in the business of buying and selling of stocks on credit.
-it extended credit to Ampil.
-Ampil failed to pay some of the transactions, but despite Ampil’s failure to pay, Abacus still extended credit
and allowed Ampil to trade.
-Ampil’s defense: Abacus can only extend credit if there is a collateral. It is absent here, thus, no collection
can be had.
RULING:
Ampil is liable for the first transaction. The pari delicto rule applied only to the subsequent transactions.
They are in pari delicto because
Abacus was guilty of violating the SRC for extending credit despite Ampil’s failure to pay the previous
obligations. The explanation given by the court why it continued extending loan despite failure of payment is
that he will lose nothing. Ampil is also equally guilty because he violated the SRC provision on margin
trading.
Kulang ang last case.
--oOo--
Nothing follows.

Compiled SCL Transcription Midterms UPDATED

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Compiled SCL Transcription Midterms UPDATED

Загружено:

Авторское право:

Доступные форматы

USC LAW EH 403 TRANSCRIPTIONS----Special Commercial Laws P a g e |1

Special Commercial Laws

November 22, 2010

A. Definition and Nature

 What is a letter of credit?

 Under the Code of Commerce, it is simply defined as one issued by a merchant to

 So, we refer to jurisprudence on the definition on what is a letter of credit. In one

 Why are their (buyer and seller) interests seemingly irreconcilable?

o Therefore, there is a seemingly irreconcilable interest. So, what happens is

 So, how do we reconcile their interests?

o A draft is a form of a bill of exchange. It could be a check or any bill of

Case: Prudential Bank vs. IAC

Prudential Bank Bank of Tokyo

(Issuing Bank) (Correspondent Bank)

Case: Bank of America NT & SA vs. CA

Inter-Resin ropes General Chemicals

(Seller) (Buyer; Thailand)

Bank of America LC Bank of Ayudhya

(Correspondent Bank) (Issuing Bank)

Drawer Negotiating Bank

 So, when do you become a confirming bank?

 What is the reason why we have a confirming bank?

 Would it make a difference if Bank of America is a confirming bank?

 Yes. If Bank of America is a confirming bank, it cannot go after Inter-Resin. As a

 No. It is not necessary. Because again, LC deals only with documents.

Case: MWSS vs. Daway

MWSS Concession agreement Maynilad

In fact, this case distinguished a guarantee and an LC.

 A guarantee is not solidary, it is collateral or secondary. The obligation of the

 Who are the parties in a LC?

 He is called the beneficiary because the LC is issued in his favor

 He is called the applicant because he is the one who applies for an LC

3. Issuing Bank/ Opening Bank

 It is called as such because it is the one who issues or opens an LC.

 A correspondent bank could either act as an advising or notifying bank.

 It is a bank that confirms.

 The issuing bank or opening bank undertakes to pay.

 Of course, if you are a paying bank, you pay.

 What are the stages in an LC?

 Contract of sale for a commercial LC

 Service contracts or other agreements requiring performance of an

o by the way, how do you distinguish a standby LC and commercial

Involves non-sale transactions Involves sale transactions

The beneficiary must show non- For the beneficiary to avail of

2. Application by the Buyer of an LC

4. Notification to the Seller of the Existence of an LC

6. Execution of the drafts and submission of the drafts to the bank

7. Payment of the Issuing Bank to the Seller

8. Redemption or Reimbursement of the Issuing Bank

 In those stages, when is the LC considered perfected?

 It is perfected the moment the correspondent bank or any participating bank

 Is the opening of the LC necessary for the contract of sale?

 No, it is not among the requisites of a perfection of a contract of sale. Because

BELMAN COMPAÑIA INCORPORADA vs CENTRAL BANK OF THE PHILIPPINES

Independent Contracts involved in a Letter of Credit

 This is especially true in a commercial LC

2. Agreement between the application for LC

Case: Keng Hua Paper products vs CA

case, this mentions of the three independent contracts

This case simply means that these contracts are independent

and these should be maintained in PERPETUAL SEPARATION.

Similarly, a BILL OF LADING, aside from the contract of sale of

CONTRACT FOR THE TRANSPORTATION OF GOODS. Both are

independent and separate from the contract of sale and the