LETTERS OF CREDIT- Negotiable Instruments the buyer upon reimbursement.
As it is the one issuing the
NATURE AND IMPORTANCE
> A letter of credit is a financial device developed by
merchants as a convenient and relatively safe mode of dealing with
sales of goods to satisfy the seemingly irreconcilable interests of the
seller, who refuses to part with his goods before he is paid, and
a buyer, who wants to have control of the goods before paying
> To break the impasse, the buyer may be required to contract a
bank to issue a letter of credit, the issuing bank can authorize
the seller to raw drafts and engage to pay them upon
their presentment simultaneously with the tender of documents
required by the letter of credit. The buyer and seller agree on
what documents are to be presented for payment, but
ordinarily they are documents of title evidencing or attesting to
the shipment of the goods to the buyer
> Once the letter of credit is established, the seller ships the
goods to the buyer and in the process secures the required shipping
documents and documents of title. To get paid, the seller
executes a draft and presents it together with the required
documents to the issuing bank
> The issuing bank redeems the draft and pays cash to the
seller if it finds that the documents submitted by the seller
conform with what the letter of credit requires. The bank then
obtains possession of the documents upon paying the seller. The
transaction is completed when the buyer reimburses the issuing
bank and acquires the documents entitling him to the goods. The
seller gets paid only if he delivers the documents of title over the
goods while the buyer acquires the said documents and control
over the goods only after reimbursing the bank.
INDEPENDENCE PRINCIPLE
> What characterizes letters of credit, as distinguished from
other accessory contract, is the ENGAGEMENT OF THE ISSUING
BANK TO PAY THE SELLER ONCE THE DRAFT AND THE
REQUIRED SHIPPING DOCUMENTS ARE PRESENTED TO IT. In
turn, this arrangement ASSURES THE SELLER OF PROMPT
PAYMENT, INDEPENDENT OF ANY BREACH OF THE MAIN SALES
CONTRACT.
LAWS GOVERNING A LETTER OF CREDIT TRANSACTION
> Uniform Customs and Practice for Documentary Credits (UCP)
issued by the International Chamber of Commerce
PARTIES TO A LETTER OF CREDIT TRANSACTION
1. Buyerprocures the letter of credit and obliges himself to
reimburse the issuing bank upon receipt of the documents of title.
He is the one initiating the operation of the transaction as buyer of
the merchandise and also of the credit instrument. His
contract with the bank which is to issue the instrument and is
represented by the Commercial Credit Agreement form which
he signs, supported by the mutually made promises contained
in the agreement
2. Opening bankusually the buyers bank which issues the letter
of credit and undertakes to pay the seller upon receipt of the
draft and proper documents of titles to surrender the documents to
instrument, it should be a strong bank, well known and well
regarded in international trading circles.
3. Sellerin compliance with the contract of sale, ships the goods
to the buyer and delivers the documents of title and draft to
the issuing bank to recover payment. He is also the beneficiary of
the credit instrument because the instrument is addressed to him
and is in his favor. While the bank cannot compel the seller
to ship the goods and avail of the benefits of the instruments,
however, the seller may recover from the bank the value of his
shipment is made within the terms of the instrument, even though
he hasnt given the bank any direct consideration for the banks
promises contained in the instrument
4. Correspondent bank/advising bankto convey to the seller
the existence of the credit or a confirming bank which will lend
credence to the letter of credit issued by the lesser known issuing
bank or paying bank which undertakes to encash the drafts drawn
by the exporter. Furthermore, another bank known as the
negotiating bank may be approached by the buyer to have the
draft discounted instead of going to the place of the issuing bank to
claim payment
RESPONSIBILITIES OF BANKS IN COMMERCIAL CREDIT
TRANSACTIONS
> If the beneficiary is to be advised by the issuing bank by
cable, the services of an ADVISING OR NOTIFYING BANK must
always be utilized
> The responsibility of the NOTIFYING BANK is merely to
convey or transmit to the seller or beneficiary the existence of
the credit. However, if the beneficiary requires that the obligation
of the issuing bank shall also be made the obligation of the bank to
himself, there is what is known as a CONFIRMED COMMERCIAL
CREDIT and the bank notifying the beneficiary of the credit
shall become a CONFIRMING BANK. In this case, the liability of the
confirming bank is primary and it is as if the credit were issued by
the issuing and confirming banks jointly, thus giving the beneficiary
or a holder for value of drafts drawn under the credit, the right to
proceed against either or both banks, the moment the credit
instrument has been breached.
> The paying bank on which the drafts are to be drawn it may
be the issuing bank or the advising bank. If the beneficiary is
to draw and receive payment in his own currency, the advising
bank may be indicated as the paying bank also. When the draft is
to be paid in this manner, the paying bank assumes no
responsibility but merely pays the beneficiary and debits the
payment immediately to the account which the issuing bank
has with it. IF THE ISSUING BANK HAS NO ACCOUNT WITH THE
PAYING BANK, the paying bank reimburses itself by drawing a bill of
exchange on the issuing bank, in dollars, for the equivalent of the
local currency paid to the beneficiary, at the buyeing rate for dollar
exchange. The beneficiary is entirely out of the transaction
because his draft is completely discharged by the payment, and the
credit arrangement between the paying bank and issuing bank
doesnt concern him.
> If the draft contemplated by the credit instrument, is to be drawn
on the issuing bank or on other designated banks not in the
city of the seller, any bank in the city of the seller which buys
or discounts the draft of the beneficiary becomes a negotiating
bank. As a rule, whenever, the facilities of an advising or notifying
bank are used, the beneficiary is apt to offer his drafts to the
advising bank for negotiation, thus giving the advising bank
the character of a negotiating bank becomes an endorser and
bona fide holder of the drafts and within the protection of the
credit instrument. It is also protected by the drawers
signature, as the drawers contingent
liability, as drawer, continues until discharged by the actual payment
of the bills of exchange.
LIABILITY IN COMMERCIAL CREDIT TRANSACTIONS
> A commercial bank which departs from what has been stipulated
under the letter of credit, as when it accepts a faulty tender, acts on
its own risk, and it may not thereafter be able to recover from
the buyer or issuing bank, as the case may be, the money thus
paid to the beneficiary
> In the case of a discounting arrangement, wherein a negotiating
bank pays the draft of a beneficiary of a letter of credit in order to
save such beneficiary from the hardship of presenting the
documents directly to the issuing bank, the negotiating bank can
seek reimbursement of what has been paid to the beneficiary
who as drawer of the draft continues to assume a contingent
liability thereon. Thus, the negotiating bank has the ordinary right
of recourse against the seller or beneficiary in the event of dishonor
by the issuing bank.
PROTOTYPE EXPORT TRANSACTION
1. PROFORMA INVOICEall the particulars for the proposed
shipment which are then known to the buyer
2. PRICE QUOTATION FAS AND CIFFAS stands for free along
side which means that the seller will be responsible for the
cost and risks of the goods along side an overseas vessel at
the stated location: the buyer bears the costs and risks from that
point. CIF on the other hand means cost, freight and
insurance, that in exchange for this stated price, the seller
undertakes not only to supply the goods but also to obtain
and pay for insurance and bear the freight charges to the stated
pointy.
3. BUYERS PURCHASE ORDER
4. LETTER OF CREDIT
a. One way for a seller to be assured of payment is to ship goods
under a negotiable bill of lading and arrange for a bank in buyers
city to hold the bill of lading until the buyer pays the draft in
the usual foreign sale this arrangement for securing payment of
the price is not adequate
b. In some situations, sellers may need assurance of payment
even before the time of payment. This problem arises in contracts
which call for the manufacture of goods to the buyers
specifications.
c. Although the proforma invoice may not specify, the seller will
expect the letter of credit to be confirmed by the local bank in
its location. But why does a local bank confirm rather than
issue a letter of credit? The bank that issues the letter of credit
needs assurance that it will be reimbursed by the buyer, on whose
behalf it pays the seller. The buyers bank can take steps to
minimize or
remove the hazards. It will receive the negotiable bill of lading
controlling the goods which will provide security for the
customers obligation to reimburse the bank; in addition, the
buyers own bank can judge in the light of its knowledge of his
financial standing whether added security is needed and can insist
on such security before it issues the letter of credit
d. To meet the sellers letter of credit requirements, the buyer
will request its bank to arrange for the issuance of a letter of credit
which will comply with the terms of the proforma invoice. The
buyer will then sign a detailed application and agreement
for commercial credit prepared by the bank. The issuing bank,
after approving the buyers credit standing transmits a letter of
credit by cable to the confirming bank. This confirming bank
will then deliver to seller a document advising the latter that the
issuing bank opened a letter of credit in its favor and adding the
confirming banks confirmation. In this arrangement, the seller is
assured of payment of its sight drafts drawn on the confirming bank
in the amount of the total amount of the sale, provided it
presents the documents called for in the letter of credit.
An examination of the letter of credit will also reveal that the bill of
lading is to be consigned to the order of the buyers bank, thereby
giving the bank control over the goods, with the consequent
security for its claim against the buyer.
5. ACCEPTANE; SHIPMENT
a. On the receipt of the confirmed letter of credit, the seller will
send the order acknowledgment. This document will repeat the
description and price of the goods which has also appeared on
the proforma invoice and states the number and expiration date
of the letter of credit.
b. Further, the arrival of the letter of credit is the go-signal for the
seller to send the goods. The seller then prepares the
COMMERCIAL INVOICE which provides a complete record of the
transaction and is an important source of information to such
interested parties as a bank discounting a draft or an
underwriting extending issuance.
c. As the time of shipment approaches, the seller will contact
its forwarder and give its shipping instructions. It will inform that
to comply with the requirements of the letter of credit, the bill
of lading must be made to the order of the issuing bank. It will
also send copies of the commercial invoice, a packing list, and a
Shippers export declaration. When the forwarder receives
these documents, he takes over all further documentation as
the agent of the shipper, the latter merely has to dispatch the
goods from the factory in accordance with the forwarders
instructions.
d. The seller will then send the truck to the pier where they are
delivered to the ocean carriers receiving clerk who signs the
dock receipt. The dock receipt is a form supplied by the ocean
carrier which contains information relevant to the shipping of the
bearings such as the number of the pier, and the name of the ship.
The dock receipt is NON-NEGOTIABLE and serves as a temporary
receipt for the goods until they are loaded on board.
e. The ocean carrier is soon ready to receive the cargo. When
the goods are loaded on board, the steamship line issues a bill of
lading which, to comply with the letter of credit, is CONSIGNED TO
ORDER OF THE ISSUING BANK. The bill of lading is initially prepared
by the forwarder on a form supplied by the ocean carrier, it
sets forth the markings and numbers of the packages,
description of the goods, and the number and weight of the
packages. On its dorsal side, it will state that the goods are received
for shipment, but a statement FREIGHT PREPAID ON BOARD is
initiated by a representative of the steamship line after loading.
The forwarder then delivers the bill of lading and the commercial
invoice to the seller.
6. INSURANCE
7. PAYMENT; THE DRAFT.
a. The confirming bank stated in their letter that the estimated
CIF price would be available by your drafts on us at sight when
accompanied by the listed documents
b. Seller accordingly draws a sight draft on the confirming
bank. The sight draft together with the commercial invoice,
insurance certificate, full set of bills of lading, and the packing
list are presented to the confirming bank. When the bank
receives these documents, it issues its bank draft to sellers
order and transmits the documents by air mail to issuing bank,
which will
reimburse the confirming bank.
c. The documents, sent by airmail, will reach the buyers bank
well ahead of the ocean shipment. The time for release of the
documents to buyer and reimbursement to the bank will depend
upon the arrangement which was made between the bank and
buyer when the letter of
credit was initially established.
d. If the buyer plans to resell the goods, he may not be able to
reimburse the bank until the goods arrive and he resells the
goods. In this event, the issuing bank may need to take further
steps to secure its claim against the buyer.
STANDBY LETTERS OF CREDIT OR GUARANTEES
HISTORY AND PURPOSE
> Sometime ago, it is common in international dealings to
require the furnishing of a cash deposit as security, but with
the expansion of international trade this became prohibitively
expensive for the counterparty and in due course gave way to
a more convenient safeguard, the provision of a written
undertaking by a bank in favor of the buyer or employer payable on
demand
> Demand guarantees as substitute for cash are designed to provide
the beneficiary with a speedy monetary remedy against the
counterparty to the underlying contract and to that end are
primary in form and documentary in character.
> The demand guarantee is expressed to be payable solely
on presentation of a written demand and any other specified
documents. Accordingly, any demand within the maximum amount
stated must in principle be paid by the guarantor, regardless
whether the underlying contract has in fact been broken and
regardless of the loss actually suffered by the beneficiary
A CONCISE DEFINITION: DEMAND GUARANTEES
> Undertaking given for payment of a stated or maximum sum of
money on presentation to the party giving the undertaking of a
demand or payment and such other documents as may be
specified in the guarantee within the period and in
conformity with the other conditions of the guarantee
> Procured by the seller in favor of the buyer for the latter to be paid
in case the seller doesnt comply with contract provisions. The
economic burder is upon the party who breaches the contract
> Employed typically in construction contracts and contracts
for international sale of goods
> Demand guarantees are intended to safeguard the other party
against non-performance or late or defective performance by
the supplier or contractor
GUARANTEE STRUCTURES AND TERMINOLOGY: DIRECT (3RD
PARTY) GUARANTEES
> Involves a minimum of three parties
1. Account party/principalparty to the underlying contract
whose performance is required to be covered by the
guarantee and who gives instruction for its
2. Issuer/guarantorthe bank or other party issuing the
guarantee on behalf of the customer the principal
3. The beneficiarythe other party to the underlying contract, in
whose favor the guarantee is issued
> Usually the guarantee in the 3-party structure is the
principals bank and carries on business in the same country as the
principal, whilst the beneficiary carries on business in a foreign
country
> Known as direct guarantees because the guarantee is issued to
directly by the principals bank, not by the local bank in the
beneficiarys country
PRINCIPAL TYPES OF DEMAND GUARANTEES
1. Tender or bid guarantee
a. Where tenders are invited it is often a condition of
consideration of the tender that the tenderer undertakes to sign the
contract if its awarded to him, to procure the issue of any
performance or other guarantee required by the guarantee and not
to modify or withdraw his tender in the meantime
b. Purposesafeguard the beneficiary against breach of such an
undertaking
c. If the tenderer is successful and fails to sign the contract and
to furnish the requisite performance or other guarantee, or
withdraws his tender before its expiry, the beneficiary can call upon
the guarantor to pay a specified sum designed to compensate
him for the trouble and
expense he suffered in reawarding the contract, as well as any
additional cost of the contract
2. Performance guarantee
a. Guarantee of the central performance of the contract from
commencement to completion
b. Given for a specified percentage of the contract sum
c. But there are stages in the relationship between the
parties which precede and follow the central
performance, and there may be distinct segments of liability to
be covered within that performance
3. Advance payment or repayment guarantee
a. Underlying contract may entitle the principal to payment of
stated sums in advance of performance
b. The advance payment guarantee is designed to secure the
beneficiarys right to repayment of the advance if the performance
to which it relates is not furnished
4. Retention guarantee
a. Construction contracts usually provide for stage
payments against architects or engineers certificate and for a
specified percentage of the amount certified in each certificate to be
retained by the employer for a specified period of time as safeguard
against defects
b. The employer may be willing to release such retention
moneys against a retention guarantee securing repayment
of the released retention moneys if defects are later found or if
the contractor fails to complete the contract
5. Maintenance or warranty guarantee
a. Construction contracts usually provide that on completion part
of the retention moneys are to be retained for a specified
period to cover the cost of any defects or malfunction which
become manifest during that period
GUARANTEES NOT GUARANTEED BY UNDERLYING CONTRACT
> Not all guarantees are meant to be in favor of a party in the
underlying contract
> For example are customs guarantees which are issued to the
customs to cover any duty that may become payable when
imported goods which would be exempt from duty if reexported
within a specified time are not in fact reexported within that time
THE LEGAL NATURE OF A DEMAND GUARANTEE
> A demand guarantee is an abstract payment undertaking that
is, a promise of payment which, though intended to
preserve the beneficiary from loss in connection with the
underlying transaction is detached from the underlying
contract between principal and beneficiary and is in form a
primary undertaking between the guarantor and beneficiary which
becomes binding solely by virtue of its issue
> A secondary guarantee is both secondary in form and
intent. The intention of the parties is that the guarantor will be
called upon to pay only if the principal defaults in performance,
and then only to the extent of the principals liability and subject
to any defenses available to the principal
> A documentary credit is both primary in intent and form. The
parties to the underlying contract intend that the bank issuing the
credit is a to be the first port of call for payment, and this is
the effect of the agreement between them. Whereas in the
case of a suretyship guarantee, the beneficiary cannot look to
the guarantor without establishing default by the principal, the
reverse is true of the documentary credit. The parties have
designated payment by the bank as the primary payment method
and only if it fails without fault on the part of the beneficiary is
entitled to > DEMAND GUARANTEE STANDS BETWEEN THE
SURETYSHIP GUARANTEE AND THE DOCUMENTARY CREDIT
SECONDARY IN INTENT AND PRIMARY IN FORM. Performance
is due in the first instance from the principal, and the
guarantee is intended to be resorted to only if the principal has
failed to perform. But though this is the intent of the parties, the
guarantee isnt in form linked to default under the underlying
contract, nor there is any question of performance to hold
the beneficiary harmless up to the agreed maximum; and the
sole condition of the guarantors payment liability is the
presentation of a demand and other documents specified in the
guarantee in the manner of and within the period of the guarantee
> THE GUARANTOR HAS NO CONCERN WITH THE
UNDERLYING CONTRACT AND IF DEMAND IS DULY PRESENTED,
PAYMENT MUST BE MADE DESPITE ALLEGATIONS BY THE
PRINCIPAL HAS FULLY PERFORMED THE CONTRACTIN THE
ABSENCE OF ESTABLISHED FRAUD OR OTHER EVENT
CONSTITUTING GROUND FOR NON-PAYMENT
STANDBY LETTERS OF CREDIT
> Undertaking primary in form but intended to be used only as a
fallback in the event of default by the principal under the underlying
contract
> Standby credit in legal perspective is simply another term for
demand guarantees
> The standby credit has developed into an all-purpose financial
support instrument embracing a much wider range of uses than
the normal demand guarantee. Thus, standby credits are used
to support financial and non-financial obligations of the
principal and to provide credit enhancement for the primary
financial undertaking
KEY ELEMENTS IN A DEMAND GUARANTEE
1. The parties
2. A reference to the underlying contract
3. The amount or maximum amount of the guarantee and any
agreement for reduction or increase
4. The currency of payment
5. The documents, if any, to be presented for the purpose of
a demand or of reduction or expiry
6. The expiry date or other expiry provisions as well as any
agreement for extension
> Where it is intended that the guarantee shall not commence
until presentation of a particular document, this fact should be
specified
> Direct guarantee: principal, guarantor, and beneficiary should
be identified
> Indirect guarantee: principal, instructing party, beneficiary,
and counter-guarantee
> Central to the demand guarantee is its documentary
character: the rights and obligations it creates are to be determined
solely from the terms of the guarantee and from any
document presented in accordance with the guarantee, without
the need to ascertain external facts
DISTINCT NATURE OF CONTRACTUAL RELATIONSHIPS
> Guarantors commitment to the beneficiary arises solely by
virtue of the issue of the guarantee and his duty to pay is
conditioned only on presentation of demand and other specified
documents in conformity with the terms and within the duration of
the guarantee
> Principal is not concerned with the contract between the
guarantor and beneficiary
> Beneficiary has no concern with the contract between the
principal and guarantor
> The relationship of principal and guarantor has an internal
mandatethe guarantor is obliged to act in accordance with
the terms of the contract, failing which he may forfeit his right
to reimbursement but those terms are of no concern to the
beneficiary, whose right to payment depends solely on his acting
on conformity with the terms of the guarantee
> In indirect contracts, there is an additional mandate which
has 2 facetsthe mandate from the instructing party to the
guarantor as to the issue of the guarantee, which the guarantor
as mandatory must comply with if he accepts the instruction;
and two, the counter-guarantee which the guarantor exacts from
the instructing party as a precondition of issuing the guarantee and
which is separate from the mandate
1. Abstract character of the payment undertakingbinding
solely by virtue of issue of the guarantee, subject to the
beneficiary not rejecting it
2. Independence of the guarantee from the underlying
transaction
> Guarantee is separate from that contract and the rights and
obligations created by the guarantee are independent of those
arising under the underlying contract
> In the absence of established fraud by the beneficiary, the
guarantor is not entitled to refuse payment and the principal is
not entitled to have payment restrained merely because of a
dispute between the principal and beneficiary
3. Independence of the guarantee from the principal-guarantor
relationshipthe guarantee is separate from the contract
between the principal and the guarantor is not entitled to
invoke a breach of that contract
4. Documentary character of guaranteeamount and duration of
the duty to pay, the conditions of payment and termination of
payment obligation depend solely on the terms of the
guarantee itself and presentation of required documents
5. Requirement of compliance of the demand with the terms of
the guarantee
6. Guarantors duty of examination limited to apparent good
order of the document
7. Guarantors duty limited the exercise of good faith and
reasonable care
8. Independence of counter-guarantee from guarantee
9. Independence of counter-guarantee from mandate received
from instructing party
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PRESIDENTIAL DECREE No. 115 January 29, 1973
PROVIDING FOR THE REGULATION OF TRUST RECEIPTS
TRANSACTIONS
WHEREAS, the utilization of trust receipts, as a convenient business
device to assist importers and merchants solve their financing
problems, had gained popular acceptance in international and
domestic business practices, particularly in commercial banking
transactions;
WHEREAS, there is no specific law in the Philippines that governs
trust receipt transactions, especially the rights and obligations of the
parties involved therein and the enforcement of the said rights in
case of default or violation of the terms of the trust receipt
agreement;
WHEREAS, the recommendations contained in the report on the
financial system which have been accepted, with certain
modifications by the monetary authorities included, among others,
the enactment of a law regulating the trust receipt transactions;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines, by virtue of the powers vested in me by the
Constitution, as Commander-in-Chief of all the Armed Forces of the
Philippines, and pursuant to Proclamation No. 1081, dated
September 21, 1972, and General Order No. 1, dated September 22,
1972, as amended, and in order to effect the desired changes and
reforms in the social, economic, and political structure of our
society, do hereby order and decree and make as part of the law of
the land the following:
Section 1. Short Title. This Decree shall be known as the Trust
Receipts Law.
Section 2. Declaration of Policy. It is hereby declared to be the policy
of the state (a) to encourage and promote the use of trust receipts
as an additional and convenient aid to commerce and trade; (b) to
provide for the regulation of trust receipts transactions in order to
assure the protection of the rights and enforcement of obligations of
the parties involved therein; and (c) to declare the misuse and/or
misappropriation of goods or proceeds realized from the sale of
goods, documents or instruments released under trust receipts as a
criminal offense punishable under Article Three hundred and fifteen
of the Revised Penal Code.
Section 3. Definition of terms. As used in this Decree, unless the
context otherwise requires, the term
(a) "Document" shall mean written or printed evidence of
title to goods.
(b) "Entrustee" shall refer to the person having or taking
possession of goods, documents or instruments under a
trust receipt transaction, and any successor in interest of
such person for the purpose or purposes specified in the
trust receipt agreement.
(c) "Entruster" shall refer to the person holding title over
the goods, documents, or instruments subject of a trust
receipt transaction, and any successor in interest of such
person.
(d) "Goods" shall include chattels and personal property
other than: money, things in action, or things so affixed to
land as to become a part thereof.
(e) "Instrument" means any negotiable instrument as
defined in the Negotiable Instrument Law; any certificate
of stock, or bond or debenture for the payment of money
issued by a public or private corporation, or any certificate
of deposit, participation certificate or receipt, any credit or
investment instrument of a sort marketed in the ordinary
course of business or finance, whereby the entrustee,
after the issuance of the trust receipt, appears by virtue of
possession and the face of the instrument to be the
owner. "Instrument" shall not include a document as
defined in this Decree.
(f) "Purchase" means taking by sale, conditional sale, lease,
mortgage, or pledge, legal or equitable.
(g) "Purchaser" means any person taking by purchase.
(h) "Security Interest" means a property interest in goods,
documents or instruments to secure performance of some
obligations of the entrustee or of some third persons to
the entruster and includes title, whether or not expressed
to be absolute, whenever such title is in substance taken
or retained for security only.
 (i) "Person" means, as the case may be, an individual,
trustee, receiver, or other fiduciary, partnership,
corporation, business trust or other association, and two
more persons having a joint or common interest.
(j) "Trust Receipt" shall refer to the written or printed
document signed by the entrustee in favor of the entruster
containing terms and conditions substantially complying
with the provisions of this Decree. No further formality of
execution or authentication shall be necessary to the
validity of a trust receipt.
(k) "Value" means any consideration sufficient to support a
simple contract.
Section 4. What constitutes a trust receipt transaction. A trust
receipt transaction, within the meaning of this Decree, is any
transaction by and between a person referred to in this Decree as
the entruster, and another person referred to in this Decree as
entrustee, whereby the entruster, who owns or holds absolute title
or security interests over certain specified goods, documents or
instruments, releases the same to the possession of the entrustee
upon the latter's execution and delivery to the entruster of a signed
document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in
trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the
entruster the proceeds thereof to the extent of the amount owing to
the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not
otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially
equivalent to any of the following:
1. In the case of goods or documents, (a) to sell the goods
or procure their sale; or (b) to manufacture or process the
goods with the purpose of ultimate sale: Provided, That, in
the case of goods delivered under trust receipt for the
purpose of manufacturing or processing before its
ultimate sale, the entruster shall retain its title over the
goods whether in its original or processed form until the
entrustee has complied fully with his obligation under the
trust receipt; or (c) to load, unload, ship or tranship or
otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments,
a) to sell or procure their sale or exchange; or
b) to deliver them to a principal; or
c) to effect the consummation of some
transactions involving delivery to a depository or
register; or
d) to effect their presentation, collection or
renewal
The sale of goods, documents or instruments by a person
in the business of selling goods, documents or instruments
for profit who, at the outset of the transaction, has, as
against the buyer, general property rights in such goods,
documents or instruments, or who sells the same to the
buyer on credit, retaining title or other interest as security
for the payment of the purchase price, does not constitute
a trust receipt transaction and is outside the purview and
coverage of this Decree.
Section 5. Form of trust receipts; contents. A trust receipt need not
be in any particular form, but every such receipt must substantially
contain (a) a description of the goods, documents or instruments
subject of the trust receipt; (2) the total invoice value of the goods
and the amount of the draft to be paid by the entrustee; (3) an
undertaking or a commitment of the entrustee (a) to hold in trust
for the entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in the
trust receipt; and (c) to turn over the proceeds of the sale of the
goods, documents or instruments to the entruster to the extent of
the amount owing to the entruster or as appears in the trust receipt
or to return the goods, documents or instruments in the event of
their non-sale within the period specified therein.
The trust receipt may contain other terms and conditions agreed
upon by the parties in addition to those hereinabove enumerated
provided that such terms and conditions shall not be contrary to the
provisions of this Decree, any existing laws, public policy or morals,
public order or good customs.
Section 6. Currency in which a trust receipt may be denominated. A
trust receipt may be denominated in the Philippine currency or any
foreign currency acceptable and eligible as part of international
reserves of the Philippines, the provisions of existing law, executive
orders, rules and regulations to the contrary notwithstanding:
Provided, however, That in the case of trust receipts denominated in
foreign currency, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange rate on the
date the proceeds of sale of the goods, documents or instruments
held in trust by the entrustee are turned over to the entruster or on
such other date as may be stipulated in the trust receipt or other
agreements executed between the entruster and the entrustee.
Section 7. Rights of the entruster. The entruster shall be entitled to
the proceeds from the sale of the goods, documents or instruments
released under a trust receipt to the entrustee to the extent of the
amount owing to the entruster or as appears in the trust receipt, or
to the return of the goods, documents or instruments in case of non-
sale, and to the enforcement of all other rights conferred on him in
the trust receipt provided such are not contrary to the provisions of
this Decree.
The entruster may cancel the trust and take possession of the goods,
documents or instruments subject of the trust or of the proceeds
realized therefrom at any time upon default or failure of the
entrustee to comply with any of the terms and conditions of the
trust receipt or any other agreement between the entruster and the
entrustee, and the entruster in possession of the goods, documents
or instruments may, on or after default, give notice to the entrustee
of the intention to sell, and may, not less than five days after serving
or sending of such notice, sell the goods, documents or instruments
at public or private sale, and the entruster may, at a public sale,
become a purchaser. The proceeds of any such sale, whether public
or private, shall be applied (a) to the payment of the expenses
thereof; (b) to the payment of the expenses of re-taking, keeping
and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the
entruster for any deficiency. Notice of sale shall be deemed
sufficiently given if in writing, and either personally served on the
entrustee or sent by post-paid ordinary mail to the entrustee's last
known business address.
Section 8. Entruster not responsible on sale by entrustee. The
entruster holding a security interest shall not, merely by virtue of
such interest or having given the entrustee liberty of sale or other
disposition of the goods, documents or instruments under the terms
of the trust receipt transaction be responsible as principal or as
vendor under any sale or contract to sell made by the entrustee.
Section 14. Cases not covered by this Decree. Cases not provided for
in this Decree shall be governed by the applicable provisions of
existing laws.
Section 15. Separability clause. If any provision or section of this
Decree or the application thereof to any person or circumstance is
held invalid, the other provisions or sections hereof and the
application of such provisions or sections to other persons or
circumstances shall not be affected thereby.
Section 16. Repealing clause. All Acts inconsistent with this Decree
are hereby repealed.

Section 9. Obligations of the entrustee. The entrustee shall (1) hold Section 17. This Decree shall take effect immediately.
the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and
Done in the City of Manila, this 29th day of January, in the year of
conditions of the trust receipt; (2) receive the proceeds in trust for
Our Lord, nineteen hundred and seventy-three.
the entruster and turn over the same to the entruster to the extent
of the amount owing to the entruster or as appears on the trust
receipt; (3) insure the goods for their total value against loss from
fire, theft, pilferage or other casualties; (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.

Section 10. Liability of entrustee for loss. The risk of loss shall be
borne by the entrustee. Loss of goods, documents or instruments
which are the subject of a trust receipt, pending their disposition,
irrespective of whether or not it was due to the fault or negligence
of the entrustee, shall not extinguish his obligation to the entruster
for the value thereof.

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.

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.

Section 13. Penalty clause. The failure of an entrustee to turn over

the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.