of the reciprocal obligation of seller to ship the Goroza started to

subject matter of the contract to buyer. But the

contract itself between the buyer and the seller had 6
already sprung into legal existence and was
enforceable.

The failure of a buyer seasonably to furnish an

agreed L/C is a breach of the contract between
buyer and seller. Where the buyer fails to open a
letter of credit as stipulated, the seller or exporter
is entitled to claim damages for such breach.
Damages for failure to open a commercial credit
may, in appropriate cases, include the loss of profit
which the seller would reasonably have made had
the transaction been carried out (Reliance
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R.
No. 100831, December 17, 1993).

Partial payments on the loan cannot be added

in computing the issuing bank’s liability under
its own Standby Letter of Credit

Although these payments could result in the

reduction of the actual amount, which could
ultimately be collected from the issuing bank, the
latter’s separate undertaking under its letters of
credit remain. The letter of credit is an absolute
and primary undertaking which is separate and
distinct from the contract underlying it (Insular
Bank of Asia & America v. IAC, G.R. No. 74834,
November 17, 1988).

In a standby letter of credit securing a loan

obligation, any payment of the debtor to the
creditor should not be deducted from the total
obligation of the issuing bank to the beneficiary.
The issuing bank, after payment of the full amount,
is entitled to full reimbursement from the debtor.
But the debtor may recover excess payment from
the creditor to prevent unjust enrichment.

Q: SMC entered into an Exclusive Dealership

Agreement with Goroza wherein the latter was
given by SMC the right to trade, deal and
market or otherwise sell its various beer
products.

Goroza applied for a credit line with SMC, but

one of the requirements for the credit line was
a letter of credit. Thus, Goroza applied for and
was granted a letter of credit by the PNB in the
amount of P2,000,000.00 and subsequently an
additional credit line of P2,400,000.00 which
the latter approved. Under the credit
agreement, the PNB has the obligation to
release the proceeds of Goroza's credit line to
SMC upon presentation of the invoices and
official receipts of Goroza's purchases of SMC
beer products to PNB. Initially, Goroza was able
to pay his credit purchases with SMC. However,
become delinquent with his accounts. Demands
were made by the SMC against Goroza and PNB
but neither of them paid. SMC filed a Complaint
for collection of sum of money against PNB and
Goroza. RTC rendered a decision in favor of the
plaintiff ordering Goroza to pay. In the
meantime, trial continued with respect to PNB.

PNB moved to terminate the proceedings on the

ground that a decision was already rendered
finding Goroza solely liable. The RTC denied the
PNB's motion and issued a Supplemental
Judgment which stated that the RTC omitted by
inadvertence to insert in its decision the phrase
"without prejudice to the decision that will be
made against the other co-defendant, PNB, which
was not declared in default." The CA affirmed the
Resolution of RTC.

Was the CA incorrect in affirming the RTC

despite complete adjudication of relief to SMC
and the perfection of appeal by Goroza?

A: NO. It is clear from the proceedings held before

and the orders issued by the RTC that the intention
of the trial court is to conduct separate proceedings
to determine the respective liabilities of Goroza and
PNB, and thereafter, to render several and separate
judgments for or against them.

The propriety of a several judgment is borne by the

fact that SMC's cause of action against PNB stems
from the latter's alleged liability under the letters of
credit which it issued. On the other hand, SMC's
cause of action against Goroza is the latter's failure
to pay his obligation to the former. As to the
separate judgment, PNB has a counterclaim against
SMC which is yet to be resolved by the RTC. The so-
called "independence principle" assures the seller or
the beneficiary of prompt payment independent of
any breach of the main contract and precludes the
issuing bank from determining whether the main
contract is actually accomplished or not. As the
principle's nomenclature clearly suggests, the
obligation under the letter of credit is independent
of the related and originating contract. In brief, the
letter of credit is separate and distinct from the
underlying transaction.

In other words, PNB cannot evade responsibility on

the sole ground that the RTC judgment found Goroza
liable and ordered him to pay the amount sought to
be recovered by SMC. PNB's liability, if any, under
the letter of credit is yet to be determined
(Philippine National Bank vs San Miguel Corporation,
GR No. 186063, January 15, 2014).

Q: AAA Carmakers opened an Irrevocable Letter

of Credit with BBB Banking Corporation with
 LETTERS OF CREDIT
CCC Cars Corporation as beneficiary. The
irrevocable Letter of Credit was opened to pay
for the importation of ten (10) units of
Mercedes Benz S class. Upon arrival of the cars,
AAA Carmakers found out that the cars were all
not in running condition and some parts were
missing. As a consequence, AAA Carmakers
instructed BBB Banking Corporation not to
allow drawdown on the Letter of Credit. Is this
legally possible? (2012 Bar)
A: NO, because under the "Independence
Principle", conditions for the drawdown on the
Letters of Credit are based only on documents, like
shipping documents, and not with the condition of
the goods subject of the importation.
Q: X Corporation entered into a contract with
PT Construction Corporation for the latter to
construct and build a sugar mill within six (6)
months. They agreed that in case of delay, PT
Construction Corporation will pay X Under the fraud exception principle, the
Corporation P100,000.00 for everyday of the
delay. To ensure payment of the agreed amount
of damages, PT Construction Corporation
secured from Atlantic Bank a confirmed and
irrevocable letter of credit which was accepted
by X Corporation in due time. One week before
the expiration of the six (6) month period, PT
Construction Corp. requested for an extension
of time to deliver claiming that the delay was
due to the fault of X Corporation. A controversy
as to the cause of delay which involved the
worksmanship of the building ensued. The
controversy remained unsolved. Despite the
controversy, X corporation presented a claim
against Atlantic Bank by executing a draft
against the letter of credit.
a. Can Atlantic Bank refuse payment due to
the unresolved controversy? Explain.
b. Can X Corporation claim directly from PT
Construction Corp.? Explain. (2008 Bar)
A:
a. NO. Atlantic Bank cannot refuse to pay X
Corporation. This is because of the Doctrine of
Independence which provides that the
obligation of the issuing bank to pay the
beneficiary does not depend on the fulfillment
or non-fulfillment of the contract supporting
the letter of credit. The only instance where
Atlantic Bank can refuse payment is when X
Corporation was not able to strictly comply
with the letter of credit.
b. YES. X Corporation may directly claim from PT
Construction Corporation. A letter of credit by
itself does not come into operation without a
contract supporting it. It is no a contract that
7
can stand on its own, it needs a supporting
contract. It is merely an alternative course and
does not in any way prevent the beneficiary
from directly claiming from the applicant
(Transfield Philippines, Inc. v. Luzon Hydro
Corporation, supra)
FRAUD EXCEPTION PRINCIPLE
The Exception to the Independence Principle
(2010 Bar)
The “Fraud Exception Principle” is the exception to
the Independence Principle. It provides that the
untruthfulness of a certificate accompanying a
demand for payment under a standby letter of
credit may qualify as fraud sufficient to support an
injunction against payment.
beneficiary may be enjoined from collecting on the
letter of credit if the beneficiary committed fraud
by substituting fraudulent documents even if on
their face the documents complied with the
requirements.
This principle refers to fraud in relation with the
independent purpose or character of the L/C and
not only fraud in the performance of the obligation
or contract supporting the letter of credit
(Transfield vs. Luzon Hydro Corp., supra).
Remedy for fraudulent abuse
Injunction against payment is the remedy; provided
the requisites enumerated immediately below this
item are present.
Requisites in order to enjoin the Beneficiary
from drawing or collecting under the Letter of
Credit on the basis of fraud (PAI)
1. Clear Proof of fraud;
2. Fraud constitutes fraudulent Abuse of the
independent purpose of the letter of credit and
not only fraud under the main agreement; and
3. Irreparable Injury might follow if injunction is
not granted or the recovery of damages would
be seriously damaged (Ibid.)
DOCTRINE OF STRICT COMPLIANCE
 MERCANTILE LAW
The documents tendered by the seller/beneficiary
must strictly conform to the terms of the L/C. The
tender of documents must include all documents
required by the letter. It is not a question of
whether or not it is fair or equitable to require
submission of documents but whether or not the
documents were agreed upon. Thus, a
correspondent bank which departs from what has
been stipulated under the L/C acts on its own risk
and may not thereafter be able to recover from the
buyer or the issuing bank, as the case may be, the
money thus paid to the beneficiary (Feati Bank and
Trust Company v. CA, supra).
Q: BV agreed to sell to AC, a Ship and
Merchandise Broker, 2500 cubic meters of logs
at $27 per cubic meter FOB. After inspecting the
logs, CD issued a purchase order.
On the arrangement made upon instruction of
the consignee, H&T Corporation of LA,
California, the SP Bank of LA issued an
irrevocable letter of credit available at sight in
favor for the total purchase price of the logs.
The letter of credit was mailed to FE Bank with
the instruction "to forward it to the
beneficiary". The letter of credit provided that
the draft to be drawn is on SP Bank and that it
be accompanied by, among other things, a
certification from AC, stating that the logs have
been approved prior shipment in accordance
with the terms and conditions of the purchase
order.
Before loading of the vessel chartered by AC,
the logs were inspected by custom inspectors
and representatives of the Bureau of Forestry,
who certified to the good condition and
exportability of the logs. After loading was
completed, the Chief Mate of the vessel issued a
mate receipt of the cargo which stated that the
logs are in good condition. However, AC refused
to issue required certification in the letter of
credit. Because of the absence of certification,
FE Bank refused to advance payment on the
letter of credit.
a. May FE Bank be held liable under the Letter
of Credit? Explain.
b. Under the facts above, the seller, BV, argued
that FE Bank, by accepting the obligation to
notify him that the irrevocable letter of
DOCTRINE OF STRICT COMPLIANCE VS. INDEPENDENCE PRINCIPLE
Basis Doctrine of Strict Compliance
8
credit has been transmitted to it on his
behalf, has confirmed the letter of credit.
Consequently, FE Bank is liable under the
letter of credit. Is the argument tenable?
Explain. (1993 Bar)
A.
a. FE Bank cannot be held liable under the letter
of credit since the certificate is not issued by
BV. It is a settled rule in commercial
transactions involving letters of credit that the
documents tendered must strictly conform to
the terms of the letter of credit. The tender of
documents by the beneficiary (seller) must
include all documents required by the letter. A
correspondent bank which departs from what
has been stipulated under the letter of credit,
as when it accepts a faulty tender, acts on its
own risks and it may not thereafter be able to
recover from the buyer or the issuing bank, as
the case may be, the money thus paid to the
beneficiary. Thus the rule of strict compliance.
(Feati Bank and Trust Company v. CA, supra).
b. The argument made by BV is untenable. The FE
Bank in this case is only a notifying bank and
not a confirming bank. It is tasked only to
notify and/or transmit the required documents
and its obligation ends there. It is not privy to
the contract between the parties, its
relationship is only with that of the issuing
bank and not with the beneficiary to whom he
assumes no liability.
Q: At the instance of CCC Corporation, AAA Bank
issued an irrevocable Letter of Credit in favor of
BBB Corporation. The terms of the irrevocable
L/C state that the beneficiary must present
certain documents including a copy of the Bill
of Lading of the importation for the bank to
release the funds, BBB Corporation could not
find the original copy of the Bill of Lading so it
instead presented to the bank a Xerox copy of
the Bill of Lading. Would you advice the bank to
allow the drawdown on the Letter of Credit?
(2012 Bar)
A: NO, because the rule of strict compliance in
commercial transactions involving letters of credit,
requiring documents set as conditions for the
release of the fund has to be strictly complied with
or else funds will not be released.
Doctrine of Independence
 LETTERS OF CREDIT
Principle Documents tendered by the seller or
beneficiary must strictly conform to the
terms of the letter of credit.
Consequence of the A correspondent bank which departs
Doctrine from what has been stipulated and acts
on its own risk may not thereafter be
able to recover.
Payment of Beneficiary cannot draw on the letter
the of credit if he did not comply with its
Beneficiary terms and conditions.
TRUST RECEIPT
DEFINITION/CONCEPT OF A
TRUST RECEIPT TRANSACTION
Trust Receipt (TR) transaction
It is any transaction between the entruster and
entrustee:
1. Whereby the entruster who owns or holds title
or security interests over certain specified
goods, documents or instrument (GDI),
releases the same to the possession of
entrustee upon the latter’s execution of a TR
agreement.
2. Wherein the entrustee binds himself to hold the
GDI in trust for the entruster and, in case of
default:
a. to sell or otherwise dispose such GDI with
the obligation to turn over to the entruster
the proceeds to the extent of the amount
owing to it or
b. to turn over the GDI itself if not sold or
otherwise disposed of in accordance with
the terms and conditions specified in the
TR.
A TR is a commercial document whereby the bank
releases the goods in the possession of the
entrustee but retains ownership thereof while the
entrustee shall sell the goods and apply the
proceeds for the full payment of his liability with
the bank. It is a security arragement to which a
bank acquires ownership of the imported personal
property (Garcia vs. Court of Appeals, G.R. No.
119845, July 5, 1996). It is a document which
expresses a security transaction where the lender,
having no prior title to the goods on which the lien
is to be constituted, and not having possession over
the same since possession thereof remains in the
borrower, lends him money to the borrower on
security of the goods which borrower is privileged
to sell, clear of the lien, and with an agreement to
pay all or part of the sale
Relationship of the buyer and the bank is
separate and distinct from the relationship
of the buyer and seller in the main contract.
The bank is not required to investigate
whether the contract underlying the L/C
has been fulfilled or not.
Fraud Exception Principle can enjoin
beneficiary from drawing or collecting
under the L/C if there is fraud in relation
with the independent purpose of the L/C.
proceeds to the lender (Metropolitan Bank vs. Go,
G.R. No. 155647, November 23, 2007).
Two views regarding Trust Receipts
1. As a commercial document - the entrustee
binds himself to hold the designated GDI in
trust for the entruster and to sell or otherwise
dispose of GDI with the obligation to turn over
to the entruster the proceeds if they are unsold
or not otherwise disposed of, in accordance
with the terms and conditions specified in the
TR (P.D. 115, Sec. 4).
2. As a commercial transaction – It is a separate
and independent security transaction intended
to aid in financing importers and retail dealers
who do not have sufficient funds (Nacu v. CA,
G.R. No. 108638, March 11, 1994).
A Trust Receipt is not a negotiable instrument
Like L/C’s, TR’s are not negotiable instruments.
The presumption of consideration under the
negotiable instrument law may not necessarily be
applicable to trust receipts (Lee v. CA, supra).
SUBJECTS OF A TRUST RECEIPT TRANSACTION
(GDI)
1. 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 (P.D. 115, Sec. 3 [d]). Goods must be
object of lawful commerce.
2. Documents – written or printed evidence of
title to goods (P.D. 115, Sec. 3 [a]). E.g. L/C.
3. Instruments – negotiable instruments;
certificates of stock, or bond or debenture for
the payment of money issued by a corporation,
or certificates of deposit, participation
certificates or receipts, credit or investment
instruments of a sort marketed in the ordinary
course of business or finance (P.D. 115, Sec. 3
[e]). E.g. checks, drafts, promissory notes, bills
of exchange.
9
 MERCANTILE LAW
PARTIES TO A TRUST RECEIPT TRANSACTION following

1. Entruster - A lender, financer or creditor. 10

Person holding title over the GDI subject of a
TR transaction; releases possession of the
goods upon execution of TR (P.D. 115, Sec.
3[c]).
2. Entrustee - A borrower, buyer, importer or
debtor. He is the person to whom the goods are
delivered for sale or processing in trust, with
the obligation to return the proceeds of sale of
the goods or the goods to the entruster (P.D.
115, Sec. 3[b]).

TRANSACTIONS NOT CONSIDERED AS A TRUST

RECEIPT

1. A sale by a person in the business of selling for

profit who retains general property rights in
the GDI.
2. Where the seller retains title or other interest
as security for the payment of the purchase
price (P.D. 115, Sec. 4).

The sale of goods by a person in the business of

selling goods, for profit, who at the outset of
the transaction, has as against the buyer,
general property rights in such goods, or who
sells goods to the buyer on credit, retaining
title or other interest as security for the
payment of the purchase price, does not
constitute as trust receipt transaction. There is
no trust receipt, notwithstanding the label, if
goods offered as security for a loan
accommodation are goods sold to the debtor
unde a supposed trust receipt transaction (Sps.
Dela Cruz vs. Planters Products, Inc., G.R. No.
158649, February 18, 2013, in
Divina, 2014).

3. If the entrustee is already the owner or in

possession of the goods before delivery of the
loan and execution of the trust receipt
transaction, the transaction shall be
considered a simple loan even though the
parties may have denominated the agreement
as one of TR. To be in the nature of TR, the
entruster should have financed the acquisition
or importation of the goods. The funds should
have been delivered before or simultaneously
with delivery of the goods.
4. Where the entruster bank knew even before
the execution of the trust receipt agreements
that the construction materials covered were
never intended by the entrustee for resale or
for the manufacture of items to be sold (Hur
Tin Yang
i. People, supra).

Q: C contracted D to renovate his commercial

building. D ordered construction materials
from E and received delivery thereof. The
day, C went to F Bank to apply for a loan to pay the
construction materials. As security for the loan, C
was made to execute a trust receipt. One year
later, after C failed to pay the balance on the loan,
F Bank was charged with violation of the Trust
Receipts Law. Will the case against C prosper?
Reason briefly. (2007 Bar)

A: The case of estafa against C will not prosper. PD

115 does not apply in this case because the proceeds
of the loan are used to renovate C's commercial
building. TR transactions are intended to aid in
financial importers and retail dealers who do not have
sufficient funds or resources to finance the
importation or purchase of merchandise and who may
not be able to acquire credit except through
utilization, as collateral, of the merchandise imported
or purchased. The transactions contemplated under
the Trust Receipts Law mainly involved acquisition of
goods for the sale thereof. The transaction is properly
called a simple loan with the trust receipt as merely a
collateral or security for the loan (Ng vs. People,
supra).

Q: Supermax is a domestic corporation engaged in

the construction business. On various occasions,
Metrobank extended several commercial letters of
credit to Supermax. These commercial credits
were used by Supermax to pay for delivery of
several construction materials to be used in their
construction business. Thereafter, Metrobank
required Hur Tin Yang, as representative and Vice-
President for Internal Affairs of Supermax, to sign
24 trust receipts as security for the construction
materials. When 24 TRs fell due and despite the
receipt of demand letter, Supermax failed to pay
or deliver the goods or proceeds to Metrobank. As
the demands fell on deaf ears, Metrobank filed a
complaint for estafa against Hur Tin Yang.

Hur Tin Yang, while admitting signing the trust

receipts, argued that said trust receipts were
demanded by Metrobank as additional security for
the loans extended to Supermax for the purchase
of construction equipments and materials, and
that Metrobank knew all along that the
construction materials subject of the TRs were not
intended for resale but for personal use of
Supermax relating to its construction business.

Is Hur Tin Yang not guilty of estafa?

A: YES. In the instant case, the factual findings of the

trial and appellate courts reveal that the dealing
between Hur Tin Yang and Metrobank was not a TR
transaction but one of simple loan. His admission –
that he signed the TRs on behalf on Supermax,
TRUST RECEIPTS LAW
 which failed to pay the loan or turn over the proceeds of the sale or the goods to
Metrobank upon demand – does not conclusively prove that the transaction was, indeed,
a trust receipts transaction. In contract to the nomenclature of the transaction, the
parties really intended a contract of loan. The Court, in Ng vs. People, and Land Bank of
the Philippines v. Perez ,cases which are in all four corners the same as the instant case,
ruled that the fact that the entruster bank knew even before the execution of the trust
receipt agreements that the construction materials covered were never intended by the
entrustee for resale or for the manufacture of items to be sold is sufficient to prove that
the transaction was a simple loan and not a trust receipts transaction.

When both parties enter into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of the
trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in relation
to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon by the parties
would be the return of the proceeds of the sale transaction. This transaction becomes a
mere loan, where the borrower is obligated to pay the bank the amount spent for
the purchase of the goods (Hur Tin Yang vs. People, supra).

LOAN/SECURITY FEATURE

TWO FEATURES OF A TRUST RECEIPT

TRANSACTION

1. Loan feature - is brought about by the fact that the entruster financed the
importation or purchase of the goods under TR (Sps. Vintola vs. Insular Bank of Asia
and America, G.R. No. 73271, May 29, 1987).
2. Security feature - property interest in the GDI to secure performance of some
obligation of the entrustee or of some third persons to the entruster (Rosario Textile
Mills Corp. v. Home Bankers Savings and Trust Company, G.R. No. 137232, June 29,
2005).

EFFECTS OF THE DUAL FEATURES OF A TRUST

1. RECEIPT
The entrustee cannot absolutely be relieved of the obligation to pay his loan just
because he surrendered the goods to the entruster if the entruster refuses to accept
and subsequently deposited them in the custody of the court (Sps. Vintola vs. Insular
Bank of Asia and America,
 2. The entrustee cannot be relieved of his obligation to pay the loan in favor of the entruster
bank in case of loss or destruction of the GDI (Rosario Textile Mills Corp. vs. Home Bankers
Savings and Trust Company, supra).
3. Where the proceeds of the sale are insufficient to satisfy the loan executed by the entrustee,
the entruster bank can institute an action to collect the deficiency (Landl Co. vs. Metropolitan
Bank and Trust Co. G.R. No. 159622, July 30, 2004).
4. Repossession by the entruster of the GDI does not amount to dacion en pago. The
repossession of the goods by the entrustee was merely to secure the payment of its
obligation to the entrustor and not for the purpose of transferring ownership in satisfaction
of the obligation (PNB vs. Pineda, G.R. No. L-46658 May 13, 1991).

OWNERSHIP OF THE GOODS, DOCUMENTS, AND INSTRUMENTS UNDER A TRUST RECEIPT

Real owner of the articles subject of the Trust Receipt transaction

The real owner of the articles subject of the TR is the entrustee who binds himself to hold the
designated GDI. The entruster merely holds a security interest. If under the trust receipt, the
bank is made to appear as the owner, it was but an artificial expedient, more of legal fiction than
fact, for if it were really so, it could dispose of the goods in any manner it wants, which it cannot
do, just to give consistency with purpose of the trust receipt of giving a stronger security for the
loan obtained by the importer. To consider the bank as the true owner from the inception of the
transaction would be to disregard the loan feature thereof (Rosario Textile Mills Corp. vs. Home
Bankers Savings and Trust Company, supra).

The entrustee, however, cannot mortgage the goods because one of the requisites of a valid
mortgage is that the mortgagor must be the absolute owner of the property mortgaged or must
have free disposal thereof. Entrustee is not the absolute owner of the goods under trust receipt
nor has free disposal thereof.

The entruster is not responsible as principal or vendor under any sale or contract to sell made by
the entrustee.

RIGHTS O