THE NEGOTIABLE INSTRUMENTS LAW But nothing in this section shall alter or repeal any statute requiring in certain
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
I. FORM AND INTERPRETATION
Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act,
although it is to be paid:
with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the
whole shall become due; or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the
meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be
debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable future time,
within the meaning of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time
of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the
defect.
Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to
do any act in addition to the payment of money is not negotiable. But the negotiable character of an
instrument otherwise negotiable is not affected by a provision which:
(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument be not paid at maturity; or
(c) waives the benefit of any law intended for the advantage or protection of the obligor; or
(d) gives the holder an election to require something to be done in lieu of payment of money.
But nothing in this section shall validate any provision or stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not
affected by the fact that:
(a) it is not dated; or
(b) does not specify the value given, or that any value had been given therefor; or
(c) does not specify the place where it is drawn or the place where it is payable; or
(d) bears a seal; or
(e) designates a particular kind of current money in which payment is to be made.
consideration to be stated in the instrument.
Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.
Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn payable to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with
reasonable certainty.
Sec. 9. When payable to bearer. - The instrument is payable to
bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person
making it so payable; or
(d) When the name of the payee does not purport to be the name of any
person; or
(e) When the only or last indorsement is an indorsement in blank.
Sec. 10. Terms, when sufficient. - The instrument need not follow the language of this Act, but any terms are
sufficient which clearly indicate an intention to conform to the requirements hereof.
Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement thereon is
dated, such date is deemed prima facie to be the true date of the making, drawing, acceptance, or
indorsement, as the case may be. chanrobles law
Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is ante-dated or
post-dated, provided this is not done for an illegal or fraudulent purpose. The person to whom an instrument
so dated is delivered acquires the title thereto as of the date of delivery.
Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after
date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of issue or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent
holder in due course; but as to him, the date so inserted is to be regarded as the true date.
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material particular, the person in
possession thereof has a prima facie authority to complete it by filling up the blanks therein. And a signature on
a blank paper delivered by the person making the signature in order that the paper may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any amount. In order,
however, that any such instrument when completed may be enforced against any person who became a party
thereto prior to its completion, it must be filled up strictly in accordance with the authority given and within a
reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid
and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance
with the authority given and within a reasonable time.
Sec. 15. Incomplete instrument not delivered. - Where an incomplete instrument has not been delivered, it will
not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against
any person whose signature was placed thereon before delivery.
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable instrument is incomplete
and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate
parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual,
must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the
case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose
only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the
hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to
him is conclusively presumed. And where the instrument is no longer in the possession of a party whose
signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.
Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or
there are omissions therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the
two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference
may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of interest, without specifying the date from which interest
is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue
thereof;
(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;
(d) Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;
(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it
as either at his election;
(f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making
the same intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are
deemed to be jointly and severally liable thereon.
Sec. 18. Liability of person signing in trade or assumed name. - No person is liable on the instrument whose
signature does not appear thereon, except as herein otherwise expressly provided. But one who signs in a trade
or assumed name will be liable to the same extent as if he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. - The signature of any party may be made by a duly
authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the
agent may be established as in other cases of agency.
Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a person adds to
his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is
not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing his principal, does not exempt him from
personal liability.
Sec. 21. Signature by procuration; effect of. - A signature by "procuration" operates as notice that the agent has
but a limited authority to sign, and the principal is bound only in case the agent in so signing acted within the
actual limits of his authority.
Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon.
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a
discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under
such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the
forgery or want of authority.
II. CONSIDERATION
Sec. 24. Presumption of consideration. - Every negotiable instrument is deemed prima facie to have been issued
for a valuable consideration; and every person whose signature appears thereon to have become a party
thereto for value.
Sec. 25. Value, what constitutes. Value is any consideration sufficient to support a simple contract. An
antecedent or pre-existing debt constitutes value; and is deemed such whether the instrument is payable on
demand or at a future time.
Sec. 26. What constitutes holder for value. - Where value has at any time been given for the instrument, the
holder is deemed a holder for value in respect to all parties who become such prior to that time.
Sec. 27. When lien on instrument constitutes holder for value. Where the holder has a lien on the
instrument arising either from contract or by implication of law, he is deemed a holder for value to the extent
of his lien.
Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as against
any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the
failure is an ascertained and liquidated amount or otherwise.
Sec. 29. Liability of accommodation party. - An accommodation party is one who has signed the instrument as
maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name
to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such
holder, at the time of taking the instrument, knew him to be only an accommodation party.
III. NEGOTIATION
Sec. 30. What constitutes negotiation. - An instrument is negotiated when it is transferred from one person to
another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated
by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.
Sec. 31. Indorsement; how made. - The indorsement must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.
Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or
which purports to transfer the instrument to two or more indorsees severally, does not operate as a
negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the
residue.
Sec. 33. Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be either
restrictive or qualified or conditional.
Sec. 34. Special indorsement; indorsement in blank. - A special indorsement specifies the person to whom, or to
whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further
negotiation of the instrument. An indorsement in blank specifies no indorsee, and an instrument so indorsed is
payable to bearer, and may be negotiated by delivery.
Sec. 35. Blank indorsement; how changed to special indorsement. - The holder may convert a blank
indorsement into a special indorsement by writing over the signature of the indorser in blank any contract
consistent with the character of the indorsement.
Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the instrument; or
(b) Constitutes the indorsee the agent of the indorser; or
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the
indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the indorser could bring;
(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive indorsement.
Sec. 38. Qualified indorsement. - A qualified indorsement constitutes the indorser a mere assignor of the title to
the instrument. It may be made by adding to the indorser's signature the words "without recourse" or any
words of similar import. Such an indorsement does not impair the negotiable character of the instrument.
Sec. 39. Conditional indorsement. - Where an indorsement is conditional, the party required to pay the
instrument may disregard the condition and make payment to the indorsee or his transferee whether the
condition has been fulfilled or not. But any person to whom an instrument so indorsed is negotiated will hold
the same, or the proceeds thereof, subject to the rights of the person indorsing conditionally.
Sec. 40. Indorsement of instrument payable to bearer. - Where an instrument, payable to bearer, is indorsed
specially, it may nevertheless be further negotiated by delivery; but the person indorsing specially is liable as
indorser to only such holders as make title through his indorsement.
Sec. 41. Indorsement where payable to two or more persons. - Where an instrument is payable to the order of
two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority
to indorse for the others.
Sec. 42. Effect of instrument drawn or indorsed to a person as
cashier. - Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, and
may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer.
Sec. 43. Indorsement where name is misspelled, and so forth. - Where the name of a payee or indorsee is
wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit,
his proper signature.
Sec. 44. Indorsement in representative capacity. - Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to negative personal liability. robles virtual law
library
Sec. 45. Time of indorsement; presumption. - Except where an indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima facie to have been effected before the instrument was
overdue.
Sec. 46. Place of indorsement; presumption. - Except where the contrary appears, every indorsement is
presumed prima facie to have been made at the place where the instrument is dated.
Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable
until it has been restrictively indorsed or discharged by payment or otherwise.
Sec. 48. Striking out indorsement. - The holder may at any time strike out any indorsement which is not
necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
Sec. 49. Transfer without indorsement; effect of. - Where the holder of an instrument payable to his order
transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had
therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the
purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the
time when the indorsement is actually made.
Sec. 50. When prior party may negotiate instrument. - Where an instrument is negotiated back to a prior party,
such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not
entitled to enforce payment thereof against any intervening party to whom he was personally liable.
IV. RIGHTS OF THE HOLDER
Sec. 51. Right of holder to sue; payment. - The holder of a negotiable instrument may to sue thereon in his own
name; and payment to him in due course discharges the instrument.
Sec. 52. What constitutes a holder in due course. - A holder in due course is a holder who has taken the
instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in
the title of the person negotiating it.
Sec. 53. When person not deemed holder in due course. - Where an instrument payable on demand is
negotiated on an unreasonable length of time after its issue, the holder is not deemed a holder in due course.
Sec. 54. Notice before full amount is paid. - Where the transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating the same before he has paid the full amount agreed
to be paid therefor, he will be deemed a holder in due course only to the extent of the amount therefore paid
by him.
Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective within the
meaning of this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or force and
fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or
under such circumstances as amount to a fraud.
Sec. 56. What constitutes notice of defect. - To constitutes notice of an infirmity in the instrument or defect in
the title of the person negotiating the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument
amounted to bad faith.
Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from any defect of
title of prior parties, and free from defenses available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof against all parties liable thereon. robles virtual law
library
Sec. 58. When subject to original defense. - In the hands of any holder other than a holder in due course, a
negotiable instrument is subject to the same defenses as if it were non-negotiable. But a holder who derives his
title through a holder in due course, and who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all parties prior to the latter.
Sec. 59. Who is deemed holder in due course. - Every holder is deemed prima facie to be a holder in due course;
but when it is shown that the title of any person who has negotiated the instrument was defective, the burden
is on the holder to prove that he or some person under whom he claims acquired the title as holder in due
course. But the last-mentioned rule does not apply in favor of a party who became bound on the instrument
prior to the acquisition of such defective title.
V. LIABILITIES OF PARTIES
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it, engages that he will pay it
according to its tenor, and admits the existence of the payee and his then capacity to indorse.
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the existence of the payee and his
then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or
both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to
pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability
to the holder.
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages that he will pay it according
to the tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to indorse.
Sec. 63. When a person deemed indorser. - A person placing his signature upon an instrument otherwise than
as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his
intention to be bound in some other capacity.
Sec. 64. Liability of irregular indorser. - Where a person, not otherwise a party to an instrument, places thereon
his signature in blank before delivery, he is liable as indorser, in accordance with the following rules:
(a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent
parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee.
Sec. 65. Warranty where negotiation by delivery and so forth. Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless.
But when the negotiation is by delivery only, the warranty extends in favor of no holder other than the
immediate transferee.
The provisions of subdivision (c) of this section do not apply to a person negotiating public or corporation
securities other than bills and notes.
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification, warrants to all
subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as the case may
be, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly
taken, he will pay the amount thereof to the holder, or to any subsequent indorser who may be compelled to
pay it.
Sec. 67. Liability of indorser where paper negotiable by delivery. Where a person places his indorsement on
an instrument negotiable by delivery, he incurs all the liability of an indorser.
Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima facie in the
order in which they indorse; but evidence is admissible to show that, as between or among themselves, they
have agreed otherwise. Joint payees or joint indorsees who indorse are deemed to indorse jointly and
severally. robles virtual law library
Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an instrument without
indorsement, he incurs all the liabilities prescribed by Section Sixty-five of this Act, unless he discloses the name
of his principal and the fact that he is acting only as agent.
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 9. Obligations of the entrustee. The entrustee shall (1) hold the goods, documents or instruments in
trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the
trust receipt; (2) receive the proceeds in trust for 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.
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 17. This Decree shall take effect immediately.
LETTERS OF CREDIT- Negotiable Instruments
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 the buyer upon reimbursement. As it is the one issuing the
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 defec
ts 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 CREDITSECONDARY 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 3. Independence of the guarantee from the principal-guarantor relationship
guarantors payment liability is the presentation of a demand and other documents specified in the the guarantee is separate from the contract between the principal and the guarantor is not entitled to invoke a breach
of that contract
guarantee in the manner of and within the period of the guarantee
4. Documentary character of guaranteeamount and duration of the duty to pay, the conditions of payment and termination
> THE GUARANTOR HAS NO CONCERN WITH THE UNDERLYING CONTRACT AND IF DEMAND IS DULY of payment obligation depend solely on the terms of the guarantee itself and presentation of required documents
PRESENTED, PAYMENT MUST BE MADE DESPITE ALLEGATIONS BY THE PRINCIPAL HAS FULLY 5. Requirement of compliance of the demand with the terms of the guarantee
PERFORMED THE CONTRACTIN THE ABSENCE OF ESTABLISHED 6. Guarantors duty of examination limited to apparent good order of the document
FRAUD OR OTHER EVENT CONSTITUTING GROUND FOR NON-PAYMENT 7. Guarantors duty limited the exercise of good faith and reasonable care
STANDBY LETTERS OF CREDIT 8. Independence of counter-guarantee from guarantee
> Undertaking primary in form but intended to be used only as a fallback in the event of default by the principal 9. Independence of counter-guarantee from mandate received from instructing party
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 mandate
the 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