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 arrangements 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 on 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 the 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 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. Court of Appeals, G.R. No. 94209, April 30, 1991)
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.

TRUST RECEIPTS

LOAN/SECURITY FEATURE

RIGHTS OF THE ENTRUSTER

OBLIGATION AND LIABILITY OF THE ENTRUSTEE

 REMEDIES AVAILABLE

WAREHOUSEMAN’S LIEN

Q: S stored hardware materials in the bonded warehouse of W, a licensed warehouseman under the General Bonded Warehouse
Law (Act 3893 as
amended). W issued the corresponding warehouse receipt in the form he ordinarily uses for such purpose in the course of his
business. All the essential terms required under Section 2 of the Warehouse Receipts Law (Act 2137 as amended) are embodied
in the form. In addition, the receipt issued to S contains a stipulation that W would not be responsible for the loss
of all or any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence
of W or his representatives or employees. S endorsed and negotiated the warehouse receipt to B, who demanded delivery of
the goods. W could not deliver because the goods were nowhere to be found in his warehouse. He claims he is not liable because
of the free-from-liability clause stipulated in the receipt. Do you agree with W’s contention? Explain. (2000 Bar)

A: No. I do not agree with the contention of W. the stipulation that W would not be responsible for the loss of all or
any portion of the hardware materials covered by the receipt even if such loss is caused by the negligence of W or his
representative or employees is void. The law requires that a warehouseman should exercise due diligence in the care
and custody of the things deposited in his warehouse.

Q: A Warehouse Company received for safekeeping 1000 bags of rice from a merchant. To evidence the transaction, the
Warehouse Company issued a receipt expressly providing that the goods be delivered to the order of said merchant.

A month after, a creditor obtained judgment against the said merchant for a sum of money. The sheriff proceeded to levy
on the rice and directed the Warehouse Company to deliver to him the deposited rice.

a. What advice will you give the Warehouse Company? Explain your answer.
b. Assuming that a week prior to the levy, the receipt was sold to a rice mill on the basis of which it filed a claim with the
sheriff. Would the rice mill have better rights to the rice than the creditor? Explain your answer. (1999 Bar)

A:

a. The 1000 bags of rice were delivered to the Warehouse Company by a merchant, and a negotiable receipt was
issued therefore. The rice cannot thereafter, while in possession of the Warehouse Company, be attached by
garnishment or otherwise, or be levied upon under an execution unless the receipt be first surrendered to the
warehouseman, or its negotiation enjoined. The Warehouse Company cannot be compelled to deliver the actual
possession of the rice until the receipt is surrendered to it or impounded by the court.
b. Yes. The rice mill, as a holder for value of the receipt, has a better right to the rice than the creditor. It is rice mill
that can surrender the receipt which is in its possession and can comply with the other requirements which will
oblige the warehouseman to deliver the rice, namely, to sign a receipt for the delivery of the rice, and to pay the
warehouseman’s lien and fees and other charges.

Q: Luzon Warehouse Corporation received from Pedro 200 cavans of rice for deposit in its warehouse for which a negotiable
warehouse receipt was issued. While the goods were stored in the said warehouse, Cicero obtained a judgment against
Pedro for the

6
recovery of a sum of money. The sheriff proceeded to levy upon the goods on a writ of execution and directed the warehouseman
to deliver the goods. Is the warehouseman under obligation to comply with the sheriff’s order? (1998 Bar)

A: No. There was a valid negotiable receipt as there was a valid delivery of 200 cavans of rice for deposit. In such case,
the warehouseman (LWC) is not obliged to deliver the 200 cavans of rice deposited to any person, except to one who
can comply with Section 8 of the Warehouse Receipts law, namely: (1) surrender the receipt of which he is a holder;

(2) willing to sign a receipt for the delivery of the goods; and
(3) pays the warehouseman’s liens, that is, his fees and advances, if any.

The sheriff cannot comply with these requisites, especially the first, as he is not the holder of the receipt.

Q: A purchased from S 150 cavans of palay on credit. A deposited the palay in W’s warehouse. W issued to A a negotiable warehouse
receipt in the name of A. thereafter, A negotiated the receipt to B who purchased the said receipt for value and in good faith.

1. Who has a better right to the deposit, S, the unpaid vendor, or B, the purchaser of the receipt for value and in good faith?
Why?
2. When can the warehouseman be obliged to deliver the palay to A? (1993 Bar)

A:

1. B has a better right than S. The right of the unpaid seller, S, to the goods was defeated by the act of A in endorsing the
receipt to B.
2. The warehouseman can be obliged to deliver the palay to A if B negotiates back the receipt to A. In that case, A
becomes a holder again of the receipt, and A can comply with Sec. 8 of the Warehouse Receipts Law.

Q: To guarantee the payment of a loan obtained from a bank, Raoul pledged 500 bales of tobacco deposited in a warehouse to said
bank and endorsed in blank the warehouse receipt. Before Raoul could pay for the loan, the tobacco disappeared from the
warehouse.

Who should bear the loss—the pledgor or the bank? Why? (1992 Bar)

A: The pledgor should bear the loss. In the pledge of a warehouse receipt the ownership of the goods remain with
depositor or his transferee. Any contract of real security, among them a pledge, does not amount to or result in an
assumption of risk of loss by the creditor. The Warehouse Receipts Law did not deviate from this rule.

Q: When is a warehouseman bound to deliver the goods upon a demand made either by the holder of a receipt for the goods or by
the depositor? (1991 Bar)

A: The warehouseman is bound to deliver the goods upon demand made either by the holder of the receipt for the
goods or by the depositor if the demand is accompanied by

(a) an offer to satisfy the warehouseman’s lien, (b) an offer to surrender the receipt, if negotiable, with such
indorsements as would be necessary for the negotiation thereof, and (c) readiness and willingness to sign when the
goods are delivered if so requested by the warehouseman.
Q: Mr. Bakal deposited with a warehouseman 2 crates
of goods for which he received two warehouse receipts (one for each crate) – one being a negotiable warehouse receipt and the
other a non-negotiable warehouse receipt. Title to both warehouse receipts were transferred on December 1, 1985
to Mr. Tigas. The warehouseman was not notified of the transfer of the receipts. Meanwhile, Mr. Tapang, a judgment creditor
of Mr. Bakal, served a notice of levy over the goods on the warehouseman.

a. Between Mr. Tigas and Mr. Bakal, who would have preference over the goods covered by the negotiable warehouse
receipt? Reasons.
b. Who would have preference over the goods covered by the non-negotiable receipt? Reasons. (1988 Bar)
2. The promissory note is not negotiable since the same is payable to Reliable Motors merely and not “to order or to
bearer” or words of similar import.

Q: Discuss the negotiability or non-negotiability of the following notes:

1. Manila, September 1, 1993 P2, 500.00

I promise to pay Pedro San Juan or order the sum of P2, 500.00

(Sgd.) NOEL CASTRO

2. Manila, June 3, 1993

A:

a. Mr. Tigas would have preference over the goods covered by the negotiable
warehouse receipt (assuming that there was proper negotiation to him). In
negotiation, the transferee’s rights over the goods vests from the very
moment of transfer and the transferee thereupon acquires the direct
obligation of the warehouseman to hold the goods for him.
b. Mr. Tapang, in this case, would have preference over the goods since the
transferee of a non-negotiable warehouse receipt merely acquires (1)
rights no better than those of the transferor and (2) the direct obligation
of the warehouseman only upon notice to him of the transfer.

NEGOTIABLE INSTRUMENTS LAW