MERCANTILE LAW SYLLABUS

NOTES

1. LETTERS OF CREDIT AND TRUST RECEIPTS:

Letters of Credit:
- An engagement by a bank or other person made at a request of a
customer that the issuer will honor drafts or other demands for
payment upon compliance with the conditions specified in the
credit.
Trust Receipt:
- It is a security transaction intended to aid in financing importers or
dealers in a merchandise by allowing them to obtain a delivery
under a certain condition.
b. Basic Concepts
i. Doctrine of Independence
- It is a rule that banks only deal with documents and not with the
goods, services or obligations to which they relate.
ii. Fraud Exception
- GR: the applicant cannot enjoin the payment of the obligation of the
issuing bank under the letters of credit based on any irregularity or
non-performance of an obligation.
- Exception: under fraud exception rule, when there is fraud or
forgery un the underlying transaction or the tender document, the
applicant can enjoin the payment of the obligation of the issuing
bank under the letters of credit.
iii. Doctrine of Strict Compliance
- The issuing bank or confirming bank, as the case may be, must
examine the Tender Documents and must make sure that the terms
and conditions of the Letters of Credit are strictly complied with.
- There is no discretion on the part of the bank to waive any
requirement.
- The Tender Documents must not only be complete but they must on
their faces be in compliance with the terms of the credit.
iv. Warehouse Lien
- A warehouseman shall have a lien on the goods deposited or on the
proceeds thereof in his hands for:
a. All lawful charges for storage and preservation of the goods,
also for
b. All lawful claims for money advanced, interest, insurance,
transportation, labor, weighing...
c. All reasonable charges and expenses for notice, and
advertisements of sale, and for sale of the goods where
default had been in satisfying the warehouseman’s lien.
c. RIGHTS AND OBLIGATIONS OF PARTIES
i. ENTRUSTER/ENTRUSTEE
- ENTRUSTER:
a. Releases the possession of the goods to the entrustee upon
the latter’s execution of the trust receipt.t
- ENTRUSTEE
a. Binds himself to hold the goods in trust for the entrustor
 b. Sell or otherwise dispose of the goods and to turn over to
the entrustor the amount still owing; and
c. To return the goods if unsold.
ii. APPLICANT/BANK/BENEFICIARY
- Advising/Notifying Bank
a. Which may be utilized to convey to the seller the existence
of the credit
- Confirming Bank
a. Which will lend credence to the letters of credit issued by a
lesser known issuing bank.
b. The confirming bank is directly liable to pay the seller-
beneficiary.
- Paying Bank
a. Which undertakes to encash the drafts drawn by the
exporter/seller
- Issuing Bank
a. Undertakes to pay the seller upon receipt of the draft and
proper documents of titles and to surrender the documents
to the buyer upon reimbursement.
d. REMEDIES AVAILABLE
i. Remedies of the Entruster
- IF THE GOODS ARE SOLD /DISPOSED BY THE ENTRUSTEE AND THE
LATTER DID NOT REMIT THE PROCEEDS
a. File estafa case against the entrustee
b. File a separate case to collect the proceeds or the money
obligation secured by the trust receipt.
- IF THE GOODS ARE UNSOLD AND ARE STILL WITH THE ENTRUSTEE;
a. Cancel the trust and take possession of the goods,
documents, or instruments subject of the trust.
b. After taking possession, sell the goods and apply the
proceeds of the sale to the expenses of sale and retaking of
the goods and indebtedness
c. As an alternative to retaking possession and sale, the
entruster can file a case to collect the indebtedness secured
by the trust receipt.t