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REPUBLIC ACT No.

1405

AN ACT PROHIBITING DISCLOSURE OF OR INQUIRY INTO, DEPOSITS WITH ANY


BANKING INSTITUTION AND PROVIDING PENALTY THEREFOR.

Section 1. It is hereby declared to be the policy of the Government to give encouragement to


the people to deposit their money in banking institutions and to discourage private hoarding
so that the same may be properly utilized by banks in authorized loans to assist in the
economic development of the country.

Section 2. 1 All deposits of whatever nature with banks or banking institutions in the
Philippines including investments in bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked into by any person,
government official, bureau or office, except upon written permission of the depositor, or in
cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of
duty of public officials, or in cases where the money deposited or invested is the subject
matter of the litigation.

Section 3. It shall be unlawful for any official or employee of a banking institution to disclose
to any person other than those mentioned in Section two hereof any information concerning
said deposits.

Section 4. All Acts or parts of Acts, Special Charters, Executive Orders, Rules and
Regulations which are inconsistent with the provisions of this Act are hereby repealed.

Section 5. Any violation of this law will subject offender upon conviction, to an imprisonment
of not more than five years or a fine of not more than twenty thousand pesos or both, in the
discretion of the court.

Section 6. This Act shall take effect upon its approval.

Approved: September 9, 1955

Footnote
1
This Section and Section 3 were both amended by PD No. 1792 issued January 16,
1981, PD 1792 was expressly repealed by Sec 135 of R.A. No. 7653, approved June
14, 1993. The original sections 2 and 3 of R.A. No.1405 are hereby reproduced for
reference, as follows; "Sec 2 All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in bonds issued by the Government
of the Philippines, its political subdivisions and its instrumentalities, are hereby
considered as of an absolutely confidential nature and may not be examined, inquired
or looked into by any person, government official, bureau or office, except upon written
per-mission of the depositor, or in cases of impeachment, or upon order of a competent
court in cases of bribery or dereliction of duty of public officials. or in cases where the
money deposited or invested is the subject matter of the litigation," "Sec. 3. It shall be
unlawful for any official or employee of a banking institution to disclose to any person
other than those mentioned in Section two hereof any information concerning said
deposits."

PRESIDENTIAL DECREE No. 115 January 29, 1973

PROVIDING FOR THE REGULATION OF TRUST RECEIPTS TRANSACTIONS

WHEREAS, the utilization of trust receipts, as a convenient business device to assist


importers and merchants solve their financing problems, had gained popular acceptance in
international and domestic business practices, particularly in commercial banking
transactions;

WHEREAS, there is no specific law in the Philippines that governs trust receipt transactions,
especially the rights and obligations of the parties involved therein and the enforcement of the
said rights in case of default or violation of the terms of the trust receipt agreement;

WHEREAS, the recommendations contained in the report on the financial system which have
been accepted, with certain modifications by the monetary authorities included, among
others, the enactment of a law regulating the trust receipt transactions;

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of


the powers vested in me by the Constitution, as Commander-in-Chief of all the Armed Forces
of the Philippines, and pursuant to Proclamation No. 1081, dated September 21, 1972, and
General Order No. 1, dated September 22, 1972, as amended, and in order to effect the
desired changes and reforms in the social, economic, and political structure of our society, do
hereby order and decree and make as part of the law of the land the following:

Section 1. Short Title. This Decree shall be known as the Trust Receipts Law.

Section 2. Declaration of Policy. It is hereby declared to be the policy of the state (a) to
encourage and promote the use of trust receipts as an additional and convenient aid to
commerce and trade; (b) to provide for the regulation of trust receipts transactions in order to
assure the protection of the rights and enforcement of obligations of the parties involved
therein; and (c) to declare the misuse and/or misappropriation of goods or proceeds realized
from the sale of goods, documents or instruments released under trust receipts as a criminal
offense punishable under Article Three hundred and fifteen of the Revised Penal Code.

Section 3. Definition of terms. As used in this Decree, unless the context otherwise requires,
the term

(a) "Document" shall mean written or printed evidence of title to goods.

(b) "Entrustee" shall refer to the person having or taking possession of goods,
documents or instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose or purposes specified in the trust receipt
agreement.

(c) "Entruster" shall refer to the person holding title over the goods, documents, or
instruments subject of a trust receipt transaction, and any successor in interest of such
person.

(d) "Goods" shall include chattels and personal property other than: money, things in
action, or things so affixed to land as to become a part thereof.

(e) "Instrument" means any negotiable instrument as defined in the Negotiable


Instrument Law; any certificate of stock, or bond or debenture for the payment of
money issued by a public or private corporation, or any certificate of deposit,
participation certificate or receipt, any credit or investment instrument of a sort
marketed in the ordinary course of business or finance, whereby the entrustee, after the
issuance of the trust receipt, appears by virtue of possession and the face of the
instrument to be the owner. "Instrument" shall not include a document as defined in this
Decree.

(f) "Purchase" means taking by sale, conditional sale, lease, mortgage, or pledge, legal
or equitable.

(g) "Purchaser" means any person taking by purchase.

(h) "Security Interest" means a property interest in goods, documents or instruments to


secure performance of some obligations of the entrustee or of some third persons to
the entruster and includes title, whether or not expressed to be absolute, whenever
such title is in substance taken or retained for security only.

(i) "Person" means, as the case may be, an individual, trustee, receiver, or other
fiduciary, partnership, corporation, business trust or other association, and two more
persons having a joint or common interest.

(j) "Trust Receipt" shall refer to the written or printed document signed by the entrustee
in favor of the entruster containing terms and conditions substantially complying with
the provisions of this Decree. No further formality of execution or authentication shall be
necessary to the validity of a trust receipt.

(k) "Value" means any consideration sufficient to support a simple contract.

Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree
as the entruster, and another person referred to in this Decree as entrustee, whereby the
entruster, who owns or holds absolute title or security interests over certain specified goods,
documents or instruments, releases the same to the possession of the entrustee upon the
latter's execution and delivery to the entruster of a signed document called a "trust receipt"
wherein the entrustee binds himself to hold the designated goods, documents or instruments
in trust for the entruster and to sell or otherwise dispose of the goods, documents or
instruments with the obligation to turn over to the entruster the proceeds thereof to the extent
of the amount owing to the entruster or as appears in the trust receipt or the goods,
documents or instruments themselves if they are unsold or not otherwise disposed of, in
accordance with the terms and conditions specified in the trust receipt, or for other purposes
substantially equivalent to any of the following:

1. In the case of goods or documents, (a) to sell the goods or procure their sale; or (b)
to manufacture or process the goods with the purpose of ultimate sale: Provided, That,
in the case of goods delivered under trust receipt for the purpose of manufacturing or
processing before its ultimate sale, the entruster shall retain its title over the goods
whether in its original or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or tranship or otherwise
deal with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments,

a) to sell or procure their sale or exchange; or

b) to deliver them to a principal; or

c) to effect the consummation of some transactions involving delivery to a


depository or register; or

d) to effect their presentation, collection or renewal

The sale of goods, documents or instruments by a person in the business of selling


goods, documents or instruments for profit who, at the outset of the transaction, has, as
against the buyer, general property rights in such goods, documents or instruments, or
who sells the same to the buyer on credit, retaining title or other interest as security for
the payment of the purchase price, does not constitute a trust receipt transaction and is
outside the purview and coverage of this Decree.

Section 5. Form of trust receipts; contents. A trust receipt need not be in any particular form,
but every such receipt must substantially contain (a) a description of the goods, documents or
instruments subject of the trust receipt; (2) the total invoice value of the goods and the
amount of the draft to be paid by the entrustee; (3) an undertaking or a commitment of the
entrustee (a) to hold in trust for the entruster the goods, documents or instruments therein
described; (b) to dispose of them in the manner provided for in the trust receipt; and (c) to turn
over the proceeds of the sale of the goods, documents or instruments to the entruster to the
extent of the amount owing to the entruster or as appears in the trust receipt or to return the
goods, documents or instruments in the event of their non-sale within the period specified
therein.

The trust receipt may contain other terms and conditions agreed upon by the parties in
addition to those hereinabove enumerated provided that such terms and conditions shall not
be contrary to the provisions of this Decree, any existing laws, public policy or morals, public
order or good customs.
Section 6. Currency in which a trust receipt may be denominated. A trust receipt may be
denominated in the Philippine currency or any foreign currency acceptable and eligible as part
of international reserves of the Philippines, the provisions of existing law, executive orders,
rules and regulations to the contrary notwithstanding: Provided, however, That in the case of
trust receipts denominated in foreign currency, payment shall be made in its equivalent in
Philippine currency computed at the prevailing exchange rate on the date the proceeds of
sale of the goods, documents or instruments held in trust by the entrustee are turned over to
the entruster or on such other date as may be stipulated in the trust receipt or other
agreements executed between the entruster and the entrustee.

Section 7. Rights of the entruster. The entruster shall be entitled to the proceeds from the
sale of the goods, documents or instruments released under a trust receipt to the entrustee to
the extent of the amount owing to the entruster or as appears in the trust receipt, or to the
return of the goods, documents or instruments in case of non-sale, and to the enforcement of
all other rights conferred on him in the trust receipt provided such are not contrary to the
provisions of this Decree.

The entruster may cancel the trust and take possession of the goods, documents or
instruments subject of the trust or of the proceeds realized therefrom at any time upon default
or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or
any other agreement between the entruster and the entrustee, and the entruster in
possession of the goods, documents or instruments may, on or after default, give notice to the
entrustee of the intention to sell, and may, not less than five days after serving or sending of
such notice, sell the goods, documents or instruments at public or private sale, and the
entruster may, at a public sale, become a purchaser. The proceeds of any such sale, whether
public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the
payment of the expenses of re-taking, keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster. The
entrustee shall receive any surplus but shall be liable to the entruster for any deficiency.
Notice of sale shall be deemed sufficiently given if in writing, and either personally served on
the entrustee or sent by post-paid ordinary mail to the entrustee's last known business
address.

Section 8. Entruster not responsible on sale by entrustee. The entruster holding a security
interest shall not, merely by virtue of such interest or having given the entrustee liberty of sale
or other disposition of the goods, documents or instruments under the terms of the trust
receipt transaction be responsible as principal or as vendor under any sale or contract to sell
made by the entrustee.

Section 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.

Done in the City of Manila, this 29th day of January, in the year of Our Lord, nineteen hundred
and seventy-three.
LETTER OF CREDIT; DEFINITION AND NATURE OF LETTER OF CREDIT

By definition, a letter of credit is a written instrument whereby the writer requests or authorizes the
addressee to pay money or deliver goods to a third person and assumes responsibility for payment of
debt therefor to the addressee. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R.
No. 146717, November 22, 2004, [Tinga])

In Metropolitan Waterworks and Sewerage System vs. Daway , we have also defined a letter of credit
as an engagement by a bank or other person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with the conditions specified in the credit.

The letter of credit evolved as a mercantile specialty, and the only way to understand all its facets is to
recognize that it is an entity unto itself. The relationship between the beneficiary and the issuer of a
letter of credit is not strictly contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right. Nor is it a third-party beneficiary contract,
because the issuer must honor drafts drawn against a letter regardless of problems subsequently arising
in the underlying contract. Since the banks customer cannot draw on the letter, it does not function as
an assignment by the customer to the beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default. Finally, it is not in itself a
negotiable instrument, because it is not payable to order or bearer and is generally conditional, yet the
draft presented under it is often negotiable. (supra)

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount
upon the presentation of documents and is thus a commitment by the issuer that the party in whose
favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly
paid in the amount specified in the letter. They are in effect absolute undertakings to pay the money
advanced or the amount for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security arrangements, they are not
converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory
contracts, is the engagement of the issuing bank to pay the seller once the draft and other required
shipping documents are presented to it. They are definite undertakings to pay at sight once the
documents stipulated therein are presented. (Metropolitan Waterworks and Sewerage System vs.
Daway, G.R. No. 160732, June 21, 2004 [Azcuna])

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LETTERS OF CREDIT; PARTIES TO A LETTER OF CREDIT; RIGHTS AND OBLIGATIONS
OF PARTIES

Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the
benefit of the issuing bank but mainly for the benefit of the parties to the original transactions. With the
letter of credit from the issuing bank, the party who applied for and obtained it may confidently present
the letter of credit to the beneficiary as a security to convince the beneficiary to enter into the business
transaction. On the other hand, the other party to the business transaction, i.e., the beneficiary of the letter
of credit, can be rest assured of being empowered to call on the letter of credit as a security in case the
commercial transaction does not push through, or the applicant fails to perform his part of the transaction.
It is for this reason that the party who is entitled to the proceeds of the letter of credit is appropriately
called beneficiary. (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717,
November 22, 2004, [Tinga])
In commercial transactions involving letters of credit, the functions assumed by a correspondent
bank are classified according to the obligations taken up by it. The correspondent bank may be called a
notifying bank, a negotiating bank, or a confirming bank. (Feati Bank & Trust Company vs. CA, G.R.
No. 94209, April 30, 1991, [Gutierrez, Jr.])
In case of a notifying bank, the correspondent bank assumes no liability except to notify and/or
transmit to the beneficiary the existence of the letter of credit. (Kronman and Co., Inc. v. Public National
Bank of New York, 218 N.Y.S. 616 [1926]; Shaterian, Export-Import Banking, p. 292, cited in Agbayani,
Commercial Laws of the Philippines, Vol. 1, p. 76). A negotiating bank, on the other hand, is a
correspondent bank which buys or discounts a draft under the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before negotiation, it has no liability with respect to the seller but
after negotiation, a contractual relationship will then prevail between the negotiating bank and the seller.
(Scanlon v. First National Bank of Mexico, 162 N.E. 567 [1928]; Shaterian, Export-Import Banking, p.
293, cited in Agbayani, Commercial Laws of the Philippines, Vol. 1, p. 76)
In the case of a confirming bank, the correspondent bank assumes a direct obligation to the seller
and its liability is a primary one as if the correspondent bank itself had issued the letter of credit.
(Shaterian, Export-Import Banking, p. 294, cited in Agbayani Commercial Laws of the Philippines, Vol.
1, p. 77)
A notifying bank is not a privy to the contract of sale between the buyer and the seller, its relationship
is only with that of the issuing bank and not with the beneficiary to whom he assumes no liability. It
follows therefore that when the petitioner refused to negotiate with the private respondent, the latter has
no cause of action against the petitioner for the enforcement of his rights under the letter. (See Kronman
and Co., Inc. v. Public National Bank of New York, supra)
As earlier stated, there must have been an absolute assurance on the part of the petitioner that it will
undertake the issuing banks obligation as its own. Verily, the loan agreement it entered into cannot be
categorized as an emphatic assurance that it will carry out the issuing banks obligation as its own. (supra)
The case of Scanlon v. First National Bank (supra) perspicuously explained the relationship
between the seller and the negotiating bank, viz:
It may buy or refuse to buy as it chooses. Equally, it must be true that it owes no contractual duty
toward the person for whose benefit the letter is written to discount or purchase any draft drawn against
the credit. No relationship of agent and principal, or of trustee and cestui, between the receiving bank
and the beneficiary of the letter is established. (P.568)
Whether therefore the petitioner is a notifying bank or a negotiating bank, it cannot be held liable.
Absent any definitive proof that it has confirmed the letter of credit or has actually negotiated with the
private respondent, the refusal by the petitioner to accept the tender of the private respondent is justified.
(supra)
The relationship between the issuing bank and the notifying bank, on the contrary, is more similar
to that of an agency and not that of a guarantee. It may be observed that the notifying bank is merely to
follow the instructions of the issuing bank which is to notify or to transmit the letter of credit to the
beneficiary. (See Kronman v. Public National Bank of New York, supra). Its commitment is only to
notify the beneficiary. It does not undertake any assurance that the issuing bank will perform what has
been mandated to or expected of it. As an agent of the issuing bank, it has only to follow the instructions
of the issuing bank and to it alone is it obligated and not to buyer with whom it has no contractual
relationship.
In fact the notifying bank, even if the seller tenders all the documents required under the letter of
credit, may refuse to negotiate or accept the drafts drawn thereunder and it will still not be held liable for
its only engagement is to notify and/or transmit to the seller the letter of credit.

Finally, even if we assume that the petitioner is a confirming bank, the petitioner cannot be forced
to pay the amount under the letter. As we have previously explained, there was a failure on the part of
the private respondent to comply with the terms of the letter of credit. (Feati Bank & Trust Company
vs. CA, G.R. No. 94209, April 30, 1991, [Gutierrez, Jr.])

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LETTERS OF CREDIT; DEFINITION AND NATURE OF LETTERS OF CREDIT

In commercial transactions, 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 a 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.[1]The use of credits in commercial transactions serves to reduce the risk of
nonpayment of the purchase price under the contract for the sale of goods. However,
credits are also used in non-sale settings where they serve to reduce the risk of
nonperformance. Generally, credits in the non-sale settings have come to be known
as standby credits.[2] (Transfield Philippines, Inc. vs. Luzon Hydro Corporation, et al.,
G.R. No. 146717, November 22, 2004, [Tinga])

Definition and Nature of Letter of Credit

By definition, a letter of credit is a written instrument whereby the writer requests


or authorizes the addressee to pay money or deliver goods to a third person and
assumes responsibility for payment of debt therefor to the addressee.[3] (Transfield
Philippines, Inc. vs. Luzon Hydro Corporation, et al., G.R. No. 146717, November 22,
2004, [Tinga])

In Metropolitan Waterworks and Sewerage System vs. Daway[4], we have also


defined a letter of credit as an engagement by a bank or other person made at the
request of a customer that the issuer shall honor drafts or other demands of payment
upon compliance with the conditions specified in the credit.[5]
The letter of credit evolved as a mercantile specialty, and the only way to
understand all its facets is to recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of credit is not strictly contractual,
because both privity and a meeting of the minds are lacking, yet strict compliance with
its terms is an enforceable right. Nor is it a third-party beneficiary contract, because
the issuer must honor drafts drawn against a letter regardless of problems
subsequently arising in the underlying contract. Since the banks customer cannot
draw on the letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or guarantee, because
it entails a primary liability following a default. Finally, it is not in itself a negotiable
instrument, because it is not payable to order or bearer and is generally conditional,
yet the draft presented under it is often negotiable.[6] (supra)

Letters of credit were developed for the purpose of insuring to a seller payment
of a definite amount upon the presentation of documents[7]and is thus a commitment
by the issuer that the party in whose favor it is issued and who can collect upon it will
have his credit against the applicant of the letter, duly paid in the amount specified in
the letter.[8]They are in effectabsolute undertakings to pay the money advanced or the
amount for which credit is given on the faith of the instrument. They are primary
obligations and not accessory contracts and while they are security arrangements, they
are not converted thereby into contracts of guaranty.[9]What distinguishes letters of
credit from other accessory contracts, is the engagement of the issuing bank to pay
the seller once the draft and other required shipping documents are presented to
it.[10]They are definite undertakings to pay at sight once the documents stipulated
therein are presented. (Metropolitan Waterworks and Sewerage System vs. Daway, G.R.
No. 160732, June 21, 2004 [Azcuna])