2017 Mercantile Law, Q2

A. Morgan, a lawyer, received a lot of diving and other water sports equipment as payment of his professional fees by Dennis, his client in a child custody case. Dennis owned a diving and water sports dealership in Anilao, Batangas. Morgan decided to name Dennis as entrustee because he did not have any experience in selling such specialized sports equipment. They executed a trust receipt agreement, with Morgan as entruster and Dennis as entrustee.
Before the sports equipment could be sold, a strong typhoon hit Batangas. Anilao and other parts of Batangas experienced power outage. Taking advantage of the total darkness, unidentified thieves destroyed the padlocks of the establishment of Dennis, and carted off the equipment inside.
Morgan demanded that Dennis pay the value of the stolen equipment, but the latter refused on the ground that he also had suffered from the effects of the typhoon, and insisted that the cause of the loss was a fortuitous event or force majeure.
Is the justification of Dennis warranted? Explain your answer. (4%)
B. Safe Warehouse, Inc. (Safe) issued on various dates negotiable warehouse receipts to Peter, Paul and Mary covering certain goods deposited by the latter with the former. Peter, Paul and Mary then negotiated and endorsed the warehouse receipts to Cyrus, Magnus and Charles upon payment by the latter of valuable consideration for the warehouse receipts. Cyrus, Magnus and Charles were not aware of, nor were they parties to any irregularity or infirmity affecting the title or the face of the warehouse receipts.
On due dates of the warehouse receipts, Cyrus, Magnus and Charles demanded that Safe surrender the goods to them. Safe refused because its warehouseman’s claim must first be paid. Cyrus, Magnus and Charles refused to pay, and insisted that such claim was the liability of Peter, Paul and Mary.
(a) What is a warehouseman’s claim? (3%)
(b) Is Safe’s refusal to surrender the goods to Cyrus, Magnus and Charles legally justified? Explain your answer. (3%)

Quick check

Under Section 10 of Presidential Decree Number 115, who bears the risk of loss of goods subject to a trust receipt agreement?

Does theft or a fortuitous event extinguish an entrustee's liability to pay the entruster under the Trust Receipts Law?

What constitutes a warehouseman's claim or lien under Section 27 of the Warehouse Receipts Law?

May a warehouseman refuse to deliver goods to an innocent endorsee of a negotiable warehouse receipt if storage charges remain unpaid?

Which statutes primary govern trust receipt transactions and warehouse receipts in the Philippines?

Learn more about these topics

1. Trust Receipts Risk
Under Section 10 of Presidential Decree Number 115 (Trust Receipts Law), the risk of loss of goods, documents, or instruments subject to a trust receipt agreement shall be borne entirely by the entrustee. The loss of goods, whether or not through a fortuitous event or force majeure, does not extinguish the entrustee's obligation to pay the entruster the value of the goods or to turn over the proceeds of the sale. Consequently, the entrustee cannot cite theft, power outages, or typhoons to evade financial liability.

2. Warehouseman's Lien
Under Section 27 of Act Number 2137 (Warehouse Receipts Law), a warehouseman's lien or claim represents a possessory lien on deposited goods for all lawful charges for storage, preservation, labor, and expenses incurred. The warehouseman may enforce this statutory lien against all goods belonging to the depositor, or against goods held for another person who is liable as debtor. This possessory lien secures the warehouseman's right to compensation for services rendered in safeguarding the stored property.

3. Refusal of Delivery
Under Section 31 of Act Number 2137, a warehouseman who has a valid lien against goods has the statutory right to refuse delivery of the goods to the holder of a negotiable warehouse receipt until his lien is fully satisfied. Even if the holders are innocent endorsees for value, the warehouseman's possessory lien attaches directly to the goods themselves. Therefore, negotiable receipt holders cannot demand surrender of the stored items without first settling the unpaid warehouseman charges.

About these questions and answers
The questions reproduced here are the official texts of the Philippine Bar Examinations, published by the Supreme Court. They are reproduced for study purposes.The suggested answers are the author’s own.

They are not official answers, have no connection with the Supreme Court, the Office of the Bar Confidant, or any bar review institution, and are not endorsed by any of them. Official answer keys, where released, should be preferred over anything here.Nothing on this page is legal advice, and reading it creates no lawyer-client relationship. Do not rely on any suggested answer in an actual legal matter. Consult counsel on your own facts.Suggested answers reflect the law and jurisprudence the author considers applicable as of the date shown.

Where a question comes from an earlier examination, the suggested answer applies the law as it now stands, which may differ from the law in force when the question was given, and may therefore differ from what would have been the correct answer at that time. Where the difference is material, the answer notes it.The practice scoring feature measures wording overlap with the suggested answer. It is not a grade, carries no official weight, and says nothing about whether your reasoning is sound.Errors are possible. If you find one, please tell me and I will correct it.Last reviewed: October 2026