Sales: Documents of Title

CHAPTER 7

DOCUMENTS OF TITLE


I. DEFINITION AND FUNCTION

Warehouse Receipts Act and Bonded Warehouse Act

Rationale for Documents of Title


II. TYPES OF DOCUMENTS OF TITLE

Negotiable Document of Title

Non-negotiable Document of Title

Effects of Errors on Document of Title

Effects of Use of "Non-Negotiable" Terms on Negotiable Documents of Title


III. NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE

Who Can Negotiate

How Negotiation Properly Effected

By Delivery Alone

By Endorsement and Delivery

Effects of Proper Negotiation

Effects of Merely Transferring/Delivering of Order Negotiable Documents of Title

Effects and Consequences of Unauthorized Negotiation


IV. ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE

How Assignment Made

Effects of Assignment


V. WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF TITLE


VI. EFFECTS WHEN OWNER OF THE DOCUMENT OF TITLE HAS NO LEGAL TITLE TO THE GOODS

When Goods Covered by Non-negotiable Document

When Goods Covered by Negotiable Document


VII. RULES ON LEVY/GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF TITLE

When Covered by Non-negotiable Document of Title

When Covered by Negotiable Document of Title




I. DEFINITION AND FUNCTION

  • A document of title of goods refers to any instrument used in the ordinary course of business to prove possession or control of goods or to authorize the transfer or receipt of goods. Examples include:

    • Bill of lading

    • Dock warrant

    • Quedan

    • Warehouse receipt

    • Order for the delivery of goods

  • Functions of Documents of Title

  1. Evidence of Possession or Control – Serves as proof that the holder has possession or control over the goods described.

  2. Medium of Transfer – Facilitates the transfer of ownership and possession of goods without requiring actual delivery.

  • Jurisprudential Basis

    • Siy Cong Bieng v. Hongkong & Shanghai Bank (1932): A warehouse receipt is more than proof of possession; it signifies ownership of goods entrusted to the possessor.

    • Philippine Trust Co. v. National Bank (1921): Endorsement and delivery of a negotiable quedan before insolvency effectively transfers ownership and removes the goods from the insolvent’s estate.

  • Constructive Delivery through Documents of Title

    • The law allows sellers to use documents of title to represent physical delivery of goods to buyers.

    • This is a legal fiction that allows constructive delivery of goods without actual transfer.

  • Conditions for Valid Transfer

  1. Valid underlying sale – The document must be based on a legitimate transaction.

  2. Ownership by the seller – The seller must have rightful ownership over the goods.

  3. Negotiability considerations – If the document is negotiable, its transfer can still be valid even if the underlying sale is defective.

  • Relevant Statues

    • Civil Code Provisions (Articles 1507-1520)

  • These provisions govern documents of title as part of the Title on Sales in the New Civil Code.

  • They have suppletory effect on laws governing warehouse receipts.

  • Warehouse Receipts Act & Bonded Warehouse Act

    • These statutes primarily regulate warehouse receipts.

    • The Civil Code provisions supplement rather than replace these laws/

  • Rationale Behind Documents of Title

  • Historical Evolution: Documents of title originated from commercial customs that allowed merchants to trade goods without physically transporting them.

  • State Recognition: The law provides a legal framework for these documents to facilitate commerce efficiently and securely.

  • Assurance to Buyers: The law ensures that buyers can trust and transact using documents of title as legitimate evidence of ownership.


II. TYPES OF DOCUMENTS OF TITLE

1. Negotiable Document of Title

  • States that goods are deliverable "to bearer" or "to order" of a specified person.

  • Can be freely transferred to another party, who then obtains rights over the goods.

2. Non-Negotiable Document of Title

  • Does not include words indicating transferability (e.g., “to order” or “to bearer”).

  • Transfer of such a document does not automatically transfer ownership of the goods.

Effects of Errors on Document of Title

  • Clerical Errors in Negotiability

    • Minor errors (e.g., “by the order” instead of “to the order”) do not affect negotiability.

    • Incorrect designation of goods (e.g., “Cagayan tobacco” instead of “Isabela tobacco”) does not invalidate the document.

Effects of Use of "Non-Negotiable" Terms on Negotiable Documents of Title

  • If a document includes terms like “non-negotiable” but otherwise meets the criteria for negotiability, it remains negotiable.

  • The holder may still negotiate the document despite contradictory wording.


III. NEGOTIATION OF NEGOTIABLE DOCUMENTS OF TITLE

Who Can Negotiate 

  • A negotiable document of title may be negotiated by:

  1. The owner thereof – The person to whom the document was originally issued.

  2. A person entrusted with possession – If:

    • The bailee undertakes to deliver the goods to the order of the person entrusted.

    • The document is in a form that allows negotiation by delivery at the time of entrusting.


How Negotiation is Properly Effected

A. By Delivery Alone

  • A negotiable document of title may be negotiated by delivery alone (without endorsement) when:

    1. The document states that the goods are deliverable “to bearer.”

    2. The document was originally issued “to order” of a specific person, but that person (or a subsequent endorsee) has endorsed it in blank or to bearer.

  • In these cases, any holder may endorse the document to himself or to a specified person, after which it may only be negotiated by endorsement.

B. By Endorsement and Delivery

  • A negotiable document of title may be negotiated only by endorsement of the person to whose order the goods are deliverable, coupled with delivery. The endorsement may be:

    1. In blank (making it payable to bearer),

    2. To bearer, or

    3. To a specified person (who may further negotiate it similarly).


Effects of Proper Negotiation

  • A person to whom a negotiable document of title has been duly negotiated acquires:

    1. Title to the goods – 

      • The same title as the person who negotiated the document had or could have conveyed to a bona fide purchaser for value.

    2. Title as per the order of delivery – 

      • The title of the person to whose order the goods were deliverable under the document.

    3. Direct obligation from the bailee – 

      • The bailee is bound to hold possession of the goods for the holder according to the document’s terms.

  • Legal Significance: 

  • The law protects the reliance of the negotiating public on the document’s validity. 

  • Dealing with a negotiable document of title equates to dealing with the goods themselves.


Effects of Merely Transferring/Delivering an "Order" Negotiable Document of Title

  • When a negotiable document of title deliverable to order is not properly negotiated:

    1. Transfer of ownership of the document – 

      • Under Article 1511 of the Civil Code, a document not negotiable by delivery may still be transferred by mere delivery.

    2. Title to the goods is limited – 

      • Per Article 1514, the transferee owns the goods only against the transferor, not against third parties, including the bailee.

    3. Right to compel endorsement – 

      • Under Article 1515, if endorsement is required for negotiation, the transferee can compel the transferor to endorse, unless there is an agreement to the contrary.

Effects and Consequences of Unauthorized Negotiation

  • Although Article 1512 states that only the owner or assignee may negotiate a negotiable document of title, Article 1518 provides exceptions when the negotiation is valid despite irregularities. These include:

    1. Breach of duty by the negotiator.

    2. Loss, fraud, theft, conversion, accident, mistake, or duress, provided the recipient is a holder in due course (i.e., one who pays value in good faith without notice of any defect).

  • Even if a negotiable document of title is lost or stolen, a holder in due course acquires valid title.

  • Article 559 of the Civil Code, which allows owners to recover lost movable property, does not apply to negotiable documents of title due to Article 1518.

  • Liberal Protection:

    • Unlike negotiable instruments, negotiable documents of title offer nearly absolute protection to holders who acquire them in good faith and for value.

    • The law prioritizes commercial efficiency by minimizing the need for buyers to verify the legitimacy of the transferor’s title.

  • Real Defense – Forgery:

    • The only valid real defense against a holder in due course is forgery of the owner's endorsement when such endorsement is necessary for negotiation.

    • Other claims, including fraud or unauthorized transfer, are generally ineffective against a holder in good faith and for value.

  • Encouraging Commercial Transactions

    • Protection of good-faith buyers facilitates faster transactions.

    • Eliminates the need for buyers to conduct extensive due diligence on the seller’s authority to transfer.

    • Encourages reliance on negotiable documents of title as reliable instruments for trade.

  • Siy Long Bieng v. Hongkong and Shanghai Banking Corp:

    • If an owner endorses a negotiable document of title in blank and entrusts it to another, a bona fide purchaser for value who receives it has a better right than the original owner.

    • Principle applied: “Between two innocent persons, the one who made the loss possible should bear the loss.”

  • Effects When the Owner of the Document of Title Has No Title to the Goods

    • The legal rules governing the document of title itself differ from those governing the actual goods covered by the document.

    • Unauthorized negotiation of a document does not necessarily equate to rightful ownership of the goods.

    • Specific rules apply in cases where the owner of the document lacks rightful title to the goods themselves.

  • Negotiable documents of title can be negotiated by delivery alone or by endorsement and delivery.

  • Proper negotiation grants the holder the same rights over the goods as the transferor.

  • Improper transfer does not give the transferee full rights against third parties.

  • Unauthorized negotiation can still be valid if made to a holder in due course.

  • Good faith purchasers are highly protected under the law to ensure smooth commercial transactions.


IV. ASSIGNMENT OF NON-NEGOTIABLE DOCUMENTS OF TITLE

How Assignment is Made

  • A non-negotiable document of title cannot be negotiated.

  • Endorsement does not confer additional rights to the transferee.

  • Transfer is done by delivery to a purchaser or donee.

  • Since it represents an incorporeal right, its sale constitutes an assignment:

    • Perfected by consent under Article 1624 of the Civil Code.

    • Must appear in a public instrument under Article 1625 to bind third parties.

Effects of Transfer by Assignment

  • Upon assignment of a non-negotiable document of title, the assignee acquires:

    1. Title to the goods, subject to the terms agreed upon with the transferor. 

    2. Right to notify the bailee of the transfer and obtain the bailee's obligation to hold the goods for the assignee.

  • Unlike in negotiable documents of title, an assignee does not have a legal relationship with the bailee until notice of the assignment is given.

  • The assignee merely steps into the shoes of the assignor.


V. WARRANTIES ON NEGOTIATION AND ASSIGNMENT OF DOCUMENTS OF TITLE

Warranties of a Transferor/Negotiator

  • A person who negotiates or assigns a document of title for value warrants that: 

    1. The document is genuine. 

    2. He has the legal right to negotiate or transfer it. 

    3. He has no knowledge of any defect that would impair its validity.

    4. He has the right to transfer title to the goods. 

    5. The goods are merchantable or fit for a specific purpose, as implied in a contract of sale.

Special Provisions on Warranties

  • The warranties of one who negotiates a negotiable document of title and one who assigns a non-negotiable document of title are the same.

  • Unlike under the Negotiable Instruments Law, endorsement does not make the endorser liable for the bailee’s failure to perform.

  • Under Article 1628, the seller/assignor warrants the existence and legality of the document of title unless:

    • The document was sold as doubtful.

    • The assignor expressly warrants the bailee’s solvency.


VI. EFFECTS WHEN OWNER OF DOCUMENT OF TITLE HAS NO LEGAL TITLE TO THE GOODS


When Goods are Covered by a Non-Negotiable Document

  • If the assignor had valid title, the assignee acquires ownership upon notification to the bailee.

  • If the assignor had no valid title, the situation is governed by Article 559:

    • If the original owner was not unlawfully deprived of the goods, the assignee-buyer in good faith acquires ownership.

    • If the original owner was unlawfully deprived, the assignee-buyer receives no title due to the principle Nemo dat quod non habet (one cannot give what one does not have).

When Goods are Covered by a Negotiable Document

  • The bailee is deemed an agent holding the goods for the benefit of the document holder.

  • Article 559 applies:

    • If the owner was not unlawfully deprived, the holder in due course acquires ownership.

    • If the owner was unlawfully deprived, the owner can recover the goods from the buyer in good faith, as the latter’s title derives from a void source.

  • Supporting provisions:

    • Article 1513: The buyer acquires only the title the transferor had.

    • Article 1505: A buyer from a non-owner gains no better title than the seller had.

    • Article 1506: A buyer in good faith and for value gets a good title only if the seller had at least a voidable title.


VII. RULES ON LEVY AND GARNISHMENT OF GOODS COVERED BY DOCUMENTS OF TITLE

When Goods are Covered by a Non-Negotiable Document

  • Article 1625: Assignment of a non-negotiable document binds third parties only when in a public instrument.

  • Article 1514: The assignee must notify the bailee for the transfer to take effect.

  • Before notification:

    • The original owner can still defeat the assignment by levying execution or selling the goods.

    • The transferor retains a possessory lien by notifying the bailee before the assignee does.

    • The assignee does not acquire possession or ownership of the goods merely by receiving the document; notification to the bailee is required.

When Goods are Covered by a Negotiable Document

  • If goods are delivered to a bailee by the owner and a negotiable document of title is issued, the goods cannot be attached or levied upon unless the document is first surrendered.

  • The bailee is not required to release the goods until the negotiable document is either:

    • Surrendered.

    • Enjoined by the court.

  • Implications:

    • Ownership and possession of the negotiable document equates to ownership and possession of the goods.

    • A creditor cannot seize the goods without first dealing with the document.


  • Non-negotiable documents require notification to the bailee for the transfer to take effect.

  • Negotiable documents grant immediate rights to the holder upon proper negotiation.

  • Ownership derived from a transferor with void title is also void (Nemo dat quod non habet).

  • Levy or attachment of goods covered by a negotiable document is restricted unless the document is surrendered.

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