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G.R. No.

100098 December 29, 1995


EMERALD GARMENT MANUFACTURING
CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS, BUREAU OF PATENTS,
TRADEMARKS AND TECHNOLOGY TRANSFER and H.D. LEE
COMPANY, INC., respondents.

KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the
Revised Rules of Court, Emerald Garment Manufacturing
Corporation seeks to annul the decision of the Court of Appeals
dated 29 November 1990 in CA-G.R. SP No. 15266 declaring
petitioner's trademark to be confusingly similar to that of private
respondent and the resolution dated 17 May 1991 denying
petitioner's motion for reconsideration.
The record reveals the following antecedent facts:
On 18 September 1981, private respondent H.D. Lee Co., Inc., a
foreign corporation organized under the laws of Delaware, U.S.A.,
filed with the Bureau of Patents, Trademarks & Technology
Transfer (BPTTT) a Petition for Cancellation of Registration No. SR
5054 (Supplemental Register) for the trademark "STYLISTIC MR.
LEE" used on skirts, jeans, blouses, socks, briefs, jackets, jogging

suits, dresses, shorts, shirts and lingerie under Class 25, issued on
27 October 1980 in the name of petitioner Emerald Garment
Manufacturing Corporation, a domestic corporation organized and
existing under Philippine laws. The petition was docketed as Inter
Partes Case No. 1558. 1
Private respondent, invoking Sec. 37 of R.A. No. 166 (Trademark
Law) and Art. VIII of the Paris Convention for the Protection of
Industrial Property, averred that petitioner's trademark "so closely
resembled its own trademark, 'LEE' as previously registered and
used in the Philippines, and not abandoned, as to be likely, when
applied to or used in connection with petitioner's goods, to cause
confusion, mistake and deception on the part of the purchasing
public as to the origin of the goods." 2
In its answer dated 23 March 1982, petitioner contended that its
trademark was entirely and unmistakably different from that of
private respondent and that its certificate of registration was
legally and validly granted. 3
On 20 February 1984, petitioner caused the publication of its
application for registration of the trademark "STYLISTIC MR. LEE"
in the Principal Register." 4
On 27 July 1984, private respondent filed a notice of opposition to
petitioner's application for registration also on grounds that
petitioner's trademark was confusingly similar to its "LEE"

trademark. 5 The case was docketed as Inter Partes Case No.


1860.
On 21 June 1985, the Director of Patents, on motion filed by
private respondent dated 15 May 1985, issued an order
consolidating Inter Partes Cases Nos. 1558 and 1860 on grounds
that a common question of law was involved. 6
On 19 July 1988, the Director of Patents rendered a decision
granting private respondent's petition for cancellation and
opposition to registration.
The Director of Patents found private respondent to be the prior
registrant of the trademark "LEE" in the Philippines and that it had
been using said mark in the Philippines. 7
Moreover, the Director of Patents, using the test of dominancy,
declared that petitioner's trademark was confusingly similar to
private respondent's mark because "it is the word 'Lee' which
draws the attention of the buyer and leads him to conclude that
the goods originated from the same manufacturer. It is undeniably
the dominant feature of the mark." 8
On 3 August 1988, petitioner appealed to the Court of Appeals
and on 8 August 1988, it filed with the BPTTT a Motion to Stay
Execution of the 19 July 1988 decision of the Director of Patents
on grounds that the same would cause it great and irreparable

damage and injury. Private respondent submitted its opposition on


22 August 1988.9
On 23 September 1988, the BPTTT issued Resolution No. 88-33
granting petitioner's motion to stay execution subject to the
following terms and conditions:
1. That under this resolution, Respondent-Registrant is
authorized only to dispose of its current stock using the
mark "STYLISTIC MR. LEE";
2. That Respondent-Registrant is strictly prohibited from
further production, regardless of mode and source, of
the mark in question (STYLISTIC MR. LEE) in addition to
its current stock;
3. That this relief Order shall automatically cease upon
resolution of the Appeal by the Court of Appeals and, if
the Respondent's appeal loses, all goods bearing the
mark "STYLISTIC MR. LEE" shall be removed from the
market, otherwise such goods shall be seized in
accordance with the law.
SO ORDERED. 10
On 29 November 1990, the Court of Appeals promulgated its
decision affirming the decision of the Director of Patents dated 19
July 1988 in all respects. 11

In said decision the Court of Appeals expounded, thus:


xxx xxx xxx
Whether or not a trademark causes confusion and is
likely to deceive the public is a question of fact which is
to be resolved by applying the "test of dominancy",
meaning, if the competing trademark contains the main
or essential or dominant features of another by reason
of which confusion and deception are likely to result,
then infringement takes place; that duplication or
imitation is not necessary, a similarity in the dominant
features of the trademark would be sufficient.
The word "LEE" is the most prominent and distinctive
feature of the appellant's trademark and all of the
appellee's "LEE" trademarks. It is the mark which draws
the attention of the buyer and leads him to conclude
that the goods originated from the same manufacturer.
While it is true that there are other words such as
"STYLISTIC", printed in the appellant's label, such word
is printed in such small letters over the word "LEE" that
it is not conspicuous enough to draw the attention of
ordinary buyers whereas the word "LEE" is printed
across the label in big, bold letters and of the same
color, style, type and size of lettering as that of the
trademark of the appellee. The alleged difference is too
insubstantial to be noticeable. Even

granting arguendo that the word "STYLISTIC" is


conspicuous enough to draw attention, the goods may
easily be mistaken for just another variation or line of
garments under the ap appelle's "LEE" trademarks in
view of the fact that the appellee has registered
trademarks which use other words in addition to the
principal mark "LEE" such as "LEE RIDERS", "LEESURES"
and "LEE LEENS". The likelihood of confusion is further
made more probable by the fact that both parties are
engaged in the same line of business. It is well to
reiterate that the determinative factor in ascertaining
whether or not the marks are confusingly similar to
each other is not whether the challenged mark would
actually cause confusion or deception of the purchasers
but whether the use of such mark would likely cause
confusion or mistake on the part of the buying public.
xxx xxx xxx
The appellee has sufficiently established its right to
prior use and registration of the trademark "LEE" in the
Philippines and is thus entitled to protection from any
infringement upon the same. It is thus axiomatic that
one who has identified a peculiar symbol or mark with
his goods thereby acquires a property right in such
symbol or mark, and if another infringes the trademark,
he thereby invokes this property right.

The merchandise or goods being sold by the parties are


not that expensive as alleged to be by the appellant
and are quite ordinary commodities purchased by the
average person and at times, by the ignorant and the
unlettered. Ordinary purchasers will not as a rule
examine the small letterings printed on the label but
will simply be guided by the presence of the striking
mark "LEE". Whatever difference there may be will pale
in insignificance in the face of an evident similarity in
the dominant features and overall appearance of the
labels of the parties. 12
xxx xxx xxx
On 19 December 1990, petitioner filed a motion for
reconsideration of the above-mentioned decision of the Court of
Appeals.
Private respondent opposed said motion on 8 January 1991 on
grounds that it involved an impermissible change of theory on
appeal. Petitioner allegedly raised entirely new and unrelated
arguments and defenses not previously raised in the proceedings
below such as laches and a claim that private respondent
appropriated the style and appearance of petitioner's trademark
when it registered its "LEE" mark under Registration No. 44220. 13
On 17 May 1991, the Court of Appeals issued a resolution
rejecting petitioner's motion for reconsideration and ruled thus:

xxx xxx xxx


A defense not raised in the trial court cannot be raised
on appeal for the first time. An issue raised for the first
time on appeal and not raised timely in the proceedings
in the lower court is barred by estoppel.
The object of requiring the parties to present all
questions and issues to the lower court before they can
be presented to this Court is to have the lower court
rule upon them, so that this Court on appeal may
determine whether or not such ruling was erroneous.
The purpose is also in furtherance of justice to require
the party to first present the question he contends for
in the lower court so that the other party may not be
taken by surprise and may present evidence to properly
meet the issues raised.
Moreover, for a question to be raised on appeal, the
same must also be within the issues raised by the
parties in their pleadings. Consequently, when a party
deliberately adopts a certain theory, and the case is
tried and decided based upon such theory presented in
the court below, he will not be permitted to change his
theory on appeal. To permit him to do so would be
unfair to the adverse party. A question raised for the
first time on appeal, there having opportunity to raise

them in the court of origin constitutes a change of


theory which is not permissible on appeal.
In the instant case, appellant's main defense pleaded in
its answer dated March 23, 1982 was that there was
"no confusing similarity between the competing
trademark involved. On appeal, the appellant raised a
single issue, to wit:
The only issue involved in this case is
whether or not respondent-registrant's
trademark "STYLISTIC MR. LEE" is confusingly
similar with the petitioner's trademarks "LEE
or LEERIDERS, LEE-LEENS and LEE-SURES."
Appellant's main argument in this motion for
reconsideration on the other hand is that the appellee is
estopped by laches from asserting its right to its
trademark. Appellant claims although belatedly that
appellee went to court with "unclean hands" by
changing the appearance of its trademark to make it
identical to the appellant's trademark.
Neither defenses were raised by the appellant in the
proceedings before the Bureau of Patents. Appellant
cannot raise them now for the first time on appeal, let
alone on a mere motion for reconsideration of the
decision of this Court dismissing the appellant's appeal.

While there may be instances and situations justifying


relaxation of this rule, the circumstance of the instant
case, equity would be better served by applying the
settled rule it appearing that appellant has not given
any reason at all as to why the defenses raised in its
motion for reconsideration was not invoked earlier. 14
xxx xxx xxx
Twice rebuffed, petitioner presents its case before this Court on
the following assignment of errors:
I. THE COURT OF APPEALS ERRED IN NOT FINDING THAT
PRIVATE RESPONDENT CAUSED THE ISSUANCE OF A
FOURTH "LEE" TRADEMARK IMITATING THAT OF THE
PETITIONER'S ON MAY 5, 1989 OR MORE THAN EIGHT
MONTHS AFTER THE BUREAU OF PATENT'S DECISION
DATED JULY 19, 1988.
II. THE COURT OF APPEALS ERRED IN RULING THAT THE
DEFENSE OF ESTOPPEL BY LACHES MUST BE RAISED IN
THE PROCEEDINGS BEFORE THE BUREAU OF PATENTS,
TRADEMARKS AND TECHNOLOGY TRANSFER.
III. THE COURT OF APPEALS ERRED WHEN IT
CONSIDERED PRIVATE RESPONDENT'S PRIOR
REGISTRATION OF ITS TRADEMARK AND DISREGARDED
THE FACT THAT PRIVATE RESPONDENT HAD FAILED TO

PROVE COMMERCIAL
USE THEREOF BEFORE FILING OF APPLICATION FOR
REGISTRATION. 15
In addition, petitioner reiterates the issues it raised in the Court of
Appeals:
I. THE ISSUE INVOLVED IN THIS CASE IS WHETHER OR
NOT PETITIONER'S TRADEMARK SYTLISTIC MR. LEE, IS
CONFUSINGLY SIMILAR WITH THE PRIVATE
RESPONDENT'S TRADEMARK LEE OR LEE-RIDER, LEELEENS AND LEE-SURES.
II. PETITIONER'S EVIDENCES ARE CLEAR AND
SUFFICIENT TO SHOW THAT IT IS THE PRIOR USER AND
ITS TRADEMARK IS DIFFERENT FROM THAT OF THE
PRIVATE RESPONDENT.
III. PETITIONER'S TRADEMARK IS ENTIRELY DIFFERENT
FROM THE PRIVATE RESPONDENT'S AND THE
REGISTRATION OF ITS TRADEMARK IS PRIMA
FACIE EVIDENCE OF GOOD FAITH.
IV. PETITIONER'S "STYLISTIC MR. LEE" TRADEMARK
CANNOT BE CONFUSED WITH PRIVATE RESPONDENT'S
LEE TRADEMARK. 16
Petitioner contends that private respondent is estopped from
instituting an action for infringement before the BPTTT under the

equitable principle of laches pursuant to Sec. 9-A of R.A. No. 166,


otherwise known as the Law on Trade-marks, Trade-names and
Unfair Competition:
Sec. 9-A. Equitable principles to govern proceedings.
In opposition proceedings and in all other inter partes
proceedings in the patent office under this act,
equitable principles of laches, estoppel, and
acquiescence, where applicable, may be considered
and applied.
Petitioner alleges that it has been using its trademark "STYLISTIC
MR. LEE" since 1 May 1975, yet, it was only on 18 September
1981 that private respondent filed a petition for cancellation of
petitioner's certificate of registration for the said trademark.
Similarly, private respondent's notice of opposition to petitioner's
application for registration in the principal register was belatedly
filed on 27 July 1984. 17
Private respondent counters by maintaining that petitioner was
barred from raising new issues on appeal, the only contention in
the proceedings below being the presence or absence of
confusing similarity between the two trademarks in question. 18
We reject petitioner's contention.
Petitioner's trademark is registered in the supplemental register.
The Trademark Law (R.A. No. 166) provides that "marks and

tradenames for the supplemental register shall not be published


for or be subject to opposition, but shall be published on
registration in the Official Gazette." 19 The reckoning point,
therefore, should not be 1 May 1975, the date of alleged use by
petitioner of its assailed trademark but 27 October 1980, 20 the
date the certificate of registration SR No. 5054 was published in
the Official Gazette and issued to petitioner.
It was only on the date of publication and issuance of the
registration certificate that private respondent may be considered
"officially" put on notice that petitioner has appropriated or is
using said mark, which, after all, is the function and purpose of
registration in the supplemental register. 21 The record is bereft of
evidence that private respondent was aware of petitioner's
trademark before the date of said publication and issuance.
Hence, when private respondent instituted cancellation
proceedings on 18 September 1981, less than a year had passed.
Corollarily, private respondent could hardly be accused of
inexcusable delay in filing its notice of opposition to petitioner's
application for registration in the principal register since said
application was published only on 20 February 1984. 22 From the
time of publication to the time of filing the opposition on 27 July
1984 barely five (5) months had elapsed. To be barred from
bringing suit on grounds of estoppel and laches, the delay must
be
lengthy. 23

More crucial is the issue of confusing similarity between the two


trademarks. Petitioner vehemently contends that its trademark
"STYLISTIC MR. LEE" is entirely different from and not confusingly
similar to private respondent's "LEE" trademark.
Private respondent maintains otherwise. It asserts that
petitioner's trademark tends to mislead and confuse the public
and thus constitutes an infringement of its own mark, since the
dominant feature therein is the word "LEE."
The pertinent provision of R.A. No. 166 (Trademark Law) states
thus:
Sec. 22. Infringement, what constitutes. Any person
who shall use, without the consent of the registrant,
any reproduction, counterfeit, copy or colorable
imitation of any registered mark or trade-name in
connection with the sale, offering for sale, or
advertising of any goods, business or services on or in
connection with which such use is likely to cause
confusion or mistake or to deceive purchasers or others
as to the source or origin of such goods or services, or
identity of such business; or reproduce, counterfeit,
copy or colorably imitable any such mark or trade-name
and apply such reproduction, counterfeit, copy, or
colorable imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be
used upon or in connection with such goods, business

or services; shall be liable to a civil action by the


registrant for any or all of the remedies herein provided.
Practical application, however, of the aforesaid provision is easier
said than done. In the history of trademark cases in the
Philippines, particularly in ascertaining whether one trademark is
confusingly similar to or is a colorable imitation of another, no set
rules can be deduced. Each case must be decided on its own
merits.
In Esso Standard Eastern, Inc. v. Court of Appeals, 24 we held:
. . . But likelihood of confusion is a relative concept; to
be determined only according to the particular, and
sometimes peculiar, circumstances of each case. It is
unquestionably true that, as stated inCoburn vs. Puritan
Mills, Inc.: "In trademark cases, even more than in other
litigation, precedent must be studied in the light of the
facts of the particular case."
xxx xxx xxx
Likewise, it has been observed that:
In determining whether a particular name or mark is a
"colorable imitation" of another, no all-embracing rule
seems possible in view of the great number of factors
which must necessarily be considered in resolving this
question of fact, such as the class of product or

business to which the article belongs; the product's


quality, quantity, or size, including its wrapper or
container; the dominant color, style, size, form,
meaning of letters, words, designs and emblems used;
the nature of the package, wrapper or container; the
character of the product's purchasers; location of the
business; the likelihood of deception or the mark or
name's tendency to confuse;
etc. 25
Proceeding to the task at hand, the essential element of
infringement is colorable imitation. This term has been defined as
"such a close or ingenious imitation as to be calculated to deceive
ordinary purchasers, or such resemblance of the infringing mark
to the original as to deceive an ordinary purchaser giving such
attention as a purchaser usually gives, and to cause him to
purchase the one supposing it to be the other." 26
Colorable imitation does not mean such similitude as
amounts to identity. Nor does it require that all the
details be literally copied. Colorable imitation refers to
such similarity in form, content, words, sound, meaning,
special arrangement, or general appearance of the
trademark or tradename with that of the other mark or
tradename in their over-all presentation or in their
essential, substantive and distinctive parts as would

likely mislead or confuse persons in the ordinary course


of purchasing the genuine article. 27
In determining whether colorable imitation exists, jurisprudence
has developed two kinds of tests the Dominancy Test applied
in Asia Brewery, Inc. v. Court of Appeals

28

and other cases

29

and

the Holistic Test developed in Del Monte Corporation v. Court of


Appeals 30 and its proponent cases. 31
As its title implies, the test of dominancy focuses on the similarity
of the prevalent features of the competing trademarks which
might cause confusion or deception and thus constitutes
infringement.
xxx xxx xxx
. . . If the competing trademark contains the main or
essential or dominant features of another, and
confusion and deception is likely to result, infringement
takes place. Duplication or imitation is not necessary;
nor it is necessary that the infringing label should
suggest an effort to imitate. [C. Neilman Brewing Co. v.
Independent Brewing Co., 191 F., 489, 495, citing Eagle
White Lead Co., vs. Pflugh (CC) 180 Fed. 579]. The
question at issue in cases of infringement of
trademarks is whether the use of the marks involved
would be likely to cause confusion or mistakes in the
mind of the public or deceive purchasers. (Auburn

Rubber Corporation vs. Honover Rubber Co., 107 F. 2d


588; . . .) 32
xxx xxx xxx
On the other side of the spectrum, the holistic test mandates that
the entirety of the marks in question must be considered in
determining confusing similarity.
xxx xxx xxx
In determining whether the trademarks are confusingly
similar, a comparison of the words is not the only
determinant factor. The trademarks in their entirety as
they appear in their respective labels or hang tags must
also be considered in relation to the goods to which
they are attached. The discerning eye of the observer
must focus not only on the predominant words but also
on the other features appearing in both labels in order
that he may draw his conclusion whether one is
confusingly similar to the other. 33
xxx xxx xxx
Applying the foregoing tenets to the present controversy and
taking into account the factual circumstances of this case, we
considered the trademarks involved as a whole and rule that
petitioner's "STYLISTIC MR. LEE" is not confusingly similar to
private respondent's "LEE" trademark.

Petitioner's trademark is the whole "STYLISTIC MR. LEE." Although


on its label the word "LEE" is prominent, the trademark should be
considered as a whole and not piecemeal. The dissimilarities
between the two marks become conspicuous, noticeable and
substantial enough to matter especially in the light of the
following variables that must be factored in.
First, the products involved in the case at bar are, in the main,
various kinds of jeans. These are not your ordinary household
items like catsup, soysauce or soap which are of minimal cost.
Maong pants or jeans are not inexpensive. Accordingly, the casual
buyer is predisposed to be more cautious and discriminating in
and would prefer to mull over his purchase. Confusion and
deception, then, is less likely. In Del Monte Corporation v. Court of
Appeals,

34

we noted that:

. . . Among these, what essentially determines the


attitudes of the purchaser, specifically his inclination to
be cautious, is the cost of the goods. To be sure, a
person who buys a box of candies will not exercise as
much care as one who buys an expensive watch. As a
general rule, an ordinary buyer does not exercise as
much prudence in buying an article for which he pays a
few centavos as he does in purchasing a more valuable
thing. Expensive and valuable items are normally
bought only after deliberate, comparative and
analytical investigation. But mass products, low priced

articles in wide use, and matters of everyday purchase


requiring frequent replacement are bought by the
casual consumer without great
care. . . .
Second, like his beer, the average Filipino consumer generally
buys his jeans by brand. He does not ask the sales clerk for
generic jeans but for, say, a Levis, Guess, Wrangler or even an
Armani. He is, therefore, more or less knowledgeable and familiar
with his preference and will not easily be distracted.
Finally, in line with the foregoing discussions, more credit should
be given to the "ordinary purchaser." Cast in this particular
controversy, the ordinary purchaser is not the "completely unwary
consumer" but is the "ordinarily intelligent buyer" considering the
type of product involved.
The definition laid down in Dy Buncio v. Tan Tiao Bok

35

is better

suited to the present case. There, the "ordinary purchaser" was


defined as one "accustomed to buy, and therefore to some extent
familiar with, the goods in question. The test of fraudulent
simulation is to be found in the likelihood of the deception of
some persons in some measure acquainted with an established
design and desirous of purchasing the commodity with which that
design has been associated. The test is not found in the
deception, or the possibility of deception, of the person who
knows nothing about the design which has been counterfeited,
and who must be indifferent between that and the other. The

simulation, in order to be objectionable, must be such as appears


likely to mislead the ordinary intelligent buyer who has a need to
supply and is familiar with the article that he seeks to purchase."
There is no cause for the Court of Appeal's apprehension that
petitioner's products might be mistaken as "another variation or
line of garments under private respondent's 'LEE'
trademark". 36 As one would readily observe, private respondent's
variation follows a standard format "LEERIDERS," "LEESURES" and
"LEELEENS." It is, therefore, improbable that the public would
immediately and naturally conclude that petitioner's "STYLISTIC
MR. LEE" is but another variation under private respondent's
"LEE" mark.
As we have previously intimated the issue of confusing similarity
between trademarks is resolved by considering the distinct
characteristics of each case. In the present controversy, taking
into account these unique factors, we conclude that the
similarities in the trademarks in question are not sufficient as to
likely cause deception and confusion tantamount to infringement.
Another way of resolving the conflict is to consider the marks
involved from the point of view of what marks are registrable
pursuant to Sec. 4 of R.A. No. 166, particularly paragraph 4 (e):
CHAPTER II-A. The Principal Register
(Inserted by Sec. 2, Rep. Act No. 638.)

Sec. 4. Registration of trade-marks, trade-names and


service-marks on the principal register. There is
hereby established a register of trade-marks, tradenames and service-marks which shall be known as the
principal register. The owner of a trade-mark, tradename or service-mark used to distinguish his goods,
business or services from the goods, business or
services of others shall have the right to register the
same on the principal register, unless it:
xxx xxx xxx
(e) Consists of a mark or trade-name which, when
applied to or used in connection with the goods,
business or services of the applicant is merely
descriptive or deceptively misdescriptive of them, or
when applied to or used in connection with the goods,
business or services of the applicant is primarily
geographically descriptive or deceptively
misdescriptive of them, or is primarily merely a
surname; (Emphasis ours.)
xxx xxx xxx
"LEE" is primarily a surname. Private respondent cannot,
therefore, acquire exclusive ownership over and singular use of
said term.

. . . It has been held that a personal name or surname


may not be monopolized as a trademark or tradename
as against others of the same name or surname. For in
the absence of contract, fraud, or estoppel, any man
may use his name or surname in all legitimate ways.
Thus, "Wellington" is a surname, and its first user has
no cause of action against the junior user of
"Wellington" as it is incapable of exclusive
appropriation. 37
In addition to the foregoing, we are constrained to agree with
petitioner's contention that private respondent failed to prove
prior actual commercial use of its "LEE" trademark in the
Philippines before filing its application for registration with the
BPTTT and hence, has not acquired ownership over said mark.
Actual use in commerce in the Philippines is an essential
prerequisite for the acquisition of ownership over a trademark
pursuant to Sec. 2 and 2-A of the Philippine Trademark Law (R.A.
No. 166) which explicitly provides that:
CHAPTER II. Registration of Marks and Trade-names.
Sec. 2. What are registrable. Trade-marks, tradenames, and service marks owned by persons,
corporations, partnerships or associations domiciled in
the Philippines and by persons, corporations,
partnerships, or associations domiciled in any foreign

country may be registered in accordance with the


provisions of this act: Provided, That said trademarks, trade-names, or service marks are actually in
use in commerce and services not less than two
months in the Philippines before the time the
applications for registration are filed: And Provided,
further, That the country of which the applicant for
registration is a citizen grants by law substantially
similar privileges to citizens of the Philippines, and such
fact is officially certified, with a certified true copy of
the foreign law translated into the English language, by
the government of the foreign country to the
Government of the Republic of the Philippines. (As
amended.) (Emphasis ours.)
Sec. 2-A. Ownership of trade-marks, trade-names and
service-marks; how acquired. Anyone who lawfully
produces or deals in merchandise of any kind or who
engages in lawful business, or who renders any lawful
service in commerce, by actual use hereof in
manufacture or trade, in business, and in the service
rendered; may appropriate to his exclusive use a trademark, a trade-name, or a service-mark not so
appropriated by another, to distinguish his
merchandise, business or services from others. The
ownership or possession of trade-mark, trade-name,
service-mark, heretofore or hereafter appropriated, as

in this section provided, shall be recognized and


protected in the same manner and to the same extent
as are other property rights to the law. (As amended.)
(Emphasis ours.)
The provisions of the 1965 Paris Convention for the Protection of
Industrial Property

38

relied upon by private respondent and Sec.

21-A of the Trademark Law (R.A. No. 166) 39 were sufficiently


expounded upon and qualified in the recent case of Philip Morris,
Inc. v. Court of Appeals: 40
xxx xxx xxx
Following universal acquiescence and comity, our
municipal law on trademarks regarding the requirement
of actual use in the Philippines must subordinate an
international agreement inasmuch as the apparent
clash is being decided by a municipal tribunal (Mortisen
vs. Peters, Great Britain, High Court of Judiciary of
Scotland, 1906, 8 Sessions, 93; Paras, International Law
and World Organization, 1971 Ed., p. 20). Withal, the
fact that international law has been made part of the
law of the land does not by any means imply the
primacy of international law over national law in the
municipal sphere. Under the doctrine of incorporation
as applied in most countries, rules of international law
are given a standing equal, not superior, to national
legislative enactments.

xxx xxx xxx


In other words, (a foreign corporation) may have the
capacity to sue for infringement irrespective of lack of
business activity in the Philippines on account of
Section 21-A of the Trademark Law but the question of
whether they have an exclusive right over their symbol
as to justify issuance of the controversial writ will
depend on actual use of their trademarks in the
Philippines in line with Sections 2 and 2-A of the same
law. It is thus incongruous for petitioners to claim that
when a foreign corporation not licensed to do business
in the Philippines files a complaint for infringement, the
entity need not be actually using its trademark in
commerce in the Philippines. Such a foreign corporation
may have the personality to file a suit for infringement
but it may not necessarily be entitled to protection due
to absence of actual use of the emblem in the local
market.
xxx xxx xxx
Undisputably, private respondent is the senior registrant, having
obtained several registration certificates for its various
trademarks "LEE," "LEERIDERS," and "LEESURES" in both the
supplemental and principal registers, as early as 1969 to
1973. 41 However, registration alone will not suffice. In Sterling

Products International, Inc. v.Farbenfabriken Bayer


Aktiengesellschaft, 42 we declared:
xxx xxx xxx
A rule widely accepted and firmly entrenched because
it has come down through the years is that actual use
in commerce or business is a prerequisite in the
acquisition of the right of ownership over a trademark.
xxx xxx xxx
It would seem quite clear that adoption alone of a
trademark would not give exclusive right thereto. Such
right "grows out of their actual use." Adoption is not
use. One may make advertisements, issue circulars,
give out price lists on certain goods; but these alone
would not give exclusive right of use. For trademark is a
creation of use. The underlying reason for all these is
that purchasers have come to understand the mark as
indicating the origin of the wares. Flowing from this is
the trader's right to protection in the trade he has built
up and the goodwill he has accumulated from use of
the trademark. Registration of a trademark, of course,
has value: it is an administrative act declaratory of a
pre-existing right. Registration does not, however,
perfect a trademark right. (Emphasis ours.)

xxx xxx xxx


To augment its arguments that it was, not only the prior
registrant, but also the prior user, private respondent invokes Sec.
20 of the Trademark Law, thus:
Sec. 20. Certificate of registration prima facie evidence
of validity. A certificate of registration of a mark or
tradename shall be a prima facie evidence of the
validity of the registration, the registrant's ownership of
the mark or trade-name, and of the registrant's
exclusive right to use the same in connection with the
goods, business or services specified in the certificate,
subject to any conditions and limitations stated therein.
The credibility placed on a certificate of registration of one's
trademark, or its weight as evidence of validity, ownership and
exclusive use, is qualified. A registration certificate serves merely
as prima facie evidence. It is not conclusive but can and may be
rebutted by controverting evidence.
Moreover, the aforequoted provision applies only to registrations
in the principal register. 43 Registrations in the supplemental
register do not enjoy a similar privilege. A supplemental register
was created precisely for the registration of marks which are not
registrable on the principal register due to some defects. 44

The determination as to who is the prior user of the trademark is


a question of fact and it is this Court's working principle not to
disturb the findings of the Director of Patents on this issue in the
absence of any showing of grave abuse of discretion. The findings
of facts of the Director of Patents are conclusive upon the
Supreme Courtprovided they are supported by substantial
evidence. 45
In the case at bench, however, we reverse the findings of the
Director of Patents and the Court of Appeals. After a meticulous
study of the records, we observe that the Director of Patents and
the Court of Appeals relied mainly on the registration certificates
as proof of use by private respondent of the trademark "LEE"
which, as we have previously discussed are not sufficient. We
cannot give credence to private respondent's claim that its "LEE"
mark first reached the Philippines in the 1960's through local
sales by the Post Exchanges of the U.S. Military Bases in the
Philippines 46 based as it was solely on the self-serving statements
of Mr. Edward Poste, General Manager of Lee (Phils.), Inc., a
wholly owned subsidiary of the H.D. Lee, Co., Inc., U.S.A., herein
private respondent.

47

Similarly, we give little weight to the

numerous
vouchers representing various advertising expenses in the
Philippines for "LEE" products.

48

It is well to note that these

expenses were incurred only in 1981 and 1982 by LEE (Phils.), Inc.
after it entered into a licensing agreement with private
respondent on 11 May 1981. 49

On the other hand, petitioner has sufficiently shown that it has


been in the business of selling jeans and other garments adopting
its "STYLISTIC MR. LEE" trademark since 1975 as evidenced by
appropriate sales invoices to various stores and retailers. 50
Our rulings in Pagasa Industrial Corp. v. Court of
Appeals 51 and Converse Rubber Corp. v. Universal Rubber
Products, Inc., 52respectively, are instructive:
The Trademark Law is very clear. It requires actual
commercial use of the mark prior to its registration.
There is no dispute that respondent corporation was the
first registrant, yet it failed to fully substantiate its
claim that it used in trade or business in the Philippines
the subject mark; it did not present proof to invest it
with exclusive, continuous adoption of the trademark
which should consist among others, of considerable
sales since its first use. The invoices submitted by
respondent which were dated way back in 1957 show
that the zippers sent to the Philippines were to be used
as "samples" and "of no commercial value." The
evidence for respondent must be clear, definite and
free from inconsistencies. "Samples" are not for sale
and therefore, the fact of exporting them to the
Philippines cannot be considered to be equivalent to
the "use" contemplated by law. Respondent did not
expect income from such "samples." There were no

receipts to establish sale, and no proof were presented


to show that they were subsequently sold in the
Philippines.
xxx xxx xxx
The sales invoices provide the best proof that there
were actual sales of petitioner's product in the country
and that there was actual use for a protracted period of
petitioner's trademark or part thereof through these
sales.
For lack of adequate proof of actual use of its trademark in the
Philippines prior to petitioner's use of its own mark and for failure
to establish confusing similarity between said trademarks, private
respondent's action for infringement must necessarily fail.
WHEREFORE, premises considered, the questioned decision and
resolution are hereby REVERSED and SET ASIDE.
SO ORDERED.
Bellosillo and Hermosisima, Jr., JJ., concur.

[G.R. No. 114508. November 19, 1999]


PRIBHDAS J. MIRPURI, petitioner, vs. COURT OF APPEALS,
DIRECTOR OF PATENTS and the BARBIZON
CORPORATION, respondents.
DECISION
PUNO, J.:

The Convention of Paris for the Protection of Industrial Property is


a multi-lateral treaty which the Philippines bound itself to honor
and enforce in this country. As to whether or not the treaty affords
protection to a foreign corporation against a Philippine applicant
for the registration of a similar trademark is the principal issue in
this case.
On June 15, 1970, one Lolita Escobar, the predecessor-in-interest
of petitioner Pribhdas J. Mirpuri, filed an application with the
Bureau of Patents for the registration of the trademark "Barbizon"
for use in brassieres and ladies undergarments. Escobar alleged
that she had been manufacturing and selling these products
under the firm name "L & BM Commercial" since March 3, 1970.
Private respondent Barbizon Corporation, a corporation organized
and doing business under the laws of New York, U.S.A., opposed
the application. It claimed that:
"The mark BARBIZON of respondent-applicant is confusingly
similar to the trademark BARBIZON which opposer owns and has
not abandoned.
That opposer will be damaged by the registration of the mark
BARBIZON and its business reputation and goodwill will suffer
great and irreparable injury.
That the respondent-applicant's use of the said mark BARBIZON
which resembles the trademark used and owned by opposer,
constitutes an unlawful appropriation of a mark previously used in

the Philippines and not abandoned and therefore a statutory


violation of Section 4 (d) of Republic Act No. 166, as amended." [1]
This was docketed as Inter Partes Case No. 686 (IPC No.
686). After filing of the pleadings, the parties submitted the case
for decision.
On June 18, 1974, the Director of Patents rendered judgment
dismissing the opposition and giving due course to Escobar's
application, thus:
"WHEREFORE, the opposition should be, as it is hereby,
DISMISSED. Accordingly, Application Serial No. 19010 for the
registration of the trademark BARBIZON, of respondent Lolita R.
Escobar, is given due course.
IT IS SO ORDERED."[2]
This decision became final and on September 11, 1974, Lolita
Escobar was issued a certificate of registration for the trademark
"Barbizon." The trademark was "for use in "brassieres and lady's
underwear garments like panties."[3]
Escobar later assigned all her rights and interest over the
trademark to petitioner Pribhdas J. Mirpuri who, under his firm
name then, the "Bonito Enterprises," was the sole and exclusive
distributor of Escobar's "Barbizon" products.
In 1979, however, Escobar failed to file with the Bureau of Patents
the Affidavit of Use of the trademark required under Section 12 of

Republic Act (R.A.) No. 166, the Philippine Trademark Law. Due to
this failure, the Bureau of Patents cancelled Escobar's certificate
of registration.
On May 27, 1981, Escobar reapplied for registration of the
cancelled trademark. Mirpuri filed his own application for
registration of Escobar's trademark. Escobar later assigned her
application to herein petitioner and this application was opposed
by private respondent. The case was docketed as Inter Partes
Case No. 2049 (IPC No. 2049).
In its opposition, private respondent alleged that:
"(a) The Opposer has adopted the trademark BARBIZON (word),
sometime in June 1933 and has then used it on various kinds of
wearing apparel. On August 14, 1934, Opposer obtained from the
United States Patent Office a more recent registration of the said
mark under Certificate of Registration No. 316,161. On March 1,
1949, Opposer obtained from the United States Patent Office a
more recent registration for the said trademark under Certificate
of Registration No. 507,214, a copy of which is herewith attached
as Annex `A.' Said Certificate of Registration covers the following
goods-- wearing apparel: robes, pajamas, lingerie, nightgowns
and slips;
(b) Sometime in March 1976, Opposer further adopted the
trademark BARBIZON and Bee design and used the said mark in
various kinds of wearing apparel. On March 15, 1977, Opposer
secured from the United States Patent Office a registration of the

said mark under Certificate of Registration No. 1,061,277, a copy


of which is herein enclosed as Annex `B.' The said Certificate of
Registration covers the following goods: robes, pajamas, lingerie,
nightgowns and slips;
(c) Still further, sometime in 1961, Opposer adopted the
trademark BARBIZON and a Representation of a Woman and
thereafter used the said trademark on various kinds of wearing
apparel. Opposer obtained from the United States Patent Office
registration of the said mark on April 5, 1983 under Certificate of
Registration No. 1,233,666 for the following goods: wearing
apparel: robes, pajamas, nightgowns and lingerie. A copy of the
said certificate of registration is herewith enclosed as Annex `C.'
(d) All the above registrations are subsisting and in force and
Opposer has not abandoned the use of the said trademarks. In
fact, Opposer, through a wholly-owned Philippine subsidiary, the
Philippine Lingerie Corporation, has been manufacturing the
goods covered by said registrations and selling them to various
countries, thereby earning valuable foreign exchange for the
country. As a result of respondent-applicant's misappropriation of
Opposer's BARBIZON trademark, Philippine Lingerie Corporation is
prevented from selling its goods in the local market, to the
damage and prejudice of Opposer and its wholly-owned
subsidiary.
(e) The Opposer's goods bearing the trademark BARBIZON have
been used in many countries, including the Philippines, for at

least 40 years and has enjoyed international reputation and good


will for their quality. To protect its registrations in countries where
the goods covered by the registrations are being sold, Opposer
has procured the registration of the trademark BARBIZON in the
following countries:Australia, Austria, Abu Dhabi, Argentina,
Belgium, Bolivia, Bahrain, Canada, Chile, Colombia, Denmark,
Ecuador, France, West Germany, Greece, Guatemala, Hongkong,
Honduras, Italy, Japan, Jordan, Lebanon, Mexico, Morocco,
Panama, New Zealand, Norway, Sweden, Switzerland, Syria, El
Salvador, South Africa, Zambia, Egypt, and Iran, among others;
(f) To enhance its international reputation for quality goods and to
further promote goodwill over its name, marks and products,
Opposer has extensively advertised its products, trademarks and
name in various publications which are circulated in the United
States and many countries around the world, including the
Philippines;
(g) The trademark BARBIZON was fraudulently registered in the
Philippines by one Lolita R. Escobar under Registration No. 21920,
issued on September 11, 1974, in violation of Article 189 (3) of
the Revised Penal Code and Section 4 (d) of the Trademark
Law. Herein respondent applicant acquired by assignment the
`rights' to the said mark previously registered by Lolita Escobar,
hence respondent-applicant's title is vitiated by the same fraud
and criminal act. Besides, Certificate of Registration No. 21920
has been cancelled for failure of either Lolita Escobar or herein
respondent-applicant, to seasonably file the statutory affidavit of

use. By applying for a re-registration of the mark BARBIZON


subject of this opposition, respondent-applicant seeks to
perpetuate the fraud and criminal act committed by Lolita
Escobar.
(h) Opposer's BARBIZON as well as its BARBIZON and Bee Design
and BARBIZON and Representation of a Woman trademarks
qualify as well-known trademarks entitled to protection under
Article6bis of the Convention of Paris for the Protection of
Industrial Property and further amplified by the Memorandum of
the Minister of Trade to the Honorable Director of Patents dated
October 25, 1983 [sic],[4] Executive Order No. 913 dated October
7, 1963 and the Memorandum of the Minister of Trade and
Industry to the Honorable Director of Patents dated October 25,
1983.
(i) The trademark applied for by respondent applicant is identical
to Opposer's BARBIZON trademark and constitutes the dominant
part of Opposer's two other marks namely, BARBIZON and Bee
design and BARBIZON and a Representation of a Woman. The
continued use by respondent-applicant of Opposer's trademark
BARBIZON on goods belonging to Class 25 constitutes a clear
case of commercial and criminal piracy and if allowed registration
will violate not only the Trademark Law but also Article 189 of the
Revised Penal Code and the commitment of the Philippines to an
international treaty."[5]

Replying to private respondent's opposition, petitioner raised the


defense of res judicata.
On March 2, 1982, Escobar assigned to petitioner the use of the
business name "Barbizon International." Petitioner registered the
name with the Department of Trade and Industry (DTI) for which a
certificate of registration was issued in 1987.
Forthwith, private respondent filed before the Office of Legal
Affairs of the DTI a petition for cancellation of petitioner's
business name.
On November 26, 1991, the DTI, Office of Legal Affairs, cancelled
petitioner's certificate of registration, and declared private
respondent the owner and prior user of the business name
"Barbizon International." Thus:
"WHEREFORE, the petition is hereby GRANTED and petitioner is
declared the owner and prior user of the business name
"BARBIZON INTERNATIONAL" under Certificate of Registration No.
87-09000 dated March 10, 1987 and issued in the name of
respondent, is [sic] hereby ordered revoked and cancelled. x x
x."[6]
Meanwhile, in IPC No. 2049, the evidence of both parties were
received by the Director of Patents. On June 18, 1992, the Director
rendered a decision declaring private respondent's opposition
barred by res judicata and giving due course to petitioner's
application for registration, to wit:

"WHEREFORE, the present Opposition in Inter Partes Case No.


2049 is hereby DECLARED BARRED by res judicata and is hereby
DISMISSED. Accordingly, Application Serial No. 45011 for
trademark BARBIZON filed by Pribhdas J. Mirpuri is GIVEN DUE
COURSE.
SO ORDERED."[7]
Private respondent questioned this decision before the Court of
Appeals in CA-G.R. SP No. 28415. On April 30, 1993, the Court of
Appeals reversed the Director of Patents finding that IPC No. 686
was not barred by judgment in IPC No. 2049 and ordered that the
case be remanded to the Bureau of Patents for further
proceedings, viz:
"WHEREFORE, the appealed Decision No. 92-13 dated June 18,
1992 of the Director of Patents in Inter Partes Case No. 2049 is
hereby SET ASIDE; and the case is hereby remanded to the
Bureau of Patents for further proceedings, in accordance with this
pronouncement. No costs."[8]
In a Resolution dated March 16, 1994, the Court of Appeals denied
reconsideration of its decision.[9] Hence, this recourse.
Before us, petitioner raises the following issues:
"1. WHETHER OR NOT THE DECISION OF THE DIRECTOR OF
PATENTS IN INTER PARTES CASE NO. 686 RENDERED ON JUNE 18,
1974, ANNEX C HEREOF, CONSTITUTED RES JUDICATA IN SO FAR
AS THE CASE BEFORE THE DIRECTOR OF PATENTS IS CONCERNED;

2. WHETHER OR NOT THE DIRECTOR OF PATENTS CORRECTLY


APPLIED THE PRINCIPLE OF RES JUDICATA IN DISMISSING PRIVATE
RESPONDENT BARBIZON'S OPPOSITION TO PETITIONER'S
APPLICATION FOR REGISTRATION FOR THE TRADEMARK
BARBIZON, WHICH HAS SINCE RIPENED TO CERTIFICATE OF
REGISTRATION NO. 53920 ON NOVEMBER 16, 1992;
3. WHETHER OR NOT THE REQUISITE THAT A 'JUDGMENT ON THE
MERITS' REQUIRED A 'HEARING WHERE BOTH PARTIES ARE
SUPPOSED TO ADDUCE EVIDENCE' AND WHETHER THE JOINT
SUBMISSION OF THE PARTIES TO A CASE ON THE BASIS OF THEIR
RESPECTIVE PLEADINGS WITHOUT PRESENTING TESTIMONIAL OR
DOCUMENTARY EVIDENCE FALLS WITHIN THE MEANING OF
'JUDGMENT ON THE MERITS' AS ONE OF THE REQUISITES TO
CONSTITUTE RES JUDICATA;
4. WHETHER A DECISION OF THE DEPARTMENT OF TRADE AND
INDUSTRY CANCELLING PETITIONER'S FIRM NAME 'BARBIZON
INTERNATIONAL' AND WHICH DECISION IS STILL PENDING
RECONSIDERATION NEVER OFFERED IN EVIDENCE BEFORE THE
DIRECTOR OF PATENTS IN INTER PARTES CASE NO. 2049 HAS THE
RIGHT TO DECIDE SUCH CANCELLATION NOT ON THE BASIS OF
THE BUSINESS NAME LAW (AS IMPLEMENTED BY THE BUREAU OF
DOMESTIC TRADE) BUT ON THE BASIS OF THE PARIS CONVENTION
AND THE TRADEMARK LAW (R.A. 166) WHICH IS WITHIN THE
ORIGINAL AND EXCLUSIVE JURISDICTION OF THE DIRECTOR OF
PATENTS."[10]

Before ruling on the issues of the case, there is need for a brief
background on the function and historical development of
trademarks and trademark law.
A "trademark" is defined under R.A. 166, the Trademark Law, as
including "any word, name, symbol, emblem, sign or device or
any combination thereof adopted and used by a manufacturer or
merchant to identify his goods and distinguish them from those
manufactured, sold or dealt in by others."[11] This definition has
been simplified in R.A. No. 8293, the Intellectual Property Code of
the Philippines, which defines a "trademark" as "any visible sign
capable of distinguishing goods."[12] In Philippine jurisprudence,
the function of a trademark is to point out distinctly the origin or
ownership of the goods to which it is affixed; to secure to him,
who has been instrumental in bringing into the market a superior
article of merchandise, the fruit of his industry and skill; to assure
the public that they are procuring the genuine article; to prevent
fraud and imposition; and to protect the manufacturer against
substitution and sale of an inferior and different article as his
product.[13]
Modern authorities on trademark law view trademarks as
performing three distinct functions: (1) they indicate origin or
ownership of the articles to which they are attached; (2) they
guarantee that those articles come up to a certain standard of
quality; and (3) they advertise the articles they symbolize. [14]

Symbols have been used to identify the ownership or origin of


articles for several centuries.[15] As early as 5,000 B.C., markings
on pottery have been found by archaeologists. Cave drawings in
southwestern Europe show bison with symbols on their flanks.
[16]

Archaeological discoveries of ancient Greek and Roman

inscriptions on sculptural works, paintings, vases, precious stones,


glassworks, bricks, etc. reveal some features which are thought to
be marks or symbols. These marks were affixed by the creator or
maker of the article, or by public authorities as indicators for the
payment of tax, for disclosing state monopoly, or devices for the
settlement of accounts between an entrepreneur and his
workmen.[17]
In the Middle Ages, the use of many kinds of marks on a variety of
goods was commonplace. Fifteenth century England saw the
compulsory use of identifying marks in certain trades. There were
the baker's mark on bread, bottlemaker's marks, smith's marks,
tanner's marks, watermarks on paper, etc. [18] Every guild had its
own mark and every master belonging to it had a special mark of
his own. The marks were not trademarks but police marks
compulsorily imposed by the sovereign to let the public know that
the goods were not "foreign" goods smuggled into an area where
the guild had a monopoly, as well as to aid in tracing defective
work or poor craftsmanship to the artisan. [19] For a similar reason,
merchants also used merchants' marks. Merchants dealt in goods
acquired from many sources and the marks enabled them to

identify and reclaim their goods upon recovery after shipwreck or


piracy.[20]
With constant use, the mark acquired popularity and became
voluntarily adopted. It was not intended to create or continue
monopoly but to give the customer an index or guarantee of
quality.[21] It was in the late 18th century when the industrial
revolution gave rise to mass production and distribution of
consumer goods that the mark became an important
instrumentality of trade and commerce.[22] By this time,
trademarks did not merely identify the goods; they also indicated
the goods to be of satisfactory quality, and thereby stimulated
further purchases by the consuming public. [23] Eventually, they
came to symbolize the goodwill and business reputation of the
owner of the product and became a property right protected by
law.[24] The common law developed the doctrine of trademarks
and tradenames "to prevent a person from palming off his goods
as another's, from getting another's business or injuring his
reputation by unfair means, and, from defrauding the
public."[25] Subsequently, England and the United States enacted
national legislation on trademarks as part of the law regulating
unfair trade.[26] It became the right of the trademark owner to
exclude others from the use of his mark, or of a confusingly
similar mark where confusion resulted in diversion of trade or
financial injury. At the same time, the trademark served as a
warning against the imitation or faking of products to prevent the
imposition of fraud upon the public.[27]

Today, the trademark is not merely a symbol of origin and


goodwill; it is often the most effective agent for the actual
creation and protection of goodwill. It imprints upon the public
mind an anonymous and impersonal guaranty of satisfaction,
creating a desire for further satisfaction. In other words, the mark
actually sells the goods.[28] The mark has become the "silent
salesman," the conduit through which direct contact between the
trademark owner and the consumer is assured. It has invaded
popular culture in ways never anticipated that it has become a
more convincing selling point than even the quality of the article
to which it refers.[29] In the last half century, the unparalleled
growth of industry and the rapid development of communications
technology have enabled trademarks, tradenames and other
distinctive signs of a product to penetrate regions where the
owner does not actually manufacture or sell the product
itself. Goodwill is no longer confined to the territory of actual
market penetration; it extends to zones where the marked article
has been fixed in the public mind through advertising. [30] Whether
in the print, broadcast or electronic communications medium,
particularly on the Internet,[31] advertising has paved the way for
growth and expansion of the product by creating and earning a
reputation that crosses over borders, virtually turning the whole
world into one vast marketplace.
This is the mise-en-scene of the present controversy. Petitioner
brings this action claiming that "Barbizon" products have been
sold in the Philippines since 1970. Petitioner developed this

market by working long hours and spending considerable sums of


money on advertisements and promotion of the trademark and its
products. Now, almost thirty years later, private respondent, a
foreign corporation, "swaggers into the country like a conquering
hero," usurps the trademark and invades petitioner's market.
[32]

Justice and fairness dictate that private respondent be

prevented from appropriating what is not its own. Legally, at the


same time, private respondent is barred from questioning
petitioner's ownership of the trademark because of res judicata.[33]
Literally, res judicata means a matter adjudged, a thing judicially
acted upon or decided; a thing or matter settled by judgment.
[34]

In res judicata, the judgment in the first action is considered

conclusive as to every matter offered and received therein, as to


any other admissible matter which might have been offered for
that purpose, and all other matters that could have been
adjudged therein.[35] Res judicatais an absolute bar to a
subsequent action for the same cause; and its requisites are: (a)
the former judgment or order must be final; (b) the judgment or
order must be one on the merits; (c) it must have been rendered
by a court having jurisdiction over the subject matter and parties;
(d) there must be between the first and second actions, identity of
parties, of subject matter and of causes of action. [36]
The Solicitor General, on behalf of respondent Director of Patents,
has joined cause with petitioner. Both claim that all the four
elements of res judicata have been complied with: that the
judgment in IPC No. 686 was final and was rendered by the

Director of Patents who had jurisdiction over the subject matter


and parties; that the judgment in IPC No. 686 was on the merits;
and that the lack of a hearing was immaterial because substantial
issues were raised by the parties and passed upon by the Director
of Patents.[37]
The decision in IPC No. 686 reads as follows:
"x x x.
Neither party took testimony nor adduced documentary
evidence. They submitted the case for decision based on the
pleadings which, together with the pertinent records, have all
been carefully considered.
Accordingly, the only issue for my disposition is whether or not
the herein opposer would probably be damaged by the
registration of the trademark BARBIZON sought by the
respondent-applicant on the ground that it so resembles the
trademark BARBIZON allegedly used and owned by the former to
be `likely to cause confusion, mistake or to deceive purchasers.'
On record, there can be no doubt that respondent-applicant's
sought-to-be-registered trademark BARBIZON is similar, in fact
obviously identical, to opposer's alleged trademark BARBIZON, in
spelling and pronunciation. The only appreciable but very
negligible difference lies in their respective appearances or
manner of presentation. Respondent-applicant's trademark is in

bold letters (set against a black background), while that of the


opposer is offered in stylish script letters.
It is opposer's assertion that its trademark BARBIZON has been
used in trade or commerce in the Philippines prior to the date of
application for the registration of the identical mark BARBIZON by
the respondent-applicant. However, the allegation of facts in
opposer's verified notice of opposition is devoid of such material
information. In fact, a reading of the text of said verified
opposition reveals an apparent, if not deliberate, omission of the
date (or year) when opposer's alleged trademark BARBIZON was
first used in trade in the Philippines (see par. No. 1, p. 2, Verified
Notice of Opposition, Rec.).Thus, it cannot here and now be
ascertained whether opposer's alleged use of the trademark
BARBIZON could be prior to the use of the identical mark by the
herein respondent-applicant, since the opposer attempted neither
to substantiate its claim of use in local commerce with any proof
or evidence. Instead, the opposer submitted the case for decision
based merely on the pleadings.
On the other hand, respondent-applicant asserted in her amended
application for registration that she first used the trademark
BARBIZON for brassiere (or 'brasseire') and ladies underwear
garments and panties as early as March 3, 1970. Be that as it
may, there being no testimony taken as to said date of first use,
respondent-applicant will be limited to the filing date, June 15,
1970, of her application as the date of first use (Rule 173, Rules of
Practice in Trademark Cases).

From the foregoing, I conclude that the opposer has not made out
a case of probable damage by the registration of the respondentapplicant's mark BARBIZON.
WHEREFORE, the opposition should be, as it is hereby,
DISMISSED. Accordingly, Application Serial No. 19010, for the
registration of the trademark BARBIZON of respondent Lolita R.
Escobar, is given due course."[38]
The decision in IPC No. 686 was a judgment on the merits and it
was error for the Court of Appeals to rule that it was not. A
judgment is on the merits when it determines the rights and
liabilities of the parties based on the disclosed facts, irrespective
of formal, technical or dilatory objections. [39] It is not necessary
that a trial should have been conducted. If the court's judgment is
general, and not based on any technical defect or objection, and
the parties had a full legal opportunity to be heard on their
respective claims and contentions, it is on the merits although
there was no actual hearing or arguments on the facts of the
case.[40] In the case at bar, the Director of Patents did not dismiss
private respondent's opposition on a sheer technicality. Although
no hearing was conducted, both parties filed their respective
pleadings and were given opportunity to present evidence. They,
however, waived their right to do so and submitted the case for
decision based on their pleadings. The lack of evidence did not
deter the Director of Patents from ruling on the case, particularly
on the issue of prior use, which goes into the very substance of
the relief sought by the parties. Since private respondent failed to

prove prior use of its trademark, Escobar's claim of first use was
upheld.
The judgment in IPC No. 686 being on the merits, petitioner and
the Solicitor General allege that IPC No. 686 and IPC No. 2049 also
comply with the fourth requisite of res judicata, i.e., they involve
the same parties and the same subject matter, and have identical
causes of action.
Undisputedly, IPC No. 686 and IPC No. 2049 involve the same
parties and the same subject matter. Petitioner herein is the
assignee of Escobar while private respondent is the same
American corporation in the first case. The subject matter of both
cases is the trademark "Barbizon." Private respondent counterargues, however, that the two cases do not have identical causes
of action. New causes of action were allegedly introduced in IPC
No. 2049, such as the prior use and registration of the trademark
in the United States and other countries worldwide, prior use in
the Philippines, and the fraudulent registration of the mark in
violation of Article 189 of the Revised Penal Code. Private
respondent also cited protection of the trademark under the
Convention of Paris for the Protection of Industrial Property,
specifically Article 6bis thereof, and the implementation of Article
6bis by two Memoranda dated November 20, 1980 and October
25, 1983 of the Minister of Trade and Industry to the Director of
Patents, as well as Executive Order (E.O.) No. 913.

The Convention of Paris for the Protection of Industrial Property,


otherwise known as the Paris Convention, is a multilateral treaty
that seeks to protect industrial property consisting of patents,
utility models, industrial designs, trademarks, service marks,
trade names and indications of source or appellations of origin,
and at the same time aims to repress unfair competition. [41] The
Convention is essentially a compact among various countries
which, as members of the Union, have pledged to accord to
citizens of the other member countries trademark and other
rights comparable to those accorded their own citizens by their
domestic laws for an effective protection against unfair
competition.[42] In short, foreign nationals are to be given the
same treatment in each of the member countries as that country
makes available to its own citizens.[43] Nationals of the various
member nations are thus assured of a certain minimum of
international protection of their industrial property. [44]
The Convention was first signed by eleven countries in Paris on
March 20, 1883.[45] It underwent several revisions-- at Brussels in
1900, at Washington in 1911, at The Hague in 1925, at London in
1934, at Lisbon in 1958,[46] and at Stockholm in 1967. Both the
Philippines and the United States of America, herein private
respondent's country, are signatories to the Convention. The
United States acceded on May 30, 1887 while the Philippines,
through its Senate, concurred on May 10, 1965. [47] The Philippines'
adhesion became effective on September 27, 1965, [48] and from

this date, the country obligated itself to honor and enforce the
provisions of the Convention.[49]
In the case at bar, private respondent anchors its cause of action
on the first paragraph of Article 6bis of the Paris Convention which
reads as follows:
"Article 6bis
(1) The countries of the Union undertake, either
administratively if their legislation so permits, or at the
request of an interested party, to refuse or to cancel the
registration and to prohibit the use, of a trademark which
constitutes a reproduction, an imitation, or a translation,
liable to create confusion, of a mark considered by the
competent authority of the country of registration or use
to be well-known in that country as being already the
mark of a person entitled to the benefits of this
Convention and used for identical or similar goods. These
provisions shall also apply when the essential part of the
mark constitutes a reproduction of any such well-known
mark or an imitation liable to create confusion therewith.
(2) A period of at least five years from the date of registration
shall be allowed for seeking the cancellation of such a mark. The
countries of the Union may provide for a period within which the
prohibition of use must be sought.

(3) No time limit shall be fixed for seeking the cancellation or the
prohibition of the use of marks registered or used in bad faith." [50]
This Article governs protection of wellknown trademarks. Under the first paragraph, each country of
the Union bound itself to undertake to refuse or cancel the
registration, and prohibit the use of a trademark which is a
reproduction, imitation or translation, or any essential part of
which trademark constitutes a reproduction, liable to create
confusion, of a mark considered by the competent authority of the
country where protection is sought, to be well-known in the
country as being already the mark of a person entitled to the
benefits of the Convention, and used for identical or similar
goods.
Article 6bis was first introduced at The Hague in 1925 and
amended in Lisbon in 1952.[51] It is a self-executing provision and
does not require legislative enactment to give it effect in the
member country.[52] It may be applied directly by the tribunals and
officials of each member country by the mere publication or
proclamation of the Convention, after its ratification according to
the public law of each state and the order for its execution. [53]
The essential requirement under Article 6bis is that the trademark
to be protected must be "well-known" in the country where
protection is sought. The power to determine whether a
trademark is well-known lies in the "competent authority of the
country of registration or use." This competent authority would be

either the registering authority if it has the power to decide this,


or the courts of the country in question if the issue comes before
a court.[54]
Pursuant to Article 6bis, on November 20, 1980, then Minister Luis
Villafuerte of the Ministry of Trade issued a Memorandum to the
Director of Patents. The Minister ordered the Director that:
"Pursuant to the Paris Convention for the Protection of Industrial
Property to which the Philippines is a signatory, you are hereby
directed to reject all pending applications for Philippine
registration of signature and other world-famous trademarks by
applicants other than its original owners or users.
The conflicting claims over internationally known trademarks
involve such name brands as Lacoste, Jordache, Vanderbilt,
Sasson, Fila, Pierre Cardin, Gucci, Christian Dior, Oscar de la
Renta, Calvin Klein, Givenchy, Ralph Lauren, Geoffrey Beene,
Lanvin and Ted Lapidus.
It is further directed that, in cases where warranted, Philippine
registrants of such trademarks should be asked to surrender their
certificates of registration, if any, to avoid suits for damages and
other legal action by the trademarks' foreign or local owners or
original users.
You are also required to submit to the undersigned a progress
report on the matter.
For immediate compliance."[55]

Three years later, on October 25, 1983, then Minister Roberto


Ongpin issued another Memorandum to the Director of
Patents, viz:
"Pursuant to Executive Order No. 913 dated 7 October 1983 which
strengthens the rule-making and adjudicatory powers of the
Minister of Trade and Industry and provides inter alia, that `such
rule-making and adjudicatory powers should be revitalized in
order that the Minister of Trade and Industry can x x x apply more
swift and effective solutions and remedies to old and new
problems x x x such as infringement of internationally-known
tradenames and trademarks x x x' and in view of the decision of
the Intermediate Appellate Court in the case of LA CHEMISE
LACOSTE, S.A., versus RAM SADWHANI [AC-G.R. SP NO. 13359
(17) June 1983][56] which affirms the validity of the MEMORANDUM
of then Minister Luis R. Villafuerte dated 20 November 1980
confirming our obligations under the PARIS CONVENTION FOR THE
PROTECTION OF INDUSTRIAL PROPERTY to which the Republic of
the Philippines is a signatory, you are hereby directed to
implement measures necessary to effect compliance with our
obligations under said Convention in general, and, more
specifically, to honor our commitment under Section
6bis[57] thereof, as follows:
1. Whether the trademark under consideration is well-known in
the Philippines or is a mark already belonging to a person entitled
to the benefits of the CONVENTION, this should be established,
pursuant to Philippine Patent Office procedures in inter partes and

ex parte cases, according to any of the following criteria or any


combination thereof:
(a) a declaration by the Minister of Trade and Industry that the
trademark being considered is already well-known in the
Philippines such that permission for its use by other than its
original owner will constitute a reproduction, imitation, translation
or other infringement;
(b) that the trademark is used in commerce internationally,
supported by proof that goods bearing the trademark are sold on
an international scale, advertisements, the establishment of
factories, sales offices, distributorships, and the like, in different
countries, including volume or other measure of international
trade and commerce;
(c) that the trademark is duly registered in the industrial property
office(s) of another country or countries, taking into consideration
the date of such registration;
(d) that the trademark has long been established and obtained
goodwill and international consumer recognition as belonging to
one owner or source;
(e) that the trademark actually belongs to a party claiming
ownership and has the right to registration under the provisions of
the aforestated PARIS CONVENTION.
2. The word trademark, as used in this MEMORANDUM, shall
include tradenames, service marks, logos, signs, emblems,

insignia or other similar devices used for identification and


recognition by consumers.
3. The Philippine Patent Office shall refuse all applications for, or
cancel the registration of, trademarks which constitute a
reproduction, translation or imitation of a trademark owned by a
person, natural or corporate, who is a citizen of a country
signatory to the PARIS CONVENTION FOR THE PROTECTION OF
INDUSTRIAL PROPERTY.
4. The Philippine Patent Office shall give due course to the
Opposition in cases already or hereafter filed against the
registration of trademarks entitled to protection of Section 6 bis of
said PARIS CONVENTION as outlined above, by remanding
applications filed by one not entitled to such protection for final
disallowance by the Examination Division.
5. All pending applications for Philippine registration of signature
and other world-famous trademarks filed by applicants other than
their original owners or users shall be rejected forthwith. Where
such applicants have already obtained registration contrary to the
abovementioned PARIS CONVENTION and/or Philippine Law, they
shall be directed to surrender their Certificates of Registration to
the Philippine Patent Office for immediate cancellation
proceedings.
x x x."[58]

In the Villafuerte Memorandum, the Minister of Trade instructed


the Director of Patents to reject all pending applications for
Philippine registration of signature and other world-famous
trademarks by applicants other than their original owners or
users. The Minister enumerated several internationally-known
trademarks and ordered the Director of Patents to require
Philippine registrants of such marks to surrender their certificates
of registration.
In the Ongpin Memorandum, the Minister of Trade and Industry
did not enumerate well-known trademarks but laid down
guidelines for the Director of Patents to observe in determining
whether a trademark is entitled to protection as a well-known
mark in the Philippines under Article 6bis of the Paris
Convention. This was to be established through Philippine Patent
Office procedures in inter partesand ex parte cases pursuant to
the criteria enumerated therein. The Philippine Patent Office was
ordered to refuse applications for, or cancel the registration of,
trademarks which constitute a reproduction, translation or
imitation of a trademark owned by a person who is a citizen of a
member of the Union. All pending applications for registration of
world-famous trademarks by persons other than their original
owners were to be rejected forthwith. The Ongpin Memorandum
was issued pursuant to Executive Order No. 913 dated October 7,
1983 of then President Marcos which strengthened the rulemaking and adjudicatory powers of the Minister of Trade and

Industry for the effective protection of consumers and the


application of swift solutions to problems in trade and industry. [59]
Both the Villafuerte and Ongpin Memoranda were sustained by
the Supreme Court in the 1984 landmark case of La Chemise
Lacoste, S.A. v. Fernandez.[60] This court ruled therein that under
the provisions of Article 6bis of the Paris Convention, the Minister
of Trade and Industry was the "competent authority" to determine
whether a trademark is well-known in this country. [61]
The Villafuerte Memorandum was issued in 1980, i.e., fifteen (15)
years after the adoption of the Paris Convention in 1965. In the
case at bar, the first inter partes case, IPC No. 686, was filed in
1970,before the Villafuerte Memorandum but five (5)
years after the effectivity of the Paris Convention. Article
6bis was already in effect five years before the first case was
instituted. Private respondent, however, did not cite the
protection of Article 6bis, neither did it mention the Paris
Convention at all. It was only in 1981 when IPC No. 2049 was
instituted that the Paris Convention and the Villafuerte
Memorandum, and, during the pendency of the case, the 1983
Ongpin Memorandum were invoked by private respondent.
The Solicitor General argues that the issue of whether the
protection of Article 6bis of the Convention and the two
Memoranda is barred by res judicata has already been answered
in Wolverine Worldwide, Inc. v. Court of Appeals.[62] In this case,
petitioner Wolverine, a foreign corporation, filed with the

Philippine Patent Office a petition for cancellation of the


registration certificate of private respondent, a Filipino citizen, for
the trademark "Hush Puppies" and "Dog Device." Petitioner
alleged that it was the registrant of the internationally-known
trademark in the United States and other countries, and cited
protection under the Paris Convention and the Ongpin
Memorandum. The petition was dismissed by the Patent Office on
the ground of res judicata. It was found that in 1973 petitioner's
predecessor-in-interest filed two petitions for cancellation of the
same trademark against respondent's predecessor-in-interest. The
Patent Office dismissed the petitions, ordered the cancellation of
registration of petitioner's trademark, and gave due course to
respondent's application for registration. This decision was
sustained by the Court of Appeals, which decision was not
elevated to us and became final and executory. [63]
Wolverine claimed that while its previous petitions were filed
under R.A. No. 166, the Trademark Law, its subsequent petition
was based on a new cause of action, i.e., the Ongpin
Memorandum and E.O. No. 913 issued in 1983, after finality of the
previous decision. We held that the said Memorandum and E.O.
did not grant a new cause of action because it did "not amend the
Trademark Law," x x x "nor did it indicate a new policy with
respect to the registration in the Philippines of world-famous
trademarks."[64] This conclusion was based on the finding that
Wolverine's two previous petitions and subsequent petition dealt
with the same issue of ownership of the trademark. [65] In other

words, since the first and second cases involved the same issue of
ownership, then the first case was a bar to the second case.
In the instant case, the issue of ownership of the trademark
"Barbizon" was not raised in IPC No. 686. Private respondent's
opposition therein was merely anchored on:
(a) "confusing similarity" of its trademark with that of Escobar's;
(b) that the registration of Escobar's similar trademark will cause
damage to private respondent's business reputation and goodwill;
and
(c) that Escobar's use of the trademark amounts to an unlawful
appropriation of a mark previously used in the Philippines which
act is penalized under Section 4 (d) of the Trademark Law.
In IPC No. 2049, private respondent's opposition set forth several
issues summarized as follows:
(a) as early as 1933, it adopted the word "BARBIZON" as
trademark on its products such as robes, pajamas, lingerie,
nightgowns and slips;
(b) that the trademark "BARBIZON" was registered with the
United States Patent Office in 1934 and 1949; and that variations
of the same trademark, i.e., "BARBIZON" with Bee design and
"BARBIZON" with the representation of a woman were also
registered with the U.S. Patent Office in 1961 and 1976;

(c) that these marks have been in use in the Philippines and in
many countries all over the world for over forty years. "Barbizon"
products have been advertised in international publications and
the marks registered in 36 countries worldwide;
(d) Escobar's registration of the similar trademark "BARBIZON" in
1974 was based on fraud; and this fraudulent registration was
cancelled in 1979, stripping Escobar of whatsoever right she had
to the said mark;
(e) Private respondent's trademark is entitled to protection as a
well-known mark under Article 6bis of the Paris Convention,
Executive Order No. 913, and the two Memoranda dated
November 20, 1980 and October 25, 1983 of the Minister of Trade
and Industry to the Director of Patents;
(f) Escobar's trademark is identical to private respondent's and its
use on the same class of goods as the latter's amounts to a
violation of the Trademark Law and Article 189 of the Revised
Penal Code.
IPC No. 2049 raised the issue of ownership of the trademark, the
first registration and use of the trademark in the United States
and other countries, and the international recognition and
reputation of the trademark established by extensive use and
advertisement of private respondent's products for over forty
years here and abroad. These are different from the issues of
confusing similarity and damage in IPC No. 686. The issue of
prior use may have been raised in IPC No. 686 but this claim was

limited to prior use in the Philippines only. Prior use in IPC No.
2049 stems from private respondent's claim asoriginator of the
word and symbol "Barbizon,"[66] as the first and registered user of
the mark attached to its products which have been sold and
advertised worldwide for a considerable number of years prior to
petitioner's first application for registration of her trademark in
the Philippines. Indeed, these are substantial allegations that
raised new issues and necessarily gave private respondent a new
cause of action.Res judicata does not apply to rights, claims or
demands, although growing out of the same subject matter,
which constitute separate or distinct causes of action and were
not put in issue in the former action.[67]
Respondent corporation also introduced in the second case a fact
that did not exist at the time the first case was filed and
terminated. The cancellation of petitioner's certificate of
registration for failure to file the affidavit of use arose only after
IPC No. 686. It did not and could not have occurred in the first
case, and this gave respondent another cause to oppose the
second application. Res judicata extends only to facts and
conditions as they existed at the time judgment was rendered and
to the legal rights and relations of the parties fixed by the facts so
determined.[68] When new facts or conditions intervene before the
second suit, furnishing a new basis for the claims and defenses of
the parties, the issues are no longer the same, and the former
judgment cannot be pleaded as a bar to the subsequent action. [69]

It is also noted that the oppositions in the first and second cases
are based on different laws. The opposition in IPC No. 686 was
based on specific provisions of the Trademark Law, i.e., Section 4
(d)[70]on confusing similarity of trademarks and Section 8 [71] on the
requisite damage to file an opposition to a petition for
registration. The opposition in IPC No. 2049 invoked the Paris
Convention, particularly Article 6bis thereof, E.O. No. 913 and the
two Memoranda of the Minister of Trade and Industry. This
opposition also invoked Article 189 of the Revised Penal Code
which is a statute totally different from the Trademark Law.
[72]

Causes of action which are distinct and independent from each

other, although arising out of the same contract, transaction, or


state of facts, may be sued on separately, recovery on one being
no bar to subsequent actions on others. [73] The mere fact that the
same relief is sought in the subsequent action will not render the
judgment in the prior action operative as res judicata, such as
where the two actions are based on different statutes. [74] Res
judicata therefore does not apply to the instant case and
respondent Court of Appeals did not err in so ruling.
Intellectual and industrial property rights cases are not simple
property cases. Trademarks deal with the psychological function
of symbols and the effect of these symbols on the public at large.
Trademarks play a significant role in communication, commerce

[75]

and trade, and serve valuable and interrelated business functions,


both nationally and internationally. For this reason, all agreements
concerning industrial property, like those on trademarks and

tradenames, are intimately connected with economic


development.[76] Industrial property encourages investments in
new ideas and inventions and stimulates creative efforts for the
satisfaction of human needs. They speed up transfer of
technology and industrialization, and thereby bring about social
and economic progress.[77] These advantages have been
acknowledged by the Philippine government itself. The Intellectual
Property Code of the Philippines declares that "an effective
intellectual and industrial property system is vital to the
development of domestic and creative activity, facilitates transfer
of technology, it attracts foreign investments, and ensures market
access for our products."[78] The Intellectual Property Code took
effect on January 1, 1998 and by its express provision, [79] repealed
the Trademark Law,[80] the Patent Law,[81] Articles 188 and 189 of
the Revised Penal Code, the Decree on Intellectual Property,
[82]

and the Decree on Compulsory Reprinting of Foreign

Textbooks.[83] The Code was enacted to strengthen the intellectual


and industrial property system in the Philippines as mandated by
the country's accession to the Agreement Establishing the World
Trade Organization (WTO).[84]
The WTO is a common institutional framework for the conduct of
trade relations among its members in matters related to the
multilateral and plurilateral trade agreements annexed to the
WTO Agreement.[85] The WTO framework ensures a "single
undertaking approach" to the administration and operation of all
agreements and arrangements attached to the WTO

Agreement. Among those annexed is the Agreement on TradeRelated Aspects of Intellectual Property Rights or TRIPs.
[86]

Members to this Agreement "desire to reduce distortions and

impediments to international trade, taking into account the need


to promote effective and adequate protection of intellectual
property rights, and to ensure that measures and procedures to
enforce intellectual property rights do not themselves become
barriers to legitimate trade." To fulfill these objectives, the
members have agreed to adhere to minimum standards of
protection set by several Conventions. [87] These Conventions
are: the Berne Convention for the Protection of Literary and
Artistic Works (1971), the Rome Convention or the International
Convention for the Protection of Performers, Producers of
Phonograms and Broadcasting Organisations, the Treaty on
Intellectual Property in Respect of Integrated Circuits, and the
Paris Convention (1967), as revised in Stockholm on July 14,
1967.[88]
A major proportion of international trade depends on the
protection of intellectual property rights. [89] Since the late 1970's,
the unauthorized counterfeiting of industrial property and
trademarked products has had a considerable adverse impact on
domestic and international trade revenues. [90] The TRIPs
Agreement seeks to grant adequate protection of intellectual
property rights by creating a favorable economic environment to
encourage the inflow of foreign investments, and strengthening
the multi-lateral trading system to bring about economic, cultural

and technological independence.[91] The Philippines and the


United States of America have acceded to the WTO
Agreement. This Agreement has revolutionized international
business and economic relations among states, and has propelled
the world towards trade liberalization and economic globalization.
[92]

Protectionism and isolationism belong to the past. Trade is no

longer confined to a bilateral system. There is now "a new era of


global economic cooperation, reflecting the widespread desire to
operate in a fairer and more open multilateral trading
system."[93] Conformably, the State must reaffirm its commitment
to the global community and take part in evolving a new
international economic order at the dawn of the new millenium.
IN VIEW WHEREOF, the petition is denied and the Decision and
Resolution of the Court of Appeals in CA-G.R. SP No. 28415 are
affirmed.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, Pardo, and YnaresSantiago, JJ., concur.

[G.R. No. 127768. November 19, 1999]


UNITED AIRLINES, petitioner, vs. WILLIE J. UY, respondent.
DECISION
BELLOSILLO, J.:
UNITED AIRLINES assails in this petition for review
on certiorari under Rule 45 the 29 August 1995 Decision of the
Court of Appeals in CA-G.R. CV No. 39761 which reversed the 7
August 1992 order issued by the trial court in Civil Case No. Q-9212410[1] granting petitioner's motion to dismiss based on
prescription of cause of action. The issues sought to be resolved
are whether the notice of appeal to the appellate court was timely
filed, and whether Art. 29 of the Warsaw Convention [2] should
apply to the case at bar.

On 13 October 1989 respondent Willie J. Uy, a revenue passenger


on United Airlines Flight No. 819 for the San Francisco - Manila
route, checked in together with his luggage one piece of which
was found to be overweight at the airline counter. To his utter
humiliation, an employee of petitioner rebuked him saying that he
should have known the maximum weight allowance to be 70 kgs.
per bag and that he should have packed his things
accordingly. Then, in a loud voice in front of the milling crowd, she
told respondent to repack his things and transfer some of them
from the overweight luggage to the lighter ones.Not wishing to
create further scene, respondent acceded only to find his luggage
still overweight. The airline then billed him overweight charges
which he offered to pay with a miscellaneous charge order (MCO)
or an airline pre-paid credit. However, the airlines employee, and
later its airport supervisor, adamantly refused to honor the MCO
pointing out that there were conflicting figures listed on it. Despite
the explanation from respondent that the last figure written on
the MCO represented his balance, petitioners employees did not
accommodate him. Faced with the prospect of leaving without his
luggage, respondent paid the overweight charges with his
American Express credit card.
Respondents troubles did not end there. Upon arrival in Manila, he
discovered that one of his bags had been slashed and its contents
stolen. He particularized his losses to be around US $5,310.00. In
a letter dated 16 October 1989 respondent bewailed the insult,
embarrassment and humiliating treatment he suffered in the

hands of United Airlines employees, notified petitioner of his loss


and requested reimbursement thereof. Petitioner United Airlines,
through Central Baggage Specialist Joan Kroll, did not refute any
of respondents allegations and mailed a check representing the
payment of his loss based on the maximum liability of US $9.70
per pound. Respondent, thinking the amount to be grossly
inadequate to compensate him for his losses, as well as for the
indignities he was subjected to, sent two (2) more letters to
petitioner airline, one dated 4 January 1990 through a certain
Atty. Pesigan, and another dated 28 October 1991 through Atty.
Ramon U. Ampil demanding an out-of-court settlement
ofP1,000,000.00. Petitioner United Airlines did not accede to his
demands.
Consequently, on 9 June 1992 respondent filed a complaint for
damages against United Airlines alleging that he was a person of
good station, sitting in the board of directors of several top 500
corporations and holding senior executive positions for such
similar firms;[3] that petitioner airline accorded him ill and shabby
treatment to his extreme embarrassment and humiliation; and, as
such he should be paid moral damages of at least P1,000,000.00,
exemplary damages of at least P500,000.00, plus attorney's fees
of at least P50,000.00. Similarly, he alleged that the damage to
his luggage and its stolen contents amounted to around
$5,310.00, and requested reimbursement therefor.

United Airlines moved to dismiss the complaint on the ground that


respondents cause of action had prescribed, invoking Art. 29 of
the Warsaw Convention which provides Art. 29 (1) The right to damages shall be extinguished if an action
is not brought within two (2) years, reckoned from the date of
arrival at the destination, or from the date on which the aircraft
ought to have arrived, or from the date on which the
transportation stopped.
(2) The method of calculating the period of limitation shall be
determined by the law of the court to which the case is
submitted.
Respondent countered that par. (1) of Art. 29 of the Warsaw
Convention must be reconciled with par. (2) thereof which states
that "the method of calculating the period of limitation shall be
determined by the law of the court to which the case is
submitted." Interpreting thus, respondent noted that according to
Philippine laws the prescription of actions is interrupted "when
they are filed before the court, when there is a written
extrajudicial demand by the creditors, and when there is any
written acknowledgment of the debt by the debtor." [4] Since he
made several demands upon United Airlines: first, through his
personal letter dated 16 October 1989; second, through a letter
dated 4 January 1990 from Atty. Pesigan; and, finally, through a
letter dated 28 October 1991 written for him by Atty. Ampil, the
two (2)-year period of limitation had not yet been exhausted.

On 2 August 1992 the trial court ordered the dismissal of the


action holding that the language of Art. 29 is clear that the action
must be brought within two (2) years from the date of arrival at
the destination. It held that although the second paragraph of Art.
29 speaks of deference to the law of the local court in "calculating
the period of limitation," the same does not refer to the local
forums rules in interrupting the prescriptive period but only to the
rules of determining the time in which the action may be deemed
commenced, and within our jurisdiction the action shall be
deemed "brought" or commenced by the filing of a
complaint. Hence, the trial court concluded that Art. 29 excludes
the application of our interruption rules.
Respondent received a copy of the dismissal order on 17 August
1992. On 31 August 1992, or fourteen (14) days later, he moved
for the reconsideration of the trial courts order. The trial court
denied the motion and respondent received copy of the denial
order on 28 September 1992. Two (2) days later, on 1 October
1992 respondent filed his notice of appeal.
United Airlines once again moved for the dismissal of the case
this time pointing out that respondents fifteen (15)-day period to
appeal had already elapsed. Petitioner argued that having used
fourteen (14) days of the reglementary period for appeal,
respondent Uy had only one (1) day remaining to perfect his
appeal, and since he filed his notice of appeal two (2) days later,
he failed to meet the deadline.

In its questioned Decision dated 29 August 1995 [5] the appellate


court gave due course to the appeal holding that respondents
delay of two (2) days in filing his notice of appeal did not hinder it
from reviewing the appealed order of dismissal since
jurisprudence dictates that an appeal may be entertained despite
procedural lapses anchored on equity and justice.
On the applicability of the Warsaw Convention, the appellate court
ruled that the Warsaw Convention did not preclude the operation
of the Civil Code and other pertinent laws. Respondents failure to
file his complaint within the two (2)-year limitation provided in the
Warsaw Convention did not bar his action since he could still hold
petitioner liable for breach of other provisions of the Civil Code
which prescribe a different period or procedure for instituting an
action. Further, under Philippine laws, prescription of actions is
interrupted where, among others, there is a written extrajudicial
demand by the creditors, and since respondent Uy sent several
demand letters to petitioner United Airlines, the running of the
two (2)-year prescriptive period was in effect suspended. Hence,
the appellate court ruled that respondents cause of action had not
yet prescribed and ordered the records remanded to the Quezon
City trial court for further proceedings.
Petitioner now contends that the appellate court erred in
assuming jurisdiction over respondent's appeal since it is clear
that the notice of appeal was filed out of time. It argues that the
courts relax the stringent rule on perfection of appeals only when
there are extraordinary circumstances, e.g., when the Republic

stands to lose hundreds of hectares of land already titled and


used for educational purposes; when the counsel of record was
already dead; and wherein appellant was the owner of the
trademark for more than thirty (30) years, and the circumstances
of the present case do not compare to the above exceptional
cases.[6]
Section 1 of Rule 45 of the 1997 Rules of Civil Procedure provides
that "a party may appeal by certiorari, from a judgment of the
Court of Appeals, by filing with the Supreme Court a petition for
certiorari, within fifteen (15) days from notice of judgment or of
the denial of his motion for reconsideration filed in due time x x x
x" This Rule however should not be interpreted as "to sacrifice the
substantial right of the appellant in the sophisticated altar of
technicalities with impairment of the sacred principles of
justice."[7] It should be borne in mind that the real purpose behind
the limitation of the period of appeal is to forestall or avoid an
unreasonable delay in the administration of justice. Thus, we have
ruled that delay in the filing of a notice of appeal does not justify
the dismissal of the appeal where the circumstances of the case
show that there is no intent to delay the administration of justice
on the part of appellant's counsel,[8] or when there are no
substantial rights affected,[9] or when appellant's counsel
committed a mistake in the computation of the period of appeal,
an error not attributable to negligence or bad faith. [10]
In the instant case, respondent filed his notice of appeal two (2)
days later than the prescribed period. Although his counsel failed

to give the reason for the delay, we are inclined to give due
course to his appeal due to the unique and peculiar facts of the
case and the serious question of law it poses. In the now almost
trite but still good principle, technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration. [11]
Petitioner likewise contends that the appellate court erred in
ruling that respondent's cause of action has not prescribed since
delegates to the Warsaw Convention clearly intended the two (2)year limitation incorporated in Art. 29 as an absolute bar to suit
and not to be made subject to the various tolling provisions of the
laws of the forum. Petitioner argues that in construing the second
paragraph of Art. 29 private respondent cannot read into it
Philippine rules on interruption of prescriptive periods and state
that his extrajudicial demand has interrupted the period of
prescription.[12] American jurisprudence has declared that "Art. 29
(2) was not intended to permit forums to consider local limitation
tolling provisions but only to let local law determine whether an
action had been commenced within the two-year period, since the
method of commencing a suit varies from country to country." [13]
Within our jurisdiction we have held that the Warsaw Convention
can be applied, or ignored, depending on the peculiar facts
presented by each case.[14] Thus, we have ruled that the
Convention's provisions do not regulate or exclude liability for
other breaches of contract by the carrier or misconduct of its
officers and employees, or for some particular or exceptional type

of damage.[15] Neither may the Convention be invoked to justify


the disregard of some extraordinary sort of damage resulting to a
passenger and preclude recovery therefor beyond the limits set
by said Convention.[16] Likewise, we have held that the Convention
does not preclude the operation of the Civil Code and other
pertinent laws.[17] It does not regulate, much less exempt, the
carrier from liability for damages for violating the rights of its
passengers under the contract of carriage, especially if willful
misconduct on the part of the carrier's employees is found or
established.[18]
Respondent's complaint reveals that he is suing on two (2) causes
of action: (a) the shabby and humiliating treatment he received
from petitioner's employees at the San Francisco Airport which
caused him extreme embarrassment and social humiliation; and,
(b) the slashing of his luggage and the loss of his personal effects
amounting to US $5,310.00.
While his second cause of action - an action for damages arising
from theft or damage to property or goods - is well within the
bounds of the Warsaw Convention, his first cause of action -an
action for damages arising from the misconduct of the airline
employees and the violation of respondent's rights as passenger clearly is not.
Consequently, insofar as the first cause of action is concerned,
respondent's failure to file his complaint within the two (2)-year
limitation of the Warsaw Convention does not bar his action since

petitioner airline may still be held liable for breach of other


provisions of the Civil Code which prescribe a different period or
procedure for instituting the action, specifically, Art. 1146 thereof
which prescribes four (4) years for filing an action based on torts.
As for respondent's second cause of action, indeed the travaux
preparatories of the Warsaw Convention reveal that the delegates
thereto intended the two (2)-year limitation incorporated in Art.
29 as an absolute bar to suit and not to be made subject to the
various tolling provisions of the laws of the forum. This therefore
forecloses the application of our own rules on interruption of
prescriptive periods.Article 29, par. (2), was intended only to let
local laws determine whether an action had been commenced
within the two (2)-year period, and within our jurisdiction an
action shall be deemed commenced upon the filing of a
complaint. Since it is indisputable that respondent filed the
present action beyond the two (2)-year time frame his second
cause of action must be barred. Nonetheless, it cannot be
doubted that respondent exerted efforts to immediately convey
his loss to petitioner, even employed the services of two (2)
lawyers to follow up his claims, and that the filing of the action
itself was delayed because of petitioner's evasion.
In this regard, Philippine Airlines, Inc. v. Court of Appeals [19] is
instructive. In this case of PAL, private respondent filed an action
for damages against petitioner airline for the breakage of the
front glass of the microwave oven which she shipped under PAL
Air Waybill No. 0-79-1013008-3. Petitioner averred that, the action

having been filed seven (7) months after her arrival at her port of
destination, she failed to comply with par. 12, subpar. (a) (1), of
the Air Waybill which expressly provided that the person entitled
to delivery must make a complaint to the carrier in writing in case
of visible damage to the goods, immediately after discovery of the
damage and at the latest within 14 days from receipt of the
goods. Despite non-compliance therewith the Court held that by
private respondent's immediate submission of a formal claim to
petitioner, which however was not immediately entertained as it
was referred from one employee to another, she was deemed to
have substantially complied with the requirement. The Court
noted that with private respondent's own zealous efforts in
pursuing her claim it was clearly not her fault that the letter of
demand for damages could only be filed, after months of
exasperating follow-up of the claim, on 13 August 1990, and that
if there was any failure at all to file the formal claim within the
prescriptive period contemplated in the Air Waybill, this was
largely because of the carrier's own doing, the consequences of
which could not in all fairness be attributed to private respondent.
In the same vein must we rule upon the circumstances brought
before us. Verily, respondent filed his complaint more than two (2)
years later, beyond the period of limitation prescribed by the
Warsaw Convention for filing a claim for damages. However, it is
obvious that respondent was forestalled from immediately filing
an action because petitioner airline gave him the runaround,
answering his letters but not giving in to his demands. True,

respondent should have already filed an action at the first


instance when his claims were denied by petitioner but the same
could only be due to his desire to make an out-of-court settlement
for which he cannot be faulted. Hence, despite the express
mandate of Art. 29 of the Warsaw Convention that an action for
damages should be filed within two (2) years from the arrival at
the place of destination, such rule shall not be applied in the
instant case because of the delaying tactics employed by
petitioner airline itself. Thus, private respondent's second cause of
action cannot be considered as time-barred under Art. 29 of the
Warsaw Convention.
WHEREFORE, the assailed Decision of the Court of Appeals
reversing and setting aside the appealed order of the trial court
granting the motion to dismiss the complaint, as well as its
Resolution denying reconsideration, is AFFIRMED. Let the records
of the case be remanded to the court of origin for further
proceedings taking its bearings from this disquisition.
SO ORDERED.
Mendoza, Quisumbing, Buena, and De Leon, Jr., JJ., concur.

[G.R. No. 116044-45. March 9, 2000]


AMERICAN AIRLINES, petitioner, vs. COURT OF APPEALS,
HON. BERNARDO LL. SALAS and DEMOCRITO
MENDOZA, respondents. Oldmis o
DECISION
GONZAGA_REYES, J.:
Before us is a petition for review of the decision dated December
24, 1993 rendered by the Court of Appeals in the consolidated
cases docketed as CA-G.R. SP nos. 30946 and 31452 entitled
American Airlines vs. The Presiding Judge Branch 8 of the Regional
Trial Court of Cebu and Democrito Mendoza, petitions
for certiorari and prohibition. In SP no. 30946, the petitioner
assails the trial courts order denying the petitioners motion to
dismiss the action for damages filed by the private respondent for
lack of jurisdiction under section 28 (1) of the Warsaw Convention;
and in SP No. 31452 the petitioner challenges the validity of the
trial courts order striking off the record the deposition of the
petitioners security officer taken in Geneva, Switzerland for failure
of the said security officer to answer the cross interrogatories
propounded by the private respondent. Ncm

The sole issue raised in SP No. 30946 is the questioned


jurisdiction of the Regional Trial Court of Cebu to take cognizance
of the action for damages filed by the private respondent against
herein petitioner in view of Art 28 (1) of the Warsaw Convention.
[1]

It is undisputed that the private respondent purchased from

Singapore Airlines in Manila conjunction tickets for Manila Singapore - Athens - Larnaca - Rome - Turin - Zurich - Geneva Copenhagen - New York. The petitioner was not a participating
airline in any of the segments in the itinerary under the said
conjunction tickets. In Geneva the petitioner decided to forego his
trip to Copenhagen and to go straight to New York and in the
absence of a direct flight under his conjunction tickets from
Geneva to New York, the private respondent on June 7, 1989
exchanged the unused portion of the conjunction ticket for a oneway ticket from Geneva to New York from the petitioner airline.
Petitioner issued its own ticket to the private respondent in
Geneva and claimed the value of the unused portion of the
conjunction ticket from the IATA[2] clearing house in
Geneva. Ncmmis
In September 1989, private respondent filed an action for
damages before the regional trial court of Cebu for the alleged
embarassment and mental anguish he suffered at the Geneva
Airport when the petitioners security officers prevented him from
boarding the plane, detained him for about an hour and allowed
him to board the plane only after all the other passengers have
boarded. The petitioner filed a motion to dismiss for lack of

jurisdiction of Philippine courts to entertain the said proceedings


under Art. 28 (1) of the Warsaw Convention. The trial court denied
the motion. The order of denial was elevated to the Court of
Appeals which affirmed the ruling of the trial court. Both the trial
and that appellate courts held that the suit may be brought in the
Philippines under the pool partnership agreement among the IATA
members, which include Singapore Airlines and American Airlines,
wherein the members act as agents of each other in the issuance
of tickets to those who may need their services. The contract of
carriage perfected in Manila between the private respondent and
Singapore Airlines binds the petitioner as an agent of Singapore
Airlines and considering that the petitioner has a place of
business in Manila, the third option of the plaintiff under the
Warsaw Convention i.e. the action may be brought in the place
where the contract was perfected and where the airline has a
place of business, is applicable. Hence this petition assailing the
order upholding the jurisdiction of Philippine courts over the
instant action. Scnc m
Both parties filed simultaneous memoranda pursuant to the
resolution of this Court giving due course to the petition.
The petitioners theory is as follows: Under Art 28 (1) of the
Warsaw convention an action for damages must be brought at the
option of the plaintiff either before the court of the 1) domicile of
the carrier; 2) the carriers principal place of business; 3) the place
where the carrier has a place of business through which the
contract was made; 4) the place of destination. The petitioner

asserts that the Philippines is neither the domicile nor the


principal place of business of the defendant airline; nor is it the
place of destination. As regards the third option of the plaintiff,
the petitioner contends that since the Philippines is not the place
where the contract of carriage was made between the parties
herein, Philippine courts do not have jurisdiction over this action
for damages. The issuance of petitioners own ticket in Geneva in
exchange for the conjunction ticket issued by Singapore Airlines
for the final leg of the private respondents trip gave rise to a
separate and distinct contract of carriage from that entered into
by the private respondent with Singapore Airlines in Manila.
Petitioner lays stress on the fact that the plane ticket for a direct
flight from Geneva to New York was purchased by the private
respondent from the petitioner by "exchange and cash" which
signifies that the contract of carriage with Singapore Airlines was
terminated and a second contract was perfected. Moreover, the
second contract of carriage cannot be deemed to have been an
extension of the first as the petitioner airline is not a participating
airline in any of the destinations under the first contract. The
petitioner claims that the private respondents argument that the
petitioner is bound under the IATA Rules as agent of the principal
airline is irrelevant and the alleged bad faith of the airline does
not remove the case from the applicability of the Warsaw
Convention. Further, the IATA Rule cited by the private respondent
which is admittedly printed on the ticket issued by the petitioner
to him which states, "An air carrier issuing a ticket for carriage

over the lines of another carrier does so only as its agent" does
not apply herein, as neither Singapore Airlines nor the petitioner
issued a ticket to the private respondent covering the route of the
other. Since the conjunction tickets issued by Singapore Airlines
do not include the route covered by the ticket issued by the
petitioner, the petitioner airline submits that it did not act as an
agent of Singapore Airlines. Sdaa miso
Private respondent controverts the applicability of the Warsaw
Convention in this case. He posits that under Article 17 of the
Warsaw Convention[3] a carrier may be held liable for damages if
the "accident" occurred on board the airline or in the course of
"embarking or disembarking" from the carrier and that under
Article 25 (1)[4] thereof the provisions of the convention will not
apply if the damage is caused by the "willful misconduct" of the
carrier. He argues that his cause of action is based on the incident
at the pre-departure area of the Geneva airport and not during
the process of embarking nor disembarking from the carrier and
that security officers of the petitioner airline acted in bad faith.
Accordingly, this case is released from the terms of the
Convention. Private respondent argues that assuming that the
convention applies, his trip to nine cities in different countries
performed by different carriers under the conjunction tickets
issued in Manila by Singapore Airlines is regarded as a single
transaction; as such the final leg of his trip from Geneva to New
York with the petitioner airline is part and parcel of the original
contract of carriage perfected in Manila. Thus, the third option of

the plaintiff under Art. 28 (1) e.g., where the carrier has a place of
business through which the contract of carriage was made,
applies herein and the case was properly filed in the Philippines.
The private respondent seeks affirmance of the ruling of the lower
courts that the petitioner acted as an agent of Singapore Airlines
under the IATA Rules and as an agent of the principal carrier the
petitioner may be held liable under the contract of carriage
perfected in Manila, citing the judicial admission made by the
petitioner that it claimed the value of the unused portion of the
private respondents conjunction tickets from the IATA Clearing
House in Geneva where the accounts of both airlines are
respectively credited and debited. Accordingly, the petitioner
cannot now deny the contract of agency with Singapore Airlines
after it honored the conjunction tickets issued by the latter. Sdaad
The petition is without merit.
The Warsaw Convention to which the Republic of the Philippines is
a party and which has the force and effect of law in this country
applies to all international transportation of persons, baggage or
goods performed by an aircraft gratuitously or for hire. [5] As
enumerated in the Preamble of the Convention, one of the
objectives is "to regulate in a uniform manner the conditions of
international transportation by air". [6] The contract of carriage
entered into by the private respondent with Singapore Airlines,
and subsequently with the petitioner, to transport him to nine
cities in different countries with New York as the final destination
is a contract of international transportation and the provisions of

the Convention automatically apply and exclusively govern the


rights and liabilities of the airline and its passengers. [7] This
includes section 28 (1) which enumerates the four places where
an action for damages may be brought. Scs daad
The threshold issue of jurisdiction of Philippine courts under Art 28
(1) must first be resolved before any pronouncements may be
made on the liability of the carrier thereunder. [8] The objections
raised by the private respondent that this case is released from
the terms of the Convention because the incident on which this
action is predicated did not occur in the process of embarking and
disembarking from the carrier under Art 17[9] and that the
employees of the petitioner airline acted with malice and bad
faith under Art 25 (1)[10] pertain to the merits of the case which
may be examined only if the action has first been properly
commenced under the rules on jurisdiction set forth in Art. 28 (1).
Art (28) (1) of the Warsaw Convention states: Sup rema
Art 28 (1) An action for damages must be brought at the option of
the plaintiff, in the territory of one of the High Contracting Parties,
either before the court of the domicile of the carrier or of his
principal place of business or where he has a place of business
through which the contract has been made, or before the court at
the place of destination.
There is no dispute that petitioner issued the ticket in Geneva
which was neither the domicile nor the principal place of business
of petitioner nor the respondents place of destination.

The question is whether the contract of transportation between


the petitioner and the private respondent would be considered as
a single operation and part of the contract of transportation
entered into by the latter with Singapore Airlines in Manila.
Petitioner disputes the ruling of the lower court that it is.
Petitioners main argument is that the issuance of a new ticket in
Geneva created a contract of carriage separate and distinct from
that entered by the private respondent in Manila.
We find the petitioners argument without merit. Juris
Art 1(3) of the Warsaw Convention which states:
"Transportation to be performed by several successive carriers
shall be deemed, for the purposes of this convention, to be one
undivided transportation, if it has been regarded by the parties as
a single operation, whether it has been agreed upon under the
form of a single contract or a series of contracts, and it shall not
lose its international character merely because one contract or
series of contracts is to be performed entirely within the territory
subject of the sovereignty, suzerainty, mandate or authority of
the same High contracting Party." Sc juris
The contract of carriage between the private respondent and
Singapore Airlines although performed by different carriers under
a series of airline tickets, including that issued by petitioner,
constitutes a single operation. Members of the IATA are under a
general pool partnership agreement wherein they act as agent of

each other in the issuance of tickets[11] to contracted passengers


to boost ticket sales worldwide and at the same time provide
passengers easy access to airlines which are otherwise
inaccessible in some parts of the world. Booking and reservation
among airline members are allowed even by telephone and it has
become an accepted practice among them. [12] A member airline
which enters into a contract of carriage consisting of a series of
trips to be performed by different carriers is authorized to receive
the fare for the whole trip and through the required process of
interline settlement of accounts by way of the IATA clearing house
an airline is duly compensated for the segment of the trip
serviced.[13] Thus, when the petitioner accepted the unused
portion of the conjunction tickets, entered it in the IATA clearing
house and undertook to transport the private respondent over the
route covered by the unused portion of the conjunction
tickets, i.e., Geneva to New York, the petitioner tacitly recognized
its commitment under the IATA pool arrangement to act as agent
of the principal contracting airline, Singapore Airlines, as to the
segment of the trip the petitioner agreed to undertake. As such,
the petitioner thereby assumed the obligation to take the place of
the carrier originally designated in the original conjunction ticket.
The petitioners argument that it is not a designated carrier in the
original conjunction tickets and that it issued its own ticket is not
decisive of its liability. The new ticket was simply a replacement
for the unused portion of the conjunction ticket, both tickets being
for the same amount of US$ 2,760 and having the same points of

departure and destination.[14] By constituting itself as an agent of


the principal carrier the petitioners undertaking should be taken
as part of a single operation under the contract of carriage
executed by the private respondent and Singapore Airlines in
Manila.
The quoted provisions of the Warsaw Convention Art. 1(3) clearly
states that a contract of air transportation is taken as a single
operation whether it is founded on a single contract or a series of
contracts. The number of tickets issued does not detract from the
oneness of the contract of carriage as long as the parties regard
the contract as a single operation. The evident purpose
underlying this Article is to promote international air travel by
facilitating the procurement of a series of contracts for air
transportation through a single principal and obligating different
airlines to be bound by one contract of transportation. Petitioners
acquiescence to take the place of the original designated carrier
binds it under the contract of carriage entered into by the private
respondent and Singapore Airlines in Manila. Juris sc
The third option of the plaintiff under Art 28 (1) of the Warsaw
Convention e.g., to sue in the place of business of the carrier
wherein the contract was made, is therefore, Manila, and
Philippine courts are clothed with jurisdiction over this case. We
note that while this case was filed in Cebu and not in Manila the
issue of venue is no longer an issue as the petitioner is deemed to
have waived it when it presented evidence before the trial court.

The issue raised in SP No. 31452 which is whether or not the trial
court committed grave abuse of discretion in ordering the
deposition of the petitioners security officer taken in Geneva to be
stricken off the record for failure of the said security officer to
appear before the Philippine consul in Geneva to answer the
cross-interrogatories filed by the private respondent does not
have to be resolved. The subsequent appearance of the said
security officer before the Philippine consul in Geneva on
September 19, 1994 and the answer to the cross-interrogatories
propounded by the private respondent was transmitted to the trial
court by the Philippine consul in Geneva on September 23,
1994[15] should be deemed as full compliance with the requisites
of the right of the private respondent to cross-examine the
petitioners witness. The deposition filed by the petitioner should
be reinstated as part of the evidence and considered together
with the answer to the cross-interrogatories.
WHEREFORE, the judgment of the appellate court in CA-G.R. SP
No. 30946 is affirmed. The case is ordered remanded to the court
of origin for further proceedings. The decision of the appellate
court in CA-G.R. SP. No. 31452 is set aside. The deposition of the
petitioners security officer is reinstated as part of the
evidence. Misj uris
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

SECOND DIVISION

KOREA TECHNOLOGIES CO., G.R. No. 143581


LTD.,
Petitioner,

Present:
- versus - QUISUMBING, J., Chairperson,
CARPIO,
CARPIO MORALES,
HON. ALBERTO A. LERMA, in TINGA, and
his capacity as Presiding Judge of VELASCO, JR., JJ.
Branch 256 of Regional Trial
Court of Muntinlupa City, and
PACIFIC GENERAL STEEL Promulgated:
MANUFACTURING
CORPORATION,
Respondents. January 7, 2008
x-----------------------------------------------------------------------------------------x

DECISION

VELASCO, JR., J.:

In our jurisdiction, the policy is to favor alternative methods of


resolving disputes, particularly in civil and commercial disputes.
Arbitration along with mediation, conciliation, and negotiation,
being inexpensive, speedy and less hostile methods have long
been favored by this Court. The petition before us puts at issue an
arbitration clause in a contract mutually agreed upon by the
parties stipulating that they would submit themselves to
arbitration in a foreign country. Regrettably, instead of hastening
the resolution of their dispute, the parties wittingly or unwittingly
prolonged the controversy.

Petitioner Korea Technologies Co., Ltd. (KOGIES) is a Korean


corporation which is engaged in the supply and installation of
Liquefied Petroleum Gas (LPG) Cylinder manufacturing plants,
while private respondent Pacific General Steel Manufacturing
Corp. (PGSMC) is a domestic corporation.

On March 5, 1997, PGSMC and KOGIES executed a Contract[1]


whereby KOGIES would set up an LPG Cylinder Manufacturing
Plant in Carmona, Cavite. The contract was executed in the
Philippines. On April 7, 1997, the parties executed, in Korea, an
Amendment for Contract No. KLP-970301 dated March 5, 1997[2]
amending the terms of payment. The contract and its amendment
stipulated that KOGIES will ship the machinery and facilities
necessary for manufacturing LPG cylinders for which PGSMC

would pay USD 1,224,000. KOGIES would install and initiate the
operation of the plant for which PGSMC bound itself to pay USD
306,000 upon the plants production of the 11-kg. LPG cylinder
samples. Thus, the total contract price amounted to USD
1,530,000.

On October 14, 1997, PGSMC entered into a Contract of Lease[3]


with Worth Properties, Inc. (Worth) for use of Worths 5,079-square
meter property with a 4,032-square meter warehouse building to
house the LPG manufacturing plant. The monthly rental was PhP
322,560 commencing on January 1, 1998 with a 10% annual
increment clause. Subsequently, the machineries, equipment, and
facilities for the manufacture of LPG cylinders were shipped,
delivered, and installed in the Carmona plant. PGSMC paid KOGIES
USD 1,224,000.

However, gleaned from the Certificate[4] executed by the parties


on January 22, 1998, after the installation of the plant, the initial
operation could not be conducted as PGSMC encountered
financial difficulties affecting the supply of materials, thus forcing
the parties to agree that KOGIES would be deemed to have
completely complied with the terms and conditions of the March
5, 1997 contract.

For the remaining balance of USD306,000 for the installation and


initial operation of the plant, PGSMC issued two postdated checks:
(1) BPI Check No. 0316412 dated January 30, 1998 for PhP
4,500,000; and (2) BPI Check No. 0316413 dated March 30, 1998
for PhP 4,500,000.[5]

When KOGIES deposited the checks, these were dishonored for


the reason PAYMENT STOPPED. Thus, on May 8, 1998, KOGIES
sent a demand letter[6] to PGSMC threatening criminal action for
violation of Batas Pambansa Blg. 22 in case of nonpayment. On
the same date, the wife of PGSMCs President faxed a letter dated
May 7, 1998 to KOGIES President who was then staying at a
Makati City hotel. She complained that not only did KOGIES
deliver a different brand of hydraulic press from that agreed upon
but it had not delivered several equipment parts already paid for.

On May 14, 1998, PGSMC replied that the two checks it issued
KOGIES were fully funded but the payments were stopped for
reasons previously made known to KOGIES.[7]

On June 1, 1998, PGSMC informed KOGIES that PGSMC was


canceling their Contract dated March 5, 1997 on the ground that
KOGIES had altered the quantity and lowered the quality of the
machineries and equipment it delivered to PGSMC, and that
PGSMC would dismantle and transfer the machineries, equipment,

and facilities installed in the Carmona plant. Five days later,


PGSMC filed before the Office of the Public Prosecutor an AffidavitComplaint for Estafa docketed as I.S. No. 98-03813 against Mr.
Dae Hyun Kang, President of KOGIES.

On June 15, 1998, KOGIES wrote PGSMC informing the latter that
PGSMC could not unilaterally rescind their contract nor dismantle
and transfer the machineries and equipment on mere imagined
violations by KOGIES. It also insisted that their disputes should be
settled by arbitration as agreed upon in Article 15, the arbitration
clause of their contract.

On June 23, 1998, PGSMC again wrote KOGIES reiterating the


contents of its June 1, 1998 letter threatening that the
machineries, equipment, and facilities installed in the plant would
be dismantled and transferred on July 4, 1998. Thus, on July 1,
1998, KOGIES instituted an Application for Arbitration before the
Korean Commercial Arbitration Board (KCAB) in Seoul, Korea
pursuant to Art. 15 of the Contract as amended.

On July 3, 1998, KOGIES filed a Complaint for Specific


Performance, docketed as Civil Case No. 98-117[8] against PGSMC
before the Muntinlupa City Regional Trial Court (RTC). The RTC
granted a temporary restraining order (TRO) on July 4, 1998,
which was subsequently extended until July 22, 1998. In its

complaint, KOGIES alleged that PGSMC had initially admitted that


the checks that were stopped were not funded but later on
claimed that it stopped payment of the checks for the reason that
their value was not received as the former allegedly breached
their contract by altering the quantity and lowering the quality of
the machinery and equipment installed in the plant and failed to
make the plant operational although it earlier certified to the
contrary as shown in a January 22, 1998 Certificate. Likewise,
KOGIES averred that PGSMC violated Art. 15 of their Contract, as
amended, by unilaterally rescinding the contract without resorting
to arbitration. KOGIES also asked that PGSMC be restrained from
dismantling and transferring the machinery and equipment
installed in the plant which the latter threatened to do on July 4,
1998.

On July 9, 1998, PGSMC filed an opposition to the TRO arguing


that KOGIES was not entitled to the TRO since Art. 15, the
arbitration clause, was null and void for being against public
policy as it ousts the local courts of jurisdiction over the instant
controversy.

On July 17, 1998, PGSMC filed its Answer with Compulsory


Counterclaim[9] asserting that it had the full right to dismantle
and transfer the machineries and equipment because it had paid
for them in full as stipulated in the contract; that KOGIES was not

entitled to the PhP 9,000,000 covered by the checks for failing to


completely install and make the plant operational; and that
KOGIES was liable for damages amounting to PhP 4,500,000 for
altering the quantity and lowering the quality of the machineries
and equipment. Moreover, PGSMC averred that it has already paid
PhP 2,257,920 in rent (covering January to July 1998) to Worth
and it was not willing to further shoulder the cost of renting the
premises of the plant considering that the LPG cylinder
manufacturing plant never became operational.

After the parties submitted their Memoranda, on July 23, 1998,


the RTC issued an Order denying the application for a writ of
preliminary injunction, reasoning that PGSMC had paid KOGIES
USD 1,224,000, the value of the machineries and equipment as
shown in the contract such that KOGIES no longer had proprietary
rights over them. And finally, the RTC held that Art. 15 of the
Contract as amended was invalid as it tended to oust the trial
court or any other court jurisdiction over any dispute that may
arise between the parties. KOGIES prayer for an injunctive writ
was denied.[10] The dispositive portion of the Order stated:

WHEREFORE, in view of the foregoing consideration, this Court


believes and so holds that no cogent reason exists for this Court
to grant the writ of preliminary injunction to restrain and refrain

defendant from dismantling the machineries and facilities at the


lot and building of Worth Properties, Incorporated at Carmona,
Cavite and transfer the same to another site: and therefore denies
plaintiffs application for a writ of preliminary injunction.

On July 29, 1998, KOGIES filed its Reply to Answer and Answer to
Counterclaim.[11] KOGIES denied it had altered the quantity and
lowered the quality of the machinery, equipment, and facilities it
delivered to the plant. It claimed that it had performed all the
undertakings under the contract and had already produced
certified samples of LPG cylinders. It averred that whatever was
unfinished was PGSMCs fault since it failed to procure raw
materials due to lack of funds. KOGIES, relying on Chung Fu
Industries (Phils.), Inc. v. Court of Appeals,[12] insisted that the
arbitration clause was without question valid.

After KOGIES filed a Supplemental Memorandum with Motion to


Dismiss[13] answering PGSMCs memorandum of July 22, 1998
and seeking dismissal of PGSMCs counterclaims, KOGIES, on
August 4, 1998, filed its Motion for Reconsideration[14] of the July
23, 1998 Order denying its application for an injunctive writ
claiming that the contract was not merely for machinery and
facilities worth USD 1,224,000 but was for the sale of an LPG

manufacturing plant consisting of supply of all the machinery and


facilities and transfer of technology for a total contract price of
USD 1,530,000 such that the dismantling and transfer of the
machinery and facilities would result in the dismantling and
transfer of the very plant itself to the great prejudice of KOGIES as
the still unpaid owner/seller of the plant. Moreover, KOGIES points
out that the arbitration clause under Art. 15 of the Contract as
amended was a valid arbitration stipulation under Art. 2044 of the
Civil Code and as held by this Court in Chung Fu Industries
(Phils.), Inc.[15]

In the meantime, PGSMC filed a Motion for Inspection of


Things[16] to determine whether there was indeed alteration of
the quantity and lowering of quality of the machineries and
equipment, and whether these were properly installed. KOGIES
opposed the motion positing that the queries and issues raised in
the motion for inspection fell under the coverage of the
arbitration clause in their contract.

On September 21, 1998, the trial court issued an Order (1)


granting PGSMCs motion for inspection; (2) denying KOGIES
motion for reconsideration of the July 23, 1998 RTC Order; and (3)
denying KOGIES motion to dismiss PGSMCs compulsory
counterclaims as these counterclaims fell within the requisites of
compulsory counterclaims.

On October 2, 1998, KOGIES filed an Urgent Motion for


Reconsideration[17] of the September 21, 1998 RTC Order
granting inspection of the plant and denying dismissal of PGSMCs
compulsory counterclaims.

Ten days after, on October 12, 1998, without waiting for the
resolution of its October 2, 1998 urgent motion for
reconsideration, KOGIES filed before the Court of Appeals (CA) a
petition for certiorari[18] docketed as CA-G.R. SP No. 49249,
seeking annulment of the July 23, 1998 and September 21, 1998
RTC Orders and praying for the issuance of writs of prohibition,
mandamus, and preliminary injunction to enjoin the RTC and
PGSMC from inspecting, dismantling, and transferring the
machineries and equipment in the Carmona plant, and to direct
the RTC to enforce the specific agreement on arbitration to
resolve the dispute.

In the meantime, on October 19, 1998, the RTC denied KOGIES


urgent motion for reconsideration and directed the Branch Sheriff
to proceed with the inspection of the machineries and equipment
in the plant on October 28, 1998.[19]

Thereafter, KOGIES filed a Supplement to the Petition[20] in CAG.R. SP No. 49249 informing the CA about the October 19, 1998
RTC Order. It also reiterated its prayer for the issuance of the writs
of prohibition, mandamus and preliminary injunction which was
not acted upon by the CA. KOGIES asserted that the Branch
Sheriff did not have the technical expertise to ascertain whether
or not the machineries and equipment conformed to the
specifications in the contract and were properly installed.

On November 11, 1998, the Branch Sheriff filed his Sheriffs


Report[21] finding that the enumerated machineries and
equipment were not fully and properly installed.

The Court of Appeals affirmed the trial court and declared


the arbitration clause against public policy

On May 30, 2000, the CA rendered the assailed Decision[22]


affirming the RTC Orders and dismissing the petition for certiorari
filed by KOGIES. The CA found that the RTC did not gravely abuse
its discretion in issuing the assailed July 23, 1998 and September
21, 1998 Orders. Moreover, the CA reasoned that KOGIES
contention that the total contract price for USD 1,530,000 was for
the whole plant and had not been fully paid was contrary to the

finding of the RTC that PGSMC fully paid the price of USD
1,224,000, which was for all the machineries and equipment.
According to the CA, this determination by the RTC was a factual
finding beyond the ambit of a petition for certiorari.

On the issue of the validity of the arbitration clause, the CA


agreed with the lower court that an arbitration clause which
provided for a final determination of the legal rights of the parties
to the contract by arbitration was against public policy.

On the issue of nonpayment of docket fees and non-attachment of


a certificate of non-forum shopping by PGSMC, the CA held that
the counterclaims of PGSMC were compulsory ones and payment
of docket fees was not required since the Answer with
counterclaim was not an initiatory pleading. For the same reason,
the CA said a certificate of non-forum shopping was also not
required.

Furthermore, the CA held that the petition for certiorari had been
filed prematurely since KOGIES did not wait for the resolution of
its urgent motion for reconsideration of the September 21, 1998
RTC Order which was the plain, speedy, and adequate remedy
available. According to the CA, the RTC must be given the
opportunity to correct any alleged error it has committed, and

that since the assailed orders were interlocutory, these cannot be


the subject of a petition for certiorari.

Hence, we have this Petition for Review on Certiorari under Rule


45.

The Issues

Petitioner posits that the appellate court committed the following


errors:
a. PRONOUNCING THE QUESTION OF OWNERSHIP OVER THE
MACHINERY AND FACILITIES AS A QUESTION OF FACT BEYOND THE
AMBIT OF A PETITION FOR CERTIORARI INTENDED ONLY FOR
CORRECTION OF ERRORS OF JURISDICTION OR GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF (SIC) EXCESS OF
JURISDICTION, AND CONCLUDING THAT THE TRIAL COURTS
FINDING ON THE SAME QUESTION WAS IMPROPERLY RAISED IN
THE PETITION BELOW;

b. DECLARING AS NULL AND VOID THE ARBITRATION CLAUSE IN


ARTICLE 15 OF THE CONTRACT BETWEEN THE PARTIES FOR BEING
CONTRARY TO PUBLIC POLICY AND FOR OUSTING THE COURTS OF
JURISDICTION;

c.

DECREEING PRIVATE RESPONDENTS

COUNTERCLAIMS TO BE ALL COMPULSORY NOT NECESSITATING


PAYMENT OF DOCKET FEES AND CERTIFICATION OF NON-FORUM
SHOPPING;

d.

RULING THAT THE PETITION WAS FILED

PREMATURELY WITHOUT WAITING FOR THE RESOLUTION OF THE


MOTION FOR RECONSIDERATION OF THE ORDER DATED
SEPTEMBER 21, 1998 OR WITHOUT GIVING THE TRIAL COURT AN
OPPORTUNITY TO CORRECT ITSELF;

e.

PROCLAIMING THE TWO ORDERS DATED JULY 23

AND SEPTEMBER 21, 1998 NOT TO BE PROPER SUBJECTS OF


CERTIORARI AND PROHIBITION FOR BEING INTERLOCUTORY IN
NATURE;

f.

NOT GRANTING THE RELIEFS AND REMEDIES

PRAYED FOR IN HE (SIC) PETITION AND, INSTEAD, DISMISSING THE


SAME FOR ALLEGEDLY WITHOUT MERIT.[23]

The Courts Ruling

The petition is partly meritorious.

Before we delve into the substantive issues, we shall first tackle


the procedural issues.

The rules on the payment of docket fees for counterclaims


and cross claims were amended effective August 16, 2004

KOGIES strongly argues that when PGSMC filed the counterclaims,


it should have paid docket fees and filed a certificate of nonforum shopping, and that its failure to do so was a fatal defect.

We disagree with KOGIES.

As aptly ruled by the CA, the counterclaims of PGSMC were


incorporated in its Answer with Compulsory Counterclaim dated
July 17, 1998 in accordance with Section 8 of Rule 11, 1997
Revised Rules of Civil Procedure, the rule that was effective at the
time the Answer with Counterclaim was filed. Sec. 8 on existing
counterclaim or cross-claim states, A compulsory counterclaim or
a cross-claim that a defending party has at the time he files his
answer shall be contained therein.

On July 17, 1998, at the time PGSMC filed its Answer incorporating
its counterclaims against KOGIES, it was not liable to pay filing
fees for said counterclaims being compulsory in nature. We stress,
however, that effective August 16, 2004 under Sec. 7, Rule 141,
as amended by A.M. No. 04-2-04-SC, docket fees are now required
to be paid in compulsory counterclaim or cross-claims.

As to the failure to submit a certificate of forum shopping,


PGSMCs Answer is not an initiatory pleading which requires a
certification against forum shopping under Sec. 5[24] of Rule 7,
1997 Revised Rules of Civil Procedure. It is a responsive pleading,
hence, the courts a quo did not commit reversible error in denying
KOGIES motion to dismiss PGSMCs compulsory counterclaims.

Interlocutory orders proper subject of certiorari

Citing Gamboa v. Cruz,[25] the CA also pronounced that certiorari


and Prohibition are neither the remedies to question the propriety
of an interlocutory order of the trial court.[26] The CA erred on its
reliance on Gamboa. Gamboa involved the denial of a motion to
acquit in a criminal case which was not assailable in an action for
certiorari since the denial of a motion to quash required the

accused to plead and to continue with the trial, and whatever


objections the accused had in his motion to quash can then be
used as part of his defense and subsequently can be raised as
errors on his appeal if the judgment of the trial court is adverse to
him. The general rule is that interlocutory orders cannot be
challenged by an appeal.[27] Thus, in Yamaoka v. Pescarich
Manufacturing Corporation, we held:

The proper remedy in such cases is an ordinary appeal from an


adverse judgment on the merits, incorporating in said appeal the
grounds for assailing the interlocutory orders. Allowing appeals
from interlocutory orders would result in the sorry spectacle of a
case being subject of a counterproductive ping-pong to and from
the appellate court as often as a trial court is perceived to have
made an error in any of its interlocutory rulings. However, where
the assailed interlocutory order was issued with grave abuse of
discretion or patently erroneous and the remedy of appeal would
not afford adequate and expeditious relief, the Court allows
certiorari as a mode of redress.[28]

Also, appeals from interlocutory orders would open the floodgates


to endless occasions for dilatory motions. Thus, where the
interlocutory order was issued without or in excess of jurisdiction
or with grave abuse of discretion, the remedy is certiorari.[29]

The alleged grave abuse of discretion of the respondent court


equivalent to lack of jurisdiction in the issuance of the two
assailed orders coupled with the fact that there is no plain,
speedy, and adequate remedy in the ordinary course of law amply
provides the basis for allowing the resort to a petition for
certiorari under Rule 65.

Prematurity of the petition before the CA

Neither do we think that KOGIES was guilty of forum shopping in


filing the petition for certiorari. Note that KOGIES motion for
reconsideration of the July 23, 1998 RTC Order which denied the
issuance of the injunctive writ had already been denied. Thus,
KOGIES only remedy was to assail the RTCs interlocutory order via
a petition for certiorari under Rule 65.

While the October 2, 1998 motion for reconsideration of KOGIES


of the September 21, 1998 RTC Order relating to the inspection of
things, and the allowance of the compulsory counterclaims has
not yet been resolved, the circumstances in this case would allow
an exception to the rule that before certiorari may be availed of,
the petitioner must have filed a motion for reconsideration and
said motion should have been first resolved by the court a quo.

The reason behind the rule is to enable the lower court, in the first
instance, to pass upon and correct its mistakes without the
intervention of the higher court.[30]

The September 21, 1998 RTC Order directing the branch sheriff to
inspect the plant, equipment, and facilities when he is not
competent and knowledgeable on said matters is evidently flawed
and devoid of any legal support. Moreover, there is an urgent
necessity to resolve the issue on the dismantling of the facilities
and any further delay would prejudice the interests of KOGIES.
Indeed, there is real and imminent threat of irreparable
destruction or substantial damage to KOGIES equipment and
machineries. We find the resort to certiorari based on the gravely
abusive orders of the trial court sans the ruling on the October 2,
1998 motion for reconsideration to be proper.

The Core Issue: Article 15 of the Contract

We now go to the core issue of the validity of Art. 15 of the


Contract, the arbitration clause. It provides:

Article 15. Arbitration.All disputes, controversies, or differences


which may arise between the parties, out of or in relation to or in
connection with this Contract or for the breach thereof, shall

finally be settled by arbitration in Seoul, Korea in accordance with


the Commercial Arbitration Rules of the Korean Commercial
Arbitration Board. The award rendered by the arbitration(s) shall
be final and binding upon both parties concerned. (Emphasis
supplied.)

Petitioner claims the RTC and the CA erred in ruling that the
arbitration clause is null and void.

Petitioner is correct.

Established in this jurisdiction is the rule that the law of the place
where the contract is made governs. Lex loci contractus. The
contract in this case was perfected here in the Philippines.
Therefore, our laws ought to govern. Nonetheless, Art. 2044 of the
Civil Code sanctions the validity of mutually agreed arbitral clause
or the finality and binding effect of an arbitral award. Art. 2044
provides, Any stipulation that the arbitrators award or decision
shall be final, is valid, without prejudice to Articles 2038, 2039
and 2040. (Emphasis supplied.)

Arts. 2038,[31] 2039,[32] and 2040[33] abovecited refer to


instances where a compromise or an arbitral award, as applied to

Art. 2044 pursuant to Art. 2043,[34] may be voided, rescinded, or


annulled, but these would not denigrate the finality of the arbitral
award.

The arbitration clause was mutually and voluntarily agreed upon


by the parties. It has not been shown to be contrary to any law, or
against morals, good customs, public order, or public policy. There
has been no showing that the parties have not dealt with each
other on equal footing. We find no reason why the arbitration
clause should not be respected and complied with by both parties.
In Gonzales v. Climax Mining Ltd.,[35] we held that submission to
arbitration is a contract and that a clause in a contract providing
that all matters in dispute between the parties shall be referred to
arbitration is a contract.[36] Again in Del Monte Corporation-USA
v. Court of Appeals, we likewise ruled that [t]he provision to
submit to arbitration any dispute arising therefrom and the
relationship of the parties is part of that contract and is itself a
contract.[37]

Arbitration clause not contrary to public policy

The arbitration clause which stipulates that the arbitration must


be done in Seoul, Korea in accordance with the Commercial
Arbitration Rules of the KCAB, and that the arbitral award is final
and binding, is not contrary to public policy. This Court has

sanctioned the validity of arbitration clauses in a catena of cases.


In the 1957 case of Eastboard Navigation Ltd. v. Juan Ysmael and
Co., Inc.,[38] this Court had occasion to rule that an arbitration
clause to resolve differences and breaches of mutually agreed
contractual terms is valid. In BF Corporation v. Court of Appeals,
we held that [i]n this jurisdiction, arbitration has been held valid
and constitutional. Even before the approval on June 19, 1953 of
Republic Act No. 876, this Court has countenanced the settlement
of disputes through arbitration. Republic Act No. 876 was adopted
to supplement the New Civil Codes provisions on arbitration.[39]
And in LM Power Engineering Corporation v. Capitol Industrial
Construction Groups, Inc., we declared that:

Being an inexpensive, speedy and amicable method of settling


disputes, arbitrationalong with mediation, conciliation and
negotiationis encouraged by the Supreme Court. Aside from
unclogging judicial dockets, arbitration also hastens the resolution
of disputes, especially of the commercial kind. It is thus regarded
as the wave of the future in international civil and commercial
disputes. Brushing aside a contractual agreement calling for
arbitration between the parties would be a step backward.

Consistent with the above-mentioned policy of encouraging


alternative dispute resolution methods, courts should liberally
construe arbitration clauses. Provided such clause is susceptible

of an interpretation that covers the asserted dispute, an order to


arbitrate should be granted. Any doubt should be resolved in
favor of arbitration.[40]

Having said that the instant arbitration clause is not against


public policy, we come to the question on what governs an
arbitration clause specifying that in case of any dispute arising
from the contract, an arbitral panel will be constituted in a foreign
country and the arbitration rules of the foreign country would
govern and its award shall be final and binding.

RA 9285 incorporated the UNCITRAL Model law


to which we are a signatory

For domestic arbitration proceedings, we have particular agencies


to arbitrate disputes arising from contractual relations. In case a
foreign arbitral body is chosen by the parties, the arbitration rules
of our domestic arbitration bodies would not be applied. As
signatory to the Arbitration Rules of the UNCITRAL Model Law on
International Commercial Arbitration[41] of the United Nations
Commission on International Trade Law (UNCITRAL) in the New
York Convention on June 21, 1985, the Philippines committed itself

to be bound by the Model Law. We have even incorporated the


Model Law in Republic Act No. (RA) 9285, otherwise known as the
Alternative Dispute Resolution Act of 2004 entitled An Act to
Institutionalize the Use of an Alternative Dispute Resolution
System in the Philippines and to Establish the Office for
Alternative Dispute Resolution, and for Other Purposes,
promulgated on April 2, 2004. Secs. 19 and 20 of Chapter 4 of the
Model Law are the pertinent provisions:

CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION

SEC. 19. Adoption of the Model Law on International Commercial


Arbitration.International commercial arbitration shall be governed
by the Model Law on International Commercial Arbitration (the
Model Law) adopted by the United Nations Commission on
International Trade Law on June 21, 1985 (United Nations
Document A/40/17) and recommended for enactment by the
General Assembly in Resolution No. 40/72 approved on December
11, 1985, copy of which is hereto attached as Appendix A.

SEC. 20. Interpretation of Model Law.In interpreting the Model


Law, regard shall be had to its international origin and to the need
for uniformity in its interpretation and resort may be made to the
travaux preparatories and the report of the Secretary General of
the United Nations Commission on International Trade Law dated

March 25, 1985 entitled, International Commercial Arbitration:


Analytical Commentary on Draft Trade identified by reference
number A/CN. 9/264.

While RA 9285 was passed only in 2004, it nonetheless applies in


the instant case since it is a procedural law which has a
retroactive effect. Likewise, KOGIES filed its application for
arbitration before the KCAB on July 1, 1998 and it is still pending
because no arbitral award has yet been rendered. Thus, RA 9285
is applicable to the instant case. Well-settled is the rule that
procedural laws are construed to be applicable to actions pending
and undetermined at the time of their passage, and are deemed
retroactive in that sense and to that extent. As a general rule, the
retroactive application of procedural laws does not violate any
personal rights because no vested right has yet attached nor
arisen from them.[42]

Among the pertinent features of RA 9285 applying and


incorporating the UNCITRAL Model Law are the following:

(1) The RTC must refer to arbitration in proper cases

Under Sec. 24, the RTC does not have jurisdiction over disputes
that are properly the subject of arbitration pursuant to an
arbitration clause, and mandates the referral to arbitration in such
cases, thus:

SEC. 24. Referral to Arbitration.A court before which an action is


brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than
the pre-trial conference, or upon the request of both parties
thereafter, refer the parties to arbitration unless it finds that the
arbitration agreement is null and void, inoperative or incapable of
being performed.

(2) Foreign arbitral awards must be confirmed by the RTC

Foreign arbitral awards while mutually stipulated by the parties in


the arbitration clause to be final and binding are not immediately
enforceable or cannot be implemented immediately. Sec. 35[43]
of the UNCITRAL Model Law stipulates the requirement for the
arbitral award to be recognized by a competent court for
enforcement, which court under Sec. 36 of the UNCITRAL Model

Law may refuse recognition or enforcement on the grounds


provided for. RA 9285 incorporated these provisos to Secs. 42, 43,
and 44 relative to Secs. 47 and 48, thus:

SEC. 42. Application of the New York Convention.The New York


Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall be


filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said
procedural rules shall provide that the party relying on the award
or applying for its enforcement shall file with the court the original
or authenticated copy of the award and the arbitration
agreement. If the award or agreement is not made in any of the
official languages, the party shall supply a duly certified
translation thereof into any of such languages.

The applicant shall establish that the country in which foreign


arbitration award was made in party to the New York Convention.

xxxx

SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards


Not Covered by the New York Convention.The recognition and
enforcement of foreign arbitral awards not covered by the New
York Convention shall be done in accordance with procedural rules
to be promulgated by the Supreme Court. The Court may, on
grounds of comity and reciprocity, recognize and enforce a nonconvention award as a convention award.

SEC. 44. Foreign Arbitral Award Not Foreign Judgment.A foreign


arbitral award when confirmed by a court of a foreign country,
shall be recognized and enforced as a foreign arbitral award and
not as a judgment of a foreign court.

A foreign arbitral award, when confirmed by the Regional Trial


Court, shall be enforced in the same manner as final and
executory decisions of courts of law of the Philippines

xxxx

SEC. 47. Venue and Jurisdiction.Proceedings for recognition and


enforcement of an arbitration agreement or for vacations, setting
aside, correction or modification of an arbitral award, and any
application with a court for arbitration assistance and supervision
shall be deemed as special proceedings and shall be filed with the

Regional Trial Court (i) where arbitration proceedings are


conducted; (ii) where the asset to be attached or levied upon, or
the act to be enjoined is located; (iii) where any of the parties to
the dispute resides or has his place of business; or (iv) in the
National Judicial Capital Region, at the option of the applicant.

SEC. 48. Notice of Proceeding to Parties.In a special proceeding


for recognition and enforcement of an arbitral award, the Court
shall send notice to the parties at their address of record in the
arbitration, or if any part cannot be served notice at such address,
at such partys last known address. The notice shall be sent al
least fifteen (15) days before the date set for the initial hearing of
the application.

It is now clear that foreign arbitral awards when confirmed by the


RTC are deemed not as a judgment of a foreign court but as a
foreign arbitral award, and when confirmed, are enforced as final
and executory decisions of our courts of law.

Thus, it can be gleaned that the concept of a final and binding


arbitral award is similar to judgments or awards given by some of
our quasi-judicial bodies, like the National Labor Relations
Commission and Mines Adjudication Board, whose final judgments

are stipulated to be final and binding, but not immediately


executory in the sense that they may still be judicially reviewed,
upon the instance of any party. Therefore, the final foreign arbitral
awards are similarly situated in that they need first to be
confirmed by the RTC.

(3) The RTC has jurisdiction to review foreign arbitral awards

Sec. 42 in relation to Sec. 45 of RA 9285 designated and vested


the RTC with specific authority and jurisdiction to set aside, reject,
or vacate a foreign arbitral award on grounds provided under Art.
34(2) of the UNCITRAL Model Law. Secs. 42 and 45 provide:

SEC. 42. Application of the New York Convention.The New York


Convention shall govern the recognition and enforcement of
arbitral awards covered by said Convention.

The recognition and enforcement of such arbitral awards shall be


filed with the Regional Trial Court in accordance with the rules of
procedure to be promulgated by the Supreme Court. Said
procedural rules shall provide that the party relying on the award
or applying for its enforcement shall file with the court the original
or authenticated copy of the award and the arbitration
agreement. If the award or agreement is not made in any of the

official languages, the party shall supply a duly certified


translation thereof into any of such languages.

The applicant shall establish that the country in which foreign


arbitration award was made is party to the New York Convention.

If the application for rejection or suspension of enforcement of an


award has been made, the Regional Trial Court may, if it considers
it proper, vacate its decision and may also, on the application of
the party claiming recognition or enforcement of the award, order
the party to provide appropriate security.

xxxx

SEC. 45. Rejection of a Foreign Arbitral Award.A party to a foreign


arbitration proceeding may oppose an application for recognition
and enforcement of the arbitral award in accordance with the
procedures and rules to be promulgated by the Supreme Court
only on those grounds enumerated under Article V of the New
York Convention. Any other ground raised shall be disregarded by
the Regional Trial Court.

Thus, while the RTC does not have jurisdiction over disputes
governed by arbitration mutually agreed upon by the parties, still
the foreign arbitral award is subject to judicial review by the RTC
which can set aside, reject, or vacate it. In this sense, what this
Court held in Chung Fu Industries (Phils.), Inc. relied upon by
KOGIES is applicable insofar as the foreign arbitral awards, while
final and binding, do not oust courts of jurisdiction since these
arbitral awards are not absolute and without exceptions as they
are still judicially reviewable. Chapter 7 of RA 9285 has made it
clear that all arbitral awards, whether domestic or foreign, are
subject to judicial review on specific grounds provided for.
(4) Grounds for judicial review different in domestic and foreign
arbitral awards

The differences between a final arbitral award from an


international or foreign arbitral tribunal and an award given by a
local arbitral tribunal are the specific grounds or conditions that
vest jurisdiction over our courts to review the awards.

For foreign or international arbitral awards which must first be


confirmed by the RTC, the grounds for setting aside, rejecting or
vacating the award by the RTC are provided under Art. 34(2) of
the UNCITRAL Model Law.

For final domestic arbitral awards, which also need confirmation


by the RTC pursuant to Sec. 23 of RA 876[44] and shall be
recognized as final and executory decisions of the RTC,[45] they
may only be assailed before the RTC and vacated on the grounds
provided under Sec. 25 of RA 876.[46]

(5) RTC decision of assailed foreign arbitral award appealable

Sec. 46 of RA 9285 provides for an appeal before the CA as the


remedy of an aggrieved party in cases where the RTC sets aside,
rejects, vacates, modifies, or corrects an arbitral award, thus:

SEC. 46. Appeal from Court Decision or Arbitral Awards.A decision


of the Regional Trial Court confirming, vacating, setting aside,
modifying or correcting an arbitral award may be appealed to the
Court of Appeals in accordance with the rules and procedure to be
promulgated by the Supreme Court.

The losing party who appeals from the judgment of the court
confirming an arbitral award shall be required by the appellate
court to post a counterbond executed in favor of the prevailing

party equal to the amount of the award in accordance with the


rules to be promulgated by the Supreme Court.

Thereafter, the CA decision may further be appealed or reviewed


before this Court through a petition for review under Rule 45 of
the Rules of Court.
PGSMC has remedies to protect its interests

Thus, based on the foregoing features of RA 9285, PGSMC must


submit to the foreign arbitration as it bound itself through the
subject contract. While it may have misgivings on the foreign
arbitration done in Korea by the KCAB, it has available remedies
under RA 9285. Its interests are duly protected by the law which
requires that the arbitral award that may be rendered by KCAB
must be confirmed here by the RTC before it can be enforced.

With our disquisition above, petitioner is correct in its contention


that an arbitration clause, stipulating that the arbitral award is
final and binding, does not oust our courts of jurisdiction as the
international arbitral award, the award of which is not absolute
and without exceptions, is still judicially reviewable under certain
conditions provided for by the UNCITRAL Model Law on ICA as
applied and incorporated in RA 9285.

Finally, it must be noted that there is nothing in the subject


Contract which provides that the parties may dispense with the
arbitration clause.

Unilateral rescission improper and illegal

Having ruled that the arbitration clause of the subject contract is


valid and binding on the parties, and not contrary to public policy;
consequently, being bound to the contract of arbitration, a party
may not unilaterally rescind or terminate the contract for
whatever cause without first resorting to arbitration.
What this Court held in University of the Philippines v. De Los
Angeles[47] and reiterated in succeeding cases,[48] that the act
of treating a contract as rescinded on account of infractions by
the other contracting party is valid albeit provisional as it can be
judicially assailed, is not applicable to the instant case on account
of a valid stipulation on arbitration. Where an arbitration clause in
a contract is availing, neither of the parties can unilaterally treat
the contract as rescinded since whatever infractions or breaches
by a party or differences arising from the contract must be
brought first and resolved by arbitration, and not through an
extrajudicial rescission or judicial action.

The issues arising from the contract between PGSMC and KOGIES
on whether the equipment and machineries delivered and
installed were properly installed and operational in the plant in
Carmona, Cavite; the ownership of equipment and payment of the
contract price; and whether there was substantial compliance by
KOGIES in the production of the samples, given the alleged fact
that PGSMC could not supply the raw materials required to
produce the sample LPG cylinders, are matters proper for
arbitration. Indeed, we note that on July 1, 1998, KOGIES
instituted an Application for Arbitration before the KCAB in Seoul,
Korea pursuant to Art. 15 of the Contract as amended. Thus, it is
incumbent upon PGSMC to abide by its commitment to arbitrate.

Corollarily, the trial court gravely abused its discretion in granting


PGSMCs Motion for Inspection of Things on September 21, 1998,
as the subject matter of the motion is under the primary
jurisdiction of the mutually agreed arbitral body, the KCAB in
Korea.
In addition, whatever findings and conclusions made by the RTC
Branch Sheriff from the inspection made on October 28, 1998, as
ordered by the trial court on October 19, 1998, is of no worth as
said Sheriff is not technically competent to ascertain the actual
status of the equipment and machineries as installed in the plant.

For these reasons, the September 21, 1998 and October 19, 1998
RTC Orders pertaining to the grant of the inspection of the
equipment and machineries have to be recalled and nullified.

Issue on ownership of plant proper for arbitration

Petitioner assails the CA ruling that the issue petitioner raised on


whether the total contract price of USD 1,530,000 was for the
whole plant and its installation is beyond the ambit of a Petition
for Certiorari.

Petitioners position is untenable.

It is settled that questions of fact cannot be raised in an original


action for certiorari.[49] Whether or not there was full payment
for the machineries and equipment and installation is indeed a
factual issue prohibited by Rule 65.

However, what appears to constitute a grave abuse of discretion


is the order of the RTC in resolving the issue on the ownership of
the plant when it is the arbitral body (KCAB) and not the RTC
which has jurisdiction and authority over the said issue. The RTCs

determination of such factual issue constitutes grave abuse of


discretion and must be reversed and set aside.

RTC has interim jurisdiction to protect the rights of the parties

Anent the July 23, 1998 Order denying the issuance of the
injunctive writ paving the way for PGSMC to dismantle and
transfer the equipment and machineries, we find it to be in order
considering the factual milieu of the instant case.

Firstly, while the issue of the proper installation of the equipment


and machineries might well be under the primary jurisdiction of
the arbitral body to decide, yet the RTC under Sec. 28 of RA 9285
has jurisdiction to hear and grant interim measures to protect
vested rights of the parties. Sec. 28 pertinently provides:

SEC. 28. Grant of interim Measure of Protection.(a) It is not


incompatible with an arbitration agreement for a party to request,
before constitution of the tribunal, from a Court to grant such
measure. After constitution of the arbitral tribunal and during
arbitral proceedings, a request for an interim measure of
protection, or modification thereof, may be made with the arbitral

or to the extent that the arbitral tribunal has no power to act or is


unable to act effectivity, the request may be made with the Court.
The arbitral tribunal is deemed constituted when the sole
arbitrator or the third arbitrator, who has been nominated, has
accepted the nomination and written communication of said
nomination and acceptance has been received by the party
making the request.

(b) The following rules on interim or provisional relief shall be


observed:

Any party may request that provisional relief be granted against


the adverse party.

Such relief may be granted:

(i) to prevent irreparable loss or injury;


(ii) to provide security for the performance of any obligation;
(iii) to produce or preserve any evidence; or
(iv) to compel any other appropriate act or omission.

(c) The order granting provisional relief may be conditioned upon


the provision of security or any act or omission specified in the
order.

(d) Interim or provisional relief is requested by written application


transmitted by reasonable means to the Court or arbitral tribunal
as the case may be and the party against whom the relief is
sought, describing in appropriate detail the precise relief, the
party against whom the relief is requested, the grounds for the
relief, and the evidence supporting the request.

(e) The order shall be binding upon the parties.

(f) Either party may apply with the Court for assistance in
implementing or enforcing an interim measure ordered by an
arbitral tribunal.

(g) A party who does not comply with the order shall be liable for
all damages resulting from noncompliance, including all expenses,
and reasonable attorney's fees, paid in obtaining the orders
judicial enforcement. (Emphasis ours.)

Art. 17(2) of the UNCITRAL Model Law on ICA defines an interim


measure of protection as:

Article 17. Power of arbitral tribunal to order interim measures

xxx xxx xxx

(2) An interim measure is any temporary measure, whether in the


form of an award or in another form, by which, at any time prior
to the issuance of the award by which the dispute is finally
decided, the arbitral tribunal orders a party to:

(a) Maintain or restore the status quo pending determination of


the dispute;

(b) Take action that would prevent, or refrain from taking action
that is likely to cause, current or imminent harm or prejudice to
the arbitral process itself;

(c) Provide a means of preserving assets out of which a


subsequent award may be satisfied; or

(d) Preserve evidence that may be relevant and material to the


resolution of the dispute.

Art. 17 J of UNCITRAL Model Law on ICA also grants courts power


and jurisdiction to issue interim measures:

Article 17 J. Court-ordered interim measures

A court shall have the same power of issuing an interim measure


in relation to arbitration proceedings, irrespective of whether their
place is in the territory of this State, as it has in relation to
proceedings in courts. The court shall exercise such power in
accordance with its own procedures in consideration of the
specific features of international arbitration.

In the recent 2006 case of Transfield Philippines, Inc. v. Luzon


Hydro Corporation, we were explicit that even the pendency of an
arbitral proceeding does not foreclose resort to the courts for
provisional reliefs. We explicated this way:

As a fundamental point, the pendency of arbitral proceedings


does not foreclose resort to the courts for provisional reliefs. The
Rules of the ICC, which governs the parties arbitral dispute, allows
the application of a party to a judicial authority for interim or
conservatory measures. Likewise, Section 14 of Republic Act (R.A.)
No. 876 (The Arbitration Law) recognizes the rights of any party to
petition the court to take measures to safeguard and/or conserve
any matter which is the subject of the dispute in arbitration. In
addition, R.A. 9285, otherwise known as the Alternative Dispute
Resolution Act of 2004, allows the filing of provisional or interim
measures with the regular courts whenever the arbitral tribunal
has no power to act or to act effectively.[50]

It is thus beyond cavil that the RTC has authority and jurisdiction
to grant interim measures of protection.

Secondly, considering that the equipment and machineries are in


the possession of PGSMC, it has the right to protect and preserve
the equipment and machineries in the best way it can.
Considering that the LPG plant was non-operational, PGSMC has
the right to dismantle and transfer the equipment and
machineries either for their protection and preservation or for the
better way to make good use of them which is ineluctably within
the management discretion of PGSMC.

Thirdly, and of greater import is the reason that maintaining the


equipment and machineries in Worths property is not to the best
interest of PGSMC due to the prohibitive rent while the LPG plant
as set-up is not operational. PGSMC was losing PhP322,560 as
monthly rentals or PhP3.87M for 1998 alone without considering
the 10% annual rent increment in maintaining the plant.

Fourthly, and corollarily, while the KCAB can rule on motions or


petitions relating to the preservation or transfer of the equipment
and machineries as an interim measure, yet on hindsight, the July
23, 1998 Order of the RTC allowing the transfer of the equipment
and machineries given the non-recognition by the lower courts of
the arbitral clause, has accorded an interim measure of protection
to PGSMC which would otherwise been irreparably damaged.

Fifth, KOGIES is not unjustly prejudiced as it has already been paid


a substantial amount based on the contract. Moreover, KOGIES is
amply protected by the arbitral action it has instituted before the
KCAB, the award of which can be enforced in our jurisdiction
through the RTC. Besides, by our decision, PGSMC is compelled to
submit to arbitration pursuant to the valid arbitration clause of its
contract with KOGIES.

PGSMC to preserve the subject equipment and machineries

Finally, while PGSMC may have been granted the right to


dismantle and transfer the subject equipment and machineries, it
does not have the right to convey or dispose of the same
considering the pending arbitral proceedings to settle the
differences of the parties. PGSMC therefore must preserve and
maintain the subject equipment and machineries with the
diligence of a good father of a family[51] until final resolution of
the arbitral proceedings and enforcement of the award, if any.

WHEREFORE, this petition is PARTLY GRANTED, in that:

(1) The May 30, 2000 CA Decision in CA-G.R. SP No. 49249 is


REVERSED and SET ASIDE;

(2) The September 21, 1998 and October 19, 1998 RTC Orders in
Civil Case No. 98-117 are REVERSED and SET ASIDE;

(3) The parties are hereby ORDERED to submit themselves to the


arbitration of their dispute and differences arising from the
subject Contract before the KCAB; and

(4) PGSMC is hereby ALLOWED to dismantle and transfer the


equipment and machineries, if it had not done so, and ORDERED
to preserve and maintain them until the finality of whatever
arbitral award is given in the arbitration proceedings.

No pronouncement as to costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.


Associate Justice

[G.R. No. 128845. June 1, 2000]

INTERNATIONAL SCHOOL ALLIANCE OF EDUCATORS (ISAE),


petitioner, vs. HON. LEONARDO A. QUISUMBING in his capacity as
the Secretary of Labor and Employment; HON. CRESENCIANO B.
TRAJANO in his capacity as the Acting Secretary of Labor and
Employment; DR. BRIAN MACCAULEY in his capacity as the
Superintendent of International School-Manila; and
INTERNATIONAL SCHOOL, INC., respondents.

DECISION

KAPUNAN, J.:

Receiving salaries less than their counterparts hired abroad, the


local-hires of private respondent School, mostly Filipinos, cry
discrimination. We agree. That the local-hires are paid more than
their colleagues in other schools is, of course, beside the point.
The point is that employees should be given equal pay for work of
equal value. That is a principle long honored in this jurisdiction.
That is a principle that rests on fundamental notions of justice.
That is the principle we uphold today.

Private respondent International School, Inc. (the School, for


short), pursuant to Presidential Decree 732, is a domestic

educational institution established primarily for dependents of


foreign diplomatic personnel and other temporary residents.[1] To
enable the School to continue carrying out its educational
program and improve its standard of instruction, Section 2(c) of
the same decree authorizes the School to

employ its own teaching and management personnel selected by


it either locally or abroad, from Philippine or other nationalities,
such personnel being exempt from otherwise applicable laws and
regulations attending their employment, except laws that have
been or will be enacted for the protection of employees.

Accordingly, the School hires both foreign and local teachers as


members of its faculty, classifying the same into two: (1) foreignhires and (2) local-hires. The School employs four tests to
determine whether a faculty member should be classified as a
foreign-hire or a local hire:

a.....What is one's domicile?

b.....Where is one's home economy?

c.....To which country does one owe economic allegiance?

d.....Was the individual hired abroad specifically to work in the


School and was the School responsible for bringing that individual
to the Philippines?[2]

Should the answer to any of these queries point to the Philippines,


the faculty member is classified as a local hire; otherwise, he or
she is deemed a foreign-hire.

The School grants foreign-hires certain benefits not accorded


local-hires. These include housing, transportation, shipping costs,
taxes, and home leave travel allowance. Foreign-hires are also
paid a salary rate twenty-five percent (25%) more than localhires. The School justifies the difference on two "significant
economic disadvantages" foreign-hires have to endure, namely:
(a) the "dislocation factor" and (b) limited tenure. The School
explains:

A foreign-hire would necessarily have to uproot himself from his


home country, leave his family and friends, and take the risk of
deviating from a promising career path-all for the purpose of
pursuing his profession as an educator, but this time in a foreign

land. The new foreign hire is faced with economic realities: decent
abode for oneself and/or for one's family, effective means of
transportation, allowance for the education of one's children,
adequate insurance against illness and death, and of course the
primary benefit of a basic salary/retirement compensation.

Because of a limited tenure, the foreign hire is confronted again


with the same economic reality after his term: that he will
eventually and inevitably return to his home country where he will
have to confront the uncertainty of obtaining suitable
employment after a long period in a foreign land.

The compensation scheme is simply the School's adaptive


measure to remain competitive on an international level in terms
of attracting competent professionals in the field of international
education.[3]

When negotiations for a new collective bargaining agreement


were held on June 1995, petitioner International School Alliance of
Educators, "a legitimate labor union and the collective bargaining
representative of all faculty members"[4] of the School, contested
the difference in salary rates between foreign and local-hires. This
issue, as well as the question of whether foreign-hires should be

included in the appropriate bargaining unit, eventually caused a


deadlock between the parties.

On September 7, 1995, petitioner filed a notice of strike. The


failure of the National Conciliation and Mediation Board to bring
the parties to a compromise prompted the Department of Labor
and Employment (DOLE) to assume jurisdiction over the dispute.
On June 10, 1996, the DOLE Acting Secretary, Crescenciano B.
Trajano, issued an Order resolving the parity and representation
issues in favor of the School. Then DOLE Secretary Leonardo A.
Quisumbing subsequently denied petitioner's motion for
reconsideration in an Order dated March 19, 1997. Petitioner now
seeks relief in this Court.

Petitioner claims that the point-of-hire classification employed by


the School is discriminatory to Filipinos and that the grant of
higher salaries to foreign-hires constitutes racial discrimination.

The School disputes these claims and gives a breakdown of its


faculty members, numbering 38 in all, with nationalities other
than Filipino, who have been hired locally and classified as local
hires.[5]The Acting Secretary of Labor found that these nonFilipino local-hires received the same benefits as the Filipino localhires:

The compensation package given to local-hires has been shown to


apply to all, regardless of race. Truth to tell, there are foreigners
who have been hired locally and who are paid equally as Filipino
local hires.[6]

The Acting Secretary upheld the point-of-hire classification for the


distinction in salary rates:

The principle "equal pay for equal work" does not find application
in the present case. The international character of the School
requires the hiring of foreign personnel to deal with different
nationalities and different cultures, among the student population.

We also take cognizance of the existence of a system of salaries


and benefits accorded to foreign hired personnel which system is
universally recognized. We agree that certain amenities have to
be provided to these people in order to entice them to render
their services in the Philippines and in the process remain
competitive in the international market.

Furthermore, we took note of the fact that foreign hires have


limited contract of employment unlike the local hires who enjoy

security of tenure. To apply parity therefore, in wages and other


benefits would also require parity in other terms and conditions of
employment which include the employment contract.

A perusal of the parties' 1992-1995 CBA points us to the


conditions and provisions for salary and professional
compensation wherein the parties agree as follows:

All members of the bargaining unit shall be compensated only in


accordance with Appendix C hereof provided that the
Superintendent of the School has the discretion to recruit and hire
expatriate teachers from abroad, under terms and conditions that
are consistent with accepted international practice.

Appendix C of said CBA further provides:

The new salary schedule is deemed at equity with the Overseas


Recruited Staff (OSRS) salary schedule. The 25% differential is
reflective of the agreed value of system displacement and
contracted status of the OSRS as differentiated from the tenured
status of Locally Recruited Staff (LRS).

To our mind, these provisions demonstrate the parties' recognition


of the difference in the status of two types of employees, hence,
the difference in their salaries.

The Union cannot also invoke the equal protection clause to


justify its claim of parity. It is an established principle of
constitutional law that the guarantee of equal protection of the
laws is not violated by legislation or private covenants based on
reasonable classification. A classification is reasonable if it is
based on substantial distinctions and apply to all members of the
same class. Verily, there is a substantial distinction between
foreign hires and local hires, the former enjoying only a limited
tenure, having no amenities of their own in the Philippines and
have to be given a good compensation package in order to attract
them to join the teaching faculty of the School.[7]

We cannot agree.

That public policy abhors inequality and discrimination is beyond


contention. Our Constitution and laws reflect the policy against
these evils. The Constitution[8] in the Article on Social Justice and
Human Rights exhorts Congress to "give highest priority to the
enactment of measures that protect and enhance the right of all
people to human dignity, reduce social, economic, and political

inequalities." The very broad Article 19 of the Civil Code requires


every person, "in the exercise of his rights and in the performance
of his duties, [to] act with justice, give everyone his due, and
observe honesty and good faith."

International law, which springs from general principles of law,[9]


likewise proscribes discrimination. General principles of law
include principles of equity,[10] i.e., the general principles of
fairness and justice, based on the test of what is reasonable.[11]
The Universal Declaration of Human Rights,[12] the International
Covenant on Economic, Social, and Cultural Rights,[13] the
International Convention on the Elimination of All Forms of Racial
Discrimination,[14] the Convention against Discrimination in
Education,[15] the Convention (No. 111) Concerning
Discrimination in Respect of Employment and Occupation[16] - all
embody the general principle against discrimination, the very
antithesis of fairness and justice. The Philippines, through its
Constitution, has incorporated this principle as part of its national
laws.

In the workplace, where the relations between capital and labor


are often skewed in favor of capital, inequality and discrimination
by the employer are all the more reprehensible.

The Constitution[17] specifically provides that labor is entitled to


"humane conditions of work." These conditions are not restricted
to the physical workplace - the factory, the office or the field - but
include as well the manner by which employers treat their
employees.

The Constitution[18] also directs the State to promote "equality of


employment opportunities for all." Similarly, the Labor Code[19]
provides that the State shall "ensure equal work opportunities
regardless of sex, race or creed." It would be an affront to both
the spirit and letter of these provisions if the State, in spite of its
primordial obligation to promote and ensure equal employment
opportunities, closes its eyes to unequal and discriminatory terms
and conditions of employment.[20]

Discrimination, particularly in terms of wages, is frowned upon by


the Labor Code. Article 135, for example, prohibits and
penalizes[21] the payment of lesser compensation to a female
employee as against a male employee for work of equal value.
Article 248 declares it an unfair labor practice for an employer to
discriminate in regard to wages in order to encourage or
discourage membership in any labor organization.

Notably, the International Covenant on Economic, Social, and


Cultural Rights, supra, in Article 7 thereof, provides:

The States Parties to the present Covenant recognize the right of


everyone to the enjoyment of just and favourable conditions of
work, which ensure, in particular:

a.....Remuneration which provides all workers, as a minimum,


with:

i.....Fair wages and equal remuneration for work of equal value


without distinction of any kind, in particular women being
guaranteed conditions of work not inferior to those enjoyed by
men, with equal pay for equal work;

x x x.

The foregoing provisions impregnably institutionalize in this


jurisdiction the long honored legal truism of "equal pay for equal
work." Persons who work with substantially equal qualifications,
skill, effort and responsibility, under similar conditions, should be

paid similar salaries.[22] This rule applies to the School, its


"international character" notwithstanding.

The School contends that petitioner has not adduced evidence


that local-hires perform work equal to that of foreign-hires.[23]
The Court finds this argument a little cavalier. If an employer
accords employees the same position and rank, the presumption
is that these employees perform equal work. This presumption is
borne by logic and human experience. If the employer pays one
employee less than the rest, it is not for that employee to explain
why he receives less or why the others receive more. That would
be adding insult to injury. The employer has discriminated against
that employee; it is for the employer to explain why the employee
is treated unfairly.

The employer in this case has failed to discharge this burden.


There is no evidence here that foreign-hires perform 25% more
efficiently or effectively than the local-hires. Both groups have
similar functions and responsibilities, which they perform under
similar working conditions.

The School cannot invoke the need to entice foreign-hires to leave


their domicile to rationalize the distinction in salary rates without
violating the principle of equal work for equal pay.

"Salary" is defined in Black's Law Dictionary (5th ed.) as "a reward


or recompense for services performed." Similarly, the Philippine
Legal Encyclopedia states that "salary" is the "[c]onsideration
paid at regular intervals for the rendering of services." In Songco
v. National Labor Relations Commission,[24] we said that:

"salary" means a recompense or consideration made to a person


for his pains or industry in another man's business. Whether it be
derived from "salarium," or more fancifully from "sal," the pay of
the Roman soldier, it carries with it the fundamental idea of
compensation for services rendered. (Emphasis supplied.)

While we recognize the need of the School to attract foreign-hires,


salaries should not be used as an enticement to the prejudice of
local-hires. The local-hires perform the same services as foreignhires and they ought to be paid the same salaries as the latter.
For the same reason, the "dislocation factor" and the foreignhires' limited tenure also cannot serve as valid bases for the
distinction in salary rates. The dislocation factor and limited
tenure affecting foreign-hires are adequately compensated by
certain benefits accorded them which are not enjoyed by localhires, such as housing, transportation, shipping costs, taxes and
home leave travel allowances.

The Constitution enjoins the State to "protect the rights of


workers and promote their welfare,"[25] "to afford labor full
protection."[26] The State, therefore, has the right and duty to
regulate the relations between labor and capital.[27] These
relations are not merely contractual but are so impressed with
public interest that labor contracts, collective bargaining
agreements included, must yield to the common good.[28] Should
such contracts contain stipulations that are contrary to public
policy, courts will not hesitate to strike down these stipulations.

In this case, we find the point-of-hire classification employed by


respondent School to justify the distinction in the salary rates of
foreign-hires and local hires to be an invalid classification. There is
no reasonable distinction between the services rendered by
foreign-hires and local-hires. The practice of the School of
according higher salaries to foreign-hires contravenes public
policy and, certainly, does not deserve the sympathy of this
Court.

We agree, however, that foreign-hires do not belong to the same


bargaining unit as the local-hires.

A bargaining unit is "a group of employees of a given employer,


comprised of all or less than all of the entire body of employees,
consistent with equity to the employer indicate to be the best
suited to serve the reciprocal rights and duties of the parties
under the collective bargaining provisions of the law."[29] The
factors in determining the appropriate collective bargaining unit
are (1) the will of the employees (Globe Doctrine); (2) affinity and
unity of the employees' interest, such as substantial similarity of
work and duties, or similarity of compensation and working
conditions (Substantial Mutual Interests Rule); (3) prior collective
bargaining history; and (4) similarity of employment status.[30]
The basic test of an asserted bargaining unit's acceptability is
whether or not it is fundamentally the combination which will best
assure to all employees the exercise of their collective bargaining
rights.[31]

It does not appear that foreign-hires have indicated their intention


to be grouped together with local-hires for purposes of collective
bargaining. The collective bargaining history in the School also
shows that these groups were always treated separately. Foreignhires have limited tenure; local-hires enjoy security of tenure.
Although foreign-hires perform similar functions under the same
working conditions as the local-hires, foreign-hires are accorded
certain benefits not granted to local-hires. These benefits, such as
housing, transportation, shipping costs, taxes, and home leave
travel allowance, are reasonably related to their status as foreign-

hires, and justify the exclusion of the former from the latter. To
include foreign-hires in a bargaining unit with local-hires would
not assure either group the exercise of their respective collective
bargaining rights.

WHEREFORE, the petition is GIVEN DUE COURSE. The petition is


hereby GRANTED IN PART. The Orders of the Secretary of Labor
and Employment dated June 10, 1996 and March 19, 1997, are
hereby REVERSED and SET ASIDE insofar as they uphold the
practice of respondent School of according foreign-hires higher
salaries than local-hires.

SO ORDERED.