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ional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798.

Upon motion of the


Development Bank of the Philippines (DBP), the two petitions were consolidated since
both assail the same Decision of the Court of Appeals.

In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND) seeks judgment
declaring the National Development Company (NDC) and the DBP solidarily liable in the
amount of US$2,315,747.32, representing the maritime lien in favor of POLIAND and the
net amount of loans incurred by Galleon Shipping Corporation (GALLEON). It also prays
that NDC and DBP be ordered to pay the attorneys fees and costs of the proceedings as
solidary debtors. In G.R. No. 143877, petitioner NDC seeks the reversal of the Court of
Appeals Decision ordering it to pay POLIAND the amount of One Million Nine Hundred
Twenty Thousand Two Hundred Ninety-Eight and 56/100 United States Dollars
(US$1,920,298.56), corresponding to the maritime lien in favor of POLIAND, plus interest.

ANTECEDENTS

The following factual antecedents are matters of record.

Between October 1979 and March 1981, Asian Hardwood Limited (Asian Hardwood),
a Hong Kong corporation, extended credit accommodations in favor of GALLEON. At that
time, GALLEON, a domestic corporation organized in 1977 and headed by its president,
Roberto Cuenca, was engaged in the maritime transport of goods. The advances were
utilized to augment GALLEONs working capital depleted as a result of the purchase of
five new vessels and two second-hand vessels in 1979 and competitiveness of the
shipping industry. GALLEON had incurred an obligation in the total amount of
US$3,391,084.91 in favor of Asian Hardwood.

To finance the acquisition of the vessels, GALLEON obtained loans from Japanese
lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni Benelux. On
October 10, 1979, GALLEON, through Cuenca, and DBP executed a Deed of
Undertaking whereby DBP guaranteed the prompt and punctual payment of GALLEONs
borrowings from the Japanese lenders. To secure DBPs guarantee under the Deed of
Undertaking, GALLEON promised, among others, to secure a first mortgage on the five
new vessels and on the second-hand vessels. Thus, GALLEON executed a mortgage
contract over five of its vessels.

Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of


Instruction No. 1155, directing NDC to acquire the entire shareholdings of GALLEON for
the amount originally contributed by its shareholders payable in five years to the
government. In the same LOI, DBP was to advance to GALLEON within three years from
its effectivity the principal amount and the interest thereon of GALLEONs maturing
obligations.
On August 10, 1981, GALLEON, represented by its president, and NDC, represented
by Minister of Trade, forged a Memorandum of Agreement, whereby NDC and GALLEON
agreed to execute a share purchase agreement for the transfer of GALLEONs
shareholdings. Thereafter, NDC assumed the management and operations of
GALLEON. Using its own funds, NDC paid Asian Hardwood the amount of
US$1,000,000.00 as partial settlement of GALLEONs obligations.

On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the
mortgage on the five vessels. For failure of GALLEON to pay its debt despite repeated
demands from DBP, the vessels were extrajudicially foreclosed on various dates and
acquired by DBP and it subsequently sold the vessels to NDC for the same amount.
Asian Hardwood assigned its rights over the outstanding obligation of GALLEON of
US$2,315,747.32 to World Universal Trading and Investment Company, S.A. (World
Universal), embodied in a Deed of Assignment. World Universal, in turn, assigned the
credit to petitioner POLIAND.

On March 24, 1988, then President Aquino issued Administrative Order No. 64,
directing NDC and Philippine Export and Foreign Loan Guarantee Corporation to transfer
some of their assets to the National Government, through the Asset Privatization Trust
for disposition. Among those transferred to the APT were the five GALLEON vessels sold
at the foreclosure proceedings. On September 24, 1991, POLIAND made written demands
on GALLEON, NDC, and DBP for the satisfaction of the outstanding balance.

For failure to heed the demand, POLIAND instituted a collection suit against NDC, DBP
and GALLEON filed on October 10, 1991 with the Regional Trial Court of Makati City.
POLIAND claimed that under LOI No. 1155 and the Memorandum of Agreement between
GALLEON and NDC, defendants GALLEON, NDC, and DBP were solidarily liable to
POLIAND as assignee of the rights of the credit loan accommodations to GALLEON.
POLIAND also claimed that it had a preferred maritime lien over the proceeds of the
extrajudicial foreclosure sale of GALLEONs vessels mortgaged by NDC to DBP. The
complaint prayed for judgment ordering NDC, DBP, and GALLEON to pay POLIAND jointly
and severally the balance of the credit loan accommodations. By way of an alternative
cause of action, POLIAND sought reimbursement from NDC and DBP for the preferred
maritime lien.

In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied being a
party to any of the alleged loan transactions. Accordingly, DBP argued that POLIANDs
complaint stated no cause of action against DBP or was barred by the Statute of Frauds
because DBP did not sign any memorandum to act as guarantor for the alleged credit
advances/loan accommodations in favor of POLIAND. DBP also denied any liability under
LOI No. 1155, which it described as immoral and unconstitutional, since it was rescinded
by LOI No. 1195. By way of its Affirmative Allegations and Defenses, DBP countered that
it was unaware of the maritime lien on the five vessels mortgaged in its favor and that as
far as GALLEONs foreign borrowings are concerned, DBP agreed to act as guarantor
thereof only under the conditions laid down under the Deed of Undertaking. DBP prayed
for the award of actual, moral and exemplary damages and attorneys fees against
POLIAND as compulsory counterclaim. In the event that it be adjudged liable for the
payment of the loan accommodations and the maritime liens, DBP prayed that its co-
defendant GALLEON be ordered to indemnify DBP for the full amount. [14]

For its part, NDC denied any participation in the execution of the loan
accommodations/credit advances and acquisition of ownership of GALLEON, asserting
that it acted only as manager of GALLEON. NDC specifically denied having agreed to the
assumption of GALLEONs liabilities because no purchase and sale agreement was
executed and the delivery of the required shares of stock of GALLEON did not take place.
[15]

Upon motion by POLIAND, the trial court dropped GALLEON as a defendant, despite
vigorous oppositions from NDC and DBP. At the pre-trial conference on April 29, 1993, the
trial court issued an Orderlimiting the issues to the following: (1) whether or not
GALLEON has an outstanding obligation in the amount of US$2,315,747.32; (2) whether
or not NDC and DBP may be held solidarily liable therefor; and (3) whether or not there
exists a preferred maritime lien of P1,000,000.00 in favor of POLIAND.[16]

After trial on the merits, the court a quo rendered a decision on August 9, 1996 in
favor of POLIAND. Finding that GALLEONs loan advances/credit accommodations were
duly established by the evidence on record, the trial court concluded that under LOI No.
1155, DBP and NDC are liable for those obligations. The trial court also found NDC liable
for GALLEONs obligations based on the Memorandum of Agreement dated August 1981
executed between GALLEON and NDC, where it was provided that NDC shall prioritize
repayments of GALLEONs valid and subsisting liabilities subject of a meritorious lawsuit
or which have been arranged and guaranteed by Cuenca. The trial court was of the
opinion that despite the subsequent issuance of LOI No. 1195, NDC and DBPs obligation
under LOI No. 1155 subsisted because vested rights of the parties have arisen therefrom.
Accordingly, the trial court interpreted LOI No. 1195s directive to limit and protect to
mean that DBP and NDC should not assume or incur additional exposure with respect to
GALLEON.[17]

The trial court dismissed NDCs argument that the Memorandum of Agreement was
merely a preliminary agreement, noting that under paragraph nine thereof, the only
condition for the payment of GALLEONs subsisting loans by NDC was the determination
by the latter that those obligations were incurred in the ordinary course of GALLEONs
business. The trial court did not regard the non-execution of the stock purchase
agreement as fatal to POLIANDs cause since its non-happening was solely attributable to
NDC. The trial court also ruled that POLIAND had preference to the maritime lien over the
proceeds of the extrajudicial foreclosure sale of GALLEONs vessels since the loan
advances/credit accommodations utilized for the payment of expenses on the vessels
were obtained prior to the constitution of the mortgage in favor of DBP.

In sum, NDC and DBP were ordered to pay POLIAND as follows:

WHEREFORE, premises above considered, judgment is hereby rendered for plaintiff as


against defendants DBP and NDC, who are hereby ORDERED as follows:

1. To jointly and severally PAY plaintiff POLIAND the amount of TWO MILLION THREE
HUNDRED FIFTEEN THOUSAND SEVEN HUNDRED FORTY SEVEN AND 21/100 [sic] United
States Dollars (US$2,315,747.32) computed at the official exchange rate at the time of
payment, plus interest at the rate of 12% per annum from 25 September 1991 until fully
paid;

2. To PAY the amount of ONE MILLION (P1,000,000.) Pesos, Philippine Currency, for and as
attorneys fees; and

3. To PAY the costs of the proceedings.

SO ORDERED.[18]

Both NDC and DBP appealed the trial courts decision.

The Court of Appeals rendered a modified judgment, absolving DBP of any liability in
view of POLIANDs failure to clearly prove its action against DBP. The appellate court also
discharged NDC of any liability arising from the credit advances/loan obligations obtained
by GALLEON on the ground that NDC did not acquire ownership of GALLEON but merely
assumed control over its management and operations. However, NDC was held liable to
POLIAND for the payment of the preferred maritime lien based on LOI No. 1195 which
directed NDC to discharge such maritime liens as may be necessary to allow the
foreclosed vessels to engage on the international shipping business, as well as attorneys
fees and costs of suit. The dispositive portion of the Decision reads:

WHEREFORE, the assailed decision is MODIFIED, in accordance with the foregoing


findings, as follows:

The case against defendant-appellant DBP is hereby DISMISSED.

Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee POLIAND the


amount of US$1,920,298.56 plus legal interest effective September 12, 1984.

The award of attorneys fees and cost of suit is addressed only against NDC.

Costs against defendant-appellant NDC.


SO ORDERED.[19]

Not satisfied with the modified judgment, both POLIAND and NDC elevated it to this
Court via two separate petitions for review on certiorari. In G.R. No. 143866 filed on
August 21, 2000, petitioner POLIAND raises the following arguments:

RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERRORS IN ITS


QUESTIONED DECISION DATED 29 JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO
LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT MODIFIED
THE DECISION DATED 09 AUGUST 1996 RENDERED BY THE REGIONAL TRIAL COURT
(BRANCH 61) CONSIDERING THAT:

A.

CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, RESPONDENT NDC


NOT ONLY TOOK OVER TOTALLY THE MANAGEMENT AND CONTROL OF GALLEON BUT
ALSO ASSUMED OWNERSHIP OF GALLEON PURSUANT TO LOI NO. 1155 AND THE
MEMORANDUM OF AGREEMENT DATED 10 AUGUST 1981; THUS, RESPONDENT NDCS
ACQUISITION OF FULL OWNERSHIP AND CONTROL OF GALLEON CARRIED WITH IT THE
ASSUMPTION OF THE LATTERS LIABILITIES TO THIRD PARTIES SUCH AS ASIAN
HARDWOOD, PETITIONER POLIANDS PREDECESSOR-IN-INTEREST.

B.

RESPONDENT COURT OF APPEALS, IN VIOLATION OF THE CONSTITUTION AND THE RULES


OF COURT, DISMISSED THE CASE AGAINST RESPONDENT DBP WITHOUT STATING
CLEARLY AND DISTINCTLY THE REASONS FOR SUCH A DISMISSAL.

C.

CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS, PETITIONER POLIAND


WAS ABLE TO ESTABLISH THAT RESPONDENT DBP IS SOLIDARILY LIABLE, TOGETHER
WITH RESPONDENT NDC, WITH RESPECT TO THE NET TOTAL AMOUNT OWING TO
PETITIONER POLIAND.

D.

RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT FINDING THAT


RESPONDENT DBP IS JOINTLY AND SOLIDARILY LIABLE WITH RESPONDENT NDC FOR THE
PAYMENT OF MARITIME LIENS PLUS INTEREST PURSUANT TO SECTION 17 OF
PRESIDENTIAL DECREEE 1521.[20]

On August 25, 2000, NDC filed its petition, docketed as G.R. No. 143877, imputing
the following errors to the Court of Appeals:

I.
THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER NDC IS LIABLE TO PAY
GALLEONS OUTSTANDING OBLIGATION TO RESPONDENT POLIAND IN THE AMOUNT OF
US$ 1,920,298.56, TO SATISFY THE PREFERRED MARITIME LIENS OVER THE PROCEEDS
OF THE FORECLOSURE SALE OF THE FIVE GALLEON VESSELS.

(A) PRESIDENTIAL DECREE NO. 1521 OTHERWISE KNOWN AS THE SHIP MORTGAGE
DECREE OF 1978 IS NOT APPLICABLE IN THE CASE AT BAR.

(B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE FORECLOSURE SALE OF
THE FIVE (5) GALLEON VESSELS.

(C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS EXTINGUISHES ALL
CLAIMS AGAINST THE VESSELS.

II.

THE COURT OF APPEALS ERRED IN AWARDING ATTORNEYS FEES TO RESPONDENT


POLIAND.[21]

The two petitions were consolidated considering that both petitions assail the same
Court of Appeals Decision, although on different fronts. In G.R. No. 143866, POLIAND
questions the appellate courts finding that neither NDC nor DBP can be held liable for the
loan accommodations to GALLEON. In G.R. No. 143877, NDC asserts that it is not liable to
POLIAND for the preferred maritime lien.

ISSUES

The bone of contention revolves around two main issues, namely: (1) Whether NDC or
DBP or both are liable to POLIAND on the loan accommodations and credit advances
incurred by GALLEON, and (2) Whether POLIAND has a maritime lien enforceable against
NDC or DBP or both.

RULING of the COURT

I. Liability on loan accommodations

and credit advances incurred by GALLEON

The Court of Appeals reversed the trial courts conclusion that NDC and DBP are both
liable to POLIAND for GALLEONs debts on the basis of LOI No. 1155 and
the Memorandum of Agreement. It ratiocinated thus:

With respect to appellant NDC, resolution of the matters raised in its assignment of
errors hinges on whether or not it acquired the shareholdings of GALLEON as directed by
LOI 1155; and if in the negative, whether or not it is liable to pay GALLEONs outstanding
obligation.
The Court answers the issue in the negative. The MOA executed by GALLEON and NDC
following the issuance of LOI 1155 called for the execution of a formal share purchase
agreement and the transfer of all the shareholdings of seller to Buyer. Since no such
execution and consequent transfer of shareholdings took place, NDC did not acquire
ownership of GALLEON. It merely assumed actual control over the management and
operations of GALLEON in the exercise of which it, on January 15, 1982, after being
satisfied of the existence of GALLEONs obligation to ASIAN HARDWOOD, partially paid
the latter One Million ($1,000,000.00) US dollars.[22]

....

With respect to defendant-appellant DBP, POLIAND failed to clearly prove its cause of
action against it. This leaves it unnecessary to dwell on DBPs other assigned errors,
including that bearing on its claim for damages and attorneys fees which does not
persuade.[23]

POLIANDs cause of action against NDC is premised on the theory that when NDC
acquired all the shareholdings of GALLEON, the former also assumed the latters
liabilities, including the loan advances/credit accommodations obtained by GALLEON
from POLIANDs predecessors-in-interest. In G.R. No. 143866, POLIAND argues that NDC
acquired ownership of GALLEON pursuant to paragraphs 1 and 2 of LOI No. 1155, which
was implemented through the execution of the Memorandum of Agreement. It believes
that no conditions were required prior to the assumption by NDC of GALLEONs ownership
and subsisting loans. Even assuming that conditions were set, POLIAND opines that the
conditions were deemed fulfilled pursuant to Article 1186 of the Civil Code because of
NDCs apparent intent to prevent the execution of the share purchase agreement.[24]

On the other hand, NDC asserts that it could not have acquired GALLEONs equity
and, consequently, its liabilities because LOI No. 1155 had been rescinded by LOI No.
1195, and therefore, became inoperative and non-existent. Moreover, NDC, relying on
the pronouncements in Philippine Association of Service Exporters, Inc. et al. v. Ruben D.
Torres[25] and Parong, et al. v. Minister Enrile,[26] is of the opinion that LOI No. 1155 does
not have the force and effect of law and cannot be a valid source of obligation. [27] NDC
denies POLIANDs contention that it deliberately prevented the execution of the share
purchase agreement considering that Cuenca remained GALLEONs president seven
months after the signing of the Memorandum of Agreement.[28] NDC contends that
the Memorandum of Agreement was a mere preliminary agreement between Cuenca and
Ongpin for the intended purchase of GALLEONs equity, prescribing the manner, terms
and conditions of said purchase.[29]

NDC, not liable under LOI No. 1155

As a general rule, letters of instructions are simply directives of the President of the
Philippines, issued in the exercise of his administrative power of control, to heads of
departments and/or officers under the executive branch of the government for
observance by the officials and/or employees thereof. [30] Being administrative in nature,
they do not have the force and effect of a law and, thus, cannot be a valid source of
obligation. However, during the period when then President Marcos exercised
extraordinary legislative powers, he issued certain decrees, orders and letters of
instruction which the Court has declared as having the force and effect of a statute. As
pointed out by the Court in Legaspi v. Minister of Finance,[31] paramount considerations
compelled the grant of extraordinary legislative power to the President at that time when
the nation was beset with threats to public order and the purpose for which the authority
was granted was specific to meet the exigencies of that period, thus:

True, without loss of time, President Marcos made it clear that there was no military take-
over of the government, and that much less was there being established a revolutionary
government, even as he declared that said martial law was of a double-barrelled type,
unfamiliar to traditional constitutionalists and political scientistsfor two basic and
transcendental objectives were intended by it: (1) the quelling of nation-wide subversive
activities characteristic not only of a rebellion but of a state of war fanned by a foreign
power of a different ideology from ours, and not excluding the stopping effectively of a
brewing, if not a strong separatist movement in Mindanao, and (2) the establishment of a
New Society by the institution of disciplinary measures designed to eradicate the deep-
rooted causes of the rebellion and elevate the standards of living, education and culture
of our people, and most of all the social amelioration of the poor and underprivileged in
the farms and in the barrios, to the end that hopefully insurgency may not rear its head
in this country again.[32]

Thus, before a letter of instruction is declared as having the force and effect of a
statute, a determination of whether or not it was issued in response to the objectives
stated in Legaspi is necessary. Parong, et al. v. Minister Enrile[33] differentiated between
LOIs in the nature of mere administrative issuances and those forming part of the law of
the land. The following conditions must be established before a letter of instruction may
be considered a law:

To form part of the law of the land, the decree, order or LOI must be issued by the
President in the exercise of his extraordinary power of legislation as contemplated in
Section 6 of the 1976 amendments to the Constitution, whenever in his judgment, there
exists a grave emergency or threat or imminence thereof, or whenever the interim
Batasan Pambansa or the regular National Assembly fails or is unable to act adequately
on any matter for any reason that in his judgment requires immediate action.[34]

Only when issued under any of the two circumstances will a decree, order, or letter
be qualified as having the force and effect of law. The decree or instruction should have
been issued either when there existed a grave emergency or threat or imminence or
when the Legislature failed or was unable to act adequately on the matter. The
qualification that there exists a grave emergency or threat or imminence thereof must
be interpreted to refer to the prevailing peace and order conditions because the
particular purpose the President was authorized to assume legislative powers was to
address the deteriorating peace and order situation during the martial law period.

There is no doubt that LOI No. 1155 was issued on July 21, 1981 when then President
Marcos was vested with extraordinary legislative powers. LOI No. 1155 was specifically
directed to DBP, NDC and the Maritime Industry Authority to undertake the following
tasks:

LETTER OF INSTRUCTIONS NO. 1155

DEVELOPMENT BANK OF THE PHILIPPINES

NATIONAL DEVELOPMENT COMPANY

MARITIME INDUSTRY AUTHORITY

DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING CORPORATION

....

1. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its
present owners for the amount of P46.7 million which is the amount originally
contributed by the present shareholders, payable after five years with no interest cost.

2. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of is
previously approved subscription to Philippine National Lines. In addition, NDC is to
provide additional equity to Galleon as may be required.

3. DBP to advance for a period of three years from date hereof both the principal and the
interest on Galleon's obligations falling due and to convert such advances into 12%
preferred shares in Galleon Shipping Corporation.

4. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of


Galleon.

5. MARINA to provide assistance to Galleon by mandating a rational liner shipping


schedule considering existing freight volumes and to immediately negotiate a bilateral
agreement with the United States in accordance with UNCTAD resolutions.

....

Although LOI No. 1155 was undoubtedly issued at the time when the President
exercised legislative powers granted under Amendment No. 6 of the 1973 Constitution,
the language and purpose of LOI No. 1155 precludes this Court from declaring that said
LOI had the force and effect of law in the absence of any of the conditions set out
in Parong. The subject matter of LOI No. 1155 is not connected, directly or remotely, to a
grave emergency or threat to the peace and order situation of the nation in particular or
to the public interest in general. Nothing in the language of LOI No. 1155 suggests that it
was issued to address the security of the nation. Obviously, LOI No. 1155 was in the
nature of a mere administrative issuance directed to NDC, DBP and MARINA to undertake
a policy measure, that is, to rehabilitate a private corporation.

NDC, not liable under the Corporation Code

The Court cannot accept POLIANDs theory that with the effectivity of LOI No. 1155,
NDC ipso facto acquired the interests in GALLEON without disregarding applicable
statutory requirements governing the acquisition of a corporation. Ordinarily, in the
merger of two or more existing corporations, one of the combining corporations survives
and continues the combined business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving corporation. [35] The merger,
however, does not become effective upon the mere agreement of the constituent
corporations.[36]

As specifically provided under Section 79 [37] of said Code, the merger shall only be
effective upon the issuance of a certificate of merger by the Securities and Exchange
Commission (SEC), subject to its prior determination that the merger is not inconsistent
with the Code or existing laws. Where a party to the merger is a special corporation
governed by its own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should first be obtained. The
issuance of the certificate of merger is crucial because not only does it bear out SECs
approval but also marks the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed corporation
ceases to exist but its rights, and properties as well as liabilities shall be taken and
deemed transferred to and vested in the surviving corporation.[38]

The records do not show SEC approval of the merger. POLIAND cannot assert that no
conditions were required prior to the assumption by NDC of ownership of GALLEON and
its subsisting loans. Compliance with the statutory requirements is a condition precedent
to the effective transfer of the shareholdings in GALLEON to NDC. In directing NDC to
acquire the shareholdings in GALLEON, the President could not have intended that the
parties disregard the requirements of law. In the absence of SEC approval, there was no
effective transfer of the shareholdings in GALLEON to NDC. Hence, NDC did not acquire
the rights or interests of GALLEON, including its liabilities.

DBP, not liable under LOI No. 1155

POLIAND argues that paragraph 3 of LOI No. 1155 unequivocally obliged DBP to
advance the obligations of GALLEON.[39] DBP argues that POLIAND has no cause of action
against it under LOI No. 1155 which is void and unconstitutional.[40]
The Court affirms the appellate courts ruling that POLIAND does not have any cause
of action against DBP under LOI No. 1155. Being a mere administrative issuance, LOI No.
1155 cannot be a valid source of obligation because it did not create any privity of
contract between DBP and POLIAND or its predecessors-in-interest. At best, the directive
in LOI No. 1155 was in the nature of a grant of authority by the President on DBP to enter
into certain transactions for the satisfaction of GALLEONs obligations. There is, however,
nothing from the records of the case to indicate that DBP had acted as surety or
guarantor, or had otherwise accommodated GALLEONs obligations to POLIAND or its
predecessors-in-interest.

II. Liability on maritime lien

On the second issue of whether or not NDC is liable to POLIAND for the payment of
maritime lien, the appellate court ruled in the affirmative, to wit:

Non-acquisition of ownership of GALLEON notwithstanding, NDC is liable to pay ASIAN


HARDWOODs successor-in-interest POLIAND the equivalent of US$1,930,298.56
representing the proceeds of the loan from Asian Hardwood which were spent by
GALLEON for ship modification and salaries of crew, to satisfy the preferred maritime
liens over the proceeds of the foreclosure sale of the 5 vessels.[41]

POLIAND contends that NDC can no longer raise the issue on the latters liability for
the payment of the maritime lien considering that upon appeal to the Court of Appeals,
NDC did not assign it as an error.[42] Generally, an appellate court may only pass upon
errors assigned. However, this rule is not without exceptions. In the following instances,
the Court ruled that an appellate court is accorded a broad discretionary power to waive
the lack of assignment of errors and consider errors not assigned:

(a) Grounds not assigned as errors but affecting the jurisdiction of the court over
the subject matter;

(b) Matters not assigned as errors on appeal but are evidently plain or clerical
errors within contemplation of law;

(c) Matters not assigned as errors on appeal but consideration of which is


necessary in arriving at a just decision and complete resolution of the case or
to serve the interests of a justice or to avoid dispensing piecemeal justice;

(d) Matters not specifically assigned as errors on appeal but raised in the trial
court and are matters of record having some bearing on the issue submitted
which the parties failed to raise or which the lower court ignored;

(e) Matters not assigned as errors on appeal but closely related to an error
assigned;
(f) Matters not assigned as errors on appeal but upon which the determination of a
question properly assigned, is dependent.[43]

It is noteworthy that the question of NDC and DBPs liability on the maritime lien had
been raised by POLIAND as an alternative cause of action against NDC and DBP and was
passed upon by the trial court. The Court of Appeals, however, reversed the trial courts
finding that NDC and DBP are liable to POLIAND for the payment of the credit advances
and loan accommodations and instead found NDC to be solely liable on the preferred
maritime lien although NDC did not assign it as an error.

The records, however, reveal that the issue on the liability on the preferred maritime
lien had been properly raised and argued upon before the Court of Appeals not by NDC
but by DBP who was also adjudged liable thereon by the trial court. DBPs appellants
brief[44] pointed out POLIANDs failure to present convincing evidence to prove its
alternative cause of action, which POLIAND disputed in its appellees brief. [45] The issue on
the maritime lien is a matter of record having been adequately ventilated before and
passed upon by the trial court and the appellate court. Thus, by way of exception, NDC is
not precluded from again raising the issue before this Court even if it did not specifically
assign the matter as an error before the Court of Appeals. Besides, this Court is clothed
with ample authority to review matters, even if they are not assigned as errors in the
appeal if it finds that their consideration is necessary in arriving at a just decision of the
case.[46]

Articles 578 and 580 of the Code

of Commerce, not applicable

NDC cites Articles 578[47] and 580[48] of the Code of Commerce to bolster its argument
that the foreclosure of the vessels extinguished all claims against the vessels including
POLIANDs claim.[49] Article 578 of the Code of Commerce is not relevant to the facts of
the instant case because it governs the sale of vessels in a foreign port. Said provision
outlines the formal and registration requirements in order that a sale of a vessel on
voyage or in a foreign port becomes effective as against third persons. On the other
hand, the resolution of the instant case depends on the determination as to which
creditor is entitled to the proceeds of the foreclosure sale of the vessels. Clearly, Article
578 of the Code of Commerce is inapplicable.

Article 580, while providing for the order of payment of creditors in the event of sale
of a vessel, had been repealed by the pertinent provisions of Presidential Decree (P.D.)
No. 1521, otherwise known as the Ship Mortgage Decree of 1978. In particular, Article
580 provides that in case of the judicial sale of a vessel for the payment of creditors, the
debts shall be satisfied in the order specified therein. On the other hand, Section 17 of
P.D. No. 1521[50] also provides that in the judicial or extrajudicial sale of a vessel for the
enforcement of a preferred mortgage lien constituted in accordance with Section 2 of
P.D. No. 1521, such preferred mortgage lien shall have priority over all pre-existing
claims against the vessel, save for those claims enumerated under Section 17, which
have preference over the preferred mortgage lien in the order stated therein. Since P.D.
No. 1521 is a subsequent legislation and since said law in Section 17 thereof confers on
the preferred mortgage lien on the vessel superiority over all other claims, thereby
engendering an irreconcilable conflict with the order of preference provided under Article
580 of the Code of Commerce, it follows that the Code of Commerce provision is deemed
repealed by the provision of P.D. No. 1521, as the posterior law. [51]

P.D. No. 1521 is applicable, not the

Civil Code provisions on

concurrence/preference of

credits

Whether or not the order of preference under Section 17, P.D. No. 1521 may be
properly applied in the instant case depends on the classification of the mortgage on the
GALLEON vessels, that is, if it falls within the ambit of Section 2, P.D. No. 1521, defining
how a preferred mortgage is constituted.

NDC and DBP both argue that POLIANDs claim cannot prevail over DBPs mortgage
credit over the foreclosed vessels because the mortgage executed in favor of DBP
pursuant to the October 10, 1979 Deed of Undertaking signed by GALLEON and DBP was
an ordinary ship mortgage and not a preferred one, that is, it was not given in connection
with the construction, acquisition, purchase or initial operation of the vessels, but for the
purpose of guaranteeing GALLEONs foreign borrowings. [52]

Section 2 of P.D. No. 1521 recognizes the constitution of a mortgage on a vessel, to


wit:

SECTION 2. Who may Constitute a Ship Mortgage. Any citizen of the Philippines, or any
association or corporation organized under the laws of the Philippines, at least sixty per
cent of the capital of which is owned by citizens of the Philippines may, for the purpose
of financing the construction, acquisition, purchase of vessels or initial operation of
vessels, freely constitute a mortgage or any other lien or encumbrance on his or its
vessels and its equipment with any bank or other financial institutions, domestic or
foreign.

If the mortgage on the vessel is constituted for the purpose stated under Section 2,
the mortgage obtains a preferred status provided the formal requisites enumerated
under Section 4[53] are complied with. Upon enforcement of the preferred mortgage and
eventual foreclosure of the vessel, the proceeds of the sale shall be first applied to the
claim of the mortgage creditor unless there are superior or preferential liens, as
enumerated under Section 17, namely:
SECTION 17. Preferred Maritime Lien, Priorities, Other Liens. (a) Upon the sale of any
mortgaged vessel in any extra-judicial sale or by order of a district court of the
Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage
lien thereon, all pre-existing claims in the vessel, including any possessory common-law
lien of which a lienor is deprived under the provisions of Section 16 of this Decree, shall
be held terminated and shall thereafter attach in like amount and in accordance with the
priorities established herein to the proceeds of the sale. The preferred mortgage lien
shall have priority over all claims against the vessel, except the following claims in the
order stated: (1) expenses and fees allowed and costs taxed by the court and
taxes due to the Government; (2) crew's wages; (3) general average; (4)
salvage including contract salvage; (5) maritime liens arising prior in time to
the recording of the preferred mortgage; (6) damages arising out of tort; and
(7) preferred mortgage registered prior in time.

(b) If the proceeds of the sale should not be sufficient to pay all creditors included in one
number or grade, the residue shall be divided among them pro rata. All credits not paid,
whether fully or partially shall subsist as ordinary credits enforceable by personal action
against the debtor. The record of judicial sale or sale by public auction shall be recorded
in the Record of Transfers and Encumbrances of Vessels in the port of documentation.
(Emphasis supplied.)

There is no question that the mortgage executed in favor of DBP is covered by P.D.
No. 1521. Contrary to NDCs assertion, the mortgage constituted on GALLEONs vessels in
favor of DBP may appropriately be characterized as a preferred mortgage under Section
2, P.D. No. 1521 because GALLEON constituted the same for the purpose of financing the
construction, acquisition, purchase of vessels or initial operation of vessels. While it is
correct that GALLEON executed the mortgage in consideration of DBPs guarantee of the
prompt payment of GALLEONs obligations to the Japanese lenders, DBPs undertaking to
pay the Japanese banks was a condition sine qua non to the acquisition of funds for the
purchase of the GALLEON vessels. Without DBPs guarantee, the Japanese lenders would
not have provided the funds utilized in the purchase of the GALLEON vessels. The
mortgage in favor of DBP was therefore constituted to facilitate the acquisition of funds
necessary for the purchase of the vessels.

NDC adds that being an ordinary ship mortgage, the Civil Code provisions on
concurrence and preference of credits and not P.D. No. 1521 should govern. NDC
contends that under Article 2246, in relation to Article 2241 of the Civil Code, the credits
guaranteed by a chattel mortgage upon the thing mortgaged shall enjoy preference
(with respect to the thing mortgaged), to the exclusion of all others to the extent of the
value of the personal property to which the preference exists. [54] Following NDCs theory,
DBPs mortgage credit, which is fourth in the order of preference under Article 2241, is
superior to POLIANDs claim, which enjoys no preference.

NDCs argument does not persuade the Court.


The provision of P.D. No. 1521 on the order of preference in the satisfaction of the
claims against the vessel is the more applicable statute to the instant case compared to
the Civil Code provisions on the concurrence and preference of credit. General legislation
must give way to special legislation on the same subject, and generally be so interpreted
as to embrace only cases in which the special provisions are not applicable. [55]

POLIANDs alternative cause of action for the payment of maritime liens is based on
Sections 17 and 21 of P.D. No. 1521. POLIAND also contends that by virtue of the
directive in LOI No. 1195 on NDC to discharge maritime liens to allow the vessels to
engage in international business, NDC is liable therefor.[56]

POLIANDs maritime lien is superior

to DBPs mortgage lien

Before POLIANDs claim may be classified as superior to the mortgage constituted on


the vessel, it must be shown to be one of the enumerated claims which Section 17, P.D.
No. 1521 declares as having preferential status in the event of the sale of the vessel.
One of such claims enumerated under Section 17, P.D. No. 1521 which is considered to
be superior to the preferred mortgage lien is a maritime lien arising prior in time to the
recording of the preferred mortgage. Such maritime lien is described under Section 21,
P.D. No. 1521, which reads:

SECTION 21. Maritime Lien for Necessaries; persons entitled to such lien. Any person
furnishing repairs, supplies, towage, use of dry dock or marine railway, or other
necessaries to any vessel, whether foreign or domestic, upon the order of the owner of
such vessel, or of a person authorized by the owner, shall have a maritime lien on the
vessel, which may be enforced by suit in rem, and it shall be necessary to allege or prove
that credit was given to the vessel.

Under the aforequoted provision, the expense must be incurred upon the order of the
owner of the vessel or its authorized person and prior to the recording of the ship
mortgage. Under the law, it must be established that the credit was extended to the
vessel itself.[57]

The trial court found that GALLEONs advances obtained from Asian Hardwood were
used to cover for the payment of bunker oil/fuel, unused stores and oil, bonded stores,
provisions, and repair and docking of the GALLEON vessels. [58] These expenses clearly fall
under Section 21, P.D. No. 1521.

The trial court also found that the advances from Asian Hardwood were spent for ship
modification cost and the crews salary and wages. DBP contends that a ship modification
cost is omitted under Section 17, P.D. No. 1521, hence, it does not have a status superior
to DBPs preferred mortgage lien.
As stated in Section 21, P.D. No. 1521, a maritime lien may consist in other
necessaries spent for the vessel. The ship modification cost may properly be classified
under this broad category because it was a necessary expenses for the vessels
navigation. As long as an expense on the vessel is indispensable to the maintenance and
navigation of the vessel, it may properly be treated as a maritime lien for necessaries
under Section 21, P.D. No. 1521.

With respect to the claim for salary and wages of the crew, there is no doubt that it is
also one of the enumerated claims under Section 17, P.D. No. 1521, second only to
judicial costs and taxes due the government in preference and, thus, having a status
superior to DBPs mortgage lien.

All told, the determination of the existence and the amount of POLIANDs claim for
maritime lien is a finding of fact which is within the province of the courts below. Findings
of fact of lower courts are deemed conclusive and binding upon the Supreme Court
except when the findings are grounded on speculation, surmises or conjectures; when
the inference made is manifestly mistaken, absurd or impossible; when there is grave
abuse of discretion in the appreciation of facts; when the factual findings of the trial and
appellate courts are conflicting; when the Court of Appeals, in making its findings, has
gone beyond the issues of the case and such findings are contrary to the admissions of
both appellant and appellee; when the judgment of the appellate court is premised on a
misapprehension of facts or when it has failed to notice certain relevant facts which, if
properly considered, will justify a different conclusion; when the findings of fact are
conclusions without citation of specific evidence upon which they are based; and when
findings of fact of the Court of Appeals are premised on the absence of evidence but are
contradicted by the evidence on record. [59] The Court finds no sufficient justification to
reverse the findings of the trial court and the appellate court in respect to the existence
and amount of maritime lien.

Only NDC is liable on the maritime lien

POLIAND maintains that DBP is also solidarily liable for the payment of the preferred
maritime lien over the proceeds of the foreclosure sale by virtue of Section 17, P.D. No.
1521. It claims that since the lien was incurred prior to the constitution of the mortgage
on January 25, 1982, the preferred maritime lien attaches to the proceeds of the sale of
the vessels and has priority over all claims against the vessels in accordance with
Section 17, P.D. No. 1521.[60]

In its defense, DBP reiterates the following arguments: (1) The salary and crews
wages cannot be claimed by POLIAND or its predecessors-in-interest because none of
them is a sailor or mariner; [61] (2) Even if conceded, POLIANDs preferred maritime lien is
unenforceable pursuant to Article 1403 of the Civil Code; and (3) POLIANDs claim is
barred by prescription and laches.[62]
The first argument is absurd. Although POLIAND or its predecessors-in-interest are
not sailors entitled to wages, they can still make a claim for the advances spent for the
salary and wages of the crew under the principle of legal subrogation. As explained
in Philippine National Bank v. Court of Appeals,[63] a third person who satisfies the
obligation to an original maritime lienor may claim from the debtor because the third
person is subrogated to the rights of the maritime lienor over the vessel. The Court
explained as follows:

From the foregoing, it is clear that the amount used for the repair of the vessel M/V
Asean Liberty was advanced by Citibank and was utilized for the purpose of paying off
the original maritime lienor, Hong Kong United Dockyards, Ltd. As a person not
interested in the fulfillment of the obligation between PISC and Hong Kong United
Dockyards, Ltd., Citibank was subrogated to the rights of Hong Kong United Dockyards,
Ltd. as a maritime lienor over the vessel, by virtue of Article 1302, par. 2 of the New Civil
Code. By definition, subrogation is the transfer of all the rights of the creditor to a third
person, who substitutes him in all his rights. Considering that Citibank paid off the debt
of PISC to Hong Kong United Dockyards, Ltd. it became the transferee of all the rights of
Hong Kong Dockyards, Ltd. as against PISC, including the maritime lien over the vessel
M/V Asian Liberty.[64]

DBPs reliance on the Statute of Frauds is misplaced. Article 1403 (2) of the Civil Code,
which enumerates the contracts covered by the Statue of Frauds, is inapplicable. To
begin with, there is no privity of contract between POLIAND or its predecessors-in-
interest, on one hand, and DBP, on the other. POLIAND hinges its claim on the maritime
lien based on LOI No. 1195 and P.D. No. 1521, and not on any contract or agreement.

Neither can DBP invoke prescription or laches against POLIAND. Under Article 1144 of
the Civil Code, an action upon an obligation created by law must be brought within ten
years from the time the right of action accrues. The right of action arose after January
15, 1982, when NDC partially paid off GALLEONs obligations to POLIANDs predecessor-in-
interest, Asian Hardwood. At that time, the prescriptive period for the enforcement by
action of the balance of GALLEONs outstanding obligations had commenced. Prescription
could not have set in because the prescriptive period was tolled when POLIAND made a
written demand for the satisfaction of the obligation on September 24, 1991, or before
the lapse of the ten-year prescriptive period. Laches also do not lie because there was no
unreasonable delay on the part of POLIAND in asserting its rights. Indeed, it instituted
the instant suit seasonably.

All things considered, however, the Court finds that only NDC is liable for the
payment of the maritime lien. A maritime lien is akin to a mortgage lien in that in spite of
the transfer of ownership, the lien is not extinguished. The maritime lien is inseparable
from the vessel and until discharged, it follows the vessel. Hence, the enforcement of a
maritime lien is in the nature and character of a proceeding quasi in rem.[65]The
expression action in rem is, in its narrow application, used only with reference to certain
proceedings in courts of admiralty wherein the property alone is treated as responsible
for the claim or obligation upon which the proceedings are based. [66] Considering that
DBP subsequently transferred ownership of the vessels to NDC, the Court holds the latter
liable on the maritime lien. Notwithstanding the subsequent transfer of the vessels to
NDC, the maritime lien subsists.

This is a unique situation where the extrajudicial foreclosure of the GALLEON vessels
took place without the intervention of GALLEONs other creditors including POLIANDs
predecessors-in-interest who were apparently left in the dark about the foreclosure
proceedings. At that time, GALLEON was already a failing corporation having borrowed
large sums of money from banks and financial institutions. When GALLEON defaulted in
the payment of its obligations to DBP, the latter foreclosed on its mortgage over the
GALLEON ships. The other creditors, including POLIANDs predecessors-in-interest who
apparently had earlier or superior rights over the foreclosed vessels, could not have
participated as they were unaware and were not made parties to the case.

On this note, the Court believes and so holds that the institution of the extrajudicial
foreclosure proceedings was tainted with bad faith. It took place when NDC had already
assumed the management and operations of GALLEON. NDC could not have pleaded
ignorance over the existence of a prior or preferential lien on the vessels subject of
foreclosure. As aptly held by the Court of Appeals:

NDCs claim that even if maritime liens existed over the proceeds of the foreclosure sale
of the vessels which it subsequently purchased from DBP, it is not liable as it was a
purchaser in good faith fails, given the fact that in its actual control over the
management and operations of GALLEON, it was put on notice of the various obligations
of GALLEON including those secured from ASIAN HARDWOOD as in fact it even paid
ASIAN HARDWOOD US$1,000,000.00 in partial settlement of GALLEONs obligations,
before it (NDC) mortgaged the 5 vessels to DBP on January 25, 1982.

Parenthetically, LOI 1195 directed NDC to discharge such maritime liens as may be
necessary to allow the foreclosed vessels to engage on the international shipping
business.

In fine, it is with respect to POLIANDs claim for payment of US$1,930,298.56


representing part of the proceeds of GALLEONs loan which was spent by GALLEON for
ship modification and salaries of crew that NDC is liable.[67]

Thus, NDC cannot claim that it was a subsequent purchaser in good faith because it
had knowledge that the vessels were subject to various liens. At the very least, to evince
good faith, NDC could have inquired as to the existence of other claims against the
vessels apart from DBPs mortgage lien. Considering that NDC was also in a position to
know or discover the financial condition of GALLEON when it took over its management,
the lack of notice to GALLEONs creditors suggests that the extrajudicial foreclosure was
effected to prejudice the rights of GALLEONs other creditors.
NDC also cannot rely on Administrative Order No. 64, [68] which directed the transfer of
the vessels to the APT, on its hypothesis that such transfer extinguished the lien. APT is a
mere conduit through which the assets acquired by the National Government are
provisionally held and managed until their eventual disposal or privatization.
Administrative Order No. 64 did not divest NDC of its ownership over the GALLEON
vessels because APT merely holds the vessels in trust for NDC until the same are
disposed. Even if ownership was transferred to APT, that would not be sufficient to
discharge the maritime lien and deprive POLIAND of its recourse based on the lien. Such
denouement would smack of denial of due process and taking of property without just
compensation.

NDCs liability for attorneys fees

The lower court awarded attorneys fees to POLIAND in the amount of P1,000,000.00
on account of the amount involved in the case and the protracted character of the
litigation.[69] The award was affirmed by the Court of Appeals as against NDC only.[70]

This Court finds no reversible error with the award as upheld by the appellate court.
Under Article 2208[71] of the Civil Code, attorneys fees may be awarded inter alia when
the defendants act or omission has compelled the plaintiff to incur expenses to protect
his interest or in any other case where the court deems it just and equitable that
attorneys fees and expenses of litigation be recovered.

One final note. There is a discrepancy between the dispositive portion of the Court of
Appeals Decision and the body thereof with respect to the amount of the maritime lien in
favor of POLIAND. The dispositive portion ordered NDC to pay POLIAND the amount of
US$1,920,298.56 plus interest[72] despite a finding that NDCs liability to POLIAND
represents the maritime lien[73] which according to the complaint [74] is the alternative
cause of action of POLIAND in the smaller amount of US$1,193,298.56, as prayed for by
POLIAND in its complaint.

The general rule is that where there is conflict between the dispositive portion or
the fallo and the body of the decision, the fallo controls. This rule rests on the theory that
the fallo is the final order while the opinion in the body is merely a statement ordering
nothing. However, where the inevitable conclusion from the body of the decision is so
clear as to show that there was a mistake in the dispositive portion, the body of the
decision will prevail.[75] In the instant case, it is clear from the trial court records and the
Court of Appeals Rollo that the bigger amount awarded in the dispositive portion of the
Court of Appeals Decision was a typographical mistake. Considering that the appellate
courts Decision merely affirmed the trial courts finding with respect to the amount of
maritime lien, the bigger amount stated in the dispositive portion of the Court of
Appeals Decision must have been awarded through indavertence.

WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED.
The Decision of the Court of Appeals in CA-G.R. CV No. 53257 is MODIFIED to the extent
that National Development Company is liable to Poliand Industrial Limited for the amount
of One Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight US Dollars
and Fifty-Six US Cents (US$ 1,193,298.56), plus interest of 12% per annum computed
from 25 September 1991 until fully paid. In other respects, said Decision is AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

G.R. No. 143866 May 19, 2006

POLIAND INDUSTRIAL LIMITED, Petitioner,


vs.
NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE PHILIPPINES,
and THE HONORABLE COURT OF APPEALS (Fourteenth Division), Respondents.

x-----------------------------x

G.R. No. 143877 May 19, 2006

NATIONAL DEVELOPMENT COMPANY, Petitioner,


vs.
POLIAND INDUSTRIAL LIMITED, Respondent.

RESOLUTION

TINGA, J.:

For resolution is the "Motion For Leave to File And To Admit The Attached Second Motion
For Partial Reconsideration" filed by Poliand Industrial Limited (POLIAND), seeking the
partial review of the Courts Resolution dated November 23, 2005. Poliand is the
petitioner in G.R. No. 143866 and the respondent in G.R. No. 143877. On August 22,
2005, the Court promulgated a consolidated Decision in G.R. Nos. 143866 & 143877, the
dispositive portion of which reads:

WHEREFORE, both Petitions in G.R. No. 143866 and G.R. No. 143877 are DENIED. The
Decision of the Court of Appeals in CA-G.R. CV No. 53257 is MODIFIED to the extent that
National Development Company is liable to Poliand Industrial Limited for the amount of
One Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight US Dollars
and Fifty Six US Cents (US$ 1, 193, 298.56), plus interest of 12% per annum computed
from 25 September 1991 until fully paid. In other respects, said Decision is AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Both POLIAND and National Development Company (NDC) separately filed motions for
partial reconsideration. Poliand, for its part, asserted that the computation of interest
should be reckoned from September 12, 1984, the date of the last foreclosure sale of the
vessels, in conformity with the dispositive portion of the Court of Appeals Decision. The
Court denied the separate motions of Poliand and NDC in its November 23, 2005
Resolution. More than simply denying Poliands motion for reconsideration, said
Resolution passed upon for the first time the issue on the computation of interest and,
thus, modified the August 22, 2005 Decision by reckoning the computation of interest
from the date of the finality of judgment. Not satisfied with the Courts ruling, Poliand
filed the instant subsequent motion for reconsideration with leave of court, praying in the
alternative that the interest rate should be computed from September 25, 1991, the date
of extrajudicial demand, that is, in conformity with the tack ordered in the Decision dated
August 22, 2005.

Ordinarily, no second motion for reconsideration of a judgment or final resolution by the


same party shall be entertained.1 Essentially, however, the instant motion is not a
second motion for reconsideration since the viable relief it seeks calls for the review, not
of the Decision dated August 22, 2005, but the November 23, 2005 Resolution which
delved for the first time on the issue of the reckoning date of the computation of interest.
In resolving the instant motion, the Court will be reverting to the Decision dated August
22, 2005. In so doing, the Court will be shunning further delay so as to ensure
that finis is written to this controversy and the adjudication of this case attains finality at
the earliest possible time as it should.

After going over the instant motion, the Court is persuaded to take a fresh scrutiny of the
facts and circumstances obtaining herein and accordingly modify its finding that
Poliands claim cannot be considered due and demandable until the finality of the Courts
Decision. Indeed, there are certain factual premises which the Court glossed over in
arriving at such pronouncement. First, the trial court had already made a factual finding
to the effect that extrajudicial demands had been made by Poliand on September 25,
1991 on NDC, Galleon Shipping Corporation and Development Bank of the Philippines,
not only with respect to the alleged loan accommodations granted to Galleon but also, in
the alternative, with respect to the maritime lien. Second, the extrajudicial demand on
NDC for the payment of the maritime lien was for a specified amount, which was the
same amount prayed for in the complaint and eventually upheld by the trial court. This
fact indicates that upon extrajudicial demand, Poliands claim for the satisfaction of the
maritime lien had already been ascertained. An account that has been "liquidated" can
also mean that the item has been made certain as to what, and how much, is deemed to
be owing.2 The amount claimed and the date of demand being both certain, to arrive at
the liquidated amount would merely be a matter of mathematical
computation.31avvphil.net

The finding of the trial court that an extrajudicial demand was made by Poliand on
September 25, 1991 on NDC for the payment of a determinate amount equivalent to its
maritime lien, unmodified as it was by the appellate court, constitutes adequate basis to
conclude that as of said date, Poliands claim was already due and demandable. Such
factual finding of the trial court, duly supported as it is by the evidence on record,
deserves great weight and respect and is binding on the Court.
Poliands main stance that the interest payment on its maritime lien should be reckoned
from the date of the last foreclosure sale of the vessels has no merit, apart from being
barred by the rule against second motions for reconsideration.

Poliand contends that the Courts finding that the institution of the extrajudicial
foreclosure proceedings was tainted with bad faith provides the basis to reckon the
computation of legal interest from the date of the foreclosure sale. Suffice it to say, this
theory has no basis in law. An act done in bad faith may be the basis of some other
award but not the award of legal interest.

Next, Poliand argues that the payment of legal interest should be reckoned from the date
of the last foreclosure sale of the vessels or on September 12, 1984 on the basis of
Section 17 (a) of Presidential Decree No. 1521.4The provision is inapplicable to the
question of interest payment as it merely enumerates the prioritized liens which are
entitled to satisfaction upon the sale of a mortgaged vessel.

WHEREFORE, the instant "second" Motion for Partial Reconsideration dated December
30, 2005 is GRANTED. The dispositive portion of the Decision dated August 22, 2005 in
G.R. No. 143866 and G.R. No. 143877 is REINSTATED in full.

SO ORDERED.

G.R. No. 115381 December 23, 1994

KILUSANG MAYO UNO LABOR CENTER, petitioner,


vs.
HON. JESUS B. GARCIA, JR., the LAND TRANSPORTATION FRANCHISING AND
REGULATORY BOARD, and the PROVINCIAL BUS OPERATORS ASSOCIATION OF
THE PHILIPPINES, respondents.

Potenciano A. Flores for petitioner.

Robert Anthony C. Sison, Cesar B. Brillantes and Jose Z. Galsim for private respondent.

Jose F. Miravite for movants.

KAPUNAN, J.:

Public utilities are privately owned and operated businesses whose service are essential
to the general public. They are enterprises which specially cater to the needs of the
public and conduce to their comfort and convenience. As such, public utility services are
impressed with public interest and concern. The same is true with respect to the
business of common carrier which holds such a peculiar relation to the public interest
that there is superinduced upon it the right of public regulation when private properties
are affected with public interest, hence, they cease to be juris privati only. When,
therefore, one devotes his property to a use in which the public has an interest, he, in
effect grants to the public an interest in that use, and must submit to the control by the
public for the common good, to the extent of the interest he has thus created. 1

An abdication of the licensing and regulatory government agencies of their functions as


the instant petition seeks to show, is indeed lamentable. Not only is it an unsound
administrative policy but it is inimical to public trust and public interest as well.

The instant petition for certiorari assails the constitutionality and validity of certain
memoranda, circulars and/or orders of the Department of Transportation and
Communications (DOTC) and the Land Transportation Franchising and Regulatory Board
LTFRB) 2 which, among others, (a) authorize provincial bus and jeepney operators to
increase or decrease the prescribed transportation fares without application therefor with
the LTFRB and without hearing and approval thereof by said agency in violation of Sec.
16(c) of Commonwealth Act No. 146, as amended, otherwise known as the Public Service
Act, and in derogation of LTFRB's duty to fix and determine just and reasonable fares by
delegating that function to bus operators, and (b) establish a presumption of public need
in favor of applicants for certificates of public convenience (CPC) and place on the
oppositor the burden of proving that there is no need for the proposed service, in patent
violation not only of Sec. 16(c) of CA 146, as amended, but also of Sec. 20(a) of the same
Act mandating that fares should be "just and reasonable." It is, likewise, violative of the
Rules of Court which places upon each party the burden to prove his own affirmative
allegations. 3 The offending provisions contained in the questioned issuances pointed out
by petitioner, have resulted in the introduction into our highways and thoroughfares
thousands of old and smoke-belching buses, many of which are right-hand driven, and
have exposed our consumers to the burden of spiraling costs of public transportation
without hearing and due process.

The following memoranda, circulars and/or orders are sought to be nullified by the
instant petition, viz: (a) DOTC Memorandum Order 90-395, dated June 26, 1990 relative
to the implementation of a fare range scheme for provincial bus services in the country;
(b) DOTC Department Order No.
92-587, dated March 30, 1992, defining the policy framework on the regulation of
transport services; (c) DOTC Memorandum dated October 8, 1992, laying down rules and
procedures to implement Department Order No. 92-587; (d) LTFRB Memorandum Circular
No. 92-009, providing implementing guidelines on the DOTC Department Order No. 92-
587; and (e) LTFRB Order dated March 24, 1994 in Case No. 94-3112.

The relevant antecedents are as follows:

On June 26, 1990; then Secretary of DOTC, Oscar M. Orbos, issued Memorandum Circular
No. 90-395 to then LTFRB Chairman, Remedios A.S. Fernando allowing provincial bus
operators to charge passengers rates within a range of 15% above and 15% below the
LTFRB official rate for a period of one (1) year. The text of the memorandum order reads
in full:
One of the policy reforms and measures that is in line with the thrusts and the priorities
set out in the Medium-Term Philippine Development Plan (MTPDP) 1987 1992) is the
liberalization of regulations in the transport sector. Along this line, the Government
intends to move away gradually from regulatory policies and make progress towards
greater reliance on free market forces.

Based on several surveys and observations, bus companies are already charging
passenger rates above and below the official fare declared by LTFRB on many provincial
routes. It is in this context that some form of liberalization on public transport fares is to
be tested on a pilot basis.

In view thereof, the LTFRB is hereby directed to immediately publicize a fare range
scheme for all provincial bus routes in country (except those operating within Metro
Manila). Transport Operators shall be allowed to charge passengers within a range of
fifteen percent (15%) above and fifteen percent (15%) below the LTFRB official rate for a
period of one year.

Guidelines and procedures for the said scheme shall be prepared by LTFRB in
coordination with the DOTC Planning Service.

The implementation of the said fare range scheme shall start on 6 August 1990.

For compliance. (Emphasis ours.)

Finding the implementation of the fare range scheme "not legally feasible," Remedios
A.S. Fernando submitted the following memorandum to Oscar M. Orbos on July 24, 1990,
to wit:

With reference to DOTC Memorandum Order No. 90-395 dated 26 June 1990 which the
LTFRB received on 19 July 1990, directing the Board "to immediately publicize a fare
range scheme for all provincial bus routes in the country (except those operating within
Metro Manila)" that will allow operators "to charge passengers within a range of fifteen
percent (15%) above and fifteen percent (15%) below the LTFRB official rate for a period
of one year" the undersigned is respectfully adverting the Secretary's attention to the
following for his consideration:

1. Section 16(c) of the Public Service Act prescribes the following for the fixing and
determination of rates (a) the rates to be approved should be proposed by public
service operators; (b) there should be a publication and notice to concerned or affected
parties in the territory affected; (c) a public hearing should be held for the fixing of the
rates; hence, implementation of the proposed fare range scheme on August 6 without
complying with the requirements of the Public Service Act may not be legally feasible.

2. To allow bus operators in the country to charge fares fifteen (15%) above the present
LTFRB fares in the wake of the devastation, death and suffering caused by the July 16
earthquake will not be socially warranted and will be politically unsound; most likely
public criticism against the DOTC and the LTFRB will be triggered by the untimely motu
propio implementation of the proposal by the mere expedient of publicizing the fare
range scheme without calling a public hearing, which scheme many as early as during
the Secretary's predecessor know through newspaper reports and columnists' comments
to be Asian Development Bank and World Bank inspired.

3. More than inducing a reduction in bus fares by fifteen percent (15%) the
implementation of the proposal will instead trigger an upward adjustment in bus fares by
fifteen percent (15%) at a time when hundreds of thousands of people in Central and
Northern Luzon, particularly in Central Pangasinan, La Union, Baguio City, Nueva Ecija,
and the Cagayan Valley are suffering from the devastation and havoc caused by the
recent earthquake.

4. In lieu of the said proposal, the DOTC with its agencies involved in public
transportation can consider measures and reforms in the industry that will be socially
uplifting, especially for the people in the areas devastated by the recent earthquake.

In view of the foregoing considerations, the undersigned respectfully suggests that the
implementation of the proposed fare range scheme this year be further studied and
evaluated.

On December 5, 1990, private respondent Provincial Bus Operators Association of the


Philippines, Inc. (PBOAP) filed an application for fare rate increase. An across-the-board
increase of eight and a half centavos (P0.085) per kilometer for all types of provincial
buses with a minimum-maximum fare range of fifteen (15%) percent over and below the
proposed basic per kilometer fare rate, with the said minimum-maximum fare range
applying only to ordinary, first class and premium class buses and a fifty-centavo (P0.50)
minimum per kilometer fare for aircon buses, was sought.

On December 6, 1990, private respondent PBOAP reduced its applied proposed fare to an
across-the-board increase of six and a half (P0.065) centavos per kilometer for ordinary
buses. The decrease was due to the drop in the expected price of diesel.

The application was opposed by the Philippine Consumers Foundation, Inc. and Perla C.
Bautista alleging that the proposed rates were exorbitant and unreasonable and that the
application contained no allegation on the rate of return of the proposed increase in
rates.

On December 14, 1990, public respondent LTFRB rendered a decision granting the fare
rate increase in accordance with the following schedule of fares on a straight
computation method, viz:

AUTHORIZED FARES

LUZON
MIN. OF 5 KMS. SUCCEEDING KM.

REGULAR P1.50 P0.37


STUDENT P1.15 P0.28

VISAYAS/MINDANAO
REGULAR P1.60 P0.375
STUDENT P1.20 P0.285
FIRST CLASS (PER KM.)
LUZON P0.385
VISAYAS/
MINDANAO P0.395
PREMIERE CLASS (PER KM.)
LUZON P0.395
VISAYAS/
MINDANAO P0.405

AIRCON (PER KM.) P0.415. 4

On March 30, 1992, then Secretary of the Department of Transportation and


Communications Pete Nicomedes Prado issued Department Order No.
92-587 defining the policy framework on the regulation of transport services. The full
text of the said order is reproduced below in view of the importance of the provisions
contained therein:

WHEREAS, Executive Order No. 125 as amended, designates the Department of


Transportation and Communications (DOTC) as the primary policy, planning, regulating
and implementing agency on transportation;

WHEREAS, to achieve the objective of a viable, efficient, and dependable transportation


system, the transportation regulatory agencies under or attached to the DOTC have to
harmonize their decisions and adopt a common philosophy and direction;

WHEREAS, the government proposes to build on the successful liberalization measures


pursued over the last five years and bring the transport sector nearer to a balanced
longer term regulatory framework;

NOW, THEREFORE, pursuant to the powers granted by laws to the DOTC, the following
policies and principles in the economic regulation of land, air, and water transportation
services are hereby adopted:

1. Entry into and exit out of the industry. Following the Constitutional dictum against
monopoly, no franchise holder shall be permitted to maintain a monopoly on any route. A
minimum of two franchise holders shall be permitted to operate on any route.

The requirements to grant a certificate to operate, or certificate of public convenience,


shall be: proof of Filipino citizenship, financial capability, public need, and sufficient
insurance cover to protect the riding public.

In determining public need, the presumption of need for a service shall be deemed in
favor of the applicant. The burden of proving that there is no need for a proposed service
shall be with the oppositor(s).
In the interest of providing efficient public transport services, the use of the "prior
operator" and the "priority of filing" rules shall be discontinued. The route measured
capacity test or other similar tests of demand for vehicle/vessel fleet on any route shall
be used only as a guide in weighing the merits of each franchise application and not as a
limit to the services offered.

Where there are limitations in facilities, such as congested road space in urban areas, or
at airports and ports, the use of demand management measures in conformity with
market principles may be considered.

The right of an operator to leave the industry is recognized as a business decision,


subject only to the filing of appropriate notice and following a phase-out period, to inform
the public and to minimize disruption of services.

2. Rate and Fare Setting. Freight rates shall be freed gradually from government
controls. Passenger fares shall also be deregulated, except for the lowest class of
passenger service (normally third class passenger transport) for which the government
will fix indicative or reference fares. Operators of particular services may fix their own
fares within a range 15% above and below the indicative or reference rate.

Where there is lack of effective competition for services, or on specific routes, or for the
transport of particular commodities, maximum mandatory freight rates or passenger
fares shall be set temporarily by the government pending actions to increase the level of
competition.

For unserved or single operator routes, the government shall contract such services in
the most advantageous terms to the public and the government, following public bids for
the services. The advisability of bidding out the services or using other kinds of
incentives on such routes shall be studied by the government.

3. Special Incentives and Financing for Fleet Acquisition. As a matter of policy, the
government shall not engage in special financing and incentive programs, including
direct subsidies for fleet acquisition and expansion. Only when the market situation
warrants government intervention shall programs of this type be considered. Existing
programs shall be phased out gradually.

The Land Transportation Franchising and Regulatory Board, the Civil Aeronautics Board,
the Maritime Industry Authority are hereby directed to submit to the Office of the
Secretary, within forty-five (45) days of this Order, the detailed rules and procedures for
the Implementation of the policies herein set forth. In the formulation of such rules, the
concerned agencies shall be guided by the most recent studies on the subjects, such as
the Provincial Road Passenger Transport Study, the Civil Aviation Master Plan, the
Presidential Task Force on the Inter-island Shipping Industry, and the Inter-island Liner
Shipping Rate Rationalization Study.

For the compliance of all concerned. (Emphasis ours)


On October 8, 1992, public respondent Secretary of the Department of Transportation
and Communications Jesus B. Garcia, Jr. issued a memorandum to the Acting Chairman of
the LTFRB suggesting swift action on the adoption of rules and procedures to implement
above-quoted Department Order No. 92-587 that laid down deregulation and other
liberalization policies for the transport sector. Attached to the said memorandum was a
revised draft of the required rules and procedures covering (i) Entry Into and Exit Out of
the Industry and (ii) Rate and Fare Setting, with comments and suggestions from the
World Bank incorporated therein. Likewise, resplendent from the said memorandum is
the statement of the DOTC Secretary that the adoption of the rules and procedures is a
pre-requisite to the approval of the Economic Integration Loan from the World Bank. 5

On February 17, 1993, the LTFRB issued Memorandum Circular


No. 92-009 promulgating the guidelines for the implementation of DOTC Department
Order No. 92-587. The Circular provides, among others, the following challenged
portions:

xxx xxx xxx

IV. Policy Guidelines on the Issuance of Certificate of Public Convenience.

The issuance of a Certificate of Public Convenience is determined by public need. The


presumption of public need for a service shall be deemed in favor of the applicant, while
burden of proving that there is no need for the proposed service shall be the
oppositor'(s).

xxx xxx xxx

V. Rate and Fare Setting

The control in pricing shall be liberalized to introduce price competition complementary


with the quality of service, subject to prior notice and public hearing. Fares shall not be
provisionally authorized without public hearing.

A. On the General Structure of Rates

1. The existing authorized fare range system of plus or minus 15 per cent for provincial
buses and jeepneys shall be widened to 20% and -25% limit in 1994 with the authorized
fare to be replaced by an indicative or reference rate as the basis for the expanded fare
range.

2. Fare systems for aircon buses are liberalized to cover first class and premier services.

xxx xxx xxx

(Emphasis ours).

Sometime in March, 1994, private respondent PBOAP, availing itself of the deregulation
policy of the DOTC allowing provincial bus operators to collect plus 20% and minus 25%
of the prescribed fare without first having filed a petition for the purpose and without the
benefit of a public hearing, announced a fare increase of twenty (20%) percent of the
existing fares. Said increased fares were to be made effective on March 16, 1994.

On March 16, 1994, petitioner KMU filed a petition before the LTFRB opposing the upward
adjustment of bus fares.

On March 24, 1994, the LTFRB issued one of the assailed orders dismissing the petition
for lack of merit. The dispositive portion reads:

PREMISES CONSIDERED, this Board after considering the arguments of the parties,
hereby DISMISSES FOR LACK OF MERIT the petition filed in the above-entitled case. This
petition in this case was resolved with dispatch at the request of petitioner to enable it to
immediately avail of the legal remedies or options it is entitled under existing laws.

SO ORDERED. 6

Hence, the instant petition for certiorari with an urgent prayer for issuance of a
temporary restraining order.

The Court, on June 20, 1994, issued a temporary restraining order enjoining, prohibiting
and preventing respondents from implementing the bus fare rate increase as well as the
questioned orders and memorandum circulars. This meant that provincial bus fares were
rolled back to the levels duly authorized by the LTFRB prior to March 16, 1994. A
moratorium was likewise enforced on the issuance of franchises for the operation of
buses, jeepneys, and taxicabs.

Petitioner KMU anchors its claim on two (2) grounds. First, the authority given by
respondent LTFRB to provincial bus operators to set a fare range of plus or minus fifteen
(15%) percent, later increased to plus twenty (20%) and minus twenty-five (-25%)
percent, over and above the existing authorized fare without having to file a petition for
the purpose, is unconstitutional, invalid and illegal. Second, the establishment of a
presumption of public need in favor of an applicant for a proposed transport service
without having to prove public necessity, is illegal for being violative of the Public Service
Act and the Rules of Court.

In its Comment, private respondent PBOAP, while not actually touching upon the issues
raised by the petitioner, questions the wisdom and the manner by which the instant
petition was filed. It asserts that the petitioner has no legal standing to sue or has no real
interest in the case at bench and in obtaining the reliefs prayed for.

In their Comment filed by the Office of the Solicitor General, public respondents DOTC
Secretary Jesus B. Garcia, Jr. and the LTFRB asseverate that the petitioner does not have
the standing to maintain the instant suit. They further claim that it is within DOTC and
LTFRB's authority to set a fare range scheme and establish a presumption of public need
in applications for certificates of public convenience.

We find the instant petition impressed with merit.


At the outset, the threshold issue of locus standi must be struck. Petitioner KMU has the
standing to sue.

The requirement of locus standi inheres from the definition of judicial power. Section 1 of
Article VIII of the Constitution provides:

xxx xxx xxx

Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of the Government.

In Lamb v. Phipps, 7 we ruled that judicial power is the power to hear and decide causes
pending between parties who have the right to sue in the courts of law and equity.
Corollary to this provision is the principle of locus standi of a party litigant. One who is
directly affected by and whose interest is immediate and substantial in the controversy
has the standing to sue. The rule therefore requires that a party must show a personal
stake in the outcome of the case or an injury to himself that can be redressed by a
favorable decision so as to warrant an invocation of the court's jurisdiction and to justify
the exercise of the court's remedial powers in his behalf. 8

In the case at bench, petitioner, whose members had suffered and continue to suffer
grave and irreparable injury and damage from the implementation of the questioned
memoranda, circulars and/or orders, has shown that it has a clear legal right that was
violated and continues to be violated with the enforcement of the challenged
memoranda, circulars and/or orders. KMU members, who avail of the use of buses, trains
and jeepneys everyday, are directly affected by the burdensome cost of arbitrary
increase in passenger fares. They are part of the millions of commuters who comprise
the riding public. Certainly, their rights must be protected, not neglected nor ignored.

Assuming arguendo that petitioner is not possessed of the standing to sue, this court is
ready to brush aside this barren procedural infirmity and recognize the legal standing of
the petitioner in view of the transcendental importance of the issues raised. And this act
of liberality is not without judicial precedent. As early as the Emergency Powers Cases,
this Court had exercised its discretion and waived the requirement of proper party. In the
recent case of Kilosbayan, Inc., et al. v. Teofisto Guingona, Jr., et al., 9 we ruled in the
same lines and enumerated some of the cases where the same policy was adopted, viz:

. . . A party's standing before this Court is a procedural technicality which it may, in the
exercise of its discretion, set aside in view of the importance of the issues raised. In the
landmark Emergency Powers Cases, [G.R. No. L-2044 (Araneta v. Dinglasan); G.R. No. L-
2756 (Araneta
v. Angeles); G.R. No. L-3054 (Rodriguez v. Tesorero de Filipinas); G.R. No. L-3055
(Guerrero v. Commissioner of Customs); and G.R. No. L-3056 (Barredo v. Commission on
Elections), 84 Phil. 368 (1949)], this Court brushed aside this technicality because "the
transcendental importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure. (Avelino
vs. Cuenco, G.R. No. L-2621)." Insofar as taxpayers' suits are concerned, this Court had
declared that it "is not devoid of discretion as to whether or not it should be
entertained," (Tan v. Macapagal, 43 SCRA 677, 680 [1972]) or that it "enjoys an open
discretion to entertain the same or not." [Sanidad v. COMELEC, 73 SCRA 333 (1976)].

xxx xxx xxx

In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members
of Congress, and even association of planters, and
non-profit civic organizations were allowed to initiate and prosecute actions before this
court to question the constitutionality or validity of laws, acts, decisions, rulings, or
orders of various government agencies or instrumentalities. Among such cases were
those assailing the constitutionality of (a) R.A. No. 3836 insofar as it allows retirement
gratuity and commutation of vacation and sick leave to Senators and Representatives
and to elective officials of both Houses of Congress (Philippine Constitution Association,
Inc. v. Gimenez, 15 SCRA 479 [1965]); (b) Executive Order No. 284, issued by President
Corazon C. Aquino on 25 July 1987, which allowed members of the cabinet, their
undersecretaries, and assistant secretaries to hold other government offices or positions
(Civil Liberties Union v. Executive Secretary, 194 SCRA 317 [1991]); (c) the automatic
appropriation for debt service in the General Appropriations Act (Guingona v. Carague,
196 SCRA 221 [1991]; (d) R.A. No. 7056 on the holding of desynchronized elections
(Osmea v. Commission on Elections, 199 SCRA 750 [1991]); (e) P.D. No. 1869 (the
charter of the Philippine Amusement and Gaming Corporation) on the ground that it is
contrary to morals, public policy, and order (Basco v. Philippine Amusement and Gaming
Corp., 197 SCRA 52 [1991]); and (f) R.A. No. 6975, establishing the Philippine National
Police. (Carpio v. Executive Secretary, 206 SCRA 290 [1992]).

Other cases where we have followed a liberal policy regarding locus standi include those
attacking the validity or legality of (a) an order allowing the importation of rice in the
light of the prohibition imposed by R.A. No. 3452 (Iloilo Palay and Corn Planters
Association, Inc. v. Feliciano, 13 SCRA 377 [1965]; (b) P.D. Nos. 991 and 1033 insofar as
they proposed amendments to the Constitution and P.D. No. 1031 insofar as it directed
the COMELEC to supervise, control, hold, and conduct the referendum-plebiscite on 16
October 1976 (Sanidad v. Commission on Elections, supra); (c) the bidding for the sale of
the 3,179 square meters of land at Roppongi, Minato-ku, Tokyo, Japan (Laurel v. Garcia,
187 SCRA 797 [1990]); (d) the approval without hearing by the Board of Investments of
the amended application of the Bataan Petrochemical Corporation to transfer the site of
its plant from Bataan to Batangas and the validity of such transfer and the shift of
feedstock from naphtha only to naphtha and/or liquefied petroleum gas (Garcia v. Board
of Investments, 177 SCRA 374 [1989]; Garcia v. Board of Investments, 191 SCRA 288
[1990]); (e) the decisions, orders, rulings, and resolutions of the Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs, and
the Fiscal Incentives Review Board exempting the National Power Corporation from
indirect tax and duties (Maceda v. Macaraig, 197 SCRA 771 [1991]); (f) the orders of the
Energy Regulatory Board of 5 and 6 December 1990 on the ground that the hearings
conducted on the second provisional increase in oil prices did not allow the petitioner
substantial cross-examination; (Maceda v. Energy Regulatory Board, 199 SCRA 454
[1991]); (g) Executive Order No. 478 which levied a special duty of P0.95 per liter of
imported oil products (Garcia v. Executive Secretary, 211 SCRA 219 [1992]); (h)
resolutions of the Commission on Elections concerning the apportionment, by district, of
the number of elective members of Sanggunians (De Guia vs. Commission on Elections,
208 SCRA 420 [1992]); and (i) memorandum orders issued by a Mayor affecting the Chief
of Police of Pasay City (Pasay Law and Conscience Union, Inc. v. Cuneta, 101 SCRA 662
[1980]).

In the 1975 case of Aquino v. Commission on Elections (62 SCRA 275 [1975]), this Court,
despite its unequivocal ruling that the petitioners therein had no personality to file the
petition, resolved nevertheless to pass upon the issues raised because of the far-
reaching implications of the petition. We did no less in De Guia v. COMELEC
(Supra) where, although we declared that De Guia "does not appear to have locus standi,
a standing in law, a personal or substantial interest," we brushed aside the procedural
infirmity "considering the importance of the issue involved, concerning as it does the
political exercise of qualified voters affected by the apportionment, and petitioner
alleging abuse of discretion and violation of the Constitution by respondent."

Now on the merits of the case.

On the fare range scheme.

Section 16(c) of the Public Service Act, as amended, reads:

Sec. 16. Proceedings of the Commission, upon notice and hearing. The Commission
shall have power, upon proper notice and hearing in accordance with the rules and
provisions of this Act, subject to the limitations and exceptions mentioned and saving
provisions to the contrary:

xxx xxx xxx

(c) To fix and determine individual or joint rates, tolls, charges, classifications, or
schedules thereof, as well as commutation, mileage kilometrage, and other special rates
which shall be imposed, observed, and followed thereafter by any public
service: Provided, That the Commission may, in its discretion, approve rates proposed by
public services provisionally and without necessity of any hearing; but it shall call a
hearing thereon within thirty days thereafter, upon publication and notice to the
concerns operating in the territory affected: Provided, further, That in case the public
service equipment of an operator is used principally or secondarily for the promotion of a
private business, the net profits of said private business shall be considered in relation
with the public service of such operator for the purpose of fixing the rates. (Emphasis
ours).

xxx xxx xxx


Under the foregoing provision, the

the Legislature delegated to the defunct Public Service Commission the power of fixing
the rates of public services. Respondent LTFRB, the existing regulatory body today, is
likewise vested with the same under Executive Order No. 202 dated June 19, 1987.
Section 5(c) of the said executive order authorizes LTFRB to determine, prescribe,
approve and periodically review and adjust, reasonable fares, rates and other related
charges, relative to the operation of public land transportation services provided by
motorized vehicles.

Such delegation of legislative power to an administrative agency is permitted in order to


adapt to the increasing complexity of modern life. As subjects for governmental
regulation multiply, so does the difficulty of administering the laws. Hence, specialization
even in legislation has become necessary. Given the task of determining sensitive and
delicate matters as route-fixing and rate-making for the transport sector, the responsible
regulatory body is entrusted with the power of subordinate legislation. With this
authority, an administrative body and in this case, the LTFRB, may implement broad
policies laid down in a statute by "filling in" the details which the Legislature may neither
have time or competence to provide. However, nowhere under the aforesaid provisions
of law are the regulatory bodies, the PSC and LTFRB alike, authorized to delegate that
power to a common carrier, a transport operator, or other public service.

In the case at bench, the authority given by the LTFRB to the provincial bus operators to
set a fare range over and above the authorized existing fare, is illegal and invalid as it is
tantamount to an undue delegation of legislative authority. Potestas delegata non
delegari potest. What has been delegated cannot be delegated. This doctrine is based on
the ethical principle that such a delegated power constitutes not only a right but a duty
to be performed by the delegate through the instrumentality of his own judgment and
not through the intervening mind of another. A further delegation of such power would
indeed constitute a negation of the duty in violation of the trust reposed in the delegate
mandated to discharge it directly. The policy of allowing the provincial bus operators to
change and increase their fares at will would result not only to a chaotic situation but to
an anarchic state of affairs. This would leave the riding public at the mercy of transport
operators who may increase fares every hour, every day, every month or every year,
whenever it pleases them or whenever they deem it "necessary" to do so.

In Panay Autobus Co. v. Philippine Railway Co., 12 where respondent Philippine Railway
Co. was granted by the Public Service Commission the authority to change its freight
rates at will, this Court categorically declared that:

In our opinion, the Public Service Commission was not authorized by law to delegate to
the Philippine Railway Co. the power of altering its freight rates whenever it should find
it necessary to do so in order to meet the competition of road trucks and autobuses, or
to change its freight rates at will, or to regard its present rates as maximum rates, and
to fix lower rates whenever in the opinion of the Philippine Railway Co. it would be to its
advantage to do so.
The mere recital of the language of the application of the Philippine Railway Co. is
enough to show that it is untenable. The Legislature has delegated to the Public Service
Commission the power of fixing the rates of public services, but it has not authorized the
Public Service Commission to delegate that power to a common carrier or other public
service. The rates of public services like the Philippine Railway Co. have been approved
or fixed by the Public Service Commission, and any change in such rates must be
authorized or approved by the Public Service Commission after they have been shown to
be just and reasonable. The public service may, of course, propose new rates, as the
Philippine Railway Co. did in case No. 31827, but it cannot lawfully make said new rates
effective without the approval of the Public Service Commission, and the Public Service
Commission itself cannot authorize a public service to enforce new rates without the
prior approval of said rates by the commission. The commission must approve new rates
when they are submitted to it, if the evidence shows them to be just and reasonable,
otherwise it must disapprove them. Clearly, the commission cannot determine in
advance whether or not the new rates of the Philippine Railway Co. will be just and
reasonable, because it does not know what those rates will be.

In the present case the Philippine Railway Co. in effect asked for permission to change its
freight rates at will. It may change them every day or every hour, whenever it deems it
necessary to do so in order to meet competition or whenever in its opinion it would be to
its advantage. Such a procedure would create a most unsatisfactory state of affairs and
largely defeat the purposes of the public service law. 13 (Emphasis ours).

One veritable consequence of the deregulation of transport fares is a compounded fare.


If transport operators will be authorized to impose and collect an additional amount
equivalent to 20% over and above the authorized fare over a period of time, this will
unduly prejudice a commuter who will be made to pay a fare that has been computed in
a manner similar to those of compounded bank interest rates.

Picture this situation. On December 14, 1990, the LTFRB authorized provincial bus
operators to collect a thirty-seven (P0.37) centavo per kilometer fare for ordinary buses.
At the same time, they were allowed to impose and collect a fare range of plus or minus
15% over the authorized rate. Thus P0.37 centavo per kilometer authorized fare plus
P0.05 centavos (which is 15% of P0.37 centavos) is equivalent to P0.42 centavos, the
allowed rate in 1990. Supposing the LTFRB grants another five (P0.05) centavo increase
per kilometer in 1994, then, the base or reference for computation would have to be
P0.47 centavos (which is P0.42 + P0.05 centavos). If bus operators will exercise their
authority to impose an additional 20% over and above the authorized fare, then the fare
to be collected shall amount to P0.56 (that is, P0.47 authorized LTFRB rate plus 20% of
P0.47 which is P0.29). In effect, commuters will be continuously subjected, not only to a
double fare adjustment but to a compounding fare as well. On their part, transport
operators shall enjoy a bigger chunk of the pie. Aside from fare increase applied for, they
can still collect an additional amount by virtue of the authorized fare range.
Mathematically, the situation translates into the following:
Year** LTFRB authorized Fare Range Fare to be
rate*** collected per
kilometer

1990 P0.37 15% (P0.05) P0.42


1994 P0.42 + 0.05 = 0.47 20% (P0.09) P0.56
1998 P0.56 + 0.05 = 0.61 20% (P0.12) P0.73
2002 P0.73 + 0.05 = 0.78 20% (P0.16) P0.94

Moreover, rate making or rate fixing is not an easy task. It is a delicate and sensitive
government function that requires dexterity of judgment and sound discretion with the
settled goal of arriving at a just and reasonable rate acceptable to both the public utility
and the public. Several factors, in fact, have to be taken into consideration before a
balance could be achieved. A rate should not be confiscatory as would place an operator
in a situation where he will continue to operate at a loss. Hence, the rate should enable
public utilities to generate revenues sufficient to cover operational costs and provide
reasonable return on the investments. On the other hand, a rate which is too high
becomes discriminatory. It is contrary to public interest. A rate, therefore, must be
reasonable and fair and must be affordable to the end user who will utilize the services.

Given the complexity of the nature of the function of rate-fixing and its far-reaching
effects on millions of commuters, government must not relinquish this important function
in favor of those who would benefit and profit from the industry. Neither should the
requisite notice and hearing be done away with. The people, represented by reputable
oppositors, deserve to be given full opportunity to be heard in their opposition to any
fare increase.

The present administrative procedure, 14 to our mind, already mirrors an orderly and
satisfactory arrangement for all parties involved. To do away with such a procedure and
allow just one party, an interested party at that, to determine what the rate should be,
will undermine the right of the other parties to due process. The purpose of a hearing is
precisely to determine what a just and reasonable rate is. 15 Discarding such procedural
and constitutional right is certainly inimical to our fundamental law and to public
interest.

On the presumption of public need.

A certificate of public convenience (CPC) is an authorization granted by the LTFRB for the
operation of land transportation services for public use as required by law. Pursuant to
Section 16(a) of the Public Service Act, as amended, the following requirements must be
met before a CPC may be granted, to wit: (i) the applicant must be a citizen of the
Philippines, or a corporation or co-partnership, association or joint-stock company
constituted and organized under the laws of the Philippines, at least 60 per centum of its
stock or paid-up capital must belong entirely to citizens of the Philippines; (ii) the
applicant must be financially capable of undertaking the proposed service and meeting
the responsibilities incident to its operation; and (iii) the applicant must prove that the
operation of the public service proposed and the authorization to do business will
promote the public interest in a proper and suitable manner. It is understood that there
must be proper notice and hearing before the PSC can exercise its power to issue a CPC.

While adopting in toto the foregoing requisites for the issuance of a CPC, LTFRB
Memorandum Circular No. 92-009, Part IV, provides for yet incongruous and
contradictory policy guideline on the issuance of a CPC. The guidelines states:

The issuance of a Certificate of Public Convenience is determined by public need. The


presumption of public need for a service shall be deemed in favor of the applicant, while
the burden of proving that there is no need for the proposed service shall be the
oppositor's. (Emphasis ours).

The above-quoted provision is entirely incompatible and inconsistent with Section 16(c)
(iii) of the Public Service Act which requires that before a CPC will be issued, the
applicant must prove by proper notice and hearing that the operation of the public
service proposed will promote public interest in a proper and suitable manner. On the
contrary, the policy guideline states that the presumption of public need for a public
service shall be deemed in favor of the applicant. In case of conflict between a statute
and an administrative order, the former must prevail.

By its terms, public convenience or necessity generally means something fitting or suited
to the public need. 16 As one of the basic requirements for the grant of a CPC, public
convenience and necessity exists when the proposed facility or service meets a
reasonable want of the public and supply a need which the existing facilities do not
adequately supply. The existence or
non-existence of public convenience and necessity is therefore a question of fact that
must be established by evidence, real and/or testimonial; empirical data; statistics and
such other means necessary, in a public hearing conducted for that purpose. The object
and purpose of such procedure, among other things, is to look out for, and protect, the
interests of both the public and the existing transport operators.

Verily, the power of a regulatory body to issue a CPC is founded on the condition that
after full-dress hearing and investigation, it shall find, as a fact, that the proposed
operation is for the convenience of the public. 17 Basic convenience is the primary
consideration for which a CPC is issued, and that fact alone must be consistently borne in
mind. Also, existing operators in subject routes must be given an opportunity to offer
proof and oppose the application. Therefore, an applicant must, at all times, be required
to prove his capacity and capability to furnish the service which he has undertaken to
render. 18 And all this will be possible only if a public hearing were conducted for that
purpose.

Otherwise stated, the establishment of public need in favor of an applicant reverses well-
settled and institutionalized judicial, quasi-judicial and administrative procedures. It
allows the party who initiates the proceedings to prove, by mere application, his
affirmative allegations. Moreover, the offending provisions of the LTFRB memorandum
circular in question would in effect amend the Rules of Court by adding another
disputable presumption in the enumeration of 37 presumptions under Rule 131, Section
5 of the Rules of Court. Such usurpation of this Court's authority cannot be countenanced
as only this Court is mandated by law to promulgate rules concerning pleading, practice
and procedure. 19

Deregulation, while it may be ideal in certain situations, may not be ideal at all in our
country given the present circumstances. Advocacy of liberalized franchising and
regulatory process is tantamount to an abdication by the government of its inherent right
to exercise police power, that is, the right of government to regulate public utilities for
protection of the public and the utilities themselves.

While we recognize the authority of the DOTC and the LTFRB to issue administrative
orders to regulate the transport sector, we find that they committed grave abuse of
discretion in issuing DOTC Department Order
No. 92-587 defining the policy framework on the regulation of transport services and
LTFRB Memorandum Circular No. 92-009 promulgating the implementing guidelines on
DOTC Department Order No. 92-587, the said administrative issuances being
amendatory and violative of the Public Service Act and the Rules of Court. Consequently,
we rule that the twenty (20%) per centum fare increase imposed by respondent PBOAP
on March 16, 1994 without the benefit of a petition and a public hearing is null and void
and of no force and effect. No grave abuse of discretion however was committed in the
issuance of DOTC Memorandum Order No. 90-395 and DOTC Memorandum dated
October 8, 1992, the same being merely internal communications between
administrative officers.

WHEREFORE, in view of the foregoing, the instant petition is hereby GRANTED and the
challenged administrative issuances and orders, namely: DOTC Department Order No.
92-587, LTFRB Memorandum Circular
No. 92-009, and the order dated March 24, 1994 issued by respondent LTFRB are hereby
DECLARED contrary to law and invalid insofar as they affect provisions therein (a)
delegating to provincial bus and jeepney operators the authority to increase or decrease
the duly prescribed transportation fares; and (b) creating a presumption of public need
for a service in favor of the applicant for a certificate of public convenience and placing
the burden of proving that there is no need for the proposed service to the oppositor.

The Temporary Restraining Order issued on June 20, 1994 is hereby MADE PERMANENT
insofar as it enjoined the bus fare rate increase granted under the provisions of the
aforementioned administrative circulars, memoranda and/or orders declared invalid.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-64693 April 27, 1984

LITA ENTERPRISES, INC., petitioner,


vs.
SECOND CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M.
OCAMPO and FRANCISCA P. GARCIA, respondents.

Manuel A. Concordia for petitioner.

Nicasio Ocampo for himself and on behalf of his correspondents.

ESCOLIN, J.:+.wph!1

"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-
honored maxim that must be applied to the parties in the case at bar. Having entered
into an illegal contract, neither can seek relief from the courts, and each must bear the
consequences of his acts.

The factual background of this case is undisputed.

Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private
respondents, purchased in installment from the Delta Motor Sales Corporation five (5)
Toyota Corona Standard cars to be used as taxicabs. Since they had no franchise to
operate taxicabs, they contracted with petitioner Lita Enterprises, Inc., through its
representative, Manuel Concordia, for the use of the latter's certificate of public
convenience in consideration of an initial payment of P1,000.00 and a monthly rental of
P200.00 per taxicab unit. To effectuate Id agreement, the aforesaid cars were registered
in the name of petitioner Lita Enterprises, Inc, Possession, however, remained with tile
spouses Ocampo who operated and maintained the same under the name Acme Taxi,
petitioner's trade name.

About a year later, on March 18, 1967, one of said taxicabs driven by their employee,
Emeterio Martin, collided with a motorcycle whose driver, one Florante Galvez, died from
the head injuries sustained therefrom. A criminal case was eventually filed against the
driver Emeterio Martin, while a civil case for damages was instituted by Rosita Sebastian
Vda. de Galvez, heir of the victim, against Lita Enterprises, Inc., as registered owner of
the taxicab in the latter case, Civil Case No. 72067 of the Court of First Instance of
Manila, petitioner Lita Enterprises, Inc. was adjudged liable for damages in the amount of
P25,000.00 and P7,000.00 for attorney's fees.

This decision having become final, a writ of execution was issued. One of the vehicles of
respondent spouses with Engine No. 2R-914472 was levied upon and sold at public
auction for 12,150.00 to one Sonnie Cortez, the highest bidder. Another car with Engine
No. 2R-915036 was likewise levied upon and sold at public auction for P8,000.00 to a
certain Mr. Lopez.

Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in
his name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over the
registration papers to him, but the latter allegedly refused. Hence, he and his wife filed a
complaint against Lita Enterprises, Inc., Rosita Sebastian Vda. de Galvez, Visayan Surety
& Insurance Co. and the Sheriff of Manila for reconveyance of motor vehicles with
damages, docketed as Civil Case No. 90988 of the Court of First Instance of Manila. Trial
on the merits ensued and on July 22, 1975, the said court rendered a decision, the
dispositive portion of which reads: t.hqw

WHEREFORE, the complaint is hereby dismissed as far as defendants Rosita Sebastian


Vda. de Galvez, Visayan Surety & Insurance Company and the Sheriff of Manila are
concerned.

Defendant Lita Enterprises, Inc., is ordered to transfer the registration certificate of the
three Toyota cars not levied upon with Engine Nos. 2R-230026, 2R-688740 and 2R-
585884 [Exhs. A, B, C and D] by executing a deed of conveyance in favor of the plaintiff.

Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in arrears for the
certificate of convenience from March 1973 up to May 1973 at the rate of P200 a month
per unit for the three cars. (Annex A, Record on Appeal, p. 102-103, Rollo)

Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same
was denied by the court a quo on October 27, 1975. (p. 121, Ibid.)

On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate


Court modified the decision by including as part of its dispositive portion another
paragraph, to wit: t.hqw

In the event the condition of the three Toyota rears will no longer serve the purpose of
the deed of conveyance because of their deterioration, or because they are no longer
serviceable, or because they are no longer available, then Lita Enterprises, Inc. is
ordered to pay the plaintiffs their fair market value as of July 22, 1975. (Annex "D", p.
167, Rollo.)

Its first and second motions for reconsideration having been denied, petitioner came to
Us, praying that: t.hqw

1. ...

2. ... after legal proceedings, decision be rendered or resolution be issued, reversing,


annulling or amending the decision of public respondent so that:

(a) the additional paragraph added by the public respondent to the DECISION of the
lower court (CFI) be deleted;

(b) that private respondents be declared liable to petitioner for whatever amount the
latter has paid or was declared liable (in Civil Case No. 72067) of the Court of First
Instance of Manila to Rosita Sebastian Vda. de Galvez, as heir of the victim Florante
Galvez, who died as a result ot the gross negligence of private respondents' driver while
driving one private respondents' taxicabs. (p. 39, Rollo.)

Unquestionably, the parties herein operated under an arrangement, comonly known as


the "kabit system", whereby a person who has been granted a certificate of convenience
allows another person who owns motors vehicles to operate under such franchise for a
fee. A certificate of public convenience is a special privilege conferred by the
government . Abuse of this privilege by the grantees thereof cannot be countenanced.
The "kabit system" has been Identified as one of the root causes of the prevalence of
graft and corruption in the government transportation offices. In the words of Chief
Justice Makalintal, 1 "this is a pernicious system that cannot be too severely condemned.
It constitutes an imposition upon the goo faith of the government.

Although not outrightly penalized as a criminal offense, the "kabit system" is invariably
recognized as being contrary to public policy and, therefore, void and inexistent under
Article 1409 of the Civil Code, It is a fundamental principle that the court will not aid
either party to enforce an illegal contract, but will leave them both where it finds them.
Upon this premise, it was flagrant error on the part of both the trial and appellate courts
to have accorded the parties relief from their predicament. Article 1412 of the Civil Code
denies them such aid. It provides:t.hqw

ART. 1412. if the act in which the unlawful or forbidden cause consists does not
constitute a criminal offense, the following rules shall be observed;

(1) when the fault, is on the part of both contracting parties, neither may recover what
he has given by virtue of the contract, or demand the performance of the other's
undertaking.

The defect of inexistence of a contract is permanent and incurable, and cannot be cured
by ratification or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere
lapse of time cannot give efficacy to contracts that are null void."

The principle of in pari delicto is well known not only in this jurisdiction but also in the
United States where common law prevails. Under American jurisdiction, the doctrine is
stated thus: "The proposition is universal that no action arises, in equity or at law, from
an illegal contract; no suit can be maintained for its specific performance, or to recover
the property agreed to be sold or delivered, or damages for its property agreed to be
sold or delivered, or damages for its violation. The rule has sometimes been laid down as
though it was equally universal, that where the parties are in pari delicto, no affirmative
relief of any kind will be given to one against the other." 3 Although certain exceptions to
the rule are provided by law, We see no cogent reason why the full force of the rule
should not be applied in the instant case.

WHEREFORE, all proceedings had in Civil Case No. 90988 entitled "Nicasio Ocampo and
Francisca P. Garcia, Plaintiffs, versus Lita Enterprises, Inc., et al., Defendants" of the
Court of First Instance of Manila and CA-G.R. No. 59157-R entitled "Nicasio Ocampo and
Francisca P. Garica, Plaintiffs-Appellees, versus Lita Enterprises, Inc., Defendant-
Appellant," of the Intermediate Appellate Court, as well as the decisions rendered therein
are hereby annuleled and set aside. No costs.

SO ORDERED.
G.R. No. 138810 September 29, 2004

BATANGAS CATV, INC., petitioner,


vs.
THE COURT OF APPEALS, THE BATANGAS CITY SANGGUNIANG PANLUNGSOD
and BATANGAS CITY MAYOR, respondents.

DECISION

SANDOVAL-GUTIERREZ, J.:

In the late 1940s, John Walson, an appliance dealer in Pennsylvania, suffered a decline in
the sale of television (tv) sets because of poor reception of signals in his community.
Troubled, he built an antenna on top of a nearby mountain. Using coaxial cable lines, he
distributed the tv signals from the antenna to the homes of his customers. Walsons
innovative idea improved his sales and at the same time gave birth to a new
telecommunication system -- the Community Antenna Television (CATV) or Cable
Television.1

This technological breakthrough found its way in our shores and, like in its country of
origin, it spawned legal controversies, especially in the field of regulation. The case at
bar is just another occasion to clarify a shady area. Here, we are tasked to resolve the
inquiry -- may a local government unit (LGU) regulate the subscriber rates charged by
CATV operators within its territorial jurisdiction?

This is a petition for review on certiorari filed by Batangas CATV, Inc. (petitioner herein)
against the Sangguniang Panlungsod and the Mayor of Batangas City (respondents
herein) assailing the Court of Appeals (1) Decision2dated February 12, 1999
and (2) Resolution3 dated May 26, 1999, in CA-G.R. CV No. 52361.4 The Appellate Court
reversed and set aside the Judgment5 dated October 29, 1995 of the Regional Trial Court
(RTC), Branch 7, Batangas City in Civil Case No. 4254,6 holding that neither of the
respondents has the power to fix the subscriber rates of CATV operators, such being
outside the scope of the LGUs power.

The antecedent facts are as follows:

On July 28, 1986, respondent Sangguniang Panlungsod enacted Resolution No.


2107 granting petitioner a permit to construct, install, and operate a CATV system in
Batangas City. Section 8 of the Resolution provides that petitioner is authorized to charge
its subscribers the maximum rates specified therein, "provided, however, that any
increase of rates shall be subject to the approval of the Sangguniang Panlungsod."8

Sometime in November 1993, petitioner increased its subscriber rates from P88.00
to P180.00 per month. As a result, respondent Mayor wrote petitioner a
letter9 threatening to cancel its permit unless it secures the approval of respondent
Sangguniang Panlungsod, pursuant to Resolution No. 210.
Petitioner then filed with the RTC, Branch 7, Batangas City, a petition for injunction
docketed as Civil Case No. 4254. It alleged that respondent Sangguniang Panlungsod has
no authority to regulate the subscriber rates charged by CATV operators because under
Executive Order No. 205, the National Telecommunications Commission (NTC) has the
sole authority to regulate the CATV operation in the Philippines.

On October 29, 1995, the trial court decided in favor of petitioner, thus:

"WHEREFORE, as prayed for, the defendants, their representatives, agents, deputies


or other persons acting on their behalf or under their instructions, are hereby enjoined
from canceling plaintiffs permit to operate a Cable Antenna Television (CATV)
system in the City of Batangas or its environs or in any manner, from
interfering with the authority and power of the National Telecommunications
Commission to grant franchises to operate CATV systems to qualified
applicants, and the right of plaintiff in fixing its service rates which needs no
prior approval of the Sangguniang Panlungsod of Batangas City.

The counterclaim of the plaintiff is hereby dismissed. No pronouncement as to costs.

IT IS SO ORDERED."10

The trial court held that the enactment of Resolution No. 210 by respondent violates the
States deregulation policy as set forth by then NTC Commissioner Jose Luis A. Alcuaz in
his Memorandum dated August 25, 1989. Also, it pointed out that the sole agency of the
government which can regulate CATV operation is the NTC, and that the LGUs cannot
exercise regulatory power over it without appropriate legislation.

Unsatisfied, respondents elevated the case to the Court of Appeals, docketed as CA-G.R.
CV No. 52361.

On February 12, 1999, the Appellate Court reversed and set aside the trial courts
Decision, ratiocinating as follows:

"Although the Certificate of Authority to operate a Cable Antenna Television


(CATV) System is granted by the National Telecommunications Commission
pursuant to Executive Order No. 205, this does not preclude the Sangguniang
Panlungsod from regulating the operation of the CATV in their locality under
the powers vested upon it by Batas Pambansa Bilang 337, otherwise known as
the Local Government Code of 1983. Section 177 (now Section 457 paragraph 3
(ii) of Republic Act 7160) provides:

Section 177. Powers and Duties The Sangguniang Panlungsod shall:

a) Enact such ordinances as may be necessary to carry into effect and discharge the
responsibilities conferred upon it by law, and such as shall be necessary and proper to
provide for health and safety, comfort and convenience, maintain peace and order,
improve the morals, and promote the prosperity and general welfare of the community
and the inhabitants thereof, and the protection of property therein;
xxx

d) Regulate, fix the license fee for, and tax any business or profession being carried on
and exercised within the territorial jurisdiction of the city, except travel agencies, tourist
guides, tourist transports, hotels, resorts, de luxe restaurants, and tourist inns of
international standards which shall remain under the licensing and regulatory power of
the Ministry of Tourism which shall exercise such authority without infringement on the
taxing and regulatory powers of the city government;

Under cover of the General Welfare Clause as provided in this section, Local Government
Units can perform just about any power that will benefit their constituencies. Thus, local
government units can exercise powers that are: (1) expressly granted; (2) necessarily
implied from the power that is expressly granted; (3) necessary, appropriate or
incidental for its efficient and effective governance; and (4) essential to the promotion of
the general welfare of their inhabitants. (Pimentel, The Local Government Code of 1991,
p. 46)

Verily, the regulation of businesses in the locality is expressly provided in the


Local Government Code. The fixing of service rates is lawful under the General
Welfare Clause.

Resolution No. 210 granting appellee a permit to construct, install and operate a
community antenna television (CATV) system in Batangas City as quoted earlier in this
decision, authorized the grantee to impose charges which cannot be increased except
upon approval of the Sangguniang Bayan. It further provided that in case of violation by
the grantee of the terms and conditions/requirements specifically provided therein, the
City shall have the right to withdraw the franchise.

Appellee increased the service rates from EIGHTY EIGHT PESOS (P88.00) to ONE
HUNDRED EIGHTY PESOS (P180.00) (Records, p. 25) without the approval of
appellant. Such act breached Resolution No. 210 which gives appellant the right
to withdraw the permit granted to appellee."11

Petitioner filed a motion for reconsideration but was denied.12

Hence, the instant petition for review on certiorari anchored on the following
assignments of error:

"I

THE COURT OF APPEALS ERRED IN HOLDING THAT THE GENERAL WELFARE


CLAUSE of the LOCAL GOVERNMENT CODE AUTHORIZES RESPONDENT
SANGGUNIANG PANLUNGSOD TO EXERCISE THE REGULATORY FUNCTION
SOLELY LODGED WITH THE NATIONAL TELECOMMUNICATIONS COMMISSION
UNDER EXECUTIVE ORDER NO. 205, INCLUDING THE AUTHORITY TO FIX AND/OR
APPROVE THE SERVICE RATES OF CATV OPERATORS; AND

II
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION APPEALED FROM
AND DISMISSING PETITIONERS COMPLAINT."13

Petitioner contends that while Republic Act No. 7160, the Local Government Code of
1991, extends to the LGUs the general power to perform any act that will benefit their
constituents, nonetheless, it does not authorize them to regulate the CATV operation.
Pursuant to E.O. No. 205, only the NTC has the authority to regulate the CATV operation,
including the fixing of subscriber rates.

Respondents counter that the Appellate Court did not commit any reversible error in
rendering the assailed Decision. First, Resolution No. 210 was enacted pursuant to
Section 177(c) and (d) of Batas Pambansa Bilang 337, the Local Government Code of
1983, which authorizes LGUs to regulate businesses. The term "businesses" necessarily
includes the CATV industry. And second, Resolution No. 210 is in the nature of a contract
between petitioner and respondents, it being a grant to the former of a franchise to
operate a CATV system. To hold that E.O. No. 205 amended its terms would violate the
constitutional prohibition against impairment of contracts.14

The petition is impressed with merit.

Earlier, we posed the question -- may a local government unit (LGU) regulate the
subscriber rates charged by CATV operators within its territorial jurisdiction? A review of
pertinent laws and jurisprudence yields a negative answer.

President Ferdinand E. Marcos was the first one to place the CATV industry under the
regulatory power of the national government.15 On June 11, 1978, he
issued Presidential Decree (P.D.) No. 151216 establishing a monopoly of the industry
by granting Sining Makulay, Inc., an exclusive franchise to operate CATV system in any
place within the Philippines. Accordingly, it terminated all franchises, permits or
certificates for the operation of CATV system previously granted by local governments or
by any instrumentality or agency of the national government.17 Likewise, it prescribed
the subscriber rates to be charged by Sining Makulay, Inc. to its customers.18

On July 21, 1979, President Marcos issued Letter of Instruction (LOI) No. 894 vesting upon
the Chairman of the Board of Communications direct supervision over the operations of
Sining Makulay, Inc. Three days after, he issued E.O. No. 54619 integrating the Board of
Communications20 and the Telecommunications Control Bureau21to form a single entity to
be known as the "National Telecommunications Commission." Two of its assigned
functions are:

"a. Issue Certificate of Public Convenience for the operation of communications utilities
and services, radio communications systems, wire or wireless telephone or telegraph
systems, radio and television broadcasting system and other similar public utilities;

b. Establish, prescribe and regulate areas of operation of particular operators of public


service communications; and determine and prescribe charges or rates pertinent to the
operation of such public utility facilities and services except in cases where charges or
rates are established by international bodies or associations of which the Philippines is a
participating member or by bodies recognized by the Philippine Government as the
proper arbiter of such charges or rates;"

Although Sining Makulay Inc.s exclusive franchise had a life term of 25 years, it was cut
short by the advent of the 1986 Revolution. Upon President Corazon C. Aquinos
assumption of power, she issued E.O. No. 20522 opening the CATV industry to all
citizens of the Philippines. It mandated the NTC to grant Certificates of Authority
to CATV operators and to issue the necessary implementing rules and
regulations.

On September 9, 1997, President Fidel V. Ramos issued E.O. No. 43623 prescribing policy
guidelines to govern CATV operation in the Philippines. Cast in more definitive terms, it
restated the NTCs regulatory powers over CATV operations, thus:

"SECTION 2. The regulation and supervision of the cable television industry in the
Philippines shall remain vested solely with the National Telecommunications
Commission (NTC).

SECTION 3. Only persons, associations, partnerships, corporations or cooperatives,


granted a Provisional Authority or Certificate of Authority by the Commission may install,
operate and maintain a cable television system or render cable television service within
a service area."

Clearly, it has been more than two decades now since our national government, through
the NTC, assumed regulatory power over the CATV industry. Changes in the political
arena did not alter the trend. Instead, subsequent presidential issuances further
reinforced the NTCs power. Significantly, President Marcos and President Aquino, in the
exercise of their legislative power, issued P.D. No. 1512, E.O. No. 546 and E.O. No. 205.
Hence, they have the force and effect of statutes or laws passed by Congress.24 That the
regulatory power stays with the NTC is also clear from President Ramos E.O. No. 436
mandating that the regulation and supervision of the CATV industry shall remain vested
"solely" in the NTC. Blacks Law Dictionary defines "sole" as "without another or
others."25 The logical conclusion, therefore, is that in light of the above laws and
E.O. No. 436, the NTC exercises regulatory power over CATV operators to the
exclusion of other bodies.

But, lest we be misunderstood, nothing herein should be interpreted as to strip LGUs of


their general power to prescribe regulations under the general welfare clause of the
Local Government Code. It must be emphasized that when E.O. No. 436 decrees that the
"regulatory power" shall be vested "solely" in the NTC, it pertains to the "regulatory
power" over those matters which are peculiarly within the NTCs competence, such as,
the: (1) determination of rates, (2) issuance of "certificates of authority, (3)
establishment of areas of operation, (4) examination and assessment of the legal,
technical and financial qualifications of applicant operators, (5) granting of permits for
the use of frequencies, (6) regulation of ownership and operation, (7) adjudication of
issues arising from its functions, and (8) other similar matters.26 Within these areas, the
NTC reigns supreme as it possesses the exclusive power to regulate -- a power
comprising varied acts, such as "to fix, establish, or control; to adjust by rule, method or
established mode; to direct by rule or restriction; or to subject to governing principles or
laws."27

Coincidentally, respondents justify their exercise of regulatory power over petitioners


CATV operation under the general welfare clause of the Local Government Code of 1983.
The Court of Appeals sustained their stance.

There is no dispute that respondent Sangguniang Panlungsod, like other local legislative
bodies, has been empowered to enact ordinances and approve resolutions under the
general welfare clause of B.P. Blg. 337, the Local Government Code of 1983. That it
continues to posses such power is clear under the new law, R.A. No. 7160 (the Local
Government Code of 1991). Section 16 thereof provides:

"SECTION 16. General Welfare. Every local government unit shall exercise the powers
expressly granted, those necessarily implied therefrom, as well as powers necessary,
appropriate, or incidental for its efficient and effective governance, and those which are
essential to the promotion of the general welfare. Within their respective territorial
jurisdictions, local government units shall ensure and support, among others, the
preservation and enrichment of culture, promote health and safety, enhance the right of
the people to a balanced ecology, encourage and support the development of
appropriate and self-reliant, scientific and technological capabilities, improve public
morals, enhance economic prosperity and social justice, promote full employment among
their residents, maintain peace and order, and preserve the comfort and convenience of
their inhabitants."

In addition, Section 458 of the same Code specifically mandates:

"SECTION 458. Powers, Duties, Functions and Compensation. (a) The Sangguniang
Panlungsod, as the legislative body of the city, shall enact ordinances, approve
resolutions and appropriate funds for the general welfare of the city and its inhabitants
pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of
the city as provided for under Section 22 of this Code, x x x:"

The general welfare clause is the delegation in statutory form of the police
power of the State to LGUs.28Through this, LGUs may prescribe regulations to protect
the lives, health, and property of their constituents and maintain peace and order within
their respective territorial jurisdictions. Accordingly, we have upheld enactments
providing, for instance, the regulation of gambling,29 the occupation of rig drivers,30 the
installation and operation of pinball machines,31 the maintenance and operation of
cockpits,32 the exhumation and transfer of corpses from public burial grounds,33 and the
operation of hotels, motels, and lodging houses34 as valid exercises by local legislatures
of the police power under the general welfare clause.

Like any other enterprise, CATV operation maybe regulated by LGUs under the general
welfare clause. This is primarily because the CATV system commits the indiscretion of
crossing public properties. (It uses public properties in order to reach subscribers.) The
physical realities of constructing CATV system the use of public streets, rights of ways,
the founding of structures, and the parceling of large regions allow an LGU a certain
degree of regulation over CATV operators.35 This is the same regulation that it exercises
over all private enterprises within its territory.

But, while we recognize the LGUs power under the general welfare clause, we cannot
sustain Resolution No. 210. We are convinced that respondents strayed from the well
recognized limits of its power. The flaws in Resolution No. 210 are: (1) it violates the
mandate of existing laws and (2) it violates the States deregulation policy over the CATV
industry.

I.

Resolution No. 210 is an enactment of an LGU acting only as agent of the national
legislature. Necessarily, its act must reflect and conform to the will of its principal. To test
its validity, we must apply the particular requisites of a valid ordinance as laid down by
the accepted principles governing municipal corporations.36

Speaking for the Court in the leading case of United States vs. Abendan,37 Justice
Moreland said: "An ordinance enacted by virtue of the general welfare clause is valid,
unless it contravenes the fundamental law of the Philippine Islands, or an Act of the
Philippine Legislature, or unless it is against public policy, or is unreasonable, oppressive,
partial, discriminating, or in derogation of common right." In De la Cruz vs. Paraz, 38 we
laid the general rule "that ordinances passed by virtue of the implied power found in the
general welfare clause must be reasonable, consonant with the general powers and
purposes of the corporation, and not inconsistent with the laws or policy of the State."

The apparent defect in Resolution No. 210 is that it contravenes E.O. No. 205 and E.O.
No. 436 insofar as it permits respondent Sangguniang Panlungsod to usurp a power
exclusively vested in the NTC, i.e., the power to fix the subscriber rates charged by CATV
operators. As earlier discussed, the fixing of subscriber rates is definitely one of the
matters within the NTCs exclusive domain.

In this regard, it is appropriate to stress that where the state legislature has made
provision for the regulation of conduct, it has manifested its intention that the subject
matter shall be fully covered by the statute, and that a municipality, under its general
powers, cannot regulate the same conduct.39 In Keller vs. State,40 it was held that:
"Where there is no express power in the charter of a municipality authorizing it to adopt
ordinances regulating certain matters which are specifically covered by a general
statute, a municipal ordinance, insofar as it attempts to regulate the subject which is
completely covered by a general statute of the legislature, may be rendered invalid. x x
x Where the subject is of statewide concern, and the legislature has appropriated the
field and declared the rule, its declaration is binding throughout the State." A reason
advanced for this view is that such ordinances are in excess of the powers granted to the
municipal corporation.41
Since E.O. No. 205, a general law, mandates that the regulation of CATV operations shall
be exercised by the NTC, an LGU cannot enact an ordinance or approve a resolution in
violation of the said law.

It is a fundamental principle that municipal ordinances are inferior in status and


subordinate to the laws of the state. An ordinance in conflict with a state law of general
character and statewide application is universally held to be invalid. 42 The principle is
frequently expressed in the declaration that municipal authorities, under a general grant
of power, cannot adopt ordinances which infringe the spirit of a state law or repugnant to
the general policy of the state.43 In every power to pass ordinances given to a
municipality, there is an implied restriction that the ordinances shall be consistent with
the general law.44 In the language of Justice Isagani Cruz (ret.), this Court, in Magtajas vs.
Pryce Properties Corp., Inc.,45 ruled that:

"The rationale of the requirement that the ordinances should not contravene a statute is
obvious. Municipal governments are only agents of the national government. Local
councils exercise only delegated legislative powers conferred on them by Congress as
the national lawmaking body. The delegate cannot be superior to the principal or
exercise powers higher than those of the latter. It is a heresy to suggest that the local
government units can undo the acts of Congress, from which they have derived their
power in the first place, and negate by mere ordinance the mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights wholly
from the legislature. It breathes into them the breath of life, without which they cannot
exist. As it creates, so it may destroy. As it may destroy, it may abridge and control.
Unless there is some constitutional limitation on the right, the legislature might, by a
single act, and if we can suppose it capable of so great a folly and so great a wrong,
sweep from existence all of the municipal corporations in the State, and the corporation
could not prevent it. We know of no limitation on the right so far as to the corporation
themselves are concerned. They are, so to phrase it, the mere tenants at will of the
legislature.

This basic relationship between the national legislature and the local government units
has not been enfeebled by the new provisions in the Constitution strengthening the
policy of local autonomy. Without meaning to detract from that policy, we here confirm
that Congress retains control of the local government units although in significantly
reduced degree now than under our previous Constitutions. The power to create still
includes the power to destroy. The power to grant still includes the power to withhold or
recall. True, there are certain notable innovations in the Constitution, like the direct
conferment on the local government units of the power to tax, which cannot now be
withdrawn by mere statute. By and large, however, the national legislature is still
the principal of the local government units, which cannot defy its will or
modify or violate it."

Respondents have an ingenious retort against the above disquisition. Their theory is that
the regulatory power of the LGUs is granted by R.A. No. 7160 (the Local Government
Code of 1991), a handiwork of the national lawmaking authority. They contend that R.A.
No. 7160 repealed E.O. No. 205 (issued by President Aquino). Respondents argument
espouses a bad precedent. To say that LGUs exercise the same regulatory power over
matters which are peculiarly within the NTCs competence is to promote a scenario of
LGUs and the NTC locked in constant clash over the appropriate regulatory measure on
the same subject matter. LGUs must recognize that technical matters concerning
CATV operation are within the exclusive regulatory power of the NTC.

At any rate, we find no basis to conclude that R.A. No. 7160 repealed E.O. No. 205, either
expressly or impliedly. It is noteworthy that R.A. No. 7160 repealing clause, which
painstakingly mentions the specific laws or the parts thereof which are repealed, does
not include E.O. No. 205, thus:

"SECTION 534. Repealing Clause. (a) Batas Pambansa Blg. 337, otherwise known as
the Local Government Code." Executive Order No. 112 (1987), and Executive Order No.
319 (1988) are hereby repealed.

(b) Presidential Decree Nos. 684, 1191, 1508 and such other decrees, orders,
instructions, memoranda and issuances related to or concerning the barangay are
hereby repealed.

(c) The provisions of Sections 2, 3, and 4 of Republic Act No. 1939 regarding hospital
fund; Section 3, a (3) and b (2) of Republic Act. No. 5447 regarding the Special Education
Fund; Presidential Decree No. 144 as amended by Presidential Decree Nos. 559 and
1741; Presidential Decree No. 231 as amended; Presidential Decree No. 436 as amended
by Presidential Decree No. 558; and Presidential Decree Nos. 381, 436, 464, 477, 526,
632, 752, and 1136 are hereby repealed and rendered of no force and effect.

(d) Presidential Decree No. 1594 is hereby repealed insofar as it governs locally-funded
projects.

(e) The following provisions are hereby repealed or amended insofar as they are
inconsistent with the provisions of this Code: Sections 2, 16, and 29 of Presidential
Decree No. 704; Section 12 of Presidential Decree No. 87, as amended; Sections 52, 53,
66, 67, 68, 69, 70, 71, 72, 73, and 74 of Presidential Decree No. 463, as amended; and
Section 16 of Presidential Decree No. 972, as amended, and

(f) All general and special laws, acts, city charters, decrees, executive orders,
proclamations and administrative regulations, or part or parts thereof which are
inconsistent with any of the provisions of this Code are hereby repealed or modified
accordingly."

Neither is there an indication that E.O. No. 205 was impliedly repealed by R.A. No. 7160.
It is a settled rule that implied repeals are not lightly presumed in the absence of a clear
and unmistakable showing of such intentions. In Mecano vs. Commission on Audit, 46 we
ruled:
"Repeal by implication proceeds on the premise that where a statute of later date clearly
reveals an intention on the part of the legislature to abrogate a prior act on the subject,
that intention must be given effect. Hence, before there can be a repeal, there must be a
clear showing on the part of the lawmaker that the intent in enacting the new law was to
abrogate the old one. The intention to repeal must be clear and manifest; otherwise, at
least, as a general rule, the later act is to be construed as a continuation of, and not a
substitute for, the first act and will continue so far as the two acts are the same from the
time of the first enactment."

As previously stated, E.O. No. 436 (issued by President Ramos) vests upon the NTC the
power to regulate the CATV operation in this country. So also Memorandum Circular No.
8-9-95, the Implementing Rules and Regulations of R.A. No. 7925 (the "Public
Telecommunications Policy Act of the Philippines"). This shows that the NTCs regulatory
power over CATV operation is continuously recognized.

It is a canon of legal hermeneutics that instead of pitting one statute against another in
an inevitably destructive confrontation, courts must exert every effort to reconcile them,
remembering that both laws deserve a becoming respect as the handiwork of coordinate
branches of the government.47 On the assumption of a conflict between E.O. No. 205 and
R.A. No. 7160, the proper action is not to uphold one and annul the other but to give
effect to both by harmonizing them if possible. This recourse finds application here. Thus,
we hold that the NTC, under E.O. No. 205, has exclusive jurisdiction over matters
affecting CATV operation, including specifically the fixing of subscriber rates, but nothing
herein precludes LGUs from exercising its general power, under R.A. No. 7160, to
prescribe regulations to promote the health, morals, peace, education, good order or
safety and general welfare of their constituents. In effect, both laws become equally
effective and mutually complementary.

The grant of regulatory power to the NTC is easily understandable. CATV system is not a
mere local concern. The complexities that characterize this new technology demand that
it be regulated by a specialized agency. This is particularly true in the area of rate-fixing.
Rate fixing involves a series of technical operations.48 Consequently, on the hands of the
regulatory body lies the ample discretion in the choice of such rational processes as
might be appropriate to the solution of its highly complicated and technical problems.
Considering that the CATV industry is so technical a field, we believe that the NTC, a
specialized agency, is in a better position than the LGU, to regulate it. Notably, in United
States vs. Southwestern Cable Co.,49 the US Supreme Court affirmed the Federal
Communications Commissions (FCCs) jurisdiction over CATV operation. The Court held
that the FCCs authority over cable systems assures the preservation of the local
broadcast service and an equitable distribution of broadcast services among the various
regions of the country.

II.

Resolution No. 210 violated the States deregulation policy.


Deregulation is the reduction of government regulation of business to permit freer
markets and competition.50Oftentimes, the State, through its regulatory agencies, carries
out a policy of deregulation to attain certain objectives or to address certain problems. In
the field of telecommunications, it is recognized that many areas in the Philippines are
still "unserved" or "underserved." Thus, to encourage private sectors to venture in this
field and be partners of the government in stimulating the growth and development of
telecommunications, the State promoted the policy of deregulation.

In the United States, the country where CATV originated, the Congress observed, when it
adopted the Telecommunications Act of 1996, that there was a need to provide a pro-
competitive, deregulatory national policy framework designed to accelerate rapidly
private sector deployment of advanced telecommunications and information
technologies and services to all Americans by opening all telecommunications markets to
competition. The FCC has adopted regulations to implement the requirements of the
1996 Act and the intent of the Congress.

Our country follows the same policy. The fifth Whereas Clause of E.O. No. 436 states:

"WHEREAS, professionalism and self-regulation among existing operators, through a


nationally recognized cable television operators association, have enhanced the growth
of the cable television industry and must therefore be maintained along with minimal
reasonable government regulations;"

This policy reaffirms the NTCs mandate set forth in the Memorandum dated August 25,
1989 of Commissioner Jose Luis A. Alcuaz, to wit:

"In line with the purpose and objective of MC 4-08-88, Cable Television System or
Community Antenna Television (CATV) is made part of the broadcast media to promote
the orderly growth of the Cable Television Industry it being in its developing stage. Being
part of the Broadcast Media, the service rates of CATV are likewise considered
deregulated in accordance with MC 06-2-81 dated 25 February 1981, the implementing
guidelines for the authorization and operation of Radio and Television Broadcasting
stations/systems.

Further, the Commission will issue Provisional Authority to existing CATV operators to
authorize their operations for a period of ninety (90) days until such time that the
Commission can issue the regular Certificate of Authority."

When the State declared a policy of deregulation, the LGUs are bound to follow. To rule
otherwise is to render the States policy ineffective. Being mere creatures of the State,
LGUs cannot defeat national policies through enactments of contrary measures. Verily, in
the case at bar, petitioner may increase its subscriber rates without respondents
approval.

At this juncture, it bears emphasizing that municipal corporations are bodies politic and
corporate, created not only as local units of local self-government, but as governmental
agencies of the state.51 The legislature, by establishing a municipal corporation, does not
divest the State of any of its sovereignty; absolve itself from its right and duty to
administer the public affairs of the entire state; or divest itself of any power over the
inhabitants of the district which it possesses before the charter was granted.52

Respondents likewise argue that E.O. No. 205 violates the constitutional prohibition
against impairment of contracts, Resolution No. 210 of Batangas City Sangguniang
Panlungsod being a grant of franchise to petitioner.

We are not convinced.

There is no law specifically authorizing the LGUs to grant franchises to operate CATV
system. Whatever authority the LGUs had before, the same had been withdrawn when
President Marcos issued P.D. No. 1512 "terminating all franchises, permits or certificates
for the operation of CATV system previously granted by local governments." Today,
pursuant to Section 3 of E.O. No. 436, "only persons, associations, partnerships,
corporations or cooperatives granted a Provisional Authority or Certificate of Authority by
the NTC may install, operate and maintain a cable television system or render cable
television service within a service area." It is clear that in the absence of constitutional or
legislative authorization, municipalities have no power to grant
franchises.53Consequently, the protection of the constitutional provision as to impairment
of the obligation of a contract does not extend to privileges, franchises and grants given
by a municipality in excess of its powers, or ultra vires.54

One last word. The devolution of powers to the LGUs, pursuant to the Constitutional
mandate of ensuring their autonomy, has bred jurisdictional tension between said LGUs
and the State. LGUs must be reminded that they merely form part of the whole. Thus,
when the Drafters of the 1987 Constitution enunciated the policy of ensuring the
autonomy of local governments,55 it was never their intention to create an imperium in
imperio and install an intra-sovereign political subdivision independent of a single
sovereign state.

WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals
dated February 12, 1999 as well as its Resolution dated May 26, 1999 in CA-G.R. CV No.
52461, are hereby REVERSED. The RTC Decision in Civil Case No. 4254 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 100727 March 18, 1992

COGEO-CUBAO OPERATORS AND DRIVERS ASSOCIATION, petitioner,


vs.
THE COURT OF APPEALS, LUNGSOD SILANGAN TRANSPORT SERVICES, CORP.,
INC., respondents.

MEDIALDEA, J.:
This is a petition for review on certiorari of the decision of the Court of Appeals which
affirmed with modification the decision of the Regional Trial Court awarding damages in
favor of respondent Lungsod Silangan Transport Services Corp., Inc. (Lungsod Corp. for
brevity).

The antecedents facts of this case are as follows:

It appears that a certificate of public convenience to operate a jeepney service was


ordered to be issued in favor of Lungsod Silangan to ply the Cogeo-Cubao route
sometime in 1983 on the justification that public necessity and convenience will best be
served, and in the absence of existing authorized operators on the lined apply for . . . On
the other hand, defendant-Association was registered as a non-stock, non-profit
organization with the Securities and Exchange Commission on October 30, 1985 . . . with
the main purpose of representing plaintiff-appellee for whatever contract and/or
agreement it will have regarding the ownership of units, and the like, of the members of
the Association . . .

Perturbed by plaintiffs' Board Resolution No. 9 . . . adopting a Bandera' System under


which a member of the cooperative is permitted to queue for passenger at the disputed
pathway in exchange for the ticket worth twenty pesos, the proceeds of which shall be
utilized for Christmas programs of the drivers and other benefits, and on the strength of
defendants' registration as a collective body with the Securities and Exchange
Commission, defendants-appellants, led by Romeo Oliva decided to form a human
barricade on November 11, 1985 and assumed the dispatching of passenger
jeepneys . . . This development as initiated by defendants-appellants gave rise to the suit
for damages.

Defendant-Association's Answer contained vehement denials to the insinuation of take


over and at the same time raised as a defense the circumstance that the organization
was formed not to compete with plaintiff-cooperative. It, however, admitted that it is not
authorized to transport passengers . . . (pp. 15-16, Rollo)

On July 31, 1989, the trial court rendered a decision in favor of respondent Lungsod
Corp., the dispositive portion of which states:

WHEREFORE FROM THE FOREGOING CONSIDERATION, the Court hereby renders


judgment in favor of the plaintiff and against the defendants as follows:

1. Ordering defendants to pay plaintiff the amount of P50,000.00 as actual damages;

2. Ordering the defendants to pay the plaintiffs the amount of P10,000.00 as attorney's
fees.

SO ORDERED. (P. 39, Rollo)

Not satisfied with the decision, petitioner Association appealed with the Court of Appeals.
On May 27, 1991, respondent appellate court rendered its decision affirming the findings
of the trial court except with regard to the award of actual damages in the amount of
P50,000.00 and attorney's fees in the amount of P10,000.00. The Court of Appeals
however, awarded nominal damages to petitioner in the amount of P10,000.00.

Hence, this petition was filed with the petitioner assigning the following errors of the
appellate court:

I. THE RESPONDENT COURT ERRED IN MERELY MODIFYING THE JUDGMENT OF THE TRIAL
COURT.

II. THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER USURPED THE
PROPERTY RIGHT OF THE PRIVATE RESPONDENT.

III. AND THE RESPONDENT COURT ERRED IN DENYING THE MOTION FOR
RECONSIDERATION.

Since the assigned errors are interrelated, this Court shall discuss them jointly. The main
issue raised by the petitioner is whether or not the petitioner usurped the property right
of the respondent which shall entitle the latter to the award of nominal damages.

Petitioner contends that the association was formed not to complete with the respondent
corporation in the latter's operation as a common carrier; that the same was organized
for the common protection of drivers from abusive traffic officers who extort money from
them, and for the elimination of the practice of respondent corporation of requiring
jeepney owners to execute deed of sale in favor of the corporation to show that the latter
is the owner of the jeeps under its certificate of public convenience. Petitioner also
argues that in organizing the association, the members thereof are merely exercising
their freedom or right to redress their grievances.

We find the petition devoid of merit.

Under the Public Service Law, a certificate of public convenience is an authorization


issued by the Public Service Commission for the operation of public services for which no
franchise is required by law. In the instant case, a certificate of public convenience was
issued to respondent corporation on January 24, 1983 to operate a public utility jeepney
service on the Cogeo-Cubao route. As found by the trial court, the certificate was issued
pursuant to a decision passed by the Board of Transportation in BOT Case No. 82-565.

A certification of public convenience is included in the term "property" in the broad sense
of the term. Under the Public Service Law, a certificate of public convenience can be sold
by the holder thereof because it has considerable material value and is considered as
valuable asset (Raymundo v. Luneta Motor Co., et al., 58 Phil. 889). Although there is no
doubt that it is private property, it is affected with a public interest and must be
submitted to the control of the government for the common good (Pangasinan
Transportation Co. v. PSC, 70 Phil 221). Hence, insofar as the interest of the State is
involved, a certificate of public convenience does not confer upon the holder any
proprietary right or interest or franchise in the route covered thereby and in the public
highways (Lugue v. Villegas, L-22545, Nov . 28, 1969, 30 SCRA 409). However, with
respect to other persons and other public utilities, a certificate of public convenience as
property, which represents the right and authority to operate its facilities for public
service, cannot be taken or interfered with without due process of law. Appropriate
actions may be maintained in courts by the holder of the certificate against those who
have not been authorized to operate in competition with the former and those who
invade the rights which the former has pursuant to the authority granted by the Public
Service Commission (A.L. Ammen Transportation Co. v. Golingco. 43 Phil. 280).

In the case at bar, the trial court found that petitioner association forcibly took over the
operation of the jeepney service in the Cogeo-Cubao route without any authorization
from the Public Service Commission and in violation of the right of respondent
corporation to operate its services in the said route under its certificate of public
convenience. These were its findings which were affirmed by the appellate court:

The Court from the testimony of plaintiff's witnesses as well as the documentary
evidences presented is convinced that the actions taken by defendant herein though it
admit that it did not have the authority to transport passenger did in fact assume the
role as a common carrier engaged in the transport of passengers within that span of ten
days beginning November 11, 1985 when it unilaterally took upon itself the operation
and dispatching of jeepneys at St. Mary's St. The president of the defendant corporation.
Romeo Oliva himself in his testimony confirmed that there was indeed a takeover of the
operations at St. Mary's St. . . . (p. 36, Rollo)

The findings of the trial court especially if affirmed by the appellate court bear great
weight and will not be disturbed on appeal before this Court. Although there is no
question that petitioner can exercise their constitutional right to redress their grievances
with respondent Lungsod Corp., the manner by which this constitutional right is to be,
exercised should not undermine public peace and order nor should it violate the legal
rights of other persons. Article 21 of the Civil Code provides that any person who wilfully
causes loss or injury to another in a manner that is contrary to morals, good customs or
public policy shall compensate the latter for the damage. The provision covers a
situation where a person has a legal right which was violated by another in a manner
contrary to morals, good customs or public policy. It presupposes loss or injury, material
or otherwise, which one may suffer as a result of such violation. It is clear form the facts
of this case that petitioner formed a barricade and forcibly took over the motor units and
personnel of the respondent corporation. This paralyzed the usual activities and earnings
of the latter during the period of ten days and violated the right of respondent Lungsod
Corp. To conduct its operations thru its authorized officers.

As to the propriety of damages in favor of respondent Lungsod Corp., the respondent


appellate court stated:

. . . it does not necessarily follow that plaintiff-appellee is entitled to actual damages and
attorney's fees. While there may have been allegations from plaintiff-cooperative
showing that it did in fact suffer some from of injury . . . it is legally unprecise to order
the payment of P50,000.00 as actual damages for lack of concrete proof therefor. There
is, however, no denying of the act of usurpation by defendants-appellants which
constituted an invasion of plaintiffs'-appellees' property right. For this, nominal damages
in the amount of P10,000.00 may be granted. (Article 2221, Civil Code). (p. 18, Rollo)

No compelling reason exists to justify the reversal of the ruling of the respondent
appellate court in the case at bar. Article 2222 of the Civil Code states that the court may
award nominal damages in every obligation arising from any source enumerated in
Article 1157, or in every case where any property right has been invaded. Considering
the circumstances of the case, the respondent corporation is entitled to the award of
nominal damages.

ACCORDINGLY, the petition is DENIED and the assailed decision of the respondent
appellate court dated May 27, 1991 is AFFIRMED.

SO ORDERED.

G.R. No. L-8325 March 10, 1914

C. B. WILLIAMS, plaintiff-appellant,
vs.
TEODORO R. YANGCO, defendant-appellant.

William A. Kincaid and Thomas L. Hartigan for plaintiff.


Haussermann, Cohn, & Fisher fro defendant.

CARSON, J.:

The steamer Subic, owned by the defendant, collided with the lunch Euclid owned by the
plaintiff, in the Bay of Manila at an early hour on the morning of January 9, 1911, and
the Euclid sank five minutes thereafter. This action was brought to recover the value of
the Euclid.

The court below held from the evidence submitted that the Euclid was worth at a fair
valuation P10,000; that both vessels were responsible for the collision; and that the loss
should be divided equally between the respective owners, P5,000 to be paid the plaintiff
by the defendant, and P5,000 to be borne by the plaintiff himself. From this judgment
both defendant and plaintiff appealed.

After a careful review of all the evidence of record we are all agreed with the trial judge
in his holding that the responsible officers on both vessels were negligent in the
performance of their duties at the time when the accident occurred, and that both
vessels were to blame for the collision. We do not deem it necessary to review the
conflicting testimony of the witnesses called by both parties, the trial also having
inserted in his opinion a careful and critical summary and analysis of the testimony
submitted to him, which, to our minds, fully and satisfactorily disposes of the evidence
are set forth in the following language (translated):

In view of the negligence of which the patron Millonario (of defendant's vessel) has been
guilty as well as that imputable to the patron of the launch Euclid, both contributed in a
decided manner and beyond all doubt to the occurrence of the accident and the
consequent damages resulting therefrom in the loss of the launch Euclid.

With a little diligence which either of the two patrons might have practiced under the
circumstances existing at the time of the collision, if both had not been so distracted and
so negligent in the fulfillment of their respective duties, the disaster could have been
easily avoided, since the sea was free of obstacles and the night one which permitted
the patron Millonario to distinguish the hull of the launch twenty minutes before the
latter entered upon his path . . .

There is proven, therefore, the negligence of which the patron of the Euclid has been
guilty.

If the negligence by which the patron of the launch Euclid has contributed to the cause of
the accident and to the resulting damages is patent, none the less so is the negligence of
the patron of the steamer Subic, Hilarion Millonario by name, as may be seen from his
own testimony which is here copied for the better appreciation thereof.

It will be seen that the trial judge was of opinion that the vessels were jointly liable for
the loss resulting from the sinking of the launch. But actions for damages resulting from
maritime collisions are governed in this jurisdiction by the provisions of section 3, title 4,
Book III of the Code of Commerce, and among these provisions we find the following:

ART. 827. If both vessels may be blamed for the collision, each one shall be liable for its
own damages, and both shall be jointly responsible for the loss and damages suffered by
their cargoes.

In disposing of this case the trial judge apparently had in mind that portion of the section
which treats of the joint liability of both vessels for loss or damages suffered by their
cargoes. In the case at bar, however, the only loss incurred was that of the
launch Euclid itself, which went to the bottom soon after the collision. Manifestly, under
the plain terms of the statute, since the evidence of record clearly discloses, as found by
the trail judge, that "both vessels may be blamed for the collision," each one must be
held may be blamed for it own damages, and the owner of neither one can recover from
the other in an action for damages to his vessel.

Counsel for the plaintiff, basing his contention upon the theory of the facts as contended
for by him, insisted that under he doctrine of "the last clear chance," the defendant
should be held liable because, as he insists, even if the officers on board the plaintiff's
launch were negligence in failing to exhibit proper lights and in failing to take the proper
steps to keep out of the path of the defendant's vessel, nevertheless the officers on
defendant's vessel, by the exercise of due precautions might have avoided the collision
by a very simple manuever. But it is sufficient answer to this contention to point out that
the rule of liability in this jurisdiction for maritime accidents such as that now under
consideration is clearly, definitely, and unequivocally laid down in the above-cited article
827 of the Code of Commerce; and under that rule, the evidence disclosing that both
vessels were blameworthy, the owners of either can successfully maintain an action
against the other for the loss or injury of his vessel.

In cases of a disaster arising from the mutual negligence of two parties, the party who
has a last clear opportunity of avoiding the accident, notwithstanding the negligence of
his opponent, is considered wholly responsible for it under the common-law rule of
liability as applied in the courts of common law of the United States. But this rule (which
is not recognized in the courts of admiralty in the United States, wherein the loss is
divided in cases of mutual and concurring negligence, as also where the error of one
vessel has exposed her to danger of collision which was consummated by he further rule,
that where the previous application by the further rule, that where the previous act of
negligence of one vessel has created a position of danger, the other vessel is not
necessarily liable for the mere failure to recognize the perilous situation; and it is only
when in fact it does discover it in time to avoid the casualty by the use of ordinary care,
that it becomes liable for the failure to make use of this last clear opportunity to avoid
the accident. (See cases cited in Notes, 7 Cyc., pp. 311, 312, 313.) So, under the English
rule which conforms very nearly to the common-law rule as applied in the American
courts, it has been held that the fault of the first vessel in failing to exhibit proper lights
or to take the proper side of the channel will relieve from liability one who negligently
runs into such vessels before he sees it; although it will not be a defense to one who,
having timely warning of the danger of collision, fails to use proper care to avoid it.
(Pollock on Torts, 374.) In the case at bar, the most that can be said in support of
plaintiff's contention is that there was negligence on the part of the officers on
defendant's vessel in failing to recognize the perilous situation created by the negligence
of those in charge of plaintiff's launch, and that had they recognized it in time, they
might have avoided the accident. But since it does not appear from the evidence that
they did, in fact, discover the perilous situation of the launch in time to avoid the
accident by the exercise of ordinary care, it is very clear that under the above set out
limitation to the rule, the plaintiff cannot escape the legal consequences of the
contributory negligence of his launch, even were we to hold that the doctrine is
applicable in the jurisdiction, upon which point we expressly reserve our decision at this
time.

The judgment of the court below in favor of the plaintiff and against the defendant
should be reserved, and the plaintiff's complaint should be dismissed without day,
without costs to either party in this instance. So ordered.

G.R. Nos. 111202-05 January 31, 2006

COMMISSIONER OF CUSTOMS, Petitioner,


vs.
THE COURT OF APPEALS; Honorable Arsenio M. Gonong, Presiding Judge
Regional Trial Court, Manila, Branch 8; Honorable MAURO T. ALLARDE,
Presiding Judge, REGIONAL TRIAL COURT Kalookan City, Branch 123; AMADO
SEVILLA and ANTONIO VELASCO, Special Sheriffs of Manila; JOVENAL SALAYON,
Special Sheriff of Kalookan City, DIONISIO J. CAMANGON, Ex-Deputy Sheriff of
Manila and CESAR S. URBINO, SR., doing business under the name and style
"Duraproof Services," Respondents.

DECISION

AZCUNA, J.:

These Petitions for Certiorari and Prohibition, with Prayers for a Writ of Preliminary
Injunction and/or Temporary Restraining Order, are the culmination of several court cases
wherein several resolutions and decisions are sought to be annulled. Petitioner
Commissioner of Customs specifically assails the following:

A) Decision of the Regional Trial Court (RTC) of Manila dated February 18, 1991 in Civil
Case No. 89-51451;

B) Order of the RTC of Kalookan dated May 28, 1991 in Special Civil Case No. C-234;

C) Resolution of the Court of Appeals (CA) dated March 6, 1992 in CA-G.R. SP No. 24669;

D) Resolution of the CA dated August 6, 1992 in CA-G.R. SP No. 28387;

E) Resolution of the CA dated November 10, 1992 in CA-G.R. SP No. 29317;

F) Resolution of the CA dated May 31, 1993 in CA-G.R. No. CV-32746; and

G) Decision of the CA dated July 19, 1993 in the consolidated petitions of CA-G.R. SP Nos.
24669, 28387 and 29317.

Petitioner also seeks to prohibit the CA and the RTC of Kalookan1 from further acting in
CA-G.R. CV No. 32746 and Civil Case No. 234, respectively.

The whole controversy revolves around a vessel and its cargo. On January 7, 1989, the
vessel M/V "Star Ace," coming from Singapore laden with cargo, entered the Port of San
Fernando, La Union (SFLU) for needed repairs. The vessel and the cargo had an
appraised value, at that time, of more or less Two Hundred Million Pesos (P200,000,000).
When the Bureau of Customs later became suspicious that the vessels real purpose in
docking was to smuggle its cargo into the country, seizure proceedings were instituted
under S.I. Nos. 02-89 and 03-89 and, subsequently, two Warrants of Seizure and
Detention were issued for the vessel and its cargo.1awph!l.net

Respondent Cesar S. Urbino, Sr., does not own the vessel or any of its cargo but claimed
a preferred maritime lien under a Salvage Agreement dated June 8, 1989. To protect his
claim, Urbino initially filed two motions in the seizure and detention cases: a Motion to
Dismiss and a Motion to Lift Warrant of Seizure and Detention.2Apparently not content
with his administrative remedies, Urbino sought relief with the regular courts by filing a
case for Prohibition, Mandamus and Damages before the RTC of SFLU3 on July 26, 1989,
seeking to restrain the District Collector of Customs from interfering with his salvage
operation. The case was docketed as Civil Case No. 89-4267. On January 31, 1991 the
RTC of SFLU dismissed the case for lack of jurisdiction because of the pending seizure
and detention cases. Urbino then elevated the matter to the CA where it was docketed
as CA-G.R. CV No. 32746. The Commissioner of Customs, in response, filed a Motion to
Suspend Proceedings, advising the CA that it intends to question the jurisdiction of the
CA before this Court. The motion was denied on May 31, 1993. Hence, in this petition the
Commissioner of Customs assails the Resolution "F" recited above and seeks to prohibit
the CA from continuing to hear the case.

On January 9, 1990, while Civil Case No. 89-4267 was pending, Urbino filed another case
for Certiorari and Mandamus with the RTC of Manila, presided by Judge Arsenio M.
Gonong,4 this time to enforce his maritime lien. Impleaded as defendants were the
Commissioner of Customs, the District Collector of Customs, the owners of the vessel
and cargo, Vlason Enterprises, Singkong Trading Company, Banco do Brazil, Dusit
International Company Incorporated, Thai-Nam Enterprises Limited, Thai-United Trading
Company Incorporated and Omega Sea Transport Company, and the vessel M/V "Star
Ace." This case was docketed as Civil Case No. 89-51451. The Office of the Solicitor
General filed a Motion to Dismiss on the ground that a similar case was pending with the
RTC of SFLU. The Motion to Dismiss was granted on July 2, 1990, but only insofar as the
Commissioner of Customs and the District Collector were concerned. The RTC of Manila
proceeded to hear the case against the other parties and received evidence ex parte.
The RTC of Manila later rendered a decision on February 18, 1991 finding in favor of
Urbino (assailed Decision "A" recited above).

Thereafter, on March 13, 1991, a writ of execution was issued by the RTC of Manila.
Respondent Camangon was appointed as Special Sheriff to execute the decision and he
issued a notice of levy and sale against the vessel and its cargo. The Commissioner of
Customs, upon learning of the notice of levy and sale, filed with the RTC of Manila a
motion to recall the writ, but before it could be acted upon, Camangon had auctioned off
the vessel and the cargo to Urbino for One Hundred and Twenty Million Pesos
(P120,000,000). The following day, Judge Gonong issued an order commanding Sheriff
Camangon to cease and desist from implementing the writ. Despite the order, Camangon
issued a Certificate of Sale in favor of Urbino. A week later, Judge Gonong issued another
order recalling the writ of execution. Both cease and desist and recall orders of Judge
Gonong were elevated by Urbino to the CA on April 12, 1991 where it was docketed as
CA-G.R. SP No. 24669. On April 26, 1991, the CA issued a Temporary Restraining Order
(TRO) enjoining the RTC of Manila from enforcing its cease and desist and recall orders.
The TRO was eventually substituted by a writ of preliminary injunction. A motion to lift
the injunction was filed by the Commissioner of Customs but it was denied. Hence, in this
petition the Commissioner of Customs assails Resolution "C" recited above.

On May 8, 1991, Urbino attempted to enforce the RTC of Manilas decision and the
Certificate of Sale against the Bureau of Customs by filing a third case, a Petition for
Certiorari, Prohibition and Mandamus with the RTC of Kaloocan.5 The case was docketed
as Civil Case No. 234. On May 28, 1991, the RTC of Kaloocan ordered the issuance of a
writ of preliminary injunction to enjoin the Philippine Ports Authority and the Bureau of
Customs from interfering with the relocation of the vessel and its cargo by Urbino
(assailed Order "B" recited above).1awph!l.net

Meanwhile, on June 5, 1992, Camangon filed his Sheriffs Return with the Clerk of Court.
On June 26, 1992, the Executive Judge for the RTC of Manila, Judge Bernardo P.
Pardo,6 having been informed of the circumstances of the sale, issued an order nullifying
the report and all proceedings taken in connection therewith. With this order Urbino filed
his fourth case with the CA on July 15, 1992, a Petition for Certiorari, Prohibition and
Mandamus against Judge Pardo. This became CA-G.R. SP No. 28387. The CA issued a
Resolution on August 6, 1992 granting the TRO against the Executive Judge to enjoin the
implementation of his June 26, 1992 Order. Hence, in this petition the Commissioner of
Customs assails Resolution "D" recited above.

Going back to the seizure and detention proceedings, the decision of the District
Collector of Customs was to forfeit the vessel and cargo in favor of the Government. This
decision was affirmed by the Commissioner of Customs. Three appeals were then filed
with the Court of Tax Appeals (CTA) by different parties, excluding Urbino, who claimed
an interest in the vessel and cargo. These three cases were docketed as CTA Case No.
4492, CTA Case No. 4494 and CTA Case No. 4500. Urbino filed his own case, CTA Case
No. 4497, but it was dismissed for want of capacity to sue. He, however, was allowed to
intervene in CTA Case No. 4500. On October 5, 1992, the CTA issued an order authorizing
the Commissioner of Customs to assign customs police and guards around the vessel
and to conduct an inventory of the cargo. In response, on November 3, 1992, Urbino filed
a fifth Petition for Certiorari and Prohibition with the CA to assail the order as well as the
jurisdiction of the Presiding Judge and Associate Judges of the CTA in the three cases.
That case was docketed as CA G.R. SP No. 29317. On November 10, 1992, the CA issued
a Resolution reminding the parties that the vessel is under the control of the appellate
court in CA-G.R. SP No. 24669 (assailed Resolution "E" recited above).

CA-G.R. SP Nos. 24669, 28387 and 29317 were later consolidated and the CA issued a
joint Decision in July 19, 1993 nullifying and setting aside: 1) the Order recalling the writ
of execution by Judge Gonong of the the RTC of Manila; 2) the Order of Executive Judge
Pardo of the RTC of Manila nullifying the Sheriffs Report and all proceedings connected
therewith; and 3) the October 19, 1993 Order of the CTA, on the ground of lack of
jurisdiction. Hence, in these petitions, which have been consolidated, the Commissioner
of Customs assails Decision "G" recited above.1awph!l.net

For purposes of deciding these petitions, the assailed Decisions and Resolutions will be
divided into three groups:

1. The Resolution of the CA dated May 31, 1993 in CA-G.R. No. CV-32746 with the
additional prayer to enjoin the CA from deciding the said case.

2. The Order of the RTC of Kalookan dated May 28, 1991 in Special Civil Case No. C-234
with the additional prayer to enjoin the RTC of Kalookan from proceeding with said case.
3. The Decision of the RTC of Manila dated February 18, 1991 in Civil Case No. 89-51451,
the Resolutions of the CA dated March 6, 1992, August 6, 1992, November 10, 1992 and
the Decision of the CA dated July 19, 1993 in the consolidated petitions CA-G.R. SP Nos.
24669, 28387 and 29317.

First Group

The Commissioner of Customs seeks to nullify the Resolution of the CA dated May 31,
1993 denying the Motion to Suspend Proceedings and to prohibit the CA from further
proceeding in CA-G.R. No. CV-32746 for lack of jurisdiction. This issue can be easily
disposed of as it appears that the petition has become moot and academic, with the CA
having terminated CA-G.R. No. CV-32746 by rendering its Decision on May 13, 2002
upholding the dismissal of the case by the RTC of SFLU for lack of jurisdiction, a finding
that sustains the position of the Commissioner of Customs. This decision became final
and entry of judgment was made on June 14, 2002.7

Second Group

The Court now proceeds to consider the Order granting an injunction dated May 28, 1991
in Civil Case No. C-234 issued by the RTC of Kalookan. The Commissioner of Customs
seeks its nullification and to prohibit the RTC of Kalookan from further proceeding with
the case.

The RTC of Kalookan issued the Order against the Philippine Ports Authority and Bureau
of Customs solely on the basis of Urbinos alleged ownership over the vessel by virtue of
his certificate of sale. By this the RTC of Kalookan committed a serious and reversible
error in interfering with the jurisdiction of customs authorities and should have dismissed
the petition outright. In Mison v. Natividad,8 this Court held that the exclusive jurisdiction
of the Collector of Customs cannot be interfered with by regular courts even upon
allegations of ownership.

To summarize the facts in that case, a warrant of seizure and detention was issued
against therein plaintiff over a number of
vehicles found in his residence for violation of customs laws. Plaintiff then filed a
complaint before the RTC of Pampanga alleging that he is the registered owner of certain
vehicles which the Bureau of Customs are threatening to seize and praying that the
latter be enjoined from doing so. The RTC of Pampanga issued a TRO and eventually,
thereafter, substituted it with a writ of preliminary injunction. This Court found that the
proceedings conducted by the trial court were null and void as it had no jurisdiction over
the res subject of the warrant of seizure and detention, holding that:

A warrant of seizure and detention having already been issued, presumably in the
regular course of official duty, the Regional Trial Court of Pampanga was indisputably
precluded from interfering in said proceedings. That in his complaint in Civil Case No.
8109 private respondent alleges ownership over several vehicles which are legally
registered in his name, having paid all the taxes and corresponding licenses incident
thereto, neither divests the Collector of Customs of such jurisdiction nor confers upon
said trial court regular jurisdiction over the case. Ownership of goods or the legality of its
acquisition can be raised as defenses in a seizure proceeding; if this were not so, the
procedure carefully delineated by law for seizure and forfeiture cases may easily be
thwarted and set to naught by scheming parties. Even the illegality of the warrant of
seizure and detention cannot justify the trial courts interference with the Collectors
jurisdiction. In the first place, there is a distinction between the existence of the
Collectors power to issue it and the regularity of the proceeding taken under such
power. In the second place, even if there be such an irregularity in the latter, the
Regional Trial Court does not have the competence to review, modify or reverse
whatever conclusions may result therefrom x x x.

The facts in this case are like those in that case. Urbino claimed to be the owner of the
vessel and he sought to restrain the PPA and the Bureau of Customs from interfering with
his rights as owner. His remedy, therefore, was not with the RTC but with the CTA where
the seizure and detention cases are now pending and where he was already allowed to
intervene.

Moreover, this Court, on numerous occasions, cautioned judges in their issuance of


temporary restraining orders and writs of preliminary injunction against the Collector of
Customs based on the principle enunciated in Mison v. Natividad and has issued
Administrative Circular No. 7-99 to carry out this policy.9 This Court again reminds all
concerned that the rule is clear: the Collector of Customs has exclusive jurisdiction over
seizure and forfeiture proceedings and trial courts are precluded from assuming
cognizance over such matters even through petitions for certiorari, prohibition or
mandamus.

Third Group

The Decision of the RTC of Manila dated February 18, 1991 has the following dispositive
portion:

WHEREFORE, IN VIEW OF THE FOREGOING, based on the allegations, prayer and


evidence adduced, both testimonial and documentary, the Court is convinced, that,
indeed, defendants/respondents are liable to plaintiff/petitioner in the amount prayed for
in the petition for which [it] renders judgment as follows:

1. Respondent M/V Star Ace, represented by Capt. Nahum Rada, Relief Captain of the
vessel and Omega Sea Transport Company, Inc., represented by Frank Cadacio is ordered
to refrain from alienating or transfer[r]ing the vessel M/V Star Ace to any third parties;

2. Singko Trading Company to pay the following:

a. Taxes due the Government;

b. Salvage fees on the vessel in the amount of $1,000,000.00 based on the Lloyds
Standard Form of Salvage Agreement;

c. Preservation, securing and guarding fees on the vessel in the amount of $225,000.00;
d. Salaries of the crew from August 16, 1989 to December, in the amount of $43,000.00
and unpaid salaries from January 1990 up to the present;

e. Attorneys fees in the amount of P656,000.00;

3. Vlazon Enterprises to pay plaintiff in the amount of P3,000,000.00 for damages;

4. Banco do Brazil to pay plaintiff in the amount of $300,000.00 in damages; and finally,

5. Costs of suit.

SO ORDERED.

On the other hand, the CA Resolutions are similar orders for the issuance of a writ of
preliminary injunction to enjoin Judge Gonong and Judge Pardo from enforcing their recall
and nullification orders and the CTA from exercising jurisdiction over the case, to
preserve the status quo pending resolution of the three petitions.

Finally, the Decision of the CA dated July 19, 1993 disposed of all three petitions in favor
of Urbino, and has the following dispositive portion:

ACCORDINGLY, in view of the foregoing disquisitions, all the three (3) consolidated
petitions for certiorari are hereby GRANTED.

THE assailed Order of respondent Judge Arsenio Gonong of the Regional Trial Court of
Manila, Branch 8, dated, April 5, 1991, in the first assailed petition for certiorari (CA-
G.R. SP No. 24669); the assailed Order of Judge Bernardo Pardo, Executive Judge of the
Regional Trial Court of Manila, Branch 8, dated July 6, 1992, in the second petition for
certiorari (CA-G.R. SP No. 28387); and Finally, the assailed order or Resolution en banc of
the respondent Court of Tax Appeals[,] Judges Ernesto Acosta, Ramon de Veyra and
Manuel Gruba, under date of October 5, 1992, in the third petition for certiorari (CA-
G.R. SP No. 29317) are all hereby NULLIFIED and SET ASIDE thereby giving way to
the entire decision dated February 18, 1991 of the respondent Regional Trial Court of
Manila, Branch 8, in Civil Case No. 89-51451 which remains valid, final and executory, if
not yet wholly executed.

THE writ of preliminary injunction heretofore issued by this Court on March 6, 1992 and
reiterated on July 22, 1992 and this date against the named respondents specified in the
dispositive portion of the judgment of the respondent Regional Trial Court of Manila,
Branch 8, in the first petition for certiorari, which remains valid, existing and enforceable,
is hereby MADE PERMANENT without prejudice (1) to the petitioners remaining unpaid
obligations to herein party-intervenor in accordance with the Compromise Agreement or
in connection with the decision of the respondent lower court in CA-G.R. SP No. 24669
and (2) to the government, in relation to the forthcoming decision of the respondent
Court of Tax Appeals on the amount of taxes, charges, assessments or obligations that
are due, as totally secured and fully guaranteed payment by petitioners bond, subject to
relevant rulings of the Department of Finance and other prevailing laws and
jurisprudence.
We make no pronouncement as to costs.

SO ORDERED.

The Court rules in favor of the Commissioner of Customs.

First of all, the Court finds the decision of the RTC of Manila, in so far as it relates to the
vessel M/V "Star Ace," to be void as jurisdiction was never acquired over the vessel. 10 In
filing the case, Urbino had impleaded the vessel as a defendant to enforce his alleged
maritime lien. This meant that he brought an action in rem under the Code of Commerce
under which the vessel may be attached and sold.11 However, the basic operative fact for
the institution and perfection of proceedings in rem is the actual or constructive
possession of the res by the tribunal empowered by law to conduct the
proceedings.12 This means that to acquire jurisdiction over the vessel, as a defendant,
the trial court must have obtained either actual or constructive possession over it.
Neither was accomplished by the RTC of Manila.

In his comment to the petition, Urbino plainly stated that "petitioner has actual[sic]
physical custody not only of the goods and/or cargo but the subject vessel, M/V Star Ace,
as well."13 This is clearly an admission that the RTC of Manila did not have jurisdiction
over the res. While Urbino contends that the Commissioner of Customs custody was
illegal, such fact, even if true, does not deprive the Commissioner of Customs of
jurisdiction thereon. This is a question that ought to be resolved in the seizure and
forfeiture cases, which are now pending with the CTA, and not by the regular courts as a
collateral matter to enforce his lien. By simply filing a case in rem against the vessel,
despite its being in the custody of customs officials, Urbino has circumvented the rule
that regular trial courts are devoid of any competence to pass upon the validity or
regularity of seizure and forfeiture proceedings conducted in the Bureau of Customs, on
his mere assertion that the administrative proceedings were a nullity. 14

On the other hand, the Bureau of Customs had acquired jurisdiction over the res ahead
and to the exclusion of the RTC of Manila. The forfeiture proceedings conducted by the
Bureau of Customs are in the nature of proceedings in rem15 and jurisdiction was
obtained from the moment the vessel entered the SFLU port. Moreover, there is no
question that forfeiture proceedings were instituted and the vessel was seized even
before the filing of the RTC of Manila case.

The Court is aware that Urbino seeks to enforce a maritime lien and, because of its
nature, it is equivalent to an attachment from the time of its existence.16 Nevertheless,
despite his liens constructive attachment, Urbino still cannot claim an advantage as his
lien only came about after the warrant of seizure and detention was issued and
implemented. The Salvage Agreement, upon which Urbino based his lien, was entered
into on June 8, 1989. The warrants of seizure and detention, on the other hand, were
issued on January 19 and 20, 1989. And to remove further doubts that the forfeiture case
takes precedence over the RTC of Manila case, it should be noted that forfeiture retroacts
to the date of the commission of the offense, in this case the day the vessel entered the
country.17 A maritime lien, in contrast, relates back to the period when it first
attached,18 in this case the earliest retroactive date can only be the date of the Salvage
Agreement. Thus, when the vessel and its cargo are ordered forfeited, the effect will
retroact to the moment the vessel entered Philippine waters.

Accordingly, the RTC of Manila decision never attained finality as to the defendant vessel,
inasmuch as no jurisdiction was acquired over it, and the decision cannot be binding and
the writ of execution issued in connection therewith is null and void.

Moreover, even assuming that execution can be made against the vessel and its cargo,
as goods and chattels to satisfy the liabilities of the other defendants who have an
interest therein, the RTC of Manila may not execute its decision against them while, as
found by this Court, these are under the proper and lawful custody of the Bureau of
Customs.19 This is especially true when, in case of finality of the order of forfeiture, the
execution cannot anymore cover the vessel and cargo as ownership of the Government
will retroact to the date of entry of the vessel into Philippine waters.

As regards the jurisdiction of the CTA, the CA was clearly in error when it issued an
injunction against it from deciding the forfeiture case on the basis that it interfered with
the subject of ownership over the vessel which was, according to the CA, beyond the
jurisdiction of the CTA. Firstly, the execution of the Decision against the vessel and cargo,
as aforesaid, was a nullity and therefore the sale of the vessel was invalid. Without a
valid certificate of sale, there can be no claim of ownership which Urbino can present
against the Government. Secondly, as previously stated, allegations of ownership neither
divest the Collector of Customs of such jurisdiction nor confer upon the trial court
jurisdiction over the case. Ownership of goods or the legality of its acquisition can be
raised as defenses in a seizure proceeding.20 The actions of the Collectors of Customs are
appealable to the Commissioner of Customs, whose decision, in turn, is subject to the
exclusive appellate jurisdiction of the CTA.21Clearly, issues of ownership over goods in the
custody of custom officials are within the power of the CTA to determine.1awphi1.net

WHEREFORE, the consolidated petitions are GRANTED. The Decision of the Regional
Trial Court of Manila dated February 18, 1991 in Civil Case No. 89-51451, insofar as it
affects the vessel M/V "Star Ace," the Order of the Regional Trial Court of Kalookan dated
May 28, 1991 in Special Civil Case No. C-234, the Resolution of the Court of Appeals
dated March 6, 1992 in CA-G.R. SP No. 24669, the Resolution of the Court of Appeals
dated August 6, 1992 in CA-G.R. SP No. 28387, the Resolution of the Court of Appeals
dated November 10, 1992 in CA-G.R. SP No. 29317 and the Decision of the Court of
Appeals dated July 19, 1993 in the consolidated petitions in CA-G.R. SP Nos. 24669,
28387 and 29317 are all SET ASIDE. The Regional Trial Court of Kalookan is enjoined
from further acting in Special Civil Case No. C-234. The Order of respondent Judge
Arsenio M. Gonong dated April 5, 1991 and the Order of then Judge Bernardo P. Pardo
dated June 26, 1992 are REINSTATED. The Court of Tax Appeals is ordered to proceed
with CTA Case No. 4492, CTA Case No. 4494 and CTA Case No. 4500. No pronouncement
as to costs.

SO ORDERED.
G.R. No. 161833. July 8, 2005

PHILIPPINE CHARTER INSURANCE CORPORATION, Petitioners,


vs.
UNKNOWN OWNER OF THE VESSEL M/V "NATIONAL HONOR," NATIONAL
SHIPPING CORPORATION OF THE PHILIPPINES and INTERNATIONAL CONTAINER
SERVICES, INC., Respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure
assailing the Decision1dated January 19, 2004 of the Court of Appeals (CA) in CA-G.R. CV
No. 57357 which affirmed the Decision dated February 17, 1997 of the Regional Trial
Court (RTC) of Manila, Branch 37, in Civil Case No. 95-73338.

The Antecedent

On November 5, 1995, J. Trading Co. Ltd. of Seoul, Korea, loaded a shipment of four units
of parts and accessories in the port of Pusan, Korea, on board the vessel M/V "National
Honor," represented in the Philippines by its agent, National Shipping Corporation of the
Philippines (NSCP). The shipment was for delivery to Manila, Philippines. Freight
forwarder, Samhwa Inter-Trans Co., Ltd., issued Bill of Lading No. SH94103062 in the
name of the shipper consigned to the order of Metropolitan Bank and Trust Company
with arrival notice in Manila to ultimate consignee Blue Mono International Company,
Incorporated (BMICI), Binondo, Manila.

NSCP, for its part, issued Bill of Lading No. NSGPBSML5125653 in the name of the freight
forwarder, as shipper, consigned to the order of Stamm International Inc., Makati,
Philippines. It is provided therein that:

12. This Bill of Lading shall be prima facie evidence of the receipt of the Carrier in
apparent good order and condition except as, otherwise, noted of the total number of
Containers or other packages or units enumerated overleaf. Proof to the contrary shall be
admissible when this Bill of Lading has been transferred to a third party acting in good
faith. No representation is made by the Carrier as to the weight, contents, measure,
quantity, quality, description, condition, marks, numbers, or value of the Goods and the
Carrier shall be under no responsibility whatsoever in respect of such description or
particulars.

13. The shipper, whether principal or agent, represents and warrants that the goods are
properly described, marked, secured, and packed and may be handled in ordinary course
without damage to the goods, ship, or property or persons and guarantees the
correctness of the particulars, weight or each piece or package and description of the
goods and agrees to ascertain and to disclose in writing on shipment, any condition,
nature, quality, ingredient or characteristic that may cause damage, injury or detriment
to the goods, other property, the ship or to persons, and for the failure to do so the
shipper agrees to be liable for and fully indemnify the carrier and hold it harmless in
respect of any injury or death of any person and loss or damage to cargo or property. The
carrier shall be responsible as to the correctness of any such mark, descriptions or
representations.4

The shipment was contained in two wooden crates, namely, Crate No. 1 and Crate No. 2,
complete and in good order condition, covered by Commercial Invoice No. YJ-73564
DTD5 and a Packing List.6 There were no markings on the outer portion of the crates
except the name of the consignee.7 Crate No. 1 measured 24 cubic meters and weighed
3,620 kgs. It contained the following articles: one (1) unit Lathe Machine complete with
parts and accessories; one (1) unit Surface Grinder complete with parts and accessories;
and one (1) unit Milling Machine complete with parts and accessories. On the flooring of
the wooden crates were three wooden battens placed side by side to support the weight
of the cargo. Crate No. 2, on the other hand, measured 10 cubic meters and weighed
2,060 kgs. The Lathe Machine was stuffed in the crate. The shipment had a total invoice
value of US$90,000.00 C&F Manila.8 It was insured for P2,547,270.00 with the Philippine
Charter Insurance Corporation (PCIC) thru its general agent, Family Insurance and
Investment Corporation,9 under Marine Risk Note No. 68043 dated October 24, 1994.10

The M/V "National Honor" arrived at the Manila International Container Terminal (MICT)
on November 14, 1995. The International Container Terminal Services, Incorporated
(ICTSI) was furnished with a copy of the crate cargo list and bill of lading, and it knew the
contents of the crate.11 The following day, the vessel started discharging its cargoes
using its winch crane. The crane was operated by Olegario Balsa, a winchman from the
ICTSI,12 the exclusive arrastre operator of MICT.

Denasto Dauz, Jr., the checker-inspector of the NSCP, along with the crew and the
surveyor of the ICTSI, conducted an inspection of the cargo.13 They inspected the
hatches, checked the cargo and found it in apparent good condition.14 Claudio Cansino,
the stevedore of the ICTSI, placed two sling cables on each end of Crate No. 1.15 No sling
cable was fastened on the mid-portion of the crate. In Dauzs experience, this was a
normal procedure.16 As the crate was being hoisted from the vessels hatch, the mid-
portion of the wooden flooring suddenly snapped in the air, about five feet high from the
vessels twin deck, sending all its contents crashing down hard,17 resulting in extensive
damage to the shipment.

BMICIs customs broker, JRM Incorporated, took delivery of the cargo in such damaged
condition.18 Upon receipt of the damaged shipment, BMICI found that the same could no
longer be used for the intended purpose. The Mariners Adjustment Corporation hired by
PCIC conducted a survey and declared that the packing of the shipment was considered
insufficient. It ruled out the possibility of taxes due to insufficiency of packing. It opined
that three to four pieces of cable or wire rope slings, held in all equal setting, never by-
passing the center of the crate, should have been used, considering that the crate
contained heavy machinery.19
BMICI subsequently filed separate claims against the NSCP,20 the ICTSI,21 and its insurer,
the PCIC,22 for US$61,500.00. When the other companies denied liability, PCIC paid the
claim and was issued a Subrogation Receipt23 for P1,740,634.50.

On March 22, 1995, PCIC, as subrogee, filed with the RTC of Manila, Branch 35, a
Complaint for Damages24against the "Unknown owner of the vessel M/V National Honor,"
NSCP and ICTSI, as defendants.

PCIC alleged that the loss was due to the fault and negligence of the defendants. It
prayed, among others

WHEREFORE, it is respectfully prayed of this Honorable Court that judgment be rendered


ordering defendants to pay plaintiff, jointly or in the alternative, the following:

1. Actual damages in the amount of P1,740,634.50 plus legal interest at the time of the
filing of this complaint until fully paid;

2. Attorneys fees in the amount of P100,000.00;

3. Cost of suit.25

ICTSI, for its part, filed its Answer with Counterclaim and Cross-claim against its co-
defendant NSCP, claiming that the loss/damage of the shipment was caused exclusively
by the defective material of the wooden battens of the shipment, insufficient packing or
acts of the shipper.

At the trial, Anthony Abarquez, the safety inspector of ICTSI, testified that the wooden
battens placed on the wooden flooring of the crate was of good material but was not
strong enough to support the weight of the machines inside the crate. He averred that
most stevedores did not know how to read and write; hence, he placed the sling cables
only on those portions of the crate where the arrow signs were placed, as in the case of
fragile cargo. He said that unless otherwise indicated by arrow signs, the ICTSI used only
two cable slings on each side of the crate and would not place a sling cable in the mid-
section.26 He declared that the crate fell from the cranes because the wooden batten in
the mid-portion was broken as it was being lifted.27 He concluded that the loss/damage
was caused by the failure of the shipper or its packer to place wooden battens of strong
materials under the flooring of the crate, and to place a sign in its mid-term section
where the sling cables would be placed.

The ICTSI adduced in evidence the report of the R.J. Del Pan & Co., Inc. that the damage
to the cargo could be attributed to insufficient packing and unbalanced weight
distribution of the cargo inside the crate as evidenced by the types and shapes of items
found.28

The trial court rendered judgment for PCIC and ordered the complaint dismissed, thus:

WHEREFORE, the complaint of the plaintiff, and the respective counterclaims of the two
defendants are dismissed, with costs against the plaintiff.
SO ORDERED.29

According to the trial court, the loss of the shipment contained in Crate No. 1 was due to
the internal defect and weakness of the materials used in the fabrication of the crates.
The middle wooden batten had a hole (bukong-bukong). The trial court rejected the
certification30 of the shipper, stating that the shipment was properly packed and secured,
as mere hearsay and devoid of any evidentiary weight, the affiant not having testified.

Not satisfied, PCIC appealed31 to the CA which rendered judgment on January 19, 2004
affirming in toto the appealed decision, with this fallo

WHEREFORE, the decision of the Regional Trial Court of Manila, Branch 35, dated
February 17, 1997, is AFFIRMED.

SO ORDERED.32

The appellate court held, inter alia, that it was bound by the finding of facts of the RTC,
especially so where the evidence in support thereof is more than substantial. It
ratiocinated that the loss of the shipment was due to an excepted cause "[t]he
character of the goods or defects in the packing or in the containers" and the failure of
the shipper to indicate signs to notify the stevedores that extra care should be employed
in handling the shipment.33 It blamed the shipper for its failure to use materials of
stronger quality to support the heavy machines and to indicate an arrow in the middle
portion of the cargo where additional slings should be attached.34 The CA concluded that
common carriers are not absolute insurers against all risks in the transport of the
goods.35

Hence, this petition by the PCIC, where it alleges that:

I.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR OF LAW IN NOT HOLDING THAT
RESPONDENT COMMON CARRIER IS LIABLE FOR THE DAMAGE SUSTAINED BY THE
SHIPMENT IN THE POSSESSION OF THE ARRASTRE OPERATOR.

II.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR OF LAW IN NOT APPLYING THE
STATUTORY PRESUMPTION OF FAULT AND NEGLIGENCE IN THE CASE AT BAR.

III.

THE COURT OF APPEALS GROSSLY MISCOMPREHENDED THE FACTS IN FINDING THAT THE
DAMAGE SUSTAINED BY THE [SHIPMENT] WAS DUE TO ITS DEFECTIVE PACKING AND NOT
TO THE FAULT AND NEGLIGENCE OF THE RESPONDENTS. 36

The petitioner asserts that the mere proof of receipt of the shipment by the common
carrier (to the carrier) in good order, and their arrival at the place of destination in bad
order makes out a prima facie case against it; in such case, it is liable for the loss or
damage to the cargo absent satisfactory explanation given by the carrier as to the
exercise of extraordinary diligence. The petitioner avers that the shipment was
sufficiently packed in wooden boxes, as shown by the fact that it was accepted on board
the vessel and arrived in Manila safely. It emphasizes that the respondents did not
contest the contents of the bill of lading, and that the respondents knew that the manner
and condition of the packing of the cargo was normal and barren of defects. It maintains
that it behooved the respondent ICTSI to place three to four cables or wire slings in equal
settings, including the center portion of the crate to prevent damage to the cargo:

[A] simple look at the manifesto of the cargo and the bill of lading would have alerted
respondents of the nature of the cargo consisting of thick and heavy machinery. Extra-
care should have been made and extended in the discharge of the subject shipment. Had
the respondent only bothered to check the list of its contents, they would have been
nervous enough to place additional slings and cables to support those massive
machines, which were composed almost entirely of thick steel, clearly intended for heavy
industries. As indicated in the list, the boxes contained one lat[h]e machine, one milling
machine and one grinding machine-all coming with complete parts and accessories. Yet,
not one among the respondents were cautious enough. Here lies the utter failure of the
respondents to observed extraordinary diligence in the handling of the cargo in their
custody and possession, which the Court of Appeals should have readily observed in its
appreciation of the pertinent facts.37

The petitioner posits that the loss/damage was caused by the mishandling of the
shipment by therein respondent ICTSI, the arrastre operator, and not by its negligence.

The petitioner insists that the respondents did not observe extraordinary diligence in the
care of the goods. It argues that in the performance of its obligations, the respondent
ICTSI should observe the same degree of diligence as that required of a common carrier
under the New Civil Code of the Philippines. Citing Eastern Shipping Lines, Inc. v. Court of
Appeals,38 it posits that respondents are liable in solidum to it, inasmuch as both are
charged with the obligation to deliver the goods in good condition to its consignee,
BMICI.

Respondent NSCP counters that if ever respondent ICTSI is adjudged liable, it is not
solidarily liable with it. It further avers that the "carrier cannot discharge directly to the
consignee because cargo discharging is the monopoly of the arrastre." Liability,
therefore, falls solely upon the shoulder of respondent ICTSI, inasmuch as the
discharging of cargoes from the vessel was its exclusive responsibility. Besides, the
petitioner is raising questions of facts, improper in a petition for review on certiorari.39

Respondent ICTSI avers that the issues raised are factual, hence, improper under Rule 45
of the Rules of Court. It claims that it is merely a depository and not a common carrier;
hence, it is not obliged to exercise extraordinary diligence. It reiterates that the
loss/damage was caused by the failure of the shipper or his packer to place a sign on the
sides and middle portion of the crate that extra care should be employed in handling the
shipment, and that the middle wooden batten on the flooring of the crate had a hole. The
respondent asserts that the testimony of Anthony Abarquez, who conducted his
investigation at the site of the incident, should prevail over that of Rolando Balatbat. As
an alternative, it argues that if ever adjudged liable, its liability is limited only
to P3,500.00 as expressed in the liability clause of Gate Pass CFS-BR-GP No. 319773.

The petition has no merit.

The well-entrenched rule in our jurisdiction is that only questions of law may be
entertained by this Court in a petition for review on certiorari. This rule, however, is not
ironclad and admits certain exceptions, such as when (1) the conclusion is grounded on
speculations, surmises or conjectures; (2) the inference is manifestly mistaken, absurd or
impossible; (3) there is grave abuse of discretion; (4) the judgment is based on a
misapprehension of facts; (5) the findings of fact are conflicting; (6) there is no citation of
specific evidence on which the factual findings are based; (7) the findings of absence of
facts are contradicted by the presence of evidence on record; (8) the findings of the
Court of Appeals are contrary to those of the trial court; (9) the Court of Appeals
manifestly overlooked certain relevant and undisputed facts that, if properly considered,
would justify a different conclusion; (10) the findings of the Court of Appeals are beyond
the issues of the case; and (11) such findings are contrary to the admissions of both
parties.40

We have reviewed the records and find no justification to warrant the application of any
exception to the general rule.

We agree with the contention of the petitioner that common carriers, from the nature of
their business and for reasons of public policy, are mandated to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.41 The Court has
defined extraordinary diligence in the vigilance over the goods as follows:

The extraordinary diligence in the vigilance over the goods tendered for shipment
requires the common carrier to know and to follow the required precaution for avoiding
damage to, or destruction of the goods entrusted to it for sale, carriage and delivery. It
requires common carriers to render service with the greatest skill and foresight and "to
use all reasonable means to ascertain the nature and characteristic of goods tendered
for shipment, and to exercise due care in the handling and stowage, including such
methods as their nature requires."42

The common carriers duty to observe the requisite diligence in the shipment of goods
lasts from the time the articles are surrendered to or unconditionally placed in the
possession of, and received by, the carrier for transportation until delivered to, or until
the lapse of a reasonable time for their acceptance, by the person entitled to receive
them.43 When the goods shipped are either lost or arrive in damaged condition, a
presumption arises against the carrier of its failure to observe that diligence, and there
need not be an express finding of negligence to hold it liable.44 To overcome the
presumption of negligence in the case of loss, destruction or deterioration of the goods,
the common carrier must prove that it exercised extraordinary diligence.45
However, under Article 1734 of the New Civil Code, the presumption of negligence does
not apply to any of the following causes:

1. Flood, storm, earthquake, lightning or other natural disaster or calamity;

2. Act of the public enemy in war, whether international or civil;

3. Act or omission of the shipper or owner of the goods;

4. The character of the goods or defects in the packing or in the containers;

5. Order or act of competent public authority.

It bears stressing that the enumeration in Article 1734 of the New Civil Code which
exempts the common carrier for the loss or damage to the cargo is a closed list.46 To
exculpate itself from liability for the loss/damage to the cargo under any of the causes,
the common carrier is burdened to prove any of the aforecited causes claimed by it by a
preponderance of evidence. If the carrier succeeds, the burden of evidence is shifted to
the shipper to prove that the carrier is negligent.47

"Defect" is the want or absence of something necessary for completeness or perfection;


a lack or absence of something essential to completeness; a deficiency in something
essential to the proper use for the purpose for which a thing is to be used.48 On the other
hand, inferior means of poor quality, mediocre, or second rate.49 A thing may be of
inferior quality but not necessarily defective. In other words, "defectiveness" is not
synonymous with "inferiority."

In the present case, the trial court declared that based on the record, the loss of the
shipment was caused by the negligence of the petitioner as the shipper:

The same may be said with respect to defendant ICTSI. The breakage and collapse of
Crate No. 1 and the total destruction of its contents were not imputable to any fault or
negligence on the part of said defendant in handling the unloading of the cargoes from
the carrying vessel, but was due solely to the inherent defect and weakness of the
materials used in the fabrication of said crate.

The crate should have three solid and strong wooden batten placed side by side
underneath or on the flooring of the crate to support the weight of its contents. However,
in the case of the crate in dispute, although there were three wooden battens placed
side by side on its flooring, the middle wooden batten, which carried substantial volume
of the weight of the crates contents, had a knot hole or "bukong-bukong," which
considerably affected, reduced and weakened its strength. Because of the enormous
weight of the machineries inside this crate, the middle wooden batten gave way and
collapsed. As the combined strength of the other two wooden battens were not sufficient
to hold and carry the load, they too simultaneously with the middle wooden battens gave
way and collapsed (TSN, Sept. 26, 1996, pp. 20-24).

Crate No. 1 was provided by the shipper of the machineries in Seoul, Korea. There is
nothing in the record which would indicate that defendant ICTSI had any role in the
choice of the materials used in fabricating this crate. Said defendant, therefore, cannot
be held as blame worthy for the loss of the machineries contained in Crate No. 1.50

The CA affirmed the ruling of the RTC, thus:

The case at bar falls under one of the exceptions mentioned in Article 1734 of the Civil
Code, particularly number (4) thereof, i.e., the character of the goods or defects in the
packing or in the containers. The trial court found that the breakage of the crate was not
due to the fault or negligence of ICTSI, but to the inherent defect and weakness of the
materials used in the fabrication of the said crate.

Upon examination of the records, We find no compelling reason to depart from the
factual findings of the trial court.

It appears that the wooden batten used as support for the flooring was not made of good
materials, which caused the middle portion thereof to give way when it was lifted. The
shipper also failed to indicate signs to notify the stevedores that extra care should be
employed in handling the shipment.

Claudio Cansino, a stevedore of ICTSI, testified before the court their duties and
responsibilities:

"Q: With regard to crates, what do you do with the crates?

A: Everyday with the crates, there is an arrow drawn where the sling is placed, Maam.

Q: When the crates have arrows drawn and where you placed the slings, what do you do
with these crates?

A: A sling is placed on it, Maam.

Q: After you placed the slings, what do you do with the crates?

A: After I have placed a sling properly, I ask the crane (sic) to haul it, Maam.

Q: Now, what, if any, were written or were marked on the crate?

A: The thing that was marked on the cargo is an arrow just like of a chain, Maam.

Q: And where did you see or what parts of the crate did you see those arrows?

A: At the corner of the crate, Maam.

Q: How many arrows did you see?

A: Four (4) on both sides, Maam.

Q: What did you do with the arrows?


A: When I saw the arrows, thats where I placed the slings, Maam.

Q: Now, did you find any other marks on the crate?

A: Nothing more, Maam.

Q: Now, Mr. Witness, if there are no arrows, would you place slings on the parts where
there are no arrows?

A: You can not place slings if there are no arrows, Maam."

Appellants allegation that since the cargo arrived safely from the port of [P]usan, Korea
without defect, the fault should be attributed to the arrastre operator who mishandled
the cargo, is without merit. The cargo fell while it was being carried only at about five (5)
feet high above the ground. It would not have so easily collapsed had the cargo been
properly packed. The shipper should have used materials of stronger quality to support
the heavy machines. Not only did the shipper fail to properly pack the cargo, it also failed
to indicate an arrow in the middle portion of the cargo where additional slings should be
attached. At any rate, the issue of negligence is factual in nature and in this regard, it is
settled that factual findings of the lower courts are entitled to great weight and respect
on appeal, and, in fact, accorded finality when supported by substantial evidence.51

We agree with the trial and appellate courts.

The petitioner failed to adduce any evidence to counter that of respondent ICTSI. The
petitioner failed to rebut the testimony of Dauz, that the crates were sealed and that the
contents thereof could not be seen from the outside.52 While it is true that the crate
contained machineries and spare parts, it cannot thereby be concluded that the
respondents knew or should have known that the middle wooden batten had a hole, or
that it was not strong enough to bear the weight of the shipment.

There is no showing in the Bill of Lading that the shipment was in good order or condition
when the carrier received the cargo, or that the three wooden battens under the flooring
of the cargo were not defective or insufficient or inadequate. On the other hand, under
Bill of Lading No. NSGPBSML512565 issued by the respondent NSCP and accepted by the
petitioner, the latter represented and warranted that the goods were properly packed,
and disclosed in writing the "condition, nature, quality or characteristic that may cause
damage, injury or detriment to the goods." Absent any signs on the shipment requiring
the placement of a sling cable in the mid-portion of the crate, the respondent ICTSI was
not obliged to do so.

The statement in the Bill of Lading, that the shipment was in apparent good condition, is
sufficient to sustain a finding of absence of defects in the merchandise. Case law has it
that such statement will create a prima facie presumption only as to the external
condition and not to that not open to inspection.53

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit.
SO ORDERED.

G.R. No. 92735 June 8, 2000

MONARCH INSURANCE CO., INC., TABACALERA INSURANCE CO., INC and Hon.
Judge AMANTE PURISIMA, petitioners,
vs.
COURT OF APPEALS and ABOITIZ SHIPPING CORPORATION, respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 94867

ALLIED GUARANTEE INSURANCE COMPANY, petitioner,


vs.
COURT OF APPEALS, Presiding Judge, RTC Manila, Br. 24 and ABOITIZ SHIPPING
CORPORATION, respondents.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. No. 95578

EQUITABLE INSURANCE CORPORATION, petitioner,


vs.
COURT OF APPEALS, Former First Division Composed of Hon. Justices RODOLFO
NOCON, PEDRO RAMIREZ, and JESUS ELBINIAS and ABOITIZ SHIPPING
CORPORATION, respondents.

DE LEON, JR., J.:

Before us are three consolidated petitions. G.R. No. 92735 is a petition for review filed
under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals dated
March 29, 1990 in CA-G.R. SP. Case No. 17427 which set aside the writ of execution
issued by the lower court for the full indemnification of the claims of the petitioners,
Monarch Insurance Company (hereafter "Monarch") and Tabacalera Insurance Company,
Incorporated (hereafter "Tabacalera") against private respondent, Aboitiz Shipping
Corporation (hereafter "Aboitiz") on the ground that the latter is entitled to the benefit of
the limited liability rule in maritime law; G.R. No. 94867 is a petition for certiorari under
Rule 65 of the Rules of Court to annul and set aside the decision of the Court of Appeals
dated August 15, 1990 in CA-G.R. SP No. 20844 which ordered the lower court to stay the
execution of the judgment in favor of the petitioner, Allied Guarantee Insurance
Company (hereafter "Allied") against Aboitiz insofar as it impairs the rights of the other
claimants to their pro-rata share in the insurance proceeds from the sinking of the M/V P.
Aboitiz, in accordance with the rule on limited liability; and G.R. No. 95578 is a petition
for review under Rule 45 of the Rules of Court seeking a reversal of the decision of the
Court of Appeals dated August 24, 1990 and its resolution dated October 4, 1990 in C.A.
G.R. Civil Case No. 15071 which modified the judgment of the lower court's award of
actual damages to petitioner Equitable Insurance Corporation (hereafter "Equitable") to
its pro-rata share in the insurance proceeds from the sinking of the M/V P. Aboitiz.

All cases arose from the loss of cargoes of various shippers when the M/V P. Aboitiz, a
common carrier owned and operated by Aboitiz, sank on her voyage from Hong Kong to
Manila on October 31, 1980. Seeking indemnification for the loss of their cargoes, the
shippers, their successors-in-interest, and the cargo insurers such as the instant
petitioners filed separate suits against Aboitiz before the Regional Trial Courts. The
claims numbered one hundred and ten (110) for the total amount of P41,230,115.00
which is almost thrice the amount of the insurance proceeds of P14,500,000.00 plus
earned freight of 500,000.00 according to Aboitiz. To this day, some of these claims,
including those of herein petitioners, have not yet been settled.

G.R. No. 92735.

Monarch and Tabacalera are insurance carriers of lost cargoes. They indemnified the
shippers and were consequently subrogated to their rights, interests and actions against
Aboitiz, the cargo carrier. 1 Because Aboitiz refused to compensate Monarch, it filed two
complaints against Aboitiz, docketed as Civil Cases Nos. 82-2767 and 82-2770. For its
part, Tabacalera also filed two complaints against the same defendant, docketed as Civil
Cases Nos. 82-2768 and 82-2769. As these four (4) cases had common causes of action,
they were consolidated and jointly tried. 2

In Civil Case No. 82-2767 where Monarch also named Malaysian International Shipping
Corporation and Litonja Merchant Shipping Agency as Aboitiz's co-defendants, Monarch
sough recovery of P29,719.88 representing the value of three (3) pallets of glass tubing
that sank with the M/V P. Aboitiz, plus attorney's fees of not less than P5,000.00,
litigation expenses, interest at the legal rate on all these amounts, and the cost of
suit. 3 Civil Case. No. 82-2770 was a complaint filed by Monarch against Aboitiz and co-
defendants Compagnie Maritime des Chargeurs Reunis and F.E. Zuellig (M), Inc. for the
recovery of P39,597.00 representing the value of the one case motor vehicle parts which
was lost when the M/V P. Aboitiz sank on her way to Manila, plus Attorney's fees of not
less than P10,000.00 and cost of suit. 4

Tabacalera sought against Franco Belgian Services, F.E. Zuellig and Aboitiz in Civil Case
No. 82-2768 the recovery of P284,218.00 corresponding to the value of nine (9) cases of
Renault spare parts, P213,207.00 for the value of twenty-five (25) cases of door closers
and P42,254.00 representing the value of eighteen (18) cases of plastic spangle, plus
attorney's fees of not less than P50,000.00 and cost of suit. 5 In Civil Case No. 82-2769,
Tabacalera claimed from Hong Kong Island Shipping Co., Ltd., Citadel Lines and Aboitiz
indemnification in the amount of P75,058.00 for the value of four (4) cartons of motor
vehicle parts foundered with the M/V P. Aboitiz, plus attorney's fees of not less than
P20,000.00 and cost of suit. 6

In its answer with counterclaim, Aboitiz rejected responsibility for the claims on the
ground that the sinking of its cargo vessel was due to force majeure or an act of
God. 7 Aboitiz was subsequently declared as in default for its failure to appear during the
pre-trial. Its counsel fried a motion to set aside the order of default with notice of his
withdrawal as such counsel. Before the motion could be acted upon, Judge Bienvenido
Ejercjto, the presiding judge of the trial court, was promoted to the then intermediate
Appellate Court. The cases were thus re-raffled to Branch VII of the RTC of Manila
presided by Judge Amante P. Purisima, the co-petitioner in G.R. No. 92735. Without
resolving the pending motion to set aside the order of default, the trial court set the
cases for hearing. However, since Aboitiz had repeatedly failed to appear in court, the
trial court denied the said motion and allowed Monarch and Tabacalera to present
evidence ex-parte. 8

Monarch and Tabacalera proffered in evidence the survey of Perfect Lambert, a surveyor
commissioned to investigate the possible cause of the sinking of the cargo vessel. The
survey established that on her voyage to Manila from Hong Kong, the vessel did not
encounter weather so inclement that Aboitiz would be exculpated from liability for
losses. In his note of protest, the master of M/V P. Aboitiz described the wind force
encountered by the vessel as from ten (10) to fifteen (15) knots, a weather condition
classified as typical and moderate in the South China Sea at that particular time of the
year. The survey added that the seaworthiness of the vessel was in question especially
because the breaches of the hull and the serious flooding of two (2) cargo holds occurred
simultaneously in "seasonal weather." 9

In due course, the trial court rendered judgment against Aboitiz but the complaint
against all the other defendants was dismissed. Aboitiz was held liable for the following:
(a) in Civil Case No. 82-2767, P29,719.88 with legal interest from the filing of the
complaint until fully paid plus attorney's fees of P30,000.00 and cost of suit; (b) in Civil
Case No. 82-2768, P539,679.00 with legal interest of 12% per annum from date of filing
of the complaint until fully paid, plus attorney's fees of P30,000.00, litigation expenses
and cost of suit; (c) in Civil Case No. 82-2769, P75,058.00 with legal interest of 12% per
annum from date of filing of the complaint until-fully paid, plus P5,000.00 attorney's fees,
litigation expenses and cost of suit, and (d) in Civil Case No. 82-2770, P39,579.66 with
legal interest of 12% per annum from date of filing of the complaint until fully paid, plus
attorney's fees of P5,000.00, litigation expenses and cost of suit.

Aboitiz filed a motion for reconsideration of the decision and/or for new trial to lift the
order of default. The court denied the motion on August 27, 1986. 10 Aboitiz appealed to
the Court of Appeals but the appeal was dismissed for its failure to file appellant's brief.
It subsequently filed an urgent motion for reconsideration of the dismissal with prayer for
the admission of its attached appellant's brief. The appellate court denied that motion for
lack of merit in a Resolution dated July 8, 1988. 11

Aboitiz thus filed a petition for review before this Court. Docketed as G.R. No. 84158, the
petition was denied in the Resolution of October 10, 1988 for being filed out of time.
Aboitiz's motion for the reconsideration of said Resolution was similarly denied. 12 Entry
of judgment was made in the case. 13
Consequently, Monarch and Tabacalera moved for execution of judgment. The trial court
granted the motion on April 4, 1989 14 and issued separate writs of execution. However,
on April 12, 1989, Aboitiz, invoking the real and hypothecary nature of liability in
maritime law, filed an urgent motion to quash the writs of execution. 15 According to
Aboitiz, since its liability is limited to the value of the vessel which was insufficient to
satisfy the aggregate claims of all 110 claimants, to indemnify Monarch and Tabacalera
ahead of the other claimants would be prejudicial to the latter. Monarch and Tabacalera
opposed the motion to quash. 16

On April 17, 1989, before the motion to quash could be heard, the sheriff levied upon five
(5) heavy equipment owned by Aboitiz for the public auction sale. At said sale, Monarch
was the highest bidder for one (1) unit FL-151 Fork Lift (big) and one (1) unit FL-25 Fork
Lift (small). Tabacalera was also the highest bidder for one (1) unit TCH TL-251 Hyster
Container Lifter, one (1) unit Hyster Top Lifter (out of order), and one (1) unit ER-353
Crane. The corresponding certificates of sale 17 were issued to Monarch and Tabacalera.

On April 18, 1989, the day before the hearing of the motion to quash, Aboitiz filed a
supplement to its motion, to add the fact that an auction sale had taken place. On April
19, 1989, Judge Purisima issued an order denying the motion to quash but freezing
execution proceedings for ten (10) days to give Aboitiz time to secure a restraining order
from a higher court. 18 Execution was scheduled to resume to fully satisfy the judgment
when the grace period shall have lapsed without such restraining order having been
obtained by Aboitiz.

Aboitiz filed with the Court of Appeals a petition for certiorari and prohibition with prayer
for preliminary injunction and/or temporary restraining order under CA-G.R. No. SP-
17427. 19 On March 29, 1990, the appellate court rendered a Decision the dispositive
portion of which reads:

WHEREFORE, the writ of certiorari is hereby granted, annulling the subject writs of
execution, auction sale, certificates of sale, and the assailed orders of respondent Judge
dated April 4 and April 19, 1989 insofar as the money value of those properties of
Aboitiz, levied on execution and sold at public auction, has exceeded the pro-rata shares
of Monarch and Tabacalera in the insurance proceeds of Aboitiz in relation to the pro-rata
shares of the 106 other claimants.

The writ of prohibition is also granted to enjoin respondent Judge, Monarch and
Tabacalera from proceeding further with execution of the judgments in question insofar
as the execution would satisfy the claims of Monarch and Tabacalera in excess of their
pro-rata shares and in effect reduce the balance of the proceeds for distribution to the
other claimants to their prejudice.

The question of whether or how much of the claims of Monarch and Tabacalera against
the insurance proceeds has already been settled through the writ of execution and
auction sale in question, being factual issues, shall be threshed out before respondent
judge.
The writ of preliminary injunction issued in favor of Aboitiz, having served its purpose, is
hereby lifted. No pronouncement as to costs.
20
SO ORDERED.

Hence, the instant petition for review on certiorari where petitioners Monarch, Tabacalera
and Judge Purisima raise the following assignment of errors:

1. The appellate court grievously erred in re-opening the Purisima decisions, already final
and executory, on the alleged ground that the issue of real and hypothecary liability had
not been previously resolved by Purisima, the appellate court, and this Hon. Supreme
Court;

2. The appellate court erred when it resolved that Aboitiz is entitled to the limited real
and hypothecary liability of a ship owner, considering the facts on record and the law on
the matter.

3. The appellate court erred when it concluded that Aboitiz does not have to present
evidence to prove its entitlement to the limited real and hypothecary liability.

4. The appellate court erred in ignoring the case of "Aboitiz Shipping Corporation v. CA
and Allied Guaranty Insurance Co., Inc. (G.R. No. 88159), decided by this Honorable
Supreme Court as early as November 13, 1989, considering that said case, now factual
and executory, is in pari materia with the instant case.

5. The appellate court erred in not concluding that irrespective of whether Aboitiz is
entitled to limited hypothecary liability or not, there are enough funds to satisfy all the
claimants.

6. The appellate court erred when it concluded that Aboitiz had made an "abandonment"
as envisioned by Art. 587 of the Code of Commerce.

7. The appellate court erred when it concluded that other claimants would suffer if
Tabacalera and Monarch would be fully paid.

8. The appellate court erred in concluding that certiorari was the proper remedy for
Aboitiz. 21

G.R. NOS. 94867 & 95578

Allied as insurer-subrogee of consignee Peak Plastic and Metal Products Limited, filed a
complaint against Aboitiz for the recovery of P278,536.50 representing the value of 676
bags of PVC compound and 10 bags of ABS plastic lost on board the M/V P. Aboitiz, with
legal interest from the date of filing of the complaint, plus attorney's fees, exemplary
damages and costs. 22 Docketed as Civil Case No. 138643, the case was heard before the
Regional Trial Court of Manila, Branch XXIV, presided by Judge Sergio D. Mabunay.

On the other hand, Equitable, as insurer-subrogee of consignee-assured Axel


Manufacturing Corporation, filed an amended complaint against Franco Belgian Services,
F.E. Zuellig, Inc. and Aboitiz for the recovery of P194,794.85 representing the value of 76
drums of synthetic organic tanning substances and 1,000 kilograms of optical bleaching
agents which were also lost on board the M/V P. Aboitiz, with legal interest from the date
of filing of the complaint, plus 25% attorney's fees, exemplary damages, litigation
expenses and costs of suit.23 Docketed as Civil Case No. 138396, the complaint was
assigned to the Regional Trial Court of Manila, Branch VIII.

In its answer with counterclaim in the two cases, Aboitiz disclaimed responsibility for the
amounts being recovered, alleging that the loss was due to a fortuitous event or an act
of God. It prayed for the dismissal of the cases and the payment of attorney's fees,
litigation expenses plus costs of suit. It similarly relied on the defenses of force mejeure,
seaworthiness of the vessel and exercise of due diligence in the carriage of goods as
regards the cross-claim of its co-defendants. 24

In support of its position, Aboitiz presented the testimonies of Capt. Gerry N. Racines,
master mariner of the M/V P. Aboitiz, and Justo C. Iglesias, a meteorologist of the
Philippine Atmospheric Geophysical and Astronomical Services Administration (PAGASA).
The gist of the testimony of Capt. Racines in the two cases follows:

The M/V P. Aboitiz left Hong Kong for Manila at about 7:30 in the evening of October 29,
1980 after securing a departure clearance from the Hong Kong Port Authority. The
departure was delayed for two hours because he (Capt. Racines) was observing the
direction of the storm that crossed the Bicol Region. He proceeded with the voyage only
after being informed that the storm had abated. At about 8:00 o'clock in the morning of
October 30, 1980, after more than twelve (12) hours of navigation, the vessel suddenly
encountered rough seas with waves about fifteen to twenty-five feet high. He ordered his
chief engineer to check the cargo holds. The latter found that sea water had entered
cargo hold Nos. 1 and 2. He immediately directed that water be pumped out by means of
the vessel's bilge pump, a device capable of ejecting 180 gallons of water per minute.
They were initially successful in pumping out the water.

At 6:00 a.m. of October 31, 1980, however, Capt. Racines received a report from his
chief engineer that the water level in the cargo holds was rapidly rising. He altered the
vessel's course and veered towards the northern tip of Luzon to prevent the vessel from
being continuously pummeled by the waves. Despite diligent efforts of the officers and
crew, however, the vessel, which was approximately 250 miles away from the eye of the
storm, began to list on starboard side at 27 degrees. Capt. Racines and his crew were not
able to make as much headway as they wanted because by 12:00 noon of the same day,
the cargo holds were already flooded with sea water that rose from three to twelve feet,
disabling the bilge pump from containing the water.

The M/V P. Aboitiz sank at about 7:00 p.m. of October 31, 1980 at latitude 18 degrees
North, longitude 170 degrees East in the South China Sea in between Hong Kong, the
Philippines and Taiwan with the nearest land being the northern tip of Luzon, around 270
miles from Cape Bojeador, Bangui, Ilocos Norte. Responding to the captain's distress call,
the M/V Kapuas (Capuas) manned by Capt. Virgilio Gonzales rescued the officers and
crew of the ill-fated M/V P. Aboitiz and brought them to Waileen, Taiwan where Capt.
Racines lodged his marine protest dated November 3, 1980.

Justo Iglesias, meteorologist of PAGASA and another witness of Aboitiz, testified in both
cases that during the inclusive dates of October 28-31, 1980, a stormy weather condition
prevailed within the Philippine area of responsibility, particularly along the sea route from
Hong Kong to Manila, because of tropical depression "Yoning." 25 PAGASA issued weather
bulletins from October 28-30, 1980 while the storm was still within Philippine territory. No
domestic bulletins were issued the following day when the storm which hit Eastern
Samar, Southern Quezon and Southern Tagalog provinces, had made its exit to the South
China Sea through Bataan.

Allied and Equitable refuted the allegation that the M/V P. Aboitiz and its cargo were lost
due to force majeure, relying mainly on the marine protest filed by Capt. Racines as well
as on the Beaufort Scale of Wind. In his marine protest under oath, Capt. Racines
affirmed that the wind force an October 29-30, 1980 was only ten (10) to fifteen (15)
knots. Under the Beaufort Scale of Wind, said wind velocity falls under scale No. 4 that
describes the sea condition as "moderate breeze," and "small waves becoming longer,
fairly frequent white horses." 26

To fortify its position, Equitable presented Rogelio T. Barboza who testified that as claims
supervisor and processor of Equitable, he recommended payment to Axel Manufacturing
Corporation as evidenced by the cash voucher, return check and subrogation receipt.
Barboza also presented a letter of demand to Aboitiz which, however, the latter
ignored. 27

On April 24, 1984, the trial court rendered a decision that disposed of Civil Case No.
138643 as follows:

WHEREFORE, judgment is hereby rendered ordering defendant Aboitiz Shipping


Company to pay plaintiff Allied Guarantee Insurance Company, Inc. the sum of
P278,536.50, with legal interest thereon from March 10, 1981, then date of the filing of
the complaint, until fully paid, plus P30,000.00 as attorney's fees, with costs of suit.
28
SO ORDERED.

A similar decision was arrived at in Civil Case No. 138396, the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing, this Court hereby renders judgment in favor of
plaintiff and against defendant Aboitiz Shipping Corporation, to pay the sum of
P194,794.85 with legal rate of interest thereon from February 27, 1981 until fully paid;
attorney's fees of twenty-five (25%) percent of the total claim, plus litigation expenses
and costs of litigation.
29
SO ORDERED.
In Civil Case No. 138643, Aboitiz appealed to the Court of Appeals under CA-G.R. CV No.
04121. On March 23, 1987, the Court of Appeals affirmed the decision of the lower court.
A motion for reconsideration of the said decision was likewise denied by the Court of
Appeals on May 3, 1989. Aggrieved, Aboitiz then filed a petition for review with this Court
docketed as G.R. No. 88159 which was denied for lack merit. Entry of judgment was
made and the lower court's decision in Civil Case No. 138643 became final and
executory. Allied prayed for the issuance of a writ of execution in the lower court which
was granted by the latter on April 4, 1990. To stay the execution of the judgment of the
lower court, Aboitiz filed a petition for certiorari and prohibition with preliminary
injunction with the Court of Appeals docketed as CA-G.R. SP No. 20844. 30 On August 15,
1990, the Court of Appeals rendered the assailed decision, the dispositive portion of
which reads as follows.

WHEREFORE, the challenged order of the respondent Judge dated April 4, 1990 granting
the execution is hereby set aside. The respondent Judge is further ordered to stay the
execution of the judgment insofar as it impairs the rights of the 100 other claimants to
the insurance proceeds including the rights of the petitioner to pay more than the value
of the vessel or the insurance proceeds and to desist from executing the judgment
insofar as it prejudices the pro-rata share of all claimants to the insurance proceeds. No
pronouncement as to costs.
31
SO ORDERED.

Hence, Allied filed the instant petition for certiorari, mandamus and injunction with
preliminary injunction and/or restraining order before this Court alleging the following
assignment of errors:

1. Respondent Court of Appeals gravely erred in staying the immediate execution of the
judgment of the lower court as it has no authority nor jurisdiction to directly or indirectly
alter, modify, amend, reverse or invalidate a final judgment as affirmed by the Honorable
Supreme Court in G.R. No. 88159.

2. Respondent Court of Appeals with grave abuse of discretion amounting to lack or


excess of jurisdiction, brushed aside the doctrine in G.R. No. 88159 which is now the law
of the case and observance of time honored principles of stare decisis, res
adjudicata and estoppel by judgment.

3. Real and hypothecary rule under Articles 587, 590 and 837 of the Code of Commerce
which is the basis of the questioned decision (Annex "C" hereof) is without application in
the face of the facts found by the lower court, sustained by the Court of Appeals in CA-
G.R. No. 04121 and affirmed in toto by the Supreme Court in G.R. No. 88159.

4. Certiorari as a special remedy is unavailing for private respondent as there was no


grave abuse of discretion nor lack or excess of jurisdiction for Judge Mabunay to issue
the order of April 4, 1990 which was in accord with law and jurisprudence, nor were there
intervening facts and/or supervening events that will justify respondent court to issue a
writ of certiorari or a restraining order on a final and executory judgment of the
Honorable Supreme Court. 32

From the decision of the trial court in Civil Case No. 138396 that favored Equitable,
Aboitiz likewise appealed to the Court of Appeals through CA-G.R. CV No. 15071. On
August 24, 1990, the Court of Appeals rendered the Decision quoting extensively its
Decision in CA-G.R. No. SP-17427 (now G.R. No. 92735) and disposing of the appeal as
follows:

WHEREFORE, we hereby affirm the trial court's awards of actual damages, attorney's
fees and litigation expenses, with the exception of legal interest, in favor of plaintiff-
appellee Equitable Insurance Corporation as subrogee of the consignee for the loss of its
shipment aboard the M/V "P. Aboitiz" and against defendant-appellant Aboitiz Shipping
Corporation. However, the amount and payment of those awards shall be subject to a
determination of the pro-rata share of said appellee in relation to the pro-rata shares of
the 109 other claimants, which determination shall be made by the trial court. This case
is therefore hereby ordered remanded to the trial court which shall reopen the case and
receive evidence to determine appellee's pro-rata share as aforesaid. No pronouncement
as to costs.
33
SO ORDERED.

On September 12, 1990, Equitable moved to reconsider the Court of Appeals' Decision.
The Court of Appeals denied the motion for reconsideration on October 4,
1990. 34 Consequently, Equitable filed with this Court a petition for review alleging the
following assignment of errors:

1. Respondent Court of Appeals, with grave abuse of discretion amounting to lack or


excess of jurisdiction, erroneously brushed aside the doctrine in G.R. No. 88159 which is
now the law of the case as held in G.R. No. 89757 involving the same and identical set of
facts and cause of action relative to the sinking of the M/V "P. Aboitiz" and observance of
the time honored principles of stare decisis, and estoppel by judgment.

2. Real and hypothecary rule under Articles 587, 590 and 837 of the Code of Commerce
which is the basis of the assailed decision and resolution is without application in the
face of the facts found by the trial court which conforms to the conclusion and finding of
facts arrived at in a similar and identical case involving the same incident and parties
similarly situated in G.R. No. 88159 already declared as the "law of the case" in a
subsequent decision of this Honorable Court in G.R. No. 89757 promulgated on August 6,
1990.

3. Respondent Court of Appeals gravely erred in concluding that limited liability rule
applies in case of loss of cargoes when the law itself does not distinguish; fault of the
shipowner or privity thereto constitutes one of the exceptions to the application of
limited liability under Article 587, 590 and 837 of the Code of Commerce, Civil Code
provisions on common carriers for breach of contract of carriage prevails. 35
These three petitions in G.R. Nos. 92735, 94867 and 95578 were consolidated in the
Resolution of August 5, 1991 on the ground that the petitioners "have identical causes of
action against the same respondent and similar reliefs are prayed for." 36

The threshold issue in these consolidated petitions is the applicability of the limited
liability rule in maritime law in favor of Aboitiz in order to stay the execution of the
judgments for full indemnification of the losses suffered by the petitioners as a result of
the sinking of the M/V P. Aboitiz. Before we can address this issue, however, there are
procedural matters that need to be threshed out.

First. At the outset, the Court takes note of the fact that in G.R. No. 92735, Judge Amante
Purisima, whose decision in the Regional Trial Court is sought to be upheld, is named as a
co-petitioner. In Calderon v. Solicitor General, 37 where the petitioner in the special civil
action of certiorari and mandamus was also the judge whose order was being assailed,
the Court held that said judge had no standing to file the petition because he was merely
a nominal or formal party-respondent under Section 5 of Rule 65 of the Rules of Court.
He should not appear as a party seeking the reversal of a decision that is unfavorable to
the action taken by him. The Court there said:

Judge Calderon should be-reminded of the well-known doctrine that a judge should
detach himself from cases where his decision is appealed to a higher court for review.
The raison d'etre for such doctrine is the fact that a judge is not an active combatant in
such proceeding and must leave the opposing parties to contend their individual
positions and for the appellate court to decide the issues without his active participation.
By filing this case, petitioner in a way ceased to be judicial and has become adversarial
instead. 38

While the petition in G.R. No. 92735 does not expressly show whether or not Judge
Purisima himself is personally interested in the disposition of this petition or he was just
inadvertently named as petitioner by the real parties in interest, the fact that Judge
Purisima is named as petitioner has not escaped this Court's notice. Judges and litigants
should be reminded of the basic rule that courts or individual judges are not supposed to
be interested "combatants" in any litigation they resolve.

Second. The petitioners contend that the inapplicability of the limited liability rule to
Aboitiz has already been decided on by no less than this Court in G.R. No. 88159 as early
as November 13, 1989 which was subsequently declared as "law of the case" in G.R. No.
89757 on August 6, 1990. Herein petitioners cite the aforementioned cases in support of
their theory that the limited liability rule based on the real and hypothecary nature of
maritime law has no application in the cases at bar.

The existence of what petitioners insist is already the "law of the case" on the matter of
limited liability is at best illusory. Petitioners are either deliberately misleading this Court
or profoundly confused. As elucidated in the case of Aboitiz Shipping Corporation vs.
General Accident Fire and Life Assurance Corporation, 39
An examination of the November 13, 1989 Resolution in G.R. No. 88159 (pp. 280-
282, Rollo) shows that the same settles two principal matters, first of which is that the
doctrine of primary administrative jurisdiction is not applicable therein; and second is
that a limitation of liability in said case would render inefficacious the extraordinary
diligence required by law of common carriers.

It should be pointed out, however, that the limited liability discussed in said case is not
the same one now in issue at bar, but an altogether different aspect. The limited liability
settled in G.R. No. 88159 is that which attaches to cargo by virtue of stipulations in the
Bill of Lading, popularly known as package limitation clauses, which in that case was
contained in Section 8 of the Bill of Lading and which limited the carrier's liability to
US$500.00 for the cargo whose value was therein sought to be recovered. Said
resolution did not tackle the matter of the Limited Liability Rule arising out of the real
and hypothecary nature of maritime law, which was not raised therein, and which is the
principal bone of contention in this case. While the matters threshed out in G.R. No.
88159, particularly those dealing with the issues on primary administrative jurisdiction
and the package liability limitation provided in the Bill of Lading are now settled and
should no longer be touched, the instant case raises a completely different issue. 40

Third. Petitioners asseverate that the judgments of the lower courts, already final and
executory, cannot be directly or indirectly altered, modified, amended, reversed or
invalidated.

The rule that once a decision becomes final and executory, it is the ministerial duty of
the court to order its execution, is not an absolute one: We have allowed the suspension
of execution in cases of special and exceptional nature when it becomes imperative in
the higher interest of justice. 41 The unjust and inequitable effects upon various other
claimants against Aboitiz should we allow the execution of judgments for the full
indemnification of petitioners' claims impel us to uphold the stay of execution as ordered
by the respondent Court of Appeals. We reiterate our pronouncement in Aboitiz Shipping
Corporation vs. General Accident Fire and Life Assurance Corporation on this very same
issue.

This brings us to the primary question herein which is whether or not respondent court
erred in granting execution of the full judgment award in Civil Case No. 14425 (G.R. No.
89757), thus effectively denying the application of the limited liability enunciated under
the appropriate articles of the Code of Commerce. . . . . Collaterally, determination of the
question of whether execution of judgments which have become final and executory may
be stayed is also an issue.

We shall tackle the latter issue first. This Court has always been consistent in its stand
that the very purpose for its existence is to see the accomplishment of the ends of
justice. Consistent with this view, a number of decisions have originated herefrom, the
tenor of which is that no procedural consideration is sancrosanct if such shall result in
the subverting of justice. The right to execution after finality of a decision is certainly no
exception to this. Thus, in Cabrias v. Adil (135 SCRA 355 [1885]), this Court ruled that:
xxx xxx xxx

. . . every court having jurisdiction to render a particular judgment has inherent power to
enforce it, and to exercise equitable control over such enforcement. The court has
authority to inquire whether its judgment has been executed, and will remove
obstructions to the enforcement thereof. Such authority extends not only to such orders
and such writs as may be necessary to prevent an improper enforcement of the
judgment. If a judgment is sought to be perverted and made a medium of consummating
a wrong the court on proper application can prevent it. 42

Fourth. Petitioners in G.R. No. 92735 ever that it was error for the respondent Court of
Appeals to allow Aboitiz the benefit of the limited liability rule despite its failure to
present evidence to prove its entitlement thereto in the court below. Petitioners Monarch
and Tabacalera remind this Court that from the inception of G.R. No. 92735 in the lower
court and all the way to the Supreme Court, Aboitiz had not presented an iota of
evidence to exculpate itself from the charge of negligence for the simple reason that it
was declared as in default. 43

It is true that for having been declared in default, Aboitiz was precluded from presenting
evidence to prove its defenses in the court a quo. We cannot, however, agree with
petitioners that this circumstance prevents the respondent Court of Appeals from taking
cognizance of Aboitiz' defenses on appeal.

It should be noted that Aboitiz was declared as in default not for its failure to file an
answer but for its absence during pre-trial and the trial proper. In Aboitiz' answer with
counterclaim, it claimed that the sinking of the M/V P. Aboitiz was due to an act of God or
unforeseen event and that the said ship had been seaworthy and fit for the voyage.
Aboitiz also alleged that it exercised the due diligence required by law, and that
considering the real and hypothecary nature of maritime trade, the sinking justified the
extinguishment of its liability for the lost shipment. 44

A judgment of default does not imply a waiver of rights except that of being heard and
presenting evidence in defendant's favor. It does not imply admission by the defendant
of the facts and causes of action of the plaintiff, because the codal section 45 requires the
latter to adduce evidence in support of his allegations as an indispensable condition
before final judgment could be given in his favor. Nor could it be interpreted as an
admission by the defendant that the plaintiff's causes of action find support in the law or
that the latter is entitled to the relief prayed for. 46 This is especially true with respect to
a defendant who had filed his answer but had been subsequently declared in default for
failing to appear at the trial since he has had an opportunity to traverse, via his answer,
the material averments contained in the complaint. Such defendant has a better
standing than a defendant who has neither answered nor appeared at trial. 47 The former
should be allowed to reiterate all affirmative defenses pleaded in his answer before the
Court of Appeals. Likewise, the Court of Appeals may review the correctness of the
evaluation of the plaintiffs evidence by the lower court.
It should also be pointed out that Aboitiz is not raising the issue of its entitlement to the
limited liability rule for the first time on appeal thus, the respondent Court of Appeals
may properly rule on the same.

However, whether or not the respondent Court of Appeals erred in finding, upon review,
that Aboitiz is entitled to the benefit of the limited liability rule is an altogether different
matter which shall be discussed below.1awphi1

Rule on Limited Liability. The petitioners assert in common that the vessel M/V P. Aboitiz
did not sink by reason of force majeure but because of its unseaworthiness and the
concurrent fault and/or negligence of Aboitiz, the captain and its crew, thereby barring
Aboitiz from availing of the benefit of the limited liability rule.

The principle of limited liability is enunciated in the following provisions of the Code of
Commerce:

Art. 587. The shipagent shall also be civilly liable for the indemnities in favor of third
persons which may arise from the conduct of the captain in the care of goods which he
loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel
with all the equipments and the freight it may have earned during the voyage.

Art. 590. The co-owners of a vessel shall be civilly liable in the proportion of their
interests in the common fund for the results of the acts of the captain referred to in Art.
587.

Each co-owner may exempt himself from his liability by the abandonment, before a
notary, of the part of the vessel belonging to him.

Art. 837. The civil liability incurred by shipowners in the case prescribed in this section,
shall be understood as limited to the value of the vessel with all its appurtenances and
the freightage served during the voyage.

Art. 837 appeals the principle of limited liability in cases of collision hence, Arts. 587 and
590 embody the universal principle of limited liability in all cases. In Yangco v.
Laserna, 48 this Court elucidated on the import of Art. 587 as follows:

The provision accords a shipowner or agent the right of abandonment; and by necessary
implication, his liability is confined to that which he is entitled as of right to abandon-"the
vessel with all her equipments and the freight it may have earned during the voyage." It
is true that the article appears to deal only with the limited liability of the shipowners or
agents for damages arising from the misconduct of the captain in the care of the goods
which the vessel carries, but this is a mere deficiency of language and in no way
indicates the true extent of such liability. The consensus of authorities is to the effect
that notwithstanding the language of the aforequoted provision, the benefit of limited
liability therein provided for, applies in all cases wherein the shipowner or agent may
properly be held liable for the negligent or illicit acts of the captain. 49
"No vessel, no liability," expresses in a nutshell the limited liability rule. The shipowner's
or agent's liability is merely co-extensive with his interest in the vessel such that a total
loss thereof results in its extinction. The total destruction of the vessel extinguishes
maritime liens because there is no longer any res to which it can attach. 50This doctrine is
based on the real and hypothecary nature of maritime law which has its origin in the
prevailing conditions of the maritime trade and sea voyages during the medieval ages,
attended by innumerable hazards and perils. To offset against these adverse conditions
and to encourage shipbuilding and maritime commerce, it was deemed necessary to
confine the liability of the owner or agent arising from the operation of a ship to the
vessel, equipment, and freight, or insurance, if any. 51

Contrary to the petitioners' theory that the limited liability rule has been rendered
obsolete by the advances in modern technology which considerably lessen the risks
involved in maritime trade, this Court continues to apply the said rule in appropriate
cases. This is not to say, however, that the limited liability rule is without exceptions,
namely: (1) where the injury or death to a passenger is due either to the fault of the
shipowner, or to the concurring negligence of the shipowner and the captain; 52 (2) where
the vessel is insured; and (3) in workmen's compensation claims. 53

We have categorically stated that Article 587 speaks only of situations where the fault or
negligence is committed solely by the captain. In cases where the ship owner is likewise
to be blamed, Article 587 does not apply. Such a situation will be covered by the
provisions of the Civil Code on common carriers. 54

A finding that a fortuitous event was the sole cause of the loss of the M/V P. Aboitiz would
absolve Aboitiz from any and all liability pursuant to Article 1734(1) of the Civil Code
which provides in part that common carriers are responsible for the loss, destruction, or
deterioration of the goods they carry, unless the same is due to flood, storm, earthquake,
lightning, or other natural disaster or calamity. On the other hand, a finding that the M/V
P. Aboitiz sank by reason of fault and/or negligence of Aboitiz, the ship captain and crew
of the M/V P. Aboitiz would render inapplicable the rule on limited liability. These issues
are therefore ultimately questions of fact which have been subject of conflicting
determinations by the trial courts, the Court of Appeals and even this Court.

In Civil Cases Nos. 82-2767-82-2770 (now G.R. No. 92735), after receiving Monarch's and
Tabacalera's evidence, the trial court found that the complete loss of the shipment on
board the M/V P. Aboitiz when it sank was neither due to a fortuitous event nor a storm or
natural cause. For Aboitiz' failure to present controverting evidence, the trial court also
upheld petitioners' allegation that the M/V P. Aboitiz was unseaworthy. 55 However, on
appeal, respondent Court of Appeals exculpated Aboitiz from fault or negligence and
ruled that:

. . ., even if she (M/V P. Aboitiz) was found to be unseaworthy, this fault (distinguished
from civil liability) cannot be laid on the shipowner's door. Such fault was directly
attributable to the captain. This is so, because under Art. 612 of the Code of Commerce,
among the inherent duties of a captain, are to examine the vessel before sailing and to
comply with the laws on navigation. 56

and that:

. . . although the shipowner may be held civilly liable for the captain's fault . . . having
abandoned the vessel in question, even if the vessel was unseaworthy due to the
captain's fault, Aboitiz is still entitled to the benefit under the rule of limited liability
accorded to shipowners by the Code of Commerce. 57

Civil Case No. 138396 (now G.R. No. 95578) was similarly resolved by the trial court,
which found that the sinking of the M/V P. Aboitiz was not due to an act of God or force
majeure. It added that the evidence presented by the petitioner Equitable demonstrated
the negligence of Aboitiz Shipping Corporation in the management and operation of its,
vessel M/V P. Aboitiz. 58

However, Aboitiz' appeal was favorably acted upon by the respondent Court of Appeals
which reiterated its ruling in G.R. No. 92735 that the unseaworthiness of the M/V P.
Aboitiz was not a fault directly attributable to Aboitiz but to the captain, and that Aboitiz
is entitled to the benefit of the limited liability rule for having abandoned its ship. 59

Finally, in Civil Case No. 138643 (now G.R. No. 94867), the trial court held that the M/V P.
Aboitiz was not lost due to a fortuitous event or force majeure, and that Aboitiz had
failed to satisfactorily establish that it had observed extraordinary diligence in the
vigilance over the goods transported by it. 60

In CA-G.R. CV No. 04121, the Court of Appeals initially ruled against Aboitiz and found
that the sinking of the vessel was due to its unseaworthiness and the failure of its crew
and master to exercise extraordinary diligence. 61 Subsequently, however, Aboitiz'
petition before the Court of Appeals, docketed as CA-G.R. SP No. 20844 (now G.R. No.
94867) to annul and set aside the order of execution issued by the lower court was
resolved in favor of Aboitiz. The Court of Appeals brushed aside the issue of Aboitiz'
negligence and/or fault and proceeded to allow the application of the limited liability rule
"to accomplish the aims of justice." 62 It elaborated thus: "To execute the judgment in this
case would prejudice the substantial right of other claimants who have filed suits to
claim their cargoes that was lost in the vessel that sank and also against the petitioner
to be ordered to pay more than what the law requires." 63

It should be pointed out that the issue of whether or not the M/V P. Aboitiz sank by
reason of force majeure is not a novel one for that question has already been the subject
of conflicting pronouncements by the Supreme Court. In Aboitiz Shipping Corporation v.
Court of Appeals, 64 this Court approved the findings of the trial court and the appellate
court that the sinking of the M/V P. Aboitiz was not due to the waves caused by tropical
storm "Yoning" but due to the fault and negligence of Aboitiz, its master and crew. 65 On
the other hand, in the later case of Country Bankers Insurance Corporation v. Court of
Appeals, 66 this Court issued a Resolution on August 28, 1991 denying the petition for
review on the ground that the Court of Appeals committed no reversible error, thereby
affirming and adopting as its own, the findings of the Court of Appeals that force
majeure had caused the M/V P. Aboitiz to founder.

In view of these conflicting pronouncements, we find that now is the opportune time to
settle once and for all the issue or whether or not force mejeure had indeed caused the
M/V P. Aboitiz to sink. After reviewing the records of the instant cases, we categorically
state that by the facts on record, the M/V P. Aboitiz did not go under water because of
the storm "Yoning."

It is true that as testified by Justo Iglesias, meteorologist of Pag-Asa, during the inclusive
dates of October 28-31, 1980, a stormy weather condition prevailed within the Philippine
area of responsibility, particularly along the sea route from Hong Kong to Manila,
because of tropical depression "Yoning". 67 But even Aboitiz' own evidence in the form of
the marine protest filed by Captain Racines affirmed that the wind force when the M/V P.
Aboitiz foundered on October 31, 1980 was only ten (10) to fifteen (15) knots which,
under the Beaufort Scale or Wind, falls within scale No. 4 that describes the wind velocity
as "moderate breeze," and characterizes the waves as "small . . . becoming longer, fairly
frequent white horses." 68 Captain Racines also testified in open court that the ill-fated
M/V P. Aboitiz was two hundred (200) miles away from storm "Yoning" when it sank. 69

The issue of negligence on the part of Aboitiz, and the captain and crew of the M/V P.
Aboitiz has also been subject of conflicting rulings by this Court. In G.R. No.
100373, Country Bankers Insurance Corporation v. Court of Appeals, this Court found no
error in the findings of the Court of Appeals that the M/V P. Aboitiz sank by reason
of force majeure, and that there was no negligence on the part of its officers and crew. In
direct contradiction is this Court's categorical declaration in Aboitiz Shipping Corporation
v. Court of Appeals," 70 to wit:

The trial court and the appellate court found that the sinking of the M/V P. Aboitiz was not
due to the waves caused by tropical storm "Yoning" but due to the fault and negligence
of petitioner, its master and crew. The court reproduces with approval said
findings . . . . 71

However, in the subsequent case of Aboitiz Shipping Corporation v. General Accident Fire
and Life Assurance Corporation, Ltd., 72 this Court exculpated Aboitiz from fault and/or
negligence while holding that the unseaworthiness of the M/V P. Aboitiz was only
attributable to the negligence of its captain and crew. Thus,

On this point, it should be stressed that unseaworthiness is not a fault that can be laid
squarely on petitioner's lap, absent a factual basis for such conclusion. The
unseaworthiness found in some cases where the same has been ruled to exist is directly
attributable to the vessel's crew and captain, more so on the part of the latter since
Article 612 of the Code of Commerce provides that among the inherent duties of a
captain is to examine a vessel before sailing and to comply with the laws of navigation.
Such a construction would also put matters to rest relative to the decision of the Board of
Marine Inquiry. While the conclusion therein exonerating the captain and crew of the
vessel was not sustained for lack of basis, the finding therein contained to the effect that
the vessel was seaworthy deserves merit. Despite appearances, it is not totally
incompatible with the findings of the trial court and the Court of Appeals, whose finding
of "unseaworthiness" clearly did not pertain to the structural condition of the vessel
which is the basis of the BMI's findings, but to the condition it was in at the time of the
sinking, which condition was a result of the acts of the captain and the crew. 73

It therefore becomes incumbent upon this Court to answer with finality the nagging
question of whether or not it was the concurrent fault and/or negligence of Aboitiz and
the captain and crew of the ill-fated vessel that had caused it to go under water.

Guided by our previous pronouncements and illuminated by the evidence now on record,
we reiterate our findings in Aboitiz Shipping Corporation v. General Accident Fire and Life
Assurance Corporation, Ltd. 74, that the unseaworthiness of the M/V P. Aboitiz had caused
it to founder. We, however, take exception to the pronouncement therein that said
unseaworthiness could not be attributed to the ship owner but only to the negligent acts
of the captain and crew of the M/V P. Aboitiz. On the matter of Aboitiz' negligence, we
adhere to our ruling in Aboitiz Shipping Corporation v. Court of Appeals, 75 that found
Aboitiz, and the captain and crew of the M/V P. Aboitiz to have been concurrently
negligent.

During the trial of Civil Case Nos. 82-2767-82-2770 (now G.R. No. 92735), petitioners
Monarch and Tabacalera presented a survey from Perfect Lambert, a surveyor based in
Hong Kong that conducted an investigation on the possible cause of the sinking of the
vessel. The said survey established that the cause of the sinking of the vessel was the
leakage of water into the M/V P. Aboitiz which probably started in the forward part of the
No. 1 hull, although no explanation was proffered as to why the No. 2 hull was likewise
flooded. Perfect Lambert surmised that the flooding was due to a leakage in the shell
plating or a defect in the water tight bulk head between the Nos. 1 and 2 holds which
allowed the water entering hull No. 1 to pass through hull No. 2. The surveyor concluded
that whatever the cause of the leakage of water into these hulls, the seaworthiness of
the vessel was definitely in question because the breaches of the hulls and serious
flooding of the two cargo holds occurred simultaneously in seasonal weather. 76

We agree with the uniform finding of the lower courts that Aboitiz had failed to prove
that it observed the extraordinary diligence required of it as a common carrier. We
therefore reiterate our pronouncement in Aboitiz Corporation v. Court of Appeals 77 on
the issue of Aboitiz' liability in the sinking of its vessel, to wit:

In accordance with Article 1732 of the Civil Code, the defendant common carrier from the
nature of its business and for reasons of public policy, is bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers
transported by it according to all circumstances of the case. While the goods are in the
possession of the carrier, it is but fair that it exercise extraordinary diligence in
protecting them from loss or damage, and if loss occurs, the law presumes that it was
due to the carrier's fault or negligence; that is necessary to protect the interest of the
shipper which is at the mercy of the carrier . . . In the case at bar, the defendant failed to
prove hat the loss of the subject cargo was not due to its fault or negligence. 78

The failure of Aboitiz to present sufficient evidence to exculpate itself from fault and/or
negligence in the sinking of its vessel in the face of the foregoing expert testimony
constrains us to hold that Aboitiz was concurrently at fault and/or negligent with the ship
captain and crew of the M/V P. Aboitiz. This is in accordance with the rule that in cases
involving the limited liability of shipowners, the initial burden of proof of negligence or
unseaworthiness rests on the claimants. However, once the vessel owner or any party
asserts the right to limit its liability, the burden of proof as to lack of privity or knowledge
on its part with respect to the matter of negligence or unseaworthiness is shifted to
it. 79 This burden, Aboitiz had unfortunately failed to discharge. That Aboitiz failed to
discharge the burden of proving that the unseaworthiness of its vessel was not due to its
fault and/or negligence should not however mean that the limited liability rule will not be
applied to the present cases. The peculiar circumstances here demand that there should
be no strict adherence to procedural rules on evidence lest the just claims of
shippers/insurers be frustrated. The rule on limited liability should be applied in
accordance with the latest ruling in Aboitiz Shipping Corporation v. General Accident Fire
and Life Assurance Corporation, Ltd., 80promulgated on January 21, 1993, that claimants
be treated as "creditors in an insolvent corporation whose assets are not enough to
satisfy the totality of claims against it." 81 To do so, the Court set out in that case the
procedural guidelines:

In the instant case, there is, therefore, a need to collate all claims preparatory to their
satisfaction from the insurance proceeds on the vessel M/V P. Aboitiz and its pending
freightage at the time of its loss. No claimant can be given precedence over the others
by the simple expedience of having completed its action earlier than the rest. Thus,
execution of judgment in earlier completed cases, even these already final and executory
must be stayed pending completion of all cases occasioned by the subject sinking. Then
and only then can all such claims be simultaneously settled, either completely or pro-
rata should the insurance proceeds and freightage be not enough to satisfy all claims.

xxx xxx xxx

In fairness to the claimants and as a matter of equity, the total proceeds of the insurance
and pending freightage should now be deposited in trust. Moreover, petitioner should
institute the necessary limitation and distribution action before the proper admiralty
court within 15 days from finality of this decision, and thereafter deposit with it the
proceeds from the insurance company and pending freightage in order to safeguard the
same pending final resolution of all incidents, for final pro-rating and settlement
thereof. 82(Emphasis supplied.)

There is no record that Aboitiz. has instituted such action or that it has deposited in trust
the insurance proceeds and freightage earned. The pendency of the instant cases before
the Court is not a reason for Aboitiz to disregard the aforementioned order of the Court.
In fact, had Aboitiz complied therewith, even these cases could have been terminated
earlier. We are inclined to believe that instead of filing the suit as directed by this Court,
Aboitiz tolerated the situation of several claimants waiting to gel hold of its insurance
proceeds, which, if correctly handled must have multiplied in amount by now. By its
failure to abide by the order of this Court, it had caused more damage to the claimants
over and above that which they have endured as a direct consequence of the sinking of
the M/V P. Aboitiz. It was obvious that from among the many cases filed against it over
the years, Aboitiz was waiting for a judgment that might prove favorable to it, in blatant
violation of the basic provisions of the Civil Code on abuse of rights.

Well aware of the 110 claimants against it, Aboitiz preferred to litigate the claims singly
rather than exert effort towards the consolidation of all claims. Consequently, courts
have arrived at conflicting decisions while claimants waited over the years for a
resolution of any of the cases that would lead to the eventual resolution of the rest.
Aboitiz failed to give the claimants their due and to observe honesty and good faith in
the exercise of its rights. 83

Aboitiz' blatant disregard of the order of this Court in Aboitiz Shipping Corporation v.
General Accident Fire and Life Assurance Corporation, Ltd. 84 cannot be anything but,
willful on its part. An act is considered willful if it is done with knowledge of its injurious
effect; it is not required that the act be done purposely to produce the injury. 85 Aboitiz is
well aware that by not instituting the said suit, it caused the delay in the resolution of all
claims against it. Having willfully caused loss or injury to the petitioners in a manner that
is contrary to morals, good customs or public policy, Aboitiz is liable for damages to the
latter. 86

Thus, for its contumacious act of defying the order of this Court to file the appropriate
action to consolidate all claims for settlement, Aboitiz must be held liable for moral
damages which may be awarded in appropriate cases under the Chapter on human
relations of the Civil Code (Articles 19 to 36). 87

On account of Aboitiz' refusal to satisfy petitioners' claims in accordance with the


directive of the Court in Aboitiz Shipping Corporation v. General Accident Fire and Life
Assurance Corporation, Ltd., it acted in gross and evident bad faith. Accordingly,
pursuant to Article 2208 of the Civil Code, 88 petitioners should be granted attorney's
fees.

WHEREFORE, the petitions in G.R. Nos. 92735, 94867, and 95578 are DENIED. The
decisions of the Court of Appeals in CA-G.R. No. SP-17427 dated March 29, 1990, CA-G.R.
SP No. 20844 dated August 15, 1990, and CA-G.R. CV No. 15071 dated August 24, 1990
are AFFIRMED with the MODIFICATION that respondent Aboitiz Shipping Corporation is
ordered to pay each of the respective petitioners the amounts of P100,000.00 as moral
damages and P50,000.00 as attorney's fees, and treble the cost of suit.

Respondent Aboitiz Shipping Corporation is further directed to comply with the Order
promulgated by this Court on January 21, 1993 in Aboitiz Shipping Corporation v. General
Accident Fire and Life Assurance Corporation, Ltd., G.R. No. 100446, January 21, 1993, to
(a) institute the necessary limitation and distribution action before the proper Regional
Trial Court, acting as admiralty court, within fifteen (15) days from the finality of this
decision, and (b) thereafter to deposit with the said court the insurance proceeds from
the loss of the vessel, M/V P. Aboitiz, and the freightage earned in order to safeguard the
same pending final resolution of all incidents relative to the final pro-rating thereof and
to the settlement of all claims.1wphi1.nt

SO ORDERED.

G..R. No. 156978 May 2, 2006

ABOITIZ SHIPPING CORPORATION, Petitioner,


vs.
NEW INDIA ASSURANCE COMPANY, LTD., Respondent.

DECISION

QUISUMBING, J.:

For review on certiorari are the Decision1 dated August 29, 2002 of the Court of Appeals
in CA-G.R. CV No. 28770 and its Resolution2 dated January 23, 2003 denying
reconsideration. The Court of Appeals affirmed the Decision3 dated November 20, 1989
of the Regional Trial Court of Manila in Civil Case No. 82-1475, in favor of respondent New
India Assurance Company, Ltd.

This petition stemmed from the action for damages against petitioner, Aboitiz Shipping
Corporation, arising from the sinking of its vessel, M/V P. Aboitiz, on October 31, 1980.

The pertinent facts are as follows:

Societe Francaise Des Colloides loaded a cargo of textiles and auxiliary chemicals from
France on board a vessel owned by Franco-Belgian Services, Inc. The cargo was
consigned to General Textile, Inc., in Manila and insured by respondent New India
Assurance Company, Ltd. While in Hongkong, the cargo was transferred to M/V P.
Aboitiz for transshipment to Manila.4

Before departing, the vessel was advised by the Japanese Meteorological Center that it
was safe to travel to its destination.5 But while at sea, the vessel received a report of a
typhoon moving within its general path. To avoid the typhoon, the vessel changed its
course. However, it was still at the fringe of the typhoon when its hull leaked. On October
31, 1980, the vessel sank, but the captain and his crew were saved.

On November 3, 1980, the captain of M/V P. Aboitiz filed his "Marine Protest", stating that
the wind force was at 10 to 15 knots at the time the ship foundered and described the
weather as "moderate breeze, small waves, becoming longer, fairly frequent white
horses."6

Thereafter, petitioner notified7 the consignee, General Textile, of the total loss of the
vessel and all of its cargoes. General Textile, lodged a claim with respondent for the
amount of its loss. Respondent paid General Textile and was subrogated to the rights of
the latter.8

Respondent hired a surveyor, Perfect, Lambert and Company, to investigate the cause of
the sinking. In its report,9 the surveyor concluded that the cause was the flooding of the
holds brought about by the vessels questionable seaworthiness. Consequently,
respondent filed a complaint for damages against petitioner Aboitiz, Franco-Belgian
Services and the latters local agent, F.E. Zuellig, Inc. (Zuellig). Respondent alleged that
the proximate cause of the loss of the shipment was the fault or negligence of the
master and crew of the vessel, its unseaworthiness, and the failure of defendants therein
to exercise extraordinary diligence in the transport of the goods. Hence, respondent
added, defendants therein breached their contract of carriage.101avvphil.net

Franco-Belgian Services and Zuellig responded, claiming that they exercised


extraordinary diligence in handling the shipment while it was in their possession; its
vessel was seaworthy; and the proximate cause of the loss of cargo was a fortuitous
event. They also filed a cross-claim against petitioner alleging that the loss occurred
during the transshipment with petitioner and so liability should rest with petitioner.

For its part, petitioner also raised the same defense that the ship was seaworthy. It
alleged that the sinking of M/V P. Aboitiz was due to an unforeseen event and without
fault or negligence on its part. It also alleged that in accordance with the real and
hypothecary nature of maritime law, the sinking of M/V P. Aboitiz extinguished its liability
on the loss of the cargoes.11

Meanwhile, the Board of Marine Inquiry (BMI) conducted its own investigation to
determine whether the captain and crew were administratively liable. However,
petitioner neither informed respondent nor the trial court of the investigation. The BMI
exonerated the captain and crew of any administrative liability; and declared the vessel
seaworthy and concluded that the sinking was due to the vessels exposure to the
approaching typhoon.

On November 20, 1989, the trial court, citing the Court of Appeals decision in General
Accident Fire and Life Assurance Corporation v. Aboitiz Shipping Corporation 12 involving
the same incident, ruled in favor of respondent. It held petitioner liable for the total value
of the lost cargo plus legal interest, thus:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of New India


and against Aboitiz ordering the latter to pay unto the former the amount of
P142,401.60, plus legal interest thereon until the same is fully paid, attorneys fees
equivalent to fifteen [percent] (15%) of the total amount due and the costs of suit.

The complaint with respect to Franco and Zuellig is dismissed and their counterclaim
against New India is likewise dismissed

SO ORDERED.131avvphil.net
Petitioner elevated the case to the Court of Appeals and presented the findings of the
BMI. However, on August 29, 2002, the appellate court affirmed in toto the trial courts
decision. It held that the proceedings before the BMI was only for the administrative
liability of the captain and crew, and was unilateral in nature, hence not binding on the
courts. Petitioner moved for reconsideration but the same was denied on January 23,
2003.

Hence, this petition for review, alleging that the Court of Appeals gravely erred in:

I.

x x x DISREGARDING THE RULINGS OF THE HONORABLE SUPREME COURT ON THE


APPLICATION OF THE RULE ON LIMITED LIABILITY UNDER ARTICLE 587, 590 AND 837 OF
THE CODE OF COMMERCE TO CASES INVOLVING THE SINKING OF THE M/V "P. ABOITIZ;

A.

x x x NOT APPLYING THE RULINGS IN THE CASES OF MONARCH INSURANCE CO., INC. ET
AL. V. COURT OF APPEALS ET AL. AND ABOITIZ SHIPPING CORPORATION V. GENERAL
ACCIDENT FIRE AND LIFE ASSURANCE CORPORATION, LTD.;

B.

x x x RULING THAT THE ISSUE ON THE APPLICATION OF THE RULE ON LIMITED LIABILITY
UNDER ARTICLES 587, 590 AND 837 OF THE CODE OF COMMERCE HAD BEEN
CONSIDERED AND PASSED UPON IN ITS DECISION;

II.

x x x NOT LIMITING THE AWARD OF DAMAGES TO RESPONDENT TO ITS PRO-


RATA SHARES IN THE INSURANCE PROCEEDS FROM THE SINKING OF THE M/V "P.
ABOITIZ".14

Stated simply, we are asked to resolve whether the limited liability doctrine, which limits
respondents award of damages to its pro-rata share in the insurance proceeds, applies
in this case.

Petitioner, citing Monarch Insurance Co. Inc. v. Court of Appeals, 15 contends that
respondents claim for damages should only be against the insurance proceeds and
limited to its pro-rata share in view of the doctrine of limited liability.

Respondent counters that the doctrine of real and hypothecary nature of maritime law is
not applicable in the present case because petitioner was found to have been negligent.
Hence, according to respondent, petitioner should be held liable for the total value of the
lost cargo.

It bears stressing that this Court has variedly applied the doctrine of limited liability to
the same incident the sinking of M/V P. Aboitiz on October 31, 1980. Monarch, the latest
ruling, tried to settle the conflicting pronouncements of this Court relative to the sinking
of M/V P. Aboitiz. In Monarch, we said that the sinking of the vessel was not due to force
majeure, but to its unseaworthy condition.16 Therein, we found petitioner concurrently
negligent with the captain and crew.17 But the Court stressed that the circumstances
therein still made the doctrine of limited liability applicable.18

Our ruling in Monarch may appear inconsistent with the exception of the limited liability
doctrine, as explicitly stated in the earlier part of the Monarch decision. An exception to
the limited liability doctrine is when the damage is due to the fault of the shipowner or to
the concurrent negligence of the shipowner and the captain. In which case, the
shipowner shall be liable to the full-extent of the damage.19 We thus find it necessary to
clarify now the applicability here of the decision in Monarch.

From the nature of their business and for reasons of public policy, common carriers are
bound to observe extraordinary diligence over the goods they transport according to all
the circumstances of each case.20 In the event of loss, destruction or deterioration of the
insured goods, common carriers are responsible, unless they can prove that the loss,
destruction or deterioration was brought about by the causes specified in Article 1734 of
the Civil Code.21 In all other cases, common carriers are presumed to have been at fault
or to have acted negligently, unless they prove that they observed extraordinary
diligence.22 Moreover, where the vessel is found unseaworthy, the shipowner is also
presumed to be negligent since it is tasked with the maintenance of its vessel. Though
this duty can be delegated, still, the shipowner must exercise close supervision over its
men.23

In the present case, petitioner has the burden of showing that it exercised extraordinary
diligence in the transport of the goods it had on board in order to invoke the limited
liability doctrine. Differently put, to limit its liability to the amount of the insurance
proceeds, petitioner has the burden of proving that the unseaworthiness of its vessel was
not due to its fault or negligence. Considering the evidence presented and the
circumstances obtaining in this case, we find that petitioner failed to discharge this
burden. It initially attributed the sinking to the typhoon and relied on the BMI findings
that it was not at fault. However, both the trial and the appellate courts, in this case,
found that the sinking was not due to the typhoon but to its unseaworthiness. Evidence
on record showed that the weather was moderate when the vessel sank. These factual
findings of the Court of Appeals, affirming those of the trial court are not to be disturbed
on appeal, but must be accorded great weight. These findings are conclusive not only on
the parties but on this Court as well.24

In contrast, the findings of the BMI are not deemed always binding on the
courts.25 Besides, exoneration of the vessels officers and crew by the BMI merely
concerns their respective administrative liabilities.26 It does not in any way operate to
absolve the common carrier from its civil liabilities arising from its failure to exercise
extraordinary diligence, the determination of which properly belongs to the courts.27

Where the shipowner fails to overcome the presumption of negligence, the doctrine of
limited liability cannot be applied.28 Therefore, we agree with the appellate court in
sustaining the trial courts ruling that petitioner is liable for the total value of the lost
cargo.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated August 29,
2002 and Resolution dated January 23, 2003 of the Court of Appeals in CA-G.R. CV No.
28770 are AFFIRMED.

Costs against petitioner.

SO ORDERED.

G.R. No. L-23326 December 18, 1965

PHILIPPINE CONSTITUTION ASSOCIATION, INC., JOSE E. ROMERO, SALVADOR


ARANETA, GUILLERMO B. GUEVARA, PIO PEDROSA, CONRADO BENITEZ, JOSE M.
ARUEGO, SOTERO H. LAUREL, FELIXBERTO M. SERRANO, and ROMAN
OZAETA, petitioners,
vs.
PEDRO M. GIMENEZ, JOSE VELASCO, ELADIO SALITA and JOSE
AVILES, respondents.

Roman Ozaeta, Guillermo B. Guevara, Jose M. Aruego, Sotero H. Laurel and Felixberto M.
Serrano for themselves and for other petitioners.
Office of the Solicitor General for respondents.

REGALA, J.:

We are called upon in this case to decide the grave and fundamental problem of the
constitutionality of Republic Act No. 3836 "insofar as the same allows retirement gratuity
and commutation of vacation and sick leave to Senators and Representatives, and to the
elective officials of both houses (of Congress)." The suit was instituted by the Philippine
Constitution Association, Inc. (Philconsa, for short), a non-profit civic organization, duly
incorporated under Philippine laws, by way of a petition for prohibition with preliminary
injunction to restrain the Auditor General of the Philippines and the disbursing officers of
both Houses of Congress from "passing in audit the vouchers, and from countersigning
the checks or treasury warrants for the payment to any former Senator or former
Member of the House of Representatives of retirement and vacation gratuities pursuant
to Republic Act No. 3836; and likewise restraining the respondent disbursing officers of
the House and Senate, respectively, and their successors in office from paying the said
retirement and vacation gratuities."

It is argued that the above-numbered Republic Act, at least to the end that it provided for
the retirement of the members of Congress in the manner and terms that it did, is
unconstitutional and void. The challenge to the constitutionality of the law is centered on
the following propositions:
1. The provision for the retirement of the members and certain officers of Congress is not
expressed in the title of the bill, in violation of section 21 (1) of Article VI of the
Constitution.

2. The provision on retirement gratuity is an attempt to circumvent the Constitutional


ban on increase of salaries of the members of Congress during their term of office,
contrary to the provisions of Article VI, Section 14 of the Constitution.

3. The same provision constitutes "selfish class legislation" because it allows members
and officers of Congress to retire after twelve (12) years of service and gives them a
gratuity equivalent to one year salary for every four years of service, which is not
refundable in case of reinstatement or re-election of the retiree, while all other officers
and employees of the government can retire only after at least twenty (20) years of
service and are given a gratuity which is only equivalent to one month salary for every
year of service, which, in any case, cannot exceed 24 months.

4. The provision on vacation and sick leave, commutable at the highest rate received,
insofar as members of Congress are concerned, is another attempt of the legislators to
further increase their compensation in violation of the Constitution.

The text of Republic Act No. 3836

The text of Republic Act No. 3836 reads:

AN ACT AMENDING SUBSECTION (c), SECTION TWELVE OF COMMONWEALTH ACT


NUMBERED ONE HUNDRED EIGHTY-SIX, AS AMENDED BY REPUBLIC ACT NUMBERED
THIRTY HUNDRED NINETY-SIX:

Be it enacted by the Senate and House of Representatives of the Philippines in Congress


assembled:

SECTION 1. Subsection (c), Section twelve of Commonwealth Act Numbered One


Hundred eighty-six, as amended by Republic Act Numbered Thirty hundred ninety-six, is
further amended to read as follows:

"(c) Retirement is likewise allowed to a member, regardless of age, who has rendered at
least twenty years of service. The benefit shall, in addition to the return of his personal
contributions plus interest and the payment of the corresponding employer's premiums
described in subsection (a) of Section five hereof, without interest, be only a gratuity
equivalent to one month's salary for every year of service, based on the highest rate
received, but not to exceed twenty-four months: Provided, That the retiring officer or
employee has been in the service of the said employer or office for at least four years
immediately preceding his retirement.

"Retirement is also allowed to a senator or a member of the House of Representatives


and to an elective officer of either House of the Congress, regardless of age, provided
that in the case of a Senator or Member, he must have served at least twelve years as a
Senator and/or as a member of the House of Representatives, and, in the case of an
elective officer of either House, he must have served the government for at least twelve
years, not less than four years of which must have been rendered as such elective
officer: Provided, That the gratuity payable to a retiring senator, member of the House of
Representatives, or elective officer, of either House, shall be equivalent to one year's
salary for every four years of service in the government and the same shall be exempt
from any tax whatsoever and shall be neither liable to attachment or execution nor
refundable in case of reinstatement or re-election of the retiree.

"This gratuity is payable by the employer or office concerned which is hereby authorized
to provide the necessary appropriation or pay the same from any unexpended items of
appropriations or savings in its appropriations or saving in its appropriations.

"Elective or appointive officials and employees paid gratuity under this subsection shall
be entitled to the commutation of the unused vacation and sick leave, based on the
highest rate received, which they may have to their credit at the time of retirement."

SECTION 2. This Act shall take effect upon its approval.

Approved, June 22, 1963.

The Solicitor General's Office, in representation of the respondent, filed its answer on
September 8, 1964, and contends, by way of special and affirmative defenses that:

1. The grant of retirement or pension benefits under Republic Act No. 3836 to the officers
objected to by the petitioner does not constitute "forbidden compensation" within the
meaning of Section 14 of Article VI of the Philippine Constitution.

2. The title of the law in question sufficiently complies with the provisions of Section 21,
Article VI, of the Constitution that "no bill which may be enacted into law shall embrace
more than one subject which shall be expressed in the title of the bill.

3. The law in question does not constitute legislation.

4. Certain indispensable parties, specifically the elected officers of Congress who are
authorized to approve vouchers for payments for funds under the law in question, and
the claimants to the vouchers to be presented for payment under said items, were not
included in the petition.

5. The petitioner has no standing to institute this suit.

6. The payment of commutable vacation and sick leave benefits under the said Act is
merely "in the nature of a basis for computing the gratuity due each retiring member"
and, therefore, is not an indirect scheme to increase their salary.

A brief historical background of Republic Act No. 3836

Republic Act No. 3836 was originally House Bill No. 6051, which was introduced by
Congressmen Marcial R. Pimentel of Camarines Norte and Marcelino R. Veloso of the
Third District of Leyte, on May 6, 1963. On the same date, it was referred to the
Committee on Civil Service. which on the following May 8, submitted its REPORT No.
3129, recommending approval of the bill with amendments, among others, that the word
"TWENTY" in the bill as filed representing the number of years that a senator or
member must serve in Congress to entitle him to retirement under the bill must be
reduced to "TWELVE" years, and that the following words were inserted, namely, "AND
THE SAME (referring to gratuity) SHALL BE EXEMPT FROM ANY TAX WHATSOEVER AND
SHALL NOT BE LIABLE FROM ATTACHMENT OR EXECUTION NOR REFUNDABLE IN CASE OF
REINSTATEMENT OR REELECTION OF THE RETIREE." On May 8, 1963, the bill with the
proposed amendments was approved on second reading. It was passed on third reading
on May 13, 1963, and on the same day was sent to the Senate, which, in turn, on May
23, 1963, passed it without amendment. The bill was finally approved on June 22, 1963.
As explained in the EXPLANATORY NOTE attached to the bill, among others

The inclusion of members of Congress in subsection (c), Section 12 of C.A. 186, as


amended, will enable them to retire voluntarily, regardless of age, after serving a
minimum of twenty years as a Member of Congress. This gratuity will insure the security
of the family of the retiring member of Congress with the latter engaging in other
activities which may detract from his exalted position and usefulness as lawmaker. It is
expected that with this assurance of security for his loved ones, deserving and well-
intentioned but poor men will be attracted to serve their people in Congress.

As finally approved, the law (Subsection [c], paragraph 2, Section 1, R.A. 3836) allows a
Senator or a Member of the House of Representatives and an elective officer of either
House of Congress to retire regardless of age. To be eligible for retirement, he must have
served for at least twelve years as such Senator and/or as member of the House of
Representatives. For an elective officer of either House, he must have served the
government for at least twelve years, of which not less than four years must have been
rendered as such elective officer. The gratuity payable by the employer or office
concerned is equivalent to one year's salary for every four years of service in the
government. Said gratuity is exempt from taxation, not liable to attachment or
execution, and not refundable in case of reinstatement or re-election of the retiree.

First legal point personality of the Petitioner to bring suit.

The first point to be considered is whether petitioner Philconsa has a standing to institute
this action. This Court has not hesitated to examine past decisions involving this matter.
This Court has repeatedly held that when the petitioner, like in this case, is composed of
substantial taxpayers, and the outcome will affect their vital interests, they are allowed
to bring this suit. (Pascual v. Secretary, G.R. No. L-10405, December 29, 1960; and
Gonzales v. Hechanova, 60 Off. Gaz. 802 [1963]).

The petitioner, Philconsa, is precisely a non-profit, civic organization composed of several


leaders from all walks of life whose main objective is to uphold the principles of the
Constitution.

In rejecting the motion to dismiss in the case of Pascual v. Secretary, supra, this Court
stated, among other things, that "there are many decisions nullifying, at the instance of
the taxpayers, laws providing the disbursement of public funds, upon the theory that the
expenditure of public funds by an officer of the State for the purpose of administering an
unconstitutional act constitutes a misappropriation of such funds, which may be enjoined
at the request of the taxpayers."1 This legislation (Republic Act 3836) involves the
disbursement of public funds.

We are not, however, unmindful of the ruling laid down by the Supreme Court of the
United States in the case of Massachusetts v. Mellon, 262 U.S. 447, holding that:

... the relation of a taxpayer of the United States to the Federal Government is very
different. His interest in the moneys of the Treasury partly realized from taxation and
partly from other sources is shared with millions of others; is comparatively minute
and indeterminable; and the effect upon future taxation of any payment out of the funds,
so remote, fluctuating and uncertain, that no basis is afforded for an appeal to the
preventive powers of equity.

The general view in the United States, which is followed here, is stated in the American
Jurisprudence, thus

In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute the general rule is that not only persons
individually affected, but also taxpayers have sufficient interest in preventing the illegal
expenditure of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public moneys. (11 Am. Jur. 761;
emphasis supplied.)

As far as the first point is concerned, We hold, therefore, that the contention of the
Solicitor General is untenable.

Second legal point Whether or not Republic Act No. 3836 falls within the prohibition
embodied in Art. VI, section 14 of the Constitution.

The first constitutional question is whether Republic Act 3836 violates Section 14, Article
VI, of the Constitution, which reads as follows:

The senators and the Members of the House of Representatives shall, unless otherwise
provided by law, receive an annual compensation of seven thousand two hundred pesos
each, including per diems and other emoluments or allowances, and exclusive only of
travelling expenses to and from their respective districts in the case of Members of the
House of Representative and to and from their places of residence in the case of
Senators, when attending sessions of the Congress. No increase in said compensation
shall take effect until after the expiration of the full term of all the Members of the
Senate and of the House of Representatives approving such increase. Until otherwise
provided by law, the President of the Senate and the Speaker of the House of
Representatives shall each receive an annual compensation of sixteen thousand pesos
(emphasis supplied)
Before discussing this point, it is worthy to note that the Constitution embodies some
limitations and prohibitions upon the members of Congress, to wit:

1. They may not hold any other office or employment in the Government without
forfeiting their respective seats;

2. They shall not be appointed, during the time for which they are elected, to any civil
office which may have been created or the emoluments whereof shall have been
increased while they were members of Congress; (Section 16, Article VI, Constitution)

3. They cannot be financially interested in any franchise;

4. They cannot appear in any civil case wherein the Government is an adverse party;

5. They cannot appear as counsel before any Electoral Tribunal; and

6. They cannot appear as counsel in any criminal case where an officer or employee of
the Government is accused. (Section 17, Article VI, Constitution)

In addition to the above prohibitions, the Anti-Graft Law (Republic Act 3019) also
prohibits members of Congress to have any special interest in any specific business
which will directly or indirectly be favored by any law or resolution authored by them
during their term of office.

It is thus clear that the Constitutional Convention wisely surrounded the Constitution with
these limitations and prohibitions upon Members of Congress. This is a practical
demonstration or application of the principle of the and balances which is one of the
peculiar characteristics of our Constitution. In the light of this background, can We
conclude that Congress can validly enact Republic Act 3836, providing retirement
benefits to its members, without violating the provisions in the aforementioned Article VI,
Section 14, of the Constitution, regarding increase of the compensation act
including other emoluments?

It is worthy to note that the original salary for the members of the National Assembly
(unicameral body) was fixed at P5,000.00 per annum each. This was raised to P7,200 per
annum by the enactment of the 1940 Constitutional amendment, when the unicameral
body, the National Assembly, was changed to Congress, composed of two bodies, the
Senate and the House of Representatives. Again, in 1964, by the enactment of Republic
Act 4143, the salary for the Members of Congress was raised to P32,000.00 per annum
for each of them; and for the President of the Senate and the Speaker of the House of
Representatives, to P40,000.00 per annum each.

Likewise, it is significant that, as stated above, when the Constitutional Convention first
determined the compensation for the Members of Congress, the amount fixed by it was
only P5,000.00 per annum, but it embodies a special proviso which reads as follows: "No
increase in said compensation shall take effect until after the expiration of the full term
of all the members of the National Assembly elected subsequent to approval of such
increase." In other words, under the original constitutional provision regarding the power
of the National Assembly to increase the salaries of its members, no increase would take
effect until after the expiration of the full term of the members of the Assembly elected
subsequent to the approval of such increase. (See Aruego, The Framing of the
Constitution, Vol. 1, pp. 296-300; Sinco, Philippine Government and Political Law, 4th ed.,
p. 187)

This goes to show how zealous were the members of the Constitutional Convention in
guarding against the temptation for members of Congress to increase their salaries.
However, the original strict prohibition was modified by the subsequent provision when
the Constitutional amendments were approved in 19402

The Constitutional provision in the aforementioned Section 14, Article VI, includes in the
term compensation "other emoluments." This is the pivotal point on this fundamental
question as to whether the retirement benefits as provided for in Republic Act 3836 fall
within the purview of the term "other emoluments."

Most of the authorities and decided cases have regarded "emolument" as "the profit
arising from office or employment; that which is received as compensation for services or
which is annexed to the possession of an office, as salary, fees and perquisites. 3

In another set of cases, "emolument" has been defined as "the profit arising from office
or employment; that which is received as compensation for services, or which is annexed
to the possession of office, as salary, fees and perquisites; advantage, gain, public or
private." The gain, profit or advantage which is contemplated in the definition or
significance of the word "emolument" as applied to public officers, clearly comprehends,
We think, a gain, profit, or advantage which is pecuniary in character. (citing Taxpayers'
League of Cargon County v. McPherson, 54 P. 2d. 897, 90l.: 49 Wy. 26; 106 A.L.R. 767)

In Schieffelin v. Berry, 216 N.Y.S. (citing Wright v. Craig, 202 App. Div. 684, 195 N.Y.S.
391, affirmed 234 N.Y. 548, 138 N.E. 441), it has been established that pensions and
retirement allowances are part of compensation of public officials; otherwise their
payment would be unconstitutional.

In another case, State v. Schmahl, 145 N.W. 795, 125 Minn. 104, it is stated that "as used
in Article 4, section 9, of the Constitution of Minnesota, providing that no Senator or
Representative shall hold any office, the emoluments of which have been increased
during the session of the Legislature of which he was a member, until after the expiration
of his term of office in the Legislature, the word "emoluments" does not refer to the fixed
salary alone, but includes fees and compensation as the incumbent of the office is by law
entitled to receive because he holds such office and performed some service required of
the occupant thereof."

From the decisions of these cases, it is evident that retirement benefit is a form or
another species of emolument, because it is a part of compensation for services of one
possessing any office.
Republic Act No. 3836 provides for an increase in the emoluments of Senators and
Members of the House of Representatives, to take effect upon the approval of said Act,
which was on June 22, 1963. Retirement benefits were immediately available thereunder,
without awaiting the expiration of the full term of all the Members of the Senate and the
House of Representatives approving such increase. Such provision clearly runs counter to
the prohibition in Article VI, Section 14 of the Constitution.

Third Legal Point Whether or not the law in question violates the equal protection
clause of the Constitution.

Another reason in support of the conclusion reached herein is that the features of said
Republic Act 3836 are patently discriminatory, and therefore violate the equal protection
clause of the Constitution. (Art. III, Sec. 1, part. 1.)

In the first place, while the said law grants retirement benefits to Senators and Members
of the House of Representatives who are elective officials, it does not include other
elective officials such as the governors of provinces and the members of the provincial
boards, and the elective officials of the municipalities and chartered cities.

The principle of equal protection of law embodied in our Constitution has been fully
explained by Us in the case of People v. Vera, 65 Phil. 56, 126, where We stated that the
classification to be reasonable must be based upon substantial distinctions which make
real differences and must be germane to the purposes of the law.

As well stated by Willoughby on the Constitution of the United States (second edition), p.
1937, the principle of the requirement of equal protection of law applies to all persons
similarly situated. Why limit the application of the benefits of Republic Act 3836 to the
elected members of Congress? We feel that the classification here is not reasonable.
(See also Sinco, Philippine Political Law, 11th ed. [1962]; Selected Essays on
Constitutional Law [1938-62], p. 789; The Equal Protection of the Laws, 37 Cal. Law Rev.
341.)

Secondly, all members of Congress under Republic Act 3836 are given retirement
benefits after serving twelve years, not necessarily continuous, whereas, most
government officers and employees are given retirement benefits after serving for at
least twenty years. In fact, the original bill of Act 3836 provided for twenty years of
service.

In the third place, all government officers and employees are given only one retirement
benefit irrespective of their length of service in the government, whereas, under Republic
Act 3836, because of no age limitation, a Senator or Member of the House of
Representatives upon being elected for 24 years will be entitled to two retirement
benefits or equivalent to six years' salary.

Also, while the payment of retirement benefits (annuity) to an employee who had been
retired and reappointed is suspended during his new employment (under Commonwealth
Act 186, as amended), this is not so under Republic Act 3836.
Lastly, it is peculiar that Republic Act 3836 grants retirement benefits to officials who are
not members of the Government Service Insurance System. Most grantees of retirement
benefits under the various retirement laws have to be members or must at least
contribute a portion of their monthly salaries to the System.4

The arguments advanced against the discriminatory features of Republic Act 3836, as far
as Members of Congress are concerned, apply with equal force to the elected officers of
each House, such as the Secretaries and the Sergeants-at-arms. Under Republic Act
3836, the Secretaries and Sergeants-at-arms of each House are given the benefits of
retirement without having served for twenty years as required with other officers and
employees of the Government.

Fourth Legal Point Whether or not the title of Republic Act No. 3836 is germane to the
subject matter expressed in the act.

Another Constitutional point to determine is whether the title of Republic Act 3836
complies with the requirement of paragraph 1, section 21, Article VI of the Constitution,
which reads as follows:

No bill which may be enacted into law shall embrace more than one subject which shall
be expressed in the title of the bill.

We are not unmindful of the fact that there has been a general disposition in all courts to
construe the constitutional provision with reference to the subject and title of the Act,
liberally.

It is the contention of petitioner that the said title of Republic Act 3836 gives no inkling
or notice whatsoever to the public regarding the retirement gratuities and commutable
vacation and sick leave privileges to members of Congress. It is claimed that petitioner
learned of this law for the first time only when Jose Velasco, disbursing officer of the
House, testified on January 30, 1964, before Justice Labrador, in connection with the
hearing of the case, and he revealed that in 1963, Congress enacted the retirement law
for its members. In fact the Appropriation Act for the fiscal year 1964-65, Republic Act
No. 4164, provides:

13. For payment of retirement gratuities of members of the Senate pursuant to the
provisions of Republic Act No. 3836: PROVIDED, That no portion of this Appropriation
shall be transferred to any other item until all approved claims shall have been paid
P210,000.00.

In the appropriations for the House of Representatives the following items appear:

7. For government share of premiums on life insurance and retirement of Members and
employees of the House of Representatives, as provided for under Republic Act No. 1616
P300,000.00

8. For payment of the cash commutation of the accumulated vacation and sick leaves as
provided for under Republic Act No. 611, and retirement gratuities of Members and
employees of the House of Representatives under Republic Act No. 1616
P1,300,000.00.

In the Appropriations Act of 1965-1966 (Republic Act No. 4642), the following item
appears in the appropriations for the Senate:

13. For payment of retirement gratuities of Senate personnel pursuant to the provisions
of Republic Act No. 1616: PROVIDED, That no portion of this appropriation shall be
transferred to any other item until all approved claims shall have been paid
P100,000.00.

It is thus clear that in the Appropriations Act for 1965-1966, the item in the Senate for
P210,000.00 to implement Republic Act 3836 was eliminated.

In the appropriations for the House (1965-1966), the following items appear:

7. For government share of premiums on life insurance and retirement of Members and
employees of the House Of Representatives as provided for under Republic Act No. 1616
P1,200,000.00.

8. For payment of the cash commutation of the accumulated vacation and sick leaves as
provided for under Republic Act No. 611, and retirement gratuities of Members and
employees of the House of Representatives under Republic Act No. 1616
P1,700,000.00.

It is to be observed that under Republic Act 3836, amending the first paragraph of
section 12, subsection (c) of Commonwealth Act 186, as amended by Republic Acts Nos.
660 and. 3096, the retirement benefits are granted to members of the Government
Service Insurance System, who have rendered at least twenty years of service regardless
of age. This paragraph is related and germane to the subject of Commonwealth Act No.
186.

On the other hand, the succeeding paragraph of Republic Act 3836 refers to members of
Congress and to elective officers thereof who are not members of the Government
Service Insurance System. To provide retirement benefits, therefore, for these officials,
would relate to subject matter which is not germane to Commonwealth Act No. 186. In
other words, this portion of the amendment (re retirement benefits for Members of
Congress and elected officers, such as the Secretary and Sergeants-at-arms for each
House) is not related in any manner to the subject of Commonwealth Act 186
establishing the Government Service Insurance System and which provides for both
retirement and insurance benefits to its members.

Parenthetically, it may be added that the purpose of the requirement that the subject of
an Act should be expressed in its title is fully explained by Cooley, thus: (1) to prevent
surprise or fraud upon the Legislature; and (2) to fairly apprise the people, through such
publication of legislation that are being considered, in order that they may have the
opportunity of being heard thereon by petition or otherwise, if they shall so desire
(Cooley, Constitutional Limitations, 8th ed., Vol. 1, p. 162; See also Martin, Political Law
Reviewer, Book One [1965], p. 119)

With respect to sufficiency of title this Court has ruled in two cases:

The Constitutional requirement with respect to titles of statutes as sufficient to reflect


their contents is satisfied if all parts of a law relate to the subject expressed in its title,
and it is not necessary that the title be a complete index of the content. (People v.
Carlos, 78 Phil. 535)

The Constitutional requirement that the subject of an act shall be expressed in its title
should be reasonably construed so as not to interfere unduly with the enactment of
necessary legislation. It should be given a practical, rather than technical, construction.
It should be a sufficient compliance with such requirement if the title expresses the
general subject and all the provisions of the statute are germane to that general subject.
(Sumulong v. The Commission on Elections, 73 Phil. 288, 291)

The requirement that the subject of an act shall be expressed in its title is wholly
illustrated and explained in Central Capiz v. Ramirez, 40 Phil. 883. In this case, the
question raised was whether Commonwealth Act 2784, known as the Public Land Act,
was limited in its application to lands of the public domain or whether its provisions also
extended to agricultural lands held in private ownership. The Court held that the act was
limited to lands of the public domain as indicated in its title, and did not include private
agricultural lands. The Court further stated that this provision of the Constitution
expressing the subject matter of an Act in its title is not a mere rule of legislative
procedure, directory to Congress, but it is mandatory. It is the duty of the Court to
declare void any statute not conforming to this constitutional provision. (See Walker v.
State, 49 Alabama 329; Cooley, Constitutional Limitations, pp. 162-164;5 See also
Agcaoili v. Suguitan, 48 Phil. 676; Sutherland on Statutory Construction, Sec. 111.)

In the light of the history and analysis of Republic Act 3836, We conclude that the title of
said Republic Act 3836 is void as it is not germane to the subject matter and is a
violation of the aforementioned paragraph 1, section 21, Article VI of the Constitution.

In short, Republic Act 3836 violates three constitutional provisions, namely: first, the
prohibition regarding increase in the salaries of Members of Congress; second, the equal
protection clause; and third, the prohibition that the title of a bill shall not embrace more
than one subject.

IN VIEW OF THE FOREGOING CONSIDERATIONS, Republic Act No. 3836 is hereby declared
null and void, in so far as it refers to the retirement of Members of Congress and the
elected officials thereof, as being unconstitutional. The restraining order issued in our
resolution on December 6, 1965 is hereby made permanent. No costs.

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