G.R. Nos.
90306-07 July 30, 1990 Atlantic and the MV Estella moved to dismiss the complaints-in-
K.K. SHELL SEKIYU OSAKA HATSUBAISHO and FU HING OIL
CO., LTD., petitioners,
vs.
THE HONORABLE COURT OF APPEALS, ATLANTIC VENUS
CO., S.A., and THE VESSEL M/V "ESTELLA", respondents.
Ordinarily, the Court will not disturb the factual findings of the
Court of Appeals, these being considered final and conclusive.
However, when its factual conclusions are manifestly mistaken, the
Court will step in to correct the misapprehension [De la Cruz v.
Sosing, 94 Phil. 26 (1953); Castillo v. Court of Appeals, G.R. No.
L-48290, September 29, 1983, 124 SCRA 808.] This case is one
such instance calling for the Court's review of the facts.
On January 7,1987, Kumagai Kaiun Kaisha, Ltd. (hereinafter
referred to as Kumagai), a corporation formed and existing under
the laws of Japan, filed a complaint for the collection of a sum of
money with preliminary attachment against Atlantic Venus Co.,
S.A. (hereinafter referred to as "Atlantic"), a corporation registered
in Panama, the vessel MV Estella and Crestamonte Shipping
Corporation (hereinafter referred to as "Crestamonte"), a Philippine
corporation. Atlantic is the owner of the MV Estella. The complaint,
docketed as Civil Case No. 8738930 of the Regional Trial Court,
Branch XIV, Manila alleged that Crestamonte, as bareboat
charterer and operator of the MV Estella, appointed N.S. Shipping
Corporation (hereinafter referred to as "NSS"), a Japanese
corporation, as its general agent in Japan. The appointment was
formalized in an Agency Agreement. NSS in turn appointed
Kumagai as its local agent in Osaka, Japan. Kumagai supplied the
MV Estella with supplies and services but despite repeated
demands Crestamonte failed to pay the amounts due.
NSS and Keihin Narasaki Corporation (hereinafter referred to a
Keihin filed complaints-in-intervention.
On May 19,1987, petitioner Fu Hing Oil Co., Ltd. (hereinafter
referred to as Fu Hing"), a corporation organized in Hong Kong
and not doing business in the Philippines, filed a motion for leave
to intervene with an attached complaint-in-intervention, alleging
that Fu Hing supplied marine diesel oil/fuel to the MV Estella and
incurred barge expenses for the total sum of One Hundred Fifty-
two Thousand Four Hundred Twelve Dollars and Fifty-Six Cents
(US$152,412.56) but such has remained unpaid despite demand
and that the claim constitutes a maritime lien. The issuance of a
writ of attachment was also prayed for.
On July 16, 1987, petitioner K.K. Shell Sekiyu Osaka Hatsubaisho
(hereinafter referred to as K.K. Shell"), a corporation organized in
Japan and not doing business in the Philippines, likewise filed a
motion to intervene with an attached complaint-in-intervention,
alleging that upon request of NSS, Crestamonte's general agent in
Japan, K.K. Shell provided and supplied marine diesel oil/fuel to
the W Estella at the ports of Tokyo and Mutsure in Japan and that
despite previous demands Crestamonte has failed to pay the
amounts of Sixteen Thousand Nine Hundred Ninety-Six Dollars
and Ninety- Six Cents (US$16,996.96) and One Million Yen
(Y1,000,000.00) and that K.K. Shell's claim constitutes a maritime
lien on the MV Estella. The complaint-in-intervention sought the
issuance of a writ of preliminary attachment.
The trial court allowed the intervention of Fu Hing and K.K. Shell
on June 19,1987 and August 11, 1987, respectively. Writs of
preliminary attachment were issued on August 25, 1987 upon
posting of the appropriate bonds. Upon the posting of
counterbonds, the writs of attachment were discharged on
September 3, 1987.
intervention filed by Fu Hing and K.K. Shell.
In the meantime, Atlantic and the AWU Estella filed a petition in
the Court of Appeals against the trial court judge, Kumagai, NSS
and Keihin, docketed as CA-G.R. SP No. 12999, which sought the
annulment of the orders of the trial court dated April 30, 1987 and
August 11, 1987. Among others, the omnibus order dated August
11, 1987 denied the motion to reconsider the order allowing Fu
Hing's intervention and granted K.K. Shell's motion to intervene.
Again Fu Hing and K.K. Shell intervened, CA-G.R. SP No. 12999
was consolidated with another case (CA-G.R. SP No. 12341). Fu
Hing and K.K. Shell intervened in CA-G.R. SP No. 12999.
In a decision dated June 14, 1989, the Court of Appeals annulled
the orders of the trial court and directed it to cease and desist from
proceeding with the case.
According to the Court of Appeals, Fu Hing and K.K. Shell were
not suppliers but sub-agents of NSS, hence they were bound by
the Agency Agreement between Crestamonte and NSS,
particularly, the choice of forum clause, which provides:
12.0-That this Agreement shall be governed by
the Laws of Japan. Any matters, disputes,
and/or differences arising between the parties
hereto concerned regarding this Agreement
shall be subject exclusively to the jurisdiction of
the District Courts of Japan.
Thus, concluded the Court of Appeals, the trial court should have
disallowed their motions to intervene.
A motion for reconsideration was filed by Fu Hing and K.K. Shell
but this was denied by the Court of Appeals. Hence this petition;
In this case, we shall review the decision of the Court of Appeals
only insofar as it relate to the intervention of K.K. Shell. Fu Hing Oil
Co., Ltd. filed a motion to withdraw as co-petitioner on March 7,
1990, alleging that an amicable settlement had been reached with
private respondents. The Court granted the motion on March 19,
1990.
After considering the pleadings filed by the parties and the
arguments raised therein, the Court finds reversible error on the
part of the Court of Appeals in so far; as it disallowed petitioners'
intervention in the case before the trial court and ordered the latter
to cease and desist from proceeding with the case.
1. A reading of the Agency Agreement fails to support the
conclusion that K.K. Shell is a sub-agent of NSS and is, therefore,
bound by the agreement.
The body of the Agency Agreement entered into by and between
Crestamonte (referred to in the agreement as "Owner") and NSS
("Agent") provides:
WITNESSETH
That the OWNER has appointed and by these presents hereby
appoints the AGENT as its General Agents for all Japan in
connection with the Owner's vessels and/or providing suitable
vessels for Japan Ports under the following terms and conditions:
1.0 - In general, the Agent will abide by the Owner's
decisions regarding the mode of operations of the
vessels in Japan and that all cargo bookings, vessel's
fixtures/charters, etc. by the Agent, shall always be
subject to the prior approval and consent of the Owners.
2.0 - That the Agent shall provide for the necessary
services required for the husbanding of the Owner's
vessels in all Japan Ports and issue Bill(s) of Lading to
Shippers in the form prescribed by the Owners.
3.0 - That the Agent shall be responsible for fixing south-
bound cargoes with revenues sufficient to cover ordinary
liner operation expenses such as bunkers, additives,
lubricating oil, water, running repairs, drydocking
expenses, usual port disbursement accounts, cargo
handling charges including stevedorage, provisions and
ship's stores and cash advance to crew (excluding crew
provisions).
The Agent expressly agrees that the Owner's cash flow
in Japan shall be essentially the Agent's responsibility,
and should the revenue for south-bound cargoes as
above-mentioned be insufficient to cover the aforesaid
expenses, the Agent shall provide credit to the extent of
the vessels' requirements, provided however that said
obligation shall be secured by the Owner committing at
least forty-eight (48) mailings of Japan/Philippines liner
service per year.
The Agent shall settle, in behalf of the Owner, all
outstanding payments for the operation costs on Owner's
liner service carried forward from the present Owner's
agent, subject to approval of Owner's Representative in
Japan in regard to amount and nature thereof.
4.0- That the agent shall furnish office space of
approximately thirty (30) square meters for the exclusive
use of the Owner and its representatives, within the
premises of the Agent's office, free of charge.
5.0 — That the responsibilities of the Agent in regard to
the cargo shall begin, in the case of imports into the
territory of Japan, from the time such cargo has left the
ship's tackles, and shall cease, in case of export, upon
completion of loading.
6.0 — That the remuneration of the Agent from the
Owner shall be as follows:
xxx xxx xxx
7.0 — That the Agent shall exert best efforts to
recommend to Owners stevedoring and other expenses
incurred in connection with work on board the Owner's
vessels, as well as customs house charges, pilotage,
harbour dues, cables, etc. which are for Owner's
account, on the cheapest possible terms. Owners shall
decide and may appoint through the Agent the services
described herein.
8.0 — That the Agent shall be responsible for the due
collection of and due payment to the Owner of all
outward freight prepaid for cargo without delay upon the
sailing of each vessel from the port. The Agent shall be
also responsible for the due collection of all inward freight
payable at the port against delivery unless otherwise
instructed by the Owner to the contrary.
9.0 — The account statements supported by vouchers in
two copies itemized for each service and/or supply for
each vessel, shall be forwarded by the Agent to the
Owner promptly after the departure of each vessel but in
no case later than 60 days thereafter.
10.0 — That the freightage to be collected by the Agent
in Japan shall be paid to the Owner after deducting the
total amount of disbursements incurred in Japan.
11.0 — That this Agreement takes effect as of April 15,
1983 and shall remain in force unless terminated by
either party upon 60 days notice.
12.0 — That this Agreement shall be governed by the
Laws of Japan. Any matters, disputes, and/or differences
arising between the parties hereto concerned regarding
this reement shall be subject exclusively to the
jurisdiction of the District Courts of Japan. [Annex "G" of
the Petition, Rollo, pp. 100-104.]
No express reference to the contracting of sub-agents or the
applicability of the terms of the agreement, particularly the choice-
of-forum clause, to sub-agents is made in the text of the
agreement. What the contract clearly states are NSS' principal
duties, i.e., that it shall provide for the necessary services required
for the husbanding of Crestamonte's vessels in Japanese ports
(section 2.0) and shall be responsible for fixing southbound
cargoes with revenues sufficient to cover ordinary expenses
(section 3.0).i•t•c-aüsl
Moreover, the complaint-in-intervention filed by K.K. Shell merely
alleges that it provided and supplied the MV Estella with marine
diesel oil/fuel, upon request of NSS who was acting for and as duly
appointed agent of Crestamonte [Rollo, pp. 116117.] There is thus
no basis for the Court of Appeal's finding, as regards K.K Shell in
relation to its intervention in Civil Case No. 87-38930, that "the
sub-agents admitted in their pleadings that they were appointed as
local agent/sub-agent or representatives by NSS by virtue of said
Agency Agreement" [Decision, p. 7; Rollo, p. 33.] What the Court
of Appeals could have been referring to was K.K. Shell's Urgent
Motion for Leave to Intervene dated February 24, 1987 in another
case (Civil Case No. 86-38704) in another court and involving
other vessels (NW Ofelia and MV Christina C), where it was
alleged that K.K. Shell is "one of the representatives of NS
Shipping Corporation for the supply of bunker oil, fuel oil,
provisions and other necessaries to vessels of which NS Shipping
Corporation was the general agent." [Comment, p. 17; Rollo, p.
274.] However, this allegation does not conclusively establish a
sub-agency between NSS and K.K. Shell. It is therefore surprising
how the Court of Appeals could have come to the conclusion, just
on the basis of the Agency Agreement and the pleadings filed in
the trial court, that "Crestamonte is the principal, NSS is the agent
and ... Fu Hing and K.K Shell are the sub-agents." [Decision, p. 6;
Rollo, p. 32.]
In view of the inconclusiveness of the Agency Agreement and the
pleadings filed in the trial court, additional evidence, if there be
any, would still have to be presented to establish the allegation
that K.K. Shell is a sub-agent of NSS.
In the same vein, as the choice-of-forum clause in the agreement
(paragraph 12.0) has not been conclusively shown to be binding
upon K.K. Shell, additional evidence would also still have to be
presented to establish this defense, K.K. Shell cannot therefore, as
of yet, be barred from instituting an action in the Philippines.
2. Private respondents have anticipated the possibility that the
courts will not find that K.K. Shell is expressly bound by the
Agency Agreement, and thus they fall back on the argument that
even if this were so, the doctrine of forum non conveniens would
be a valid ground to cause the dismissal of K.K. Shell's complaint-
in-intervention.
K.K. Shell counters this argument by invoking its right as maritime
lienholder. It cites Presidential Decree No. 1521, the Ship
Mortgage Decree of 1978, which provides:
SEC. 21. Maritime Lien for Necessaries; person
entitled to such lien-Any person furnishing
repairs, supplies, to wage, 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.
Private respondents on the other hand argue that even if P.D. No.
1521 is applicable, K.K. Shell cannot rely on the maritime lien
because the fuel was provided not exclusively for the benefit of the
MV Estella, but for the benefit of Crestamonte in general. Under
the law it must be established that the credit was extended to the
vessel itself. Now, this is a defense that calls precisely for a factual
determination by the trial court of who benefitted from the delivery
of the fuel. Hence, again, the necessity for the reception of
evidence before the trial court.
In other words, considering the dearth of evidence due to the fact
that the private respondents have yet to file their answer in the
proceedings below and trial on the merits is still to be conducted,
whether or not petitioners are indeed maritime lienholders and as
such may enforce the lien against the MV Estella are matters that
still have to be established.
Neither are we ready to rule on the private respondents' invocation
of the doctrine of forum non conveniens, as the exact nature of the
relationship of the parties is still to be established. We leave this
matter to the sound discretion of the trial court judge who is in the
best position, after some vital facts are established, to determine
whether special circumstances require that his court desist from
assuming jurisdiction over the suit.
It was clearly reversible error on the. part of the Court of Appeals
to annul the trial court's orders, insofar as K.K. Shell is concerned,
and order the trial court to cease and desist from proceeding with
Civil Case No. 87-38930. There are still numerous material facts to
be established in order to arrive at a conclusion as to the true
nature of the relationship between Crestamonte and K.K. Shell and
between NSS and K.K. Shell. The best recourse would have been
to allow the trial court to proceed with Civil Case No. 87-38930 and
consider whatever defenses may be raised by private respondents
after they have filed their answer and evidence to support their
conflicting claims has been presented. The Court of Appeals,
however, substituted its judgment for that of the trial court and
decided the merits of the case, even in the absence of evidence,
on the pretext of reviewing an interlocutory order.
WHEREFORE, the petition is GRANTED and the decision of the
Court of Appeals is REVERSED in CA-G.R. SP No. 12999, insofar
as it annulled the order of the August 11, 1987 and directed the
trial court to cease and desist from proceeding with Civil Case No.
87-38930.
SO ORDERED.
G.R. No. 61594 September 28, 1990
PAKISTAN INTERNATIONAL AIRLINES
CORPORATION, petitioner,
vs
HON. BLAS F. OPLE, in his capacity as Minister of Labor;
HON. VICENTE LEOGARDO, JR., in his capacity as Deputy
Minister; ETHELYNNE B. FARRALES and MARIA MOONYEEN
MAMASIG, respondents.
On 2 December 1978, petitioner Pakistan International Airlines
Corporation ("PIA"), a foreign corporation licensed to do business
in the Philippines, executed in Manila two (2) separate contracts of
employment, one with private respondent Ethelynne B. Farrales
and the other with private respondent Ma. M.C. Mamasig. 1The
contracts, which became effective on 9 January 1979, provided in
pertinent portion as follows:
5. DURATION OF EMPLOYMENT AND
PENALTY
This agreement is for a period of three (3)
years, but can be extended by the mutual
consent of the parties.
xxx xxx xxx
6. TERMINATION
xxx xxx xxx
Notwithstanding anything to contrary as herein
provided, PIA reserves the right to terminate
this agreement at any time by giving the
EMPLOYEE notice in writing in advance one
month before the intended termination or in lieu
thereof, by paying the EMPLOYEE wages
equivalent to one month's salary.
xxx xxx xxx
10. APPLICABLE LAW:
This agreement shall be construed and
governed under and by the laws of Pakistan,
and only the Courts of Karachi, Pakistan shall
have the jurisdiction to consider any matter
arising out of or under this agreement.
Respondents then commenced training in Pakistan. After their
training period, they began discharging their job functions as flight
attendants, with base station in Manila and flying assignments to
different parts of the Middle East and Europe.
On 2 August 1980, roughly one (1) year and four (4) months prior
to the expiration of the contracts of employment, PIA through Mr.
Oscar Benares, counsel for and official of the local branch of PIA,
sent separate letters both dated 1 August 1980 to private
respondents Farrales and Mamasig advising both that their
services as flight stewardesses would be terminated "effective 1
September 1980, conformably to clause 6 (b) of the employment
agreement [they had) executed with [PIA]."2
On 9 September 1980, private respondents Farrales and Mamasig
jointly instituted a complaint, docketed as NCR-STF-95151-80, for
illegal dismissal and non-payment of company benefits and
bonuses, against PIA with the then Ministry of Labor and
Employment ("MOLE"). After several unfruitful attempts at
conciliation, the MOLE hearing officer Atty. Jose M. Pascual
ordered the parties to submit their position papers and evidence
supporting their respective positions. The PIA submitted its
position paper, 3 but no evidence, and there claimed that both
private respondents were habitual absentees; that both were in the
habit of bringing in from abroad sizeable quantities of "personal
effects"; and that PIA personnel at the Manila International Airport
had been discreetly warned by customs officials to advise private
respondents to discontinue that practice. PIA further claimed that
the services of both private respondents were terminated pursuant
to the provisions of the employment contract.
In his Order dated 22 January 1981, Regional Director Francisco
L. Estrella ordered the reinstatement of private respondents with
full backwages or, in the alternative, the payment to them of the
amounts equivalent to their salaries for the remainder of the fixed
three-year period of their employment contracts; the payment to
private respondent Mamasig of an amount equivalent to the value
of a round trip ticket Manila-USA Manila; and payment of a bonus
to each of the private respondents equivalent to their one-month
salary. 4 The Order stated that private respondents had attained
the status of regular employees after they had rendered more than
a year of continued service; that the stipulation limiting the period
of the employment contract to three (3) years was null and void as
violative of the provisions of the Labor Code and its implementing
rules and regulations on regular and casual employment; and that
the dismissal, having been carried out without the requisite
clearance from the MOLE, was illegal and entitled private
respondents to reinstatement with full backwages.
On appeal, in an Order dated 12 August 1982, Hon. Vicente
Leogardo, Jr., Deputy Minister, MOLE, adopted the findings of fact
and conclusions of the Regional Director and affirmed the latter's
award save for the portion thereof giving PIA the option, in lieu of
reinstatement, "to pay each of the complainants [private
respondents] their salaries corresponding to the unexpired portion
of the contract[s] [of employment] . . .". 5
In the instant Petition for Certiorari, petitioner PIA assails the
award of the Regional Director and the Order of the Deputy
Minister as having been rendered without jurisdiction; for having
been rendered without support in the evidence of record since,
allegedly, no hearing was conducted by the hearing officer, Atty.
Jose M. Pascual; and for having been issued in disregard and in
violation of petitioner's rights under the employment contracts with
private respondents.
1. Petitioner's first contention is that the Regional Director, MOLE,
had no jurisdiction over the subject matter of the complaint initiated
by private respondents for illegal dismissal, jurisdiction over the
same being lodged in the Arbitration Branch of the National Labor
Relations Commission ("NLRC") It appears to us beyond dispute,
however, that both at the time the complaint was initiated in
September 1980 and at the time the Orders assailed were
rendered on January 1981 (by Regional Director Francisco L.
Estrella) and August 1982 (by Deputy Minister Vicente Leogardo,
Jr.), the Regional Director had jurisdiction over termination cases.
Art. 278 of the Labor Code, as it then existed, forbade the
termination of the services of employees with at least one (1) year
of service without prior clearance from the Department of Labor
and Employment:
Art. 278. Miscellaneous Provisions — . . .
(b) With or without a collective agreement, no
employer may shut down his establishment or
dismiss or terminate the employment of
employees with at least one year of service
during the last two (2) years, whether such
service is continuous or broken, without prior
written authority issued in accordance with
such rules and regulations as the Secretary
may promulgate . . . (emphasis supplied)
Rule XIV, Book No. 5 of the Rules and Regulations
Implementing the Labor Code, made clear that in case of
a termination without the necessary clearance, the
Regional Director was authorized to order the
reinstatement of the employee concerned and the
payment of backwages; necessarily, therefore, the
Regional Director must have been given jurisdiction over
such termination cases:
Sec. 2. Shutdown or dismissal without
clearance. — Any shutdown or dismissal
without prior clearance shall be conclusively
presumed to be termination of employment
without a just cause. The Regional Director
shall, in such case order the immediate
reinstatement of the employee and the
payment of his wages from the time of the
shutdown or dismissal until the time of
reinstatement. (emphasis supplied)
Policy Instruction No. 14 issued by the Secretary of
Labor, dated 23 April 1976, was similarly very explicit
about the jurisdiction of the Regional Director over
termination of employment cases:
Under PD 850, termination cases — with or
without CBA — are now placed under the
original jurisdiction of the Regional Director.
Preventive suspension cases, now made
cognizable for the first time, are also placed
under the Regional Director. Before PD 850,
termination cases where there was a CBA were
under the jurisdiction of the grievance
machinery and voluntary arbitration, while
termination cases where there was no CBA
were under the jurisdiction of the Conciliation
Section.
In more details, the major innovations
introduced by PD 850 and its implementing
rules and regulations with respect to
termination and preventive suspension cases
are:
1. The Regional Director is now required to rule
on every application for clearance, whether
there is opposition or not, within ten days from
receipt thereof.
xxx xxx xxx
(Emphasis supplied)
2. The second contention of petitioner PIA is that, even if the
Regional Director had jurisdiction, still his order was null and void
because it had been issued in violation of petitioner's right to
procedural due process .6 This claim, however, cannot be given
serious consideration. Petitioner was ordered by the Regional
Director to submit not only its position paper but also such
evidence in its favor as it might have. Petitioner opted to rely solely
upon its position paper; we must assume it had no evidence to
sustain its assertions. Thus, even if no formal or oral hearing was
conducted, petitioner had ample opportunity to explain its side.
Moreover, petitioner PIA was able to appeal his case to the
Ministry of Labor and Employment. 7
There is another reason why petitioner's claim of denial of due
process must be rejected. At the time the complaint was filed by
private respondents on 21 September 1980 and at the time the
Regional Director issued his questioned order on 22 January 1981,
applicable regulation, as noted above, specified that a "dismissal
without prior clearance shall be conclusively presumed to be
termination of employment without a cause", and the Regional
Director was required in such case to" order the immediate
reinstatement of the employee and the payment of his wages from
the time of the shutdown or dismiss until . . . reinstatement." In
other words, under the then applicable rule, the Regional Director
did not even have to require submission of position papers by the
parties in view of the conclusive (juris et de jure) character of the
presumption created by such applicable law and regulation.
In Cebu Institute of Technology v. Minister of Labor and
Employment, 8 the Court pointed out that "under Rule 14, Section
2, of the Implementing Rules and Regulations, the termination of
[an employee] which was without previous clearance from the
Ministry of Labor is conclusively presumed to be without [just]
cause . . . [a presumption which] cannot be overturned by any
contrary proof however strong."
3. In its third contention, petitioner PIA invokes paragraphs 5 and 6
of its contract of employment with private respondents Farrales
and Mamasig, arguing that its relationship with them was governed
by the provisions of its contract rather than by the general
provisions of the Labor Code. 9
Paragraph 5 of that contract set a term of three (3) years for that
relationship, extendible by agreement between the parties; while
paragraph 6 provided that, notwithstanding any other provision in
the Contract, PIA had the right to terminate the employment
agreement at any time by giving one-month's notice to the
employee or, in lieu of such notice, one-months salary.
A contract freely entered into should, of course, be respected, as
PIA argues, since a contract is the law between the parties. 10 The
principle of party autonomy in contracts is not, however, an
absolute principle. The rule in Article 1306, of our Civil Code is that
the contracting parties may establish such stipulations as they may
deem convenient, "provided they are not contrary to law, morals,
good customs, public order or public policy." Thus, counter-
balancing the principle of autonomy of contracting parties is the
equally general rule that provisions of applicable law, especially
provisions relating to matters affected with public policy, are
deemed written into the contract. 11 Put a little differently, the
governing principle is that parties may not contract away
applicable provisions of law especially peremptory provisions
dealing with matters heavily impressed with public interest. The
law relating to labor and employment is clearly such an area and
parties are not at liberty to insulate themselves and their
relationships from the impact of labor laws and regulations by
simply contracting with each other. It is thus necessary to appraise
the contractual provisions invoked by petitioner PIA in terms of
their consistency with applicable Philippine law and regulations.
As noted earlier, both the Labor Arbiter and the Deputy Minister,
MOLE, in effect held that paragraph 5 of that employment contract
was inconsistent with Articles 280 and 281 of the Labor Code as
they existed at the time the contract of employment was entered
into, and hence refused to give effect to said paragraph 5. These
Articles read as follows:
Art. 280. Security of Tenure. — In cases of regular
employment, the employer shall not terminate the
services of an employee except for a just cause or when
authorized by this Title An employee who is unjustly
dismissed from work shall be entitled to reinstatement
without loss of seniority rights and to his backwages
computed from the time his compensation was withheld
from him up to the time his reinstatement.
Art. 281. Regular and Casual Employment. The
provisions of written agreement to the contrary
notwithstanding and regardless of the oral agreements of
the parties, an employment shall be deemed to be
regular where the employee has been engaged to
perform activities which are usually necessary or
desirable in the usual business or trade of the employer,
except where the employment has been fixed for a
specific project or undertaking the completion or
termination of which has been determined at the time of
the engagement of the employee or where the work or
services to be performed is seasonal in nature and the
employment is for the duration of the season.
An employment shall be deemed to be casual if it is not
covered by the preceding paragraph: provided, that, any
employee who has rendered at least one year of service,
whether such service is continuous or broken, shall be
considered as regular employee with respect to the
activity in which he is employed and his employment
shall continue while such actually exists. (Emphasis
supplied)
In Brent School, Inc., et al. v. Ronaldo Zamora, etc., et al., 12 the
Court had occasion to examine in detail the question of whether
employment for a fixed term has been outlawed under the above
quoted provisions of the Labor Code. After an extensive
examination of the history and development of Articles 280 and
281, the Court reached the conclusion that a contract providing for
employment with a fixed period was not necessarily unlawful:
There can of course be no quarrel with the proposition
that where from the circumstances it is apparent that
periods have been imposed to preclude acquisition of
tenurial security by the employee, they should be struck
down or disregarded as contrary to public policy, morals,
etc. But where no such intent to circumvent the law is
shown, or stated otherwise, where the reason for the law
does not exist e.g. where it is indeed the employee
himself who insists upon a period or where the nature of
the engagement is such that, without being seasonal or
for a specific project, a definite date of termination is
a sine qua non would an agreement fixing a period be
essentially evil or illicit, therefore anathema Would such
an agreement come within the scope of Article 280 which
admittedly was enacted "to prevent the circumvention of
the right of the employee to be secured in . . . (his)
employment?"
As it is evident from even only the three examples
already given that Article 280 of the Labor Code, under a
narrow and literal interpretation, not only fails to exhaust
the gamut of employment contracts to which the lack of a
fixed period would be an anomaly, but would also appear
to restrict, without reasonable distinctions, the right of an
employee to freely stipulate with his employer the
duration of his engagement, it logically follows that such
a literal interpretation should be eschewed or avoided.
The law must be given reasonable interpretation, to
preclude absurdity in its application. Outlawing the whole
concept of term employment and subverting to boot the
principle of freedom of contract to remedy the evil of
employers" using it as a means to prevent their
employees from obtaining security of tenure is like cutting
off the nose to spite the face or, more relevantly, curing a
headache by lopping off the head.
xxx xxx xxx
Accordingly, and since the entire purpose behind the
development of legislation culminating in the present
Article 280 of the Labor Code clearly appears to have
been, as already observed, to prevent circumvention of
the employee's right to be secure in his tenure, the
clause in said article indiscriminately and completely
ruling out all written or oral agreements conflicting with
the concept of regular employment as defined therein
should be construed to refer to the substantive evil that
the Code itself has singled out: agreements entered into
precisely to circumvent security of tenure. It should have
no application to instances where a fixed period of
employment was agreed upon knowingly and voluntarily
by the parties, without any force, duress or improper
pressure being brought to bear upon the employee and
absent any other circumstances vitiating his consent, or
where it satisfactorily appears that the employer and
employee dealt with each other on more or less equal
terms with no moral dominance whatever being
 exercised by the former over the latter. Unless thus
limited in its purview, the law would be made to apply to
purposes other than those explicitly stated by its framers;
it thus becomes pointless and arbitrary, unjust in its
effects and apt to lead to absurd and unintended
consequences. (emphasis supplied)
It is apparent from Brent School that the critical consideration
is the presence or absence of a substantial indication that the
period specified in an employment agreement was designed to
circumvent the security of tenure of regular employees which is
provided for in Articles 280 and 281 of the Labor Code. This
indication must ordinarily rest upon some aspect of the
agreement other than the mere specification of a fixed term of
the ernployment agreement, or upon evidence aliunde of the
intent to evade.
Examining the provisions of paragraphs 5 and 6 of the
employment agreement between petitioner PIA and private
respondents, we consider that those provisions must be read
together and when so read, the fixed period of three (3) years
specified in paragraph 5 will be seen to have been effectively
neutralized by the provisions of paragraph 6 of that agreement.
Paragraph 6 in effect took back from the employee the fixed three
(3)-year period ostensibly granted by paragraph 5 by rendering
such period in effect a facultative one at the option of the employer
PIA. For petitioner PIA claims to be authorized to shorten that
term, at any time and for any cause satisfactory to itself, to a one-
month period, or even less by simply paying the employee a
month's salary. Because the net effect of paragraphs 5 and 6 of
the agreement here involved is to render the employment of
private respondents Farrales and Mamasig basically employment
at the pleasure of petitioner PIA, the Court considers that
paragraphs 5 and 6 were intended to prevent any security of
tenure from accruing in favor of private respondents even during
the limited period of three (3) years,13 and thus to escape
completely the thrust of Articles 280 and 281 of the Labor Code.
the matter; it must therefore be presumed that the applicable
provisions of the law of Pakistan are the same as the applicable
provisions of Philippine law.14
We conclude that private respondents Farrales and Mamasig were
illegally dismissed and that public respondent Deputy Minister,
MOLE, had not committed any grave abuse of discretion nor any
act without or in excess of jurisdiction in ordering their
reinstatement with backwages. Private respondents are entitled to
three (3) years backwages without qualification or deduction.
Should their reinstatement to their former or other substantially
equivalent positions not be feasible in view of the length of time
which has gone by since their services were unlawfully terminated,
petitioner should be required to pay separation pay to private
respondents amounting to one (1) month's salary for every year of
service rendered by them, including the three (3) years service
putatively rendered.
ACCORDINGLY, the Petition for certiorari is hereby DISMISSED
for lack of merit, and the Order dated 12 August 1982 of public
respondent is hereby AFFIRMED, except that (1) private
respondents are entitled to three (3) years backwages, without
deduction or qualification; and (2) should reinstatement of private
respondents to their former positions or to substantially equivalent
positions not be feasible, then petitioner shall, in lieu thereof, pay
to private respondents separation pay amounting to one (1)-
month's salary for every year of service actually rendered by them
and for the three (3) years putative service by private respondents.
The Temporary Restraining Order issued on 13 September 1982 is
hereby LIFTED. Costs against petitioner. SO ORDERED.

Petitioner PIA cannot take refuge in paragraph 10 of its

employment agreement which specifies, firstly, the law of Pakistan
as the applicable law of the agreement and, secondly, lays the
venue for settlement of any dispute arising out of or in connection
with the agreement "only [in] courts of Karachi Pakistan". The first
clause of paragraph 10 cannot be invoked to prevent the
application of Philippine labor laws and regulations to the subject
matter of this case, i.e., the employer-employee relationship
between petitioner PIA and private respondents. We have already
pointed out that the relationship is much affected with public
interest and that the otherwise applicable Philippine laws and
regulations cannot be rendered illusory by the parties agreeing
upon some other law to govern their relationship. Neither may
petitioner invoke the second clause of paragraph 10, specifying the
Karachi courts as the sole venue for the settlement of dispute;
between the contracting parties. Even a cursory scrutiny of the
relevant circumstances of this case will show the multiple and
substantive contacts between Philippine law and Philippine courts,
on the one hand, and the relationship between the parties, upon
the other: the contract was not only executed in the Philippines, it
was also performed here, at least partially; private respondents are
Philippine citizens and respondents, while petitioner, although a
foreign corporation, is licensed to do business (and actually doing
business) and hence resident in the Philippines; lastly, private
respondents were based in the Philippines in between their
assigned flights to the Middle East and Europe. All the above
contacts point to the Philippine courts and administrative agencies
as a proper forum for the resolution of contractual disputes
between the parties. Under these circumstances, paragraph 10 of
the employment agreement cannot be given effect so as to oust
Philippine agencies and courts of the jurisdiction vested upon them
by Philippine law. Finally, and in any event, the petitioner PIA did
not undertake to plead and prove the contents of Pakistan law on
G.R. No. L-20099 July 7, 1966
PARMANAND SHEWARAM, plaintiff and appellee,
vs. PHILIPPINE AIR LINES, INC., defendant and appellant.
Before the municipal court of Zamboanga City, plaintiff-appellee
Parmanand Shewaram instituted an action to recover damages
suffered by him due to the alleged failure of defendant-appellant
Philippines Air Lines, Inc. to observe extraordinary diligence in the
vigilance and carriage of his luggage. After trial the municipal court
of Zamboanga City rendered judgment ordering the appellant to
pay appellee P373.00 as actual damages, P100.00 as exemplary
damages, P150.00 as attorney's fees, and the costs of the action.
Appellant Philippine Air Lines appealed to the Court of First
Instance of Zamboanga City. After hearing the Court of First
Instance of Zamboanga City modified the judgment of the inferior
court by ordering the appellant to pay the appellee only the sum of
P373.00 as actual damages, with legal interest from May 6, 1960
and the sum of P150.00 as attorney's fees, eliminating the award
of exemplary damages.
From the decision of the Court of First Instance of Zamboanga
City, appellant appeals to this Court on a question of law,
assigning two errors allegedly committed by the lower court a quo,
to wit:
1. The lower court erred in not holding that plaintiff-
appellee was bound by the provisions of the tariff
regulations filed by defendant-appellant with the civil
aeronautics board and the conditions of carriage printed
at the back of the plane ticket stub.
2. The lower court erred in not dismissing this case or
limiting the liability of the defendant-appellant to P100.00.
The facts of this case, as found by the trial court, quoted from the
decision appealed from, are as follows:
That Parmanand Shewaram, the plaintiff herein, was on
November 23, 1959, a paying passenger with ticket No.
4-30976, on defendant's aircraft flight No. 976/910 from
Zamboanga City bound for Manila; that defendant is a
common carrier engaged in air line transportation in the
Philippines, offering its services to the public to carry and
transport passengers and cargoes from and to different
points in the Philippines; that on the above-mentioned
date of November 23, 1959, he checked in three (3)
pieces of baggages — a suitcase and two (2) other
pieces; that the suitcase was mistagged by defendant's
personnel in Zamboanga City, as I.G.N. (for Iligan) with
claim check No. B-3883, instead of MNL (for Manila).
When plaintiff Parmanand Shewaram arrived in Manila
on the date of November 23, 1959, his suitcase did not
arrive with his flight because it was sent to Iligan. So, he
made a claim with defendant's personnel in Manila
airport and another suitcase similar to his own which was
the only baggage left for that flight, the rest having been
claimed and released to the other passengers of said
flight, was given to the plaintiff for him to take delivery but
he did not and refused to take delivery of the same on
the ground that it was not his, alleging that all his clothes
were white and the National transistor 7 and a Rollflex
camera were not found inside the suitcase, and
moreover, it contained a pistol which he did not have nor
placed inside his suitcase; that after inquiries made by
defendant's personnel in Manila from different airports
where the suitcase in question must have been sent, it
was found to have reached Iligan and the station agent of
the PAL in Iligan caused the same to be sent to Manila
for delivery to Mr. Shewaram and which suitcase
belonging to the plaintiff herein arrived in Manila airport
on November 24, 1959; that it was also found out that the
suitcase shown to and given to the plaintiff for delivery
which he refused to take delivery belonged to a certain
Del Rosario who was bound for Iligan in the same flight
with Mr. Shewaram; that when the plaintiff's suitcase
arrived in Manila as stated above on November 24, 1959,
he was informed by Mr. Tomas Blanco, Jr., the acting
station agent of the Manila airport of the arrival of his
suitcase but of course minus his Transistor Radio 7 and
the Rollflex Camera; that Shewaram made demand for
these two (2) items or for the value thereof but the same
was not complied with by defendant.
xxx xxx xxx
It is admitted by defendant that there was mistake in
tagging the suitcase of plaintiff as IGN. The tampering of
the suitcase is more apparent when on November 24,
1959, when the suitcase arrived in Manila, defendant's
personnel could open the same in spite of the fact that
plaintiff had it under key when he delivered the suitcase
to defendant's personnel in Zamboanga City. Moreover,
it was established during the hearing that there was
space in the suitcase where the two items in question
could have been placed. It was also shown that as early
as November 24, 1959, when plaintiff was notified by
phone of the arrival of the suitcase, plaintiff asked that
check of the things inside his suitcase be made and
defendant admitted that the two items could not be found
inside the suitcase. There was no evidence on record
sufficient to show that plaintiff's suitcase was never
opened during the time it was placed in defendant's
possession and prior to its recovery by the plaintiff.
However, defendant had presented evidence that it had
authority to open passengers' baggage to verify and find
its ownership or identity. Exhibit "1" of the defendant
would show that the baggage that was offered to plaintiff
as his own was opened and the plaintiff denied
ownership of the contents of the baggage. This proven
fact that baggage may and could be opened without the
necessary authorization and presence of its owner,
applied too, to the suitcase of plaintiff which was mis-sent
to Iligan City because of mistagging. The possibility of
what happened in the baggage of Mr. Del Rosario at the
Manila Airport in his absence could have also happened
to plaintiffs suitcase at Iligan City in the absence of
plaintiff. Hence, the Court believes that these two items
were really in plaintiff's suitcase and defendant should be
held liable for the same by virtue of its contract of
carriage.
It is clear from the above-quoted portions of the decision of the trial
court that said court had found that the suitcase of the appellee
was tampered, and the transistor radio and the camera contained
therein were lost, and that the loss of those articles was due to the
negligence of the employees of the appellant. The evidence shows
that the transistor radio cost P197.00 and the camera cost
P176.00, so the total value of the two articles was P373.00.
There is no question that the appellant is a common carrier. 1 As
such common carrier the appellant, 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 the circumstances of
each case. 2 It having been shown that the loss of the transistor
radio and the camera of the appellee, costing P373.00, was due to
the negligence of the employees of the appellant, it is clear that the
appellant should be held liable for the payment of said loss. 3
It is, however, contended by the appellant that its liability should be
limited to the amount stated in the conditions of carriage printed at
the back of the plane ticket stub which was issued to the appellee,
which conditions are embodied in Domestic Tariff Regulations No.
2 which was filed with the Civil Aeronautics Board. One of those
conditions, which is pertinent to the issue raised by the appellant in
this case provides as follows:
The liability, if any, for loss or damage to checked
baggage or for delay in the delivery thereof is limited to
its value and, unless the passenger declares in advance
a higher valuation and pay an additional charge therefor,
the value shall be conclusively deemed not to exceed
P100.00 for each ticket.
The appellant maintains that in view of the failure of the appellee to
declare a higher value for his luggage, and pay the freight on the
basis of said declared value when he checked such luggage at the
Zamboanga City airport, pursuant to the abovequoted condition,
appellee can not demand payment from the appellant of an
amount in excess of P100.00.
The law that may be invoked, in this connection is Article 1750 of
the New Civil Code which provides as follows:
A contract fixing the sum that may be recovered by the
owner or shipper for the loss, destruction, or deterioration
of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed
upon.
In accordance with the above-quoted provision of Article 1750 of
the New Civil Code, the pecuniary liability of a common carrier
may, by contract, be limited to a fixed amount. It is required,
however, that the contract must be "reasonable and just under the
circumstances and has been fairly and freely agreed upon."
The requirements provided in Article 1750 of the New Civil Code
must be complied with before a common carrier can claim a
limitation of its pecuniary liability in case of loss, destruction or
deterioration of the goods it has undertaken to transport. In the
case before us We believe that the requirements of said article
have not been met. It can not be said that the appellee had
actually entered into a contract with the appellant, embodying the
conditions as printed at the back of the ticket stub that was issued
by the appellant to the appellee. The fact that those conditions are
printed at the back of the ticket stub in letters so small that they are
hard to read would not warrant the presumption that the appellee
was aware of those conditions such that he had "fairly and freely
agreed" to those conditions. The trial court has categorically stated
in its decision that the "Defendant admits that passengers do not
sign the ticket, much less did plaintiff herein sign his ticket when he
made the flight on November 23, 1959." We hold, therefore, that
the appellee is not, and can not be, bound by the conditions of
carriage found at the back of the ticket stub issued to him when he
made the flight on appellant's plane on November 23, 1959.
The liability of the appellant in the present case should be
governed by the provisions of Articles 1734 and 1735 of the New
Civil Code, which We quote as follows:
ART. 1734. Common carries are responsible for the loss,
destruction, or deterioration of the goods, unless the
same is due to any of the following causes only:
(1) Flood, storm, earthquake, 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.1äwphï1.ñët
ART. 1735. In all cases other than those mentioned in
Nos. 1, 2, 3, 4 and 5 of the preceding article, if the goods
are lost, destroyed or deteriorated, common carriers are
presumed to have been at fault or to have acted
negligently, unless they prove that they observed
extraordinary diligence as required in Article 1733.
It having been clearly found by the trial court that the transistor
radio and the camera of the appellee were lost as a result of the
negligence of the appellant as a common carrier, the liability of the
appellant is clear — it must pay the appellee the value of those two
articles.
In the case of Ysmael and Co. vs. Barreto, 51 Phil. 90, cited by the
trial court in support of its decision, this Court had laid down the
rule that the carrier can not limit its liability for injury to or loss of
goods shipped where such injury or loss was caused by its own
negligence.
Corpus Juris, volume 10, p. 154, says:
"Par. 194, 6. Reasonableness of Limitations. — The
validity of stipulations limiting the carrier's liability is to be
determined by their reasonableness and their conformity
to the sound public policy, in accordance with which the
obligations of the carrier to the public are settled. It
cannot lawfully stipulate for exemption from liability,
unless such exemption is just and reasonable, and
unless the contract is freely and fairly made. No
contractual limitation is reasonable which is subversive of
public policy.
"Par. 195. 7. What Limitations of Liability Permissible. —
a. Negligence — (1) Rule in America — (a) In Absence of
Organic or Statutory Provisions Regulating Subject —
aa. Majority Rule. — In the absence of statute, it is
settled by the weight of authority in the United States,
that whatever limitations against its common-law liability
are permissible to a carrier, it cannot limit its liability for
injury to or loss of goods shipped, where such injury or
loss is caused by its own negligence. This is the common
law doctrine and it makes no difference that there is no
statutory prohibition against contracts of this character.
"Par. 196. bb. Considerations on which Rule Based. —
The rule, it is said, rests on considerations of public
policy. The undertaking is to carry the goods, and to
relieve the shipper from all liability for loss or damage
arising from negligence in performing its contract is to
ignore the contract itself. The natural effect of a limitation
of liability against negligence is to induce want of care on
the part of the carrier in the performance of its duty. The
shipper and the common carrier are not on equal terms;
the shipper must send his freight by the common carrier,
or not at all; he is therefore entirely at the mercy of the
carrier unless protected by the higher power of the law
against being forced into contracts limiting the carrier's
liability. Such contracts are wanting in the element of
voluntary assent.
"Par. 197. cc. Application and Extent of Rule —
(aa) Negligence of Servants. — The rule prohibiting
limitation of liability for negligence is often stated as a
prohibition of any contract relieving the carrier from loss
or damage caused by its own negligence or
misfeasance, or that of its servants; and it has been
specifically decided in many cases that no contract
limitation will relieve the carrier from responsibility for the
negligence, unskillfulness, or carelessness of its
employer." (Cited in Ysmael and Co. vs. Barreto, 51 Phil.
90, 98, 99).
In view of the foregoing, the decision appealed from is affirmed,
with costs against the appellant.
G.R. No. L-40597 June 29, 1979
AGUSTINO B. ONG YIU, petitioner,
vs.HONORABLE COURT OF APPEALS and PHILIPPINE AIR
LINES, INC., respondents.
In this Petition for Review by Certiorari, petitioner, a practicing
lawyer and businessman, seeks a reversal of the Decision of the
Court of Appeals in CA-G.R. No. 45005-R, which reduced his
claim for damages for breach of contract of transportation.
The facts are as follows:
On August 26, 1967, petitioner was a fare paying passenger of
respondent Philippine Air Lines, Inc. (PAL), on board Flight No.
463-R, from Mactan Cebu, bound for Butuan City. He was
scheduled to attend the trial of Civil Case No. 1005 and Spec.
Procs. No. 1125 in the Court of First Instance, Branch II, thereat,
set for hearing on August 28-31, 1967. As a passenger, he
checked in one piece of luggage, a blue "maleta" for which he was
issued Claim Check No. 2106-R (Exh. "A"). The plane left Mactan
Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi
airport, Butuan City, at past 2:00 o'clock P.M., of the same day.
Upon arrival, petitioner claimed his luggage but it could not be
found. According to petitioner, it was only after reacting indignantly
to the loss that the matter was attended to by the porter clerk,
Maximo Gomez, which, however, the latter denies, At about 3:00
o'clock P.M., PAL Butuan, sent a message to PAL, Cebu, inquiring
about the missing luggage, which message was, in turn relayed in
full to the Mactan Airport teletype operator at 3:45 P.M. (Exh. "2")
that same afternoon. It must have been transmitted to Manila
immediately, for at 3:59 that same afternoon, PAL Manila wired
PAL Cebu advising that the luggage had been over carried to
Manila aboard Flight No. 156 and that it would be forwarded to
Cebu on Flight No. 345 of the same day. Instructions were also
given that the luggage be immediately forwarded to Butuan City on
the first available flight (Exh. "3"). At 5:00 P.M. of the same
afternoon, PAL Cebu sent a message to PAL Butuan that the
luggage would be forwarded on Fright No. 963 the following day,
August 27, 196'(. However, this message was not received by PAL
Butuan as all the personnel had already left since there were no
more incoming flights that afternoon.
In the meantime, petitioner was worried about the missing luggage
because it contained vital documents needed for trial the next day.
At 10:00 o'clock that evening, petitioner wired PAL Cebu
demanding the delivery of his baggage before noon the next day,
otherwise, he would hold PAL liable for damages, and stating that
PAL's gross negligence had caused him undue inconvenience,
worry, anxiety and extreme embarrassment (Exh. "B"). This
telegram was received by the Cebu PAL supervisor but the latter
felt no need to wire petitioner that his luggage had already been
forwarded on the assumption that by the time the message
reached Butuan City, the luggage would have arrived.
Early in the morning of the next day, August 27, 1967, petitioner
went to the Bancasi Airport to inquire about his luggage. He did not
wait, however, for the morning flight which arrived at 10:00 o'clock
that morning. This flight carried the missing luggage. The porter
clerk, Maximo Gomez, paged petitioner, but the latter had already
left. A certain Emilio Dagorro a driver of a "colorum" car, who also
used to drive for petitioner, volunteered to take the luggage to
petitioner. As Maximo Gomez knew Dagorro to be the same driver
used by petitioner whenever the latter was in Butuan City, Gomez
took the luggage and placed it on the counter. Dagorro examined
the lock, pressed it, and it opened. After calling the attention of
Maximo Gomez, the "maleta" was opened, Gomez took a look at
its contents, but did not touch them. Dagorro then delivered the
"maleta" to petitioner, with the information that the lock was open.
Upon inspection, petitioner found that a folder containing certain
exhibits, transcripts and private documents in Civil Case No. 1005
and Sp. Procs. No. 1126 were missing, aside from two gift items
for his parents-in-law. Petitioner refused to accept the luggage.
Dagorro returned it to the porter clerk, Maximo Gomez, who sealed
it and forwarded the same to PAL Cebu.
Meanwhile, petitioner asked for postponement of the hearing of
Civil Case No. 1005 due to loss of his documents, which was
granted by the Court (Exhs. "C" and "C-1"). Petitioner returned to
Cebu City on August 28, 1967. In a letter dated August 29, 1967
addressed to PAL, Cebu, petitioner called attention to his telegram
(Exh. "D"), demanded that his luggage be produced intact, and
that he be compensated in the sum of P250,000,00 for actual and
moral damages within five days from receipt of the letter,
otherwise, he would be left with no alternative but to file suit (Exh.
"D").
On August 31, 1967, Messrs. de Leon, Navarsi, and Agustin, all of
PAL Cebu, went to petitioner's office to deliver the "maleta". In the
presence of Mr. Jose Yap and Atty. Manuel Maranga the contents
were listed and receipted for by petitioner (Exh. "E").
On September 5, 1967, petitioner sent a tracer letter to PAL Cebu
inquiring about the results of the investigation which Messrs. de
Leon, Navarsi, and Agustin had promised to conduct to pinpoint
responsibility for the unauthorized opening of the "maleta" (Exh.
"F").
The following day, September 6, 1967, PAL sent its reply
hereinunder quoted verbatim:
Dear Atty. Ong Yiu:
This is with reference to your September 5,
1967, letter to Mr. Ricardo G. Paloma, Acting
Manager, Southern Philippines.
First of all, may we apologize for the delay in
informing you of the result of our investigation
since we visited you in your office last August
31, 1967. Since there are stations other than
Cebu which are involved in your case, we have
to communicate and await replies from them.
We regret to inform you that to date we have
not found the supposedly lost folder of papers
nor have we been able to pinpoint the
personnel who allegedly pilferred your
baggage.
You must realize that no inventory was taken of
the cargo upon loading them on any plane.
Consequently, we have no way of knowing the
real contents of your baggage when same was
loaded.
We realized the inconvenience you
encountered of this incident but we trust that
you will give us another opportunity to be of
better service to you.
Very truly yours,
PHILIPPINE AIR LINES, INC.
(Sgd) JEREMIAS S. AGUSTIN
Branch Supervisor
Cebu
(Exhibit G, Folder of Exhibits) 1
On September 13, 1967, petitioner filed a Complaint against PAL
for damages for breach of contract of transportation with the Court
of First Instance of Cebu, Branch V, docketed as Civil Case No. R-
10188, which PAL traversed. After due trial, the lower Court found
PAL to have acted in bad faith and with malice and declared
petitioner entitled to moral damages in the sum of P80,000.00,
exemplary damages of P30,000.00, attorney's fees of P5,000.00,
and costs.
Both parties appealed to the Court of Appeals — petitioner in so
far as he was awarded only the sum of P80,000.00 as moral
damages; and defendant because of the unfavorable judgment
rendered against it.
On August 22, 1974, the Court of Appeals,* finding that PAL was
guilty only of simple negligence, reversed the judgment of the trial
Court granting petitioner moral and exemplary damages, but
ordered PAL to pay plaintiff the sum of P100.00, the baggage
liability assumed by it under the condition of carriage printed at the
back of the ticket.
Hence, this Petition for Review by Certiorari, filed on May 2, 1975,
with petitioner making the following Assignments of Error:
I. THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING RESPONDENT PAL GUILTY ONLY OF
SIMPLE NEGLIGENCE AND NOT BAD FAITH IN THE
BREACH OF ITS CONTRACT OF TRANSPORTATION
WITH PETITIONER.
II. THE HONORABLE COURT OF APPEALS
MISCONSTRUED THE EVIDENCE AND THE LAW
WHEN IT REVERSED THE DECISION OF THE LOWER
COURT AWARDING TO PETITIONER MORAL
DAMAGES IN THE AMOUNT OF P80,000.00,
EXEMPLARY DAMAGES OF P30,000.00, AND
P5,000.00 REPRESENTING ATTORNEY'S FEES, AND
ORDERED RESPONDENT PAL TO COMPENSATE
PLAINTIFF THE SUM OF P100.00 ONLY, CONTRARY
TO THE EXPLICIT PROVISIONS OF ARTICLES 2220,
2229, 2232 AND 2234 OF THE CIVIL CODE OF THE
PHILIPPINES.
On July 16, 1975, this Court gave due course to the Petition.
There is no dispute that PAL incurred in delay in the delivery of
petitioner's luggage. The question is the correctness of respondent
Court's conclusion that there was no gross negligence on the part
of PAL and that it had not acted fraudulently or in bad faith as to
entitle petitioner to an award of moral and exemplary damages.
From the facts of the case, we agree with respondent Court that
PAL had not acted in bad faith. Bad faith means a breach of a
known duty through some motive of interest or ill will. 2 It was the
duty of PAL to look for petitioner's luggage which had been
miscarried. PAL exerted due diligence in complying with such duty.
As aptly stated by the appellate Court:
We do not find any evidence of bad faith in this. On the
contrary, We find that the defendant had exerted diligent
effort to locate plaintiff's baggage. The trial court saw
evidence of bad faith because PAL sent the telegraphic
message to Mactan only at 3:00 o'clock that same
afternoon, despite plaintiff's indignation for the non-arrival
of his baggage. The message was sent within less than
one hour after plaintiff's luggage could not be located.
Efforts had to be exerted to locate plaintiff's maleta. Then
the Bancasi airport had to attend to other incoming
passengers and to the outgoing passengers. Certainly,
no evidence of bad faith can be inferred from these facts.
Cebu office immediately wired Manila inquiring about the
missing baggage of the plaintiff. At 3:59 P.M., Manila
station agent at the domestic airport wired Cebu that the
baggage was over carried to Manila. And this message
was received in Cebu one minute thereafter, or at 4:00
P.M. The baggage was in fact sent back to Cebu City
that same afternoon. His Honor stated that the fact that
the message was sent at 3:59 P.M. from Manila and
completely relayed to Mactan at 4:00 P.M., or within one
minute, made the message appear spurious. This is a
forced reasoning. A radio message of about 50 words
can be completely transmitted in even less than one
minute depending upon atmospheric conditions. Even if
the message was sent from Manila or other distant
places, the message can be received within a minute.
that is a scientific fact which cannot be questioned. 3
Neither was the failure of PAL Cebu to reply to petitioner's rush
telegram indicative of bad faith, The telegram (Exh. B) was
dispatched by petitioner at around 10:00 P.M. of August 26, 1967.
The PAL supervisor at Mactan Airport was notified of it only in the
morning of the following day. At that time the luggage was already
to be forwarded to Butuan City. There was no bad faith, therefore,
in the assumption made by said supervisor that the plane carrying
the bag would arrive at Butuan earlier than a reply telegram. Had
petitioner waited or caused someone to wait at the Bancasi airport
for the arrival of the morning flight, he would have been able to
retrieve his luggage sooner.
In the absence of a wrongful act or omission or of fraud or bad
faith, petitioner is not entitled to moral damages.
Art. 2217. Moral damages include physical suffering,
mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social
humiliation, and similar injury. Though incapable of
pecuniary computation, moral damages may be
recovered if they are the proximate result of the
defendant's wrongful act of omission.
Art. 2220. Willful injury to property may be a legal ground
for awarding moral damages if the court should find that,
under the circumstances, such damages are justly due.
The same rule applies to breaches of contract where the
defendant acted fraudulently or in bad faith.
Petitioner is neither entitled to exemplary damages. In contracts,
as provided for in Article 2232 of the Civil Code, exemplary
damages can be granted if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner, which has
not been proven in this case.
Petitioner further contends that respondent Court committed grave
error when it limited PAL's carriage liability to the amount of
P100.00 as stipulated at the back of the ticket. In this connection,
respondent Court opined:
As a general proposition, the plaintiff's maleta having
been pilfered while in the custody of the defendant, it is
presumed that the defendant had been negligent. The
liability, however, of PAL for the loss, in accordance with
the stipulation written on the back of the ticket, Exhibit
12, is limited to P100.00 per baggage, plaintiff not having
declared a greater value, and not having called the
attention of the defendant on its true value and paid the
tariff therefor. The validity of this stipulation is not
 questioned by the plaintiff. They are printed in reasonably
and fairly big letters, and are easily readable. Moreover,
plaintiff had been a frequent passenger of PAL from
Cebu to Butuan City and back, and he, being a lawyer
and businessman, must be fully aware of these
conditions. 4
We agree with the foregoing finding. The pertinent Condition of
Carriage printed at the back of the plane ticket reads:
8. BAGGAGE LIABILITY ... The total liability of the
Carrier for lost or damaged baggage of the passenger is
LIMITED TO P100.00 for each ticket unless a passenger
declares a higher valuation in excess of P100.00, but not
in excess, however, of a total valuation of P1,000.00 and
additional charges are paid pursuant to Carrier's tariffs.
Under the circumstances, considering the demise of petitioner
himself, who acted as his own counsel, it is best that technicality
yields to the interests of substantial justice. Besides, in the 'last
analysis, no serious prejudice has been caused respondent PAL.
In fine, we hold that the conclusions drawn by respondent Court
from the evidence on record are not erroneous.
WHEREFORE, for lack of merit, the instant Petition is hereby
denied, and the judgment sought to be reviewed hereby affirmed in
toto.
No costs.
SO ORDERED

There is no dispute that petitioner did not declare any higher value
for his luggage, much less did he pay any additional transportation
charge.

But petitioner argues that there is nothing in the evidence to show

that he had actually entered into a contract with PAL limiting the
latter's liability for loss or delay of the baggage of its passengers,
and that Article 1750* of the Civil Code has not been complied
with.

While it may be true that petitioner had not signed the plane ticket
(Exh. "12"), he is nevertheless bound by the provisions thereof.
"Such provisions have been held to be a part of the contract of
carriage, and valid and binding upon the passenger regardless of
the latter's lack of knowledge or assent to the regulation". 5 It is
what is known as a contract of "adhesion", in regards which it has
been said that contracts of adhesion wherein one party imposes a
ready made form of contract on the other, as the plane ticket in the
case at bar, are contracts not entirely prohibited. The one who
adheres to the contract is in reality free to reject it entirely; if he
adheres, he gives his consent. 6 And as held in Randolph v.
American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878;
Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a
contract limiting liability upon an agreed valuation does not offend
against the policy of the law forbidding one from contracting
against his own negligence.

Considering, therefore, that petitioner had failed to declare a

higher value for his baggage, he cannot be permitted a recovery in
excess of P100.00.Besides, passengers are advised not to place
valuable items inside their baggage but "to avail of our V-cargo
service " (Exh. "1"). I t is likewise to be noted that there is nothing
in the evidence to show the actual value of the goods allegedly lost
by petitioner.

There is another matter involved, raised as an error by PAL — the

fact that on October 24, 1974 or two months after the promulgation
of the Decision of the appellate Court, petitioner's widow filed a
Motion for Substitution claiming that petitioner died on January 6,
1974 and that she only came to know of the adverse Decision on
October 23, 1974 when petitioner's law partner informed her that
he received copy of the Decision on August 28, 1974. Attached to
her Motion was an Affidavit of petitioner's law partner reciting facts
constitutive of excusable negligence. The appellate Court noting
that all pleadings had been signed by petitioner himself allowed
the widow "to take such steps as she or counsel may deem
necessary." She then filed a Motion for Reconsideration over the
opposition of PAL which alleged that the Court of Appeals
Decision, promulgated on August 22, 1974, had already become
final and executory since no appeal had been interposed therefrom
within the reglementary period.
J
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G.R. No. 70462 August 11, 1988
PAN AMERICAN WORLD AIRWAYS, INC., petitioner,
vs.
INTERMEDIATE APPELLATE COURT, RENE V. PANGAN,
SOTANG BASTOS PRODUCTIONS and ARCHER
PRODUCTIONS, respondents.
CORTES, J.:
Before the Court is a petition filed by an international air carrier
seeking to limit its liability for lost baggage, containing promotional
and advertising materials for films to be exhibited in Guam and the
U.S.A., clutch bags, barong tagalogs and personal belongings, to
the amount specified in the airline ticket absent a declaration of a
higher valuation and the payment of additional charges.
The undisputed facts of the case, as found by the trial court and
adopted by the appellate court, are as follows:
On April 25, 1978, plaintiff Rene V. Pangan, president
and general manager of the plaintiffs Sotang Bastos and
Archer Production while in San Francisco, Califonia and
Primo Quesada of Prime Films, San Francisco,
California, entered into an agreement (Exh. A) whereby
the former, for and in consideration of the amount of US
$2,500.00 per picture, bound himself to supply the latter
with three films. 'Ang Mabait, Masungit at ang Pangit,'
'Big Happening with Chikiting and Iking,' and 'Kambal
Dragon' for exhibition in the United States. It was also
their agreement that plaintiffs would provide the
necessary promotional and advertising materials for said
films on or before May 30, 1978.
On his way home to the Philippines, plaintiff Pangan
visited Guam where he contacted Leo Slutchnick of the
Hafa Adai Organization. Plaintiff Pangan likewise entered
into a verbal agreement with Slutchnick for the exhibition
of two of the films above-mentioned at the Hafa Adai
Theater in Guam on May 30, 1978 for the consideration
of P7,000.00 per picture (p. 11, tsn, June 20, 1979).
Plaintiff Pangan undertook to provide the necessary
promotional and advertising materials for said films on or
before the exhibition date on May 30,1978.
By virtue of the above agreements, plaintiff Pangan
caused the preparation of the requisite promotional
handbills and still pictures for which he paid the total sum
of P12,900.00 (Exhs. B, B-1, C and C1). Likewise in
preparation for his trip abroad to comply with his
contracts, plaintiff Pangan purchased fourteen clutch
bags, four capiz lamps and four barong tagalog, with a
total value of P4,400.00 (Exhs. D, D-1, E, and F).
On May 18, 1978, plaintiff Pangan obtained from
defendant Pan Am's Manila Office, through the Your
Travel Guide, an economy class airplane ticket with No.
0269207406324 (Exh. G) for passage from Manila to
Guam on defendant's Flight No. 842 of May 27,1978,
upon payment by said plaintiff of the regular fare. The
Your Travel Guide is a tour and travel office owned and
managed by plaintiffs witness Mila de la Rama.
On May 27, 1978, two hours before departure time
plaintiff Pangan was at the defendant's ticket counter at
the Manila International Airport and presented his ticket
and checked in his two luggages, for which he was given
baggage claim tickets Nos. 963633 and 963649 (Exhs. H
and H-1). The two luggages contained the promotional
and advertising materials, the clutch bags, barong
tagalog and his personal belongings. Subsequently,
Pangan was informed that his name was not in the
manifest and so he could not take Flight No. 842 in the
economy class. Since there was no space in the
economy class, plaintiff Pangan took the first class
because he wanted to be on time in Guam to comply with
his commitment, paying an additional sum of $112.00.
When plaintiff Pangan arrived in Guam on the date of
May 27, 1978, his two luggages did not arrive with his
flight, as a consequence of which his agreements with
Slutchnick and Quesada for the exhibition of the films in
Guam and in the United States were cancelled (Exh. L).
Thereafter, he filed a written claim (Exh. J) for his
missing luggages.
Upon arrival in the Philippines, Pangan contacted his
lawyer, who made the necessary representations to
protest as to the treatment which he received from the
employees of the defendant and the loss of his two
luggages (Exh. M, O, Q, S, and T). Defendant Pan Am
assured plaintiff Pangan that his grievances would be
investigated and given its immediate consideration
(Exhs. N, P and R). Due to the defendant's failure to
communicate with Pangan about the action taken on his
protests, the present complaint was filed by the plaintiff.
(Pages 4-7, Record On Appeal). [Rollo, pp. 27-29.]
On the basis of these facts, the Court of First Instance found
petitioner liable and rendered judgment as follows:
(1) Ordering defendant Pan American World Airways,
Inc. to pay all the plaintiffs the sum of P83,000.00, for
actual damages, with interest thereon at the rate of 14%
per annum from December 6, 1978, when the complaint
was filed, until the same is fully paid, plus the further sum
of P10,000.00 as attorney's fees;
(2) Ordering defendant Pan American World Airways,
Inc. to pay plaintiff Rene V. Pangan the sum of
P8,123.34, for additional actual damages, with interest
thereon at the rate of 14% per annum from December 6,
1978, until the same is fully paid;
(3) Dismissing the counterclaim interposed by defendant
Pan American World Airways, Inc.; and
(4) Ordering defendant Pan American World Airways,
Inc. to pay the costs of suit. [Rollo, pp. 106-107.]
On appeal, the then Intermediate Appellate Court affirmed the trial
court decision.
Hence, the instant recourse to this Court by petitioner.
The petition was given due course and the parties, as required,
submitted their respective memoranda. In due time the case was
submitted for decision.
In assailing the decision of the Intermediate Appellate Court
petitioner assigned the following errors:
1. The respondent court erred as a matter of law in affirming the
trial court's award of actual damages beyond the limitation of
liability set forth in the Warsaw Convention and the contract of
carriage.
2. The respondent court erred as a matter of law in affirming the
trial court's award of actual damages consisting of alleged lost
profits in the face of this Court's ruling concerning special or
consequential damages as set forth in Mendoza v.
Philippine Airlines [90 Phil. 836 (1952).]
The assigned errors shall be discussed seriatim
1. The airline ticket (Exh. "G') contains the following conditions:
NOTICE
If the passenger's journey involves an ultimate
destination or stop in a country other than the country of
departure the Warsaw Convention may be applicable
and the Convention governs and in most cases limits the
liability of carriers for death or personal injury and in
respect of loss of or damage to baggage. See also notice
headed "Advice to International Passengers on Limitation
of Liability.
CONDITIONS OF CONTRACT
1. As used in this contract "ticket" means this passenger
ticket and baggage check of which these conditions and
the notices form part, "carriage" is equivalent to
"transportation," "carrier" means all air carriers that carry
or undertake to carry the passenger or his baggage
hereunder or perform any other service incidental to such
air carriage. "WARSAW CONVENTION" means the
convention for the Unification of Certain Rules Relating to
International Carriage by Air signed at Warsaw, 12th
October 1929, or that Convention as amended at The
Hague, 28th September 1955, whichever may be
applicable.
2. Carriage hereunder is subject to the rules and
limitations relating to liability established by the Warsaw
Convention unless such carriage is not "international
carriage" as defined by that Convention.
3. To the extent not in conflict with the foregoing carriage
and other services performed by each carrier are subject
to: (i) provisions contained in this ticket, (ii) applicable
tariffs, (iii) carrier's conditions of carriage and related
regulations which are made part hereof (and are
available on application at the offices of carrier), except
in transportation between a place in the United States or
Canada and any place outside thereof to which tariffs in
force in those countries apply.
xxx xxx xxx
NOTICE OF BAGGAGE LIABILITY LIMITATIONS
Liability for loss, delay, or damage to baggage is limited
as follows unless a higher value is declared in advance
and additional charges are paid: (1)for most international
travel (including domestic portions of international
journeys) to approximately $9.07 per pound ($20.00 per
kilo) for checked baggage and $400 per passenger for
unchecked baggage: (2) for travel wholly between U.S.
points, to $750 per passenger on most carriers (a few
have lower limits). Excess valuation may not be declared
on certain types of valuable articles. Carriers assume no
liability for fragile or perishable articles. Further
information may be obtained from the carrier. [Emphasis
supplied.].
On the basis of the foregoing stipulations printed at the back of the
ticket, petitioner contends that its liability for the lost baggage of
private respondent Pangan is limited to $600.00 ($20.00 x 30 kilos)
as the latter did not declare a higher value for his baggage and pay
the corresponding additional charges.
To support this contention, petitioner cites the case of Ong Yiu v.
Court of Appeals [G.R. No. L-40597, June 29, 1979, 91 SCRA
223], where the Court sustained the validity of a printed stipulation
at the back of an airline ticket limiting the liability of the carrier for
lost baggage to a specified amount and ruled that the carrier's
liability was limited to said amount since the passenger did not
declare a higher value, much less pay additional charges.
We find the ruling in Ong Yiu squarely applicable to the instant
case. In said case, the Court, through Justice Melencio Herrera,
stated:
Petitioner further contends that respondent Court
committed grave error when it limited PAL's carriage
liability to the amount of P100.00 as stipulated at the
back of the ticket....
We agree with the foregoing finding. The pertinent
Condition of Carriage printed at the back of the plane
ticket reads:
8. BAGGAGE LIABILITY ... The total liability of
the Carrier for lost or damage baggage of the
passenger is LIMITED TO P100.00 for each
ticket unless a passenger declares a higher
valuation in excess of P100.00, but not in
excess, however, of a total valuation of
Pl,000.00 and additional charges are paid
pursuant to Carrier's tariffs.
There is no dispute that petitioner did not declare any
higher value for his luggage, much less (lid he pay any
additional transportation charge.
But petitioner argues that there is nothing in the evidence
to show that he had actually entered into a contract with
PAL limiting the latter's liability for loss or delay of the
baggage of its passengers, and that Article 1750 * of the
Civil Code has not been complied with.
While it may be true that petitioner had not signed the
plane ticket (Exh. "12"), he is nevertheless bound by the
provisions thereof. "Such provisions have been held to
be a part of the contract of carriage, and valid and
binding upon the passenger regardless of the latter's lack
of knowledge or assent to the regulation." [Tannebaum v.
National Airline, Inc., 13 Misc. 2d 450,176 N.Y.S. 2d 400;
Lichten v. Eastern Airlines, 87 Fed. Supp. 691; Migoski v.
Eastern Air Lines, Inc., Fla., 63 So. 2d 634.] It is what is
known as a contract of "adhesion," in regards which it
has been said that contracts of adhesion wherein one
party imposes a ready made form of contract on the
other, as the plane ticket in the case at bar, are contracts
not entirely prohibited. The one who adheres to the
contract is in reality free to reject it entirely; if he adheres,
he gives his consent,[Tolentino, Civil Code, Vol. IV, 1962
ed., p. 462, citing Mr. Justice J.B.L. Reyes, Lawyer's
Journal, Jan. 31, 1951, p. 49]. And as held in Randolph
v. American Airlines, 103 Ohio App. 172,144 N.E. 2d
878; Rosenchein v. Trans World Airlines, Inc., 349 S.W.
2d 483.] "a contract limiting liability upon an agreed
valuation does not offend against the policy of the law
forbidding one from contracting against his own
negligence."
 Considering, therefore, that petitioner had failed to
declare a higher value for his baggage, he cannot be
permitted a recovery in excess of P100.00....
On the other hand, the ruling in Shewaram v. Philippine Air Lines,
Inc. [G.R. No. L-20099, July 2, 1966, 17 SCRA 606], where the
Court held that the stipulation limiting the carrier's liability to a
specified amount was invalid, finds no application in the instant
case, as the ruling in said case was premised on the finding that
the conditions printed at the back of the ticket were so small and
hard to read that they would not warrant the presumption that the
passenger was aware of the conditions and that he had freely and
fairly agreed thereto. In the instant case, similar facts that would
make the case fall under the exception have not been alleged,
much less shown to exist.
In view thereof petitioner's liability for the lost baggage is limited to
$20.00 per kilo or $600.00, as stipulated at the back of the ticket.
At this juncture, in order to rectify certain misconceptions the Court
finds it necessary to state that the Court of Appeal's reliance on a
quotation from Northwest Airlines, Inc. v. Cuenca [G.R. No. L-
22425, August 31, 1965, 14 SCRA 1063] to sustain the view that
"to apply the Warsaw Convention which limits a carrier's liability to
US$9.07 per pound or US$20.00 per kilo in cases of contractual
breach of carriage ** is against public policy" is utterly misplaced,
to say the least. In said case, while the Court, as quoted in the
Intermediate Appellate Court's decision, said:
Petitioner argues that pursuant to those provisions, an air
"carrier is liable only" in the event of death of a
passenger or injury suffered by him, or of destruction or
loss of, or damages to any checked baggage or any
goods, or of delay in the transportation by air of
passengers, baggage or goods. This pretense is not
borne out by the language of said Articles. The same
merely declare the carrier liable for damages in
enumerated cases, if the conditions therein specified are
present. Neither said provisions nor others in the
aforementioned Convention regulate or exclude liability
for other breaches of contract by the carrier. Under
petitioner's theory, an air carrier would be exempt from
any liability for damages in the event of its absolute
refusal, in bad faith, to comply with a contract of carriage,
which is absurd.
it prefaced this statement by explaining that:
...The case is now before us on petition for review by
certiorari, upon the ground that the lower court has erred:
(1) in holding that the Warsaw Convention of October 12,
1929, relative to transportation by air is not in force in the
Philippines: (2) in not holding that respondent has no
cause of action; and (3) in awarding P20,000 as nominal
damages.
We deem it unnecessary to pass upon the First
assignment of error because the same is the basis of the
second assignment of error, and the latter is devoid of
merit, even if we assumed the former to be well
taken. (Emphasis supplied.)
Thus, it is quite clear that the Court never intended to, and in fact
never did, rule against the validity of provisions of the Warsaw
Convention. Consequently, by no stretch of the imagination may
said quotation from Northwest be considered as supportive of the
appellate court's statement that the provisions of the Warsaw
Convention limited a carrier's liability are against public policy.
2. The Court finds itself unable to agree with the decision of the
trial court, and affirmed by the Court of Appeals, awarding private
respondents damages as and for lost profits when their contracts
to show the films in Guam and San Francisco, California were
cancelled.
The rule laid down in Mendoza v. Philippine Air Lines, Inc. [90 Phil.
836 (1952)] cannot be any clearer:
...Under Art.1107 of the Civil Code, a debtor in good faith
like the defendant herein, may be held liable only for
damages that were foreseen or might have been
foreseen at the time the contract of transportation was
entered into. The trial court correctly found that the
defendant company could not have foreseen the
damages that would be suffered by Mendoza upon
failure to deliver the can of film on the 17th of September,
1948 for the reason that the plans of Mendoza to exhibit
that film during the town fiesta and his preparations,
specially the announcement of said exhibition by posters
and advertisement in the newspaper, were not called to
the defendant's attention.
In our research for authorities we have found a case very similar to
the one under consideration. In the case of Chapman vs. Fargo,
L.R.A. (1918 F) p. 1049, the plaintiff in Troy, New York, delivered
motion picture films to the defendant Fargo, an express company,
consigned and to be delivered to him in Utica. At the time of
shipment the attention of the express company was called to the
fact that the shipment involved motion picture films to be exhibited
in Utica, and that they should be sent to their destination, rush.
There was delay in their delivery and it was found that the plaintiff
because of his failure to exhibit the film in Utica due to the delay
suffered damages or loss of profits. But the highest court in the
State of New York refused to award him special damages. Said
appellate court observed:
But before defendant could be held to special damages,
such as the present alleged loss of profits on account of
delay or failure of delivery, it must have appeared that he
had notice at the time of delivery to him of the particular
circumstances attending the shipment, and which
probably would lead to such special loss if he defaulted.
Or, as the rule has been stated in another form, in order
to purpose on the defaulting party further liability than for
damages naturally and directly, i.e., in the ordinary
course of things, arising from a breach of contract, such
unusual or extraordinary damages must have been
brought within the contemplation of the parties as the
probable result of breach at the time of or prior to
contracting. Generally, notice then of any special
circumstances which will show that the damages to be
anticipated from a breach would be enhanced has been
held sufficient for this effect.
As may be seen, that New York case is a stronger one than the
present case for the reason that the attention of the common
carrier in said case was called to the nature of the articles shipped,
the purpose of shipment, and the desire to rush the shipment,
circumstances and facts absent in the present case. [Emphasis
supplied.]
Thus, applying the foregoing ruling to the facts of the instant case,
in the absence of a showing that petitioner's attention was called to
the special circumstances requiring prompt delivery of private
respondent Pangan's luggages, petitioner cannot be held liable for
the cancellation of private respondents' contracts as it could not
have foreseen such an eventuality when it accepted the luggages
for transit.
The Court is unable to uphold the Intermediate Appellate Court's
disregard of the rule laid down in Mendoza and affirmance of the
trial court's conclusion that petitioner is liable for damages based
on the finding that "[tlhe undisputed fact is that the contracts of the
plaintiffs for the exhibition of the films in Guam and California were
cancelled because of the loss of the two luggages in question."
[Rollo, p. 36] The evidence reveals that the proximate cause of the
cancellation of the contracts was private respondent Pangan's
failure to deliver the promotional and advertising materials on the
dates agreed upon. For this petitioner cannot be held liable.
Private respondent Pangan had not declared the value of the two
luggages he had checked in and paid additional charges. Neither
was petitioner privy to respondents' contracts nor was its attention
called to the condition therein requiring delivery of the promotional
and advertising materials on or before a certain date.
3. With the Court's holding that petitioner's liability is limited to the
amount stated in the ticket, the award of attorney's fees, which is
grounded on the alleged unjustified refusal of petitioner to satisfy
private respondent's just and valid claim, loses support and must
be set aside.
WHEREFORE, the Petition is hereby GRANTED and the Decision
of the Intermediate Appellate Court is SET ASIDE and a new
judgment is rendered ordering petitioner to pay private
respondents damages in the amount of US $600.00 or its
equivalent in Philippine currency at the time of actual payment. SO
ORDERED.
G.R. No. 140047 July 13, 2004
PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE
CORPORATION, petitioner,
vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX
INTERNATIONAL, INC.; VICENTE P. EUSEBIO; SOLEDAD C.
EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND
FIRST INTEGRATED BONDING AND INSURANCE COMPANY,
INC., respondents.
This case is an offshoot of a service contract entered into by a
Filipino construction firm with the Iraqi Government for the
construction of the Institute of Physical Therapy-Medical Center,
Phase II, in Baghdad, Iraq, at a time when the Iran-Iraq war was
ongoing.
In a complaint filed with the Regional Trial Court of Makati City,
docketed as Civil Case No. 91-1906 and assigned to Branch 58,
petitioner Philippine Export and Foreign Loan Guarantee
Corporation1 (hereinafter Philguarantee) sought reimbursement
from the respondents of the sum of money it paid to Al Ahli Bank of
Kuwait pursuant to a guarantee it issued for respondent V.P.
Eusebio Construction, Inc. (VPECI).
The factual and procedural antecedents in this case are as follows:
On 8 November 1980, the State Organization of Buildings (SOB),
Ministry of Housing and Construction, Baghdad, Iraq, awarded the
construction of the Institute of Physical Therapy–Medical
Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the
Project) to Ajyal Trading and Contracting Company (hereinafter
Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce
for a total contract price of ID5,416,089/046 (or about
US$18,739,668).2
On 7 March 1981, respondent spouses Eduardo and Iluminada
Santos, in behalf of respondent 3-Plex International, Inc.
(hereinafter 3-Plex), a local contractor engaged in construction
business, entered into a joint venture agreement with Ajyal
wherein the former undertook the execution of the entire Project,
while the latter would be entitled to a commission of 4% of the
contract price.3 Later, or on 8 April 1981, respondent 3-Plex, not
being accredited by or registered with the Philippine Overseas
Construction Board (POCB), assigned and transferred all its rights
and interests under the joint venture agreement to VPECI, a
construction and engineering firm duly registered with the
POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into
an agreement that the execution of the Project would be under
their joint management.5
The SOB required the contractors to submit (1) a performance
bond of ID271,808/610 representing 5% of the total contract price
and (2) an advance payment bond of ID541,608/901 representing
10% of the advance payment to be released upon signing of the
contract.6 To comply with these requirements, respondents 3-Plex
and VPECI applied for the issuance of a guarantee with petitioner
Philguarantee, a government financial institution empowered to
issue guarantees for qualified Filipino contractors to secure the
performance of approved service contracts abroad. 7
Petitioner Philguarantee approved respondents' application.
Subsequently, letters of guarantee8 were issued by Philguarantee
to the Rafidain Bank of Baghdad covering 100% of the
performance and advance payment bonds, but they were not
accepted by SOB. What SOB required was a letter-guarantee from
Rafidain Bank, the government bank of Iraq. Rafidain Bank then
issued a performance bond in favor of SOB on the condition that
another foreign bank, not Philguarantee, would issue a counter-
guarantee to cover its exposure. Al Ahli Bank of Kuwait was,
therefore, engaged to provide a counter-guarantee to Rafidain
Bank, but it required a similar counter-guarantee in its favor from
the petitioner. Thus, three layers of guarantees had to be
arranged.9
Upon the application of respondents 3-Plex and VPECI, petitioner
Philguarantee issued in favor of Al Ahli Bank of Kuwait Letter of
Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the
amount of ID271,808/610 and Letter of Guarantee No. 81-195-
F11 (Advance Payment Guarantee) in the amount of
ID541,608/901, both for a term of eighteen months from 25 May
1981. These letters of guarantee were secured by (1) a Deed of
Undertaking12executed by respondents VPECI, Spouses Vicente
P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses
Eduardo E. Santos and Iluminada Santos; and (2) a surety
bond13 issued by respondent First Integrated Bonding and
Insurance Company, Inc. (FIBICI). The Surety Bond was later
amended on 23 June 1981 to increase the amount of coverage
from P6.4 million to P6.967 million and to change the bank in
whose favor the petitioner's guarantee was issued, from Rafidain
Bank to Al Ahli Bank of Kuwait.14
On 11 June 1981, SOB and the joint venture VPECI and Ajyal
executed the service contract15 for the construction of the Institute
of Physical Therapy – Medical Rehabilitation Center, Phase II, in
Baghdad, Iraq, wherein the joint venture contractor undertook to
complete the Project within a period of 547 days or 18 months.
Under the Contract, the Joint Venture would supply manpower and
materials, and SOB would refund to the former 25% of the project
cost in Iraqi Dinar and the 75% in US dollars at the exchange rate
of 1 Dinar to 3.37777 US Dollars.16
The construction, which was supposed to start on 2 June 1981,
commenced only on the last week of August 1981. Because of this
delay and the slow progress of the construction work due to some
setbacks and difficulties, the Project was not completed on 15
November 1982 as scheduled. But in October 1982, upon
foreseeing the impossibility of meeting the deadline and upon the
request of Al Ahli Bank, the joint venture contractor worked for the
renewal or extension of the Performance Bond and Advance
Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-
194-F (Performance Bond) and 81-195-F (Advance Payment
Bond) with expiry date of 25 November 1982 were then renewed
or extended to 9 February 1983 and 9 March 1983,
respectively.17 The surety bond was also extended for another
period of one year, from 12 May 1982 to 12 May 1983. 18 The
Performance Bond was further extended twelve times with validity
of up to 8 December 1986,19 while the Advance Payment
Guarantee was extended three times more up to 24 May 1984
when the latter was cancelled after full refund or reimbursement by
the joint venture contractor.20 The surety bond was likewise
extended to 8 May 1987.21
As of March 1986, the status of the Project was 51%
accomplished, meaning the structures were already finished. The
remaining 47% consisted in electro-mechanical works and the 2%,
sanitary works, which both required importation of equipment and
materials.22
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the
petitioner demanding full payment of its performance bond
counter-guarantee.
Upon receiving a copy of that telex message on 27 October 1986,
respondent VPECI requested Iraq Trade and Economic
Development Minister Mohammad Fadhi Hussein to recall the
telex call on the performance guarantee for being a drastic action
in contravention of its mutual agreement with the latter that (1) the
imposition of penalty would be held in abeyance until the
completion of the project; and (2) the time extension would be
open, depending on the developments on the negotiations for a
foreign loan to finance the completion of the project. 23 It also wrote
SOB protesting the call for lack of factual or legal basis, since the
failure to complete the Project was due to (1) the Iraqi
government's lack of foreign exchange with which to pay its
(VPECI's) accomplishments and (2) SOB's noncompliance for the
past several years with the provision in the contract that 75% of
the billings would be paid in US dollars. 24 Subsequently, or on 19
November 1986, respondent VPECI advised the petitioner not to
pay yet Al Ahli Bank because efforts were being exerted for the
amicable settlement of the Project.25
On 14 April 1987, the petitioner received another telex message
from Al Ahli Bank stating that it had already paid to Rafidain Bank
the sum of US$876,564 under its letter of guarantee, and
demanding reimbursement by the petitioner of what it paid to the
latter bank plus interest thereon and related expenses.26
Both petitioner Philguarantee and respondent VPECI sought the
assistance of some government agencies of the Philippines. On 10
August 1987, VPECI requested the Central Bank to hold in
abeyance the payment by the petitioner "to allow the diplomatic
machinery to take its course, for otherwise, the Philippine
government , through the Philguarantee and the Central Bank,
would become instruments of the Iraqi Government in
consummating a clear act of injustice and inequity committed
against a Filipino contractor."27
On 27 August 1987, the Central Bank authorized the remittance for
its account of the amount of US$876,564 (equivalent to ID271,
808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECI's project in Iraq. 28
On 6 November 1987, Philguarantee informed VPECI that it would
remit US$876,564 to Al Ahli Bank, and reiterated the joint and
solidary obligation of the respondents to reimburse the petitioner
for the advances made on its counter-guarantee.29
The petitioner thus paid the amount of US$876,564 to Al Ahli Bank
of Kuwait on 21 January 1988.30 Then, on 6 May 1988, the
petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter
bank.31
On 19 June 1991, the petitioner sent to the respondents separate
letters demanding full payment of the amount of P47,872,373.98
plus accruing interest, penalty charges, and 10% attorney's fees
pursuant to their joint and solidary obligations under the deed of
undertaking and surety bond.32 When the respondents failed to
pay, the petitioner filed on 9 July 1991 a civil case for collection of
a sum of money against the respondents before the RTC of Makati
City.
After due trial, the trial court ruled against Philguarantee and held
that the latter had no valid cause of action against the
respondents. It opined that at the time the call was made on the
guarantee which was executed for a specific period, the guarantee
had already lapsed or expired. There was no valid renewal or
extension of the guarantee for failure of the petitioner to secure
respondents' express consent thereto. The trial court also found
that the joint venture contractor incurred no delay in the execution
of the Project. Considering the Project owner's violations of the
contract which rendered impossible the joint venture contractor's
performance of its undertaking, no valid call on the guarantee
could be made. Furthermore, the trial court held that no valid
notice was first made by the Project owner SOB to the joint
venture contractor before the call on the guarantee. Accordingly, it
dismissed the complaint, as well as the counterclaims and cross-
claim, and ordered the petitioner to pay attorney's fees
of P100,000 to respondents VPECI and Eusebio Spouses
and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33
In its 14 June 1999 Decision,34 the Court of Appeals affirmed the
trial court's decision, ratiocinating as follows:
First, appellant cannot deny the fact that it was fully
aware of the status of project implementation as well as
the problems besetting the contractors, between 1982 to
1985, having sent some of its people to Baghdad during
that period. The successive renewals/extensions of the
guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension
understandably allowed by the SOB (project owner)
which had not anyway complied with its contractual
commitment to tender 75% of payment in US Dollars,
and which still retained overdue amounts collectible by
VPECI.
…
Second, appellant was very much aware of the violations
committed by the SOB of its contractual undertakings
with VPECI, principally, the payment of foreign currency
(US$) for 75% of the total contract price, as well as of the
complications and injustice that will result from its
payment of the full amount of the performance
guarantee, as evident in PHILGUARANTEE's letter dated
13 May 1987 ….
…
Third, appellant was fully aware that SOB was in fact still
obligated to the Joint Venture and there was still an
amount collectible from and still being retained by the
project owner, which amount can be set-off with the sum
covered by the performance guarantee.
…
Fourth, well-apprised of the above conditions obtaining at
the Project site and cognizant of the war situation at the
time in Iraq, appellant, though earlier has made
representations with the SOB regarding a possible
amicable termination of the Project as suggested by
VPECI, made a complete turn-around and insisted on
 acting in favor of the unjustified "call" by the foreign
banks.35
The petitioner then came to this Court via Rule 45 of the Rules of
Court claiming that the Court of Appeals erred in affirming the trial
court's ruling that
I F to pay you on your first written or telex demand Iraq
…RESPONDENTS ARE NOT LIABLE UNDER THE
DEED OF UNDERTAKING THEY EXECUTED IN
FAVOR OF PETITIONER IN CONSIDERATION FOR
THE ISSUANCE OF ITS COUNTER-GUARANTEE AND
THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE
SAID COUNTER-GUARANTEE.
II
…PETITIONER CANNOT CLAIM SUBROGATION.
III
…IT IS INIQUITOUS AND UNJUST FOR PETITIONER
TO HOLD RESPONDENTS LIABLE UNDER THEIR
DEED OF UNDERTAKING.36
The main issue in this case is whether the petitioner is entitled to
reimbursement of what it paid under Letter of Guarantee No. 81-
194-F it issued to Al Ahli Bank of Kuwait based on the deed of
undertaking and surety bond from the respondents.
The petitioner asserts that since the guarantee it issued was
absolute, unconditional, and irrevocable the nature and extent of
its liability are analogous to those of suretyship. Its liability accrued
upon the failure of the respondents to finish the construction of the
Institute of Physical Therapy Buildings in Baghdad.
By guaranty a person, called the guarantor, binds himself to the
creditor to fulfill the obligation of the principal debtor in case the
latter should fail to do so. If a person binds himself solidarily with
the principal debtor, the contract is called suretyship. 37
Strictly speaking, guaranty and surety are nearly related, and
many of the principles are common to both. In both contracts,
there is a promise to answer for the debt or default of another.
However, in this jurisdiction, they may be distinguished thus:
1. A surety is usually bound with his principal by the
same instrument executed at the same time and on the
same consideration. On the other hand, the contract of
guaranty is the guarantor's own separate undertaking
often supported by a consideration separate from that
supporting the contract of the principal; the original
contract of his principal is not his contract.
2. A surety assumes liability as a regular party to the
undertaking; while the liability of a guarantor is
conditional depending on the failure of the primary debtor
to pay the obligation.
3. The obligation of a surety is primary, while that of a
guarantor is secondary.
4. A surety is an original promissor and debtor from the
beginning, while a guarantor is charged on his own
undertaking.
5. A surety is, ordinarily, held to know every default of his
principal; whereas a guarantor is not bound to take notice
of the non-performance of his principal.
6. Usually, a surety will not be discharged either by the
mere indulgence of the creditor to the principal or by
want of notice of the default of the principal, no matter
how much he may be injured thereby. A guarantor is
often discharged by the mere indulgence of the creditor
to the principal, and is usually not liable unless notified of
the default of the principal. 38
In determining petitioner's status, it is necessary to read Letter of
Guarantee No. 81-194-F, which provides in part as follows:
In consideration of your issuing the above performance
guarantee/counter-guarantee, we hereby unconditionally
and irrevocably guarantee, under our Ref. No. LG-81-194
Dinars Two Hundred Seventy One Thousand Eight
Hundred Eight and fils six hundred ten (ID271,808/610)
representing 100% of the performance bond required of
V.P. EUSEBIO for the construction of the Physical
Therapy Institute, Phase II, Baghdad, Iraq, plus interest
and other incidental expenses related thereto.
In the event of default by V.P. EUSEBIO, we shall pay
you 100% of the obligation unpaid but in no case shall
such amount exceed Iraq Dinars (ID) 271,808/610 plus
interest and other incidental expenses…. (Emphasis
supplied)39
Guided by the abovementioned distinctions between a surety and
a guaranty, as well as the factual milieu of this case, we find that
the Court of Appeals and the trial court were correct in ruling that
the petitioner is a guarantor and not a surety. That the guarantee
issued by the petitioner is unconditional and irrevocable does not
make the petitioner a surety. As a guaranty, it is still characterized
by its subsidiary and conditional quality because it does not take
effect until the fulfillment of the condition, namely, that the principal
obligor should fail in his obligation at the time and in the form he
bound himself.40 In other words, an unconditional guarantee is still
subject to the condition that the principal debtor should default in
his obligation first before resort to the guarantor could be had. A
conditional guaranty, as opposed to an unconditional guaranty, is
one which depends upon some extraneous event, beyond the
mere default of the principal, and generally upon notice of the
principal's default and reasonable diligence in exhausting proper
remedies against the principal.41
It appearing that Letter of Guarantee No. 81-194-F merely stated
that in the event of default by respondent VPECI the petitioner
shall pay, the obligation assumed by the petitioner was simply that
of an unconditional guaranty, not conditional guaranty. But as
earlier ruled the fact that petitioner's guaranty is unconditional
does not make it a surety. Besides, surety is never presumed. A
party should not be considered a surety where the contract itself
stipulates that he is acting only as a guarantor. It is only when the
guarantor binds himself solidarily with the principal debtor that the
contract becomes one of suretyship.42
Having determined petitioner's liability as guarantor, the next
question we have to grapple with is whether the respondent
contractor has defaulted in its obligations that would justify resort
to the guaranty. This is a mixed question of fact and law that is
better addressed by the lower courts, since this Court is not a trier
of facts.
It is a fundamental and settled rule that the findings of fact of the
trial court and the Court of Appeals are binding or conclusive upon
this Court unless they are not supported by the evidence or unless
strong and cogent reasons dictate otherwise. 43 The factual findings
of the Court of Appeals are normally not reviewable by us under
Rule 45 of the Rules of Court except when they are at variance
with those of the trial court. 44 The trial court and the Court of
Appeals were in unison that the respondent contractor cannot be
considered to have defaulted in its obligations because the cause
of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining
whether the respondent contractor has defaulted in the
performance of its obligations under the service contract. The
question of whether there is a breach of an agreement, which
includes default or mora,45 pertains to the essential or intrinsic
validity of a contract. 46
No conflicts rule on essential validity of contracts is expressly
provided for in our laws. The rule followed by most legal systems,
however, is that the intrinsic validity of a contract must be
governed by the lex contractus or "proper law of the contract." This
is the law voluntarily agreed upon by the parties (the lex loci
voluntatis) or the law intended by them either expressly or implicitly
(the lex loci intentionis). The law selected may be implied from
such factors as substantial connection with the transaction, or the
nationality or domicile of the parties.47 Philippine courts would do
well to adopt the first and most basic rule in most legal systems,
namely, to allow the parties to select the law applicable to their
contract, subject to the limitation that it is not against the law,
morals, or public policy of the forum and that the chosen law must
bear a substantive relationship to the transaction. 48
It must be noted that the service contract between SOB and
VPECI contains no express choice of the law that would govern it.
In the United States and Europe, the two rules that now seem to
have emerged as "kings of the hill" are (1) the parties may choose
the governing law; and (2) in the absence of such a choice, the
applicable law is that of the State that "has the most significant
relationship to the transaction and the parties."49 Another authority
proposed that all matters relating to the time, place, and manner of
performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci
solutionis, which is useful because it is undoubtedly always
connected to the contract in a significant way. 50
In this case, the laws of Iraq bear substantial connection to the
transaction, since one of the parties is the Iraqi Government and
the place of performance is in Iraq. Hence, the issue of whether
respondent VPECI defaulted in its obligations may be determined
by the laws of Iraq. However, since that foreign law was not
properly pleaded or proved, the presumption of identity or
similarity, otherwise known as the processual presumption, comes
into play. Where foreign law is not pleaded or, even if pleaded, is
not proved, the presumption is that foreign law is the same as
ours.51
Our law, specifically Article 1169, last paragraph, of the Civil Code,
provides: "In reciprocal obligations, neither party incurs in delay if
the other party does not comply or is not ready to comply in a
proper manner with what is incumbent upon him."
Default or mora on the part of the debtor is the delay in the
fulfillment of the prestation by reason of a cause imputable to the
former. 52 It is the non-fulfillment of an obligation with respect to
time.53
It is undisputed that only 51.7% of the total work had been
accomplished. The 48.3% unfinished portion consisted in the
purchase and installation of electro-mechanical equipment and
materials, which were available from foreign suppliers, thus
requiring US Dollars for their importation. The monthly billings and
payments made by SOB54 reveal that the agreement between the
parties was a periodic payment by the Project owner to the
contractor depending on the percentage of accomplishment within
the period. 55 The payments were, in turn, to be used by the
contractor to finance the subsequent phase of the
work. 56 However, as explained by VPECI in its letter to the
Department of Foreign Affairs (DFA), the payment by SOB purely
in Dinars adversely affected the completion of the project; thus:
4. Despite protests from the plaintiff, SOB continued
paying the accomplishment billings of the Contractor
purely in Iraqi Dinars and which payment came only after
some delays.
5. SOB is fully aware of the following:
…
5.2 That Plaintiff is a foreign contractor in Iraq and as
such, would need foreign currency (US$), to finance the
purchase of various equipment, materials, supplies, tools
and to pay for the cost of project management,
supervision and skilled labor not available in Iraq and
therefore have to be imported and or obtained from the
Philippines and other sources outside Iraq.
5.3 That the Ministry of Labor and Employment of the
Philippines requires the remittance into the Philippines of
70% of the salaries of Filipino workers working abroad in
US Dollars;
…
5.5 That the Iraqi Dinar is not a freely convertible
currency such that the same cannot be used to purchase
equipment, materials, supplies, etc. outside of Iraq;
5.6 That most of the materials specified by SOB in the
CONTRACT are not available in Iraq and therefore have
to be imported;
5.7 That the government of Iraq prohibits the bringing of
local currency (Iraqui Dinars) out of Iraq and hence,
imported materials, equipment, etc., cannot be
purchased or obtained using Iraqui Dinars as medium of
acquisition.
…
8. Following the approved construction program of the
CONTRACT, upon completion of the civil works portion
of the installation of equipment for the building, should
immediately follow, however, the CONTRACT specified
that these equipment which are to be installed and to
form part of the PROJECT have to be procured outside
Iraq since these are not being locally manufactured.
Copy f the relevant portion of the Technical Specification
is hereto attached as Annex "C" and made an integral
part hereof;
…
10. Due to the lack of Foreign currency in Iraq for this
purpose, and if only to assist the Iraqi government in
completing the PROJECT, the Contractor without any
obligation on its part to do so but with the knowledge and
consent of SOB and the Ministry of Housing &
Construction of Iraq, offered to arrange on behalf of SOB,
a foreign currency loan, through the facilities of Circle
International S.A., the Contractor's Sub-contractor and
SACE MEDIO CREDITO which will act as the guarantor
for this foreign currency loan.
Arrangements were first made with Banco di Roma.
Negotiation started in June 1985. SOB is informed of the
developments of this negotiation, attached is a copy of
the draft of the loan Agreement between SOB as the
Borrower and Agent. The Several Banks, as Lender, and
counter-guaranteed by Istituto Centrale Per II Credito A
Medio Termine (Mediocredito) Sezione Speciale Per
L'Assicurazione Del Credito All'Exportazione (Sace).
Negotiations went on and continued until it suddenly
collapsed due to the reported default by Iraq in the
payment of its obligations with Italian government, copy
of the news clipping dated June 18, 1986 is hereto
attached as Annex "D" to form an integral part hereof;
 15. On September 15, 1986, Contractor received
information from Circle International S.A. that because of
the news report that Iraq defaulted in its obligations with
European banks, the approval by Banco di Roma of the
loan to SOB shall be deferred indefinitely, a copy of the
letter of Circle International together with the news
clippings are hereto attached as Annexes "F" and "F-1",
respectively.57
As found by both the Court of Appeals and the trial court, the delay
or the non-completion of the Project was caused by factors not
imputable to the respondent contractor. It was rather due mainly to
the persistent violations by SOB of the terms and conditions of the
contract, particularly its failure to pay 75% of the accomplished
work in US Dollars. Indeed, where one of the parties to a contract
does not perform in a proper manner the prestation which he is
bound to perform under the contract, he is not entitled to demand
the performance of the other party. A party does not incur in delay
if the other party fails to perform the obligation incumbent upon
him.
The petitioner, however, maintains that the payments by SOB of
the monthly billings in purely Iraqi Dinars did not render impossible
the performance of the Project by VPECI. Such posture is quite
contrary to its previous representations. In his 26 March 1987 letter
to the Office of the Middle Eastern and African Affairs (OMEAA),
DFA, Manila, petitioner's Executive Vice-President Jesus M.
Tañedo stated that while VPECI had taken every possible
measure to complete the Project, the war situation in Iraq,
particularly the lack of foreign exchange, was proving to be a great
obstacle; thus:
VPECI has taken every possible measure for the
completion of the project but the war situation in Iraq
particularly the lack of foreign exchange is proving to be
a great obstacle. Our performance counterguarantee was
called last 26 October 1986 when the negotiations for a
foreign currency loan with the Italian government through
Banco de Roma bogged down following news report that
Iraq has defaulted in its obligation with major European
banks. Unless the situation in Iraq is improved as to allay
the bank's apprehension, there is no assurance that the
project will ever be completed. 58
In order that the debtor may be in default it is necessary that the
following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance
because it must appear that the tolerance or benevolence of the
creditor must have ended. 59
As stated earlier, SOB cannot yet demand complete performance
from VPECI because it has not yet itself performed its obligation in
a proper manner, particularly the payment of the 75% of the cost of
the Project in US Dollars. The VPECI cannot yet be said to have
incurred in delay. Even assuming that there was delay and that the
delay was attributable to VPECI, still the effects of that delay
ceased upon the renunciation by the creditor, SOB, which could be
implied when the latter granted several extensions of time to the
former. 60 Besides, no demand has yet been made by SOB against
the respondent contractor. Demand is generally necessary even if
a period has been fixed in the obligation. And default generally
begins from the moment the creditor demands judicially or extra-
judicially the performance of the obligation. Without such demand,
the effects of default will not arise.61
Moreover, the petitioner as a guarantor is entitled to the benefit of
excussion, that is, it cannot be compelled to pay the creditor SOB
unless the property of the debtor VPECI has been exhausted and
all legal remedies against the said debtor have been resorted to by
the creditor.62 It could also set up compensation as regards what
the creditor SOB may owe the principal debtor VPECI. 63 In this
case, however, the petitioner has clearly waived these rights and
remedies by making the payment of an obligation that was yet to
be shown to be rightfully due the creditor and demandable of the
principal debtor.
As found by the Court of Appeals, the petitioner fully knew that the
joint venture contractor had collectibles from SOB which could be
set off with the amount covered by the performance guarantee. In
February 1987, the OMEAA transmitted to the petitioner a copy of
a telex dated 10 February 1987 of the Philippine Ambassador in
Baghdad, Iraq, informing it of the note verbale sent by the Iraqi
Ministry of Foreign Affairs stating that the past due obligations of
the joint venture contractor from the petitioner would "be deducted
from the dues of the two contractors."64
Also, in the project situationer attached to the letter to the OMEAA
dated 26 March 1987, the petitioner raised as among the
arguments to be presented in support of the cancellation of the
counter-guarantee the fact that the amount of ID281,414/066
retained by SOB from the Project was more than enough to cover
the counter-guarantee of ID271,808/610; thus:
6.1 Present the following arguments in cancelling the
counterguarantee:
· The Iraqi Government does not have the
foreign exchange to fulfill its contractual
obligations of paying 75% of progress billings in
US dollars.
…
· It could also be argued that the amount of
ID281,414/066 retained by SOB from the
proposed project is more than the amount of
the outstanding counterguarantee.65
In a nutshell, since the petitioner was aware of the contractor's
outstanding receivables from SOB, it should have set up
compensation as was proposed in its project situationer.
Moreover, the petitioner was very much aware of the predicament
of the respondents. In fact, in its 13 May 1987 letter to the
OMEAA, DFA, Manila, it stated:
VPECI also maintains that the delay in the completion of
the project was mainly due to SOB's violation of contract
terms and as such, call on the guarantee has no basis.
While PHILGUARANTEE is prepared to honor its
commitment under the guarantee, PHILGUARANTEE
does not want to be an instrument in any case of inequity
committed against a Filipino contractor. It is for this
reason that we are constrained to seek your assistance
not only in ascertaining the veracity of Al Ahli Bank's
claim that it has paid Rafidain Bank but possibly averting
such an event. As any payment effected by the banks will
complicate matters, we cannot help underscore the
urgency of VPECI's bid for government intervention for
the amicable termination of the contract and release of
the performance guarantee. 66
But surprisingly, though fully cognizant of SOB's violations of the
service contract and VPECI's outstanding receivables from SOB,
as well as the situation obtaining in the Project site compounded
by the Iran-Iraq war, the petitioner opted to pay the second layer
guarantor not only the full amount of the performance bond
counter-guarantee but also interests and penalty charges.
This brings us to the next question: May the petitioner as a
guarantor secure reimbursement from the respondents for what it
has paid under Letter of Guarantee No. 81-194-F?
As a rule, a guarantor who pays for a debtor should be indemnified
by the latter67 and would be legally subrogated to the rights which
the creditor has against the debtor.68 However, a person who
makes payment without the knowledge or against the will of the
debtor has the right to recover only insofar as the payment has
been beneficial to the debtor.69 If the obligation was subject to
defenses on the part of the debtor, the same defenses which could
have been set up against the creditor can be set up against the
paying guarantor.70
From the findings of the Court of Appeals and the trial court, it is
clear that the payment made by the petitioner guarantor did not in
any way benefit the principal debtor, given the project status and
the conditions obtaining at the Project site at that time. Moreover,
the respondent contractor was found to have valid defenses
against SOB, which are fully supported by evidence and which
have been meritoriously set up against the paying guarantor, the
petitioner in this case. And even if the deed of undertaking and the
surety bond secured petitioner's guaranty, the petitioner is
precluded from enforcing the same by reason of the petitioner's
undue payment on the guaranty. Rights under the deed of
undertaking and the surety bond do not arise because these
contracts depend on the validity of the enforcement of the
guaranty.
The petitioner guarantor should have waited for the natural course
of guaranty: the debtor VPECI should have, in the first place,
defaulted in its obligation and that the creditor SOB should have
first made a demand from the principal debtor. It is only when the
debtor does not or cannot pay, in whole or in part, that the
guarantor should pay.71 When the petitioner guarantor in this case
paid against the will of the debtor VPECI, the debtor VPECI may
set up against it defenses available against the creditor SOB at the
time of payment. This is the hard lesson that the petitioner must
learn.
As the government arm in pursuing its objective of providing "the
necessary support and assistance in order to enable … [Filipino
exporters and contractors to operate viably under the prevailing
economic and business conditions,"72 the petitioner should have
exercised prudence and caution under the circumstances. As aptly
put by the Court of Appeals, it would be the height of inequity to
allow the petitioner to pass on its losses to the Filipino contractor
VPECI which had sternly warned against paying the Al Ahli Bank
and constantly apprised it of the developments in the Project
implementation.
WHEREFORE, the petition for review on certiorari is hereby
DENIED for lack of merit, and the decision of the Court of appeals
in CA-G.R. CV No. 39302 is AFFIRMED.
No pronouncement as to costs. SO ORDERED.
G.R. No. 101538 June 23, 1992
AUGUSTO BENEDICTO SANTOS III, represented by his father
and legal guardian, Augusto Benedicto Santos, petitioner,
vs.NORTHWEST ORIENT AIRLINES and COURT OF
APPEALS, respondents.
This case involves the Proper interpretation of Article 28(1) of the
Warsaw Convention, reading as follows:
Art. 28. (1) An action for damage must be
brought at the option of the plaintiff, in the
territory of one of the High Contracting Parties,
either before the court of the domicile of the
carrier or of his principal place of business, or
where he has a place of business through
which the contract has been made, or before
the court at the place of destination.
The petitioner is a minor and a resident of the Philippines. Private
respondent Northwest Orient Airlines (NOA) is a foreign
corporation with principal office in Minnesota, U.S.A. and licensed
to do business and maintain a branch office in the Philippines.
On October 21, 1986, the petitioner purchased from NOA a round-
trip ticket in San Francisco. U.S.A., for his flight from San
Francisco to Manila via Tokyo and back. The scheduled departure
date from Tokyo was December 20, 1986. No date was specified
for his return to San Francisco. 1
On December 19, 1986, the petitioner checked in at the NOA
counter in the San Francisco airport for his scheduled departure to
Manila. Despite a previous confirmation and re-confirmation, he
was informed that he had no reservation for his flight from Tokyo to
Manila. He therefore had to be wait-listed.
On March 12, 1987, the petitioner sued NOA for damages in the
Regional Trial Court of Makati. On April 13, 1987, NOA moved to
dismiss the complaint on the ground of lack of jurisdiction. Citing
the above-quoted article, it contended that the complaint could be
instituted only in the territory of one of the High Contracting
Parties, before:
1. the court of the domicile of the carrier;
2. the court of its principal place of business;
3. the court where it has a place of business
through which the contract had been made;
4. the court of the place of destination.
The private respondent contended that the Philippines was not its
domicile nor was this its principal place of business. Neither was
the petitioner's ticket issued in this country nor was his destination
Manila but San Francisco in the United States.
On February 1, 1988, the lower court granted the motion and
dismissed the case. 2 The petitioner appealed to the Court of
Appeals, which affirmed the decision of the lower court. 3 On June
26, 1991, the petitioner filed a motion for reconsideration, but the
same was denied. 4 The petitioner then came to this Court, raising
substantially the same issues it submitted in the Court of Appeals.
The assignment of errors may be grouped into two major
issues, viz:
(1) the constitutionality of Article 28(1) of the Warsaw Convention;
and
(2) the jurisdiction of Philippine courts over the case.
The petitioner also invokes Article 24 of the Civil Code on the
protection of minors.
 I The petitioner goes at great lengths to show that the provisions in
THE ISSUE OF CONSTITUTIONALITY
A. The petitioner claims that the lower court
erred in not ruling that Article 28(1) of the
Warsaw Convention violates the constitutional
guarantees of due process and equal
protection.
The Republic of the Philippines is a party to the Convention for the
Unification of Certain Rules Relating to International
Transportation by Air, otherwise known as the Warsaw
Convention. It took effect on February 13, 1933. The Convention
was concurred in by the Senate, through its Resolution No. 19, on
May 16, 1950. The Philippine instrument of accession was signed
by President Elpidio Quirino on October 13, 1950, and was
deposited with the Polish government on November 9, 1950. The
Convention became applicable to the Philippines on February 9,
1951. On September 23, 1955, President Ramon Magsaysay
issued Proclamation No. 201, declaring our formal adherence
thereto. "to the end that the same and every article and clause
thereof may be observed and fulfilled in good faith by the Republic
of the Philippines and the citizens thereof." 5
The Convention is thus a treaty commitment voluntarily assumed
by the Philippine government and, as such, has the force and
effect of law in this country.
The petitioner contends that Article 28(1) cannot be applied in the
present case because it is unconstitutional. He argues that there is
no substantial distinction between a person who purchases a ticket
in Manila and a person who purchases his ticket in San Francisco.
The classification of the places in which actions for damages may
be brought is arbitrary and irrational and thus violates the due
process and equal protection clauses.
It is well-settled that courts will assume jurisdiction over a
constitutional question only if it is shown that the essential
requisites of a judicial inquiry into such a question are first
satisfied. Thus, there must be an actual case or controversy
involving a conflict of legal rights susceptible of judicial
determination; the constitutional question must have been
opportunely raised by the proper party; and the resolution of the
question is unavoidably necessary to the decision of the case
itself. 6
Courts generally avoid having to decide a constitutional question.
This attitude is based on the doctrine of separation of powers,
which enjoins upon the departments of the government a
becoming respect for each other's acts.
The treaty which is the subject matter of this petition was a joint
legislative-executive act. The presumption is that it was first
carefully studied and determined to be constitutional before it was
adopted and given the force of law in this country.
The petitioner's allegations are not convincing enough to
overcome this presumption. Apparently, the Convention
considered the four places designated in Article 28 the most
convenient forums for the litigation of any claim that may arise
between the airline and its passenger, as distinguished from all
other places. At any rate, we agree with the respondent court that
this case can be decided on other grounds without the necessity of
resolving the constitutional issue.
B. The petitioner claims that the lower court
erred in not ruling that Art. 28(1) of the Warsaw
Convention is inapplicable because of a
fundamental change in the circumstances that
served as its basis.
the Convention were intended to protect airline companies under
"the conditions prevailing then and which have long ceased to
exist." He argues that in view of the significant developments in the
airline industry through the years, the treaty has become irrelevant.
Hence, to the extent that it has lost its basis for approval, it has
become unconstitutional.
The petitioner is invoking the doctrine of rebus sic stantibus.
According to Jessup, "this doctrine constitutes an attempt to
formulate a legal principle which would justify non-performance of
a treaty obligation if the conditions with relation to which the parties
contracted have changed so materially and so unexpectedly as to
create a situation in which the exaction of performance would be
unreasonable." 7 The key element of this doctrine is the vital
change in the condition of the contracting parties that they could
not have foreseen at the time the treaty was concluded.
The Court notes in this connection the following observation made
in Day v. Trans World Airlines, Inc.: 8
The Warsaw drafters wished to create a system
of liability rules that would cover all the hazards
of air travel . . . The Warsaw delegates knew
that, in the years to come, civil aviation would
change in ways that they could not foresee.
They wished to design a system of air law that
would be both durable and flexible enough to
keep pace with these changes . . . The ever-
changing needs of the system of civil aviation
can be served within the framework they
created.
It is true that at the time the Warsaw Convention was drafted, the
airline industry was still in its infancy. However, that circumstance
alone is not sufficient justification for the rejection of the treaty at
this time. The changes recited by the petitioner were, realistically,
not entirely unforeseen although they were expected in a general
sense only. In fact, the Convention itself, anticipating such
developments, contains the following significant provision:
Article 41. Any High Contracting Party shall be
entitled not earlier than two years after the
coming into force of this convention to call for
the assembling of a new international
conference in order to consider any
improvements which may be made in this
convention. To this end, it will communicate
with the Government of the French Republic
which will take the necessary measures to
make preparations for such conference.
But the more important consideration is that the treaty has not
been rejected by the Philippine government. The doctrine of rebus
sic stantibus does not operate automatically to render the treaty
inoperative. There is a necessity for a formal act of rejection,
usually made by the head of State, with a statement of the reasons
why compliance with the treaty is no longer required.
In lieu thereof, the treaty may be denounced even without an
expressed justification for this action. Such denunciation is
authorized under its Article 39, viz:
Article 39. (1) Any one of the High Contracting
Parties may denounce this convention by a
notification addressed to the Government of the
Republic of Poland, which shall at once inform
the Government of each of the High
Contracting Parties.
(2) Denunciation shall take effect six months
after the notification of denunciation, and shall
 operate only as regards the party which shall
have proceeded to denunciation.
Obviously. rejection of the treaty, whether on the ground of rebus
sic stantibus or pursuant to Article 39, is not a function of the
courts but of the other branches of government. This is a political
act. The conclusion and renunciation of treaties is the prerogative
of the political departments and may not be usurped by the
judiciary. The courts are concerned only with the interpretation and
application of laws and treaties in force and not with their wisdom
or efficacy.
C. The petitioner claims that the lower court
erred in ruling that the plaintiff must sue in the
United States, because this would deny him the
right to access to our courts.
The petitioner alleges that the expenses and difficulties he will
incur in filing a suit in the United States would constitute a
constructive denial of his right to access to our courts for the
protection of his rights. He would consequently be deprived of this
vital guaranty as embodied in the Bill of Rights.
Obviously, the constitutional guaranty of access to courts refers
only to courts with appropriate jurisdiction as defined by law. It
does not mean that a person can go to any court for redress of his
grievances regardless of the nature or value of his claim. If the
petitioner is barred from filing his complaint before our courts, it is
because they are not vested with the appropriate jurisdiction under
the Warsaw Convention, which is part of the law of our land.
II
THE ISSUE OF JURISDICTION.
A. The petitioner claims that the lower court
erred in not ruling that Article 28(1) of the
Warsaw Convention is a rule merely of venue
and was waived by defendant when it did not
move to dismiss on the ground of improper
venue.
By its own terms, the Convention applies to all international
transportation of persons performed by aircraft for hire.
International transportation is defined in paragraph (2) of Article 1
as follows:
(2) For the purposes of this convention, the
expression "international transportation" shall
mean any transportation in which, according to
the contract made by the parties, the place of
departure and the place of destination, whether
or not there be a break in the transportation or
a transshipment, are situated [either] within the
territories of two High Contracting Parties . . .
Whether the transportation is "international" is determined by the
contract of the parties, which in the case of passengers is the
ticket. When the contract of carriage provides for the transportation
of the passenger between certain designated terminals "within the
territories of two High Contracting Parties," the provisions of the
Convention automatically apply and exclusively govern the rights
and liabilities of the airline and its passenger.
Since the flight involved in the case at bar is international, the
same being from the United States to the Philippines and back to
the United States, it is subject to the provisions of the Warsaw
Convention, including Article 28(1), which enumerates the four
places where an action for damages may be brought.
Whether Article 28(1) refers to jurisdiction or only to venue is a
question over which authorities are sharply divided. While the
petitioner cites several cases holding that Article 28(1) refers to
venue rather than jurisdiction, 9there are later cases cited by the
private respondent supporting the conclusion that the provision is
jurisdictional. 10
Venue and jurisdiction are entirely distinct matters. Jurisdiction
may not be conferred by consent or waiver upon d court which
otherwise would have no jurisdiction over the subject-matter of an
action; but the venue of an action as fixed by statute may be
changed by the consent of the parties and an objection that the
plaintiff brought his suit in the wrong county may be waived by the
failure of the defendant to make a timely objection. In either case,
the court may render a valid judgment. Rules as to jurisdiction can
never be left to the consent or agreement of the parties, whether or
not a prohibition exists against their alteration. 11
A number of reasons tends to support the characterization of
Article 28(1) as a jurisdiction and not a venue provision. First, the
wording of Article 32, which indicates the places where the action
for damages "must" be brought, underscores the mandatory nature
of Article 28(1). Second, this characterization is consistent with
one of the objectives of the Convention, which is to "regulate in a
uniform manner the conditions of international transportation by
air." Third, the Convention does not contain any provision
prescribing rules of jurisdiction other than Article 28(1), which
means that the phrase "rules as to jurisdiction" used in Article 32
must refer only to Article 28(1). In fact, the last sentence of Article
32 specifically deals with the exclusive enumeration in Article 28(1)
as "jurisdictions," which, as such, cannot be left to the will of the
parties regardless of the time when the damage occurred.
This issue was analyzed in the leading case of Smith v. Canadian
Pacific Airways, Ltd., 12 where it was held:
. . . Of more, but still incomplete, assistance is
the wording of Article 28(2), especially when
considered in the light of Article 32. Article
28(2) provides that "questions
of procedure shall be governed by the law of
the court to which the case is submitted"
(Emphasis supplied). Section (2) thus may be
read to leave for domestic decision questions
regarding the suitability and location of a
particular Warsaw Convention case.
In other words, where the matter is governed by the Warsaw
Convention, jurisdiction takes on a dual concept. Jurisdiction in the
international sense must be established in accordance with Article
28(1) of the Warsaw Convention, following which the jurisdiction of
a particular court must be established pursuant to the applicable
domestic law. Only after the question of which court has
jurisdiction is determined will the issue of venue be taken up. This
second question shall be governed by the law of the court to which
the case is submitted.
The petitioner submits that since Article 32 states that the parties
are precluded "before the damages occurred" from amending the
rules of Article 28(1) as to the place where the action may be
brought, it would follow that the Warsaw Convention was not
intended to preclude them from doing so "after the damages
occurred."
Article 32 provides:
Art. 32. Any clause contained in the contract
and all special agreements entered into before
the damage occurred by which the parties
purport to infringe the rules laid down by this
convention, whether by deciding the law to be
applied, or by altering the rules as to
jurisdiction, shall be null and void. Nevertheless
for the transportation of goods, arbitration
 clauses shall be allowed, subject to this
convention, if the arbitration is to take place
within one of the jurisdictions referred to in the
first paragraph of Article 28.
His point is that since the requirements of Article 28(1) can be
waived "after the damages (shall have) occurred," the article
should be regarded as possessing the character of a "venue" and
not of a "jurisdiction" provision. Hence, in moving to dismiss on the
ground of lack of jurisdiction, the private respondent has waived
improper venue as a ground to dismiss.
The foregoing examination of Article 28(1) in relation to Article 32
does not support this conclusion. In any event, we agree that even
granting arguendo that Article 28(1) is a venue and not a
jurisdictional provision, dismissal of the case was still in order. The
respondent court was correct in affirming the ruling of the trial court
on this matter, thus:
Santos' claim that NOA waived venue as a
ground of its motion to dismiss is not correct.
True it is that NOA averred in its MOTION TO
DISMISS that the ground thereof is "the Court
has no subject matter jurisdiction to entertain
the Complaint" which SANTOS considers as
equivalent to "lack of jurisdiction over the
subject matter . . ." However, the gist of NOA's
argument in its motion is that the Philippines is
not the proper place where SANTOS could file
the action — meaning that the venue of the
action is improperly laid. Even assuming then
that the specified ground of the motion is
erroneous, the fact is the proper ground of the
motion — improper venue — has been
discussed therein.
Waiver cannot be lightly inferred. In case of doubt, it must be
resolved in favor of non-waiver if there are special circumstances
justifying this conclusion, as in the petition at bar. As we observed
in Javier vs. Intermediate Court of Appeals: 13
Legally, of course, the lack of proper venue
was deemed waived by the petitioners when
they failed to invoke it in their original motion to
dismiss. Even so, the motivation of the private
respondent should have been taken into
account by both the trial judge and the
respondent court in arriving at their decisions.
The petitioner also invokes KLM Royal Dutch Airlines v. RTC, 14 a
decision of our Court of Appeals, where it was held that Article
28(1) is a venue provision. However, the private respondent avers
that this was in effect reversed by the case of Aranas v. United
Airlines, 15 where the same court held that Article 28(1) is a
jurisdictional provision. Neither of these cases is binding on this
Court, of course, nor was either of them appealed to us.
Nevertheless, we here express our own preference for the later
case of Aranas insofar as its pronouncements on jurisdiction
conform to the judgment we now make in this petition.
B. The petitioner claims that the lower court
erred in not ruling that under Article 28(1) of the
Warsaw Convention, this case was properly
filed in the Philippines, because Manila was the
destination of the plaintiff.
The Petitioner contends that the facts of this case are analogous to
those in Aanestad v. Air Canada. 16 In that case, Mrs. Silverberg
purchased a round-trip ticket from Montreal to Los Angeles and
back to Montreal. The date and time of departure were specified
but not of the return flight. The plane crashed while on route from
Montreal to Los Angeles, killing Mrs. Silverberg. Her administratrix
filed an action for damages against Air Canada in the U.S. District
Court of California. The defendant moved to dismiss for lack of
jurisdiction but the motion was denied thus:
. . . It is evident that the contract entered into
between Air Canada and Mrs. Silverberg as
evidenced by the ticket booklets and the Flight
Coupon No. 1, was a contract for Air Canada to
carry Mrs. Silverberg to Los Angeles on a
certain flight, a certain time and a certain class,
but that the time for her to return remained
completely in her power. Coupon No. 2 was
only a continuing offer by Air Canada to give
her a ticket to return to Montreal between
certain dates. . . .
The only conclusion that can be reached then,
is that "the place of destination" as used in the
Warsaw Convention is considered by both the
Canadian C.T.C. and the United States C.A.B.
to describe at least two "places of
destination," viz., the "place of destination" of
a particular flight either an "outward destination"
from the "point of origin" or from the "outward
point of destination" to any place in Canada.
Thus the place of destination under Art. 28 and
Art. 1 of the Warsaw Convention of the flight on
which Mrs. Silverberg was killed, was Los
Angeles according to the ticket, which was the
contract between the parties and the suit is
properly filed in this Court which has
jurisdiction.
The Petitioner avers that the present case falls squarely under the
above ruling because the date and time of his return flight to San
Francisco were, as in the Aanestad case, also left open.
Consequently, Manila and not San Francisco should be
considered the petitioner's destination.
The private respondent for its part invokes the ruling in Butz v.
British Airways, 17 where the United States District Court (Eastern
District of Pennsylvania) said:
. . . Although the authorities which addressed
this precise issue are not extensive, both the
cases and the commentators are almost
unanimous in concluding that the "place of
destination" referred to in the Warsaw
Convention "in a trip consisting of several parts
. . . is the ultimate destination that is accorded
treaty jurisdiction." . . .
But apart from that distinguishing feature, I
cannot agree with the Court's analysis
in Aanestad; whether the return portion of the
ticket is characterized as an option or a
contract, the carrier was legally bound to
transport the passenger back to the place of
origin within the prescribed time and. the
passenger for her part agreed to pay the fare
and, in fact, did pay the fare. Thus there was
mutuality of obligation and a binding contract of
carriage, The fact that the passenger could
forego her rights under the contract does not
make it any less a binding contract. Certainly, if
the parties did not contemplate the return leg of
the journey, the passenger would not have paid
 for it and the carrier would not have issued a
round trip ticket.
We agree with the latter case. The place of destination, within the
meaning of the Warsaw Convention, is determined by the terms of
the contract of carriage or, specifically in this case, the ticket
between the passenger and the carrier. Examination of the
petitioner's ticket shows that his ultimate destination is San
Francisco. Although the date of the return flight was left open, the
contract of carriage between the parties indicates that NOA was
bound to transport the petitioner to San Francisco from Manila.
Manila should therefore be considered merely an agreed stopping
place and not the destination.
The petitioner submits that the Butz case could not have overruled
the Aanestad case because these decisions are from different
jurisdictions. But that is neither here nor there. In fact, neither of
these cases is controlling on this Court. If we have preferred the
Butz case, it is because, exercising our own freedom of choice, we
have decided that it represents the better, and correct,
interpretation of Article 28(1).
Article 1(2) also draws a distinction between a "destination" and an
"agreed stopping place." It is the "destination" and not an "agreed
stopping place" that controls for purposes of ascertaining
jurisdiction under the Convention.
The contract is a single undivided operation, beginning with the
place of departure and ending with the ultimate destination. The
use of the singular in this expression indicates the understanding
of the parties to the Convention that every contract of carriage has
one place of departure and one place of destination. An
intermediate place where the carriage may be broken is not
regarded as a "place of destination."
C. The petitioner claims that the lower court
erred in not ruling that under Art. 28(1) of the
Warsaw Convention, this case was properly
filed in the Philippines because the defendant
has its domicile in the Philippines.
The petitioner argues that the Warsaw Convention was originally
written in French and that in interpreting its provisions, American
courts have taken the broad view that the French legal meaning
must govern. 18 In French, he says, the "domicile" of the carrier
means every place where it has a branch office.
The private respondent notes, however, that in Compagnie
Nationale Air France vs. Giliberto, 19 it was held:
The plaintiffs' first contention is that Air France
is domiciled in the United States. They say that
the domicile of a corporation includes any
country where the airline carries on its business
on "a regular and substantial basis," and that
the United States qualifies under such
definition. The meaning of domicile cannot,
however, be so extended. The domicile of a
corporation is customarily regarded as the
place where it is incorporated, and the courts
have given the meaning to the term as it is
used in article 28(1) of the Convention.
(See Smith v. Canadian Pacific Airways, Ltd.
(2d Cir. 1971), 452 F2d 798, 802; Nudo v.
Societe Anonyme Belge d' Exploitation de la
Navigation Aerienne Sabena Belgian World
Airlines (E.D. pa. 1962). 207 F. Supp, 191;
Karfunkel v. Compagnie Nationale Air France
(S.D.N.Y. 1977), 427 F. Suppl. 971, 974).
Moreover, the structure of article 28(1), viewed
as a whole, is also incompatible with the
plaintiffs' claim. The article, in stating that
places of business are among the bases of the
jurisdiction, sets out two places where an action
for damages may be brought; the country
where the carrier's principal place of business
is located, and the country in which it has a
place of business through which the particular
contract in question was made, that is, where
the ticket was bought, Adopting the plaintiffs'
theory would at a minimum blur these carefully
drawn distinctions by creating a third
intermediate category. It would obviously
introduce uncertainty into litigation under the
article because of the necessity of having to
determine, and without standards or criteria,
whether the amount of business done by a
carrier in a particular country was "regular" and
"substantial." The plaintiff's request to adopt
this basis of jurisdiction is in effect a request to
create a new jurisdictional standard for the
Convention.
Furthermore, it was argued in another case 20 that:
. . . In arriving at an interpretation of a treaty
whose sole official language is French, are we
bound to apply French law? . . . We think this
question and the underlying choice of law issue
warrant some discussion
. . . We do not think this statement can be
regarded as a conclusion that internal French
law is to be "applied" in the choice of law
sense, to determine the meaning and scope of
the Convention's terms. Of course, French legal
usage must be considered in arriving at an
accurate English translation of the French. But
when an accurate English translation is made
and agreed upon, as here, the inquiry into
meaning does not then revert to a quest for a
past or present French law to be "applied" for
revelation of the proper scope of the terms. It
does not follow from the fact that the treaty is
written in French that in interpreting it, we are
forever chained to French law, either as it
existed when the treaty was written or in its
present state of development. There is no
suggestion in the treaty that French law was
intended to govern the meaning of Warsaw's
terms, nor have we found any indication to this
effect in its legislative history or from our study
of its application and interpretation by other
courts. Indeed, analysis of the cases indicates
that the courts, in interpreting and applying the
Warsaw Convention, have, not considered
themselves bound to apply French law simply
because the Convention is written in French. . .
.
We agree with these rulings.
Notably, the domicile of the carrier is only one of the places where
the complaint is allowed to be filed under Article 28(1). By
specifying the three other places, to wit, the principal place of
business of the carrier, its place of business where the contract
was made, and the place of destination, the article clearly meant
that these three other places were not comprehended in the term
"domicile."
 D. The petitioner claims that the lower court
erred in not ruling that Art. 28(1) of the Warsaw
Convention does not apply to actions based on
tort.
The petitioner alleges that the gravamen of the complaint is that
private respondent acted arbitrarily and in bad faith, discriminated
against the petitioner, and committed a willful misconduct because
it canceled his confirmed reservation and gave his reserved seat to
someone who had no better right to it. In short. the private
respondent committed a tort.
Such allegation, he submits, removes the present case from the
coverage of the Warsaw Convention. He argues that in at least two
American cases, 21 it was held that Article 28(1) of the Warsaw
Convention does not apply if the action is based on tort.
This position is negated by Husserl v. Swiss Air Transport
Company, 22 where the article in question was interpreted thus:
. . . Assuming for the present that plaintiff's
claim is "covered" by Article 17, Article 24
clearly excludes any relief not provided for in
the Convention as modified by the Montreal
Agreement. It does not, however, limit the kind
of cause of action on which the relief may be
founded; rather it provides that any action
based on the injuries specified in Article 17
"however founded," i.e., regardless of the type
of action on which relief is founded, can only be
brought subject to the conditions and limitations
established by the Warsaw System.
Presumably, the reason for the use of the
phrase "however founded," in two-fold: to
accommodate all of the multifarious bases on
which a claim might be founded in different
countries, whether under code law or common
law, whether under contract or tort, etc.; and to
include all bases on which a claim seeking
relief for an injury might be founded in any one
country. In other words, if the injury occurs as
described in Article 17, any relief available is
subject to the conditions and limitations
established by the Warsaw System, regardless
of the particular cause of action which forms
the basis on which a plaintiff could seek
relief . . .
The private respondent correctly contends that the allegation of
willful misconduct resulting in a tort is insufficient to exclude the
case from the comprehension of the Warsaw Convention. The
petitioner has apparently misconstrued the import of Article 25(l) of
the Convention, which reads as follows:
Art. 25 (1). The carrier shall not be entitled to
avail himself of the provisions of this
Convention which exclude or limit his liability. if
the damage is caused by his willful misconduct
or by such default on his part as, in accordance
with the law of the court to which the case is
submitted, is considered to be equivalent to
willful misconduct.
It is understood under this article that the court called upon to
determine the applicability of the limitation provision must first be
vested with the appropriate jurisdiction. Article 28(1) is the
provision in the Convention which defines that jurisdiction. Article
22 23 merely fixes the monetary ceiling for the liability of the carrier
in cases covered by the Convention. If the carrier is indeed guilty
of willful misconduct, it can avail itself of the limitations set forth in
this article. But this can be done only if the action has first been
commenced properly under the rules on jurisdiction set forth in
Article 28(1).
III
THE ISSUE OF PROTECTION TO MINORS
The petitioner calls our attention to Article 24 of the Civil Code,
which states:
Art. 24. In all contractual property or other
relations, when one of the parties is at a
disadvantage on account of his moral
dependence, ignorance, indigence, mental
weakness, tender age or other handicap, the
courts must be vigilant for his protection.
Application of this article to the present case is misplaced. The
above provision assumes that the court is vested with jurisdiction
to rule in favor of the disadvantaged minor, As already explained,
such jurisdiction is absent in the case at bar.
CONCLUSION
A number of countries have signified their concern over the
problem of citizens being denied access to their own courts
because of the restrictive provision of Article 28(1) of the Warsaw
Convention. Among these is the United States, which has
proposed an amendment that would enable the passenger to sue
in his own domicile if the carrier does business in that jurisdiction.
The reason for this proposal is explained thus:
In the event a US citizen temporarily residing
abroad purchases a Rome to New York to
Rome ticket on a foreign air carrier which is
generally subject to the jurisdiction of the US,
Article 28 would prevent that person from suing
the carrier in the US in a "Warsaw Case" even
though such a suit could be brought in the
absence of the Convention.
The proposal was incorporated in the Guatemala Protocol
amending the Warsaw Convention, which was adopted at
Guatemala City on March 8,
1971. 24 But it is still ineffective because it has not yet been
ratified by the required minimum number of contracting parties.
Pending such ratification, the petitioner will still have to file his
complaint only in any of the four places designated by Article 28(1)
of the Warsaw Convention.
The proposed amendment bolsters the ruling of this Court that a
citizen does not necessarily have the right to sue in his own courts
simply because the defendant airline has a place of business in his
country.
The Court can only sympathize with the petitioner, who must
prosecute his claims in the United States rather than in his own
country at least inconvenience. But we are unable to grant him the
relief he seeks because we are limited by the provisions of the
Warsaw Convention which continues to bind us. It may not be
amiss to observe at this point that the mere fact that he will have to
litigate in the American courts does not necessarily mean he will
litigate in vain. The judicial system of that country in known for its
sense of fairness and, generally, its strict adherence to the rule of
law.
WHEREFORE, the petition is DENIED, with costs against the
petitioner. It is so ordered.