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Republic of the Philippines



G.R. Nos. 90306-07 July 30, 1990

M/V "ESTELLA", respondents.

Hernandez, Velicaria Vibar & Santiago for petitioners.

Cesar C. Cruz & Partners for private 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

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.

Atlantic and the MV Estella moved to dismiss the complaints-in- intervention filed by Fu Hing and K.K.

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:


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

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

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

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.

Republic of the Philippines


G.R. No. 61594 September 28, 1990


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.

Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for petitioner.

Ledesma, Saludo & Associates for private 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. 1 The contracts, which became effective on 9 January 1979, provided in pertinent
portion as follows:


This agreement is for a period of three (3) years, but can be extended by the mutual consent
of the parties.

xxx xxx xxx


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


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

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.
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 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.

Republic of the Philippines


G.R. No. L-20099 July 7, 1966

PARMANAND SHEWARAM, plaintiff and appellee,

PHILIPPINE AIR LINES, INC., defendant and appellant.

Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant and appellant.
Climaco and Associates for plaintiff and appellee.


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

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

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.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P. and Sanchez, JJ.,
Republic of the Philippines


G.R. No. L-40597 June 29, 1979

AGUSTINO B. ONG YIU, petitioner,



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.




Branch Supervisor


(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:




P80,000.00, EXEMPLARY DAMAGES OF P30,000.00, AND P5,000.00

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

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
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.

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.

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

WHEREFORE, for lack of merit, the instant Petition is hereby denied, and the judgment sought to be
reviewed hereby affirmed in toto.

No costs.

Republic of the Philippines


G.R. No. 70462 August 11, 1988



Guerrero & Torres for petitioner.

Jose B. Layug for private respondents.


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

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

(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:


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.


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


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

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.


G.R. No. 140047 July 13, 2004





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.

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

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 Undertaking12 executed 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

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

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

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








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 F to pay you on your
first written or telex demand Iraq 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

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",

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

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.

Republic of the Philippines


G.R. No. 101538 June 23, 1992

AUGUSTO BENEDICTO SANTOS III, represented by his father and legal guardian, Augusto
Benedicto Santos, petitioner,


This case involves the Proper interpretation of Article 28(1) of the Warsaw Convention, reading as

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.


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

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 petitioner goes at great lengths to show that the provisions in 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

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.:

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.


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, 9 there 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

. . . 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

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

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

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

The private respondent notes, however, that in Compagnie Nationale Air France vs. Giliberto, 19 it was

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
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).



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.


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

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.