IN MATTER OF AN ARBITRATION UNDER THE ARBITRATION RULES OF THE

PHILIPPINE DISPUTE RESOLUTION CENTER INC.

WESTERN VISAYAS

———————————————————————————————————

PHILIPPINE PACIFIC AIRLINES (PhilPa)

claimant

-and-

BOWING AIRTECH Inc. (Bowing)

respondent

———————————————————————————————————

RESPONSE TO THE NOTICE OF ARBITRATION

———————————————————————————————————

January 19, 2018

CONTENTS

STATEMENT OF DEFENSE 3

PRELIMINARY STATEMENT 3

I. STATEMENT OF FACTS 4

A. General Statement of Facts 4

B. Specifications of the Contract of Agreement: Stipulations 5

C. Series of events: Repair and Remodeling of aircraft Bowing AX-010712 5

D. PhilPa’s demand against Bowing 6

II. POINTS AT ISSUE 7

A. The damages claimed by PhilPa is inconsistent and has no basis 7

B. Bowing has complied with all its contractual obligations 8

C. Bowing has exercised due diligence; it was PhilPa that was negligent by prematurely

selling tickets without first complying with the prescribed requirements of CAAP 9

C. Bowing has exercised due diligence; it was PhilPa that was negligent 11

D. Invoking the Last Clear Chance Doctrine 12

III. RELIEFS SOUGHT 13

STATEMENT OF DEFENSE

RESPONDENT BOWING AIRTECH, INC.

In accordance with Article 5 of the Arbitration Rules of The Philippine Dispute Resolution Center, Inc., the
Respondent Bowing Airtech respectfully submits this Statement of Defense.

PRELIMINARY STATEMENT

1. This arbitration involves the claim of Philippine Pacific Airline (“PhilPa”) against Bowing Airtech
Inc (“Bowing”) under the Philippine Dispute Resolution Center, Inc., Arbitration Rules, one
brought in a Statement of Claims (“SOC”) dated 6 January 2018 and received by the Respondent
on 11 January 2018. The claim arose from the damages allegedly incurred by PhilPa involving the
cancellation of pre-sold flight tickets of the airline, due to the Advanced Relay feature installed by
Bowing on Bowing AX-010712 which was not cleared for operation by the Civil Aviation Authority
of the Philippines (CAAP).

Philippine Pacific Airline seeks damages allegedly resulting from the cancellation of pre-sold tickets, and
alleged fraud and negligence of Bowing for installing a feature not approved by the CAAP for takeoff.
2. PhilPa’s claim amount to nothing more than a mere speculation on the supposed fraud and
negligence of Bowing upon the false assurance given to PhilPa that the advanced relay feature technology
was fit for operation as set by the standards set by the CAAP with regard to autopilot system upgrades
built for long-haul commercial flights.

3. In Section I, Bowing Airtech sets forth the relevant facts of the case. In Section II, Bowing discusses
the points at issue in this case and why PhilPa’s claim is wholly without merit. In Section III, Bowing Airtech
requests that this Tribunal dismiss PhilPa’s claim with prejudice and award all costs, both for this
arbitration and for attorney’s fees to Bowing Airtech.

I. STATEMENT OF FACTS

A. General Statement of Facts

1. Philippine Pacific Airlines (PhilPa), the claimant, is the oldest airline company in the Philippines,
operating since 1935.

2. Bowing Airtech Inc. (Bowing), the respondent, is an American multinational corporation that
designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, and missiles worldwide.

3. Bowing is PhilPa’s sole aircraft manufacturer and the two parties have been partners for 75 years.

B. Specifications of the Contract of Agreement: Stipulations

4. On February 5, 2018, PhilPa and Bowing entered into a Contract of Agreement (herein attached
as Annex A) for the repair and remodeling of PhilPa’s aircraft, Bowing AX-010712, for purposes of the
latter’s first long-haul commercial flight to New Zealand from Iloilo, and vice versa.

5. The scope of the intended repair and remodeling as requested by PhilPa was specified under the
same Contract of Agreement.

6. Aside from the specifications of the intended repair and remodeling, it is also stated in the
Contract that Bowing shall submit periodic progress reports to PhilPa on the dates stipulated in order to
inform the latter of the status of the repair (herein attached as Annexes B, C and D).

7. Advanced relay feature is an optimizing program embedded into the three axis auto-pilot system
which brings out the maximum efficiency of its overall system. Specifically, it is directed to enhance the
functional system of the central processing unit of the three axis auto-pilot. The said feature is currently
being used by Bowing’s other prominent customers in the airline industry - namely: Air New Zealand
Airline, Thai Airways International, and All Nippon Airways (ANA). All aircrafts intended for long-haul travel
of the said airlines were also installed with advanced relay feature as evidenced by their certificates of
registration and airworthiness (see Annexes E, F, and G).

C. Series of events: Repair and Remodeling of aircraft Bowing AX-010712

8. On April 4, 2018, pursuant to Section 2, paragraphs (c) and (d) of the Contract of Agreement, the
submission of Bowing’s first progressive report to PhilPa was accompanied by a letter of notification that
Bowing will embed an additional feature into the agreed three axis auto-pilot which is technically called
as the Advanced Relay Feature (see Annex B).

9. On April 6, 2018, the Major Repair and Modification Approval Sheet as mandated by the Civil
Aviation Regulations of CAAP to be approved by the said Authority prior to the installation of new and/or
additional features in aircrafts, has been faithfully complied with by Bowing (attached herein is the
Approval Sheet set as Annex H).

10. On June 26, 2018, Bowing delivered its second progress report to PhilPa. Said approval sheet as
referred in Annex I basi ANNEX H ?? Kay ga refer ta sa same approval sheet? Haha was attached to the
second progress report.

11. Thereafter, on July 02, 2018, PhilPa coordinated with Bowing as to the intended feature to be
installed in the aircraft (attached herein is the letter addressed by PhilPa to Bowing set as Annex J).

12. Bowing, in its reply dated July 03, 2018, explained to PhilPa that the advanced relay feature will
not in anyway contribute to future errors (See Annex K). Furthermore, the letter indicated an assurance
from Bowing that the said feature is embedded and part of the advance autopilot technology and is within
the standards set by the CAAP. However, no further response or clarification was made by PhilPa to
Bowing.

13. On August 06, 2018, Bowing delivered its final progress report to PhilPa.

14. On August 11, 2018, PhilPa posted advertisements for the sale of tickets (attached herein as
Annex L).

15. On September 04, 2018, Bowing notified PhilPa that the aircraft will be delivered on the agreed
time in the contract (attached herein is the Letter of Notification as Annex M)

16. On October 5, 2018, Bowing successfully delivered the aircraft to PhilPa in compliance with the
contract agreement.

17. Upon delivery, PhilPa consequently paid Bowing the contract price for the repair and remodeling
of the subject aircraft (see attached Annex N)

18. The delivery of the aircraft by Bowing to PhilPa and the payment of PhilPa to Bowing of the agreed
price implies that the contract of agreement has already been faithfully complied by Bowing Airtech Inc.
Otherwise, no payment shall be made.
19. On November 5, 2018, PhilPa scheduled the supposed flight of the maiden aircraft on December
11, 2018 to March 01, 2019.

20. However, on December 4, 2018, a letter from CAAP was received by PhilPa denying their
application for certificate of airworthiness.

21. Subsequently on the same date, PhilPa posted notices of cancellation of the December 11, 2018
to March 01, 2019 flights from Iloilo to New Zealand and vice versa stating due to the denial of the
certificate of airworthiness.

22. Due to the cancellation of the pre-sold tickets, PhilPa was forced to refund the tickets, pay for
cargo transfer and rebook the flights to another airline, New Zealand Air, thus causing tremendous loss to
the corporation. It cannot be denied that PhilPa incurred losses.

D. PhilPa’s demand against Bowing

23. On December 11, 2018, a demand letter from PhilPa was sent to Bowing demanding the latter to
remove the said advanced auto relay. It was followed by another demand letter dated on December 21,
2018.

24. On December 26, 2018, Bowing replied that the company will not answer for any damages and
losses incurred by PhilPa for the very fact that the former has faithfully complied with its obligation to the
latter. - AUTHORIZED REPRESENTATIVE, me, aaron

25. Subsequently, PhilPa executed the arbitration clause of the contract by filing a Notice of
Arbitration.

II. POINTS AT ISSUE

26. Below, Bowing Airtech Inc. sets forth its defenses on the merits of the claims of claimant Philippine
Pacific Airline regarding the repair and the remodeling of aircraft Bowing AX-010712

A. The damages claimed by PhilPa is inconsistent and has no basis

27. The reliefs ask by the claimant under paragraph (1) of its merits has no legal ground and basis. It
is an oft-cited doctrine that he who pleads for equity must come to court with clean hands. It has to be
emphasized that when Bowing has already faithfully complied with all its contractual obligations, it cannot
be made answerable to any subsequent negligence made by PhilPa.

28. As a matter of fact, Bowing has complied with all the necessary requirements and standards set
by the Civil Aviation Authority of the Philippines’ (CAAP) Civil Aviation Rules, the International Civil
Aviation Organization, and Convention on International Civil Aviation done at Chicago.
29. Bowing also specifically denies PhilPa’s claim that it did not comply with its contractual obligation
under Section 2-e of the Contract of Agreement which states that: “..it shall introduce to PhilPa any
necessary and additional features it installs on the aircraft and provide the required training, if any, to the
crew to familiarize themselves as to the features installed”.

30. There was no negligence on the part of Bowing Airtech to inform the Philippine Pacific Airlines
about the plan to install the said advanced relay feature because as evidenced by the first progress report
submitted by Bowing to PhilPa (Annex B), the said feature has already been introduced to the latter.
Furthermore, a notification letter was also attached separately together with the progress report to
clearly appraise PhilPa of the necessity and importance of the said feature.

31. Moreover, PhilPa’s claim under paragraph (3) of its merits is misplaced.

32. PhilPa contends that Bowing was negligent in not producing a Parts Manufacturer Approval for
the auto relay feature installed on the aircraft. As stated in PhilPa’s Statement of Claims (see 5.5.1.5.2
Replacement and Modification Parts): “no person may produce a modification or replacement part for sale
for installation on a type certificated product unless it is produced pursuant to a Parts Manufacturer
Approval issued under this subpart.” Bowing opposes that the installation is a software-based program,
and not merely a mechanical feature which requires the Parts Manufacturer Approval. The approval in
question is specified for hardware parts and subparts, and does not include software technology.

33. Additionally, the Parts Manufacturer Approval must include “Test reports and computations
necessary to show that the design of the part meets the airworthiness requirements of these CAR
applicable to the product on which the part is to be installed, unless the applicant shows to the Authority
that the design of the part is identical to the design of a part that is covered under a type certificate. If the
design of the part was obtained by a licensing agreement, evidence of that agreement must be furnished.”
Test reports and computations are no longer necessary since the auto relay feature is excluded from the
type certified modification or replacement specified in the statement of claims, which only refers to
hardware parts and not intangible features such as a software program.

B. Bowing has complied with all its contractual obligations

34. PhilPa’s another claim under paragraph (4) of its merits cannot withstand. It is not true that
Bowing has not complied with all the standards set by CAAP. As a matter of fact, Bowing has procured all
the necessary certificates and requirements that will prove its substantial compliance with the rules.

35. Two contentions were also raised by PhilPa, that: (1) the first cause of action arose because of the
installation of the advanced relay feature not approved for operation by the CAAP; (2) second, the
contention that the non-issuance of the certificate of airworthiness in PhilPa’s favor is in the fault of
Bowing Airtech is without basis.

36. The advanced relay feature was already approved by the United States Federal Aviation Authority
(FAA), automatically clearing the installation for operation and in-flight use (Annex O). No longer needing
further approval from the CAAP. Bowing’s assurance that the feature was safe for use and fully functional
for the specific aircraft was valid, thus negating any negligence on Bowing’s obligation (see Annex K).
37. It is a rule under the CAAP that before the remodeling or installment of a new feature, the
manufacturer, must secure a certificate of airworthiness, in which Bowing has fully complied with,
disproving any doubt that Bowing was negligent on their obligation.

38. More importantly, therefore, the denial of the certificate of airworthiness applied by Philpa for
the reason that “...the plane was not cleared for takeoff due to the auto-pilot advance relay feature which
was not tried and tested by the Pilots Association of the Philippines...”, has no relevance as to the
compliance of Bowing in its contractual obligation. Further, their allegation under the same paragraph
asserting that “...the said advance relay feature has never been heard of by the Philippine Pilots
Association” has no bearing at all.

39. In this regard (38), the application of Article 1267 of the New Civil Code is in need of emphasis. It
thus states “When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, the obligor may also be released therefrom, in whole or in part.” Citing the comments of the
reports of the code commission in the Civil Code as regards this Article, “the intention of the parties should
govern and if it appears that the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold the obligor still responsible.

40. In line with Article 1267 of the New Civil Code, there is no stipulation under the contract of
agreement which warrants the prerequisite of a trial and examination before the Pilots Association of the
Philippines, CAAP’s office tasked with flight testing. Nor any condition which warrants the pre-requisite
knowledge and recognition of the Pilot’s Association as to the modifications/features to be installed in
the subject aircraft. For it is thus clear under the contract of agreement that it shall be subject only to the
compliance of the standards, rules and requirements of the Civil Aviation Authority of the Philippines’
(CAAP) Civil Aviation Rules and of the International Civil Aviation Organization, and with prior notice to
the PhilPa. But this requirement, has been outstandingly complied with by Bowing in the first place. Clearly
then, such issue as raised by Philpa, if it indeed be true, is clearly beyond the contemplation of the parties
or the contract of agreement between Philpa and Bowing.

41. In fact, the delivery of the aircraft by Bowing to PhilPa and the payment of the latter of the agreed
price shows that the contract of agreement has already been faithfully complied by Bowing Airtech Inc.

C. Philpa’s negligence; premature selling of tickets without first complying with the prescribed
requirements for airline companies, as mandated by CAAP

42. PhilPa’s claim under paragraph (5) and (6) of its merits is without legal ground. Having laid down
the points of argument which clearly indicates that Bowing has substantially complied with its contractual
obligation, considering that there was timely delivery of the plane and a bona fide intention in installing
safe and warranted features on the aircraft, it is now then appropriate to point out that it is due to PhilPa’s
acts which had forced them to contend with the resulting loss and damage.

43. The argument of negligence on the part of Bowing as alleged by PhilPa that caused the
cancellation of the maiden flight cannot be sustained as supported by the Major Repair and Modification
Approval Sheet secured and presented by Bowing herein attached and labelled as “Annex H”. Under the
Civil Aviation Regulations of CAAP, prior to the installation of new and/or additional features in aircrafts,
it needs to be certified approved by the said authority which in this case has been faithfully complied with
by Bowing. In the case at hand, the installation of the Advanced Relay was approved by CAAP.

44. Art. 2179 of the New Civil Code provides that: “When the plaintiff's own negligence was the
immediate and proximate cause of his injury, he cannot recover damages.”

NEGLIGENCE: The omission to do something which a reasonable man, guided by those considerations
which ordinarily regulate the conduct of human affairs, would do, or the doing of something, which a
prudent and reasonable man would not do.

45. To begin with, it is but unfortunate to fathom that such a prominent airline company is remised
in observance of its regulations and duties. For basic is the procedure in aircraft companies that a final
approval and certification of safety and airworthiness is required before an aircraft could be all set and
clear for operation. Yet, PhilPa hastily sold tickets to numerous passengers immediately on August 11,
2018, days after the submission of the third progress report of Bowing.

46. In fact, the airline clearly admitted in their statement of claims, specifically in paragraph (17) that
it was only “a week before the maiden flight or on November 5, 2018, PhilPa received a letter from CAAP
dated December 4, 2018 that the application for a certificate of airworthiness for Bowing AX-010712 was
DENIED”. If not because of the fact that the tickets were pre-sold, such damages incurred by PhilPa would
not arise.

47. This error on the part of PhilPa is a breach of customer’s trust. An airline such as PhilPa that has
been in operation for 75 years must possess the foresight, and at least exercise extraordinary diligence
for the safety of their passengers and for the well-being of the public at large.

48. Noteworthy is it then that an airline company cannot pre-sell tickets before the aircraft’s
clearance for operation, and which, must be preceded by the approval of CAAP by virtue of the certificate
of safety and airworthiness. However, it appears that PhilPa was in clear transgression of the basic
procedure as revealed by paragraph (10) of PhilPa’s Statement of Claims: “upon receipt of the notice from
Bowing of the on-scheduled delivery of the subject aircraft, it prompted PhilPa to post notices for the sale
of tickets on August 11, 2018 for their Iloilo-New Zealand and vice versa flights”.

49. Also, PROXIMATE CAUSE is defined as the “cause, which, in natural and continuous sequence,
unbroken by any efficient intervening cause, produces the injury, and without which the result would not
have occurred.

50. PhilPa is nonetheless negligent for being remiss in the observance of its diligence and duties thus
they should solely bear the loss that is being sued upon them. The proximate cause of the damages
suffered by passengers is due to the own negligence of PhilPa by pre-selling tickets without first complying
with the necessary requirements set by CAAP.

51. The fact established by the claimant under paragraph (3) of their statement of claim will invalidate
PhilPa’s claim that Bowing is negligent and fraudulent. Bowing would like to emphasize that they cannot
hold their business partners’ corporate name in vain, knowing that PhilPa and Bowing has been partners
for almost 75 years.
 D. Annex C, D, and E submitted by PhilPa are reproductions of fictitious and sham documents.

52. As regards Annex C, the purported letter had never been received by Bowing. There should have
been a stamped notice from the secretary of the global services department of Bowing annotated in the
letter. Further, if it was indeed the intention of PhilPa to communicate with Mr. Earl Aaron Reyes, Bowing’s
Authorized Representative in this subject business transaction, they should have informed him thru his
valid and existing business email. Herein attached screen captures of Mr. Earl Aaron Reyes’ Email, showing
several business and work-related transactions which the same had engaged into. (ANNEX __). In line with
this point of argument, PhilPa would again be guilty of misrepresentation as demonstrated by Annex E of
their work. “aaronreyes@bowing.com” is a sham, fake, fictitious and dummy account, if not inexistent.
Quite interestingly, why would Li Anne Care Roth be using Mr. Earl Aaron Reyes’ email account, as
reflected in Annex E of PhilPa that the email was “sincerely” prepared and sent by Li Anne Care Roth.
(ANNEX __)

53. Annex D is much more dishonorable. For again, any business-related communication as to the
project: “REMODELING OF BOWING AX-010712” could only be initiated or prepared by the authorized
representative, Mr. Earl Aaron P. Reyes, of the said business transaction, or its Private Assistant, Ms.
Desiree Jane Tubaon. Farcically, however, Annex D as submitted by PhilPa contains a sign and a name that
the letter was prepared by the Chief Executive Officer of the whole company, Dennis Muilenberg, and
noted by Li Anne Care Roth as they allege as the Senior VP. CEO Dennis Muilenberg has never been tasked
nor would never engage into any communications with business partners/customers. Chief executive
officer (CEO), Dennis Muilenberg, is the highest-ranking executive in the company, and his primary
responsibilities include making major corporate decisions, managing the overall operations and resources
of a company. Though he is not precluded to act as the main point of communication between the board
of directors and corporate operations, nevertheless, such communication is limited to corporate matters
only. Communications regarding business transactions with partners/customers are not within his line of
duty and given the fact that there is already a designated representative to act on this matter.

54. Also, Li Anne Care Roth is a fictitious person. Such person is not known in the company, as gleaned
from ANNEX_ table of the organization of officers. Granting that such was the Senior VP, the same
argument in the previous paragraph (53) would still apply and give merit since there is a designated
authorized representative, Mr. Earl Aaron P. Reyes, entrusted and tasked to conduct negotiations with
PhilPa.S

E. Doctrine of Last Clear Chance

55. More importantly, assuming arguendo that Bowing is negligent in performing its obligation with
PhilPa, the former is still released from its obligation and would not be liable for the damage since by
applying the Doctrine of the Last Clear Chance, PhilPa has within its capacity the last fair chance to prevent
the negligent act and the subsequent damage and loss suffered by the passengers.

56. As held in the long-time honored principle in the case of Philippine National Railways v. Brunty,
G.R. No. 169891, 506 SCRA 685. The doctrine of last clear chance states that where both parties are
negligent but the negligent act of one is appreciably later than that of the other, or where it is impossible
to determine whose fault or negligence caused the loss, the one who had the last clear opportunity to
avoid the loss but failed to do so, is chargeable with the loss.

57. Granting, for the sake of argument that Bowing was indeed negligent when it installed the said
advanced relay feature, it cannot be denied that PhilPa had the last clear chance to prevent the damage
by making sure that it has complied with all the necessary requirements set by the aviation authority- to
wit: to procure all the necessary certificates before a repaired and remodelled aircraft can take flights.

58. Here, it must be recalled that PhilPa did not observe the standard and basic procedure which is
mandated to airline companies before clearing aircrafts for operation and for selling of tickets. It shows
the proximate and direct cause of the damages incurred by the passengers and the loss they had
subsequently suffered, notwithstanding the negligence brought up by Bowing, but only for the sake of
argument.

59. It is also worthy of mention that in taking into account the nature of PhilPa’s business, which is
imbued with public interest, their reliance on the assurance clause of the contract and the subsequent
notice given by Bowing could not outweigh the diligence which befalls on airline companies. PhilPa should
have traversed outside the four corners of a formal piece of paper (notice) in order to insure the aircraft’s
good condition before clearing said plane for operation and the selling of tickets.

60. As furtherly mandated by the doctrine of last clear chance in the case of Picart vs. Smith: “It will
be noted that the negligent acts of the two parties were not contemporaneous, since the negligence of the
defendant succeeded the negligence of the plaintiff by an appreciable interval. Under these circumstances
the law is that the person who has the last fair chance to avoid the impending harm and fails to do so is
chargeable with the consequences, without reference to the prior negligence of the other party”. The
appreciable interval in the present situation is manifested by the fact that PhilPa was in control of the
situation. They could have waited for the approval of the certificate of airworthiness, before the selling of
tickets, which would take almost 22 working days before the certificate is released. For then granting that
such program installed in their aircraft is defective, Philpa, having the insight on taking the necessary
precautions and in waiting the approval of the certificates, could have precluded the damage or possible
damage that may affect the public in general.

61. Thus, whether or not there was doubt on PhilPa’s part as to the compliance of the advanced relay
program with the standards of CAAP, it is but logical to assume that they could have discovered the
featured program’s propriety and compliance with the CAAP and thus prevent the selling of tickets should
they followed their usual routine in conducting their business operations.

III. RELIEFS SOUGHT

62. For the foregoing reasons, Bowing Airtech Inc. respectfully requests that this Tribunal render an
award:

A. In favor of Bowing Airtech Inc. and against Philippine Pacific Airline dismissing all claims in their entirety
and with prejudice; and

B. Ordering that Philippine Pacific Airline bear the costs of this arbitration, including Bowing’s costs for
legal representation and assistance.
Nomination of Arbitrator

1. In accordance with the arbitration clause in the contract and PACV rules and regulations, we
appoint Atty. Lyndon Calimoso of San Agustin Compound, Iloilo City, Iloilo, Philippines, for confirmation
by the Secretariat John Mallare as Mr. Lyndon Calimoso is on the List of Arbitrators, his resume is attached.

Legal Evaluation

● Jurisdiction

1. The Arbitral Tribunal has jurisdiction over the dispute by virtue of the PACV rules and the Agreement
contained in the contract between CLAIMANT and RESPONDENT (Claimant A).

Dispute Resolution:

All disputes shall be settled amicably and in good faith between the parties. The arbitration shall be
conducted under the Rules and Regulation of Philippine Dispute Resolution Center, Inc. (PDRCI) and in
line with Philippines arbitration laws and practice.

The Arbitral Tribunal shall consist of three arbitrators, appointed in accordance with the PDRCI rules and
regulation. The parties can select their own respective arbitrator in the list of Arbitrators of PDRCI while
Atty. Joenar Pueblo, the president of PDRCI, will sit as chairman of the arbitrators.

The place of arbitration is the University of San Agustin, Iloilo City Philippines.

The arbitration proceeding shall be conducted in the language agreed upon by both parties.