G.R. No.

141314

April 9, 2003

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY REGULATORY BOARD, petitioner,

vs.
MANILA ELECTRIC COMPANY, respondent.

accounts and records of MERALCO and thereafter recommended, among others, that: (1) income taxes
paid by MERALCO should not be included as part of MERALCO's operating expenses and (2) the "net
average investment method" or the "number of months use method" should be applied in determining
the proportionate value of the properties used by MERALCO during the test year.
In its decision dated February 16, 1998, the ERB adopted the recommendations of the COA and
authorized MERALCO to adopt a rate adjustment of P0.017 per kilowatthour (kwh) for its billing cycles
beginning 1994. The ERB further directed MERALCO to credit the excess average amount of P0.167
per kwh to its customers starting with MERALCO's billing cycles beginning February 1994. The said
ruling of the ERB was affirmed by this Court in its decision dated November 15, 2002.

x-----------------------------x
G.R. No. 141369 April 9, 2003
LAWYERS AGAINST MONOPOLY AND POVERTY (LAMP) consisting of CEFERINO PADUA,
Chairman, G. FULTON ACOSTA, GALILEO BRION, ANATALIA BUENAVENTURA, PEDRO
CASTILLO, NAPOLEON CORONADO, ROMEO ECHAUZ, FERNANDO GAITE, ALFREDO DE
GUZMAN, ROGELIO KARAGDAG, JR., MA. LUZ ARZAGA-MENDOZA, ANSBERTO PAREDES,
AQUILINO PIMENTEL III, MARIO REYES, EMMANUEL SANTOS, RUDEGELIO TACORDA,
members, and ROLANDO ARZAGA, Secretary-General, JUSTICE ABRAHAM SARMIENTO,
SENATOR AQUILINO PIMENTEL, JR. and COMMISSIONER BARTOLOME FERNANDEZ, JR.,
Board of Consultants, and Lawyer GENARO LUALHATI, petitioners,
vs.
MANILA ELECTRIC COMPANY (MERALCO), respondent.
RESOLUTION
PUNO, J.:
The business and operations of a public utility are imbued with public interest. In a very real sense, a
public utility is engaged in public service-- providing basic commodities and services indispensable to
the interest of the general public. For this reason, a public utility submits to the regulation of government
authorities and surrenders certain business prerogatives, including the amount of rates that may be
charged by it. It is the imperative duty of the State to interpose its protective power whenever too much
profits become the priority of public utilities.
For resolution is the Motion for Reconsideration filed by respondent Manila Electric Company
(MERALCO) on December 5, 2002 from the decision of this Court dated November 15, 2002 reducing
MERALCO's rate adjustment in the amount of P0.017 per kilowatthour (kwh) for its billing cycles
beginning 1994 and further directing MERALCO to credit the excess average amount of P0.167 per kwh
to its customers starting with MERALCO's billing cycles beginning February 1994.1
First, we leapfrog through the facts. On December 23, 1993, MERALCO filed with the Energy
Regulatory Board (ERB) an application for revised rates, with an average increase of P0.21 per kwh in
its distribution charge. On January 28, 1994 the ERB granted a provisional increase of P0.184 per
kwh subject to the condition that in the event the ERB determines that MERALCO is entitled to a lesser
increase in rates, all excess amounts collected by MERALCO shall be refunded to its customers or
credited in their favor. The Commission on Audit (COA) conducted an examination of the books of

In its Motion for Reconsideration, respondent MERALCO contends that: (1) the deduction of income tax
from revenues allowed for rate determination of public utilities is part of its constitutional right to
property; (2) it correctly used the "average investment method" or the "simple average" in computing the
value of its properties entitled to a return instead of the "net average investment method" or the
"number of months use method"; and (3) the decision of the ERB ordering the refund of P0.167 per kwh
to its customers should not be given retroactive effect.2
The Republic of the Philippines through the ERB, now Energy Regulatory Commission (ERC),
represented by the Office of the Solicitor General, filed its Comment on March 7, 2003. Surprisingly, in
its Comment, the ERC proffered a divergent view from the Office of the Solicitor General. The ERC
submits that income taxes are not operating expenses but are reasonable costs that may be
recoverable from the consuming public. While the ERC admits that "there is still no categorical
determination on whether income tax should indeed be deducted from revenues of a public utility," it
agrees with MERALCO that to disallow public utilities from recovering its income tax payments will
effectively lower the return on rate base enjoyed by a public utility to 8%. The ERC, however, agrees
with this Court's ruling that the use of the "net average investment method" or the "number of months
use method" is not unreasonable.3
The Office of the Solicitor General, under its solemn duty to protect the interests of the people,
defended the thesis that income tax payments by a public utility should not be recovered as costs from
the consuming public. It contended that: (1) the foreign jurisprudence cited by MERALCO in support of
its position is not applicable in this jurisdiction; (2) MERALCO was given a fair rate of return; (3) the
COA and the ERB followed the National Accounting and Auditing Manual which expressly disallows the
treatment of income tax as operating expense; (4) Executive Order No. 72 does not grant electric
utilities the privilege of treating income tax as operating expense; (5) the COA and the ERB have been
consistent in not allowing income tax as part of operating expenses; (6) ERB decisions allowing the
application of a tax recovery clause are inapropos; (7) allowing MERALCO to treat income tax as an
operating expense would set a dangerous precedent; (8) assuming that the disallowance of income tax
as operating expense would discourage foreign investors and lenders, the government is not precluded
from enacting laws and instituting measures to lure them back; and (9) the findings and conclusions of
the ERB carry great weight and should be binding on the courts in the absence of grave abuse of
discretion. The Solicitor General agrees with the ERC that the "net average investment method" is a
reasonable method for property valuation. Finally, the Solicitor General argues that the ERB decision

may be applied retroactively and the use of a test period to determine the rate base and allowable rates
to be collected by a public utility is an accepted practice.4
We shall discuss the main issues in seriatim.

of excess revenue, the ERB determined that the provisional rate granted by it to MERALCO
was P0.167 per kwh more than the amount MERALCO ought to charge its customers to obtain the
prescribed 12% rate of return on rate base. Thus, the ERB correspondingly lowered the provisional
increase by P0.167 per kwh and ordered MERALCO to increase its rates at a reduced amount
of P0.017 per kwh, computed as follows:9

I
MERALCO argues that deduction of all kinds of taxes, including income tax, from the gross revenues of
a public utility is firmly entrenched in American jurisprudence. It contends that the Public Service Act
(Commonwealth Act No. 146) was patterned after Act 2306 of the Philippine Commission, which, in turn,
was borrowed from American state public utility laws such as the New Jersey Public Utility Act. Hence, it
maintains that American jurisprudence on the inclusion of income taxes as a lawful charge to operating
expenses should be controlling. It cites the rule on statutory construction that a statute adopted from a
foreign country will be presumed to be adopted with the construction placed upon it by the courts of that
country before its adoption.5

At appraised value

Total Invested Capital Entitled

P 30,059,614,00010

to Return
We are not persuaded. American decisions and authorities are not per se controlling in this jurisdiction.
At best, they are persuasive for no court holds a patent on correct decisions. Our laws must be
construed in accordance with the intention of our own lawmakers and such intent may be deduced from
the language of each law and the context of other local legislation related thereto. More
importantly, they must be construed to serve our own public interest which is the be-all and the end-all
of all our laws. And it need not be stressed that our public interest is distinct and different from others.
Rate regulation calls for a careful consideration of the totality of facts and circumstances material to
each application for an upward rate revision. Rate regulators should strain to strike a balance between
the clashing interests of the public utility and the consuming public and the balance must assure a
reasonable rate of return to public utilities without being unreasonable to the consuming public. What is
reasonable or unreasonable depends on a calculus of changing circumstances that ebb and flow with
time. Yesterday cannot govern today, no more than today can determine tomorrow.

12% return thereon

Add: Total Operating expenses

Upon the instructions of the ERB, the COA conducted an audit of the operations of MERALCO covering
the period from February 1, 1994 to January 31, 1995, or the period immediately after the
implementation of the provisional rate increase.7 Hence, amounts culled by the COA from its
examination of the books of MERALCO already included the provisional rate increase of P0.184
granted by the ERB.
From the figures submitted by the COA, the ERB was able to determine that MERALCO derived excess
revenueduring the test year in the amount of P2,448,378,000.8 This means that during the test year, and
after the rates were increased by P0.184, MERALCO earned P2,448,378,000 or 8.15% more than the
amount it should have earned at a 12% rate of return on rate base. Accordingly, based on this amount

P 38,260,420,00011

for Rate Determination

Purposes

Prescinding from these premises, we reject MERALCO's insistence that the non-inclusion of income tax
payments as a legitimate operating expense will deny public utilities a fair return of their investment.
This stubborn stance is belied by the report submitted by the COA on the audit conducted on
MERALCO's books of accounts and the findings of the ERB.6

P 3,607,154,000

P 41,867,573,000

Computed Revenue

Actual Revenue

P 44,315,951,000

Excess Revenue

P 2,448,378,000

Percent of Excess Revenue to

8.15%

Invested Capital

Add: Total Operating expenses for Rate

Determination Purposes

Authorized Rate of Return

P 40,396,059,00013

12.00%

Actual Rate of Return

Computed Revenue

P 44,003,213,000

Actual Revenue

P 44,315,951,000

20.15%

Total kwh sold

14,640,094,000
Excess Revenue

P 312,738,000

Ratio of Excess Revenue to

Percent of Excess Revenue to Invested Capital
Total kwh Sold

P 0.167

In fact, even if MERALCO's income tax liability would be included as an operating expense, MERALCO
would still enjoy excess revenue of P312,738,000.00 or 1.04% above the authorized rate of return of
12%. Based on its audit, the COA determined that the provision for income tax liability of MERALCO
amounted to P2,135,639,000.00.12 Thus, even if such amount of income tax liability would be included
as operating expense,the amount of excess revenue earned by MERALCO during the test year would
be more than sufficient to cover the additional income tax expense. Thus:

At appraised value

Total Invested Capital Entitled to Return

12% return thereon

1.04%

P 30,059,614,000

P 3,607,154,000

Authorized Rate of Return

12.00%

Actual Rate of Return

13.04%

It is crystal clear, therefore, that even if income tax is to be included as an operating expense and
hence, recoverable from the consuming public, MERALCO would still enjoy a rate of return that is
above the authorized rate of 12%. Public utilities cannot be allowed to overcharge at the expense of the
public and worse, they cannot complain that they are not overcharging enough.
Be that as it may, MERALCO contends that considering income tax payments of public utilities
constitute one-third of their net income, public utilities will effectively get, not the 12% rate of return on
rate base allowed them, but only about 8%.14 Again, we are not persuaded.
The foregoing argument assumes that the 12% return allowed to public utilities is equivalent to
its taxable incomewhich will be subject to income tax. The 12% rate of return is computed only for the
purpose of fixing the allowable rates to be charged by a public utility and is in no way determinative of
the income subject to income tax of the public utility. The computation of a corporation's income tax
liability is an altogether different matter, with the corporation's taxable income derived by taking into
account the corporation's gross revenues less allowable deductions.15

At any rate, even on the assumption that in the test year involved (February 1, 1994 to January 31,
1995), MERALCO's computed revenue of P 41,867,573,000 or the amount that it is allowed to earn
based on a 12% rate of return is its taxable income, after payment of its income tax liability of
P2,135,639,000.00, MERALCO would still obtain an 11.38% rate of return or a return that is well within
the 12% rate allowed to public utilities.16
MERALCO also contends that even the successor of the ERB or the ERC created under the Electric
Power Industry Reform Act of 2001 (EPIRA)17 "adheres to the principle that income tax is part of
operating expense."18To bolster its argument, MERALCO cites Article 36 of the EPIRA which charges
the ERC with the responsibility of unbundling the rates of the National Power Corporation (NPC) and
each distribution utility coming within the coverage of the law.19 MERALCO alleges that pursuant to said
provision, the ERC issued a set of Uniform Rate Filing Requirements (UFR) containing guidelines to be
followed with respect to rate unbundling applications to be filed. MERALCO asserts that under the UFR,
the enumeration of the expenses which are to be recovered through the rates, and which are to be
separated or allocated for the purpose of unbundling of these rates include income tax expenses.
Under Section 36 of the EPIRA, the NPC and every distribution facility covered by the law is mandated
to unbundle, segregate or itemize its rates according to the various sectors of the electric power
industry identified in the law, namely: generation, transmission, distribution and supply.20 The law further
directs the ERC to regulate and facilitate the unbundling of rates prescribed by Section 36. Thus, on
October 30, 2001, the ERC issued guidelines prescribing the uniform rate filing requirements to be
followed by distribution facilities for the purposes of unbundling rates.21
A proper appreciation of the UFR shows that it simply specifies a uniform accounting system to be
complied with by a distribution facility when filing an application for revised rates under the EPIRA. As
the EPIRA requires the unbundling or segregation of rates according to the different sectors of the
electric power industry, the UFR seeks to facilitate this process by properly identifying the accounts or
information required for proper evaluation by the ERB. Thus, the introductory statements of the UFR
provide:
These uniform rate filing requirements are intended to promote consistency and completeness
in the rate filings required by Republic Act No. 9136 (RA 9136), Section 36. To that end, the
filing requirements only specify minimum form and content. A rate application in all its aspects
continues to be subject to subsequent Commission review and deliberation.22
At the onset, it is clear that the UFR does not seek to determine which accounting method will be used
by the ERC for determination of rate base or the items of expenses that may be recovered by a public
utility from its customers. The UFR only seeks to prescribe a uniform system or format to standardize or
facilitate the process of unbundling of rates mandated by the EPIRA. At best, the UFR prescribes the
set of raw data or figures to be disclosed by a distribution facility that the ERC will need to determine the
authorized rates that a distribution facility may charge. The UFR does not, in any way, determine the
manner by which the set of data or figures indicated in the rate application will be evaluated by the ERC
for rate determination purposes.
II

MERALCO also challenges the use of the "net average investment method" or the "number of months
use method" on the ground that MERALCO and the Public Service Commission (PSC) have been
consistently applying the "average investment method" or "simple average", which it alleged was also
affirmed by this Court in the case of MERALCO v. PSC23 and Republic v. Medina.24
It is true that in MERALCO v. PSC,25 the issue of the proper valuation method to be used in determining
the value of MERALCO's utility plants for rate fixing purposes was brought to fore. In the said case,
MERALCO applied the "average investment method" or "simple average" by obtaining the average
value of the utility plants, using its values at the beginning and at the end of the test year. In contrast,
the General Auditing Office used the "appraisal method" which fixes the value of the utility plants by
ascertaining the cost of production per kilowatt and multiplying the same by the total capacity of said
plants, less the corresponding depreciation.26 In upholding the "average investment method" used by
MERALCO, this Court adopted the findings of the PSC for being "by and large, supported by the
records of the case."27 This Court did not make an independent assessment of the validity or
applicability of the average investment method but simply did not disturb the findings of the PSC for
being supported by substantial evidence. To conclude that the said decision "affirmed" the use of the
"average investment method" thereby implying that the said method is the only method to be applied in
all instances, is a strained reading of the decision.
In fact, in the case of Republic v. Medina,28 also cited by MERALCO to have affirmed the use of the
"average investment method", this Court ruled:
The decided weight of authority, however, is to the effect that property valuation is not to be
solved by formula but depends upon the particular circumstances and relevant facts affecting
each utility as to what constitutes a just rate base and what would be a fair return, just to both
the utility and the public.29
Further, Mr. Justice Castro in his concurring opinion in the same case elucidated:
A regulatory commission's field of inquiry, however, is not confined to the computation of the
cost of service or capital nor to a mere prognostication of the future behavior of the money and
capital markets. It must also balance investor and consumer expectations in such a way that
broad requirements of public interest may be meaningfully realized. It would hence appear in
keeping with its public duty if a regulatory body is allowed wide discretion in the choice of
methods rationally related to the achievement of this end.30
Thus, the rule then as it is now, is that rate regulating authorities are not hidebound to use any single
formula or combination of formulas for property valuation purposes because the rate-making process
involves the balancing of investor and consumer interests which takes into account various factors that
may be unique or peculiar to a particular rate revision application.
We again stress the long established doctrine that findings of administrative or regulatory agencies on
matters which are within their technical area of expertise are generally accorded not only respect but at
times even finality if such findings and conclusions are supported by substantial evidence.31 Rate fixing
calls for a technical examination and a specialized review of specific details which the courts are ill-

equipped to enter, hence, such matters are primarily entrusted to the administrative or regulating
authority.32
Thus, this Court finds no reversible error on the part of the COA and the ERB in adopting the "net
average investment method" or the "number of months use method" for property valuation purposes in
the cases at bar.
III
MERALCO also rants against the retroactive application of the rate adjustment ordered by the ERB and
affirmed by this Court. In its decision, the ERB, after authorizing MERALCO to adopt a rate adjustment
in the amount of P0.017 per kwh, directed MERALCO to refund or credit to its customers' future
consumption the excess average amount of P0.167 per kwh from its billing cycles beginning February
199433 until its billing cycles beginning February 1998.34 In the decision appealed from, this Court
likewise ordered that the refund in the average amount of P0.167 per kwh be made to retroact from
MERALCO's billing cycles beginning February 1994.
MERALCO contends that the refund cannot be given retroactive effect as the figures determined by the
ERB only apply to the test year or the period subject of the COA Audit, i.e., February 1, 1994 to January
31, 1995. It reasoned that the amounts used to determine the proper rates to be charged by MERALCO
would vary from year to year and thus the computation of the excess average charge of P0.167 would
hold true only for the test year. Thus, MERALCO argues that if a refund of P0.167 would be uniformly
applied to its billing cycles beginning 1994, with respect to periods after January 31, 1995, there will be
instances wherein its operating revenues would fall below the 12% authorized rate of return. MERALCO
therefore suggests that the dispositive portion be modified and order that "the refund applicable to the
periods after January 31, 1995 is to be computed on the basis of the excess collection in proportion to
the excess over the 12% return."35
The purpose of the audit procedures conducted in a rate application proceeding is to determine whether
the rate applied for will generate a reasonable return for the public utility, which, in accordance with
settled laws and jurisprudence, is 12% on rate base or the present value of the assets used in the
operations of a public utility. For audit purposes, however, there is a need to obtain a sample set of
data-- usually derived from figures within a designated period of time-- to determine the amount of
returns obtained by a public utility during such period. In the cases at bar, the COA conducted an audit
for the test year beginning February 1, 1994 and ending January 31, 1995 or a 12-month period
immediately after the order of the ERB granting a provisional increase in the amount of P0.184 per kwh
was issued. Thus, the ultimate issue resolved by the COA when it conducted its audit was whether the
provisional increase granted by the ERB generated an amount of return well within the rates authorized
by law. As stated earlier, based on the findings of the ERB, with the increase of P0.184 per kwh,
MERALCO obtained a rate of return which was 8.15% more than the authorized rate of return of
12%.36 Thus, a refund in the amount of P0.167 was determined and ordered by ERB.
The essence of the use of a "test year" for auditing purposes is to obtain a sample or representative set
of figures to enable the examining authority to arrive at a conclusion or finding based on the gathered
data. The use of a "test year" does not mean that the information and conclusions so derived would only
be correct for that year and would be incorrect on the succeeding years. The use of a "test year"

assumes that within a reasonable period after such test year, figures used to determine the amount of
return would only vary slightly from the figures culled during the test year such that the impact on the
utility's rate of return would not be very significant. Thus, in the event that there is a substantial change
in circumstances significantly affecting the variable amounts that would determine the reasonableness
of a return, an event which would normally occur after a certain period of time has elapsed, the public
utility may subsequently apply for a rate revision.
We agree with the Solicitor General that following MERALCO's reasoning that the figures culled from a
test year would only be relevant during such year, there would be a need for public utilities to apply for a
rate adjustmentevery year and perform an audit examination on a public utility's books of
accounts every year as the amount of a utility's revenue may fall above or below the authorized rates at
any given year. Needless to say, the trajectory of MERALCO's arguments will lead to an absurdity.
From the time the order granting a provisional increase was issued by the ERB, nowhere in the records
does it appear that the subsequent refund of P0.167 per kwh ordered by the ERB was ever
implemented or executed by MERALCO.37 Accordingly, from January 28, 1994 MERALCO imposed on
its customers a charge that is P0.167 in excess of the proper amount. In fact, any application for rate
adjustment that may have been applied for and/or granted to MERALCO during the intervening period
would have to be reckoned from rates increased by P0.184 per kwh as these were the rates prevailing
at the time any application for rate adjustment was made by MERALCO.
While we agree that the amounts used to determine the utility's rate of return would vary from year to
year, we are unable to subscribe to the view that the refund applicable to the periods after January 31,
1995 should be computed on the basis of the excess collection in proportion to the excess over the 12%
return. MERALCO's contention that the refund for periods after January 31, 1995 should be computed
on the basis of revenue of each year in excess of the 12% authorized rate of return calls for a year-byyear computation of MERALCO's revenues and assets which would be contrary to the essence of an
audit examination of a public utility based on a test year. To grant MERALCO's prayer would, in effect,
allow MERALCO the benefit of a year-by-year adjustment of rates not normally enjoyed by any other
public utility required to adopt a subsequent rate modification. Indeed, had the ERB ordered
an increase in the provisional rates it previously granted, said increase in rates would apply retroactively
and would not have varied from year to year, depending on the variable amounts used to determine the
authorized rates that may be charged by MERALCO. We find no significant circumstance prevailing in
the cases at bar that would justify the application of a yearly adjustment as requested by MERALCO.
WHEREFORE, in view of the foregoing, the petitioner's Motion for Reconsideration is DENIED WITH
FINALITY.

G.R. No. L-6055

June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General Francisco Carreon for
appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila
with the crime of falsification of a public and commercial document in that, having been entrusted with
the preparation and registration of the article of incorporation of the Pacific Airways Corporation, a
domestic corporation organized for the purpose of engaging in business as a common carrier, he
caused it to appear in said article of incorporation that one Arsenio Baylon, a Filipino citizen, had
subscribed to and was the owner of 60.005 per cent of the subscribed capital stock of the corporation
when in reality, as the accused well knew, such was not the case, the truth being that the owner of the
portion of the capital stock subscribed to by Baylon and the money paid thereon were American citizen
whose name did not appear in the article of incorporation, and that the purpose for making this false
statement was to circumvent the constitutional mandate that no corporation shall be authorize to
operate as a public utility in the Philippines unless 60 per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed
to this Court.
The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation registered
its articles of incorporation with the Securities and Exchanged Commission. The article were prepared
and the registration was effected by the accused, who was in fact the organizer of the corporation. The
article stated that the primary purpose of the corporation was to carry on the business of a common
carrier by air, land or water; that its capital stock was P1,000,000, represented by 9,000 preferred and
100,000 common shares, each preferred share being of the par value of p100 and entitled to 1/3 vote
and each common share, of the par value of P1 and entitled to one vote; that the amount capital stock
actually subscribed was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin E.
Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first
being a Filipino and the other five all Americans; that Baylon's subscription was for 1,145 preferred
shares, of the total value of P114,500, and for 6,500 common shares, of the total par value of P6,500,
while the aggregate subscriptions of the American subscribers were for 200 preferred shares, of the
total par value of P20,000, and 59,000 common shares, of the total par value of P59,000; and that
Baylon and the American subscribers had already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the
corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting
power between the preferred shares and the common shares. Still, with the capital structure as it was,

the article of incorporation were accepted for registration and a certificate of incorporation was issued
by the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock
of the corporation. But it is admitted that the money paid on his subscription did not belong to him but to
the Americans subscribers to the corporate stock. In explanation, the accused testified, without
contradiction, that in the process of organization Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred
shares with a total value of P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are listed on page 7 of this
certified copy came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get them all together at one time
because they were pilots. They had difficulty in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in airplane surplus property and they had obtained a
considerable amount of money on those planes and as I recall they were desirous of getting a
corporation formed right away. And they wanted to have their respective shares holdings resolved at a
latter date. They stated that they could get together that they feel that they had no time to settle their
respective share holdings. We discussed the matter and finally it was decided that the best way to
handle the things was not to put the shares in the name of anyone of the interested parties and to have
someone act as trustee for their respective shares holdings. So we looked around for a trustee. And he
said "There are a lot of people whom I trust." He said, "Is there someone around whom we could get
right away?" I said, "There is Arsenio. He was my boy during the liberation and he cared for me when i
was sick and i said i consider him my friend." I said. They all knew Arsenio. He is a very kind man and
that was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4, of the
Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. The
penalty ofprision mayor and a fine not to exceed 5,000 pesos shall be imposed upon any
public officer, employee, or notary who, taking advantage of his official position, shall falsify a
document by committing any of the following acts:
xxx

xxx

4. Making untruthful statements in a narration of facts.

xxx

ART. 172. Falsification by private individuals and use of falsified documents. The penalty
of prision correccional in its medium and maximum period and a fine of not more than 5,000
pesos shall be imposed upon:
xxx

xxx

xxx

1. Any private individual who shall commit any of the falsifications enumerated in the next
preceding article in any public or official document or letter of exchange or any other kind of
commercial document.
Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal Code
( new edition, pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the
perversion of truth in the narration of facts must be made with the wrongful intent of injuring a third
person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the same author further maintains that
even if such wrongful intent is proven, still the untruthful statement will not constitute the crime of
falsification if there is no legal obligation on the part of the narrator to disclose the truth. Wrongful intent
to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential
to a conviction for a crime of falsification under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present case consists in not disclosing
in the articles of incorporation that Baylon was a mere trustee ( or dummy as the prosecution chooses
to call him) of his American co-incorporators, thus giving the impression that Baylon was the owner of
the shares subscribed to by him which, as above stated, amount to 60.005 per cent of the sub-scribed
capital stock. This, in the opinion of the trial court, is a malicious perversion of the truth made with the
wrongful intent circumventing section 8, Article XIV of the Constitution, which provides that " no
franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to citizens of the Philippines or to corporation or other entities organized under the law
of the Philippines, sixty per centum of the capital of which is owned by citizens of the Philippines . . . ."
Plausible though it may appear at first glance, this opinion loses validity once it is noted that it is
predicated on the erroneous assumption that the constitutional provision just quoted was meant to
prohibit the mere formation of a public utility corporation without 60 per cent of its capital being owned
by the Filipinos, a mistaken belief which has induced the lower court to that the accused was under
obligation to disclose the whole truth about the nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere trustee or dummy of his American co-incorporators,
and that in not making such disclosure defendant's intention was to circumvent the Constitution to the
detriment of the public interests. Contrary to the lower court's assumption, the Constitution does not
prohibit the mere formation of a public utility corporation without the required formation of Filipino
capital. What it does prohibit is the granting of a franchise or other form of authorization for the
operation of a public utility to a corporation already in existence but without the requisite proportion of
Filipino capital. This is obvious from the context, for the constitutional provision in question qualifies the
terms " franchise", "certificate", or "any other form of authorization" with the phrase "for the operation of
a public utility," thereby making it clear that the franchise meant is not the "primary franchise" that invest
a body of men with corporate existence but the "secondary franchise" or the privilege to operate as a
public utility after the corporation has already come into being.

If the Constitution does not prohibit the mere formation of a public utility corporation with the alien
capital, then how can the accused be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation that Baylon was a mere trustee of his
American co-incorporation and that for that reason the subscribed capital stock of the corporation was
wholly American? For the mere formation of the corporation such revelation was not essential, and the
Corporation Law does not require it. Defendant was, therefore, under no obligation to make it. In the
absence of such obligation and of the allege wrongful intent, defendant cannot be legally convicted of
the crime with which he is charged.
It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock
appearing in the name of Baylon was an indispensable preparatory step to the subversion of the
constitutional prohibition and the laws implementing the policy expressed therein. This view is not
correct. For a corporation to be entitled to operate a public utility it is not necessary that it be organized
with 60 per cent of its capital owned by Filipinos from the start. A corporation formed with capital that is
entirely alien may subsequently change the nationality of its capital through transfer of shares to Filipino
citizens. conversely, a corporation originally formed with Filipino capital may subsequently change the
national status of said capital through transfer of shares to foreigners. What need is there then for a
corporation that intends to operate a public utility to have, at the time of its formation, 60 per cent of its
capital owned by Filipinos alone? That condition may anytime be attained thru the necessary transfer of
stocks. The moment for determining whether a corporation is entitled to operate as a public utility is
when it applies for a franchise, certificate, or any other form of authorization for that purpose. And that
can be done after the corporation has already come into being and not while it is still being formed. And
at that moment, the corporation must show that it has complied not only with the requirement of the
Constitution as to the nationality of its capital, but also with the requirements of the Civil Aviation Law if
it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water, and the
Public Service Law if it is a common carrier by land or other kind of public service.
Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible
crime" under article 59 of the Revised Penal Code. It not being possible to suppose that defendant had
intended to commit a crime for the simple reason that the alleged constitutional prohibition which he is
charged for having tried to circumvent does not exist, conviction under that article is out of the question.
The foregoing consideration can not but lead to the conclusion that the defendant can not be held guilty
of the crime charged. The majority of the court, however, are also of the opinion that, even supposing
that the act imputed to the defendant constituted falsification at the time it was perpetrated, still with the
approval of the Party Amendment to the Constitution in March, 1947, which placed Americans on the
same footing as Filipino citizens with respect to the right to operate public utilities in the Philippines,
thus doing away with the prohibition in section 8, Article XIV of the Constitution in so far as American
citizens are concerned, the said act has ceased to be an offense within the meaning of the law, so that
defendant can no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha
acquitted, with costs de oficio.

G.R. No. 168914

July 4, 2007

METROPOLITAN CEBU WATER DISTRICT (MCWD), Petitioner,

vs.
MARGARITA A. ADALA, Respondent.
DECISION

Consumption Blocks

Proposed Rates

0-10 cu. m.

P125.00(min. charge)

11-20 cu. m.

13.50 per cu. m.

21-30 cu. m.

14.50 per cu. m.

31-40 cu. m.

35.00 per cu. m.

41-50 cu. m.

37.00 per cu. m.

51-60 cu. m.

38.00 per cu. m.

61-70 cu. m.

40.00 per cu. m.

71-100 cu. m.

45.00 per cu. m.

Over 100 cu. m.

50.00 per cu. m.

CARPIO MORALES, J.:

The Decision of the Regional Trial Court (RTC) of Cebu dated February 10, 2005, which affirmed in
toto the Decision of the National Water Resources Board (NWRB) dated September 22, 2003 in favor of
Margarita A. Adala, respondent, is being challenged in the present petition for review on certiorari.
Respondent filed on October 24, 2002 an application with the NWRB for the issuance of a Certificate of
Public Convenience (CPC) to operate and maintain waterworks system in sitios San Vicente, Fatima,
and Sambag in Barangay Bulacao, Cebu City.
At the initial hearing of December 16, 2002 during which respondent submitted proof of compliance with
jurisdictional requirements of notice and publication, herein petitioner Metropolitan Cebu Water District,
a government-owned and controlled corporation created pursuant to P.D. 1981 which took effect upon its
issuance by then President Marcos on May 25, 1973, as amended, appeared through its lawyers to
oppose the application.
While petitioner filed a formal opposition by mail, a copy thereof had not, on December 16, 2002, yet
been received by the NWRB, the day of the hearing. Counsel for respondent, who received a copy of
petitioners Opposition dated December 12, 2002 earlier that morning, volunteered to give a copy
thereof to the hearing officer.2
In its Opposition, petitioner prayed for the denial of respondents application on the following grounds:
(1) petitioners Board of Directors had not consented to the issuance of the franchise applied for, such
consent being a mandatory condition pursuant to P.D. 198, (2) the proposed waterworks would interfere
with petitioners water supply which it has the right to protect, and (3) the water needs of the residents in
the subject area was already being well served by petitioner.
After hearing and an ocular inspection of the area, the NWRB, by Decision dated September 22, 2003,
dismissed petitioners Opposition "for lack of merit and/or failure to state the cause of action"3 and ruled
in favor of respondent as follows:
PREMISES ALL CONSIDERED, and finding that Applicant is legally and financially qualified to operate
and maintain the subject waterworks system, and that said operation shall redound to the benefit of the
of the [sic] consumers of Sitios San Vicente, Fatima and Sambag at Bulacao Pardo, Cebu City, thereby
promoting public service in a proper and suitable manner, the instant application for a Certificate of
Public Convenience (CPC) is, hereby, GRANTED for a period of five (5) years with authority to charge
the proposed rates herein set effective upon approval as follows:

The Rules and Regulations, hereto, attached for the operation of the waterworks system should be
strictly complied with.

Since the average production is below average day demand, it is recommended to construct another
well or increase the well horsepower from 1.5 - 3.00 Hp to satisfy the water requirement of the
consumers.

RESOLVE[D], AS IT IS HEREBY RESOLVED, to authorize the General Manager, ENGR. ARMANDO H.

PAREDES, to file in behalf of the Metropolitan Cebu Water District expropriation and other
cases and to affirm and confirm above-stated authority with respect to previous cases filed by MCWD.

Moreover, the rates herein approved should be posted by GRANTEE at conspicuous places within the
area serviced by it, within seven (7) calendar days from notice of this Decision.

x x x x8 (Emphasis and underscoring supplied)

SO ORDERED.4
Its motion for reconsideration having been denied by the NWRB by Resolution of May 17, 2004,
petitioner appealed the case to the RTC of Cebu City. As mentioned early on, the RTC denied the
appeal and upheld the Decision of the NWRB by Decision dated February 10, 2005. And the RTC
denied too petitioners motion for reconsideration by Order of May 13, 2005.
Hence, the present petition for review raising the following questions of law:
i. WHETHER OR NOT THE CONSENT OF THE BOARD OF DIRECTORS OF THE WATER
DISTRICT IS A CONDITION SINE QUA NON TO THE GRANT OF CERTIFICATE OF PUBLIC
CONVENIENCE BY THE NATIONAL WATER RESOURCES BOARD UPON OPERATORS OF
WATERWORKS WITHIN THE SERVICE AREA OF THE WATER DISTRICT?
ii. WHETHER THE TERM FRANCHISE AS USED IN SECTION 47 OF PRESIDENTIAL
DECREE 198, AS AMENDED MEANS A FRANCHISE GRANTED BY CONGRESS THROUGH
LEGISLATION ONLY OR DOES IT ALSO INCLUDE IN ITS MEANING A CERTIFICATE OF
PUBLIC CONVENIENCE ISSUED BY THE NATIONAL WATER RESOURCES BOARD FOR
THE MAINTENANCE OF WATERWORKS SYSTEM OR WATER SUPPLY SERVICE?5
Before discussing these substantive issues, a resolution of the procedural grounds raised by
respondent for the outright denial of the petition is in order.
By respondents claim, petitioners General Manager, Engineer Armando H. Paredes, who filed the
present petition and signed the accompanying verification and certification of non-forum shopping, was
not specifically authorized for that purpose. Respondent cites Premium Marble Resources v. Court of
Appeals6 where this Court held that, in the absence of a board resolution authorizing a person to act for
and in behalf of a corporation, the action filed in its behalf must fail since "the power of the corporation
to sue and be sued in any court is lodged with the board of directors that exercises its corporate
powers."
Respondent likewise cites ABS-CBN Broadcasting Corporation v. Court of Appeals7 where this Court
held that "[f]or such officers to be deemed fully clothed by the corporation to exercise a power of the
Board, the latter mustspecially authorize them to do so." (Emphasis supplied by respondent)
That there is a board resolution authorizing Engineer Paredes to file cases in behalf of petitioner is not
disputed. Attached to the petition is petitioners Board of Directors Resolution No. 015-2004, the
relevant portion of which states:

To respondent, however, the board resolution is invalid and ineffective for being a roving authority and
not a specific resolution pursuant to the ruling in ABS-CBN.
That the subject board resolution does not authorize Engineer Paredes to file the instant petition in
particular but "expropriation and other cases" does not, by itself, render the authorization invalid or
ineffective.
In BA Savings Bank v. Sia,9 the therein board resolution, couched in words similar to the questioned
resolution, authorized persons to represent the corporation, not for a specific case, but for a general
class of cases. Significantly, the Court upheld its validity:
In the present case, the corporation's board of directors issued a Resolution specifically
authorizing its lawyers "to act as their agents in any action or proceeding before the Supreme
Court, the Court of Appeals, or any other tribunal or agency[;] and to sign, execute and deliver in
connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate of nonforum shopping and other instruments necessary for such action and proceeding." The Resolution was
sufficient to vest such persons with the authority to bind the corporation and was specific
enough as to the acts they were empowered to do. (Emphasis and underscoring supplied, italics in
the original)
Nonetheless, while the questioned resolution sufficiently identifies the kind of cases which Engineer
Paredes may file in petitioners behalf, the same does not authorize him for the specific act of signing
verifications and certifications against forum shopping. For it merely authorizes Engineer Paredes
to file cases in behalf of the corporation. There is no mention of signing verifications and certifications
against forum shopping, or, for that matter, any document of whatever nature.
A board resolution purporting to authorize a person to sign documents in behalf of the corporation must
explicitly vest such authority. BPI Leasing Corporation v. Court of Appeals10 so instructs:
Corporations have no powers except those expressly conferred upon them by the Corporation Code
and those that are implied by or are incidental to its existence. These powers are exercised through
their board of directors and/or duly authorized officers and agents. Hence, physical acts, like the
signing of documents, can be performed only by natural persons duly authorized for the
purpose by corporate bylaws or by specific act of the board of directors.
The records are bereft of the authority of BLC's [BPI Leasing Corporation] counsel to institute
the present petition and to sign the certification of non-forum shopping. While said counsel may
be the counsel of record for BLC, the representation does not vest upon him the authority to execute the
certification on behalf of his client. There must be a resolution issued by the board of directors

that specifically authorizes him to institute the petition and execute the certification, for it is only
then that his actions can be legally binding upon BLC. (Emphasis, italics and underscoring
supplied)
It bears noting, moreover, that Rule 13 Section 2 of the Rules of Court merely defines filing as "the act
of presenting the pleading or other paper to the clerk of court." Since the signing of verifications and
certifications against forum shopping is not integral to the act of filing, this may not be deemed as
necessarily included in an authorization merely to file cases.
Engineer Paredes not having been specifically authorized to sign the verification and certification
against forum shopping in petitioners behalf, the instant petition may be dismissed outright.
Technicality aside, the petition just the same merits dismissal.
In support of its contention that the consent of its Board of Directors is a condition sine qua non for the
grant of the CPC applied for by respondent, petitioner cites Section 47 of P.D. 19811 which states:
Sec. 47. Exclusive Franchise. No franchise shall be granted to any other person or agency for
domestic, industrial or commercial water service within the district or any portion thereof unless and
except to the extent that the board of directors of said district consents thereto by resolution duly
adopted, such resolution, however, shall be subject to review by the Administration. (Emphasis and
underscoring supplied)
There being no such consent on the part of its board of directors, petitioner concludes that respondents
application for CPC should be denied.
Both parties arguments center, in the main, on the scope of the word "franchise" as used in the abovequoted provision.
Petitioner contends that "franchise" should be broadly interpreted, such that the prohibition against its
grant to other entities without the consent of the districts board of directors extends to the issuance of
CPCs. A contrary reading, petitioner adds, would result in absurd consequences, for it would mean that
Congress power to grant franchises for the operation of waterworks systems cannot be exercised
without the consent of water districts.
Respondent, on the other hand, proffers that the same prohibition only applies to franchises in the strict
sense those granted by Congress by means of statute and does not extend to CPCs granted by
agencies such as the NWRB.
Respondent quotes the NWRB Resolution dated May 17, 2004 which distinguished a franchise from a
CPC, thus:
A CPC is formal written authority issued by quasi-judicial bodies for the operation and maintenance of a
public utility for which a franchise is not required by law and a CPC issued by this Board is an authority

to operate and maintain a waterworks system or water supply service. On the other hand, a franchise is
privilege or authority to operate appropriate private property for public use vested by Congress through
legislation. Clearly, therefore, a CPC is different from a franchise and Section 47 of Presidential
Decree 198 refers only to franchise. Accordingly, the possession of franchise by a water district
does not bar the issuance of a CPC for an area covered by the water district. (Emphasis and
underscoring supplied by respondent)
Petitioners position that an overly strict construction of the term "franchise" as used in Section 47 of
P.D. 198 would lead to an absurd result impresses. If franchises, in this context, were strictly understood
to mean an authorization issuing directly from the legislature, it would follow that, while Congress
cannot issue franchises for operating waterworks systems without the water districts consent, the
NWRB may keep on issuing CPCs authorizing the very same act even without such consent. In effect,
not only would the NWRB be subject to less constraints than Congress in issuing franchises. The
exclusive character of the franchise provided for by Section 47 would be illusory.
Moreover, this Court, in Philippine Airlines, Inc. v. Civil Aeronautics Board,12 has construed the term
"franchise" broadly so as to include, not only authorizations issuing directly from Congress in the form of
statute, but also those granted by administrative agencies to which the power to grant franchises has
been delegated by Congress, to wit:
Congress has granted certain administrative agencies the power to grant licenses for, or to
authorize the operation of certain public utilities. With the growing complexity of modern life, the
multiplication of the subjects of governmental regulation, and the increased difficulty of administering
the laws, there is a constantly growing tendency towards the delegation of greater powers by the
legislature, and towards the approval of the practice by the courts. It is generally recognized that a
franchise may be derived indirectly from the state through a duly designated agency, and to this
extent, the power to grant franchises has frequently been delegated, even to agencies other than
those of a legislative nature. In pursuance of this, it has been held that privileges conferred by
grant by local authorities as agents for the state constitute as much a legislative franchise as
though the grant had been made by an act of the Legislature.13
That the legislative authority in this instance, then President Marcos14 intended to delegate its power
to issue franchises in the case of water districts is clear from the fact that, pursuant to the procedure
outlined in P.D. 198, it no longer plays a direct role in authorizing the formation and maintenance of
water districts, it having vested the same to local legislative bodies and the Local Water Utilities
Administration (LWUA).
Sections 6 and 7 of P.D. 198, as amended, state:
SECTION 6. Formation of District. This Act is the source of authorization and power to form and
maintain a district. Once formed, a district is subject to the provisions of this Act and not under the
jurisdiction of any political subdivision. For purposes of this Act, a district shall be considered as a quasipublic corporation performing public service and supplying public wants. As such, a district shall
exercise the powers, rights and privileges given to private corporations under existing laws, in addition
to the powers granted in, and subject to such restrictions imposed, under this Act. To form a district,

the legislative body of any city, municipality or province shall enact a resolution containing the
following:
(a) The name of the local water district, which shall include the name of the city, municipality, or
province, or region thereof, served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or
more municipalities, cities or provinces, or portions thereof: Provided, That such municipalities,
cities or provinces, or portions thereof, cover a contiguous area.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include
those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of the term of
office for each which shall be on the 31st of December of first, second, or third even-numbered
year after assuming office, as set forth in Section 11 hereof.
(f) A statement that the district may only be dissolved on the grounds and under the conditions
set forth in Section 45 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 25 of
this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the power to
dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single
district, a similar resolution shall be adopted in each city, municipality and province; or the city,
municipality or province in which 75% of the total active service connections are situated shall pass an
initial resolution to be concurred in by the other cities, municipalities or provinces.
SECTION 7. Filing of Resolution. A certified copy of the resolution or resolutions forming a
district shall be forwarded to the office of the Secretary of Administration. If found by the
Administration to conform to the requirements of Section 6 and the policy objectives in Section
2, the resolution shall be duly filed.The district shall be deemed duly formed and existing upon
the date of such filing. A certified copy of said resolution showing the stamp of the Administration shall
be maintained in the office of the district. Upon such filing, the local government or governments
concerned shall lose ownership, supervision and control or any right whatsoever over the district except
as provided herein. (Emphasis and underscoring supplied)

It bears noting that once a district is "duly formed and existing" after following the above procedure, it
acquires the "exclusive franchise" referred to in Section 47. Thus, P.D. 198 itself, in harmony
with Philippine Airlines, Inc. v. Civil Aeronautics Board,15 gives the name "franchise" to an authorization
that does not proceed directly from the legislature.
It would thus be incongruous to adopt in this instance the strict interpretation proffered by respondent
and exclude from the scope of the term "franchise" the CPCs issued by the NWRB.16
Nonetheless, while the prohibition in Section 47 of P.D. 198 applies to the issuance of CPCs for
the reasons discussed above, the same provision must be deemed void ab initio for being
irreconcilable with Article XIV Section 5 of the 1973 Constitution which was ratified on January 17,
1973 the constitution in force when P.D. 198 was issued on May 25, 1973. Thus, Section 5 of Art. XIV
of the 1973 Constitution reads:
SECTION 5. No franchise, certificate, or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or associations organized
under the laws of the Philippines at least sixty per centum of the capital of which is owned by such
citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Batasang Pambansa when
the public interest so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility enterprise
shall be limited to their proportionate share in the capital thereof. (Emphasis and underscoring supplied)
This provision has been substantially reproduced in Article XII Section 11 of the 1987 Constitution,
including the prohibition against exclusive franchises.17
In view of the purposes for which they are established,18 water districts fall under the term "public utility"
as defined in the case of National Power Corporation v. Court of Appeals:191avvphil
A "public utility" is a business or service engaged in regularly supplying the public with some
commodity or service of public consequence such as electricity, gas, water, transportation, telephone or
telegraph service. x x x (Emphasis and underscoring supplied)
It bears noting, moreover, that as early as 1933, the Court held that a particular water district the
Metropolitan Water District is a public utility.20
The ruling in National Waterworks and Sewerage Authority v. NWSA Consolidated Unions21 is also
instructive:
We agree with petitioner that the NAWASA is a public utility because its primary function is to
construct, maintain and operate water reservoirs and waterworks for the purpose of supplying
water to the inhabitants, as well as consolidate and centralize all water supplies and drainage
systems in the Philippines. x x x (Emphasis supplied)

Since Section 47 of P.D. 198, which vests an "exclusive franchise" upon public utilities, is clearly
repugnant to Article XIV, Section 5 of the 1973 Constitution,22 it is unconstitutional and may not,
therefore, be relied upon by petitioner in support of its opposition against respondents application for
CPC and the subsequent grant thereof by the NWRB.
WHEREFORE, Section 47 of P.D. 198 is unconstitutional. The Petition is thus, in light of the foregoing
discussions, DISMISSED.

G.R. No. 114222 April 6, 1995

FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of
Transportation and Communications, and EDSA LRT CORPORATION, LTD., respondents.

QUIASON, J.:
This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further
implementing and enforcing the "Revised and Restated Agreement to Build, Lease and Transfer a Light
Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to the 22 April
1992 Revised and Restated Agreement To Build, Lease and Transfer a Light Rail Transit System for
EDSA" dated May 6, 1993.
Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the Philippine
Senate and are suing in their capacities as Senators and as taxpayers. Respondent Jesus B. Garcia, Jr.
is the incumbent Secretary of the Department of Transportation and Communications (DOTC), while
private respondent EDSA LRT Corporation, Ltd. is a private corporation organized under the laws of
Hongkong.
I
In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare in
Metropolitan Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The
plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was intended to provide a mass transit
system along EDSA and alleviate the congestion and growing transportation problem in the metropolis.
On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by Elijahu
Levin to DOTC Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a Build-OperateTransfer (BOT) basis.
On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project with
DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction,
Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes,"
was signed by President Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT) Law, it
took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing, construction and operation of
government projects through private initiative and investment: Build-Operate-Transfer (BOT) or BuildTransfer (BT).
In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway,
DOTC, on January 22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and 91-496,
respectively creating the Prequalification Bids and Awards Committee (PBAC) and the Technical
Committee.
After its constitution, the PBAC issued guidelines for the prequalification of contractors for the financing
and implementation of the project The notice, advertising the prequalification of bidders, was published
in three newspapers of general circulation once a week for three consecutive weeks starting February
21, 1991.
The deadline set for submission of prequalification documents was March 21, 1991, later extended to
April 1, 1991. Five groups responded to the invitation namely, ABB Trazione of Italy, Hopewell Holdings
Ltd. of Hongkong, Mansteel International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA
LRT Consortium, composed of ten foreign and domestic corporations: namely, Kaiser Engineers
International, Inc., ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the
Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing Corporation, The
Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group,
Inc, and F. F. Cruz & co., Inc.
On the last day for submission of prequalification documents, the prequalification criteria proposed by
the Technical Committee were adopted by the PBAC. The criteria totalling 100 percent, are as follows:
(a) Legal aspects 10 percent; (b) Management/Organizational capability 30 percent; and (c)
Financial capability 30 percent; and (d) Technical capability 30 percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the
Implementation Rules and Regulations thereof, approved the same.
After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring that
of the five applicants, only the EDSA LRT Consortium "met the requirements of garnering at least 21
points per criteria [sic], except for Legal Aspects, and obtaining an over-all passing mark of at least 82
points" (Rollo, p. 146). The Legal Aspects referred to provided that the BOT/BT contractor-applicant
meet the requirements specified in the Constitution and other pertinent laws (Rollo, p. 114).
Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the Philippines
and was replaced by Secretary Pete Nicomedes Prado. The latter sent to President Aquino two letters
dated May 31, 1991 and June 14, 1991, respectively recommending the award of the EDSA LRT III
project to the sole complying bidder, the EDSA LRT Consortium, and requesting for authority to
negotiate with the said firm for the contract pursuant to paragraph 14(b) of the Implementing Rules and
Regulations of the BOT Law (Rollo, pp. 298-302).

In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive to
the DOTC to proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium submitted its
bid proposal to DOTC.
Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA LRT
Corporation, Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement to Build,
Lease and Transfer a Light Rail Transit System for EDSA" under the terms of the BOT Law (Rollo, pp.
147-177).
Secretary Prado, thereafter, requested presidential approval of the contract.
In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive
Secretary Orbos, informed Secretary Prado that the President could not grant the requested approval
for the following reasons: (1) that DOTC failed to conduct actual public bidding in compliance with
Section 5 of the BOT Law; (2) that the law authorized public bidding as the only mode to award BOT
projects, and the prequalification proceedings was not the public bidding contemplated under the law;
(3) that Item 14 of the Implementing Rules and Regulations of the BOT Law which authorized
negotiated award of contract in addition to public bidding was of doubtful legality; and (4) that
congressional approval of the list of priority projects under the BOT or BT Scheme provided in the law
had not yet been granted at the time the contract was awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon, the DOTC and private respondents renegotiated the agreement. On April 22, 1992, the parties entered into a "Revised and Restated
Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78)
inasmuch as "the parties [are] cognizant of the fact the DOTC has full authority to sign the Agreement
without need of approval by the President pursuant to the provisions of Executive Order No. 380 and
that certain events [had] supervened since November 7, 1991 which necessitate[d] the revision of the
Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary Jesus
Garcia vice Secretary Prado, and private respondent entered into a "Supplemental Agreement to the 22
April 1992 Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System
for EDSA" so as to "clarify their respective rights and responsibilities" and to submit [the] Supplemental
Agreement to the President, of the Philippines for his approval" (Rollo, pp. 79-80).
Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration and
approval. In a Memorandum to Secretary Garcia on May 6, 1993, approved the said Agreements,
(Rollo, p. 194).
According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and Slovak
Federal Republics and will have a maximum carrying capacity of 450,000 passengers a day, or 150
million a year to be achieved-through 54 such vehicles operating simultaneously. The EDSA LRT III will
run at grade, or street level, on the mid-section of EDSA for a distance of 17.8 kilometers from F.B.
Harrison, Pasay City to North Avenue, Quezon City. The system will have its own power facility
(Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger

stations and one depot in 16-hectare government property at North Avenue (Supplemental Agreement,
Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the entire project required for a complete operational
light rail transit system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion
date is 1,080 days or approximately three years from the implementation date of the contract inclusive
of mobilization, site works, initial and final testing of the system (Supplemental Agreement, Sec.
5; Rollo, p. 83). Upon full or partial completion and viability thereof, private respondent shall deliver the
use and possession of the completed portion to DOTC which shall operate the same (Supplemental
Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay
private respondent rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall
be determined by an independent and internationally accredited inspection firm to be appointed by the
parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's
capital shall be recovered from the rentals to be paid by the DOTC which, in turn, shall come from the
earnings of the EDSA LRT III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25
years and DOTC shall have completed payment of the rentals, ownership of the project shall be
transferred to the latter for a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec.
11.1; Rollo, p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957, Entitled
"An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects
by the Private Sector, and for Other Purposes" was signed into law by the President. The law was
published in two newspapers of general circulation on May 12, 1994, and took effect 15 days thereafter
or on May 28, 1994. The law expressly recognizes BLT scheme and allows direct negotiation of BLT
contracts.
II
In their petition, petitioners argued that:
(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE
SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA
LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF
EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE CONSTITUTION AND, HENCE,
IS UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE AGREEMENTS
IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING
RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;
(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R; A.
NO. 6957 AND, HENCE, IS UNLAWFUL;

(4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT

CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE, IS
ILLEGAL;
(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR
FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND
INEFFECTIVE; AND
(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE
GOVERNMENT (Rollo, pp. 15-16).
Secretary Garcia and private respondent filed their comments separately and claimed that:
(1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present
petition;
(2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of facts;
(3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the BOT
Law;
(4) The nationality requirement for public utilities mandated by the Constitution does not apply to private
respondent;
(5) The Agreements executed by and between respondents have been approved by President Ramos
and are not disadvantageous to the government;
(6) The award of the contract to private respondent through negotiation and not public bidding is
allowed by the BOT Law; and
(7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718 passed
by the Legislature On May 12, 1994, which provides for direct negotiation as a mode of award of
infrastructure projects.

the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110 [1994]) and to disallow the same when only
municipal contracts are involved (Bugnay Construction and Development Corporation v. Laron, 176
SCRA. 240 [1989]).
For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to follow it
and uphold the legal standing of petitioners as taxpayers to institute the present action.
IV
In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and the
Supplemental Agreement of May 6, 1993 are unconstitutional and invalid for the following reasons:
(1) the EDSA LRT III is a public utility, and the ownership and operation thereof is
limited by the Constitution to Filipino citizens and domestic corporations, not foreign
corporations like private respondent;
(2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the
BOT or BT Scheme under the law;
(3) the contract to construct the EDSA LRT III was awarded to private respondent not
through public bidding which is the only mode of awarding infrastructure projects
under the BOT law; and
(4) the agreements are grossly disadvantageous to the government.
1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA LRT III
was awarded by public respondent, is admittedly a foreign corporation "duly incorporated and existing
under the laws of Hongkong" (Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is
constructed, private respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate
the system and pay rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT
III; a public utility? (Rollo, p. 17).

III
Respondents claimed that petitioners had no legal standing to initiate the instant action. Petitioners,
however, countered that the action was filed by them in their capacity as Senators and as taxpayers.
The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered into by
the national government or government-owned or controlled corporations allegedly in contravention of

The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail
tracks, rolling stocks like the coaches, rail stations, terminals and the power plant, not a public utility.
While a franchise is needed to operate these facilities to serve the public, they do not by themselves
constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the
public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility.
However, it does not require a franchise before one can own the facilities needed to operate a public
utility so long as it does not operate them to serve the public.
Section 11 of Article XII of the Constitution provides:
No franchise, certificate or any other form of authorization for the operation of a public
utility shall be granted except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens, nor shall such franchise, certificate or
authorization be exclusive character or for a longer period than fifty years . . .
(Emphasis supplied).
In law, there is a clear distinction between the "operation" of a public utility and the ownership of the
facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is
completely subjected to his will in everything not prohibited by law or the concurrence with the rights of
another (Tolentino, II Commentaries and Jurisprudence on the Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is limited by law so that a property cannot be
operated and used to serve the public as a public utility unless the operator has a franchise. The
operation of a rail system as a public utility includes the transportation of passengers from one point to
another point, their loading and unloading at designated places and the movement of the trains at prescheduled times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149
[1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d 868, 2 A.L.R. 2d
1065 [1948]).
The right to operate a public utility may exist independently and separately from the ownership of the
facilities thereof. One can own said facilities without operating them as a public utility, or conversely, one
may operate a public utility without owning the facilities used to serve the public. The devotion of
property to serve the public may be done by the owner or by the person in control thereof who may not
necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the ownership of the facilities used to serve
the public can be very well appreciated when we consider the transportation industry. Enfranchised
airline and shipping companies may lease their aircraft and vessels instead of owning them themselves.
While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it admits
that it is not enfranchised to operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo,
p. 57). In view of this incapacity, private respondent and DOTC agreed that on completion date, private
respondent will immediately deliver possession of the LRT system by way of lease for 25 years, during
which period DOTC shall operate the same as a common carrier and private respondent shall provide

technical maintenance and repair services to DOTC (Revised and Restated Agreement, Secs. 3.2, 5.1
and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of providing (1) repair and
maintenance facilities for the depot and rail lines, services for routine clearing and security; and (2)
producing and distributing maintenance manuals and drawings for the entire system (Revised and
Restated Agreement, Annex F).
Private respondent shall also train DOTC personnel for familiarization with the operation, use,
maintenance and repair of the rolling stock, power plant, substations, electrical, signaling,
communications and all other equipment as supplied in the agreement (Revised and Restated
Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and live training of DOTC
operational personnel which includes actual driving of light rail vehicles under simulated operating
conditions, control of operations, dealing with emergencies, collection, counting and securing cash from
the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC
will work under the direction and control of private respondent only during training (Revised and
Restated Agreement, Annex E, Sec. 3.1). The training objectives, however, shall be such that upon
completion of the EDSA LRT III and upon opening of normal revenue operation, DOTC shall have in
their employ personnel capable of undertaking training of all new and replacement personnel (Revised
and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of the three-year construction
period and upon commencement of normal revenue operation, DOTC shall be able to operate the
EDSA LRT III on its own and train all new personnel by itself.
Fees for private respondent' s services shall be included in the rent, which likewise includes the project
cost, cost of replacement of plant equipment and spare parts, investment and financing cost, plus a
reasonable rate of return thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a
common carrier. For this purpose, DOTC shall indemnify and hold harmless private respondent from
any losses, damages, injuries or death which may be claimed in the operation or implementation of the
system, except losses, damages, injury or death due to defects in the EDSA LRT III on account of the
defective condition of equipment or facilities or the defective maintenance of such equipment facilities
(Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).
In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will
have no dealings with the public and the public will have no right to demand any services from it.
It is well to point out that the role of private respondent as lessor during the lease period must be
distinguished from the role of the Philippine Gaming Management Corporation (PGMC) in the case
of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease between PGMC
and the Philippine Charity Sweepstakes Office (PCSO) was actually a collaboration or joint venture
agreement prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the lessor
obligated itself to build, at its own expense, all the facilities necessary to operate and maintain a
nationwide on-line lottery system from whom PCSO was to lease the facilities and operate the same.
Upon due examination of the contract, the Court found that PGMC's participation was not confined to
the construction and setting up of the on-line lottery system. It spilled over to the actual operation

thereof, becoming indispensable to the pursuit, conduct, administration and control of the highly
technical and sophisticated lottery system. In effect, the PCSO leased out its franchise to PGMC which
actually operated and managed the same.
Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility (Providence
and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission
of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35
S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine,
poultry and beer cars who supply cars under contract to railroad companies considered as public
utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).
Even the mere formation of a public utility corporation does not ipso facto characterize the corporation
as one operating a public utility. The moment for determining the requisite Filipino nationality is when
the entity applies for a franchise, certificate or any other form of authorization for that purpose (People v.
Quasha, 93 Phil. 333 [1953]).
2. Petitioners further assert that the BLT scheme under the Agreements in question is not recognized in
the BOT Law and its Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT schemes as follows:
(a) Build-operate-and-transfer scheme A contractual arrangement whereby the
contractor undertakes the construction including financing, of a given infrastructure
facility, and the operation and maintenance thereof. The contractor operates the
facility over a fixed term during which it is allowed to charge facility users appropriate
tolls, fees, rentals and charges sufficient to enable the contractor to recover its
operating and maintenance expenses and its investment in the project plus a
reasonable rate of return thereon. The contractor transfers the facility to the
government agency or local government unit concerned at the end of the fixed term
which shall not exceed fifty (50) years. For the construction stage, the contractor may
obtain financing from foreign and/or domestic sources and/or engage the services of
a foreign and/or Filipino constructor [sic]: Provided, That the ownership structure of
the contractor of an infrastructure facility whose operation requires a public utility
franchise must be in accordance with the Constitution: Provided, however, That in the
case of corporate investors in the build-operate-and-transfer corporation, the
citizenship of each stockholder in the corporate investors shall be the basis for the
computation of Filipino equity in the said corporation: Provided, further, That, in the
case of foreign constructors [sic], Filipino labor shall be employed or hired in the
different phases of the construction where Filipino skills are available: Provided,
furthermore, that the financing of a foreign or foreign-controlled contractor from
Philippine government financing institutions shall not exceed twenty percent (20%) of
the total cost of the infrastructure facility or project: Provided, finally, That financing
from foreign sources shall not require a guarantee by the Government or by
government-owned or controlled corporations. The build-operate-and-transfer

scheme shall include a supply-and-operate situation which is a contractual agreement

whereby the supplier of equipment and machinery for a given infrastructure facility, if
the interest of the Government so requires, operates the facility providing in the
process technology transfer and training to Filipino nationals.
(b) Build-and-transfer scheme "A contractual arrangement whereby the contractor
undertakes the construction including financing, of a given infrastructure facility, and
its turnover after completion to the government agency or local government unit
concerned which shall pay the contractor its total investment expended on the project,
plus a reasonable rate of return thereon. This arrangement may be employed in the
construction of any infrastructure project including critical facilities which for security
or strategic reasons, must be operated directly by the government (Emphasis
supplied).
The BOT scheme is expressly defined as one where the contractor undertakes the construction and
financing in infrastructure facility, and operates and maintains the same. The contractor operates the
facility for a fixed period during which it may recover its expenses and investment in the project plus a
reasonable rate of return thereon. After the expiration of the agreed term, the contractor transfers the
ownership and operation of the project to the government.
In the BT scheme, the contractor undertakes the construction and financing of the facility, but after
completion, the ownership and operation thereof are turned over to the government. The government, in
turn, shall pay the contractor its total investment on the project in addition to a reasonable rate of return.
If payment is to be effected through amortization payments by the government infrastructure agency or
local government unit concerned, this shall be made in accordance with a scheme proposed in the bid
and incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must
comply with the citizenship requirement of the Constitution on the operation of a public utility. No such a
requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement for the
payment by the government of the project cost. The law must not be read in such a way as to rule out or
unduly restrict any variation within the context of the two schemes. Indeed, no statute can be enacted to
anticipate and provide all the fine points and details for the multifarious and complex situations that may
be encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v.
Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29 Phil. 119 [1914]).
The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law.
As a matter of fact, the burden on the government in raising funds to pay for the project is made lighter
by allowing it to amortize payments out of the income from the operation of the LRT System.

In form and substance, the challenged agreements provide that rentals are to be paid on a monthly
basis according to a schedule of rates through and under the terms of a confirmed Irrevocable
Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85). At the end of 25 years and
when full payment shall have been made to and received by private respondent, it shall transfer to
DOTC, free from any lien or encumbrances, all its title to, rights and interest in, the project for only U.S.
$1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo, pp. 67, .
87).
A lease is a contract where one of the parties binds himself to give to another the enjoyment or use of a
thing for a certain price and for a period which may be definite or indefinite but not longer than 99 years
(Civil Code of the Philippines, Art. 1643). There is no transfer of ownership at the end of the lease
period. But if the parties stipulate that title to the leased premises shall be transferred to the lessee at
the end of the lease period upon the payment of an agreed sum, the lease becomes a lease-purchase
agreement.
Furthermore, it is of no significance that the rents shall be paid in United States currency, not Philippine
pesos. The EDSA LRT III Project is a high priority project certified by Congress and the National
Economic and Development Authority as falling under the Investment Priorities Plan of Government
(Rollo, pp. 310-311). It is, therefore, outside the application of the Uniform Currency Act (R.A. No. 529),
which reads as follows:
Sec. 1. Every provision contained in, or made with respect to, any domestic
obligation to wit, any obligation contracted in the Philippines which provisions purports
to give the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines
measured thereby, be as it is hereby declared against public policy, and null, void,
and of no effect, and no such provision shall be contained in, or made with respect to,
any obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b)
transactions affecting high-priority economic projects for agricultural, industrial and
power development as may be determined by
the National Economic Council which are financed by or through foreign funds; . . . .
3. The fact that the contract for the construction of the EDSA LRT III was awarded through negotiation
and before congressional approval on January 22 and 23, 1992 of the List of National Projects to be
undertaken by the private sector pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to
invalidate the award.
Subsequent congressional approval of the list including "rail-based projects packaged with commercial
development opportunities" (Rollo, p. 310) under which the EDSA LRT III projects falls, amounts to a
ratification of the prior award of the EDSA LRT III contract under the BOT Law.
Petitioners insist that the prequalifications process which led to the negotiated award of the contract
appears to have been rigged from the very beginning to do away with the usual open international
public bidding where qualified internationally known applicants could fairly participate.

The records show that only one applicant passed the prequalification process. Since only one was left,
to conduct a public bidding in accordance with Section 5 of the BOT Law for that lone participant will be
an absurb and pointless exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation to
Presidential Decree No. 1594 allows the negotiated award of government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for Government
Infrastructure Contracts," allows the negotiated award of government projects in exceptional cases.
Sections 4 of the said law reads as follows:
Bidding. Construction projects shall generally be undertaken by contract after
competitive public bidding. Projects may be undertaken by administration or force
account or by negotiated contract only in exceptional cases where time is of the
essence, or where there is lack of qualified bidders or contractors, or where there is
conclusive evidence that greater economy and efficiency would be achieved through
this arrangement, and in accordance with provision of laws and acts on the matter,
subject to the approval of the Minister of Public Works and Transportation and
Communications, the Minister of Public Highways, or the Minister of Energy, as the
case may be, if the project cost is less than P1 Million, and the President of the
Philippines, upon recommendation of the Minister, if the project cost is P1 Million or
more (Emphasis supplied).
xxx xxx xxx
Indeed, where there is a lack of qualified bidders or contractors, the award of government infrastructure
contracts may he made by negotiation. Presidential Decree No. 1594 is the general law on government
infrastructure contracts while the BOT Law governs particular arrangements or schemes aimed at
encouraging private sector participation in government infrastructure projects. The two laws are not
inconsistent with each other but are inpari materia and should be read together accordingly.
In the instant case, if the prequalification process was actually tainted by foul play, one wonders why
none of the competing firms ever brought the matter before the PBAC, or intervened in this case before
us (cf. Malayan Integrated Industries Corp. v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v.
Office of the President, 205 SCRA 705 [1992]).
The challenged agreements have been approved by President Ramos himself. Although then Executive
Secretary Drilon may have disapproved the "Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA," there is nothing in our laws that prohibits parties to a contract from
renegotiating and modifying in good faith the terms and conditions thereof so as to meet legal, statutory
and constitutional requirements. Under the circumstances, to require the parties to go back to step one
of the prequalification process would just be an idle ceremony. Useless bureaucratic "red tape" should

be eschewed because it discourages private sector participation, the "main engine" for national growth
and development (R.A. No. 6957, Sec. 1), and renders the BOT Law nugatory.
Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:
(e) Build-lease-and-transfer A contractual arrangement whereby a project
proponent is authorized to finance and construct an infrastructure or development
facility and upon its completion turns it over to the government agency or local
government unit concerned on a lease arrangement for a fixed period after which
ownership of the facility is automatically transferred to the government unit
concerned.
Section 5-A of the law, which expressly allows direct negotiation of contracts, provides:
Direct Negotiation of Contracts. Direct negotiation shall be resorted to when there
is only one complying bidder left as defined hereunder.
(a) If, after advertisement, only one contractor applies for prequalification and it meets
the prequalification requirements, after which it is required to submit a bid proposal
which is subsequently found by the agency/local government unit (LGU) to be
complying.
(b) If, after advertisement, more than one contractor applied for prequalification but
only one meets the prequalification requirements, after which it submits bid/proposal
which is found by the agency/local government unit (LGU) to be complying.
(c) If, after prequalification of more than one contractor only one submits a bid which
is found by the agency/LGU to be complying.
(d) If, after prequalification, more than one contractor submit bids but only one is
found by the agency/LGU to be complying. Provided, That, any of the disqualified
prospective bidder [sic] may appeal the decision of the implementing agency,
agency/LGUs prequalification bids and awards committee within fifteen (15) working
days to the head of the agency, in case of national projects or to the Department of
the Interior and Local Government, in case of local projects from the date the
disqualification was made known to the disqualified bidder: Provided, furthermore,
That the implementing agency/LGUs concerned should act on the appeal within fortyfive (45) working days from receipt thereof.
Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated by the
BOT Law has now been rendered moot and academic by R.A. No. 7718. Section 3 of this law
authorizes all government infrastructure agencies, government-owned and controlled corporations and
local government units to enter into contract with any duly prequalified proponent for the financing,

construction, operation and maintenance of any financially viable infrastructure or development facility
through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-operate), DOT (Developoperate-and-transfer), ROT (Rehabilitate-operate-and-transfer), and ROO (Rehabilitate-own-operate)
(R.A. No. 7718, Sec. 2 [b-j]).
From the law itself, once and applicant has prequalified, it can enter into any of the schemes
enumerated in Section 2 thereof, including a BLT arrangement, enumerated and defined therein (Sec.
3).
Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a climate
of minimum government regulations and procedures and specific government undertakings in support
of the private sector" (Sec. 1). A curative statute makes valid that which before enactment of the statute
was invalid. Thus, whatever doubts and alleged procedural lapses private respondent and DOTC may
have engendered and committed in entering into the questioned contracts, these have now been cured
by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342 [1980];
Santos V. Duata, 14 SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil. 43 [1922].
4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government
because the rental rates are excessive and private respondent's development rights over the 13
stations and the depot will rob DOTC of the best terms during the most productive years of the project.
It must be noted that as part of the EDSA LRT III project, private respondent has been granted, for a
period of 25 years, exclusive rights over the depot and the air space above the stations for development
into commercial premises for lease, sublease, transfer, or advertising (Supplemental Agreement, Sec.
11; Rollo, pp. 91-92). For and in consideration of these development rights, private respondent shall pay
DOTC in Philippine currency guaranteed revenues generated therefrom in the amounts set forth in the
Supplemental Agreement (Sec. 11;Rollo, p. 93). In the event that DOTC shall be unable to collect the
guaranteed revenues, DOTC shall be allowed to deduct any shortfalls from the monthly rent due private
respondent for the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 9394). All rights, titles, interests and income over all contracts on the commercial spaces shall revert to
DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a painstaking study by DOTC. The determination by
the proper administrative agencies and officials who have acquired expertise, specialized skills and
knowledge in the performance of their functions should be accorded respect absent any showing of
grave abuse of discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673
[1990]; Board of Medical Education v. Alfonso, 176 SCRA 304 [1989]).
Government officials are presumed to perform their functions with regularity and strong evidence is
necessary to rebut this presumption. Petitioners have not presented evidence on the reasonable rentals
to be paid by the parties to each other. The matter of valuation is an esoteric field which is better left to
the experts and which this Court is not eager to undertake.

That the grantee of a government contract will profit therefrom and to that extent the government is
deprived of the profits if it engages in the business itself, is not worthy of being raised as an issue. In all
cases where a party enters into a contract with the government, he does so, not out of charity and not to
lose money, but to gain pecuniarily.
5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its
governmental function. DOTC is the primary policy, planning, programming, regulating and
administrative entity of the Executive branch of government in the promotion, development and
regulation of dependable and coordinated networks of transportation and communications systems as
well as in the fast, safe, efficient and reliable postal, transportation and communications services
(Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive department, DOTC in
particular that has the power, authority and technical expertise determine whether or not a specific
transportation or communication project is necessary, viable and beneficial to the people. The discretion
to award a contract is vested in the government agencies entrusted with that function (Bureau Veritas v.
Office of the President, 205 SCRA 705 [1992]).
WHEREFORE, the petition is DISMISSED.

G.R. No. 125948 December 29, 1998

FIRST PHILIPPINE INDUSTRIAL CORPORATION, petitioner,
vs.
COURT OF APPEALS, HONORABLE PATERNO V. TAC-AN, BATANGAS CITY and ADORACION C.
ARELLANO, in her official capacity as City Treasurer of Batangas, respondents.

MARTINEZ, J.:
This petition for review on certiorari assails the Decision of the Court of Appeals dated November 29,
1995, in CA-G.R. SP No. 36801, affirming the decision of the Regional Trial Court of Batangas City,
Branch 84, in Civil Case No. 4293, which dismissed petitioners' complaint for a business tax refund
imposed by the City of Batangas.
Petitioner is a grantee of a pipeline concession under Republic Act No. 387, as amended, to contract,
install and operate oil pipelines. The original pipeline concession was granted in 1967 1 and renewed by
the Energy Regulatory Board in 1992. 2
Sometime in January 1995, petitioner applied for a mayor's permit with the Office of the Mayor of
Batangas City. However, before the mayor's permit could be issued, the respondent City Treasurer
required petitioner to pay a local tax based on its gross receipts for the fiscal year 1993 pursuant to the
Local Government Code 3. The respondent City Treasurer assessed a business tax on the petitioner
amounting to P956,076.04 payable in four installments based on the gross receipts for products
pumped at GPS-1 for the fiscal year 1993 which amounted to P181,681,151.00. In order not to hamper
its operations, petitioner paid the tax under protest in the amount of P239,019.01 for the first quarter of
1993.
On January 20, 1994, petitioner filed a letter-protest addressed to the respondent City Treasurer, the
pertinent portion of which reads:

The imposition and assessment cannot be categorized as a mere fee authorized

under Section 147 of the Local Government Code. The said section limits the
imposition of fees and charges on business to such amounts as may be
commensurate to the cost of regulation, inspection, and licensing. Hence, assuming
arguendo that FPIC is liable for the license fee, the imposition thereof based on gross
receipts is violative of the aforecited provision. The amount of P956,076.04
(P239,019.01 per quarter) is not commensurate to the cost of regulation, inspection
and licensing. The fee is already a revenue raising measure, and not a mere
regulatory imposition. 4
On March 8, 1994, the respondent City Treasurer denied the protest contending that petitioner cannot
be considered engaged in transportation business, thus it cannot claim exemption under Section 133 (j)
of the Local Government Code. 5
On June 15, 1994, petitioner filed with the Regional Trial Court of Batangas City a complaint 6 for tax
refund with prayer for writ of preliminary injunction against respondents City of Batangas and Adoracion
Arellano in her capacity as City Treasurer. In its complaint, petitioner alleged, inter alia, that: (1) the
imposition and collection of the business tax on its gross receipts violates Section 133 of the Local
Government Code; (2) the authority of cities to impose and collect a tax on the gross receipts of
"contractors and independent contractors" under Sec. 141 (e) and 151 does not include the authority to
collect such taxes on transportation contractors for, as defined under Sec. 131 (h), the term
"contractors" excludes transportation contractors; and, (3) the City Treasurer illegally and erroneously
imposed and collected the said tax, thus meriting the immediate refund of the tax paid. 7
Traversing the complaint, the respondents argued that petitioner cannot be exempt from taxes under
Section 133 (j) of the Local Government Code as said exemption applies only to "transportation
contractors and persons engaged in the transportation by hire and common carriers by air, land and
water." Respondents assert that pipelines are not included in the term "common carrier" which refers
solely to ordinary carriers such as trucks, trains, ships and the like. Respondents further posit that the
term "common carrier" under the said code pertains to the mode or manner by which a product is
delivered to its destination. 8
On October 3, 1994, the trial court rendered a decision dismissing the complaint, ruling in this wise:

Please note that our Company (FPIC) is a pipeline operator with a government
concession granted under the Petroleum Act. It is engaged in the business of
transporting petroleum products from the Batangas refineries, via pipeline, to Sucat
and JTF Pandacan Terminals. As such, our Company is exempt from paying tax on
gross receipts under Section 133 of the Local Government Code of 1991 . . . .
Moreover, Transportation contractors are not included in the enumeration of
contractors under Section 131, Paragraph (h) of the Local Government Code.
Therefore, the authority to impose tax "on contractors and other independent
contractors" under Section 143, Paragraph (e) of the Local Government Code does
not include the power to levy on transportation contractors.

. . . Plaintiff is either a contractor or other independent contractor.

. . . the exemption to tax claimed by the plaintiff has become unclear. It is a rule that
tax exemptions are to be strictly construed against the taxpayer, taxes being the
lifeblood of the government. Exemption may therefore be granted only by clear and
unequivocal provisions of law.
Plaintiff claims that it is a grantee of a pipeline concession under Republic Act 387.
(Exhibit A) whose concession was lately renewed by the Energy Regulatory Board

(Exhibit B). Yet neither said law nor the deed of concession grant any tax exemption
upon the plaintiff.
Even the Local Government Code imposes a tax on franchise holders under Sec. 137
of the Local Tax Code. Such being the situation obtained in this case (exemption
being unclear and equivocal) resort to distinctions or other considerations may be of
help:
1. That the exemption granted under Sec. 133 (j)
encompasses onlycommon carriers so as not to
overburden the riding public or commuters with
taxes. Plaintiff is not a common carrier, but a
special carrier extending its services and facilities
to a single specific or "special customer" under a
"special contract."
2. The Local Tax Code of 1992 was basically
enacted to give more and effective local
autonomy to local governments than the previous
enactments, to make them economically and
financially viable to serve the people and
discharge their functions with a concomitant
obligation to accept certain devolution of
powers, . . . So, consistent with this policy even
franchise grantees are taxed (Sec. 137) and
contractors are also taxed under Sec. 143 (e)
and 151 of the Code. 9
Petitioner assailed the aforesaid decision before this Court via a petition for review. On February 27,
1995, we referred the case to the respondent Court of Appeals for consideration and adjudication. 10 On
November 29, 1995, the respondent court rendered a decision 11 affirming the trial court's dismissal of
petitioner's complaint. Petitioner's motion for reconsideration was denied on July 18, 1996. 12
Hence, this petition. At first, the petition was denied due course in a Resolution dated November 11,
1996. 13 Petitioner moved for a reconsideration which was granted by this Court in a Resolution 14 of
January 22, 1997. Thus, the petition was reinstated.
Petitioner claims that the respondent Court of Appeals erred in holding that (1) the petitioner is not a
common carrier or a transportation contractor, and (2) the exemption sought for by petitioner is not clear
under the law.
There is merit in the petition.

A "common carrier" may be defined, broadly, as one who holds himself out to the public as engaged in
the business of transporting persons or property from place to place, for compensation, offering his
services to the public generally.
Art. 1732 of the Civil Code defines a "common carrier" as "any person, corporation, firm or association
engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air,
for compensation, offering their services to the public."
The test for determining whether a party is a common carrier of goods is:
1. He must be engaged in the business of
carrying goods for others as a public
employment, and must hold himself out as ready
to engage in the transportation of goods for
person generally as a business and not as a
casual occupation;
2. He must undertake to carry goods of the kind
to which his business is confined;
3. He must undertake to carry by the method by
which his business is conducted and over his
established roads; and
4. The transportation must be for hire. 15
Based on the above definitions and requirements, there is no doubt that petitioner is a common carrier.
It is engaged in the business of transporting or carrying goods, i.e. petroleum products, for hire as a
public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose
to employ its services, and transports the goods by land and for compensation. The fact that petitioner
has a limited clientele does not exclude it from the definition of a common carrier. In De Guzman vs.
Court of Appeals 16 we ruled that:
The above article (Art. 1732, Civil Code) makes no distinction
between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as
an ancillary activity (in local idiom, as a "sideline"). Article 1732 . . .
avoids making any distinction between a person or enterprise
offering transportation service on a regular or scheduled basis and
one offering such service on an occasional, episodic or
unscheduled basis. Neither does Article 1732 distinguish between a
carrier offering its services to the "general public," i.e., the general
community or population, and one who offers services or solicits

business only from a narrow segment of the general population. We

think that Article 1877 deliberately refrained from making such
distinctions.
So understood, the concept of "common carrier" under Article 1732
may be seen to coincide neatly with the notion of "public service,"
under the Public Service Act (Commonwealth Act No. 1416, as
amended) which at least partially supplements the law on common
carriers set forth in the Civil Code. Under Section 13, paragraph (b)
of the Public Service Act, "public service" includes:
every person that now or hereafter may own,
operate. manage, or control in the Philippines, for
hire or compensation, with general or limited
clientele, whether permanent, occasional or
accidental, and done for general business
purposes, any common carrier, railroad, street
railway, traction railway, subway motor vehicle,
either for freight or passenger, or both, with or
without fixed route and whatever may be its
classification, freight or carrier service of any
class, express service, steamboat, or steamship
line, pontines, ferries and water craft, engaged in
the transportation of passengers or freight or
both, shipyard, marine repair shop, wharf or
dock, ice plant, ice-refrigeration plant, canal,
irrigation system gas, electric light heat and
power, water supply and power
petroleum, sewerage system, wire or wireless
communications systems, wire or wireless
broadcasting stations and other similar public
services. (Emphasis Supplied)
Also, respondent's argument that the term "common carrier" as used in Section 133 (j) of the Local
Government Code refers only to common carriers transporting goods and passengers through moving
vehicles or vessels either by land, sea or water, is erroneous.
As correctly pointed out by petitioner, the definition of "common carriers" in the Civil Code makes no
distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that
the transportation of the passengers or goods should be by motor vehicle. In fact, in the United States,
oil pipe line operators are considered common carriers. 17
Under the Petroleum Act of the Philippines (Republic Act 387), petitioner is considered a "common
carrier." Thus, Article 86 thereof provides that:

Art. 86. Pipe line concessionaire as common carrier. A pipe line

shall have the preferential right to utilize installations for the
transportation of petroleum owned by him, but is obligated to utilize
the remaining transportation capacity pro rata for the transportation
of such other petroleum as may be offered by others for transport,
and to charge without discrimination such rates as may have been
approved by the Secretary of Agriculture and Natural Resources.
Republic Act 387 also regards petroleum operation as a public utility. Pertinent portion of Article 7
thereof provides:
that everything relating to the exploration for and exploitation of
petroleum . . . and everything relating to the manufacture, refining,
storage, or transportation by special methods of petroleum, is
hereby declared to be a public utility. (Emphasis Supplied)
The Bureau of Internal Revenue likewise considers the petitioner a "common carrier." In BIR Ruling No.
069-83, it declared:
. . . since [petitioner] is a pipeline concessionaire that is engaged
only in transporting petroleum products, it is considered a common
carrier under Republic Act No. 387 . . . . Such being the case, it is
not subject to withholding tax prescribed by Revenue Regulations
No. 13-78, as amended.
From the foregoing disquisition, there is no doubt that petitioner is a "common carrier" and, therefore,
exempt from the business tax as provided for in Section 133 (j), of the Local Government Code, to wit:
Sec. 133. Common Limitations on the Taxing Powers of Local
Government Units. Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities,
and barangays shall not extend to the levy of the following:
xxx xxx xxx
(j) Taxes on the gross receipts
of transportation contractors
and persons engaged in the
transportation of passengers or
freight by hire and common
carriers by air, land or water,
except as provided in this
Code.

The deliberations conducted in the House of Representatives on the Local Government Code of 1991
are illuminating:

It is clear that the legislative intent in excluding from the taxing power of the local government unit the
imposition of business tax against common carriers is to prevent a duplication of the so-called "common
carrier's tax."

MR. AQUINO (A). Thank you, Mr. Speaker.

Mr. Speaker, we would like to proceed to page 95, line
1. It states: "SEC. 121 [now Sec. 131]. Common Limitations on the
Taxing Powers of Local Government Units." . . .
MR. AQUINO (A.). Thank you Mr. Speaker.
Still on page 95, subparagraph 5, on taxes on the business of
transportation. This appears to be one of those being deemed to be
exempted from the taxing powers of the local government units.
May we know the reason why the transportation business is being
excluded from the taxing powers of the local government units?
MR. JAVIER (E.). Mr. Speaker, there is an exception contained in
Section 121 (now Sec. 131), line 16, paragraph 5. It states that
local government units may not impose taxes on the business of
transportation, except as otherwise provided in this code.
Now, Mr. Speaker, if the Gentleman would care to go to page 98 of
Book II, one can see there that provinces have the power to impose
a tax on business enjoying a franchise at the rate of not more than
one-half of 1 percent of the gross annual receipts. So,
transportation contractors who are enjoying a franchise would be
subject to tax by the province. That is the exception, Mr. Speaker.
What we want to guard against here, Mr. Speaker, is the imposition
of taxes by local government units on the carrier business. Local
government units may impose taxes on top of what is already being
imposed by the National Internal Revenue Code which is the socalled "common carriers tax." We do not want a duplication of this
tax, so we just provided for an exception under Section 125 [now
Sec. 137] that a province may impose this tax at a specific rate.
MR. AQUINO (A.). Thank you for that clarification, Mr.
Speaker. . . . 18

Petitioner is already paying three (3%) percent common carrier's tax on its gross sales/earnings under
the National Internal Revenue Code. 19 To tax petitioner again on its gross receipts in its transportation
of petroleum business would defeat the purpose of the Local Government Code.
WHEREFORE, the petition is hereby GRANTED. The decision of the respondent Court of Appeals
dated November 29, 1995 in CA-G.R. SP No. 36801 is REVERSED and SET ASIDE.
SO ORDERED.

NATIONAL STEEL CORPORATION, petitioner, vs. COURT

SHIPPING, INC., respondents.

OF

APPEALS

AND

VLASONS

On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the decision appealed from is modified by reducing the award for
demurrage to P44,000.00 and deleting the award for attorneys fees and expenses of litigation. Except
as thus modified, the decision is AFFIRMED. There is no pronouncement as to costs.

[G.R. No. 112350. December 12, 1997]

SO ORDERED. [3]

VLASONS SHIPPING, INC., petitioner, vs. COURT OF APPEALS AND NATIONAL STEEL
CORPORATION, respondents.

The Facts

DECISION

The MV Vlasons I is a vessel which renders tramping service and, as such, does not transport
cargo or shipment for the general public. Its services are available only to specific persons who enter
into a special contract of charter party with its owner. It is undisputed that the ship is a private
carrier. And it is in this capacity that its owner, Vlasons Shipping, Inc., entered into a contract of
affreightment or contract of voyage charter hire with National Steel Corporation.

PANGANIBAN, J.:
The Court finds occasion to apply the rules on the seaworthiness of a private carrier, its owners
responsibility for damage to the cargo and its liability for demurrage and attorneys fees. The Court also
reiterates the well-known rule that findings of facts of trial courts, when affirmed by the Court of Appeals,
are binding on this Court.

The Case
Before us are two separate petitions for review filed by National Steel Corporation (NSC) and
Vlasons Shipping, Inc. (VSI), both of which assail the August 12, 1993 Decision of the Court of
Appeals. [1] The Court of Appeals modified the decision of the Regional Trial Court of Pasig, Metro
Manila, Branch 163 in Civil Case No. 23317. The RTC disposed as follows:

The facts as found by Respondent Court of Appeals are as follows:

(1) On July 17, 1974, plaintiff National Steel Corporation (NSC) as Charterer and defendant Vlasons
Shipping, Inc. (VSI) as Owner, entered into a Contract of Voyage Charter Hire (Exhibit B; also Exhibit 1)
whereby NSC hired VSIs vessel, the MV VLASONS I to make one (1) voyage to load steel products at
Iligan City and discharge them at North Harbor, Manila, under the following terms and conditions, viz:
1. x x x x x x.
2. Cargo: Full cargo of steel products of not less than 2,500 MT, 10% more or less at Masters option.
3. x x x x x x

WHEREFORE, judgment is hereby rendered in favor of defendant and against the plaintiff dismissing
the complaint with cost against plaintiff, and ordering plaintiff to pay the defendant on the counterclaim
as follows:
1. The sum of P75,000.00 as unpaid freight and P88,000.00 as demurrage with interest at
the legal rate on both amounts from April 7, 1976 until the same shall have been fully
paid;
2. Attorneys fees and expenses of litigation in the sum of P100,000.00; and
3. Cost of suit.
SO ORDERED.

4. Freight/Payment: P30.00 /metric ton, FIOST basis. Payment upon presentation of Bill of Lading within
fifteen (15) days.
5. Laydays/Cancelling: July 26, 1974/Aug. 5, 1974.
6. Loading/Discharging Rate: 750 tons per WWDSHINC. (Weather Working Day of 24 consecutive
hours, Sundays and Holidays Included).
7. Demurrage/Dispatch: P8,000.00/P4,000.00 per day.

[2]

8. x x x x x x

9. Cargo Insurance: Charterers and/or Shippers must insure the cargoes. Shipowners not responsible
for losses/damages except on proven willful negligence of the officers of the vessel.
10. Other terms:(a) All terms/conditions of NONYAZAI C/P [sic] or other internationally recognized
Charter Party Agreement shall form part of this Contract.
xxxxxxxxx
The terms F.I.O.S.T. which is used in the shipping business is a standard provision in the NANYOZAI
Charter Party which stands for Freight In and Out including Stevedoring and Trading, which means that
the handling, loading and unloading of the cargoes are the responsibility of the Charterer. Under
Paragraph 5 of the NANYOZAI Charter Party, it states, Charterers to load, stow and discharge the
cargo free of risk and expenses to owners. x x x(Underscoring supplied).

(4) To determine the nature and extent of the wetting and rusting, NSC called for a survey of the
shipment by the Manila Adjusters and Surveyors Company (MASCO). In a letter to the NSC dated
March 17, 1975 (Exhibit G), MASCO made a report of its ocular inspection conducted on the cargo,
both while it was still on board the vessel and later at the NDC warehouse in Pureza St., Sta. Mesa,
Manila where the cargo was taken and stored. MASCO reported that it found wetting and rusting of the
packages of hot rolled sheets and metal covers of the tinplates; that tarpaulin hatch covers were noted
torn at various extents; that container/metal casings of the skids were rusting all over. MASCO ventured
the opinion that rusting of the tinplates was caused by contact with SEA WATER sustained while still on
board the vessel as a consequence of the heavy weather and rough seas encountered while en route to
destination (Exhibit F). It was also reported that MASCOs surveyors drew at random samples of bad
order packing materials of the tinplates and delivered the same to the M.I.T. Testing Laboratories for
analysis. On August 31, 1974, the M.I.T. Testing Laboratories issued Report No. 1770 (Exhibit I) which
in part, states, The analysis of bad order samples of packing materials xxx shows that wetting was
caused by contact with SEA WATER.

Under paragraph 10 thereof, it is provided that (o)wners shall, before and at the beginning of the
voyage, exercise due diligence to make the vessel seaworthy and properly manned, equipped and
supplied and to make the holds and all other parts of the vessel in which cargo is carried, fit and safe for
its reception, carriage and preservation. Owners shall not be liable for loss of or damage of the cargo
arising or resulting from: unseaworthiness unless caused by want of due diligence on the part of the
owners to make the vessel seaworthy, and to secure that the vessel is properly manned, equipped and
supplied and to make the holds and all other parts of the vessel in which cargo is carried, fit and safe for
its reception, carriage and preservation; xxx; perils, dangers and accidents of the sea or other navigable
waters; xxx; wastage in bulk or weight or any other loss or damage arising from inherent defect, quality
or vice of the cargo; insufficiency of packing; xxx; latent defects not discoverable by due diligence; any
other cause arising without the actual fault or privity of Owners or without the fault of the agents or
servants of owners.

(5) On September 6, 1974, on the basis of the aforesaid Report No. 1770, plaintiff filed with the
defendant its claim for damages suffered due to the downgrading of the damaged tinplates in the
amount of P941,145.18. Then on October 3, 1974, plaintiff formally demanded payment of said claim
but defendant VSI refused and failed to pay. Plaintiff filed its complaint against defendant on April 21,
1976 which was docketed as Civil Case No. 23317, CFI, Rizal.

Paragraph 12 of said NANYOZAI Charter Party also provides that (o)wners shall not be responsible for
split, chafing and/or any damage unless caused by the negligence or default of the master and crew.

(7) In its answer, defendant denied liability for the alleged damage claiming that the MV VLASONS I
was seaworthy in all respects for the carriage of plaintiffs cargo; that said vessel was not a common
carrier inasmuch as she was under voyage charter contract with the plaintiff as charterer under the
charter party; that in the course of the voyage from Iligan City to Manila, the MV VLASONS I
encountered very rough seas, strong winds and adverse weather condition, causing strong winds and
big waves to continuously pound against the vessel and seawater to overflow on its deck and hatch
covers; that under the Contract of Voyage Charter Hire, defendant shall not be responsible for
losses/damages except on proven willful negligence of the officers of the vessel, that the officers of said
MV VLASONS I exercised due diligence and proper seamanship and were not willfully negligent; that
furthermore the Voyage Charter Party provides that loading and discharging of the cargo was on FIOST
terms which means that the vessel was free of risk and expense in connection with the loading and
discharging of the cargo; that the damage, if any, was due to the inherent defect, quality or vice of the
cargo or to the insufficient packing thereof or to latent defect of the cargo not discoverable by due
diligence or to any other cause arising without the actual fault or privity of defendant and without the
fault of the agents or servants of defendant; consequently, defendant is not liable; that the stevedores of
plaintiff who discharged the cargo in Manila were negligent and did not exercise due care in the
discharge of the cargo; and that the cargo was exposed to rain and seawater spray while on the pier or
in transit from the pier to plaintiffs warehouse after discharge from the vessel; and that plaintiffs claim
was highly speculative and grossly exaggerated and that the small stain marks or sweat marks on the

(2) On August 6, 7 and 8, 1974, in accordance with the Contract of Voyage Charter Hire, the MV
VLASONS I loaded at plaintiffs pier at Iligan City, the NSCs shipment of 1,677 skids of tinplates and 92
packages of hot rolled sheets or a total of 1,769 packages with a total weight of about 2,481.19 metric
tons for carriage to Manila. The shipment was placed in the three (3) hatches of the ship. Chief Mate
Gonzalo Sabando, acting as agent of the vessel[,] acknowledged receipt of the cargo on board and
signed the corresponding bill of lading, B.L.P.P. No. 0233 (Exhibit D) on August 8, 1974.
(3) The vessel arrived with the cargo at Pier 12, North Harbor, Manila, on August 12, 1974. The
following day, August 13, 1974, when the vessels three (3) hatches containing the shipment were
opened by plaintiffs agents, nearly all the skids of tinplates and hot rolled sheets were allegedly found to
be wet and rusty. The cargo was discharged and unloaded by stevedores hired by the
Charterer. Unloading was completed only on August 24, 1974 after incurring a delay of eleven (11) days
due to the heavy rain which interrupted the unloading operations. (Exhibit E)

(6) In its complaint, plaintiff claimed that it sustained losses in the aforesaid amount of P941,145.18 as a
result of the act, neglect and default of the master and crew in the management of the vessel as well as
the want of due diligence on the part of the defendant to make the vessel seaworthy and to make the
holds and all other parts of the vessel in which the cargo was carried, fit and safe for its reception,
carriage and preservation -- all in violation of defendants undertaking under their Contract of Voyage
Charter Hire.

edges of the tinplates were magnified and considered total loss of the cargo. Finally, defendant claimed
that it had complied with all its duties and obligations under the Voyage Charter Hire Contract and had
no responsibility whatsoever to plaintiff. In turn, it alleged the following counterclaim:
(a) That despite the full and proper performance by defendant of its obligations under the Voyage
Charter Hire Contract, plaintiff failed and refused to pay the agreed charter hire of P75,000.00 despite
demands made by defendant;
(b) That under their Voyage Charter Hire Contract, plaintiff had agreed to pay defendant the sum
of P8,000.00 per day for demurrage. The vessel was on demurrage for eleven (11) days in Manila
waiting for plaintiff to discharge its cargo from the vessel. Thus, plaintiff was liable to pay defendant
demurrage in the total amount of P88,000.00.
(c) For filing a clearly unfounded civil action against defendant, plaintiff should be ordered to pay
defendant attorneys fees and all expenses of litigation in the amount of not less than P100,000.00.
(8) From the evidence presented by both parties, the trial court came out with the following findings
which were set forth in its decision:
(a) The MV VLASONS I is a vessel of Philippine registry engaged in the tramping service and is
available for hire only under special contracts of charter party as in this particular case.
(b) That for purposes of the voyage covered by the Contract of Voyage Charter Hire (Exh. 1), the MV
VLASONS I was covered by the required seaworthiness certificates including the Certification of
Classification issued by an international classification society, the NIPPON KAIJI KYOKAI (Exh. 4);
Coastwise License from the Board of Transportation (Exh. 5); International Loadline Certificate from the
Philippine Coast Guard (Exh. 6); Cargo Ship Safety Equipment Certificate also from the Philippine
Coast Guard (Exh. 7); Ship Radio Station License (Exh. 8); Certificate of Inspection by the Philippine
Coast Guard (Exh. 12); and Certificate of Approval for Conversion issued by the Bureau of Customs
(Exh. 9). That being a vessel engaged in both overseas and coastwise trade, the MV VLASONS I has a
higher degree of seaworthiness and safety.
(c) Before it proceeded to Iligan City to perform the voyage called for by the Contract of Voyage Charter
Hire, the MV VLASONS I underwent drydocking in Cebu and was thoroughly inspected by the
Philippine Coast Guard. In fact, subject voyage was the vessels first voyage after the drydocking. The
evidence shows that the MV VLASONS I was seaworthy and properly manned, equipped and supplied
when it undertook the voyage. It had all the required certificates of seaworthiness.
(d) The cargo/shipment was securely stowed in three (3) hatches of the ship. The hatch openings were
covered by hatchboards which were in turn covered by two or double tarpaulins. The hatch covers were
water tight. Furthermore, under the hatchboards were steel beams to give support.
(e) The claim of the plaintiff that defendant violated the contract of carriage is not supported by
evidence. The provisions of the Civil Code on common carriers pursuant to which there exists a
presumption of negligence in case of loss or damage to the cargo are not applicable. As to the damage

to the tinplates which was allegedly due to the wetting and rusting thereof, there is unrebutted testimony
of witness Vicente Angliongto that tinplates sweat by themselves when packed even without being in
contract (sic) with water from outside especially when the weather is bad or raining. The rust caused by
sweat or moisture on the tinplates may be considered as a loss or damage but then, defendant cannot
be held liable for it pursuant to Article 1734 of the Civil Case which exempts the carrier from
responsibility for loss or damage arising from the character of the goods x x x. All the 1,769 skids of the
tinplates could not have been damaged by water as claimed by plaintiff. It was shown as claimed by
plaintiff that the tinplates themselves were wrapped in kraft paper lining and corrugated cardboards
could not be affected by water from outside.
(f) The stevedores hired by the plaintiff to discharge the cargo of tinplates were negligent in not closing
the hatch openings of the MV VLASONS I when rains occurred during the discharging of the cargo thus
allowing rainwater to enter the hatches. It was proven that the stevedores merely set up temporary tents
to cover the hatch openings in case of rain so that it would be easy for them to resume work when the
rains stopped by just removing the tent or canvas. Because of this improper covering of the hatches by
the stevedores during the discharging and unloading operations which were interrupted by rains,
rainwater drifted into the cargo through the hatch openings. Pursuant to paragraph 5 of the NANYOSAI
[sic] Charter Party which was expressly made part of the Contract of Voyage Charter Hire, the loading,
stowing and discharging of the cargo is the sole responsibility of the plaintiff charterer and defendant
carrier has no liability for whatever damage may occur or maybe [sic] caused to the cargo in the
process.
(g) It was also established that the vessel encountered rough seas and bad weather while en route from
Iligan City to Manila causing sea water to splash on the ships deck on account of which the master of
the vessel (Mr. Antonio C. Dumlao) filed a Marine Protest on August 13, 1974 (Exh. 15) which can be
invoked by defendant as a force majeure that would exempt the defendant from liability.
(h) Plaintiff did not comply with the requirement prescribed in paragraph 9 of the Voyage Charter Hire
contract that it was to insure the cargo because it did not. Had plaintiff complied with the requirement,
then it could have recovered its loss or damage from the insurer. Plaintiff also violated the charter party
contract when it loaded not only steel products, i.e. steel bars, angular bars and the like but also
tinplates and hot rolled sheets which are high grade cargo commanding a higher freight. Thus plaintiff
was able to ship high grade cargo at a lower freight rate.
(I) As regards defendants counterclaim, the contract of voyage charter hire under paragraph 4 thereof,
fixed the freight at P30.00 per metric ton payable to defendant carrier upon presentation of the bill of
lading within fifteen (15) days. Plaintiff has not paid the total freight due of P75,000.00 despite
demands. The evidence also showed that the plaintiff was required and bound under paragraph 7 of the
same Voyage Charter Hire contract to pay demurrage ofP8,000.00 per day of delay in the unloading of
the cargoes. The delay amounted to eleven (11) days thereby making plaintiff liable to pay defendant for
demurrage in the amount of P88,000.00.
Appealing the RTC decision to the Court of Appeals, NSC alleged six errors:
I

The trial court erred in finding that the MV VLASONS I was seaworthy, properly manned, equipped and
supplied, and that there is no proof of willful negligence of the vessels officers.

3. Whether or not a charterers failure to insure its cargo exempts the shipowner from liability
for cargo damage.

II
The trial court erred in finding that the rusting of NSCs tinplates was due to the inherent nature or
character of the goods and not due to contact with seawater.
III
The trial court erred in finding that the stevedores hired by NSC were negligent in the unloading of
NSCs shipment.
IV
The trial court erred in exempting VSI from liability on the ground of force majeure.
V
The trial court erred in finding that NSC violated the contract of voyage charter hire.
VI

Questions of Fact
1. Whether or not the vessel was seaworthy and cargo-worthy;
2. Whether or not vessels officers and crew were negligent in handling and caring for NSCs
cargo;
3. Whether or not NSCs cargo of tinplates did sweat during the voyage and, hence, rusted
on their own; and
(4) Whether or not NSCs stevedores were negligent and caused the wetting[/]rusting of
NSCs tinplates.
In its separate petition, [9] VSI submits for the consideration of this Court the following alleged
errors of the CA:

The trial court erred in ordering NSC to pay freight, demurrage and attorneys fees, to VSI.[4]
As earlier stated, the Court of Appeals modified the decision of the trial court by reducing the
demurrage from P88,000.00 to P44,000.00 and deleting the award of attorneys fees and expenses of
litigation.NSC and VSI filed separate motions for reconsideration. In a Resolution[5] dated October 20,
1993, the appellate court denied both motions. Undaunted, NSC and VSI filed their respective petitions
for review before this Court. On motion of VSI, the Court ordered on February 14, 1994 the
consolidation of these petitions.[6]

A. The respondent Court of Appeals committed an error of law in reducing the award of demurrage
from P88,000.00 to P44,000.00.
B. The respondent Court of Appeals committed an error of law in deleting the award of P100,000 for
attorneys fees and expenses of litigation.
Amplifying the foregoing, VSI raises the following issues in its memorandum: [10]

The Issues
In its petition[7] and memorandum,[8] NSC raises the following questions of law and fact:

Questions of Law
1. Whether or not a charterer of a vessel is liable for demurrage due to cargo unloading
delays caused by weather interruption;
2. Whether or not the alleged seaworthiness certificates (Exhibits 3, 4, 5, 6, 7, 8, 9, 11 and
12) were admissible in evidence and constituted evidence of the vessels seaworthiness
at the beginning of the voyages; and

I. Whether or not the provisions of the Civil Code of the Philippines on common carriers pursuant to
which there exist[s] a presumption of negligence against the common carrier in case of loss or damage
to the cargo are applicable to a private carrier.
II. Whether or not the terms and conditions of the Contract of Voyage Charter Hire, including the
Nanyozai Charter, are valid and binding on both contracting parties.
The foregoing issues raised by the parties will be discussed under the following headings:
1. Questions of Fact
2. Effect of NSCs Failure to Insure the Cargo
3. Admissibility of Certificates Proving Seaworthiness
4. Demurrage and Attorneys Fees.

The Courts Ruling

The Court affirms the assailed Decision of the Court of Appeals, except in respect of the
demurrage.

NANYOZAI Charter Party, which was incorporated in the parties contract of transportation, further
provided that the shipowner shall not be liable for loss of or damage to the cargo arising or resulting
from unseaworthiness, unless the same was caused by its lack of due diligence to make the vessel
seaworthy or to ensure that the same was properly manned, equipped and supplied, and to make the
holds and all other parts of the vessel in which cargo [was] carried, fit and safe for its reception, carriage
and preservation. [18] The NANYOZAI Charter Party also provided that [o]wners shall not be responsible
for split, chafing and/or any damage unless caused by the negligence or default of the master or crew.
[19]

Preliminary Matter: Common Carrier or Private Carrier?

At the outset, it is essential to establish whether VSI contracted with NSC as a common carrier or
as a private carrier. The resolution of this preliminary question determines the law, standard of diligence
and burden of proof applicable to the present case.
Article 1732 of the Civil Code defines a common carrier as persons, corporations, firms or
associations engaged in the business of carrying or transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services to the public. It has been held that the true test of
a common carrier is the carriage of passengers or goods, provided it has space, for all who opt to avail
themselves of its transportation service for a fee. [11] A carrier which does not qualify under the above
test is deemed a private carrier. Generally, private carriage is undertaken by special agreement and the
carrier does not hold himself out to carry goods for the general public. The most typical, although not
the only form of private carriage, is the charter party, a maritime contract by which the charterer, a party
other than the shipowner, obtains the use and service of all or some part of a ship for a period of time or
a voyage or voyages. [12]
In the instant case, it is undisputed that VSI did not offer its services to the general public. As
found by the Regional Trial Court, it carried passengers or goods only for those it chose under a special
contract of charter party. [13] As correctly concluded by the Court of Appeals, the MV Vlasons I was not a
common but a private carrier. [14] Consequently, the rights and obligations of VSI and NSC, including
their respective liability for damage to the cargo, are determined primarily by stipulations in their
contract of private carriage or charter party. [15] Recently, in Valenzuela Hardwood and Industrial Supply,
Inc., vs. Court of Appeals and Seven Brothers Shipping Corporation, [16] the Court ruled:
x x x in a contract of private carriage, the parties may freely stipulate their duties and obligations which
perforce would be binding on them. Unlike in a contract involving a common carrier, private carriage
does not involve the general public. Hence, the stringent provisions of the Civil Code on common
carriers protecting the general public cannot justifiably be applied to a ship transporting commercial
goods as a private carrier. Consequently, the public policy embodied therein is not contravened by
stipulations in a charter party that lessen or remove the protection given by law in contracts involving
common carriers.[17]

Extent of VSIs Responsibility and Liability Over NSCs Cargo

It is clear from the parties Contract of Voyage Charter Hire, dated July 17, 1974, that VSI shall not
be responsible for losses except on proven willful negligence of the officers of the vessel. The

Burden of Proof
In view of the aforementioned contractual stipulations, NSC must prove that the damage to its
shipment was caused by VSIs willful negligence or failure to exercise due diligence in making MV
Vlasons Iseaworthy and fit for holding, carrying and safekeeping the cargo. Ineluctably, the burden of
proof was placed on NSC by the parties agreement.
This view finds further support in the Code of Commerce which pertinently provides:
Art. 361. Merchandise shall be transported at the risk and venture of the shipper, if the contrary has not
been expressly stipulated.
Therefore, the damage and impairment suffered by the goods during the transportation, due to
fortuitous event, force majeure, or the nature and inherent defect of the things, shall be for the account
and risk of the shipper.
The burden of proof of these accidents is on the carrier.
Art. 362. The carrier, however, shall be liable for damages arising from the cause mentioned in the
preceding article if proofs against him show that they occurred on account of his negligence or his
omission to take the precautions usually adopted by careful persons, unless the shipper committed
fraud in the bill of lading, making him to believe that the goods were of a class or quality different from
what they really were.
Because the MV Vlasons I was a private carrier, the shipowners obligations are governed by the
foregoing provisions of the Code of Commerce and not by the Civil Code which, as a general rule,
places theprima facie presumption of negligence on a common carrier. It is a hornbook doctrine that:
In an action against a private carrier for loss of, or injury to, cargo, the burden is on the plaintiff to prove
that the carrier was negligent or unseaworthy, and the fact that the goods were lost or damaged while in
the carriers custody does not put the burden of proof on the carrier.
Since x x x a private carrier is not an insurer but undertakes only to exercise due care in the protection
of the goods committed to its care, the burden of proving negligence or a breach of that duty rests on

plaintiff and proof of loss of, or damage to, cargo while in the carriers possession does not cast on it the
burden of proving proper care and diligence on its part or that the loss occurred from an excepted cause
in the contract or bill of lading. However, in discharging the burden of proof, plaintiff is entitled to the
benefit of the presumptions and inferences by which the law aids the bailor in an action against a bailee,
and since the carrier is in a better position to know the cause of the loss and that it was not one
involving its liability, the law requires that it come forward with the information available to it, and its
failure to do so warrants an inference or presumption of its liability. However, such inferences and
presumptions, while they may affect the burden of coming forward with evidence, do not alter the
burden of proof which remains on plaintiff, and, where the carrier comes forward with evidence
explaining the loss or damage, the burden of going forward with the evidence is again on plaintiff.
Where the action is based on the shipowners warranty of seaworthiness, the burden of proving a
breach thereof and that such breach was the proximate cause of the damage rests on plaintiff, and
proof that the goods were lost or damaged while in the carriers possession does not cast on it the
burden of proving seaworthiness. x x x Where the contract of carriage exempts the carrier from liability
for unseaworthiness not discoverable by due diligence, the carrier has the preliminary burden of proving
the exercise of due diligence to make the vessel seaworthy. [20]
In the instant case, the Court of Appeals correctly found that NSC has not taken the correct
position in relation to the question of who has the burden of proof. Thus, in its brief (pp. 10-11), after
citing Clause 10 and Clause 12 of the NANYOZAI Charter Party (incidentally plaintiff-appellants [NSCs]
interpretation of Clause 12 is not even correct), it argues that a careful examination of the evidence will
show that VSI miserably failed to comply with any of these obligations as if defendant-appellee [VSI]
had the burden of proof.[21]

In any event, the records reveal that VSI exercised due diligence to make the ship seaworthy and
fit for the carriage of NSCs cargo of steel and tinplates. This is shown by the fact that it was drydocked
and inspected by the Philippine Coast Guard before it proceeded to Iligan City for its voyage to Manila
under the contract of voyage charter hire. [24] The vessels voyage from Iligan to Manila was the
vessels first voyage after drydocking. The Philippine Coast Guard Station in Cebu cleared it
as seaworthy, fitted and equipped; it met all requirements for trading as cargo vessel. [25] The Court of
Appeals itself sustained the conclusion of the trial court that MV Vlasons I was seaworthy. We find no
reason to modify or reverse this finding of both the trial and the appellate courts.

Who Were Negligent: Seamen or Stevedores?

As noted earlier, the NSC had the burden of proving that the damage to the cargo was caused by
the negligence of the officers and the crew of MV Vlasons I in making their vessel seaworthy and fit for
the carriage of tinplates. NSC failed to discharge this burden.
Before us, NSC relies heavily on its claim that MV Vlasons I had used an old and torn tarpaulin or
canvas to cover the hatches through which the cargo was loaded into the cargo hold of the ship. It faults
the Court of Appeals for failing to consider such claim as an uncontroverted fact [26] and denies that MV
Vlasons I was equipped with new canvas covers in tandem with the old ones as indicated in the Marine
Protest xxx. [27] We disagree.
The records sufficiently support VSIs contention that the ship used the old tarpaulin, only in
addition to the new one used primarily to make the ships hatches watertight. The foregoing are clear
from the marine protest of the master of the MV Vlasons I, Antonio C. Dumlao, and the deposition of the
ships boatswain, Jose Pascua. The salient portions of said marine protest read:

First Issue: Questions of Fact

Based on the foregoing, the determination of the following factual questions is manifestly
relevant: (1) whether VSI exercised due diligence in making MV Vlasons I seaworthy for the intended
purpose under the charter party; (2) whether the damage to the cargo should be attributed to the willful
negligence of the officers and crew of the vessel or of the stevedores hired by NSC; and (3) whether the
rusting of the tinplates was caused by its own sweat or by contact with seawater.
These questions of fact were threshed out and decided by the trial court, which had the firsthand
opportunity to hear the parties conflicting claims and to carefully weigh their respective evidence. The
findings of the trial court were subsequently affirmed by the Court of Appeals. Where the factual findings
of both the trial court and the Court of Appeals coincide, the same are binding on this Court. [22] We
stress that, subject to some exceptional instances, [23] only questions of law -- not questions of fact -may be raised before this Court in a petition for review under Rule 45 of the Rules of Court. After a
thorough review of the case at bar, we find no reason to disturb the lower courts factual findings, as
indeed NSC has not successfully proven the application of any of the aforecited exceptions.

x x x That the M/V VLASONS I departed Iligan City or or about 0730 hours of August 8, 1974, loaded
with approximately 2,487.9 tons of steel plates and tin plates consigned to National Steel Corporation;
that before departure, the vessel was rigged, fully equipped and cleared by the authorities; that on or
about August 9, 1974, while in the vicinity of the western part of Negros and Panay, we encountered
very rough seas and strong winds and Manila office was advised by telegram of the adverse weather
conditions encountered; that in the morning of August 10, 1974, the weather condition changed to
worse and strong winds and big waves continued pounding the vessel at her port side causing sea
water to overflow on deck andhatch (sic) covers and which caused the first layer of the canvass
covering to give way while the new canvass covering still holding on;
That the weather condition improved when we reached Dumali Point protected by Mindoro; that we resecured the canvass covering back to position; that in the afternoon of August 10, 1974, while entering
Maricaban Passage, we were again exposed to moderate seas and heavy rains; that while approaching
Fortune Island, we encountered again rough seas, strong winds and big waves which caused the same
canvass to give way and leaving the new canvass holding on;
xxx xxx xxx [28]

Was MV Vlasons I Seaworthy?

And the relevant portions of Jose Pascuas deposition are as follows:

Q: What is the purpose of the canvas cover?

A: There is none, sir.

A: So that the cargo would not be soaked with water.

Q: They are tight together?

A: And will you describe how the canvas cover was secured on the hatch opening?

A: Yes, sir.

WITNESS

Q: How tight?

A: It was placed flat on top of the hatch cover, with a little canvas flowing over the sides and
we place[d] a flat bar over the canvas on the side of the hatches and then we place[d] a
stopper so that the canvas could not be removed.

A: Very tight, sir.

ATTY DEL ROSARIO

Q: And will you tell us the size of the hatch opening? The length and the width of the hatch
opening.
A: Forty-five feet by thirty-five feet, sir.
xxxxxxxxx
Q: How was the canvas supported in the middle of the hatch opening?
A: There is a hatch board.
ATTY DEL ROSARIO
Q: What is the hatch board made of?
A: It is made of wood, with a handle.
Q: And aside from the hatch board, is there any other material there to cover the hatch?
A: There is a beam supporting the hatch board.

Q: Now, on top of the hatch boards, according to you, is the canvas cover. How many canvas
covers?
A: Two, sir. [29]
That due diligence was exercised by the officers and the crew of the MV Vlasons I was further
demonstrated by the fact that, despite encountering rough weather twice, the new tarpaulin did not give
way and the ships hatches and cargo holds remained waterproof. As aptly stated by the Court of
Appeals, xxx we find no reason not to sustain the conclusion of the lower court based on overwhelming
evidence, that the MV VLASONS I was seaworthy when it undertook the voyage on August 8, 1974
carrying on board thereof plaintiff-appellants shipment of 1,677 skids of tinplates and 92 packages of
hot rolled sheets or a total of 1,769 packages from NSCs pier in Iligan City arriving safely at North
Harbor, Port Area, Manila, on August 12, 1974; xxx. [30]
Indeed, NSC failed to discharge its burden to show negligence on the part of the officers and the
crew of MV Vlasons I. On the contrary, the records reveal that it was the stevedores of NSC who were
negligent in unloading the cargo from the ship.
The stevedores employed only a tent-like material to cover the hatches when strong rains
occasioned by a passing typhoon disrupted the unloading of the cargo. This tent-like covering, however,
was clearly inadequate for keeping rain and seawater away from the hatches of the ship. Vicente
Angliongto, an officer of VSI, testified thus:

Q: What is this beam made of?

ATTY ZAMORA:

A: It is made of steel, sir.

Q: Now, during your testimony on November 5, 1979, you stated on August 14 you went on
board the vessel upon notice from the National Steel Corporation in order to conduct
the inspection of the cargo. During the course of the investigation, did you chance to
see the discharging operation?

Q: Is the beam that was placed in the hatch opening covering the whole hatch opening?
A: No, sir.
Q: How many hatch beams were there placed across the opening?

WITNESS:

A: There are five beams in one hatch opening.

A: Yes, sir, upon my arrival at the vessel, I saw some of the tinplates already discharged on
the pier but majority of the tinplates were inside the hall, all the hatches were opened.

ATTY DEL ROSARIO

Q: In connection with these cargoes which were unloaded, where is the place.

Q: And on top of the beams you said there is a hatch board. How many pieces of wood are
put on top?

A: At the Pier.

A: Plenty, sir, because there are several pieces on top of the hatch beam.
Q: And is there a space between the hatch boards?

Q: What was used to protect the same from weather?

ATTY LOPEZ:

We object, your Honor, this question was already asked. This particular matter . . . the
transcript of stenographic notes shows the same was covered in the direct examination.
ATTY ZAMORA:
Precisely, your Honor, we would like to go on detail, this is the serious part of the testimony.
COURT:
All right, witness may answer.
ATTY LOPEZ:
Q: What was used in order to protect the cargo from the weather?
A: A base of canvas was used as cover on top of the tin plates, and tents were built at the
opening of the hatches.
Q: You also stated that the hatches were already opened and that there were tents
constructed at the opening of the hatches to protect the cargo from the rain. Now, will
you describe [to] the Court the tents constructed.
A: The tents are just a base of canvas which look like a tent of an Indian camp raise[d] high
at the middle with the whole side separated down to the hatch, the size of the hatch
and it is soaks [sic] at the middle because of those weather and this can be used only
to temporarily protect the cargo from getting wet by rains.
Q: Now, is this procedure adopted by the stevedores of covering tents proper?
A: No, sir, at the time they were discharging the cargo, there was a typhoon passing by and
the hatch tent was not good enough to hold all of it to prevent the water soaking
through the canvas and enter the cargo.
Q: In the course of your inspection, Mr. Anglingto [sic], did you see in fact the water enter and
soak into the canvas and tinplates.

for calling the stevedores attention first and then the NSCs representative on location before formally
informing NSC of the negligence he had observed, because he was not responsible for the stevedores
or the unloading operations. In fact, he was merely expressing concern for NSC which was ultimately
responsible for the stevedores it had hired and the performance of their task to unload the cargo.
We see no reason to reverse the trial and the appellate courts findings and conclusions on this
point, viz:
In the THIRD assigned error, [NSC] claims that the trial court erred in finding that the stevedores hired
by NSC were negligent in the unloading of NSCs shipment. We do not think so. Such negligence
according to the trial court is evident in the stevedores hired by [NSC], not closing the hatch of MV
VLASONS I when rains occurred during the discharging of the cargo thus allowing rain water and
seawater spray to enter the hatches and to drift to and fall on the cargo. It was proven that the
stevedores merely set up temporary tents or canvas to cover the hatch openings when it rained during
the unloading operations so that it would be easier for them to resume work after the rains stopped by
just removing said tents or canvass. It has also been shown that on August 20, 1974, VSI President
Vicente Angliongto wrote [NSC] calling attention to the manner the stevedores hired by [NSC] were
discharging the cargo on rainy days and the improper closing of the hatches which allowed continuous
heavy rain water to leak through and drip to the tinplates covers and [Vicente Angliongto] also
suggesting that due to four (4) days continuos rains with strong winds that the hatches be totally closed
down and covered with canvas and the hatch tents lowered. (Exh 13). This letter was received by [NSC]
on 22 August 1974 while discharging operations were still going on (Exhibit 13-A). [33]
The fact that NSC actually accepted and proceeded to remove the cargo from the ship during
unfavorable weather will not make VSI liable for any damage caused thereby. In passing, it may be
noted that the NSC may seek indemnification, subject to the laws on prescription, from the stevedoring
company at fault in the discharge operations. A stevedore company engaged in discharging cargo xxx
has the duty to load the cargo xxx in a prudent manner, and it is liable for injury to, or loss of, cargo
caused by its negligence xxx and where the officers and members and crew of the vessel do nothing
and have no responsibility in the discharge of cargo by stevedores xxx the vessel is not liable for loss
of, or damage to, the cargo caused by the negligence of the stevedores xxx [34] as in the instant case.

A: Yes, sir, the second time I went there, I saw it.

Q: As owner of the vessel, did you not advise the National Steel Corporation [of] the
procedure adopted by its stevedores in discharging the cargo particularly in this tent
covering of the hatches?

Do Tinplates Sweat?

A: Yes, sir, I did the first time I saw it, I called the attention of the stevedores but the
stevedores did not mind at all, so, I called the attention of the representative of the
National Steel but nothing was done, just the same. Finally, I wrote a letter to them. [31]

The trial court relied on the testimony of Vicente Angliongto in finding that xxx tinplates sweat by
themselves when packed even without being in contact with water from outside especially when the
weather is bad or raining xxx. [35] The Court of Appeals affirmed the trial courts finding.

NSC attempts to discredit the testimony of Angliongto by questioning his failure to complain
immediately about the stevedores negligence on the first day of unloading, pointing out that he wrote his
letter to petitioner only seven days later. [32] The Court is not persuaded. Angliongtos candid answer in
his aforequoted testimony satisfactorily explained the delay. Seven days lapsed because he first called
the attention of the stevedores, then the NSCs representative, about the negligent and defective
procedure adopted in unloading the cargo. This series of actions constitutes a reasonable response in
accord with common sense and ordinary human experience. Vicente Angliongto could not be blamed

A discussion of this issue appears inconsequential and unnecessary. As previously discussed, the
damage to the tinplates was occasioned not by airborne moisture but by contact with rain and seawater
which the stevedores negligently allowed to seep in during the unloading.

Second Issue: Effect of NSCs Failure to Insure the Cargo

The obligation of NSC to insure the cargo stipulated in the Contract of Voyage Charter Hire is
totally separate and distinct from the contractual or statutory responsibility that may be incurred by VSI
for damage to the cargo caused by the willful negligence of the officers and the crew of MV Vlasons
I. Clearly, therefore, NSCs failure to insure the cargo will not affect its right, as owner and real party in
interest, to file an action against VSI for damages caused by the latters willful negligence. We do not
find anything in the charter party that would make the liability of VSI for damage to the cargo contingent
on or affected in any manner by NSCs obtaining an insurance over the cargo.

At any rate, it should be stressed that that NSC has the burden of proving that MV Vlasons I was
not seaworthy. As observed earlier, the vessel was a private carrier and, as such, it did not have the
obligation of a common carrier to show that it was seaworthy. Indeed, NSC glaringly failed to discharge
its duty of proving the willful negligence of VSI in making the ship seaworthy resulting in damage to its
cargo. Assailing the genuineness of the certificate of seaworthiness is not sufficient proof that the vessel
was not seaworthy.

Fourth Issue: Demurrage and Attorneys Fees

Third Issue: Admissibility of Certificates Proving Seaworthiness
The contract of voyage charter hire provides inter alia:
NSCs contention that MV Vlasons I was not seaworthy is anchored on the alleged inadmissibility
of the certificates of seaworthiness offered in evidence by VSI. The said certificates include the
following:
1. Certificate of Inspection of the Philippine Coast Guard at Cebu
2. Certificate of Inspection from the Philippine Coast Guard
3. International Load Line Certificate from the Philippine Coast Guard

xxx xxx xxx

2. Cargo: Full cargo of steel products of not less than 2,500 MT, 10% more or less at Masters option.
xxx xxx xxx
6. Loading/Discharging Rate : 750 tons per WWDSHINC.

4. Coastwise License from the Board of Transportation

5. Certificate of Approval for Conversion issued by the Bureau of Customs. [36]

7. Demurrage/Dispatch : P8,000.00/P4,000.00 per day. [39]

NSC argues that the certificates are hearsay for not having been presented in accordance with the
Rules of Court. It points out that Exhibits 3, 4 and 11 allegedly are not written records or acts of public
officers; while Exhibits 5, 6, 7, 8, 9, 11 and 12 are not evidenced by official publications or certified true
copies as required by Sections 25 and 26, Rule 132, of the Rules of Court. [37]

The Court defined demurrage in its strict sense as the compensation provided for in the contract of
affreightment for the detention of the vessel beyond the laytime or that period of time agreed on for
loading and unloading of cargo. [40] It is given to compensate the shipowner for the nonuse of the
vessel. On the other hand, the following is well-settled:

After a careful examination of these exhibits, the Court rules that Exhibits 3, 4, 5, 6, 7, 8, 9 and 12
are inadmissible, for they have not been properly offered as evidence. Exhibits 3 and 4 are certificates
issued by private parties, but they have not been proven by one who saw the writing executed, or by
evidence of the genuineness of the handwriting of the maker, or by a subscribing witness. Exhibits 5, 6,
7, 8, 9, and 12 are photocopies, but their admission under the best evidence rule have not been
demonstrated.

Laytime runs according to the particular clause of the charter party. x x x If laytime is expressed in
running days, this means days when the ship would be run continuously, and holidays are not
excepted. A qualification of weather permitting excepts only those days when bad weather reasonably
prevents the work contemplated. [41]

We find, however, that Exhibit 11 is admissible under a well-settled exception to the hearsay rule
per Section 44 of Rule 130 of the Rules of Court, which provides that (e)ntries in official records made in
the performance of a duty by a public officer of the Philippines, or by a person in the performance of a
duty specially enjoined by law, are prima facie evidence of the facts therein stated. [38] Exhibit 11 is an
original certificate of the Philippine Coast Guard in Cebu issued by Lieutenant Junior Grade Noli C.
Flores to the effect that the vessel VLASONS I was drydocked x x x and PCG Inspectors were sent on
board for inspection x x x. After completion of drydocking and duly inspected by PCG Inspectors, the
vessel VLASONS I, a cargo vessel, is in seaworthy condition, meets all requirements, fitted and
equipped for trading as a cargo vessel was cleared by the Philippine Coast Guard and sailed for Cebu
Port on July 10, 1974. (sic) NSCs claim, therefore, is obviously misleading and erroneous.

In this case, the contract of voyage charter hire provided for a four-day laytime; it also qualified
laytime as WWDSHINC or weather working days Sundays and holidays included. [42] The running of
laytime was thus made subject to the weather, and would cease to run in the event unfavorable weather
interfered with the unloading of cargo. [43] Consequently, NSC may not be held liable for demurrage as
the four-day laytime allowed it did not lapse, having been tolled by unfavorable weather condition in
view of the WWDSHINC qualification agreed upon by the parties. Clearly, it was error for the trial court
and the Court of Appeals to have found and affirmed respectively that NSC incurred eleven days of
delay in unloading the cargo. The trial court arrived at this erroneous finding by subtracting from the
twelve days, specifically August 13, 1974 to August 24, 1974, the only day of unloading unhampered by
unfavorable weather or rain which was August 22, 1974. Based on our previous discussion, such finding
is a reversible error. As mentioned, the respondent appellate court also erred in ruling that NSC was
liable to VSI for demurrage, even if it reduced the amount by half.

Attorneys Fees
VSI assigns as error of law the Court of Appeals deletion of the award of attorneys fees. We
disagree. While VSI was compelled to litigate to protect its rights, such fact by itself will not justify an
award of attorneys fees under Article 2208 of the Civil Code when x x x no sufficient showing of bad
faith would be reflected in a partys persistence in a case other than an erroneous conviction of the
righteousness of his cause x x x. [44] Moreover, attorneys fees may not be awarded to a party for the
reason alone that the judgment rendered was favorable to the latter, as this is tantamount to imposing a
premium on ones right to litigate or seek judicial redress of legitimate grievances. [45]

Epilogue
At bottom, this appeal really hinges on a factual issue: when, how and who caused the damage to
the cargo? Ranged against NSC are two formidable truths. First, both lower courts found that such
damage was brought about during the unloading process when rain and seawater seeped through the
cargo due to the fault or negligence of the stevedores employed by it. Basic is the rule that factual
findings of the trial court, when affirmed by the Court of Appeals, are binding on the Supreme
Court. Although there are settled exceptions, NSC has not satisfactorily shown that this case is one of
them. Second, the agreement between the parties -- the Contract of Voyage Charter Hire -- placed the
burden of proof for such loss or damage upon the shipper, not upon the shipowner. Such stipulation,
while disadvantageous to NSC, is valid because the parties entered into a contract of private charter,
not one of common carriage. Basic too is the doctrine that courts cannot relieve a party from the effects
of a private contract freely entered into, on the ground that it is allegedly one-sided or unfair to the
plaintiff. The charter party is a normal commercial contract and its stipulations are agreed upon in
consideration of many factors, not the least of which is the transport price which is determined not only
by the actual costs but also by the risks and burdens assumed by the shipper in regard to possible loss
or damage to the cargo. In recognition of such factors, the parties even stipulated that the shipper
should insure the cargo to protect itself from the risks it undertook under the charter party. That NSC
failed or neglected to protect itself with such insurance should not adversely affect VSI, which had
nothing to do with such failure or neglect.
WHEREFORE, premises considered, the instant consolidated petitions are hereby DENIED. The
questioned Decision of the Court of Appeals is AFFIRMED with the MODIFICATION that the demurrage
awarded to VSI is deleted. No pronouncement as to costs.
SO ORDERED.

G.R. No. L-49407 August 19, 1988

NATIONAL DEVELOPMENT COMPANY, petitioner-appellant,
vs.
THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY
CORPORATION, respondents-appellees.
No. L-49469 August 19, 1988
MARITIME COMPANY OF THE PHILIPPINES, petitioner-appellant,
vs.
THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY
CORPORATION, respondents- appellees.
Balgos & Perez Law Office for private respondent in both cases.

PARAS, J.:
These are appeals by certiorari from the decision * of the Court of Appeals in CA G.R. No: L- 46513-R
entitled "Development Insurance and Surety Corporation plaintiff-appellee vs. Maritime Company of the
Philippines and National Development Company defendant-appellants," affirming in toto the
decision ** in Civil Case No. 60641 of the then Court of First Instance of Manila, Sixth Judicial District,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering the defendants National
Development Company and Maritime Company of the Philippines, to pay jointly and
severally, to the plaintiff Development Insurance and Surety Corp., the sum of THREE
HUNDRED SIXTY FOUR THOUSAND AND NINE HUNDRED FIFTEEN PESOS AND
EIGHTY SIX CENTAVOS (364,915.86) with the legal interest thereon from the filing of
plaintiffs complaint on April 22, 1965 until fully paid, plus TEN THOUSAND PESOS
(Pl0,000.00) by way of damages as and for attorney's fee.
On defendant Maritime Company of the Philippines' cross-claim against the
defendant National Development Company, judgment is hereby rendered, ordering
the National Development Company to pay the cross-claimant Maritime Company of
the Philippines the total amount that the Maritime Company of the Philippines may
voluntarily or by compliance to a writ of execution pay to the plaintiff pursuant to the
judgment rendered in this case.
With costs against the defendant Maritime Company of the Philippines.

(pp. 34-35, Rollo, GR No. L-49469)

The facts of these cases as found by the Court of Appeals, are as follows:
The evidence before us shows that in accordance with a memorandum agreement
entered into between defendants NDC and MCP on September 13, 1962, defendant
NDC as the first preferred mortgagee of three ocean going vessels including one with
the name 'Dona Nati' appointed defendant MCP as its agent to manage and operate
said vessel for and in its behalf and account (Exh. A). Thus, on February 28, 1964 the
E. Philipp Corporation of New York loaded on board the vessel "Dona Nati" at San
Francisco, California, a total of 1,200 bales of American raw cotton consigned to the
order of Manila Banking Corporation, Manila and the People's Bank and Trust
Company acting for and in behalf of the Pan Asiatic Commercial Company, Inc., who
represents Riverside Mills Corporation (Exhs. K-2 to K7-A & L-2 to L-7-A). Also
loaded on the same vessel at Tokyo, Japan, were the cargo of Kyokuto Boekui,
Kaisa, Ltd., consigned to the order of Manila Banking Corporation consisting of 200
cartons of sodium lauryl sulfate and 10 cases of aluminum foil (Exhs. M & M-1). En
route to Manila the vessel Dofia Nati figured in a collision at 6:04 a.m. on April 15,
1964 at Ise Bay, Japan with a Japanese vessel 'SS Yasushima Maru' as a result of
which 550 bales of aforesaid cargo of American raw cotton were lost and/or
destroyed, of which 535 bales as damaged were landed and sold on the authority of
the General Average Surveyor for Yen 6,045,-500 and 15 bales were not landed and
deemed lost (Exh. G). The damaged and lost cargoes was worth P344,977.86 which
amount, the plaintiff as insurer, paid to the Riverside Mills Corporation as holder of the
negotiable bills of lading duly endorsed (Exhs. L-7-A, K-8-A, K-2-A, K-3-A, K-4-A, K-5A, A- 2, N-3 and R-3}. Also considered totally lost were the aforesaid shipment of
Kyokuto, Boekui Kaisa Ltd., consigned to the order of Manila Banking Corporation,
Manila, acting for Guilcon, Manila, The total loss was P19,938.00 which the plaintiff as
insurer paid to Guilcon as holder of the duly endorsed bill of lading (Exhibits M-1 and
S-3). Thus, the plaintiff had paid as insurer the total amount of P364,915.86 to the
consignees or their successors-in-interest, for the said lost or damaged cargoes.
Hence, plaintiff filed this complaint to recover said amount from the defendants-NDC
and MCP as owner and ship agent respectively, of the said 'Dofia Nati' vessel. (Rollo,
L-49469, p.38)
On April 22, 1965, the Development Insurance and Surety Corporation filed before the then Court of
First Instance of Manila an action for the recovery of the sum of P364,915.86 plus attorney's fees of
P10,000.00 against NDC and MCP (Record on Appeal), pp. 1-6).
Interposing the defense that the complaint states no cause of action and even if it does, the action has
prescribed, MCP filed on May 12, 1965 a motion to dismiss (Record on Appeal, pp. 7-14). DISC filed an
Opposition on May 21, 1965 to which MCP filed a reply on May 27, 1965 (Record on Appeal, pp. 1424). On June 29, 1965, the trial court deferred the resolution of the motion to dismiss till after the trial on

the merits (Record on Appeal, p. 32). On June 8, 1965, MCP filed its answer with counterclaim and
cross-claim against NDC.
NDC, for its part, filed its answer to DISC's complaint on May 27, 1965 (Record on Appeal, pp. 22-24). It
also filed an answer to MCP's cross-claim on July 16, 1965 (Record on Appeal, pp. 39-40). However, on
October 16, 1965, NDC's answer to DISC's complaint was stricken off from the record for its failure to
answer DISC's written interrogatories and to comply with the trial court's order dated August 14, 1965
allowing the inspection or photographing of the memorandum of agreement it executed with MCP. Said
order of October 16, 1965 likewise declared NDC in default (Record on Appeal, p. 44). On August 31,
1966, NDC filed a motion to set aside the order of October 16, 1965, but the trial court denied it in its
order dated September 21, 1966.
On November 12, 1969, after DISC and MCP presented their respective evidence, the trial court
rendered a decision ordering the defendants MCP and NDC to pay jointly and solidarity to DISC the
sum of P364,915.86 plus the legal rate of interest to be computed from the filing of the complaint on
April 22, 1965, until fully paid and attorney's fees of P10,000.00. Likewise, in said decision, the trial
court granted MCP's crossclaim against NDC.
MCP interposed its appeal on December 20, 1969, while NDC filed its appeal on February 17, 1970
after its motion to set aside the decision was denied by the trial court in its order dated February
13,1970.
On November 17,1978, the Court of Appeals promulgated its decision affirming in toto the decision of
the trial court.
Hence these appeals by certiorari.
NDC's appeal was docketed as G.R. No. 49407, while that of MCP was docketed as G.R. No. 49469.
On July 25,1979, this Court ordered the consolidation of the above cases (Rollo, p. 103). On August
27,1979, these consolidated cases were given due course (Rollo, p. 108) and submitted for decision on
February 29, 1980 (Rollo, p. 136).
In its brief, NDC cited the following assignments of error:
I
THE COURT OF APPEALS ERRED IN APPLYING ARTICLE 827 OF THE CODE OF COMMERCE
AND NOT SECTION 4(2a) OF COMMONWEALTH ACT NO. 65, OTHERWISE KNOWN AS THE
CARRIAGE OF GOODS BY SEA ACT IN DETERMINING THE LIABILITY FOR LOSS OF CARGOES
RESULTING FROM THE COLLISION OF ITS VESSEL "DONA NATI" WITH THE YASUSHIMA
MARU"OCCURRED AT ISE BAY, JAPAN OR OUTSIDE THE TERRITORIAL JURISDICTION OF THE
PHILIPPINES.

II
THE COURT OF APPEALS ERRED IN NOT DISMISSING THE C0MPLAINT FOR REIMBURSEMENT
FILED BY THE INSURER, HEREIN PRIVATE RESPONDENT-APPELLEE, AGAINST THE CARRIER,
HEREIN PETITIONER-APPELLANT. (pp. 1-2, Brief for Petitioner-Appellant National Development
Company; p. 96, Rollo).
On its part, MCP assigned the following alleged errors:
I
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
DEVELOPMENT INSURANCE AND SURETY CORPORATION HAS NO CAUSE OF ACTION AS
AGAINST PETITIONER MARITIME COMPANY OF THE PHILIPPINES AND IN NOT DISMISSING THE
COMPLAINT.
II
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CAUSE OF
ACTION OF RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION IF ANY
EXISTS AS AGAINST HEREIN PETITIONER MARITIME COMPANY OF THE PHILIPPINES IS
BARRED BY THE STATUTE OF LIMITATION AND HAS ALREADY PRESCRIBED.
III
THE RESPONDENT COURT OF APPEALS ERRED IN ADMITTING IN EVIDENCE PRIVATE
RESPONDENTS EXHIBIT "H" AND IN FINDING ON THE BASIS THEREOF THAT THE COLLISION
OF THE SS DONA NATI AND THE YASUSHIMA MARU WAS DUE TO THE FAULT OF BOTH
VESSELS INSTEAD OF FINDING THAT THE COLLISION WAS CAUSED BY THE FAULT,
NEGLIGENCE AND LACK OF SKILL OF THE COMPLEMENTS OF THE YASUSHIMA MARU
WITHOUT THE FAULT OR NEGLIGENCE OF THE COMPLEMENT OF THE SS DONA NATI
IV
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT UNDER THE CODE OF
COMMERCE PETITIONER APPELLANT MARITIME COMPANY OF THE PHILIPPINES IS A SHIP
AGENT OR NAVIERO OF SS DONA NATI OWNED BY CO-PETITIONER APPELLANT NATIONAL
DEVELOPMENT COMPANY AND THAT SAID PETITIONER-APPELLANT IS SOLIDARILY LIABLE
WITH SAID CO-PETITIONER FOR LOSS OF OR DAMAGES TO CARGO RESULTING IN THE
COLLISION OF SAID VESSEL, WITH THE JAPANESE YASUSHIMA MARU.
V

THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT THE LOSS OF OR DAMAGES
TO THE CARGO OF 550 BALES OF AMERICAN RAW COTTON, DAMAGES WERE CAUSED IN THE
AMOUNT OF P344,977.86 INSTEAD OF ONLY P110,000 AT P200.00 PER BALE AS ESTABLISHED
IN THE BILLS OF LADING AND ALSO IN HOLDING THAT PARAGRAPH 1O OF THE BILLS OF
LADING HAS NO APPLICATION IN THE INSTANT CASE THERE BEING NO GENERAL AVERAGE
TO SPEAK OF.
VI
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THE PETITIONERS NATIONAL
DEVELOPMENT COMPANY AND COMPANY OF THE PHILIPPINES TO PAY JOINTLY AND
SEVERALLY TO HEREIN RESPONDENT DEVELOPMENT INSURANCE AND SURETY
CORPORATION THE SUM OF P364,915.86 WITH LEGAL INTEREST FROM THE FILING OF THE
COMPLAINT UNTIL FULLY PAID PLUS P10,000.00 AS AND FOR ATTORNEYS FEES INSTEAD OF
SENTENCING SAID PRIVATE RESPONDENT TO PAY HEREIN PETITIONERS ITS COUNTERCLAIM
IN THE AMOUNT OF P10,000.00 BY WAY OF ATTORNEY'S FEES AND THE COSTS. (pp. 1-4, Brief
for the Maritime Company of the Philippines; p. 121, Rollo)
The pivotal issue in these consolidated cases is the determination of which laws govern loss or
destruction of goods due to collision of vessels outside Philippine waters, and the extent of liability as
well as the rules of prescription provided thereunder.
The main thrust of NDC's argument is to the effect that the Carriage of Goods by Sea Act should apply
to the case at bar and not the Civil Code or the Code of Commerce. Under Section 4 (2) of said Act, the
carrier is not responsible for the loss or damage resulting from the "act, neglect or default of the master,
mariner, pilot or the servants of the carrier in the navigation or in the management of the ship." Thus,
NDC insists that based on the findings of the trial court which were adopted by the Court of Appeals,
both pilots of the colliding vessels were at fault and negligent, NDC would have been relieved of liability
under the Carriage of Goods by Sea Act. Instead, Article 287 of the Code of Commerce was applied
and both NDC and MCP were ordered to reimburse the insurance company for the amount the latter
paid to the consignee as earlier stated.
This issue has already been laid to rest by this Court of Eastern Shipping Lines Inc. v. IAC (1 50 SCRA
469-470 [1987]) where it was held under similar circumstance "that the law of the country to which the
goods are to be transported governs the liability of the common carrier in case of their loss, destruction
or deterioration" (Article 1753, Civil Code). Thus, the rule was specifically laid down that for cargoes
transported from Japan to the Philippines, the liability of the carrier is governed primarily by the Civil
Code and in all matters not regulated by said Code, the rights and obligations of common carrier shall
be governed by the Code of commerce and by laws (Article 1766, Civil Code). Hence, the Carriage of
Goods by Sea Act, a special law, is merely suppletory to the provision of the Civil Code.
In the case at bar, it has been established that the goods in question are transported from San
Francisco, California and Tokyo, Japan to the Philippines and that they were lost or due to a collision
which was found to have been caused by the negligence or fault of both captains of the colliding

vessels. Under the above ruling, it is evident that the laws of the Philippines will apply, and it is
immaterial that the collision actually occurred in foreign waters, such as Ise Bay, Japan.
Under Article 1733 of the Civil Code, common carriers from the nature of their business and for reasons
of public policy are bound to observe extraordinary diligence in the vigilance over the goods and for the
safety of the passengers transported by them according to all circumstances of each case. Accordingly,
under Article 1735 of the same Code, in all other than those mentioned is Article 1734 thereof, the
common carrier shall be presumed to have been at fault or to have acted negigently, unless it proves
that it has observed the extraordinary diligence required by law.
It appears, however, that collision falls among matters not specifically regulated by the Civil Code, so
that no reversible error can be found in respondent courses application to the case at bar of Articles 826
to 839, Book Three of the Code of Commerce, which deal exclusively with collision of vessels.
More specifically, Article 826 of the Code of Commerce provides that where collision is imputable to the
personnel of a vessel, the owner of the vessel at fault, shall indemnify the losses and damages incurred
after an expert appraisal. But more in point to the instant case is Article 827 of the same Code, which
provides that if the collision is imputable to both vessels, each one shall suffer its own damages and
both shall be solidarily responsible for the losses and damages suffered by their cargoes.
Significantly, under the provisions of the Code of Commerce, particularly Articles 826 to 839, the
shipowner or carrier, is not exempt from liability for damages arising from collision due to the fault or
negligence of the captain. Primary liability is imposed on the shipowner or carrier in recognition of the
universally accepted doctrine that the shipmaster or captain is merely the representative of the owner
who has the actual or constructive control over the conduct of the voyage (Y'eung Sheng Exchange and
Trading Co. v. Urrutia & Co., 12 Phil. 751 [1909]).
There is, therefore, no room for NDC's interpretation that the Code of Commerce should apply only to
domestic trade and not to foreign trade. Aside from the fact that the Carriage of Goods by Sea Act
(Com. Act No. 65) does not specifically provide for the subject of collision, said Act in no uncertain
terms, restricts its application "to all contracts for the carriage of goods by sea to and from Philippine
ports in foreign trade." Under Section I thereof, it is explicitly provided that "nothing in this Act shall be
construed as repealing any existing provision of the Code of Commerce which is now in force, or as
limiting its application." By such incorporation, it is obvious that said law not only recognizes the
existence of the Code of Commerce, but more importantly does not repeal nor limit its application.
On the other hand, Maritime Company of the Philippines claims that Development Insurance and Surety
Corporation, has no cause of action against it because the latter did not prove that its alleged subrogers
have either the ownership or special property right or beneficial interest in the cargo in question; neither
was it proved that the bills of lading were transferred or assigned to the alleged subrogers; thus, they
could not possibly have transferred any right of action to said plaintiff- appellee in this case. (Brief for
the Maritime Company of the Philippines, p. 16).

The records show that the Riverside Mills Corporation and Guilcon, Manila are the holders of the duly
endorsed bills of lading covering the shipments in question and an examination of the invoices in
particular, shows that the actual consignees of the said goods are the aforementioned companies.
Moreover, no less than MCP itself issued a certification attesting to this fact. Accordingly, as it is
undisputed that the insurer, plaintiff appellee paid the total amount of P364,915.86 to said consignees
for the loss or damage of the insured cargo, it is evident that said plaintiff-appellee has a cause of action
to recover (what it has paid) from defendant-appellant MCP (Decision, CA-G.R. No. 46513-R, p. 10;
Rollo, p. 43).

being jettisoned to save some of the cargoes and the vessel, the trial court and the Court of Appeals
acted correctly in not applying the law on averages (Articles 806 to 818, Code of Commerce).

MCP next contends that it can not be liable solidarity with NDC because it is merely the manager and
operator of the vessel Dona Nati not a ship agent. As the general managing agent, according to MCP, it
can only be liable if it acted in excess of its authority.

Finally on the issue of prescription, the trial court correctly found that the bills of lading issued allow
trans-shipment of the cargo, which simply means that the date of arrival of the ship Dona Nati on April
18,1964 was merely tentative to give allowances for such contingencies that said vessel might not
arrive on schedule at Manila and therefore, would necessitate the trans-shipment of cargo, resulting in
consequent delay of their arrival. In fact, because of the collision, the cargo which was supposed to
arrive in Manila on April 18, 1964 arrived only on June 12, 13, 18, 20 and July 10, 13 and 15, 1964.
Hence, had the cargoes in question been saved, they could have arrived in Manila on the abovementioned dates. Accordingly, the complaint in the instant case was filed on April 22, 1965, that is, long
before the lapse of one (1) year from the date the lost or damaged cargo "should have been delivered"
in the light of Section 3, sub-paragraph (6) of the Carriage of Goods by Sea Act.

As found by the trial court and by the Court of Appeals, the Memorandum Agreement of September 13,
1962 (Exhibit 6, Maritime) shows that NDC appointed MCP as Agent, a term broad enough to include
the concept of Ship-agent in Maritime Law. In fact, MCP was even conferred all the powers of the owner
of the vessel, including the power to contract in the name of the NDC (Decision, CA G.R. No. 46513, p.
12; Rollo, p. 40). Consequently, under the circumstances, MCP cannot escape liability.
It is well settled that both the owner and agent of the offending vessel are liable for the damage done
where both are impleaded (Philippine Shipping Co. v. Garcia Vergara, 96 Phil. 281 [1906]); that in case
of collision, both the owner and the agent are civilly responsible for the acts of the captain (Yueng
Sheng Exchange and Trading Co. v. Urrutia & Co., supra citing Article 586 of the Code of Commerce;
Standard Oil Co. of New York v. Lopez Castelo, 42 Phil. 256, 262 [1921]); that while it is true that the
liability of the naviero in the sense of charterer or agent, is not expressly provided in Article 826 of the
Code of Commerce, it is clearly deducible from the general doctrine of jurisprudence under the Civil
Code but more specially as regards contractual obligations in Article 586 of the Code of Commerce.
Moreover, the Court held that both the owner and agent (Naviero) should be declared jointly and
severally liable, since the obligation which is the subject of the action had its origin in a tortious act and
did not arise from contract (Verzosa and Ruiz, Rementeria y Cia v. Lim, 45 Phil. 423 [1923]).
Consequently, the agent, even though he may not be the owner of the vessel, is liable to the shippers
and owners of the cargo transported by it, for losses and damages occasioned to such cargo, without
prejudice, however, to his rights against the owner of the ship, to the extent of the value of the vessel,
its equipment, and the freight (Behn Meyer Y Co. v. McMicking et al. 11 Phil. 276 [1908]).
As to the extent of their liability, MCP insists that their liability should be limited to P200.00 per package
or per bale of raw cotton as stated in paragraph 17 of the bills of lading. Also the MCP argues that the
law on averages should be applied in determining their liability.
MCP's contention is devoid of merit. The declared value of the goods was stated in the bills of lading
and corroborated no less by invoices offered as evidence ' during the trial. Besides, common carriers, in
the language of the court in Juan Ysmael & Co., Inc. v. Barrette et al., (51 Phil. 90 [1927]) "cannot limit
its liability for injury to a loss of goods where such injury or loss was caused by its own negligence."
Negligence of the captains of the colliding vessel being the cause of the collision, and the cargoes not

MCP's claim that the fault or negligence can only be attributed to the pilot of the vessel SS Yasushima
Maru and not to the Japanese Coast pilot navigating the vessel Dona Nati need not be discussed
lengthily as said claim is not only at variance with NDC's posture, but also contrary to the factual
findings of the trial court affirmed no less by the Court of Appeals, that both pilots were at fault for not
changing their excessive speed despite the thick fog obstructing their visibility.

PREMISES CONSIDERED, the subject petitions are DENIED for lack of merit and the assailed decision
of the respondent Appellate Court is AFFIRMED.
SO ORDERED.

G.R. No. 102316 June 30, 1997

VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY INC., petitioner,
vs.
COURT OF APPEALS AND SEVEN BROTHERS SHIPPING CORPORATION, respondents.

It appears that on 16 January 1984, plaintiff (Valenzuela Hardwood and Industrial

Supply, Inc.) entered into an agreement with the defendant Seven Brothers (Shipping
Corporation) whereby the latter undertook to load on board its vessel M/V Seven
Ambassador the former's lauan round logs numbering 940 at the port of Maconacon,
Isabela for shipment to Manila.
On 20 January 1984, plaintiff insured the logs against loss and/or damage with
defendant South Sea Surety and Insurance Co., Inc. for P2,000,000.00 and the latter
issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said
date.

PANGANIBAN, J.:
Is a stipulation in a charter party that the "(o)wners shall not be responsible for loss, split, short-landing,
breakages and any kind of damages to the cargo" 1 valid? This is the main question raised in this
petition for review assailing the Decision of Respondent Court of Appeals 2 in CA-G.R. No. CV-20156
promulgated on October 15, 1991. The Court of Appeals modified the judgment of the Regional Trial
Court of Valenzuela, Metro Manila, Branch 171, the dispositive portion of which reads:
WHEREFORE, Judgment is hereby rendered ordering South Sea Surety and
Insurance Co., Inc. to pay plaintiff the sum of TWO MILLION PESOS (P2,000,000.00)
representing the value of the policy of the lost logs with legal interest thereon from the
date of demand on February 2, 1984 until the amount is fully paid or in the alternative,
defendant Seven Brothers Shipping Corporation to pay plaintiff the amount of TWO
MILLION PESOS (2,000,000.00) representing the value of lost logs plus legal interest
from the date of demand on April 24, 1984 until full payment thereof; the reasonable
attorney's fees in the amount equivalent to five (5) percent of the amount of the claim
and the costs of the suit.
Plaintiff is hereby ordered to pay defendant Seven Brothers Shipping Corporation the
sum of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00) representing
the balance of the stipulated freight charges.
Defendant South Sea Surety and Insurance Company's counterclaim is hereby
dismissed.
In its assailed Decision, Respondent Court of Appeals held:
WHEREFORE, the appealed judgment is hereby AFFIRMED except in so far (sic) as
the liability of the Seven Brothers Shipping Corporation to the plaintiff is concerned
which is hereby REVERSED and SET ASIDE. 3
The Facts
The factual antecedents of this case as narrated in the Court of Appeals Decision are as follows:

On 24 January 1984, the plaintiff gave the check in payment of the premium on the
insurance policy to Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984
resulting in the loss of the plaintiff's insured logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the
premium and documentary stamps due on the policy was tendered due to the insurer
but was not accepted. Instead, the South Sea Surety and Insurance Co., Inc.
cancelled the insurance policy it issued as of the date of the inception for nonpayment of the premium due in accordance with Section 77 of the Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South Sea Surety and
Insurance Co., Inc. the payment of the proceeds of the policy but the latter denied
liability under the policy. Plaintiff likewise filed a formal claim with defendant Seven
Brothers Shipping Corporation for the value of the lost logs but the latter denied the
claim.
After due hearing and trial, the court a quo rendered judgment in favor of plaintiff and
against defendants. Both defendants shipping corporation and the surety company
appealed.
Defendant-appellant Seven Brothers Shipping Corporation impute (sic) to the court a
quo the following assignment of errors, to wit:
A. The lower court erred in holding that the proximate cause of the sinking of the
vessel Seven Ambassadors, was not due to fortuitous event but to the negligence of
the captain in stowing and securing the logs on board, causing the iron chains to snap
and the logs to roll to the portside.
B. The lower court erred in declaring that the non-liability clause of the Seven
Brothers Shipping Corporation from logs (sic) of the cargo stipulated in the charter

party is void for being contrary to public policy invoking article 1745 of the New Civil
Code.
C. The lower court erred in holding defendant-appellant Seven Brothers Shipping
Corporation liable in the alternative and ordering/directing it to pay plaintiff-appellee
the amount of two million (2,000,000.00) pesos representing the value of the logs plus
legal interest from date of demand until fully paid.
D. The lower court erred in ordering defendant-appellant Seven Brothers Shipping
Corporation to pay appellee reasonable attorney's fees in the amount equivalent to
5% of the amount of the claim and the costs of the suit.
E. The lower court erred in not awarding defendant-appellant Seven Brothers
Corporation its counter-claim for attorney's fees.
F. The lower court erred in not dismissing the complaint against Seven Brothers
Shipping Corporation.
Defendant-appellant South Sea Surety and Insurance Co., Inc. assigns the following errors:
A. The trial court erred in holding that Victorio Chua was an agent of defendantappellant South Sea Surety and Insurance Company, Inc. and likewise erred in not
holding that he was the representative of the insurance broker Columbia Insurance
Brokers, Ltd.
B. The trial court erred in holding that Victorio Chua received
compensation/commission on the premiums paid on the policies issued by the
defendant-appellant South Sea Surety and Insurance Company, Inc.

G. The trial court erred in ordering defendant-appellant South Sea Surety and
Insurance Company, Inc. to pay plaintiff-appellee P2,000,000.00 representing value
of the policy with legal interest from 2 February 1984 until the amount is fully paid,
H. The trial court erred in not awarding to the defendant-appellant the attorney's fees
alleged and proven in its counterclaim.
The primary issue to be resolved before us is whether defendants shipping
corporation and the surety company are liable to the plaintiff for the latter's lost logs. 4
The Court of Appeals affirmed in part the RTC judgment by sustaining the liability of South Sea Surety
and Insurance Company ("South Sea"), but modified it by holding that Seven Brothers Shipping
Corporation ("Seven Brothers") was not liable for the lost cargo. 5 In modifying the RTC judgment, the
respondent appellate court ratiocinated thus:
It appears that there is a stipulation in the charter party that the ship owner would be
exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil Code on common carriers
to establish the liability of the shipping corporation. The provisions on common
carriers should not be applied where the carrier is not acting as such but as a private
carrier.
Under American jurisprudence, a common carrier undertaking to carry a special cargo
or chartered to a special person only, becomes a private carrier.
As a private carrier, a stipulation exempting the owner from liability even for the
negligence of its agent is valid (Home Insurance Company, Inc. vs. American
Steamship Agencies, Inc., 23 SCRA 24).

C. The trial court erred in not applying Section 77 of the Insurance Code.
The shipping corporation should not therefore be held liable for the loss of the logs. 6
D. The trial court erred in disregarding the "receipt of payment clause" attached to
and forming part of the Marine Cargo Insurance Policy No. 84/24229.
E. The trial court in disregarding the statement of account or bill stating the amount of
premium and documentary stamps to be paid on the policy by the plaintiff-appellee.
F. The trial court erred in disregarding the endorsement of cancellation of the policy
due to non-payment of premium and documentary stamps.

South Sea and herein Petitioner Valenzuela Hardwood and Industrial Supply, Inc. ("Valenzuela") filed
separate petitions for review before this Court. In a Resolution dated June 2, 1995, this Court denied
the petition of South
Sea. 7 There the Court found no reason to reverse the factual findings of the trial court and the Court of
Appeals that Chua was indeed an authorized agent of South Sea when he received Valenzuela's
premium payment for the marine cargo insurance policy which was thus binding on the insurer. 8
The Court is now called upon to resolve the petition for review filed by Valenzuela assailing the CA
Decision which exempted Seven Brothers from any liability for the lost cargo.

The Issue
Petitioner Valenzuela's arguments resolve around a single issue: "whether or not respondent Court (of
Appeals) committed a reversible error in upholding the validity of the stipulation in the charter party
executed between the petitioner and the private respondent exempting the latter from liability for the
loss of petitioner's logs arising from the negligence of its (Seven Brothers') captain." 9
The Court's Ruling
The petition is not meritorious.
Validity of Stipulation is Lis Mota
The charter party between the petitioner and private respondent stipulated that the "(o)wners shall not
be responsible for loss, split, short-landing, breakages and any kind of damages to the cargo." 10 The
validity of this stipulation is the lis mota of this case.
It should be noted at the outset that there is no dispute between the parties that the proximate cause of
the sinking of M/V Seven Ambassadors resulting in the loss of its cargo was the "snapping of the iron
chains and the subsequent rolling of the logs to the portside due to the negligence of the captain in
stowing and securing the logs on board the vessel and not due to fortuitous event." 11 Likewise
undisputed is the status of Private Respondent Seven Brothers as a private carrier when it contracted to
transport the cargo of Petitioner Valenzuela. Even the latter admits this in its petition. 12
The trial court deemed the charter party stipulation void for being contrary to public policy, 13 citing
Article 1745 of the Civil Code which provides:
Art. 1745. Any of the following or similar stipulations shall be considered
unreasonable, unjust and contrary to public policy:
(1) That the goods are transported at the risk of the owner or shipper;
(2) That the common carrier will not be liable for any loss, destruction, or deterioration
of the goods;
(3) That the common carrier need not observe any diligence in the custody of the
goods;
(4) That the common carrier shall exercise a degree of diligence less than that of a
good father of a family, or of a man of ordinary prudence in the vigilance over the
movables transported;

(5) That the common carrier shall not be responsible for the acts or omissions of his
or its employees;
(6) That the common carrier's liability for acts committed by thieves, or of robbers who
do not act with grave or irresistible threat, violence or force, is dispensed with or
diminished;
(7) That the common carrier is not responsible for the loss, destruction, or
deterioration of goods on account of the defective condition of the car, vehicle, ship,
airplane or other equipment used in the contract of carriage.
Petitioner Valenzuela adds that the stipulation is void for being contrary to Articles 586 and 587 of the
Code of Commerce 14 and Articles 1170 and 1173 of the Civil Code. Citing Article 1306 and paragraph 1,
Article 1409 of the Civil Code, 15 petitioner further contends that said stipulation "gives no duty or
obligation to the private respondent to observe the diligence of a good father of a family in the custody
and transportation of the cargo."
The Court is not persuaded. As adverted to earlier, it is undisputed that private respondent had acted as
a private carrier in transporting petitioner's lauan logs. Thus, Article 1745 and other Civil Code
provisions on common carriers which were cited by petitioner may not be applied unless expressly
stipulated by the parties in their charter party. 16
In a contract of private carriage, the parties may validly stipulate that responsibility for the cargo rests
solely on the charterer, exempting the shipowner from liability for loss of or damage to the cargo caused
even by the negligence of the ship captain. Pursuant to Article 1306 17 of the Civil Code, such stipulation
is valid because it is freely entered into by the parties and the same is not contrary to law, morals, good
customs, public order, or public policy. Indeed, their contract of private carriage is not even a contract of
adhesion. We stress that in a contract of private carriage, the parties may freely stipulate their duties
and obligations which perforce would be binding on them. Unlike in a contract involving a common
carrier, private carriage does not involve the general public. Hence, the stringent provisions of the Civil
Code on common carriers protecting the general public cannot justifiably be applied to a ship
transporting commercial goods as a private carrier. Consequently, the public policy embodied therein is
not contravened by stipulations in a charter party that lessen or remove the protection given by law in
contracts involving common carriers.
The issue posed in this case and the arguments raised by petitioner are not novel; they were resolved
long ago by this Court in Home Insurance Co. vs. American Steamship Agencies, Inc. 18 In that case,
the trial court similarly nullified a stipulation identical to that involved in the present case for being
contrary to public policy based on Article 1744 of the Civil Code and Article 587 of the Code of
Commerce. Consequently, the trial court held the shipowner liable for damages resulting for the partial
loss of the cargo. This Court reversed the trial court and laid down, through Mr. Justice Jose P.
Bengzon, the following well-settled observation and doctrine:

The provisions of our Civil Code on common carriers were taken from AngloAmerican law. Under American jurisprudence, a common carrier undertaking to carry
a special cargo or chartered to a special person only, becomes a private carrier. As a
private carrier, a stipulation exempting the owner from liability for the negligence of its
agent is not against public policy, and is deemed valid.
Such doctrine We find reasonable. The Civil Code provisions on common carriers
should not be applied where the carrier is not acting as such but as a private
carrier. The stipulation in the charter party absolving the owner from liability for loss
due to the negligence of its agent would be void if the strict public policy governing
common carriers is applied. Such policy has no force where the public at large is not
involved, as in this case of a ship totally chartered for the used of a single
party. 19(Emphasis supplied.)
Indeed, where the reason for the rule ceases, the rule itself does not apply. The general public enters
into a contract of transportation with common carriers without a hand or a voice in the preparation
thereof. The riding public merely adheres to the contract; even if the public wants to, it cannot submit its
own stipulations for the approval of the common carrier. Thus, the law on common carriers extends its
protective mantle against one-sided stipulations inserted in tickets, invoices or other documents over
which the riding public has no understanding or, worse, no choice. Compared to the general public, a
charterer in a contract of private carriage is not similarly situated. It can and in fact it usually does
enter into a free and voluntary agreement. In practice, the parties in a contract of private carriage can
stipulate the carrier's obligations and liabilities over the shipment which, in turn, determine the price or
consideration of the charter. Thus, a charterer, in exchange for convenience and economy, may opt to
set aside the protection of the law on common carriers. When the charterer decides to exercise this
option, he takes a normal business risk.
Petitioner contends that the rule in Home Insurance is not applicable to the present case because it
"covers only a stipulation exempting a private carrier from liability for the negligence of his agent, but it
does not apply to a stipulation exempting a private carrier like private respondent from the negligence of
his employee or servant which is the situation in this case." 20 This contention of petitioner is bereft of
merit, for it raises a distinction without any substantive difference. The case Home Insurance specifically
dealt with "the liability of the shipowner for acts or negligence of its captain and crew" 21 and a charter
party stipulation which "exempts the owner of the vessel from any loss or damage or delay arising from
any other source, even from the neglect or fault of the captain or crew or some other person employed
by the owner on
board, for whose acts the owner would ordinarily be liable except for said
paragraph." 22 Undoubtedly, Home Insurance is applicable to the case at bar.
The naked assertion of petitioner that the American rule enunciated in Home Insurance is not the rule in
the Philippines 23 deserves scant consideration. The Court there categorically held that said rule was
"reasonable" and proceeded to apply it in the resolution of that case. Petitioner miserably failed to show
such circumstances or arguments which would necessitate a departure from a well-settled rule.
Consequently, our ruling in said case remains a binding judicial precedent based on the doctrine

of stare decisis and Article 8 of the Civil Code which provides that "(j)udicial decisions applying or
interpreting the laws or the Constitution shall form part of the legal system of the Philippines."
In fine, the respondent appellate court aptly stated that "[in the case of] a private carrier, a stipulation
exempting the owner from liability even for the negligence of its agents is valid." 24
Other Arguments
On the basis of the foregoing alone, the present petition may already be denied; the Court, however, will
discuss the other arguments of petitioner for the benefit and satisfaction of all concerned.
Articles 586 and 587, Code of Commerce
Petitioner Valenzuela insists that the charter party stipulation is contrary to Articles 586 and 587 of the
Code of Commerce which confer on petitioner the right to recover damages from the shipowner and
ship agent for the acts or conduct of the captain. 25 We are not persuaded. Whatever rights petitioner
may have under the aforementioned statutory provisions were waived when it entered into the charter
party.
Article 6 of the Civil Code provides that "(r)ights may be waived, unless the waiver is contrary to law,
public order, public policy, morals, or good customs, or prejudicial to a person with a right recognized by
law." As a general rule, patrimonial rights may be waived as opposed to rights to personality and family
rights which may not be made the subject of waiver. 26 Being patently and undoubtedly patrimonial,
petitioner's right conferred under said articles may be waived. This, the petitioner did by acceding to the
contractual stipulation that it is solely responsible or any damage to the cargo, thereby exempting the
private carrier from any responsibility for loss or damage thereto. Furthermore, as discussed above, the
contract of private carriage binds petitioner and private respondent alone; it is not imbued with public
policy considerations for the general public or third persons are not affected thereby.
Articles 1170 and 1173, Civil Code
Petitioner likewise argues that the stipulation subject of this controversy is void for being contrary to
Articles 1170 and 1173 of the Civil Code 27 which read:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are
liable for damages
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, shall apply.

If the law does not state the diligence which is to be observed in the performance,
that which is expected of a good father of a family shall be required.
The Court notes that the foregoing articles are applicable only to the obligor or the one with an
obligation to perform. In the instant case, Private Respondent Seven Brothers is not an obligor in
respect of the cargo, for this obligation to bear the loss was shifted to petitioner by virtue of the charter
party. This shifting of responsibility, as earlier observed, is not void. The provisions cited by petitioner
are, therefore, inapplicable to the present case.
Moreover, the factual milieu of this case does not justify the application of the second paragraph of
Article 1173 of the Civil Code which prescribes the standard of diligence to be observed in the event the
law or the contract is silent. In the instant case, Article 362 of the Code of Commerce 28 provides the
standard of ordinary diligence for the carriage of goods by a carrier. The standard of diligence under this
statutory provision may, however, be modified in a contract of private carriage as the petitioner and
private respondent had done in their charter party.
Cases Cited by Petitioner Inapplicable
Petitioner cites Shewaram vs. Philippine Airlines, Inc. 29 which, in turn, quoted Juan Ysmael &
Co. vs. Gabino Barreto & Co. 30 and argues that the public policy considerations stated there vis-avis contractual stipulations limiting the carrier's liability be applied "with equal force" to this case. 31 It
also cites Manila Railroad Co. vs. Compaia Transatlantica 32 and contends that stipulations exempting
a party from liability for damages due to negligence "should not be countenanced" and should be
"strictly construed" against the party claiming its benefit. 33 We disagree.
The cases of Shewaram and Ysmael both involve a common carrier; thus, they necessarily justify the
application of such policy considerations and concomitantly stricter rules. As already discussed above,
the public policy considerations behind the rigorous treatment of common carriers are absent in the
case of private carriers. Hence, the stringent laws applicable to common carriers are not applied to
private carries. The case of Manila Railroad is also inapplicable because the action for damages there
does not involve a contract for transportation. Furthermore, the defendant therein made a "promise to
use due care in the lifting operations" and, consequently, it was "bound by its undertaking"'; besides, the
exemption was intended to cover accidents due to hidden defects in the apparatus or other
unforseeable occurrences" not caused by its "personal negligence." This promise was thus constructed
to make sense together with the stipulation against liability for damages. 34 In the present case, we
stress that the private respondent made no such promise. The agreement of the parties to exempt the
shipowner from responsibility for any damage to the cargo and place responsibility over the same to
petitioner is the lone stipulation considered now by this Court.
Finally, petitioner points to Standard Oil Co. of New York vs. Lopez Costelo, 35 Walter A. Smith &
Co. vs.Cadwallader Gibson Lumber Co., 36 N. T . Hashim and Co. vs. Rocha and Co., 37 Ohta
Development Co. vs. Steamship "Pompey" 38 and Limpangco Sons vs. Yangco Steamship Co. 39 in
support of its contention that the shipowner be held liable for damages. 40 These however are not on all
fours with the present case because they do not involve a similar factual milieu or an identical

stipulation in the charter party expressly exempting the shipowner form responsibility for any damage to
the cargo.
Effect of the South Sea Resolution
In its memorandum, Seven Brothers argues that petitioner has no cause of action against it because
this Court has earlier affirmed the liability of South Sea for the loss suffered by petitioner. Private
respondent submits that petitioner is not legally entitled to collect twice for a single loss. 41 In view of the
above disquisition upholding the validity of the questioned charter party stipulation and holding that
petitioner may not recover from private respondent, the present issue is moot and academic. It suffices
to state that the Resolution of this Court dated June 2, 1995 42 affirming the liability of South Sea does
not, by itself, necessarily preclude the petitioner from proceeding against private respondent. An
aggrieved party may still recover the deficiency for the person causing the loss in the event the amount
paid by the insurance company does not fully cover the loss. Article 2207 of the Civil Code provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
for the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency form the person causing the
loss or injury.
WHEREFORE, premises considered, the petition is hereby DENIED for its utter failure to show any
reversible error on the part of Respondent Court. The assailed Decision is AFFIRMED.

LOADSTAR SHIPPING CO., INC., petitioner, vs. COURT OF APPEALS and THE MANILA
INSURANCE CO., INC., respondents.
DECISION
DAVIDE, JR., C.J.:
Petitioner Loadstar Shipping Co., Inc. (hereafter LOADSTAR), in this petition for review
on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, seeks to reverse and set aside the
following: (a) the 30 January 1997 decision[1] of the Court of Appeals in CA-G.R. CV No. 36401, which
affirmed the decision of 4 October 1991[2] of the Regional Trial Court of Manila, Branch 16, in Civil Case
No. 85-29110, ordering LOADSTAR to pay private respondent Manila Insurance Co. (hereafter MIC) the
amount of P6,067,178, with legal interest from the filing of the complaint until fully paid, P8,000 as
attorneys fees, and the costs of the suit; and (b) its resolution of 19 November 1997, [3] denying
LOADSTARs motion for reconsideration of said decision.
The facts are undisputed.
On 19 November 1984, LOADSTAR received on board its M/V Cherokee (hereafter, the vessel)
the following goods for shipment:
a) 705 bales of lawanit hardwood;
b) 27 boxes and crates of tilewood assemblies and others; and
c) 49 bundles of mouldings R & W (3) Apitong Bolidenized.
The goods, amounting to P6,067,178, were insured for the same amount with MIC against various risks
including TOTAL LOSS BY TOTAL LOSS OF THE VESSEL. The vessel, in turn, was insured by
Prudential Guarantee & Assurance, Inc. (hereafter PGAI) for P4 million. On 20 November 1984, on its
way to Manila from the port of Nasipit, Agusan del Norte, the vessel, along with its cargo, sank off
Limasawa Island. As a result of the total loss of its shipment, the consignee made a claim with
LOADSTAR which, however, ignored the same. As the insurer, MIC paid P6,075,000 to the insured in
full settlement of its claim, and the latter executed a subrogation receipt therefor.
On 4 February 1985, MIC filed a complaint against LOADSTAR and PGAI, alleging that the sinking
of the vessel was due to the fault and negligence of LOADSTAR and its employees. It also prayed that
PGAI be ordered to pay the insurance proceeds from the loss of the vessel directly to MIC, said amount
to be deducted from MICs claim from LOADSTAR.

In its answer, LOADSTAR denied any liability for the loss of the shippers goods and claimed that
the sinking of its vessel was due to force majeure. PGAI, on the other hand, averred that MIC had no
cause of action against it, LOADSTAR being the party insured. In any event, PGAI was later dropped as
a party defendant after it paid the insurance proceeds to LOADSTAR.
As stated at the outset, the court a quo rendered judgment in favor of MIC, prompting LOADSTAR
to elevate the matter to the Court of Appeals, which, however, agreed with the trial court and affirmed its
decision in toto.
In dismissing LOADSTARs appeal, the appellate court made the following observations:
1) LOADSTAR cannot be considered a private carrier on the sole ground that there was a
single shipper on that fateful voyage. The court noted that the charter of the vessel was
limited to the ship, but LOADSTAR retained control over its crew.[4]
2) As a common carrier, it is the Code of Commerce, not the Civil Code, which should be
applied in determining the rights and liabilities of the parties.
3) The vessel was not seaworthy because it was undermanned on the day of the voyage. If it
had been seaworthy, it could have withstood the natural and inevitable action of the sea
on 20 November 1984, when the condition of the sea was moderate. The vessel sank,
not because of force majeure, but because it was not seaworthy. LOADSTARS allegation
that the sinking was probably due to the convergence of the winds, as stated by a
PAGASA expert, was not duly proven at the trial. The limited liability rule, therefore, is not
applicable considering that, in this case, there was an actual finding of negligence on the
part of the carrier.[5]
4) Between MIC and LOADSTAR, the provisions of the Bill of Lading do not apply because
said provisions bind only the shipper/consignee and the carrier. When MIC paid the
shipper for the goods insured, it was subrogated to the latters rights as against the
carrier, LOADSTAR.[6]
5) There was a clear breach of the contract of carriage when the shippers goods never
reached their destination. LOADSTARs defense of diligence of a good father of a family
in the training and selection of its crew is unavailing because this is not a proper or
complete defense in culpa contractual.
6) Art. 361 (of the Code of Commerce) has been judicially construed to mean that when
goods are delivered on board a ship in good order and condition, and the shipowner
delivers them to the shipper in bad order and condition, it then devolves upon the
shipowner to both allege and prove that the goods were damaged by reason of some fact
which legally exempts him from liability. Transportation of the merchandise at the risk and

venture of the shipper means that the latter bears the risk of loss or deterioration of his
goods arising from fortuitous events, force majeure, or the inherent nature and defects of
the goods, but not those caused by the presumed negligence or fault of the carrier,
unless otherwise proved.[7]
The errors assigned by LOADSTAR boil down to a determination of the following issues:
(1) Is the M/V Cherokee a private or a common carrier?
(2) Did LOADSTAR observe due and/or ordinary diligence in these premises?
Regarding the first issue, LOADSTAR submits that the vessel was a private carrier because it was
not issued a certificate of public convenience, it did not have a regular trip or schedule nor a fixed route,
and there was only one shipper, one consignee for a special cargo.
In refutation, MIC argues that the issue as to the classification of the M/V Cherokee was not timely
raised below; hence, it is barred by estoppel. While it is true that the vessel had on board only the cargo
of wood products for delivery to one consignee, it was also carrying passengers as part of its regular
business. Moreover, the bills of lading in this case made no mention of any charter party but only a
statement that the vessel was a general cargo carrier.Neither was there any special arrangement
between LOADSTAR and the shipper regarding the shipment of the cargo. The singular fact that the
vessel was carrying a particular type of cargo for one shipper is not sufficient to convert the vessel into
a private carrier.
As regards the second error, LOADSTAR argues that as a private carrier, it cannot be presumed to
have been negligent, and the burden of proving otherwise devolved upon MIC.[8]
LOADSTAR also maintains that the vessel was seaworthy. Before the fateful voyage on 19
November 1984, the vessel was allegedly dry docked at Keppel Philippines Shipyard and was duly
inspected by the maritime safety engineers of the Philippine Coast Guard, who certified that the ship
was fit to undertake a voyage. Its crew at the time was experienced, licensed and unquestionably
competent. With all these precautions, there could be no other conclusion except that LOADSTAR
exercised the diligence of a good father of a family in ensuring the vessels seaworthiness.
LOADSTAR further claims that it was not responsible for the loss of the cargo, such loss being due
to force majeure. It points out that when the vessel left Nasipit, Agusan del Norte, on 19 November
1984, the weather was fine until the next day when the vessel sank due to strong waves. MICs witness,
Gracelia Tapel, fully established the existence of two typhoons, WELFRING and YOLING, inside the
Philippine area of responsibility. In fact, on 20 November 1984, signal no. 1 was declared over Eastern
Visayas, which includes Limasawa Island. Tapel also testified that the convergence of winds brought
about by these two typhoons strengthened wind velocity in the area, naturally producing strong waves
and winds, in turn, causing the vessel to list and eventually sink.

LOADSTAR goes on to argue that, being a private carrier, any agreement limiting its liability, such
as what transpired in this case, is valid. Since the cargo was being shipped at owners risk, LOADSTAR
was not liable for any loss or damage to the same. Therefore, the Court of Appeals erred in holding that
the provisions of the bills of lading apply only to the shipper and the carrier, and not to the insurer of the
goods, which conclusion runs counter to the Supreme Courts ruling in the case of St. Paul Fire &
Marine Insurance Co. v. Macondray & Co., Inc.,[9] and National Union Fire Insurance Company of
Pittsburg v. Stolt-Nielsen Phils., Inc.[10]
Finally, LOADSTAR avers that MICs claim had already prescribed, the case having been instituted
beyond the period stated in the bills of lading for instituting the same suits based upon claims arising
from shortage, damage, or non-delivery of shipment shall be instituted within sixty days from the accrual
of the right of action. The vessel sank on 20 November 1984; yet, the case for recovery was filed only
on 4 February 1985.
MIC, on the other hand, claims that LOADSTAR was liable, notwithstanding that the loss of the
cargo was due to force majeure, because the same concurred with LOADSTARs fault or negligence.
Secondly, LOADSTAR did not raise the issue of prescription in the court below; hence, the same
must be deemed waived.
Thirdly, the limited liability theory is not applicable in the case at bar because LOADSTAR was at
fault or negligent, and because it failed to maintain a seaworthy vessel. Authorizing the voyage
notwithstanding its knowledge of a typhoon is tantamount to negligence.
We find no merit in this petition.
Anent the first assigned error, we hold that LOADSTAR is a common carrier. It is not necessary
that the carrier be issued a certificate of public convenience, and this public character is not altered by
the fact that the carriage of the goods in question was periodic, occasional, episodic or unscheduled.
In support of its position, LOADSTAR relied on the 1968 case of Home Insurance Co. v. American
Steamship Agencies, Inc.,[11] where this Court held that a common carrier transporting special cargo or
chartering the vessel to a special person becomes a private carrier that is not subject to the provisions
of the Civil Code. Any stipulation in the charter party absolving the owner from liability for loss due to the
negligence of its agent is void only if the strict policy governing common carriers is upheld. Such policy
has no force where the public at large is not involved, as in the case of a ship totally chartered for the
use of a single party. LOADSTAR also cited Valenzuela Hardwood and Industrial Supply, Inc. v. Court of
Appeals[12] and National Steel Corp. v. Court of Appeals,[13] both of which upheld the Home
Insurance doctrine.
These cases invoked by LOADSTAR are not applicable in the case at bar for simple reason that
the factual settings are different. The records do not disclose that the M/V Cherokee, on the date in
question, undertook to carry a special cargo or was chartered to a special person only. There was no

charter party. The bills of lading failed to show any special arrangement, but only a general provision to
the effect that the M/V Cherokee was a general cargo carrier.[14] Further, the bare fact that the vessel
was carrying a particular type of cargo for one shipper, which appears to be purely coincidental, is not
reason enough to convert the vessel from a common to a private carrier, especially where, as in this
case, it was shown that the vessel was also carrying passengers.
Under the facts and circumstances obtaining in this case, LOADSTAR fits the definition of a
common carrier under Article 1732 of the Civil Code. In the case of De Guzman v. Court of Appeals,
[15]
the Court juxtaposed the statutory definition of common carriers with the peculiar circumstances of
that case, viz.:
The Civil Code defines common carriers in the following terms:
Article 1732. Common carriers are persons, corporations, firms or associations engaged in the business
of carrying or transporting passengers or goods or both, by land, water, or air for compensation, offering
their services to the public.
The above article makes no distinction between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom,
as a sideline. Article 1732 also carefully avoids making any distinction between a person or enterprise
offering transportation service on a regular or scheduled basis and one offering such service on
an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier
offering its services to the general public, i.e., the general community or population, and one who offers
services or solicits business only from a narrow segment of the general population. We think that Article
1733 deliberately refrained from making such distinctions.
xxx
It appears to the Court that private respondent is properly characterized as a common carrier even
though he merely back-hauled goods for other merchants from Manila to Pangasinan, although such
backhauling was done on a periodic or occasional rather than regular or scheduled manner, and even
though private respondents principal occupation was not the carriage of goods for others. There is no
dispute that private respondent charged his customers a fee for hauling their goods; that that fee
frequently fell below commercial freight rates is not relevant here.
The Court of Appeals referred to the fact that private respondent held no certificate of public
convenience, and concluded he was not a common carrier. This is palpable error. A certificate of public
convenience is not a requisite for the incurring of liability under the Civil Code provisions governing
common carriers. That liability arises the moment a person or firm acts as a common carrier, without
regard to whether or not such carrier has also complied with the requirements of the applicable
regulatory statute and implementing regulations and has been granted a certificate of public
convenience or other franchise. To exempt private respondent from the liabilities of a common carrier
because he has not secured the necessary certificate of public convenience, would be offensive to

sound public policy; that would be to reward private respondent precisely for failing to comply with
applicable statutory requirements.The business of a common carrier impinges directly and intimately
upon the safety and well being and property of those members of the general community who happen
to deal with such carrier. The law imposes duties and liabilities upon common carriers for the safety and
protection of those who utilize their services and the law cannot allow a common carrier to render such
duties and liabilities merely facultative by simply failing to obtain the necessary permits and
authorizations.
Moving on to the second assigned error, we find that the M/V Cherokee was not seaworthy when it
embarked on its voyage on 19 November 1984. The vessel was not even sufficiently manned at the
time. For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a
sufficient number of competent officers and crew. The failure of a common carrier to maintain in
seaworthy condition its vessel involved in a contract of carriage is a clear breach of its duty prescribed
in Article 1755 of the Civil Code.[16]
Neither do we agree with LOADSTARs argument that the limited liability theory should be applied
in this case. The doctrine of limited liability does not apply where there was negligence on the part of
the vessel owner or agent.[17] LOADSTAR was at fault or negligent in not maintaining a seaworthy
vessel and in having allowed its vessel to sail despite knowledge of an approaching typhoon. In any
event, it did not sink because of any storm that may be deemed as force majeure, inasmuch as the wind
condition in the area where it sank was determined to be moderate. Since it was remiss in the
performance of its duties, LOADSTAR cannot hide behind the limited liability doctrine to escape
responsibility for the loss of the vessel and its cargo.
LOADSTAR also claims that the Court of Appeals erred in holding it liable for the loss of the
goods, in utter disregard of this Courts pronouncements in St. Paul Fire & Marine Ins. Co. v. Macondray
& Co., Inc.,[18] andNational Union Fire Insurance v. Stolt-Nielsen Phils., Inc. [19] It was ruled in these two
cases that after paying the claim of the insured for damages under the insurance policy, the insurer is
subrogated merely to the rights of the assured, that is, it can recover only the amount that may, in turn,
be recovered by the latter. Since the right of the assured in case of loss or damage to the goods is
limited or restricted by the provisions in the bills of lading, a suit by the insurer as subrogee is
necessarily subject to the same limitations and restrictions. We do not agree. In the first place, the
cases relied on by LOADSTAR involved a limitation on the carriers liability to an amount fixed in the bill
of lading which the parties may enter into, provided that the same was freely and fairly agreed upon
(Articles 1749-1750). On the other hand, the stipulation in the case at bar effectively reduces the
common carriers liability for the loss or destruction of the goods to a degree less than extraordinary
(Articles 1744 and 1745), that is, the carrier is not liable for any loss or damage to shipments made at
owners risk. Such stipulation is obviously null and void for being contrary to public policy.[20] It has been
said:
Three kinds of stipulations have often been made in a bill of lading. The first is one exempting the
carrier from any and all liability for loss or damage occasioned by its own negligence. The second is one
providing for an unqualified limitation of such liability to an agreed valuation. And the third is one limiting
the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a

higher rate of freight. According to an almost uniform weight of authority, the first and second kinds of
stipulations are invalid as being contrary to public policy, but the third is valid and enforceable.[21]
Since the stipulation in question is null and void, it follows that when MIC paid the shipper, it was
subrogated to all the rights which the latter has against the common carrier, LOADSTAR.
Neither is there merit to the contention that the claim in this case was barred by prescription. MICs
cause of action had not yet prescribed at the time it was concerned. Inasmuch as neither the Civil Code
nor the Code of Commerce states a specific prescriptive period on the matter, the Carriage of Goods by
Sea Act (COGSA) which provides for a one-year period of limitation on claims for loss of, or damage to,
cargoes sustained during transit may be applied suppletorily to the case at bar. This one-year
prescriptive period also applies to the insurer of the good. [22] In this case, the period for filing the action
for recovery has not yet elapsed. Moreover, a stipulation reducing the one-year period is null and void;
[23]
it must, accordingly, be struck down.
WHEREFORE, the instant petition is DENIED and the challenged decision of 30 January 1997 of
the Court of Appeals in CA-G.R. CV No. 36401 is AFFIRMED. Costs against petitioner.

G.R. No. L-69044 May 29, 1987

EASTERN SHIPPING LINES, INC., petitioner,
vs.
INTERMEDIATE APPELLATE COURT and DEVELOPMENT INSURANCE & SURETY
CORPORATION,respondents.

On May 11, 1978, respondent Development Insurance & Surety Corporation (Development Insurance,
for short), having been subrogated unto the rights of the two insured companies, filed suit against
petitioner Carrier for the recovery of the amounts it had paid to the insured before the then Court of First
instance of Manila, Branch XXX (Civil Case No. 6087).
Petitioner-Carrier denied liability mainly on the ground that the loss was due to an extraordinary
fortuitous event, hence, it is not liable under the law.

No. 71478 May 29, 1987

EASTERN SHIPPING LINES, INC., petitioner,
vs.
THE NISSHIN FIRE AND MARINE INSURANCE CO., and DOWA FIRE & MARINE INSURANCE CO.,
LTD.,respondents.

On August 31, 1979, the Trial Court rendered judgment in favor of Development Insurance in the
amounts of P256,039.00 and P92,361.75, respectively, with legal interest, plus P35,000.00 as attorney's
fees and costs. Petitioner Carrier took an appeal to the then Court of Appeals which, on August 14,
1984, affirmed.
Petitioner Carrier is now before us on a Petition for Review on Certiorari.
G.R. NO. 71478

MELENCIO-HERRERA, J.:
These two cases, both for the recovery of the value of cargo insurance, arose from the same incident,
the sinking of the M/S ASIATICA when it caught fire, resulting in the total loss of ship and cargo.
The basic facts are not in controversy:
In G.R. No. 69044, sometime in or prior to June, 1977, the M/S ASIATICA, a vessel operated by
petitioner Eastern Shipping Lines, Inc., (referred to hereinafter as Petitioner Carrier) loaded at Kobe,
Japan for transportation to Manila, 5,000 pieces of calorized lance pipes in 28 packages valued at
P256,039.00 consigned to Philippine Blooming Mills Co., Inc., and 7 cases of spare parts valued at
P92,361.75, consigned to Central Textile Mills, Inc. Both sets of goods were insured against marine risk
for their stated value with respondent Development Insurance and Surety Corporation.
In G.R. No. 71478, during the same period, the same vessel took on board 128 cartons of garment
fabrics and accessories, in two (2) containers, consigned to Mariveles Apparel Corporation, and two
cases of surveying instruments consigned to Aman Enterprises and General Merchandise. The 128
cartons were insured for their stated value by respondent Nisshin Fire & Marine Insurance Co., for US
$46,583.00, and the 2 cases by respondent Dowa Fire & Marine Insurance Co., Ltd., for US $11,385.00.
Enroute for Kobe, Japan, to Manila, the vessel caught fire and sank, resulting in the total loss of ship
and cargo. The respective respondent Insurers paid the corresponding marine insurance values to the
consignees concerned and were thus subrogated unto the rights of the latter as the insured.
G.R. NO. 69044

On June 16, 1978, respondents Nisshin Fire & Marine Insurance Co. NISSHIN for short), and Dowa
Fire & Marine Insurance Co., Ltd. (DOWA, for brevity), as subrogees of the insured, filed suit against
Petitioner Carrier for the recovery of the insured value of the cargo lost with the then Court of First
Instance of Manila, Branch 11 (Civil Case No. 116151), imputing unseaworthiness of the ship and nonobservance of extraordinary diligence by petitioner Carrier.
Petitioner Carrier denied liability on the principal grounds that the fire which caused the sinking of the
ship is an exempting circumstance under Section 4(2) (b) of the Carriage of Goods by Sea Act
(COGSA); and that when the loss of fire is established, the burden of proving negligence of the vessel is
shifted to the cargo shipper.
On September 15, 1980, the Trial Court rendered judgment in favor of NISSHIN and DOWA in the
amounts of US $46,583.00 and US $11,385.00, respectively, with legal interest, plus attorney's fees of
P5,000.00 and costs. On appeal by petitioner, the then Court of Appeals on September 10, 1984,
affirmed with modification the Trial Court's judgment by decreasing the amount recoverable by DOWA to
US $1,000.00 because of $500 per package limitation of liability under the COGSA.
Hence, this Petition for Review on certiorari by Petitioner Carrier.
Both Petitions were initially denied for lack of merit. G.R. No. 69044 on January 16, 1985 by the First
Division, and G. R. No. 71478 on September 25, 1985 by the Second Division. Upon Petitioner Carrier's
Motion for Reconsideration, however, G.R. No. 69044 was given due course on March 25, 1985, and
the parties were required to submit their respective Memoranda, which they have done.

On the other hand, in G.R. No. 71478, Petitioner Carrier sought reconsideration of the Resolution
denying the Petition for Review and moved for its consolidation with G.R. No. 69044, the lowernumbered case, which was then pending resolution with the First Division. The same was granted; the
Resolution of the Second Division of September 25, 1985 was set aside and the Petition was given due
course.

Petitioner Carrier claims that the loss of the vessel by fire exempts it from liability under the phrase
"natural disaster or calamity. " However, we are of the opinion that fire may not be considered a natural
disaster or calamity. This must be so as it arises almost invariably from some act of man or by human
means. 10 It does not fall within the category of an act of God unless caused by lightning 11 or by other
natural disaster or calamity. 12 It may even be caused by the actual fault or privity of the carrier. 13

At the outset, we reject Petitioner Carrier's claim that it is not the operator of the M/S Asiatica but merely
a charterer thereof. We note that in G.R. No. 69044, Petitioner Carrier stated in its Petition:

Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous event refers to leases
of rural lands where a reduction of the rent is allowed when more than one-half of the fruits have been
lost due to such event, considering that the law adopts a protection policy towards agriculture. 14

There are about 22 cases of the "ASIATICA" pending in various courts where various
plaintiffs are represented by various counsel representing various consignees or
insurance companies. The common defendant in these cases is petitioner herein,
being the operator of said vessel. ... 1
Petitioner Carrier should be held bound to said admission. As a general rule, the facts alleged in a
party's pleading are deemed admissions of that party and binding upon it. 2 And an admission in one
pleading in one action may be received in evidence against the pleader or his successor-in-interest on
the trial of another action to which he is a party, in favor of a party to the latter action. 3
The threshold issues in both cases are: (1) which law should govern the Civil Code provisions on
Common carriers or the Carriage of Goods by Sea Act? and (2) who has the burden of proof to show
negligence of the carrier?
On the Law Applicable
The law of the country to which the goods are to be transported governs the liability of the common
carrier in case of their loss, destruction or deterioration. 4 As the cargoes in question were transported
from Japan to the Philippines, the liability of Petitioner Carrier is governed primarily by the Civil
Code. 5 However, in all matters not regulated by said Code, the rights and obligations of common carrier
shall be governed by the Code of Commerce and by special laws. 6 Thus, the Carriage of Goods by Sea
Act, a special law, is suppletory to the provisions of the Civil Code. 7
On the Burden of Proof
Under the Civil Code, common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in the vigilance over goods, according to all the
circumstances of each case. 8 Common carriers 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, lightning or other natural disaster or calamity;
xxx xxx xxx 9

As the peril of the fire is not comprehended within the exception in Article 1734, supra, Article 1735 of
the Civil Code provides that all cases than those mention in Article 1734, the common carrier shall be
presumed to have been at fault or to have acted negligently, unless it proves that it has observed the
extraordinary deligence required by law.
In this case, the respective Insurers. as subrogees of the cargo shippers, have proven that the
transported goods have been lost. Petitioner Carrier has also proved that the loss was caused by fire.
The burden then is upon Petitioner Carrier to proved that it has exercised the extraordinary diligence
required by law. In this regard, the Trial Court, concurred in by the Appellate Court, made the following
Finding of fact:
The cargoes in question were, according to the witnesses defendant placed in
hatches No, 2 and 3 cf the vessel, Boatswain Ernesto Pastrana noticed that smoke
was coming out from hatch No. 2 and hatch No. 3; that where the smoke was noticed,
the fire was already big; that the fire must have started twenty-four 24) our the same
was noticed; that carbon dioxide was ordered released and the crew was ordered to
open the hatch covers of No, 2 tor commencement of fire fighting by sea water: that
all of these effort were not enough to control the fire.
Pursuant to Article 1733, common carriers are bound to extraordinary diligence in the
vigilance over the goods. The evidence of the defendant did not show that
extraordinary vigilance was observed by the vessel to prevent the occurrence of fire
at hatches numbers 2 and 3. Defendant's evidence did not likewise show he amount
of diligence made by the crew, on orders, in the care of the cargoes. What appears is
that after the cargoes were stored in the hatches, no regular inspection was made as
to their condition during the voyage. Consequently, the crew could not have even
explain what could have caused the fire. The defendant, in the Court's mind, failed to
satisfactorily show that extraordinary vigilance and care had been made by the crew
to prevent the occurrence of the fire. The defendant, as a common carrier, is liable to
the consignees for said lack of deligence required of it under Article 1733 of the Civil
Code. 15
Having failed to discharge the burden of proving that it had exercised the extraordinary diligence
required by law, Petitioner Carrier cannot escape liability for the loss of the cargo.

And even if fire were to be considered a "natural disaster" within the meaning of Article 1734 of the Civil
Code, it is required under Article 1739 of the same Code that the "natural disaster" must have been the
"proximate and only cause of the loss," and that the carrier has "exercised due diligence to prevent or
minimize the loss before, during or after the occurrence of the disaster. " This Petitioner Carrier has also
failed to establish satisfactorily.
Nor may Petitioner Carrier seek refuge from liability under the Carriage of Goods by Sea Act, It is
provided therein that:
Sec. 4(2). Neither the carrier nor the ship shall be responsible for loss or damage
arising or resulting from
(b) Fire, unless caused by the actual fault or privity of the carrier.
xxx xxx xxx
In this case, both the Trial Court and the Appellate Court, in effect, found, as a fact, that there was
"actual fault" of the carrier shown by "lack of diligence" in that "when the smoke was noticed, the fire
was already big; that the fire must have started twenty-four (24) hours before the same was noticed; "
and that "after the cargoes were stored in the hatches, no regular inspection was made as to their
condition during the voyage." The foregoing suffices to show that the circumstances under which the fire
originated and spread are such as to show that Petitioner Carrier or its servants were negligent in
connection therewith. Consequently, the complete defense afforded by the COGSA when loss results
from fire is unavailing to Petitioner Carrier.
On the US $500 Per Package Limitation:
Petitioner Carrier avers that its liability if any, should not exceed US $500 per package as provided in
section 4(5) of the COGSA, which reads:
(5) Neither the carrier nor the ship shall in any event be or become liable for any loss
or damage to or in connection with the transportation of goods in an amount
exceeding $500 per package lawful money of the United States, or in case of goods
not shipped in packages, per customary freight unit, or the equivalent of that sum in
other currency, unless the nature and value of such goods have been declared by the
shipper before shipment and inserted in bill of lading. This declaration if embodied in
the bill of lading shall be prima facie evidence, but all be conclusive on the carrier.
By agreement between the carrier, master or agent of the carrier, and the shipper
another maximum amount than that mentioned in this paragraph may be fixed:
Provided, That such maximum shall not be less than the figure above named. In no
event shall the carrier be Liable for more than the amount of damage actually
sustained.

xxx xxx xxx

Article 1749 of the New Civil Code also allows the limitations of liability in this wise:
Art. 1749. A stipulation that the common carrier's liability as limited to the value of the
goods appearing in the bill of lading, unless the shipper or owner declares a greater
value, is binding.
It is to be noted that the Civil Code does not of itself limit the liability of the common carrier to a fixed
amount per package although the Code expressly permits a stipulation limiting such liability. Thus, the
COGSA which is suppletory to the provisions of the Civil Code, steps in and supplements the Code by
establishing a statutory provision limiting the carrier's liability in the absence of a declaration of a higher
value of the goods by the shipper in the bill of lading. The provisions of the Carriage of Goods by.Sea
Act on limited liability are as much a part of a bill of lading as though physically in it and as much a part
thereof as though placed therein by agreement of the parties. 16
In G.R. No. 69044, there is no stipulation in the respective Bills of Lading (Exhibits "C-2" and "I-3") 1 7
limiting the carrier's liability for the loss or destruction of the goods. Nor is there a declaration of a higher
value of the goods. Hence, Petitioner Carrier's liability should not exceed US $500 per package, or its
peso equivalent, at the time of payment of the value of the goods lost, but in no case "more than the
amount of damage actually sustained."
The actual total loss for the 5,000 pieces of calorized lance pipes was P256,039 (Exhibit "C"), which
was exactly the amount of the insurance coverage by Development Insurance (Exhibit "A"), and the
amount affirmed to be paid by respondent Court. The goods were shipped in 28 packages (Exhibit "C2") Multiplying 28 packages by $500 would result in a product of $14,000 which, at the current
exchange rate of P20.44 to US $1, would be P286,160, or "more than the amount of damage actually
sustained." Consequently, the aforestated amount of P256,039 should be upheld.
With respect to the seven (7) cases of spare parts (Exhibit "I-3"), their actual value was P92,361.75
(Exhibit "I"), which is likewise the insured value of the cargo (Exhibit "H") and amount was affirmed to be
paid by respondent Court. however, multiplying seven (7) cases by $500 per package at the present
prevailing rate of P20.44 to US $1 (US $3,500 x P20.44) would yield P71,540 only, which is the amount
that should be paid by Petitioner Carrier for those spare parts, and not P92,361.75.
In G.R. No. 71478, in so far as the two (2) cases of surveying instruments are concerned, the amount
awarded to DOWA which was already reduced to $1,000 by the Appellate Court following the statutory
$500 liability per package, is in order.
In respect of the shipment of 128 cartons of garment fabrics in two (2) containers and insured with
NISSHIN, the Appellate Court also limited Petitioner Carrier's liability to $500 per package and affirmed
the award of $46,583 to NISSHIN. it multiplied 128 cartons (considered as COGSA packages) by $500
to arrive at the figure of $64,000, and explained that "since this amount is more than the insured value

of the goods, that is $46,583, the Trial Court was correct in awarding said amount only for the 128
cartons, which amount is less than the maximum limitation of the carrier's liability."

Certainly, if the individual crates or cartons prepared by the shipper

and containing his goods can rightly be considered "packages"
standing by themselves, they do not suddenly lose that character
upon being stowed in a carrier's container. I would liken these
containers to detachable stowage compartments of the ship. They
simply serve to divide the ship's overall cargo stowage space into
smaller, more serviceable loci. Shippers' packages are quite literally
"stowed" in the containers utilizing stevedoring practices and
materials analogous to those employed in traditional on board
stowage.

We find no reversible error. The 128 cartons and not the two (2) containers should be considered as the
shipping unit.
In Mitsui & Co., Ltd. vs. American Export Lines, Inc. 636 F 2d 807 (1981), the consignees of tin ingots
and the shipper of floor covering brought action against the vessel owner and operator to recover for
loss of ingots and floor covering, which had been shipped in vessel supplied containers. The U.S.
District Court for the Southern District of New York rendered judgment for the plaintiffs, and the
defendant appealed. The United States Court of Appeals, Second Division, modified and affirmed
holding that:
When what would ordinarily be considered packages are shipped in a container
supplied by the carrier and the number of such units is disclosed in the shipping
documents, each of those units and not the container constitutes the "package"
referred to in liability limitation provision of Carriage of Goods by Sea Act. Carriage of
Goods by Sea Act, 4(5), 46 U.S.C.A.& 1304(5).
Even if language and purposes of Carriage of Goods by Sea Act left doubt as to
whether carrier-furnished containers whose contents are disclosed should be treated
as packages, the interest in securing international uniformity would suggest that they
should not be so treated. Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A. 1304(5).
... After quoting the statement in Leather's Best, supra, 451 F 2d at 815, that treating
a container as a package is inconsistent with the congressional purpose of
establishing a reasonable minimum level of liability, Judge Beeks wrote, 414 F. Supp.
at 907 (footnotes omitted):
Although this approach has not completely escaped criticism, there
is, nonetheless, much to commend it. It gives needed recognition to
the responsibility of the courts to construe and apply the statute as
enacted, however great might be the temptation to "modernize" or
reconstitute it by artful judicial gloss. If COGSA's package limitation
scheme suffers from internal illness, Congress alone must
undertake the surgery. There is, in this regard, obvious wisdom in
the Ninth Circuit's conclusion in Hartford that technological
advancements, whether or not forseeable by the COGSA
promulgators, do not warrant a distortion or artificial construction of
the statutory term "package." A ruling that these large reusable
metal pieces of transport equipment qualify as COGSA packages
at least where, as here, they were carrier owned and supplied
would amount to just such a distortion.

In Yeramex International v. S.S. Tando,, 1977 A.M.C. 1807 (E.D. Va.) rev'd on other
grounds, 595 F 2nd 943 (4 Cir. 1979), another district with many maritime cases
followed Judge Beeks' reasoning in Matsushita and similarly rejected the functional
economics test. Judge Kellam held that when rolls of polyester goods are packed into
cardboard cartons which are then placed in containers, the cartons and not the
containers are the packages.
xxx xxx xxx
The case of Smithgreyhound v. M/V Eurygenes, 18 followed the Mitsui test:
Eurygenes concerned a shipment of stereo equipment packaged by the shipper into
cartons which were then placed by the shipper into a carrier- furnished container. The
number of cartons was disclosed to the carrier in the bill of lading. Eurygenes
followed the Mitsui test and treated the cartons, not the container, as the COGSA
packages. However, Eurygenes indicated that a carrier could limit its liability to $500
per container if the bill of lading failed to disclose the number of cartons or units within
the container, or if the parties indicated, in clear and unambiguous language, an
agreement to treat the container as the package.
(Admiralty Litigation in Perpetuum: The Continuing Saga of
Package Limitations and Third World Delivery Problems by Chester
D. Hooper & Keith L. Flicker, published in Fordham International
Law Journal, Vol. 6, 1982-83, Number 1) (Emphasis supplied)
In this case, the Bill of Lading (Exhibit "A") disclosed the following data:
2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight Prepaid

Say: Two (2) Containers Only.

Considering, therefore, that the Bill of Lading clearly disclosed the contents of the containers, the
number of cartons or units, as well as the nature of the goods, and applying the ruling in
the Mitsui and Eurygenes cases it is clear that the 128 cartons, not the two (2) containers should be
considered as the shipping unit subject to the $500 limitation of liability.
True, the evidence does not disclose whether the containers involved herein were carrier-furnished or
not. Usually, however, containers are provided by the carrier. 19 In this case, the probability is that they
were so furnished for Petitioner Carrier was at liberty to pack and carry the goods in containers if they
were not so packed. Thus, at the dorsal side of the Bill of Lading (Exhibit "A") appears the following
stipulation in fine print:
11. (Use of Container) Where the goods receipt of which is acknowledged on the face
of this Bill of Lading are not already packed into container(s) at the time of receipt, the
Carrier shall be at liberty to pack and carry them in any type of container(s).
The foregoing would explain the use of the estimate "Say: Two (2) Containers Only" in the Bill of Lading,
meaning that the goods could probably fit in two (2) containers only. It cannot mean that the shipper had
furnished the containers for if so, "Two (2) Containers" appearing as the first entry would have sufficed.
and if there is any ambiguity in the Bill of Lading, it is a cardinal principle in the construction of contracts
that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused
the obscurity. 20 This applies with even greater force in a contract of adhesion where a contract is
already prepared and the other party merely adheres to it, like the Bill of Lading in this case, which is
draw. up by the carrier. 21
On Alleged Denial of Opportunity to Present Deposition of Its Witnesses: (in G.R. No. 69044 only)
Petitioner Carrier claims that the Trial Court did not give it sufficient time to take the depositions of its
witnesses in Japan by written interrogatories.

would be dispensed with if by next time it had not yet been obtained, only proves the
lack of merit of the defendant's motion for postponement, for which reason it deserves
no sympathy from the Court in that regard. The defendant has told the Court since
February 16, 1979, that it was going to take the deposition of its witnesses in Japan.
Why did it take until August 25, 1979, or more than six months, to prepare its written
interrogatories. Only the defendant itself is to blame for its failure to adduce evidence
in support of its defenses.
xxx xxx xxx 22
Petitioner Carrier was afforded ample time to present its side of the case. 23 It cannot complain now that
it was denied due process when the Trial Court rendered its Decision on the basis of the evidence
adduced. What due process abhors is absolute lack of opportunity to be heard. 24
On the Award of Attorney's Fees:
Petitioner Carrier questions the award of attorney's fees. In both cases, respondent Court affirmed the
award by the Trial Court of attorney's fees of P35,000.00 in favor of Development Insurance in G.R. No.
69044, and P5,000.00 in favor of NISSHIN and DOWA in G.R. No. 71478.
Courts being vested with discretion in fixing the amount of attorney's fees, it is believed that the amount
of P5,000.00 would be more reasonable in G.R. No. 69044. The award of P5,000.00 in G.R. No. 71478
is affirmed.
WHEREFORE, 1) in G.R. No. 69044, the judgment is modified in that petitioner Eastern Shipping Lines
shall pay the Development Insurance and Surety Corporation the amount of P256,039 for the twentyeight (28) packages of calorized lance pipes, and P71,540 for the seven (7) cases of spare parts, with
interest at the legal rate from the date of the filing of the complaint on June 13, 1978, plus P5,000 as
attorney's fees, and the costs.
2) In G.R.No.71478,the judgment is hereby affirmed.

We do not agree. petitioner Carrier was given- full opportunity to present its evidence but it failed to do
so. On this point, the Trial Court found:
xxx xxx xxx
Indeed, since after November 6, 1978, to August 27, 1979, not to mention the time
from June 27, 1978, when its answer was prepared and filed in Court, until
September 26, 1978, when the pre-trial conference was conducted for the last time,
the defendant had more than nine months to prepare its evidence. Its belated notice
to take deposition on written interrogatories of its witnesses in Japan, served upon the
plaintiff on August 25th, just two days before the hearing set for August 27th, knowing
fully well that it was its undertaking on July 11 the that the deposition of the witnesses

G.R. No. 101089. April 7, 1993.

ESTRELLITA M. BASCOS, petitioners,
vs.
COURT OF APPEALS and RODOLFO A. CIPRIANO, respondents.
Modesto S. Bascos for petitioner.
Pelaez, Adriano & Gregorio for private respondent.
SYLLABUS
1. CIVIL LAW; COMMON CARRIERS; DEFINED; TEST TO DETERMINE COMMON CARRIER.
Article 1732 of the Civil Code defines a common carrier as "(a) person, corporation or firm, or
association engaged in the business of carrying or transporting passengers or goods or both, by land,
water or air, for compensation, offering their services to the public." The test to determine a common
carrier is "whether the given undertaking is a part of the business engaged in by the carrier which he
has held out to the general public as his occupation rather than the quantity or extent of the business
transacted." . . . The holding of the Court in De Guzman vs. Court of Appeals is instructive. In referring
to Article 1732 of the Civil Code, it held thus: "The above article makes no distinction between one
whose principal business activity is the carrying of persons or goods or both, and one who does such
carrying only as an ancillary activity (in local idiom, as a "sideline"). Article 1732 also carefully avoids
making any distinction between a person or enterprise offering transportation service on a regular or
scheduled basis and one offering such service on an occasional, episodic or unscheduled basis.
Neither does Article 1732 distinguished between a carrier offering its services to the "general public,"
i.e., the general community or population, and one who offers services or solicits business only from a
narrow segment of the general population. We think that Article 1732 deliberately refrained from making
such distinctions."
2. ID.; ID.; DILIGENCE REQUIRED IN VIGILANCE OVER GOODS TRANSPORTED; WHEN
PRESUMPTION OF NEGLIGENCE ARISES; HOW PRESUMPTION OVERCAME; WHEN
PRESUMPTION MADE ABSOLUTE. Common carriers are obliged to observe extraordinary
diligence in the vigilance over the goods transported by them. Accordingly, they are presumed to have
been at fault or to have acted negligently if the goods are lost, destroyed or deteriorated. There are very
few instances when the presumption of negligence does not attach and these instances are
enumerated in Article 1734. In those cases where the presumption is applied, the common carrier must
prove that it exercised extraordinary diligence in order to overcome the presumption . . . The
presumption of negligence was raised against petitioner. It was petitioner's burden to overcome it. Thus,
contrary to her assertion, private respondent need not introduce any evidence to prove her negligence.
Her own failure to adduce sufficient proof of extraordinary diligence made the presumption conclusive
against her.

3. ID.; ID.; HIJACKING OF GOODS; CARRIER PRESUMED NEGLIGENT; HOW CARRIER

ABSOLVED FROM LIABILITY. In De Guzman vs. Court of Appeals, the Court held that hijacking, not
being included in the provisions of Article 1734, must be dealt with under the provisions of Article 1735
and thus, the common carrier is presumed to have been at fault or negligent. To exculpate the carrier
from liability arising from hijacking, he must prove that the robbers or the hijackers acted with grave or
irresistible threat, violence, or force. This is in accordance with Article 1745 of the Civil Code which
provides: "Art. 1745. Any of the following or similar stipulations shall be considered unreasonable,
unjust and contrary to public policy . . . (6) That the common carrier's liability for acts committed by
thieves, or of robbers who do not act with grave or irresistible threat, violences or force, is dispensed
with or diminished"; In the same case, the Supreme Court also held that: "Under Article 1745 (6) above,
a common carrier is held responsible and will not be allowed to divest or to diminish such
responsibility even for acts of strangers like thieves or robbers, except where such thieves or robbers
in fact acted "with grave of irresistible threat, violence of force," We believe and so hold that the limits of
the duty of extraordinary diligence in the vigilance over the goods carried are reached where the goods
are lost as a result of a robbery which is attended by "grave or irresistible threat, violence or force."
4. REMEDIAL LAW; EVIDENCE; JUDICIAL ADMISSIONS CONCLUSIVE. In this case, petitioner
herself has made the admission that she was in the trucking business, offering her trucks to those with
cargo to move. Judicial admissions are conclusive and no evidence is required to prove the same.
5. ID.; ID.; BURDEN OF PROOF RESTS WITH PARTY WHO ALLEGES A FACT. Petitioner
presented no other proof of the existence of the contract of lease. He who alleges a fact has the burden
of proving it.
6. ID.; ID.; AFFIDAVITS NOT CONSIDERED BEST EVIDENCE IF AFFIANTS AVAILABLE AS
WITNESSES. While the affidavit of Juanito Morden, the truck helper in the hijacked truck, was
presented as evidence in court, he himself was a witness as could be gleaned from the contents of the
petition. Affidavits are not considered the best evidence if the affiants are available as witnesses.
7. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT IS WHAT LAW DEFINES IT TO BE.
Granting that the said evidence were not self-serving, the same were not sufficient to prove that the
contract was one of lease. It must be understood that a contract is what the law defines it to be and not
what it is called by the contracting parties.
DECISION
CAMPOS, JR., J p:
This is a petition for review on certiorari of the decision ** of the Court of Appeals in "RODOLFO A.
CIPRIANO, doing business under the name CIPRIANO TRADING ENTERPRISES plaintiff-appellee, vs.
ESTRELLITA M. BASCOS, doing business under the name of BASCOS TRUCKING, defendantappellant," C.A.-G.R. CV No. 25216, the dispositive portion of which is quoted hereunder:

"PREMISES considered, We find no reversible error in the decision appealed from, which is hereby
affirmed in toto. Costs against appellant." 1
The facts, as gathered by this Court, are as follows:
Rodolfo A. Cipriano representing Cipriano Trading Enterprise (CIPTRADE for short) entered into a
hauling contract 2 with Jibfair Shipping Agency Corporation whereby the former bound itself to haul the
latter's 2,000 m/tons of soya bean meal from Magallanes Drive, Del Pan, Manila to the warehouse of
Purefoods Corporation in Calamba, Laguna. To carry out its obligation, CIPTRADE, through Rodolfo
Cipriano, subcontracted with Estrellita Bascos (petitioner) to transport and to deliver 400 sacks of soya
bean meal worth P156,404.00 from the Manila Port Area to Calamba, Laguna at the rate of P50.00 per
metric ton. Petitioner failed to deliver the said cargo. As a consequence of that failure, Cipriano paid
Jibfair Shipping Agency the amount of the lost goods in accordance with the contract which stated that:
"1. CIPTRADE shall be held liable and answerable for any loss in bags due to theft, hijacking and nondelivery or damages to the cargo during transport at market value, . . ." 3
Cipriano demanded reimbursement from petitioner but the latter refused to pay. Eventually, Cipriano
filed a complaint for a sum of money and damages with writ of preliminary attachment 4 for breach of a
contract of carriage. The prayer for a Writ of Preliminary Attachment was supported by an affidavit 5
which contained the following allegations:

After trial, the trial court rendered a decision *** the dispositive portion of which reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant ordering the
latter to pay the former:
1. The amount of ONE HUNDRED FIFTY-SIX THOUSAND FOUR HUNDRED FOUR PESOS
(P156,404.00) as an (sic) for actual damages with legal interest of 12% per cent per annum to be
counted from December 4, 1986 until fully paid;
2. The amount of FIVE THOUSAND PESOS (P5,000.00) as and for attorney's fees; and
3. The costs of the suit.
The "Urgent Motion To Dissolve/Lift preliminary Attachment" dated March 10, 1987 filed by defendant is
DENIED for being moot and academic.
SO ORDERED." 6
Petitioner appealed to the Court of Appeals but respondent Court affirmed the trial court's judgment.
Consequently, petitioner filed this petition where she makes the following assignment of errors; to wit:

"4. That this action is one of those specifically mentioned in Sec. 1, Rule 57 the Rules of Court, whereby
a writ of preliminary attachment may lawfully issue, namely:
"(e) in an action against a party who has removed or disposed of his property, or is about to do so, with
intent to defraud his creditors;"
5. That there is no sufficient security for the claim sought to be enforced by the present action;
6. That the amount due to the plaintiff in the above-entitled case is above all legal counterclaims;"
The trial court granted the writ of preliminary attachment on February 17, 1987.
In her answer, petitioner interposed the following defenses: that there was no contract of carriage since
CIPTRADE leased her cargo truck to load the cargo from Manila Port Area to Laguna; that CIPTRADE
was liable to petitioner in the amount of P11,000.00 for loading the cargo; that the truck carrying the
cargo was hijacked along Canonigo St., Paco, Manila on the night of October 21, 1988; that the
hijacking was immediately reported to CIPTRADE and that petitioner and the police exerted all efforts to
locate the hijacked properties; that after preliminary investigation, an information for robbery and
carnapping were filed against Jose Opriano, et al.; and that hijacking, being a force majeure, exculpated
petitioner from any liability to CIPTRADE.

"I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE CONTRACTUAL RELATIONSHIP
BETWEEN PETITIONER AND PRIVATE RESPONDENT WAS CARRIAGE OF GOODS AND NOT
LEASE OF CARGO TRUCK.
II. GRANTING, EX GRATIA ARGUMENTI, THAT THE FINDING OF THE RESPONDENT COURT THAT
THE CONTRACTUAL RELATIONSHIP BETWEEN PETITIONER AND PRIVATE RESPONDENT WAS
CARRIAGE OF GOODS IS CORRECT, NEVERTHELESS, IT ERRED IN FINDING PETITIONER
LIABLE THEREUNDER BECAUSE THE LOSS OF THE CARGO WAS DUE TO FORCE MAJEURE,
NAMELY, HIJACKING.
III. THE RESPONDENT COURT ERRED IN AFFIRMING THE FINDING OF THE TRIAL COURT THAT
PETITIONER'S MOTION TO DISSOLVE/LIFT THE WRIT OF PRELIMINARY ATTACHMENT HAS
BEEN RENDERED MOOT AND ACADEMIC BY THE DECISION OF THE MERITS OF THE CASE." 7
The petition presents the following issues for resolution: (1) was petitioner a common carrier?; and (2)
was the hijacking referred to a force majeure?
The Court of Appeals, in holding that petitioner was a common carrier, found that she admitted in her
answer that she did business under the name A.M. Bascos Trucking and that said admission dispensed
with the presentation by private respondent, Rodolfo Cipriano, of proofs that petitioner was a common

carrier. The respondent Court also adopted in toto the trial court's decision that petitioner was a
common carrier, Moreover, both courts appreciated the following pieces of evidence as indicators that
petitioner was a common carrier: the fact that the truck driver of petitioner, Maximo Sanglay, received
the cargo consisting of 400 bags of soya bean meal as evidenced by a cargo receipt signed by Maximo
Sanglay; the fact that the truck helper, Juanito Morden, was also an employee of petitioner; and the fact
that control of the cargo was placed in petitioner's care.
In disputing the conclusion of the trial and appellate courts that petitioner was a common carrier, she
alleged in this petition that the contract between her and Rodolfo A. Cipriano, representing CIPTRADE,
was lease of the truck. She cited as evidence certain affidavits which referred to the contract as "lease".
These affidavits were made by Jesus Bascos 8 and by petitioner herself. 9 She further averred that
Jesus Bascos confirmed in his testimony his statement that the contract was a lease contract. 10 She
also stated that: she was not catering to the general public. Thus, in her answer to the amended
complaint, she said that she does business under the same style of A.M. Bascos Trucking, offering her
trucks for lease to those who have cargo to move, not to the general public but to a few customers only
in view of the fact that it is only a small business. 11

Regarding the affidavits presented by petitioner to the court, both the trial and appellate courts have
dismissed them as self-serving and petitioner contests the conclusion. We are bound by the appellate
court's factual conclusions. Yet, granting that the said evidence were not self-serving, the same were
not sufficient to prove that the contract was one of lease. It must be understood that a contract is what
the law defines it to be and not what it is called by the contracting parties. 15 Furthermore, petitioner
presented no other proof of the existence of the contract of lease. He who alleges a fact has the burden
of proving it. 16
Likewise, We affirm the holding of the respondent court that the loss of the goods was not due to force
majeure.
Common carriers are obliged to observe extraordinary diligence in the vigilance over the goods
transported by them. 17 Accordingly, they are presumed to have been at fault or to have acted
negligently if the goods are lost, destroyed or deteriorated. 18 There are very few instances when the
presumption of negligence does not attach and these instances are enumerated in Article 1734. 19 In
those cases where the presumption is applied, the common carrier must prove that it exercised
extraordinary diligence in order to overcome the presumption.

We agree with the respondent Court in its finding that petitioner is a common carrier.
Article 1732 of the Civil Code defines a common carrier as "(a) person, corporation or firm, or
association engaged in the business of carrying or transporting passengers or goods or both, by land,
water or air, for compensation, offering their services to the public." The test to determine a common
carrier is "whether the given undertaking is a part of the business engaged in by the carrier which he
has held out to the general public as his occupation rather than the quantity or extent of the business
transacted." 12 In this case, petitioner herself has made the admission that she was in the trucking
business, offering her trucks to those with cargo to move. Judicial admissions are conclusive and no
evidence is required to prove the same. 13
But petitioner argues that there was only a contract of lease because they offer their services only to a
select group of people and because the private respondents, plaintiffs in the lower court, did not object
to the presentation of affidavits by petitioner where the transaction was referred to as a lease contract.
Regarding the first contention, the holding of the Court in De Guzman vs. Court of Appeals 14 is
instructive. In referring to Article 1732 of the Civil Code, it held thus:
"The above article makes no distinction between one whose principal business activity is the carrying of
persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom,
as a "sideline"). Article 1732 also carefully avoids making any distinction between a person or enterprise
offering transportation service on a regular or scheduled basis and one offering such service on an
occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier
offering its services to the "general public," i.e., the general community or population, and one who
offers services or solicits business only from a narrow segment of the general population. We think that
Article 1732 deliberately refrained from making such distinctions."

In this case, petitioner alleged that hijacking constituted force majeure which exculpated her from
liability for the loss of the cargo. In De Guzman vs. Court of Appeals, 20 the Court held that hijacking,
not being included in the provisions of Article 1734, must be dealt with under the provisions of Article
1735 and thus, the common carrier is presumed to have been at fault or negligent. To exculpate the
carrier from liability arising from hijacking, he must prove that the robbers or the hijackers acted with
grave or irresistible threat, violence, or force. This is in accordance with Article 1745 of the Civil Code
which provides:
"Art. 1745. Any of the following or similar stipulations shall be considered unreasonable, unjust and
contrary to public policy;
xxx xxx xxx
(6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with
grave or irresistible threat, violences or force, is dispensed with or diminished;"
In the same case, 21 the Supreme Court also held that:
"Under Article 1745 (6) above, a common carrier is held responsible and will not be allowed to divest
or to diminish such responsibility even for acts of strangers like thieves or robbers except where such
thieves or robbers in fact acted with grave or irresistible threat, violence or force. We believe and so
hold that the limits of the duty of extraordinary diligence in the vigilance over the goods carried are
reached where the goods are lost as a result of a robbery which is attended by "grave or irresistible
threat, violence or force."

To establish grave and irresistible force, petitioner presented her accusatory affidavit, 22 Jesus Bascos'
affidavit, 23 and Juanito Morden's 24 "Salaysay". However, both the trial court and the Court of Appeals
have concluded that these affidavits were not enough to overcome the presumption. Petitioner's
affidavit about the hijacking was based on what had been told her by Juanito Morden. It was not a firsthand account. While it had been admitted in court for lack of objection on the part of private respondent,
the respondent Court had discretion in assigning weight to such evidence. We are bound by the
conclusion of the appellate court. In a petition for review on certiorari, We are not to determine the
probative value of evidence but to resolve questions of law. Secondly, the affidavit of Jesus Bascos did
not dwell on how the hijacking took place. Thirdly, while the affidavit of Juanito Morden, the truck helper
in the hijacked truck, was presented as evidence in court, he himself was a witness as could be gleaned
from the contents of the petition. Affidavits are not considered the best evidence if the affiants are
available as witnesses. 25 The subsequent filing of the information for carnapping and robbery against
the accused named in said affidavits did not necessarily mean that the contents of the affidavits were
true because they were yet to be determined in the trial of the criminal cases.
The presumption of negligence was raised against petitioner. It was petitioner's burden to overcome it.
Thus, contrary to her assertion, private respondent need not introduce any evidence to prove her
negligence. Her own failure to adduce sufficient proof of extraordinary diligence made the presumption
conclusive against her.
Having affirmed the findings of the respondent Court on the substantial issues involved, We find no
reason to disturb the conclusion that the motion to lift/dissolve the writ of preliminary attachment has
been rendered moot and academic by the decision on the merits.
In the light of the foregoing analysis, it is Our opinion that the petitioner's claim cannot be sustained.
The petition is DISMISSED and the decision of the Court of Appeals is hereby AFFIRMED.

SABENA BELGIAN WORLD AIRLINES, petitioner, vs. HON. COURT OF APPEALS and MA. PAULA
SAN AGUSTIN, respondents.
DECISION
VITUG, J.:
The appeal before the Court involves the issue of an airlines liability for lost luggage. The petition
for review assails the decision of the Court Appeals, [1] dated 27 February 1992, affirming an award of
damages made by the trial court in a complaint filed by private respondent against petitioner.
The factual background of the case, narrated by the trial court and reproduced at length by the
appellate court, is hereunder quoted:
On August 21, 1987, plaintiff was a passenger on board Flight SN 284 of defendant airline originating
from Casablanca to Brussels, Belgium on her way back to Manila. Plaintiff checked in her luggage
which contained her valuables, namely: jewelries valued at $2,350.00; clothes $1,500.00; shoes/bag
$150; accessories $75; luggage itself $10.00; or a total of $4,265.00, for which she was issued Tag No.
71423. She stayed overnight in Brussels and her luggage was left on board Flight SN 284.
Plaintiff arrived at Manila International Airport on September 2, 1987 and immediately submitted her Tag
No. 71423 to facilitate the release of her luggage hut the luggage was missing. She was advised to
accomplish and submit a property Irregularity Report which she submitted and filed on the same day.

Defendant asserts in its Answer and its evidence tend to show that while it admits that the plaintiff was a
passenger on board Flight No. SN 284 with a piece of checked in luggage bearing Tag No. 71423, the
loss of the luggage was due to plaintiffs sole if not contributory negligence; that she did not declare the
valuable items in her checked-in luggage at the flight counter when she checked in for her flight from
Casablanca to Brussels so that either the representative of the defendant at the counter would have
advised her to secure an insurance on the alleged valuable items and required her to pay additional
charges, or would have refused acceptance of her baggage as required by the generally accepted
practices of international carriers; that Section 9(a), Article IX of General Conditions of carriage requiring
passengers to collect their checked baggage at the place of stopover, plaintiff neglected to claim her
baggage at the Brussels Airport; that plaintiff should have retrieved her undeclared valuables from her
baggage at the Brussels Airport since her flight from Brussels to Manila will still have to visit for
confirmation inasmuch as only her flight from Casablanca to Brussels was confirmed; that defendant
incorporated in all Sabena Plane Tickets, including Sabena Ticket No. 082422-72502241 issued to
plaintiff in Manila on August 21, 1987, a warning that Items of value should be carried on your person
and that some carriers assume no liability for fragile, valuable or perishable articles and that further
information may he obtained from the carrier for guidance; that granting without conceding that
defendant is liable, its liability is limited only to US $20.00 per kilo due to plaintiffs failure to declare a
higher value on the contents of her checked in luggage and pay additional charges thereon.[2]
The trial court rendered judgment ordering petitioner Sabena Belgian World Airlines to pay private
respondent Ma. Paula San Agustin
(a) x x x US$4,265.00 or its legal exchange in Philippine pesos;
(b) x x x P30,000.00 as moral damages;

She followed up her claim on September 14, 1987 but the luggage remained to be missing.
(c) x x x P10,000.00 as exemplary damages;
On September 15, 1987, she filed her formal complaint with the office of Ferge Massed, defendants
Local Manager, demanding immediate attention (Exh. A).
On September 30, 1987, on the occasion of plaintiffs following up of her luggage claim, she was
furnished copies of defendants telexes with an information that the Brussels Office of defendant found
the luggage and that they have broken the locks for identification (Exhibit B). Plaintiff was assured by
the defendant that it has notified its Manila Office that the luggage will be shipped to Manila on October
27, 1987. But unfortunately plaintiff was informed that the luggage was lost for the second time (Exhibits
C and C-1).
At the time of the filling of the complaint, the luggage with its content has not been found.
Plaintiff demanded from the defendant the money value of the luggage and its contents amounting to
$4,265.00 or its exchange value, but defendant refused to settle the claim.

(d) x x x P10,000.00 attorneys fees; and

(e) (t)he costs of the suit.[3]
Sabena appealed the decision of the Regional Trial Court to the Court of Appeals. The appellate
court, in its decision of 27 February 1992, affirmed in toto the trial courts judgment.
Petitioner airline company, in contending that the alleged negligence of private respondent should
be considered the primary cause for the loss of her luggage, avers that, despite her awareness that the
flight ticket had been confirmed only for Casablanca and Brussels, and that her flight from Brussels to
Manila had yet to be confirmed, she did not retrieve the luggage upon arrival in Brussels. Petitioner
insists that private respondent, being a seasoned international traveler, must have likewise been familiar
with the standard provisions contained in her flight ticket that items of value are required to be handcarried by the passenger and that the liability of the airline or loss, delay or damage to baggage would

be limited, in any event, to only US$20.00 per kilo unless a higher value is declared in advance and
corresponding additional charges are paid thereon. At the Casablanca International Airport, private
respondent, in checking in her luggage, evidently did not declare its contents or value. Petitioner cites
Section 5(c), Article IX, of the General Conditions of Carriage, signed at Warsaw, Poland, on 02 October
1929, as amended by the Hague Protocol of 1955, generally observed by International carriers, stating,
among other things, that:
Passengers shall not include in his checked baggage, and the carrier may refuse to carry as checked
baggage, fragile or perishable articles, money, jewelry, precious metals, negotiable papers, securities or
other valuables.[4]
Fault or negligence consists in the omission of that diligence which is demanded by the nature of
an obligation and corresponds with the circumstances of the person, of the time, and of the place. When
the source of an obligation is derived from a contract, the mere breach or non-fulfillment of the
prestation gives rise to the presumption of fault on the part of the obligor. This rule is not different in the
case of common carriers in the carriage of goods which, indeed, are bound to observe not just the due
diligence of a good father of a family but that of extraordinary care in the vigilance over the goods. The
appellate court has aptly observed:
x x x Art. 1733 of the [Civil] Code provides that from the very nature of their business and by reasons of
public policy, common carriers are bound to observe extraordinary diligence in the vigilance over the
goods transported by them. This extraordinary responsibility, according to Art. 1736, lasts from the time
the goods are unconditionally placed in the possession of and received by the carrier until they are
delivered actually or constructively to the consignee or person who has the right to receive them. Art.
1737 states that the common carriers duty to observe extraordinary diligence in the vigilance over the
goods transported by them remains in full force and effect even when they are temporarily unloaded or
stored in transit. And Art. 1735 establishes the presumption that 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 had observed extraordinary diligence as required in Article 1733.
The only exceptions to the foregoing extraordinary responsibility of the common carrier is when the loss,
destruction, or deterioration of the goods is due to any of the following causes:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.

Not one of the above excepted causes obtains in this case.[5]

The above rules remain basically unchanged even when the contract is breached by
tort[6] although noncontradictory principles on quasi-delict may then be assimilated as also forming part
of the governing law. Petitioner is not thus entirely off track when it has likewise raised in its defense the
tort doctrine of proximate cause. Unfortunately for petitioner, however, the doctrine cannot, in this
particular instance, support its case. Proximate cause is that which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces injury and without which the result
would not have occurred. The exemplification by the Court in one case[7] is simple and explicit; viz:
(T)he proximate legal cause is that acting first and producing the injury, either immediately or by setting
other events in motion, all constituting a natural and Continuous chain of events, each having a close
causal Connection with its immediate predecessor, the final event in the chain immediately affecting the
injury as a natural and probable result of the cause which first acted, under such circumstances that the
person responsible for the first event should, as an ordinarily prudent, and intelligent person, have
reasonable ground to expect at the moment of his act or default that an injury to some person might
probably result therefrom.
It remained undisputed that private respondents luggage was lost while it was in the custody of
petitioner. It was supposed to arrive on the same flight that private respondent took in returning to
Manila on 02 September 1987. When she discovered that the luggage was missing, she promptly
accomplished and filed a Property Irregularity Report. She followed up her claim on 14 September
1987, and filed, on the following day, a formal letter-complaint with petitioner. She felt relieved when, on
23 October 1987, she was advised that her luggage had finally been found, with its contents intact when
examined, and that she could expect it to arrive on 27 October 1987. She then waited anxiously only to
be told later that her luggage had been lost for the second time. Thus, the appellate court, given all the
facts before it, sustained the trial court in finding petitioner ultimately guilty of gross negligence in the
handling of private respondents luggage. The loss of said baggage not only once by twice, said the
appellate court, underscores the wanton negligence and lack of care on the part of the carrier.
The above findings, which certainly cannot be said to be without basis, foreclose whatever rights
petitioner might have had to the possible limitation of liabilities enjoyed by international air carriers
under the Warsaw Convention (Convention for the Unification of Certain Rules Relating to International
Carriage by Air, as amended by the Hague Protocol of 1955, the Montreal Agreement of 1966, the
Guatemala Protocol of 1971 and the Montreal Protocols of 1975). In Alitalia vs. Intermediate Appellate
Court,[8] now Chief Justice Andres R. Narvasa, speaking for the Court, has explained it well; he said:
The Warsaw Convention however denies to the carrier availment of the provisions which exclude or
limit his liability, if the damage is caused by his wilful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is considered to be equivalent to wilful
misconduct, or if the damage is (similarly) caused x x x by any agent of the carrier acting within the
scope of his employment. The Hague Protocol amended the Warsaw Convention by removing the
provision that if the airline took all necessary steps to avoid the damage, it could exculpate itself
completely, and declaring the stated limits of liability not applicable if it is proved that the damage

resulted from an act or omission of the carrier, its servants or agents, done with intent to cause damage
or recklessly and with knowledge that damage would probably result. The same deletion was effected
by the Montreal Agreement of 1966, with the result that a passenger could recover unlimited damages
upon proof of wilful misconduct.
The Convention does not thus operate as an exclusive enumeration of the instances of an airlines
liability, or as an absolute limit of the extent of that liability. Such a proposition is not borne out by the
language of the Convention, as this Court has now, and at an earlier time, pointed out. Moreover, slight
reflection readily leads to the conclusion that it should be deemed a limit of liability only in those cases
where the cause of the death or injury to person, or destruction, loss or damage to property or delay in
its transport is not attributable to or attended by any wilful misconduct, bad faith, recklessness or
otherwise improper conduct on the part of any official or employee for which the carrier is responsible,
and there is otherwise no special or extraordinary form of resulting injury. The Contentions provisions, in
short, do not regulate or exclude liability for other breaches of contract by the carrier or misconduct of its
officers and employees, or for some particular or exceptional type of damage. Otherwise, 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. Nor may it for a moment be supposed that if a
member of the aircraft complement should inflict some physical injury on a passenger, or maliciously
destroy or damage the latters property, the Convention might successfully be pleaded as the sole gauge
to determine the carriers liability to the passenger. Neither may the Convention be invoked to justify the
disregard of some extraordinary sort of damage resulting to a passenger and preclude recovery therefor
beyond the limits set by said Convention. It is in this sense that the Convention has been applied, or
ignored, depending on the peculiar facts presented by each case.

The Court thus sees no error in the preponderant application to the instant case by the appellate
court, as well as by the trial court, of the usual rules on the extent of recoverable damages beyond the
Warsaw limitations. Under domestic law and jurisprudence (the Philippines being the country of
destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the
common carrier liable for all damages which can be reasonably attributed, although unforeseen, to the
non-performance of the obligation,[9] including moral and exemplary damages.[10]
WHEREFORE, the decision appealed from is AFFIRMED. Costs against petitioner.

Skipped david v macapagal arroyo. Anong kinalaman ng emergency powers ng president sa transpo?