Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. L-47822 December 22, 1988

PEDRO DE GUZMAN, petitioner,

vs.
COURT OF APPEALS and ERNESTO CENDANA, respondents.

Vicente D. Millora for petitioner., Jacinto Callanta for private respondent.

FELICIANO, J.:
Respondent Ernesto Cendana, a junk dealer, was engaged in buying up used bottles and scrap metal
in Pangasinan. Upon gathering sufficient quantities of such scrap material, respondent would bring
such material to Manila for resale. He utilized two (2) six-wheeler trucks which he owned for hauling
the material to Manila. On the return trip to Pangasinan, respondent would load his vehicles with cargo
which various merchants wanted delivered to differing establishments in Pangasinan. For that service,
respondent charged freight rates which were commonly lower than regular commercial rates.
Sometime in November 1970, petitioner Pedro de Guzman a merchant and authorized dealer of
General Milk Company (Philippines), Inc. in Urdaneta, Pangasinan, contracted with respondent for
the hauling of 750 cartons of Liberty filled milk from a warehouse of General Milk in Makati, Rizal, to
petitioner's establishment in Urdaneta on or before 4 December 1970. Accordingly, on 1 December
1970, respondent loaded in Makati the merchandise on to his trucks: 150 cartons were loaded on a
truck driven by respondent himself, while 600 cartons were placed on board the other truck which
was driven by Manuel Estrada, respondent's driver and employee.
Only 150 boxes of Liberty filled milk were delivered to petitioner. The other 600 boxes never reached
petitioner, since the truck which carried these boxes was hijacked somewhere along the MacArthur
Highway in Paniqui, Tarlac, by armed men who took with them the truck, its driver, his helper and the
cargo.
On 6 January 1971, petitioner commenced action against private respondent in the Court of First
Instance of Pangasinan, demanding payment of P 22,150.00, the claimed value of the lost
merchandise, plus damages and attorney's fees. Petitioner argued that private respondent, being a
common carrier, and having failed to exercise the extraordinary diligence required of him by the law,
should be held liable for the value of the undelivered goods.
In his Answer, private respondent denied that he was a common carrier and argued that he could not
be held responsible for the value of the lost goods, such loss having been due to force majeure.
On 10 December 1975, the trial court rendered a Decision 1 finding private respondent to be a
common carrier and holding him liable for the value of the undelivered goods (P 22,150.00) as well
as for P 4,000.00 as damages and P 2,000.00 as attorney's fees.
On appeal before the Court of Appeals, respondent urged that the trial court had erred in considering
him a common carrier; in finding that he had habitually offered trucking services to the public; in not
exempting him from liability on the ground of force majeure; and in ordering him to pay damages and
attorney's fees.
The Court of Appeals reversed the judgment of the trial court and held that respondent had been
engaged in transporting return loads of freight "as a casual

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occupation — a sideline to his scrap iron business" and not as a common carrier. Petitioner came to
this Court by way of a Petition for Review assigning as errors the following conclusions of the Court
of Appeals:
1. that private respondent was not a common carrier;
2. that the hijacking of respondent's truck was force majeure; and
3. that respondent was not liable for the value of the undelivered cargo. (Rollo, p. 111)
We consider first the issue of whether or not private respondent Ernesto Cendana may, under the
facts earlier set forth, be properly characterized as a common carrier.
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 deliberaom 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)
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
back-hauling was done on a periodic or occasional rather than regular or scheduled manner, and
even though private respondent's 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 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

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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.
We turn then to the liability of private respondent as a common carrier.
Common carriers, "by the nature of their business and for reasons of public policy" 2 are held to a
very high degree of care and diligence ("extraordinary diligence") in the carriage of goods as well as
of passengers. The specific import of extraordinary diligence in the care of goods transported by a
common carrier is, according to Article 1733, "further expressed in Articles 1734,1735 and 1745,
numbers 5, 6 and 7" of the Civil Code.
Article 1734 establishes the general rule that common carriers are responsible for the loss, destruction
or deterioration of the goods which they carry, "unless the same is due to any of the following causes
only:
(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; and
(5) Order or act of competent public authority.
It is important to point out that the above list of causes of loss, destruction or deterioration which
exempt the common carrier for responsibility therefor, is a closed list. Causes falling outside the
foregoing list, even if they appear to constitute a species of force majeure fall within the scope of
Article 1735, which provides as follows:
In all cases other than those mentioned in numbers 1, 2, 3, 4 and 5 of the preceding article, if the
goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to
have acted negligently, unless they prove that they observed extraordinary diligence as required in
Article 1733. (Emphasis supplied)
Applying the above-quoted Articles 1734 and 1735, we note firstly that the specific cause alleged in
the instant case — the hijacking of the carrier's truck — does not fall within any of the five (5)
categories of exempting causes listed in Article 1734. It would follow, therefore, that the hijacking of
the carrier's vehicle must be dealt with under the provisions of Article 1735, in other words, that the
private respondent as common carrier is presumed to have been at fault or to have acted negligently.
This presumption, however, may be overthrown by proof of extraordinary diligence on the part of
private respondent.
Petitioner insists that private respondent had not observed extraordinary diligence in the care of
petitioner's goods. Petitioner argues that in the circumstances of this case, private respondent should
have hired a security guard presumably to ride with the truck carrying the 600 cartons of Liberty filled
milk. We do not believe, however, that in the instant case, the standard of extraordinary diligence
required private respondent to retain a security guard to ride with the truck and to engage brigands in
a firelight at the risk of his own life and the lives of the driver and his helper.
The precise issue that we address here relates to the specific requirements of the duty of
extraordinary diligence in the vigilance over the goods carried in the specific context of hijacking or
armed robbery.

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As noted earlier, the duty of extraordinary diligence in the vigilance over goods is, under Article 1733,
given additional specification not only by Articles 1734 and 1735 but also by Article 1745, numbers 4,
5 and 6, Article 1745 provides in relevant part:
Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to
public policy:
xxx xxx xxx
(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; and
(7) that the common carrier shall 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. (Emphasis supplied)
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."
In the instant case, armed men held up the second truck owned by private respondent which carried
petitioner's cargo. The record shows that an information for robbery in band was filed in the Court of
First Instance of Tarlac, Branch 2, in Criminal Case No. 198 entitled "People of the Philippines v.
Felipe Boncorno, Napoleon Presno, Armando Mesina, Oscar Oria and one John Doe." There, the
accused were charged with willfully and unlawfully taking and carrying away with them the second
truck, driven by Manuel Estrada and loaded with the 600 cartons of Liberty filled milk destined for
delivery at petitioner's store in Urdaneta, Pangasinan. The decision of the trial court shows that the
accused acted with grave, if not irresistible, threat, violence or force. Three (3) of the five (5) hold-
uppers were armed with firearms. The robbers not only took away the truck and its cargo but also
kidnapped the driver and his helper, detaining them for several days and later releasing them in
another province (in Zambales). The hijacked truck was subsequently found by the police in Quezon
City. The Court of First Instance convicted all the accused of robbery, though not of robbery in band.
In these circumstances, we hold that the occurrence of the loss must reasonably be regarded as quite
beyond the control of the common carrier and properly regarded as a fortuitous event. It is necessary
to recall that even common carriers are not made absolute insurers against all risks of travel and of
transport of goods, and are not held liable for acts or events which cannot be foreseen or are
inevitable, provided that they shall have complied with the rigorous standard of extraordinary
diligence.
We, therefore, agree with the result reached by the Court of Appeals that private respondent Cendana
is not liable for the value of the undelivered merchandise which was lost because of an event entirely
beyond private respondent's control.
ACCORDINGLY, the Petition for Review on certiorari is hereby DENIED and the Decision of the Court
of Appeals dated 3 August 1977 is AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Bidin and Cortes, JJ., concur.

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 DE GUZMAN VS CA Case Digest
168 SCRA 612

Facts: Cendena was a junk dealer and was engaged in buying used bottles and scrap materials in
Pangasinan and brought these to Manila for resale. He used two 6-wheeler trucks. On the return trip
to Pangasinan, he would load his vehicles with cargo which various merchants wanted delivered to
Pangasinan. For that service, he charged freight lower than regular rates. General Milk Co. contacted
with him for the hauling of 750 cartons of milk. On the way to Pangasinan, one of the trucks was
hijacked by armed men who took with them the truck and its cargo and kidnapped the driver and his
helper. Only 150 cartons of milk were delivered. The Milk Co. sued to claim the value of the lost
merchandise based on an alleged contract of carriage. Cendena denied that he was a common carrier
and contended that he could not be liable for the loss it was due to force majeure. The trial court ruled
that he was a common carrier. The CA reversed.

Issue: Whether or not Cendena is a common carrier?

Held: Yes, Cendena is properly characterized as a common carrier even though he merely
backhauled goods for other merchants, and even if it was done on a periodic basis rather than on a
regular basis, and even if his principal occupation was not the carriage of goods.

Article 1732 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. It also avoids
making a distinction between a person or enterprise offering transportation services on a regular or
scheduled basis and one offering service on an occasional, episodic or unscheduled basis. Neither
does it make a distinction between a carrier offering its services to the general public and one who
offers services or solicits business only from a narrow segment of population.

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 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 101503 September 15, 1993

PLANTERS PRODUCTS, INC., petitioner,

vs.
COURT OF APPEALS, SORIAMONT STEAMSHIP AGENCIES AND KYOSEI KISEN KABUSHIKI
KAISHA, respondents.

Gonzales, Sinense, Jimenez & Associates for petitioner.

Siguion Reyna, Montecillo & Ongsiako Law Office for private respondents.

BELLOSILLO, J.:

Does a charter-party1 between a shipowner and a charterer transform a common carrier into a private
one as to negate the civil law presumption of negligence in case of loss or damage to its cargo?

Planters Products, Inc. (PPI), purchased from Mitsubishi International Corporation (MITSUBISHI) of
New York, U.S.A., 9,329.7069 metric tons (M/T) of Urea 46% fertilizer which the latter shipped in bulk
on 16 June 1974 aboard the cargo vessel M/V "Sun Plum" owned by private respondent Kyosei Kisen
Kabushiki Kaisha (KKKK) from Kenai, Alaska, U.S.A., to Poro Point, San Fernando, La Union,
Philippines, as evidenced by Bill of Lading No. KP-1 signed by the master of the vessel and issued
on the date of departure.

On 17 May 1974, or prior to its voyage, a time charter-party on the vessel M/V "Sun Plum" pursuant
to the Uniform General Charter was entered into between Mitsubishi as shipper/charterer and KKKK
as shipowner, in Tokyo, Japan. Riders to the aforesaid charter-party starting from par. 16 to 40 were
attached to the pre-printed agreement. Addenda Nos. 1, 2, 3 and 4 to the charter-party were also
subsequently entered into on the 18th, 20th, 21st and 27th of May 1974, respectively.

Before loading the fertilizer aboard the vessel, four (4) of her holds4 were all presumably inspected
by the charterer's representative and found fit to take a load of urea in bulk pursuant to par. 16 of the
charter-party which reads:

16. . . . At loading port, notice of readiness to be accomplished by certificate from National Cargo
Bureau inspector or substitute appointed by charterers for his account certifying the vessel's
readiness to receive cargo spaces. The vessel's hold to be properly swept, cleaned and dried at the
vessel's expense and the vessel to be presented clean for use in bulk to the satisfaction of the
inspector before daytime commences. (emphasis supplied)

After the Urea fertilizer was loaded in bulk by stevedores hired by and under the supervision of the
shipper, the steel hatches were closed with heavy iron lids, covered with three (3) layers of tarpaulin,
then tied with steel bonds. The hatches remained closed and tightly sealed throughout the entire
voyage.

Upon arrival of the vessel at her port of call on 3 July 1974, the steel pontoon hatches were opened
with the use of the vessel's boom. Petitioner unloaded the cargo from the holds into its steelbodied
dump trucks which were parked alongside the berth, using metal scoops attached to the ship,
pursuant to the terms and conditions of the charter-partly (which provided for an F.I.O.S. clause). The
hatches remained open throughout the duration of the discharge.

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Each time a dump truck was filled up, its load of Urea was covered with tarpaulin before it was
transported to the consignee's warehouse located some fifty (50) meters from the wharf. Midway to
the warehouse, the trucks were made to pass through a weighing scale where they were individually
weighed for the purpose of ascertaining the net weight of the cargo. The port area was windy, certain
portions of the route to the warehouse were sandy and the weather was variable, raining occasionally
while the discharge was in progress. The petitioner's warehouse was made of corrugated galvanized
iron (GI) sheets, with an opening at the front where the dump trucks entered and unloaded the fertilizer
on the warehouse floor. Tarpaulins and GI sheets were placed in-between and alongside the trucks
to contain spillages of the ferilizer.

It took eleven (11) days for PPI to unload the cargo, from 5 July to 18 July 1974 (except July 12th,
14th and 18th). A private marine and cargo surveyor, Cargo Superintendents Company Inc. (CSCI),
was hired by PPI to determine the "outturn" of the cargo shipped, by taking draft readings of the vessel
prior to and after discharge. The survey report submitted by CSCI to the consignee (PPI) dated 19
July 1974 revealed a shortage in the cargo of 106.726 M/T and that a portion of the Urea fertilizer
approximating 18 M/T was contaminated with dirt. The same results were contained in a Certificate
of Shortage/Damaged Cargo dated 18 July 1974 prepared by PPI which showed that the cargo
delivered was indeed short of 94.839 M/T and about 23 M/T were rendered unfit for commerce, having
been polluted with sand, rust and
dirt.

Consequently, PPI sent a claim letter dated 18 December 1974 to Soriamont Steamship Agencies
(SSA), the resident agent of the carrier, KKKK, for P245,969.31 representing the cost of the alleged
shortage in the goods shipped and the diminution in value of that portion said to have been
contaminated with dirt.

Respondent SSA explained that they were not able to respond to the consignee's claim for payment
because, according to them, what they received was just a request for shortlanded certificate and not
a formal claim, and that this "request" was denied by them because they "had nothing to do with the
discharge of the shipment." Hence, on 18 July 1975, PPI filed an action for damages with the Court
of First Instance of Manila. The defendant carrier argued that the strict public policy governing
common carriers does not apply to them because they have become private carriers by reason of the
provisions of the charter-party. The court a quo however sustained the claim of the plaintiff against
the defendant carrier for the value of the goods lost or damaged when it ruled thus:

. . . Prescinding from the provision of the law that a common carrier is presumed negligent in case of
loss or damage of the goods it contracts to transport, all that a shipper has to do in a suit to recover
for loss or damage is to show receipt by the carrier of the goods and to delivery by it of less than what
it received. After that, the burden of proving that the loss or damage was due to any of the causes
which exempt him from liability is shipted to the carrier, common or private he may be. Even if the
provisions of the charter-party aforequoted are deemed valid, and the defendants considered private
carriers, it was still incumbent upon them to prove that the shortage or contamination sustained by
the cargo is attributable to the fault or negligence on the part of the shipper or consignee in the loading,
stowing, trimming and discharge of the cargo. This they failed to do. By this omission, coupled with
their failure to destroy the presumption of negligence against them, the defendants are liable
(emphasis supplied).

On appeal, respondent Court of Appeals reversed the lower court and absolved the carrier from
liability for the value of the cargo that was lost or damaged. 16 Relying on the 1968 case of Home
Insurance Co. v. American Steamship Agencies, Inc.,17 the appellate court ruled that the cargo vessel
M/V "Sun Plum" owned by private respondent KKKK was a private carrier and not a common carrier
by reason of the time charterer-party. Accordingly, the Civil Code provisions on common carriers
which set forth a presumption of negligence do not find application in the case at bar. Thus —

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. . . In the absence of such presumption, it was incumbent upon the plaintiff-appellee to adduce
sufficient evidence to prove the negligence of the defendant carrier as alleged in its complaint. It is an
old and well settled rule that if the plaintiff, upon whom rests the burden of proving his cause of action,
fails to show in a satisfactory manner the facts upon which he bases his claim, the defendant is under
no obligation to prove his exception or defense (Moran, Commentaries on the Rules of Court, Volume
6, p. 2, citing Belen v. Belen, 13 Phil. 202).

But, the record shows that the plaintiff-appellee dismally failed to prove the basis of its cause of action,
i.e. the alleged negligence of defendant carrier. It appears that the plaintiff was under the impression
that it did not have to establish defendant's negligence. Be that as it may, contrary to the trial court's
finding, the record of the instant case discloses ample evidence showing that defendant carrier was
not negligent in performing its obligation . . . (emphasis supplied).

Petitioner PPI appeals to us by way of a petition for review assailing the decision of the Court of
Appeals. Petitioner theorizes that the Home Insurance case has no bearing on the present
controversy because the issue raised therein is the validity of a stipulation in the charter-party
delimiting the liability of the shipowner for loss or damage to goods cause by want of due deligence
on its part or that of its manager to make the vessel seaworthy in all respects, and not whether the
presumption of negligence provided under the Civil Code applies only to common carriers and not to
private carriers. Petitioner further argues that since the possession and control of the vessel remain
with the shipowner, absent any stipulation to the contrary, such shipowner should made liable for the
negligence of the captain and crew. In fine, PPI faults the appellate court in not applying the
presumption of negligence against respondent carrier, and instead shifting the onus probandi on the
shipper to show want of due deligence on the part of the carrier, when he was not even at hand to
witness what transpired during the entire voyage.

As earlier stated, the primordial issue here is whether a common carrier becomes a private carrier by
reason of a charter-party; in the negative, whether the shipowner in the instant case was able to prove
that he had exercised that degree of diligence required of him under the law.

It is said that etymology is the basis of reliable judicial decisions in commercial cases. This being so,
we find it fitting to first define important terms which are relevant to our discussion.

A "charter-party" is defined as a contract by which an entire ship, or some principal part thereof, is let
by the owner to another person for a specified time or use; a contract of affreightment by which the
owner of a ship or other vessel lets the whole or a part of her to a merchant or other person for the
conveyance of goods, on a particular voyage, in consideration of the payment of freight; Charter
parties are of two types: (a) contract of affreightment which involves the use of shipping space on
vessels leased by the owner in part or as a whole, to carry goods for others; and, (b) charter by demise
or bareboat charter, by the terms of which the whole vessel is let to the charterer with a transfer to
him of its entire command and possession and consequent control over its navigation, including the
master and the crew, who are his servants. Contract of affreightment may either be time charter,
wherein the vessel is leased to the charterer for a fixed period of time, or voyage charter, wherein the
ship is leased for a single voyage. In both cases, the charter-party provides for the hire of vessel only,
either for a determinate period of time or for a single or consecutive voyage, the shipowner to supply
the ship's stores, pay for the wages of the master and the crew, and defray the expenses for the
maintenance of the ship.

Upon the other hand, the term "common or public carrier" is defined in Art. 1732 of the Civil Code.
The definition extends to carriers either by land, air or water which hold themselves out as ready to
engage in carrying goods or transporting passengers or both for compensation as a public
employment and not as a casual occupation. The distinction between a "common or public carrier"
and a "private or special carrier" lies in the character of the business, such that if the undertaking is a
single transaction, not a part of the general business or occupation, although involving the carriage
of goods for a fee, the person or corporation offering such service is a private carrier.

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Article 1733 of the New Civil Code mandates that common carriers, by reason of the nature of their
business, should observe extraordinary diligence in the vigilance over the goods they carry. In the
case of private carriers, however, the exercise of ordinary diligence in the carriage of goods will
suffice. Moreover, in the case of loss, destruction or deterioration of the goods, common carriers are
presumed to have been at fault or to have acted negligently, and the burden of proving otherwise
rests on them. On the contrary, no such presumption applies to private carriers, for whosoever alleges
damage to or deterioration of the goods carried has the onus of proving that the cause was the
negligence of the carrier.

It is not disputed that respondent carrier, in the ordinary course of business, operates as a common
carrier, transporting goods indiscriminately for all persons. When petitioner chartered the vessel M/V
"Sun Plum", the ship captain, its officers and compliment were under the employ of the shipowner
and therefore continued to be under its direct supervision and control. Hardly then can we charge the
charterer, a stranger to the crew and to the ship, with the duty of caring for his cargo when the
charterer did not have any control of the means in doing so. This is evident in the present case
considering that the steering of the ship, the manning of the decks, the determination of the course of
the voyage and other technical incidents of maritime navigation were all consigned to the officers and
crew who were screened, chosen and hired by the shipowner.

It is therefore imperative that a public carrier shall remain as such, notwithstanding the charter of the
whole or portion of a vessel by one or more persons, provided the charter is limited to the ship only,
as in the case of a time-charter or voyage-charter. It is only when the charter includes both the vessel
and its crew, as in a bareboat or demise that a common carrier becomes private, at least insofar as
the particular voyage covering the charter-party is concerned. Indubitably, a shipowner in a time or
voyage charter retains possession and control of the ship, although her holds may, for the moment,
be the property of the charterer.

Respondent carrier's heavy reliance on the case of Home Insurance Co. v. American Steamship
Agencies, supra, is misplaced for the reason that the meat of the controversy therein was the validity
of a stipulation in the charter-party exempting the shipowners from liability for loss due to the
negligence of its agent, and not the effects of a special charter on common carriers. At any rate, the
rule in the United States that a ship chartered by a single shipper to carry special cargo is not a
common carrier, does not find application in our jurisdiction, for we have observed that the growing
concern for safety in the transportation of passengers and /or carriage of goods by sea requires a
more exacting interpretation of admiralty laws, more particularly, the rules governing common carriers.

We quote with approval the observations of Raoul Colinvaux, the learned barrister-at-law —

As a matter of principle, it is difficult to find a valid distinction between cases in which a ship is used
to convey the goods of one and of several persons. Where the ship herself is let to a charterer, so
that he takes over the charge and control of her, the case is different; the shipowner is not then a
carrier. But where her services only are let, the same grounds for imposing a strict responsibility exist,
whether he is employed by one or many. The master and the crew are in each case his servants, the
freighter in each case is usually without any representative on board the ship; the same opportunities
for fraud or collusion occur; and the same difficulty in discovering the truth as to what has taken place
arises . . .

In an action for recovery of damages against a common carrier on the goods shipped, the shipper or
consignee should first prove the fact of shipment and its consequent loss or damage while the same
was in the possession, actual or constructive, of the carrier. Thereafter, the burden of proof shifts to
respondent to prove that he has exercised extraordinary diligence required by law or that the loss,
damage or deterioration of the cargo was due to fortuitous event, or some other circumstances
inconsistent with its liability.

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To our mind, respondent carrier has sufficiently overcome, by clear and convincing proof, the prima
facie presumption of negligence.

The master of the carrying vessel, Captain Lee Tae Bo, in his deposition taken on 19 April 1977 before
the Philippine Consul and Legal Attache in the Philippine Embassy in Tokyo, Japan, testified that
before the fertilizer was loaded, the four (4) hatches of the vessel were cleaned, dried and fumigated.
After completing the loading of the cargo in bulk in the ship's holds, the steel pontoon hatches were
closed and sealed with iron lids, then covered with three (3) layers of serviceable tarpaulins which
were tied with steel bonds. The hatches remained close and tightly sealed while the ship was in transit
as the weight of the steel covers made it impossible for a person to open without the use of the ship's
boom.

It was also shown during the trial that the hull of the vessel was in good condition, foreclosing the
possibility of spillage of the cargo into the sea or seepage of water inside the hull of the vessel. When
M/V "Sun Plum" docked at its berthing place, representatives of the consignee boarded, and in the
presence of a representative of the shipowner, the foreman, the stevedores, and a cargo surveyor
representing CSCI, opened the hatches and inspected the condition of the hull of the vessel. The
stevedores unloaded the cargo under the watchful eyes of the shipmates who were overseeing the
whole operation on rotation basis.

Verily, the presumption of negligence on the part of the respondent carrier has been efficaciously
overcome by the showing of extraordinary zeal and assiduity exercised by the carrier in the care of
the cargo. This was confirmed by respondent appellate court thus —

. . . Be that as it may, contrary to the trial court's finding, the record of the instant case discloses ample
evidence showing that defendant carrier was not negligent in performing its obligations. Particularly,
the following testimonies of plaintiff-appellee's own witnesses clearly show absence of negligence by
the defendant carrier; that the hull of the vessel at the time of the discharge of the cargo was sealed
and nobody could open the same except in the presence of the owner of the cargo and the
representatives of the vessel (TSN, 20 July 1977, p. 14); that the cover of the hatches was made of
steel and it was overlaid with tarpaulins, three layers of tarpaulins and therefore their contents were
protected from the weather (TSN, 5 April 1978, p. 24); and, that to open these hatches, the seals
would have to be broken, all the seals were found to be intact (TSN, 20 July 1977, pp. 15-16)
(emphasis supplied).

The period during which private respondent was to observe the degree of diligence required of it as
a public carrier began from the time the cargo was unconditionally placed in its charge after the
vessel's holds were duly inspected and passed scrutiny by the shipper, up to and until the vessel
reached its destination and its hull was reexamined by the consignee, but prior to unloading. This is
clear from the limitation clause agreed upon by the parties in the Addendum to the standard
"GENCON" time charter-party which provided for an F.I.O.S., meaning, that the loading, stowing,
trimming and discharge of the cargo was to be done by the charterer, free from all risk and expense
to the carrier. Moreover, a shipowner is liable for damage to the cargo resulting from improper stowage
only when the stowing is done by stevedores employed by him, and therefore under his control and
supervision, not when the same is done by the consignee or stevedores under the employ of the
latter.

Article 1734 of the New Civil Code provides that common carriers are not responsible for the loss,
destruction or deterioration of the goods if caused by the charterer of the goods or defects in the
packaging or in the containers. The Code of Commerce also provides that all losses and deterioration
which the goods may suffer during the transportation by reason of fortuitous event, force majeure, or
the inherent defect of the goods, shall be for the account and risk of the shipper, and that proof of
these accidents is incumbent upon the carrier. The carrier, nonetheless, shall be liable for the loss
and damage resulting from the preceding causes if it is proved, as against him, that they arose through

10 | P a g e
his negligence or by reason of his having failed to take the precautions which usage has established
among careful persons.

Respondent carrier presented a witness who testified on the characteristics of the fertilizer shipped
and the expected risks of bulk shipping. Mr. Estanislao Chupungco, a chemical engineer working with
Atlas Fertilizer, described Urea as a chemical compound consisting mostly of ammonia and carbon
monoxide compounds which are used as fertilizer. Urea also contains 46% nitrogen and is highly
soluble in water. However, during storage, nitrogen and ammonia do not normally evaporate even on
a long voyage, provided that the temperature inside the hull does not exceed eighty (80) degrees
centigrade. Mr. Chupungco further added that in unloading fertilizer in bulk with the use of a clamped
shell, losses due to spillage during such operation amounting to one percent (1%) against the bill of
lading is deemed "normal" or "tolerable." The primary cause of these spillages is the clamped shell
which does not seal very tightly. Also, the wind tends to blow away some of the materials during the
unloading process.

The dissipation of quantities of fertilizer, or its daterioration in value, is caused either by an extremely
high temperature in its place of storage, or when it comes in contact with water. When Urea is
drenched in water, either fresh or saline, some of its particles dissolve. But the salvaged portion which
is in liquid form still remains potent and usable although no longer saleable in its original market value.

The probability of the cargo being damaged or getting mixed or contaminated with foreign particles
was made greater by the fact that the fertilizer was transported in "bulk," thereby exposing it to the
inimical effects of the elements and the grimy condition of the various pieces of equipment used in
transporting and hauling it.

The evidence of respondent carrier also showed that it was highly improbable for sea water to seep
into the vessel's holds during the voyage since the hull of the vessel was in good condition and her
hatches were tightly closed and firmly sealed, making the M/V "Sun Plum" in all respects seaworthy
to carry the cargo she was chartered for. If there was loss or contamination of the cargo, it was more
likely to have occurred while the same was being transported from the ship to the dump trucks and
finally to the consignee's warehouse. This may be gleaned from the testimony of the marine and cargo
surveyor of CSCI who supervised the unloading. He explained that the 18 M/T of alleged "bar order
cargo" as contained in their report to PPI was just an approximation or estimate made by them after
the fertilizer was discharged from the vessel and segregated from the rest of the cargo.

The Court notes that it was in the month of July when the vessel arrived port and unloaded her cargo.
It rained from time to time at the harbor area while the cargo was being discharged according to the
supply officer of PPI, who also testified that it was windy at the waterfront and along the shoreline
where the dump trucks passed enroute to the consignee's warehouse.

Indeed, we agree with respondent carrier that bulk shipment of highly soluble goods like fertilizer
carries with it the risk of loss or damage. More so, with a variable weather condition prevalent during
its unloading, as was the case at bar. This is a risk the shipper or the owner of the goods has to face.
Clearly, respondent carrier has sufficiently proved the inherent character of the goods which makes
it highly vulnerable to deterioration; as well as the inadequacy of its packaging which further
contributed to the loss. On the other hand, no proof was adduced by the petitioner showing that the
carrier was remise in the exercise of due diligence in order to minimize the loss or damage to the
goods it carried.

WHEREFORE, the petition is DISMISSED. The assailed decision of the Court of Appeals, which
reversed the trial court, is AFFIRMED. Consequently, Civil Case No. 98623 of the then Court of the
First Instance, now Regional Trial Court, of Manila should be, as it is hereby DISMISSED.

Costs against petitioner.

SO ORDERED.

11 | P a g e
 Planters Products vs. CA Case Digest
G.R. No. 101503 September 15, 1993

Facts: Planters Product Inc. purchased from Mitsubishi international corporation metric tons of Urea
fertilizer, which the latter shipped aboard the cargo vessel M/V Sun Plum owned by private respondent
Kyosei Kisen Kabushiki Kaisha. Prior to its voyage, a time charter-party on the vessel respondent
entered into between Mitsubishi as shipper/charterer and KKKK as ship owner, in Tokyo, Japan.

Before loading the fertilizer aboard the vessel, (4) of her holds were presumably inspected by the
charterer’s representative and found fit to take a load of urea in bulk. After the Urea fertilizer was
loaded in bulk by stevedores hired by and under the supervision of the shipper, the steel hatches
were closed with heavy iron lids. Upon arrival of vessel at port, the petitioner unloaded the cargo
pursuant to the terms and conditions of the charter-party. The hatches remained open throughout the
duration of the discharge.

Upon arrival at petitioner’s warehouse a survey conducted over the cargo revealed a shortage and
the most of the fertilizer was contaminated with dirt. As such, Planters filed an action for damages.
The defendant argued that the public policy governing common carriers do not apply to them because
they have become private carriers by reason of the provisions of the charter-party.

Issue: Whether or not the charter-party contract between the ship owner and the charterer transforms
a common carrier into a private carrier?

Held: A charter party may either her be time charter wherein the vessel is leased to the charterer,
wherein the ship is leased to the charterer for a fixed period of time or voyage charter, wherein the
ship is leased for a single voyage. In both cases, the charter party provides for the hire of the vessel
only, either for a determinate time or for a single or consecutive voyage.

It is therefor imperative that such common carrier shall remain as such, notwithstanding the charter
of the whole or part of the vessel by one or more persons, provided the charter is limited to the ship
only, as in the case of a time-charter or voyage-charter. It is only when the charter includes both ship
and its crew as in bareboat or demise that it becomes a private carrier. Undoubtedly, a shipowner in
a time or voyage charter retains in possession and control of the ship, although her holds may be the
property of the charterer.

12 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-8095 March 31, 1915

F.C. FISHER, plaintiff,

vs.
YANGCO STEAMSHIP COMPANY, J.S. STANLEY, as Acting Collector of Customs of the Philippine
Islands, IGNACIO VILLAMOR, as Attorney-General of the Philippine Islands, and W.H. BISHOP, as
prosecuting attorney of the city of Manila, respondents.

Haussermann, Cohn and Fisher for plaintiff.

Office of the Solicitor-General Harvey for respondents.

CARSON, J.:

The real question involved in these proceedings is whether the refusal of the owners and officers of
a steam vessel, duly licensed to engage in the coastwise trade of the Philippine Islands and engaged
in that trade as a common carrier, to accept for carriage "dynamite, powder or other explosives" from
any and all shippers who may offer such explosives for carriage can be held to be a lawful act without
regard to any question as to the conditions under which such explosives are offered to carriage, or as
to the suitableness of the vessel for the transportation of such explosives, or as to the possibility that
the refusal to accept such articles of commerce in a particular case may have the effect of subjecting
any person or locality or the traffic in such explosives to an undue, unreasonable or unnecessary
prejudice or discrimination.

Summarized briefly, the complaint alleges that plaintiff is a stockholder in the Yangco Steamship
Company, the owner of a large number of steam vessels, duly licensed to engage in the coastwise
trade of the Philippine Islands; that on or about June 10, 1912, the directors of the company adopted
a resolution which was thereafter ratified and affirmed by the shareholders of the company, "expressly
declaring and providing that the classes of merchandise to be carried by the company in its business
as a common carrier do not include dynamite, powder or other explosives, and expressly prohibiting
the officers, agents and servants of the company from offering to carry, accepting for carriage said
dynamite, powder or other explosives;" that thereafter the respondent Acting Collector of Customs
demanded and required of the company the acceptance and carriage of such explosives; that he has
refused and suspended the issuance of the necessary clearance documents of the vessels of the
company unless and until the company consents to accept such explosives for carriage; that plaintiff
is advised and believes that should the company decline to accept such explosives for carriage, the
respondent Attorney-General of the Philippine Islands and the respondent prosecuting attorney of the
city of Manila intend to institute proceedings under the penal provisions of sections 4, 5, and 6 of Act
No. 98 of the Philippine Commission against the company, its managers, agents and servants, to
enforce the requirements of the Acting Collector of Customs as to the acceptance of such explosives
for carriage; that notwithstanding the demands of the plaintiff stockholder, the manager, agents and
servants of the company decline and refuse to cease the carriage of such explosives, on the ground
that by reason of the severity of the penalties with which they are threatened upon failure to carry
such explosives, they cannot subject themselves to "the ruinous consequences which would
inevitably result" from failure on their part to obey the demands and requirements of the Acting
Collector of Customs as to the acceptance for carriage of explosives; that plaintiff believes that the
Acting Collector of Customs erroneously construes the provisions of Act No. 98 in holding that they
require the company to accept such explosives for carriage notwithstanding the above mentioned
resolution of the directors and stockholders of the company, and that if the Act does in fact require
the company to carry such explosives it is to that extent unconstitutional and void; that notwithstanding

13 | P a g e
this belief of complainant as to the true meaning of the Act, the questions involved cannot be raised
by the refusal of the company or its agents to comply with the demands of the Acting Collector of
Customs, without the risk of irreparable loss and damage resulting from his refusal to facilitate
the documentation of the company's vessels, and without assuming the company to test the questions
involved by refusing to accept such explosives for carriage.

The prayer of the complaint is as follows:

Wherefore your petitioner prays to this honorable court as follows:

First. That to the due hearing of the above entitled action be issued a writ of prohibition perpetually
restraining the respondent Yangco Steamship Company, its appraisers, agents, servants or other
representatives from accepting to carry and from carrying, in steamers of said company dynamite,
powder or other explosive substance, in accordance with the resolution of the board of directors and
of the shareholders of said company.

Second. That a writ of prohibition be issued perpetually enjoining the respondent J.S. Stanley as
Acting Collector of Customs of the Philippine Islands, his successors, deputies, servants or other
representatives, from obligating the said Yangco Steamship Company, by any means whatever, to
carry dynamite, powder or other explosive substance.

Third. That a writ of prohibition be issued perpetually enjoining the respondent Ignacio Villamor as
Attorney-General of the Philippine Islands, and W.H. Bishop as prosecuting attorney of the city of
Manila, their deputies representatives or employees, from accusing the said Yangco Steamship
Company, its officers, agents or servants, of the violation of Act No. 98 by reason of the failure or
omission of the said company to accept for carriage out to carry dynamite powder or other explosive.

Fourth. That the petitioner be granted such other remedy as may be meet and proper.

To this complaint the respondents demurred, and we are of opinion that the demurrer must be
sustained, on the ground that the complaint does not set forth facts sufficient to constitute a cause of
action.

It will readily be seen that plaintiff seeks in these proceedings to enjoin the steamship company from
accepting for carriage on any of its vessels, dynamite, powder or other explosives, under any
conditions whatsoever; to prohibit the Collector of Customs and the prosecuting officers of the
government from all attempts to compel the company to accept such explosives for carriage on any
of its vessels under any conditions whatsoever; and to prohibit these officials from any attempt to
invoke the penal provisions of Act No. 98, in any case of a refusal by the company or its officers so
to do; and this without regard to the conditions as to safety and so forth under which such explosives
are offered for carriage, and without regard also to any question as to the suitableness for the
transportation of such explosives of the particular vessel upon which the shipper offers them for
carriage; and further without regard to any question as to whether such conduct on the part of the
steamship company and its officers involves in any instance an undue, unnecessary or unreasonable
discrimination to the prejudice of any person, locality or particular kind of traffic.

There are no allegations in the complaint that for some special and sufficient reasons all or indeed
any of the company's vessels are unsuitable for the business of transporting explosives; or that
shippers have declined or will in future decline to comply with such reasonable regulations and to take
such reasonable precautions as may be necessary and proper to secure the safety of the vessels of
the company in transporting such explosives. Indeed the contention of petitioner is that a common
carrier in the Philippine Islands may decline to accept for carriage any shipment of merchandise of a
class which it expressly or impliedly declines to accept from all shippers alike, because as he contends
"the duty of a common carrier to carry for all who offer arises from the public profession he has made,
and limited by it."

14 | P a g e
In support of this contention counsel cites for a number of English and American authorities,
discussing and applying the doctrine of the common law with reference to common carriers. But it is
unnecessary now to decide whether, in the absence of statute, the principles on which the American
and English cases were decided would be applicable in this jurisdiction. The duties and liabilities of
common carriers in this jurisdiction are defined and fully set forth in Act No. 98 of the Philippine
Commission, and until and unless that statute be declared invalid or unconstitutional, we are bound
by its provisions.

Sections 2, 3 and 4 of the Act are as follows:

SEC. 2. It shall be unlawful for any common carrier engaged in the transportation of passengers or
property as above set forth to make or give any unnecessary or unreasonable preference or
advantage to any particular person, company, firm, corporation or locality, or any particular kind of
traffic in any respect whatsoever, or to subject any particular person, company, firm, corporation or
locality, or any particular kind of traffic, to undue or unreasonable prejudice or discrimination
whatsoever, and such unjust preference or discrimination is also hereby prohibited and declared to
be unlawful.

SEC. 3. No common carrier engaged in the carriage of passengers or property as aforesaid shall,
under any pretense whatsoever, fail or refuse to receive for carriage, and as promptly as it is able to
do so without discrimination, to carry any person or property offering for carriage, and in the order in
which such persons or property are offered for carriage, nor shall any such common carrier enter into
any arrangement, contract or agreement with any other person or corporation whereby the latter is
given an exclusive or preferential or monopolize the carriage any class or kind of property to the
exclusion or partial exclusion of any other person or persons, and the entering into any such
arrangement, contract or agreement, under any form or pretense whatsoever, is hereby prohibited
and declared to be unlawful.

SEC. 4. Any willful violation of the provisions of this Act by any common carrier engaged in the
transportation of passengers or property as hereinbefore set forth is hereby declared to be punishable
by a fine not exceeding five thousand dollars money of the United States, or by imprisonment not
exceeding two years, or both, within the discretion of the court.

The validity of this Act has been questioned on various grounds, and it is vigorously contended that
in so far as it imposes any obligation on a common carrier to accept for carriage merchandise of a
class which he makes no public profession to carry, or which he has expressly or impliedly announced
his intention to decline to accept for carriage from all shippers alike, it is ultra vires, unconstitutional
and void.

We may dismiss without extended discussion any argument or contention as to the invalidity of the
statute based on alleged absurdities inherent in its provisions or on alleged unreasonable or
impossible requirements which may be read into it by a strained construction of its terms.

We agree with counsel for petitioner that the provision of the Act which prescribes that, "No common
carrier ... shall, under any pretense whatsoever, fail or refuse to receive for carriage ... to carry any
person or property offering for carriage," is not to be construed in its literal sense and without regard
to the context, so as to impose an imperative duty on all common carriers to accept for carriage, and
to carry all and any kind of freight which may be offered for carriage without regard to the facilities
which they may have at their disposal. The legislator could not have intended and did not intend to
prescribe that a common carrier running passenger automobiles for hire must transport coal in his
machines; nor that the owner of a tank steamer, expressly constructed in small watertight
compartments for the carriage of crude oil must accept common carrier must accept and carry
contraband articles, such as opium, morphine, cocaine, or the like, the mere possession of which is
declared to be a criminal offense; nor that common carriers must accept eggs offered for

15 | P a g e
transportation in paper parcels or any merchandise whatever do defectively packed as to entail upon
the company unreasonable and unnecessary care or risks.

Read in connection with its context this, as well as all the other mandatory and prohibitory provisions
of the statute, was clearly intended merely to forbid failures or refusals to receive persons or property
for carriage involving any "unnecessary or unreasonable preference or advantage to any particular
person, company, firm, corporation, or locality, or any particular kind of traffic in any respect
whatsoever," or which would "subject any particular person, company, firm, corporation or locality, or
any particular kind of traffic to any undue or unreasonable prejudice or discrimination whatsoever."

The question, then, of construing and applying the statute, in cases of alleged violations of its
provisions, always involves a consideration as to whether the acts complained of had the effect of
making or giving an "unreasonable or unnecessary preference or advantage" to any person, locality
or particular kind of traffic, or of subjecting any person, locality, or particular kind of traffic to any undue
or unreasonable prejudice or discrimination. It is very clear therefore that the language of the statute
itself refutes any contention as to its invalidity based on the alleged unreasonableness of its
mandatory or prohibitory provisions.

So also we may dismiss without much discussion the contentions as to the invalidity of the statute,
which are based on the alleged excessive severity of the penalties prescribed for violation of its
provisions. Upon general principles it is peculiarly and exclusively within the province of the legislator
to prescribe the pains and penalties which may be imposed upon persons convicted of violations of
the laws in force within his territorial jurisdiction. With the exercise of his discretion in this regard where
it is alleged that excessive fines or cruel and unusual punishments have been prescribed, and even
in such cases the courts will not presume to interfere in the absence of the clearest and most
convincing argument and proof in support of such contentions. (Weems vs. United States, 217 U.S.,
349; U.S. vs. Pico, 18 Phil. Rep., 386.) We need hardly add that there is no ground upon which to rest
a contention that the penalties prescribed in the statute under consideration are either excessive or
cruel and unusual, in the sense in which these terms are used in the organic legislation in force in the
Philippine Islands.

But it is contended that on account of the penalties prescribed the statute should be held invalid upon
the principles announced in Ex parte Young (209 U.S., 123, 147, 148); Cotting vs. Goddard (183 U.S.,
79, 102); Mercantile Trust Co. vs. Texas Co. (51 Fed., 529); Louisville Ry. vs. McCord (103 Fed.,
216); Cons. Gas Co. vs. Mayer (416 Fed., 150). We are satisfied however that the reasoning of those
cases is not applicable to the statute under consideration. The principles announced in those
decisions are fairly indicated in the following citations found in petitioner's brief:

But when the legislature, in an effort to prevent any inquiry of the validity of a particular statute, so
burdens any challenge thereof in the courts that the party affected is necessarily constrained to submit
rather than take the chances of the penalties imposed, then it becomes a serious question whether
the party is not deprived of the equal protection of the laws. (Cotting vs. Goddard, 183 U. S., 79, 102.)

It may therefore be said that when the penalties for disobedience are by fines so enormous and
imprisonment so severe as to intimidate the company and its officers from resorting to the courts to
test the validity of the legislation, the result is the same as if the law in terms prohibited the company
from seeking judicial construction of laws which deeply affect its rights.

It is urged that there is no principle upon which to base the claim that a person is entitled to disobey
a statute at least once, for the purpose of testing its validity, without subjecting himself to the penalties
for disobedience provided by the statute in case it is valid. This is not an accurate statement of the
case. Ordinarily a law creating offenses in the nature of misdemeanors or felonies relates to a subject
over which the jurisdiction of the legislature is complete in any event. In the case, however, of the
establishment of certain rates without any hearing, the validity of such rates necessarily depends
upon whether they are high enough to permit at least some return upon the investment (how much it

16 | P a g e
is not now necessary to state), and an inquiry as to that fact is a proper subject of judicial investigation.
If it turns out that the rates are too low for that purpose, then they are illegal. Now, to impose upon a
party interested the burden of obtaining a judicial decision of such a question (no prior hearing having
been given) only upon the condition that, if unsuccessful, he must suffer imprisonment and pay fines,
as provided in these acts, is, in effect, to close up all approaches to the courts, and thus prevent any
hearing upon the question whether the rates as provided by the acts are not too low, and therefore
invalid. The distinction is obvious between a case where the validity of the act depends upon the
existence of a fact which can be determined only after investigation of a very complicated and
technical character, and the ordinary case of a statute upon a subject requiring no such investigation,
and over which the jurisdiction of the legislature is complete in any event.

We hold, therefore, that the provisions of the acts relating to the enforcement of the rates, either for
freight or passengers, by imposing such enormous fines and possible imprisonment as a result of an
unsuccessful effort to test the validity of the laws themselves, are unconstitutional on their face,
without regard to the question of the insufficiency of those rates. (Ex parte Young, 209 U.S., 123 147,
148.)

An examination of the general provisions of our statute, of the circumstances under which it was
enacted, the mischief which it sought to remedy and of the nature of the penalties prescribed for
violations of its terms convinces us that, unlike the statutes under consideration in the above cited
cases, its enactment involved no attempt to prevent common carriers "from resorting to the courts to
test the validity of the legislation;" no "effort to prevent any inquiry" as to its validity. It imposes no
arbitrary obligation upon the company to do or to refrain from doing anything. It makes no attempt to
compel such carriers to do business at a fixed or arbitrarily designated rate, at the risk of separate
criminal prosecutions for every demand of a higher or a different rate. Its penalties can be imposed
only upon proof of "unreasonable," "unnecessary" and "unjust" discriminations, and range from a
maximum which is certainly not excessive for willful, deliberate and contumacious violations of its
provisions by a great and powerful corporation, to a minimum which may be a merely nominal fine.
With so wide a range of discretion for a contention on the part of any common carrier that it or its
officers are "intimidated from resorting to the courts to test the validity" of the provisions of the statute
prohibiting such "unreasonable," "unnecessary" and "unjust" discriminations, or to test in any
particular case whether a given course of conduct does in fact involve such discrimination. We will
presume, for the purpose of declaring the statute invalid, that there is so real a danger that the Courts
of First Instance and this court on appeal will abuse the discretion thus conferred upon us, as to
intimidate any common carrier, acting in good faith, from resorting to the courts to test the validity of
the statute. Legislative enactments, penalizing unreasonable discriminations, unreasonable restraints
of trade, and unreasonable conduct in various forms of human activity are so familiar and have been
so frequently sustained in the courts, as to render extended discussion unnecessary to refute any
contention as to the invalidity of the statute under consideration, merely it imposes upon the carrier
the obligation of adopting one of various courses of conduct open to it, at the risk of incurring a
prescribed penalty in the event that the course of conduct actually adopted by it should be held to
have involved an unreasonable, unnecessary or unjust discrimination. Applying the test announced
in Ex parte Young, supra, it will be seen that the validity of the Act does not depend upon "the
existence of a fact which can be determined only after investigation of a very complicated and
technical character," and that "the jurisdiction of the legislature" over the subject with which the statute
deals "is complete in any event." There can be no real question as to the plenary power of the
legislature to prohibit and to penalize the making of undue, unreasonable and unjust discriminations
by common carriers to the prejudice of any person, locality or particular kind of traffic. (See Munn vs.
Illinois, 94 U.S., 113, and other cases hereinafter cited in support of this proposition.)

Counsel for petitioner contends also that the statute, if construed so as to deny the right of the
steamship company to elect at will whether or not it will engage in a particular business, such as that
of carrying explosives, is unconstitutional "because it is a confiscation of property, a taking of the
carrier's property without due process of law," and because it deprives him of his liberty by compelling
him to engage in business against his will. The argument continues as follows:

17 | P a g e
To require of a carrier, as a condition to his continuing in said business, that he must carry anything
and every thing is to render useless the facilities he may have for the carriage of certain lines of
freight. It would be almost as complete a confiscation of such facilities as if the same were destroyed.
Their value as a means of livelihood would be utterly taken away. The law is a prohibition to him to
continue in business; the alternative is to get out or to go into some other business — the same
alternative as was offered in the case of the Chicago & N.W. Ry. vs. Dey (35 Fed. Rep., 866, 880),
and which was there commented on as follows:

"Whatever of force there may be in such arguments, as applied to mere personal property capable of
removal and use elsewhere, or in other business, it is wholly without force as against railroad
corporations, so large a proportion of whose investment is in the soil and fixtures appertaining thereto,
which cannot be removed. For a government, whether that government be a single sovereign or one
of the majority, to say to an individual who has invested his means in so laudable an enterprise as the
construction of a railroad, one which tends so much to the wealth and prosperity of the community,
that, if he finds that the rates imposed will cause him to do business at a loss, he may quit business,
and abandon that road, is the very irony of despotism. Apples of Sodom were fruit of joy in
comparison. Reading, as I do, in the preamble of the Federal Constitution, that it was ordained to
"establish justice," I can never believe that it is within the property of an individual invested in and
used for a purpose in which even the Argus eyes of the police power can see nothing injurious to
public morals, public health, or the general welfare. I read also in the first section of the bill of rights
of this state that "all men are by nature free and equal, and have certain inalienable rights, among
which are those of enjoying and defending life and liberty, acquiring, possessing, and protecting
property, and pursuing and obtaining safety and happiness;" and I know that, while that remains as
the supreme law of the state, no legislature can directly or indirectly lay its withering or destroying
hand on a single dollar invested in the legitimate business of transportation." (Chicago & N.W. Ry. vs.
Dey, 35 Fed. Rep., 866, 880.)

It is manifest, however, that this contention is directed against a construction of the statute, which, as
we have said, is not warranted by its terms. As we have already indicated, the statute does not "require
of a carrier, as a condition to his continuing in said business, that he must carry anything and
everything," and thereby "render useless the facilities he may have for the carriage of certain lines of
freight." It merely forbids failures or refusals to receive persons or property for carriage which have
the effect of giving an "unreasonable or unnecessary preference or advantage" to any person, locality
or particular kind of traffic, or of subjecting any person, locality or particular kind of traffic to any undue
or unreasonable prejudice or discrimination.

Counsel expressly admits that the statute, "as a prohibition against discrimination is a fair, reasonable
and valid exercise of government," and that "it is necessary and proper that such discrimination be
prohibited and prevented," but he contends that "on the other hand there is no reasonable warrant
nor valid excuse for depriving a person of his liberty by requiring him to engage in business against
his will. If he has a rolling boat, unsuitable and unprofitable for passenger trade, he may devote it to
lumber carrying. To prohibit him from using it unless it is fitted out with doctors and stewards and
staterooms to carry passengers would be an invalid confiscation of this property. A carrier may limit
his business to the branches thereof that suit his convenience. If his wagon be old, or the route
dangerous, he may avoid liability for loss of passengers' lives and limbs by carrying freight only. If his
vehicles require expensive pneumatic tires, unsuitable for freight transportation, ha may nevertheless
carry passengers. The only limitation upon his action that it is competent for the governing authority
to impose is to require him to treat all alike. His limitations must apply to all, and they must be
established limitations. He cannot refuse to carry a case of red jusi on the ground that he has carried
for others only jusi that he was green, or blue, or black. But he can refuse to carry red jusi, if he has
publicly professed such a limitation upon his business and held himself out as unwilling to carry the
same for anyone."

18 | P a g e
To this it is sufficient answer to say that there is nothing in the statute which would deprive any person
of his liberty "by requiring him to engage in business against his will." The prohibitions of the statute
against undue, unnecessary or unreasonable regulations which the legislator has seen fit to prescribe
for the conduct of the business in which the carrier is engaged of his own free will and accord. In so
far as the self-imposed limitations by the carrier upon the business conducted by him, in the various
examples given by counsel, do not involve an unreasonable or unnecessary discrimination the statute
would not control his action in any wise whatever. It operates only in cases involving such
unreasonable or unnecessary preferences or discriminations. Thus in the hypothetical case
suggested by the petitioner, a carrier engaged in the carriage of green, blue or black jusi, and duly
equipped therefor would manifestly be guilty of "giving an unnecessary and unreasonable preference
to a particular kind of traffic" and of subjecting to "an undue and reasonable prejudice a particular kind
of traffic," should he decline to carry red jusi, to the prejudice of a particular shipper or of those
engaged in the manufacture of that kind of jusi, basing his refusal on the ground of "mere whim or
caprice" or of mere personal convenience. So a public carrier of passengers would not be permitted
under this statute to absolve himself from liability for a refusal to carry a Chinaman, a Spaniard, an
American, a Filipino, or a mestizo by proof that from "mere whim or caprice or personal scruple," or
to suit his own convenience, or in the hope of increasing his business and thus making larger profits,
he had publicly announced his intention not to carry one or other of these classes of passengers.

The nature of the business of a common carrier as a public employment is such that it is clearly within
the power of the state to impose such just and reasonable regulations thereon in the interest of the
public as the legislator may deem proper. Of course such regulations must not have the effect of
depriving an owner of his property without due process of law, nor of confiscating or appropriating
private property without just compensation, nor of limiting or prescribing irrevocably vested rights or
privileges lawfully acquired under a charter or franchise. But aside from such constitutional limitations,
the determination of the nature and extent of the regulations which should be prescribed rests in the
hands of the legislator.

Common carriers exercise a sort of public office, and have duties to perform in which the public is
interested. Their business is, therefore, affected with a public interest, and is subject of public
regulation. (New Jersey Steam Nav. Co. vs. Merchants Bank, 6 How., 344, 382; Munn vs. Illinois, 94
U.S., 113, 130.) Indeed, this right of regulation is so far beyond question that it is well settled that the
power of the state to exercise legislative control over railroad companies and other carriers "in all
respects necessary to protect the public against danger, injustice and oppression" may be exercised
through boards of commissioners. (New York etc. R. Co. vs. Bristol, 151 U.S., 556, 571; Connecticut
etc. R. Co. vs. Woodruff, 153 U.S., 689.)

Regulations limiting of passengers the number of passengers that may be carried in a particular
vehicle or steam vessel, or forbidding the loading of a vessel beyond a certain point, or prescribing
the number and qualifications of the personnel in the employ of a common carrier, or forbidding unjust
discrimination as to rates, all tend to limit and restrict his liberty and to control to some degree the free
exercise of his discretion in the conduct of his business. But since the Granger cases were decided
by the Supreme Court of the United States no one questions the power of the legislator to prescribe
such reasonable regulations upon property clothed with a public interest as he may deem expedient
or necessary to protect the public against danger, injustice or oppression. (Munn vs. Illinois, 94 U.S.,
113, 130; Chicago etc. R. Co. vs. Cutts, 94 U.S., 155; Budd vs. New York, 143 U.S., 517; Cotting vs.
Goddard, 183 U.S., 79.) The right to enter the public employment as a common carrier and to offer
one's services to the public for hire does not carry with it the right to conduct that business as one
pleases, without regard to the interest of the public and free from such reasonable and just regulations
as may be prescribed for the protection of the public from the reckless or careless indifference of the
carrier as to the public welfare and for the prevention of unjust and unreasonable discrimination of
any kind whatsoever in the performance of the carrier's duties as a servant of the public.

Business of certain kinds, including the business of a common carrier, holds such a peculiar relation
to the public interest that there is superinduced upon it the right of public regulation. (Budd vs. New

19 | P a g e
York, 143 U.S., 517, 533.) When private property is "affected with a public interest it ceases to be
juris privati only." Property becomes clothed with a public interest when used in a manner to make it
of public consequence and affect the community at large. "When, therefore, one devotes his property
to a use in which the public has an interest, he, in effect, grants to the public an interest in that use,
and must submit to be controlled by the public for the common good, to the extent of the interest he
has thus created. He may withdraw his grant by discontinuing the use, but so long as he maintains
the use he must submit to control." (Munn vs. Illinois, 94 U.S., 113; Georgia R. & Bkg. Co. vs. Smith,
128 U.S., 174; Budd vs. New York, 143 U.S., 517; Louisville etc. Ry. Co. vs. Kentucky, 161 U.S., 677,
695.)

Of course this power to regulate is not a power to destroy, and limitation is not the equivalent of
confiscation. Under pretense of regulating fares and freight the state can not require a railroad
corporation to carry persons or property without reward. Nor can it do that which in law amounts to a
taking of private property for public use without just compensation, or without due process of law.
(Chicago etc. R. Co. vs. Minnesota, 134 U.S., 418; Minneapolis Eastern R. Co. vs. Minnesota, 134
U.S., 467.) But the judiciary ought not to interfere with regulations established and palpably
unreasonable as to make their enforcement equivalent to the taking of property for public use without
such compensation as under all the circumstances is just both to the owner and to the public, that is,
judicial interference should never occur unless the case presents, clearly and beyond all doubt, such
a flagrant attack upon the rights of property under the guise of regulations as to compel the court to
say that the regulation in question will have the effect to deny just compensation for private property
taken for the public use. (Chicago etc. R. Co. vs. Wellman, 143 U.S., 339; Smyth vs. Ames, 169 U.S.,
466, 524; Henderson Bridge Co. vs. Henderson City, 173 U.S., 592, 614.)

Under the common law of England it was early recognized that common carriers owe to the public
the duty of carrying indifferently for all who may employ them, and in the order in which application is
made, and without discrimination as to terms. True, they were allowed to restrict their business so as
to exclude particular classes of goods, but as to the kinds of property which the carrier was in the
habit of carrying in the prosecution of his business he was bound to serve all customers alike (State
vs. Cincinnati etc. R. Co., 47 Ohio St., 130, 134, 138; Louisville etc. Ry. Co. vs. Quezon City Coal
Co., 13 Ky. L. Rep., 832); and it is to be observed in passing that these common law rules are
themselves regulations controlling, limiting and prescribing the conditions under which common
carriers were permitted to conduct their business. (Munn vs. Illinois, 94 U. S., 113, 133.)

It was found, in the course of time, that the correction of abuses which had grown up with the
enormously increasing business of common carriers necessitated the adoption of statutory
regulations controlling the business of common carriers, and imposing severe and drastic penalties
for violations of their terms. In England, the Railway Clauses Consolidation Act was enacted in 1845,
the Railway and Canal Traffic Act in 1854, and since the passage of those Acts much additional
legislation has been adopted tending to limit and control the conduct of their business by common
carriers. In the United States, the business of common carriers has been subjected to a great variety
of statutory regulations. Among others Congress enacted "The Interstate Commerce Act" (1887) and
its amendments, and the Elkins Act as amended (1906); and most if not all of the States of the Union
have adopted similar legislation regulating the business of common carriers within their respective
jurisdictions. Unending litigation has arisen under these statutes and their amendments, but nowhere
has the right of the state to prescribe just and reasonable regulations controlling and limiting the
conduct of the business of common carriers in the public interest and for the general welfare been
successfully challenged, though of course there has been wide divergence of opinion as to the
reasonableness, the validity and legality of many of the regulations actually adopted.

The power of the Philippine legislator to prohibit and to penalize all and any unnecessary or
unreasonable discriminations by common carriers may be maintained upon the same reasoning
which justified the enactment by the Parliament of England and the Congress of the United States of
the above mentioned statutes prohibiting and penalizing the granting of certain preferences and
discriminations in those countries. As we have said before, we find nothing confiscatory or

20 | P a g e
unreasonable in the conditions imposed in the Philippine statute upon the business of common
carriers. Correctly construed they do not force him to engage in any business his will or to make use
of his facilities in a manner or for a purpose for which they are not reasonably adapted. It is only when
he offers his facilities as a common carrier to the public for hire, that the statute steps in and prescribes
that he must treat all alike, that he may not pick and choose which customer he will serve, and,
specifically, that he shall not make any undue or unreasonable preferences or discriminations
whatsoever to the prejudice not only of any person or locality but also of any particular kind of traffic.

The legislator having enacted a regulation prohibiting common carriers from giving unnecessary or
unreasonable preferences or advantages to any particular kind of traffic or subjecting any particular
kind of traffic to any undue or unreasonable prejudice or discrimination whatsoever, it is clear that
whatever may have been the rule at the common law, common carriers in this jurisdiction cannot
lawfully decline to accept a particular class of goods for carriage, to the prejudice of the traffic in those
goods, unless it appears that for some sufficient reason the discrimination against the traffic in such
goods is reasonable and necessary. Mere whim or prejudice will not suffice. The grounds for the
discrimination must be substantial ones, such as will justify the courts in holding the discrimination to
have been reasonable and necessary under all circumstances of the case.

The prayer of the petition in the case at bar cannot be granted unless we hold that the refusal of the
defendant steamship company to accept for carriage on any of its vessels "dynamite, gunpowder or
other explosives" would in no instance involve a violation of the provisions of this statute. There can
be little doubt, however, that cases may and will arise wherein the refusal of a vessel "engaged in the
coastwise trade of the Philippine Islands as a common carrier" to accept such explosives for carriage
would subject some person, company, firm or corporation, or locality, or particular kind of traffic to a
certain prejudice or discrimination. Indeed it cannot be doubted that the refusal of a "steamship
company, the owner of a large number of vessels" engaged in that trade to receive for carriage any
such explosives on any of its vessels would subject the traffic in such explosives to a manifest
prejudice and discrimination. The only question to be determined therefore is whether such prejudice
or discrimination might in any case prove to be undue, unnecessary or unreasonable.

This of course is, in each case, a question of fact, and we are of the opinion that the facts alleged in
the complaint are not sufficient to sustain a finding in favor of the contentions of the petitioner. It is not
alleged in the complaint that "dynamite, gunpowder and other explosives" can in no event be
transported with reasonable safety on board steam vessels engaged in the business of common
carriers. It is not alleged that all, or indeed any of the defendant steamship company's vessels are
unsuited for the carriage of such explosives. It is not alleged that the nature of the business in which
the steamship company is engaged is such as to preclude a finding that a refusal to accept such
explosives on any of its vessels would subject the traffic in such explosives to an undue and
unreasonable prejudice and discrimination.

Plaintiff's contention in this regard is as follows:

In the present case, the respondent company has expressly and publicly renounced the carriage of
explosives, and expressly excluded the same terms from the business it conducts. This in itself were
sufficient, even though such exclusion of explosives were based on no other ground than the mere
whim, caprice or personal scruple of the carrier. It is unnecessary, however, to indulge in academic
discussion of a moot question, for the decision not a carry explosives rests on substantial grounds
which are self-evident.

We think however that the answer to the question whether such a refusal to carry explosives involves
an unnecessary or unreasonable preference or advantage to any person, locality or particular kind of
traffic or subjects any person, locality or particular to traffic to an undue or unreasonable prejudice
and discrimination is by no means "self-evident," and that it is a question of fact to be determined by
the particular circumstances of each case.

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The words "dynamite, powder or other explosives" are broad enough to include matches, and other
articles of like nature, and may fairly be held to include also kerosene oil, gasoline and similar products
of a highly inflammable and explosive character. Many of these articles of merchandise are in the
nature of necessities in any country open to modern progress and advancement. We are not fully
advised as to the methods of transportation by which they are made commercially available
throughout the world, but certain it is that dynamite, gunpowder, matches, kerosene oil and gasoline
are transported on many vessels sailing the high seas. Indeed it is a matter of common knowledge
that common carriers throughout the world transport enormous quantities of these explosives, on both
land and sea, and there can be little doubt that a general refusal of the common carriers in any country
to accept such explosives for carriage would involve many persons, firms and enterprises in utter ruin,
and would disastrously affect the interests of the public and the general welfare of the community.

It would be going to far to say that a refusal by a steam vessel engaged in the business of transporting
general merchandise as a common carrier to accept for carriage a shipment of matches, solely on
the ground of the dangers incident to the explosive quality of this class of merchandise, would not
subject the traffic in matches to an unnecessary, undue or unreasonable prejudice and discrimination
without proof that for some special reason the particular vessel is not fitted to carry articles of that
nature. There may be and doubtless are some vessels engaged in business as common carriers of
merchandise, which for lack of suitable deck space or storage rooms might be justified in declining to
carry kerosene oil, gasoline, and similar products, even when offered for carriage securely packed in
cases; and few vessels are equipped to transport those products in bulk. But in any case of a refusal
to carry such products which would subject any person, locality or the traffic in such products would
be necessary to hear evidence before making an affirmative finding that such prejudice or
discrimination was or was not unnecessary, undue or unreasonable. The making of such a finding
would involve a consideration of the suitability of the vessel for the transportation of such products ;
the reasonable possibility of danger or disaster resulting from their transportation in the form and
under the conditions in which they are offered for carriage; the general nature of the business done
by the carrier and, in a word, all the attendant circumstances which might affect the question of the
reasonable necessity for the refusal by the carrier to undertake the transportation of this class of
merchandise.

But it is contended that whatever the rule may be as to other explosives, the exceptional power and
violence of dynamite and gunpowder in explosion will always furnish the owner of a vessel with a
reasonable excuse for his failure or refusal to accept them for carriage or to carry them on board his
boat. We think however that even as to dynamite and gunpowder we would not be justified in making
such a holding unaided by evidence sustaining the proposition that these articles can never be carried
with reasonable safety on any vessel engaged in the business of a common carrier. It is said that
dynamite is so erratic an uncontrollable in its action that it is impossible to assert that it can be handled
with safety in any given case. On the other hand it is contended that while this may be true of some
kinds of dynamite, it is a fact that dynamite can be and is manufactured so as to eliminate any real
danger from explosion during transportation. These are of course questions of fact upon which we
are not qualified to pass judgment without the assistance of expert witnesses who have made special
studies as to the chemical composition and reactions of the different kinds of dynamite, or attained a
thorough knowledge of its properties as a result of wide experience in its manufacture and
transportation.

As we construe the Philippine statute, the mere fact that violent and destructive explosions can be
obtained by the use of dynamite under certain conditions would not be sufficient in itself to justify the
refusal of a vessel, duly licensed as a common carrier of merchandise, to accept it for carriage, if it
can be proven that in the condition in which it is offered for carriage there is no real danger to the
carrier, nor reasonable ground to fear that his vessel or those on board his vessel will be exposed to
unnecessary and unreasonable risk in transporting it, having in mind the nature of his business as a
common carrier engaged in the coastwise trade in the Philippine Islands, and his duty as a servant of
the public engaged in a public employment. So also, if by the exercise of due diligence and the taking
of unreasonable precautions the danger of explosions can be practically eliminated, the carrier would

22 | P a g e
not be justified in subjecting the traffic in this commodity to prejudice or discrimination by proof that
there would be a possibility of danger from explosion when no such precautions are taken.

The traffic in dynamite, gunpowder and other explosives is vitally essential to the material and general
welfare of the people of these Islands. If dynamite, gunpowder and other explosives are to continue
in general use throughout the Philippines, they must be transported by water from port to port in the
various islands which make up the Archipelago. We are satisfied therefore that the refusal by a
particular vessel, engaged as a common carrier of merchandise in the coastwise trade of the
Philippine Islands, to accept any or all of these explosives for carriage would constitute a violation of
the prohibitions against discriminations penalized under the statute, unless it can be shown by
affirmative evidence that there is so real and substantial a danger of disaster necessarily involved in
the carriage of any or all of these articles of merchandise as to render such refusal a due or a
necessary or a reasonable exercise of prudence and discretion on the part of the shipowner.

The complaint in the case at bar lacking the necessary allegations under this ruling, the demurrer
must be sustained on the ground that the facts alleged do not constitute a cause of action.

A number of interesting questions of procedure are raised and discussed in the briefs of counsel. As
to all of these questions we expressly reserve our opinion, believing as we do that in sustaining the
demurrer on the grounds indicated in this opinion we are able to dispose of the real issue involved in
the proceedings without entering upon the discussion of the nice questions which it might have been
necessary to pass upon had it appeared that the facts alleged in the complaint constitute a cause of
action.

We think, however, that we should not finally dispose of the case without indicating that since the
institution of these proceedings the enactment of Acts No. 2307 and No. 2362 (creating a Board of
Public Utility Commissioners and for other purposes) may have materially modified the right to institute
and maintain such proceedings in this jurisdiction. But the demurrer having been formallly submitted
for judgment before the enactment of these statutes, counsel have not been heard in this connection.
We therefore refrain from any comment upon any questions which might be raised as to whether or
not there may be another adequate and appropriate remedy for the alleged wrong set forth in the
complaint. Our disposition of the question raised by the demurrer renders that unnecessary at this
time, though it may not be improper to observe that a careful examination of those acts confirms us
in the holding upon which we base our ruling on this demurrer, that is to say "That whatever may have
been the rule at the common law, common carriers in this jurisdiction cannot lawfully decline to accept
a particular class of goods for carriage, to the prejudice of the traffic in those goods, unless it appears
that for some sufficient reason the discrimination against the traffic in such goods is reasonable and
necessary. Mere prejudice or whim will not suffice. The grounds of the discrimination must be
substantial ones, such as will justify the courts in holding the discrimination to have been reasonable
and necessary under all the circumstances of the case."

Unless an amended complaint be filed in the meantime, let judgment be entered ten days hereafter
sustaining the demurrer and dismissing the complaint with costs against the complainant, and twenty
days thereafter let the record be filed in the archives of original actions in this court. So ordered.

23 | P a g e
 Fisher vs. Yangco Steamship Case Digest
(31 Phil 1)

Facts: The complained alleges that plaintiff is a stockholder in Yangco Steamship Company, the
owner of the large steam vessels, duly licensed to engage in the coastwise trade of the Philippine
Island; that on or about June 10, 1912, the directors of the company, adopted a resolution which was
thereafter ratified and affirmed by the stockholders of the company “expressly declaring and providing
that the classes of merchandise to be carried by the company in its business as common carrier do
not include dynamite, powder or other explosives, and expressly prohibiting the officers, agents an d
servants of the company from offering to carry, accepting for carriage or carrying said dynamite,
powder or other explosives.”

Issue: Whether the refusal of the owner and officer of a steam vessel, to accept for carriage dynamite,
powder or other explosives for carriage can be held to be a lawful act?

Held: The traffic in dynamite gun powder and other explosive is vitally essential to the material and
general welfare of the inhabitants of this islands and it these products are to continue in general use
throughout the Philippines they must be transported from water to port to port in various island which
make up the Archipelago.

It follows that a refusal by a particular vessel engage as a common carrier of merchandise in coastwise
trade in the Philippine Island to accept such explosives for carriage constitutes a violation.

The prohibition against discrimination penalized under the statute, unless it can be shown that there
is so Real and substantial danger of disaster necessarily involved in the courage of any or all of this
article of merchandise as to render such refusal a due or unnecessary or a reasonable exercise or
prudence and discretion on the part of the ship owner.

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 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-8686 July 30, 1915

THE UNITED STATES, plaintiff-appellee,

vs.
PASCUAL QUINAJON and EUGENIO QUITORIANO, defendants-appellants.

Irineo Javier for appellants.

Attorney-General Villamor for appellee.

JOHNSON, J.:

The defendants were charged with a violation of the provisions of Act No. 98. A complaint was
presented in the court of the justice of the peace on the 11th day of November, 1912. A preliminary
examination was had and the defendants were held for trial in the Court of First Instance of the
province of Ilocos Norte.

On the 17th day of November, 1912, the prosecuting attorney of the Province of Ilocos Norte
presented the following complaint:

The undersigned charges Pascual Quinajon and Eugenio Quitoriano, residents of the municipality of
Paoay, Ilocos Norte, P.I., with violating Act No. 98 of the Civil Commission, within the jurisdiction of
this court, as follows:

That the aforementioned accused are now and have been engaged for more than four years prior to
this date in the transportation of passengers and merchandise in the port of Currimao — that is, in the
loading and unloading of passengers and merchandise by means of virayes from the shore the
steamers that anchor in the said port, and vice versa.

That the said accused have been regularly charging 6 centavos for the unloading and loading of each
package of merchandise of cargo, large or small, heavy or light, off or on the steamers that anchor in
the said port of Currimao, and that the unloading is understood to be from the steamer to the storage
warehouses.

That, in the months of June, July, and September, 1912, the said accused, by means of their virayes
and employees, did unload in the port of Currimao aforementioned 5,986 sacks of rice belonging to
the provincial government of Ilocos Norte, P.I., that had come from Manila, P.I., which sacks were
unloaded from the steamers in which they had been shipped and were carried to the storage
warehouses in which they were deposited; that the said accused did willfully, unlawfully, and criminally
demand and collect from the provincial treasurer for the unloading of each one of the said sacks of
rice 10 centavos which, as set forth in the preceding paragraph, they have been regularly charging
for such services in the unloading of the same kind of merchandise and under virtually the same
circumstances and conditions; that the total sum of the payments so made by the provincial treasurer
amounted to P598.60 for the aforesaid 5,986 sacks of rice, the provincial government of Ilocos Norte,
P.I., being thereby damaged in the sum of 359.16, inasmuch as it should have paid only 239.44, in
accordance with the said rate of 6 centavos for each package.

Acts committed in violation of the said Act No. 98 of the Civil Commission.

25 | P a g e
Upon that complaint the defendants were duly arraigned, tried, found guilty of the crime charged, and
sentenced by the Honorable Dionisio Chanco, judge, to pay a fine of $100 (P200) and costs, and to
return to the provincial government of the Province of Ilocos Norte the sum of P359.16.

From that sentence each of the defendants appealed to this court. In this court they allege that the
lower court committed the following errors:

1. The court erred in holding that the accused had been regularly collecting 6 centavos for the
loading or the unloading of each sack rice from steamers in the port of Currimao.

2. The court erred in holding that the defendants established preferential privileges and made
discriminations in favor of certain shippers, against the provincial government of Ilocos Norte, in the
loading or unloading of merchandise on to or from the steamers in the port of Currimao.

3. The court erred, further, in sentencing the accused to pay to the provincial government of
Ilocos Norte the sum of P359.16.

The first assignment of error presents a question of fact only. The appellants allege that the lower
court committed an error in its conclusions of fact. They allege that the lower court committed an error
in deciding that they had regularly charged 6 centavos for each sack of rice loaded or unloaded at the
port of Currimao. The decision of the lower court contains the following statement of facts:

It is proven that the defendants, acting as representatives of the Union Obrera, established at the port
of Currimao, Ilocos Norte, and engaged by means of virayes as common carriers of passengers and
in loading and unloading freight from steamers anchoring at said port, to the shore or to the
warehouses, and vice versa, have regularly collected, during the last four years, 6 centavos for each
sack of rice loaded or unloaded by said association.

It is likewise proven that the same defendants, representing the same association, collected from the
provincial government of Ilocos Norte 10 centavos for each of the 5,986 sacks of rice which they
unloaded from the steamers during the months of June, July, and September, as property belonging
to the said government, a price which differed from the usual, charge of 6 centavos made to others
shippers of said commodity.

The provincial fiscal presented as witnesses in support of the information the Chinese merchants Cu
Chatco, Cu Joco, Sy Yacco, Lim Anco, and Francisco Castro, who testified that they paid to the
defendants for loading and unloading supplies from the steamers at Currimao 6 centavos for each
package of any kind of supplies, large or small, heavy or light. The two first named, Cu Chatco and
Cu Joco, testified, furthermore, that formerly they paid transportation charges for the loading and
discharge of their supplies from the steamers according to the weight and size of each package, for
which purpose a classification was previously made by weighing and measuring said packages or
merchandise. Cu Joco does not remember how much was paid at that time for each package, but Cu
Chatco states that 10 centavos was paid for the transportation of each sack of rice weighing 60 kilos
or more. The two above-named witnesses, Cu Chatco and Cu Joco, add that as the task of weighing
and measuring was very annoying to the Chinese merchants at Laoag, Ilocos Norte, they suggested
to the defendants and entered into an agreement with them, to pay by the lot the transportation
charges covering loaded onto or unloaded from the steamers, at the rate of 6 centavos for each
package, heavy or light, large or small.

We have made a careful examination of the evidence adduced during the trial of the cause, and
conclude that said facts are substantially sustained thereby. The evidence clearly shows that the
defendant collected 6 centavos for each package, of whatever kind of merchandise, large or small,
heavy or light, from those merchants only with whom they had a special contract. From other
merchants, with whom they had not made said special contract, as well as the Province of Ilocos
Norte, they collected a different rate. The evidence shows that they collected from the Province of

26 | P a g e
Ilocos Norte 10 centavos for each sack of rice which they unloaded from the steamers during the
months of June, July, and September. There seems to be no reason for reversing or modifying the
conclusions of the lower court based upon said finding of facts. The effect of collecting a different
amount from different persons for exactly analogous or similar service performed by the defendants
will be discussed when we come to a discussion of the law applicable to the foregoing facts.

The second assignment of error, to wit, that "the lower court committed an error in holding that the
defendants established preferential privileges in favor of certain shippers," presents the question
whether or not the defendants and appellants, in view of the foregoing facts, have violated the
provisions of said Act No. 98.

The facts, as they are disclosed by the record and the findings of the lower court, may be stated
concretely as follows: (1) The defendants, as common carriers, charged and collected from some
shippers and merchants, a certain price for each package of merchandise, loaded or unloaded,
according to a certain schedule. (See Exhibit A.) The prices fixed in the schedule depended upon the
size and weight of the package. (2) The defendants entered into a special contract with certain
merchants, under and by virtue of the terms of which they charged and collected, for loading
merchandise in said port, the sum of 6 centavos for each package, without reference to its size or
weight.

It is contended that it cost any more to load or unload the rice for the province than it did for the
merchants with whom the special contract was made. There is no proof that the conditions were
different. There is no proof that the services rendered by the defendants for the different parties were
unlike or even not contemporaneous. The defendants justify their acts by the fact that they handled
all the merchandise of some merchants, whether the packages were large or small, at the same price.

Under these facts, the question is squarely presented whether or not the defendants are guilty of a
violation of the spirit or the letter of said Act No. 98. Said Act No. 98 was largely borrowed from the
Act of Congress of February 4, 1887. The language of the two Acts, so far as they relate to the present
case, is practically the same. Said Act of Congress has been construed by the Federal courts of the
United States in several decisions. In view of the United States to said Act of Congress.

The similarity of Act No. 98 and the Act of Congress may be seen in the following quotations:

(Sec. 1, Act No. 98.) (Sec. 2, Act of Congress, Feb. 4, 1887.)

No person or corporation engaged as a common carrier of passengers or

That if any common carrier subject property shall directly or indirectly by to the provisions of
this Act shall, any special rate, rebate, drawback or directly or indirectly, by any special
other device, charge, demand, collect rate, rebate, drawback, or other device, or receive from
any person or persons, charge, demand, collect, or receive from a greater or less
compensation for any person or persons a greater or service rendered, or to be rendered in
less compensation for any service, the transportation of passengers or rendered , or to be
rendered, in the property on land or water between any transportation of passengers or
points in the Philippine Islands than property, subject to the provisions of such common carrier
charges, demands, this Act, than it charges, demands, collects or receives from any other
person collects, or receives from any other or persons for doing for him a like or person or
persons for doing contemporaneous service in the for him or them a like and transportation of
a like kind of traffic contemporaneous service in the under substantially similar circumstances
transportation of a like kind of and conditions, and any such unjust traffic under substantially
similar discrimination is hereby prohibited and circumstances and conditions, such declared to
be unlawful. common carrier shall be deemed guilty of unjust discrimination, which is hereby
prohibited and declared to be unlawful.

27 | P a g e
 (Sec. 2, Act No. 98.) (Sec. 3, Act of Congress, Feb. 4, 1887.)

It shall be unlawful for anyncommon carrier engaged in the That it shall be unlawful for any
common transportation of passengers or carrier subject to the provisions of this Act property
as above set forth to make to make or give any undue or unreasonable or give any necessary
or unreasonable preference or advantage to any particular preference or advantage to any
particular person, company, firm, corporation, or person, company, firm, corporation or locality,
or any particular description of locality, or any particular kind of traffic, in any respect
whatsoever, or to in any respect whatsoever, or to subject subject any particular person,
company, any particular person, company, firm, corporation, or locality, or any corporation or
locality, or any particular particular description of traffic, to any kind of traffic, to any undue or
undue or unreasonable prejudice or unreasonable prejudice or discrimination disadvantage in
any respect whatsoever. whatsoever, and such unjust preference or discrimination is also
hereby prohibited and declared to be unlawful.

Said Act No. 98 is "An Act to regulate commerce in the Philippine Islands." Its purpose, so far as it is
possible, is to compel common carriers to render to all persons exactly the same or analogous service
for exactly the same price, to the end that there may be no unjust advantage or unreasonable
discrimination. It applies to persons or corporation engaged as common carriers of passengers or
property. A common carrier is a person or corporation whose regular business is to carry passengers
or property for all persons who may choose to employ and renumerate him. A common carrier is a
person or corporation who undertakes to carry goods or persons for hire. The appellants admit that
they are common carriers. The only question presented is whether or not, under the facts, they have
violated the Act regulating commerce in the Philippine Islands.

The law provides that no common carrier shall directly or indirectly, by any special rate, rebate,
drawback, or other device, charge, demand collect, or receive from any person or persons, a greater
or less compensation for any service rendered in the transportation of passengers or property,
between points in the Philippine Islands, than he charges, demands, collects, or receives from any
other person or persons, for doing a like or contemporaneous service, under substantially similar
conditions or circumstances.

The law prohibits any common carrier from making or giving any unnecessary or unreasonable
preference or advantage to any particular person, company, firm, corporation or locality, or any
particular kind of traffic, or to subject any particular person, company, firm, corporation, or locality, or
any particular kind of traffic, to any undue or unreasonable prejudice or discrimination whatsoever.

It will be noted that the law requires common carriers to carry for all persons, either passengers or
property, for exactly the same charge for a like or contemporaneous service in the transportation of
like kind of traffic under substantially similar circumstances or conditions. The law prohibits common
carriers from subjecting any person, etc., or locality, or any particular kind of traffic, to any undue or
unreasonable prejudice or discrimination whatsoever. The law does not require that the same charge
shall be made for the carrying of passengers or property, unless all the conditions are alike and
contemporaneous. It is not believed that the law prohibits the charging of a different rate for the
carrying of passengers or property when the actual cost of handling and transporting the same is
different. it is not believed that the law intended to require common carriers to carry the same kind of
merchandise, even at the same price, under different and unlike conditions and where the actual cost
is different. The actual cost of handling and transporting the same quantity of rice, for example, might
be different, depending upon the form of package or other conditions. It would cost more to handle
and transport rice packed in open boxes or baskets, for example, than it would to handle and transport
the same quantity of rice neatly packed in sacks. It would cost more to handle and transport hemp,
when it is unbaled and loose, than it would when it is baled. It might cost more to handle and transport
household goods uncrated than when they are crated. It is not believed that the law prohibits the
charging of a different price for handling and shipping merchandise when the shipper exercises
greater care in preparing the same for shipment, thereby reducing the actual cost of handling and

28 | P a g e
transporting. If the shipper puts his merchandise in a condition which costs less to handle and
transport, he is certainly entitled to a better rate. The difference in the charge to different merchants
or shippers must be based upon the actual cost of handling and transporting. The law does not require
common carriers to perform different services for the same price, unless the actual cost is the same.
It is when the price charged is for the purpose of favoring persons or localities or particular kinds of
merchandise, that the law intervenes and prohibits. It is favoritism and discrimination which the law
prohibits. The difference in charge must not be made to favor one merchant, or shipper, or locality, to
the disadvantage of another merchant, or shipper, or locality. If the services are alike and
contemporaneous, discrimination in the price charged is prohibited. For the purposes of the law, it is
not sufficient always to say that merchandise is alike, simply because it is of a like kind or quantity.
The quantity, kind, and quality may be exactly the same, and yet not be alike, so far as the cost of
transportation is concerned. Examples have been given above. Many others might be given. A and B
are each shippers of bananas between the same points. A delivers his bananas to the carrier in
separate bundles or bunches, without a wrapper or any kind of protection, while B delivers exactly the
same number of bunches of bananas, but they are neatly packed in a few boxes or baskets. It does
not require much argument to convince men conversant with the shipping of merchandise, in such a
case, that the actual cost of handling and shipping would be different and would, therefore, not be
"alike," although contemporaneous, perhaps. Neither is it believed that shipments may be rendered
unlike by the fact that the total shipment is composed of different kinds or classes of merchandise.
For example, A is a shipper of rice and hemp and B is a shipper of rice alone. Both A and B prepare
their rice for shipment in exactly the same form of package. It is not believed that the carrier is
permitted, under the law, to carry A's rice for a less price than he carries B's rice, simply because A
is also a shipper of hemp. A difference in the charge for handling and transporting may only be made
when the difference is based upon actual cost. The actual cost may depend upon quantity. A man
who ships freight by the car-load, by reason of the actual cost of handling and shipping, may be
entitled, under certain conditions, to a better rate than the man who ships a single article or package
of the same class or kind of merchandise. A train-load of cattle might be shipped from Dagupan to
Manila, for example, at less cost per head than it would cost to ship just a few head, less than a car-
load. The actual cost of each shipment must necessarily depend upon and be settled by its own proof.
This rule, however, does not prohibit the making of general schedules, providing they are made
applicable to all. The difference in the charge made by the common carrier cannot be made for the
purpose of favoring any person or locality, to the prejudice or disadvantage of another person or
locality. A common carrier may discriminate between shippers when the amount of goods shipped by
one actually costs less to handle and transport, but he cannot discriminate upon the ground simply
that he carries all of the goods of one shipper, while he does not carry all of the goods of another. The
difference in the charge must be the difference in the cost.

It is competent for a common carrier under the law, we believe, to enter into special agreements for
handling and transporting merchandise, whereby advantage may accrue to individuals, when it is
made clearly to appear that by such agreements the common carrier has only its interests and the
legitimate increase of its profits in view, and when the consideration given to the individual is for the
interest of the common carrier alone, and when the common carrier gives all shippers exactly the
same rate, under the same conditions.

The appellants justify the different charge upon the ground that they carried pianos and matches, for
the merchants with whom they had the special contracts, at the same price. It is not believed that a
merchant who happens to be a shipper of both pianos and matches, should have any advantage over
the merchant who ships pianos alone, unless there is some other actual additional cost in the one
case, which does not exist in the other. A common carrier can not discriminate upon the ground that
he carries all of the goods of one shipper, while he does not of another.

In the present case there is no pretense that it actually cost more to handle the rice for the province
than it did for the merchants with whom the special contracts were made. From the evidence it would
seem that there was a clear discrimination made against the province. Discrimination is the thing
which is specifically prohibited and punished under the law.

29 | P a g e
It is not believed that the law prohibits common carriers from making special rates for the handling
and transporting of merchandise, when the same are made for the purpose of increasing their
business, and to manage their important interests upon the same principles which are regarded as
sound, and adopted in other trades and pursuits. It is not believed that the law requires absolute
equality in all cases. Circumstances and conditions may make it injurious to the carrier. Absolute
equality, under certain circumstances and conditions, may give shippers an advantage over others. It
is only unjust, undue, and unreasonable discrimination which the law forbids. The law of equality is in
force only where the services performed in the different cases are substantially the same, and the
circumstances and conditions are similar. Many considerations may properly enter into the agreement
for the carriage or shipment rate, such as the quantity carried, its nature, its risks, the expense of
carriage at different periods of time, and the like. Numerous circumstances may intervene, which bear
upon the cost and expense of transportation, and it is but just to the carrier that he be permitted to
take these circumstances into consideration, in determining the rate or amount of his compensation.
A question of fact is raised in each case for the courts to decide.

The foregoing conclusions are based upon literally hundreds of decisions of the courts of different
states, and the Supreme Court of the United States, as well as those of England, which have
interpreted statutes analogous to the one under consideration.

In the third assignment of error the appellants allege that the lower court committed an error in
condemning them to pay or return to the provincial government the sum of P359.16. It is not exactly
clear from the decision of the lower court just how he arrived at that conclusion. Section 5 of Act No.
98 provides that any person or corporation, who may be damaged by reason of the doing by a
common carrier of any matters and things prohibited, shall be entitled to sue for and recover all
damages so incurred, etc. It would seem that the defendants and appellants had a right to charge the
provincial government 6 centavos for each sack of rice unloaded. They unloaded for the province
5,986 sacks, for which they charged the sum of P598.60. They had a right to collect 6 centavos, or
the sum of P359.16. The appellants therefore collected from the province more than they had a right
to collect, the difference between P598.60 and 359.16, or P239.44. They should be required,
therefore, to return to the province the excess which they collected, or the sum of P239.44. The
judgment of the lower court, therefore, should be modified in this respect. The defendants are hereby
ordered to return to the Province of Ilocos Norte the sum P239.44, for which sum a judgment is hereby
ordered to be entered against them, for which execution may issue when this judgment becomes
final, in case the same is not paid.

After a careful analysis of the facts, and the law applicable thereto, the judgment of the lower court,
as herein modified, should be and is hereby affirmed with costs. So ordered.

US v. Pascual Quinajon and Eugenio Quitorano

G.R. No. L-8686 July 30, 1915
Johnson, J.

FACTS:
Quinajon and Quitorano have been engaged in the transportation of passengers and
merchandise in the port of Currimao by means of virayes. They charged and collected from some
shippers and merchants, a certain price for each package of merchandise, loaded or unloaded,
according to a certain schedule.
They collected 6 centavos for each package, of whatever kind of merchandise, large or
small, heavy or light, from those merchants only with whom they had a special contract. From other
merchants, with whom they had not made said special contract, as well as the Province of Ilocos
Norte, they collected a different rate (10 centavos).

30 | P a g e
 They were charged with violation of Act. No. 98 of the Civil Commission which compels
common carriers to render to all persons exactly the same or analogous service for exactly the
same price, to the end that there may be no unjust advantage or unreasonable discrimination.
The law provides that no common carrier shall directly or indirectly, by any special rate,
rebate, drawback, or other device, charge, demand collect, or receive from any person or persons,
a greater or less compensation for any service rendered in the transportation of passengers or
property, between points in the Philippine Islands, than he charges, demands, collects, or receives
from any other person or persons, for doing a like or contemporaneous service, under substantially
similar conditions or circumstances.
The law prohibits any common carrier from making or giving any unnecessary or
unreasonable preference or advantage to any particular person, company, firm, corporation or
locality, or any particular kind of traffic, or to subject any particular person, company, firm,
corporation, or locality, or any particular kind of traffic, to any undue or unreasonable prejudice or
discrimination whatsoever.

ISSUE: WON Quinajon and Quitorano violated Act No. 98

HELD: No.
The law does not require that the same charge shall be made for the carrying of passengers
or property, unless all the conditions are alike and contemporaneous. It is not believed that the law
prohibits the charging of a different rate for the carrying of passengers or property when the actual
cost of handling and transporting the same is different. It is not believed that the law intended to
require common carriers to carry the same kind of merchandise, even at the same price, under
different and unlike conditions and where the actual cost is different.
A common carrier may enter into special agreements for handling and transporting
merchandise, whereby advantage may accrue to individuals, when it is made clearly to appear that
by such agreements the common carrier has only its interests and the legitimate increase of its
profits in view, and when the consideration given to the individual is for the interest of the common
carrier alone, and when the common carrier gives all shippers exactly the same rate, under the
same conditions.

31 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 131621 September 28, 1999

LOADSTAR SHIPPING CO., INC., petitioner,

vs.
COURT OF APPEALS and THE MANILA INSURANCE CO., INC., respondents.

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 compliant until fully paid, P8,000 as
attorney's fees, and the costs of the suit; and (b) its resolution of 19 November 1997, 3 denying
LOADSTAR's motion for reconsideration of said decision.

The facts are undisputed.1âwphi1.nêt

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 the 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 OF THE LOSS 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 the vessel directly to MIC, said
amount to be deducted from MIC's claim from LOADSTAR.

In its answer, LOADSTAR denied any liability for the loss of the shipper's goods and claimed that
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.

32 | P a g e
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 LOADSTAR's 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. LOADSTAR'S 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 latter's rights as against the carrier, LOADSTAR. 6

5) There was a clear breach of the contract of carriage when the shipper's goods never reached
their destination. LOADSTAR's 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 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

33 | P a g e
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 vessel's 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. MCI's
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 "owner's 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 Court's ruling in the case of St. Paul Fire
& Marine Co. v. Macondray & Co., Inc., 9 and National Union Fire Insurance Company of Pittsburgh
v. Stolt-Nielsen Phils., Inc. 10

Finally, LOADSTAR avers that MIC's 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 LOADSTAR's 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

34 | P a g e
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 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 the 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:

Art. 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 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 xxx 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
eventhough private respondent's 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 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

35 | P a g e
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 LOADSTAR's 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 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 Court's pronouncements in St. Paul Fire & Marine Ins. Co. v. Macondray &
Co., Inc., 18 and National 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 carrier's 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 carrier's 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 "owner's 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 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. MIC's
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 goods. 22 In this case, the period

36 | P a g e
for filing the action for recovery has not yet elapsed. Moreover, a stipulation reducing the one-year
period is null and void; 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.

SO ORDERED.

Loadstar Shipping vs. Court of Appeals

(GR 131621, 28 September 1999)

FACTS :

Loadstar Shipping Co. Inc. received on board its M/V “Cherokee” goods, amounting to P6,067,178,
which were insured for the same amount with the respondent Manila Insurance Co. (MIC) against
various risks including “total loss by total loss of the vessel.” The vessel, in turn, was insured by
Prudential Guarantee & Assurance, Inc. (PGAI) for P4 million. 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.

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. PGAI was later dropped as a party defendant
after it paid the insurance proceeds to Loadstar. 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. The trial court
rendered judgment in favor of MIC. Loadstar elevated the matter to the Court of Appeals, which
affirmed the RTC’s decision in toto.

ISSUE: Whether or not Loadstar is a common carrier.

HELD:

Yes.

x x x [W]e 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., 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 and National Steel Corp. v. Court of Appeals, both of which upheld the Home
Insurance doctrine.

37 | P a g e
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 ["A general ship carrying goods
for hire, whether employed in internal, in coasting, or in foreign commerce is a common carrier." (Baer,
Senior & Co.’s Successors v. La Compania Maritima, 6 Phil. 215, 217-218, quoting Liverpool
Steamship Co. v. Phoenix Ins. Co., 129 U.S. 397, 437), cited in 3 TEODORICO C. MARTIN,
PHILIPPINE COMMERCIAL LAWS 118 (Rev. Ed. 1989).] 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.

38 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

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 19671 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 Code3. 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:

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.

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

39 | P a g e
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 complaint6 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:

. . . 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 only common 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

40 | P a g e
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

41 | P a g e
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:

42 | P a g e
. . . 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:

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 so-called "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

43 | P a g e
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."

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.

First Philippine Industrial Corp. vs. Court of Appeals

300 SCRA 661, 1998

Facts: Petitioner is a grantee of a pipeline concession under R.A. No. 387, as amended, a contract,
install and operate oil pipelines. The original pipeline concession was granted in 1967 and renewed
by the Energy Regulatory Board in 1992.

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. The respondent City Treasure 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 June 15, 1994, petitioner filed with the RTC of Batangas City a complaint 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 Sec. 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 contactors; and (3) the City Treasurer illegally and erroneously imposed and collected
the said tax, thus meriting the immediate refund of the tax paid.

Traversing the complaint, the respondents argued that petitioner cannot be exempt from taxes under
Sec. 133 (J) of the Local Government Code as said exemption applied 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 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.

Issue: Whether or not the petitioner is a common carrier so that in the affirmative, he is not liable to
pay the carriers tax under the Local Government Code of 1991?

44 | P a g e
Held: Petitioner is a common carrier.

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.

Article 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 carrying of goods for others as a public employment, and must hold
himself out as ready to engage in the transportation of goods or persons 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.

45 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-25599 April 4, 1968

HOME INSURANCE COMPANY, plaintiff-appellee,

vs.
AMERICAN STEAMSHIP AGENCIES, INC. and LUZON STEVEDORING CORPORATION,
defendants,
AMERICAN STEAMSHIP AGENCIES, INC., defendant-appellant.

William H. Quasha and Associates for plaintiff-appellee.

Ross, Selph, Salcedo and Associates for defendant-appellant.

BENGZON, J.P., J.:

"Consorcio Pesquero del Peru of South America" shipped freight pre-paid at Chimbate, Peru, 21,740
jute bags of Peruvian fish meal through SS Crowborough, covered by clean bills of lading Numbers 1
and 2, both dated January 17, 1963. The cargo, consigned to San Miguel Brewery, Inc., now San
Miguel Corporation, and insured by Home Insurance Company for $202,505, arrived in Manila on
March 7, 1963 and was discharged into the lighters of Luzon Stevedoring Company. When the cargo
was delivered to consignee San Miguel Brewery Inc., there were shortages amounting to P12,033.85,
causing the latter to lay claims against Luzon Stevedoring Corporation, Home Insurance Company
and the American Steamship Agencies, owner and operator of SS Crowborough.

Because the others denied liability, Home Insurance Company paid the consignee P14,870.71 — the
insurance value of the loss, as full settlement of the claim. Having been refused reimbursement by
both the Luzon Stevedoring Corporation and American Steamship Agencies, Home Insurance
Company, as subrogee to the consignee, filed against them on March 6, 1964 before the Court of
First Instance of Manila a complaint for recovery of P14,870.71 with legal interest, plus attorney's
fees.

In answer, Luzon Stevedoring Corporation alleged that it delivered with due diligence the goods in
the same quantity and quality that it had received the same from the carrier. It also claimed that
plaintiff's claim had prescribed under Article 366 of the Code of Commerce stating that the claim must
be made within 24 hours from receipt of the cargo.

American Steamship Agencies denied liability by alleging that under the provisions of the Charter
party referred to in the bills of lading, the charterer, not the shipowner, was responsible for any loss
or damage of the cargo. Furthermore, it claimed to have exercised due diligence in stowing the goods
and that as a mere forwarding agent, it was not responsible for losses or damages to the cargo.

On November 17, 1965, the Court of First Instance, after trial, absolved Luzon Stevedoring
Corporation, having found the latter to have merely delivered what it received from the carrier in the
same condition and quality, and ordered American Steamship Agencies to pay plaintiff P14,870.71
with legal interest plus P1,000 attorney's fees. Said court cited the following grounds:

46 | P a g e
(a) The non-liability claim of American Steamship Agencies under the charter party contract is not
tenable because Article 587 of the Code of Commerce makes the ship agent also civilly liable for
damages in favor of third persons due to the conduct of the captain of the carrier;

(b) The stipulation in the charter party contract exempting the owner from liability is against public
policy under Article 1744 of the Civil Code;

(c) In case of loss, destruction or deterioration of goods, common carriers are presumed at fault or
negligent under Article 1735 of the Civil Code unless they prove extraordinary diligence, and they
cannot by contract exempt themselves from liability resulting from their negligence or that of their
servants; and

(d) When goods are delivered to the carrier in good order and the same are in bad order at the place
of destination, the carrier is prima facie liable.

Disagreeing with such judgment, American Steamship Agencies appealed directly to Us. The appeal
brings forth for determination this legal issue: Is the stipulation in the charter party of the owner's non-
liability valid so as to absolve the American Steamship Agencies from liability for loss?

The bills of lading,1 covering the shipment of Peruvian fish meal provide at the back thereof that the
bills of lading shall be governed by and subject to the terms and conditions of the charter party, if any,
otherwise, the bills of lading prevail over all the agreements.2 On the of the bills are stamped "Freight
prepaid as per charter party. Subject to all terms, conditions and exceptions of charter party dated
London, Dec. 13, 1962."

A perusal of the charter party3 referred to shows that while the possession and control of the ship
were not entirely transferred to the charterer,4 the vessel was chartered to its full and complete
capacity (Exh. 3). Furthermore, the, charter had the option to go north or south or vice-versa,5 loading,
stowing and discharging at its risk and expense.6 Accordingly, the charter party contract is one of
affreightment over the whole vessel rather than a demise. As such, the liability of the shipowner for
acts or negligence of its captain and crew, would remain in the absence of stipulation.

Section 2, paragraph 2 of the charter party, provides that the owner is liable for loss or damage to the
goods caused by personal want of due diligence on its part or its manager to make the vessel in all
respects seaworthy and to secure that she be properly manned, equipped and supplied or by the
personal act or default of the owner or its manager. Said paragraph, however, 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..

Regarding the stipulation, the Court of First Instance declared the contract as contrary to Article 587
of the Code of Commerce making the ship agent civilly liable for indemnities suffered by third persons
arising from acts or omissions of the captain in the care of the goods and Article 1744 of the Civil
Code under which a stipulation between the common carrier and the shipper or owner limiting the
liability of the former for loss or destruction of the goods to a degree less than extraordinary diligence
is valid provided it be reasonable, just and not contrary to public policy. The release from liability in
this case was held unreasonable and contrary to the public policy on common carriers.

The provisions of our Civil Code on common carriers were taken from Anglo-American law.7 Under
American jurisprudence, a common carrier undertaking to carry a special cargo or chartered to a

47 | P a g e
special person only, becomes a private carrier.8 As a private carrier, a stipulation exempting the
owner from liability for the negligence of its agent is not against public policy,9 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 only
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 the case of a ship totally chartered for the use of a single party.

And furthermore, in a charter of the entire vessel, the bill of lading issued by the master to the
charterer, as shipper, is in fact and legal contemplation merely a receipt and a document of title not a
contract, for the contract is the charter party.10 The consignee may not claim ignorance of said charter
party because the bills of lading expressly referred to the same. Accordingly, the consignees under
the bills of lading must likewise abide by the terms of the charter party. And as stated, recovery cannot
be had thereunder, for loss or damage to the cargo, against the shipowners, unless the same is due
to personal acts or negligence of said owner or its manager, as distinguished from its other agents or
employees. In this case, no such personal act or negligence has been proved.

WHEREFORE, the judgment appealed from is hereby reversed and appellant is absolved from liability
to plaintiff. No costs. So ordered.

Home Insurance vs. American Steamship

23 SCRA 24

Facts: The Consorcio Pesquero del Peru of South America shipped jute bags of Peruvian fishmeal
through SS Crowborough, consigned to San Miguel Brewery, Inc. The cargo, which was insured by
Home Insurance Company, arrived at the port of Manila and was discharged to the lighters of the
Luzon Stevedoring Corporation. When the same was delivered to the consignee, there were
shortages amounting to P 12, 033.85, prompting the latter to pay against Luzon Stevedoring Co.

Because the others denied liability, Home Insurance paid San Miguel the insurance value loss. This
cost was brought by the former to recover indemnity from Luzon Stevedoring and the ship owner.
Luzon Stevedoring raised the defense that it deliver with due diligence in the same from the carrier.
Mexican Steamship Agencies denied liability on the ground that the charter party referred to in the
bills of lading, the charter, not the ship owner, was responsible for any loss or damage of the cargo.
Furthermore, it claimed to have exercised due diligence in stowing the goods and as a mere
forwarding agent, it was not responsible for losses or damages to the cargo.

Issue: Whether or not the stipulation in the charter party to owner’s non-liability was valid as to absolve
the American Steamship from liability loss?

Held: The Civil Code provision 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 is void only 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
the case of a ship totally chartered for the use of a single party.

48 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-61461 August 21, 1987

EPITACIO SAN PABLO, (Substituted by Heirs of E. San Pablo), petitioners,

vs.
PANTRANCO SOUTH EXPRESS, INC., respondent.

CARDINAL SHIPPING CORPORATION, petitioner,

vs.
HONORABLE BOARD OF TRANSPORTATION AND PANTRANCO SOUTH EXPRESS, INC.,
respondents.

GANCAYCO, J.:

The question that is posed in these petitions for review is whether the sea can be considered as a
continuation of the highway. The corollary issue is whether a land transportation company can be
authorized to operate a ferry service or coastwise or interisland shipping service along its authorized
route as an incident to its franchise without the need of filing a separate application for the same.

The Pantranco South Express, Inc., hereinafter referred to as PANTRANCO is a domestic corporation
engaged in the land transportation business with PUB service for passengers and freight and various
certificates for public conveniences CPC to operate passenger buses from Metro Manila to Bicol
Region and Eastern Samar. On March 27,1980 PANTRANCO through its counsel wrote to Maritime
Industry Authority (MARINA) requesting authority to lease/purchase a vessel named M/V "Black
Double" "to be used for its project to operate a ferryboat service from Matnog, Sorsogon and Allen,
Samar that will provide service to company buses and freight trucks that have to cross San Bernardo
Strait. 1 In a reply of April 29,1981 PANTRANCO was informed by MARINA that it cannot give due
course to the request on the basis of the following observations:

1. The Matnog-Allen run is adequately serviced by Cardinal Shipping Corp. and Epitacio San
Pablo; MARINA policies on interisland shipping restrict the entry of new operators to Liner trade routes
where these are adequately serviced by existing/authorized operators.

2. Market conditions in the proposed route cannot support the entry of additional tonnage; vessel
acquisitions intended for operations therein are necessarily limited to those intended for replacement
purposes only. 2

PANTRANCO nevertheless acquired the vessel MV "Black Double" on May 27, 1981 for P3 Million
pesos. It wrote the Chairman of the Board of Transportation (BOT) through its counsel, that it
proposes to operate a ferry service to carry its passenger buses and freight trucks between Allen and
Matnog in connection with its trips to Tacloban City invoking the case of Javellana vs. Public Service
Commission. 3 PANTRANCO claims that it can operate a ferry service in connection with its franchise
for bus operation in the highway from Pasay City to Tacloban City "for the purpose of continuing the
highway, which is interrupted by a small body of water, the said proposed ferry operation is merely a
necessary and incidental service to its main service and obligation of transporting its passengers from
Pasay City to Tacloban City. Such being the case ... there is no need ... to obtain a separate certificate

49 | P a g e
for public convenience to operate a ferry service between Allen and Matnog to cater exclusively to its
passenger buses and freight trucks.4

Without awaiting action on its request PANTRANCO started to operate said ferry service. Acting
Chairman Jose C. Campos, Jr. of BOT ordered PANTRANCO not to operate its vessel until the
application for hearing on Oct. 1, 1981 at 10:00 A.M. 5 In another order BOT enjoined PANTRANCO
from operating the MV "Black Double" otherwise it will be cited to show cause why its CPC should not
be suspended or the pending application denied. 6

Epitacio San Pablo (now represented by his heirs) and Cardinal Shipping Corporation who are
franchise holders of the ferry service in this area interposed their opposition. They claim they
adequately service the PANTRANCO by ferrying its buses, trucks and passengers. BOT then asked
the legal opinion from the Minister of Justice whether or not a bus company with an existing CPC
between Pasay City and Tacloban City may still be required to secure another certificate in order to
operate a ferry service between two terminals of a small body of water. On October 20, 1981 then
Minister of Justice Ricardo Puno rendered an opinion to the effect that there is no need for bus
operators to secure a separate CPC to operate a ferryboat service holding as follows:

Further, a common carrier which has been granted a certificate of public convenience is expected to
provide efficient, convenient and adequate service to the riding public. (Hocking Valley Railroad Co.
vs. Public Utilities Commission, 1 10 NE 521; Louiseville and NR Co. vs. Railroad Commissioners,
58 SO 543) It is the right of the public which has accepted the service of a public utility operator to
demand that the service should be conducted with reasonable efficiency. (Almario, supra, citing 73
C.J.S. 990-991) Thus, when the bus company in the case at bar proposes to add a ferry service to its
Pasay Tacloban route, it merely does so in the discharge of its duty under its current certificate of
public convenience to provide adequate and convenient service to its riders. Requiring said bus
company to obtain another certificate to operate such ferry service when it merely forms a part — and
constitutes an improvement — of its existing transportation service would simply be duplicitous and
superfluous. 7

Thus on October 23, 1981 the BOT rendered its decision holding that the ferry boat service is part of
its CPC to operate from Pasay to Samar/Leyte by amending PANTRANCO's CPC so as to reflect the
same in this wise:

Let the original Certificate of public convenience granted to Pantranco South Express Co., Inc. be
amended to embody the grant of authority to operate a private ferry boat service as one of the
conditions for the grant of the certificate subject to the condition that the ferryboat shall be for the
exclusive use of Pantranco buses, its passengers and freight trucks, and should it offer itself to the
public for hire other than its own passengers, it must apply for a separate certificate of public
convenience as a public ferry boat service, separate and distinct from its land transport systems. 8

Cardinal Shipping Corporation and the heirs of San Pablo filed separate motions for reconsideration
of said decision and San Pablo filed a supplemental motion for reconsideration that were denied by
the BOT on July 21, 1981. 9

Hence, San Pablo filed the herein petition for review on certiorari with prayer for preliminary injunction
10 seeking the revocation of said decision, and pending consideration of the petition, the issuance of
a restraining order or preliminary injunction against the operation by PANTRANCO of said ferry
service. San Pablo raised the following issues:

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A. DID THE RESPONDENT BOARD VIOLATE PETITIONERS' RIGHT TO DUE PROCESS,
THE RULES OF PROCEDURE AND SECTION 16 (m) OF THE PUBLIC SERVICE ACT, WHEN IT
ISSUED IN A COMPLAINT CASE THE DECISION DATED OCTOBER 23, 1981 WHICH MOTU
PROPIO AMENDED RESPONDENT PANTRANCO'S PUB CERTIFICATE TO INCLUDE AND
AUTHORIZE OPERATION OF A SHIPPING SERVICE ON THE ROUTE MATNOG, SORSOGON —
ALLEN, SAMAR — EVEN AS THERE MUST BE A FORMAL APPLICATION FOR AMENDMENT
AND SEPARATE PROCEEDINGS HELD THEREFORE, ASSUMING AMENDMENT IS PROPER?

B. DID THE RESPONDENT BOARD ERR IN FINDING IN ITS DECISION OF OCTOBER 23,
1981, THAT THE SEA FROM THE PORT OF MATNOG, SORSOGON, LUZON ISLAND TO THE
PORT OF ALLEN, SAMAR ISLAND, OR FROM LUZON ISLAND TO SAMAR ISLAND IS A MERE
FERRY OR CONTINUATION OF THE HIGHWAY — IT BEING 23 KILOMETERS OF ROUGH AND
OPEN SEA AND ABOUT 2 HOURS TRAVEL TIME REQUIRING BIG INTER-ISLAND VESSELS,
NOT MERE BARGES, RAFTS OR SMALL BOATS UTILIZED IN FERRY SERVICE?

C. DID THE RESPONDENT BOARD ERR WHEN IT RULED THAT RESPONDENT

PANTRANCO'S VESSEL M/V BLACK DOUBLE IS MERELY A PRIVATE CARRIER, NOT A PUBLIC
FERRY OPERATING FOR PUBLIC SERVICE (ASSUMING THAT THE MATNOG-ALLEN SEA
ROUTE IS A MERE FERRY OR CONTINUATION OF HIGHWAY) EVEN IF SAID VESSEL IS FOR
HIRE AND COLLECTS SEPARATE FARES AND CATERS TO THE PUBLIC EVEN FOR A LIMITED
CLIENTELE?

D. DID THE RESPONDENT BOARD ERR WHEN IT GRANTED RESPONDENT PANTRANCO

AUTHORITY TO OPERATE A SHIPPING SERVICE IN THE FACE OF THE LATTER'S
CONTENTION AS AN AFTER THOUGH THAT IT NEED NOT APPLY THEREFOR, AND IN SPITE
OF ITS FAILURE TO SECURE THE PRE-REQUISITE MARITIME INDUSTRY AUTHORITY
(MARINA) APPROVAL TO ACQUIRE A VESSEL UNDER ITS MEMORANDUM CIRCULAR NO. 8-
A AS WELL AS ITS PRIOR FAVORABLE ENDORSEMENT BEFORE ANY SHIPPING
AUTHORIZATION MAY BE GRANTED UNDER BOT — MARINA AGREEMENT OF AUGUST 10,
1976 AND FEBRUARY 26, 1982?

E. DID RESPONDENT BOARD ERR WHEN IT GRANTED RESPONDENT PANTRANCO

AUTHORITY TO OPERATE A SHIPPING SERVICE ON A ROUTE ADEQUATELY SERVICED IF
NOT ALREADY "SATURATED" WITH THE SERVICES OF TWO 12) EXISTING OPERATORS
PETITIONERS AND CARDINAL SHIPPING CORP.) IN VIOLATION OF THE PRINCIPLE OF PRIOR
OPERATOR RULE'? 11

By the same token Cardinal Shipping Corporation filed a separate petition raising similar issues,
namely:

a. the decision did not conform to the procedures laid down by law for an amendment of the
original certificate of public convenience, and the authority to operate a private ferry boat service to
PANTRANCO was issued without ascertaining the established essential requisites for such grant,
hence, violative of due process requirements;

b. the grant to PANTRANCO of authority to operate a ferryboat service as a private carrier on

said route contravenes existing government policies relative to the rationalization of operations of all
water transport utilities;

c. it contravenes the memorandum of agreement between MARINA and the Board of

Transportation; d. the grant of authority to operate a ferry service as a private carrier is not feasible;

51 | P a g e
it lessens PANTRANCO's liability to passengers and cargo to a degree less than extraordinary
diligence?

e. PANTRANCO is not a private carrier when it operates its ferry service;

f. it runs counter to the "old operator" doctrine; and

g. the operation by PANTRANCO of the ferry service c•nstitutes undue competition.

The foregoing considerations constitutes the substantial errors committed by the respondent Board
which would more than amply justify review of the questioned decision by this Honorable Court.12

Both cases were consolidated and are now admitted for decision.

The resolution of all said issues raised revolves on the validity of the questioned BOT decision.

The BOT resolved the issue of whether a ferry service is an extension of the highway and thus is a
part of the authority originally granted PANTRANCO in the following manner:

A ferry service, in law, is treated as a continuation of the highway from one side of the water over
which passes to the other side for transportation of passengers or of travellers with their teams
vehicles and such other property as, they may carry or have with them. (U.S. vs. Pudget Sound Nev.
Co. DC Washington, 24 F. Supp. 431). It maybe said to be a necessary service of a specially
constructed boat to carry passengers and property across rivers or bodies of water from a place in
one shore to a point conveniently opposite on the other shore and continuation of the highway making
a connection with the thoroughfare at each terminal (U.S. vs. Canadian Pac. N.Y. Co. 4 P. Supp, 85).
It comprises not merely the privilege of transportation but also the use for that purpose of the
respective landings with outlets therefrom. (Nole vs. Record, 74 OKL. 77; 176 Pac. 756). A ferry
service maybe a public ferry or a private ferry. A public ferry service is one which all the public have
the right to resort to and for which a regular fare is established and the ferryman is a common carrier
be inbound to take an who apply and bound to keep his ferry in operation and good repair. (Hudspeth
v. Hall, 11 Oa. 510; 36 SB 770). A ferry (private) service is mainly for the use of the owner and though
he may take pay for ferriage, he does not follow it as a business. His ferry is not open to the public at
its demand and he may or may not keep it in operation (Hudspeth vs. Hall, supra, St. Paul Fire and
Marine Ins. 696), Harrison, 140 Ark 158; 215 S.W. 698).

The ferry boat service of Pantranco is a continuation of the highway traversed by its buses from Pasay
City to Samar, Leyte passing through Matnog (Sorsogon) through San Bernardino Strait to Alien
(Samar). It is a private carrier because it will be used exclusively to transport its own buses,
passengers and freight trucks traversing the said route. It will cater exclusively to the needs of its own
clientele (passengers on board- Pantranco buses) and will not offer itself indiscriminately for hire or
for compensation to the general public. Legally therefore, Pantranco has the right to operate the ferry
boat M/V BLACK DOUBLE, along the route from Matnog (Sorsogon) to Allen (Samar) and vice versa
for the exclusive use of its own buses, passengers and freight trucks without the need of applying for
a separate certificate of public convenience or provisional authority. Since its operation is an integral
part of its land transport system, its original certificate of public convenience should be amended to
include the operation of such ferryboat for its own exclusive use

In Javellana 14 this Court recited the following definition of ferry :

52 | P a g e
The term "ferry" implied the continuation by means of boats, barges, or rafts, of a highway or the
connection of highways located on the opposite banks of a stream or other body of water. The term
necessarily implies transportation for a short distance, almost invariably between two points, which is
unrelated to other transportation .(Emphasis supplied)

The term "ferry" is often employed to denote the right or franchise granted by the state or its authorized
mandatories to continue by means of boats, an interrupted land highway over the interrupting waters
and to charge toll for the use thereof by the public. In this sense it has also been defined as a privilege,
a liberty, to take tolls for transporting passengers and goods across a lake or stream or some other
body of water, with no essential difference from a bridge franchise except as to the mode of
transportation, 22 Am. Jur. 553.

A "ferry" has been defined by many courts as "a public highway or thoroughfare across a stream of
water or river by boat instead of a bridge." (St. Clare Country v. Interstate Car and Sand Transfer Co.,
192 U.S. 454, 48 L. ed. 518; etc.)

The term ferry is often employed to denote the right or franchise granted by the state or its authorized
mandatories to continue by means of boats, an interrupted land highway over the interrupting waters
and to charge toll for the use thereof by the public. (Vallejo Ferry Co. vs. Solano Aquatic Club, 165
Cal. 255, 131 P. 864, Ann. Cas. 1914C 1179; etc.) (Emphasis supplied)

"Ferry" is service necessity for common good to reach point across a stream lagoon, lake, or bay.
(U.S. vs. Canadian Pac. Ry. Co. DC Was., 4 Supp. 851,853)'

"Ferry" properly means a place of transit across a river or arm of the sea, but in law it is treated as a
franchise, and defined as the exclusive right to carry passengers across a river, or arm of the sea,
from one vill to another, or to connect a continuous line of road leading from township or vill to another.
(Canadian Pac. Ry. Co. vs. C.C. A. Wash. 73 F. 2d. 831, 832)'

Includes various waters: (1) But an arm of the sea may include various subordinate descriptions of
waters, where the tide ebbs and flows. It may be a river, harbor, creek, basin, or bay; and it is
sometimes used to designate very extensive reaches of waters within the projecting capes or points
or a country. (See Rex vs. Bruce, Deach C.C. 1093). (2) In an early case the court said: "The
distinction between rivers navigable and not navigable, that is, where the sea does, or does not, ebb
and flow, is very ancient. Rex vs. Smith, 2 Dougl. 441, 99 Reprint 283. The former are called arms of
the sea, while the latter pass under the denomination of private or inland rivers" Adams vs. Pease 2
Conn. 481, 484. (Emphasis supplied)

In the cases of Cababa vs. Public Service Commission, 16 Cababa vs. Remigio & Carillo and
Municipality of Gattaran vs. Elizaga 17 this Court considered as ferry service such water service that
crosses rivers.

However, in Javellana We made clear distinction between a ferry service and coastwise or interisland
service by holding that:

We are not unmindful of the reasons adduced by the Commission in considering the motorboat
service between Calapan and Batangas as ferry; but from our consideration of the law as it stands,
particularly Commonwealth Act No. 146, known as the Public Service Act and the provisions of the
Revised Administrative Code regarding municipal ferries and those regarding the jurisdiction of the
Bureau of Customs over documentation, registration, licensing, inspection, etc. of steamboats,
motorboats or motor vessels, and the definition of ferry as above quoted we have the impression and

53 | P a g e
we are inclined to believe that the Legislature intended ferry to mean the service either by barges or
rafts, even by motor or steam vessels, between the banks of a river or stream to continue the highway
which is interrupted by the body of water, or in some cases to connect two points on opposite shores
of an arm of the sea such as bay or lake which does not involve too great a distance or too long a
time to navigate But where the line or service involves crossing the open sea like the body of water
between the province of Batangas and the island of Mindoro which the oppositors describe thus "the
intervening waters between Calapan and Batangas are wide and dangerous with big waves where
small boat barge, or raft are not adapted to the service," then it is more reasonable to regard said line
or service as more properly belonging to interisland or coastwise trade. According to the finding of the
Commission itself the distance between Calapan is about 24 nautical miles or about 44.5 kilometers.
We do not believe that this is the short distance contemplated by the Legislature in referring to ferries
whether within the jurisdiction of a single municipality or ferries between two municipalities or
provinces. If we are to grant that water transportation between Calapan and Batangas is ferry service,
then there would be no reason for not considering the same service between the different islands of
the Philippines, such as Boac Marinduque and Batangas; Roxas City of Capiz and Romblon; Cebu
City, Cebu and Ormoc, Leyte; Guian, Samar and Surigao, Surigao; and Dumaguete, Negros Oriental
and Oroquieta or Cagayan de Oro.

The Commission makes the distinction between ferry service and motorship in the coastwise trade,
thus:

A ferry service is distinguished from a motorship or motorboat service engaged in the coastwise trade
in that the latter is intended for the transportation of passengers and/or freight for hire or compensation
between ports or places in the Philippines without definite routes or lines of service.

We cannot agree. The definiteness of the route of a boat is not the deciding factor. A boat of say the
William Lines, Inc. goes from Manila to Davao City via Cebu, Tagbilaran, Dumaguete, Zamboanga,
every week. It has a definite route, and yet it may not for that reason be regarded as engaged in ferry
service. Again, a vessel of the Compania Maritima makes the trip from Manila to Tacloban and back,
twice a week. Certainly, it has a definite route. But that service is not ferry service, but rather
interisland or coastwise trade.

We believe that it will be more in consonance with the spirit of the law to consider steamboat or
motorboat service between the different islands, involving more or less great distance and over more
or less turbulent and dangerous waters of the open sea, to be coastwise or inter-island service.
Anyway, whether said service between the different islands is regarded as ferry service or coastwise
trade service, as long as the water craft used are steamboats, motorboats or motor vessels, the result
will be the same as far as the Commission is concerned. " 18 (Emphasis supplied)

This Court takes judicial notice of the fact, and as shown by an examination of the map of the
Philippines, that Matnog which is on the southern tip of the island of Luzon and within the province of
Sorsogon and Allen which is on the northeastern tip of the island of Samar, is traversed by the San
Bernardino Strait which leads towards the Pacific Ocean. The parties admit that the distance between
Matnog and Allen is about 23 kilometers which maybe negotiated by motorboat or vessel in about 1-
1/2 hours as claimed by respondent PANTRANCO to 2 hours according to petitioners. As the San
Bernardino Strait which separates Matnog and Allen leads to the ocean it must at times be choppy
and rough so that it will not be safe to navigate the same by small boats or barges but only by such
steamboats or vessels as the MV "Black Double. 19

Considering the environmental circumstances of the case, the conveyance of passengers, trucks and
cargo from Matnog to Allen is certainly not a ferry boat service but a coastwise or interisland shipping

54 | P a g e
service. Under no circumstance can the sea between Matnog and Allen be considered a continuation
of the highway. While a ferry boat service has been considered as a continuation of the highway when
crossing rivers or even lakes, which are small body of waters - separating the land, however, when
as in this case the two terminals, Matnog and Allen are separated by an open sea it can not be
considered as a continuation of the highway. Respondent PANTRANCO should secure a separate
CPC for the operation of an interisland or coastwise shipping service in accordance with the provisions
of law. Its CPC as a bus transportation cannot be merely amended to include this water service under
the guise that it is a mere private ferry service.

The contention of private respondent PANTRANCO that its ferry service operation is as a private
carrier, not as a common carrier for its exclusive use in the ferrying of its passenger buses and cargo
trucks is absurd. PANTRANCO does not deny that it charges its passengers separately from the
charges for the bus trips and issues separate tickets whenever they board the MV "Black Double" that
crosses Matnog to Allen, 20 PANTRANCO cannot pretend that in issuing tickets to its passengers it
did so as a private carrier and not as a common carrier. The Court does not see any reason why
inspite of its amended franchise to operate a private ferry boat service it cannot accept walk-in
passengers just for the purpose of crossing the sea between Matnog and Allen. Indeed evidence to
this effect has been submitted. 21 What is even more difficult to comprehend is that while in one
breath respondent PANTRANCO claims that it is a private carrier insofar as the ferryboat service is
concerned, in another breath it states that it does not thereby abdicate from its obligation as a common
carrier to observe extraordinary diligence and vigilance in the transportation of its passengers and
goods. Nevertheless, considering that the authority granted to PANTRANCO is to operate a private
ferry, it can still assert that it cannot be held to account as a common carrier towards its passengers
and cargo. Such an anomalous situation that will jeopardize the safety and interests of its passengers
and the cargo owners cannot be allowed.

What appears clear from the record is that at the beginning PANTRANCO planned to operate such
ferry boat service between Matnog and Alien as a common carrier so it requested authority from
MARINA to purchase the vessel M/V "Black Double 22 in accordance with the procedure provided for
by law for such application for a certificate of public convenience. 23 However when its request was
denied as the said routes "are adequately serviced by existing/authorized operators, 24 it
nevertheless purchased the vessel and started operating the same. Obviously to go about this
obstacle to its operation, it then contrived a novel theory that what it proposes to operate is a private
ferryboat service across a small body of water for the exclusive use of its buses, trucks and
passengers as an incident to its franchise to convey passengers and cargo on land from Pasay City
to Tacloban so that it believes it need not secure a separate certificate of public convenience. 25
Based on this representation, no less than the Secretary of Justice was led to render an affirmative
opinion on October 20, 1981, 26 followed a few days later by the questioned decision of public
respondent of October 23, 1981. 27 Certainly the Court cannot give its imprimatur to such a situation.

Thus the Court holds that the water transport service between Matnog and Allen is not a ferry boat
service but a coastwise or interisland shipping service. Before private respondent may be issued a
franchise or CPC for the operation of the said service as a common carrier, it must comply with the
usual requirements of filing an application, payment of the fees, publication, adducing evidence at a
hearing and affording the oppositors the opportunity to be heard, among others, as provided by law.
28

WHEREFORE, the petitions are hereby GRANTED and the Decision of the respondent Board of
Transportation (BOT) of October 23, 1981 in BOT Case No. 81-348-C and its Order of July 21, 1982
in the same case denying the motions for reconsideration filed by petitioners are hereby Reversed
and set aside and declared null and void. Respondent PANTRANCO is hereby permanently enjoined

55 | P a g e
from operating the ferryboat service and/or coastwise/interisland services between Matnog and Allen
until it shall have secured the appropriate Certificate of Public Convenience (CPC) in accordance with
the requirements of the law, with costs against respondent PANTRANCO.
SO ORDERED.

San Pablo v. Pantranco South Express, Inc.

G.R. No. L-61461, 21 August 1987, 153 SCRA 199

FACTS:

Pantranco – engaged in the land transportation business with PUB service for passengersand freight
and various certificates for public conveniences to operate passenger busesfrom Metro Manila to
Bicol Region and Eastern Samar; through its counsel, it wrote toMaritime Industry Authority (MARINA)
requesting authority to lease/purchase a vesselnamed M/V “Black Double” “to be used for its project
to operate a ferryboat service fromMatnog, Sorsogon and Allen, Samar that will provide service to
company buses and freighttrucks that have to cross San Bernardo Strait; request was denied by
MARINA
It nevertheless acquired the vessel MV “Black Double”; it wrote the Chairman of the Boardof
Transportation that it proposes to operate a ferry service to carry its passenger busesand freight
trucks between Allen and Matnog in connection with its trips to Tacloban Cityfor the purpose of
continuing the highway, which is interrupted by a small body of water,the said proposed ferry
operation being merely a necessary and incidental service to itsmain service and obligation of
transporting its passengers; that being so, it believed thatthere was no need for it to obtain a separate
certificate for public convenience to operatea ferry service Matnog to cater exclusively to its passenger
buses and freight trucks. BOTgranted the request. Cardinal Shipping Corporation and the heirs of
San Pablo filedseparate motions for reconsideration.

ISSUE:

WON a ferry service is an extension of the highway and thus is a part of theauthority originally granted
PANTRANCO; 2. WON a land transportation company can beauthorized to operate a ferry service or
coastwise or interisland shipping service along itsauthorized route as an incident to its franchise
without the need of filing a separateapplication for the same

HELD:

No.

Ferry- continuation by means of boats, barges, or rafts, of a highway or the connection of highways
located on the opposite banks of a stream or other body of water. The termnecessarily implies
transportation for a short distance, almost invariably between twopoints, which is unrelated to other
transportation

Ferry service- service either by barges or rafts, even by motor or steam vessels, betweenthe banks
of a river or stream to continue the highway which is interrupted by the body of water, or in some
cases to connect two points on opposite shores of an arm of the seasuch as bay or lake which does
not involve too great a distance or too long a time tonavigate(engaged in the coastwise trade) ,service
between the different islands, involving more or less great distance and over moreor less turbulent
and dangerous waters of the open sea, to be coastwise or inter-islandservice; considered coastwise
or inter-island service conveyance of passengers, trucks and cargo from Matnog to Allen is certainly
not a ferryboat service but a coastwise or interisland shipping service. Under no circumstance canthe

56 | P a g e
sea between Matnog and Allen be considered a continuation of the highway. While aferry boat service
has been considered as a continuation of the highway when crossingrivers or even lakes, which are
small body of waters – separating the land, however, whenas in this case the two terminals, Matnog
and Allen are separated by an open sea it cannot be considered as a continuation of the highway.
PANTRANCO should secure a separate CPC for the operation of an interisland or coastwise shipping.
Its CPC as a bustransportation cannot be merely amended to include this water service under the
guisethat it is a mere private ferry service.

57 | P a g e
 THIRD DIVISION
G.R. No. 112287 December 12, 1997

NATIONAL STEEL CORPORATION, Petitioner, v. COURT OF APPEALS AND VLASONS

SHIPPING, INC., Respondents.
G.R. No. 112350 December 12, 1997
VLASONS SHIPPING, INC., Petitioner, v. COURT OF APPEALS AND NATIONAL STEEL
CORPORATION, Respondents.
PANGANIBAN, J.:

The Court finds occasion to apply the rules on the seaworthiness of private carrier, its owner's
responsibility for damage to the cargo and its liability for demurrage and attorney's 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:

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. Attorney's fees and expenses of litigation in the sum of P100,000.00; and

3. Costs of suit.

SO ORDERED. 2

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 attorney's fees and expenses of litigation.
Except as thus modified, the decision is AFFIRMED. There is no pronouncement as to costs.

SO ORDERED. 3

The Facts

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 the capacity that its owner, Vlasons Shipping, Inc., entered into a contract of affreightment or
contract of voyage charter hire with National Steel Corporation.

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

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(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 VSI's 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. ...

2. Cargo: Full cargo of steel products of not less than 2,500 MT, 10% more or less at Master's
option.

3. ...

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.

8. ...

9. Cargo Insurance: Charterer's and/or Shipper's 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.

xxx xxx xxx

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. . . . (Emphasis supplied).

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; . . . ; perils, dangers and accidents of
the sea or other navigable waters; . . . ; wastage in bulk or weight or any other loss or damage arising
from inherent defect, quality or vice of the cargo; insufficiency of packing; . . . ; 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."

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."

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(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 NSC's 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 vessel's three (3) hatches containing the shipment were
opened by plaintiff's 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")

(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 MASCO's 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 .
. . shows that wetting was caused by contact with SEA WATER".

(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.

(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 defendant's undertaking under
their Contract of Voyage Charter Hire.

(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 plaintiff's 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

60 | P a g e
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; land that the cargo was exposed
to rain and seawater spray while on the pier or in transit from the pier to plaintiff's warehouse after
discharge from the vessel; and that plaintiff's claim was highly speculative and grossly exaggerated
and that the small stain marks or sweat marks on the 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 attorney's 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 vessel's 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 has 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

61 | P a g e
without being in contract (sic) with water from outside especially when the weather is bad or raining.
The trust 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 . . ." 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 ship's 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 grade cargo at a lower freight rate.

(i) As regards defendant's 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 of P8,000.00 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:

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 vessel's officers.

II

The trial court erred in finding that the rusting of NSC's tinplates was due to the inherent nature or
character of the goods and not due to contact with seawater.

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III

The trial court erred in finding that the stevedores hired by NSC were negligent in the unloading of
NSC's shipment.

IV

The trial court erred in exempting VSI from liability on the ground of force majeure.

The trial court erred in finding that NSC violated the contract of voyage charter hire.

VI

The trial court erred in ordering NSC to pay freight, demurrage and attorney's 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

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 vessel's seaworthiness
at the beginning of the voyages; and

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

Questions of Fact

1. Whether or not the vessel was seaworthy and cargo-worthy;

2. Whether or not vessel's officers and crew were negligent in handling and caring for NSC's
cargo;

3. Whether or not NSC's cargo of tinplates did sweat during the voyage and, hence, rusted on
their own; and

4. Whether or not NSC's stevedores were negligent and caused the wetting[/]rusting of NSC's
tinplates.

In its separate petition, 9 VSI submits for the consideration of this Court the following alleged errors
of the CA:

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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 attorney's fees and expenses of litigation.

Amplifying the foregoing, VSI raises the following issues in its memorandum: 10

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 NSC's Failure to Insure the Cargo

3. Admissibility of Certificates Proving Seaworthiness

4. Demurrage and Attorney's Fees.

The Court's Ruling

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

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:

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. . . 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 VSI's Responsibility and

Liability Over NSC's 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
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 a 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

Burden of Proof

In view of the aforementioned contractual stipulations, NSC must prove that the damage to its
shipment was caused by VSI's willful negligence or failure to exercise due diligence in making MV
Vlasons I seaworthy 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 shipowner's obligations are governed by the
foregoing provisions of the Code of Commerce and not by the Civil Code which, as a general rule,
places the prima 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 carrier's custody does not put the burden of proof on the carrier.

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Since . . . 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 carrier's 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 shipowner's 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 carrier's possession does not cast on it the
burden of proving seaworthiness. . . . 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 the 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-appellant's [NSC's]
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 obligation's as if defendant-appellee
[VSI] had the burden of
proof." 21

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 court's factual
findings, as indeed NSC has not successfully proven the application of any of the aforecited
exceptions.

Was MV Vlasons I Seaworthy?

In any event, the records reveal that VSI exercised due diligence to make the ship seaworthy and fit
for the carriage of NSC's cargo of steel and tinplates. This is shown by the fact that it was drylocked
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 vessel's voyage from Iligan to Manila was the
vessel's 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

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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 . . ." 27 We disagree.

The records sufficiently support VSI's contention that the ship used the old tarpaulin, only in addition
to the new one used primarily to make the ship's 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 ship's
boatswain, Jose Pascua. The salient portions of said marine protest read:

. . . That the M/V "VLASONS I" departed Iligan City 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
re-secured 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

And the relevant portions of Jose Pascua's deposition are as follows:

q What is the purpose of the canvas cover?

a So that the cargo would not be soaked with water.

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

WITNESS

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.

ATTY DEL ROSARIO

67 | P a g e
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.

xxx xxx xxx

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 What is this beam made of?

a It is made of steel, sir.

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?

a There are five beams in one hatch opening.

ATTY DEL ROSARIO

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

a Plenty, sir, because there are several pieces on top of the hatch beam.

q And is there a space between the hatch boards?

a There is none, sir.

q They are tight together?

a Yes, sir.

q How tight?

a Very tight, sir.

q Now, on top of the hatch boards, according to you, is the canvass cover. How many canvas
covers?

68 | P a g e
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 ship's hatches and cargo holds remained waterproof. As aptly stated by the Court
of Appeals, ". . . 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-appellant's shipment of 1,677 skids of tinplates and
92 packages of hot rolled sheets or a total of 1,769 packages from NSC's pier in Iligan City arriving
safely at North Harbor, Port Area, Manila, on August 12, 1974; . . . 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:

ATTY ZAMORA:

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?

WITNESS:

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.

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

A At the Pier.

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?

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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 canvass 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 canvass and tinplates.

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?

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, 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

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. Angliongto's candid
answer in his aforequoted testimony satisfactorily explained the delay. Seven days lapsed because
he first called the attention of the stevedores, then the NSC's 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 for calling the stevedores' attention first and then the NSC's 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 NSC's 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

70 | P a g e
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 .
. . has the duty to load the cargo . . . in a prudent manner, and it is liable for injury to, or loss of, cargo
caused by its negligence . . . and where the officers and members and crew of the vessel do nothing
and have no responsibility in the discharge of cargo by stevedores . . . the vessel is not liable for loss
of, or damage to, the cargo caused by the negligence of the
stevedores . . ." 34 as in the instant case.

Do Tinplates "Sweat"?

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

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 NSC's 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, NSC's 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 latter's 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 NSC's obtaining an insurance over the cargo.

Third Issue: Admissibility of Certificates

Proving Seaworthiness

NSC's 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 Philippines Coast Guard at Cebu

2. Certificate of Inspection from the Philippine Coast Guard

3. International Load Line Certificate from the Philippine Coast Guard

4. Coastwise License from the Board of Transportation

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

71 | P a g e
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

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.

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 . . . and PCG Inspectors were
sent on board for inspection . . . 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) NSC's claim, therefore, is obviously misleading and erroneous.

At any rate, it should be stressed 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 Attorney's Fees

The contract of voyage charter hire provides inter alia:

xxx xxx xxx

2. Cargo: Full cargo of steel products of not less than 2,500 MT, 10% more or less at Master's
option.

xxx xxx xxx

6. Loading/Discharging Rate: 750 tons per WWDSHINC.

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

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:

Laytime runs according to the particular clause of the charter party. . . . 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

72 | P a g e
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.

Attorney's Fees

VSI assigns as error of law the Court of Appeals' deletion of the award of attorney's fees. We disagree.
While VSI was compelled to litigate to protect its rights, such fact by itself will not justify an award of
attorney's fees under Article 2208 of the Civil Code when ". . . no sufficient showing of bad faith would
be reflected in a party's persistence in a case other than an erroneous conviction of the righteousness
of his cause . . ." 44 Moreover, attorney's 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 one's 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 parry 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.

73 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 115381 December 23, 1994

KILUSANG MAYO UNO LABOR CENTER, petitioner,

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

Potenciano A. Flores for petitioner.

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

Jose F. Miravite for movants.

KAPUNAN, J.:

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

An abdication of the licensing and regulatory government agencies of their functions as the instant
petition seeks to show, is indeed lamentable. Not only is it an unsound administrative policy but it is
inimical to public trust and public interest as well.

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

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

The relevant antecedents are as follows:

On June 26, 1990; then Secretary of DOTC, Oscar M. Orbos, issued Memorandum Circular No. 90-
395 to then LTFRB Chairman, Remedios A.S. Fernando allowing provincial bus operators to charge
passengers rates within a range of 15% above and 15% below the LTFRB official rate for a period of
one (1) year. The text of the memorandum order reads in full:

One of the policy reforms and measures that is in line with the thrusts and the priorities set out in the
Medium-Term Philippine Development Plan (MTPDP) 1987 — 1992) is the liberalization of regulations
in the transport sector. Along this line, the Government intends to move away gradually from
regulatory policies and make progress towards greater reliance on free market forces.

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

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

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

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

For compliance. (Emphasis ours.)

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

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

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

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

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

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

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

On December 5, 1990, private respondent Provincial Bus Operators Association of the Philippines,
Inc. (PBOAP) filed an application for fare rate increase. An across-the-board increase of eight and a
half centavos (P0.085) per kilometer for all types of provincial buses with a minimum-maximum fare
range of fifteen (15%) percent over and below the proposed basic per kilometer fare rate, with the
said minimum-maximum fare range applying only to ordinary, first class and premium class buses
and a fifty-centavo (P0.50) minimum per kilometer fare for aircon buses, was sought.

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

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

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

AUTHORIZED FARES

LUZON
MIN. OF 5 KMS. SUCCEEDING KM.

REGULAR P1.50 P0.37

STUDENT P1.15 P0.28

VISAYAS/MINDANAO

REGULAR P1.60 P0.375

STUDENT P1.20 P0.285
FIRST CLASS (PER KM.)
LUZON P0.385
VISAYAS/
MINDANAO P0.395

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PREMIERE CLASS (PER KM.)
LUZON P0.395
VISAYAS/
MINDANAO P0.405

AIRCON (PER KM.) P0.415.4

On March 30, 1992, then Secretary of the Department of Transportation and Communications Pete
Nicomedes Prado issued Department Order No.
92-587 defining the policy framework on the regulation of transport services. The full text of the said
order is reproduced below in view of the importance of the provisions contained therein:

WHEREAS, Executive Order No. 125 as amended, designates the Department of Transportation and
Communications (DOTC) as the primary policy, planning, regulating and implementing agency on
transportation;

WHEREAS, to achieve the objective of a viable, efficient, and dependable transportation system, the
transportation regulatory agencies under or attached to the DOTC have to harmonize their decisions
and adopt a common philosophy and direction;

WHEREAS, the government proposes to build on the successful liberalization measures pursued over
the last five years and bring the transport sector nearer to a balanced longer term regulatory
framework;

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

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

The requirements to grant a certificate to operate, or certificate of public convenience, shall be: proof
of Filipino citizenship, financial capability, public need, and sufficient insurance cover to protect the
riding public.

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

In the interest of providing efficient public transport services, the use of the "prior operator" and the
"priority of filing" rules shall be discontinued. The route measured capacity test or other similar tests
of demand for vehicle/vessel fleet on any route shall be used only as a guide in weighing the merits
of each franchise application and not as a limit to the services offered.

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

The right of an operator to leave the industry is recognized as a business decision, subject only to the
filing of appropriate notice and following a phase-out period, to inform the public and to minimize
disruption of services.

2. Rate and Fare Setting. Freight rates shall be freed gradually from government controls.
Passenger fares shall also be deregulated, except for the lowest class of passenger service (normally

77 | P a g e
third class passenger transport) for which the government will fix indicative or reference fares.
Operators of particular services may fix their own fares within a range 15% above and below the
indicative or reference rate.

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

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

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

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

For the compliance of all concerned. (Emphasis ours)

On October 8, 1992, public respondent Secretary of the Department of Transportation and

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

On February 17, 1993, the LTFRB issued Memorandum Circular

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

xxx xxx xxx

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

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

xxx xxx xxx

V. Rate and Fare Setting

78 | P a g e
The control in pricing shall be liberalized to introduce price competition complementary with the quality
of service, subject to prior notice and public hearing. Fares shall not be provisionally authorized
without public hearing.

A. On the General Structure of Rates

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

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

xxx xxx xxx

(Emphasis ours).

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

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

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

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

SO ORDERED.6

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

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

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

In its Comment, private respondent PBOAP, while not actually touching upon the issues raised by the
petitioner, questions the wisdom and the manner by which the instant petition was filed. It asserts that

79 | P a g e
the petitioner has no legal standing to sue or has no real interest in the case at bench and in obtaining
the reliefs prayed for.

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

We find the instant petition impressed with merit.

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

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

xxx xxx xxx

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

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

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

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

. . . A party's standing before this Court is a procedural technicality which it may, in the exercise of its
discretion, set aside in view of the importance of the issues raised. In the landmark Emergency
Powers Cases, [G.R. No. L-2044 (Araneta v. Dinglasan); G.R. No. L-2756 (Araneta
v. Angeles); G.R. No. L-3054 (Rodriguez v. Tesorero de Filipinas); G.R. No. L-3055 (Guerrero v.
Commissioner of Customs); and G.R. No. L-3056 (Barredo v. Commission on Elections), 84 Phil. 368
(1949)], this Court brushed aside this technicality because "the transcendental importance to the
public of these cases demands that they be settled promptly and definitely, brushing aside, if we must,

80 | P a g e
technicalities of procedure. (Avelino vs. Cuenco, G.R. No. L-2621)." Insofar as taxpayers' suits are
concerned, this Court had declared that it "is not devoid of discretion as to whether or not it should be
entertained," (Tan v. Macapagal, 43 SCRA 677, 680 [1972]) or that it "enjoys an open discretion to
entertain the same or not." [Sanidad v. COMELEC, 73 SCRA 333 (1976)].

xxx xxx xxx

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

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

In the 1975 case of Aquino v. Commission on Elections (62 SCRA 275 [1975]), this Court, despite its
unequivocal ruling that the petitioners therein had no personality to file the petition, resolved
nevertheless to pass upon the issues raised because of the far-reaching implications of the petition.
We did no less in De Guia v. COMELEC (Supra) where, although we declared that De Guia "does not
appear to have locus standi, a standing in law, a personal or substantial interest," we brushed aside

81 | P a g e
the procedural infirmity "considering the importance of the issue involved, concerning as it does the
political exercise of qualified voters affected by the apportionment, and petitioner alleging abuse of
discretion and violation of the Constitution by respondent."

Now on the merits of the case.

On the fare range scheme.

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

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

xxx xxx xxx

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

xxx xxx xxx

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

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

In the case at bench, the authority given by the LTFRB to the provincial bus operators to set a fare
range over and above the authorized existing fare, is illegal and invalid as it is tantamount to an undue
delegation of legislative authority. Potestas delegata non delegari potest. What has been delegated
cannot be delegated. This doctrine is based on the ethical principle that such a delegated power
constitutes not only a right but a duty to be performed by the delegate through the instrumentality of
his own judgment and not through the intervening mind of another.10 A further delegation of such
power would indeed constitute a negation of the duty in violation of the trust reposed in the delegate
mandated to discharge it directly.11 The policy of allowing the provincial bus operators to change and
increase their fares at will would result not only to a chaotic situation but to an anarchic state of affairs.

82 | P a g e
This would leave the riding public at the mercy of transport operators who may increase fares every
hour, every day, every month or every year, whenever it pleases them or whenever they deem it
"necessary" to do so. In Panay Autobus Co. v. Philippine Railway Co.,12 where respondent Philippine
Railway Co. was granted by the Public Service Commission the authority to change its freight rates
at will, this Court categorically declared that:

In our opinion, the Public Service Commission was not authorized by law to delegate to the Philippine
Railway Co. the power of altering its freight rates whenever it should find it necessary to do so in order
to meet the competition of road trucks and autobuses, or to change its freight rates at will, or to regard
its present rates as maximum rates, and to fix lower rates whenever in the opinion of the Philippine
Railway Co. it would be to its advantage to do so.

The mere recital of the language of the application of the Philippine Railway Co. is enough to show
that it is untenable. The Legislature has delegated to the Public Service Commission the power of
fixing the rates of public services, but it has not authorized the Public Service Commission to delegate
that power to a common carrier or other public service. The rates of public services like the Philippine
Railway Co. have been approved or fixed by the Public Service Commission, and any change in such
rates must be authorized or approved by the Public Service Commission after they have been shown
to be just and reasonable. The public service may, of course, propose new rates, as the Philippine
Railway Co. did in case No. 31827, but it cannot lawfully make said new rates effective without the
approval of the Public Service Commission, and the Public Service Commission itself cannot
authorize a public service to enforce new rates without the prior approval of said rates by the
commission. The commission must approve new rates when they are submitted to it, if the evidence
shows them to be just and reasonable, otherwise it must disapprove them. Clearly, the commission
cannot determine in advance whether or not the new rates of the Philippine Railway Co. will be just
and reasonable, because it does not know what those rates will be.

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

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

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

Year** LTFRB authorized Fare Range Fare to be

rate*** collected per

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kilometer

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

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

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

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

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

On the presumption of public need.

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

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

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

The above-quoted provision is entirely incompatible and inconsistent with Section 16(c)(iii) of the
Public Service Act which requires that before a CPC will be issued, the applicant must prove by proper
notice and hearing that the operation of the public service proposed will promote public interest in a

84 | P a g e
proper and suitable manner. On the contrary, the policy guideline states that the presumption of public
need for a public service shall be deemed in favor of the applicant. In case of conflict between a
statute and an administrative order, the former must prevail.

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

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

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

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

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

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

85 | P a g e
applicant for a certificate of public convenience and placing the burden of proving that there is no
need for the proposed service to the oppositor.

The Temporary Restraining Order issued on June 20, 1994 is hereby MADE PERMANENT insofar
as it enjoined the bus fare rate increase granted under the provisions of the aforementioned
administrative circulars, memoranda and/or orders declared invalid.No pronouncement as to costs.

Kilusang Mayo Uno Labor Center vs Garcia

239 SCRA 538 (1994)
Facts: The Kilusang Mayo Uno Labor Center (KMU) assails the constitutionality and validity of a
memorandum which, among others, authorize provincial bus and jeepney operators to increase or
decrease the prescribed transportation fares without application therefore with the LTFRB, and
without hearing and approval thereof by said agency.

Issue: Whether or not the absence of notice and hearing and the delegation of authority in the increase
or decrease of transportation fares to provincial bus and jeepney operators is illegal?

Held: Under Section 16 (c) of the Public Service Act, as amended, the legislature delegated to the
defunct Public Service Commission the power of fixing the rates of public services. LTFRB, the
existing regulatory body today, is likewise vested with the same under Executive Order 202.

The authority given by the LTFRB to the bus operators to set fares over and above the authorized
existing fare is illegal and invalid, as it is tantamount to undue delegation of legislative authority. Under
the maxim potestas delegate non delegari potest – “what has been delegated cannot be delegated.”

The policy allowing provincial bus operators to change and increase their fares would result not only
to a chaotic situation but to an anarchic state of affairs. This would leave the riding public at the mercy
of transport operators who may increase fares, every hour, every day, every month or every year,
whenever it pleases them or whenever they deem it necessary to do so. Furthermore, under the
Section 16 (a) of Public Service Act, there must be proper notice and hearing in the fixing of rates, to
arrive at a just and reasonable rate acceptable to both the public utility and the public.

86 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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.

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-Operate-
Transfer (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 Build-
Transfer (BT).

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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

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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 re-
negotiated 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

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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.

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.

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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 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).

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).

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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
pre-scheduled 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.

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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

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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

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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,

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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 in pari 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

96 | P a g e
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 forty-five (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
(Develop-operate-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. 93-94). 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.

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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.

SO ORDERED

98 | P a g e
 Tatad vs. Garcia
241 SCRA 334, GR. No. 114222. April 6, 1995

Facts: DOTC planned to construct a light railway transit line along Edsa. EDSA LRT Corporation,
Ltd., a foreign corporation was awarded the contract to build, lease and transfer the said light
railway.

The said award was questioned by the petitioners on the basis that a foreign corporation cannot
own the EDSA LRT III, a public utility as it violates the Constitution.

Issue: Whether or not an owner and lessor of the facilities used by a public utility constitute a public
utility?

Held: EDSA LRT Corporation, Ltd. Is admittedly a foreign corporation “duly incorporated and
existing under the laws of Hong Kong”. However, there is no dispute that once the EDSA LRT III is
constructed, the private respondent, as lessor, will turn it over to DOTC as lessee, for the latter to
operate the system and pay rentals for the said use.

What private respondent owns are the rail tracks, rolling stocks, 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 themselves constitute a public utility. What constitutes a public utility in not their
ownership but their use to serve the public.

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. In law, there is a clear
distinction between the “operation” of a public utility and the ownership of the facilities and the
equipment used to serve the public.

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 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-28673 October 23, 1984

SAMAR MINING COMPANY, INC., plaintiff-appellee,
vs.
NORDEUTSCHER LLOYD and C.F. SHARP & COMPANY, INC., defendants-appellants.
CUEVAS
This is an appeal taken directly to Us on certiorari from the decision of the defunct Court of First
Instance of Manila, finding defendants carrier and agent, liable for the value of goods never delivered
to plaintiff consignee. The issue raised is a pure question of law, which is, the liability of the
defendants, now appellants, under the bill of lading covering the subject shipment.

The case arose from an importation made by plaintiff, now appellee, SAMAR MINING COMPANY,
INC., of one (1) crate Optima welded wedge wire sieves through the M/S SCHWABENSTEIN a vessel
owned by defendant-appellant NORDEUTSCHER LLOYD, (represented in the Philippines by its
agent, C.F. SHARP & CO., INC.), which shipment is covered by Bill of Lading No. 18 duly issued to
consignee SAMAR MINING COMPANY, INC. Upon arrival of the aforesaid vessel at the port of
Manila, the aforementioned importation was unloaded and delivered in good order and condition to
the bonded warehouse of AMCYL. 1 The goods were however never delivered to, nor received by,
the consignee at the port of destination — Davao.

When the letters of complaint sent to defendants failed to elicit the desired response, consignee herein
appellee, filed a formal claim for P1,691.93, the equivalent of $424.00 at the prevailing rate of
exchange at that time, against the former, but neither paid. Hence, the filing of the instant suit to
enforce payment. Defendants-appellants brought in AMCYL as third party defendant.

The trial court rendered judgment in favor of plaintiff, ordering defendants to pay the amount of
P1,691.93 plus attorney's fees and costs. However, the Court stated that defendants may recoup
whatever they may pay plaintiff by enforcing the judgment against third party defendant AMCYL which
had earlier been declared in default. Only the defendants appealed from said decision.

The issue at hand demands a close scrutiny of Bill of Lading No. 18 and its various clauses and
stipulations which should be examined in the light of pertinent legal provisions and settled
jurisprudence. This undertaking is not only proper but necessary as well because of the nature of the
bill of lading which operates both as a receipt for the goods; and more importantly, as a contract to
transport and deliver the same as stipulated therein. 2 Being a contract, it is the law between the
parties thereto 3 who are bound by its terms and conditions 4 provided that these are not contrary to
law, morals, good customs, public order and public policy. 5

Bill of Lading No. 18 sets forth in page 2 thereof 6 that one (1) crate of Optima welded wedge wire
sieves was received by the carrier NORDEUTSCHER LLOYD at the "port of loading" which is Bremen,
Germany, while the freight had been prepaid up to the port of destination or the "port of discharge of
goods in this case, Davao, the carrier undertook to transport the goods in its vessel, M/S
SCHWABENSTEIN only up to the "port of discharge from ship-Manila. Thereafter, the goods were to

100 | P a g e
be transshipped by the carrier to the port of destination or "port of discharge of goods The stipulation
is plainly indicated on the face of the bill which contains the following phrase printed below the space
provided for the port of discharge from ship", thus: if goods are to be transshipped at port of discharge,
show destination under the column for "description of contents." As instructed above, the following
words appeared typewritten under the column for "description of contents":

PORT OF DISCHARGE OF GOODS: DAVAO

FREIGHT PREPAID 8
It is clear, then, that in discharging the goods from the ship at the port of Manila, and delivering the
same into the custody of AMCYL, the bonded warehouse, appellants were acting in full accord with
the contractual stipulations contained in Bill of Lading No. 18. The delivery of the goods to AMCYL
was part of appellants' duty to transship the goods from Manila to their port of destination-Davao. The
word "transship" means to transfer for further transportation from one ship or conveyance to another.

The extent of appellant carrier's responsibility and/or liability in the transshipment of the goods in
question are spelled out and delineated under Section 1, paragraph 3 of Bill of Lading No. 18, to wit:
The carrier shall not be liable in any capacity whatsoever for any delay, loss or damage occurring
before the goods enter ship's tackle to be loaded or after the goods leave ship's tackle to be
discharged, transshipped or forwarded ... (Emphasis supplied) and in Section 11 of the same Bill,
which provides: Whenever the carrier or m aster may deem it advisable or in any case where the
goods are placed at carrier's disposal at or consigned to a point where the ship does not expect to
load or discharge, the carrier or master may, without notice, forward the whole or any part of the
goods before or after loading at the original port of shipment, ... This carrier, in making arrangements
for any transshipping or forwarding vessels or means of transportation not operated by this carrier
shall be considered solely the forwarding agent of the shipper and without any other responsibility
whatsoever even though the freight for the whole transport has been collected by him. ... Pending or
during forwarding or transshipping the carrier may store the goods ashore or afloat solely as agent of
the shipper and at risk and expense of the goods and the carrier shall not be liable for detention nor
responsible for the acts, neglect, delay or failure to act of anyone to whom the goods are entrusted or
delivered for storage, handling or any service incidental thereto (Emphasis supplied) 10

Defendants-appellants now shirk liability for the loss of the subject goods by claiming that they have
discharged the same in full and good condition unto the custody of AMCYL at the port of discharge
from ship — Manila, and therefore, pursuant to the aforequoted stipulation (Sec. 11) in the bill of
lading, their responsibility for the cargo had ceased. 11

We find merit in appellants' stand. The validity of stipulations in bills of lading exempting the carrier
from liability for loss or damage to the goods when the same are not in its actual custody has been
upheld by Us in PHOENIX ASSURANCE CO., LTD. vs. UNITED STATES LINES, 22 SCRA 674
(1968). Said case matches the present controversy not only as to the material facts but more
importantly, as to the stipulations contained in the bill of lading concerned. As if to underline their
awesome likeness, the goods in question in both cases were destined for Davao, but were discharged
from ship in Manila, in accordance with their respective bills of lading.

The stipulations in the bill of lading in the PHOENIX case which are substantially the same as the
subject stipulations before Us, provides:

The carrier shall not be liable in any capacity whatsoever for any loss or damage to the goods while
the goods are not in its actual custody. (Par. 2, last subpar.)

xxx xxx xxx

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The carrier or master, in making arrangements with any person for or in connection with all
transshipping or forwarding of the goods or the use of any means of transportation or forwarding of
goods not used or operated by the carrier, shall be considered solely the agent of the shipper and
consignee and without any other responsibility whatsoever or for the cost thereof ... (Par. 16). 12

Finding the above stipulations not contrary to law, morals, good customs, public order or public policy,
We sustained their validity 13 Applying said stipulations as the law between the parties in the
aforecited case, the Court concluded that:

... The short form Bill of Lading ( ) states in no uncertain terms that the port of discharge of the cargo
is Manila, but that the same was to be transshipped beyond the port of discharge to Davao City.
Pursuant to the terms of the long form Bill of Lading ( ), appellee's responsibility as a common carrier
ceased the moment the goods were unloaded in Manila and in the matter of transshipment, appellee
acted merely as an agent of the shipper and consignee. ... (Emphasis supplied) 14

Coming now to the case before Us, We hold, that by the authority of the above pronouncements, and
in conformity with the pertinent provisions of the New Civil Code, Section 11 of Bill of Lading No. 18
and the third paragraph of Section 1 thereof are valid stipulations between the parties insofar as they
exempt the carrier from liability for loss or damage to the goods while the same are not in the latter's
actual custody.

The liability of the common carrier for the loss, destruction or deterioration of goods transported from
a foreign country to the Philippines is governed primarily by the New Civil Code. 15 In all matters not
regulated by said Code, the rights and obligations of common carriers shall be governed by the Code
of Commerce and by special laws. 16 A careful perusal of the provisions of the New Civil Code on
common carriers (Section 4, Title VIII, Book IV) directs our attention to Article 1736 thereof, which
reads:

Article 1736. The extraordinary responsibility of the common carrier lasts from the time the goods
are unconditionally placed in the possession of, and received by the carrier for transportation until the
same are delivered, actually or constructively, by the carrier to the consignee, or to the person who
has a right to receive them, without prejudice to the provisions of article 1738.

Article 1738 referred to in the foregoing provision runs thus:

Article 1738. The extraordinary liability of the common carrier continues to be operative even during
the time the goods are stored in a warehouse of the carrier at the place of destination, until the
consignee has been advised of the arrival of the goods and has had reasonable opportunity thereafter
to remove them or otherwise dispose of them.

There is no doubt that Art. 1738 finds no applicability to the instant case. The said article contemplates
a situation where the goods had already reached their place of destination and are stored in the
warehouse of the carrier. The subject goods were still awaiting transshipment to their port of
destination, and were stored in the warehouse of a third party when last seen and/or heard of.
However, Article 1736 is applicable to the instant suit. Under said article, the carrier may be relieved
of the responsibility for loss or damage to the goods upon actual or constructive delivery of the same
by the carrier to the consignee, or to the person who has a right to receive them. In sales, actual
delivery has been defined as the ceding of corporeal possession by the seller, and the actual
apprehension of corporeal possession by the buyer or by some person authorized by him to receive
the goods as his representative for the purpose of custody or disposal. 17 By the same token, there

102 | P a g e
is actual delivery in contracts for the transport of goods when possession has been turned over to the
consignee or to his duly authorized agent and a reasonable time is given him to remove the goods.
18 The court a quo found that there was actual delivery to the consignee through its duly authorized
agent, the carrier.

It becomes necessary at this point to dissect the complex relationship that had developed between
appellant and appellee in the course of the transactions that gave birth to the present suit. Two
undertakings appeared embodied and/or provided for in the Bill of Lading 19 in question. The first is
FOR THE TRANSPORT OF GOODS from Bremen, Germany to Manila. The second, THE
TRANSSHIPMENT OF THE SAME GOODS from Manila to Davao, with appellant acting as agent of
the consignee. 20 At the hiatus between these two undertakings of appellant which is the moment
when the subject goods are discharged in Manila, its personality changes from that of carrier to that
of agent of the consignee. Thus, the character of appellant's possession also changes, from
possession in its own name as carrier, into possession in the name of consignee as the latter's agent.
Such being the case, there was, in effect, actual delivery of the goods from appellant as carrier to the
same appellant as agent of the consignee. Upon such delivery, the appellant, as erstwhile carrier,
ceases to be responsible for any loss or damage that may befall the goods from that point onwards.
This is the full import of Article 1736, as applied to the case before Us.

But even as agent of the consignee, the appellant cannot be made answerable for the value of the
missing goods, It is true that the transshipment of the goods, which was the object of the agency, was
not fully performed. However, appellant had commenced said performance, the completion of which
was aborted by circumstances beyond its control. An agent who carries out the orders and instructions
of the principal without being guilty of negligence, deceit or fraud, cannot be held responsible for the
failure of the principal to accomplish the object of the agency, 21 This can be gleaned from the
following provisions of the New Civil Code on the obligations of the agent:

Article 1884. The agent is bound by his acceptance to carry out the agency, and is liable for the
damages which, through his non-performance, the principal may suffer.

xxx xxx xxx

Article 1889. The agent shall be liable for damages if, there being a conflict between his interests
and those of the principal, he should prefer his own.

Article 1892. The agent may appoint a substitute if the principal has not prohibited him from doing
so; but he shall be responsible for the acts of the substitute:

(1) When he was not given the power to appoint one;

(2) When he was given such power but without designating the person and the person appointed
was notoriously incompetent or insolvent.

xxx xxx xxx

Article 1909. The agent is responsible not only for fraud, but also for negligence which shall be
judged with more or less rigor by the courts, according to whether the agency was or was not for a
compensation.

The records fail to reveal proof of negligence, deceit or fraud committed by appellant or by its
representative in the Philippines. Neither is there any showing of notorious incompetence or

103 | P a g e
insolvency on the part of AMCYT, which acted as appellant's substitute in storing the goods awaiting
transshipment.

The actions of appellant carrier and of its representative in the Philippines being in full faith with the
lawful stipulations of Bill of Lading No. 18 and in conformity with the provisions of the New Civil Code
on common carriers, agency and contracts, they incur no liability for the loss of the goods in question.

WHEREFORE, the appealed decision is hereby REVERSED. Plaintiff-appellee's complaint is hereby

DISMISSED.

No costs.
SO ORDERED
Samar Mining Co., Inc. vs. Nordeutscher Lloyd
(132 SCRA 529)
Facts: Samar Mining imported 1 crate optima welded wire (amounting to around USD 424 or PhP
1,700) from Germany, which was shipped on a vessel owned by Nordeutscher Lloyd (M/S
Schwabenstein). The shipment was unloaded in Manila into a barge for transshipment to Davao and
temporarily stored in a bonded warehouse owned by AMCYL. The goods never reached Davao and
were never delivered to or received by the consignee, Samar Mining Co.

CFI ruled in favor of Samar Mining holding Nordeutscher Lloyd liable. However, defendants may
recoup whatever they may pay Samar Mining by enforcing the judgment against third party defendant
AMCYL.
Issue: Whether Nordeustscher Lloyd is liable for the loss of the goods as common carrier?

Held: No. At the time of the loss of the goods, the character of possession of Nordeutscher Lloyd
shifted from common carrier to agent of Samar Mining Co.
The Bill of Lading is serves both as a receipt of goods and is likewise the contract to transport and
deliver the same as stipulated. It is a contract and is therefore the law between the parties. The Bill
of Lading in question stipulated that Nordeutscher Lloyd only undertook to transport the goods in its
vessel only up to the port of discharge from ship, which is Manila. The Bill of Lading further stipulated
that the goods were to be transshipped by the carrier from Manila to the port of destination – Davao.
By unloading the shipment in Manila and delivering the goods to the warehouse of AMCYL, the
appellant was acting within the contractual stipulations contained in the Bill of Lading.

Article 1736 of the Civil Code relives the carrier of responsibility over the shipment as soon as the
carrier makes actual or constructive delivery of the goods to the consignee or to the person who has
a right to receive them.

Under the Civil Code provisions governing Agency, an agent can only be held liable in cases where
his acts are attended by fraud, negligence, deceit or if there is a conflict of interest between him and
the principal. Under the same law an agent is likewise liable if he appoints a substitute when he was
not given the power to appoint one or otherwise appoints one that is notoriously incompetent or
insolvent. These facts were not proven in the record.

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 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-30212 September 30, 1987

BIENVENIDO GELISAN, petitioner,
vs.
BENITO ALDAY, respondent.
PADILLA, J.:

Review on certiorari of the judgment * rendered by the Court of Appeals, dated 11 October 1968, as
amended by its resolution, dated 11 February 1969, in CA-G.R. No. 32670-R, entitled: "Benito Alday,
plaintiff-appellant, vs. Roberto Espiritu and Bienvenido Gelisan, defendants-appellees," which
ordered the herein petitioner Bienvenido Gelisan to pay, jointly and severally, with Roberto Espiritu,
the respondent Benito Alday the amount of P5,397.30, with. legal interest thereon from the filing of
the complaint, and the costs of suit; and for the said Roberto Espiritu to pay or refund the petitioner
Bienvenido Gelisan whatever amount the latter may have paid to the respondent Benito Alday by
virtue of the judgment.

The uncontroverted facts of the case are, as follows:

Defendant Bienvenido Gelisan is the owner of a freight truck bearing plate No. TH-2377. On January
31, 1962, defendant Bienvenido Gelisan and Roberto Espiritu entered into a contract marked Exhibit
3-Gelisan under which Espiritu hired the same freight truck of Gelisan for the purpose of hauling rice,
sugar, flour and fertilizer at an agreed price of P18.00 per trip within the limits of the City of Manila
provided the loads shall not exceed 200 sacks. It is also agreed that Espiritu shall bear and pay all
losses and damages attending the carriage of the goods to be hauled by him. The truck was taken by
a driver of Roberto Espiritu on February 1, 1962. Plaintiff Benito Alday, a trucking operator, and who
owns about 15 freight trucks, had known the defendant Roberto Espiritu since 1948 as a truck
operator. Plaintiff had a contract to haul the fertilizers of the Atlas Fertilizer Corporation from Pier 4,
North Harbor, to its Warehouse in Mandaluyong. Alday met Espiritu at the gate of Pier 4 and the latter
offered the use of his truck with the driver and helper at 9 centavos per bag of fertilizer. The offer was
accepted by plaintiff Alday and he instructed his checker Celso Henson to let Roberto Espiritu haul
the fertilizer. Espiritu made two hauls of 200 bags of fertilizer per trip. The fertilizer was delivered to
the driver and helper of Espiritu with the necessary way bill receipts, Exhibits A and B. Espiritu,
however, did not deliver the fertilizer to the Atlas Fertolizer bodega at Mandaluyong. The signatures
appearing in the way bill receipts Exhibits A and B of the Alday Transportation admittedly not the
signature of any representative or employee of the Atlas Fertilizer Corporation. Roberto Espiritu could
not be found, and plaintiff reported the loss to the Manila Police Department. Roberto Espiritu was
later arrested and booked for theft. ...

Subsequently, plaintiff Aiday saw the truck in question on Sto. Cristo St. and he notified the Manila
Police Department, and it was impounded by the police. It was claimed by Bienvenido Gelisan from
the Police Department after he had been notified by his employees that the truck had been impounded
by the police; but as he could not produce at the time the registration papers, the police would not
release the truck to Gelisan. As a result of the impounding of the truck according to Gelisan, ... and
that for the release of the truck he paid the premium of P300 to the surety company. 1

Benito Alday was compelled to pay the value of the 400 bags of fertilizer, in the amount of P5,397.33,
to Atlas Fertilizer Corporation so that, on 12 February 1962, he (Alday) filed a complaint against

105 | P a g e
Roberto Espiritu and Bienvenido Gelisan with the Court of First Instance of Manila, docketed therein
as Civil Case No. 49603, for the recovery of damages suffered by him thru the criminal acts committed
by the defendants.

The defendant, Roberto Espiritu failed to file an answer and was, accordingly, declared in default.

The defendant, Bienvenido Gelisan, upon the other hand, disowned responsibility. He claimed that
he had no contractual relations with the plaintiff Benito Alday as regards the hauling and/or delivery
of the 400 bags of fertilizer mentioned in the complaint; that the alleged misappropriation or
nondelivery by defendant Roberto Espiritu of plaintiff's 400 bags of fertilizer, was entirely beyond his
(Gelisan's) control and knowledge, and which fact became known to him, for the first time, on 8
February 1962 when his freight truck, with plate No. TH-2377, was impounded by the Manila Police
Department, at the instance of the plaintiff; and that in his written contract of hire with Roberto Espiritu,
it was expressly provided that the latter will bear and pay all loss and damages attending the carriage
of goods to be hauled by said Roberto Espiritu.

After trial, the Court of First Instance of Manila ruled that Roberto Espiritu alone was liable to Benito
Alday, since Bienvenido Gelisan was not privy to the contract between Espiritu and Alday. The
dispositive portion of the decision reads, as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Roberto
Espiritu for the sum of P6,000 with interest at the legal rate from the time of the filing of the complaint,
and the costs of the suit. Plantiff's complaint is dismissed with respect to defendant Bienvenido
Gelisan, and judgment is rendered in favor of defendant Bienvenido Gelisan and against the plaintiff
for the sum of P350. 2

On appeal, however, the Court of Appeals, citing the case of Montoya vs. Ignacio, 3 found that
Bienvenido Gelisan is likewise liable for being the registered owner of the truck; and that the lease
contract, executed by and between Bienvenido Gelisan and Roberto Espiritu, is not binding upon
Benito Alday for not having been previously approved by the Public Service Commission. Accordingly,
it sentenced Bienvenido Gelisan to pay, jointly and severally with Roberto Espiritu, Benito Alday the
amount of P5,397.30, with legal interest thereon from the filing of the complaint; and to pay the costs.
Roberto Espiritu, in turn, was ordered to pay or refund Bienvenido Gelisan whatever amount the latter
may have paid to Benito Alday by virtue of the judgment. 4

Hence, the present recourse by Bienvenido Gelisan.

The petition is without merit. The judgment rendered by the Court of Appeals, which is sought to be
reviewed, is in accord with the facts and the law on the case and we find no cogent reason to disturb
the same. The Court has invariably held in several decisions that the registered owner of a public
service vehicle is responsible for damages that may arise from consequences incident to its operation
or that may be caused to any of the passengers therein. 5 The claim of the petitioner that he is not
hable in view of the lease contract executed by and between him and Roberto Espiritu which exempts
him from liability to third persons, cannot be sustained because it appears that the lease contract,
adverted to, had not been approved by the Public Service Commission. It is settled in our
jurisprudence that if the property covered by a franchise is transferred or leased to another without
obtaining the requisite approval, the transfer is not binding upon the public and third persons. 6

We also find no merit in the petitioner's argument that the rule requiring the previous approval by the
Public Service Commission, of the transfer or lease of the motor vehicle, may be applied only in cases
where there is no positive Identification of the owner or driver, or where there are very scant means

106 | P a g e
of Identification, but not in those instances where the person responsible for damages has been fixed
or determined beforehand, as in the case at bar. The reason for the rule we reiterate in the present
case, was explained by the Court in Montoya vs. Ignacio, 7 thus:

There is merit in this contention. The law really requires the approval of the Public Service
Commission in order that a franchise, or any privilege pertaining thereto, may be sold or leased
without infringing the certificate issued to the grantee. The reason is obvious. Since a franchise is
personal in nature any transfer or lease thereof should be notified to the Public Service Commission
so that the latter mav take proper safeguards to protect the interest of the public. In fact, the law
requires that, before the approval is granted, there should be a public hearing, with notice to all
interested parties, in order that the Commission may determine if there are good and reasonable
grounds justifying the transfer or lease of the property covered by the franchise, or if the sale or lease
is detrimental to public interest. Such being the reason and philosophy behind this requirement, it
follows that if the property covered by the franchise is transferred, or leased to another without
obtaining the requisite approval, the transfer is not binding against the Public Service Commission
and in contemplation of law the grantee continues to be responsible under the franchise in relation to
the Commission and to the Public. Since the lease of the jeepney in question was made without such
approval the only conclusion that can be drawn is that Marcelino Ignacio still continues to be its
operator in contemplation of law, and as such is responsible for the consequences incident to its
operation, one of them being the collision under consideration.

Bienvenido Gelisan, the registered owner, is not however without recourse. He has a right to be
indemnified by Roberto Espiritu for the amount titat he may be required to pay as damages for the
injury caused to Benito Alday, since the lease contract in question, although not effective against the
public for not having been approved by the Public Service Commission, is valid and binding between
the contracting parties. 8

We also find no merit in the petitioner's contention that his liability is only subsidiary. The Court has
consistently considered the registered owner/operator of a public service vehicle to be jointly and
severally liable with the driver for damages incurred by passengers or third persons as a consequence
of injuries sustained in the operation of said vehicles. Thus, in the case of Vargas vs. Langcay, 9 the
Court said:

We hold that the Court of Appeals erred in considering appellant-petitioner Diwata Vargas only
subsidiarily liable under Article 103 of the Revised Penal Code. This court, in previous decisions, has
always considered the registered owner/operator of a passenger vehicle, jointly and severally liable
with the driver, for damages incurred by passengers or third persons as a consequence of injuries (or
death) sustained in the operation of said vehicles. (Montoya vs. Ignacio, 94 Phil., 182; Timbol vs.
Osias, G.R. No. L-7547, April 30, 1955; Vda. de Medina vs. Cresencia, 99 Phil., 506; Necesito vs.
Paras, 104 Phil., 75; Erezo vs. Jepte, 102 Phil., 103; Tamayo vs. Aquino and Rayos vs Tamayo, 105
Phil., 949; 56 Off. Gaz. [36] 5617.) In the case of Erezo vs. Jepte, Supra, We held:

* * * In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily
responsible for the damage caused * * * (Emphasis supplied)
In the case of Tamayo vs. Aquino, supra, We said:
* * * As Tamayo is the registered owner of the truck, his responsibffity to the public or to any passenger
riding in the vehicle or truck must be direct * * * (Emphasis supplied)

WHEREFORE, the petition is hereby DENIED. With costs against the petitioner.

SO ORDERED.

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 Gelisan vs. Alday
(154 SCRA 388)

Facts: Bienvenido Gelisan and Roberto Espiritu entered into a contract where the former hired the
truck of Gelisan for the purpose of transporting goods at the price of P18.00. It is also agreed that
Espiritu shall bear and pay all losses and damages attending the carriage of the goods to be hauled
by him. Benito Alday, a trucking operator, had a contract to haul the fertilizers of the Atlas Fertilizer
Corporation from Pier 4, North Harbor, to its Warehouse in Mandaluyong. Alday met Espiritu at the
gate of Pier 4 and the latter offered the use of his truck with the driver and helper at 9 centavos per
bag of fertilizer. The offer was accepted by plaintiff Alday and he instructed his checker Celso Henson
to let Roberto Espiritu haul the fertilizer. Espiritu made two hauls of 200 bags of fertilizer per trip. The
fertilizer was delivered to the driver and helper of Espiritu with the necessary way bill receipts, Exhibits
A and B. Espiritu, however, did not deliver the fertilizer to the Atlas Fertilizer bodega at Mandaluyong.

Subsequently, plaintiff Alday saw the truck in question on Sto. Cristo St. and he notified the Manila
Police Department, and it was impounded by the police. It was claimed by Bienvenido Gelisan. As a
result of the impounding of the truck according to Gelisan and that for the release of the truck he paid
the premium of P300 to the surety company.

Benito Alday was compelled to pay the value of the 400 bags of fertilizer, in the amount of P5,397.33,
to Atlas Fertilizer Corporation so that, on 12 February 1962, he (Alday) filed a complaint against
Roberto Espiritu and Bienvenido Gelisan with the CFI Manila

Bienvenido Gelisan, upon the other hand, claimed that he had no contractual relations with the plaintiff
Benito Alday.

Issue: Whether Gelisan being a registered owner is responsible for damages?

Held: The Court has invariably held in several decisions that the registered owner of a public service
vehicle is responsible for damages that may arise from consequences incident to its operation or that
may be caused to any of the passengers therein. The claim of the petitioner that he is not able in view
of the lease contract executed by and between him and Roberto Espiritu which exempts him from
liability to third persons, cannot be sustained because it appears that the lease contract, adverted to,
had not been approved by the Public Service Commission. It is settled in our jurisprudence that if the
property covered by a franchise is transferred or leased to another without obtaining the requisite
approval, the transfer is not binding upon the public and third persons.

Bienvenido Gelisan, the registered owner, is not however without recourse. He has a right to be
indemnified by Roberto Espiritu for the amount that he may be required to pay as damages for the
injury caused to Benito Alday, since the lease contract in question, although not effective against the
public for not having been approved by the Public Service Commission, is valid and binding between
the contracting parties.

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 FIRST DIVISION
G.R. No. L-26815 May 26, 19810
ADOLFO L. SANTOS, Petitioner, vs. ABRAHAM SIBUG and COURT OF APPEALS,
Respondents.
MELENCIO-HERRERA, J.:
The controversy in this case will be resolved on the basis of the following facts and expositions. Prior
to April 26, 1963 (the ACCIDENT DATE), Vicente U. Vidad (VIDAD, for short) was a duly authorized
passenger jeepney operator. Also prior to the ACCIDENT DATE, petitioner Adolfo L. Santos
(SANTOS, for short) was the owner of a passenger jeep, but he had no certificate of public
convenience for the operation of the vehicle as a public passenger jeep. SANTOS then transferred
his jeep to the name of VIDAD so that it could be operated under the latter's certificate of public
convenience. ln other words, SANTOS became what is known in ordinary parlance as a kabit
operator. For the protection of SANTOS, VIDAD executed a re-transfer document to the former, which
was to be a private document presumably to be registered if and where it was decided that the
passenger jeep of SANTOS was to be withdrawn from the kabit arrangement.
On the ACCIDENT DATE, private respondent Abraham Sibug (SIBUG for short) was bumped by a
passenger jeepney operated by VIDAD and driven by Severe Gragas. As a result thereof, SIBUG
filed a complaint for damages against VIDAD and Gragas with the Court of First Instance of Manila,
Branch XVII, then presided by Hon. Arsenic Solidum. That Civil Case will hereinafter be referred to
as the BRANCH XVII CASE.
On December 5, 1963, a judgment was rendered by Branch XVII, sentencing VIDAD and Gragas,
jointly and severally, to pay SIBUG the sums of P506.20 as actual damages; P3,000.00 as moral
damages; P500.00 as attorney's fees, and costs.
On April 10, 1964, the Sheriff of Manila levied on a motor vehicle, with Plate No. PUJ-343-64,
registered in the name of VIDAD, and scheduled the public auction sale thereof on May 8,1964.
On April 11, 1964, SANTOS presented a third-party claim with the Sheriff alleging actual ownership
of the motor vehicle levied upon, and stating that registration thereof in the name of VIDAD was merely
to enable SANTOS to make use of VIDAD'S Certificate of Public Convenience. After the third-party
complaint was filed, SIBUG submitted to the Sheriff a bond issued by the Philippine Surety Insurance
Company (THE BONDING COMPANY, for short), To save the Sheriff from liability if he were to
proceed with the sale and if SANTOS' third-party claim should be ultimately upheld.
On April 22, 1964, that is, before the scheduled sale of May 8, 1964, SANTOS instituted an action for
Damages and injunction with a prayer for Preliminary Mandatory Injunction against SIBUG; VIDAD;
and the Sheriff in Civil Case No. 56842 of Branch X, of the same Court of First Instance of Manila
(hereinafter referred to as the BRANCH X CASE). The complaint was later amended to include the
BONDING COMPANY as a party defendant although its bond had not become effective. ln the
Complaint, SANTOS alleged essentially that he was the actual owner of the motor vehicle subject of
levy: that a fictitious Deed of Sale of said motor vehicle was executed by him in VIDAD'S favor for
purposes of operating said vehicle as a passenger jeepney under the latter's franchise; that SANTOS
did not receive any payment from VIDAD in consideration of said sale; that to protect SANTOS'
proprietary interest over the vehicle in question, VIDAD in turn had executed a Deed of Sale in favor
of SANTOS on June 27, 1962; that SANTOS was not a party in the BRANCH XVII CASE and was
not in any manner liable to the registered owner VIDAD and the driver Gragas; that SANTOS derived
a daily income of P30.00 from the operation of said motor vehicle as a passenger jeepney and stood
to suffer irreparable damage will possession of said motor vehicle were not restored to him. SANTOS
then prayed that 1,) pending trial, a Writ of Preliminary Mandatory injunction be issued ex-parte
commanding the Sheriff of Manila to restore the motor vehicle to him and that the Sheriff be enjoined
from proceeding with its sale; 2) that, after trial, the Deed of Sale in favor of VIDAD be declared
absolutely fictitious and, therefore, null and void, and adjudging SANTOS to be the absolute owner of

109 | P a g e
the vehicle in questioned and 3) that damages be awarded to SANTOS as proven during the trial plus
attorney's fees in the amount of P450.00 and costs.
No public sale was conducted on May 8, 1964. On May 11, 1964, Branch X issued a Restraining
Order enjoining the Sheriff from conducting the public auction sale of the motor vehicle levied upon.
3 The Restraining Order was issued wrongfully. Under the provisions of Section 17, Rule 39, the
action taken by the Sheriff cannot be restrained by another Court or by another Branch of the same
Court. The Sheriff has the right to continue with the public sale on his own responsibility, or he can
desist from conducting the public sale unless the attaching creditor files a bond securing him against
the third-party-claim. But the decision to proceed or not with the public sale lies with him. As said in
Uy Piaoco vs. Osmea 9 Phil. 299, 307, "the powers of the Sheriff involve both discretional power and
personal liability." The mentioned discretional power and personal liability have been further
elucidated in Planes and Verdon vs. Madrigal & Co., et al., 94 Phil. 754, where it was held.
The duty of the sheriff in connection with the execution and satisfaction of judgment of the court is
governed by Rule 39 of the Rules of Court. Section 15 thereof provides for the procedure to be.
followed where the property levied on execution 'is claimed by a by person. lf the third-party claim is
sufficient, the sheriff, upon receiving it, is not bound to proceed with the levy of the property, unless
he is given by the judgment creditor an indemnity bond against the claim (Mangaoang vs. Provincial
Sheriff, 91 Phil., 368). Of course, the sheriff may proceed with the levy even without the Indemnity
bond, but in such case he will answer for any damages with his own personal funds (Waits vs.
Peterson, et al., S Phil. 419 Alzua et al. vs. Johnson, 21 Phil., 308; Consults No. 341 de los abogados
de Smith, Bell & Co., 48 Phil., 565). And the rule also provides that nothing therein contained shall
prevent a third person from vindicating his claim to the property by any proper action (Sec. 15 of Rule
39.).
It appears from the above that if the attaching creditor should furnish an adequate bond. the Sheriff
has to proceed with the public auction. When such bond is not filed, then the Sheriff shall decide
whether to proceed. or to desist from proceeding, with the public auction. lf he decides to proceed, he
will incur personal liability in favor of the successful third-party claimant.
On October 14, 1965, Branch X affirmed SANTOS' ownership of the jeepney in question based on
the evidence adduced, and decreed:
WHEREFORE, judgment is hereby rendered, enjoining the defendants from proceeding with the sale
of the vehicle in question ordering its return to the plaintiff and furthermore sentencing the defendant
Abraham Sibug to pay the plaintiff the sum of P15.00 a day from April 10, 1964 until the vehicle is
returned to him, and P500.00 as attorney's fee's as well as the costs.
This was subsequently amended on December 5, 1965, upon motion for reconsideration filed by
SANTOS, to include the BONDING COMPANY as jointly slid severally liable with SIBUG. 5
... provided that the liability of the Philippine Surety & insurance Co., Inc. shall in no case exceed
P6,500.00. Abraham Sibug is furthermore condemned to pay the Philippine Surety & Insurance Co.,
Inc. the same sums it is ordered to pay under this decision.
The jugdment in the BRANCH X CASE appears to be quite legally unpalatable For instance, since
the undertaking furnished to the Sheriff by the BONDING COMPANY did not become effective for the
reason that the jeep was not sold, the public sale thereof having been restrained, there was no reason
for promulgating judgment against the BONDING COMPANY. lt has also been noted that the
Complaint against VIDAD was dismissed.
Most important of all, the judgment against SIBUG was inequitable. ln asserting his rights of ownership
to the vehicle in question, SANTOS candidly admitted his participation in the illegal and pernicious
practice in the transportation business known as the kabit system. Sec.. 20 (g) of the Public Service
Act, then the applicable law, specifically provided: ... it shall be unlawful for any public service or for
the owner, lessee or operator thereof, without the approval and authorization of the Commission

110 | P a g e
previously had ... (g) to sell, alienate, mortgage, encumber or lease its property, franchise, certificates,
privileges, or rights, or any part thereof.
In this case, SANTOS had fictitiously sold the jeepney to VIDAD, who had become the registered
owner and operator of record at the time of the accident. lt is true that VIDAD had executed a re-sale
to SANTOS, but the document was not registered. Although SANTOS, as the kabit was the true owner
as against VIDAD, the latter, as the registered owner/operator and grantee of the franchise, is directly
and primarily responsible and liable for the damages caused to SIBUG, the injured party, as a
consequence of the negligent or careless operation of the vehicle. 6This ruling is based on the
principle that the operator of record is considered the operator of the vehicle in contemplation of law
as regards the public and third persons 7even if the vehicle involved in the accident had been sold to
another where such sale had not been approved by the then Public Service Commission. 8For the
same basic reason, as the vehicle here in question was registered in VIDAD'S name, the levy on
execution against said vehicle should be enforced so that the judgment in the BRANCH XVII CASE
may be satisfied, notwithstanding the fact that the secret ownership of the vehicle belonged to
another. SANTOS, as the kabit should not be allowed to defeat the levy on his vehicle and to avoid
his responsibilities as a kabit owner for he had led the public to believe that the vehicle belonged to
VIDAD. This is one way of curbing the pernicious kabit system that facilitates the commission of fraud
against the travelling public.
As indicated in the Erezo case, supra, SANTOS' remedy. as the real owner of the vehicle, is to go
against VIDAD, the actual operator who was responsible for the accident, for the recovery of whatever
damages SANTOS may suffer by reason of the execution. In fact, if SANTOS, as the kabit had been
impleaded as a party defendant in the BRANCH XVII CASE, he should be held jointly and severally
liable with VIDAD and the driver for damages suffered by SIBUG, 9 as well as for exemplary damages.
From the judgment in the BRANCH X CASE SIBUG appealed. Meanwhile, SANTOS moved for
immidiately execution. SIBUG opposed it on the ground that Branch X had no jurisdiction over the
BRANCH XVII CASE, and that Branch X had no power to interfere by injunction with the judgment of
Branch XVII a Court of concurrent or coordinate jurisdiction.
On November 13, 1965, Branch X released an order authorizing immediate execution on the theory
that the BRANCH X CASE is "principally an action for the issuance of a writ of prohibition to forbid
the Sheriff from selling at public auction property not belonging to the judgment creditor (sic) and there
being no attempt in this case to interfere with the Judgment or decree of another court of concurrent
jurisdiction."
Without waiting for the resolution of his Motion for Reconsideration, SIBUG sought relief from
respondent Appellate Court in a Petition for certiorari with Preliminary injunction. On November 18,
1965, respondent Court of Appeals enjoined the enforcement of the Branch X Decision and the Order
of execution issued by said Branch. 13 On September 28, 1966, respondent Count of Appeals
rendered the herein challenged Decision nullifying the judgment renderred in the Branch X Case and
permanently restraining V from taking cognizance of the BRANCH X CASE SANTOS. It ruled that:
... the respondent Court Branch X, indeed, encroached and interfered with the judgment of Branch
XVII when it issued a restraining order and finally a decision permanently enjoining the other court
from excuting the decision rendered in Civil Case No. 54335. This to our mind constitutes an
interference with the powers and authority of the other court having co-equal and coordinate
jurisdiction. To rule otherwise, would indubitably lead to confusion which might hamper or hinder the
proper administration of justice. ...
Respondent Court further held that SANTOS may not be permitted to prove his ownership over a
particular vehicle being levied upon but registered in another's name in a separated action, observing
that:
As the vehicle in question was registered in the name of Vicente U. Vidad, the government or any
person affected by the representation that said vehicle is registered under the name of a particular
person had the right to rely on his declaration of ownership and registration: and the registered owner

111 | P a g e
or any other person for that matter cannot be permitted to repudiate said declaration with the objective
of proving that said registered vehicle is owned by another person and not by the registered owner
(sec. 68, (a), Rule 123, and art. 1431, New Civil Code)
xxx xxx xxx
Were we to allow a third person to prove that he is the real owner of a particular vehicle and not the
registered owner it would in effect be tantamount to sanctioning the attempt of the registered owner
of the particular vehicle in evading responsibility for it cannot be dispelled that the door would be
opened to collusion between a person and a registered owner for the latter to escape said
responsibility to the public or to any person. ...

SANTOS now seeks a review of respondent Court's Decision contending that:

1) The respondent Court of Appeals erred in holding that Branch X of the Court of First Instance
of Manila has no jurisdiction to restrain by Writ of Injunction the auction sale of petitioner's motor
vehicle to satisfy the judgment indebtedness of another person:
2) The respondent Court of Appeals erred in holding that petitioner as owner of a motor vehicle
that was levied upon pursuant to a Writ of Execution issued by Branch XVII of the Court of i stance of
Manila in Civil Case No. 54335 cannot be allowed to prove in a separate suit filed in Branch X of the
same court (Civil Case No. 56842) that he is the true owner of the said motor vehicle and not its
registered owner;
3) The respondent Court of Appeals erred in declaring null and void the decision of the Court of
First Instance of Manila (Branch X ) in Civil Case No. 56482.
We gave due course to the Petition for Review on certiorari on December 14, 1966 and considered
the case submitted for decision on July 20, 1967.
One of the issues ventilated for resolution is the general question of jurisdiction of a Court of First
Instance to issue, at the instance of a third-party claimant, an Injunction restraining the execution sale
of a passenger jeepney levied upon by a judgment creditor in another Court of First Instance. The
corollary issue is whether or not the third-party claimant has a right to vindicate his claim to the vehicle
levied upon through a separate action.
Since this case was submitted for decision in July, 1967, this Court, in Arabay, lnc. vs. Hon. Serafin
Salvador, 15 speaking through Mr. Justice Ramon Aquino, succinctly held:
It is noteworthy that, generally, the rule, that no court has authority to interfere by injunction with the
judgments or decrees of a concurrent or coordinate jurisdiction having equal power to grant the
injunctive relief, is applied in cases, where no third-party claimant is involved, in order to prevent one
court from nullifying the judgment or process of another court of the same rank or category, a power
which devolves upon the proper appellate court.
xxx xxx xxx
When the sheriff, acting beyond the bounds of his authority, seizes a stranger's property, the writ of
injunction, which is issued to stop the auction sale of that property, is not an interference with the writ
of execution issued by another court because the writ of execution was improperly implemented by
the sheriff. Under that writ, he could attach the property of the judgment debtor. He is not authorized
to levy upon the property of the third-party claimant (Polaris Marketing Corporation vs. Plan, L-40666,
January 22, 1976, 69 SCRA 93, 97; Manila Herald Publishing Co., Inc. vs. Ramos, 88 Phil. 94, 102).
An earlier case, Abiera vs. Hon. Court of Appeals, et al., 16explained the doctrine more extensively:

112 | P a g e
Courts; Jurisdiction Courts without power to interfere by injunction with judgments or decrees of a
court of concurrent jurisdiction. No court has power to interfere by injunction with the judgments or
decrees of a court of concurrent or coordinate jurisdiction having equal power to grant the relief sought
by injunction.

Same, Same; Same; When applicable. For this doctrine to apply, the injunction issued by one court
must interfere with the judgment or decree issued by another court of equal or coordinate jurisdiction
and the relief sought by such injunction must be one which could be granted by the court which
rendered the judgment or issued the decree.
Same, Same Same; Exception Judgment rendered by another court in favor of a third person who
claims property levied upon on execution. Under section 17 of Rule 39 a third person who claims
property levied upon on execution may vindicate such claim by action. A judgment rendered in his
favor - declaring him to be the owner of the property - would not constitute interference with the powers
or processes of the court which rendered the judgment to enforce which the execution was levied. lf
that be so - and it is so because the property, being that of a stranger, is not subject to levy - then an
interlocutory order, such as injunction, upon a claim and prima facie showing of ownership by the
claimant, cannot be considered as such interference either.
Execution; Where property levied on claimed by third person; "Action" in section l7, Rule 39 of the
Rules of Court, interpreted The right of a person who claims to be the owner of property levied upon
on execution to file a third-party claim with the sheriff is not exclusive, and he may file an action to
vindicate his claim even if the judgment creditor files an indemnity bond in favor of the sheriff to answer
for any damages that may be suffered by the third party claimant. By "action", as stated in the Rule,
what is meant is a separate and independent action.
Applied to the case at bar, it mill have to be held that, contrary to the rationale in the Decision of
respondent Court, it was appropriate, as a matter of procedure, for SANTOS, as an ordinary third-
party claimant, to vindicate his claim of ownership in a separate action under Section 17 of Rule 39.
And the judgment rendered in his favor by Branch X, declaring him to be the owner of the property,
did not as a basic proposition, constitute interference with the powers or processes of Branch XVII
which rendered the judgment, to enforce which the was levied upon. And this is so because property
belonging to a stranger is not ordinarily subject to levy. While it is true that the vehicle in question was
in custodia legis, and should not be interfered with without the permission of the proper Court, the
property must be one in which the defendant has proprietary interest. Where the Sheriff seizes a
stranger's property, the rule does not apply and interference with his custody is not interference with
another Court's Order of attachment.
However, as a matter of substance and on the merits, the ultimate conclusion of respondent Court
nullifying the Decision of Branch X permanently enjoining the auction sale, should be upheld. Legally
speaking, it was not a "stranger's property" that was levied upon by the Sheriff pursuant to the
judgment rendered by Branch XVII. The vehicle was, in fact, registered in the name of VIDAD, one of
the judgment debtors. And what is more, the aspect of public service, with its effects on the riding
public, is involved. Whatever legal technicalities may be invoked, we find the judgment of respondent
Court of Appeals to be in consonance with justice.
WHEREFORE, as prayed for by private respondent Abraham Sibug, the petition for review on
certiorari filed by Adolfo L. Santos is dismissed with costs against the petitioner.
SO ORDERED.

113 | P a g e
 EN BANC
[G.R. No. 64693. April 27, 1984.]
LITA ENTERPRISES, INC., Petitioner, v. SECOND CIVIL CASES DIVISION, INTERMEDIATE
APPELLATE COURT, NICASIO M. OCAMPO and FRANCISCA P. GARCIA, Respondents.
SYLLABUS
1. MERCANTILE LAW; TRANSPORTATION; CERTIFICATE OF PUBLIC CONVENIENCE;
USE OF SAME UNDER "KABIT SYSTEM p" CONDEMNED. — The parties herein operated under
an arrangement, commonly known as the "kabit system," whereby a person who has been granted a
certificate of convenience allows another person who owns motor vehicles to operate under such
franchise for a fee. A certificate of public convenience is a special privilege conferred by the
government. Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit
system" has been identified as one of the root causes of the prevalence of graft and corruption in the
government transportation offices. In the words of Chief Justice Makalintal, (Dizon v. Octavio, 51 O.G.
4059) "this is a pernicious system that cannot be too severely condemned. It constitutes an imposition
upon the good faith of the government."
2. ID.; ID.; ID.; ID.; AGREEMENT UNDER THE SYSTEM, VOID FOR BEING CONTRARY TO
PUBLIC POLICY. — Although not outrightly penalized as a criminal offense, the "kabit system" is
invariably recognized as being contrary to public policy and, therefore, void and inexistent under
Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid either party to
enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it was
flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from
their predicament. Article 1412 of the Civil Code denies them such aid.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; VOID CONTRACTS, CANNOT BE CURED
BY RATIFICATION OR PRESCRIPTION. — The defect of inexistence of a contract is permanent and
incurable, and cannot be cured by ratification or by prescription. As this Court said in Eugenio v.
Perdido, 97 Phil. 41, "the mere lapse of time cannot give efficacy to contracts that are null and void."
4. ID.; PRINCIPLES OF IN PARI DELICTO, DEFINED; APPLIED IN CASE AT BAR. — The
principle of in pari delicto is well known not only in this jurisdiction but also in the United States where
common law prevails. Under American jurisdiction, the doctrine is stated thus: "The proposition is
universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained
for its specific performance, or to recover the property agreed to be sold or delivered, or damages for
its violation. The rule has sometimes been laid down as though it was equally universal, that where
the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other."
(Pomeroy’s Equity Jurisprudence, Vol. 3, 5th ed. p. 728) Although certain exceptions to the rule are
provided by law, We see no cogent reason why the full force of the rule should not be applied in the
instant case.
DECISION
ESCOLIN, J.:
"Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the time-honored maxim
that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither
can seek relief from the courts, and each must bear the consequences of his acts.
The factual background of this case is undisputed.
Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private
respondents, purchased in installment from the Delta Motor Sales Corporation five (5) Toyota Corona
Standard cars to be used as taxicabs. Since they had no franchise to operate taxicabs, they
contracted with petitioner Lita Enterprises, Inc., through its representative, Manuel Concordia, for the
use of the latter’s certificate of public convenience in consideration of an initial payment of P1,000.00

114 | P a g e
and a monthly rental of P200.00 per taxicab unit. To effectuate said agreement, the aforesaid cars
were registered in the name of petitioner Lita Enterprises, Inc. Possession, however, remained with
the spouses Ocampo who operated and maintained the same under the name Acme Taxi, petitioner’s
trade name.
About a year later, on March 18, 1967, one of said taxicabs driven by their employee, Emeterio Martin,
collided with a motorcycle whose driver, one Florante Galvez, died from the head injuries sustained
therefrom. A criminal case was eventually filed against the driver Emeterio Martin, while a civil case
for damages was instituted by Rosita Sebastian Vda. de Galvez, heir of the victim, against Lita
Enterprises, Inc., as registered owner of the taxicab. In the latter case, Civil Case No. 72067 of the
Court of First Instance of Manila, petitioner Lita Enterprises, Inc. was adjudged liable for damages in
the amount of P25,000.00 and P7,000.00 for attorney’s fees.
This decision having become final, a writ of execution was issued. One of the vehicles of respondent
spouses with Engine No. 2R- 914472 was levied upon and sold at public auction for P2,150.00 to one
Sonnie Cortez, the highest bidder. Another car with Engine No. 2R-915036 was likewise levied upon
and sold at public auction for P8,000.00 to a certain Mr. Lopez.
Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name.
He requested the manager of petitioner Lita Enterprises, Inc. to turn over the registration papers to
him, but the latter allegedly refused. Hence, he and his wife filed a complaint against Lita Enterprises,
Inc., Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Co. and the Sheriff of Manila for
reconveyance of motor vehicles with damages, docketed as Civil Case No. 90988 of the Court of First
Instance of Manila. Trial on the merits ensued and on July 22, 1975, the said court rendered a
decision, the dispositive portion of which reads:
"WHEREFORE, the complaint is hereby dismissed as far as defendants Rosita Sebastian Vda. de
Galvez, Visayan Surety & Insurance Company and the Sheriff of Manila are concerned.
"Defendant Lita Enterprises, Inc., is ordered to transfer the registration certificate of the three Toyota
cars not levied upon with Engine Nos. 2R-230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D]
by executing a deed of conveyance in favor of the plaintiff.
"Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in arrears for the certificate of
convenience from March 1973 up to May 1973 at the rate of P200 a month per unit for the three cars."
(Annex A, Record on Appeal, p. 102-103, Rollo).
Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same was denied
by the court a quo on October 27, 1975. (p. 121, Ibid.)
On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate Court
modified the decision by including as part of its dispositive portion another paragraph, to wit:
"In the event the condition of the three Toyota cars will no longer serve the purpose of the deed of
conveyance because of their deterioration, or because they are no longer serviceable, or because
they are no longer available, the Lita Enterprises, Inc. is ordered to pay the plaintiffs their fair market
value as of July 22, 1975." (Annex "D", p. 167, Rollo.).
Its first and second motions for reconsideration having been denied, petitioner came to Us, praying
that:
"1. ...
"2. . . . after legal proceedings, decision be rendered or resolution be issued, reversing, annulling
or amending the decision of public respondent so that:
"(a) the additional paragraph added by the public respondent to the DECISION of the lower court
(CFI) be deleted;

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"(b) that private respondents be declared liable to petitioner for whatever amount the latter has
paid or was declared liable (in Civil Case No. 72067) of the Court of First Instance of Manila to Rosita
Sebastian Vda. de Galvez, as heir of the victim Florante Galvez, who died as a result of the gross
negligence of private respondents’ driver while driving one private respondents’ taxicabs." (p. 39,
Rollo.)
Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit
system", whereby a person who has been granted a certificate of convenience allows another person
who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience
is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof
cannot be countenanced. The "kabit system" has been identified as one of the root causes of this
prevalence of graft and corruption in the government transportation offices. In the words of Chief
Justice Makalintal, 1 "this is a pernicious system that cannot be too severely condemned. It constitutes
an imposition upon the good faith of the government."
Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as
being contrary to public policy and, therefore, void and inexistent under Artic1e 1409 of the Civil Code.
It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but
will leave them both where it finds them. Upon this premise, it was flagrant error on the part of both
the trial and appellate courts to have accorded the parties relief from their predicament. Article 1412
of the Civil Code denies them such aid. It provides
"ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a
criminal offense, the following rules shall be observed:
"(1) when the fault is on the part of both contracting parties, neither may recover what he has given
by virtue of the contract, or demand the performance of the other’s undertaking."
The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification
or by prescription. As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time cannot give
efficacy to contracts that are null and void."
The principle of in pari delicto is well known not only in this jurisdiction but also in the United States
where common law prevails. Under American jurisdiction, the doctrina is stated thus: "The proposition
is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained
for its specific performance, or to recover the property agreed to be sold or delivered, or damages for
its violation. The rule has sometimes been laid down as though it was equally universal, that where
the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other."
3 Although certain exceptions to the rule are provided by law, We see no cogent reason why the full
force of the rule should not be applied in the instant case.
WHEREFORE, all proceedings had in Civil Case No. 90988 entitle "Nicasio Ocampo and Francisca
P. Garcia, Plaintiffs, versus Lita Enterprises, Inc., Et Al., Defendants" of the Court of First Instance of
Manila and CA-G.R. No. 59157-R entitled "Nicasio Ocampo and Francisca P. Garcia, Plaintiffs-
Appellees, versus Lita Enterprises, Inc., Defendant-Appellant," of the Intermediate Appellate Court,
as well as the decisions rendered therein are hereby annulled and set aside. No costs.
SO ORDERED.

Lita Enterprises vs. Intermediate Appellate Court

(129 SCRA 464)
Facts: Spouses Nicasio Ocampo and Francisca Garcia (private respondents) purchased in
installment from the Delta Motor Sales Corporation five (5) Toyota Corona Standard cars to be used
as taxi. Since they had no franchise to operate taxicabs, they contracted with petitioner Lita
Enterprise, Inc., through its representative Manuel Concordia, for the use of the latter’s certificate of

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public convenience for a consideration of P1, 000.00 and a monthly rental of P200.00/taxicab unit.
For the agreement to take effect, the cars were registered in the name of Lita Enterprises, Inc. The
possession, however, remains with spouses Ocampo and Garcia who operated and maintained the
same under Acme Taxi, petitioner’s trade name.
A year later, one of the taxicabs, driven by their employee, Emeterio Martin, collided with a motorcycle.
Unfortunately the driver of the motorcycle, Florante Galvez died from the injuries it sustained.
Criminal case was filed against Emeterio Martin, while a civil case was filed by the heir of the victim
against Lita Enterprises. In the decision of the lower court Lita Enterprises was held liable for damages
for the amount of P25, 000.00 and P7, 000.00 for attorney’s fees.
A writ of execution for the decision followed, 2 of the cars of the respondent’s spouses were levied
and were sold to a public auction.
On March 1973, respondent Ocampo decided to register his taxicabs in his own name. The manager
of petitioner refused to give him the registration papers. Thus, making spouses file a complaint against
petitioner. In the decision, Lita Enterprise was ordered to return the three certificate of registration not
levied in the prior case.
Petitioner now prays that private respondent be held liable to pay the amount they have given to the
heir of Galvez.
Issue: Whether or not petitioner can recover from private respondent, knowing they are in an
arrangement known as “kabit system”.
Held: “Kabit system” is defined as, when a person who has been granted a certificate of convenience
allows another person who owns a motor vehicle to operate under such franchise for a fee. This
system is not penalized as a criminal offense but is recognized as one that is against public policy;
therefore it is void and inexistent.
It is fundamental that the court will not aid either of the party to enforce an illegal contract, but will
leave them both where it finds them. Upon this premise, it was flagrant error on the part of both trial
and appellate courts to have accorded the parties relief from their predicament. Specifically Article
1412 states that:
“If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed: “when the fault, is on the part of both contracting parties, neither
may recover what he has given by virtue of the contract, or demand the performance of the other’s
undertaking.”
The principle of in pari delicto is evident in this case. “the proposition is universal that no action arises,
in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or
to recover the property agreed to sold or delivered, or damages for its property agreed to be sold or
delivered, or damages for its violation.” The parties in this case are in pari delicto, therefore no
affirmative relief can be granted to them.

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 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-65510 March 9, 1987
TEJA MARKETING AND/OR ANGEL JAUCIAN, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT * AND PEDRO N. NALE, respondents.
Cirilo A. Diaz, Jr. for petitioner.
Henry V. Briguera for private respondent.
PARAS, J.:
"'Ex pacto illicito' non oritur actio" (No action arises out of illicit bargain) is the time-honored maxim
that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither
can seek relief from the courts, and each must bear the consequences of his acts." (Lita Enterprises
vs. IAC, 129 SCRA 81.)
The factual background of this case is undisputed. The same is narrated by the respondent court in
its now assailed decision, as follows:
On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete accessories and
a sidecar in the total consideration of P8,000.00 as shown by Invoice No. 144 (Exh. "A"). Out of the
total purchase price the defendant gave a downpayment of P1,700.00 with a promise that he would
pay plaintiff the balance within sixty days. The defendant, however, failed to comply with his promise
and so upon his own request, the period of paying the balance was extended to one year in monthly
installments until January 1976 when he stopped paying anymore. The plaintiff made demands but
just the same the defendant failed to comply with the same thus forcing the plaintiff to consult a lawyer
and file this action for his damage in the amount of P546.21 for attorney's fees and P100.00 for
expenses of litigation. The plaintiff also claims that as of February 20, 1978, the total account of the
defendant was already P2,731.06 as shown in a statement of account (Exhibit. "B"). This amount
includes not only the balance of P1,700.00 but an additional 12% interest per annum on the said
balance from January 26, 1976 to February 27, 1978; a 2% service charge; and P 546.21 representing
attorney's fees.
In this particular transaction a chattel mortgage (Exhibit 1) was constituted as a security for the
payment of the balance of the purchase price. It has been the practice of financing firms that whenever
there is a balance of the purchase price the registration papers of the motor vehicle subject of the
sale are not given to the buyer. The records of the LTC show that the motorcycle sold to the defendant
was first mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing and Angel
Jaucian are one and the same, because it was made to appear that way only as the defendant had
no franchise of his own and he attached the unit to the plaintiff's MCH Line. The agreement also of
the parties here was for the plaintiff to undertake the yearly registration of the motorcycle with the
Land Transportation Commission. Pursuant to this agreement the defendant on February 22, 1976
gave the plaintiff P90.00, the P8.00 would be for the mortgage fee and the P82.00 for the registration
fee of the motorcycle. The plaintiff, however failed to register the motorcycle on that year on the
ground that the defendant failed to comply with some requirements such as the payment of the
insurance premiums and the bringing of the motorcycle to the LTC for stenciling, the plaintiff saying
that the defendant was hiding the motorcycle from him. Lastly, the plaintiff explained also that though
the ownership of the motorcycle was already transferred to the defendant the vehicle was still
mortgaged with the consent of the defendant to the Rural Bank of Camaligan for the reason that all
motorcycle purchased from the plaintiff on credit was rediscounted with the bank.

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On his part the defendant did not dispute the sale and the outstanding balance of P1,700. 00 still
payable to the plaintiff. The defendant was persuaded to buy from the plaintiff the motorcycle with the
side car because of the condition that the plaintiff would be the one to register every year the
motorcycle with the Land Transportation Commission. In 1976, however, the plaintfff failed to register
both the chattel mortgage and the motorcycle with the LTC notwithstanding the fact that the defendant
gave him P90.00 for mortgage fee and registration fee and had the motorcycle insured with La Perla
Compana de Seguros (Exhibit "6") as shown also by the Certificate of cover (Exhibit "3"). Because of
this failure of the plaintiff to comply with his obligation to register the motorcycle the defendant suffered
damages when he failed to claim any insurance indemnity which would amount to no less than
P15,000.00 for the more than two times that the motorcycle figured in accidents aside from the loss
of the daily income of P15.00 as boundary fee beginning October 1976 when the motorcycle was
impounded by the LTC for not being registered.
The defendant disputed the claim of the plaintiff that he was hiding from the plaintiff the motorcycle
resulting in its not being registered. The truth being that the motorcycle was being used for
transporting passengers and it kept on travelling from one place to another. The motor vehicle sold
to him was mortgaged by the plaintiff with the Rural Bank of Camaligan without his consent and
knowledge and the defendant was not even given a copy of the mortgage deed. The defendant claims
that it is not true that the motorcycle was mortgaged because of re-discounting for rediscounting is
only true with Rural Banks and the Central Bank. The defendant puts the blame on the plaintiff for not
registering the motorcycle with the LTC and for not giving him the registration papers inspite of
demands made. Finally, the evidence of the defendant shows that because of the filing of this case
he was forced to retain the services of a lawyer for a fee on not less than P1,000.00.
xxx xxx xxx
... it also appears and the Court so finds that defendant purchased the motorcycle in question,
particularly for the purpose of engaging and using the same in the transportation business and for this
purpose said trimobile unit was attached to the plaintiffs transportation line who had the franchise, so
much so that in the registration certificate, the plaintiff appears to be the owner of the unit.
Furthermore, it appears to have been agreed, further between the plaintiff and the defendant, that
plaintiff would undertake the yearly registration of the unit in question with the LTC. Thus, for the
registration of the unit for the year 1976, per agreement, the defendant gave to the plaintiff the amount
of P82.00 for its registration, as well as the insurance coverage of the unit.
Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with
Damages" against private respondent Pedro N. Nale in the City Court of Naga City. The City Court
rendered judgment in favor of petitioner, the dispositive portion of which reads:
WHEREFORE, decision is hereby rendered dismissing the counterclaim and ordering the defendant
to pay plaintiff the sum of P1,700.00 representing the unpaid balance of the purchase price with legal
rate of interest from the date of the filing of the complaint until the same is fully paid; to pay plaintiff
the sum of P546.21 as attorney's fees; to pay plaintiff the sum of P200.00 as expenses of litigation;
and to pay the costs.
SO ORDERED.
On appeal to the Court of First Instance of Camarines Sur, the decision was affirmed in toto. Private
respondent filed a petition for review with the Intermediate Appellate Court and on July 18, 1983 the
said Court promulgated its decision, the pertinent portion of which reads —
However, as the purchase of the motorcycle for operation as a trimobile under the franchise of the
private respondent Jaucian, pursuant to what is commonly known as the "kabit system", without the
prior approval of the Board of Transportation (formerly the Public Service Commission) was an illegal
transaction involving the fictitious registration of the motor vehicle in the name of the private
respondent so that he may traffic with the privileges of his franchise, or certificate of public
convenience, to operate a tricycle service, the parties being in pari delicto, neither of them may bring
an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code].

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xxx xxx xxx
WHEREFORE, the decision under review is hereby set aside. The complaint of respondent Teja
Marketing and/or Angel Jaucian, as well as the counterclaim of petitioner Pedro Nale in Civil Case
No. 1153 of the Court of First Instance of Camarines Sur (formerly Civil Case No. 5856 of the City
Court of Naga City) are dismissed. No pronouncement as to costs.
SO ORDERED.
The decision is now before Us on a petition for review, petitioner Teja Marketing and/or Angel Jaucian
presenting a lone assignment of error — whether or not respondent court erred in applying the
doctrine of "pari delicto."
We find the petition devoid of merit.
Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit
system" whereby a person who has been granted a certificate of public convenience allows another
person who owns motor vehicles to operate under such franchise for a fee. A certificate of public
convenience is a special privilege conferred by the government. Abuse of this privilege by the
grantees thereof cannot be countenanced. The "kabit system" has been Identified as one of the root
causes of the prevalence of graft and corruption in the government transportation offices.
Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as
being contrary to public policy and, therefore, void and in existent under Article 1409 of the Civil Code.
It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but
will leave both where it finds then. Upon this premise it would be error to accord the parties relief from
their predicament. Article 1412 of the Civil Code denies them such aid. It provides:
Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal
offense, the following rules shall be observed:
1. When the fault is on the part of both contracting parties, neither may recover that he has given
by virtue of the contract, or demand, the performance of the other's undertaking.
The defect of in existence of a contract is permanent and cannot be cured by ratification or by
prescription. The mere lapse of time cannot give efficacy to contracts that are null and void.
WHEREFORE, the petition is hereby dismissed for lack of merit. The assailed decision of the
Intermediate Appellate Court (now the Court of Appeals) is AFFIRMED. No costs.
SO ORDERED.

Teja Marketing v. Intermediate Appellate Court

(148 SCRA 347)

Facts: Pedro Nale bought from Teja Marketing a motorcycle with complete accessories and a sidecar.
A chattel mortgage was constituted as a security for the payment of the balance of the purchase price.
The records of the Land Transportation Commission show that the motorcycle sold to the defendant
was first mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing and Angel
Jaucian are one and the same, because it was made to appear that way only as the defendant had
no franchise of his own and he attached the unit to the plaintiff's MCH Line. The agreement also of
the parties here was for the plaintiff to undertake the yearly registration of the motorcycle with the
Land Transportation Commission. The plaintiff, however failed to register the motorcycle on that year
on the ground that the defendant failed to comply with some requirements such as the payment of
the insurance premiums and the bringing of the motorcycle to the LTC for stenciling, the plaintiff said
that the defendant was hiding the motorcycle from him. Lastly, the plaintiff also explained that though

120 | P a g e
the ownership of the motorcycle was already transferred to the defendant, the vehicle was still
mortgaged with the consent of the defendant to the Rural Bank of Camaligan for the reason that all
motorcycle purchased from the plaintiff on credit was rediscounted with the bank.
Teja Marketing made demands for the payment of the motorcycle but just the same Nale failed to
comply, thus forcing Teja Marketing to consult a lawyer and file an action for damage before the City
Court of Naga in the amount of P546.21 for attorney's fees and P100.00 for expenses of litigation.
Teja Marketing also claimed that as of 20 February 1978, the total account of Nale was already P2,
731, 05 as shown in a statement of account; includes not only the balance of P1, 700.00 but an
additional 12% interest per annum on the said balance from 26 January 1976 to 27 February 1978; a
2% service charge; and P546.21 representing attorney's fees. On his part, Nale did not dispute the
sale and the outstanding balance of P1,700.00 still payable to Teja Marketing; but contends that
because of this failure of Teja Marketing to comply with his obligation to register the motorcycle, Nale
suffered damages when he failed to claim any insurance indemnity which would amount to no less
than P15,000.00 for the more than 2 times that the motorcycle figured in accidents aside from the
loss of the daily income of P15.00 as boundary fee beginning October 1976 when the motorcycle was
impounded by the LTC for not being registered. The City Court rendered judgment in favor of Teja
Marketing, dismissing the counterclaim, and ordered Nale to pay Teja Marketing On appeal to the
Court of First Instance of Camarines Sur, the decision was affirmed in toto. Nale filed a petition for
review with the Intermediate Appellate Court. On 18 July 1983, the appellate court set aside the
decision under review on the basis of doctrine of "pari delicto," and accordingly, dismissed the
complaint of Teja Marketing, as well as the counterclaim of Nale; without pronouncements as to costs.
Hence, the petition for review was filed by Teja Marketing and/or Angel Jaucian.
Issue: Whether the defendant can recover damages against the plaintiff?
Held: Unquestionably, the parties herein operated under an arrangement, commonly known as the
"kabit system" whereby a person who has been granted a certificate of public convenience allows
another person who owns motor vehicles to operate under such franchise for a fee. A certificate of
public convenience is a special privilege conferred by the government. Abuse of this privilege by the
grantees thereof cannot be countenanced.

The "kabit system" has been identified as one of the root causes of the prevalence of graft and
corruption in the government transportation offices. Although not out rightly penalized as a criminal
offense, the kabit system is invariably recognized as being contrary to public policy and, therefore,
void and in existent under Article 1409 of the Civil Code. It is a fundamental principle that the court
will not aid either party to enforce an illegal contract, but will leave both where it finds then. Upon this
premise it would be error to accord the parties relief from their predicament.

121 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. L-16790 April 30, 1963

URBANO MAGBOO and EMILIA C. MAGBOO, plaintiffs-appellees,

vs.
DELFIN BERNARDO, defendant-appellant.

Parades, Gaw and Associates for plaintiffs-appellees.

Bonifacio B. Camacho for defendant-appellant.

MAKALINTAL, J.:

Appeal from the Court of First Instance of Manila to the Court of Appeals, and certified by the latter
to this Court on the ground that only questions of law are involved.

The action of the spouses Urbano Magboo and Emilia C. Magboo against Delfin Bernardo is for
enforcement of his subsidiary liability as employer in accordance with Article 103, Revised Penal
Code. The trial court ordered defendant to pay plaintiffs P3,000.00 and costs upon the following
stipulated facts:

1. That plaintiffs are the parents of Cesar Magboo, a child of 8 years old, who lived with them and
was under their custody until his death on October 24,1956 when he was killed in a motor vehicle
accident, the fatal vehicle being a passenger jeepney with Plate No, AC-1963 (56) owned by the
defendant;

2. That at the time of the accident, said passenger jeepney was driven by Conrado Roque;

3. That the contract between Conrado Roque and defendant Delfin Bernardo was that Roque was
to pay to defendant the sum of P8.00, which he paid to said defendant, for privilege of driving the
jeepney on October 24, 1956, it being their agreement that whatever earnings Roque could make
out of the use of the jeepney in transporting passengers from one point to another in the City of
Manila would belong entirely to Conrado Roque;

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4. That as a consequence of the accident and as a result of the death of Cesar Magboo in said
accident, Conrado Roque was prosecuted for homicide thru reckless imprudence before the Court
of First Instance of Manila, the information having been docketed as Criminal Case No. 37736, and
that upon arraignment Conrado Roque pleaded guilty to the information and was sentenced to six
(6) months of arresto mayor, with the accessory penalties of the law; to indemnify the heirs of the
deceased in the sum of P3,000.00, with subsidiary imprisonment in case of insolvency, and to pay
the costs;

5. That pursuant to said judgment Conrado Roque served his sentence but he was not able to pay
the indemnity because he was insolvent."

Appellant assails said decision, assigning three errors which boil down to the question of whether or
not an employer-employee relationship exists between a jeepney-owner and a driver under a
"boundary system" arrangement. Appellant contends that the relationship is essentially that of lessor
and lessee.

A similar contention has been rejected by this Court in several cases. In National Labor Union v.
Dinglasan, 52 O.G., No. 4, 1933, it was held that the features which characterize the "boundary
system" — namely, the fact that the driver does not receive a fixed wage but gets only the excess of
the receipt of fares collected by him over the amount he pays to the jeep-owner and that the
gasoline consumed by the jeep is for the account of the driver — are not sufficient to withdraw the
relationship between them from that of employer and employee. The ruling was subsequently cited
and applied in Doce v. Workmen's Compensation Commission, L-9417, December 22, 1958, which
involved the liability of a bus owner for injury compensation to a conductor working under the
"boundary system."

The same principle applies with greater reason in negligence cases concerning the right of third
parties to recover damages for injuries sustained. In Montoya v. Ignacio, L-5868, December 29,
1953, the owner and operator of a passenger jeepney leased it to another, but without the approval
of the Public Service Commission. In a subsequent collision a passenger died. We ruled that since
the lease was made without such approval, which was required by law, the owner continued to be
the operator of the vehicle in legal contemplation and as such was responsible for the
consequences incident to its operation. The same responsibility was held to attach in a case where
the injured party was not a passenger but a third person, who sued on the theory of culpa aquiliana
(Timbol vs. Osias, L-7547, April 30, 1955). There is no reason why a different rule should be applied
in a subsidiary liability case under Article 103 of the Revised Penal Code. As in the existence of an
employer-employee relationship between the owner of the vehicle and the driver. Indeed to exempt
from liability the owner of a public vehicle who operates it under the "boundary system" on the
ground that he is a mere lessor would be not only to abet flagrant violations of the Public Service
law but also to place the riding public at the mercy of reckless and irresponsible drivers - reckless
because the measure of their earnings depends largely upon the number of trips they make and,
hence, the speed at which they drive; and irresponsible because most if not all of them are in no
position to pay the damages they might cause. (See Erezo vs. Jepte, L-9605, September 30, 1957).

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Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1äwphï1.ñët

Appellant further argues that he should not have been held subsidiarily liable because Conrado
Roque (the driver of the jeepney) pleaded guilty to the charge in the criminal case without
appellant's knowledge and contrary to the agreement between them that such plea would not be
entered but, instead evidence would be presented to prove Roque's innocence. On this point we
quote with approval the pertinent portion of the decision appealed from:

"'With respect to the contention of the defendant that he was taken unaware by the spontaneous
plea of guilt entered by the driver Conrado Roque, and that he did not have a chance to prove the
innocence of said Conrado Roque, the Court holds that at this stage, it is already too late to try the
criminal case all over again. Defendant's allegation that he relied on his belief that Conrado Roque
would defend himself and they had sufficient proof to show that Roque was not guilty of the crime
charged cannot be entertained. Defendant should have taken it to himself to aid in the defense of
Conrado Roque. Having failed to take this step and the accused having been declared guilty by final
judgment of the crime of homicide thru reckless imprudence, there appears no more way for the
defendant to escape his subsidiary liability as provided for in Article 103 of the Revised Penal
Code."'

WHEREFORE, the judgment appealed from, being in accordance with law, is hereby affirmed, with
costs against defendant-appellant.

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 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who
paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of
Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.

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Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey."
Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented
against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95
under the aforestated marine insurance policy, so that it became subrogated to all the rights of
action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking
check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:

Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged
unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage
alleged that plaintiff has no cause of action against it, not having negligent or at fault for the
shipment was already in damage and bad order condition when received by it, but nonetheless, it
still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in
the same condition shipment was received by it.

From the evidence the court found the following:

The issues are:

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1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in
whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-
Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two
drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C).
But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc.,
it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in
the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre
operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo
Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is
stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on
December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered
by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when
defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact.
Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred
before the shipment reached the consignee while under the successive custodies of defendants.
Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence
in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded
and stored in transit in the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

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1. The amount of P19,032.95, with the present legal interest of 12% per annum from October
1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser,
while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to
Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage

Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount
it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE

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OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF
THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely
tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 17341 of the Civil
Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in
good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-
versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been
brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut
the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of
both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that
the shipment sustained damage while in the successive possession of appellants" (the herein

129 | P a g e
petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the undelivered
goods amounted to P3,947.20. This demand, however, was neither established in its totality nor
definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the
amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants
(defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance
the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28
December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of
legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal
rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial
court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages
for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and
against the defendants and third party plaintiffs as follows:

Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:

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xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time
they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest
from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid.
When the appellate court's decision became final, the case was remanded to the lower court for
execution, and this was when the trial court issued its assailed resolution which applied the 6%
interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on
certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in
its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance
of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with,
nor involving loans or forbearance of any money, goods or credits does not fall within the coverage
of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action
for Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the
law applicable to the said case is Article 2209 of the New Civil Code which reads —

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Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per
annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.

In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November
29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of
the amount granted by the lower court, the Court of Appeals sustained the trial court's decision.
When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos
to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of the monetary award was in contravention
of law." The Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines
cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or
credit; and

132 | P a g e
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA
160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case,
there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages.
Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11
was a petition for review on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by
the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April
1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral
damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from
notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court12
thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to
pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose
from a breach of employment contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in
the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory
damages, with interest at the legal rate from the date of the filing of the complaint until fully paid
(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed
that only compensatory damages should earn interest at 6% per annum from the date of the filing of
the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for
certiorari assailed the said order. This Court said:

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. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate"
from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not
apply to actions based on a breach of employment contract like the case at bar. (Emphasis
supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the
time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest
per annum under the Civil Code, the Court15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just compensation
for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower
court sought to be enforced in this case is interest by way of damages, and not by way of earnings
from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol
(1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and
American Express International v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12% interest
per annum applies only to loans or forbearance16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.

134 | P a g e
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest
per annum,17 depending on whether or not the amount involved is a loan or forbearance, on the
one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest should be from the time of
the filing of the complaint until fully paid, the "second group" varied on the commencement of the
running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be
from the date of the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision
until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts18 is breached, the contravenor can be held liable for damages.19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.20

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions
of Article 116923 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court24 at the rate of
6% per annum.25 No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty.26 Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of damages

135 | P a g e
may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment
thereof.

SO ORDERED.

136 | P a g e
 Eastern Shipping Lines Inc. VS. Intermediate Appellate Court
(150 SCRA 463)

Facts: Sometime in or prior to June 1977, the M/S Asiatica, a vessel operated by petitioner Eastern
Shipping Lines Inc., loaded at Kobe, Japan for transportation to Manila loaded 5,000 pieces of
calorized pipes valued at P256,039.00 which was consigned to Philippine Blooming Mills Co, Inc.
and 7 cases of spare parts valued at P92, 361.75 consigned to Central Textile Mills. Both sets of
goods were inured against marine risk for their stated value with respondent Development
Insurance and Surety Corp.

In the same vessel, 2 containers of garment fabrics were also loaded which was consigned to
Mariveles Apparel Corp worth $46,583. The said cargoes were consigned to Nisshin Fire and
Marine Insurance. Another cargo loaded to the vessel was the surveying instruments consigned to
Aman Enterprises and General Merchandise and insured against respondent Dowa Fire & Marine
Insurance for $1,385.00.

On the way to Manila, M/S Asiatica caught fire and sank. This resulted to the loss of the ship and its
cargoes. The respective Insurers paid the corresponding marine insurance values and were thus
subrogated to the rights of the insured.

The insurers filed a suit against the petitioner carrier for recovery of the amounts paid to the insured.
However, petitioner contends that it is not liable on the ground that the loss was due to an
extraordinary fortuitous event.

Issue: Whether the Civil Code provisions on Common Carriers or the Carriage of the Goods by Sea
Act will govern the case at bar?

Held: The law of the country to which the goods are to be transported governs the liability of
common carrier in case of their loss, destruction or deterioration. The liability of petitioner is
governed primarily by the Civil Code however, in all matters not regulated by the Civil Code, the
Code of Commerce and Special Laws will govern with respect to the rights and obligations of the
carrier. Therefore COGSA is suppletory to the provisions of the Civil Code.

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 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 93252 August 5, 1991
RODOLFO T. GANZON, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and LUIS T. SANTOS, respondents.
G.R. No. 93746 August 5,1991
MARY ANN RIVERA ARTIEDA, petitioner,
vs.
HON. LUIS SANTOS, in his capacity as Secretary of the Department of Local Government,
NICANOR M. PATRICIO, in his capacity as Chief, Legal Service of the Department of Local
Government and SALVADOR CABALUNA JR., respondents.
G.R. No. 95245 August 5,1991
RODOLFO T. GANZON, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and LUIS T. SANTOS, in his capacity as the Secretary
of the Department of Local Government, respondents.
Nicolas P. Sonalan for petitioner in 93252.
Romeo A. Gerochi for petitioner in 93746.
Eugenio Original for petitioner in 95245.
SARMIENTO, J.:

The petitioners take common issue on the power of the President (acting through the Secretary of
Local Government), to suspend and/or remove local officials.

The petitioners are the Mayor of Iloilo City (G.R. Nos. 93252 and 95245) and a member of the
Sangguniang Panglunsod thereof (G.R. No. 93746), respectively.

The petitions of Mayor Ganzon originated from a series of administrative complaints, ten in number,
filed against him by various city officials sometime in 1988, on various charges, among them, abuse
of authority, oppression, grave misconduct, disgraceful and immoral conduct, intimidation, culpable
violation of the Constitution, and arbitrary detention.1 The personalities involved are Joceleehn
Cabaluna, a clerk at the city health office; Salvador Cabaluna, her husband; Dr. Felicidad Ortigoza,
Assistant City Health Officer; Mansueto Malabor, Vice-Mayor; Rolando Dabao, Dan Dalido, German

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Gonzales, Larry Ong, and Eduardo Pefia Redondo members of the Sangguniang Panglunsod; and
Pancho Erbite, a barangay tanod. The complaints against the Mayor are set forth in the opinion of
the respondent Court of Appeals.2 We quote:

xxx xxx xxx

In her verified complaint (Annex A), Mrs. Cabaluna, a clerk assigned to the City Health, Office of
Iloilo City charged that due to political reasons, having supported the rival candidate, Mrs. Rosa 0.
Caram, the petitioner City Mayor, using as an excuse the exigency of the service and the interest of
the public, pulled her out from rightful office where her qualifications are best suited and assigned
her to a work that should be the function of a non-career service employee. To make matters worse,
a utility worker in the office of the Public Services, whose duties are alien to the complainant's duties
and functions, has been detailed to take her place. The petitioner's act are pure harassments aimed
at luring her away from her permanent position or force her to resign.

In the case of Dra. Felicidad Ortigoza, she claims that the petitioner handpicked her to perform task
not befitting her position as Assistant City Health Officer of Iloilo City; that her office was padlocked
without any explanation or justification; that her salary was withheld without cause since April 1,
1988; that when she filed her vacation leave, she was given the run-around treatment in the
approval of her leave in connivance with Dr. Rodolfo Villegas and that she was the object of a well-
engineered trumped-up charge in an administrative complaint filed by Dr. Rodolfo Villegas (Annex
B).

On the other hand, Mansuelo Malabor is the duly elected Vice-Mayor of Iloilo City and complainants
Rolando Dabao, Dan Dalido, German Gonzales, Larry Ong and Eduardo Pefia Pedondo are
members of the Sangguniang Panglunsod of the City of Iloilo. Their complaint arose out from the
case where Councilor Larry Ong, whose key to his office was unceremoniously and without previous
notice, taken by petitioner. Without an office, Councilor Ong had to hold office at Plaza Libertad,
The Vice-Mayor and the other complainants sympathized with him and decided to do the same.
However, the petitioner, together with its fully-armed security men, forcefully drove them away from
Plaza Libertad. Councilor Ong denounced the petitioner's actuations the following day in the radio
station and decided to hold office at the Freedom Grandstand at Iloilo City and there were so many
people who gathered to witness the incident. However, before the group could reach the area, the
petitioner, together with his security men, led the firemen using a firetruck in dozing water to the
people and the bystanders.

Another administrative case was filed by Pancho Erbite, a barangay tanod, appointed by former
mayor Rosa O. Caram. On March 13, 1988, without the benefit of charges filed against him and no
warrant of arrest was issued, Erbite was arrested and detained at the City Jail of Iloilo City upon
orders of petitioner. In jail, he was allegedly mauled by other detainees thereby causing injuries He
was released only the following day.3

The Mayor thereafter answered4 and the cases were shortly set for hearing. The opinion of the
Court of Appeals also set forth the succeeding events:

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xxx xxx xxx

The initial hearing in the Cabaluna and Ortigoza cases were set for hearing on June 20-21, 1988 at
the Regional Office of the Department of Local Government in Iloilo City. Notices, through
telegrams, were sent to the parties (Annex L) and the parties received them, including the petitioner.
The petitioner asked for a postponement before the scheduled date of hearing and was represented
by counsel, Atty. Samuel Castro. The hearing officers, Atty. Salvador Quebral and Atty. Marino
Bermudez had to come all the way from Manila for the two-day hearings but was actually held only
on June 20,1988 in view of the inability and unpreparedness of petitioner's counsel.

The next hearings were re-set to July 25, 26, 27,1988 in the same venue-Iloilo City. Again, the
petitioner attempted to delay the proceedings and moved for a postponement under the excuse that
he had just hired his counsel. Nonetheless, the hearing officers denied the motion to postpone, in
view of the fact that the parties were notified by telegrams of the scheduled hearings (Annex M).

In the said hearings, petitioner's counsel cross-examined the complainants and their witnesses.

Finding probable grounds and reasons, the respondent issued a preventive suspension order on
August 11, 1988 to last until October 11,1988 for a period of sixty (60) days.

Then the next investigation was set on September 21, 1988 and the petitioner again asked for a
postponement to September 26,1988. On September 26, 1988, the complainants and petitioner
were present, together with their respective counsel. The petitioner sought for a postponement
which was denied. In these hearings which were held in Mala the petitioner testified in Adm. Case
No. C-10298 and 10299.

The investigation was continued regarding the Malabor case and the complainants testified
including their witnesses.

On October 10, 1988, petitioner's counsel, Atty. Original moved for a postponement of the October
24, 1988 hearing to November 7 to 11, 1988 which was granted. However, the motion for change of
venue as denied due to lack of funds. At the hearing on November 7, 1988, the parties and counsel
were present. Petitioner reiterated his motion to change venue and moved for postponement anew.
The counsel discussed a proposal to take the deposition of witnesses in Iloilo City so the hearing
was indefinitely postponed. However, the parties failed to come to terms and after the parties were
notified of the hearing, the investigation was set to December 13 to 15, 1988.

The petitioner sought for another postponement on the ground that his witnesses were sick or
cannot attend the investigation due to lack of transportation. The motion was denied and the
petitioner was given up to December 14, 1988 to present his evidence.

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On December 14,1988, petitioner's counsel insisted on his motion for postponement and the
hearing officers gave petitioner up to December 15, 1988 to present his evidence. On December 15,
1988, the petitioner failed to present evidence and the cases were considered submitted for
resolution.

In the meantime, a prima facie evidence was found to exist in the arbitrary detention case filed by
Pancho Erbite so the respondent ordered the petitioner's second preventive suspension dated
October 11, 1988 for another sixty (60) days. The petitioner was able to obtain a restraining order
and a writ of preliminary injunction in the Regional Trial Court, Branch 33 of Iloilo City. The second
preventive suspension was not enforced.5

Amidst the two successive suspensions, Mayor Ganzon instituted an action for prohibition against
the respondent Secretary of Local Government (now, Interior) in the Regional Trial Court, Iloilo City,
where he succeeded in obtaining a writ of preliminary injunction. Presently, he instituted CA-G.R.
SP No. 16417, an action for prohibition, in the respondent Court of Appeals.

Meanwhile, on May 3, 1990, the respondent Secretary issued another order, preventively
suspending Mayor Ganzon for another sixty days, the third time in twenty months, and designating
meantime Vice-Mayor Mansueto Malabor as acting mayor. Undaunted, Mayor Ganzon commenced
CA-G.R. SP No. 20736 of the Court of Appeals, a petition for prohibition,6 (Malabor it is to be noted,
is one of the complainants, and hence, he is interested in seeing Mayor Ganzon ousted.)

On September 7, 1989, the Court of Appeals rendered judgment, dismissing CA-G.R. SP No.
16417. On July 5, 1990, it likewise promulgated a decision, dismissing CA-G.R. SP No. 20736. In a
Resolution dated January 24, 1990, it issued a Resolution certifying the petition of Mary Ann
Artieda, who had been similary charged by the respondent Secretary, to this Court.

On June 26,1990, we issued a Temporary Restraining Order, barring the respondent Secretary from
implementing the suspension orders, and restraining the enforcement of the Court of Appeals' two
decisions.

In our Resolution of November 29, 1990, we consolidated all three cases. In our Resolutions of
January 15, 1991, we gave due course thereto.

Mayor Ganzon claims as a preliminary (GR No. 93252), that the Department of Local Government
in hearing the ten cases against him, had denied him due process of law and that the respondent
Secretary had been "biased, prejudicial and hostile" towards him7 arising from his (Mayor
Ganzon's) alleged refusal to join the Laban ng Demokratikong Pilipino party8 and the running
political rivalry they maintained in the last congressional and local elections;9 and his alleged refusal
to operate a lottery in Iloilo City.10 He also alleges that he requested the Secretary to lift his
suspension since it had come ninety days prior to an election (the barangay elections of November

141 | P a g e
14, 1988),11 notwithstanding which, the latter proceeded with the hearing and meted out two more
suspension orders of the aforementioned cases.12 He likewise contends that he sought to bring the
cases to Iloilo City (they were held in Manila) in order to reduce the costs of proceeding, but the
Secretary rejected his request.13 He states that he asked for postponement on "valid and
justifiable"14 grounds, among them, that he was suffering from a heart ailment which required
confinement; that his "vital"15 witness was also hospitalized16 but that the latter unduly denied his
request.17

Mayor Ganzon's primary argument (G.R. Nos. 93252 and 95245) is that the Secretary of Local
Government is devoid, in any event, of any authority to suspend and remove local officials, an
argument reiterated by the petitioner Mary Ann Rivera Artieda (G.R. No. 93746).

As to Mayor Ganzon's charges of denial of due process, the records do not show very clearly in
what manner the Mayor might have been deprived of his rights by the respondent Secretary. His
claims that he and Secretary Luis-Santos were (are) political rivals and that his "persecution" was
politically motivated are pure speculation and although the latter does not appear to have denied
these contentions (as he, Mayor Ganzon, claims), we can not take his word for it the way we would
have under less political circumstances, considering furthermore that "political feud" has often been
a good excuse in contesting complaints.

The Mayor has failed furthermore to substantiate his say-so's that Secretary Santos had attempted
to seduce him to join the administration party and to operate a lottery in Iloilo City. Again, although
the Secretary failed to rebut his allegations, we can not accept them, at face value, much more, as
judicial admissions as he would have us accept them18 for the same reasons above-stated and
furthermore, because his say so's were never corroborated by independent testimonies. As a
responsible public official, Secretary Santos, in pursuing an official function, is presumed to be
performing his duties regularly and in the absence of contrary evidence, no ill motive can be
ascribed to him.

As to Mayor Ganzon's contention that he had requested the respondent Secretary to defer the
hearing on account of the ninety-day ban prescribed by Section 62 of Batas Blg. 337, the Court
finds the question to be moot and academic since we have in fact restrained the Secretary from
further hearing the complaints against the petitioners.19

As to his request, finally, for postponements, the Court is afraid that he has not given any
compelling reason why we should overturn the Court of Appeals, which found no convincing reason
to overrule Secretary Santos in denying his requests. Besides, postponements are a matter of
discretion on the part of the hearing officer, and based on Mayor Ganzon's above story, we are not
convinced that the Secretary has been guilty of a grave abuse of discretion.

The Court can not say, under these circumstances, that Secretary Santos' actuations deprived
Mayor Ganzon of due process of law.

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We come to the core question: Whether or not the Secretary of Local Government, as the
President's alter ego, can suspend and/or remove local officials.

It is the petitioners' argument that the 1987 Constitution20 no longer allows the President, as the
1935 and 1973 Constitutions did, to exercise the power of suspension and/or removal over local
officials. According to both petitioners, the Constitution is meant, first, to strengthen self-rule by local
government units and second, by deleting the phrase21 as may be provided by law to strip the
President of the power of control over local governments. It is a view, so they contend, that finds
support in the debates of the Constitutional Commission. The provision in question reads as follows:

Sec. 4. The President of the Philippines shall exercise general supervision over local governments.
Provinces with respect to component cities and municipalities, and cities and municipalities with
respect to component barangays shall ensure that the acts of their component units are within the
scope of their prescribed powers and functions.22

It modifies a counterpart provision appearing in the 1935 Constitution, which we quote:

Sec. 10. The President shall have control of all the executive departments, bureaus, or offices,
exercise general supervision over all Local governments as may be provided by law, and take care
that the laws be faithfully executed.23

The petitioners submit that the deletion (of "as may be provided by law") is significant, as their
argument goes, since: (1) the power of the President is "provided by law" and (2) hence, no law may
provide for it any longer.

It is to be noted that in meting out the suspensions under question, the Secretary of Local
Government acted in consonance with the specific legal provisions of Batas Blg. 337, the Local
Government Code, we quote:

Sec. 62. Notice of Hearing. — Within seven days after the complaint is filed, the Minister of local
Government, or the sanggunian concerned, as the case may be, shall require the respondent to
submit his verified answer within seven days from receipt of said complaint, and commence the
hearing and investigation of the case within ten days after receipt of such answer of the respondent.
No investigation shall be held within ninety days immediately prior to an election, and no preventive
suspension shall be imposed with the said period. If preventive suspension has been imposed prior
to the aforesaid period, the preventive suspension shall be lifted.24

Sec. 63. Preventive Suspension. — (1) Preventive suspension may be imposed by the
Minister of Local Government if the respondent is a provincial or city official, by the provincial
governor if the respondent is an elective municipal official, or by the city or municipal mayor if the
respondent is an elective barangay official.

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(2) Preventive suspension may be imposed at any time after the issues are joined, when there
is reasonable ground to believe that the respondent has committed the act or acts complained of,
when the evidence of culpability is strong, when the gravity of the offense so warrants, or when the
continuance in office of the respondent could influence the witnesses or pose a threat to the safety
and integrity of the records and other evidence. In all cases, preventive suspension shall not extend
beyond sixty days after the start of said suspension.

(3) At the expiration of sixty days, the suspended official shall be deemed reinstated in office
without prejudice to the continuation of the proceedings against him until its termination. However ' if
the delay in the proceedings of the case is due to his fault, neglect or request, the time of the delay
shall not be counted in computing the time of suspension.25

The issue, as the Court understands it, consists of three questions: (1) Did the 1987 Constitution, in
deleting the phrase "as may be provided by law" intend to divest the President of the power to
investigate, suspend, discipline, and/or remove local officials? (2) Has the Constitution repealed
Sections 62 and 63 of the Local Government Code? (3) What is the significance of the change in
the constitutional language?

It is the considered opinion of the Court that notwithstanding the change in the constitutional
language, the charter did not intend to divest the legislature of its right or the President of her
prerogative as conferred by existing legislation to provide administrative sanctions against local
officials. It is our opinion that the omission (of "as may be provided by law") signifies nothing more
than to underscore local governments' autonomy from congress and to break Congress' "control"
over local government affairs. The Constitution did not, however, intend, for the sake of local
autonomy, to deprive the legislature of all authority over municipal corporations, in particular,
concerning discipline.

Autonomy does not, after all, contemplate making mini-states out of local government units, as in
the federal governments of the United States of America (or Brazil or Germany), although Jefferson
is said to have compared municipal corporations euphemistically to "small republics."26 Autonomy,
in the constitutional sense, is subject to the guiding star, though not control, of the legislature, albeit
the legislative responsibility under the Constitution and as the "supervision clause" itself suggest-is
to wean local government units from over-dependence on the central government.

It is noteworthy that under the Charter, "local autonomy" is not instantly self-executing, but subject
to, among other things, the passage of a local government code,27 a local tax law,28 income
distribution legislation,29 and a national representation law,30 and measures31 designed to realize
autonomy at the local level. It is also noteworthy that in spite of autonomy, the Constitution places
the local government under the general supervision of the Executive. It is noteworthy finally, that the
Charter allows Congress to include in the local government code provisions for removal of local
officials, which suggest that Congress may exercise removal powers, and as the existing Local
Government Code has done, delegate its exercise to the President. Thus:

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Sec. 3. The Congress shall enact a local government code which shall provide for a more
responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the
different local government units their powers, responsibilities and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and functions and duties of
local officials, and all other matters relating to the organization and operation of the local units.32

As hereinabove indicated, the deletion of "as may be provided by law" was meant to stress, sub
silencio, the objective of the framers to strengthen local autonomy by severing congressional control
of its affairs, as observed by the Court of Appeals, like the power of local legislation.33 The
Constitution did nothing more, however, and insofar as existing legislation authorizes the President
(through the Secretary of Local Government) to proceed against local officials administratively, the
Constitution contains no prohibition.

The petitioners are under the impression that the Constitution has left the President mere
supervisory powers, which supposedly excludes the power of investigation, and denied her control,
which allegedly embraces disciplinary authority. It is a mistaken impression because legally,
"supervision" is not incompatible with disciplinary authority as this Court has held,34 thus:

xxx xxx xxx

It is true that in the case of Mondano vs. Silvosa, 51 Off. Gaz., No. 6 p. 2884, this Court had
occasion to discuss the scope and extent of the power of supervision by the President over local
government officials in contrast to the power of control given to him over executive officials of our
government wherein it was emphasized that the two terms, control and supervision, are two
different things which differ one from the other in meaning and extent. Thus in that case the Court
has made the following digression: "In administration law supervision means overseeing or the
power or authority of an officer to see that subordinate officers perform their duties. If the latter fail
or neglect to fulfill them the former may take such action or step as prescribed by law to make them
perform their duties. Control, on the other hand, means the power of an officer to alter or modify or
nullify of set aside what a subordinate officer had done in the performance of his duties and to
substitute the judgment of the former for that of the latter." But from this pronouncement it cannot be
reasonably inferred that the power of supervision of the President over local government officials
does not include the power of investigation when in his opinion the good of the public service so
requires, as postulated in Section 64(c) of the Revised Administrative Code. ...35

xxx xxx xxx

"Control" has been defined as "the power of an officer to alter or modify or nullify or set aside what a
subordinate officer had done in the performance of his duties and to substitute the judgment of the
former for test of the latter."36 "Supervision" on the other hand means "overseeing or the power or
authority of an officer to see that subordinate officers perform their duties.37 As we held,38
however, "investigating" is not inconsistent with "overseeing", although it is a lesser power than
"altering". The impression is apparently exacerbated by the Court's pronouncements in at least

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three cases, Lacson v. Roque,39 Hebron v. Reyes,40 and Mondano v. Silvosa,41 and possibly, a
fourth one, Pelaez v. Auditor General.42 In Lacson, this Court said that the President enjoyed no
control powers but only supervision "as may be provided by law,"43 a rule we reiterated in Hebron,
and Mondano. In Pelaez, we stated that the President "may not . . . suspend an elective official of a
regular municipality or take any disciplinary action against him, except on appeal from a decision of
the corresponding provincial board."44 However, neither Lacson nor Hebron nor Mondano
categorically banned the Chief Executive from exercising acts of disciplinary authority because she
did not exercise control powers, but because no law allowed her to exercise disciplinary authority.
Thus, according to Lacson:

The contention that the President has inherent power to remove or suspend municipal officers is
without doubt not well taken. Removal and suspension of public officers are always controlled by
the particular law applicable and its proper construction subject to constitutional limitations.45

In Hebron we stated:

Accordingly, when the procedure for the suspension of an officer is specified by law, the same must
be deemed mandatory and adhered to strictly, in the absence of express or clear provision to the
contrary-which does not et with respect to municipal officers ...46

In Mondano, the Court held:

... The Congress has expressly and specifically lodged the provincial supervision over municipal
officials in the provincial governor who is authorized to "receive and investigate complaints made
under oath against municipal officers for neglect of duty, oppression, corruption or other form of
maladministration of office, and conviction by final judgment of any crime involving moral turpitude."
And if the charges are serious, "he shall submit written charges touching the matter to the provincial
board, furnishing a copy of such charges to the accused either personally or by registered mail, and
he may in such case suspend the officer (not being the municipal treasurer) pending action by the
board, if in his opinion the charge by one affecting the official integrity of the officer in question."
Section 86 of the Revised Administration Code adds nothing to the power of supervision to be
exercised by the Department Head over the administration of ... municipalities ... . If it be construed
that it does and such additional power is the same authority as that vested in the Department Head
by section 79(c) of the Revised Administrative Code, then such additional power must be deemed to
have been abrogated by Section 110(l), Article VII of the Constitution.47

xxx xxx xxx

In Pelaez, we stated that the President can not impose disciplinary measures on local officials
except on appeal from the provincial board pursuant to the Administrative Code.48

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Thus, in those case that this Court denied the President the power (to suspend/remove) it was not
because we did not think that the President can not exercise it on account of his limited power, but
because the law lodged the power elsewhere. But in those cases ii which the law gave him the
power, the Court, as in Ganzon v. Kayanan, found little difficulty in sustaining him.49

The Court does not believe that the petitioners can rightfully point to the debates of the
Constitutional Commission to defeat the President's powers. The Court believes that the
deliberations are by themselves inconclusive, because although Commissioner Jose Nolledo would
exclude the power of removal from the President,50 Commissioner Blas Ople would not.51

The Court is consequently reluctant to say that the new Constitution has repealed the Local
Government Code, Batas Blg. 37. As we said, "supervision" and "removal" are not incompatible
terms and one may stand with the other notwithstanding the stronger expression of local autonomy
under the new Charter. We have indeed held that in spite of the approval of the Charter, Batas Blg.
337 is still in force and effect.52

As the Constitution itself declares, local autonomy means "a more responsive and accountable local
government structure instituted through a system of decentralization."53 The Constitution as we
observed, does nothing more than to break up the monopoly of the national government over the
affairs of local governments and as put by political adherents, to "liberate the local governments
from the imperialism of Manila." Autonomy, however, is not meant to end the relation of partnership
and inter-dependence between the central administration and local government units, or otherwise,
to user in a regime of federalism. The Charter has not taken such a radical step. Local
governments, under the Constitution, are subject to regulation, however limited, and for no other
purpose than precisely, albeit paradoxically, to enhance self- government.

As we observed in one case,54 decentralization means devolution of national administration but not
power to the local levels. Thus:

Now, autonomy is either decentralization of administration or decentralization of power. There is

decentralization of administration when the central government delegates administrative powers to
political subdivisions in order to broaden the base of government power and in the process to make
local governments "more responsive and accountable," and "ensure their fullest development as
self-reliant communities and make them more effective partners in the pursuit of national
development and social progress." At the same time, it relieves the central government of the
burden of managing local affairs and enables it to concentrate on national concerns. The President
exercises "general supervision" over them, but only to "ensure that local affairs are administered
according to law." He has no control over their acts in the sense that he can substitute their
judgments with his own.

Decentralization of power, on the other hand, involves an abdication of political power in the favor of
local governments units declared to be autonomous, In that case, the autonomous government is
free to chart its own destiny and shape its future with minimum intervention from central authorities.
According to a constitutional author, decentralization of power amounts to "self-immolation," since in

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that event, the autonomous government becomes accountable not to the central authorities but to
its constituency.55

The successive sixty-day suspensions imposed on Mayor Rodolfo Ganzon is albeit another matter.
What bothers the Court, and what indeed looms very large, is the fact that since the Mayor is facing
ten administrative charges, the Mayor is in fact facing the possibility of 600 days of suspension, in
the event that all ten cases yield prima facie findings. The Court is not of course tolerating
misfeasance in public office (assuming that Mayor Ganzon is guilty of misfeasance) but it is certainly
another question to make him serve 600 days of suspension, which is effectively, to suspend him
out of office. As we held:56

2. Petitioner is a duly elected municipal mayor of Lianga, Surigao del Sur. His term of office
does not expire until 1986. Were it not for this information and the suspension decreed by the
Sandiganbayan according to the Anti-Graft and Corrupt Practices Act, he would have been all this
while in the full discharge of his functions as such municipal mayor. He was elected precisely to do
so. As of October 26, 1983, he has been unable to. it is a basic assumption of the electoral process
implicit in the right of suffrage that the people are entitled to the services of elective officials of their
choice. For misfeasance or malfeasance, any of them could, of course, be proceeded against
administratively or, as in this instance, criminally. In either case, Ms culpability must be established.
Moreover, if there be a criminal action, he is entitled to the constitutional presumption of innocence.
A preventive suspension may be justified. Its continuance, however, for an unreasonable length of
time raises a due process question. For even if thereafter he were acquitted, in the meanwhile his
right to hold office had been nullified. Clearly, there would be in such a case an injustice suffered by
him. Nor is he the only victim. There is injustice inflicted likewise on the people of Lianga They were
deprived of the services of the man they had elected to serve as mayor. In that sense, to
paraphrase Justice Cardozo, the protracted continuance of this preventive suspension had outrun
the bounds of reason and resulted in sheer oppression. A denial of due process is thus quite
manifest. It is to avoid such an unconstitutional application that the order of suspension should be
lifted.57

The plain truth is that this Court has been ill at ease with suspensions, for the above reasons,58 and
so also, because it is out of the ordinary to have a vacancy in local government. The sole objective
of a suspension, as we have held,59 is simply "to prevent the accused from hampering the normal
cause of the investigation with his influence and authority over possible witnesses"60 or to keep him
off "the records and other evidence.61

It is a means, and no more, to assist prosecutors in firming up a case, if any, against an erring local
official. Under the Local Government Code, it can not exceed sixty days,62 which is to say that it
need not be exactly sixty days long if a shorter period is otherwise sufficient, and which is also to
say that it ought to be lifted if prosecutors have achieved their purpose in a shorter span.

Suspension is not a penalty and is not unlike preventive imprisonment in which the accused is held
to insure his presence at the trial. In both cases, the accused (the respondent) enjoys a
presumption of innocence unless and until found guilty.

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Suspension finally is temporary and as the Local Government Code provides, it may be imposed for
no more than sixty days. As we held,63 a longer suspension is unjust and unreasonable, and we
might add, nothing less than tyranny.

As we observed earlier, imposing 600 days of suspension which is not a remote possibility Mayor
Ganzon is to all intents and purposes, to make him spend the rest of his term in inactivity. It is also
to make, to all intents and purposes, his suspension permanent.

It is also, in fact, to mete out punishment in spite of the fact that the Mayor's guilt has not been
proven. Worse, any absolution will be for naught because needless to say, the length of his
suspension would have, by the time he is reinstated, wiped out his tenure considerably.

The Court is not to be mistaken for obstructing the efforts of the respondent Secretary to see that
justice is done in Iloilo City, yet it is hardly any argument to inflict on Mayor Ganzon successive
suspensions when apparently, the respondent Secretary has had sufficient time to gather the
necessary evidence to build a case against the Mayor without suspending him a day longer. What is
intriguing is that the respondent Secretary has been cracking down, so to speak, on the Mayor
piecemeal apparently, to pin him down ten times the pain, when he, the respondent Secretary,
could have pursued a consolidated effort.

We reiterate that we are not precluding the President, through the Secretary of Interior from
exercising a legal power, yet we are of the opinion that the Secretary of Interior is exercising that
power oppressively, and needless to say, with a grave abuse of discretion.

The Court is aware that only the third suspension is under questions, and that any talk of future
suspensions is in fact premature. The fact remains, however, that Mayor Ganzon has been made to
serve a total of 120 days of suspension and the possibility of sixty days more is arguably around the
corner (which amounts to a violation of the Local Government Code which brings to light a pattern
of suspensions intended to suspend the Mayor the rest of his natural tenure. The Court is simply
foreclosing what appears to us as a concerted effort of the State to perpetuate an arbitrary act.

As we said, we can not tolerate such a state of affairs.

We are therefore allowing Mayor Rodolfo Ganzon to suffer the duration of his third suspension and
lifting, for the purpose, the Temporary Restraining Order earlier issued. Insofar as the seven
remaining charges are concerned, we are urging the Department of Local Government, upon the
finality of this Decision, to undertake steps to expedite the same, subject to Mayor Ganzon's usual
remedies of appeal, judicial or administrative, or certiorari, if warranted, and meanwhile, we are
precluding the Secretary from meting out further suspensions based on those remaining complaints,
notwithstanding findings of prima facie evidence.

149 | P a g e
In resume the Court is laying down the following rules:

1. Local autonomy, under the Constitution, involves a mere decentralization of administration,

not of power, in which local officials remain accountable to the central government in the manner
the law may provide;

2. The new Constitution does not prescribe federalism;

3. The change in constitutional language (with respect to the supervision clause) was meant
but to deny legislative control over local governments; it did not exempt the latter from legislative
regulations provided regulation is consistent with the fundamental premise of autonomy;

4. Since local governments remain accountable to the national authority, the latter may, by law,
and in the manner set forth therein, impose disciplinary action against local officials;

5. "Supervision" and "investigation" are not inconsistent terms; "investigation" does not signify
"control" (which the President does not have);

6. The petitioner, Mayor Rodolfo Ganzon. may serve the suspension so far ordered, but may
no longer be suspended for the offenses he was charged originally; provided:

a) that delays in the investigation of those charges "due to his fault, neglect or request, (the
time of the delay) shall not be counted in computing the time of suspension. [Supra, sec. 63(3)]

b) that if during, or after the expiration of, his preventive suspension, the petitioner commits
another or other crimes and abuses for which proper charges are filed against him by the aggrieved
party or parties, his previous suspension shall not be a bar to his being preventively suspended
again, if warranted under subpar. (2), Section 63 of the Local Government Code.

WHEREFORE, premises considered, the petitions are DISMISSED. The Temporary Restraining
Order issued is LIFTED.1âwphi1 The suspensions of the petitioners are AFFIRMED, provided that
the petitioner, Mayor Rodolfo Ganzon, may not be made to serve future suspensions on account of
any of the remaining administrative charges pending against him for acts committed prior to August
11, 1988. The Secretary of Interior is ORDERED to consolidate all such administrative cases
pending against Mayor Ganzon.
The sixty-day suspension against the petitioner, Mary Ann Rivera Artieda, is AFFIRMED. No costs.
SO ORDERED.

150 | P a g e
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 97412 July 12, 1994

EASTERN SHIPPING LINES, INC., petitioner,

vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.

Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.

Zapa Law Office for private respondent.

VITUG, J.:

The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a
shipment of goods can be a solidary, or joint and several, liability of the common carrier, the arrastre
operator and the customs broker; (b) whether the payment of legal interest on an award for loss or
damage is to be computed from the time the complaint is filed or from the date the decision
appealed from is rendered; and (c) whether the applicable rate of interest, referred to above, is
twelve percent (12%) or six percent (6%).

The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed
facts that have led to the controversy are hereunder reproduced:

This is an action against defendants shipping company, arrastre operator and broker-forwarder for
damages sustained by a shipment while in defendants' custody, filed by the insurer-subrogee who
paid the consignee the value of such losses/damages.

On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill of
Lading

151 | P a g e
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.

Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the custody of
defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad order, which
damage was unknown to plaintiff.

On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from defendant
Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad Order Survey."
Exh. D).

On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained spillages,
while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No. 10649, Exh. E).

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee suffered
losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were presented
against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).

As a consequence of the losses sustained, plaintiff was compelled to pay the consignee P19,032.95
under the aforestated marine insurance policy, so that it became subrogated to all the rights of
action of said consignee against defendants (per "Form of Subrogation", "Release" and Philbanking
check, Exhs. M, N, and O). (pp. 85-86, Rollo.)

There were, to be sure, other factual issues that confronted both courts. Here, the appellate court
said:

Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged in
good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject shipment was discharged
unto its custody, portion of the same was already in bad order (p. 11, Record); Allied Brokerage
alleged that plaintiff has no cause of action against it, not having negligent or at fault for the
shipment was already in damage and bad order condition when received by it, but nonetheless, it
still exercised extra ordinary care and diligence in the handling/delivery of the cargo to consignee in
the same condition shipment was received by it.

From the evidence the court found the following:

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The issues are:

1. Whether or not the shipment sustained losses/damages;

2. Whether or not these losses/damages were sustained while in the custody of defendants (in
whose respective custody, if determinable);

3. Whether or not defendant(s) should be held liable for the losses/damages (see plaintiff's pre-
Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's Records, p. 38).

As to the first issue, there can be no doubt that the shipment sustained losses/damages. The two
drums were shipped in good order and condition, as clearly shown by the Bill of Lading and
Commercial Invoice which do not indicate any damages drum that was shipped (Exhs. B and C).
But when on December 12, 1981 the shipment was delivered to defendant Metro Port Service, Inc.,
it excepted to one drum in bad order.

Correspondingly, as to the second issue, it follows that the losses/damages were sustained while in
the respective and/or successive custody and possession of defendants carrier (Eastern), arrastre
operator (Metro Port) and broker (Allied Brokerage). This becomes evident when the Marine Cargo
Survey Report (Exh. G), with its "Additional Survey Notes", are considered. In the latter notes, it is
stated that when the shipment was "landed on vessel" to dock of Pier # 15, South Harbor, Manila on
December 12, 1981, it was observed that "one (1) fiber drum (was) in damaged condition, covered
by the vessel's Agent's Bad Order Tally Sheet No. 86427." The report further states that when
defendant Allied Brokerage withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag partly torn but contents intact.
Net unrecovered spillages was
15 kgs. The report went on to state that when the drums reached the consignee, one drum was
found with adulterated/faked contents. It is obvious, therefore, that these losses/damages occurred
before the shipment reached the consignee while under the successive custodies of defendants.
Under Art. 1737 of the New Civil Code, the common carrier's duty to observe extraordinary diligence
in the vigilance of goods remains in full force and effect even if the goods are temporarily unloaded
and stored in transit in the warehouse of the carrier at the place of destination, until the consignee
has been advised and has had reasonable opportunity to remove or dispose of the goods (Art.
1738, NCC). Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was found "open".

and thus held:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

A. Ordering defendants to pay plaintiff, jointly and severally:

153 | P a g e
1. The amount of P19,032.95, with the present legal interest of 12% per annum from October
1, 1982, the date of filing of this complaints, until fully paid (the liability of defendant Eastern
Shipping, Inc. shall not exceed US$500 per case or the CIF value of the loss, whichever is lesser,
while the liability of defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed P5,000.00 each, pursuant to
Section 6.01 of the Management Contract);

2. P3,000.00 as attorney's fees, and

3. Costs.

B. Dismissing the counterclaims and crossclaim of defendant/cross-claimant Allied Brokerage

Corporation.

SO ORDERED. (p. 207, Record).

Dissatisfied, defendant's recourse to US.

The appeal is devoid of merit.

After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom is
correct. As there is sufficient evidence that the shipment sustained damage while in the successive
possession of appellants, and therefore they are liable to the appellee, as subrogee for the amount
it paid to the consignee. (pp. 87-89, Rollo.)

The Court of Appeals thus affirmed in toto the judgment of the court
a quo.

In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of
discretion on the part of the appellate court when —

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE

ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;

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II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE RATE
OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE DECISION OF
THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER ANNUM, PRIVATE
RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.

The petition is, in part, granted.

In this decision, we have begun by saying that the questions raised by petitioner carrier are not all
that novel. Indeed, we do have a fairly good number of previous decisions this Court can merely
tack to.

The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the
time the articles are surrendered to or unconditionally placed in the possession of, and received by,
the carrier for transportation until delivered to, or until the lapse of a reasonable time for their
acceptance by, the person entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court
of Appeals, 161 SCRA 646; Kui Bai vs. Dollar Steamship Lines, 52 Phil. 863). When the goods
shipped either are lost or arrive in damaged condition, a presumption arises against the carrier of its
failure to observe that diligence, and there need not be an express finding of negligence to hold it
liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of Appeals, 139 SCRA 87; Metro
Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course, exceptional cases when
such presumption of fault is not observed but these cases, enumerated in Article 17341 of the Civil
Code, are exclusive, not one of which can be applied to this case.

The question of charging both the carrier and the arrastre operator with the obligation of properly
delivering the goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund
Insurance vs. Metro Port Services (182 SCRA 455), we have explained, in holding the carrier and
the arrastre operator liable in solidum, thus:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor
and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The relationship between
the consignee and the common carrier is similar to that of the consignee and the arrastre operator
(Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]). Since it is the duty of the
ARRASTRE to take good care of the goods that are in its custody and to deliver them in good
condition to the consignee, such responsibility also devolves upon the CARRIER. Both the
ARRASTRE and the CARRIER are therefore charged with the obligation to deliver the goods in
good condition to the consignee.

We do not, of course, imply by the above pronouncement that the arrastre operator and the
customs broker are themselves always and necessarily liable solidarily with the carrier, or vice-
versa, nor that attendant facts in a given case may not vary the rule. The instant petition has been
brought solely by Eastern Shipping Lines, which, being the carrier and not having been able to rebut
the presumption of fault, is, in any event, to be held liable in this particular case. A factual finding of
both the court a quo and the appellate court, we take note, is that "there is sufficient evidence that

155 | P a g e
the shipment sustained damage while in the successive possession of appellants" (the herein
petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines, Inc., the sole
petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.

It is over the issue of legal interest adjudged by the appellate court that deserves more than just a
passing remark.

Let us first see a chronological recitation of the major rulings of this Court:

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service,2 decided3 on 15 May 1969, involved a suit for recovery of money arising out of short
deliveries and pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower
court) averred in its complaint that the total amount of its claim for the value of the undelivered
goods amounted to P3,947.20. This demand, however, was neither established in its totality nor
definitely ascertained. In the stipulation of facts later entered into by the parties, in lieu of proof, the
amount of P1,447.51 was agreed upon. The trial court rendered judgment ordering the appellants
(defendants) Manila Port Service and Manila Railroad Company to pay appellee Malayan Insurance
the sum of P1,447.51 with legal interest thereon from the date the complaint was filed on 28
December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of
legal interest. In sustaining the appellants, this Court ruled:

Interest upon an obligation which calls for the payment of money, absent a stipulation, is the legal
rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial. The trial
court opted for judicial demand as the starting point.

But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with reasonable
certainty." And as was held by this Court in Rivera vs. Perez,4 L-6998, February 29, 1956, if the suit
were for damages, "unliquidated and not known until definitely ascertained, assessed and
determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos, 25 Phil. 447;
Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)

The case of Reformina vs. Tomol,5 rendered on 11 October 1985, was for "Recovery of Damages
for Injury to Person and Loss of Property." After trial, the lower court decreed:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants and
against the defendants and third party plaintiffs as follows:

156 | P a g e
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:

xxx xxx xxx

(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a month
as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up to the time
they are actually paid or already the total sum of P370,000.00 as of June 4, 1972 with legal interest
from the filing of the complaint until paid and to pay attorney's fees of P5,000.00 with costs against
defendants and third party plaintiffs. (Emphasis supplied.)

On appeal to the Court of Appeals, the latter modified the amount of damages awarded but
sustained the trial court in adjudging legal interest from the filing of the complaint until fully paid.
When the appellate court's decision became final, the case was remanded to the lower court for
execution, and this was when the trial court issued its assailed resolution which applied the 6%
interest per annum prescribed in Article 2209 of the Civil Code. In their petition for review on
certiorari, the petitioners contended that Central Bank Circular
No. 416, providing thus —

By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary Board in
its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for the loan, or
forbearance of any money, goods, or credits and the rate allowed in judgments, in the absence of
express contract as to such rate of interest, shall be twelve (12%) percent per annum. This Circular
shall take effect immediately. (Emphasis found in the text) —

should have, instead, been applied. This Court6 ruled:

The judgments spoken of and referred to are judgments in litigations involving loans or forbearance
of any money, goods or credits. Any other kind of monetary judgment which has nothing to do with,
nor involving loans or forbearance of any money, goods or credits does not fall within the coverage
of the said law for it is not within the ambit of the authority granted to the Central Bank.

xxx xxx xxx

Coming to the case at bar, the decision herein sought to be executed is one rendered in an Action
for Damages for injury to persons and loss of property and does not involve any loan, much less
forbearances of any money, goods or credits. As correctly argued by the private respondents, the
law applicable to the said case is Article 2209 of the New Civil Code which reads —

157 | P a g e
Art. 2209. — If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of
interest agreed upon, and in the absence of stipulation, the legal interest which is six percent per
annum.

The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz,7 promulgated on 28 July
1986. The case was for damages occasioned by an injury to person and loss of property. The trial
court awarded private respondent Pedro Manabat actual and compensatory damages in the amount
of P72,500.00 with legal interest thereon from the filing of the complaint until fully paid. Relying on
the Reformina v. Tomol case, this Court8 modified the interest award from 12% to 6% interest per
annum but sustained the time computation thereof, i.e., from the filing of the complaint until fully
paid.

In Nakpil and Sons vs. Court of Appeals,9 the trial court, in an action for the recovery of damages
arising from the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November
29, 1968, the date of the filing of the complaint until full payment . . . ." Save from the modification of
the amount granted by the lower court, the Court of Appeals sustained the trial court's decision.
When taken to this Court for review, the case, on 03 October 1986, was decided, thus:

WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and
environmental circumstances of this case, we deem it reasonable to render a decision imposing, as
We do hereby impose, upon the defendant and the third-party defendants (with the exception of
Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos
to cover all damages (with the exception to attorney's fees) occasioned by the loss of the building
(including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND
(P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this
decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be
imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant
and third-party defendants (Except Roman Ozaeta). (Emphasis supplied)

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of the monetary award was in contravention
of law." The Court10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines
cases and, in its resolution of 15 April 1988, it explained:

There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or
credit; and

158 | P a g e
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143 SCRA
160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the instant case,
there is neither a loan or a forbearance, but then no interest is actually imposed provided the sums
referred to in the judgment are paid upon the finality of the judgment. It is delay in the payment of
such final judgment, that will cause the imposition of the interest.

It will be noted that in the cases already adverted to, the rate of interest is imposed on the total sum,
from the filing of the complaint until paid; in other words, as part of the judgment for damages.
Clearly, they are not applicable to the instant case. (Emphasis supplied.)

The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court11
was a petition for review on certiorari from the decision, dated 27 February 1985, of the then
Intermediate Appellate Court reducing the amount of moral and exemplary damages awarded by
the trial court, to P240,000.00 and P100,000.00, respectively, and its resolution, dated 29 April
1985, restoring the amount of damages awarded by the trial court, i.e., P2,000,000.00 as moral
damages and P400,000.00 as exemplary damages with interest thereon at 12% per annum from
notice of judgment, plus costs of suit. In a decision of 09 November 1988, this Court, while
recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court12
thus set aside the decision of the appellate court and rendered a new one, "ordering the petitioner to
pay private respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral
damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis
supplied)

Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz13 which arose
from a breach of employment contract. For having been illegally dismissed, the petitioner was
awarded by the trial court moral and exemplary damages without, however, providing any legal
interest thereon. When the decision was appealed to the Court of Appeals, the latter held:

WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental dated
October 31, 1972 is affirmed in all respects, with the modification that defendants-appellants, except
defendant-appellant Merton Munn, are ordered to pay, jointly and severally, the amounts stated in
the dispositive portion of the decision, including the sum of P1,400.00 in concept of compensatory
damages, with interest at the legal rate from the date of the filing of the complaint until fully paid
(Emphasis supplied.)

The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed
that only compensatory damages should earn interest at 6% per annum from the date of the filing of
the complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition for
certiorari assailed the said order. This Court said:

159 | P a g e
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal rate"
from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416] does not
apply to actions based on a breach of employment contract like the case at bar. (Emphasis
supplied)

The Court reiterated that the 6% interest per annum on the damages should be computed from the
time the complaint was filed until the amount is fully paid.

Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas,14 decided on 08 May 1992, involved the expropriation of certain parcels of land. After
conducting a hearing on the complaints for eminent domain, the trial court ordered the petitioner to
pay the private respondents certain sums of money as just compensation for their lands so
expropriated "with legal interest thereon . . . until fully paid." Again, in applying the 6% legal interest
per annum under the Civil Code, the Court15 declared:

. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits but
expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just compensation
for the properties expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. Therefore, since the kind of interest involved in the joint judgment of the lower
court sought to be enforced in this case is interest by way of damages, and not by way of earnings
from loans, etc. Art. 2209 of the Civil Code shall apply.

Concededly, there have been seeming variances in the above holdings. The cases can perhaps be
classified into two groups according to the similarity of the issues involved and the corresponding
rulings rendered by the court. The "first group" would consist of the cases of Reformina v. Tomol
(1985), Philippine Rabbit Bus Lines v. Cruz (1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan
Insurance Company v. Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and
American Express International v. Intermediate Appellate Court (1988).

In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code)
or 12% (under the Central Bank Circular) interest per annum. It is easily discernible in these cases
that there has been a consistent holding that the Central Bank Circular imposing the 12% interest
per annum applies only to loans or forbearance16 of money, goods or credits, as well as to
judgments involving such loan or forbearance of money, goods or credits, and that the 6% interest
under the Civil Code governs when the transaction involves the payment of indemnities in the
concept of damage arising from the breach or a delay in the performance of obligations in general.
Observe, too, that in these cases, a common time frame in the computation of the 6% interest per
annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.

160 | P a g e
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest
per annum,17 depending on whether or not the amount involved is a loan or forbearance, on the
one hand, or one of indemnity for damage, on the other hand. Unlike, however, the "first group"
which remained consistent in holding that the running of the legal interest should be from the time of
the filing of the complaint until fully paid, the "second group" varied on the commencement of the
running of the legal interest.

Malayan held that the amount awarded should bear legal interest from the date of the decision of
the court a quo, explaining that "if the suit were for damages, 'unliquidated and not known until
definitely ascertained, assessed and determined by the courts after proof,' then, interest 'should be
from the date of the decision.'" American Express International v. IAC, introduced a different time
frame for reckoning the 6% interest by ordering it to be "computed from the finality of (the) decision
until paid." The Nakpil and Sons case ruled that 12% interest per annum should be imposed from
the finality of the decision until the judgment amount is paid.

The ostensible discord is not difficult to explain. The factual circumstances may have called for
different applications, guided by the rule that the courts are vested with discretion, depending on the
equities of each case, on the award of interest. Nonetheless, it may not be unwise, by way of
clarification and reconciliation, to suggest the following rules of thumb for future guidance.

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts18 is breached, the contravenor can be held liable for damages.19 The provisions
under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable
damages.20

II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated in
writing.21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded.22 In the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and subject to the provisions
of Article 116923 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest

on the amount of damages awarded may be imposed at the discretion of the court24 at the rate of
6% per annum.25 No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty.26 Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the quantification of damages

161 | P a g e
may be deemed to have been reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12%
per annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.

WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX
PERCENT (6%), shall be imposed on such amount upon finality of this decision until the payment
thereof.

SO ORDERED.

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 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 108897 October 2, 1997

SARKIES TOURS PHILIPPINES, INC., petitioner,

vs.
HONORABLE COURT OF APPEALS (TENTH DIVISION), DR. ELINO G. FORTADES, MARISOL
A. FORTADES and FATIMA MINERVA A. FORTADES, respondents.

ROMERO, J.:

This petition for review is seeking the reversal of the decision of the Court of Appeals in CA-G.R. CV
No. 18979 promulgated on January 13, 1993, as well as its resolution of February 19, 1993,
denying petitioner's motion for reconsideration for being a mere rehash of the arguments raised in
the appellant's brief.

The case arose from a damage suit filed by private respondents Elino, Marisol, and Fatima Minerva,
all surnamed Fortades, against petitioner for breach of contract of carriage allegedly attended by
bad faith.

On August 31, 1984, Fatima boarded petitioner's De Luxe Bus No. 5 in Manila on her way to
Legazpi City. Her brother Raul helped her load three pieces of luggage containing all of her
optometry review books, materials and equipment, trial lenses, trial contact lenses, passport and
visa, as well as her mother Marisol's U.S. immigration (green) card, among other important
documents and personal belongings. Her belongings were kept in the baggage compartment of the
bus, but during a stopover at Daet, it was discovered that only one bag remained in the open
compartment. The others, including Fatima's things, were missing and might have dropped along
the way. Some of the passengers suggested retracing the route of the bus to try to recover the lost
items, but the driver ignored them and proceeded to Legazpi City.

163 | P a g e
Fatima immediately reported the loss to her mother who, in turn, went to petitioner's office in
Legazpi City and later at its head office in Manila. Petitioner, however, merely offered her P1,000.00
for each piece of luggage lost, which she turned down. After returning to Bicol, disappointed but not
defeated, mother and daughter asked assistance from the radio stations and even from Philtranco
bus drivers who plied the same route on August 31st. The effort paid off when one of Fatima's bags
was recovered. Marisol further reported the incident to the National Bureau of Investigation's field
office in Legazpi City and to the local police.

On September 20, 1984, respondents, through counsel, formally demanded satisfaction of their
complaint from petitioner. In a letter dated October 1, 1984, the latter apologized for the delay and
said that "(a) team has been sent out to Bicol for the purpose of recovering or at least getting the full
detail"1 of the incident.

After more than nine months of fruitless waiting, respondents decided to file the case below to
recover the value of the remaining lost items, as well as moral and exemplary damages, attorney's
fees and expenses of litigation. They claimed that the loss was due to petitioner's failure to observe
extraordinary diligence in the care of Fatima's luggage and that petitioner dealt with them in bad
faith from the start. Petitioner, on the other hand, disowned any liability for the loss on the ground
that Fatima allegedly did not declare any excess baggage upon boarding its bus.

On June 15, 1988, after trial on the merits, the court a quo adjudged the case in favor of
respondents, viz.:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the plaintiffs (herein

respondents) and against the herein defendant Sarkies Tours Philippines, Inc., ordering the latter to
pay to the former the following sums of money, to wit:

1. The sum of P30,000.00 equivalent to the value of the personal belongings of plaintiff Fatima
Minerva Fortades, etc. less the value of one luggage recovered;

2. The sum of P90,000.00 for the transportation expenses, as well as moral damages;

3. The sum of P10,000.00 by way of exemplary damages;

4. The sum of P5,000.00 as attorney's fees; and

5. The sum of P5,000.00 as litigation expenses or a total of One Hundred Forty Thousand
(P140,000.00) Pesos.

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to be paid by herein defendant Sarkies Tours Philippines, Inc. to the herein plaintiffs within 30 days
from receipt of this Decision.

SO ORDERED.

On appeal, the appellate court affirmed the trial court's judgment, but deleted the award of moral
and exemplary damages. Thus,

WHEREFORE, premises considered, except as above modified, fixing the award for transportation
expenses at P30,000.00 and the deletion of the award for moral and exemplary damages, the
decision appealed from is AFFIRMED, with costs against defendant-appellant.

SO ORDERED.

Its motion for reconsideration was likewise rejected by the Court of Appeals, so petitioner elevated
its case to this Court for a review.

After a careful scrutiny of the records of this case, we are convinced that the trial and appellate
courts resolved the issues judiciously based on the evidence at hand.

Petitioner claims that Fatima did not bring any piece of luggage with her, and even if she did, none
was declared at the start of the trip. The documentary and testimonial evidence presented at the
trial, however, established that Fatima indeed boarded petitioner's De Luxe Bus No. 5 in the
evening of August 31, 1984, and she brought three pieces of luggage with her, as testified by her
brother Raul,2 who helped her pack her things and load them on said bus. One of the bags was
even recovered by a Philtranco bus driver. In its letter dated October 1, 1984, petitioner tacitly
admitted its liability by apologizing to respondents and assuring them that efforts were being made
to recover the lost items.

The records also reveal that respondents went to great lengths just to salvage their loss. The
incident was reported to the police, the NBI, and the regional and head offices of petitioner. Marisol
even sought the assistance of Philtranco bus drivers and the radio stations. To expedite the
replacement of her mother's lost U.S. immigration documents, Fatima also had to execute an
affidavit of loss.3 Clearly, they would not have gone through all that trouble in pursuit of a fancied
loss.

Fatima was not the only one who lost her luggage. Apparently, other passengers had suffered a
similar fate: Dr. Lita Samarista testified that petitioner offered her P1,000.00 for her lost baggage
and she accepted it;4 Carleen Carullo-Magno lost her chemical engineering review materials, while
her brother lost abaca products he was transporting to Bicol.5

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Petitioner's receipt of Fatima's personal luggage having been thus established, it must now be
determined if, as a common carrier, it is responsible for their loss. Under the Civil Code, "(c)ommon
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 . . . transported by them,"6 and this liability
"lasts from the time the goods are unconditionally placed in the possession of, and received by the
carrier for transportation until the same are delivered, actually or constructively, by the carrier to . . .
the person who has a right to receive them,"7 unless the loss is due to any of the excepted causes
under Article 1734 thereof.8

The cause of the loss in the case at bar was petitioner's negligence in not ensuring that the doors of
the baggage compartment of its bus were securely fastened. As a result of this lack of care, almost
all of the luggage was lost, to the prejudice of the paying passengers. As the Court of Appeals
correctly observed:

. . . . Where the common carrier accepted its passenger's baggage for transportation and even had
it placed in the vehicle by its own employee, its failure to collect the freight charge is the common
carrier's own lookout. It is responsible for the consequent loss of the baggage. In the instant case,
defendant appellant's employee even helped Fatima Minerva Fortades and her brother load the
luggages/baggages in the bus' baggage compartment, without asking that they be weighed,
declared, receipted or paid for (TSN, August 4, 1986, pp. 29, 34, 54, 57, 70; December 23, 1987, p.
35). Neither was this required of the other passengers (TSN, August 4, 1986, p. 104; February 5,
1988; p. 13).

Finally, petitioner questions the award of actual damages to respondents. On this point, we likewise
agree with the trial and appellate courts' conclusions. There is no dispute that of the three pieces of
luggage of Fatima, only one was recovered. The other two contained optometry books, materials,
equipment, as well as vital documents and personal belongings. Respondents had to shuttle
between Bicol and Manila in their efforts to be compensated for the loss. During the trial, Fatima
and Marisol had to travel from the United States just to be able to testify. Expenses were also
incurred in reconstituting their lost documents. Under these circumstances, the Court agrees with
the Court of Appeals in awarding P30,000.00 for the lost items and P30,000.00 for the
transportation expenses, but disagrees with the deletion of the award of moral and exemplary
damages which, in view of the foregoing proven facts, with negligence and bad faith on the fault of
petitioner having been duly established, should be granted to respondents in the amount of
P20,000.00 and P5,000.00, respectively.

WHEREFORE, the assailed decision of the Court of Appeals dated January 13, 1993, and its
resolution dated February 19, 1993, are hereby AFFIRMED with the MODIFICATION that petitioner
is ordered to pay respondents an additional P20,000.00 as moral damages and P5,000.00 as
exemplary damages. Costs against petitioner.

SO ORDERED.

166 | P a g e
 THIRD DIVISION

[G.R. No. 102316. June 30, 1997]

VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY, INC., Petitioner, vs. COURT OF

APPEALS AND SEVEN BROTHERS SHIPPING CORPORATION, Respondents.

DECISION

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 cargo1 valid? This is the main question raised
in this petition for review assailing the Decision of Respondent Court of Appeals2 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 (P2,000,000.00) representing the value of lost logs
plus legal interest from the date of demand on April 24, 1984 until full payment thereof; the
reasonable attorneys 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 Companys 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.3chanroblesvirtuallawlibrary

167 | P a g e
The Facts

The factual antecedents of this case as narrated in the Court of Appeals Decision are as follows:

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 formers 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.

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 plaintiffs 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 non-payment 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:

168 | P a g e
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
(P2,000,000.00) 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 attorneys 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 attorneys 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 defendant-appellant 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.

C. The trial court erred in not applying Section 77 of the Insurance Code.

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.

169 | P a g e
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 indorsement of cancellation of the policy due to non-
payment of premium and documentary stamps.

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 attorneys 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 latters lost logs.4chanroblesvirtuallawlibrary

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).

The shipping corporation should not therefore be held liable for the loss of the
logs.6chanroblesvirtuallawlibrary

170 | P a g e
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 Valenzuelas premium payment for the marine cargo insurance policy which was
thus binding on the insurer.8chanroblesvirtuallawlibrary

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 Valenzuelas arguments revolve 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 petitioners logs arising from the negligence of its (Seven Brothers)
captain.9chanroblesvirtuallawlibrary

The Courts 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.12chanroblesvirtuallawlibrary

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:

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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 carriers 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 Commerce14 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 petitioners 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.16chanroblesvirtuallawlibrary

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 130617 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

172 | P a g e
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
from 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 Anglo-American 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 only
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 use of a single
party.19 (Underscoring 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 carriers 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 of

173 | P a g e
Home Insurance specifically dealt with the liability of the shipowner for acts or negligence of its
captain and crew21 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 Philippines23 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 agent is
valid.24chanroblesvirtuallawlibrary

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, petitioners right conferred under said articles may be waived. This, the
petitioner did by acceding to the contractual stipulation that it is solely responsible for 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

174 | P a g e
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 Code27 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 Commerce28
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--vis
contractual stipulations limiting the carriers liability be applied with equal force to this case.31 It also
cites Manila Railroad Co. vs. Compaia Transatlantica32 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.

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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 carriers. 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 construed 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. SteamshipPompey38 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 from 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, 199542 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 from 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 plaintiffs property has been insured, and he has received indemnity from 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 from the
person causing the loss or injury.

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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.

SO ORDERED.

Valenzuela Hardwood vs. Court of Appeals

(30 June 1997,274 SCRA 643)

Facts: On January 16, 1984, plaintiff entered into an agreement with Seven Brothers Shipping
corporation whereby the latter undertook to load on board its vessel M/V Seven Ambassadors 940
Lauan round logs for shipment from Isabela to Manila. On January 20, plaintiff insured the cargo
with South Sea Surety and Insurance for two million pesos. However on January 25, 1984, the M/V
Seven Ambassador sank, resulting in the loss of petitioners’ logs. Pursuant to the loss, petitioner
filed a claim with South Sea Surety and Insurance for the insured amount of the logs, but the latter
refused, denying liability under the policy. Petitioner likewise filed a formal claim against Seven
Brothers Shipping Corporation for the value of the lost logs, but the latter likewise denied their claim.

The trial court found for the plaintiff, holding South Sea and Seven Brothers liable for the loss. On
appeal, the Court of Appeals affirmed in part the decision of the trial court. The Court of Appeals
affirmed the liability of South Sea Surety and Assurance but exonerated Seven Brothers, stating
that the latter is a private carrier therefore the provisions on common carriers is not applicable to
their contract. Hence the present appeal.

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 petitioner and Seven Brothers
exempting the latter from liability of loss arising from the negligence of its captain.

Held: The decision of the Court of appeals is correct. The contract between petitioner and Seven
Brothers is one of Private Carriage hence the provisions on common carriage do not apply. In a
contract of private carriage parties are free to stipulate that the responsibility for the cargo rests
solely in the charterer, such stipulations are valid because they are freely entered into by the parties
and the same is not contrary to law, morals, good custom, public order or public policy.

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 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. 113003 October 17, 1997

ALBERTA YOBIDO and CRESENCIO YOBIDO, petitioners,

vs.
COURT OF APPEALS, LENY TUMBOY, ARDEE TUMBOY and JASMIN TUMBOY, respondents.

ROMERO, J.:

In this petition for review on certiorari of the decision of the Court of Appeals, the issue is whether or
not the explosion of a newly installed tire of a passenger vehicle is a fortuitous event that exempts
the carrier from liability for the death of a passenger.

On April 26, 1988, spouses Tito and Leny Tumboy and their minor children named Ardee and
Jasmin, bearded at Mangagoy, Surigao del Sur, a Yobido Liner bus bound for Davao City. Along
Picop Road in Km. 17, Sta. Maria, Agusan del Sur, the left front tire of the bus exploded. The bus
fell into a ravine around three (3) feet from the road and struck a tree. The incident resulted in the
death of 28-year-old Tito Tumboy and physical injuries to other passengers.

On November 21, 1988, a complaint for breach of contract of carriage, damages and attorney's fees
was filed by Leny and her children against Alberta Yobido, the owner of the bus, and Cresencio
Yobido, its driver, before the Regional Trial Court of Davao City. When the defendants therein filed
their answer to the complaint, they raised the affirmative defense of caso fortuito. They also filed a
third-party complaint against Philippine Phoenix Surety and Insurance, Inc. This third-party
defendant filed an answer with compulsory counterclaim. At the pre-trial conference, the parties
agreed to a stipulation of facts.1

Upon a finding that the third party defendant was not liable under the insurance contract, the lower
court dismissed the third party complaint. No amicable settlement having been arrived at by the
parties, trial on the merits ensued.

The plaintiffs asserted that violation of the contract of carriage between them and the defendants
was brought about by the driver's failure to exercise the diligence required of the carrier in

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transporting passengers safely to their place of destination. According to Leny Tumboy, the bus left
Mangagoy at 3:00 o'clock in the afternoon. The winding road it traversed was not cemented and
was wet due to the rain; it was rough with crushed rocks. The bus which was full of passengers had
cargoes on top. Since it was "running fast," she cautioned the driver to slow down but he merely
stared at her through the mirror. At around 3:30 p.m., in Trento, she heard something explode and
immediately, the bus fell into a ravine.

For their part, the defendants tried to establish that the accident was due to a fortuitous event.
Abundio Salce, who was the bus conductor when the incident happened, testified that the 42-seater
bus was not full as there were only 32 passengers, such that he himself managed to get a seat. He
added that the bus was running at a speed of "60 to 50" and that it was going slow because of the
zigzag road. He affirmed that the left front tire that exploded was a "brand new tire" that he mounted
on the bus on April 21, 1988 or only five (5) days before the incident. The Yobido Liner secretary,
Minerva Fernando, bought the new Goodyear tire from Davao Toyo Parts on April 20, 1988 and she
was present when it was mounted on the bus by Salce. She stated that all driver applicants in
Yobido Liner underwent actual driving tests before they were employed. Defendant Cresencio
Yobido underwent such test and submitted his professional driver's license and clearances from the
barangay, the fiscal and the police.

On August 29, 1991, the lower court rendered a decision2 dismissing the action for lack of merit. On
the issue of whether or not the tire blowout was a caso fortuito, it found that "the falling of the bus to
the cliff was a result of no other outside factor than the tire blow-out." It held that the ruling in the La
Mallorca and Pampanga Bus Co. v. De Jesus3 that a tire blowout is "a mechanical defect of the
conveyance or a fault in its equipment which was easily discoverable if the bus had been subjected
to a more thorough or rigid check-up before it took to the road that morning" is inapplicable to this
case. It reasoned out that in said case, it was found that the blowout was caused by the established
fact that the inner tube of the left front tire "was pressed between the inner circle of the left wheel
and the rim which had slipped out of the wheel." In this case, however, "the cause of the explosion
remains a mystery until at present." As such, the court added, the tire blowout was "a caso fortuito
which is completely an extraordinary circumstance independent of the will" of the defendants who
should be relieved of "whatever liability the plaintiffs may have suffered by reason of the explosion
pursuant to Article 11744 of the Civil Code."

Dissatisfied, the plaintiffs appealed to the Court of Appeals. They ascribed to the lower court the
following errors: (a) finding that the tire blowout was a caso fortuito; (b) failing to hold that the
defendants did not exercise utmost and/or extraordinary diligence required of carriers under Article
1755 of the Civil Code, and (c) deciding the case contrary to the ruling in Juntilla v. Fontanar,5 and
Necesito v. Paras.6

On August 23, 1993, the Court of Appeals rendered the Decision7 reversing that of the lower court.
It held that:

To Our mind, the explosion of the tire is not in itself a fortuitous event. The cause of the blow-out, if
due to a factory defect, improper mounting, excessive tire pressure, is not an unavoidable event. On
the other hand, there may have been adverse conditions on the road that were unforeseeable

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and/or inevitable, which could make the blow-out a caso fortuito. The fact that the cause of the
blow-out was not known does not relieve the carrier of liability. Owing to the statutory presumption
of negligence against the carrier and its obligation to exercise the utmost diligence of very cautious
persons to carry the passenger safely as far as human care and foresight can provide, it is the
burden of the defendants to prove that the cause of the blow-out was a fortuitous event. It is not
incumbent upon the plaintiff to prove that the cause of the blow-out is not caso-fortuito.

Proving that the tire that exploded is a new Goodyear tire is not sufficient to discharge defendants'
burden. As enunciated in Necesito vs. Paras, the passenger has neither choice nor control over the
carrier in the selection and use of its equipment, and the good repute of the manufacturer will not
necessarily relieve the carrier from liability.

Moreover, there is evidence that the bus was moving fast, and the road was wet and rough. The
driver could have explained that the blow-out that precipitated the accident that caused the death of
Toto Tumboy could not have been prevented even if he had exercised due care to avoid the same,
but he was not presented as witness.

The Court of Appeals thus disposed of the appeal as follows:

WHEREFORE, the judgment of the court a quo is set aside and another one entered ordering
defendants to pay plaintiffs the sum of P50,000.00 for the death of Tito Tumboy, P30,000.00 in
moral damages, and P7,000.00 for funeral and burial expenses.

SO ORDERED.

The defendants filed a motion for reconsideration of said decision which was denied on November
4, 1993 by the Court of Appeals. Hence, the instant petition asserting the position that the tire
blowout that caused the death of Tito Tumboy was a caso fortuito. Petitioners claim further that the
Court of Appeals, in ruling contrary to that of the lower court, misapprehended facts and, therefore,
its findings of fact cannot be considered final which shall bind this Court. Hence, they pray that this
Court review the facts of the case.

The Court did re-examine the facts and evidence in this case because of the inapplicability of the
established principle that the factual findings of the Court of Appeals are final and may not be
reviewed on appeal by this Court. This general principle is subject to exceptions such as the one
present in this case, namely, that the lower court and the Court of Appeals arrived at diverse factual
findings.8 However, upon such re-examination, we found no reason to overturn the findings and
conclusions of the Court of Appeals.

As a rule, when a passenger boards a common carrier, he takes the risks incidental to the mode of
travel he has taken. After all, a carrier is not an insurer of the safety of its passengers and is not

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bound absolutely and at all events to carry them safely and without injury.9 However, when a
passenger is injured or dies while travelling, the law presumes that the common carrier is negligent.
Thus, the Civil Code provides:

Art. 1756. In case of death or injuries to passengers, common carriers are presumed to have
been at fault or to have acted negligently, unless they prove that they observed extraordinary
diligence as prescribed in articles 1733 and 1755.

Article 1755 provides that "(a) common carrier is bound to carry the passengers safely as far as
human care and foresight can provide, using the utmost diligence of very cautious persons, with a
due regard for all the circumstances." Accordingly, in culpa contractual, once a passenger dies or is
injured, the carrier is presumed to have been at fault or to have acted negligently. This disputable
presumption may only be overcome by evidence that the carrier had observed extraordinary
diligence as prescribed by Articles 1733,10 1755 and 1756 of the Civil Code or that the death or
injury of the passenger was due to a fortuitous event.11 Consequently, the court need not make an
express finding of fault or negligence on the part of the carrier to hold it responsible for damages
sought by the passenger.12

In view of the foregoing, petitioners' contention that they should be exempt from liability because the
tire blowout was no more than a fortuitous event that could not have been foreseen, must fail. A
fortuitous event is possessed of the following characteristics: (a) the cause of the unforeseen and
unexpected occurrence, or the failure of the debtor to comply with his obligations, must be
independent of human will; (b) it must be impossible to foresee the event which constitutes the caso
fortuito, or if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as
to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the obliger
must be free from any participation in the aggravation of the injury resulting to the creditor.13 As
Article 1174 provides, no person shall be responsible for a fortuitous event which could not be
foreseen, or which, though foreseen, was inevitable. In other words, there must be an entire
exclusion of human agency from the cause of injury or loss.14

Under the circumstances of this case, the explosion of the new tire may not be considered a
fortuitous event. There are human factors involved in the situation. The fact that the tire was new did
not imply that it was entirely free from manufacturing defects or that it was properly mounted on the
vehicle. Neither may the fact that the tire bought and used in the vehicle is of a brand name noted
for quality, resulting in the conclusion that it could not explode within five days' use. Be that as it
may, it is settled that an accident caused either by defects in the automobile or through the
negligence of its driver is not a caso fortuito that would exempt the carrier from liability for
damages.15

Moreover, a common carrier may not be absolved from liability in case of force majeure or fortuitous
event alone. The common carrier must still prove that it was not negligent in causing the death or
injury resulting from an accident.16 This Court has had occasion to state:

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While it may be true that the tire that blew-up was still good because the grooves of the tire were still
visible, this fact alone does not make the explosion of the tire a fortuitous event. No evidence was
presented to show that the accident was due to adverse road conditions or that precautions were
taken by the jeepney driver to compensate for any conditions liable to cause accidents. The sudden
blowing-up, therefore, could have been caused by too much air pressure injected into the tire
coupled by the fact that the jeepney was overloaded and speeding at the time of the accident.17

It is interesting to note that petitioners proved through the bus conductor, Salce, that the bus was
running at "60-50" kilometers per hour only or within the prescribed lawful speed limit. However,
they failed to rebut the testimony of Leny Tumboy that the bus was running so fast that she
cautioned the driver to slow down. These contradictory facts must, therefore, be resolved in favor of
liability in view of the presumption of negligence of the carrier in the law. Coupled with this is the
established condition of the road — rough, winding and wet due to the rain. It was incumbent upon
the defense to establish that it took precautionary measures considering partially dangerous
condition of the road. As stated above, proof that the tire was new and of good quality is not
sufficient proof that it was not negligent. Petitioners should have shown that it undertook
extraordinary diligence in the care of its carrier, such as conducting daily routinary check-ups of the
vehicle's parts. As the late Justice J.B.L. Reyes said:

It may be impracticable, as appellee argues, to require of carriers to test the strength of each and
every part of its vehicles before each trip; but we are of the opinion that a due regard for the carrier's
obligations toward the traveling public demands adequate periodical tests to determine the condition
and strength of those vehicle portions the failure of which may endanger the safety of the
passengers.18

Having failed to discharge its duty to overthrow the presumption of negligence with clear and
convincing evidence, petitioners are hereby held liable for damages. Article 176419 in relation to
Article 220620 of the Civil Code prescribes the amount of at least three thousand pesos as
damages for the death of a passenger. Under prevailing jurisprudence, the award of damages
under Article 2206 has been increased to fifty thousand pesos (P50,000.00).21

Moral damages are generally not recoverable in culpa contractual except when bad faith had been
proven. However, the same damages may be recovered when breach of contract of carriage results
in the death of a passenger,22 as in this case. Exemplary damages, awarded by way of example or
correction for the public good when moral damages are awarded,23 may likewise be recovered in
contractual obligations if the defendant acted in wanton, fraudulent, reckless, oppressive, or
malevolent manner.24 Because petitioners failed to exercise the extraordinary diligence required of
a common carrier, which resulted in the death of Tito Tumboy, it is deemed to have acted
recklessly.25 As such, private respondents shall be entitled to exemplary damages.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED subject to the
modification that petitioners shall, in addition to the monetary awards therein, be liable for the award
of exemplary damages in the amount of P20,000.00. Costs against petitioners.

SO ORDERED.

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