Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

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

K.K. SHELL SEKIYU OSAKA HATSUBAISHO and FU HING OIL CO., LTD., petitioners,
vs.
THE HONORABLE COURT OF APPEALS, ATLANTIC VENUS CO., S.A., and THE VESSEL M/V
"ESTELLA", respondents.

Hernandez, Velicaria Vibar & Santiago for petitioners.

Cesar C. Cruz & Partners for private respondents

CORTES, J:

Ordinarily, the Court will not disturb the factual findings of the Court of Appeals, these being
considered final and conclusive. However, when its factual conclusions are manifestly mistaken, the
Court will step in to correct the misapprehension [De la Cruz v. Sosing, 94 Phil. 26 (1953); Castillo v.
Court of Appeals, G.R. No. L-48290, September 29, 1983, 124 SCRA 808.] This case is one such
instance calling for the Court's review of the facts.

On January 7,1987, Kumagai Kaiun Kaisha, Ltd. (hereinafter referred to as Kumagai), a corporation
formed and existing under the laws of Japan, filed a complaint for the collection of a sum of money
with preliminary attachment against Atlantic Venus Co., S.A. (hereinafter referred to as "Atlantic"), a
corporation registered in Panama, the vessel MV Estella and Crestamonte Shipping Corporation
(hereinafter referred to as "Crestamonte"), a Philippine corporation. Atlantic is the owner of the MV
Estella. The complaint, docketed as Civil Case No. 8738930 of the Regional Trial Court, Branch XIV,
Manila alleged that Crestamonte, as bareboat charterer and operator of the MV Estella, appointed
N.S. Shipping Corporation (hereinafter referred to as "NSS"), a Japanese corporation, as its general
agent in Japan. The appointment was formalized in an Agency Agreement. NSS in turn appointed
Kumagai as its local agent in Osaka, Japan. Kumagai supplied the MV Estella with supplies and
services but despite repeated demands Crestamonte failed to pay the amounts due.

NSS and Keihin Narasaki Corporation (hereinafter referred to a Keihin filed complaints-in-
intervention.

On May 19,1987, petitioner Fu Hing Oil Co., Ltd. (hereinafter referred to as Fu Hing"), a corporation
organized in Hong Kong and not doing business in the Philippines, filed a motion for leave to
intervene with an attached complaint-in-intervention, alleging that Fu Hing supplied marine diesel
oil/fuel to the MV Estella and incurred barge expenses for the total sum of One Hundred Fifty-two
Thousand Four Hundred Twelve Dollars and Fifty-Six Cents (US$152,412.56) but such has
remained unpaid despite demand and that the claim constitutes a maritime lien. The issuance of a
writ of attachment was also prayed for.
On July 16, 1987, petitioner K.K. Shell Sekiyu Osaka Hatsubaisho (hereinafter referred to as K.K.
Shell"), a corporation organized in Japan and not doing business in the Philippines, likewise filed a
motion to intervene with an attached complaint-in-intervention, alleging that upon request of NSS,
Crestamonte's general agent in Japan, K.K. Shell provided and supplied marine diesel oil/fuel to the
W Estella at the ports of Tokyo and Mutsure in Japan and that despite previous demands
Crestamonte has failed to pay the amounts of Sixteen Thousand Nine Hundred Ninety-Six Dollars
and Ninety- Six Cents (US$16,996.96) and One Million Yen (Y1,000,000.00) and that K.K. Shell's
claim constitutes a maritime lien on the MV Estella. The complaint-in-intervention sought the
issuance of a writ of preliminary attachment.

The trial court allowed the intervention of Fu Hing and K.K. Shell on June 19,1987 and August 11,
1987, respectively. Writs of preliminary attachment were issued on August 25, 1987 upon posting of
the appropriate bonds. Upon the posting of counterbonds, the writs of attachment were discharged
on September 3, 1987.

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

In the meantime, Atlantic and the AWU Estella filed a petition in the Court of Appeals against the trial
court judge, Kumagai, NSS and Keihin, docketed as CA-G.R. SP No. 12999, which sought the
annulment of the orders of the trial court dated April 30, 1987 and August 11, 1987. Among others,
the omnibus order dated August 11, 1987 denied the motion to reconsider the order allowing Fu
Hing's intervention and granted K.K. Shell's motion to intervene. Again Fu Hing and K.K. Shell
intervened, CA-G.R. SP No. 12999 was consolidated with another case (CA-G.R. SP No. 12341). Fu
Hing and K.K. Shell intervened in CA-G.R. SP No. 12999.

In a decision dated June 14, 1989, the Court of Appeals annulled the orders of the trial court and
directed it to cease and desist from proceeding with the case.

According to the Court of Appeals, Fu Hing and K.K. Shell were not suppliers but sub-agents of
NSS, hence they were bound by the Agency Agreement between Crestamonte and NSS,
particularly, the choice of forum clause, which provides:

12.0-That this Agreement shall be governed by the Laws of Japan. Any matters,
disputes, and/or differences arising between the parties hereto concerned regarding
this Agreement shall be subject exclusively to the jurisdiction of the District Courts of
Japan.

Thus, concluded the Court of Appeals, the trial court should have disallowed their motions to
intervene.

A motion for reconsideration was filed by Fu Hing and K.K. Shell but this was denied by the Court of
Appeals. Hence this petition;

In this case, we shall review the decision of the Court of Appeals only insofar as it relate to the
intervention of K.K. Shell. Fu Hing Oil Co., Ltd. filed a motion to withdraw as co-petitioner on March
7, 1990, alleging that an amicable settlement had been reached with private respondents. The Court
granted the motion on March 19, 1990.

After considering the pleadings filed by the parties and the arguments raised therein, the Court finds
reversible error on the part of the Court of Appeals in so far; as it disallowed petitioners' intervention
in the case before the trial court and ordered the latter to cease and desist from proceeding with the
case.

1. A reading of the Agency Agreement fails to support the conclusion that K.K. Shell is a sub-agent
of NSS and is, therefore, bound by the agreement.

The body of the Agency Agreement entered into by and between Crestamonte (referred to in the
agreement as "Owner") and NSS ("Agent") provides:

WITNESSETH

That the OWNER has appointed and by these presents hereby appoints the AGENT as its General
Agents for all Japan in connection with the Owner's vessels and/or providing suitable vessels for
Japan Ports under the following terms and conditions:

1.0 - In general, the Agent will abide by the Owner's decisions regarding the mode of
operations of the vessels in Japan and that all cargo bookings, vessel's
fixtures/charters, etc. by the Agent, shall always be subject to the prior approval and
consent of the Owners.

2.0 - That the Agent shall provide for the necessary services required for the
husbanding of the Owner's vessels in all Japan Ports and issue Bill(s) of Lading to
Shippers in the form prescribed by the Owners.

3.0 - That the Agent shall be responsible for fixing south-bound cargoes with
revenues sufficient to cover ordinary liner operation expenses such as bunkers,
additives, lubricating oil, water, running repairs, drydocking expenses, usual port
disbursement accounts, cargo handling charges including stevedorage, provisions
and ship's stores and cash advance to crew (excluding crew provisions).

The Agent expressly agrees that the Owner's cash flow in Japan shall be essentially
the Agent's responsibility, and should the revenue for south-bound cargoes as
above-mentioned be insufficient to cover the aforesaid expenses, the Agent shall
provide credit to the extent of the vessels' requirements, provided however that said
obligation shall be secured by the Owner committing at least forty-eight (48) mailings
of Japan/Philippines liner service per year.

The Agent shall settle, in behalf of the Owner, all outstanding payments for the
operation costs on Owner's liner service carried forward from the present Owner's
agent, subject to approval of Owner's Representative in Japan in regard to amount
and nature thereof.

4.0- That the agent shall furnish office space of approximately thirty (30) square
meters for the exclusive use of the Owner and its representatives, within the
premises of the Agent's office, free of charge.

5.0 — That the responsibilities of the Agent in regard to the cargo shall begin, in the
case of imports into the territory of Japan, from the time such cargo has left the ship's
tackles, and shall cease, in case of export, upon completion of loading.

6.0 — That the remuneration of the Agent from the Owner shall be as follows:
 xxx xxx xxx

7.0 — That the Agent shall exert best efforts to recommend to Owners stevedoring
and other expenses incurred in connection with work on board the Owner's vessels,
as well as customs house charges, pilotage, harbour dues, cables, etc. which are for
Owner's account, on the cheapest possible terms. Owners shall decide and may
appoint through the Agent the services described herein.

8.0 — That the Agent shall be responsible for the due collection of and due payment
to the Owner of all outward freight prepaid for cargo without delay upon the sailing of
each vessel from the port. The Agent shall be also responsible for the due collection
of all inward freight payable at the port against delivery unless otherwise instructed
by the Owner to the contrary.

9.0 — The account statements supported by vouchers in two copies itemized for
each service and/or supply for each vessel, shall be forwarded by the Agent to the
Owner promptly after the departure of each vessel but in no case later than 60 days
thereafter.

10.0 — That the freightage to be collected by the Agent in Japan shall be paid to the
Owner after deducting the total amount of disbursements incurred in Japan.

11.0 — That this Agreement takes effect as of April 15, 1983 and shall remain in
force unless terminated by either party upon 60 days notice.

12.0 — That this Agreement shall be governed by the Laws of Japan. Any matters,
disputes, and/or differences arising between the parties hereto concerned regarding
this reement shall be subject exclusively to the jurisdiction of the District Courts of
Japan. [Annex "G" of the Petition, Rollo, pp. 100-104.]

No express reference to the contracting of sub-agents or the applicability of the terms of the
agreement, particularly the choice-of-forum clause, to sub-agents is made in the text of the
agreement. What the contract clearly states are NSS' principal duties, i.e., that it shall provide for the
necessary services required for the husbanding of Crestamonte's vessels in Japanese ports (section
2.0) and shall be responsible for fixing southbound cargoes with revenues sufficient to cover
ordinary expenses (section 3.0). i•t•c-aüsl

Moreover, the complaint-in-intervention filed by K.K. Shell merely alleges that it provided and
supplied the MV Estella with marine diesel oil/fuel, upon request of NSS who was acting for and as
duly appointed agent of Crestamonte [Rollo, pp. 116117.] There is thus no basis for the Court of
Appeal's finding, as regards K.K Shell in relation to its intervention in Civil Case No. 87-38930, that
"the sub-agents admitted in their pleadings that they were appointed as local agent/sub-agent or
representatives by NSS by virtue of said Agency Agreement" [Decision, p. 7; Rollo, p. 33.] What the
Court of Appeals could have been referring to was K.K. Shell's Urgent Motion for Leave to Intervene
dated February 24, 1987 in another case (Civil Case No. 86-38704) in another court and involving
other vessels (NW Ofelia and MV Christina C), where it was alleged that K.K. Shell is "one of the
representatives of NS Shipping Corporation for the supply of bunker oil, fuel oil, provisions and other
necessaries to vessels of which NS Shipping Corporation was the general agent." [Comment, p. 17;
Rollo, p. 274.] However, this allegation does not conclusively establish a sub-agency between NSS
and K.K. Shell. It is therefore surprising how the Court of Appeals could have come to the
conclusion, just on the basis of the Agency Agreement and the pleadings filed in the trial court, that
"Crestamonte is the principal, NSS is the agent and ... Fu Hing and K.K Shell are the sub-agents."
[Decision, p. 6; Rollo, p. 32.]

In view of the inconclusiveness of the Agency Agreement and the pleadings filed in the trial court,
additional evidence, if there be any, would still have to be presented to establish the allegation that
K.K. Shell is a sub-agent of NSS.

In the same vein, as the choice-of-forum clause in the agreement (paragraph 12.0) has not been
conclusively shown to be binding upon K.K. Shell, additional evidence would also still have to be
presented to establish this defense, K.K. Shell cannot therefore, as of yet, be barred from instituting
an action in the Philippines.

2. Private respondents have anticipated the possibility that the courts will not find that K.K. Shell is
expressly bound by the Agency Agreement, and thus they fall back on the argument that even if this
were so, the doctrine of forum non conveniens would be a valid ground to cause the dismissal of
K.K. Shell's complaint-in-intervention.

K.K. Shell counters this argument by invoking its right as maritime lienholder. It cites Presidential
Decree No. 1521, the Ship Mortgage Decree of 1978, which provides:

SEC. 21. Maritime Lien for Necessaries; person entitled to such lien-Any person
furnishing repairs, supplies, to wage, use of dry dock or marine railway, or other
necessaries, to any vessel, whether foreign or domestic, upon the order of the owner
of such vessel, or of a person authorized by the owner, shall have a maritime lien on
the vessel, which may be enforced by suit in rem, and it shall be necessary to allege
or prove that credit was given to the vessel.

Private respondents on the other hand argue that even if P.D. No. 1521 is applicable, K.K. Shell
cannot rely on the maritime lien because the fuel was provided not exclusively for the benefit of the
MV Estella, but for the benefit of Crestamonte in general. Under the law it must be established that
the credit was extended to the vessel itself. Now, this is a defense that calls precisely for a factual
determination by the trial court of who benefitted from the delivery of the fuel. Hence, again, the
necessity for the reception of evidence before the trial court.

In other words, considering the dearth of evidence due to the fact that the private respondents have
yet to file their answer in the proceedings below and trial on the merits is still to be conducted,
whether or not petitioners are indeed maritime lienholders and as such may enforce the lien against
the MV Estella are matters that still have to be established.

Neither are we ready to rule on the private respondents' invocation of the doctrine of forum non
conveniens, as the exact nature of the relationship of the parties is still to be established. We leave
this matter to the sound discretion of the trial court judge who is in the best position, after some vital
facts are established, to determine whether special circumstances require that his court desist from
assuming jurisdiction over the suit.

It was clearly reversible error on the. part of the Court of Appeals to annul the trial court's orders,
insofar as K.K. Shell is concerned, and order the trial court to cease and desist from proceeding with
Civil Case No. 87-38930. There are still numerous material facts to be established in order to arrive
at a conclusion as to the true nature of the relationship between Crestamonte and K.K. Shell and
between NSS and K.K. Shell. The best recourse would have been to allow the trial court to proceed
with Civil Case No. 87-38930 and consider whatever defenses may be raised by private respondents
after they have filed their answer and evidence to support their conflicting claims has been
presented. The Court of Appeals, however, substituted its judgment for that of the trial court and
decided the merits of the case, even in the absence of evidence, on the pretext of reviewing an
interlocutory order.

WHEREFORE, the petition is GRANTED and the decision of the Court of Appeals is REVERSED in
CA-G.R. SP No. 12999, insofar as it annulled the order of the August 11, 1987 and directed the trial
court to cease and desist from proceeding with Civil Case No. 87-38930.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 61594 September 28, 1990

PAKISTAN INTERNATIONAL AIRLINES CORPORATION, petitioner,

vs
HON. BLAS F. OPLE, in his capacity as Minister of Labor; HON. VICENTE LEOGARDO, JR., in
his capacity as Deputy Minister; ETHELYNNE B. FARRALES and MARIA MOONYEEN
MAMASIG, respondents.

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

Ledesma, Saludo & Associates for private respondents.

FELICIANO, J.:

On 2 December 1978, petitioner Pakistan International Airlines Corporation ("PIA"), a foreign corporation licensed to do business in the
Philippines, executed in Manila two (2) separate contracts of employment, one with private respondent Ethelynne B. Farrales and the other
with private respondent Ma. M.C. Mamasig. 1 The contracts, which became effective on 9 January 1979, provided in pertinent portion as
follows:

5. DURATION OF EMPLOYMENT AND PENALTY

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

xxx xxx xxx

6. TERMINATION

xxx xxx xxx

Notwithstanding anything to contrary as herein provided, PIA reserves the right to

terminate this agreement at any time by giving the EMPLOYEE notice in writing in
advance one month before the intended termination or in lieu thereof, by paying the
EMPLOYEE wages equivalent to one month's salary.

xxx xxx xxx

10. APPLICABLE LAW:

This agreement shall be construed and governed under and by the laws of Pakistan,
and only the Courts of Karachi, Pakistan shall have the jurisdiction to consider any
matter arising out of or under this agreement.
Respondents then commenced training in Pakistan. After their training period, they began
discharging their job functions as flight attendants, with base station in Manila and flying
assignments to different parts of the Middle East and Europe.

On 2 August 1980, roughly one (1) year and four (4) months prior to the expiration of the contracts of
employment, PIA through Mr. Oscar Benares, counsel for and official of the local branch of PIA, sent
separate letters both dated 1 August 1980 to private respondents Farrales and Mamasig advising
both that their services as flight stewardesses would be terminated "effective 1 September 1980,
conformably to clause 6 (b) of the employment agreement [they had) executed with [PIA]."2

On 9 September 1980, private respondents Farrales and Mamasig jointly instituted a complaint,
docketed as NCR-STF-95151-80, for illegal dismissal and non-payment of company benefits and
bonuses, against PIA with the then Ministry of Labor and Employment ("MOLE"). After several
unfruitful attempts at conciliation, the MOLE hearing officer Atty. Jose M. Pascual ordered the parties
to submit their position papers and evidence supporting their respective positions. The PIA
submitted its position paper, 3 but no evidence, and there claimed that both private respondents were
habitual absentees; that both were in the habit of bringing in from abroad sizeable quantities of
"personal effects"; and that PIA personnel at the Manila International Airport had been discreetly
warned by customs officials to advise private respondents to discontinue that practice. PIA further
claimed that the services of both private respondents were terminated pursuant to the provisions of
the employment contract.

In his Order dated 22 January 1981, Regional Director Francisco L. Estrella ordered the
reinstatement of private respondents with full backwages or, in the alternative, the payment to them
of the amounts equivalent to their salaries for the remainder of the fixed three-year period of their
employment contracts; the payment to private respondent Mamasig of an amount equivalent to the
value of a round trip ticket Manila-USA Manila; and payment of a bonus to each of the private
respondents equivalent to their one-month salary. 4 The Order stated that private respondents had
attained the status of regular employees after they had rendered more than a year of continued
service; that the stipulation limiting the period of the employment contract to three (3) years was null
and void as violative of the provisions of the Labor Code and its implementing rules and regulations
on regular and casual employment; and that the dismissal, having been carried out without the
requisite clearance from the MOLE, was illegal and entitled private respondents to reinstatement
with full backwages.

On appeal, in an Order dated 12 August 1982, Hon. Vicente Leogardo, Jr., Deputy Minister, MOLE,
adopted the findings of fact and conclusions of the Regional Director and affirmed the latter's award
save for the portion thereof giving PIA the option, in lieu of reinstatement, "to pay each of the
complainants [private respondents] their salaries corresponding to the unexpired portion of the
contract[s] [of employment] . . .". 5

In the instant Petition for Certiorari, petitioner PIA assails the award of the Regional Director and the
Order of the Deputy Minister as having been rendered without jurisdiction; for having been rendered
without support in the evidence of record since, allegedly, no hearing was conducted by the hearing
officer, Atty. Jose M. Pascual; and for having been issued in disregard and in violation of petitioner's
rights under the employment contracts with private respondents.

1. Petitioner's first contention is that the Regional Director, MOLE, had no jurisdiction over the
subject matter of the complaint initiated by private respondents for illegal dismissal, jurisdiction over
the same being lodged in the Arbitration Branch of the National Labor Relations Commission
("NLRC") It appears to us beyond dispute, however, that both at the time the complaint was initiated
in September 1980 and at the time the Orders assailed were rendered on January 1981 (by
Regional Director Francisco L. Estrella) and August 1982 (by Deputy Minister Vicente Leogardo, Jr.),
the Regional Director had jurisdiction over termination cases.

Art. 278 of the Labor Code, as it then existed, forbade the termination of the services of employees
with at least one (1) year of service without prior clearance from the Department of Labor and
Employment:

Art. 278. Miscellaneous Provisions — . . .

(b) With or without a collective agreement, no employer may shut down his
establishment or dismiss or terminate the employment of employees with at least one
year of service during the last two (2) years, whether such service is continuous or
broken, without prior written authority issued in accordance with such rules and
regulations as the Secretary may promulgate . . . (emphasis supplied)

Rule XIV, Book No. 5 of the Rules and Regulations Implementing the Labor Code, made
clear that in case of a termination without the necessary clearance, the Regional Director
was authorized to order the reinstatement of the employee concerned and the payment of
backwages; necessarily, therefore, the Regional Director must have been given jurisdiction
over such termination cases:

Sec. 2. Shutdown or dismissal without clearance. — Any shutdown or dismissal

without prior clearance shall be conclusively presumed to be termination of
employment without a just cause. The Regional Director shall, in such case order the
immediate reinstatement of the employee and the payment of his wages from the
time of the shutdown or dismissal until the time of reinstatement. (emphasis supplied)

Policy Instruction No. 14 issued by the Secretary of Labor, dated 23 April 1976, was similarly
very explicit about the jurisdiction of the Regional Director over termination of employment
cases:

Under PD 850, termination cases — with or without CBA — are now placed under
the original jurisdiction of the Regional Director. Preventive suspension cases, now
made cognizable for the first time, are also placed under the Regional Director.
Before PD 850, termination cases where there was a CBA were under the jurisdiction
of the grievance machinery and voluntary arbitration, while termination cases where
there was no CBA were under the jurisdiction of the Conciliation Section.

In more details, the major innovations introduced by PD 850 and its implementing
rules and regulations with respect to termination and preventive suspension cases
are:

1. The Regional Director is now required to rule on every application for clearance,
whether there is opposition or not, within ten days from receipt thereof.

xxx xxx xxx

(Emphasis supplied)

2. The second contention of petitioner PIA is that, even if the Regional Director had jurisdiction, still
his order was null and void because it had been issued in violation of petitioner's right to procedural
due process .6 This claim, however, cannot be given serious consideration. Petitioner was ordered
by the Regional Director to submit not only its position paper but also such evidence in its favor as it
might have. Petitioner opted to rely solely upon its position paper; we must assume it had no
evidence to sustain its assertions. Thus, even if no formal or oral hearing was conducted, petitioner
had ample opportunity to explain its side. Moreover, petitioner PIA was able to appeal his case to the
Ministry of Labor and Employment. 7

There is another reason why petitioner's claim of denial of due process must be rejected. At the time
the complaint was filed by private respondents on 21 September 1980 and at the time the Regional
Director issued his questioned order on 22 January 1981, applicable regulation, as noted above,
specified that a "dismissal without prior clearance shall be conclusively presumed to be
termination of employment without a cause", and the Regional Director was required in such case to"
order the immediate reinstatement of the employee and the payment of his wages from the time of
the shutdown or dismiss until . . . reinstatement." In other words, under the then applicable rule, the
Regional Director did not even have to require submission of position papers by the parties in view
of the conclusive (juris et de jure) character of the presumption created by such applicable law and
regulation. In Cebu Institute of Technology v. Minister of Labor and Employment, 8 the Court pointed
out that "under Rule 14, Section 2, of the Implementing Rules and Regulations, the termination of
[an employee] which was without previous clearance from the Ministry of Labor is conclusively
presumed to be without [just] cause . . . [a presumption which] cannot be overturned by any contrary
proof however strong."

3. In its third contention, petitioner PIA invokes paragraphs 5 and 6 of its contract of employment
with private respondents Farrales and Mamasig, arguing that its relationship with them was
governed by the provisions of its contract rather than by the general provisions of the Labor Code. 9

Paragraph 5 of that contract set a term of three (3) years for that relationship, extendible by
agreement between the parties; while paragraph 6 provided that, notwithstanding any other
provision in the Contract, PIA had the right to terminate the employment agreement at any time by
giving one-month's notice to the employee or, in lieu of such notice, one-months salary.

A contract freely entered into should, of course, be respected, as PIA argues, since a contract is the
law between the parties. 10 The principle of party autonomy in contracts is not, however, an absolute
principle. The rule in Article 1306, of our Civil Code is that the contracting parties may establish such
stipulations as they may deem convenient, "provided they are not contrary to law, morals, good
customs, public order or public policy." Thus, counter-balancing the principle of autonomy of
contracting parties is the equally general rule that provisions of applicable law, especially provisions
relating to matters affected with public policy, are deemed written into the contract. 11 Put a little
differently, the governing principle is that parties may not contract away applicable provisions of law
especially peremptory provisions dealing with matters heavily impressed with public interest. The law
relating to labor and employment is clearly such an area and parties are not at liberty to insulate
themselves and their relationships from the impact of labor laws and regulations by simply
contracting with each other. It is thus necessary to appraise the contractual provisions invoked by
petitioner PIA in terms of their consistency with applicable Philippine law and regulations.

As noted earlier, both the Labor Arbiter and the Deputy Minister, MOLE, in effect held that paragraph
5 of that employment contract was inconsistent with Articles 280 and 281 of the Labor Code as they
existed at the time the contract of employment was entered into, and hence refused to give effect to
said paragraph 5. These Articles read as follows:

Art. 280. Security of Tenure. — In cases of regular employment, the employer shall
not terminate the services of an employee except for a just cause or when authorized
 by this Title An employee who is unjustly dismissed from work shall be entitled to
reinstatement without loss of seniority rights and to his backwages computed from
the time his compensation was withheld from him up to the time his reinstatement.

Art. 281. Regular and Casual Employment. The provisions of written agreement to
the contrary notwithstanding and regardless of the oral agreements of the parties, an
employment shall be deemed to be regular where the employee has been engaged
to perform activities which are usually necessary or desirable in the usual business
or trade of the employer, except where the employment has been fixed for a specific
project or undertaking the completion or termination of which has been determined at
the time of the engagement of the employee or where the work or services to be
performed is seasonal in nature and the employment is for the duration of the
season.

An employment shall be deemed to be casual if it is not covered by the preceding

paragraph: provided, that, any employee who has rendered at least one year of
service, whether such service is continuous or broken, shall be considered as regular
employee with respect to the activity in which he is employed and his employment
shall continue while such actually exists. (Emphasis supplied)

In Brent School, Inc., et al. v. Ronaldo Zamora, etc., et al., 12 the Court had occasion to examine in
detail the question of whether employment for a fixed term has been outlawed under the above
quoted provisions of the Labor Code. After an extensive examination of the history and development
of Articles 280 and 281, the Court reached the conclusion that a contract providing for employment
with a fixed period was not necessarily unlawful:

There can of course be no quarrel with the proposition that where from the
circumstances it is apparent that periods have been imposed to preclude acquisition
of tenurial security by the employee, they should be struck down or disregarded as
contrary to public policy, morals, etc. But where no such intent to circumvent the law
is shown, or stated otherwise, where the reason for the law does not exist e.g. where
it is indeed the employee himself who insists upon a period or where the nature of
the engagement is such that, without being seasonal or for a specific project, a
definite date of termination is a sine qua non would an agreement fixing a period be
essentially evil or illicit, therefore anathema Would such an agreement come within
the scope of Article 280 which admittedly was enacted "to prevent the circumvention
of the right of the employee to be secured in . . . (his) employment?"

As it is evident from even only the three examples already given that Article 280 of
the Labor Code, under a narrow and literal interpretation, not only fails to exhaust the
gamut of employment contracts to which the lack of a fixed period would be an
anomaly, but would also appear to restrict, without reasonable distinctions, the right
of an employee to freely stipulate with his employer the duration of his engagement,
it logically follows that such a literal interpretation should be eschewed or avoided.
The law must be given reasonable interpretation, to preclude absurdity in its
application. Outlawing the whole concept of term employment and subverting to boot
the principle of freedom of contract to remedy the evil of employers" using it as a
means to prevent their employees from obtaining security of tenure is like cutting off
the nose to spite the face or, more relevantly, curing a headache by lopping off the
head.

xxx xxx xxx

 Accordingly, and since the entire purpose behind the development of legislation
culminating in the present Article 280 of the Labor Code clearly appears to have
been, as already observed, to prevent circumvention of the employee's right to be
secure in his tenure, the clause in said article indiscriminately and completely ruling
out all written or oral agreements conflicting with the concept of regular employment
as defined therein should be construed to refer to the substantive evil that the Code
itself has singled out: agreements entered into precisely to circumvent security of
tenure. It should have no application to instances where a fixed period of
employment was agreed upon knowingly and voluntarily by the parties, without any
force, duress or improper pressure being brought to bear upon the employee and
absent any other circumstances vitiating his consent, or where it satisfactorily
appears that the employer and employee dealt with each other on more or less equal
terms with no moral dominance whatever being exercised by the former over the
latter. Unless thus limited in its purview, the law would be made to apply to purposes
other than those explicitly stated by its framers; it thus becomes pointless and
arbitrary, unjust in its effects and apt to lead to absurd and unintended
consequences. (emphasis supplied)

It is apparent from Brent School that the critical consideration is the presence or absence of
a substantial indication that the period specified in an employment agreement was designed
to circumvent the security of tenure of regular employees which is provided for in Articles 280
and 281 of the Labor Code. This indication must ordinarily rest upon some aspect of the
agreement other than the mere specification of a fixed term of the ernployment agreement,
or upon evidence aliunde of the intent to evade.

Examining the provisions of paragraphs 5 and 6 of the employment agreement between petitioner
PIA and private respondents, we consider that those provisions must be read together and when so
read, the fixed period of three (3) years specified in paragraph 5 will be seen to have been effectively
neutralized by the provisions of paragraph 6 of that agreement. Paragraph 6 in effect took back from
the employee the fixed three (3)-year period ostensibly granted by paragraph 5 by rendering such
period in effect a facultative one at the option of the employer PIA. For petitioner PIA claims to be
authorized to shorten that term, at any time and for any cause satisfactory to itself, to a one-month
period, or even less by simply paying the employee a month's salary. Because the net effect of
paragraphs 5 and 6 of the agreement here involved is to render the employment of private
respondents Farrales and Mamasig basically employment at the pleasure of petitioner PIA, the Court
considers that paragraphs 5 and 6 were intended to prevent any security of tenure from accruing in
favor of private respondents even during the limited period of three (3) years,13 and thus to escape
completely the thrust of Articles 280 and 281 of the Labor Code.

Petitioner PIA cannot take refuge in paragraph 10 of its employment agreement which specifies,
firstly, the law of Pakistan as the applicable law of the agreement and, secondly, lays the venue for
settlement of any dispute arising out of or in connection with the agreement "only [in] courts of
Karachi Pakistan". The first clause of paragraph 10 cannot be invoked to prevent the application of
Philippine labor laws and regulations to the subject matter of this case, i.e., the employer-employee
relationship between petitioner PIA and private respondents. We have already pointed out that the
relationship is much affected with public interest and that the otherwise applicable Philippine laws
and regulations cannot be rendered illusory by the parties agreeing upon some other law to govern
their relationship. Neither may petitioner invoke the second clause of paragraph 10, specifying the
Karachi courts as the sole venue for the settlement of dispute; between the contracting parties. Even
a cursory scrutiny of the relevant circumstances of this case will show the multiple and substantive
contacts between Philippine law and Philippine courts, on the one hand, and the relationship
between the parties, upon the other: the contract was not only executed in the Philippines, it was
also performed here, at least partially; private respondents are Philippine citizens and respondents,
while petitioner, although a foreign corporation, is licensed to do business (and actually doing
business) and hence resident in the Philippines; lastly, private respondents were based in the
Philippines in between their assigned flights to the Middle East and Europe. All the above contacts
point to the Philippine courts and administrative agencies as a proper forum for the resolution of
contractual disputes between the parties. Under these circumstances, paragraph 10 of the
employment agreement cannot be given effect so as to oust Philippine agencies and courts of the
jurisdiction vested upon them by Philippine law. Finally, and in any event, the petitioner PIA did not
undertake to plead and prove the contents of Pakistan law on the matter; it must therefore be
presumed that the applicable provisions of the law of Pakistan are the same as the applicable
provisions of Philippine law.14

We conclude that private respondents Farrales and Mamasig were illegally dismissed and that public
respondent Deputy Minister, MOLE, had not committed any grave abuse of discretion nor any act
without or in excess of jurisdiction in ordering their reinstatement with backwages. Private
respondents are entitled to three (3) years backwages without qualification or deduction. Should
their reinstatement to their former or other substantially equivalent positions not be feasible in view
of the length of time which has gone by since their services were unlawfully terminated, petitioner
should be required to pay separation pay to private respondents amounting to one (1) month's salary
for every year of service rendered by them, including the three (3) years service putatively rendered.

ACCORDINGLY, the Petition for certiorari is hereby DISMISSED for lack of merit, and the Order
dated 12 August 1982 of public respondent is hereby AFFIRMED, except that (1) private
respondents are entitled to three (3) years backwages, without deduction or qualification; and (2)
should reinstatement of private respondents to their former positions or to substantially equivalent
positions not be feasible, then petitioner shall, in lieu thereof, pay to private respondents separation
pay amounting to one (1)-month's salary for every year of service actually rendered by them and for
the three (3) years putative service by private respondents. The Temporary Restraining Order issued
on 13 September 1982 is hereby LIFTED. Costs against petitioner.

SO ORDERED.

Fernan (C.J., Chairman), Gutierrez, Jr., Bidin and Cortés, JJ., concur.

Footnotes

1 Rollo, pp. 12 and 17.

2 Id., p. 22.

3 Id., pp. 36-41.

4 Id., p. 43.

5 Id., p. 64.

6 Rollo, p. 6.

7 See Llora Motors, Inc., et al. v. Hon. Franklin Drilon, et al., G.R. No. 82895, 7
November 1989.
8 113 SCRA 257 (1982).

9 Rollo, p. 8.

10 Henson v. Intermediate Appellate Court, 148 SCRA 11 (1987).

11 Commissioner of Internal Revenue v. United Lines Co., 5 SCRA 175 (1962).

12 G.R. No. L-48494, promulgated 5 February 1990.

13 See Biboso v. Victorias Milling Co., Inc., 76 SCRA 250 (1977).

14 Miciano v. Brimo, 50 Phil. 867 (1924); Collector of Internal Revenue v. Fisher, 110
Phil. 686 (1961).
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

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

PARMANAND SHEWARAM, plaintiff and appellee,

vs.
PHILIPPINE AIR LINES, INC., defendant and appellant.

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

ZALDIVAR, J.:

Before the municipal court of Zamboanga City, plaintiff-appellee Parmanand Shewaram instituted an
action to recover damages suffered by him due to the alleged failure of defendant-appellant
Philippines Air Lines, Inc. to observe extraordinary diligence in the vigilance and carriage of his
luggage. After trial the municipal court of Zamboanga City rendered judgment ordering the appellant
to pay appellee P373.00 as actual damages, P100.00 as exemplary damages, P150.00 as attorney's
fees, and the costs of the action.

Appellant Philippine Air Lines appealed to the Court of First Instance of Zamboanga City. After
hearing the Court of First Instance of Zamboanga City modified the judgment of the inferior court by
ordering the appellant to pay the appellee only the sum of P373.00 as actual damages, with legal
interest from May 6, 1960 and the sum of P150.00 as attorney's fees, eliminating the award of
exemplary damages.

From the decision of the Court of First Instance of Zamboanga City, appellant appeals to this Court
on a question of law, assigning two errors allegedly committed by the lower court a quo, to wit:

1. The lower court erred in not holding that plaintiff-appellee was bound by the provisions of
the tariff regulations filed by defendant-appellant with the civil aeronautics board and the
conditions of carriage printed at the back of the plane ticket stub.

2. The lower court erred in not dismissing this case or limiting the liability of the defendant-
appellant to P100.00.

The facts of this case, as found by the trial court, quoted from the decision appealed from, are as
follows:

That Parmanand Shewaram, the plaintiff herein, was on November 23, 1959, a paying
passenger with ticket No. 4-30976, on defendant's aircraft flight No. 976/910 from
Zamboanga City bound for Manila; that defendant is a common carrier engaged in air line
transportation in the Philippines, offering its services to the public to carry and transport
passengers and cargoes from and to different points in the Philippines; that on the above-
mentioned date of November 23, 1959, he checked in three (3) pieces of baggages — a
suitcase and two (2) other pieces; that the suitcase was mistagged by defendant's personnel
in Zamboanga City, as I.G.N. (for Iligan) with claim check No. B-3883, instead of MNL (for
 Manila). When plaintiff Parmanand Shewaram arrived in Manila on the date of November 23,
1959, his suitcase did not arrive with his flight because it was sent to Iligan. So, he made a
claim with defendant's personnel in Manila airport and another suitcase similar to his own
which was the only baggage left for that flight, the rest having been claimed and released to
the other passengers of said flight, was given to the plaintiff for him to take delivery but he
did not and refused to take delivery of the same on the ground that it was not his, alleging
that all his clothes were white and the National transistor 7 and a Rollflex camera were not
found inside the suitcase, and moreover, it contained a pistol which he did not have nor
placed inside his suitcase; that after inquiries made by defendant's personnel in Manila from
different airports where the suitcase in question must have been sent, it was found to have
reached Iligan and the station agent of the PAL in Iligan caused the same to be sent to
Manila for delivery to Mr. Shewaram and which suitcase belonging to the plaintiff herein
arrived in Manila airport on November 24, 1959; that it was also found out that the suitcase
shown to and given to the plaintiff for delivery which he refused to take delivery belonged to
a certain Del Rosario who was bound for Iligan in the same flight with Mr. Shewaram; that
when the plaintiff's suitcase arrived in Manila as stated above on November 24, 1959, he
was informed by Mr. Tomas Blanco, Jr., the acting station agent of the Manila airport of the
arrival of his suitcase but of course minus his Transistor Radio 7 and the Rollflex Camera;
that Shewaram made demand for these two (2) items or for the value thereof but the same
was not complied with by defendant.

xxx xxx xxx

It is admitted by defendant that there was mistake in tagging the suitcase of plaintiff as IGN.
The tampering of the suitcase is more apparent when on November 24, 1959, when the
suitcase arrived in Manila, defendant's personnel could open the same in spite of the fact
that plaintiff had it under key when he delivered the suitcase to defendant's personnel in
Zamboanga City. Moreover, it was established during the hearing that there was space in the
suitcase where the two items in question could have been placed. It was also shown that as
early as November 24, 1959, when plaintiff was notified by phone of the arrival of the
suitcase, plaintiff asked that check of the things inside his suitcase be made and defendant
admitted that the two items could not be found inside the suitcase. There was no evidence
on record sufficient to show that plaintiff's suitcase was never opened during the time it was
placed in defendant's possession and prior to its recovery by the plaintiff. However,
defendant had presented evidence that it had authority to open passengers' baggage to
verify and find its ownership or identity. Exhibit "1" of the defendant would show that the
baggage that was offered to plaintiff as his own was opened and the plaintiff denied
ownership of the contents of the baggage. This proven fact that baggage may and could be
opened without the necessary authorization and presence of its owner, applied too, to the
suitcase of plaintiff which was mis-sent to Iligan City because of mistagging. The possibility
of what happened in the baggage of Mr. Del Rosario at the Manila Airport in his absence
could have also happened to plaintiffs suitcase at Iligan City in the absence of plaintiff.
Hence, the Court believes that these two items were really in plaintiff's suitcase and
defendant should be held liable for the same by virtue of its contract of carriage.

It is clear from the above-quoted portions of the decision of the trial court that said court had found
that the suitcase of the appellee was tampered, and the transistor radio and the camera contained
therein were lost, and that the loss of those articles was due to the negligence of the employees of
the appellant. The evidence shows that the transistor radio cost P197.00 and the camera cost
P176.00, so the total value of the two articles was P373.00.

There is no question that the appellant is a common carrier.1 As such common carrier the appellant,
from the nature of its business and for reasons of public policy, is bound to observe extraordinary
diligence in the vigilance over the goods and for the safety of the passengers transported by it
according to the circumstances of each case. 2 It having been shown that the loss of the transistor
radio and the camera of the appellee, costing P373.00, was due to the negligence of the employees
of the appellant, it is clear that the appellant should be held liable for the payment of said loss.3

It is, however, contended by the appellant that its liability should be limited to the amount stated in
the conditions of carriage printed at the back of the plane ticket stub which was issued to the
appellee, which conditions are embodied in Domestic Tariff Regulations No. 2 which was filed with
the Civil Aeronautics Board. One of those conditions, which is pertinent to the issue raised by the
appellant in this case provides as follows:

The liability, if any, for loss or damage to checked baggage or for delay in the delivery
thereof is limited to its value and, unless the passenger declares in advance a higher
valuation and pay an additional charge therefor, the value shall be conclusively deemed not
to exceed P100.00 for each ticket.

The appellant maintains that in view of the failure of the appellee to declare a higher value for his
luggage, and pay the freight on the basis of said declared value when he checked such luggage at
the Zamboanga City airport, pursuant to the abovequoted condition, appellee can not demand
payment from the appellant of an amount in excess of P100.00.

The law that may be invoked, in this connection is Article 1750 of the New Civil Code which provides
as follows:

A contract fixing the sum that may be recovered by the owner or shipper for the loss,
destruction, or deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.

In accordance with the above-quoted provision of Article 1750 of the New Civil Code, the pecuniary
liability of a common carrier may, by contract, be limited to a fixed amount. It is required, however,
that the contract must be "reasonable and just under the circumstances and has been fairly and
freely agreed upon."

The requirements provided in Article 1750 of the New Civil Code must be complied with before a
common carrier can claim a limitation of its pecuniary liability in case of loss, destruction or
deterioration of the goods it has undertaken to transport. In the case before us We believe that the
requirements of said article have not been met. It can not be said that the appellee had actually
entered into a contract with the appellant, embodying the conditions as printed at the back of the
ticket stub that was issued by the appellant to the appellee. The fact that those conditions are printed
at the back of the ticket stub in letters so small that they are hard to read would not warrant the
presumption that the appellee was aware of those conditions such that he had "fairly and freely
agreed" to those conditions. The trial court has categorically stated in its decision that the
"Defendant admits that passengers do not sign the ticket, much less did plaintiff herein sign his ticket
when he made the flight on November 23, 1959." We hold, therefore, that the appellee is not, and
can not be, bound by the conditions of carriage found at the back of the ticket stub issued to him
when he made the flight on appellant's plane on November 23, 1959.

The liability of the appellant in the present case should be governed by the provisions of Articles
1734 and 1735 of the New Civil Code, which We quote as follows:

ART. 1734. Common carries are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:
 (1) Flood, storm, earthquake, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority. 1äwphï1.ñët

ART. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4 and 5 of the preceding
article, if the goods are lost, destroyed or deteriorated, common carriers are presumed to
have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as required in Article 1733.

It having been clearly found by the trial court that the transistor radio and the camera of the appellee
were lost as a result of the negligence of the appellant as a common carrier, the liability of the
appellant is clear — it must pay the appellee the value of those two articles.

In the case of Ysmael and Co. vs. Barreto, 51 Phil. 90, cited by the trial court in support of its
decision, this Court had laid down the rule that the carrier can not limit its liability for injury to or loss
of goods shipped where such injury or loss was caused by its own negligence.

Corpus Juris, volume 10, p. 154, says:

"Par. 194, 6. Reasonableness of Limitations. — The validity of stipulations limiting the

carrier's liability is to be determined by their reasonableness and their conformity to the
sound public policy, in accordance with which the obligations of the carrier to the public are
settled. It cannot lawfully stipulate for exemption from liability, unless such exemption is just
and reasonable, and unless the contract is freely and fairly made. No contractual limitation is
reasonable which is subversive of public policy.

"Par. 195. 7. What Limitations of Liability Permissible. — a. Negligence — (1) Rule in

America — (a) In Absence of Organic or Statutory Provisions Regulating Subject — aa.
Majority Rule. — In the absence of statute, it is settled by the weight of authority in the
United States, that whatever limitations against its common-law liability are permissible to a
carrier, it cannot limit its liability for injury to or loss of goods shipped, where such injury or
loss is caused by its own negligence. This is the common law doctrine and it makes no
difference that there is no statutory prohibition against contracts of this character.

"Par. 196. bb. Considerations on which Rule Based. — The rule, it is said, rests on
considerations of public policy. The undertaking is to carry the goods, and to relieve the
shipper from all liability for loss or damage arising from negligence in performing its contract
is to ignore the contract itself. The natural effect of a limitation of liability against negligence
is to induce want of care on the part of the carrier in the performance of its duty. The shipper
and the common carrier are not on equal terms; the shipper must send his freight by the
common carrier, or not at all; he is therefore entirely at the mercy of the carrier unless
protected by the higher power of the law against being forced into contracts limiting the
carrier's liability. Such contracts are wanting in the element of voluntary assent.
 "Par. 197. cc. Application and Extent of Rule — (aa) Negligence of Servants. — The rule
prohibiting limitation of liability for negligence is often stated as a prohibition of any contract
relieving the carrier from loss or damage caused by its own negligence or misfeasance, or
that of its servants; and it has been specifically decided in many cases that no contract
limitation will relieve the carrier from responsibility for the negligence, unskillfulness, or
carelessness of its employer." (Cited in Ysmael and Co. vs. Barreto, 51 Phil. 90, 98, 99).

In view of the foregoing, the decision appealed from is affirmed, with costs against the appellant.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P. and Sanchez,
JJ., concur.

Footnotes

1
Article 1732, New Civil Code.

2
Articles 1733, 1734, 1735 and 1745, New Civil Code.

3
Articles 1734, 1735, 1736 and 1754, New Civil Code.

 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

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

AGUSTINO B. ONG YIU, petitioner,

vs.
HONORABLE COURT OF APPEALS and PHILIPPINE AIR LINES, INC., respondents.

MELENCIO-HERRERA, J.:

In this Petition for Review by Certiorari, petitioner, a practicing lawyer and businessman, seeks a
reversal of the Decision of the Court of Appeals in CA-G.R. No. 45005-R, which reduced his claim
for damages for breach of contract of transportation.

The facts are as follows:

On August 26, 1967, petitioner was a fare paying passenger of respondent Philippine Air Lines, Inc.
(PAL), on board Flight No. 463-R, from Mactan Cebu, bound for Butuan City. He was scheduled to
attend the trial of Civil Case No. 1005 and Spec. Procs. No. 1125 in the Court of First Instance,
Branch II, thereat, set for hearing on August 28-31, 1967. As a passenger, he checked in one piece
of luggage, a blue "maleta" for which he was issued Claim Check No. 2106-R (Exh. "A"). The plane
left Mactan Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport, Butuan City, at
past 2:00 o'clock P.M., of the same day. Upon arrival, petitioner claimed his luggage but it could not
be found. According to petitioner, it was only after reacting indignantly to the loss that the matter was
attended to by the porter clerk, Maximo Gomez, which, however, the latter denies, At about 3:00
o'clock P.M., PAL Butuan, sent a message to PAL, Cebu, inquiring about the missing luggage, which
message was, in turn relayed in full to the Mactan Airport teletype operator at 3:45 P.M. (Exh. "2")
that same afternoon. It must have been transmitted to Manila immediately, for at 3:59 that same
afternoon, PAL Manila wired PAL Cebu advising that the luggage had been over carried to Manila
aboard Flight No. 156 and that it would be forwarded to Cebu on Flight No. 345 of the same day.
Instructions were also given that the luggage be immediately forwarded to Butuan City on the first
available flight (Exh. "3"). At 5:00 P.M. of the same afternoon, PAL Cebu sent a message to PAL
Butuan that the luggage would be forwarded on Fright No. 963 the following day, August 27, 196'(.
However, this message was not received by PAL Butuan as all the personnel had already left since
there were no more incoming flights that afternoon.

In the meantime, petitioner was worried about the missing luggage because it contained vital
documents needed for trial the next day. At 10:00 o'clock that evening, petitioner wired PAL Cebu
demanding the delivery of his baggage before noon the next day, otherwise, he would hold PAL
liable for damages, and stating that PAL's gross negligence had caused him undue inconvenience,
worry, anxiety and extreme embarrassment (Exh. "B"). This telegram was received by the Cebu PAL
supervisor but the latter felt no need to wire petitioner that his luggage had already been forwarded
on the assumption that by the time the message reached Butuan City, the luggage would have
arrived.
Early in the morning of the next day, August 27, 1967, petitioner went to the Bancasi Airport to
inquire about his luggage. He did not wait, however, for the morning flight which arrived at 10:00
o'clock that morning. This flight carried the missing luggage. The porter clerk, Maximo Gomez,
paged petitioner, but the latter had already left. A certain Emilio Dagorro a driver of a "colorum" car,
who also used to drive for petitioner, volunteered to take the luggage to petitioner. As Maximo
Gomez knew Dagorro to be the same driver used by petitioner whenever the latter was in Butuan
City, Gomez took the luggage and placed it on the counter. Dagorro examined the lock, pressed it,
and it opened. After calling the attention of Maximo Gomez, the "maleta" was opened, Gomez took a
look at its contents, but did not touch them. Dagorro then delivered the "maleta" to petitioner, with
the information that the lock was open. Upon inspection, petitioner found that a folder containing
certain exhibits, transcripts and private documents in Civil Case No. 1005 and Sp. Procs. No. 1126
were missing, aside from two gift items for his parents-in-law. Petitioner refused to accept the
luggage. Dagorro returned it to the porter clerk, Maximo Gomez, who sealed it and forwarded the
same to PAL Cebu.

Meanwhile, petitioner asked for postponement of the hearing of Civil Case No. 1005 due to loss of
his documents, which was granted by the Court (Exhs. "C" and "C-1"). Petitioner returned to Cebu
City on August 28, 1967. In a letter dated August 29, 1967 addressed to PAL, Cebu, petitioner called
attention to his telegram (Exh. "D"), demanded that his luggage be produced intact, and that he be
compensated in the sum of P250,000,00 for actual and moral damages within five days from receipt
of the letter, otherwise, he would be left with no alternative but to file suit (Exh. "D").

On August 31, 1967, Messrs. de Leon, Navarsi, and Agustin, all of PAL Cebu, went to petitioner's
office to deliver the "maleta". In the presence of Mr. Jose Yap and Atty. Manuel Maranga the
contents were listed and receipted for by petitioner (Exh. "E").

On September 5, 1967, petitioner sent a tracer letter to PAL Cebu inquiring about the results of the
investigation which Messrs. de Leon, Navarsi, and Agustin had promised to conduct to pinpoint
responsibility for the unauthorized opening of the "maleta" (Exh. "F").

The following day, September 6, 1967, PAL sent its reply hereinunder quoted verbatim:

Dear Atty. Ong Yiu:

This is with reference to your September 5, 1967, letter to Mr. Ricardo G. Paloma,
Acting Manager, Southern Philippines.

First of all, may we apologize for the delay in informing you of the result of our
investigation since we visited you in your office last August 31, 1967. Since there are
stations other than Cebu which are involved in your case, we have to communicate
and await replies from them. We regret to inform you that to date we have not found
the supposedly lost folder of papers nor have we been able to pinpoint the personnel
who allegedly pilferred your baggage.

You must realize that no inventory was taken of the cargo upon loading them on any
plane. Consequently, we have no way of knowing the real contents of your baggage
when same was loaded.

We realized the inconvenience you encountered of this incident but we trust that you
will give us another opportunity to be of better service to you.

Very truly yours,

 PHILIPPINE AIR LINES, INC.

(Sgd) JEREMIAS S. AGUSTIN

Branch Supervisor
Cebu

(Exhibit G, Folder of Exhibits) 1

On September 13, 1967, petitioner filed a Complaint against PAL for damages for breach of contract
of transportation with the Court of First Instance of Cebu, Branch V, docketed as Civil Case No. R-
10188, which PAL traversed. After due trial, the lower Court found PAL to have acted in bad faith
and with malice and declared petitioner entitled to moral damages in the sum of P80,000.00,
exemplary damages of P30,000.00, attorney's fees of P5,000.00, and costs.

Both parties appealed to the Court of Appeals — petitioner in so far as he was awarded only the
sum of P80,000.00 as moral damages; and defendant because of the unfavorable judgment
rendered against it.

On August 22, 1974, the Court of Appeals,* finding that PAL was guilty only of simple negligence,
reversed the judgment of the trial Court granting petitioner moral and exemplary damages, but
ordered PAL to pay plaintiff the sum of P100.00, the baggage liability assumed by it under the
condition of carriage printed at the back of the ticket.

Hence, this Petition for Review by Certiorari, filed on May 2, 1975, with petitioner making the
following Assignments of Error:

I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING RESPONDENT

PAL GUILTY ONLY OF SIMPLE NEGLIGENCE AND NOT BAD FAITH IN THE
BREACH OF ITS CONTRACT OF TRANSPORTATION WITH PETITIONER.

II. THE HONORABLE COURT OF APPEALS MISCONSTRUED THE EVIDENCE

AND THE LAW WHEN IT REVERSED THE DECISION OF THE LOWER COURT
AWARDING TO PETITIONER MORAL DAMAGES IN THE AMOUNT OF
P80,000.00, EXEMPLARY DAMAGES OF P30,000.00, AND P5,000.00
REPRESENTING ATTORNEY'S FEES, AND ORDERED RESPONDENT PAL TO
COMPENSATE PLAINTIFF THE SUM OF P100.00 ONLY, CONTRARY TO THE
EXPLICIT PROVISIONS OF ARTICLES 2220, 2229, 2232 AND 2234 OF THE CIVIL
CODE OF THE PHILIPPINES.

On July 16, 1975, this Court gave due course to the Petition.

There is no dispute that PAL incurred in delay in the delivery of petitioner's luggage. The question is
the correctness of respondent Court's conclusion that there was no gross negligence on the part of
PAL and that it had not acted fraudulently or in bad faith as to entitle petitioner to an award of moral
and exemplary damages.

From the facts of the case, we agree with respondent Court that PAL had not acted in bad faith. Bad
faith means a breach of a known duty through some motive of interest or ill will. 2 It was the duty of
PAL to look for petitioner's luggage which had been miscarried. PAL exerted due diligence in
complying with such duty.
As aptly stated by the appellate Court:

We do not find any evidence of bad faith in this. On the contrary, We find that the
defendant had exerted diligent effort to locate plaintiff's baggage. The trial court saw
evidence of bad faith because PAL sent the telegraphic message to Mactan only at
3:00 o'clock that same afternoon, despite plaintiff's indignation for the non-arrival of
his baggage. The message was sent within less than one hour after plaintiff's
luggage could not be located. Efforts had to be exerted to locate plaintiff's maleta.
Then the Bancasi airport had to attend to other incoming passengers and to the
outgoing passengers. Certainly, no evidence of bad faith can be inferred from these
facts. Cebu office immediately wired Manila inquiring about the missing baggage of
the plaintiff. At 3:59 P.M., Manila station agent at the domestic airport wired Cebu
that the baggage was over carried to Manila. And this message was received in
Cebu one minute thereafter, or at 4:00 P.M. The baggage was in fact sent back to
Cebu City that same afternoon. His Honor stated that the fact that the message was
sent at 3:59 P.M. from Manila and completely relayed to Mactan at 4:00 P.M., or
within one minute, made the message appear spurious. This is a forced reasoning. A
radio message of about 50 words can be completely transmitted in even less than
one minute depending upon atmospheric conditions. Even if the message was sent
from Manila or other distant places, the message can be received within a minute.
that is a scientific fact which cannot be questioned. 3

Neither was the failure of PAL Cebu to reply to petitioner's rush telegram indicative of bad faith, The
telegram (Exh. B) was dispatched by petitioner at around 10:00 P.M. of August 26, 1967. The PAL
supervisor at Mactan Airport was notified of it only in the morning of the following day. At that time
the luggage was already to be forwarded to Butuan City. There was no bad faith, therefore, in the
assumption made by said supervisor that the plane carrying the bag would arrive at Butuan earlier
than a reply telegram. Had petitioner waited or caused someone to wait at the Bancasi airport for the
arrival of the morning flight, he would have been able to retrieve his luggage sooner.

In the absence of a wrongful act or omission or of fraud or bad faith, petitioner is not entitled to moral
damages.

Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious
anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation,
and similar injury. Though incapable of pecuniary computation, moral damages may
be recovered if they are the proximate result of the defendant's wrongful act of
omission.

Art. 2220. Willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are
justly due. The same rule applies to breaches of contract where the defendant acted
fraudulently or in bad faith.

Petitioner is neither entitled to exemplary damages. In contracts, as provided for in Article 2232 of
the Civil Code, exemplary damages can be granted if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner, which has not been proven in this case.

Petitioner further contends that respondent Court committed grave error when it limited PAL's
carriage liability to the amount of P100.00 as stipulated at the back of the ticket. In this connection,
respondent Court opined:
 As a general proposition, the plaintiff's maleta having been pilfered while in the
custody of the defendant, it is presumed that the defendant had been negligent. The
liability, however, of PAL for the loss, in accordance with the stipulation written on the
back of the ticket, Exhibit 12, is limited to P100.00 per baggage, plaintiff not having
declared a greater value, and not having called the attention of the defendant on its
true value and paid the tariff therefor. The validity of this stipulation is not questioned
by the plaintiff. They are printed in reasonably and fairly big letters, and are easily
readable. Moreover, plaintiff had been a frequent passenger of PAL from Cebu to
Butuan City and back, and he, being a lawyer and businessman, must be fully aware
of these conditions. 4

We agree with the foregoing finding. The pertinent Condition of Carriage printed at the back of the
plane ticket reads:

8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or damaged
baggage of the passenger is LIMITED TO P100.00 for each ticket unless a
passenger declares a higher valuation in excess of P100.00, but not in excess,
however, of a total valuation of P1,000.00 and additional charges are paid pursuant
to Carrier's tariffs.

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

But petitioner argues that there is nothing in the evidence to show that he had actually entered into a
contract with PAL limiting the latter's liability for loss or delay of the baggage of its passengers, and
that Article 1750* of the Civil Code has not been complied with.

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

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

There is another matter involved, raised as an error by PAL — the fact that on October 24, 1974 or
two months after the promulgation of the Decision of the appellate Court, petitioner's widow filed a
Motion for Substitution claiming that petitioner died on January 6, 1974 and that she only came to
know of the adverse Decision on October 23, 1974 when petitioner's law partner informed her that
he received copy of the Decision on August 28, 1974. Attached to her Motion was an Affidavit of
petitioner's law partner reciting facts constitutive of excusable negligence. The appellate Court noting
that all pleadings had been signed by petitioner himself allowed the widow "to take such steps as
she or counsel may deem necessary." She then filed a Motion for Reconsideration over the
opposition of PAL which alleged that the Court of Appeals Decision, promulgated on August 22,
1974, had already become final and executory since no appeal had been interposed therefrom
within the reglementary period.

Under the circumstances, considering the demise of petitioner himself, who acted as his own
counsel, it is best that technicality yields to the interests of substantial justice. Besides, in the 'last
analysis, no serious prejudice has been caused respondent PAL.

In fine, we hold that the conclusions drawn by respondent Court from the evidence on record are not
erroneous.

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

No costs.

SO ORDERED.

Teehankee, (Chairman), Makasiar, Fernandez, Guerrero and De Castro, JJ., concur.

#Footnotes

1 pp. 47-48, Rollo.

* Decision penned by Justice Jose Leuterio, with Justice Roseller Lim and Francisco
Tantuico, Jr., concurring.

2 Air France vs. Carrascoso, 18 SCRA 166 (1966); Lopez vs. Pan American World
Airways, 16 SCRA 431 (1966).

3 pp. 12-13, Decision. on pp. 53-54, Rollo.

4 pp. 8-9, Decision on pp. 27-28, Rollo.

* A contract fixing the sum that may be recovered by the owner or shipper for the
loss, destruction, or deterioration of the goods is valid, if it is reasonable and just
under the circumstances, and has been fairly and freely agreed upon.

5 Tannebaum v. National Airline, Inc. 13 Misc. 2d 450, 176 N.Y.S. 2d 400; Lichten
vs. Eastern Airlines, 87 Fed. Supp. 691; Migoski v. Eastern Air Lines, Inc., Fla. 63
So. 2d 634.

6 Tolentino, Civil Code, Vol. IV, 1962 ed., p, 462, citing Mr. Justice J.B.L. Reyes,
Lawyer's Journal, Jan. 31, 195 1, p. 49.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 70462 August 11, 1988

PAN AMERICAN WORLD AIRWAYS, INC., petitioner,

vs.
INTERMEDIATE APPELLATE COURT, RENE V. PANGAN, SOTANG BASTOS PRODUCTIONS
and ARCHER PRODUCTIONS, respondents.

Guerrero & Torres for petitioner.

Jose B. Layug for private respondents.

CORTES, J.:

Before the Court is a petition filed by an international air carrier seeking to limit its liability for lost baggage, containing promotional and
advertising materials for films to be exhibited in Guam and the U.S.A., clutch bags, barong tagalogs and personal belongings, to the amount
specified in the airline ticket absent a declaration of a higher valuation and the payment of additional charges.

The undisputed facts of the case, as found by the trial court and adopted by the appellate court, are
as follows:

On April 25, 1978, plaintiff Rene V. Pangan, president and general manager of the
plaintiffs Sotang Bastos and Archer Production while in San Francisco, Califonia and
Primo Quesada of Prime Films, San Francisco, California, entered into an agreement
(Exh. A) whereby the former, for and in consideration of the amount of US $2,500.00
per picture, bound himself to supply the latter with three films. 'Ang Mabait, Masungit
at ang Pangit,' 'Big Happening with Chikiting and Iking,' and 'Kambal Dragon' for
exhibition in the United States. It was also their agreement that plaintiffs would
provide the necessary promotional and advertising materials for said films on or
before May 30, 1978.

On his way home to the Philippines, plaintiff Pangan visited Guam where he
contacted Leo Slutchnick of the Hafa Adai Organization. Plaintiff Pangan likewise
entered into a verbal agreement with Slutchnick for the exhibition of two of the films
above-mentioned at the Hafa Adai Theater in Guam on May 30, 1978 for the
consideration of P7,000.00 per picture (p. 11, tsn, June 20, 1979). Plaintiff Pangan
undertook to provide the necessary promotional and advertising materials for said
films on or before the exhibition date on May 30,1978.

By virtue of the above agreements, plaintiff Pangan caused the preparation of the
requisite promotional handbills and still pictures for which he paid the total sum of
P12,900.00 (Exhs. B, B-1, C and C1). Likewise in preparation for his trip abroad to
comply with his contracts, plaintiff Pangan purchased fourteen clutch bags, four capiz
lamps and four barong tagalog, with a total value of P4,400.00 (Exhs. D, D-1, E, and
F).
 On May 18, 1978, plaintiff Pangan obtained from defendant Pan Am's Manila Office,
through the Your Travel Guide, an economy class airplane ticket with No.
0269207406324 (Exh. G) for passage from Manila to Guam on defendant's Flight No.
842 of May 27,1978, upon payment by said plaintiff of the regular fare. The Your
Travel Guide is a tour and travel office owned and managed by plaintiffs witness Mila
de la Rama.

On May 27, 1978, two hours before departure time plaintiff Pangan was at the
defendant's ticket counter at the Manila International Airport and presented his ticket
and checked in his two luggages, for which he was given baggage claim tickets Nos.
963633 and 963649 (Exhs. H and H-1). The two luggages contained the promotional
and advertising materials, the clutch bags, barong tagalog and his personal
belongings. Subsequently, Pangan was informed that his name was not in the
manifest and so he could not take Flight No. 842 in the economy class. Since there
was no space in the economy class, plaintiff Pangan took the first class because he
wanted to be on time in Guam to comply with his commitment, paying an additional
sum of $112.00.

When plaintiff Pangan arrived in Guam on the date of May 27, 1978, his two
luggages did not arrive with his flight, as a consequence of which his agreements
with Slutchnick and Quesada for the exhibition of the films in Guam and in the United
States were cancelled (Exh. L). Thereafter, he filed a written claim (Exh. J) for his
missing luggages.

Upon arrival in the Philippines, Pangan contacted his lawyer, who made the
necessary representations to protest as to the treatment which he received from the
employees of the defendant and the loss of his two luggages (Exh. M, O, Q, S, and
T). Defendant Pan Am assured plaintiff Pangan that his grievances would be
investigated and given its immediate consideration (Exhs. N, P and R). Due to the
defendant's failure to communicate with Pangan about the action taken on his
protests, the present complaint was filed by the plaintiff. (Pages 4-7, Record On
Appeal). [Rollo, pp. 27-29.]

On the basis of these facts, the Court of First Instance found petitioner liable and rendered judgment
as follows:

(1) Ordering defendant Pan American World Airways, Inc. to pay all the plaintiffs the
sum of P83,000.00, for actual damages, with interest thereon at the rate of 14% per
annum from December 6, 1978, when the complaint was filed, until the same is fully
paid, plus the further sum of P10,000.00 as attorney's fees;

(2) Ordering defendant Pan American World Airways, Inc. to pay plaintiff Rene V.
Pangan the sum of P8,123.34, for additional actual damages, with interest thereon at
the rate of 14% per annum from December 6, 1978, until the same is fully paid;

(3) Dismissing the counterclaim interposed by defendant Pan American World

Airways, Inc.; and

(4) Ordering defendant Pan American World Airways, Inc. to pay the costs of suit.
[Rollo, pp. 106-107.]

On appeal, the then Intermediate Appellate Court affirmed the trial court decision.
Hence, the instant recourse to this Court by petitioner.

The petition was given due course and the parties, as required, submitted their respective
memoranda. In due time the case was submitted for decision.

In assailing the decision of the Intermediate Appellate Court petitioner assigned the following errors:

1. The respondent court erred as a matter of law in affirming the trial court's award of actual
damages beyond the limitation of liability set forth in the Warsaw Convention and the contract of
carriage.

2. The respondent court erred as a matter of law in affirming the trial court's award of actual
damages consisting of alleged lost profits in the face of this Court's ruling concerning special or
consequential damages as set forth in Mendoza v. Philippine Airlines [90 Phil. 836 (1952).]

The assigned errors shall be discussed seriatim

1. The airline ticket (Exh. "G') contains the following conditions:

NOTICE

If the passenger's journey involves an ultimate destination or stop in a country other

than the country of departure the Warsaw Convention may be applicable and the
Convention governs and in most cases limits the liability of carriers for death or
personal injury and in respect of loss of or damage to baggage. See also notice
headed "Advice to International Passengers on Limitation of Liability.

CONDITIONS OF CONTRACT

1. As used in this contract "ticket" means this passenger ticket and baggage check of
which these conditions and the notices form part, "carriage" is equivalent to
"transportation," "carrier" means all air carriers that carry or undertake to carry the
passenger or his baggage hereunder or perform any other service incidental to such
air carriage. "WARSAW CONVENTION" means the convention for the Unification of
Certain Rules Relating to International Carriage by Air signed at Warsaw, 12th
October 1929, or that Convention as amended at The Hague, 28th September 1955,
whichever may be applicable.

2. Carriage hereunder is subject to the rules and limitations relating to liability

established by the Warsaw Convention unless such carriage is not "international
carriage" as defined by that Convention.

3. To the extent not in conflict with the foregoing carriage and other services
performed by each carrier are subject to: (i) provisions contained in this ticket, (ii)
applicable tariffs, (iii) carrier's conditions of carriage and related regulations which are
made part hereof (and are available on application at the offices of carrier), except in
transportation between a place in the United States or Canada and any place outside
thereof to which tariffs in force in those countries apply.

xxx xxx xxx

 NOTICE OF BAGGAGE LIABILITY LIMITATIONS

Liability for loss, delay, or damage to baggage is limited as follows unless a higher
value is declared in advance and additional charges are paid: (1)for most
international travel (including domestic portions of international journeys) to
approximately $9.07 per pound ($20.00 per kilo) for checked baggage and $400 per
passenger for unchecked baggage: (2) for travel wholly between U.S. points, to $750
per passenger on most carriers (a few have lower limits). Excess valuation may not
be declared on certain types of valuable articles. Carriers assume no liability for
fragile or perishable articles. Further information may be obtained from the carrier.
[Emphasis supplied.].

On the basis of the foregoing stipulations printed at the back of the ticket, petitioner contends that its
liability for the lost baggage of private respondent Pangan is limited to $600.00 ($20.00 x 30 kilos) as
the latter did not declare a higher value for his baggage and pay the corresponding additional
charges.

To support this contention, petitioner cites the case of Ong Yiu v. Court of Appeals [G.R. No. L-
40597, June 29, 1979, 91 SCRA 223], where the Court sustained the validity of a printed stipulation
at the back of an airline ticket limiting the liability of the carrier for lost baggage to a specified amount
and ruled that the carrier's liability was limited to said amount since the passenger did not declare a
higher value, much less pay additional charges.

We find the ruling in Ong Yiu squarely applicable to the instant case. In said case, the Court, through
Justice Melencio Herrera, stated:

Petitioner further contends that respondent Court committed grave error when it
limited PAL's carriage liability to the amount of P100.00 as stipulated at the back of
the ticket....

We agree with the foregoing finding. The pertinent Condition of Carriage printed at
the back of the plane ticket reads:

8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost or
damage baggage of the passenger is LIMITED TO P100.00 for each
ticket unless a passenger declares a higher valuation in excess of
P100.00, but not in excess, however, of a total valuation of Pl,000.00
and additional charges are paid pursuant to Carrier's tariffs.

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

But petitioner argues that there is nothing in the evidence to show that he had
actually entered into a contract with PAL limiting the latter's liability for loss or delay
of the baggage of its passengers, and that Article 1750 * of the Civil Code has not been complied
with.

While it may be true that petitioner had not signed the plane ticket (Exh. "12"), he is
nevertheless bound by the provisions thereof. "Such provisions have been held to be
a part of the contract of carriage, and valid and binding upon the passenger
regardless of the latter's lack of knowledge or assent to the regulation." [Tannebaum
v. National Airline, Inc., 13 Misc. 2d 450,176 N.Y.S. 2d 400; Lichten v. Eastern
 Airlines, 87 Fed. Supp. 691; Migoski v. Eastern Air Lines, Inc., Fla., 63 So. 2d 634.] It
is what is known as a contract of "adhesion," in regards which it has been said that
contracts of adhesion wherein one party imposes a ready made form of contract on
the other, as the plane ticket in the case at bar, are contracts not entirely prohibited.
The one who adheres to the contract is in reality free to reject it entirely; if he
adheres, he gives his consent,[Tolentino, Civil Code, Vol. IV, 1962 ed., p. 462, citing
Mr. Justice J.B.L. Reyes, Lawyer's Journal, Jan. 31, 1951, p. 49]. And as held in
Randolph v. American Airlines, 103 Ohio App. 172,144 N.E. 2d 878; Rosenchein v.
Trans World Airlines, Inc., 349 S.W. 2d 483.] "a contract limiting liability upon an
agreed valuation does not offend against the policy of the law forbidding one from
contracting against his own negligence."

Considering, therefore, that petitioner had failed to declare a higher value for his
baggage, he cannot be permitted a recovery in excess of P100.00....

On the other hand, the ruling in Shewaram v. Philippine Air Lines, Inc. [G.R. No. L-20099, July 2,
1966, 17 SCRA 606], where the Court held that the stipulation limiting the carrier's liability to a
specified amount was invalid, finds no application in the instant case, as the ruling in said case was
premised on the finding that the conditions printed at the back of the ticket were so small and hard to
read that they would not warrant the presumption that the passenger was aware of the conditions
and that he had freely and fairly agreed thereto. In the instant case, similar facts that would make the
case fall under the exception have not been alleged, much less shown to exist.

In view thereof petitioner's liability for the lost baggage is limited to $20.00 per kilo or $600.00, as
stipulated at the back of the ticket.

At this juncture, in order to rectify certain misconceptions the Court finds it necessary to state that
the Court of Appeal's reliance on a quotation from Northwest Airlines, Inc. v. Cuenca [G.R. No. L-
22425, August 31, 1965, 14 SCRA 1063] to sustain the view that "to apply the Warsaw Convention
which limits a carrier's liability to US$9.07 per pound or US$20.00 per kilo in cases of contractual
breach of carriage ** is against public policy" is utterly misplaced, to say the least. In said case, while the Court, as quoted in the
Intermediate Appellate Court's decision, said:

Petitioner argues that pursuant to those provisions, an air "carrier is liable only" in the
event of death of a passenger or injury suffered by him, or of destruction or loss of, or
damages to any checked baggage or any goods, or of delay in the transportation by
air of passengers, baggage or goods. This pretense is not borne out by the language
of said Articles. The same merely declare the carrier liable for damages in
enumerated cases, if the conditions therein specified are present. Neither said
provisions nor others in the aforementioned Convention regulate or exclude liability
for other breaches of contract by the carrier. Under petitioner's theory, an air carrier
would be exempt from any liability for damages in the event of its absolute refusal, in
bad faith, to comply with a contract of carriage, which is absurd.

it prefaced this statement by explaining that:

...The case is now before us on petition for review by certiorari, upon the ground that
the lower court has erred: (1) in holding that the Warsaw Convention of October 12,
1929, relative to transportation by air is not in force in the Philippines: (2) in not
holding that respondent has no cause of action; and (3) in awarding P20,000 as
nominal damages.
 We deem it unnecessary to pass upon the First assignment of error because the
same is the basis of the second assignment of error, and the latter is devoid of merit,
even if we assumed the former to be well taken. (Emphasis supplied.)

Thus, it is quite clear that the Court never intended to, and in fact never did, rule against the validity
of provisions of the Warsaw Convention. Consequently, by no stretch of the imagination may said
quotation from Northwest be considered as supportive of the appellate court's statement that the
provisions of the Warsaw Convention limited a carrier's liability are against public policy.

2. The Court finds itself unable to agree with the decision of the trial court, and affirmed by the Court
of Appeals, awarding private respondents damages as and for lost profits when their contracts to
show the films in Guam and San Francisco, California were cancelled.

The rule laid down in Mendoza v. Philippine Air Lines, Inc. [90 Phil. 836 (1952)] cannot be any
clearer:

...Under Art.1107 of the Civil Code, a debtor in good faith like the defendant herein,
may be held liable only for damages that were foreseen or might have been foreseen
at the time the contract of transportation was entered into. The trial court correctly
found that the defendant company could not have foreseen the damages that would
be suffered by Mendoza upon failure to deliver the can of film on the 17th of
September, 1948 for the reason that the plans of Mendoza to exhibit that film during
the town fiesta and his preparations, specially the announcement of said exhibition
by posters and advertisement in the newspaper, were not called to the defendant's
attention.

In our research for authorities we have found a case very similar to the one under consideration. In
the case of Chapman vs. Fargo, L.R.A. (1918 F) p. 1049, the plaintiff in Troy, New York, delivered
motion picture films to the defendant Fargo, an express company, consigned and to be delivered to
him in Utica. At the time of shipment the attention of the express company was called to the fact that
the shipment involved motion picture films to be exhibited in Utica, and that they should be sent to
their destination, rush. There was delay in their delivery and it was found that the plaintiff because of
his failure to exhibit the film in Utica due to the delay suffered damages or loss of profits. But the
highest court in the State of New York refused to award him special damages. Said appellate court
observed:

But before defendant could be held to special damages, such as the present alleged
loss of profits on account of delay or failure of delivery, it must have appeared that he
had notice at the time of delivery to him of the particular circumstances attending the
shipment, and which probably would lead to such special loss if he defaulted. Or, as
the rule has been stated in another form, in order to purpose on the defaulting party
further liability than for damages naturally and directly, i.e., in the ordinary course of
things, arising from a breach of contract, such unusual or extraordinary damages
must have been brought within the contemplation of the parties as the probable
result of breach at the time of or prior to contracting. Generally, notice then of any
special circumstances which will show that the damages to be anticipated from a
breach would be enhanced has been held sufficient for this effect.

As may be seen, that New York case is a stronger one than the present case for the reason that the
attention of the common carrier in said case was called to the nature of the articles shipped, the
purpose of shipment, and the desire to rush the shipment, circumstances and facts absent in the
present case. [Emphasis supplied.]
Thus, applying the foregoing ruling to the facts of the instant case, in the absence of a showing that
petitioner's attention was called to the special circumstances requiring prompt delivery of private
respondent Pangan's luggages, petitioner cannot be held liable for the cancellation of private
respondents' contracts as it could not have foreseen such an eventuality when it accepted the
luggages for transit.

The Court is unable to uphold the Intermediate Appellate Court's disregard of the rule laid down
in Mendoza and affirmance of the trial court's conclusion that petitioner is liable for damages based
on the finding that "[tlhe undisputed fact is that the contracts of the plaintiffs for the exhibition of the
films in Guam and California were cancelled because of the loss of the two luggages in question."
[Rollo, p. 36] The evidence reveals that the proximate cause of the cancellation of the contracts was
private respondent Pangan's failure to deliver the promotional and advertising materials on the dates
agreed upon. For this petitioner cannot be held liable. Private respondent Pangan had not declared
the value of the two luggages he had checked in and paid additional charges. Neither was petitioner
privy to respondents' contracts nor was its attention called to the condition therein requiring delivery
of the promotional and advertising materials on or before a certain date.

3. With the Court's holding that petitioner's liability is limited to the amount stated in the ticket, the
award of attorney's fees, which is grounded on the alleged unjustified refusal of petitioner to satisfy
private respondent's just and valid claim, loses support and must be set aside.

WHEREFORE, the Petition is hereby GRANTED and the Decision of the Intermediate Appellate
Court is SET ASIDE and a new judgment is rendered ordering petitioner to pay private respondents
damages in the amount of US $600.00 or its equivalent in Philippine currency at the time of actual
payment.

SO ORDERED.

Fernan, C.J., Feliciano and Bidin JJ., concur.

Gutierrez, Jr., J., took no part.

Footnotes

* Art. 1750. A contract fixing the sum that may be recovered by the owner or shipper
for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and
just under the circumstances, and has been fairly and freely agreed upon.

** The Warsaw Convention actually provides that "[i]n the transportation of checked
baggage and of goods, the liability of the carrier shall be limited to a sum of 250
francs per kilogram, unless the consignor has made, at the time when the package
was handed over to the carrier, a special declaration of the value of delivery and has
paid a supplementary sum if the case so requires. In that case, the carrier will be
liable to pay a sum not exceeding the declared sum, unless he proves that the sum is
greater than the actual value to the consignor at delivery.... The sums mentioned
above shall be deemed to refer to the French franc consisting of 65-1/2 milligrams of
gold at the standard of fineness of nine hundred thousandths. These sums may be
converted into any national currency in round figures. [51 O.G. 5084, 5091.]
Proclamation No. 201, (September 23, 1955) made public
 FIRST DIVISION

G.R. No. 140047 July 13, 2004

PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner,

vs.
V.P. EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC.; VICENTE P. EUSEBIO;
SOLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.

DECISION

DAVIDE, JR., C.J.:

This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in
Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.

In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906
and assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee
Corporation1 (hereinafter Philguarantee) sought reimbursement from the respondents of the sum of
money it paid to Al Ahli Bank of Kuwait pursuant to a guarantee it issued for respondent V.P.
Eusebio Construction, Inc. (VPECI).

The factual and procedural antecedents in this case are as follows:

On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and
Construction, Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy–Medical
Rehabilitation Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and
Contracting Company (hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of
Commerce for a total contract price of ID5,416,089/046 (or about US$18,739,668).2

On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-
Plex International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business,
entered into a joint venture agreement with Ajyal wherein the former undertook the execution of the
entire Project, while the latter would be entitled to a commission of 4% of the contract price.3 Later, or
on 8 April 1981, respondent 3-Plex, not being accredited by or registered with the Philippine
Overseas Construction Board (POCB), assigned and transferred all its rights and interests under the
joint venture agreement to VPECI, a construction and engineering firm duly registered with the
POCB.4 However, on 2 May 1981, 3-Plex and VPECI entered into an agreement that the execution of
the Project would be under their joint management.5

The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing
5% of the total contract price and (2) an advance payment bond of ID541,608/901 representing 10%
of the advance payment to be released upon signing of the contract.6 To comply with these
requirements, respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner
Philguarantee, a government financial institution empowered to issue guarantees for qualified
Filipino contractors to secure the performance of approved service contracts abroad.7

Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were

issued by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and
advance payment bonds, but they were not accepted by SOB. What SOB required was a letter-
guarantee from Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a
performance bond in favor of SOB on the condition that another foreign bank, not Philguarantee,
would issue a counter-guarantee to cover its exposure. Al Ahli Bank of Kuwait was, therefore,
engaged to provide a counter-guarantee to Rafidain Bank, but it required a similar counter-
guarantee in its favor from the petitioner. Thus, three layers of guarantees had to be arranged.9

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al
Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the
amount of ID271,808/610 and Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in
the amount of ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters
of guarantee were secured by (1) a Deed of Undertaking12 executed by respondents VPECI, Spouses
Vicente P. Eusebio and Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada
Santos; and (2) a surety bond13 issued by respondent First Integrated Bonding and Insurance
Company, Inc. (FIBICI). The Surety Bond was later amended on 23 June 1981 to increase the
amount of coverage from P6.4 million to P6.967 million and to change the bank in whose favor the
petitioner's guarantee was issued, from Rafidain Bank to Al Ahli Bank of Kuwait.14

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract15 for the
construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in
Baghdad, Iraq, wherein the joint venture contractor undertook to complete the Project within a period
of 547 days or 18 months. Under the Contract, the Joint Venture would supply manpower and
materials, and SOB would refund to the former 25% of the project cost in Iraqi Dinar and the 75% in
US dollars at the exchange rate of 1 Dinar to 3.37777 US Dollars.16

The construction, which was supposed to start on 2 June 1981, commenced only on the last week of
August 1981. Because of this delay and the slow progress of the construction work due to some
setbacks and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in
October 1982, upon foreseeing the impossibility of meeting the deadline and upon the request of Al
Ahli Bank, the joint venture contractor worked for the renewal or extension of the Performance Bond
and Advance Payment Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance
Bond) and 81-195-F (Advance Payment Bond) with expiry date of 25 November 1982 were then
renewed or extended to 9 February 1983 and 9 March 1983, respectively.17 The surety bond was also
extended for another period of one year, from 12 May 1982 to 12 May 1983.18 The Performance Bond
was further extended twelve times with validity of up to 8 December 1986,19 while the Advance
Payment Guarantee was extended three times more up to 24 May 1984 when the latter was
cancelled after full refund or reimbursement by the joint venture contractor.20 The surety bond was
likewise extended to 8 May 1987.21

As of March 1986, the status of the Project was 51% accomplished, meaning the structures were
already finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary
works, which both required importation of equipment and materials.22

On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full
payment of its performance bond counter-guarantee.

Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq
Trade and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the
performance guarantee for being a drastic action in contravention of its mutual agreement with the
latter that (1) the imposition of penalty would be held in abeyance until the completion of the project;
and (2) the time extension would be open, depending on the developments on the negotiations for a
foreign loan to finance the completion of the project.23 It also wrote SOB protesting the call for lack of
factual or legal basis, since the failure to complete the Project was due to (1) the Iraqi government's
lack of foreign exchange with which to pay its (VPECI's) accomplishments and (2) SOB's
noncompliance for the past several years with the provision in the contract that 75% of the billings
would be paid in US dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised
the petitioner not to pay yet Al Ahli Bank because efforts were being exerted for the amicable
settlement of the Project.25

On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had
already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding
reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related
expenses.26

Both petitioner Philguarantee and respondent VPECI sought the assistance of some government
agencies of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in
abeyance the payment by the petitioner "to allow the diplomatic machinery to take its course, for
otherwise, the Philippine government , through the Philguarantee and the Central Bank, would
become instruments of the Iraqi Government in consummating a clear act of injustice and inequity
committed against a Filipino contractor."27

On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
performance counter-guarantee for VPECI's project in Iraq. 28

On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli
Bank, and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner
for the advances made on its counter-guarantee.29

The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83
representing interest and penalty charges demanded by the latter bank.31

On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of
the amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees
pursuant to their joint and solidary obligations under the deed of undertaking and surety
bond.32 When the respondents failed to pay, the petitioner filed on 9 July 1991 a civil case for
collection of a sum of money against the respondents before the RTC of Makati City.
After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause
of action against the respondents. It opined that at the time the call was made on the guarantee
which was executed for a specific period, the guarantee had already lapsed or expired. There was
no valid renewal or extension of the guarantee for failure of the petitioner to secure respondents'
express consent thereto. The trial court also found that the joint venture contractor incurred no delay
in the execution of the Project. Considering the Project owner's violations of the contract which
rendered impossible the joint venture contractor's performance of its undertaking, no valid call on the
guarantee could be made. Furthermore, the trial court held that no valid notice was first made by the
Project owner SOB to the joint venture contractor before the call on the guarantee. Accordingly, it
dismissed the complaint, as well as the counterclaims and cross-claim, and ordered the petitioner to
pay attorney's fees of P100,000 to respondents VPECI and Eusebio Spouses and P100,000 to 3-
Plex and the Santos Spouses, plus costs. 33

In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as
follows:

First, appellant cannot deny the fact that it was fully aware of the status of project
implementation as well as the problems besetting the contractors, between 1982 to 1985,
having sent some of its people to Baghdad during that period. The successive
renewals/extensions of the guarantees in fact, was prompted by delays, not solely
attributable to the contractors, and such extension understandably allowed by the SOB
(project owner) which had not anyway complied with its contractual commitment to tender
75% of payment in US Dollars, and which still retained overdue amounts collectible by
VPECI.

Second, appellant was very much aware of the violations committed by the SOB of its
contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for
75% of the total contract price, as well as of the complications and injustice that will result
from its payment of the full amount of the performance guarantee, as evident in
PHILGUARANTEE's letter dated 13 May 1987 ….

Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and
there was still an amount collectible from and still being retained by the project owner, which
amount can be set-off with the sum covered by the performance guarantee.

Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of
the war situation at the time in Iraq, appellant, though earlier has made representations with
the SOB regarding a possible amicable termination of the Project as suggested by VPECI,
made a complete turn-around and insisted on acting in favor of the unjustified "call" by the
foreign banks.35

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of
Appeals erred in affirming the trial court's ruling that

I
 …RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE OF
ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE.

II

…PETITIONER CANNOT CLAIM SUBROGATION.

III

…IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS LIABLE

UNDER THEIR DEED OF UNDERTAKING.36

The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid
under Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of
undertaking and surety bond from the respondents.

The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable
the nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the
failure of the respondents to finish the construction of the Institute of Physical Therapy Buildings in
Baghdad.

By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the
principal debtor, the contract is called suretyship. 37

Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to
both. In both contracts, there is a promise to answer for the debt or default of another. However, in
this jurisdiction, they may be distinguished thus:

1. A surety is usually bound with his principal by the same instrument executed at the same
time and on the same consideration. On the other hand, the contract of guaranty is the
guarantor's own separate undertaking often supported by a consideration separate from that
supporting the contract of the principal; the original contract of his principal is not his
contract.

2. A surety assumes liability as a regular party to the undertaking; while the liability of a
guarantor is conditional depending on the failure of the primary debtor to pay the obligation.

3. The obligation of a surety is primary, while that of a guarantor is secondary.

4. A surety is an original promissor and debtor from the beginning, while a guarantor is
charged on his own undertaking.

5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is
not bound to take notice of the non-performance of his principal.

6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the
principal or by want of notice of the default of the principal, no matter how much he may be
 injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principal. 38

In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which
provides in part as follows:

In consideration of your issuing the above performance guarantee/counter-guarantee, we

hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay
you on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand
Eight Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the
performance bond required of V.P. EUSEBIO for the construction of the Physical Therapy
Institute, Phase II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest
and other incidental expenses…. (Emphasis supplied)39

Guided by the abovementioned distinctions between a surety and a guaranty, as well as the factual
milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that the
petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is
unconditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still
characterized by its subsidiary and conditional quality because it does not take effect until the
fulfillment of the condition, namely, that the principal obligor should fail in his obligation at the time
and in the form he bound himself.40 In other words, an unconditional guarantee is still subject to the
condition that the principal debtor should default in his obligation first before resort to the guarantor
could be had. A conditional guaranty, as opposed to an unconditional guaranty, is one which
depends upon some extraneous event, beyond the mere default of the principal, and generally upon
notice of the principal's default and reasonable diligence in exhausting proper remedies against the
principal.41

It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that
of an unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's
guaranty is unconditional does not make it a surety. Besides, surety is never presumed. A party
should not be considered a surety where the contract itself stipulates that he is acting only as a
guarantor. It is only when the guarantor binds himself solidarily with the principal debtor that the
contract becomes one of suretyship.42

Having determined petitioner's liability as guarantor, the next question we have to grapple with is
whether the respondent contractor has defaulted in its obligations that would justify resort to the
guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since
this Court is not a trier of facts.

It is a fundamental and settled rule that the findings of fact of the trial court and the Court of Appeals
are binding or conclusive upon this Court unless they are not supported by the evidence or unless
strong and cogent reasons dictate otherwise.43 The factual findings of the Court of Appeals are
normally not reviewable by us under Rule 45 of the Rules of Court except when they are at variance
with those of the trial court. 44 The trial court and the Court of Appeals were in unison that the
respondent contractor cannot be considered to have defaulted in its obligations because the cause
of the delay was not primarily attributable to it.
A corollary issue is what law should be applied in determining whether the respondent contractor
has defaulted in the performance of its obligations under the service contract. The question of
whether there is a breach of an agreement, which includes default or mora,45 pertains to the
essential or intrinsic validity of a contract. 46

No conflicts rule on essential validity of contracts is expressly provided for in our laws. The rule
followed by most legal systems, however, is that the intrinsic validity of a contract must be governed
by the lex contractus or "proper law of the contract." This is the law voluntarily agreed upon by the
parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci
intentionis). The law selected may be implied from such factors as substantial connection with the
transaction, or the nationality or domicile of the parties.47 Philippine courts would do well to adopt the
first and most basic rule in most legal systems, namely, to allow the parties to select the law
applicable to their contract, subject to the limitation that it is not against the law, morals, or public
policy of the forum and that the chosen law must bear a substantive relationship to the transaction. 48

It must be noted that the service contract between SOB and VPECI contains no express choice of
the law that would govern it. In the United States and Europe, the two rules that now seem to have
emerged as "kings of the hill" are (1) the parties may choose the governing law; and (2) in the
absence of such a choice, the applicable law is that of the State that "has the most significant
relationship to the transaction and the parties."49 Another authority proposed that all matters relating
to the time, place, and manner of performance and valid excuses for non-performance are
determined by the law of the place of performance or lex loci solutionis, which is useful because it is
undoubtedly always connected to the contract in a significant way.50

In this case, the laws of Iraq bear substantial connection to the transaction, since one of the parties
is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether
respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However,
since that foreign law was not properly pleaded or proved, the presumption of identity or similarity,
otherwise known as the processual presumption, comes into play. Where foreign law is not pleaded
or, even if pleaded, is not proved, the presumption is that foreign law is the same as ours.51

Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal
obligations, neither party incurs in delay if the other party does not comply or is not ready to comply
in a proper manner with what is incumbent upon him."

Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by reason of a
cause imputable to the former. 52 It is the non-fulfillment of an obligation with respect to time.53

It is undisputed that only 51.7% of the total work had been accomplished. The 48.3% unfinished
portion consisted in the purchase and installation of electro-mechanical equipment and materials,
which were available from foreign suppliers, thus requiring US Dollars for their importation. The
monthly billings and payments made by SOB54 reveal that the agreement between the parties was a
periodic payment by the Project owner to the contractor depending on the percentage of
accomplishment within the period. 55 The payments were, in turn, to be used by the contractor to
finance the subsequent phase of the work. 56 However, as explained by VPECI in its letter to the
Department of Foreign Affairs (DFA), the payment by SOB purely in Dinars adversely affected the
completion of the project; thus:

4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of
the Contractor purely in Iraqi Dinars and which payment came only after some delays.

5. SOB is fully aware of the following:

…

5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency
(US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for
the cost of project management, supervision and skilled labor not available in Iraq and
therefore have to be imported and or obtained from the Philippines and other sources
outside Iraq.

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into
the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;

5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be
used to purchase equipment, materials, supplies, etc. outside of Iraq;

5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq
and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of
Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using
Iraqui Dinars as medium of acquisition.

8. Following the approved construction program of the CONTRACT, upon completion of the
civil works portion of the installation of equipment for the building, should immediately follow,
however, the CONTRACT specified that these equipment which are to be installed and to
form part of the PROJECT have to be procured outside Iraq since these are not being locally
manufactured. Copy f the relevant portion of the Technical Specification is hereto attached
as Annex "C" and made an integral part hereof;

10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
government in completing the PROJECT, the Contractor without any obligation on its part to
do so but with the knowledge and consent of SOB and the Ministry of Housing &
Construction of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through
the facilities of Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO
CREDITO which will act as the guarantor for this foreign currency loan.

Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB
is informed of the developments of this negotiation, attached is a copy of the draft of the loan
Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and
counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito)
Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations
went on and continued until it suddenly collapsed due to the reported default by Iraq in the
payment of its obligations with Italian government, copy of the news clipping dated June 18,
1986 is hereto attached as Annex "D" to form an integral part hereof;
 15. On September 15, 1986, Contractor received information from Circle International S.A.
that because of the news report that Iraq defaulted in its obligations with European banks,
the approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of
the letter of Circle International together with the news clippings are hereto attached as
Annexes "F" and "F-1", respectively.57

As found by both the Court of Appeals and the trial court, the delay or the non-completion of the
Project was caused by factors not imputable to the respondent contractor. It was rather due mainly
to the persistent violations by SOB of the terms and conditions of the contract, particularly its failure
to pay 75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract
does not perform in a proper manner the prestation which he is bound to perform under the contract,
he is not entitled to demand the performance of the other party. A party does not incur in delay if the
other party fails to perform the obligation incumbent upon him.

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely Iraqi
Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite
contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle
Eastern and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-President Jesus M.
Tañedo stated that while VPECI had taken every possible measure to complete the Project, the war
situation in Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:

VPECI has taken every possible measure for the completion of the project but the war
situation in Iraq particularly the lack of foreign exchange is proving to be a great obstacle.
Our performance counterguarantee was called last 26 October 1986 when the negotiations
for a foreign currency loan with the Italian government through Banco de Roma bogged
down following news report that Iraq has defaulted in its obligation with major European
banks. Unless the situation in Iraq is improved as to allay the bank's apprehension, there is
no assurance that the project will ever be completed. 58

In order that the debtor may be in default it is necessary that the following requisites be present: (1)
that the obligation be demandable and already liquidated; (2) that the debtor delays performance;
and (3) that the creditor requires the performance because it must appear that the tolerance or
benevolence of the creditor must have ended. 59

As stated earlier, SOB cannot yet demand complete performance from VPECI because it has not yet
itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost of
the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming
that there was delay and that the delay was attributable to VPECI, still the effects of that delay
ceased upon the renunciation by the creditor, SOB, which could be implied when the latter granted
several extensions of time to the former. 60 Besides, no demand has yet been made by SOB against
the respondent contractor. Demand is generally necessary even if a period has been fixed in the
obligation. And default generally begins from the moment the creditor demands judicially or extra-
judicially the performance of the obligation. Without such demand, the effects of default will not
arise.61

Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot be
compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and
all legal remedies against the said debtor have been resorted to by the creditor.62 It could also set up
compensation as regards what the creditor SOB may owe the principal debtor VPECI.63 In this case,
however, the petitioner has clearly waived these rights and remedies by making the payment of an
obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal
debtor.
As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor had
collectibles from SOB which could be set off with the amount covered by the performance
guarantee. In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10
February 1987 of the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent
by the Iraqi Ministry of Foreign Affairs stating that the past due obligations of the joint venture
contractor from the petitioner would "be deducted from the dues of the two contractors."64

Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
petitioner raised as among the arguments to be presented in support of the cancellation of the
counter-guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was
more than enough to cover the counter-guarantee of ID271,808/610; thus:

6.1 Present the following arguments in cancelling the counterguarantee:

· The Iraqi Government does not have the foreign exchange to fulfill its contractual
obligations of paying 75% of progress billings in US dollars.

· It could also be argued that the amount of ID281,414/066 retained by SOB from the
proposed project is more than the amount of the outstanding counterguarantee.65

In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it
should have set up compensation as was proposed in its project situationer.

Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its
13 May 1987 letter to the OMEAA, DFA, Manila, it stated:

VPECI also maintains that the delay in the completion of the project was mainly due to
SOB's violation of contract terms and as such, call on the guarantee has no basis.

While PHILGUARANTEE is prepared to honor its commitment under the guarantee,

PHILGUARANTEE does not want to be an instrument in any case of inequity committed
against a Filipino contractor. It is for this reason that we are constrained to seek your
assistance not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid
Rafidain Bank but possibly averting such an event. As any payment effected by the banks
will complicate matters, we cannot help underscore the urgency of VPECI's bid for
government intervention for the amicable termination of the contract and release of the
performance guarantee. 66

But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded
by the Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount
of the performance bond counter-guarantee but also interests and penalty charges.

This brings us to the next question: May the petitioner as a guarantor secure reimbursement from
the respondents for what it has paid under Letter of Guarantee No. 81-194-F?

As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be
legally subrogated to the rights which the creditor has against the debtor.68 However, a person who
makes payment without the knowledge or against the will of the debtor has the right to recover only
insofar as the payment has been beneficial to the debtor.69 If the obligation was subject to defenses
on the part of the debtor, the same defenses which could have been set up against the creditor can
be set up against the paying guarantor.70

From the findings of the Court of Appeals and the trial court, it is clear that the payment made by the
petitioner guarantor did not in any way benefit the principal debtor, given the project status and the
conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found
to have valid defenses against SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of
undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from
enforcing the same by reason of the petitioner's undue payment on the guaranty. Rights under the
deed of undertaking and the surety bond do not arise because these contracts depend on the
validity of the enforcement of the guaranty.

The petitioner guarantor should have waited for the natural course of guaranty: the debtor VPECI
should have, in the first place, defaulted in its obligation and that the creditor SOB should have first
made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in
whole or in part, that the guarantor should pay.71 When the petitioner guarantor in this case paid
against the will of the debtor VPECI, the debtor VPECI may set up against it defenses available
against the creditor SOB at the time of payment. This is the hard lesson that the petitioner must
learn.

As the government arm in pursuing its objective of providing "the necessary support and assistance
in order to enable … [Filipino exporters and contractors to operate viably under the prevailing
economic and business conditions,"72 the petitioner should have exercised prudence and caution
under the circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to
allow the petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned
against paying the Al Ahli Bank and constantly apprised it of the developments in the Project
implementation.

WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the
decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Panganiban, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Footnotes

1
Now known as the Trade Investment Development Corporation of the Philippines.

2
Exhibit "V" and "2-3," Original Record, vol. III (hereinafter OR III), 395.

3
Exh. 12-E," OR III, 433.

4
Exh. 12-E," OR III, 433.
5
Exh. "9-A," OR III, 416.

6
Exh. "12-G," OR III, 435.

7
Exh. "V," OR III, 395.

8
Exh. "13-V," OR III, 447.

9
CA Decision, 3.

10
Exh. "A," OR III, 49.

11
Exh. "B," OR III, 64.

12
Exh. "11," OR III, 421.

13
Exh. "12," OR III, 81.

14
Exh. "E-1," OR III, 83.

15
Exh. "1," OR III, 276.

16
Exh. "1-J," OR III, 282.

17
Exh. "A-1," OR III, 51.

18
Exh. "E-2," OR III, 84.

19
Exhs. "A-2" to "A-13," OR III, 51-63.

20
Exhs. "B-2" to "B-4," OR III, 67-69.

21
Exhs. "E" to "E-12," OR III, 84.

22
TSN, 10 April 1992, 41-44.

23
Exh. "22," OR III, 344-345.

24
Exh."40," OR III, 366.

25
Exh. "16," OR III, 220.

26
Exh. "G-12-a," OR III, 207.

27
Exh. 7-A," OR III, 306.

28
Exh. "G-12-g," OR III, 213.

29
Exh. "I," OR III, 230.
30
Exh."G-12-h," OR III, 214.

31
Exhs. "G-13-d" to "G-13-f," OR III, 220-222; Exh."G-12-h," OR III, 214.

32
Exhs. "Q" to "T," OR III, 254-263.

33
Per Judge Zosimo Z. Angeles. Rollo, 72-79.

Per Associate Justice Martin S. Villarama, Jr. with Associate Justices Angelina Sandoval-
34

Gutierrez (now Supreme Court Associate Justice) and Romeo A. Brawner concurring. Rollo,
48-71.

35
Rollo, 61-68.

36
Id., 293-294.

37
Article 2047, Civil Code.

E. Zobel Inc. v. CA, G.R. No. 113931, 6 May 1998, 290 SCRA 1; VI Ambrosio Padilla, Civil
38

Law 497-498 (5th ed. 1969)(hereinafter Padilla) .

39
Exh. "A," OR III, 49-50.

40
VI Padilla 494.

41
Black's Law Dictionary 635 (5th ed. 1979).

42
Art. 2047, Civil Code.

43
Alba v. Court of Appeals, G.R. No. 120066, 9 September 1999, 314 SCRA 36.

Development Bank of the Philippines v. Court of Appeals, G.R. No. 119712, 29 January
44

1999, 302 SCRA 362.

Disederio P. Jurado, Comments and Jurisprudence on Obligations and Contracts 49

45

(7th Revised ed. 1980) (hereinafter Jurado ).

46
Jovito R. Salonga, Private International Law 350 (1995 ed.) (hereinafter Salonga).

47
Edgardo L. PAras, Philippine Conflict of Laws 414 (6th ed. 1984).

48
Salonga, 356.

49
Id., 355.

50
Jorge R. Coquia & Elizabeth A. Pangalangan, Conflict of Laws 418 (1995 ed.).

Lim v. Collector of Customs, 36 Phil. 472 (1917); International Harvester Co. v. Hamburg-
51

American Line, 42 Phil. 845; Miciano v. Brimo, 50 Phil. 867 (1924).

 IV Arturo M. Tolentino, Commentaries and Jurisprudence on the Civil Code of the
52

Philippines 101 (hereinafter Tolentino).

53
Jurado, 50.

54
Exhs. "16" to "16-O,"OR III, 454-469.

55
See Court of Appeals' Decision, 19, Rollo, 66; RTC's Decision, 22, Rollo, 93.

56
RTC's Decision, 22; Rollo, 93.

57
Exhs. "4-A" to "4-D," OR III, 296-298.

58
Exh. "25," OR III, 352.

59
IV Tolentino 110.

60
Id.,102.

61
Id.,110.

62
Art. 2058, Civil Code.

63
Art.1280, Civil Code.

64
Exh. "23," OR III, 348-349.

65
Exh. "25-E," OR III, 355.

66
Exh. "5," OR III, 303-304.

67
Art. 2066, Civil Code.

68
Arts. 1302(3) and 2067, Civil Code.

69
Art. 1236, second par., Civil Code.

70
VI Padilla, 545.

71
V Tolentino, 521.

72
4th Whereas Clause of Executive Order No. 185, which took effect on 5 June 1987
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. 101538 June 23, 1992

AUGUSTO BENEDICTO SANTOS III, represented by his father and legal guardian, Augusto
Benedicto Santos, petitioner,
vs.
NORTHWEST ORIENT AIRLINES and COURT OF APPEALS, respondents.

CRUZ, J.:

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

Art. 28. (1) An action for damage must be brought at the option of the plaintiff, in the
territory of one of the High Contracting Parties, either before the court of the domicile
of the carrier or of his principal place of business, or where he has a place of
business through which the contract has been made, or before the court at the place
of destination.

The petitioner is a minor and a resident of the Philippines. Private respondent Northwest Orient
Airlines (NOA) is a foreign corporation with principal office in Minnesota, U.S.A. and licensed to do
business and maintain a branch office in the Philippines.

On October 21, 1986, the petitioner purchased from NOA a round-trip ticket in San Francisco.
U.S.A., for his flight from San Francisco to Manila via Tokyo and back. The scheduled departure
date from Tokyo was December 20, 1986. No date was specified for his return to San Francisco. 1

On December 19, 1986, the petitioner checked in at the NOA counter in the San Francisco airport
for his scheduled departure to Manila. Despite a previous confirmation and re-confirmation, he was
informed that he had no reservation for his flight from Tokyo to Manila. He therefore had to be wait-
listed.

On March 12, 1987, the petitioner sued NOA for damages in the Regional Trial Court of Makati. On
April 13, 1987, NOA moved to dismiss the complaint on the ground of lack of jurisdiction. Citing the
above-quoted article, it contended that the complaint could be instituted only in the territory of one of
the High Contracting Parties, before:

1. the court of the domicile of the carrier;

2. the court of its principal place of business;

 3. the court where it has a place of business through which the contract had been
made;

4. the court of the place of destination.

The private respondent contended that the Philippines was not its domicile nor was this its principal
place of business. Neither was the petitioner's ticket issued in this country nor was his destination
Manila but San Francisco in the United States.

On February 1, 1988, the lower court granted the motion and dismissed the case. 2 The petitioner
appealed to the Court of Appeals, which affirmed the decision of the lower court. 3 On June 26,
1991, the petitioner filed a motion for reconsideration, but the same was denied. 4 The petitioner
then came to this Court, raising substantially the same issues it submitted in the Court of Appeals.

The assignment of errors may be grouped into two major issues, viz:

(1) the constitutionality of Article 28(1) of the Warsaw Convention; and

(2) the jurisdiction of Philippine courts over the case.

The petitioner also invokes Article 24 of the Civil Code on the protection of minors.

THE ISSUE OF CONSTITUTIONALITY

A. The petitioner claims that the lower court erred in not ruling that Article 28(1) of the
Warsaw Convention violates the constitutional guarantees of due process and equal
protection.

The Republic of the Philippines is a party to the Convention for the Unification of Certain Rules
Relating to International Transportation by Air, otherwise known as the Warsaw Convention. It took
effect on February 13, 1933. The Convention was concurred in by the Senate, through its Resolution
No. 19, on May 16, 1950. The Philippine instrument of accession was signed by President Elpidio
Quirino on October 13, 1950, and was deposited with the Polish government on November 9, 1950.
The Convention became applicable to the Philippines on February 9, 1951. On September 23, 1955,
President Ramon Magsaysay issued Proclamation No. 201, declaring our formal adherence thereto.
"to the end that the same and every article and clause thereof may be observed and fulfilled in good
faith by the Republic of the Philippines and the citizens thereof." 5

The Convention is thus a treaty commitment voluntarily assumed by the Philippine government and,
as such, has the force and effect of law in this country.

The petitioner contends that Article 28(1) cannot be applied in the present case because it is
unconstitutional. He argues that there is no substantial distinction between a person who purchases
a ticket in Manila and a person who purchases his ticket in San Francisco. The classification of the
places in which actions for damages may be brought is arbitrary and irrational and thus violates the
due process and equal protection clauses.

It is well-settled that courts will assume jurisdiction over a constitutional question only if it is shown
that the essential requisites of a judicial inquiry into such a question are first satisfied. Thus, there
must be an actual case or controversy involving a conflict of legal rights susceptible of judicial
determination; the constitutional question must have been opportunely raised by the proper party;
and the resolution of the question is unavoidably necessary to the decision of the case itself. 6

Courts generally avoid having to decide a constitutional question. This attitude is based on the
doctrine of separation of powers, which enjoins upon the departments of the government a
becoming respect for each other's acts.

The treaty which is the subject matter of this petition was a joint legislative-executive act. The
presumption is that it was first carefully studied and determined to be constitutional before it was
adopted and given the force of law in this country.

The petitioner's allegations are not convincing enough to overcome this presumption. Apparently, the
Convention considered the four places designated in Article 28 the most convenient forums for the
litigation of any claim that may arise between the airline and its passenger, as distinguished from all
other places. At any rate, we agree with the respondent court that this case can be decided on other
grounds without the necessity of resolving the constitutional issue.

B. The petitioner claims that the lower court erred in not ruling that Art. 28(1) of the
Warsaw Convention is inapplicable because of a fundamental change in the
circumstances that served as its basis.

The petitioner goes at great lengths to show that the provisions in the Convention were intended to
protect airline companies under "the conditions prevailing then and which have long ceased to exist."
He argues that in view of the significant developments in the airline industry through the years, the
treaty has become irrelevant. Hence, to the extent that it has lost its basis for approval, it has
become unconstitutional.

The petitioner is invoking the doctrine of rebus sic stantibus. According to Jessup, "this doctrine
constitutes an attempt to formulate a legal principle which would justify non-performance of a treaty
obligation if the conditions with relation to which the parties contracted have changed so materially
and so unexpectedly as to create a situation in which the exaction of performance would be
unreasonable." 7 The key element of this doctrine is the vital change in the condition of the
contracting parties that they could not have foreseen at the time the treaty was concluded.

The Court notes in this connection the following observation made in Day v. Trans World Airlines,
Inc.: 8

The Warsaw drafters wished to create a system of liability rules that would cover all
the hazards of air travel . . . The Warsaw delegates knew that, in the years to come,
civil aviation would change in ways that they could not foresee. They wished to
design a system of air law that would be both durable and flexible enough to keep
pace with these changes . . . The ever-changing needs of the system of civil aviation
can be served within the framework they created.

It is true that at the time the Warsaw Convention was drafted, the airline industry was still in its
infancy. However, that circumstance alone is not sufficient justification for the rejection of the treaty
at this time. The changes recited by the petitioner were, realistically, not entirely unforeseen
although they were expected in a general sense only. In fact, the Convention itself, anticipating such
developments, contains the following significant provision:
 Article 41. Any High Contracting Party shall be entitled not earlier than two years
after the coming into force of this convention to call for the assembling of a new
international conference in order to consider any improvements which may be made
in this convention. To this end, it will communicate with the Government of the
French Republic which will take the necessary measures to make preparations for
such conference.

But the more important consideration is that the treaty has not been rejected by the Philippine
government. The doctrine of rebus sic stantibus does not operate automatically to render the treaty
inoperative. There is a necessity for a formal act of rejection, usually made by the head of State, with
a statement of the reasons why compliance with the treaty is no longer required.

In lieu thereof, the treaty may be denounced even without an expressed justification for this action.
Such denunciation is authorized under its Article 39, viz:

Article 39. (1) Any one of the High Contracting Parties may denounce this convention
by a notification addressed to the Government of the Republic of Poland, which shall
at once inform the Government of each of the High Contracting Parties.

(2) Denunciation shall take effect six months after the notification of denunciation,
and shall operate only as regards the party which shall have proceeded to
denunciation.

Obviously. rejection of the treaty, whether on the ground of rebus sic stantibus or pursuant to Article
39, is not a function of the courts but of the other branches of government. This is a political act. The
conclusion and renunciation of treaties is the prerogative of the political departments and may not be
usurped by the judiciary. The courts are concerned only with the interpretation and application of
laws and treaties in force and not with their wisdom or efficacy.

C. The petitioner claims that the lower court erred in ruling that the plaintiff must sue
in the United States, because this would deny him the right to access to our courts.

The petitioner alleges that the expenses and difficulties he will incur in filing a suit in the United
States would constitute a constructive denial of his right to access to our courts for the protection of
his rights. He would consequently be deprived of this vital guaranty as embodied in the Bill of Rights.

Obviously, the constitutional guaranty of access to courts refers only to courts with appropriate
jurisdiction as defined by law. It does not mean that a person can go to any court for redress of his
grievances regardless of the nature or value of his claim. If the petitioner is barred from filing his
complaint before our courts, it is because they are not vested with the appropriate jurisdiction under
the Warsaw Convention, which is part of the law of our land.

II

THE ISSUE OF JURISDICTION.

A. The petitioner claims that the lower court erred in not ruling that Article 28(1) of the
Warsaw Convention is a rule merely of venue and was waived by defendant when it
did not move to dismiss on the ground of improper venue.
By its own terms, the Convention applies to all international transportation of persons performed by
aircraft for hire.

International transportation is defined in paragraph (2) of Article 1 as follows:

(2) For the purposes of this convention, the expression "international transportation"
shall mean any transportation in which, according to the contract made by the
parties, the place of departure and the place of destination, whether or not there be a
break in the transportation or a transshipment, are situated [either] within the
territories of two High Contracting Parties . . .

Whether the transportation is "international" is determined by the contract of the parties, which in the
case of passengers is the ticket. When the contract of carriage provides for the transportation of the
passenger between certain designated terminals "within the territories of two High Contracting
Parties," the provisions of the Convention automatically apply and exclusively govern the rights and
liabilities of the airline and its passenger.

Since the flight involved in the case at bar is international, the same being from the United States to
the Philippines and back to the United States, it is subject to the provisions of the Warsaw
Convention, including Article 28(1), which enumerates the four places where an action for damages
may be brought.

Whether Article 28(1) refers to jurisdiction or only to venue is a question over which authorities are
sharply divided. While the petitioner cites several cases holding that Article 28(1) refers to venue
rather than jurisdiction, 9 there are later cases cited by the private respondent supporting the
conclusion that the provision is jurisdictional. 10

Venue and jurisdiction are entirely distinct matters. Jurisdiction may not be conferred by consent or
waiver upon d court which otherwise would have no jurisdiction over the subject-matter of an action;
but the venue of an action as fixed by statute may be changed by the consent of the parties and an
objection that the plaintiff brought his suit in the wrong county may be waived by the failure of the
defendant to make a timely objection. In either case, the court may render a valid judgment. Rules
as to jurisdiction can never be left to the consent or agreement of the parties, whether or not a
prohibition exists against their alteration. 11

A number of reasons tends to support the characterization of Article 28(1) as a jurisdiction and not a
venue provision. First, the wording of Article 32, which indicates the places where the action for
damages "must" be brought, underscores the mandatory nature of Article 28(1). Second, this
characterization is consistent with one of the objectives of the Convention, which is to "regulate in a
uniform manner the conditions of international transportation by air." Third, the Convention does not
contain any provision prescribing rules of jurisdiction other than Article 28(1), which means that the
phrase "rules as to jurisdiction" used in Article 32 must refer only to Article 28(1). In fact, the last
sentence of Article 32 specifically deals with the exclusive enumeration in Article 28(1) as
"jurisdictions," which, as such, cannot be left to the will of the parties regardless of the time when the
damage occurred.

This issue was analyzed in the leading case of Smith v. Canadian Pacific Airways, Ltd., 12 where it
was held:

. . . Of more, but still incomplete, assistance is the wording of Article 28(2), especially
when considered in the light of Article 32. Article 28(2) provides that "questions
of procedure shall be governed by the law of the court to which the case is
 submitted" (Emphasis supplied). Section (2) thus may be read to leave for domestic
decision questions regarding the suitability and location of a particular Warsaw
Convention case.

In other words, where the matter is governed by the Warsaw Convention, jurisdiction takes on a dual
concept. Jurisdiction in the international sense must be established in accordance with Article 28(1)
of the Warsaw Convention, following which the jurisdiction of a particular court must be established
pursuant to the applicable domestic law. Only after the question of which court has jurisdiction is
determined will the issue of venue be taken up. This second question shall be governed by the law
of the court to which the case is submitted.

The petitioner submits that since Article 32 states that the parties are precluded "before the
damages occurred" from amending the rules of Article 28(1) as to the place where the action may be
brought, it would follow that the Warsaw Convention was not intended to preclude them from doing
so "after the damages occurred."

Article 32 provides:

Art. 32. Any clause contained in the contract and all special agreements entered into
before the damage occurred by which the parties purport to infringe the rules laid
down by this convention, whether by deciding the law to be applied, or by altering the
rules as to jurisdiction, shall be null and void. Nevertheless for the transportation of
goods, arbitration clauses shall be allowed, subject to this convention, if the
arbitration is to take place within one of the jurisdictions referred to in the first
paragraph of Article 28.

His point is that since the requirements of Article 28(1) can be waived "after the damages (shall
have) occurred," the article should be regarded as possessing the character of a "venue" and not of
a "jurisdiction" provision. Hence, in moving to dismiss on the ground of lack of jurisdiction, the private
respondent has waived improper venue as a ground to dismiss.

The foregoing examination of Article 28(1) in relation to Article 32 does not support this conclusion.
In any event, we agree that even granting arguendo that Article 28(1) is a venue and not a
jurisdictional provision, dismissal of the case was still in order. The respondent court was correct in
affirming the ruling of the trial court on this matter, thus:

Santos' claim that NOA waived venue as a ground of its motion to dismiss is not
correct. True it is that NOA averred in its MOTION TO DISMISS that the ground
thereof is "the Court has no subject matter jurisdiction to entertain the Complaint"
which SANTOS considers as equivalent to "lack of jurisdiction over the subject
matter . . ." However, the gist of NOA's argument in its motion is that the Philippines
is not the proper place where SANTOS could file the action — meaning that the
venue of the action is improperly laid. Even assuming then that the specified ground
of the motion is erroneous, the fact is the proper ground of the motion — improper
venue — has been discussed therein.

Waiver cannot be lightly inferred. In case of doubt, it must be resolved in favor of non-waiver if there
are special circumstances justifying this conclusion, as in the petition at bar. As we observed
in Javier vs. Intermediate Court of Appeals: 13

Legally, of course, the lack of proper venue was deemed waived by the petitioners
when they failed to invoke it in their original motion to dismiss. Even so, the
 motivation of the private respondent should have been taken into account by both the
trial judge and the respondent court in arriving at their decisions.

The petitioner also invokes KLM Royal Dutch Airlines v. RTC, 14 a decision of our Court of Appeals,
where it was held that Article 28(1) is a venue provision. However, the private respondent avers that
this was in effect reversed by the case of Aranas v. United Airlines, 15 where the same court held
that Article 28(1) is a jurisdictional provision. Neither of these cases is binding on this Court, of
course, nor was either of them appealed to us. Nevertheless, we here express our own preference
for the later case of Aranas insofar as its pronouncements on jurisdiction conform to the judgment
we now make in this petition.

B. The petitioner claims that the lower court erred in not ruling that under Article
28(1) of the Warsaw Convention, this case was properly filed in the Philippines,
because Manila was the destination of the plaintiff.

The Petitioner contends that the facts of this case are analogous to those in Aanestad v. Air
Canada. 16 In that case, Mrs. Silverberg purchased a round-trip ticket from Montreal to Los Angeles
and back to Montreal. The date and time of departure were specified but not of the return flight. The
plane crashed while on route from Montreal to Los Angeles, killing Mrs. Silverberg. Her
administratrix filed an action for damages against Air Canada in the U.S. District Court of California.
The defendant moved to dismiss for lack of jurisdiction but the motion was denied thus:

. . . It is evident that the contract entered into between Air Canada and Mrs.
Silverberg as evidenced by the ticket booklets and the Flight Coupon No. 1, was a
contract for Air Canada to carry Mrs. Silverberg to Los Angeles on a certain flight, a
certain time and a certain class, but that the time for her to return remained
completely in her power. Coupon No. 2 was only a continuing offer by Air Canada to
give her a ticket to return to Montreal between certain dates. . . .

The only conclusion that can be reached then, is that "the place of destination" as
used in the Warsaw Convention is considered by both the Canadian C.T.C. and the
United States C.A.B. to describe at least two "places of destination," viz., the "place
of destination" of a particular flight either an "outward destination" from the "point of
origin" or from the "outward point of destination" to any place in Canada.

Thus the place of destination under Art. 28 and Art. 1 of the Warsaw Convention of
the flight on which Mrs. Silverberg was killed, was Los Angeles according to the
ticket, which was the contract between the parties and the suit is properly filed in this
Court which has jurisdiction.

The Petitioner avers that the present case falls squarely under the above ruling because the date
and time of his return flight to San Francisco were, as in the Aanestad case, also left open.
Consequently, Manila and not San Francisco should be considered the petitioner's destination.

The private respondent for its part invokes the ruling in Butz v. British Airways, 17 where the United
States District Court (Eastern District of Pennsylvania) said:

. . . Although the authorities which addressed this precise issue are not extensive,
both the cases and the commentators are almost unanimous in concluding that the
"place of destination" referred to in the Warsaw Convention "in a trip consisting of
several parts . . . is the ultimate destination that is accorded treaty jurisdiction." . . .
 But apart from that distinguishing feature, I cannot agree with the Court's analysis
in Aanestad; whether the return portion of the ticket is characterized as an option or a
contract, the carrier was legally bound to transport the passenger back to the place
of origin within the prescribed time and. the passenger for her part agreed to pay the
fare and, in fact, did pay the fare. Thus there was mutuality of obligation and a
binding contract of carriage, The fact that the passenger could forego her rights
under the contract does not make it any less a binding contract. Certainly, if the
parties did not contemplate the return leg of the journey, the passenger would not
have paid for it and the carrier would not have issued a round trip ticket.

We agree with the latter case. The place of destination, within the meaning of the Warsaw
Convention, is determined by the terms of the contract of carriage or, specifically in this case, the
ticket between the passenger and the carrier. Examination of the petitioner's ticket shows that his
ultimate destination is San Francisco. Although the date of the return flight was left open, the
contract of carriage between the parties indicates that NOA was bound to transport the petitioner to
San Francisco from Manila. Manila should therefore be considered merely an agreed stopping place
and not the destination.

The petitioner submits that the Butz case could not have overruled the Aanestad case because
these decisions are from different jurisdictions. But that is neither here nor there. In fact, neither of
these cases is controlling on this Court. If we have preferred the Butz case, it is because, exercising
our own freedom of choice, we have decided that it represents the better, and correct, interpretation
of Article 28(1).

Article 1(2) also draws a distinction between a "destination" and an "agreed stopping place." It is the
"destination" and not an "agreed stopping place" that controls for purposes of ascertaining
jurisdiction under the Convention.

The contract is a single undivided operation, beginning with the place of departure and ending with
the ultimate destination. The use of the singular in this expression indicates the understanding of the
parties to the Convention that every contract of carriage has one place of departure and one place of
destination. An intermediate place where the carriage may be broken is not regarded as a "place of
destination."

C. The petitioner claims that the lower court erred in not ruling that under Art. 28(1) of
the Warsaw Convention, this case was properly filed in the Philippines because the
defendant has its domicile in the Philippines.

The petitioner argues that the Warsaw Convention was originally written in French and that in
interpreting its provisions, American courts have taken the broad view that the French legal meaning
must govern. 18 In French, he says, the "domicile" of the carrier means every place where it has a
branch office.

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

The plaintiffs' first contention is that Air France is domiciled in the United States.
They say that the domicile of a corporation includes any country where the airline
carries on its business on "a regular and substantial basis," and that the United
States qualifies under such definition. The meaning of domicile cannot, however, be
so extended. The domicile of a corporation is customarily regarded as the place
where it is incorporated, and the courts have given the meaning to the term as it is
 used in article 28(1) of the Convention. (See Smith v. Canadian Pacific Airways, Ltd.
(2d Cir. 1971), 452 F2d 798, 802; Nudo v. Societe Anonyme Belge d' Exploitation de
la Navigation Aerienne Sabena Belgian World Airlines (E.D. pa. 1962). 207 F. Supp,
191; Karfunkel v. Compagnie Nationale Air France (S.D.N.Y. 1977), 427 F. Suppl.
971, 974). Moreover, the structure of article 28(1), viewed as a whole, is also
incompatible with the plaintiffs' claim. The article, in stating that places of business
are among the bases of the jurisdiction, sets out two places where an action for
damages may be brought; the country where the carrier's principal place of business
is located, and the country in which it has a place of business through which the
particular contract in question was made, that is, where the ticket was bought,
Adopting the plaintiffs' theory would at a minimum blur these carefully drawn
distinctions by creating a third intermediate category. It would obviously introduce
uncertainty into litigation under the article because of the necessity of having to
determine, and without standards or criteria, whether the amount of business done
by a carrier in a particular country was "regular" and "substantial." The plaintiff's
request to adopt this basis of jurisdiction is in effect a request to create a new
jurisdictional standard for the Convention.

Furthermore, it was argued in another case 20 that:

. . . In arriving at an interpretation of a treaty whose sole official language is French,

are we bound to apply French law? . . . We think this question and the underlying
choice of law issue warrant some discussion
. . . We do not think this statement can be regarded as a conclusion that internal
French law is to be "applied" in the choice of law sense, to determine the meaning
and scope of the Convention's terms. Of course, French legal usage must be
considered in arriving at an accurate English translation of the French. But when an
accurate English translation is made and agreed upon, as here, the inquiry into
meaning does not then revert to a quest for a past or present French law to be
"applied" for revelation of the proper scope of the terms. It does not follow from the
fact that the treaty is written in French that in interpreting it, we are forever chained to
French law, either as it existed when the treaty was written or in its present state of
development. There is no suggestion in the treaty that French law was intended to
govern the meaning of Warsaw's terms, nor have we found any indication to this
effect in its legislative history or from our study of its application and interpretation by
other courts. Indeed, analysis of the cases indicates that the courts, in interpreting
and applying the Warsaw Convention, have, not considered themselves bound to
apply French law simply because the Convention is written in French. . . .

We agree with these rulings.

Notably, the domicile of the carrier is only one of the places where the complaint is allowed to be
filed under Article 28(1). By specifying the three other places, to wit, the principal place of business
of the carrier, its place of business where the contract was made, and the place of destination, the
article clearly meant that these three other places were not comprehended in the term "domicile."

D. The petitioner claims that the lower court erred in not ruling that Art. 28(1) of the
Warsaw Convention does not apply to actions based on tort.

The petitioner alleges that the gravamen of the complaint is that private respondent acted arbitrarily
and in bad faith, discriminated against the petitioner, and committed a willful misconduct because it
canceled his confirmed reservation and gave his reserved seat to someone who had no better right
to it. In short. the private respondent committed a tort.

Such allegation, he submits, removes the present case from the coverage of the Warsaw
Convention. He argues that in at least two American cases, 21 it was held that Article 28(1) of the
Warsaw Convention does not apply if the action is based on tort.

This position is negated by Husserl v. Swiss Air Transport Company, 22 where the article in question
was interpreted thus:

. . . Assuming for the present that plaintiff's claim is "covered" by Article 17, Article 24
clearly excludes any relief not provided for in the Convention as modified by the
Montreal Agreement. It does not, however, limit the kind of cause of action on which
the relief may be founded; rather it provides that any action based on the injuries
specified in Article 17 "however founded," i.e., regardless of the type of action on
which relief is founded, can only be brought subject to the conditions and limitations
established by the Warsaw System. Presumably, the reason for the use of the
phrase "however founded," in two-fold: to accommodate all of the multifarious bases
on which a claim might be founded in different countries, whether under code law or
common law, whether under contract or tort, etc.; and to include all bases on which a
claim seeking relief for an injury might be founded in any one country. In other words,
if the injury occurs as described in Article 17, any relief available is subject to the
conditions and limitations established by the Warsaw System, regardless of the
particular cause of action which forms the basis on which a plaintiff could seek
relief . . .

The private respondent correctly contends that the allegation of willful misconduct resulting in a tort
is insufficient to exclude the case from the comprehension of the Warsaw Convention. The petitioner
has apparently misconstrued the import of Article 25(l) of the Convention, which reads as follows:

Art. 25 (1). The carrier shall not be entitled to avail himself of the provisions of this
Convention which exclude or limit his liability. if the damage is caused by his willful
misconduct or by such default on his part as, in accordance with the law of the court
to which the case is submitted, is considered to be equivalent to willful misconduct.

It is understood under this article that the court called upon to determine the applicability of the
limitation provision must first be vested with the appropriate jurisdiction. Article 28(1) is the provision
in the Convention which defines that jurisdiction. Article 22 23 merely fixes the monetary ceiling for
the liability of the carrier in cases covered by the Convention. If the carrier is indeed guilty of willful
misconduct, it can avail itself of the limitations set forth in this article. But this can be done only if the
action has first been commenced properly under the rules on jurisdiction set forth in Article 28(1).

III

THE ISSUE OF PROTECTION TO MINORS

The petitioner calls our attention to Article 24 of the Civil Code, which states:

Art. 24. In all contractual property or other relations, when one of the parties is at a
disadvantage on account of his moral dependence, ignorance, indigence, mental
weakness, tender age or other handicap, the courts must be vigilant for his
protection.
Application of this article to the present case is misplaced. The above provision assumes that the
court is vested with jurisdiction to rule in favor of the disadvantaged minor, As already explained,
such jurisdiction is absent in the case at bar.

CONCLUSION

A number of countries have signified their concern over the problem of citizens being denied access
to their own courts because of the restrictive provision of Article 28(1) of the Warsaw Convention.
Among these is the United States, which has proposed an amendment that would enable the
passenger to sue in his own domicile if the carrier does business in that jurisdiction. The reason for
this proposal is explained thus:

In the event a US citizen temporarily residing abroad purchases a Rome to New York
to Rome ticket on a foreign air carrier which is generally subject to the jurisdiction of
the US, Article 28 would prevent that person from suing the carrier in the US in a
"Warsaw Case" even though such a suit could be brought in the absence of the
Convention.

The proposal was incorporated in the Guatemala Protocol amending the Warsaw Convention, which
was adopted at Guatemala City on March 8,
1971. 24 But it is still ineffective because it has not yet been ratified by the required minimum
number of contracting parties. Pending such ratification, the petitioner will still have to file his
complaint only in any of the four places designated by Article 28(1) of the Warsaw Convention.

The proposed amendment bolsters the ruling of this Court that a citizen does not necessarily have
the right to sue in his own courts simply because the defendant airline has a place of business in his
country.

The Court can only sympathize with the petitioner, who must prosecute his claims in the United
States rather than in his own country at least inconvenience. But we are unable to grant him the
relief he seeks because we are limited by the provisions of the Warsaw Convention which continues
to bind us. It may not be amiss to observe at this point that the mere fact that he will have to litigate
in the American courts does not necessarily mean he will litigate in vain. The judicial system of that
country in known for its sense of fairness and, generally, its strict adherence to the rule of law.

WHEREFORE, the petition is DENIED, with costs against the petitioner. It is so ordered.

Narvasa, C.J., Gutierrez, Jr., Paras, Feliciano, Padilla, Bidin, Griño-Aquino, Medialdea, Regalado,
Davide, Jr., Romero, Nocon and Bellosillo, JJ., concur.

Footnotes

1 Annex "A," Orig. Records, pp. 4-5.

2 Ibid., pp. 205-207; penned by Judge Pedro N. Laggui.

3 Rollo, p. 60; penned by Buena, J., with Gonzaga-Reyes and Abad Santos, Jr., JJ.,
concurring.
4 Ibid., p. 79.

5 51 O.G. 4933-4934.

6 Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian

Reform, 175 SCRA 343; Dumlao v. Comelec, 95 SCRA 392.

7 A Modern Law of Nations (1950), p. 150.

8 528 F. 2d 31.

9 Berner v. United Airlines, Inc., 149 NYS 2d, 335, 343, 1956; Doering v.
Scandinavian Airlines System, 329 F Supp 1081, 1082, 1971; Spencer v. Northwest
Orient Airlines, 201 F. Supp. 504, 506, 1962.

10 Smith v. Canadian Pacific Airways Ltd., 452 F. 2d 798 1971; Campagnie

Nationale Air France v. Giliberto, 1838 N.E., 2d 977, 1978; MacCarthy v. East African
Airways Corp., 13 Av 17, 385, Records, p. 113, 1974; Sabharwal v. Kuwait Airways
Corp., 18 Av 8, 380; Records, p. 115, 1984: Duff v. Varig Airlines, Inc., S.A., 22
Avi, Rollo, p. 186, 1989.

11 Francisco, Rules of Court, Vol. I, 1973, p. 331.

12 452 F. 2d 798.

13 171 SCRA 605.

14 CA G.R.-SP No. 09259, January 22, 1987.

15 CA G.R.-CV No. 19974, April 8, 1991.

16 390 F. Supp. 1165, 1975.

17 421 F. Suppl. 127.

18 Block v. Compagnie, 386 F. 2d 232.

19 838 N.E. 2d 977, 1978.

20 Rosman v. TWA, 1974; 34 NY 2d 385; 358 NYS 2d 97; 314 N.E. 2d 848; 72
A.L.R. 3d 1282.

21 Eck v. United Arab, S.A.A., 241 F. Supp. 804-807; Spencer v. Northwest Orient
Airlines, 201 F. Supp. 504-507.

22 Rollo, pp. 189-199; 388 F. Supp. 1238.

23 Article 22. (1) In the transportation of passengers, the liability of the carrier for
each passenger shall be limited to the sum of 125,000 francs. Where in accordance
with the law of the court to which the case is submitted, damages may be awarded in
the form of periodical payments, the equivalent capital value of the said payments
shall not exceed 125,000 francs. Nevertheless, by special contract, the carrier and
the passenger may agree to a higher limit of liability.

(2) In the transportation of checked baggage and of goods, the liability of the carrier
shall be limited to a sum of 250 francs per kilogram, unless the consignor has made,
at the time when the package was handed over to the carrier, a special declaration of
the value of delivery and has paid a supplementary sum if the case so requires. In
that case the carrier will be liable to pay a sum not exceeding the declared sum,
unless he proves that the sum is greater than the actual value to the consignor at
delivery.

(3) As regards objects of which the passenger takes charge himself, the liability of
the carrier shall be limited to 5,000 francs per passenger.

(4) The sums mentioned above shall be deemed to refer to the French franc
consisting of 65-1/2 milligrams of gold at the standard of fineness of nine hundred
thousandths. These sums may be converted into any national currency in round
figures.

24 Varkonyi v. S.A. Impress De Viacao Airea Rio Grandense (Varig) 1972; 336 NYS
2d 1973.