G.R. No.

61594

September 28, 1990

PAKISTAN INTERNATIONAL AIRLINES CORPORATION,

Petitioner,

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.

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
respondents.

&

Associates

for

private

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.

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 nonpayment 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, 3but
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

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 onemonth'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. 11Put 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.
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,
13and 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
Corts, JJ., concur
[G.R. No. L-5897. April 23, 1954.]
KING MAU WU, Plaintiff-Appellee, v. FRANCISCO
SYCIP, Defendant-Appellant.
I. C. Monsod for Appellant.
J. A. Wolfson and P. P. Gallardo for Appellee.
SYLLABUS
INTERNATIONAL
LAW;
CONFLICT
OF
LAWS;
CONTRACTS EXECUTED IN FOREIGN COUNTRY,
COGNIZABLE BY LOCAL COURTS; NO CONFLICT OF
LAWS WHEN QUESTION INVOLVED IS TO ENFORCE
OBLIGATION ARISING FROM CONTRACT. Although
the contract of agency was executed in New York, the
Court of First Instance of Manila has jurisdiction to try
a personal action for the collection of a sum of
money arising from such contract, because a nonresident may sue a resident in the courts of this
country where the defendant may be summoned and
his property leviable upon execution in case of a
favorable, final and executory judgment. There is no
conflict of laws involved in this case because it is
only a question of enforcing an obligation created by
or arising from contract; and unless the enforcement
of the contract be against public policy of the forum,
it must be enforced.
DECISION
PADILLA, J.:
This is an action to collect P59,082.92, together with
lawful interests from 14 October 1947, the date of
the written demand for payment, and costs. The
claim arises out of a shipment of 1,000 tons of
coconut oil emulsion sold by the plaintiff, as agent of
the defendant, to Jas. Maxwell Fassett, who in turn
assigned it to Fortrade Corporation. Under an agency
agreement set forth in a letter dated 7 November
1946 in New York addressed. to the defendant and
accepted by the latter on the 22nd day of the same
month, the plaintiff was made the exclusive agent of
the defendant in the sale of Philippine coconut oil
and its derivatives outside the Philippines and was to
be paid 2 1/2 per cent on the total actual sale price
of sales obtained through his efforts and in addition
thereto 50 per cent of the difference between the
authorized sale price and the actual sale price.

After trial where the depositions of the plaintiff and of

Jas. Maxwell Fassett and several letters in connection
therewith were introduced and the testimony of the
defendant was heard, the Court rendered judgment
as prayed for in the complaint. A motion for
reconsideration was denied. A motion for new trial
was filed, supported by the defendants affidavit,
based on newly discovered evidence which consists
of a duplicate original of a letter dated 16 October
1946 covering the sale of 1,000 tons of coconut oil
soap emulsion signed by Jas. Maxwell Fassett to the
defendant; the letter of credit No. 20122 of the
Chemical Bank & Trust Company in favor of Jas.
Maxwell Fassett assigned by the latter to the
defendant; and a letter dated 16 December 1946 by
the Fortrade Corporation to Jas. Maxwell Fassett
whereby the corporation placed a firm order of 1,000
metric tons of coconut oil soap emulsion and Jas.
Maxwell Fassett accepted it on 24 December 1946,
all of which documents, according to the defendant,
could not be produced at the trial, despite the use of
reasonable diligence, and if produced they would
alter the result of the controversy. The motion for
new trial was denied. The defendant is appealing
from said judgment.

out by the evidence. The plaintiff and his witness

depose that there were several drafts of documents
or letters prepared by Jas. Maxwell Fassett
preparatory or leading to the execution of the agency
agreement of 7 November 1946, which was accepted
by the defendant on 22 November 1946, and that the
letter, on which the defendant bases his contention
that the transaction on the 1,000 metric tons of
coconut oil emulsion was not covered by the agency
agreement, was one of those letters. That is
believable. The letter upon which defendant relies for
his defense does not stipulate on the commission to
be paid to the plaintiff as agent, and yet if he paid
the plaintiff a 2 1/2 per cent commission on the first
three coconut oil emulsion shipments, there is no
reason why he should not pay him the same
commission on the last shipment amounting to
$3,794.94. There can be no doubt that the sale of
1,000 metric tons of coconut oil emulsion was not a
separate and independent contract from that of the
agency agreement of 7 November and accepted on
22 November 1946 by the defendant, because in a
letter dated 2 January 1947 addressed to the
plaintiff, referring to the transaction of 1,000 metric
tons of coconut oil emulsion, the defendant says

Both parties are agreed that the only transaction or

sale made by the plaintiff, as agent of the defendant,
was that of 1,000 metric tons of coconut oil emulsion
f.o.b. in Manila, Philippines, to Jas. Maxwell Fassett, in
whose favor letter of credit No. 20112 of the
Chemical Bank & Trust Company for a sum not to
exceed $400,000 was established and who assigned
to Fortrade Corporation his fight to the 1,000 metric
tons of coconut oil emulsion and in the defendant the
letter of credit referred to for a sum not to exceed
$400,000.

. . . I am doing everything possible to fulfill these

1,000 tons of emulsion, and until such time that we
completed this order I do not feel it very sensible on
my part to accept more orders. I want to prove to
Fortrade, yourself and other people that we deliver
our goods. Regarding your commission, it is
understood to be 2 1/2 per cent of all prices quoted
by me plus 50-50 on over price. (Schedule B.)

The plaintiff claims that for that sale he is entitled

under the agency contract dated 7 November 1946
and accepted by the defendant on 22 November of
the same year to a commission of 21 1/2 per cent on
the total actual sale price of 1,000 tons of coconut oil
emulsion, part of which has already been paid by the
defendant, there being only a balance of $3,794.94
for commission due and unpaid on the last shipment
of 379.494 tons and 50 per cent of the difference
between the authorized sale price of $350 per ton
and the actual selling price of $400 per ton, which
amounts to $25,000 due and unpaid, and $746.52 for
interest from 14 October 1947, the date of the
written demand.
The defendant, on the other hand, contends that the
transaction for the sale of 1,000 metric tons of
coconut oil emulsion was not covered by the agency
contract of 22 November 1946 because it was agreed
upon on 16 October 1946; that it was an independent
and separate transaction for which the plaintiff has
been duly compensated. The contention is not borne

In another letter dated 16 January 1947 to the

plaintiff, speaking of the same transaction, the
defendant says
As per our understanding when I was in the States
the overprice is subject to any increase in the cost of
production. I am not trying to make things difficult for
you and I shall give you your 2 1/2 per cent
commission plus our overprice provided you can give
me substantial order in order for me to amortize my
loss on this first deal. Unless such could be arranged
I shall remit to you for the present your commission
upon collection from the bank (Schedule C.)
In a telegram sent by the defendant to the plaintiff
the former says
. . . Your money pending stop understand you
authorized some local attorneys and my relatives to
intervene your behalf. (Schedule D.)
The defendants claim that the agreement for the
sale of 1,000 metric tons of coconut oil emulsion was
agreed upon in a document, referring to the letter of
16 October 1946, is again disproved by his letter

dated 2 December 1946 to Fortrade Corporation

where he says:
The purpose of this letter is to confirm in final form
the oral agreement which we have heretofore
reached, as between ourselves, during the course of
various conversations between us and our respective
representatives upon the subject matter of this letter.
It is understood that I am to sell to you, and you are
to purchase from me, 1,000 tons of coconut oil soap
emulsion at a price of $400 per metric ton, i. e.,
2,204.6 pounds, F.O.B. shipboard, Manila, P. I. (Exhibit
S, Special. Italics supplied.)
The contention that as the contract was executed in
New York, the Court of First Instance of Manila has no
jurisdiction over this case, is without merit, because
a non-resident may sue a resident in the courts of
this country 1 where the defendant may be
summoned and his property leviable upon execution
in case of a favorable, final and executory judgment.
It is a personal action for the collection of a sum of
money which the Courts of First Instance have
jurisdiction to try and decide. There is no conflict of
laws involved in the case, because it is only a
question of enforcing an obligation created by or
arising from contract; and unless the enforcement of
the contract be against public policy of the forum, it
must be enforced.
The plaintiff is entitled to collect P7,589.88 for
commission and P50,000 for one-half of the
overprice, or a total of P57,589.88, lawful interests
thereon from the date of the filing of the complaint,
and costs in both instances.
As thus modified the judgment appealed from is
affirmed, with costs against the Appellant.
Paras, C.J., Pablo, Bengzon, Montemayor, Reyes, Jugo,
Bautista Angelo and Concepcion, JJ., concur..

[G.R. No. L-72456. February 19, 1987.]

LUZ J. HENSON, Petitioner, v. THE INTERMEDIATE
APPELLATE COURT, ELY FUDERANAN and LUISA
COMMENDADOR, Respondents.
SYLLABUS
1.
CIVIL LAW, CONTRACTS; RESPECTED AS THE
LAW BETWEEN THE PARTIES. Contracts are
respected as the law between the contracting parties
(Castro v. Court of Appeals, 99 SCRA 772; Escano v.
Court of Appeals, 100 SCRA 197). In the case at bar,
the lease contract executed by the petitioner and the
private respondents remains as the law between
them. In litigations involving the adjudication of

rights and obligations between the lessor and the

lessee, the lease contract shall govern (Chua Peng
Hian v. Court of Appeals, 133 SCRA 572).
2.
ID.; ID.; INTERPRETED ACCORDING TO THEIR
LITERAL MEANING. The facts of the case constrain
us to apply the rule that contracts are to be
interpreted according to their literal meaning when
the terms and conditions are clear and leave no
doubt as to the intention of the contracting parties
(Gonzales v. Court of Appeals, 124 SCRA 630;
Matienzo v. Servidad, 107 SCRA 276; see also Article
1370 of the Civil Code of the Philippines). It was error
on the part of appellate court to make room for
construction of the provisions of the subject lease
contract when the case plainly calls for application
thereof. We reiterate our ruling in the case of San
Mauricio Mining Company v. Ancheta (105 SCRA 371,
418) that: . . .." . . The primary and elementary rule
of construction of documents is that when the words
or language thereof s clear and plain or readily
understandable by any ordinary reader thereof, there
is absolutely no room for interpretation or
construction anymore. . . . ." (See also Pichel v.
Alonzo, 111 SCRA 341)
3.
REMEDIAL LAW; COURTS; HAVE NO POWER
TO MAKE CONTRACTS FOR THE PARTIES. The first
stipulation in the disputed lease contract provided for
a specific period of one year as the duration of lease.
This ought to be followed (See Vda. de San Juan v.
Tan, 116 SCRA 447). For the respondent court to hold
the private respondents-lessees are justified in
disregarding their obligation to pay for the leased
premises throughout the term of the lease due to the
requirement of the Ministry of Tourism that travel
agencies must operate their business in a area
mandated by the rule is tantamount to the courts
revising the contract for the parties. The courts, be it
the original trial court or the appellate court, have no
power to make contracts for the parties (Top-Weld
Manufacturing, Inc. v. ECED, S.A., 138 SCRA 118).
4.
STATUTORY CONSTRUCTION; CONTRACTS;
STIPULATION MUST BE READ IN RELATION TO OTHER
PROVISIONS OF THE CONTRACT. The private
respondents argue that their failure to comply with
their obligations under the lease contract may be
justified by Stipulation No. 9 in the lease contract.
The stipulation in the lease contract must be read in
the context of the petitioners business of leasing
office spaces, not in that of the private respondents
travel agency business. The laws, ordinance, rules,
regulations, and orders which the lessee ought to
obey, execute, and fulfill pertain to those relating to
the business of the petitioner such as the payment of
expenses for the deed of lease, the settlement of
electric, water and phone bills or the installation of
safety measures in cases of fire and other similar
emergencies.

DECISION
GUTIERREZ, JR., J.:
Whether or not the judicial interpretation of the lease
contract amounts to the courts contracting for the
parties is the issue in this petition for review of the
decision of the then Intermediate Appellate Court
which upheld the Court of First Instance of Manila
dismissing the petitioners complaint for recovery of
the balance of unpaid rentals due for one year under
the lease contract in question.
The petitioner leases out office spaces in her building
at #494 Soldado Street, Ermita, Manila. The lessee in
the disputed lease contract was designated as Sto.
Nio Travel and Tour Agency, a sole proprietorship
duly organized and existing under the laws of the
Philippines, represented by private respondent Ely
Fuderanan, its President and General Manager.
On May 15, 1980, the petitioner received the sum of
P8,000.00 as "reservation deposit" for Apartment No.
116 at Luz J. Henson Building for which she issued a
receipt to private respondent Fuderanan as follows:
"This reservation is good up to May 15, 1980, at 4:00
P.M.; failure to sign the Lease Contract, pay the
required Three (3) months advance rental and Three
(3) months guarantee deposits, the reservation is
forfeited, monthly rental is P2,000.00 - net of W. H.
Tax. Lease Contract is for one year."
On the same day, the petitioner and private
respondent Fuderanan entered into a lease contract
which, in part, provides:
"1.
That this contract shall have a duration of
one year, commencing from May 15, 1980; Provided
that, at the expiration hereof, the lease shall be
deemed renewed on a month to month basis under
the same terms and conditions as this contract,
unless either party, at least one month before this
contract expires, informs the other in writing of his
desire not to be bound anymore after said period;
Provided Further, that should LESSEE terminate this
contract before its termination or be cancelled for
any of the causes enumerated, the LESSEE shall for
his breach of this contract, have his guarantee
deposit automatically forfeited and still be liable to
LESSOR as penalty and liquidated damages for the
rentals of the unexpired portion of this lease,
irrespective of whether or not LESSOR subsequently
finds another person to lease the vacated premises
for the duration of said unexpired portion;
"2.
That LESSEE agrees to pay rentals for the
premises leased as above-described at the rate of
TWO THOUSAND PESOS Net of Withholding Tax

(P2,000.00), Philippine Currency, a month, due and

payable without need of further demand and notice
on the due date of the corresponding month, at
LESSORs office or residence; LESSEE shall pay in
advance the amount of SIX THOUSAND PESOS
(P6,000.00), Philippine Currency, as rentals for the
first two (2) months of this contract and one month
end of lease. Rentals are payable monthly in
advance. A fraction of a month is considered one
month rental;
"Upon execution of this contract, the LESSOR (should
be LESSEE) (shall) deposit with the LESSOR the
amount equivalent to SIX THOUSAND PESOS
(P6,000.00), three months rental. This deposit shall
answer for any damages, losses, breakage, utilities
destroyed including damages caused by renovation
done on the leased premises and any extensions
thereof, and shall be returned only upon expiration of
this Lease Contract; Provided, that all Meralco Bills
are fully paid and that charges for any and all long
distance calls are paid duly certified by the PLDT Co.
Nothing herein contained shall be understood as
granting the LESSEE the right to require, before the
termination of this lease, that this deposit shall be
applied against over due rentals and other
outstanding accounts owing to LESSOR in order to
keep the LESSEEs account current, deposits bear no
interest."
x

Pursuant to the lease contract between the petitioner

and private respondent Fuderanan, the latter paid
Henson the amount of P6,000.00 in cash as deposit
for rentals, water service and four keys (Exhibit A-1)
and P1,660.00 in cash and P4,640.00 in a postdated
check as rentals due from May 15, 1980 to July 14,
1980 (Exhibit A-1; Exhibit D). This postdated check
was later replaced by another postdated check of
private respondent Luisa Commendador which was
dishonored due to insufficiency of funds as indicated
by the banks dishonor slip (Exhibit D-1).
On May 30, 1980, the Chief of the Licensing and
Inspection Division of the Bureau of Tourism Services,
Ministry of Tourism disapproved the request of the
private respondents to transfer their office to the
premises owned by the petitioner on the ground that
the place failed to meet the minimum 50 square
meter-space requirement of the Bureau (Exhibit 6).
On June 10, 1980, the private respondents informed
the petitioner in writing that they had to vacate the
leased premises in question on or about June 14,
1980 in view of the disapproval of their request to
operate their business in the office space rented from
the petitioner (Exhibit B).

On June 16, 1980, the petitioner notified the private

respondents in writing of the dishonor of
Commendadors postdated check (Exhibit C).
On July 9, 1980, that petitioner wrote the private
respondents demanding that they make good their
dishonored check in compliance with the terms and
conditions of their lease contract (Exhibits F and F-1).
On July 18, 1980, the private respondents replied by
stating that they had to rescind the lease contract
and requested the refund of the amounts they paid
by way of advance and deposit rentals less the
amount of rental due (Exhibit 5). Their request was
not granted by the petitioner (Exhibits E and E1).
On January 16, 1981, the petitioner filed an action
against the private respondents to recover the value
of the dishonored check worth P4,640.00 plus 12%
interest per annum from May 30, 1980 until paid and
the amount of P22,000.00 as rental fees
corresponding to the unexpired portion of the term of
the lease contract between them.
On March 24, 1982, the private respondents filed
their answer, which was later amended on July 29,
1981, alleging, among others, that private
respondent Commendador was wrongly sued
because she was not a party to the lease contract
having issued the check merely for accommodation
purposes; that the private respondents did not make
good the dishonored check since the Ministry of
Tourism had disapproved their request to transfer
their office to the petitioners premises; and that
under the circumstances the private respondents had
no other alternative but to rescind the lease contract
and vacate the premises. A counterclaim was filed for
the refund of P6,200.00 representing the advance
rentals paid by the private respondents and for the
award of moral damages, attorneys fees, and
expenses of litigation.
After trial, the trial court, on March 18, 1982,
rendered judgment in favor of the private
respondents. The dispositive portion of the decision
reads:
"WHEREFORE,
judgment
is
hereby
rendered
dismissing the complaint of the plaintiff Luz J. Henson
against the defendants Ely Fuderanan and Luisa
Commendador, doing business under the name and
style `Sto. Nio Travel and Tours Agency, and upon
the latters counterclaim against the former, ordering
the plaintiff to refund to the defendants the amount
of P5,600.00. Costs against the plaintiff."
The appellate court affirmed the trial courts
judgment. A motion for reconsideration was denied in
a resolution dated October 9, 1985. Hence, this
present petition assigning as errors the following:

I
The Intermediate Appellate Court erred when its
decision `made a new contract for the parties.
II
The Intermediate Appellate Court erred in rendering
a decision not sanctioned by equity.
The Intermediate Appellate Court dismissed the
petitioners complaint thereby giving the private
respondents the right to a refund of the sum they
advanced as rental fees when they executed the
contract of lease. The court did not find the private
respondents in breach of their obligations under said
contract. In the words of the appellate court:
"The reason for the non-compliance of the obligation
to occupy the leased premises came from a third
party."
By "third party," it meant the Chief of the Licensing
and Inspection Division of the Bureau of Tourism
Services, Ministry of Tourism.
We are constrained under the circumstances of this
case to uphold the time-honored principle that
contracts are respected as the law between the
contracting parties (Castro v. Court of Appeals, 99
SCRA 722; Escano v. Court of Appeals, 100 SCRA
197). In the case at bar, the lease contract executed
by the petitioner and the private respondents
remains as the law between them. In litigations
involving the adjudication of rights and obligations
between the lessor and the lessee, the lease contract
shall govern (Chua Peng Hian v. Court of Appeals,
133 SCRA 572).
The disputed lease contract is plain and unequivocal
in its terms. The stipulations are expressed in clear
and explicit language that leaves no doubt as to the
intention of the contracting parties. Nowhere is it
provided in the contract that the fulfillment of the
terms and conditions of the lease depend upon an
act of a third party, i.e., the final action to be taken
by the Chief of the Licensing and Inspection Division
of the Bureau of Tourism. Neither is there any
indication from the evidence presented that would
justify either of the contracting parties to impugn the
lease contract they executed.
The facts of the case constrain us to apply the rule
that contracts are to be interpreted according to their
literal meaning when the terms and conditions are
clear and leave no doubt as to the intention of the
contracting parties (Gonzales v. Court of Appeals,
124 SCRA 630; Matienzo v. Servidad, 107 SCRA 276;
see also Article 1370 of the Civil Code of the

Philippines). It was error on the part of the appellate

court to make room for construction of the provisions
of the subject lease contract when the case plainly
calls for application thereof. We reiterate our ruling in
the case of San Mauricio Mining Company v. Ancheta
(105 SCRA 371, 418) that:
x

". . . The primary and elementary rule of construction

of documents is that when the words or language
thereof is clear and plain or readily understandable
by any ordinary reader thereof, there is absolutely no
room
for
interpretation
or
construction
anymore. . . . ." (See also Pichel v. Alonzo, 111 SCRA
341)
The first stipulation in the disputed lease contract
provided for a specific period of one year as the
duration of the lease. This ought to be followed (See
Vda. de San Juan v. Tan, 116 SCRA 447). For the
respondent court to hold that the private
respondents-lessees are justified in disregarding their
obligation to pay for the leased premises throughout
the term of the lease due to the requirement of the
Ministry of Tourism that travel agencies must operate
their business in an area mandated by the rules is
tantamount to the courts revising the contract for
the parties. The courts, be it the original trial court or
the appellate court, have no power to make contracts
for the parties (Top-Weld Manufacturing, Inc. v. ECED,
S.A., 138 SCRA 118).
Given the simple and unambiguous document of
lease in this case, the lessees, at the most, would be
entitled to a refund of the advance rental fees only if
the rule on equity can be applied under the
circumstances. However, there are no circumstances
in this case that warrant the application of equitable
considerations.
The predicament in which Sto. Nio Travel and Tour
Agency found itself is entirely of its own making. It
should have ascertained all the rules and
requirements for the operation of a travel agency
before it even started to look for premises to house
its office. The petitioner had absolutely nothing to do
with the private respondents violating the
requirements. Moreover, the record shows that the
petitioner-lessor offered the occupancy of the bigger
rooms in her apartments for lease to the private
respondents in order that they could meet the
minimum space requirement of 50 square meters
ordered by the Ministry of Tourism. The private
respondents declined the offer because they were
not willing to pay for the corresponding increase in
the rental fees.
The appellate court opined that the petitioner, in
offering the bigger rooms for lease at a higher rent

value, gave the private respondents no other choice

but to stop the operation of their travel agency
business as against renting one of the bigger rooms
and operating at a loss in view of the increased
rental fees. The records do not show upon what
evidence the respondent court based this finding.
The questioned decision itself shows that the courts
conclusion is purely conjectural and cannot support
the application of equity. It states:
"However, the record shows that defendantsappellees finally rejected leasing these larger rooms
because the rents were `different. We presume that,
by the word `different, appellees meant the rents
were higher which they could not afford." (Emphasis
supplied).
The rule that travel agencies should have at least 50
square meters of office space is a reasonable
regulation intended to dignify the business as a
whole and avoid fly-by-night operators working out of
cramped and dingy quarters. If the private
respondents did not bother to look into this
requirement before entering into a lease contract,
they have no right to visit upon the petitioner the
results of their negligence.
The petitioner contends that under the disputed
lease contract, the lessor is not bound to make sure
that her lessee realizes profit out of the latters travel
agency business while occupying the leased
premises in the same way that it is not incumbent
upon her to see to it that her lessee observes the
regulatory measures laid down by the Ministry of
Tourism for travel agencies. She states that the only
business with which she is concerned is that of
leasing office spaces in her apartment building to
those lessees who agree to the terms and conditions
of the lease such as the private respondents. This
may be a rigid and hardhearted approach to the
problem but it is correct. The contract of lease was
never conditioned on the lessees ability to comply
with governmental requirements pertaining to their
business. We also note that the contract was
executed on May 15, 1980. Part of the consideration
was in the form of a postdated check for P4,600.00.
The denial by the Inspection Division of the Bureau of
Tourism Services was dated May 30, 1980. When the
postdated check fell due the following day, May 31,
the funds to meet the check were insufficient and the
bank had to dishonor the check.
The private respondents argue that their failure to
comply with their obligations under the lease
contract may be justified by Stipulation No. 9 in the
lease contract which provides that:
"Compliance With Law. The LESSEE shall promptly
obey, execute and fulfill any and all laws, ordinances,
rules, regulations, and orders of the national or city

government or of any bureau, board or commission

for the sanitation and safety of the leased premises."
The aforequoted stipulation in the lease contract
must be read in the context of the petitioners
business of leasing office spaces, not in that of the
private respondents travel agency business. The
laws, ordinances, rules, regulations, and orders which
the lessee ought to obey, execute, and fulfill pertain
to those relating to the business of the petitioner
such as the payment of expenses for the deed of
lease, the settlement of electric, water and phone
bills or the installation of safety measures in cases of
fire and other similar emergencies.
In view of the foregoing discussion, there is no
question that the subject lease contract which is the
law between the parties herein admits of no gap that
the rule on equity may rightfully bridge.
WHEREFORE, the petition is hereby GRANTED. The
decision appealed from is REVERSED and SET ASIDE
and a new one is rendered:
1.
Ordering private respondent Ely Fuderanan
to replace or pay the value of the dishonored check
of P4,640.00 with 12% interest per annum from May
30, 1980 until paid;
2.
Ordering private respondent Ely Fuderanan
to pay the rentals corresponding to the unexpired
portion of the lease provided, however, that the
P6,000.00 deposited by the private respondent which
the petitioner is obliged to return may be offset
against the unpaid rentals under the lease contract;
and
3.
Ordering private respondent Ely Fuderanan
to pay P2,000.00 as attorneys fees plus costs of the
suit.
SO ORDERED.
Fernan (Chairman), Alampay, Paras, Padilla and
Cortes, JJ., concur.

1. CONTRACTS; GOVERNMENT CONTRACT NOT

PREJUDICED BY SUBSEQUENT AMENDMENT OF THE
LAW. A contract made between the Government of
the Philippine Islands and an employee, under the
provisions of Acts Nos. 80 and 224, is not affected by
any subsequent amendment of said Acts. The
legislative department of the Government is
expressly prohibited by section 5 of the Act of
Congress of July 1, 1902, from altering or changing
the terms of a contract.
2. ID.; EXECUTION; INTERPRETATION AND VALIDITY;
REMEDIES. No rule is better settled in law than
that
matters
bearing
upon
the
execution,
interpretation, and validity of a contract are
determined by the law of the place where the
contract is made. (Scudder v. Union National Bank,
91 U. S., 406.) Matters connected with performance
are regulated by the law prevailing at the place of
performance. Remedies, such as the bringing of suit,
admissibility of evidence, and the statute of
limitations, depend upon the law of the place where
the action is brought.
DECISION
JOHNSON, J. :
Judgment was rendered in the lower court on the 5th
day of September, 1905. the defendant appealed. On
the 12th day of October, 1905, the appellant filed his
printed bill of exceptions with the clerk of the
Supreme Court. On the 5th day of December, 1905,
the appellant filed his brief with the clerk of the
Supreme Court. On the 19th day of January, 1906,
the Attorney-General filed his brief in said cause.
Nothing further was done in said cause until on about
the 30th day of January, 1909, when the respective
parties were requested by this court to prosecute the
appeal under penalty of having the same dismissed
for failure so to do; whereupon the appellant, by
petition, had the cause placed upon the calendar and
the same was heard on the 2d day of February, 1909.
The facts from the record appear to be as follows:

Bidin, J., ** no part.

[G.R. No. 2935. March 23, 1909. ]

THE GOVERNMENT OF THE PHILIPPINE ISLANDS,
Plaintiff-Appellee, v. GEORGE I. FRANK, DefendantAppellant.
Bishop & OBrien, for Appellant.
Attorney-General Wilfley, for Appellee.
SYLLABUS

First. That on or about the 17th day of April, 1903, in

the city of Chicago, in the State of Illinois, in the
United
States,
the
defendant,
through
a
representative of the Insular Government of the
Philippine Islands, entered into a contract for a period
of two years with the plaintiff, by which the
defendant was to receive a salary of 1,200 dollars
per year as a stenographer in the service of the said
plaintiff, and in addition thereto was to be paid in
advance the expenses incurred in traveling from the
said city of Chicago to Manila, and one-half salary
during said period of travel.

Second. Said contract contained a provision that in

case of a violation of its terms on the part of the
defendant, he should become liable to the plaintiff
for the amount expended by the Government by way
of expenses incurred in traveling from Chicago to
Manila and the one-half salary paid during such
period.
Third. The defendant entered upon the performance
of his contract upon the 30th day of April, 1903, and
was paid half-salary from the date until June 4, 1903,
the date of his arrival in the Philippine Islands.
Fourth. That on the 11th day of February, 1904, the
defendant left the service of the plaintiff and refused
to make a further compliance with the terms of the
contract.
Fifth. On the 3d day of December, 1904, the plaintiff
commenced an action in the Court of First Instance of
the city of Manila to recover from the defendant the
sum of 269.23 dollars, which amount the plaintiff
claimed had been paid to the defendant as expenses
incurred in traveling from Chicago to Manila, and as
half-salary for the period consumed in travel.
Sixth. It was expressly agreed between the parties to
said contract that Laws No. 80 and No. 224 should
constitute a part of said contract.
To the complaint of the plaintiff the defendant filed a
general denial and a special defense, alleging in his
special defense that the Government of the
Philippine Islands had amended Laws No. 80 and No.
224 and had thereby materially altered the said
contract, and also that he was a minor at the time
the contract was entered into and was therefore not
responsible under the law.
To the special defense of the defendant the plaintiff
filed a demurrer, which demurrer the court sustained.
Upon the issue thus presented, and after hearing the
evidence adduced during the trial of the cause, the
lower court rendered a judgment against the
defendant and in favor of the plaintiff for the sum of
265.90 dollars. The lower court found that at the
time the defendant quit the service of the plaintiff
there was due him from the said plaintiff the sum of
3.33 dollars, leaving a balance due the plaintiff in the
sum of 265.90 dollars. From this judgment the
defendant appealed and made the following
assignments of error:
1. The court erred in sustaining plaintiffs demurrer to
defendants special defenses.
2. The court erred in rendering judgment against the
defendant on the facts.

With reference to the above assignments of error, it

may be said that the mere fact that the legislative
department of the Government of the Philippine
Islands had amended said Acts No. 80 and No. 224
by Acts No. 643 and No. 1040 did not have the effect
of changing the terms of the contract made between
the plaintiff and the defendant. The legislative
department of the Government is expressly
prohibited by section 5 of the Act of Congress of
1902 from altering or changing the terms of a
contract. The right which the defendant had acquired
by virtue of Acts No. 80 and No. 224 had not been
changed in any respect by the fact that said laws had
been amended. These acts, constituting the terms of
the contract, still constituted a part of said contract
and were enforceable in favor of the defendant.
The defendant alleged in his special defense that he
was a minor and therefore the contract could not be
enforced against him. The record discloses that, at
the time the contract was entered into in the State of
Illinois, he was an adult under the laws of that State
and had full authority to contract. The plaintiff [the
defendant] claims that, by reason of the fact that,
under that laws of the Philippine Islands at the time
the contract was made, made persons in said Islands
did not reach their majority until they had attained
the age of 23 years, he was not liable under said
contract, contending that the laws of the Philippine
Islands governed. It is not disputed upon the
contrary the fact is admitted that at the time and
place of the making of the contract in question the
defendant had full capacity to make the same. No
rule is better settled in law than that matters bearing
upon the execution, interpretation and validity of a
contract are determined b the law of the place where
the contract is made. (Scudder v. Union National
Bank, 91 U. S., 406.) Matters connected with its
performance are regulated by the law prevailing at
the place of performance. Matters respecting a
remedy, such as the bringing of suit, admissibility of
evidence, and statutes of limitations, depend upon
the law of the place where the suit is brought.
(Idem.)
The defendants claim that he was an adult when he
left Chicago but was a minor when he arrived at
Manila; that he was an adult a the time he made the
contract but was a minor at the time the plaintiff
attempted to enforce the contract, more than a year
later, is not tenable.
Our conclusions with reference to the first above
assignment of error are, therefore.
First. That the amendments to Acts No. 80 and No.
224 in no way affected the terms of the contract in
question; and

Second. The plaintiff [defendant] being fully qualified

to enter into the contract at the place and time the
contract was made, he can not plead infancy as a
defense at the place where the contract is being
enforced.
We believe that the above conclusions also dispose
of the second assignment of error.
For the reasons above stated, the judgment of the
lower court is affirmed, with costs.
Arellano, C.J., Torres, Mapa, Carson and Willard, JJ.,
concur.
[G.R. No. 2721. March 22, 1906. ]
RAFAEL MOLINA Y SALVADOR, Plaintiff-Appellee, v.
ANTONIO DE LA RIVA, Defendant-Appellant.
Gibbs & Gale, for Appellant.

DECISION
MAPA, J. :
This is an action to recover a debt due upon a
contract executed July 27, 1903, whereby plaintiff
transferred to the defendant the abaca and coprax
business theretofore carried on by him at various
places in the Island of Catanduanes, with all the
property and right pertaining to the said business, or
the sum of 134,636 pesos and 12 cents, payable in
Mexican currency or its equivalent in local currency.
Defendant paid at the time of the execution of the
contract, on account of the purchase price, the sum
of P33,659 pesos and 3 cents, promising to pay the
balance on three installments P33,659 pesos and 3
cents each, with interest at the rate of 5 per cent per
annum from the date of the contract. The first
installment became due July 27, 1904. It was for the
recovery of this first installment that their action was
brought in the Court of First Instance of the City of
Manila.

Pillsbury & Sutro, for Appellee.

SYLLABUS
1.
CIVIL
PROCEDURE;
ACTION;
COMPLAINT;
RESIDENCE. A personal action to recover a debt
may be brought, under section 377 of the Code of
Civil procedure, either in the Court of First Instance of
the province where the plaintiff resides or in that
where the defendant may reside, at the election of
the plaintiff. The residence in such case should be
that which the parties had at the time of the
commencement of the action and not prior thereto.
2. ID.; JURISDICTION; STIPULATION; PARTIES TO
ACTION. The law does not authorize parties litigant
to submit themselves, by express stipulation, to the
jurisdiction of a particular court, to the exclusion of
the court duly vested with such jurisdiction. An
express agreement tending to deprive a court of the
jurisdiction conferred on it by law is void and of no
legal effect.
3. ID.; COMPLAINT; PARTIES TO ACTION. The relief
granted to the plaintiff, if there be no answer, can not
exceed that which he shall have demanded in his
complaint. (Sec. 126, Code of Civil Procedure.)
4. ID.; ID.; ID.; MEXICAN CURRENCY; EVIDENCE.
When the value of Mexican currency in Philippine
currency as stated in the complaint has been
admitted by the defendant through his failure to
deny, dispute, or controvert the same, it shall not be
necessary for the court to hear evidence upon this
point. The proof required by section 3 of Act No. 1045
is only necessary when the parties disagree as to the
actual value of either currency.

Defendant demurred to the complaint on the ground

that the court had no jurisdiction of the subject of the
action. The court overruled the demurrer and
defendant refused to and did not, as a matter of fact,
answer plaintiffs complaint.
Judgment having been rendered in favor of the
plaintiff for the sum of 33,659 pesos and 3 cents,
Mexican currency, equal to 30,052 pesos and 70
centavos, Philippine currency, an interest thereon at
the rate of 5 per cent per annum from July 27, 1903
and costs, the defendant duly excepted.
The appellant relies upon four assignments of error.
The first error assigned by him is that the court had
no jurisdiction of the subject of the action.
It is alleged in support of this contention that plaintiff
and defendant were residents of the Island of
Catanduanes, as would appear, as the plaintiff is
concerned, from a power of attorney, executed by
him to Antonio Vallejo Valencia and introduced in
evidence during the trial. This power of attorney was
executed August 22, 1901. The instrument in fact
contains the statement that plaintiff was a resident of
Catanduanes. Nothing is said however, either in the
power of attorney or in the contract upon which this
action is based, as to the residence of the defendant.
The complaint was filed March 10, 1905, and it
alleges that both plaintiff and defendant were
residents of the city of Manila. This allegation was
not either generally or specifically denied by the
defendant, who refused and failed to give an answer
to the complaint, having merely demurred thereto.
This allegation, therefore, must be demurred
admitted. The power of attorney above referred to

having been executed in August, 1901, does not and

can not by itself prove that the parties were not
residents of the city of Manila in March, 1905, when
the complaint was filed. The actual residence, and
not that which the parties had four years, prior to the
filing of the complaint, is the one that should govern
the question as to the jurisdiction of the court.
A personal action like this for the record of a debt
may be brought, under section 377 of the Code of
the Civil Procedure, in the Court of First Instance of
the province where the plaintiff resides or in the
province where the defendant may reside, at the
election of the plaintiff. Both parties to this case
being residents the city of Manila, it is apparent that
the Court of First Instance of that city had jurisdiction
to try and determine this action.
It is further urged in support of the alleged want of
jurisdiction on the part of the court below, that the
parties had mutually designated in the contract in
question the town of Bato, Islands of Catanduanes,
as the place where all judicial and extrajudicial acts
necessary under the terms thereof should take place.
Paragraph 9 of the contract contains in fact a
stipulation to that effect. This the appellant claims
amounted to an express submission by the
contracting parties to jurisdiction of the Court of First
Instance of the Province of Albay, in which the town
of Bato was located, all other courts being thereby
inhibited from exercising jurisdiction over actions
arising under the contract.
We are of the opinion that the designation of the
town of Bato made by the parties had no legal force
and could not have the effect of depriving the Court
of First Instance of Manila of the jurisdiction conferred
on it by law. This would be true even though it may
be granted that the parties actually intended to
waive the rights of domicile and expressly submit
themselves to the exclusive jurisdiction of the Court
of First Instance of Albay, contended the appellant,
all of which it may be said seems to be very doubtful,
judging from the vague and uncertain manner in
which the designation was made. The jurisdiction of a
court is filed by law and not by the will of the parties.
As a matter of public policy, parties can only
stipulate in regard to that which is expressly
authorized by law. Section 377 of the Code of Civil
Procedure provides a plain and definite rule for the
purpose of determining the jurisdiction of courts
according to the nature of the action. Neither that
section nor any other provision of law, of which we
have any knowledge, authorizes the parties to
submit themselves by an express stipulation to the
jurisdiction of a particular court to the exclusion of
the court duly vested with such jurisdiction. We
consequently hold that the agreement between the
parties to submit themselves to the jurisdiction of the
Court of First Instance of Albay, if there was any such

agreement, was null and void, in so far as it had for

its object to deprive the Court of First Instance of
Manila of its own jurisdiction.
Articles 1255 and 1278 of the Civil Code relied upon
by the appellant in his brief are not applicable to
cases relating to the jurisdiction of courts. The Law of
Procedure and not the Civil Code Case and defines
the jurisdiction of courts. It is not true as contended
by the appellant that the right which litigants had
under the Spanish law to submit themselves to the
jurisdiction of a particular court was governed by the
provisions of the Civil Code. Such right was
recognized and governed by the provisions of the
Law of Procedure and not by the substantive law. The
right to contract, recognized in the Civil Code and
referred to by appellant, has nothing to do with the
right to establish and fix the jurisdiction of a court.
This right can only be exercised by the legislative
branch of the Government, the only one vested with
the necessary power to make rules governing the
subject. In this connection it may be said that the
jurisdiction of a court can not be the subject-matter
of a contract.
The second error assigned by the appellant is that
the court erred in fixing in Philippine currency the
sum which the appellee should recover, without
hearing evidence as to the relative value of Mexican
and Philippine currency. The amount sought to be
recovered in this action, under the terms of the
contract, was 33,859 pesos and 3 cents, payable in
Mexican currency, or its equivalent in local currency.
In paragraph 4 of the complaint it is alleged that
"Under the terms of the contract the actual amount
due from defendant to plaintiff, converted into
Philippine currency is 28,049 pesos and 19 centavos .
. ."
This contention was not denied by the defendant,
who, as has been said before, simply demurred to
the complaint. Plaintiffs allegation must therefore be
deemed admitted. Consequently it was not
necessary for the court to hear evidence as to the
relative value of Mexican and Philippine currency.
There is no dispute between the parties as to the fact
that the 33,659 pesos and 3 Cents, Mexican
currency, referred to in the contract, were equal to
28,049 pesos and 19 centavos, Philippine currency,
at the time of the filing of the complaint.
The proof required by section 3 of Act No. 1045, cited
by the appellant, should be received only when the
parties disagree as to the relative value of the
currency. The court below did not, therefore, err in
not hearing evidence upon this point, even under the
assumption that no such evidence as heard in regard
thereto, as claimed by the Appellant.

The appellant also assigns as error the fact that

defendant was given the option to pay the debt
either in Mexican or Philippine currency, claiming
that the court should have directed payment to be
made in the latter currency as required by Act No.
1045. Assuming that this contention is correct, it
should nevertheless be true that it did not prejudice
any of his essential rights. He was rather favored
thereby, since he was given an option to pay in
whatever currency he might see fit. It is well known
that in the case of an alternative obligation the
debtor has the right to choose the method of
meeting the obligation unless the creditor has
expressly reserved that right to himself. (Art. 1132 of
the Civil Code.)
The alleged violation by the court below of the
provisions of Act No. 1045 in this particular respect is
not therefore, a sufficient ground for the reversal of
the judgment. Section 503 of the Code of Civil
Procedure provides that no judgment shall be
reversed for such error as has not prejudiced the
substantial rights of the excepting party.
The third error assigned by the appellant is that the
court erred in rendering judgment in a sum larger
than that sought to be recovered in the complaint.
The prayer of the complaint is for the specific
amount of 28,049 pesos and 19 centavos, Philippine
currency, and the court in its judgment ordered the
defendant to pay to the plaintiff 30,052 pesos and 70
centavos, in the same currency.
Section 126 of the Code of Civil Procedure provides in
part as follows:
"The relief granted to the plaintiff, if there be no
answer, can not exceed that which he shall have
demanded in his complaint. . . ."
The defendant failed to answer. Under such
circumstances plaintiff could not have obtained more
than what he had demanded in his complaint.
Plaintiffs demand was for the sum of 28,049 pesos
and 19 centavos only. The court had no power to
enter judgment in favor of the plaintiff for 30,052
pesos and 70 centavos. We hold that this was error
on the part of the trial court. The judgment of the
court below should be modified in this respect.
The fourth and last error assigned by the appellant is
that the court took into consideration as the basis of
its judgment the contract in question, the same
being null and void. The appellant alleges in support
of his contention that the contract did not bear the
internal-revenue stamp required by Act No. 1045 of
the Philippine Commission enacted January 27, 1904,
and relies particularly upon the provisions of sections
9 and 10 of the act.

Section 9 reads in part as follows:

"Every check, draft, note, bond, bill of exchange, and
every contract whatsoever payable in local currency .
. . shall be presumably subject to the taxes levied in
accordance with the provisions of this act, and the
obligation shall rest upon the drawer or maker, or
holder or beneficiary . . . who claims exemption, to
prove that he is entitled to any of the exemptions
provided in this act. No check, draft, note, bond, bill
of exchange, or any contract whatsoever payable in
local currency shall be exempted from the payment
of the stamp tax provided for in sections six and
seven of this act unless the contract for which
exemption is claimed shall be registered with the
Collector of Internal Revenue or his deputy before
October first, nineteen hundred and four, and a
certificate be attached thereto by the Collector of
Internal Revenue, or his deputy, certifying to the
exemption.
Under section 10
"Every check, draft, note, bond, bill of exchange, and
every contract whatsoever which is not properly
stamped in accordance with the provisions of this
act, shall be void. . . ."
The two sections above quoted refer to other
provisions of the same Act No. 1045. Section 9 refers
expressly to sections 6 and 7. Section 9, as well as
section 10, refers to documents which should be
stamped in accordance with the provisions of the
same act. These provisions are contained in sections
6 and 7 above referred to, the documents subject to
the stamp tax being therein enumerated.
Section 6 provides that
"Every check, note, draft, bond, bill of exchange, and
every contract whatsoever payable wholly or in part
in local currency, and drawn or made upon or
subsequent to October first, nineteen hundred and
four, shall bear upon its face an internal-revenue
stamp or stamps of the face value in Philippine
currency to the amount hereinafter provided.
This same section in subsections (a), (b), (c), (d), (e),
(f), and (g,) enumerates the exemptions referred to
in section 9 above quoted.
Section 7 provides as follows:
"Every transfer of ownership, by indorsement or
otherwise, after September thirtieth, nineteen
hundred and four, of a check, draft, note, bond, bill of
exchange, or any contract whatsoever payable
wholly or in part in local currency in the Philippine
Islands after the thirtieth of September, nineteen

hundred and four, . . . shall be considered a separate

and distinct contract, and as such shall require a
stamp or stamps."
It seems clear from the language of these two latter
sections that only such contracts payable in local
currency as were made on or after October 1, 1904,
are subject to the stamp tax. The provisions of the
section in question are very clear and leave no room
for doubt. Sections 9 and 10 are merely
supplementary to sections 6 and 7. They provide a
method for proving the exemption from the stamp
tax and penalty in case of failure to comply with the
provisions of sections 6 and 7. These latter sections
are the ones which require a stamp tax upon all
contracts payable in local currency and declare what
documents shall be subject to such tax. It is therefore
necessary to construe these sections together with
sections 9 and 10 in order to arrive at the proper
conclusion. A full and correct interpretation of the act
in question would not be possible if we only consider
the two latter sections. They are, as has been said
before, merely supplementary to the preceding
sections.
The contract under consideration was executed July
27, 1903. Such contract was not subject to the stamp
tax provided in Act No. 1045. The penalty of nullity
prescribed in section 10 of the act is not applicable to
that contract. The court, therefore, committed no
error in finding that the absence of revenue stamp
did not render the contract void.
The judgment of the court below is hereby affirmed,
provided, however, that the plaintiff shall only be
entitled to recover from the defendant the sum of
28,049 pesos and 19 centavos, Philippine currency,
with accrued interest thereon from July 27, 1903,
until fully paid, at the rate of 5 per cent per annum,
no special order being made as to costs of this
appeal.
After the expiration of twenty days from the date
hereof let judgment be entered accordingly, and let
the case be remanded to the Court of First Instance
for such action as may be proper. So ordered.
Arellano, C.J., Johnson, Carson, and Willard, JJ.,
concur.

[G.R. No. 9403. November 4, 1914. ]

ALLAN A. BRYAN ET AL., Plaintiffs-Appellees, v.
EASTERN & AUSTRALIAN S. S. CO., LTD., DefendantAppellant.
Haussermann, Cohn & Fisher, for Appellant.
Southworth, Hargis, Adams & Jordain for Appellees.

SYLLABUS
1. SHIPPING; TRANSPORTATION OF PERSONS AND
BAGGAGE FROM HONGKONG TO MANILA; LAW OF
CONTRACT. A contract made in Hongkong for the
transportation of persons and baggage from
Hongkong to Manila will be construed according to
the law of the Colony of Hongkong and will be
enforced in the Philippine Islands in accordance with
that law, provided it is not in violation of a law or the
public policy of the Philippine Islands.
2. ID.; ID.; ID.; LIMITATION OF LIABILITY OF CARRIER.
A contract printed in legible type upon the back of
a ticket purchased in Hongkong for the transportation
of purchaser and his baggage to Manila, limiting the
liability of the carrying company with respect to
purchasers baggage, is, according to the law of that
colony, a valid and binding contract even though the
attention of the purchaser is not specially drawn
thereto at the time of purchase, and will be so
regarded here provided it does not violate a law or
the public policy of the Philippine Islands.
3. ID., ID.; ID., ID. A contract printed in legible type
upon the back of a ticket purchased in Hongkong for
the transportation of purchaser and baggage to
Manila, providing that "the company will not hold
itself responsible for any loss, or damage to or
detention, or overcarriage of luggage, under any
circumstances whatsoever unless it has been booked
and paid for as freight" is valid and binding in the
Colony of Hongkong upon the purchaser of the ticket.
Such a stipulation, however, does not, according to
the law of that colony, relieve the carrying company
from liability for negligence of its servants by which
the baggage of the passenger is lost or damaged.
4. ID.; ID.; ID.; ID. Such a limitation, according to
the law of the Colony of Hongkong, is strictly
construed against the carrier and will not, by
construction or interpretation, be held to include an
exemption from damages by negligence.
5. ID.; ID.; ID.; ID.; ACTION FOR DAMAGES.
Therefore, when the baggage of a passenger who
has purchased a ticket with the limitation as to
liability above set forth, is injured or destroyed in
Manila by the negligence of the carriers servants,
the passenger is entitled, under the lex loci
contractus, to recover for the damages caused
thereby in spite of the limitations upon the carriers
liability as above set forth.
6. ID.; NEGLIGENCE. Where it appears undisputed
that the usual and customary method of unloading
baggage from a ship is by a rope or wire net attached
to a rope running over the end of a crane, which net
completely surrounds and incloses the baggage and
thereby prevents it from escaping, or by means of a

cargo chute running from the deck of the ship to the

pier, it is negligence for a carriers servants, in
unloading the baggage of a passenger, simply to
wrap a single rope about the center of the pieces of
baggage, and, suspending the same by a rope
running over the end of a crane, swing it over the
water; and where said baggage, by reason of such
negligent handling, slips from the rope so attached
and falls into the water, the carrier is responsible for
the damages naturally and ordinarily flowing from
such negligence.
7. EVIDENCE; FOREIGN STATUTES. This court is
not, by reason of the opinion expressed by an expert
witness as to the law of a foreign country, precluded
from advising itself from other sources as to the law
of that country.
DECISION
MORELAND, J. :
This is an action to recover P1,915.30 damages
alleged to have been caused by the negligence of
the defendant in handling the plaintiffs baggage,
whereby it fell into the sea and was injured or
destroyed.
The plaintiffs wee passengers on the streamer St.
Albans, which, at the time herein complained of, was
the property of the defendant corporation and was
engaged in carrying freight and passengers between
Shanghai, China, and Manila, Philippine Islands. It
arrived in Manila on the morning of the 7th of
January, 1913. Shortly after its arrival plaintiffs
baggage was taken out of the hold of the ship for the
purpose of being placed on the dock alongside of
which the vessel was berthed. The baggage was
placed in a sling, consisting of a single rope wound
once around the trunks, and was swung from the side
of the vessel. While still several feet above the wharf,
the employee of the defendant company who was
operating the winch, by some act or other, permitted
the baggage to drop with great rapidity. in its
passage downward it struck the side of the ship with
such force as to release it from the sling and it
dropped into the water alongside of the ship. The
damages are stipulated at P1,188.
The defendant, while admitting the damage caused
to plaintiffs baggage, denied that it was the result of
the companys negligence and set up as a special
defense the limitation of liability established by the
contract under which the defendant undertook to
transport the plaintiffs from the city of Hongkong to
Manila.
The record shows that on or about the end of
December, 1912, the plaintiffs bought of the
defendants agent in Shanghai two first-class tickets

for Manila, which entitled steamship St. Albans. The

tickets delivered to them were in English, which
language plaintiffs read with ease and understand
perfectly, and bore on their face, in large print, a
statement that they were issued subject to the
conditions printed on the back. One of these
conditions, printed in legible type, was as follows:
"This ticket is issued by the company and accepted
by the passenger subject to the following conditions:
"The company will not hold itself responsible for any
loss or damage passengers may sustain from the
following causes: From advance in or delays after
advertised date of sailing, either through the
performance of His Majestys mail service or any
other cause, from detention on the voyage, or at any
of the intermediate ports, or through streamers not
meeting, or delays from accident, from perils of the
sea, or from machinery, boilers or stream, or from
any act, neglect or default whatsoever of the pilot,
masters, or mariners, nor from any consequences
arising from any sanitary regulations or precautions
which the companys officers or local government
authorities may deem necessary.
"Personal baggage. In order to insure as far as
possible the safe custody of luggage, passengers
should personally see their luggage delivered on
board. Each adult saloon passenger may carry, free
of charge, but at his own risk, 20 cubic feet of
luggage; and each steerage passenger 10 cubic feet,
under similar conditions (all in excess of these
quantities must be paid for at the current rate of
freight); but the company will not hold itself
responsible for any loss, or damage to or detention,
or overcarriage of luggage, under any circumstances
whatsoever unless it has been booked and paid for
as freight."
At the time the tickets were delivered to plaintiffs in
Shanghai their attention was not especially drawn to
the provisions on the back of the ticket. The plaintiffs
put their baggage on the St. Albans without paying
for its transportation as freight and traveled with
such baggage to Manila.
The trial courts finding as to the negligence of
defendant is based particularly on the testimony of J.
S. Stanley Deputy Collector of Customs, and I. V.
Chapman, chief wharfinger in charge of pier No. 5.
Mr. Stanley testified: "While standing at the extreme
end of Pier No. 5, I witnessed a number of trunks
being lifted from the deck of the steamship St.
Albans to an elevation of about 10 or 12 feet from
the deck and practically the same height above the
pier. The winchman was instructed to let go. The
sling dropped suddenly and was not checked at the
proper time, and the sling of trunks struck the side of

the wharf, with the result that the trunks were forced
from the sling and fell into the water. It is customary
to use a rope sling or a cargo chute running from the
deck to the pier. The slings vary in size but are
sufficiently large to contain a large number of trunks
and are formed of ropes running in opposite
directions forming a rope net. If these trunks had
been in a rope sling they would not have fallen in the
water."
Mr. Chapman testified: "When the steamship St.
Albans came alongside the pier I took all her lines
and berthed her in a position for the gangway and
hatchways to work. Immediately after the ship was
made fast I requested to be informed from the chief
officer where the baggage would be discharged from;
he told me hatch No. 4; I went to No. l hatch and
asked the second officer who was there in charge of
the hatch where the baggage was to be discharged
from; he said, Right here, indicating No. 4 hatch. I
then told him I would have a chute there for him right
away and he answered: All right. I immediately
went into the pier and ordered one of the foremen
and the men to take a chute to No. 4 hatch. I was
following with the foreman and behind the chute
when Mr. Stanley informed me that the baggage was
over the side. The chute at this time was just through
the door about 75 feet from the hatch. On arriving
there I saw that the sling and these trunks were all
lying in the water. The stevedore had a lot of his men
over the side picking up the trunks with the men
from the pier helping."
It is the contention of the defendant company that it
is exempt from liability by virtue of the contract
appearing on the tickets already referred to and
quoted; as that contract was valid in the place where
made, namely, the Colony of Hongkong, and that
that being the case, it will be enforced according to
its terms in the Philippine Islands. It is also urged that
it was not necessary specifically to direct the
attention of the passengers to the stipulations on the
back of the ticket introduced in evidence.
The evidence relative to the law governing these
contracts in Hongkong consists of the testimony of a
Hongkong barrister, learned in the law of England
and her colonies, and is to the effect that, under the
law in force at the place where the contract was
made, the contract was valid and enforceable, and
that it is not necessary that the attention of persons
purchasing tickets from common carriers be drawn
specially to the terms thereof when printed upon a
ticket which on its face shows that it is issued subject
to such conditions. The barrister also testified that
under the law of England and her colonies everything
was done which was necessary to make the terms
printed on the back of the tickets a part of the
contract between the parties.

It is our conclusion that the judgment must be

affirmed.
It is undoubted that the contract found upon the back
of the tickets is a contract perfectly valid in England
and her colonies and one which would be enforced
according to its terms in British jurisdictions. The
question is what were its terms? It will be
remembered that the contract provides "the
company will not hold itself responsible for any loss,
or damage to or detention, or overcarriage of
luggage, under any circumstances whatsoever,
unless it has been booked and paid for as freight."
Ordinarily this language would seem to be broad
enough to cover every possible contingency,
including the negligent act of defendants servant. To
so hold, however, would run counter to the
established law of England and the United States on
that subject. In the case of Price and Company v.
Union Lighterage Company (Kings Bench Division,
1903, Vol. 1, pp. 750, 754), the court said:
"An exemption in general words not expressly
relating to negligence, even though the words are
wide enough to include loss by negligence or default
of carriers servants, must be construed as limiting
the liability of the carrier as assurer, and not as
relieving him from the duty of exercising reasonable
skill and care."
The result of this decision seems to be that unless
the contract of exemption specifically refers to
exemption for negligence, it will be construed as
simply exempting the carrier from his liability as
insurer, in other words, from his common law liability
as carrier. This decision of the Kings Bench Division
is supported by many authorities and apparently has
never been questioned. Among other references
made in that case is that of Compaia de Navegacion
La Flecha v. Brauer (168 U. S., 104), in which the
opinion was rendered by Mr. Justice Gray, who
reviews with great thoroughness and erudition both
the English and American authorities, many of which
contain exemptions quite as comprehensive as those
contained in the condition under which plaintiffs
baggage was accepted by the defendant in this case,
such as that the baggage "was to be carried at the
risk of the owner" and that the "carrier is not to be
responsible for any loss under any circumstances
whatsoever." (See also Wheeler v. O. S. N. Co., 125 N.
Y., 155; Nicholas v. N. Y. C. & H. R. R. R. Co., 89 N. Y.,
370.)
The reasonableness of the strict rule of construction
that the courts of England and of the State of New
York apply to contracts restricting the liability of
carriers with respect to their negligence is apparent
when one considers that such contracts are held to
be contrary to public Policy and invalid in the Federal

courts and in most of the State courts of the Union.

(The Kensington, 183 U. S., 263.)
In this connection, it may not be amiss to state that a
critical examination of the deposition of Mr. Ernest
Hamilton Sharpe, Master of Arts and Bachelor of Civil
Law of the University of Oxford, Barrister at Law of
London, Shanghai and Hongkong, and Kings Counsel
at the latter colony, does not disclose anything
contradictory to the rule just stated. Mr. Sharpes
examination was confined to the question of the
validity of the contract indorsed upon plaintiffs ticket
exempting the defendant company from liability for
damage to their baggage. In view of the accurate
answers of the learned witness to the questions put
to him as to the validity of the condition in question
under English law, there is no reason to suppose that
he would not have stated correctly the rule as to the
construction of the condition had his attention been
directed to that point. In any event, this court is not,
by reason of the opinion expressed by an expert
witness, precluded from advising itself as to the
common law of England. (Sec. 302, Code of Civil
Procedure.)

7 cases of spare parts valued at P92,361.75,

consigned to Central Textile Mills, Inc. Both sets of
goods were insured against marine risk for their
stated value with respondent Development Insurance
and Surety Corporation.
In G.R. No. 71478, during the same period, the same
vessel took on board 128 cartons of garment fabrics
and accessories, in two (2) containers, consigned to
Mariveles Apparel Corporation, and two cases of
surveying
instruments
consigned
to
Aman
Enterprises and General Merchandise. The 128
cartons were insured for their stated value by
respondent Nisshin Fire & Marine Insurance Co., for
US $46,583.00, and the 2 cases by respondent Dowa
Fire & Marine Insurance Co., Ltd., for US $11,385.00.
Enroute for Kobe, Japan, to Manila, the vessel caught
fire and sank, resulting in the total loss of ship and
cargo. The respective respondent Insurers paid the
corresponding marine insurance values to the
consignees concerned and were thus subrogated
unto the rights of the latter as the insured.
G.R. NO. 69044

The judgment is affirmed, with costs against the

Appellant.
Arellano, C.J., Torres, Carson and Araullo, JJ., concur.

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

EASTERN SHIPPING LINES, INC., Petitioner, vs.
INTERMEDIATE APPELLATE COURT and DEVELOPMENT
INSURANCE & SURETY CORPORATION, Respondents.
No. 71478

May 29, 1987

EASTERN SHIPPING LINES, INC., Petitioner, vs. THE

NISSHIN FIRE AND MARINE INSURANCE CO., and
DOWA FIRE & MARINE INSURANCE CO., LTD.,
Respondents.
MELENCIO-HERRERA, J.:
These two cases, both for the recovery of the value
of cargo insurance, arose from the same incident, the
sinking of the M/S ASIATICA when it caught fire,
resulting in the total loss of ship and cargo.

On May 11, 1978, respondent Development

Insurance & Surety Corporation (Development
Insurance, for short), having been subrogated unto
the rights of the two insured companies, filed suit
against petitioner Carrier for the recovery of the
amounts it had paid to the insured before the then
Court of First instance of Manila, Branch XXX (Civil
Case No. 6087).
Petitioner-Carrier denied liability mainly on the
ground that the loss was due to an extraordinary
fortuitous event, hence, it is not liable under the law.
On August 31, 1979, the Trial Court rendered
judgment in favor of Development Insurance in the
amounts
of
P256,039.00
and
P92,361.75,
respectively, with legal interest, plus P35,000.00 as
attorney's fees and costs. Petitioner Carrier took an
appeal to the then Court of Appeals which, on August
14, 1984, affirmed.
Petitioner Carrier is now before us on a Petition for
Review on Certiorari.
G.R. NO. 71478

The basic facts are not in controversy:

In G.R. No. 69044, sometime in or prior to June, 1977,
the M/S ASIATICA, a vessel operated by petitioner
Eastern Shipping Lines, Inc., (referred to hereinafter
as Petitioner Carrier) loaded at Kobe, Japan for
transportation to Manila, 5,000 pieces of calorized
lance pipes in 28 packages valued at P256,039.00
consigned to Philippine Blooming Mills Co., Inc., and

On June 16, 1978, respondents Nisshin Fire & Marine

Insurance Co. NISSHIN for short), and Dowa Fire &
Marine Insurance Co., Ltd. (DOWA, for brevity), as
subrogees of the insured, filed suit against Petitioner
Carrier for the recovery of the insured value of the
cargo lost with the then Court of First Instance of
Manila, Branch 11 (Civil Case No. 116151), imputing

unseaworthiness of the ship and non-observance of

extraordinary diligence by petitioner Carrier.
Petitioner Carrier denied liability on the principal
grounds that the fire which caused the sinking of the
ship is an exempting circumstance under Section
4(2) (b) of the Carriage of Goods by Sea Act
(COGSA); and that when the loss of fire is
established, the burden of proving negligence of the
vessel is shifted to the cargo shipper.
On September 15, 1980, the Trial Court rendered
judgment in favor of NISSHIN and DOWA in the
amounts of US $46,583.00 and US $11,385.00,
respectively, with legal interest, plus attorney's fees
of P5,000.00 and costs. On appeal by petitioner, the
then Court of Appeals on September 10, 1984,
affirmed with modification the Trial Court's judgment
by decreasing the amount recoverable by DOWA to
US $1,000.00 because of $500 per package limitation
of liability under the COGSA.
Hence, this Petition for Review on certiorari by
Petitioner Carrier.
Both Petitions were initially denied for lack of merit.
G.R. No. 69044 on January 16, 1985 by the First
Division, and G. R. No. 71478 on September 25, 1985
by the Second Division. Upon Petitioner Carrier's
Motion for Reconsideration, however, G.R. No. 69044
was given due course on March 25, 1985, and the
parties were required to submit their respective
Memoranda, which they have done.
On the other hand, in G.R. No. 71478, Petitioner
Carrier sought reconsideration of the Resolution
denying the Petition for Review and moved for its
consolidation with G.R. No. 69044, the lowernumbered case, which was then pending resolution
with the First Division. The same was granted; the
Resolution of the Second Division of September 25,
1985 was set aside and the Petition was given due
course.
At the outset, we reject Petitioner Carrier's claim that
it is not the operator of the M/S Asiatica but merely a
charterer thereof. We note that in G.R. No. 69044,
Petitioner Carrier stated in its Petition:
There are about 22 cases of the "ASIATICA" pending
in various courts where various plaintiffs are
represented by various counsel representing various
consignees or insurance companies. The common
defendant in these cases is petitioner herein, being
the operator of said vessel. ... 1
Petitioner Carrier should be held bound to said
admission. As a general rule, the facts alleged in a
party's pleading are deemed admissions of that party
and binding upon it. 2And an admission in one

pleading in one action may be received in evidence

against the pleader or his successor-in-interest on
the trial of another action to which he is a party, in
favor of a party to the latter action. 3
The threshold issues in both cases are: (1) which law
should govern - the Civil Code provisions on Common
carriers or the Carriage of Goods by Sea Act? and (2)
who has the burden of proof to show negligence of
the carrier?
On the Law Applicable
The law of the country to which the goods are to be
transported governs the liability of the common
carrier in case of their loss, destruction or
deterioration. 4 As the cargoes in question were
transported from Japan to the Philippines, the liability
of Petitioner Carrier is governed primarily by the Civil
Code. 5 However, in all matters not regulated by said
Code, the rights and obligations of common carrier
shall be governed by the Code of Commerce and by
special laws. 6Thus, the Carriage of Goods by Sea
Act, a special law, is suppletory to the provisions of
the Civil Code. 7
On the Burden of Proof
Under the Civil Code, common carriers, from the
nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence
in the vigilance over goods, according to all the
circumstances of each case. 8 Common carriers are
responsible for the loss, destruction, or deterioration
of the goods unless the same is due to any of the
following causes only:
(1)
Flood, storm, earthquake, lightning or other
natural disaster or calamity;
xxx

xxx

xxx 9

Petitioner Carrier claims that the loss of the vessel by

fire exempts it from liability under the phrase
"natural disaster or calamity. " However, we are of
the opinion that fire may not be considered a natural
disaster or calamity. This must be so as it arises
almost invariably from some act of man or by human
means. 10 It does not fall within the category of an
act of God unless caused by lightning 11 or by other
natural disaster or calamity. 12 It may even be
caused by the actual fault or privity of the carrier. 13
Article 1680 of the Civil Code, which considers fire as
an extraordinary fortuitous event refers to leases of
rural lands where a reduction of the rent is allowed
when more than one-half of the fruits have been lost
due to such event, considering that the law adopts a
protection policy towards agriculture. 14

As the peril of the fire is not comprehended within

the exception in Article 1734, supra, Article 1735 of
the Civil Code provides that all cases than those
mention in Article 1734, the common carrier shall be
presumed to have been at fault or to have acted
negligently, unless it proves that it has observed the
extraordinary deligence required by law.

prevent or minimize the loss before, during or after

the occurrence of the disaster. " This Petitioner
Carrier has also failed to establish satisfactorily.

In this case, the respective Insurers. as subrogees of

the cargo shippers, have proven that the transported
goods have been lost. Petitioner Carrier has also
proved that the loss was caused by fire. The burden
then is upon Petitioner Carrier to proved that it has
exercised the extraordinary diligence required by law.
In this regard, the Trial Court, concurred in by the
Appellate Court, made the following Finding of fact:

Sec. 4(2).
Neither the carrier nor the ship
shall be responsible for loss or damage arising or
resulting from

The cargoes in question were, according to the

witnesses defendant placed in hatches No, 2 and 3 cf
the vessel, Boatswain Ernesto Pastrana noticed that
smoke was coming out from hatch No. 2 and hatch
No. 3; that where the smoke was noticed, the fire
was already big; that the fire must have started
twenty-four 24) our the same was noticed; that
carbon dioxide was ordered released and the crew
was ordered to open the hatch covers of No, 2 tor
commencement of fire fighting by sea water: that all
of these effort were not enough to control the fire.

In this case, both the Trial Court and the Appellate

Court, in effect, found, as a fact, that there was
"actual fault" of the carrier shown by "lack of
diligence" in that "when the smoke was noticed, the
fire was already big; that the fire must have started
twenty-four (24) hours before the same was noticed;
" and that "after the cargoes were stored in the
hatches, no regular inspection was made as to their
condition during the voyage." The foregoing suffices
to show that the circumstances under which the fire
originated and spread are such as to show that
Petitioner Carrier or its servants were negligent in
connection therewith. Consequently, the complete
defense afforded by the COGSA when loss results
from fire is unavailing to Petitioner Carrier.

Pursuant to Article 1733, common carriers are bound

to extraordinary diligence in the vigilance over the
goods. The evidence of the defendant did not show
that extraordinary vigilance was observed by the
vessel to prevent the occurrence of fire at hatches
numbers 2 and 3. Defendant's evidence did not
likewise show he amount of diligence made by the
crew, on orders, in the care of the cargoes. What
appears is that after the cargoes were stored in the
hatches, no regular inspection was made as to their
condition during the voyage. Consequently, the crew
could not have even explain what could have caused
the fire. The defendant, in the Court's mind, failed to
satisfactorily show that extraordinary vigilance and
care had been made by the crew to prevent the
occurrence of the fire. The defendant, as a common
carrier, is liable to the consignees for said lack of
deligence required of it under Article 1733 of the Civil
Code. 15
Having failed to discharge the burden of proving that
it had exercised the extraordinary diligence required
by law, Petitioner Carrier cannot escape liability for
the loss of the cargo.
And even if fire were to be considered a "natural
disaster" within the meaning of Article 1734 of the
Civil Code, it is required under Article 1739 of the
same Code that the "natural disaster" must have
been the "proximate and only cause of the loss," and
that the carrier has "exercised due diligence to

Nor may Petitioner Carrier seek refuge from liability

under the Carriage of Goods by Sea Act, It is
provided therein that:

(b)
Fire, unless caused by the actual fault or
privity of the carrier.
xxx

xxx

xxx

On the US $500 Per Package Limitation:

Petitioner Carrier avers that its liability if any, should
not exceed US $500 per package as provided in
section 4(5) of the COGSA, which reads:
(5)
Neither the carrier nor the ship shall in any
event be or become liable for any loss or damage to
or in connection with the transportation of goods in
an amount exceeding $500 per package lawful
money of the United States, or in case of goods not
shipped in packages, per customary freight unit, or
the equivalent of that sum in other currency, unless
the nature and value of such goods have been
declared by the shipper before shipment and
inserted in bill of lading. This declaration if embodied
in the bill of lading shall be prima facie evidence, but
all be conclusive on the carrier.
By agreement between the carrier, master or agent
of the carrier, and the shipper another maximum
amount than that mentioned in this paragraph may
be fixed: Provided, That such maximum shall not be
less than the figure above named. In no event shall
the carrier be Liable for more than the amount of
damage actually sustained.

xxx

xxx

xxx

Article 1749 of the New Civil Code also allows the

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

In G.R. No. 71478, in so far as the two (2) cases of

surveying instruments are concerned, the amount
awarded to DOWA which was already reduced to
$1,000 by the Appellate Court following the statutory
$500 liability per package, is in order.
In respect of the shipment of 128 cartons of garment
fabrics in two (2) containers and insured with
NISSHIN, the Appellate Court also limited Petitioner
Carrier's liability to $500 per package and affirmed
the award of $46,583 to NISSHIN. it multiplied 128
cartons (considered as COGSA packages) by $500 to
arrive at the figure of $64,000, and explained that
"since this amount is more than the insured value of
the goods, that is $46,583, the Trial Court was correct
in awarding said amount only for the 128 cartons,
which amount is less than the maximum limitation of
the carrier's liability."
We find no reversible error. The 128 cartons and not
the two (2) containers should be considered as the
shipping unit.
In Mitsui & Co., Ltd. vs. American Export Lines, Inc.
636 F 2d 807 (1981), the consignees of tin ingots and
the shipper of floor covering brought action against
the vessel owner and operator to recover for loss of
ingots and floor covering, which had been shipped in
vessel - supplied containers. The U.S. District Court
for the Southern District of New York rendered
judgment for the plaintiffs, and the defendant
appealed. The United States Court of Appeals,
Second Division, modified and affirmed holding that:
When what would ordinarily be considered packages
are shipped in a container supplied by the carrier and
the number of such units is disclosed in the shipping
documents, each of those units and not the container
constitutes the "package" referred to in liability
limitation provision of Carriage of Goods by Sea Act.
Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A.&
1304(5).
Even if language and purposes of Carriage of Goods
by Sea Act left doubt as to whether carrier-furnished
containers whose contents are disclosed should be
treated as packages, the interest in securing
international uniformity would suggest that they
should not be so treated. Carriage of Goods by Sea
Act, 4(5), 46 U.S.C.A. 1304(5).
... After quoting the statement in Leather's Best,
supra, 451 F 2d at 815, that treating a container as a
package is inconsistent with the congressional
purpose of establishing a reasonable minimum level
of liability, Judge Beeks wrote, 414 F. Supp. at 907
(footnotes omitted):
Although this approach has not completely escaped
criticism, there is, nonetheless, much to commend it.

It gives needed recognition to the responsibility of

the courts to construe and apply the statute as
enacted, however great might be the temptation to
"modernize" or reconstitute it by artful judicial gloss.
If COGSA's package limitation scheme suffers from
internal illness, Congress alone must undertake the
surgery. There is, in this regard, obvious wisdom in
the Ninth Circuit's conclusion in Hartford that
technological advancements, whether or not
forseeable by the COGSA promulgators, do not
warrant a distortion or artificial construction of the
statutory term "package." A ruling that these large
reusable metal pieces of transport equipment qualify
as COGSA packages - at least where, as here, they
were carrier owned and supplied - would amount to
just such a distortion.

(Admiralty Litigation in Perpetuum: The Continuing

Saga of Package Limitations and Third World Delivery
Problems by Chester D. Hooper & Keith L. Flicker,
published in Fordham International Law Journal, Vol.
6, 1982-83, Number 1) (Emphasis supplied)

Certainly, if the individual crates or cartons prepared

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

Considering, therefore, that the Bill of Lading clearly

disclosed the contents of the containers, the number
of cartons or units, as well as the nature of the
goods, and applying the ruling in the Mitsui and
Eurygenes cases it is clear that the 128 cartons, not
the two (2) containers should be considered as the
shipping unit subject to the $500 limitation of
liability.

In Yeramex International v. S.S. Tando,, 1977 A.M.C.

1807 (E.D. Va.) rev'd on other grounds, 595 F 2nd
943 (4 Cir. 1979), another district with many
maritime cases followed Judge Beeks' reasoning in
Matsushita and similarly rejected the functional
economics test. Judge Kellam held that when rolls of
polyester goods are packed into cardboard cartons
which are then placed in containers, the cartons and
not the containers are the packages.
xxx

xxx

xxx

The case of Smithgreyhound v. M/V Eurygenes, 18

followed the Mitsui test:
Eurygenes concerned a shipment of stereo
equipment packaged by the shipper into cartons
which were then placed by the shipper into a carrierfurnished container. The number of cartons was
disclosed to the carrier in the bill of lading.
Eurygenes followed the Mitsui test and treated the
cartons, not the container, as the COGSA packages.
However, Eurygenes indicated that a carrier could
limit its liability to $500 per container if the bill of
lading failed to disclose the number of cartons or
units within the container, or if the parties indicated,
in clear and unambiguous language, an agreement to
treat the container as the package.

In this case, the Bill of Lading (Exhibit "A") disclosed

the following data:
2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight
Prepaid
Say: Two (2) Containers Only.

True, the evidence does not disclose whether the

containers involved herein were carrier-furnished or
not. Usually, however, containers are provided by the
carrier. 19 In this case, the probability is that they
were so furnished for Petitioner Carrier was at liberty
to pack and carry the goods in containers if they
were not so packed. Thus, at the dorsal side of the
Bill of Lading (Exhibit "A") appears the following
stipulation in fine print:
11.
(Use of Container) Where the goods receipt
of which is acknowledged on the face of this Bill of
Lading are not already packed into container(s) at
the time of receipt, the Carrier shall be at liberty to
pack and carry them in any type of container(s).

The foregoing would explain the use of the estimate

"Say: Two (2) Containers Only" in the Bill of Lading,
meaning that the goods could probably fit in two (2)
containers only. It cannot mean that the shipper had
furnished the containers for if so, "Two (2)
Containers" appearing as the first entry would have
sufficed. and if there is any ambiguity in the Bill of
Lading, it is a cardinal principle in the construction of
contracts that the interpretation of obscure words or
stipulations in a contract shall not favor the party
who caused the obscurity. 20 This applies with even
greater force in a contract of adhesion where a
contract is already prepared and the other party
merely adheres to it, like the Bill of Lading in this
case, which is draw. up by the carrier. 21

On Alleged Denial of Opportunity to Present

Deposition of Its Witnesses: (in G.R. No. 69044 only)
Petitioner Carrier claims that the Trial Court did not
give it sufficient time to take the depositions of its
witnesses in Japan by written interrogatories.
We do not agree. petitioner Carrier was given- full
opportunity to present its evidence but it failed to do
so. On this point, the Trial Court found:
xxx

xxx

xxx

Indeed, since after November 6, 1978, to August 27,

1979, not to mention the time from June 27, 1978,
when its answer was prepared and filed in Court,
until September 26, 1978, when the pre-trial
conference was conducted for the last time, the
defendant had more than nine months to prepare its
evidence. Its belated notice to take deposition on
written interrogatories of its witnesses in Japan,
served upon the plaintiff on August 25th, just two
days before the hearing set for August 27th, knowing
fully well that it was its undertaking on July 11 the
that the deposition of the witnesses would be
dispensed with if by next time it had not yet been
obtained, only proves the lack of merit of the
defendant's motion for postponement, for which
reason it deserves no sympathy from the Court in
that regard. The defendant has told the Court since
February 16, 1979, that it was going to take the
deposition of its witnesses in Japan. Why did it take
until August 25, 1979, or more than six months, to
prepare its written interrogatories. Only the
defendant itself is to blame for its failure to adduce
evidence in support of its defenses.
xxx

xxx

xxx 22

Petitioner Carrier was afforded ample time to present

its side of the case. 23 It cannot complain now that it
was denied due process when the Trial Court
rendered its Decision on the basis of the evidence
adduced. What due process abhors is absolute lack
of opportunity to be heard. 24
On the Award of Attorney's Fees:
Petitioner Carrier questions the award of attorney's
fees. In both cases, respondent Court affirmed the
award by the Trial Court of attorney's fees of
P35,000.00 in favor of Development Insurance in G.R.
No. 69044, and P5,000.00 in favor of NISSHIN and
DOWA in G.R. No. 71478.
Courts being vested with discretion in fixing the
amount of attorney's fees, it is believed that the
amount of P5,000.00 would be more reasonable in
G.R. No. 69044. The award of P5,000.00 in G.R. No.
71478 is affirmed.

WHEREFORE, 1) in G.R. No. 69044, the judgment is

modified in that petitioner Eastern Shipping Lines
shall pay the Development Insurance and Surety
Corporation the amount of P256,039 for the twentyeight (28) packages of calorized lance pipes, and
P71,540 for the seven (7) cases of spare parts, with
interest at the legal rate from the date of the filing of
the complaint on June 13, 1978, plus P5,000 as
attorney's fees, and the costs.
2)
In G.R.No.71478,the judgment is hereby
affirmed.
SO ORDERED.
Narvasa, Cruz, Feliciano and Gancayco, JJ., concur.

Separate Opinions
YAP, J., concurring and dissenting:
With respect to G.R. No. 71478, the majority opinion
holds that the 128 cartons of textile materials, and
not the two (2) containers, should be considered as
the shipping unit for the purpose of applying the
$500.00 limitation under the Carriage of Goods by
Sea Act (COGSA).
The majority opinion followed and applied the
interpretation of the COGSA "package" limitation
adopted by the Second Circuit, United States Court of
Appeals, in Mitsui & Co., Ltd. vs. American Export
Lines, Inc., 636 F. 2d 807 (1981) and the
Smithgreyhound v. M/V Eurygenes, 666, F 2nd, 746.
Both cases adopted the rule that carrier-furnished
containers whose contents are fully disclosed are not
"packages" within the meaning of Section 4 (5) of
COGSA.
I cannot go along with the majority in applying the
Mitsui and Eurygenes decisions to the present case,
for the following reasons: (1) The facts in those cases
differ materially from those obtaining in the present
case; and (2) the rule laid down in those two cases is
by no means settled doctrine.
In Mitsui and Eurygenes, the containers were
supplied by the carrier or shipping company. In Mitsui
the Court held: "Certainly, if the individual crates or
cartons prepared by the shipper and containing his
goods can rightly be considered "packages" standing
by themselves, they do not suddenly lose that
character upon being stowed in a carrier's container.
I would liken these containers to detachable stowage
compartments of the ship." Cartons or crates placed
inside carrier-furnished containers are deemed
stowed in the vessel itself, and do not lose their
character as individual units simply by being placed

inside container provided by the carrier, which are

merely "detachable stowage compartments of the
ship.
In the case at bar, there is no evidence showing that
the two containers in question were carrier-supplied.
This fact cannot be presumed. The facts of the case
in fact show that this was the only shipment placed
in containers. The other shipment involved in the
case, consisting of surveying instruments, was
packed in two "cases."
We cannot speculate on the meaning of the words
"Say: Two (2) Containers Only, " which appear in the
bill of lading. Absent any positive evidence on this
point, we cannot say that those words constitute a
mere estimate that the shipment could fit in two
containers, thereby showing that when the goods
were delivered by the shipper, they were not yet
placed inside the containers and that it was the
petitioner carrier which packed the goods into its own
containers, as authorized under paragraph 11 on the
dorsal side of the bill of lading, Exhibit A. Such
assumption cannot be made in view of the following
words clearly stamped in red ink on the face of the
bill of lading: "Shipper's Load, Count and Seal Said to
Contain." This clearly indicates that it was the
shipper which loaded and counted the goods placed
inside the container and sealed the latter.
The two containers were delivered by the shipper to
the carrier already sealed for shipment, and the
number of cartons said to be contained inside them
was indicated in the bill of lading, on the mere say-so
of the shipper. The freight paid to the carrier on the
shipment was based on the measurement (by
volume) of the two containers at $34.50 per cubic
meter. The shipper must have saved on the freight
charges by using containers for the shipment. Under
the circumstances, it would be unfair to the carrier to
have the limitation of its liability under COGSA fixed
on the number of cartons inside the containers,
rather than on the containers themselves, since the
freight revenue was based on the latter.
The Mitsui and Eurygenes decisions are not the last
word on the subject. The interpretation of the COGSA
package limitation is in a state of flux, 1 as the courts
continue to wrestle with the troublesome problem of
applying the statutory limitation under COGSA to
containerized shipments. The law was adopted
before
modern
technological
changes
have
revolutionized the shipping industry. There is need
for the law itself to be updated to meet the changes
brought about by the container revolution, but this is
a task which should be addressed by the legislative
body. Until then, this Court, while mindful of
American jurisprudence on the subject, should make
its own interpretation of the COGSA provisions,
consistent with what is equitable to the parties

concerned. There is need to balance the interests of

the shipper and those of the carrier.
In the case at bar, the shipper opted to ship the
goods in two containers, and paid freight charges
based on the freight unit, i.e., cubic meters. The
shipper did not declare the value of the shipment, for
that would have entailed higher freight charges;
instead of paying higher freight charges, the shipper
protected itself by insuring the shipment. As
subrogee, the insurance company can recover from
the carrier only what the shipper itself is entitled to
recover, not the amount it actually paid the shipper
under the insurance policy.
In our view, under the circumstances, the container
should be regarded as the shipping unit or "package"
within the purview of COGSA. However, we realize
that this may not be equitable as far as the shipper is
concerned. If the container is not regarded as a
"package" within the terms of COGSA, then, the
$500.00 liability limitation should be based on "the
customary freight unit." Sec. 4 (5) of COGSA provides
that in case of goods not shipped in packages, the
limit of the carrier's liability shall be $500.00 "per
customary freight unit." In the case at bar, the
petitioner's liability for the shipment in question
based on "freight unit" would be $21,950.00 for the
shipment of 43.9 cubic meters.
I concur with the rest of the decision.
Sarmiento, J., concur.

[G.R. No. 87958. April 26, 1990.]

NATIONAL UNION FIRE INSURANCE COMPANY OF
PITTSBURG,
PA/AMERICAN
INTERNATIONAL
UNDERWRITER (PHIL.) INC., Petitioners, v. STOLTNIELSEN PHILIPPINES, INC. and COURT OF APPEALS,
Respondents.
Fajardo Law Offices, for Petitioners.
Sycip, Salazar, Hernandez & Gatmaitan for StoltNielsen Phil., Inc.
SYLLABUS
1.
REMEDIAL LAW; SPECIAL CIVIL ACTION;
CERTIORARI; AS A GENERAL RULE, COURT ORDER
DEFERRING ACTION ON MOTION TO DISMISS UNTIL
THE TRIAL, IS INTERLOCUTORY; EXCEPTION.
Petitioner-INSURER alleges that the RTC Order

deferring resolution of the CARRIERs Motion to

Dismiss constitutes an interlocutory order, which can
not be the subject of a special civil action on
certiorari and prohibition. Generally, this would be
true. However, the case before us falls under the
exception. While a Court Order deferring action on a
motion to dismiss until the trial is interlocutory and
cannot be challenged until final judgment, still,
where it clearly appears that the trial Judge or Court
is proceeding in excess or outside of its jurisdiction,
the remedy of prohibition would lie since it would be
useless and a waste of time to go ahead with the
proceedings (University of Sto. Tomas v. Villanueva,
106 Phil. 439, [1959] citing Philippine International
Fair, Inc., Et Al., v. Ibaez, Et Al., 94 Phil. 424 [1954];
Enrique v. Macadaeg, Et Al., 84 Phil. 674 [1949]; San
Beda College v. CIR, 97 Phil. 787 [1955]). Even a
cursory reading of the subject Bill of Lading, in
relation to the Charter Party, reveals the Courts
patent lack of jurisdiction to hear and decide the
claim.
2.
COMMERCIAL LAW; MARINE INSURANCE;
INSURER; BOUND BY ARBITRATION CLAUSE OF THE
CHARTER PARTY; RATIONALE. The Bill of Lading
incorporates by reference the terms of the Charter
Party. It is settled law that the charter may be made
part of the contract under which the goods are
carried by an appropriate reference in the Bill of
Lading (Wharton Poor, Charter Parties and Ocean
Bills of Lading (5th ed., p. 71). This should include
the provision on arbitration even without a specific
stipulation to that effect. The entire contract must be
read together and its clauses interpreted in relation
to one another and not by parts. Moreover, in cases
where a Bill of Lading has been issued by a carrier
covering goods shipped aboard a vessel under a
charter party, and the charterer is also the holder of
the bill of lading, "the bill of lading operates as the
receipt for the goods, and as document of title
passing the property of the goods, but not as varying
the contract between the charterer and the
shipowner" (In re Marine Sulphur Queen, 460 F 2d
89, 103 [2d Cir. 1972]; Ministry of Commerce v.
Marine Tankers Corp. 194 F. Supp 161, 163 [S.D.N.Y.
1960]; Greenstone Shipping Co., S.A. v. Transworld
Oil, Ltd., 588 F Supp [D.E.I. 1984]). The Bill of Lading
becomes, therefore, only a receipt and not the
contract of carriage in a charter of the entire vessel,
for the contract is the Charter Party (Shell Oil Co. v.
M/T Gilda, 790 F 2d 1209, 1212 [5th Cir. 1986] and is
the law between the parties who are bound by its
terms and condition provided that these are not
contrary to law, morals, good customs, public order
and public policy (Article 1306, Civil Code).
3.
ID.; ID.; ID.; APPLICABLE IN CASE AT BAR.
As the respondent Appellate Court found, the
INSURER "cannot feign ignorance of the arbitration
clause since it was already charged with notice of the

existence of the charter party due to an appropriate

reference thereof in the bill of lading and, by the
exercise of ordinary diligence, it could have easily
obtained a copy thereof either from the shipper or
the charterer." The INSURER cannot avoid the binding
effect of the arbitration clause. By subrogation, it
became privy to the Charter Party as fully as the
SHIPPER before the latter was indemnified, because
as subrogee, it stepped into the shoes of the
SHIPPER-ASSURED and is subrogated merely to the
latters rights. It can recover only the amount that is
recoverable by the assured. And since the right of
action of the SHIPPER-ASSURED is governed by the
provisions of the Bill of Lading, which includes by
reference the terms of the Charter Party. Any claim of
inconvenience or additional expense on its part
should
not
render
the
arbitration
clause
unenforceable.
4.
CIVIL LAW; ARBITRATION; RECOGNIZED AND
ACCEPTED
IN
OUR
JURISDICTION;
AS
AN
ALTERNATIVE MODE OF SETTLING DISPUTES.
Arbitration, as an alternative mode of settling
disputes, has long been recognized and accepted in
our jurisdiction (Chapter 2, Title XIV, Book IV, Civil
Code). Republic Act No. 876 (The Arbitration Law)
also expressly authorizes arbitration of domestic
disputes. Foreign arbitration as a system of settling
commercial disputes of an international character
was likewise recognized when the Philippines
adhered to the United Nations "Convention on the
Recognition and the Enforcement of Foreign Arbitral
Awards of 1958," under the 10 May 1965 Resolution
No. 71 of the Philippine Senate, giving reciprocal
recognition and allowing enforcement of international
arbitration agreements between parties of different
nationalities within a contracting state.
DECISION
MELENCIO-HERRERA, J.:
We uphold the ruling of respondent Court of Appeals
that the claim or dispute herein is arbitrable.
On 9 January 1985, United Coconut Chemicals, Inc.
(hereinafter referred to as SHIPPER) shipped 404.774
metric tons of distilled C6-C18 fatty acid on board MT
"Stolt Sceptre," a tanker owned by Stolt-Nielsen
Philippines Inc. (hereinafter referred to as CARRIER),
from Bauan, Batangas, Philippines, consigned to
"Nieuwe Matex" at Rotterdam, Netherlands, covered
by Tanker Bill of Lading B/L No. BAT-1. The shipment
was insured under a marine cargo policy with
Petitioner National Union Fire Insurance Company of
Pittsburg (hereinafter referred to as INSURER), a nonlife American insurance corporation, through its
settling agent in the Philippines, the American
International Underwriters (Philippines), Inc., the
other petitioner herein.

It appears that the Bill of Lading issued by the

CARRIER contained a general statement of
incorporation of the terms of a Charter Party between
the SHIPPER and Parcel Tankers, Inc., entered into in
Greenwich, Connecticut, U.S.A.
Upon receipt of the cargo by the CONSIGNEE in the
Netherlands, it was found to be discolored and totally
contaminated. The claim filed by the SHIPPERASSURED with the CARRIER having been denied, the
INSURER indemnified the SHIPPER pursuant to the
stipulation in the marine cargo policy covering said
shipment.
On 21 April 1986, as subrogee of the SHIPPERASSURED, the INSURER filed suit against the
CARRIER, before the Regional Trial Court of Makati,
Branch 58 (RTC), for recovery of the sum of
P1,619,469.21, with interest, representing the
amount the INSURER had paid the SHIPPERASSURED. The CARRIER moved to dismiss/suspend
the proceedings on the ground that the RTC had no
jurisdiction over the claim the same being an
arbitrable one; that as subrogee of the SHIPPERASSURED, the INSURER is subject to the provisions of
the Bill of Lading, which includes a provision that the
shipment is carried under and pursuant to the terms
of the Charter Party, dated 21 December 1984,
between the SHIPPER-ASSURED and Parcel Tankers,
Inc. providing for arbitration.
The INSURER opposed the dismissal/suspension of
the proceedings on the ground that it was not legally
bound to submit the claim for arbitration inasmuch
as the arbitration clause provided in the Charter
Party was not incorporated into the Bill of Lading, and
that the arbitration clause is void for being
unreasonable and unjust. On 28 July 1987, the RTC 1
denied the Motion, but subsequently reconsidered its
action on 19 November 1987, and deferred resolution
on the Motion to Dismiss/Suspend Proceedings until
trial on the merits "since the ground alleged in said
motion does not appear to be indubitable."
The CARRIER then resorted to a Petition for Certiorari
and Prohibition with prayer for Preliminary Injunction
and/or Temporary Restraining Order before the
respondent Appellate Court seeking the annulment of
the 19 November 1987 RTC Order. On 12 April 1989,
the respondent Court 2 promulgated the Decision
now under review, with the following dispositive
tenor:
"WHEREFORE, the order of respondent Judge dated
November 19, 1987 deferring resolution on petitioner
Stolt-Nielsens
Motion
to
Dismiss/Suspend
Proceedings is hereby SET ASIDE; private respondent
NUFIC (the INSURER) is ordered to refer its claims for
arbitration; and respondent Judge is directed to
suspend the proceedings in Civil Case No. 13498

pending the return of the corresponding arbitral

award."
On 21 August 1989, we resolved to give due course
and required the parties to submit their respective
Memoranda, which they have done, the last filed
having been Noted on 23 October 1989.
First, herein petitioner-INSURER alleges that the RTC
Order deferring resolution of the CARRIERs Motion to
Dismiss constitutes an interlocutory order, which can
not be the subject of a special civil action on
certiorari and prohibition.
Generally, this would be true. However, the case
before us falls under the exception. While a Court
Order deferring action on a motion to dismiss until
the trial is interlocutory and cannot be challenged
until final judgment, still, where it clearly appears
that the trial Judge or Court is proceeding in excess
or outside of its jurisdiction, the remedy of
prohibition would lie since it would be useless and a
waste of time to go ahead with the proceedings
(University of Sto. Tomas v. Villanueva, 106 Phil. 439,
[1959] citing Philippine International Fair, Inc., Et Al.,
v. Ibaez, Et Al., 94 Phil. 424 [1954]; Enrique v.
Macadaeg, Et Al., 84 Phil. 674 [1949]; San Beda
College v. CIR, 97 Phil. 787 [1955]). Even a cursory
reading of the subject Bill of Lading, in relation to the
Charter Party, reveals the Courts patent lack of
jurisdiction to hear and decide the claim.
We proceed to the second but more crucial issue: Are
the terms of the Charter Party, particularly the
provision on arbitration, binding on the INSURER?
The INSURER postulates that it cannot be bound by
the Charter Party because, as insurer, it is subrogee
only with respect to the Bill of Lading; that only the
Bill of Lading should regulate the relation among the
INSURER, the holder of the Bill of Lading, and the
CARRIER; and that in order to bind it, the arbitral
clause in the Charter Party should have been
incorporated into the Bill of Lading.
We rule against that submission.
The pertinent portion of the Bill of Lading in issue
provides in part:
"This shipment is carried under and pursuant to the
terms of the Charter dated December 21st 1984 at
Greenwich, Connecticut, U.S.A. between Parcel
Tankers, Inc. and United Coconut Chemicals, Ind. as
Charterer and all the terms whatsoever of the said
Charter except the rate and payment of freight
specified therein apply to and govern the rights of
the parties concerned in this shipment. Copy of the
Charter may be obtained from the Shipper or
Charterer."

While the provision on arbitration in the Charter Party

reads:
"H.
x

reference thereof in the bill of lading and, by the

exercise of ordinary diligence, it could have easily
obtained a copy thereof either from the shipper or
the charterer."

Special Provisions.
x

4.
Arbitration. Any dispute arising from the
making, performance or termination of this Charter
Party shall be settled in New York, Owner and
Charterer each appointing an arbitrator, who shall be
a merchant, broker or individual experienced in the
shipping business; the two thus chosen, if they
cannot agree, shall nominate a third arbitrator who
shall be an admiralty lawyer. Such arbitration shall be
conducted in conformity with the provisions and
procedure of the United States arbitration act, and a
judgment of the court shall be entered upon any
award made by said arbitrator. Nothing in this clause
shall be deemed to waive Owners right to lien on the
cargo for freight, deed of freight, or demurrage."
Clearly, the Bill of Lading incorporates by reference
the terms of the Charter Party. It is settled law that
the charter may be made part of the contract under
which the goods are carried by an appropriate
reference in the Bill of Lading (Wharton Poor, Charter
Parties and Ocean Bills of Lading (5th ed., p. 71). This
should include the provision on arbitration even
without a specific stipulation to that effect. The entire
contract must be read together and its clauses
interpreted in relation to one another and not by
parts. Moreover, in cases where a Bill of Lading has
been issued by a carrier covering goods shipped
aboard a vessel under a charter party, and the
charterer is also the holder of the bill of lading, "the
bill of lading operates as the receipt for the goods,
and as document of title passing the property of the
goods, but not as varying the contract between the
charterer and the shipowner" (In re Marine Sulphur
Queen, 460 F 2d 89, 103 [2d Cir. 1972]; Ministry of
Commerce v. Marine Tankers Corp. 194 F. Supp 161,
163 [S.D.N.Y. 1960]; Greenstone Shipping Co., S.A. v.
Transworld Oil, Ltd., 588 F Supp [D.E.I. 1984]). The
Bill of Lading becomes, therefore, only a receipt and
not the contract of carriage in a charter of the entire
vessel, for the contract is the Charter Party (Shell Oil
Co. v. M/T Gilda, 790 F 2d 1209, 1212 [5th Cir. 1986];
Home Insurance Co. v. American Steamship
Agencies, Inc., G.R. No. L-25599, 4 April 1968, 23
SCRA 24), and is the law between the parties who are
bound by its terms and condition provided that these
are not contrary to law, morals, good customs, public
order and public policy (Article 1306, Civil Code).
As the respondent Appellate Court found, the
INSURER "cannot feign ignorance of the arbitration
clause since it was already charged with notice of the
existence of the charter party due to an appropriate

We hold, therefore, that the INSURER cannot avoid

the binding effect of the arbitration clause. By
subrogation, it became privy to the Charter Party as
fully as the SHIPPER before the latter was
indemnified, because as subrogee, it stepped into
the shoes of the SHIPPER-ASSURED and is
subrogated merely to the latters rights. It can
recover only the amount that is recoverable by the
assured. And since the right of action of the SHIPPERASSURED is governed by the provisions of the Bill of
Lading, which includes by reference the terms of the
Charter Party, necessarily, a suit by the INSURER is
subject to the same agreements (see St. Paul Fire
and Marine Insurance Co. v. Macondray, G.R. No. L27796, 25 March 1976, 70 SCRA 122).
Stated otherwise, as the subrogee of the SHIPPER,
the INSURER is contractually bound by the terms of
the Charter party. Any claim of inconvenience or
additional expense on its part should not render the
arbitration clause unenforceable.
Arbitration, as an alternative mode of settling
disputes, has long been recognized and accepted in
our jurisdiction (Chapter 2, Title XIV, Book IV, Civil
Code). Republic Act No. 876 (The Arbitration Law)
also expressly authorizes arbitration of domestic
disputes. Foreign arbitration as a system of settling
commercial disputes of an international character
was likewise recognized when the Philippines
adhered to the United Nations "Convention on the
Recognition and the Enforcement of Foreign Arbitral
Awards of 1958," under the 10 May 1965 Resolution
No. 71 of the Philippine Senate, giving reciprocal
recognition and allowing enforcement of international
arbitration agreements between parties of different
nationalities within a contracting state. Thus, it
pertinently provides:
"1.
Each Contracting State shall recognize an
agreement in writing under which the parties
undertake to submit to arbitration all or any
differences which have arisen or which may arise
between them in respect of a defined legal
relationship, whether contractual or not, concerning
a subject matter capable of settlement by arbitration.
"2.
The term agreement in writing shall include
an arbitral clause in a contract or an arbitration
agreement, signed by the parties or contained in an
exchange of letters or telegrams.
"3.
The court of a Contracting State, when
seized of an action in a matter in respect of which
the parties have made an agreement within the

meaning of this article, shall, at the request of one of

the parties, refer the parties to arbitration, unless it
finds that the said agreement is null and void,
inoperative or incapable of being performed."
It has not been shown that the arbitral clause in
question is null and void, inoperative, or incapable of
being performed. Nor has any conflict been pointed
out between the Charter Party and the Bill of Lading.
In fine, referral to arbitration in New York pursuant to
the arbitration clause, and suspension of the
proceedings in Civil Case No. 13498 below, pending
the return of the arbitral award, is, indeed called for.
WHEREFORE, finding no reversible error in
respondent Appellate Courts 12 April 1989 Decision,
the instant Petition for Review on Certiorari is DENIED
and the said judgment is hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.
Padilla, Sarmiento and Regalado, JJ., concur.
Paras, J., took no part.

G.R. No. 91228

March 22, 1993

PUROMINES, INC., Petitioner, vs. COURT OF APPEALS

and PHILIPP BROTHERS OCEANIC, INC., Respondents.
Fajardo Law Offices for petitioner.
Del Rosario & Del Rosario for private respondent.
NOCON, J.:
This is a special civil action for certiorari and
prohibition to annul and set aside the Decision of the
respondent Court of Appeals dated November 16,
1989 1reversing the order of the trial court and
dismissing petitioner's complaint in Civil Case No. 8947403, entitled Puromines, Inc. v. Maritime Factors,
Inc. and Philipp Brothers Oceanic, Inc.
Culled from the records of this case, the facts show
that petitioner, Puromines, Inc. (Puromines for
brevity) and Makati Agro Trading, Inc. (not a party in
this case) entered into a contract with private
respondent Philipp Brothers Oceanic, Inc. for the sale
of prilled Urea in bulk. The Sales Contract No.
S151.8.01018 provided, among others an arbitration
clause which states, thus:
9.

the Arbitration Act 1950 and any statutory

amendment or modification thereof. Each party is to
appoint an Arbitrator, and should they be unable to
agree, the decision of an Umpire appointed by them
to be final. The Arbitrators and Umpire are all to be
commercial men and resident in London. This
submission may be made a rule of the High Court of
Justice in England by either party. 2
On or about May 22, 1988, the vessel M/V "Liliana
Dimitrova" loaded on board at Yuzhny, USSR a
shipment of 15,500 metric tons prilled Urea in bulk
complete and in good order and condition for
transport to Iloilo and Manila, to be delivered to
petitioner. Three bills of lading were issued by the
ship-agent in the Philippines, Maritime Factors Inc.,
namely: Bill of Lading No. 1 dated May 12, 1988
covering 10,000 metric tons for discharge in Manila;
Bill of Lading No. 2 of even date covering 4,000
metric tons for unloading in Iloilo City; and Bill of
Lading No. 3, also dated May 12, 1988, covering
1,500 metric tons likewise for discharge in Manila.
The shipment covered by Bill of Lading No. 2 was
discharged in Iloilo City complete and in good order
and condition. However, the shipments covered by
Bill of Lading Nos. 1 and 3 were discharged in Manila
in bad order and condition, caked, hardened and
lumpy, discolored and contaminated with rust and
dirt. Damages were valued at P683,056.29 including
additional discharging expenses.
Consequently, petitioner filed a complaint 3with the
trial court 4for breach of contract of carriage against
Maritime Factors, Inc. (which was not included as
respondent in this petition) as ship-agent in the
Philippines for the owners of the vessel MV "Liliana
Dimitrova," while private respondent, Philipp
Brothers Oceanic, Inc., was impleaded as charterer of
the said vessel and proper party to accord petitioner
complete relief. Maritime Factors, Inc. filed its Answer
5to the complaint, while private respondent filed a
motion to dismiss, dated February 9, 1989, on the
grounds that the complaint states no cause of action;
that it was prematurely filed; and that petitioner
should comply with the arbitration clause in the sales
contract.
The motion to dismiss was opposed by petitioner
contending the inapplicability of the arbitration
clause inasmuch as the cause of action did not arise
from a violation of the terms of the sales contract but
rather for claims of cargo damages where there is no
arbitration agreement. On April 26, 1989, the trial
court denied respondent's motion to dismiss in this
wise:

Arbitration
The sales contract in question states in part:

Any disputes arising under this contract shall be

settled by arbitration in London in accordance with

Any disputes arising under this contract shall be

settled by arbitration . . .
A perusal of the facts alleged in the complaint upon
which the question of sufficiency of the cause of
action is to be determined shows quite clearly that
the cause of action of the complaint arose from a
breach of contract of carriage by the vessel
chartered by the defendant Philipp Brothers Oceanic,
Inc. Thus, the aforementioned arbitration clause
cannot apply to the dispute in the present action
which
concerns
plaintiff's
claim
for
cargo
loss/damage arising from breach of contract of
carriage.
That the defendant is not the ship owner or common
carrier and therefore plaintiff does not have a legal
right against it since every action must be brought
against the real party in interest has no merit either
for by the allegations in the complaint the defendant
herein has been impleaded as charterer of the
vessel, hence, a proper party. 7
Elevating the matter to the Court of Appeals,
petitioner's complaint was dismissed. The appellate
court found that the arbitration provision in the sales
contract and/or the bills of lading is applicable in the
present case. Said the court:
An examination of the sales contract No.
S151.8.01018 shows that it is broad enough to
include the claim for damages arising from the
carriage and delivery of the goods subject-matter
thereof.
It is also noted that the bills of lading attached as
Annexes "A", "B" and "C" to the complaint state, in
part, "any dispute arising under this Bill of Lading
shall be referred to arbitration of the Maritime
Arbitration Commission at the USSR Chamber of
Commerce and Industry, 6 Kuibyshevskaia Str.,
Moscow, USSR, in accordance with the rules of
procedure of said commission."
Considering that the private respondent was one of
the signatories to the sales contract . . . all parties
are obliged to respect the terms and conditions of
the said sales contract, including the provision
thereof on "arbitration."
Hence, this petition.
The issue raised is: Whether the phrase "any dispute
arising under this contract" in the arbitration clause
of the sales contract covers a cargo claim against the
vessel (owners and/or charterers) for breach of
contract of carriage.
Petitioner states in its complaint that Philipp Brothers
"was the charterer of the vessel MV "Liliana

Dimitrova" which transported the shipment from

Yuzhny USSR to Manila." Petitioner further alleged
that the caking and hardening, wetting and melting,
and contamination by rust and dirt of the damaged
portions of the shipment were due to the improper
ventilation and inadequate storage facilities of the
vessel; that the wetting of the cargo was attributable
to the failure of the crew to close the hatches before
and when it rained while the shipment was being
unloaded in the Port of Manila; and that as a direct
and natural consequence of the unseaworthiness and
negligence of the vessel (sic), petitioner suffered
damages in the total amount of P683,056.29
Philippine currency." 8(emphasis supplied).
Moreover, in its Opposition to the Motion to Dismiss,
petitioner said that "[t]he cause of action of the
complaint arose from breach of contract of carriage
by the vessel that was chartered by defendant
Philipp Brothers." 9
In the present petition, petitioner argues that the
sales contract does not include the contract of
carriage which is a different contract entered into by
the carrier with the cargo owners. That it was an
error for the respondent court to touch upon the
arbitration provision of the bills of lading in its
decision inasmuch as the same was not raised as an
issue by private respondent who was not a party in
the bills of lading (emphasis Ours). Petitioner
contradicts itself.
We agree with the court a quo that the sales contract
is comprehensive enough to include claims for
damages arising from carriage and delivery of the
goods. As a general rule, the seller has the obligation
to transmit the goods to the buyer, and concomitant
thereto, the contracting of a carrier to deliver the
same. Art. 1523 of the Civil Code provides:
Art. 1523.
Where in pursuance of a contract of
sale, the seller is authorized or required to send the
goods to the buyer, delivery of the goods to a carrier,
whether named by the buyer or not, for the purpose
of transmission to the buyer is deemed to be a
delivery of the goods to the buyer, except in the
cases provided for in article 1503, first, second and
third paragraphs, or unless a contrary intent appears.
Unless otherwise authorized by the buyer, the seller
must make such contract with the carrier on behalf of
the buyer as may be reasonable, having regard to
the nature of the goods and the other circumstances
of the case. If the seller omit so to do, and the goods
are lost or damaged in course of transit, the buyer
may decline to treat the delivery to the carrier as a
delivery to himself, or may hold the seller responsible
in damages.
xxx

xxx

xxx

The disputed sales contract provides for conditions

relative to the delivery of goods, such as date of
shipment, demurrage, weight as determined by the
bill of lading at load port and more particularly the
following provisions:
3.
Intention is to ship in one bottom,
approximately 5,000 metric tons to Puromines and
approximately 15,000 metric tons to Makati Agro.
However, Sellers to have right to ship material as
partial shipment or co-shipment in addition to above.
In the event of co-shipment to a third party within
Philippines same to be discussed with and acceptable
to both Puromines and Makati Agro.
4.
Sellers to appoint neutral survey for Seller's
account to conduct initial draft survey at first
discharge port and final survey at last discharge port.
Surveyors results to be binding and final. In the event
draft survey results show a quantity less than the
combined Bills of Lading quantity for both Puromines
and Makati Agro, Sellers to refund the difference. In
the event that draft survey results show a quantity in
excess of combined Bills of Lading quantity of both
Puromines and Makati Agro then Buyers to refund the
difference.
5.
It is expressly and mutually agreed that
neither Sellers nor vessel's Owners have any liability
to separate cargo or to deliver cargo separately or to
deliver minimum/maximum quantities stated on
individual Bills of Lading. At each port vessel is to
discharge
in
accordance with
Buyers
local
requirements and it is Buyer's responsibility to
separate individual quantities required by each of
them at each port during or after discharge.
As argued by respondent on its motion to dismiss,
"the (petitioner) derives his right to the cargo from
the bill of lading which is the contract of
affreightment together with the sales contract.
Consequently, the (petitioner) is bound by the
provisions and terms of said bill of lading and of the
arbitration clause incorporated in the sales contract."
Assuming arguendo that the liability of respondent is
not based on the sales contract, but rather on the
contract of carriage, being the charterer of the vessel
MV "Liliana Dimitrova," it would, therefore, be
material to show what kind of charter party the
respondent had with the shipowner to determine
respondent's liability.
American jurisprudence defines charter party as a
contract by which an entire ship or some principal
part thereof is let by the owner to another person for
a specified time or use. 10 Charter or charter parties
are of two kinds. Charter of demise or bareboat and
contracts of affreightment.

Under the demise or bareboat charter of the vessel,

the charterer will generally be considered as owner
for the voyage or service stipulated. The charterer
mans the vessel with his own people and becomes,
in effect, the owner pro hac vice, subject to liability
to others for damages caused by negligence. 11 To
create a demise the owner of a vessel must
completely and exclusively relinquish possession,
command and navigation thereof to the charterer;
anything short of such a complete transfer is a
contract of affreightment (time or voyage charter
party) or not a charter party at all.
On the other hand, a contract of affreightment is one
in which the owner of the vessel leases part or all of
its space to haul goods for others. It is a contract for
a special service to be rendered by the owner of the
vessel 12and under such contract the general owner
retains the possession, command and navigation of
the ship, the charterer or freighter merely having use
of the space in the vessel in return for his payment of
the charter hire. 13If the charter is a contract of
affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the
rights, responsibilities of ownership rest on the owner
and the charterer is usually free from liability to third
persons in respect of the ship. 14
Responsibility to third persons for goods shipped on
board a vessel follows the vessel's possession and
employment; and if possession is transferred to the
charterer by virtue of a demise, the charterer, and
not the owner, is liable as carrier on the contract of
affreightment made by himself or by the master with
third persons, and is answerable for loss, damage or
nondelivery of goods received for transportation. An
owner who retains possession of the ship, though the
hold is the property of the charterer, remains liable
as carrier and must answer for any breach of duty as
to the care, loading or unloading of the
cargo. 15
Assuming that in the present case, the charter party
is a demise or bareboat charter, then Philipp Brothers
is liable to Puromines, Inc., subject to the terms and
conditions of the sales contract. On the other hand, if
the contract between respondent and the owner of
the vessel MV "Liliana Dimitrova" was merely that of
affreightment, then it cannot be held liable for the
damages caused by the breach of contract of
carriage, the evidence of which is the bills of lading.
In any case, whether the liability of respondent
should be based on the sales contract or that of the
bill of lading, the parties are nevertheless obligated
to respect the arbitration provisions on the sales
contract and/or the bill of lading. Petitioner being a
signatory and party to the sales contract cannot

escape from his obligation under the arbitration

clause as stated therein.
Neither can petitioner contend that the arbitration
provision in the bills of lading should not have been
discussed as an issue in the decision of the Court of
Appeals since it was not raised as a special or
affirmative defense. The three bills of lading were
attached to the complaint as Annexes "A," "B," and
"C," and are therefore parts thereof and may be
considered as evidence although not introduced as
such. 16Hence, it was then proper for the court a quo
to discuss the contents of the bills of lading, having
been made part of the record.
Going back to the main subject of this case,
arbitration has been held valid and constitutional.
Even before the enactment of Republic Act No. 876,
this Court has countenanced the settlement of
disputes through arbitration. The rule now is that
unless the agreement is such as absolutely to close
the doors of the courts against the parties, which
agreement would be void, the courts will look with
favor upon such amicable arrangements and will only
interfere with great reluctance to anticipate or nullify
the action of the arbitrator. 17
As pointed out in the case of Mindanao Portland
Cement Corp. v. McDonough Construction Company
of Florida 18wherein the plaintiff sued defendant for
damages arising from a contract, the Court said:
Since there obtains herein a written provision for
arbitration as well as failure on respondent's part to
comply therewith, the court a quo rightly ordered the
parties to proceed to their arbitration in accordance
with the terms of their agreement (Sec. 6 Republic
Act 876). Respondent's arguments touching upon the
merits of the dispute are improperly raised herein.
They should be addressed to the arbitrators. This
proceeding is merely a summary remedy to enforce
the agreement to arbitrate. The duty of the court in
this case is not to resolve the merits of the parties'
claims but only to determine if they should proceed
to arbitration or not. And although it has been ruled
that a frivolous or patently baseless claim should not
be ordered to arbitration it is also recognized that the
mere fact that a defense exists against a claim does
not make it frivolous or baseless. 19
In the case of Bengson v. Chan, 20We upheld the
provision of a contract which required the parties to
submit their disputes to arbitration and We held as
follows:
The trial court sensibly said that "all the causes of
action alleged in the plaintiff's amended complaint
are based upon the supposed violations committed
by the defendants of the "Contract of Construction of
a Building" and that "the provisions of paragraph 15

hereof leave a very little room for doubt that the said
causes of action are embraced within the phrase
"any and all questions, disputes or differences
between the parties hereto relative to the
construction of the building," which must be
determined by arbitration of two persons and such
determination by the arbitrators shall be "final,
conclusive and binding upon both parties" unless
they go to court, in which the case the determination
by arbitration is a condition precedent "for taking any
court action."
xxx

xxx

xxx

We hold that the terms of paragraph 15 clearly

express the intention of the parties that all disputes
between them should first be arbitrated before court
action can be taken by the aggrieved party. 21
Premises considered, We uphold the validity and
applicability of the arbitration clause as stated in
Sales Contract No. S151.8.01018 to the present
dispute.
WHEREFORE, petition is hereby DISMISSED and the
decision of the court a quo is AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Campos, Jr., JJ.,
concur.

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-appelleeParmanandShewaram 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 plaintiffappellee 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 ParmanandShewaram, 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 ParmanandShewaram 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.
x xx

x xx

x xx

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, appelleecan 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,
disaster or calamity;

or

other

natural

(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
authority.1wph1.t

of

competent

public

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.

"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.

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.

G.R. No. L-31150 July 22, 1975

KONINKLIJKE
LUCHTVAART
MAATSHAPPIJ
N.V.,
otherwise
known
as
KLM
ROYAL
DUTCH
AIRLINES,petitioner,
vs.
THE HONORABLE COURT OF APPEALS, CONSUELO T.
MENDOZA and RUFINO T. MENDOZA, respondents.
Picazo, Agcaoili, Santayana, Reyes and Tayao for
petitioner.
Bengzon, Villegas, Zarraga, Narciso and Cudala for
respondents.
CASTRO, J.:
In this appeal by way of certiorari the Koninklijke
Luchtvaart Maatschappij N.V., otherwise known as
the KLM Royal Dutch Airlines (hereinafter referred to
as the KLM) assails the award of damages made by
the Court of Appeals in CA-G.R. 40620 in favor of the
spouses Rufino T. Mendoza and Consuelo T. Mendoza
(hereinafter
referred
to
as
the
respondents).1wph1.t
Sometime
in
March
1965
the
respondents
approached Tirso Reyes, manager of a branch of the
Philippine Travel Bureau, a travel agency, for
consultations about a world tour which they were
intending to make with their daughter and a niece.
Reyes submitted to them, after preliminary
discussions, a tentative itinerary which prescribed a
trip of thirty-five legs; the respondents would fly on
different airlines. Three segments of the trip, the
longest, would be via KLM. The respondents
expressed a desire to visit Lourdes, France, and
discussed with Reyes two alternate routes, namely,
Paris to Lourdes and Barcelona to Lourdes. The

respondents decided on the Barcelona-Lourdes route

with knowledge that only one airline, Aer Lingus,
serviced it.
The Philippine Travel Bureau to which Reyes was
accredited was an agent for international air carriers
which are members of the International Air Transport
Association, popularly known as the "IATA," of which
both the KLM and the Aer Lingus are members.
After about two weeks, the respondents approved the
itinerary prepared for them, and asked Reyes to
make the necessary plane reservations. Reyes went
to the KLM, for which the respondents had expressed
preference. The KLM thereafter secured seat
reservations for the respondents and their two
companions from the carriers which would ferry them
throughout their trip, with the exception of Aer
Lingus. When the respondents left the Philippines
(without their young wards who had enplaned much
earlier), they were issued KLM tickets for their entire
trip. However, their coupon for the Aer Lingus portion
(Flight 861 for June 22, 1965) was marked "RQ"
which meant "on request".
After sightseeing in American and European cities
(they were in the meantime joined by their two
young companions), the respondents arrived in
Frankfurt, Germany. They went to a KLM office there
and obtained a confirmation from Aer Lingus of seat
reservations on flight 861. After meandering in
London, Paris and Lisbon, the foursome finally took
wing to Barcelona for their trip to Lourdes, France.
In the afternoon of June 22, 1965 the respondents
with their wards went to the Barcelona airport to take
their plane which arrived at 4:00 o'clock. At the
airport, the manager of Aer Lingus directed the
respondents to check in. They did so as instructed
and were accepted for passage. However, although
their daughter and niece were allowed to take the
plane, the respondents were off-loaded on orders of
the Aer Lingus manager who brusquely shoved them
aside with the aid of a policeman and who shouted at
them, "Conos! Ignorantes Filipinos!"
Mrs. Mendoza later called up the manager of Aer
Lingus and requested that they provide her and her
husband means to get to Lourdes, but the request
was denied. A stranger, however, advised them to
take a train, which the two did; despite the third class
accommodations and lack of food service, they
reached Lourdes the following morning. During the
train trip the respondents had to suffer draft winds as
they wore only minimum clothing, their luggage
having gone ahead with the Aer Lingus plane. They
spent $50 for that train trip; their plane passage was
worth $43.35.

On March 17, 1966 the respondents, referring to KLM

as the principal of Aer Lingus, filed a complaint for
damages with the Court of First Instance of Manila
arising from breach of contract of carriage and for
the humiliating treatment received by them at the
hands of the Aer Lingus manager in Barcelona. After
due hearing, the trial court awarded damages to the
respondents as follows: $43.35 or its peso equivalent
as actual damages, P10,000 as moral damages,
P5,000 as exemplary damages, and P5,000 as
attorney's fees, and expenses of litigation.
Both parties appealed to the Court of Appeals. The
KLM sought complete exoneration; the respondents
prayed for an increase in the award of damages. In
its decision of August 14, 1969 the Court of Appeals
decreed as follows: "Appellant KLM is condemned to
pay unto the plaintiffs the sum of $43.35 as actual
damages; P50,000 as moral damages; and P6,000 as
attorney's fees and costs."
Hence, the present recourse by the KLM.
The KLM prays for exculpation from damages on the
strength of the following particulars which were
advanced to but rejected by the Court of Appeals:
(a) The air tickets issued to the respondents stipulate
that carriage thereunder is subject to the
"Convention for the Unification of Certain Rules
Relating to International Transportation by Air,"
otherwise known as the "Warsaw Convention," to
which the Philippine Government is a party by
adherence, and which pertinently provides. 1
ART. 30. (1) In the case of transportation to be
performed by various successive carriers and failing
within the definition set out in the third paragraph of
Article I, each carrier who accepts passengers,
baggage, or goods shall be subject to the rules set
out in the convention, and shall be deemed to be one
of the contracting parties to the contract of
transportation insofar as the contract deals with that
part of transportation which is performed under his
supervision. 2
(2) In the case of transportation of this nature, the
passenger or his representative can take action only
against the carrier who performed the transportation
during which the accident or the delay occured, save
in the case where, by express agreement, the first
carrier has assumed liability for the whole journey.
(emphasis supplied)
(b) On the inside front cover of each ticket the
following appears under the heading "Conditions of
Contract":
1 ... (a) Liability of carrier for damages shall be
limited to occurrences on its own line, except in the

case of checked baggage as to which the passenger

also has a right of action against the first or last
carrier. A carrier issuing a ticket or checking baggage
for carriage over the lines of others does so only as
agent..
(c) All that the KLM did after the respondents
completed their arrangements with the travel agency
was to request for seat reservations among the
airlines called for by the itinerary submitted to the
KLM and to issue tickets for the entire flight as a
ticket-issuing agent.
The respondents rebut the foregoing arguments,
thus:
(a) Article 30 of the Warsaw Convention has no
application in the case at bar which involves, not an
accident or delay, but a willful misconduct on the
part of the KLM's agent, the Aer Lingus. Under article
25 of the same Convention the following is
prescribed:
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. 3
(2) Similarly, the carrier shall not be entitled to avail
himself of the said provisions, if the damage is
caused under the same circumstances by any agent
of the carrier acting within the scope of his
employment. (emphasis by respondents)
(b) The condition in their tickets which purportedly
excuse the KLM from liability appears in very small
print, to read which, as found by the Court of
Appeals, one has practically to use a magnifying
glass.
(c) The first paragraph of the "Conditions of Contract"
appearing identically on the KLM tickets issued to
them idubitably shows that their contract was one of
continuous air transportation around the world:
1 ... "carriage" includes the air carrier issuing this
ticket and all carriers that carry or undertake to carry
the passenger or his baggage hereunder or perform
any other service incidental to such air carriage...
Carriage to be performed hereunder by several
successive carrier is regarded as a single operation.
(d) The contract of air transportation was exclusively
between the respondents and the KLM, the latter
merely endorsing its performance to other carriers,
like Aer Lingus, as its subcontractors or agents, as
evidenced by the passage tickets themselves which
on their face disclose that they are KLM tickets.

Moreover, the respondents dealt only with KLM

through the travel agency.
1. The applicability insisted upon by the KLM of
article 30 of the Warsaw Convention cannot be
sustained. That article presupposes the occurrence of
either an accident or a delay, neither of which took
place at the Barcelona airport; what is here manifest,
instead, is that the Aer Lingus, through its manager
there, refused to transport the respondents to their
planned and contracted destination.
2. The argument that the KLM should not be held
accountable for the tortious conduct of Aer Lingus
because of the provision printed on the respondents'
tickets expressly limiting the KLM's liability for
damages only to occurrences on its own lines is
unacceptable. As noted by the Court of Appeals that
condition was printed in letters so small that one
would have to use a magnifying glass to read the
words. Under the circumstances, it would be unfair
and inequitable to charge the respondents with
automatic knowledge or notice of the said condition
so as to preclude any doubt that it was fairly and
freely agreed upon by the respondents when they
accepted the passage tickets issued to them by the
KLM. As the airline which issued those tickets with
the knowledge that the respondents would be flown
on the various legs of their journey by different air
carriers, the KLM was chargeable with the duty and
responsibility
of
specifically
informing
the
respondents of conditions prescribed in their tickets
or, in the very least, to ascertain that the
respondents read them before they accepted their
passage tickets. A thorough search of the record,
however, inexplicably fails to show that any effort
was exerted by the KLM officials or employees to
discharge in a proper manner this responsibility to
the respondents. Consequently, we hold that the
respondents cannot be bound by the provision in
question by which KLM unilaterally assumed the role
of a mere ticket-issuing agent for other airlines and
limited its liability only to untoward occurrences on
its own lines.
3. Moreover, as maintained by the respondents and
the Court of Appeals, the passage tickets of the
respondents provide that the carriage to be
performed thereunder by several successive carriers
"is to be regarded as a single operation," which is
diametrically incompatible with the theory of the KLM
that the respondents entered into a series of
independent contracts with the carriers which took
them on the various segments of their trip. This
position of KLM we reject. The respondents dealt
exclusively with the KLM which issued them tickets
for their entire trip and which in effect guaranteed to
them that they would have sure space in Aer Lingus
flight 861. The respondents, under that assurance of
the internationally prestigious KLM, naturally had the

right to expect that their tickets would be honored by

Aer Lingus to which, in the legal sense, the KLM had
indorsed and in effect guaranteed the performance
of its principal engagement to carry out the
respondents' scheduled itinerary previously and
mutually agreed upon between the parties.
4.The breach of that guarantee was aggravated by
the discourteous and highly arbitrary conduct of an
official of the Aer Lingus which the KLM had engaged
to transport the respondents on the BarcelonaLourdes segment of their itinerary. It is but just and in
full accord with the policy expressly embodied in our
civil law which enjoins courts to be more vigilant for
the protection of a contracting party who occupies an
inferior position with respect to the other contracting
party, that the KLM should be held responsible for
the abuse, injury and embarrassment suffered by the
respondents at the hands of a supercilious boor of
the Aer Lingus.
ACCORDINGLY, the judgment of the Court of Appeals
dated August 14, 1969 is affirmed, at KLM's cost.
Makalintal, C.J., Makasiar,
Palma, JJ., concur.

Esguerra

and

Muoz

Footnotes
1 See 51 O.G. 4933 et seq. for text of Presidential
Proclamation of adherence dated September 23,
1955. See 51 O.G. 5084 et seq. for full text of the
Convention.
2 Article I (3) provides: "Transportation to be
performed by several successive air carriers shall be
deemed, for the purposes of this Convention, to be
one undivided transportation, if it has been regarded
by the parties as a single operation, whether it has
been agreed upon under the form of a single contract
or of a series of contracts, and it shall not lose its
international character merely because one contract
or a series of contracts is to be performed entirely
within the territory subject to the sovereignty,
suzerainty, mandate, or authority of the same High
Contracting Party."
3 Article 22 of the Convention limits the liability of an
air carrier in the transportation of passengers to
125,000 francs except where both carrier and
passenger "agree to a higher limit of liability."

G.R. No. 60673 May 19, 1992

PAN AMERICAN WORLD AIRWAYS, INC., petitioner,

vs.
JOSE K. RAPADAS and THE COURT OF APPEALS,
respondents.
Froilan P. Pobre for private respondent.
GUTIERREZ, JR., J.:
This is a petition for review assailing the decision of
the respondent Court of Appeals which affirmed in
toto the trial court decision on the liability of
petitioner Pan American World Airways for damages
due to private respondent. The trial court ruled that
the petitioner can not avail of a limitation of liabilities
for lost baggages of a passenger. The dispositive
portion of the trial court decision reads:
WHEREFORE, in view of the foregoing considerations,
judgment is hereby rendered ordering defendant to
pay plaintiff by way of actual damages the equivalent
peso value of the amount of $5,228.90 and 100
paengs, nominal damages in the amount of
P20,000.00 and attorney's fees of P5,000.00, and the
costs of the suit. Defendant's counterclaim is
dismissed. (Rollo, p. 13)
On January 16, 1975, private respondent Jose K.
Rapadas held Passenger Ticket and Baggage Claim
Check No. 026-394830084-5 for petitioner's Flight
No. 841 with the route from Guam to Manila. While
standing in line to board the flight at the Guam
airport, Rapadas was ordered by petitioner's
handcarry control agent to check-in his Samsonite
attache case. Rapadas protested pointing to the fact
that other co-passengers were permitted to
handcarry bulkier baggages. He stepped out of the
line only to go back again at the end of it to try if he
can get through without having to register his
attache case. However, the same man in charge of
handcarry control did not fail to notice him and
ordered him again to register his baggage. For fear
that he would miss the plane if he insisted and
argued on personally taking the valise with him, he
acceded to checking it in. He then gave his attache
case to his brother who happened to be around and
who checked it in for him, but without declaring its
contents or the value of its contents. He was given a
Baggage Claim Tag No. P-749-713. (Exhibit "B" for
the plaintiff-respondent)
Upon arriving in Manila on the same date, January
16, 1975, Rapadas claimed and was given all his
checked-in baggages except the attache case. Since
Rapadas felt ill on his arrival, he sent his son, Jorge
Rapadas to request for the search of the missing
luggage. The petitioner exerted efforts to locate the
luggage through the Pan American World AirwaysManila International Airport (PAN AM-MIA) Baggage
Service.

On January 30, 1975, the petitioner required the

private respondent to put the request in writing. The
respondent filled in a Baggage Claim Blank Form.
Thereafter, Rapadas personally followed up his claim.
For several times, he called up Mr. Panuelos, the
head of the Baggage Section of PAN AM. He also sent
letters demanding and reminding the petitioner of his
claim.
Rapadas received a letter from the petitioner's
counsel dated August 2, 1975 offering to settle the
claim for the sum of one hundred sixty dollars
($160.00) representing the petitioner's alleged limit
of liability for loss or damage to a passenger's
personal property under the contract of carriage
between Rapadas and PAN AM. Refusing to accept
this kind of settlement, Rapadas filed the instant
action for damages on October 1, 1975. Rapadas
alleged that PAN AM discriminated or singled him out
in ordering that his luggage be checked in. He also
alleged that PAN AM neglected its duty in the
handling and safekeeping of his attache case from
the point of embarkation in Guam to his destination
in Manila. He placed the value of the lost attache
case and its contents at US$42,403.90. According to
him, the loss resulted in his failure to pay certain
monetary obligations, failure to remit money sent
through him to relatives, inability to enjoy the fruits
of his retirement and vacation pay earned from
working in Tonga Construction Company (he retired
in August 1974) and inability to return to Tonga to
comply with then existing contracts.
In its answer, petitioner-defendant PAN AM
acknowledged responsibility for the loss of the
attache case but asserted that the claim was subject
to the "Notice of Baggage Liability Limitations"
allegedly attached to and forming part of the
passenger ticket. The petitioner argued that the
same notice was also conspicuously posted in its
offices for the guidance of the passengers.
At the trial, private respondent showed proof of his
retirement award and vacation pay amounting to
$4,750.00. He claimed that the attache case also
contained other money consisting of $1,400
allegedly given to him by his son, Jaime, as a round
trip fare of his (plaintiff-respondent) wife, but which
amount was later found to be actually intended by
Jaime as payment for arrears of a lot purchased from
Tropical Homes, Inc.; $3,000 allegedly given by his
brothers for payment of taxes and for constructing
improvements on the Rapadas estates; and $300.00
birthday present of the spouses Mr. and Mrs. Ruben
Canonizado to plaintiff-respondent's wife. He also
claimed having kept several items in the attache
case, namely (1) contracts and records of
employment, letters of commendation, testimonials
and newspaper clippings on his achievement for 13
years in Tonga, New Zealand and Australia, drafts of

manuscripts, photographs and drivers license alleged

to be worth $20,000.00; a Polaroid camera, films,
calculator, and other personal items worth $403.90;
memorabilia, autographs personally acquired from
Charles Lindberg, Lawrence Rockefeller and Ryoichi
Sasakawa, a commemorative palladium coin worth
Tongan 100 paengs and unused Tongan stamps, all
totalling $7,500.00; and a plan worth $5,000.00
drawn by his son Jaime, who is an architect, for the
construction of a residential house and a 6-story
commercial building. Rapadas claimed the amount of
the attache case itself to be $25.50. (See Decision in
Civil Case No. 99564 in Amended Record on Appeal,
pp. 61-85)
The lower court ruled in favor of complainant
Rapadas after finding no stipulation giving notice to
the baggage liability limitation. The court rejected
the claim of defendant PANAM that its liability under
the terms of the passenger ticket is only up to
$160.00. However, it scrutinized all the claims of the
plaintiff. It discredited insufficient evidence to show
discriminatory acts or bad faith on the part of
petitioner PANAM.
On appeal, the Court of Appeals affirmed the trial
court decision. Hence, this petition.
The main issue raised in the case at bar is whether or
not a passenger is bound by the terms of a
passenger ticket declaring that the limitations of
liability set forth in the Warsaw Convention (October
12, 1929; 137 League of Nations Treaty Series II; See
Proclamation No. 201 [1955], 51 O.G. 4933 [October,
1955]) as amended by the Hague Protocol
(September 28, 1955; 478 UNTS 373; III PTS 515),
shall apply in case of loss, damage or destruction to
a registered luggage of a passenger.
The petitioner maintains that its liability for the lost
baggage of respondent Rapadas was limited to
$160.00 since the latter did not declare a higher
value for his baggage and did not pay the
corresponding additional charges.
The private respondent, on the other hand, insists
that he is entitled to as much damages as those
awarded by the court and affirmed by the respondent
appellate court.
After a review of the various arguments of the
opposing parties as well as the records of the case,
the Court finds sufficient basis under the particular
facts of this case for the availment of the liability
limitations under the Warsaw Convention.
There is no dispute, and the courts below admit, that
there was such a Notice appearing on page two (2) of
the airline ticket stating that the Warsaw Convention
governs in case of death or injury to a passenger or

of loss, damage or destruction to a passenger's

luggage.
The Notice states:
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."
(The latter notice refers to limited liability for death
or personal injury to passengers with proven
damages not exceeding US $75,000 per passenger;
Exhibit "K" for plaintiff respondent, Table of Exhibits,
p. 19)
Furthermore, paragraph 2 of the "Conditions of
Contract" also appearing on page 2 of the ticket
states:
2. Carriage hereunder is subject to the rules
limitations relating to liability established by
Warsaw Convention unless such carriage is
"international carriage"
as
defined by
Convention. (Exhibit "K", supra)

and
the
not
that

We note that plaintiff-respondent Rapadas presented

as proof of the Passenger Ticket and Baggage Check
No. 026-394830084-5 a xerox copy of its page 2
which contains the Notice and Conditions of Contract,
and also page 3 which recites the Advice to
International Passengers on Limitation of Liability. He
also presented two xerox copies of Flight Coupon No.
3 of the same passenger ticket showing the fares
paid for the trips Honolulu to Guam, Guam to Manila,
and Manila to Honolulu to prove his obligations which
remained unpaid because of the unexpected loss of
money allegedly placed inside the missing attache
case. Rapadas explained during the trial that the
same passenger ticket was returned by him to one
Mr. S.L. Faupula of the Union Steam Ship Company of
New Zealand, Ltd., Tonga who demanded the
payment of the fares or otherwise, the return of the
unused plane tickets (including the subject Passenger
Ticket & Baggage Check No. 026-394830084-5). The
issuance of these tickets was facilitated by Mr.
Faupula on credit.
Meanwhile, the petitioner offered as evidence Exhibit
"1" also showing page 2 of the passenger ticket to
prove the notice and the conditions of the contract of
carriage. It likewise offered Exhibit "1-A", a xerox
copy of a "Notice of Baggage Liability Limitations"
which the trial court disregarded and held to be nonexistent. The same Exhibit "1-A" contained the
following stipulations:

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 $8.16 per
pound ($18.00 per kilo; now $20.00 per Exhibit "13")
for checked baggage and $360 (now $400 per Exhibit
"13") per passenger for unchecked baggage; (2) for
travel wholly between U.S. points, to $500 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. (Table of Exhibits,
p. 45)
The original of the Passenger Ticket and Baggage
Check No. 026-394830084-5 itself was not presented
as evidence as it was among those returned to Mr.
Faupula. Thus, apart from the evidence offered by
the defendant airline, the lower court had no other
basis for determining whether or not there was
actually a stipulation on the specific amounts the
petitioner had expressed itself to be liable for loss of
baggage.
Although the trial court rejected the evidence of the
defendant-petitioner of a stipulation particularly
specifying what amounts it had bound itself to pay
for loss of luggage, the Notice and paragraph 2 of the
"Conditions of Contract" should be sufficient notice
showing the applicability of the Warsaw limitations.
The Warsaw Convention, as amended, specifically
provides that it is applicable to international carriage
which it defines in Article 1, par. 2 as follows:
(2) For the purposes of this Convention, the
expression "international carriage" means any
carriage in which, according to the agreement
between the parties, the place of departure and the
place of destination, whether or not there be a
breach in the carriage or a transhipment, are
situated either within the territories of two High
Contracting Parties or within the territory of a single
High Contracting Party if there is an agreed stopping
place within the territory of another State, even if
that State is not a High Contracting Party. Carriage
between two points within the territory of a single
High Contracting Party without an agreed stopping
place within the territory of another State is not
international carriage for the purposes of this
Convention. ("High Contracting Party" refers to a
state which has ratified or adhered to the
Convention, or which has not effectively denounced
the Convention [Article 40A(l)]).
Nowhere in the Warsaw Convention, as amended, is
such a detailed notice of baggage liability limitations

required. Nevertheless, it should become a common,

safe and practical custom among air carriers to
indicate beforehand the precise sums equivalent to
those fixed by Article 22 (2) of the Convention.

because of their basically one sided nature, the Court

does not hesitate to rule out blind adherence to their
terms. (See Sweet Lines, Inc. v. Teves, 83 SCRA 361,
368-369[1978])

The Convention governs the availment of the liability

limitations where the baggage check is combined
with or incorporated in the passenger ticket which
complies with the provisions of Article 3, par. l (c).
(Article 4, par. 2) In the case at bar, the baggage
check is combined with the passenger ticket in one
document of carriage. The passenger ticket complies
with Article 3, par. l (c) which provides:

The arguments of the petitioner do not belie the fact

that it was indeed accountable for the loss of the
attache case. What the petitioner is concerned about
is whether or not the notice, which it did not fail to
state in the plane ticket and which it deemed to have
been read and accepted by the private respondent
will be considered by this Court as adequate under
the circumstances of this case. As earlier stated, the
Court finds the provisions in the plane ticket
sufficient to govern the limitations of liabilities of the
airline for loss of luggage. The passenger, upon
contracting with the airline and receiving the plane
ticket, was expected to be vigilant insofar as his
luggage is concerned. If the passenger fails to
adduce evidence to overcome the stipulations, he
cannot avoid the application of the liability
limitations.

(l) In respect of the carriage of passengers a ticket

shall be delivered containing:
(a) . . .
(b) . . .
(c) a notice to the effect that, 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 that 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.
We have held in the case of OngYiu v. Court of
Appeals, supra, and reiterated in a similar case
where herein petitioner was also sued for damages,
Pan American World Airways v. Intermediate
Appellate Court (164 SCRA 268 [1988]) that:
It (plane ticket) 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, January 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 . . . (91
SCRA 223 at page 231)
We hasten to add that while contracts of adhesion
are not entirely prohibited, neither is a blind reliance
on them encouraged. In the face of facts and
circumstances showing they should be ignored

The facts show that the private respondent actually

refused to register the attache case and chose to
take it with him despite having been ordered by the
PANAM agent to check it in. In attempting to avoid
registering the luggage by going back to the line,
private respondent manifested a disregard of airline
rules on allowable handcarriedbaggages. Prudence of
a reasonably careful person also dictates that cash
and jewelry should be removed from checked-inluggage and placed in one's pockets or in a
handcarried Manila-paper or plastic envelope.
The alleged lack of enough time for him to make a
declaration of a higher value and to pay the
corresponding supplementary charges cannot justify
his failure to comply with the requirement that will
exclude the application of limited liability. Had he not
wavered in his decision to register his luggage, he
could have had enough time to disclose the true
worth of the articles in it and to pay the extra
charges or remove them from the checked-inluggage. Moreover, an airplane will not depart
meantime that its own employee is asking a
passenger to comply with a safety regulation.
Passengers are also allowed one handcarried bag
each provided it conforms to certain prescribed
dimensions. If Mr. Rapadas was not allowed to
handcarry the lost attache case, it can only mean
that he was carrying more than the allowable weight
for all his luggages or more than the allowable
number of handcarried items or more than the
prescribed dimensions for the bag or valise. The
evidence on any arbitrary behavior of a Pan Am
employee or inexcusable negligence on the part of
the carrier is not clear from the petition. Absent such

proof, we cannot hold the carrier liable because of

arbitrariness, discrimination, or mistreatment.
We are not by any means suggesting that
passengers are always bound to the stipulated
amounts printed on a ticket, found in a contract of
adhesion, or printed elsewhere but referred to in
handouts or forms. We simply recognize that the
reasons behind stipulations on liability limitations
arise from the difficulty, if not impossibility, of
establishing with a clear preponderance of evidence
the contents of a lost valise or suitcase. Unless the
contents are declared, it will always be the word of a
passenger against that of the airline. If the loss of life
or property is caused by the gross negligence or
arbitrary acts of the airline or the contents of the lost
luggage are proved by satisfactory evidence other
than the self-serving declarations of one party, the
Court will not hesitate to disregard the fine print in a
contract of adhesion. (See Sweet Lines Inc. v. Teves,
supra) Otherwise, we are constrained to rule that we
have to enforce the contract as it is the only
reasonable basis to arrive at a just award.
We note that the finding on the amount lost is more
of a probability than a proved conclusion.
The trial court stated:
xxx xxxxxx
We come now to the actual loss of $4,750.00 which
the plaintiff claims was the amount of his retirement
award and vacation pay. According to the plaintiff,
this was in cash of $100 denominations and was
placed in an envelope separate from the other
money he was carrying. Plaintiff presented the
memorandum award, Exhibit T-1 and the vouchers of
payment, Exhibits T-2 and T-3. Under the
circumstances, recited by the plaintiff in which the
loss occurred, the Court believes that plaintiff could
really have placed this amount in the attache case
considering that he was originally handcarrying said
attache case and the same was looked, and he did
not expect that he would be required to check it in. . .
. (Amended Record on Appeal, p. 75; Emphasis ours)
The above conclusion of the trial court does not arise
from the facts. That the attache case was originally
handcarried does not beg the conclusion that the
amount of $4,750.00 in cash could have been placed
inside. It may be noted that out of a claim for
US$42,403.90 as the amount lost, the trial court
found for only US$5,228.90 and 100 paengs. The
court had doubts as to the total claim.
The lost luggage was declared as weighing around 18
pounds or approximately 8 kilograms. At $20.00 per
kilogram, the petitioner offered to pay $160.00 as a
higher value was not declared in advance and

additional charges were not paid. We note, however,

that an amount of $400.00 per passenger is allowed
for unchecked luggage. Since the checking-in was
against the will of the respondent, we treat the lost
bag as partaking of involuntarily and hurriedly
checked-in luggage and continuing its earlier status
as unchecked luggage. The fair liability under the
petitioner's own printed terms is $400.00. Since the
trial court ruled out discriminatory acts or bad faith
on the part of Pan Am or other reasons warranting
damages, there is no factual basis for the grant of
P20,000.00 damages.
As to the question of whether or not private
respondent should be paid attorney's fees, the Court
sustains the finding of the trial court and the
respondent appellate court that it is just and
equitable for the private respondent to recover
expenses for litigation in the amount of P5,000.00.
Article 22(4) of the Warsaw Convention, as amended
does not preclude an award of attorney's fees. That
provision states that the limits of liability prescribed
in the instrument "shall not prevent the court from
awarding, in accordance with its own law, in addition,
the whole or part of the court costs and other
expenses of litigation incurred by the plaintiff." We,
however, raise the award to P10,000.00 considering
the resort to the Court of Appeals and this Court.
WHEREFORE, the petition is hereby GRANTED and
the decision of the respondent Court of Appeals is
REVERSED and SET ASIDE. The petitioner is ordered
to pay the private respondent damages in the
amount of US$400.00 or its equivalent in Philippine
Currency at the time of actual payment, P10,000.00
in attorney's fees, and costs of the suit.
SO ORDERED.
Feleciano, Bidin, Davide, Jr. and Romero, JJ., concur.

G.R. No. 103338 January 4, 1994

FEDERICO SERRA, petitioner,
vs.
THE HON. COURT OF APPEALS AND RIZAL
COMMERCIAL BANKING CORPORATION, respondents.
Andres R. Amante, Jr. for petitioner.
R.C. Domingo, Jr. & Associates for private respondent.
NOCON, J.:
A promise to buy and sell a determinate thing for a
price certain is reciprocally demandable. An accepted
unilateral promise to buy and sell a determinate

thing for a price certain is binding upon the promisor

if the promise is supported by a consideration
distinct from the price. (Article 1479, New Civil Code)
The first is the mutual promise and each has the
right to demand from the other the fulfillment of the
obligation. While the second is merely an offer of one
to another, which if accepted, would create an
obligation to the offeror to make good his promise,
provided the acceptance is supported by a
consideration distinct from the price.
Disputed in the present case is the efficacy of a
"Contract of Lease with Option to Buy", entered into
between petitioner Federico Serra and private
respondent Rizal Commercial Banking Corporation.
(RCBC).
Petitioner is the owner of a 374 square meter parcel
of land located at Quezon St., Masbate, Masbate.
Sometime in 1975, respondent bank, in its desire to
put up a branch in Masbate, Masbate, negotiated
with petitioner for the purchase of the then
unregistered property. On May 20, 1975, a contract
of LEASE WITH OPTION TO BUY was instead forged by
the parties, the pertinent portion of which reads:
1. The LESSOR leases unto the LESSEE, and the
LESSEE hereby accepts in lease, the parcel of land
described in the first WHEREAS clause, to have and
to hold the same for a period of twenty-five (25)
years commencing from June 1, 1975 to June 1,
2000. The LESSEE, however, shall have the option to
purchase said parcel of land within a period of ten
(10) years from the date of the signing of this
Contract at a price not greater than TWO HUNDRED
TEN PESOS (P210.00) per square meter. For this
purpose, the LESSOR undertakes, within such tenyear period, to register said parcel of land under the
TORRENS SYSTEM and all expenses appurtenant
thereto shall be for his sole account.
If, for any reason, said parcel of land is not registered
under
the
TORRENS
SYSTEM
within
the
aforementioned ten-year period, the LESSEE shall
have the right, upon termination of the lease to be
paid by the LESSOR the market value of the building
and improvements constructed on said parcel of
land.
The LESSEE is hereby appointed attorney-in-fact for
the LESSOR to register said parcel of land under the
TORRENS SYSTEM in case the LESSOR, for any
reason, fails to comply with his obligation to effect
said registration within reasonable time after the
signing of this Agreement, and all expenses
appurtenant to such registration shall be charged by
the LESSEE against the rentals due to the LESSOR.
2. During the period of the lease, the LESSEE
covenants to pay the LESSOR, at the latter's

residence, a monthly rental of SEVEN HUNDRED

PESOS (P700.00), Philippine Currency, payable in
advance on or before the fifth (5th) day of every
calendar month, provided that the rentals for the first
four (4) months shall be paid by the LESSEE in
advance upon the signing of this Contract.
3. The LESSEE is hereby authorized to construct as
its sole expense a building and such other
improvements on said parcel of land, which it may
need in pursuance of its business and/or operations;
provided, that if for any reason the LESSEE shall fail
to exercise its option mentioned in paragraph (1)
above in case the parcel of land is registered under
the TORRENS SYSTEM within the ten-year period
mentioned
therein,
said
building
and/or
improvements, shall become the property of the
LESSOR after the expiration of the 25-year lease
period without the right of reimbursement on the
part of the LESSEE. The authority herein granted
does not, however, extend to the making or allowing
any unlawful, improper or offensive used of the
leased premises, or any use thereof, other than
banking and office purposes. The maintenance and
upkeep of such building, structure and improvements
shall likewise be for the sole account of the LESSEE.
1
The foregoing agreement was subscribed before
Notary Public Romeo F. Natividad.
Pursuant to said contract, a building and other
improvements were constructed on the land which
housed the branch office of RCBC in Masbate,
Masbate. Within three years from the signing of the
contract, petitioner complied with his part of the
agreement by having the property registered and
placed under the TORRENS SYSTEM, for which
Original Certificate of Title No. 0-232 was issued by
the Register of Deeds of the Province of Masbate.
Petitioner alleges that as soon as he had the property
registered, he kept on pursuing the manager of the
branch to effect the sale of the lot as per their
agreement. It was not until September 4, 1984,
however, when the respondent bank decided to
exercise its option and informed petitioner, through a
letter, 2 of its intention to buy the property at the
agreed price of not greater than P210.00 per square
meter or a total of P78,430.00. But much to the
surprise of the respondent, petitioner replied that he
is no longer selling the property. 3
Hence, on March 14, 1985, a complaint for specific
performance and damages were filed by respondent
against petitioner. In the complaint, respondent
alleged that during the negotiations it made clear to
petitioner that it intends to stay permanently on
property once its branch office is opened unless the

exigencies of the business requires otherwise. Aside

from its prayer for specific performance, it likewise
asked for an award of P50,000.00 for attorney's fees
P100,000.00 as exemplary damages and the cost of
the suit. 4
A special and
contended:

affirmative

defenses,

petitioner

1. That the contract having been prepared and drawn

by RCBC, it took undue advantage on him when it set
in lopsided terms.
2. That the option was not supported by any
consideration distinct from the price and hence not
binding upon him.

1. The defendant is hereby ordered to execute and

deliver the proper deed of sale in favor of plaintiff
selling, transferring and
conveying the property covered by and described in
the Original Certificate of Title 0-232 of the Registry
of Deeds of Masbate for the sum of Seventy Eight
Thousand Five Hundred Forty Pesos (P78,540,00),
Philippine Currency;
2. Defendant is ordered to pay plaintiff the sum of
Five Thousand (P5,000.00) Pesos as attorney's fees;
3. The counter
dismissed; and

claim

of

defendant

is

hereby

4. Defendants shall pay the costs of suit. 8

3. That as a condition for the validity and/or efficacy
of the option, it should have been exercised within
the reasonable time after the registration of the land
under the Torrens System; that its delayed action on
the option have forfeited whatever its claim to the
same.
4. That extraordinary inflation supervened resulting
in the unusual decrease in the purchasing power of
the currency that could not reasonably be forseen or
was manifestly beyond the contemplation of the
parties at the time of the establishment of the
obligation, thus, rendering the terms of the contract
unenforceable, inequitable and to the undue
enrichment of RCBC. 5
and as counterclaim petitioner alleged that:
1. The rental of P700.00 has become unrealistic and
unreasonable, that justice and equity will require its
adjustment.
2. By the institution of the complaint he suffered
moral damages which may be assessed at
P100,000.00 and award of attorney's fee of
P25,000.00 and exemplary damages at P100,000.00.
6
Initially, after trial on the merits, the court dismissed
the complaint. Although it found the contract to be
valid, the court nonetheless ruled that the option to
buy in unenforceable because it lacked a
consideration distinct from the price and RCBC did
not exercise its option within reasonable time. The
prayer for readjustment of rental was denied, as well
as that for moral and exemplary damages. 7
Nevertheless, upon motion for reconsideration of
respondent, the court in the order of January 9, 1989,
reversed itself, the dispositive portion reads:
WHEREFORE, the Court reconsiders its decision dated
June 6, 1988, and hereby renders judgment as
follows:

In a decision promulgated on September 19, 1991, 9

the Court of Appeals affirmed the findings of the trial
court that:
1. The contract is valid and that the parties perfectly
understood the contents thereof;
2. The option is supported by a distinct and separate
consideration as embodied in the agreement;
3. There is no basis in granting an adjustment in
rental.
Assailing the judgment of the appellate court,
petitioner would like us to consider mainly the
following:
1. The disputed contract is a contract of adhesion.
2. There was no consideration to support the option,
distinct from the price, hence the option cannot be
exercised.
3. Respondent court gravely abused its discretion in
not granting currency adjustment on the already
eroded value of the stipulated rentals for twenty-five
years.
The petition is devoid of merit.
There is no dispute that the contract is valid and
existing between the parties, as found by both the
trial court and the appellate court. Neither do we find
the terms of the contract unfairly lopsided to have it
ignored.
A contract of adhesion is one wherein a party, usually
a corporation, prepares the stipulations in the
contract, while the other party merely affixes his
signature or his "adhesion" thereto. These types of
contracts are as binding as ordinary contracts.
Because in reality, the party who adheres to the
contract is free to reject it entirely. Although, this

Court will not hesitate to rule out blind adherence to

terms where facts and circumstances will show that it
is basically one-sided. 10
We do not find the situation in the present case to be
inequitable. Petitioner is a highly educated man,
who, at the time of the trial was already a CPALawyer, and when he entered into the contract, was
already a CPA, holding a respectable position with
the Metropolitan Manila Commission. It is evident
that a man of his stature should have been more
cautious in transactions he enters into, particularly
where it concerns valuable properties. He is amply
equipped to drive a hard bargain if he would be so
minded to.
Petitioner contends that the doctrines laid down in
the cases of
Atkins Kroll v. CuaHianTek, 11 Sanchez v. Rigos, 12
and Vda. de Quirino v. Palarca 13 were misapplied in
the present case, because 1) the option given to the
respondent bank was not supported by a
consideration distinct from the price; and 2) that the
stipulated price of "not greater than P210.00 per
square meter" is not certain or definite.
Article 1324 of the Civil Code provides that when an
offeror has allowed the offeree a certain period to
accept, the offer maybe withdrawn at anytime before
acceptance by communicating such withdrawal,
except when the option is founded upon
consideration, as something paid or promised. On the
other hand, Article 1479 of the Code provides that an
accepted unilateral promise to buy and sell a
determinate thing for a price certain is binding upon
the promisor if the promise is supported by a
consideration distinct from the price.

On the other hand, what may be regarded as a

consideration separate from the price is discussed in
the case ofVda. deQuirino v. Palarca 16 wherein the
facts are almost on all fours with the case at bar. The
said case also involved a lease contract with option
to buy where we had occasion to say that "the
consideration for the lessor's obligation to sell the
leased premises to the lessee, should he choose to
exercise his option to purchase the same, is the
obligation of the lessee to sell to the lessor the
building and/or improvements constructed and/or
made by the former, if he fails to exercise his option
to buy leased premises." 17
In the present case, the consideration is even more
onerous on the part of the lessee since it entails
transferring of the building and/or improvements on
the property to petitioner, should respondent bank
fail to exercise its option within the period stipulated.
18
The bugging question then is whether the price "not
greater than TWO HUNDRED PESOS" is certain or
definite. A price is considered certain if it is so with
reference to another thing certain or when the
determination thereof is left to the judgment of a
specified person or persons. 19 And generally, gross
inadequacy of price does not affect a contract of
sale. 20
Contracts are to be construed according to the sense
and meaning of the terms which the parties
themselves have used. In the present dispute, there
is evidence to show that the intention of the parties
is to peg the price at P210 per square meter. This
was confirmed by petitioner himself in his testimony,
as follows:
Q. Will you please tell this Court what was the offer?

In a unilateral promise to sell, where the debtor fails

to withdraw the promise before the acceptance by
the creditor, the transaction becomes a bilateral
contract to sell and to buy, because upon acceptance
by the creditor of the offer to sell by the debtor, there
is already a meeting of the minds of the parties as to
the thing which is determinate and the price which is
certain. 14 In which case, the parties may then
reciprocally demand performance.
Jurisprudence has taught us that an optional contract
is a privilege existing only in one party the buyer.
For a separate consideration paid, he is given the
right to decide to purchase or not, a certain
merchandise or property, at any time within the
agreed period, at a fixed price. This being his
prerogative, he may not be compelled to exercise the
option to buy before the time
expires. 15

A. It was an offer to buy the property that I have in

Quezon City (sic).
Q. And did they give you a specific amount?
xxxxxxxxx
A. Well, there was an offer to buy the property at
P210 per square meters (sic).
Q. And that was in what year?
A .1975, sir.
Q. And did you accept the offer?
A. Yes, sir. 21
Moreover, by his subsequent acts of having the land
titled under the Torrens System, and in pursuing the
bank manager to effect the sale immediately, means

that he understood perfectly the terms of the

contract. He even had the same property mortgaged
to the respondent bank sometime in 1979, without
the slightest hint of wanting to abandon his offer to
sell the property at the agreed price of P210 per
square meter. 22
Finally, we agree with the courts a quo that there is
no basis, legal or factual, in adjusting the amount of
the rent. The contract is the law between the parties
and if there is indeed reason to adjust the rent, the
parties could by themselves negotiate for the
amendment of the contract. Neither could we
consider the decline of the purchasing power of the
Philippine peso from 1983 to the time of the
commencement of the present case in 1985, to be so
great as to result in an extraordinary inflation.
Extraordinary inflation exists when there in an
unimaginable increase or decrease of the purchasing
power of the Philippine currency, or fluctuation in the
value of pesos manifestly beyond the contemplation
of the parties at the time of the establishment of the
obligation. 23
Premises considered, we find that the contract of
"LEASE WITH OPTION TO BUY" between petitioner
and respondent bank is valid, effective and
enforceable, the price being certain and that there
was consideration distinct from the price to support
the option given to the lessee.
WHEREFORE, this petition is hereby DISMISSED, and
the decision of the appellate court is hereby
AFFIRMED.
SO ORDERED.
Narvasa, C.J., Padilla, Regalado and Puno, JJ., concur.

G.R. No. L-37750 May 19, 1978

SWEET LINES, INC., petitioner,
vs.
HON. BERNARDO TEVES, Presiding Judge, CFI of
Misamis Oriental Branch VII, LEOVIGILDO TANDOG,
JR., and ROGELIO TIRO, respondents.
Filiberto Leonardo, Abelardo C. Almario& Samuel B.
Abadiano for petitioner.
Leovigildo Vallar for private respondents.
SANTOS, J.:
This is an original action for Prohibition with Pre
Injunction filed October 3, 1973 to restrain
respondent Judge from proceeding further with Civil

Case No. 4091, entitled Leovigildo D. Tandog, Jr. and

Rogelio Tiro v. Sweet Lines, Inc." after he denied
petitioner's Motion to Dismiss the complaint, and the
Motion for Reconsideration of said order. 1
Briefly, the facts of record follow. Private respondents
Atty. LeovigildoTandog and Rogelio Tiro, a contractor
by professions, bought tickets Nos. 0011736 and
011737 for Voyage 90 on December 31, 1971 at the
branch office of petitioner, a shipping company
transporting inter-island passengers and cargoes, at
Cagayan de Oro City. Respondents were to board
petitioner's vessel, M/S "Sweet Hope" bound for
Tagbilaran City via the port of Cebu. Upon learning
that the vessel was not proceeding to Bohol, since
many passengers were bound for Surigao, private
respondents per advice, went to the branch office for
proper relocation to M/S "Sweet Town". Because the
said vessel was already filled to capacity, they were
forced to agree "to hide at the cargo section to avoid
inspection of the officers of the Philippine
Coastguard." Private respondents alleged that they
were, during the trip," "exposed to the scorching
heat of the sun and the dust coming from the ship's
cargo of corn grits," and that the tickets they bought
at Cagayan de Oro City for Tagbilaran were not
honored and they were constrained to pay for other
tickets. In view thereof, private respondents sued
petitioner for damages and for breach of contract of
carriage in the alleged sum of P10,000.00 before
respondents Court of First Instance of Misamis
Oriental. 2
Petitioner moved to dismiss the complaint on the
ground of improper venue. This motion was premised
on the condition printed at the back of the tickets,
i.e., Condition No. 14, which reads:
14. It is hereby agreed and understood that any and
all actions arising out of the conditions and
provisions of this ticket, irrespective of where it is
issued, shall be filed in the competent courts in the
City of Cebu. 3
The motion was denied by the trial court. 4 Petitioner
moved to reconnsider the order of denial, but no
avail. 5Hence, this instant petition for prohibition for
preliminary injunction, 'alleging that the respondent
judge has departed from the accepted and usual
course of judicial preoceeding" and "had acted
without or in excess or in error of his jurisdicton or in
gross abuse of discretion. 6
In Our resolution of November 20, 1973, We
restrained respondent Judge from proceeding further
with the case and required respondent to comment.
7 On January 18, 1974, We gave due course to the
petition and required respondent to answer. 8
Thereafter, the parties submitted their respesctive

memoranda
in
contentions. 9

support

of

their

respective

therefore, exclude the filing of the action in Misamis

Oriental,14

Presented thus for Our resolution is a question is

aquestion which, to all appearances, is one of first
impression, to wit Is Condition No. 14 printed at
the back of the petitioner's passage tickets
purchased by private respondents, which limits the
venue of actions arising from the contract of carriage
to theCourt of First Instance of Cebu, valid and
enforceable? Otherwise stated, may a common
carrier engaged in inter-island shipping stipulate thru
condition printed at the back of passage tickets to its
vessels that any and all actions arising out of the
ocntract of carriage should be filed only in a
particular province or city, in this case the City of
Cebu, to the exclusion of all others?

There is no question that there was a valid contract

of carriage entered into by petitioner and private
respondents and that the passage tickets, upon
which the latter based their complaint, are the best
evidence thereof. All the essential elements of a valid
contract, i.e., consent, cause or consideration and
object, are present. As held inPeralta de Guerrero, et
al. v. Madrigal Shipping Co., Inc., 15

Petitioner contends thaty Condition No. 14 is valid

and enforceable, since private respndents acceded to
tit when they purchased passage tickets at its
Cagayan de Oro branch office and took its vessel M/S
"Sweet Town" for passage to Tagbilaran, Bohol that
the condition of the venue of actions in the City of
Cebu is proper since venue may be validly waived,
citing cases; 10 that is an effective waiver of venue,
valid and binding as such, since it is printed in bold
and capital letters and not in fine print and merely
assigns the place where the action sing from the
contract is institution likewise citing cases; 11 and
that condition No. 14 is unequivocal and mandatory,
the words and phrases "any and all", "irrespective of
where it is issued," and "shall" leave no doubt that
the intention of Condition No. 14 is to fix the venue in
the City of Cebu, to the exclusion of other places;
that the orders of the respondent Judge are an
unwarranted
departure
from
established
jurisprudence governing the case; and that he acted
without or in excess of his jurisdiction in is the orders
complained of. 12
On the other hand, private respondents claim that
Condition No. 14 is not valid, that the same is not an
essential element of the contract of carriage, being in
itself a different agreement which requires the
mutual consent of the parties to it; that they had no
say in its preparation, the existence of which they
could not refuse, hence, they had no choice but to
pay for the tickets and to avail of petitioner's
shipping facilities out of necessity; that the carrier
"has been exacting too much from the public by
inserting impositions in the passage tickets too
burdensome to bear," that the condition which was
printed in fine letters is an imposition on the riding
public and does not bind respondents, citing cases;
13 that while venue 6f actions may be transferred
from one province to another, such arrangement
requires the "written agreement of the parties", not
to be imposed unilaterally; and that assuming that
the condition is valid, it is not exclusive and does not,

It is a matter of common knowledge that whenever a

passenger boards a ship for transportation from one
place to another he is issued a ticket by the shipper
which has all the elements of a written contract,
Namely: (1) the consent of the contracting parties
manifested by the fact that the passenger boards the
ship and the shipper consents or accepts him in the
ship for transportation; (2) cause or consideration
which is the fare paid by the passenger as stated in
the ticket; (3) object, which is the transportation of
the passenger from the place of departure to the
place of destination which are stated in the ticket.
It should be borne in mind, however, that with
respect to the fourteen (14) conditions one of
which is "Condition No. 14" which is in issue in this
case printed at the back of the passage tickets,
these are commonly known as "contracts of
adhesion," the validity and/or enforceability of which
will have to be determined by the peculiar
circumstances obtaining in each case and the nature
of the conditions or terms sought to be enforced. For,
"(W)hile generally, stipulations in a contract come
about after deliberate drafting by the parties thereto,
... there are certain contracts almost all the
provisions of which have been drafted only by one
party, usually a corporation. Such contracts are
called contracts of adhesion, because the only
participation of the party is the signing of his
signature or his 'adhesion' thereto. Insurance
contracts, bills of lading, contracts of make of lots on
the installment plan fall into this category" 16
By the peculiar circumstances under which contracts
of adhesion are entered into namely, that it is
drafted only by one party, usually the corporation,
and is sought to be accepted or adhered to by the
other party, in this instance the passengers, private
respondents, who cannot change the same and who
are thus made to adhere thereto on the "take it or
leave it" basis certain guidelines in the
determination of their validity and/or enforceability
have been formulated in order to that justice and fan
play characterize the relationship of the contracting
parties. Thus, this Court speaking through Justice
J.B.L. Reyes in Qua CheeGan v. Law Union and Rock
Insurance Co., 17 and later through Justice Fernando
in Fieldman Insurance v. Vargas, 18 held

The courts cannot ignore that nowadays, monopolies,

cartels and concentration of capital endowed with
overwhelm economic power, manage to impose upon
parties d with them y prepared 'agreements' that the
weaker party may not change one whit his
participation in the 'agreement' being reduced to the
alternative 'to take it or leave it,' labelled since
Raymond
Saleilles
'contracts
by
adherence'
(contracts d' adhesion) in contrast to those entered
into by parties bargaining on an equal footing. Such
contracts (of which policies of insurance and
international bill of lading are prime examples)
obviously cap for greater strictness and vigilance on
the part of the courts of justice with a view to
protecting the weaker party from abuses and
imposition, and prevent their becoming traps for the
unwary.

with the hope of reaching their destinations. The

schedules are as often as not if not more so
delayed or altered. This was precisely the experience
of private respondents when they were relocated to
M/S "Sweet Town" from M/S "Sweet Hope" and then
any to the scorching heat of the sun and the dust
coming from the ship's cargo of corn grits, " because
even the latter was filed to capacity.

To the same effect and import, and, in recognition of

the character of contracts of this kind, the protection
of the disadvantaged is expressly enjoined by the
New Civil Code

Again, it should be noted that Condition No. 14 was

prepared solely at the ms of the petitioner,
respondents had no say in its preparation. Neither
did the latter have the opportunity to take the into
account prior to the purpose chase of their tickets.
For, unlike the small print provisions of contracts
the common example of contracts of adherence
which are entered into by the insured in his
awareness of said conditions, since the insured is
afforded the op to and co the same, passengers of
inter-island v do not have the same chance, since
their alleged adhesion is presumed only from the fact
that they purpose chased the tickets.

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 and other handicap, the courts
must be vigilant for his protection. 19
Considered in the light Of the foregoing norms and in
the context Of circumstances Prevailing in the interisland ship. ping industry in the country today, We
find and hold that Condition No. 14 printed at the
back of the passage tickets should be held as void
and unenforceable for the following reasons first,
under circumstances obligation in the inter-island
ship. ping industry, it is not just and fair to bind
passengers to the terms of the conditions printed at
the back of the passage tickets, on which Condition
No. 14 is Printed in fine letters, and second,
Condition No. 14 subverts the public policy on
transfer of venue of proceedings of this nature, since
the same will prejudice rights and interests of
innumerable passengers in different s of the country
who, under Condition No. 14, will have to file suits
against petitioner only in the City of Cebu.
1. It is a matter of public knowledge, of which We can
take judicial notice, that there is a dearth of and
acute shortage in inter- island vessels plying between
the country's several islands, and the facilities they
offer leave much to be desired. Thus, even under
ordinary circumstances, the piers are congested with
passengers and their cargo waiting to be
transported. The conditions are even worse at peak
and/or the rainy seasons, when Passengers literally
scramble to whatever accommodations may be
availed of, even through circuitous routes, and/or at
the risk of their safety their immediate concern,
for the moment, being to be able to board vessels

Under these circumstances, it is hardly just and

proper to expect the passengers to examine their
tickets received from crowded/congested counters,
more often than not during rush hours, for conditions
that may be printed much charge them with having
consented to the conditions, so printed, especially if
there are a number of such conditions m fine print,
as in this case. 20

It should also be stressed that slapping companies

are franchise holders of certificates of public
convenience and therefore, posses a virtual
monopoly over the business of transporting
passengers between the ports covered by their
franchise. This being so, shipping companies, like
petitioner, engaged in inter-island shipping, have a
virtual monopoly of the business of transporting
passengers and may thus dictate their terms of
passage, leaving passengers with no choice but to
buy their tickets and avail of their vessels and
facilities. Finally, judicial notice may be taken of the
fact that the bulk of those who board these interisland vested come from the low-income groups and
are less literate, and who have little or no choice but
to avail of petitioner's vessels.
2. Condition No. 14 is subversive of public policy on
transfers of venue of actions. For, although venue
may be changed or transferred from one province to
another by agreement of the parties in writing t to
Rule 4, Section 3, of the Rules of Court, such an
agreement will not be held valid where it practically
negates the action of the claimants, such as the
private
respondents
herein.
The
philosophy
underlying the provisions on transfer of venue of
actions is the convenience of the plaintiffs as well as
his witnesses and to promote 21 the ends of justice.

Considering the expense and trouble a passenger

residing outside of Cebu City would incur to
prosecute a claim in the City of Cebu, he would most
probably decide not to file the action at all. The
condition will thus defeat, instead of enhance, the
ends of justice. Upon the other hand, petitioner has
branches or offices in the respective ports of call of
its vessels and can afford to litigate in any of these
places. Hence, the filing of the suit in the CFI of
Misamis Oriental, as was done in the instant case,
will not cause inconvenience to, much less prejudice,
petitioner.
Public policy is ". . . that principle of the law which
holds that no subject or citizen can lawfully do that
which has a tendency to be injurious to the public or
against the public good ... 22 Under this principle" ...
freedom of contract or private dealing is restricted by
law for the good of the public. 23 Clearly, Condition
No. 14, if enforced, will be subversive of the public
good or interest, since it will frustrate in meritorious
cases, actions of passenger cants outside of Cebu
City, thus placing petitioner company at a decided
advantage over said persons, who may have
perfectly legitimate claims against it. The said
condition should, therefore, be declared void and
unenforceable, as contrary to public policy to
make the courts accessible to all who may have need
of their services.
WHEREFORE, the petition for prohibition is DISMISS.
ED. The restraining order issued on November 20,
1973, is hereby LIFTED and SET ASIDE. Costs against
petitioner.
Fernando (Chairman), Aquino, Concepcion, Jr., JJ.,
concur.

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.

of papers nor have we been able to pinpoint the

personnel who allegedly pilferred your baggage.

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").

Branch Supervisor

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. OngYiu:
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

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

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.

G.R. No. 110581 September 21, 1994

TELENGTAN BROTHERS & SONS, INC. (LA SUERTE
CIGAR & CIGARETTE), petitioner,
vs.
THE COURT OF APPEALS, KAWASAKI KISHEN KAISHA,
LTD. and SMITH, BELL & CO., INC., respondents.
Juan, Luces, Luna and Associates for petitioner.
Bito, Lozada,
respondents.

Ortega

&

Castillo

for

private

MENDOZA, J.:
This is a petition for review of the decision of the
Court of Appeals, 1 in CA-G.R. CV No. 09514,

affirming with modification the decision of the

Regional Trial Court in a case for specific
performance brought by petitioner.
Private respondent Kawasaki Kishen Kaisha, Ltd. (KLine) is a foreign shipping company doing business in
the Philippines, its shipping agent being respondent
the Smith, Bell & Co., Inc. It is a member of the Far
East Conference, the body which fixes rates by
agreement
of
its
member-shipowners.
The
conference is registered with the U.S. Federal
Maritime Commission. 2
On May 8, 1979, the Van Reekum Paper, Inc. entered
into a contract of affreightment with the K-Line for
the shipment of 468 rolls of container board liners
from Savannah, Georgia to Manila. The shipment was
consigned to herein petitioner La Suerte Cigar &
Cigarette Factory. The contract of affreightment was
embodied in Bill of Lading No. 602 issued by the
carrier to the shipper. The expenses of loading and
unloading were for the account of the consignee.
The shipment was packed in 12 container vans and
loaded on board the carrier's vessel, SS Verrazano
Bridge. At Tokyo, Japan, the cargo was transhipped
on two vessels of the K-Line. Ten container vans were
loaded on the SSFar East Friendship, while two were
loaded on the SS Hangang Glory.
Shortly thereafter, the consignee (herein petitioner)
received from the shipper photocopies of the bill of
lading, consular invoice and packing list, as well as
notice of the estimated time of arrival of the cargo.
On June 11, 1979, the SS Far East Friendship arrived
at the port of Manila. Aside from the regular
advertisements in the shipping section of the Bulletin
Today announcing the arrival of its vessels, petitioner
was notified in writing of the ship's arrival, together
with information that container demurrage at the
rate of P4.00 per linear foot per day for the first 5
days and P8.00 per linear foot per day after the 5th
day would be charged unless the consignee took
delivery of the cargo within ten days.
On June 21, 1979, the other vessel SS Hangang
Glory, carrying petitioner's two other vans, arrived
and was discharged of its contents the next day. On
the same day the shipping agent Smith, Bell & Co.
released the Delivery Permit for twelve (12)
containers to the broker upon payment of freight
charges on the bill of lading.
The next day, June 22, 1979, the Island Brokerage
Co. presented, in behalf of petitioner, the shipping
documents to the Customs Marine Division of the
Bureau of Customs. But the latter refused to act on
them because the manifest of the SS Far East

Friendship covered only 10 containers, whereas the

bill of lading covered 12 containers.
The broker, therefore, sent back the manifest to the
shipping agent with the request that the manifest be
amended. Smith, Bell & Co. refused on the ground
that an amendment, as requested, would violate
1005 of the Tariff and Customs Code relating to
unmanifested cargo. Later, however, it agreed to add
a footnote reading "Two container vans carried by the
SS Hangang Glory to complete the shipment of
twelve containers under the bill of lading."
On June 29, 1979 the manifest was picked up from
the office of respondent shipping agent by an
employee of the IBC and filed with the Bureau of
Customs. The manifest was approved for release on
July 3, 1979. IBC wrote Smith, Bell & Co. to make of
record that entry of the shipment had been delayed
by the error in the manifest.
On July 11, 1979, when the IBC tried to secure the
release of the cargo, it was informed by private
respondents' collection agent, the CBCS Guaranteed
Fast Collection Services, that the free time for
removing the containers from the container yard had
expired on June 26, 1979, in the case of the SS Far
East Friendship, and on July 9, in the case of the SS
Hangang Glory, 3 and that demurrage charges had
begun to run on June 27, 1979 with respect to the 10
containers on the SS Far East Friendship and on July
10, 1979 with respect to the 2 containers shipped on
board the SS Hangang Glory.
On July 13, 1979, petitioner paid P47,680.00
representing the total demurrage charges on all the
containers, but it was not able to obtain its goods. On
July 16, 1979 it was able to obtain the release of two
containers and on
July 17, 1979 of one more container. It was able to
obtain only a partial release of the cargo because of
the breakdown of the arrastre's equipment at the
container yard.
This matter was reported by IBC in letters of
complaint sent to the Philippine Ports Authority. In
addition, on July 16, 1979, petitioner sent a letter
dated July 12, 1979 (Exh. I) to Smith, Bell & Co.,
requesting reconsideration of the demurrage
charges, on the ground that the delay in claiming the
goods was due to the alleged late arrival of the
shipping documents, the delay caused by the
amendment of the manifest, and the fact that two of
the containers arrived separately from the other ten
containers.
On July 19, 1979, petitioner paid additional charges
in the amount of P20,160.00 for the period July 1419, 1979 to secure the release of its cargo, but still

petitioner was unable to get any cargo from the

remaining nine container vans. It was only the next
day, July 20, 1979, that it was able to have two more
containers released from the container yard, bringing
to five the total number of containers whose contents
had been delivered to it.
Subsequently, petitioner refused to pay any more
demurrage charges on the ground that there was
agreement for their payment in the bill of lading and
that the delay in the release of the cargo was not due
to its fault but to the breakdown of the equipment at
the container yard. In all, petitioner had paid
demurrage charges from June 27 to July 19, 1979, in
the total amount of P67,840.00, computed as follows:
A. Container demurrage paid on July 13, 1979
1. Far East Friendship (Exh. H-1) June 27 July 13
(17 days)
1st 5 days @ P4/day/foot
5 days x P40 ft. x 10 ctrns. P 8,000.00
Next 12 days @ P8/day/foot
12 days x P8 x 40 ft. x 10 ctrns. P 38,400.00

P 46,400.00
2. Hangang Glory (Exh. H) July 10 July 13 (4 days)
1st 4 days:
4 days x P4 x 40 ft. x 2 ctnrs. P 1,280.00

TOTAL PAID ON JULY 13 P 47,680.00

6 days x P8 x 40 ft. x 7 cntrs. P 13,440.00

(Exh. L-1)
2. Hangang Glory
a. 5th day (July 14)
1 day x P4.00 x 40 ft. x 2 cntrs. P 320.00
b. July 15-19:
5 days x P8.00 x 40 ft. x 2 cntrs. P 3,200.00
(Exh. L)

TOTAL P 20,160.00
(Exh. L-4)

OVERALL TOTAL P 67,840.00

=========
On July 20, 1979 petitioner wrote private respondent
for a refund of the demurrage charges, but private
respondent replied on July 25, 1979 that, as member
of the Far East Conference, it could not modify the
rules or authorize refunds of the stipulated tariffs.
Petitioner, therefore, filed this suit in the RTC for
specific performance to compel private respondent
carrier, through it s shipping agent, the Smith, Bell &
Co., to release 7 container vans consigned to it free
of charge and for a refund of P67,840.00 which it had
paid, plus attorney's fees and other expenses of
litigation. Petitioner also asked for the issuance of a
writ of preliminary injunction to restrain private
respondents from charging additional demurrage.

(Exh. H-2)
B. Container demurrage paid on July 19, 1979
1. Far East Friendship
a. on 2 containers released July 16
3 days x P8 x 40 ft. x 2 ctnrs. P 1,920.00
(Exh. L-2)
b. on 1 container released July 17
4 days x P8 x 40 ft. x 7 cntrs. P 1,280.00
(Exh. L-3)
c. remaining 7 containers as of July 19

In their amended answer, private respondents

claimed that collection of container charges was
authorized by 2, 23 and 29 of the bill of lading and
that they were not free to waive these charges
because under the United States Shipping Act of
1916 it was unlawful for any common carrier
engaged in transportation involving the foreign
commerce of the United States to charge or collect a
greater or lesser compensation that the rates and
charges specified in its tariffs on file with the Federal
Maritime Commission.
Private respondents alleged that petitioner knew that
the contract of carriage was subject to the Far East
Conference rules and that the publication of the
notice of reimposition of container demurrage
charges published in the shipping section of the

Bulletin Today and Businessday newspapers from

February 19 February 25, 1979 was binding upon
petitioner. They contended further that the collection
of container demurrage was an international practice
which is widely accepted in ports all over the world
and that it was in conformity with Republic Act No.
1407, otherwise known as the Philippine Overseas
Shipping Act of 1955.

2. Demurrage charges are incurred before the

container leaves the carrier's designated CY, and
shall be applicable on the container commencing the
next working calendar day following expiration of the
allowable free time until the consignee has taken
delivery of the container or has fully striped the
container of its contents in the carrier's designated
CY.

Thereafter, a writ was issued after petitioner had

posted a bond of P50,000.00 and the container vans
were released to the petitioner. On March 19, 1986,
however, the RTC dismissed petitioner's complaint. It
cited the bill of lading which provided:

Demurrage charges shall be assessed hereunder:

23. The ocean carrier shall have a lien on the goods,

which shall survive delivery, for all freight, dead
freight,
demurrage,
damages,
loss,
charges,
expenses and any other sums whatsoever payable or
chargeable to or for the account of the Merchant
under this bill of lading . . . .

The RTC held that the bill of lading was the contract
between the parties and, therefore, petitioner was
liable for demurrage charges. It rejected petitioner's
claim of force majeure. It held:

It likewise invoked clause 29 of the bill of lading

which provided:
29. . . .The terms of the ocean carrier's applicable
tariff,
including
tariffs
covering
intermodal
transportation on file with the Federal Maritime
Commission and the Interstate Commission or any
other regulatory body which governs a portion of the
carriage of goods, are incorporated herein.
Rule 21 of the Far East Conference Tariff No. 28-FMC
No. 12 Rules and Regulations, referred to above,
provides:
(D) Free Time, Demurrage, and Equipment Detention
at Ports in the Philippines.
Note: Philippine Customs Law prescribes all cargo
discharged from vessels to be given into custody of
the Government Arrastre Contractor, appointed by
Philippine Customs who undertakes delivery to the
consignee.
xxxxxxxxx
Demurrage charges on Containers with CY Cargo.
1. Free time will commence at 8:00 a.m. on the first
working calendar day following completion of
discharge of the vessel. It shall expire at 12:00 p.m.
(midnight) on the tenth working calendar day,
excluding Saturdays, Sundays and holidays.
Work stoppage at a terminal due to labor dispute or
other force majeure as defined by the conference
preventing delivery of cargo or containers shall be
excluded from the calculation of the free time for the
period of the work stoppage.

Ordinary containers P4.00 per linear foot of the

container per day for the first five days; P8.00 per
linear foot of the container per day, thereafter.

This Court cannot also accord faith and credit on the

plaintiff's claim that the delay in the delivery of the
containers was caused by the breaking down of the
equipment of the arrastre operator. Such claim was
not supported with competent evidence. Let us
assume the fact that the arrastre operator's
equipment broke down still plaintiff has to pay the
corresponding demurrage charges. The possibility
that the equipment would break down was not only
foreseeable, but actually, foreseen, and was not
casofortuito. 4
The RTC, therefore, ordered:
WHEREFORE, finding the preponderance of evidence
in favor of the defendants and against the plaintiff,
judgment is hereby rendered dismissing the
complaint with costs against it. Plaintiff is hereby
ordered to pay defendants the sum of P36,480.00
representing demurrage charges for the detention of
the seven (7) forty-footer container vans from July 20
to August 7, 1979, with legal interest commencing on
August 7, 1979 until fully paid. And plaintiff has to
pay the sum of P10,000.00, by way of attorney's
fees.
SO ORDERED.
On appeal, the case was affirmed with modification
by the Court of Appeals as follows:
WHEREFORE, modified as indicated above deleting
the award of attorney's fees, the decision appealed
from is hereby AFFIRMED in all other respects.
Costs against plaintiff-appellant.
SO ORDERED. 5
Hence, this petition for review in which it is
contended:

1 that no demurrage lies in the absence of any

showing that the vessels had been improperly
detained or that loss or damage had been incurred
as a consequence of improper detention;

quoted above, specifically provides for the payment

by the consignee of demurrage for the detention of
containers and other equipment after the so-called
"free time."

2 that respondent Court's finding that private

respondent Smith Bell had promptly and on the same
day amended the defective manifest is contrary to
the evidence of record.

Now a bill of lading is both a receipt and a contract.

As a contract, its terms and conditions are conclusive
on the parties, including the consignee. What we said
in one case mutatis mutandis applies to this case:

3 that respondent Court manifestly over-looked

undisputed evidence presented by petitioner showing
that the breakdown in the facilities and equipment of
the arrastre operator further delayed petitioner's
withdrawal of the cargo. 6

A bill of lading operates both as a receipt and a

contract . . . As a contract, it names the contracting
partieswhich include the consignee, fixes the route,
destination, freight rate or charges, and stipulates
the right and obligations assumed by the parties . . . .
By receiving the bill of lading, Davao Parts and
Services, Inc. assented to the terms of the
consignment contained therein, and became bound
thereby, so far as the conditions named are
reasonable in the eyes of the law. Since neither
appellant nor appellee alleges that any provision
therein is contrary to law, morals, good customs,
public policy or public order and indeed we found
none the validity of the Bill of Lading must be
sustained and the provisions therein properly applies
to resolve the conflict between the parties. 8

Petitioner prays for

Court of Appeals
demurrage charges
as to pay attorney's

a reversal of the decision of the

and the refund to it of the
paid by it, with interest, as well
fees and expenses of litigation.

Our decision will be presently explained, but in brief

it is this: petitioner is liable for demurrage for delay
in removing its cargo from the containers but only for
the period July 3 to 13, 1979 with respect to ten
containers and from July 10 to July 13, 1979, in
respect of two other containers.
First. With respect to petitioner's liability for
demurrage, petitioner's contention is that the bill of
lading does not provide for the payment of container
demurrage, as Clause 23 of the bill of lading only
says "demurrage," i.e., damages for the detention of
vessels, and here there is no detention of vessels.
Petitioner
invokes
the
ruling
inMagellan
Manufacturing Marketing Corp. v. Court of Appeals 7,
where we defined "demurrage" as follows:
Demurrage, in its strict sense, is the compensation
provided for in the contract of affreightment for the
detention of the vessel beyond the time agreed on
for loading and unloading. Essentially, demurrage is
the claim for damages for failure to accept delivery.
In a broad sense, every improper detention of a
vessel may be considered a demurrage. Liability for
demurrage, using the word in its strictly technical
sense, exists only when expressly stipulated in the
contract. Using the term in [its broader sense,
damages in the] nature of demurrage are
recoverable for a breach of the implied obligation to
load or unload the cargo with reasonable dispatch,
but only by the party to whom the duty is owed and
only against one who is a party to the shipping
contract.
Whatever may be the merit of petitioner's contention
as to the meaning of the word "demurrage" in clause
23 of the bill of lading, the fact is that clause 29(a)
also of the bill of lading, in relation to Rule 21 of the
Far East Conference Tariff No. 28-FMC No. 12, as

As the Court of Appeals pointed out in its appealed

decision, the enforcement of the rules of the Far East
Conference and the Federal Maritime Commission is
in accordance with Republic Act No. 1407, 1 of
which declares that the Philippines, in common with
other maritime nations, recognizes the international
character of shipping in foreign trade and existing
international practices in maritime transportation and
that it is part of the national policy to cooperate with
other friendly nations in the maintenance and
improvement of such practices.
Petitioner's argument that it is not bound by the bill
of lading issued by K-Line because it is a contract of
adhesion, whose terms as set forth at the back are in
small prints and are hardly readable, is without merit.
As we held inServando v. Philippine Steam
Navigation: 9
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". It is what is known as a contract of
"adhesion," in regards to 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 JBL Reyes,
Lawyer's Journal, Jan. 31, 1951, p. 49).
Second. With respect to the period of petitioner's
liability, private respondent's position is that the
"free time" expired on June 26, 1979 and demurrage
began to toll on June 27, 1979, with respect to 10
containers which were unloaded from the SS Far East
Friendship, while with respect to the 2 containers
which were unloaded from the SSHangang Glory, the
free time expired on July 9, 1979 and demurrage
began to run on July 10, 1979.
This contention is without merit. Petitioner cannot be
held liable for demurrage starting June 27, 1979 on
the 10 containers which arrived on the SS Far East
Friendship because the delay in obtaining release of
the goods was not due to its fault. The evidence
shows that because the manifest issued by the
respondent K-Line, through the Smith, Bell & Co.,
stated only 10 containers, whereas the bill of lading
also issued by the K-Line showed there were 12
containers, the Bureau of Customs refused to give an
entry permit to petitioner. For this reason, petitioner's
broker, the IBC, had to see the respondent's agent
(Smith, Bell & Co.) on June 22, 1979 but the latter did
not immediately do something to correct the
manifest. Smith, Bell & Co. was asked to "amend" the
manifest, but it refused to do so on the ground that
this would violate the law. It was only on June 29,
1979 that it thought of adding instead a footnote to
indicate that two other container vans to account
for a total of 12 container vans consigned to
petitioner had been loaded on the other vessel
SS Hangang Glory.
It is not true that the necessary correction was made
on June 22, 1979, the same day the manifest was
presented to Smith, Bell & Co. There is nothing in the
testimonies of witnesses of either party to support
the appellate court's finding that the footnote,
explaining the apparent discrepancy between the bill
of lading and the manifest, was added on June 22,
1979 but that petitioner's representative did not
return to pick up the manifesst until June 29, 1979. To
the contrary, it is more probable to believe the
petitioner's claim that the manifest was corrected
only on June 29, 1979 (by which time the "free time"
had already expired), because Smith, Bell & Co. did
not immediately know what to do as it insisted it
could not amend the manifest and only thought of
adding a footnote on June 29, 1979 upon the
suggestion of the IBC.
Now June 29, 1979 was a Friday. Again it is probable
the correct manifest was presented to the Bureau of
Customs only on Monday, July 2, 1979 and, therefore,
it was only on July 3 that it was approved. It was,
therefore, only from this date (July 3, 1979) that

petitioner could have claimed its cargo and charged

for any delay in removing its cargo from the
containers. With respect to the other two containers
which arrived on the SS Hangang Glory, demurrage
was properly considered to have accrued on July 10,
1979 since the "free time" expired on July 9.
The period of delay, however, for all the 12
containers must be deemed to have stopped on July
13, 1979, because on this date petitioner paid
P47,680.00. If it was not able to get its cargo from
the container vans, it was because of the breakdown
of the shifter or cranes. This breakdown cannot be
blamed on petitioners since these were cranes of the
arrastre service operator. It would be unjust to
charge demurrage after July 13, 1979 since the delay
in emptying the containers was not due to the fault
of the petitioner.
Indeed, there is no reason why petitioner should not
get its cargo after paying all demurrage charges due
on July 13, 1979. If it paid P20,180.00 more in
demurrage charges after July 13, 1979 it was only
because respondents would not release the goods.
Even then petitioner was able to obtain the release of
cargo from five container vans. Its trucks were
unable to load anymore cargo and returned to
petitioner's premises empty.
In sum, we hold that petitioner can be held liable for
demurrage only for the period July 3-13, 1979 and
that in accordance with the stipulation in its bill of
lading, it is liable for demurrage only in the amount
of P28,480.00 computed as follows;
A. 10 containers ex Far East Friendship (July 3-13,
1979)
1. 1st 5 days @ P4.00/day/foot
5 days x P4 x 40 ft. x 10 ctnrs. P 8,000
2. Next 6 days @ P8.00/day/foot
6 days x P8 x 40 ft. x 10 cntrs. P 19,200 P 27,200

B. 2 containers ex Hangang Glory (July 10-13, 1979)

1st 4 days @ P4.00/day/foot
4 days x P4 x 40 ft. x 10 cntrs. P 1,280

TOTAL DEMURRAGE DUE P 28,480

=======
LESS: TOTAL PAID (P 67,840)

OVERPAYMENT (P 39,360)
As shown above there is an overpayment of
P39,360.00 which should be refunded to petitioner.
WHEREFORE, the decision appealed from is SET
ASIDE and another one is RENDERED, ORDERING the
private respondents to pay to petitioner the sum of
P39,360.00 by way of refund, with legal interest.
SO ORDERED.

are
Deed Restrictions: 2
a) The total height of the building to be constructed
on the lot shall not be more than forty-two (42)
meters, nor shall it have a total gross floor area of
more than five (5) times the lot area; and
b) The sewage disposal must be by means of
connection into the sewerage system servicing the
area.

G.R. No. 126699 August 7, 1998

AYALA CORPORATION, petitioner,

Special Conditions: 3

vs.
RAY
BURTON
respondent.

The transaction was documented in a Deed of Sale 1

of even date, which provides, among others, that the
vendee would comply with certain special conditions
and restrictions on the use or occupancy of the land,
among which

DEVELOPMENT

CORPORATION,

MARTINEZ, J.:
Petitioner Ayala Corporation (AYALA) is the owner of
the Ayala estate located in Makati City. The said
estate was originally a raw land which was
subdivided for sale into different lots devoted for
residential, commercial and industrial purposes. The
development of the estate consisted of road and
building construction and installation of a central
sewerage treatment plant and drainage system
which services the whole Ayala Commercial Area.
On March 20, 1984, Karamfil Import-Export Company
Ltd. (KARAMFIL) bought from AYALA a piece of land
identified as Lot 26, Block 2 consisting of 1,188
square meters, located at what is now known as H.V.
de la Costa Street, Salcedo Village, Makati City. The
said land, which is now the subject of this case, is
more particularly described as follows:
A parcel of land (Lot 26, Block 2, of the subdivision
plan [LRC] Psd-6086, being a portion of Block D,
described as plan [LRC] Psd-5812 LRC [GLRO] Rec.
No. 2029) situated in the Municipality of Makati,
Province of Rizal, Is. of Luzon. Bounded on the NE.,
points 2 to 3 by Lot 31, Block 2 (Creek 6.00 m. wide)
of the subdivision plan, on the SE., points 3 to 4 by
Lot 27, Block 2 of the Subdivision plan; on the SW,
points 4 to 5, by proposed Road, 17.00 m. wide
(Block C[LRC] Psd-5812); points 5 to 1 by Street Lot 2
(17.00 m. wide) of the subdivision plan. On the NW,
points 1 to 2 by Lot 25, Block 2 of the subdivision
plan. . . . beginning, containing an area of ONE
THOUSAND ONE HUNDRED EIGHTY EIGHT (1,188)
SQUARE METERS.

a) The vendee must obtain final approval from AYALA

of the building plans and specifications of the
proposed structures that shall be constructed on the
land;
b) The lot shall not be sold without the building
having been completed; and
c) Any breach of the stipulations and restrictions
entitles AYALA to rescission of the contract.
As a result of the sale, a Transfer Certificate of Title
No. 132086 4 was issued in the name of KARAMFIL.
The said special conditions and restrictions were
attached as an annex to the deed of sale and
incorporated in the "Memorandum of Encumbrances"
at the reverse side of the title of the lot as Entry No.
2432/T-131086.
On February 18, 1988, KARAMFIL sold the lot to
Palmcrest Development and Realty Corporation
(PALMCREST) under a Deed of Absolute Sale 5 of
even date. This deed was submitted to AYALA for
approval in order to obtain the latter's waiver of the
special condition prohibiting the resale of the lot until
after KARAMFIL shall have constructed a building
thereon. AYALA gave its written conformity to the
sale but reflecting in its approval the same special
conditions/restrictions as in the previous sale.
AYALA's conformity was annotated on the deed of
sale. 6 PALMCREST did not object to the stipulated
conditions and restrictions. 7
PALMCREST in turn sold the lot to Ray Burton
Development Corporation (RBDC), now respondent,
on April 11, 1988, with the agreement that AYALA
retains possession of the Owner's Duplicate copy of
the title until a building is erected on said parcel of
land in accordance with the requirements and/or
restrictions of AYALA. 8 The Deed of Absolute Sale 9

executed on the said date was also presented to

AYALA for approval since no building had yet been
constructed on the lot at the time of the sale. As in
the KARAMFIL-PALMCREST transaction, AYALA gave
its conformity to the sale, subject to RBDC's
compliance with the special conditions/restrictions
which were annotated in the deed of sale, thus:
With our conformity, subject to the compliance by
the Vendees of the Special Conditions of Sale on the
reverse side of the Deed of Sale dated March 20,
1984 per Doc. No. 140, Page No. 29, Book No. 1,
Series of 1984 of the Notary Public Silverio Aquino.
10

The conditions and restrictions of the sale were

likewise entered as encumbrances at the reverse
side of the Transfer Certificate of Title No. 155384
which was later issued in the name of RBDC. 11 Like
PALMCREST, RBDC was not also averse to the
aforesaid conditions and restrictions. 12
Sometime in June of 1989, RBDC submitted to AYALA
for approval a set of architectural plans for the
construction of a 5-storey office building on the
subject lot, with a height of 25.85 meters and a total
gross floor area of 4,989.402 square meters. 13 The
building was to be known as "Trafalgar Tower" but
later renamed "Trafalgar Plaza." Since the building
was well within the 42-meter height restriction,
AYALA approved the architectural plans.
Upon written request 14 made by RBDC, AYALA
likewise agreed to release the owner's copy of the
title covering the subject lot to the China Banking
Corporation as guarantee of the loan granted to
RBDC for the construction of the 5-storey building.
Meanwhile, on November 28, 1989, RBDC, together
with the Makati Developers Association, Inc. (MADAI),
of which RBDC is a member, and other lot owners,
filed a complaint against AYALA before the Housing
and Land Use Regulatory Board (HLRB), docketed as
HLRB Case No. REM-A-0818 (OAALA-REM-1114894240). The complaint sought the nullification of the
very same Deed Restrictions incorporated in the
deeds of sale of the lots purchased by the
complainants from AYALA and annotated on their
certificates of title, on the grounds, inter alia, that
said restrictions purportedly: (a) place unreasonable
control over the lots sold by AYALA, thereby depriving
the vendees of the full enjoyment of the lots they
bought, in violation of Article 428 of the Civil Code;
(b) have been superseded by Presidential Decree No.
1096 (the National Building Code) and Metro Manila
Commission Zoning Ordinance No. 81-01; (c) violate
the constitutional provision on equal protection of the
laws, since the restrictions are imposed without

regard to reasonable standards or classifications; and

(d) are contracts of adhesion 15 since AYALA would
not sell the lots unless the buyers agree to the deed
restrictions. The complaint also alleged that AYALA is
in estoppel from enforcing the restrictions in question
when it allowed the construction of other high-rise
buildings in Makati City beyond the height and floor
area limits. AYALA was further charged with unsound
business practice.
Early in June of 1990, RBDC made another set of
building plans for "Trafalgar Plaza" and submitted the
same for approval, this time to the Building Official of
the Makati City Engineer's Office, 16 not to AYALA. In
these plans, the building was to be 26-storey high, or
a height of 98.60 meters, with a total gross floor area
of 28,600 square meters. After having obtained the
necessary building permits from the City Engineer's
Office, RBDC began to construct "Trafalgar Plaza" in
accordance with these new plans.
On July 11, 1990, the majority of the lot owners in
the Makati City area, including the Salcedo and
Legaspi Village areas, in a general assembly of the
Makati Commercial Estate Association, Inc. (MACEA),
approved the revision of the Deed Restrictions, which
revision was embodied in the "Consolidated and
Revised Deed Restrictions" 17 (Revised Deed
Restrictions) wherein direct height restrictions were
abolished in favor of floor area limits computed on
the basis of "floor area ratios" (FARs). In the case of
buildings devoted solely to office use in Salcedo
Village such as the "Trafalgar Plaza" the same
could have a maximum gross floor area of only eight
(8) times the lot area. Thus, under the Revised Deed
Restrictions, "Trafalgar Plaza" could be built with a
maximum gross floor area of only 9,504 square
meters (1,188 sq. m. the size of the subject lot
multiplied by 8). Even under the Revised Deed
Restrictions, Trafalgar would still exceed 19,065
square meters of floor area on the basis of a FARs of
8:1. RBDC did not vote for the approval of the
Revised Deed Restrictions and, therefore, it
continued to be bound by the original Deed
Restrictions.
In the meantime, on August 22, 1990, the HLRB En
Banc rendered a decision 18 (a) upholding the Deed
Restrictions; (b) absolving AYALA from the charge of
unsound business practice; and (c) dismissing HLRB
Case No. REM-A-0818. MADAI and RBDC separately
appealed the decision to the Office of the President,
which appeal was docketed as O.P. Case No. 4476.
While the appeal was pending before the Office of
the President, the September 21, 1990 issue of the
Business Worldmagazine 19 featured the "Trafalgar
Plaza" as a modern 27-storey structure which will
soon rise in Salcedo Village, Makati City. Stunned by
this information, AYALA, through counsel, then sent a

letter 20 to RBDC demanding the latter to cease the

construction of the building which dimensions do not
conform to the previous plans it earlier approved.
RBDC, through counsel, replied with a series of
letters 21 requesting for time to assess the merits of
AYALA's demand.
For failing to heed AYALA's bidding, RBDC was sued
on January 25, 1991 before the Regional Trial Court of
Makati City (Branch 148). AYALA's complaint for
Specific Performance or Rescission, docketed as Civil
Case No. 91-220, prayed inter alia that judgment be
rendered
xxx xxxxxx
b. Ordering the defendant to comply with its
contractual obligations and to remove or demolish
the portions or areas of the Trafalgar Tower/Plaza
Building constructed beyond or in excess of the
approved height as shown by building plans
approved by the plaintiff, including any other portion
of the building constructed not in accordance with
the building plans and specifications submitted to
and approved by plaintiff.
c. Alternatively, in the event specific performance
becomes impossible:
i) Ordering the cancellation and rescission of the
Deed of Sale dated March 20, 1984 (Annex "A"
hereof) and ordering defendant to return to plaintiff
Lot 26, Block 2 of Salcedo Village;
ii) Ordering the cancellation of Transfer Certificate of
Title No. 155384 (in the name of defendant) and
directing the Makati Register of Deeds to issue a new
title over the Lot in the name of plaintiff; and
d. Ordering defendant to pay plaintiff attorney's fees
in the amount of P500,000.00, exemplary damages
in the amount of P5,000.00 and the costs of the
instant suit. 22
In its answer (with counterclaim) to the complaint,
RBDC denied having "actual or constructive notice of
the Deed Restrictions" imposed by AYALA on the
subject lot. RBDC alleged in essence that even if said
deed restrictions exist, the same are not
economically viable and should not be enforced
because they constitute unreasonable restrictions on
its property rights and are, therefore, contrary to law,
morals, good customs, public order or public policy.
Moreover, RBDC claimed that the enforcement of the
deed restrictions has also been arbitrary or
discriminatory since AYALA has not made any action
against a number of violators of the deed
restrictions.
Meantime, the appeal of MADAI in O.P. Case No.
44761 was considered resolved when it entered into

a compromise agreement with AYALA wherein the

latter adopted and acknowledged as binding the
Revised Deed Restrictions of July 11, 1990. 23 On the
other hand, RBDC's appeal was dismissed in an Order
dated February 13, 1992, for the reason that, "insofar
as the disposition of the appealed (HLRB) decision is
concerned, there is virtually no more actual
controversy on the subject of the 'Deed Restrictions'
because the same has been overriden by the
'Revised (Deed) Restrictions' which the appellee
Ayala Corporation has in fact acknowledged as
binding and in full force and
effect . . . 24 Accordingly, aside from dismissing
RBDC's appeal, the Order of February 13, 1992 also
"set aside" the appealed HLRB decision. From this
order, AYALA sought a reconsideration or clarification,
noting, inter alia, that while the said order has ruled
that AYALA can no longer enforce the Deed
Restrictions against RBDC, it does not expressly state
that RBDC is bound by the Revised Deed Restrictions.
Clarifying this matter, the Office of the President
issued a Resolution dated April 21,1992, 25
modifying the February 13, 1992 order, ruling: (1)
that RBDC is bound by the original Deed Restrictions,
but it has the option to accept and be bound by the
Revised Deed Restrictions in lieu of the former; and
(2) that the "HLRB decision dated 22 August 1990, to
the extent that it absolved Ayala from the charge of
unsound business practice, subject of the basic
complaint, is affirmed." This time RBDC moved for a
reconsideration of the April 21, 1992 Order, but the
motion was denied in a Resolution dated October 15,
1993. 26 Another Resolution of March 21, 1994 27
was issued denying with finality RBDC's second
motion for reconsideration.
AYALA then filed a Manifestation 28 in Civil Case No.
91-220, informing the trial court of the pertinent
rulings/resolutions in the proceedings before the
HLRB and the Office of the President, which rulings,
AYALA suggested, amount to res judicataon the issue
of the validity and enforceability of the Deed
Restrictions involved in the said civil case.
After trial on the merits, the trial court rendered a
Decision on April 28, 1994 in favor of RBDC, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the defendant and
against the plaintiff, and as a consequence:
1. The instant case is hereby dismissed;
2. The motion/application for the annotation of the
lispendens is hereby DENIED;
3. The motion/application to hold defendant in
continuing contempt is hereby also DENIED;

4. No damages is awarded to any of the parties;

5. Plaintiff is hereby ordered to pay the defendant
P30,000.00 for and as attorney's fees and litigation
expenses;
With costs against plaintiff.
SO ORDERED. 29
The trial court's decision is based on its findings that:
(1) RBDC had neither actual nor constructive notice
of the 42-meter height limitation of the building to be
constructed on the subject lot; (2) even if the Deed
Restrictions did exist, AYALA is estopped from
enforcing the same against RBDC by reason of the
former's failure to enforce said restrictions against
other violators in the same area; (3) the Deed
Restrictions partake of the nature of a contract of
adhesion; (4) since the Trafalgar Plaza building is in
accord with the minimum requirements of P.D. No.
1096 (The National Building Code), the Deed
Restrictions may not be followed by RBDC; and (5)
the rulings of the HLRB and the Office of the
President do not have binding effect in the instant
case.
Dissatisfied, AYALA appealed to the Court of Appeals
which affirmed the judgment of the trial court in a
Decision 30 dated February 27, 1996 in CA-G.R. CV
No. 46488. AYALA's motion for reconsideration was
likewise denied in the Resolution 31of October 7,
1996.
AYALA now interposes the present petition for review
on certiorari, citing several errors in the decision of
the Court of Appeals, some of which involve
questions of fact.
The resolution of factual issues raised in the petition
would certainly call for a review of the Court of
Appeals' findings of fact. As a rule, the reexamination of the evidence proffered by the
contending parties during the trial of the case is not
a function that this Court normally undertakes
inasmuch as the findings of fact of the Court of
Appeals are generally binding and conclusive on the
Supreme Court. 32 The jurisdiction of this Court in a
petition for review on certiorari under Rule 45 of the
Revised Rules of Court is limited to reviewing only
errors of law. 33 A reevaluation of factual issues by
this Court is justified when the findings of fact
complained of are devoid of support by the evidence
on record, or when the assailed judgment is based on
misapprehension of facts. 34
The present petition has shown that certain relevant
facts were overlooked by the Court of Appeals, which
facts, if properly appreciated, would justify a different

conclusion from the one reached in the assailed

decision.
The principal error raised here by petitioner AYALA
pertains to the Court of Appeals' finding that RBDC
did not have actual or constructive notice of the 42meter height restriction, since what was annotated
on its (RBDC's) title is the erroneous 23-meter height
limit which, according to AYALA's own witness, Jose
Cuaresma, was not applicable to RBDC. 35 Thus, the
Court of Appeals concluded, RBDC "has the right to
enjoy the subject property as if no restrictions and
conditions were imposed thereon." 36
The above finding and conclusion of the Court of
Appeals, AYALA submits, are based on "surmises and
conjectures" which are "contrary to the evidence on
record and (RBDC's) own admissions." 37
There is merit in AYALA's submission.
The erroneous annotation of the 23-meter height
restriction in RBDC's title was explained by Jose
Cuaresma, AYALA's Assistant Manager for Marketing
and Sales. Cuaresma testified that when the deed of
sale between PALMCREST and RBDC was submitted
to the Register of Deeds of Makati and the
corresponding title was issued in the name of RBDC,
the Register of Deeds annotated the wrong height
limit in Entry No. 2432 on the said title, but he
emphasized that the incorrect annotation does not
apply to RBDC. 38
Jose Cuaresma further clarified that the correct
height restriction imposed by AYALA on RBDC was 42
meters. 39 This height ceiling, he said, is based on
the deed of restrictions attached as annex to the
deed of sale, 40 and the same has been uniformly
imposed on the transferees beginning from the
original deed of sale between AYALA and KARAMFIL.
41
This clarificatory statement of Jose Cuaresma should
have cautioned the Court of Appeals from making the
unfounded and sweeping conclusion that RBDC can
do anything it wants on the subject property "as if no
restrictions and conditions were imposed thereon,"
on the mistaken premise that RBDC was unaware of
the correct 42-meter height limit. It must be stressed
that Cuaresma's testimony is bolstered by
documentary evidence and circumstances of the
case which would show that RBDC was put on notice
about the 42-meter height restriction.
The record reveals that the subject Lot 26 was first
sold by AYALA to KARAMFIL under a deed of sale
(Exhibit "A") dated March 20, 1984 and duly
notarized by Notary Public Silverio Aquino. Attached
to the deed of sale is an appendix of special
conditions/restrictions (deed restrictions), which

provides, inter alia, that the building to be

constructed on the lot must have a total height of not
more than 42 meters, and that any building plans
and specifications of the proposed structures must
have the approval of AYALA. The deed restrictions
were
incorporated
in
the
memorandum
of
encumbrances at the reverse side of the title of the
lot as Entry No. 2432. When the lot was sold by
KARAMFIL to PALMCREST, the deed of sale (Exhibit
"B") on this transaction bears an annotation of
AYALA's conformity to the transfer, with the condition
that the approval was "subject to the compliance by
the vendee of the special conditions of sale on the
reverse side of the deed of sale dated March 20,
1984, per Doc. No. 140, Page No. 29, Book No. 1,
Series of 1984 of Notary Public Silverio F. Aquino"
(Exhibit "B-1"). PALMCREST later resold the lot to
RBDC by virtue of a deed of sale (Exhibit "C"), to
which AYALA's approval was also annotated therein
(Exhibit "C-1"), but with the same explicit inscription
that RBDC, as vendee, must comply with the special
deed restrictions appended to the AYALA-KARAMFIL
deed of sale of March 20, 1984. All these three (3)
deeds of sale and the accompanying special deed
restrictions imposing a 42-meter height limit, were
duly registered with the Register of Deeds. Thus,
RBDC cannot profess ignorance of the 42-meter
height restriction and other special conditions of the
sale.
Verily, the deed restrictions are integral parts of the
PALMCREST-RBDC deed of sale, considering that
AYALA's required conformity to the transfer, as
annotated therein, was conditioned upon RBDC's
compliance of the deed restrictions. Consequently, as
a matter of contractual obligation, RBDC is bound to
observe the deed restrictions which impose a
building height of not more than 42 meters.
Moreover, RBDC was fully aware that it was bound by
the 42-meter height limit. This is shown by the fact
that, pursuant to the special conditions/restrictions of
the sale, it submitted to AYALA, for approval, building
plans for a 5-storey structure with a height of 25.85
meters. Certainly, RBDC would not have submitted
such plans had it truly believed that it was restricted
by a lower 23-meter height ceiling, in the same
manner that RBDC did not seek AYALA's approval
when it later made another set of building plans for
the 26-storey "Trafalgar Plaza," knowing that the
same would be disapproved for exceeding the 42meter height restriction. The fact that RBDC was
later issued a building permit from the Makati City
Engineer's Office for the construction of the
"Trafalgar Plaza" is not a valid justification to
disregard the stipulated contractual restriction of 42
meters.
Another error which AYALA claims to have been
committed by the Court of Appeals is the latter's

finding that AYALA, under the principle of estoppel, is

now barred from enforcing the deed restrictions
because it had supposedly failed to act against other
violators of the said restrictions. AYALA argues that
such finding is baseless and is contrary to the Civil
Code provisions on estoppel and applicable
jurisprudence.
We agree with the petitioner.
In support of its finding that estoppel operates
against AYALA, the Court of Appeals merely cited its
decision dated November 17, 1993, in CA-G.R. SP No.
29157, entitled Rosa-Diana Realty and Development
Corporation,
Petitioner
vs.
Land
Registration
Authority and Ayala Corporation, Respondents, and
reiterated its findings therein, to wit:
Also, Ayala is barred from enforcing the deed of
restrictions in question, pursuant to the doctrines of
waiver and estoppel. Under the terms of the deed of
sale, the vendee SyKaKieng assumed faithful
compliance with the special conditions of sale and
with the Salcedo Village deed of restrictions. One of
the conditions was that a building would be
constructed within one year. Ayala did nothing to
enforce the terms of the contract. In fact, it even
agreed to the sale of the lot by SyKaKieng in favor of
the petitioner realty in 1989, or thirteen (13) years
later. We, therefore, see no justifiable reason for
Ayala to attempt to enforce the terms of the
conditions of the sale against the petitioner. It should
now be estopped from enforcing the said conditions
through any means.
xxx xxxxxx
Even assuming that petitioner RDR violated the floor
area and height restrictions, it is markedly significant
that Ayala disregarded the fact that it had previously
allowed and tolerated similar and repeated violations
of the same restrictive covenants by property owners
which it now seeks to enforce against the herein
petitioner. Some examples of existing buildings in
Salcedo Village that greatly exceeded the gross floor
area (5 times lot area) and height (42 meters)
limitations are (Rollo, p. 32):
(1) Pacific Star (Nauru Center Building 29 stories
and 112.5 meters high)
(2) Sagittarius Building 16 stories
(3) Shell House Building 14 stories
(4) Eurovilla Building 15 stories
(5) LPL Plaza Building 18 stories
(6) LPL Tower Building 24 stories. 42

An examination of the decision in the said Rosa

Diana case reveals that the sole issue raised before
the appellate court was the propriety of the
lispendens annotation. However, the appellate court
went beyond the sole issue and made factual
findings bereft of any basis in the record to
inappropriately rule that AYALA is in estoppel and has
waived its right to enforce the subject restrictions.
Such ruling was immaterial to the resolution of the
issue of the propriety of the annotation of the
lispendens. The finding of estoppel was thus
improper and made in excess of jurisdiction.
Moreover, the decision in CA-G.R. SP No. 29157 is not
binding on the parties herein, simply because, except
for Ayala, RBDC is not a party in that case. Section
49, Rule 39 of the Revised Rules of Court (now Sec.
47, Rule 39 of the 1997 Rules of Civil Procedure)
provides in part:
Sec. 49. Effect of judgments. The effect of a
judgment or final order rendered by a court or judge
of the Philippines, having jurisdiction to pronounce
the judgment or order, may be as follows:
(a) . . .;
(b) In other cases the judgment or order is, with
respect to the matter directly adjudged or as to any
other matter that could have been raised in relation
thereto, conclusive between the parties and their
successors in interest by title subsequent to the
commencement of action or special proceeding,
litigating for the same thing and under the same title
and in the same capacity; (emphasis supplied)
(c) . . . .
The clear mandate of the above-quoted rule is that a
final judgment or order of a court is conclusive and
binding only upon the parties to a case and their
successors in interest. Both the present case and the
Rosa-Diana case, however, involve different parties
who are not litigating "for the same thing" nor "under
the same title and in the same capacity." Hence, the
Rosa-Diana decision cannot have binding effect
against either party to the instant case.
In any case, AYALA asserts that a few gross violators
of the deed restrictions "have been, or are being,
proceeded against."43 AYALA admits, though, that
there are other violations of the restrictions but these
are of a minor nature which do not detract from
substantial compliance by the lot owners of the deed
restrictions. AYALA submits that minor violations are
insufficient to warrant judicial action, thus:
As a rule, non-objection to trivial breaches of a
restrictive covenant does not result in loss of the
right to enforce the covenant by injunction, and

acquiescence in violations of a restrictive covenant

which are immaterial and do not affect or injure one
will not preclude him from restraining violations
thereof which would so operate as to cause him to be
damaged." (20 Am Jur. 2d Sec. 271, p. 835; emphasis
provided).
Occasional and temporary violations by lot owners of
a covenant forbidding the use of property for
mercantile purposes are not sufficient as a matter of
law to warrant a finding of a waiver or abandonment
to the right to enforce the restriction. A waiver in
favor of one person and for a limited purpose is not a
waiver as to all persons generally. (id., at 836;
emphasis provided). 44
It is the sole prerogative and discretion of AYALA to
initiate any action against violators of the deed
restrictions. This Court cannot interfere with the
exercise of such prerogative/discretion.
How AYALA could be considered in estoppel as found
by both the trial court and the Court of Appeals, was
not duly established. "Under the doctrine of estoppel,
an admission or representation is rendered
conclusive upon the person making it, and cannot be
denied or disproved as against the person relying
thereon. A party may not go back on his own acts
and representations to the prejudice of the other
party who relied upon them." 45 Here, we find no
admission, false representation or concealment that
can be attributed to AYALA relied upon by RBDC.
What is clear from the record, however, is that RBDC
was the party guilty of misrepresentation and/or
concealment when it resorted to the fraudulent
scheme of submitting two (2) sets of building plans,
one (1) set conformed to the Deed Restrictions,
which was submitted to and approved by AYALA, 46
while another set violated the said restrictions, and
which it presented to the Makati City Building Official
in order to secure from the latter the necessary
building permit. 47 It is noteworthy that after the
submission of the second set of building plans to the
Building
Official,
RBDC
continued
to
make
representations to AYALA that it would build the fivestorey building in accordance with the first set of
plans approved by AYALA, obviously for the purpose
of securing the release of the title of the subject lot
to obtain bank funding. AYALA relied on RBDC's false
representations and released the said title. Hence,
RBDC was in bad faith.
AYALA further assigns as error the finding of the
respondent court that, "while the Deed of Sale to Ray
Burton (RBDC) did not appear to be a contract of
adhesion," however, "the subject Deed Restrictions
annotated therein appeared to be one." 48The only
basis for such finding is that the Deed Restrictions
and Special Conditions were "pre-printed" and

"prepared" by AYALA, and that RBDC's participation

thereof was "only to sign the Deed of Sale with the
said restrictions and conditions."49
The respondent court erred in ruling that the Deed
Restrictions is a contract of adhesion.
A contract of adhesion in itself is not an invalid
agreement. This type of contract is as binding as a
mutually executed transaction. We have emphatically
ruled in the case of OngYiu vs. Court of Appeals, et.
al. 50 that "contracts of adhesion wherein one party
imposes a ready-made form of contract on the other .
. . 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." This
ruling was reiterated inPhilippine American General
Insurance Co., Inc. vs. Sweet Lines, Inc., et. al., 51
wherein we further declared through Justice
FlorenzRegalado that "not even an allegation of
ignorance of a party excuses non-compliance with
the contractual stipulations since the responsibility
for ensuring full comprehension of the provisions of a
contract of carriage (a contract of adhesion) devolves
not on the carrier but on the owner, shipper, or
consignee as the case may be."
Contracts of adhesion, however, stand out from other
contracts (which are bilaterally drafted by the
parties) in that the former is accorded inordinate
vigilance and scrutiny by the courts in order to shield
the unwary from deceptive schemes contained in
ready-made covenants. As stated by this Court,
speaking through Justice J.B.L. Reyes, in Qua
CheeGan vs. Law Union and Rock Insurance Co., Ltd.:
52
The courts cannot ignore that nowadays, monopolies,
cartels and concentration of capital, endowed with
overwhelming economic power, manage to impose
upon parties dealing with them cunningly prepared
"agreements" that the weaker party may not change
one whit, his participation in the "agreement" being
reduced to the alternative to "take it or leave it"
labeled since Raymond Saleilles "contracts by
adherence" (contracts d' adhesion) in contrast to
those entered into by parties bargaining on an equal
footing. Such contracts (of which policies of
insurance and international bill of lading are prime
examples) obviously call for greater strictness and
vigilance on the part of the courts of justice with a
view to protecting the weaker party from abuses and
imposition, and prevent their becoming traps for the
unwary. 53 (Emphasis supplied)
The stringent treatment towards contracts of
adhesion which the courts are enjoined to observe is
in pursuance of the mandate in Article 24 of the New
Civil Code that "(i)n 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."
Thus, the validity and/or enforceability of a contract
of adhesion will have to be determined by the
peculiar circumstances obtaining in each case and
the situation of the parties concerned.
In the instant case, the stipulations in the Deed
Restrictions and Special Conditions are plain and
unambiguous which leave no room for interpretation.
Moreover, there was even no attempt on the part of
RBDC to prove that, in the execution of the Deed of
Sale on the subject lot, it was a weaker or a
disadvantaged party on account of its moral
dependence, ignorance, mental weakness or other
handicap. On the contrary, as testified to by Edwin
Ngo, President of RBDC, the latter is a realty firm and
has been engaged in realty business, 54 and that he,
a businessman for 30 years, 55 represented RBDC in
the negotiations and in the eventual purchase of the
subject lot from
PALMCREST. 56 Edwin Ngo's testimony proves that
RBDC was not an unwary party in the subject
transaction. Instead, Edwin Ngo has portrayed RBDC
as a knowledgeable realty firm experienced in real
estate business.
In sum, there is more than ample evidence on record
pinpointing RBDC's violation of the applicable FAR
restrictions in the Consolidated and Revised Deed
Restrictions (CRDRs) when it constructed the 27storey Trafalgar Plaza. The prayer of petitioner is that
judgment be rendered as follows:
a. Ordering Ray Burton to comply with its contractual
obligations in the construction of Trafalgar Plaza' by
removing or demolishing the portions of areas
thereof constructed beyond or in excess of the
approved height, as shown by the building plans
submitted to, and approved by, Ayala, including any
other portion of the building constructed not in
accordance with the said building plans;
b. Alternatively, in the event specific performance
becomes impossible:
(1) ordering the cancellation and rescission of the
March 20, 1984 "Deed of Sale" and all subsequent
"Deeds of Sale" executed in favor of the original
vendee's successors-in-interest and ordering Ray
Burton to return to Ayala Lot 26, Lot 2 of Salcedo
Village;
(2) ordering the cancellation of Transfer Certificate of
Title No. 155384 (in the name of defendant) and
directing the Office of the Register of Deeds of Makati

to issue a new title over the lot in the name of Ayala;

and

based on the weighted average of wholesale price

and wage indices of the National Census and
Statistics Office and the Bureau of Labor Statistics.

xxx xxxxxx. 57
However, the record reveals that construction of
Trafalgar Plaza began in 1990, and a certificate of
completion thereof was issued by the Makati City
Engineer's Office per ocular inspection on November
7, 1996. 58 Apparently Trafalgar Plaza has been fully
built, and we assume, is now fully tenanted. The
alternative prayers of petitioner under the CRDRs,
i.e., the demolition of excessively built space or to
permanently restrict the use thereof, are no longer
feasible.
Thus, we perforce instead rule that RBDC may only
be
held
alternatively
liable
for
substitute
performance of its obligations the payment of
damages. In this regard, we note that the CRDRs
impose development charges on constructions which
exceed the estimated Gross Limits permitted under
the original Deed Restrictions but which are within
the limits of the CRDRs.
In this regard, we quote hereunder pertinent portions
of The Revised Deed Restrictions, to wit:

B is equal to the total Gross Floor Area of the

completed or expanded building in square meters.
C is equal to the estimated Gross Floor Area
permitted under the original deed restrictions,
derived by multiplying the lot area by the effective
original FAR shown below for each location: 59
Accordingly, in accordance with the unique, peculiar
circumstance of the case at hand, we hold that the
said development charges are a fair measure of
compensatory damages which RBDC has caused in
terms of creating a disproportionate additional
burden on the facilities of the Makati Central
Business District.
As discussed above, Ray Burton Development
Corporation acted in bad faith in constructing
Trafalgar Plaza in excess of the applicable restrictions
upon a double submission of plans and exercising
deceit upon both AYALA and the Makati Engineer's
Office, and thus by way of example and correction,
should be held liable to pay AYALA exemplary
damages in the sum of P2,500,000.00.

3. DEVELOPMENT CHARGE
For any building construction within the Gross Floor
Area limits defined under Paragraphs C-2.1 to C-2.4
above, but which will result in a Gross Floor Area
exceeding certain standards defined in Paragraphs C3.1-C below, the OWNER shall pay MACEA, prior to
the start of construction of any new building or any
expansion of an existing building, a DEVELOPMENT
CHARGE as a contribution to a trust fund to be
administered by MACEA. This trust fund shall be used
to improve facilities and utilities in the Makati Central
Business District.
3.1 The amount of the development charge that shall
be due from the OWNER shall be computed as
follows:
DEVELOPMENT CHARGE = A x (B - C - D)
where:
A is equal to the Area Assessment which shall be
set at Five Hundred Pesos (P500.00) until December
31, 1990. Each January 1st thereafter, such amount
shall increase by ten percent (10%) over the Area
Assessment charged in the immediately preceding
year; provided that, beginning 1995 and at the end
of every successive five-year period thereafter, the
increase in the Area Assessment shall be reviewed
and adjusted by the VENDOR to correspond to the
accumulated increase in the construction cost index
during the immediately preceding five years as

Finally, we find the complaint to be well-grounded,

thus it is AYALA which is entitled to an award of
attorney's fees, and while it prays for the amount of
P500,000.00, we award the amount of P250,000.00
which we find to be reasonable under the
circumstances.
WHEREFORE, premises considered, the assailed
Decision of the Court of Appeals dated February 27,
1996, in CA-G.R. CV No. 46488, and its Resolution
dated October 7, 1996 are hereby REVERSED and
SET ASIDE, and in lieu thereof, judgment is hereby
rendered finding that:
(1) The Deed Restrictions are valid and petitioner
AYALA is not estopped from enforcing them against
lot owners who have not yet adopted the
Consolidated and Revised Deed Restrictions;
(2) Having admitted that the Consolidated and
Revised Deed Restrictions are the applicable Deed
Restrictions
to
Ray
Burton
Development
Corporation's Trafalgar Plaza, RBDC should be, and is,
bound by the same;
(3) Considering that Ray Burton Development
Corporation's Trafalgar Plaza exceeds the floor area
limits of the Deed Restrictions, RBDC is hereby
ordered to pay development charges as computed
under the provisions of the Consolidated and Revised
Deed Restrictions currently in force.

(4) Ray Burton Development Corporation is further

ordered to pay AYALA exemplary damages in the
amount of P2,500,000.00, attorney's fees in the
amount of P250,000.00, and the costs of suit.
SO ORDERED.

Regalado, Melo, Puno and Mendoza, JJ., concur.