LORENZO SHIPPING CORP. vs. BJ MARTHEL INTERNATIONAL, INC.

This is a petition for review seeking to set aside the Decision1 of the Court of Appeals in
CA-G.R. CV No. 54334 and its Resolution denying petitioner's motion for
reconsideration.

The factual antecedents of this case are as follows:

Petitioner Lorenzo Shipping Corporation is a domestic corporation engaged in

coastwise shipping. It used to own the cargo vessel M/V Dadiangas Express.

Upon the other hand, respondent BJ Marthel International, Inc. is a business entity
engaged in trading, marketing, and selling of various industrial commodities. It is also an
importer and distributor of different brands of engines and spare parts.

From 1987 up to the institution of this case, respondent supplied petitioner with spare
parts for the latter's marine engines. Sometime in 1989, petitioner asked respondent for
a quotation for various machine parts. Acceding to this request, respondent furnished
petitioner with a formal quotation,2 thus:

May 31, 1989

MINQ-6093
LORENZO SHIPPING LINES
Pier 8, North Harbor
Manila

SUBJECT: PARTS FOR ENGINE MODEL

MITSUBISHI 6UET 52/60

Dear Mr. Go:

We are pleased to submit our offer for your above subject requirements.

Description Qty. Unit Price Total Price

Nozzle Tip 6 pcs. P 5,520.00 33,120.00
Plunger & 6 pcs. 27,630.00 165,780.00
Barrel
Cylinder Head 2 pcs. 1,035,000.00 2,070,000.00
Cylinder Liner 1 set 477,000.00
TOTAL PRICE FOB P2,745,900.00
 MANILA
___________

DELIVERY: Within 2 months after receipt of firm order.

TERMS: 25% upon delivery, balance payable in 5 bi-monthly equal

Installment[s] not to exceed 90 days.

We trust you find our above offer acceptable and look forward to your most
valued order.

Very truly yours,

(SGD) HENRY PAJARILLO

Sales Manager

Petitioner thereafter issued to respondent Purchase Order No. 13839, 3 dated 02

November 1989, for the procurement of one set of cylinder liner, valued at P477,000, to
be used for M/V Dadiangas Express. The purchase order was co-signed by Jose Go,
Jr., petitioner's vice-president, and Henry Pajarillo. Quoted hereunder is the pertinent
portion of the purchase order:

Name of Qty. Amount

Description
CYL. LINER M/E 1 SET P477,000.00
NOTHING FOLLOW
INV. #
TERM OF PAYMENT: 25% DOWN PAYMENT
5 BI-MONTHLY INSTALLMENT[S]

Instead of paying the 25% down payment for the first cylinder liner, petitioner issued in
favor of respondent ten postdated checks4 to be drawn against the former's account with
Allied Banking Corporation. The checks were supposed to represent the full payment of
the aforementioned cylinder liner.

Subsequently, petitioner issued Purchase Order No. 14011, 5 dated 15 January 1990, for
yet another unit of cylinder liner. This purchase order stated the term of payment to be
"25% upon delivery, balance payable in 5 bi-monthly equal installment[s]."6 Like the
purchase order of 02 November 1989, the second purchase order did not state the date
of the cylinder liner's delivery.
On 26 January 1990, respondent deposited petitioner's check that was postdated 18
January 1990, however, the same was dishonored by the drawee bank due to
insufficiency of funds. The remaining nine postdated checks were eventually returned
by respondent to petitioner.

The parties presented disparate accounts of what happened to the check which was
previously dishonored. Petitioner claimed that it replaced said check with a good one,
the proceeds of which were applied to its other obligation to respondent. For its part,
respondent insisted that it returned said postdated check to petitioner.

Respondent thereafter placed the order for the two cylinder liners with its principal in
Japan, Daiei Sangyo Co. Ltd., by opening a letter of credit on 23 February 1990 under
its own name with the First Interstate Bank of Tokyo.

On 20 April 1990, Pajarillo delivered the two cylinder liners at petitioner's warehouse in
North Harbor, Manila. The sales invoices7 evidencing the delivery of the cylinder liners
both contain the notation "subject to verification" under which the signature of Eric Go,
petitioner's warehouseman, appeared.

Respondent thereafter sent a Statement of Account dated 15 November 1990 8 to

petitioner. While the other items listed in said statement of account were fully paid by
petitioner, the two cylinder liners delivered to petitioner on 20 April 1990 remained
unsettled. Consequently, Mr. Alejandro Kanaan, Jr., respondent's vice-president, sent a
demand letter dated 02 January 19919 to petitioner requiring the latter to pay the value
of the cylinder liners subjects of this case. Instead of heeding the demand of respondent
for the full payment of the value of the cylinder liners, petitioner sent the former a letter
dated 12 March 199110 offering to pay only P150,000 for the cylinder liners. In said
letter, petitioner claimed that as the cylinder liners were delivered late and due to the
scrapping of the M/V Dadiangas Express, it (petitioner) would have to sell the cylinder
liners in Singapore and pay the balance from the proceeds of said sale.

Shortly thereafter, another demand letter dated 27 March 199111 was furnished
petitioner by respondent's counsel requiring the former to settle its obligation to
respondent together with accrued interest and attorney's fees.

Due to the failure of the parties to settle the matter, respondent filed an action for sum of
money and damages before the Regional Trial Court (RTC) of Makati City. In its
complaint,12 respondent (plaintiff below) alleged that despite its repeated oral and
written demands, petitioner obstinately refused to settle its obligations. Respondent
prayed that petitioner be ordered to pay for the value of the cylinder liners plus accrued
interest of P111,300 as of May 1991 and additional interest of 14% per annum to be
reckoned from June 1991 until the full payment of the principal; attorney's fees; costs of
suits; exemplary damages; actual damages; and compensatory damages.

On 25 July 1991, and prior to the filing of a responsive pleading, respondent filed an
amended complaint with preliminary attachment pursuant to Sections 2 and 3, Rule 57
of the then Rules of Court.13 Aside from the prayer for the issuance of writ of preliminary
attachment, the amendments also pertained to the issuance by petitioner of the
postdated checks and the amounts of damages claimed.

In an Order dated 25 July 1991,14 the court a quo granted respondent's prayer for the
issuance of a preliminary attachment. On 09 August 1991, petitioner filed an Urgent Ex-
Parte Motion to Discharge Writ of Attachment15attaching thereto a counter-bond as
required by the Rules of Court. On even date, the trial court issued an Order16lifting the
levy on petitioner's properties and the garnishment of its bank accounts.

Petitioner afterwards filed its Answer17 alleging therein that time was of the essence in
the delivery of the cylinder liners and that the delivery on 20 April 1990 of said items
was late as respondent committed to deliver said items "within two (2) months after
receipt of firm order"18 from petitioner. Petitioner likewise sought counterclaims for moral
damages, exemplary damages, attorney's fees plus appearance fees, and expenses of
litigation.

Subsequently, respondent filed a Second Amended Complaint with Preliminary

Attachment dated 25 October 1991.19 The amendment introduced dealt solely with the
number of postdated checks issued by petitioner as full payment for the first cylinder
liner it ordered from respondent. Whereas in the first amended complaint, only nine
postdated checks were involved, in its second amended complaint, respondent claimed
that petitioner actually issued ten postdated checks. Despite the opposition by
petitioner, the trial court admitted respondent's Second Amended Complaint with
Preliminary Attachment.20

Prior to the commencement of trial, petitioner filed a Motion (For Leave To Sell Cylinder
Liners)21 alleging therein that "[w]ith the passage of time and with no definite end in sight
to the present litigation, the cylinder liners run the risk of obsolescence and
deterioration"22 to the prejudice of the parties to this case. Thus, petitioner prayed that it
be allowed to sell the cylinder liners at the best possible price and to place the proceeds
of said sale in escrow. This motion, unopposed by respondent, was granted by the trial
court through the Order of 17 March 1991.23

After trial, the court a quo dismissed the action, the decretal portion of the Decision
stating:

WHEREFORE, the complaint is hereby dismissed, with costs against the plaintiff, which
is ordered to pay P50,000.00 to the defendant as and by way of attorney's fees. 24

The trial court held respondent bound to the quotation it submitted to petitioner
particularly with respect to the terms of payment and delivery of the cylinder liners. It
also declared that respondent had agreed to the cancellation of the contract of sale
when it returned the postdated checks issued by petitioner. Respondent's counterclaims
for moral, exemplary, and compensatory damages were dismissed for insufficiency of
evidence.
Respondent moved for the reconsideration of the trial court's Decision but the motion
was denied for lack of merit.25

Aggrieved by the findings of the trial court, respondent filed an appeal with the Court of
Appeals26 which reversed and set aside the Decision of the court a quo. The appellate
court brushed aside petitioner's claim that time was of the essence in the contract of
sale between the parties herein considering the fact that a significant period of time had
lapsed between respondent's offer and the issuance by petitioner of its purchase orders.
The dispositive portion of the Decision of the appellate court states:

WHEREFORE, the decision of the lower court is REVERSED and SET ASIDE.
The appellee is hereby ORDERED to pay the appellant the amount of
P954,000.00, and accrued interest computed at 14% per annum reckoned from
May, 1991.27

The Court of Appeals also held that respondent could not have incurred delay in the
delivery of cylinder liners as no demand, judicial or extrajudicial, was made by
respondent upon petitioner in contravention of the express provision of Article 1169 of
the Civil Code which provides:

Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their
obligation.

Likewise, the appellate court concluded that there was no evidence of the alleged
cancellation of orders by petitioner and that the delivery of the cylinder liners on 20 April
1990 was reasonable under the circumstances.

On 22 May 2000, petitioner filed a motion for reconsideration of the Decision of the
Court of Appeals but this was denied through the resolution of 06 October
2000.28 Hence, this petition for review which basically raises the issues of whether or
not respondent incurred delay in performing its obligation under the contract of sale and
whether or not said contract was validly rescinded by petitioner.

That a contract of sale was entered into by the parties is not disputed. Petitioner,
however, maintains that its obligation to pay fully the purchase price was extinguished
because the adverted contract was validly terminated due to respondent's failure to
deliver the cylinder liners within the two-month period stated in the formal quotation
dated 31 May 1989.

The threshold question, then, is: Was there late delivery of the subjects of the contract
of sale to justify petitioner to disregard the terms of the contract considering that time
was of the essence thereof?

In determining whether time is of the essence in a contract, the ultimate criterion is the
actual or apparent intention of the parties and before time may be so regarded by a
court, there must be a sufficient manifestation, either in the contract itself or the
surrounding circumstances of that intention.29 Petitioner insists that although its
purchase orders did not specify the dates when the cylinder liners were supposed to be
delivered, nevertheless, respondent should abide by the term of delivery appearing on
the quotation it submitted to petitioner.30 Petitioner theorizes that the quotation
embodied the offer from respondent while the purchase order represented its
(petitioner's) acceptance of the proposed terms of the contract of sale.31 Thus, petitioner
is of the view that these two documents "cannot be taken separately as if there were
two distinct contracts."32 We do not agree.

It is a cardinal rule in interpretation of contracts that if the terms thereof are clear and
leave no doubt as to the intention of the contracting parties, the literal meaning shall
control.33 However, in order to ascertain the intention of the parties, their
contemporaneous and subsequent acts should be considered.34 While this Court
recognizes the principle that contracts are respected as the law between the contracting
parties, this principle is tempered by the rule that the intention of the parties is
primordial35 and "once the intention of the parties has been ascertained, that element is
deemed as an integral part of the contract as though it has been originally expressed in
unequivocal terms."36

In the present case, we cannot subscribe to the position of petitioner that the
documents, by themselves, embody the terms of the sale of the cylinder liners. One can
easily glean the significant differences in the terms as stated in the formal quotation and
Purchase Order No. 13839 with regard to the due date of the down payment for the first
cylinder liner and the date of its delivery as well as Purchase Order No. 14011 with
respect to the date of delivery of the second cylinder liner. While the quotation provided
by respondent evidently stated that the cylinder liners were supposed to be delivered
within two months from receipt of the firm order of petitioner and that the 25% down
payment was due upon the cylinder liners' delivery, the purchase orders prepared by
petitioner clearly omitted these significant items. The petitioner's Purchase Order No.
13839 made no mention at all of the due dates of delivery of the first cylinder liner and
of the payment of 25% down payment. Its Purchase Order No. 14011 likewise did not
indicate the due date of delivery of the second cylinder liner.

In the case of Bugatti v. Court of Appeals,37 we reiterated the principle that "[a] contract
undergoes three distinct stages – preparation or negotiation, its perfection, and finally,
its consummation. Negotiation begins from the time the prospective contracting parties
manifest their interest in the contract and ends at the moment of agreement of the
parties. The perfection or birth of the contract takes place when the parties agree upon
the essential elements of the contract. The last stage is the consummation of the
contract wherein the parties fulfill or perform the terms agreed upon in the contract,
culminating in the extinguishment thereof."

In the instant case, the formal quotation provided by respondent represented the
negotiation phase of the subject contract of sale between the parties. As of that time,
the parties had not yet reached an agreement as regards the terms and conditions of
the contract of sale of the cylinder liners. Petitioner could very well have ignored the
offer or tendered a counter-offer to respondent while the latter could have, under the
pertinent provision of the Civil Code,38withdrawn or modified the same. The parties were
at liberty to discuss the provisions of the contract of sale prior to its perfection. In this
connection, we turn to the testimonies of Pajarillo and Kanaan, Jr., that the terms of the
offer were, indeed, renegotiated prior to the issuance of Purchase Order No. 13839.

During the hearing of the case on 28 January 1993, Pajarillo testified as follows:

Q: You testified Mr. Witness, that you submitted a quotation with defendant
Lorenzo Shipping Corporation dated rather marked as Exhibit A stating the terms
of payment and delivery of the cylinder liner, did you not?

A: Yes sir.

Q: I am showing to you the quotation which is marked as Exhibit A there appears

in the quotation that the delivery of the cylinder liner will be made in two months'
time from the time you received the confirmation of the order. Is that correct?

A: Yes sir.

Q: Now, after you made the formal quotation which is Exhibit A how long a time
did the defendant make a confirmation of the order?

A: After six months.

Q: And this is contained in the purchase order given to you by Lorenzo Shipping
Corporation?

A: Yes sir.

Q: Now, in the purchase order dated November 2, 1989 there appears only the
date the terms of payment which you required of them of 25% down payment,
now, it is stated in the purchase order the date of delivery, will you explain to the
court why the date of delivery of the cylinder liner was not mentioned in the
purchase order which is the contract between you and Lorenzo Shipping
Corporation?

A: When Lorenzo Shipping Corporation inquired from us for that cylinder liner, we
have inquired [with] our supplier in Japan to give us the price and delivery of that
item. When we received that quotation from our supplier it is stated there that
they can deliver within two months but we have to get our confirmed order within
June.

Q: But were you able to confirm the order from your Japanese supplier on June
of that year?
A: No sir.

Q: Why? Will you tell the court why you were not able to confirm your order with
your Japanese supplier?

A: Because Lorenzo Shipping Corporation did not give us the purchase order for
that cylinder liner.

Q: And it was only on November 2, 1989 when they gave you the purchase
order?

A: Yes sir.

Q: So upon receipt of the purchase order from Lorenzo Shipping Lines in 1989
did you confirm the order with your Japanese supplier after receiving the
purchase order dated November 2, 1989?

A: Only when Lorenzo Shipping Corporation will give us the down payment of
25%.39

For his part, during the cross-examination conducted by counsel for petitioner,
Kanaan, Jr., testified in the following manner:

WITNESS: This term said 25% upon delivery. Subsequently, in the final contract,
what was agreed upon by both parties was 25% down payment.

Q: When?

A: Upon confirmation of the order.

...

Q: And when was the down payment supposed to be paid?

A: It was not stated when we were supposed to receive that. Normally, we expect
to receive at the earliest possible time. Again, that would depend on the
customers. Even after receipt of the purchase order which was what happened
here, they re-negotiated the terms and sometimes we do accept that.

Q: Was there a re-negotiation of this term?

A: This offer, yes. We offered a final requirement of 25% down payment upon
delivery.

Q: What was the re-negotiated term?

 A: 25% down payment

Q: To be paid when?

A: Supposed to be paid upon order.40

The above declarations remain unassailed. Other than its bare assertion that the
subject contracts of sale did not undergo further renegotiation, petitioner failed to proffer
sufficient evidence to refute the above testimonies of Pajarillo and Kanaan, Jr.

Notably, petitioner was the one who caused the preparation of Purchase Orders No.
13839 and No. 14011 yet it utterly failed to adduce any justification as to why said
documents contained terms which are at variance with those stated in the quotation
provided by respondent. The only plausible reason for such failure on the part of
petitioner is that the parties had, in fact, renegotiated the proposed terms of the contract
of sale. Moreover, as the obscurity in the terms of the contract between respondent and
petitioner was caused by the latter when it omitted the date of delivery of the cylinder
liners in the purchase orders and varied the term with respect to the due date of the
down payment,41 said obscurity must be resolved against it.42

Relative to the above discussion, we find the case of Smith, Bell & Co., Ltd. v.
Matti,43 instructive. There, we held that –

When the time of delivery is not fixed or is stated in general and indefinite terms,
time is not of the essence of the contract. . . .

In such cases, the delivery must be made within a reasonable time.

The law implies, however, that if no time is fixed, delivery shall be made within a
reasonable time, in the absence of anything to show that an immediate delivery
intended. . . .

We also find significant the fact that while petitioner alleges that the cylinder liners were
to be used for dry dock repair and maintenance of its M/V Dadiangas Express between
the later part of December 1989 to early January 1990, the record is bereft of any
indication that respondent was aware of such fact. The failure of petitioner to notify
respondent of said date is fatal to its claim that time was of the essence in the subject
contracts of sale.

In addition, we quote, with approval, the keen observation of the Court of Appeals:

. . . It must be noted that in the purchase orders issued by the appellee, dated
November 2, 1989 and January 15, 1990, no specific date of delivery was
indicated therein. If time was really of the essence as claimed by the appellee,
they should have stated the same in the said purchase orders, and not merely
relied on the quotation issued by the appellant considering the lapse of time
 between the quotation issued by the appellant and the purchase orders of the
appellee.

In the instant case, the appellee should have provided for an allowance of time
and made the purchase order earlier if indeed the said cylinder liner was
necessary for the repair of the vessel scheduled on the first week of January,
1990. In fact, the appellee should have cancelled the first purchase order when
the cylinder liner was not delivered on the date it now says was necessary.
Instead it issued another purchase order for the second set of cylinder liner. This
fact negates appellee's claim that time was indeed of the essence in the
consummation of the contract of sale between the parties.44

Finally, the ten postdated checks issued in November 1989 by petitioner and received
by the respondent as full payment of the purchase price of the first cylinder liner
supposed to be delivered on 02 January 1990 fail to impress. It is not an indication of
failure to honor a commitment on the part of the respondent. The earliest maturity date
of the checks was 18 January 1990. As delivery of said checks could produce the effect
of payment only when they have been cashed,45 respondent's obligation to deliver the
first cylinder liner could not have arisen as early as 02 January 1990 as claimed by
petitioner since by that time, petitioner had yet to fulfill its undertaking to fully pay for the
value of the first cylinder liner. As explained by respondent, it proceeded with the
placement of the order for the cylinder liners with its principal in Japan solely on the
basis of its previously harmonious business relationship with petitioner.

As an aside, let it be underscored that "[e]ven where time is of the essence, a breach of
the contract in that respect by one of the parties may be waived by the other party's
subsequently treating the contract as still in force."46Petitioner's receipt of the cylinder
liners when they were delivered to its warehouse on 20 April 1990 clearly indicates that
it considered the contract of sale to be still subsisting up to that time. Indeed, had the
contract of sale been cancelled already as claimed by petitioner, it no longer had any
business receiving the cylinder liners even if said receipt was "subject to verification."
By accepting the cylinder liners when these were delivered to its warehouse, petitioner
indisputably waived the claimed delay in the delivery of said items.

We, therefore, hold that in the subject contracts, time was not of the essence. The
delivery of the cylinder liners on 20 April 1990 was made within a reasonable period of
time considering that respondent had to place the order for the cylinder liners with its
principal in Japan and that the latter was, at that time, beset by heavy volume of work. 47

There having been no failure on the part of the respondent to perform its obligation, the
power to rescind the contract is unavailing to the petitioner. Article 1191 of the New Civil
Code runs as follows:

The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The law explicitly gives either party the right to rescind the contract only upon the failure
of the other to perform the obligation assumed thereunder.48 The right, however, is not
an unbridled one. This Court in the case of University of the Philippines v. De los
Angeles,49 speaking through the eminent civilist Justice J.B.L. Reyes, exhorts:

Of course, it must be understood that the act of a party in treating a contract as

cancelled or resolved on account of infractions by the other contracting party must be
made known to the other and is always provisional, being ever subject to scrutiny and
review by the proper court. If the other party denied that rescission is justified, it is free
to resort to judicial action in its own behalf, and bring the matter to court. Then, should
the court, after due hearing, decide that the resolution of the contract was not
warranted, the responsible party will be sentenced to damages; in the contrary case, the
resolution will be affirmed, and the consequent indemnity awarded to the party
prejudiced. (Emphasis supplied)

In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law. But the law
definitely does not require that the contracting party who believes itself injured must first
file suit and wait for a judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the other's breach will have to passively sit and watch its
damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence
to minimize its own damages.50

Here, there is no showing that petitioner notified respondent of its intention to rescind
the contract of sale between them. Quite the contrary, respondent's act of proceeding
with the opening of an irrevocable letter of credit on 23 February 1990 belies petitioner's
claim that it notified respondent of the cancellation of the contract of sale. Truly, no
prudent businessman would pursue such action knowing that the contract of sale, for
which the letter of credit was opened, was already rescinded by the other party.

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is

DENIED. The Decision of the Court of Appeals, dated 28 April 2000, and its Resolution,
dated 06 October 2000, are hereby AFFIRMED. No costs.

SO ORDERED.

LOADSTAR SHIPPING CO., INC.,

Petitioner,

- versus -

PIONEER ASIA INSURANCE CORP.,

Respondent.
 For review on certiorari are (1) the Decision[1] dated October 15, 2002 and (2)
the Resolution[2] dated February 27, 2003, of the Court of Appeals in CA-G.R. CV No.
40999, which affirmed with modification the Decision [3] dated February 15, 1993 of the
Regional Trial Court of Manila, Branch 8 in Civil Case No. 86-37957.

The pertinent facts are as follows:

Petitioner Loadstar Shipping Co., Inc. (Loadstar for brevity) is the registered owner
and operator of the vessel M/V Weasel. It holds office at 1294 Romualdez St.,
Paco, Manila.

On June 6, 1984, Loadstar entered into a voyage-charter with Northern Mindanao

Transport Company, Inc. for the carriage of 65,000 bags of cement
fromIligan City to Manila. The shipper was Iligan Cement Corporation, while the
consignee in Manila was Market Developers, Inc.

On June 24, 1984, 67,500 bags of cement were loaded on board M/V Weasel and
stowed in the cargo holds for delivery to the consignee. The shipment was covered by
petitioners Bill of Lading[4] dated June 23, 1984.

Prior to the voyage, the consignee insured the shipment of cement with respondent
Pioneer Asia Insurance Corporation for P1,400,000, for which respondent issued Marine
Open Policy No. MOP-006 dated September 17, 1980, covering all shipments made on
or after September 30, 1980.[5]

At 12:50 in the afternoon of June 24, 1984, M/V

Weasel left Iligan City for Manila in good weather. However, at 4:31 in the morning
of June 25, 1984, Captain Vicente C. Montera, master of M/V Weasel, ordered the vessel
to be forced aground. Consequently, the entire shipment of cement was good as gone
due to exposure to sea water. Petitioner thus failed to deliver the goods to the consignee
in Manila.

The consignee demanded from petitioner full reimbursement of the cost of the lost
shipment. Petitioner, however, refused to reimburse the consignee despite repeated
demands.

Nonetheless, on March 11, 1985, respondent insurance company paid the

consignee P1,400,000 plus an additional amount of P500,000, the value of the lost
shipment of cement. In return, the consignee executed a Loss and Subrogation Receipt
in favor of respondent concerning the latters subrogation rights against petitioner.

Hence, on October 15, 1986, respondent filed a complaint docketed as Civil Case
No. 86-37957, against petitioner with the Regional Trial Court of Manila, Branch 8. It
alleged that: (1) the M/V Weasel was not seaworthy at the commencement of the voyage;
(2) the weather and sea conditions then prevailing were usual and expected for that time
of the year and as such, was an ordinary peril of the voyage for which the M/V
Weasel should have been normally able to cope with; and (3) petitioner was negligent in
the selection and supervision of its agents and employees then manning the M/V Weasel.
 In its Answer, petitioner alleged that no fault nor negligence could be attributed to
it because it exercised due diligence to make the ship seaworthy, as well as properly
manned and equipped. Petitioner insisted that the failure to deliver the subject cargo to
the consignee was due to force majeure. Petitioner claimed it could not be held liable for
an act or omission not directly attributable to it.

On February 15, 1993, the RTC rendered a Decision in favor of respondent, to wit:
WHEREFORE, in view of the foregoing, judgment is hereby
rendered in favor of plaintiff and against defendant Loadstar Shipping Co.,
Inc. ordering the latter to pay as follows:

1. To pay plaintiff the sum of P1,900,000.00 with legal rate of

interest per annum from date of complaint until fully paid;

2. To pay the sum equal to 25% of the claim as and for attorneys
fees and litigation expenses; and,

3. To pay the costs of suit.

IT IS SO ORDERED.[6]

The RTC reasoned that petitioner, as a common carrier, bears the burden of
proving that it exercised extraordinary diligence in its vigilance over the goods it
transported. The trial court explained that in case of loss or destruction of the goods, a
statutory presumption arises that the common carrier was negligent unless it could prove
that it had observed extraordinary diligence.

Petitioners defense of force majeure was found bereft of factual basis. The RTC
called attention to the PAG-ASA report that at the time of the incident, tropical
storm Asiang had moved away from the Philippines. Further, records showed that the sea
and weather conditions in the area of Hinubaan, Negros Occidental from 8:00
p.m. of June 24, 1984 to 8:00 a.m. the next day were slight and smooth. Thus, the trial
court concluded that the cause of the loss was not tropical storm Asiang or any
other force majeure, but gross negligence of petitioner.

Petitioner appealed to the Court of Appeals.

In its Decision dated October 15, 2002, the Court of Appeals affirmed the RTC
Decision with modification that Loadstar shall only pay the sum of 10% of the total claim
for attorneys fees and litigation expenses. It ruled,
WHEREFORE, premises considered, the Decision dated February
15, 1993, of the Regional Trial Court of Manila, National Capital Judicial
Region, Branch 8, in Civil Case No. 86-37957 is hereby AFFIRMED with
the MODIFICATION that the appellant shall only pay the sum of 10% of the
total claim as and for attorneys fees and litigation expenses. Costs against
the appellant.
 SO ORDERED.[7]

Petitioners Motion for Reconsideration was denied.[8]

The instant petition is anchored now on the following assignments of error:

I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER IS A COMMON CARRIER UNDER ARTICLE 1732 OF THE
CIVIL CODE.

II
ASSUMING ARGUENDO THAT PETITIONER IS A COMMON CARRIER,
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
THE PROXIMATE CAUSE OF THE LOSS OF CARGO WAS NOT A
FORTUITOUS EVENT BUT WAS ALLEGEDLY DUE TO THE FAILURE OF
PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.

III
THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE
AWARD BY THE TRIAL COURT OF ATTORNEYS FEES AND
LITIGATION EXPENSES IN FAVOR OF HEREIN RESPONDENT.[9]

On the first and second issues, petitioner contends that at the time of the voyage
the carriers voyage-charter with the shipper converted it into a private carrier. Thus, the
presumption of negligence against common carriers could not apply. Petitioner further
avers that the stipulation in the voyage-charter holding it free from liability is valid and
binds the respondent. In any event, petitioner insists that it had exercised extraordinary
diligence and that the proximate cause of the loss of the cargo was a fortuitous event.

With regard to the third issue, petitioner points out that the award of attorneys fees
and litigation expenses appeared only in the dispositive portion of the RTC Decision with
nary a justification. Petitioner maintains that the Court of Appeals thus erred in affirming
the award.

For its part, respondent dismisses as factual issues the inquiry on (1) whether the
loss of the cargo was due to force majeure or due to petitioners failure to exercise
extraordinary diligence; and (2) whether respondent is entitled to recover attorneys fees
and expenses of litigation.

Respondent further counters that the Court of Appeals was correct when it held
that petitioner was a common carrier despite the charter of the whole vessel, since the
charter was limited to the ship only.

Prefatorily, we stress that the finding of fact by the trial court, when affirmed by the
Court of Appeals, is not reviewable by this Court in a petition for review on certiorari.
However, the conclusions derived from such factual finding are not necessarily pure
issues of fact when they are inextricably intertwined with the determination of a legal
issue. In such instances, the conclusions made may be raised in a petition for review
before this Court.[10]

The threshold issues in this case are: (1) Given the circumstances of this case, is
petitioner a common or a private carrier? and (2) In either case, did petitioner exercise
the required diligence i.e., the extraordinary diligence of a common carrier or the ordinary
diligence of a private carrier?

Article 1732 of the Civil Code defines a common carrier as follows:

Article 1732. Common carriers are persons, corporations, firms or
associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public.

Petitioner is a corporation engaged in the business of transporting cargo by water and for
compensation, offering its services indiscriminately to the public. Thus, without doubt, it
is a common carrier. However, petitioner entered into a voyage-charter with the Northern
Mindanao Transport Company, Inc. Now, had the voyage-charter converted petitioner
into a private carrier?

We think not. The voyage-charter agreement between petitioner and Northern Mindanao
Transport Company, Inc. did not in any way convert the common carrier into a private
carrier. We have already resolved this issue with finality in Planters Products, Inc. v. Court
of Appeals[11] where we ruled that:
It is therefore imperative that a public carrier shall remain as such,
notwithstanding the charter of the whole or portion of a vessel by one or
more persons, provided the charter is limited to the ship only, as in the case
of a time-charter or voyage-charter. It is only when the charter includes both
the vessel and its crew, as in a bareboat or demise that a common carrier
becomes private, at least insofar as the particular voyage covering the
charter-party is concerned. Indubitably, a shipowner in a time or voyage
charter retains possession and control of the ship, although her holds may,
for the moment, be the property of the charterer.[12]

Conformably, petitioner remains a common carrier notwithstanding the existence

of the charter agreement with the Northern Mindanao Transport Company, Inc. since the
said charter is limited to the ship only and does not involve both the vessel and its crew.
As elucidated in Planters Products, its charter is only a voyage-charter, not a bareboat
charter.

As a common carrier, petitioner is required to observe extraordinary diligence in

the vigilance over the goods it transports.[13] When the goods placed in its care are lost,
petitioner is presumed to have been at fault or to have acted negligently. Petitioner
therefore has the burden of proving that it observed extraordinary diligence in order to
avoid responsibility for the lost cargo.[14]

In Compania Maritima v. Court of Appeals,[15] we said:

it is incumbent upon the common carrier to prove that the loss,
deterioration or destruction was due to accident or some other
circumstances inconsistent with its liability.
...

The extraordinary diligence in the vigilance over the goods tendered

for shipment requires the common carrier to know and to follow the required
precaution for avoiding damage to, or destruction of the goods entrusted to
it for safe carriage and delivery. It requires common carriers to render
service with the greatest skill and foresight and to use all reasonable means
to ascertain the nature and characteristics of goods tendered for shipment,
and to exercise due care in the handling and stowage, including such
methods as their nature requires.[16]

Article 1734 enumerates the instances when a carrier might be exempt from
liability for the loss of the goods. These are:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;
(2) Act of the public enemy in war, whether international or civil;
(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
and
(5) Order or act of competent public authority.[17]

Petitioner claims that the loss of the goods was due to a fortuitous event under
paragraph 1. Yet, its claim is not substantiated. On the contrary, we find supported by
evidence on record the conclusion of the trial court and the Court of Appeals that the loss
of the entire shipment of cement was due to the gross negligence of petitioner.

Records show that in the evening of June 24, 1984, the sea and weather
conditions in the vicinity of Negros Occidental were calm. The records reveal that
petitioner took a shortcut route, instead of the usual route, which exposed the voyage to
unexpected hazard. Petitioner has only itself to blame for its misjudgment.

Petitioner heavily relies on Home Insurance Co. v. American Steamship Agencies,

Inc.[18]and Valenzuela Hardwood and Industrial Supply, Inc. v. Court of Appeals.[19] The
said cases involved a private carrier, not a common carrier. Moreover, the issue in both
cases is not the effect of a voyage-charter on a common carrier, but the validity of a
stipulation absolving the private carrier from liability in case of loss of the cargo
attributable to the negligence of the private carrier.
 Lastly, on the third issue, we find consistent with law and prevailing jurisprudence
the Court of Appeals award of attorneys fees and expenses of litigation equivalent to ten
percent (10%) of the total claim. The contract between the parties in this case contained
a stipulation that in case of suit, attorneys fees and expenses of litigation shall be limited
to only ten percent (10%) of the total monetary award. Given the circumstances of this
case, we deem the said amount just and equitable.

WHEREFORE, the petition is DENIED. The assailed Decision dated October 15,
2002 and the Resolution dated February 27, 2003, of the Court of Appeals in CA-G.R.
CV No. 40999, are AFFIRMED.

Costs against petitioner.

SO ORDERED.

ABOITIZ SHIPPING CORPORATION v INSURANCE COMPANY OF NORTH

AMERICA

THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims
by the assured. As subrogee, the insurer steps into the shoes of the assured and may
exercise only those rights that the assured may have against the wrongdoer who caused
the damage.

Before Us is a petition for review on certiorari of the Decision[1] of the Court of Appeals
(CA) which reversed the Decision[2] of the Regional Trial Court (RTC). The CA ordered
petitioner Aboitiz Shipping Corporation to pay the sum of P280,176.92 plus interest and
attorneys fees in favor of respondent Insurance Company of North America (ICNA).

The Facts

Culled from the records, the facts are as follows:

On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or
Subsidiary Companies (MSAS) procured a marine insurance policy from respondent
ICNA UK Limited of London. The insurance was for a transshipment of certain wooden
work tools and workbenches purchased for the consignee Science Teaching
Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu
[3] [4]
City, Philippines. ICNA issued an all-risk open marine policy, stating:

This Company, in consideration of a premium as agreed and subject

to the terms and conditions printed hereon, does insure for MSAS Cargo
International Limited &/or Associated &/or Subsidiary Companies on behalf
of the title holder: Loss, if any, payable to the Assured or order.[5]

The cargo, packed inside one container van, was shipped freight prepaid
from Hamburg, Germany on board M/S Katsuragi. A clean bill of lading[6] was issued by
Hapag-Lloyd which stated the consignee to be STIP, Ecotech Center, Sudlon
Lahug, Cebu City.

The container van was then off-loaded at Singapore and transshipped on board M/S
Vigour Singapore. On July 18, 1993, the ship arrived and docked at the Manila
International Container Port where the container van was again off-loaded. On July 26,
1993, the cargo was received by petitioner Aboitiz Shipping Corporation (Aboitiz) through
its duly authorized booking representative, Aboitiz Transport System. The bill of
lading[7] issued by Aboitiz contained the notation grounded outside warehouse.

The container van was stripped and transferred to another crate/container van without
any notation on the condition of the cargo on the Stuffing/Stripping Report.[8]On August
1, 1993, the container van was loaded on board petitioners vessel, MV Super Concarrier
I. The vessel left Manila en route to Cebu City on August 2, 1993.

On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving
apron of the Cebu International Port. It was then brought to the Cebu Bonded
Warehousing Corporation pending clearance from the Customs authorities. In the
Stripping Report[9] dated August 5, 1993, petitioners checker noted that the crates were
slightly broken or cracked at the bottom.

On August 11, 1993, the cargo was withdrawn by the representative of the consignee,
Science Teaching Improvement Project (STIP) and delivered
to Don BoscoTechnical High School, Punta Princesa, Cebu City. It was received by Mr.
Bernhard Willig. On August 13, 1993, Mayo B. Perez, then Claims Head of petitioner,
received a telephone call from Willig informing him that the cargo sustained water
damage. Perez, upon receiving the call, immediately went to the bonded warehouse and
checked the condition of the container and other cargoes stuffed in the same
container. He found that the container van and other cargoes stuffed there were
completely dry and showed no sign of wetness.[10]

Perez found that except for the bottom of the crate which was slightly broken, the crate
itself appeared to be completely dry and had no water
marks. But he confirmed that the tools which were stored inside the crate were already
corroded. He further explained that the grounded outside warehouse notation in the bill
of lading referred only to the container van bearing the cargo.[11]

In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon
opening of the cargo.[12] The letter stated that the crate was broken at its bottom part such
that the contents were exposed. The work tools and workbenches were found to have
been completely soaked in water with most of the packing cartons already disintegrating.
The crate was properly sealed off from the inside with tarpaper sheets. On the outside,
galvanized metal bands were nailed onto all the edges. The letter concluded that
apparently, the damage was caused by water entering through the broken parts of the
crate.
The consignee contacted the Philippine office of ICNA for insurance claims. On August
21, 1993, the Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection
and survey of the damage. CAC reported to ICNA that the goods sustained water
damage, molds, and corrosion which were discovered upon delivery to consignee.[13]

On September 21, 1993, the consignee filed a formal claim[14] with Aboitiz in the amount
of P276,540.00 for the damaged condition of the following goods:

ten (10) wooden workbenches

three (3) carbide-tipped saw blades
one (1) set of ball-bearing guides
one (1) set of overarm router bits
twenty (20) rolls of sandpaper for stroke sander

In a Supplemental Report dated October 20, 1993,[15] CAC reported to ICNA that based
on official weather report from the Philippine Atmospheric, Geophysical and Astronomical
Services Administration, it would appear that heavy rains on July 28 and 29, 1993 caused
water damage to the shipment. CAC noted that the shipment was placed outside the
warehouse of Pier No. 4, North Harbor, Manila when it was delivered on July 26,
1993. The shipment was placed outside the warehouse as can be gleaned from the bill
of lading issued by Aboitiz which contained the notation grounded outside warehouse. It
was only on July 31, 1993 when the shipment was stuffed inside another container van
for shipment to Cebu.

Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount
of P280,176.92 to consignee. A subrogation receipt was duly signed by Willig. ICNA
formally advised Aboitiz of the claim and subrogation receipt executed in its favor. Despite
follow-ups, however, no reply was received from Aboitiz.

RTC Disposition

ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum
of P280,176.92, plus interest and attorneys fees.[16] ICNA alleged that the damage
sustained by the shipment was exclusively and solely brought about by the fault and
negligence of Aboitiz when the shipment was left grounded outside its warehouse prior
to delivery.

Aboitiz disavowed any liability and asserted that the claim had no factual and legal
bases. It countered that the complaint stated no cause of action, plaintiff ICNA had no
personality to institute the suit, the cause of action was barred, and the suit was premature
there being no claim made upon Aboitiz.
On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive
portion of the decision[17] states:
 WHEREFORE, premises considered, the court holds that plaintiff is not
entitled to the relief claimed in the complaint for being baseless and without
merit. The complaint is hereby DISMISSED. The defendants counterclaims
are, likewise, DISMISSED for lack of basis.[18]

The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue
the claim against Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was
issued by ICNA UK Limited with address at Cigna House, 8 Lime Street, London EC3M
7NA. However, complainant ICNA Phils. did not present any evidence to show that ICNA
UK is its predecessor-in-interest, or that ICNA UK assigned the insurance policy to ICNA
Phils. Moreover, ICNA Phils. claim that it had been subrogated to the rights of the
consignee must fail because the subrogation receipt had no probative value for being
hearsay evidence. The RTC reasoned:

While it is clear that Marine Policy No. 87GB 4475 was issued by
Insurance Company of North America (U.K.) Limited (ICNA UK) with
address at Cigna House, 8 Lime Street, London EC3M 7NA, no evidence
has been adduced which would show that ICNA UK is the same as or the
predecessor-in-interest of plaintiff Insurance Company of North America
ICNA with office address at Cigna-Monarch Bldg., dela Rosa cor. Herrera
Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned the
Marine Policy to ICNA. Second, the assured in the Marine Policy appears
to be MSAS Cargo International Limited &/or Associated &/or Subsidiary
Companies. Plaintiffs witness, Francisco B. Francisco, claims that the
signature below the name MSAS Cargo International is an endorsement of
the marine policy in favor of Science Teaching Improvement
Project. Plaintiffs witness, however, failed to identify whose signature it was
and plaintiff did not present on the witness stand or took (sic) the deposition
of the person who made that signature. Hence, the claim that there was an
endorsement of the marine policy has no probative value as it is hearsay.

Plaintiff, further, claims that it has been subrogated to the rights and
interest of Science Teaching Improvement Project as shown by the
Subrogation Form (Exhibit K) allegedly signed by a representative of
Science Teaching Improvement Project. Such representative, however,
was not presented on the witness stand. Hence, the Subrogation Form is
self-serving and has no probative value.[19] (Emphasis supplied)

The trial court also found that ICNA failed to produce evidence that it was a foreign
corporation duly licensed to do business in the Philippines. Thus, it lacked the capacity to
sue before Philippine Courts, to wit:

Prescinding from the foregoing, plaintiff alleged in its complaint

that it is a foreign insurance company duly authorized to do business
in the Philippines. This allegation was, however, denied by the
defendant. In fact, in the Pre-Trial Order of 12 March 1996, one of the
 issues defined by the court is whether or not the plaintiff has legal capacity
to sue and be sued. Under Philippine law, the condition is that a foreign
insurance company must obtain licenses/authority to do business in
the Philippines. These licenses/authority are obtained from the
Securities and Exchange Commission, the Board of Investments and
the Insurance Commission. If it fails to obtain these
licenses/authority, such foreign corporation doing business in
the Philippines cannot sue before Philippine courts. Mentholatum Co.,
Inc. v. Mangaliman, 72 Phil. 524.(Emphasis supplied)

CA Disposition

ICNA appealed to the CA. It contended that the trial court failed to consider that its cause
of action is anchored on the right of subrogation under Article 2207 of the Civil
Code. ICNA said it is one and the same as the ICNA UK Limited as made known in the
dorsal portion of the Open Policy.[20]

On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that
the formal claim was not filed within the period required under Article 366 of the Code of
Commerce; that ICNA had no right of subrogation because the subrogation receipt should
have been signed by MSAS, the assured in the open policy, and not Willig, who is merely
the representative of the consignee.

On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:

WHEREFORE, premises considered, the present appeal is hereby

GRANTED. The appealed decision of the Regional Trial Court of Makati
City in Civil Case No. 94-1590 is hereby REVERSED and SET ASIDE. A
new judgment is hereby rendered ordering defendant-appellee Aboitiz
Shipping Corporation to pay the plaintiff-appellant Insurance Company of
North America the sum of P280,176.92 with interest thereon at the legal
rate from the date of the institution of this case until fully paid, and attorneys
fees in the sum of P50,000, plus the costs of suit.[21]

The CA opined that the right of subrogation accrues simply upon payment by the
insurance company of the insurance claim. As subrogee, ICNA is entitled to
reimbursement from Aboitiz, even assuming that it is an unlicensed foreign
corporation. The CA ruled:

At any rate, We find the ground invoked for the dismissal of the complaint
as legally untenable. Even assuming arguendo that the plaintiff-insurer in
this case is an unlicensed foreign corporation, such circumstance will not
bar it from claiming reimbursement from the defendant carrier by virtue of
subrogation under the contract of insurance and as recognized by Philippine
courts. x x x
 xxxx

Plaintiff insurer, whether the foreign company or its duly authorized

Agent/Representative in the country, as subrogee of the claim of the insured
under the subject marine policy, is therefore the real party in interest to bring
this suit and recover the full amount of loss of the subject cargo shipped by
it from Manila to the consignee in Cebu City. x x x[22]

The CA ruled that the presumption that the carrier was at fault or that it acted negligently
was not overcome by any countervailing evidence. Hence, the trial court erred in
dismissing the complaint and in not finding that based on the evidence on record and
relevant provisions of law, Aboitiz is liable for the loss or damage sustained by the subject
cargo.

Issues

The following issues are up for Our consideration:

(1) THE HONORABLE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR IN RULING THAT ICNA HAS A CAUSE OF
ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF
SUBROGATION BUT WITHOUT CONSIDERING THE ISSUE
CONSISTENTLY RAISED BY ABOITIZ THAT THE FORMAL CLAIM
OF STIP WAS NOT MADE WITHIN THE PERIOD PRESCRIBED BY
ARTICLE 366 OF THE CODE OF COMMERCE; AND, MORE SO,
THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT.

(2) THE HONORABLE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR IN RULING THAT THE SUIT FOR
REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY
ICNA AS THE LATTER WAS AN AUTHORIZED AGENT OF THE
INSURANCE COMPANY OF NORTH AMERICA (U.K.) (ICNA UK).

(3) THE HONORABLE COURT OF APPEALS COMMITTED A

REVERSIBLE ERROR IN RULING THAT THERE WAS PROPER
INDORSEMENT OF THE INSURANCE POLICY FROM THE
ORIGINAL ASSURED MSAS CARGO INTERNATIONAL LIMITED
(MSAS) IN FAVOR OF THE CONSIGNEE STIP, AND THAT THE
SUBROGATION RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS
VALID NOTWITHSTANDING THE FACT THAT IT HAS NO
PROBATIVE VALUE ANDIS MERELY HEARSAY AND A SELF-
SERVING DOCUMENT FOR FAILURE OF ICNA TO PRESENT A
REPRESENTATIVE OF STIP TO IDENTIFY ANDAUTHENTICATE
THE SAME.
 (4) THE HONORABLE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR IN RULING THAT THE EXTENT AND KIND OF
DAMAGE SUSTAINED BY THE SUBJECT CARGO WAS CAUSED BY
THE FAULT OR NEGLIGENCE OF ABOITIZ.[23] (Underscoring
supplied)

Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent
ICNA the real party-in-interest that possesses the right of subrogation to claim
reimbursement from petitioner Aboitiz? (b) Was there a timely filing of the notice of claim
as required under Article 366 of the Code of Commerce? (c) If so, can petitioner be held
liable on the claim for damages?

Our Ruling

We answer the triple questions in the affirmative.

A foreign corporation not licensed to do business in the Philippines is not

absolutely incapacitated from filing a suit in local courts. Only when that foreign
corporation is transacting or doing business in the country will a license be necessary
before it can institute suits.[24] It may, however, bring suits on isolated business
transactions, which is not prohibited under Philippine law.[25] Thus, this Court has held
that a foreign insurance company may sue in Philippine courts upon the marine insurance
policies issued by it abroad to cover international-bound cargoes shipped by a Philippine
carrier, even if it has no license to do business in this country. It is the act of engaging in
business without the prescribed license, and not the lack of license per se, which bars a
foreign corporation from access to our courts.[26]

In any case, We uphold the CA observation that while it was the ICNA UK Limited which
issued the subject marine policy, the present suit was filed by the said companys
authorized agent in Manila. It was the domestic corporation that brought the suit and not
the foreign company. Its authority is expressly provided for in the open policy which
includes the ICNA office in the Philippines as one of the foreign companys agents.

As found by the CA, the RTC erred when it ruled that there was no proper
indorsement of the insurance policy by MSAS, the shipper, in favor of STIP of Don Bosco
Technical High School, the consignee.

The terms of the Open Policy authorize the filing of any claim on the insured goods, to be
brought against ICNA UK, the company who issued the insurance, or against any of its
listed agents worldwide.[27] MSAS accepted said provision when it signed and accepted
the policy. The acceptance operated as an acceptance of the authority of the
agents. Hence, a formal indorsement of the policy to the agent in the Philippines was
unnecessary for the latter to exercise the rights of the insurer.

Likewise, the Open Policy expressly provides that:

 The Company, in consideration of a premium as agreed and subject
to the terms and conditions printed hereon, does insure MSAS Cargo
International Limited &/or Associates &/or Subsidiary Companies in behalf
of the title holder: Loss, if any, payable to the Assured or Order.

The policy benefits any subsequent assignee, or holder, including the consignee,
who may file claims on behalf of the assured. This is in keeping with Section 57 of the
Insurance Code which states:

A policy may be so framed that it will inure to the benefit of

whosoever, during the continuance of the risk, may become the owner of
the interest insured. (Emphasis added)

Respondents cause of action is founded on it being subrogated to the rights of the

consignee of the damaged shipment. The right of subrogation springs from Article
2207 of the Civil Code, which states:

Article 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss arising
out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. If the amount paid
by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury. (Emphasis added)

As this Court held in the case of Pan Malayan Insurance Corporation v. Court of
Appeals,[28] payment by the insurer to the assured operates as an equitable assignment
of all remedies the assured may have against the third party who caused the
damage. Subrogation is not dependent upon, nor does it grow out of, any privity of
contract or upon written assignment of claim. It accrues simply upon payment of the
insurance claim by the insurer.[29]

Upon payment to the consignee of indemnity for damage to the insured goods, ICNAs
entitlement to subrogation equipped it with a cause of action against petitioner in case of
a contractual breach or negligence.[30] This right of subrogation, however, has its
limitations. First, both the insurer and the consignee are bound by the contractual
stipulations under the bill of lading.[31] Second, the insurer can be subrogated only to the
rights as the insured may have against the wrongdoer. If by its own acts after receiving
payment from the insurer, the insured releases the wrongdoer who caused the loss from
liability, the insurer loses its claim against the latter.[32]

The giving of notice of loss or injury is a condition precedent to the action for loss
or injury or the right to enforce the carriers liability. Circumstances peculiar to this
case lead Us to conclude that the notice requirement was complied with. As held in
the case of Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc.,[33] this
notice requirement protects the carrier by affording it an opportunity to make an
investigation of the claim while the matter is still fresh and easily investigated. It is meant
to safeguard the carrier from false and fraudulent claims.

Under the Code of Commerce, the notice of claim must be made within twenty four
(24) hours from receipt of the cargo if the damage is not apparent from the outside of the
package. For damages that are visible from the outside of the package, the claim must
be made immediately. The law provides:

Article 366. Within twenty four hours following the receipt of the
merchandise, the claim against the carrier for damages or average which
may be found therein upon opening the packages, may be made, provided
that the indications of the damage or average which give rise to the claim
cannot be ascertained from the outside part of such packages, in which
case the claim shall be admitted only at the time of receipt.

After the periods mentioned have elapsed, or the transportation

charges have been paid, no claim shall be admitted against the carrier with
regard to the condition in which the goods transported were
delivered. (Emphasis supplied)

The periods above, as well as the manner of giving notice may be modified in the
terms of the bill of lading, which is the contract between the parties. Notably, neither of
the parties in this case presented the terms for giving notices of claim under the bill of
lading issued by petitioner for the goods.

The shipment was delivered on August 11, 1993. Although the letter informing the
carrier of the damage was dated August 15, 1993, that letter, together with the notice of
claim, was received by petitioner only on September 21, 1993. But petitioner admits that
even before it received the written notice of claim, Mr. Mayo B. Perez, Claims Head of the
company, was informed by telephone sometime in August 13, 1993. Mr. Perez then
immediately went to the warehouse and to the delivery site to inspect the goods in behalf
of petitioner.[34]

In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil

Lighterage Corporation,[35] the notice was allegedly made by the consignee through
telephone. The claim for damages was denied. This Court ruled that such a notice did not
comply with the notice requirement under the law. There was no evidence presented that
the notice was timely given. Neither was there evidence presented that the notice was
relayed to the responsible authority of the carrier.
 As adverted to earlier, there are peculiar circumstances in the instant case that
constrain Us to rule differently from the PCIC case, albeit this ruling is being made pro
hac vice, not to be made a precedent for other cases.

Stipulations requiring notice of loss or claim for damage as a condition precedent

to the right of recovery from a carrier must be given a reasonable and practical
construction, adapted to the circumstances of the case under adjudication, and their
application is limited to cases falling fairly within their object and purpose. [36]

Bernhard Willig, the representative of consignee who received the shipment,

relayed the information that the delivered goods were discovered to have sustained water
damage to no less than the Claims Head of petitioner, Mayo B. Perez. Immediately, Perez
was able to investigate the claims himself and he confirmed that the goods were, indeed,
already corroded.

Provisions specifying a time to give notice of damage to common carriers are

ordinarily to be given a reasonable and practical, rather than a strict construction. [37] We
give due consideration to the fact that the final destination of the damaged cargo was a
school institution where authorities are bound by rules and regulations governing their
actions. Understandably, when the goods were delivered, the necessary clearance had
to be made before the package was opened. Upon opening and discovery of the
damaged condition of the goods, a report to this effect had to pass through the proper
channels before it could be finalized and endorsed by the institution to the claims
department of the shipping company.

The call to petitioner was made two days from delivery, a reasonable period
considering that the goods could not have corroded instantly overnight such that it could
only have sustained the damage during transit. Moreover, petitioner was able to
immediately inspect the damage while the matter was still fresh. In so doing, the main
objective of the prescribed time period was fulfilled. Thus, there was substantial
compliance with the notice requirement in this case.
To recapitulate, We have found that respondent, as subrogee of the consignee, is the
real party in interest to institute the claim for damages against petitioner; and pro hac vice,
that a valid notice of claim was made by respondent.

We now discuss petitioners liability for the damages sustained by the

shipment. The rule as stated in Article 1735 of the Civil Code is that in cases where
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 required by law.[38] Extraordinary diligence is that
extreme measure of care and caution which persons of unusual prudence and
circumspection use for securing and preserving their own property rights. [39] This standard
is intended to grant favor to the shipper who is at the mercy of the common carrier once
the goods have been entrusted to the latter for shipment.[40]
 Here, the shipment delivered to the consignee sustained water damage. We agree
with the findings of the CA that petitioner failed to overturn this presumption:

x x x upon delivery of the cargo to the consignee Don Bosco

Technical High School by a representative from Trabajo Arrastre, and the
crates opened, it was discovered that the workbenches and work tools
suffered damage due to wettage although by then they were already
physically dry. Appellee carrier having failed to discharge the burden of
proving that it exercised extraordinary diligence in the vigilance over such
goods it contracted for carriage, the presumption of fault or negligence on
its part from the time the goods were unconditionally placed in its
possession (July 26, 1993) up to the time the same were delivered to the
consignee (August 11, 1993), therefore stands. The presumption that the
carrier was at fault or that it acted negligently was not overcome by any
countervailing evidence. x x x[41] (Emphasis added)

The shipment arrived in the port of Manila and was received by petitioner for
carriage on July 26, 1993. On the same day, it was stripped from the container van. Five
days later, on July 31, 1993, it was re-stuffed inside another container van. On August 1,
1993, it was loaded onto another vessel bound for Cebu. During the period between July
26 to 31, 1993, the shipment was outside a container van and kept in storage by
petitioner.

The bill of lading issued by petitioner on July 31, 1993 contains the notation
grounded outside warehouse, suggesting that from July 26 to 31, the goods were kept
outside the warehouse. And since evidence showed that rain fell over Manila during the
same period, We can conclude that this was when the shipment sustained water damage.

To prove the exercise of extraordinary diligence, petitioner must do more than

merely show the possibility that some other party could be responsible for the damage. It
must prove that it used all reasonable means to ascertain the nature and characteristic of
the goods tendered for transport and that it exercised due care in handling
them.[42] Extraordinary diligence must include safeguarding the shipment from damage
coming from natural elements such as rainfall.

Aside from denying that the grounded outside warehouse notation referred not to
the crate for shipment but only to the carrier van, petitioner failed to mention where exactly
the goods were stored during the period in question. It failed to show that the crate was
properly stored indoors during the time when it exercised custody before shipment
to Cebu. As amply explained by the CA:

On the other hand, the supplemental report submitted by the surveyor has
confirmed that it was rainwater that seeped into the cargo based on official
data from the PAGASA that there was, indeed, rainfall in the Port Area of
Manila from July 26 to 31, 1993. The Surveyor specifically noted that the
subject cargo was under the custody of appellee carrier from the time it was
 delivered by the shipper on July 26, 1993 until it was stuffed inside
Container No. ACCU-213798-4 on July 31, 1993. No other inevitable
conclusion can be deduced from the foregoing established facts that
damage from wettage suffered by the subject cargo was caused by the
negligence of appellee carrier in grounding the shipment outside causing
rainwater to seep into the cargoes.

Appellees witness, Mr. Mayo tried to disavow any responsibility for causing
wettage to the subject goods by claiming that the notation GROUNDED
OUTSIDE WHSE. actually refers to the container and not the contents
thereof or the cargoes. And yet it presented no evidence to explain where
did they place or store the subject goods from the time it accepted the same
for shipment on July 26, 1993 up to the time the goods were stripped or
transferred from the container van to another container and loaded into the
vessel M/V Supercon Carrier I on August 1, 1993 and left Manila for Cebu
City on August 2, 1993. x x x If the subject cargo was not grounded outside
prior to shipment to Cebu City, appellee provided no explanation as to
where said cargo was stored from July 26, 1993 to July 31, 1993. What the
records showed is that the subject cargo was stripped from the container
van of the shipper and transferred to the container on August 1, 1993 and
finally loaded into the appellees vessel bound for Cebu City on August 2,
1993. The Stuffing/Stripping Report (Exhibit D) at the Manila port did not
indicate any such defect or damage, but when the container was stripped
upon arrival in Cebu City port after being discharged from appellees vessel,
it was noted that only one (1) slab was slightly broken at the bottom
allegedly hit by a forklift blade (Exhibit F).[43] (Emphasis added)

Petitioner is thus liable for the water damage sustained by the goods due to its
failure to satisfactorily prove that it exercised the extraordinary diligence required of
common carriers.

WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.

SO ORDERED.

LUFTHANSA GERMAN AIRLINES, petitioner,

vs.
COURT OF APPEALS and TIRSO V. ANTIPORDA, SR., respondents.

Quisumbing, Torres & Evangelista for petitioner.

Quirante and Associates Law Office for private respondent.

ROMERO, J.:

In this petition for review on certiorari, the Court is confronted with the issue of whether
or not petitioner Lufthansa German Airlines which issued a confirmed Lufthansa ticket to
private respondent Antiporda covering a five-leg trip abroad different airlines should be
held liable for damages occasioned by the "bumping-off" of said private respondent
Antiporda by Air Kenya, one of the airlines contracted to carry him to a particular
destination of the five-leg trip.

Tirso V. Antiporda, Sr. was an associate director of the Central Bank of the
Philippines and a registered consultant of the Asian Development Bank, the
World Bank and the UNDP. He was, contracted by Sycip, Gorres, Velayo & Co.
(SGV) to be the institutional financial specialist for the agricultural credit
institution project of the Investment and Development Bank of Malawi in Africa.
According to the letter of August 30, 1984 addressed to Antiporda from J.F.
Singson of SGV, he would render his services to the Malawi bank as an
independent contractor for which he would be paid US$9,167 for a 50-day period
commencing sometime in September 1984. For the engagement, Antiporda
would be provided one round-trip economy ticket from Manila to Blantyre and
back with a maximum travel time of four days per round-trip and, in addition, a
travel allowance of $50 per day, a travel insurance coverage of P100,000 and
major hospitalization with AFIA and an accident insurance coverage of
P150,000.1 On September 17, 1984, Lufthansa, through SGV, issued ticket No.
3477712678 for Antiporda's confirmed flights to Malawi, Africa. The ticket
particularized his itinerary as follows:

Carrier Flight Date Time Status

Manila to SQ 081 25-9-84 1530 OK

Singapore

Singapore to LH 695 25-9-84 2200 OK

Bombay

Bombay to KQ 203 26-9-84 0215 OK

Nairobi

Nairobi to QM 335 26-9-84 1395 OK

Lilongwe

Lilongwe to QM 031 26-9-84 1600 OK

Blantyre

Thus, on September 25, 1984, Antiporda took the Lufthansa flight to Singapore from
where he proceeded to Bombay on board the same airline. He arrived in Bombay as
scheduled and waited at the transit area of the airport for his connecting flight to Nairobi
which was, per schedule given him by Lufthansa, to leave Bombay in the morning of
September 26, 1984. Finding no representative of Lufthansa waiting for him at the gate,
Antiporda asked the duty officer of Air India how he could get in touch with Lufthansa.
He was told to call up Lufthansa which informed him that somebody would attend to him
shortly. Ten minutes later, Gerard Matias, Lufthansa's traffic officer, arrived, asked for
Antiporda's ticket and told him to just sit down and wait. Matias returned with one Leslie
Benent, duty officer of Lufthansa, who informed Antiporda that his seat in Air Kenya
Flight 203 to Nairobi had been given to a very important person of Bombay who was
attending a religious function in Nairobi. Antiporda protested, stressing that he had an
important professional engagement in Blantyre, Malawi in the afternoon of September
26, 1984. He requested that the situation be remedied but Air Kenya Flight 203 left for
Nairobi without him on board. Stranded in Bombay, Antiporda was booked for Nairobi
via Addis Ababa only on September 27, 1984. He finally arrived in Blantyre at 9:00
o'clock in the evening of September 28, 1984, more than a couple of days late for his
appointment with people from the institution he was to work with in Malawi.

Consequently, on January 8, 1985, Antiporda's counsel wrote the general manager of

Lufthansa in Manila demanding P1,000,000 in damages for the airline's "malicious,
wanton, disregard of the contract of carriage." 2 In reply, Lufthansa general manager
Hagen Keilich assured Antiporda that the matter would be investigated.

Apparently getting no positive action from Lufthansa, on January 21, 1985, Antiporda
filed with the Regional Trial Court of Quezon City a complaint against Lufthansa which
was docketed as Civil Case No. Q-43810.

The lower court, 3 guided by the Supreme Court ruling in KLM Dutch Airlines v. Court of
Appeals, et al., 4 found that Lufthansa breached the contract to transport Antiporda from
Manila to Blantyre on a trip of five legs. It said:

The threshold issue that confronts this Court is:

Was there a breach of obligation by the defendant in failing to transport

the plaintiff from Manila to Blantyre, Malawi, Africa?

The defendant admits the issuance and validity of Ticket

No. 3477712678 (Exh. B). However, it denies its obligation to transport the
plaintiff to his point of destination at Blantyre, Malawi, Africa. Defendant
claims that it was obligated to transport the plaintiff only up to Bombay.

This case is one of a contract of carriage. And the ticket issued by the
defendant to the plaintiff is the written agreement between the
parties herein. Ticket No. 3477712678 particularizes the itinerary of the
plaintiff . . .

xxx xxx xxx

 From the ticket, therefore, it is indubitably clear that it was the duty and
responsibility of the defendant Lufthansa to transport the plaintiff from
Manila to Blantyre, on a trip of five legs.

The posture taken by the defendant that it was Air Kenya's, not
Lufthansa's, liability to transport plaintiff from Bombay to Malawi, is
inacceptable. The plaintiff dealt exclusively with the defendant Lufthansa
which issued to him the ticket for his entire trip and which in effect
guaranteed to the plaintiff that he would have sure space in Air Kenya's
flight to Nairobi. Plaintiff, under that assurance of the defendant, naturally,
had the right to expect that his ticket would be honored by Air Kenya, to
which, in the legal sense, Lufthansa had endorsed and in effect
guaranteed the performance of its principal engagement to carry out
plaintiff's scheduled itinerary previously and mutually agreed upon by the
parties. Defendant itself admitted that the flight from Manila, Singapore,
Bombay, Nairobi, Lilongwe, Blantyre, Malawi, were all confirmed with the
stamped letters "OK" thereon. In short, after issuing a confirmed ticket
from Manila to Malawi and receiv(ing) payment from the plaintiff for such
one whole trip, how can the defendant now deny its contractual obligation
by alleging that its responsibility ceased at the Bombay Airport?

The contract of air transportation was exclusively between the plaintiff

Antiporda and the defendant Lufthansa, the latter merely endorsing its
performance to Air Kenya, as its subcontractor or agent. The fourth
paragraph of the "Conditions of Contracts" of the ticket (Exh. B) issued by
Lufthansa to plaintiff indubitably shows that the contract was one of
continuous air transportation from Manila to Blantyre, Malawi.

4. . . . carriage to be performed hereunder by several

successive carriers is regarded as a single operation.

This condition embodied in the ticket issued to plaintiff is diametrically

opposed to the defense theory that Lufthansa's liability is only limited up to
Bombay.

Pursuant to the above reasoning, the lower court held that Lufthansa cannot limit its
liability as a mere ticket issuing agent for other airlines and only to untoward
occurrences on its own line.

The lower court added that under the pool arrangement of the International Air
Transport Association (IATA), of which Lufthansa and Air Kenya are members, member
airlines are agents of each other in the issuance of tickets and, therefore, in accordance
with Ortigas v. Lufthansa,5 an airline company is considered bound by the mistakes
committed by another member of IATA which, in behalf of the former, had confirmed a
passenger's reservation for accommodation.
In justifying its award of moral and exemplary damages, the lower court emphasized
that the breach of contract was "aggravated by the discourteous and highly arbitrary
conduct of Gerard Matias, an official of petitioner Lufthansa in Bombay." Its factual
findings on the matter are the following:

. . . . Bumped off from his connecting flight to Nairobi and stranded in the
Bombay Airport for 32 hours, when plaintiff insisted on taking his
scheduled flight to Nairobi, Gerard Matias got angry and threw the ticket
and passport on plaintiff's lap and was ordered to go to the basement with
his heavy luggages for no reason at all. It was a difficult task for the
plaintiff to carry three luggages and yet Gerard Matias did not even offer to
help him. Plaintiff requested accommodation but Matias ignored it and just
left. Not even Lufthansa office in Bombay, after learning plaintiff's being
stranded in Bombay and his accommodation problem, provided any relief
to plaintiff's sordid situation. Plaintiff had to stay in the transit area and
could not sleep for fear that his luggages might be lost. Everytime he went
to the toilet, he had to drag with him his luggages. He tried to eat the high-
seasoned food available at the airport but developed stomach trouble. It
was indeed a pathetic sight that the plaintiff, an official of the Central
Bank, a multi-awarded institutional expert, tasked to perform consultancy
work in a World Bank funded agricultural bank project in Malawi instead
found himself stranded in a foreign land where nobody was expected to
help him in his predicament except the defendant, who displayed utter
lack of concern of its obligation to the plaintiff and left plaintiff alone in his
misery at the Bombay airport.

Citing Air France v. Carrascoso, 6 the lower court ruled that passengers have a right to
be treated with kindness, respect, courtesy and consideration by the carrier's
employees apart from their right to be protected against personal misconduct, injurious
language, indignities and abuses from such employees.

Consequently, the trial court ordered Lufthansa to pay Antiporda the following:

(a) the amount of P300,000.00 as moral damages;

(b) the amount of P200,000.00 as exemplary damages; and

(c) the amount of P50,000.00 as reasonable attorney's fees.

With costs against the defendant.

Lufthansa elevated the case to the Court of Appeals arguing that it cannot be held liable
for the acts committed by Air Kenya on the basis of the following:
 (a) it merely acted as a ticket-issuing agent in behalf of Air Kenya;
consequently the contract of carriage entered into is between respondent
Antiporda and Air Kenya, to the exclusion of petitioner Lufthansa;

(b) under sections (1) and (2) Article 30 of the Warsaw Convention, an
airline carrier is liable only to untoward occurrences on its own line;

(c) the award of moral and exemplary damages in addition to attorney's

fees by the trial court is without basis in fact and in law.

The Court of Appeals not convinced with Lufthansa's appeal, affirmed the decision on
the trial court sought to be reviewed.

Explained the Court of Appeals: although the contract of carriage was to be performed
by several air carriers, the same is to be treated as a single operation conducted by
Lufthansa because Antiporda dealt exclusively with it which issued him a Lufthansa
ticket for the entire trip. By issuing a confirmed ticket, Lufthansa in effect guaranteed
Antiporda a sure seat with Air Kenya. Private respondent Antiporda, maintained the
Court of Appeals, had the right to expect that his ticket would be honored by Air Kenya
which, in the legal sense, Lufthansa had endorsed and, in effect, guaranteed the
performance of its principal engagement to carry out his five-leg trip.

The appellate court also ruled that Lufthansa cannot rely on Sections (1) and (2), Article
30 of the Warsaw Convention 7 because the provisions thereof are not applicable under
the circumstances of the case.

Sections (1) and (2), Article 30 of the Warsaw Convention provide:

Art. 30 (1). In the case of transportation to be performed by various

successive carriers and falling 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 the
transportation which is performed under his supervision.

(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 occurred, save in the
case where, by express agreement, the first carrier has assumed liability
for the whole journey. (Emphasis supplied).

According to the Court of Appeals, Antiporda's cause of action is not premised on the
occurrence of an accident or delay as contemplated under Section 2 of said Article but
on Air Kenya's refusal to transport him in order to accommodate another. To support
this ruling, the Court of Appeals cited the Supreme Court ruling in KLM Royal Dutch
Airlines v. Court of Appeals, 8 which held, inter alia, that:

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.

The Court of Appeals concluded that Lufthansa cannot, thus, invoke Sections (1) and
(2), Article 30 of the Warsaw Convention to evade liability.

Failing to obtain a favorable decision, Lufthansa filed this petition for review
on certiorari anchored on the following arguments:

1. The respondent court erred as a matter of law in refusing to apply the

Warsaw Convention to the instant case.

2. Respondent court's ruling that Lufthansa had deceived private

respondent has no factual or legal basis.

3. The respondent court erred as a matter of law in affirming the trial

court's award of moral damages in the face of this Court's rulings
concerning moral damages in cases of breach of contract.

4. The respondent court erred as a matter of law in affirming the trial

court's award of exemplary damages for lack of legal or factual basis
therefor.

The arguments propounded by petitioner Lufthansa cannot suffice to reverse the

appellate court's decision as prayed for. Lufthansa raised four assignments of error but
the focal point at issue has been defined by us at the inception of this ponencia.

Lufthansa maintains that its liability to any passenger is limited to occurrences in its own
line, and, thus, in the case at bench, its liability to Antiporda is limited to the extent that it
had transported him from Manila to Singapore and from Singapore to Bombay; that
therefrom, responsibility for the performance of the contract of carriage is assumed by
the succeeding carriers tasked to transport him for the remaining leg of his trip because
at that stage, its contract of carriage with Antiporda ceases, with Lufthansa acting, no
longer as the principal in the contract of carriage, but merely as a ticket-issuing agent
for the other carriers.

In further advancing this line of defense, Lufthansa invoked Section 2, Article 30 of the
Warsaw Convention9 which expressly stipulates that in cases where the transportation
of passengers or goods is performed by various successive carriers, the passenger can
take action only against the carrier which performed the transportation, during which
the accident or delay occurred. Lufthansa further advanced the theory that this provision
of the Warsaw Convention is applicable to the present case, contrary to the decision of
the Court of Appeals which relied on the Supreme Court ruling in KLM Royal Dutch
Lines. 10 For Lufthansa, "bumping-off" is considered delay since delay would inevitably
result therefrom. It implored this Court to re-examine our ruling in KLM and take heed of
jurisprudence 11 in the U.S. where "delay," unlike in our ruling in KLM, contemplates the
instance of "bumping-off." In KLM, we held that the term "delay" does not encompass
the instance of "bumping-off," the latter having been defined as refusal to carry or
transport a passenger.

On his part, private respondent Antiporda insists that he entered with Lufthansa an
exclusive contract of carriage, the nature of which is a continuous carriage by air from
Manila to Blantyre Malawi; that it did not enter into a series of independent contracts
with the carriers that transported him for the remaining leg of his trip.

The basis for such claim is well-founded. As ruled by the trial court, with the Court of
Appeals concurring favorably, Antiporda was issued a confirmed Lufthansa ticket all
throughout the five-leg trip. The fourth paragraph of the "Conditions of Contract"
stipulated in the ticket indubitably showed that the contract of carriage was considered
as one of continuous air transportation from Manila to Blantyre, Malawi, thus:

4. . . . carriage to be performed hereunder by several successive carriers

is regarded as a single operation.

In light of the stipulations expressly specified in the ticket defining the true nature of its
contract of carriage with Antiporda, Lufthansa cannot claim that its liability thereon
ceased at Bombay Airport and thence, shifted to the various carriers that assumed the
actual task of transporting said private respondent.

We, therefore, reject Lufthansa's theory that from the time another carrier was engaged
to transport Antiporda on another segment of his trip, it merely acted as a ticket-issuing
agent in behalf of said carrier. In the very nature of their contract, Lufthansa is clearly
the principal in the contract of carriage with Antiporda and remains to be so, regardless
of those instances when actual carriage was to be performed by various carriers. The
issuance of a confirmed Lufthansa ticket in favor of Antiporda covering his entire five-leg
trip abroad successive carriers concretely attests to this. This also serves as proof that
Lufthansa, in effect guaranteed that the successive carriers, such as Air Kenya would
honor his ticket; assure him of a space therein and transport him on a particular
segment of his trip. This ruling finds corroboration in the Supreme Court decision
in KLM , 12 where the same issues were confronted, thus:

xxx xxx xxx

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.

On the issue of whether the Warsaw Convention, particularly Section 2, Article 30

thereof is applicable herein, we agree with the Court of Appeals in ruling in the negative.
We reiterate what has been settled in KLM:

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. . . .

Lufthansa prays this court to take heed of jurisprudence in the United States where the
term "delay" was interpreted to include "bumping-off" or failure to carry a passenger with
a confirmed reservation. These decisions in the United States are not controlling in this
jurisdiction. We are not prepared, absent reasons of compelling nature, to entertain an
extended meaning of the term "delay," which in KLM was given its ordinary signification.
"Construction and interpretation come only after it has been demonstrated that
application is impossible or inadequate without them. The ordinary language of a statute
must be given its ordinary meaning and limited to a reasonable interpretation." 13In its
ordinary sense, "delay" means to prolong the time of or before; to stop, detain or hinder
for a time, or cause someone or something to be behind in schedule or usual rate of
movement in progress. 14 "Bumping-off," which is the refusal to transport passengers
with confirmed reservation to their planned and contracted destinations, totally
forecloses said passengers' right to be transported, whereas delay merely postpones for
a time being the enforcement of such right.

Consequently, Section 2, Article 30 of the Warsaw Convention which does not

contemplate the instance of "bumping-off" but merely of simple delay, cannot provide a
handy excuse for Lufthansa as to exculpate it from any liability to Antiporda. The
payment of damages is, thus, deemed warranted by this Court. We find no reversible
error in the lower court's award of moral and exemplary damages, including attorney's
fees in favor of Antiporda.
Article 2220 of the Civil Code provides:

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.

According to the findings of the appellate court which affirmed that of the lower court,
the reasons given by the witnesses for Lufthansa for private respondent's being
"bumped off" at Bombay airport were conflicting.

Observed the Court of Appeals:

If there was really no seat available because of over-booking, why did

Lufthansa confirm the ticket of the plaintiff-appellee? It has to be pointed
out that the confirmed ticket is up to Blantyre, Malawi, not only to Bombay.

If the plaintiff-appellee was not in the list of passengers of Kenya Airways

(the connecting flight) then Lufthansa must have deceived him in Manila
because according to Gerard Matias, the passengers booked by Kenya
Airways for Boeing 707 were 190 passengers when the plane could
accommodate only 144 passengers considering that the name of plaintiff-
appellee was not in the list. If that was the situation, Lufthansa by the
issuance of its ticket should have not assured the plaintiff-appellee that he
could get the connecting flights as scheduled. Surely, Lufthansa before
confirming the ticket of the plaintiff-appellee must have confirmed the flight
with Kenya Airways. If it was impossible to get a seat upon its own
investigation in Bombay, then it should have not confirmed the ticket of the
plaintiff-appellee. It is the defendant-appellant who was negligent in the
performance of its duties, and plaintiff-appellee was just plainly deceived.

Since the ticket was marked O.K., meaning confirmed, therefore plaintiff-
appellee must have a definite seat with Kenya Airways but it was lost or
given to another person. It is not true therefore, that plaintiff-appellee's
name was not in the list of Kenya Airways. Besides, why should Lufthansa
allow a passenger to depart from the Philippines with a confirmed ticket,
without instructing its Bombay office to reserve a seat with Kenya Airways
for its connecting flight? In spite of the confirmation, Nelda Aquino testified
that plaintiff-appellee was stranded in Bombay because he did not get a
seat with Kenya Airways, and his name did not appear in the list of
passengers. Then contrary to the testimonies of
Berndt Loewe and Gerard Matias that the obligation of the
defendant-appellant is only up to Bombay and the reason why plaintiff-
appellee was not in the list of passengers is because of overbooking.
Nelda Aquino contrary to the testimonies of the two, testified that the
 reason for the bumping-off is that the seat was given to another
passenger, to wit:

Q Did you know or eventually learned later that the name of

Antiporda was not in the list of confirmed passengers?

A I only learned from the office at Bombay that it was given

to other passenger which I only learned from the office at
Bombay.

Q Who informed you that the seat of Mr. Antiporda was

given to other passenger?

A From our international officer.

Q Who is he?

A Our Sales Manager.

Q Is he your Sales Manager in Bombay?

A Yes, our Manager.

If Nelda Aquino knew that the reason for the bumping-off is that the seat
was given to another, how come Berndt Loewe, passenger Sales
Manager of defendant, Gerard Matias, an employee of defendant-
appellant in Bombay did not know the said reason why the name of
plaintiff-appellee did not appear in the list of passengers? It is either they
knew the truth but because they wanted to escape liability they pretended
not to know the truth.

Clearly, bad faith attended the performance of the contract of carriage, for even while
Antiporda was in Bombay, representatives of Lufthansa already tried to evade liability
first, by claiming that the contract of carriage between Lufthansa and Antiporda ceased
at Bombay airport, in disregard of the fact that Antiporda was holding a Lufthansa ticket
for the entire five-leg trip; second, despite Berndt Loewe's knowledge that Antiporda's
seat was allowed to be given to another passenger, the same suppressed the
information and feigned ignorance of the matter, presenting altogether another reason
why Antiporda was not listed in the manifest, i.e. that Air Kenya Boeing 707 was
overbooked, notwithstanding clear proof that Lufthansa in Manila confirmed his
reservation for said flight.

Antiporda is likewise entitled to the award of exemplary damages on the basis of Article
2232 of the Civil Code which provides:
 Art. 2232. In contracts and quasi-contracts, the court may award
exemplary damages if the defendant acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.

There is every indication that Lufthansa, through its representatives in Bombay, acted in
a reckless and malevolent manner in dealing with Antiporda.

As found by the trial court:

The breach of the guarantee was aggravated by the discourteous and

highly arbitrary conduct of Gerard Matias, an official of Lufthansa in
Bombay. Bumped off from his connecting flight to Nairobi and stranded in
the Bombay Airport for 32 hours, when plaintiff insisted on taking his
scheduled flight to Nairobi, Gerard Matias got angry and threw the ticket
and passport on plaintiff's lap and was ordered to go to the basement with
his heavy luggages for no reason at all. It was a difficult task for the
plaintiff to carry three luggages and yet Gerard Matias did not even offer to
help him. Plaintiff requested accommodation but Matias ignored it and just
left. Not even Lufthansa office in Bombay, after learning plaintiff's being
stranded in Bombay and his accommodation problem, provided any relief
to plaintiff's sordid situation. Plaintiff has to stay in the transit area and
could not sleep for fear that his luggages might be lost. Everytime he went
to the toilet, he had to drag with him his luggages. He tried to eat the high-
seasoned food available at the airport but developed stomach trouble. It
was indeed a pathetic sight that the plaintiff, an official of the Central
Bank, a multi-awarded institutional expert, tasked to perform consultancy
work in a World Bank funded agricultural bank project in Malawi instead
found himself stranded in a foreign land where nobody was expected to
help him in his predicament except the defendant, who displayed utter
lack of concern of its obligation to the plaintiff and left plaintiff alone in his
misery at the Bombay airport.

These findings of the trial court were affirmed by the Court of Appeals on the ground
that there are no cogent reasons to justify a contrary finding. The same holds true with
this Court. The findings of fact of lower courts are binding on us and will not be
generally disturbed on appeal. 15 In affirming the lower court's award of damages to
Antiporda, we take into account his high position in the government, coupled with the
fact that he failed to meet his professional commitment in Blantyre, Malawi due to the
"bumping-off" incident accompanied by rude and discourteous behavior on the part of
airline officials who should have been the first to attend to his travel needs.

WHEREFORE, the petition for review is hereby DENIED and the decision of the Court
of Appeals AFFIRMED.

Costs against petitioner.

SO ORDERED.