Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 141314

April 9, 2003

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY

REGULATORY BOARD, petitioner,
vs.
MANILA ELECTRIC COMPANY, respondent.
x-----------------------------x
G.R. No. 141369 April 9, 2003
LAWYERS AGAINST MONOPOLY AND POVERTY (LAMP) consisting of
CEFERINO PADUA, Chairman, G. FULTON ACOSTA, GALILEO BRION,
ANATALIA BUENAVENTURA, PEDRO CASTILLO, NAPOLEON
CORONADO, ROMEO ECHAUZ, FERNANDO GAITE, ALFREDO DE
GUZMAN, ROGELIO KARAGDAG, JR., MA. LUZ ARZAGA-MENDOZA,
ANSBERTO PAREDES, AQUILINO PIMENTEL III, MARIO REYES,
EMMANUEL SANTOS, RUDEGELIO TACORDA, members, and ROLANDO
ARZAGA, Secretary-General, JUSTICE ABRAHAM SARMIENTO,
SENATOR AQUILINO PIMENTEL, JR. and COMMISSIONER
BARTOLOME FERNANDEZ, JR., Board of Consultants, and Lawyer
GENARO LUALHATI, petitioners,
vs.
MANILA ELECTRIC COMPANY (MERALCO), respondent.
RESOLUTION
PUNO, J.:
The business and operations of a public utility are imbued with public interest. In a
very real sense, a public utility is engaged in public service-- providing basic
commodities and services indispensable to the interest of the general public. For this
reason, a public utility submits to the regulation of government authorities and
surrenders certain business prerogatives, including the amount of rates that may be

charged by it. It is the imperative duty of the State to interpose its protective power
whenever too much profits become the priority of public utilities.
For resolution is the Motion for Reconsideration filed by respondent Manila Electric
Company (MERALCO) on December 5, 2002 from the decision of this Court dated
November 15, 2002 reducing MERALCO's rate adjustment in the amount of P0.017
per kilowatthour (kwh) for its billing cycles beginning 1994 and further directing
MERALCO to credit the excess average amount of P0.167 per kwh to its customers
starting with MERALCO's billing cycles beginning February 1994. 1
First, we leapfrog through the facts. On December 23, 1993, MERALCO filed with
the Energy Regulatory Board (ERB) an application for revised rates, with an average
increase of P0.21 per kwh in its distribution charge. On January 28, 1994 the ERB
granted a provisional increase of P0.184 per kwh subject to the condition that in the
event the ERB determines that MERALCO is entitled to a lesser increase in rates, all
excess amounts collected by MERALCO shall be refunded to its customers or
credited in their favor. The Commission on Audit (COA) conducted an examination
of the books of accounts and records of MERALCO and thereafter recommended,
among others, that: (1) income taxes paid by MERALCO should not be included as
part of MERALCO's operating expenses and (2) the "net average investment
method" or the "number of months use method" should be applied in determining
the proportionate value of the properties used by MERALCO during the test year.
In its decision dated February 16, 1998, the ERB adopted the recommendations of
the COA and authorized MERALCO to adopt a rate adjustment of P0.017 per
kilowatthour (kwh) for its billing cycles beginning 1994. The ERB further directed
MERALCO to credit the excess average amount of P0.167 per kwh to its
customers starting with MERALCO's billing cycles beginning February 1994. The
said ruling of the ERB was affirmed by this Court in its decision dated November
15, 2002.
In its Motion for Reconsideration, respondent MERALCO contends that: (1) the
deduction of income tax from revenues allowed for rate determination of public
utilities is part of its constitutional right to property; (2) it correctly used the
"average investment method" or the "simple average" in computing the value of its
properties entitled to a return instead of the "net average investment method" or the
"number of months use method"; and (3) the decision of the ERB ordering the
refund of P0.167 per kwh to its customers should not be given retroactive effect. 2
The Republic of the Philippines through the ERB, now Energy Regulatory
Commission (ERC), represented by the Office of the Solicitor General, filed its
Comment on March 7, 2003. Surprisingly, in its Comment, the ERC proffered a
divergent view from the Office of the Solicitor General. The ERC submits that

income taxes are not operating expenses but are reasonable costs that may be
recoverable from the consuming public. While the ERC admits that "there is still no
categorical determination on whether income tax should indeed be deducted from
revenues of a public utility," it agrees with MERALCO that to disallow public
utilities from recovering its income tax payments will effectively lower the return on
rate base enjoyed by a public utility to 8%. The ERC, however, agrees with this
Court's ruling that the use of the "net average investment method" or the "number of
months use method" is not unreasonable.3
The Office of the Solicitor General, under its solemn duty to protect the interests of
the people, defended the thesis that income tax payments by a public utility should
not be recovered as costs from the consuming public. It contended that: (1) the
foreign jurisprudence cited by MERALCO in support of its position is not applicable
in this jurisdiction; (2) MERALCO was given a fair rate of return; (3) the COA and
the ERB followed the National Accounting and Auditing Manual which expressly
disallows the treatment of income tax as operating expense; (4) Executive Order No.
72 does not grant electric utilities the privilege of treating income tax as operating
expense; (5) the COA and the ERB have been consistent in not allowing income tax
as part of operating expenses; (6) ERB decisions allowing the application of a tax
recovery clause are inapropos; (7) allowing MERALCO to treat income tax as an
operating expense would set a dangerous precedent; (8) assuming that the
disallowance of income tax as operating expense would discourage foreign investors
and lenders, the government is not precluded from enacting laws and instituting
measures to lure them back; and (9) the findings and conclusions of the ERB carry
great weight and should be binding on the courts in the absence of grave abuse of
discretion. The Solicitor General agrees with the ERC that the "net average
investment method" is a reasonable method for property valuation. Finally, the
Solicitor General argues that the ERB decision may be applied retroactively and the
use of a test period to determine the rate base and allowable rates to be collected by
a public utility is an accepted practice. 4
We shall discuss the main issues in seriatim.
I
MERALCO argues that deduction of all kinds of taxes, including income tax, from
the gross revenues of a public utility is firmly entrenched in American jurisprudence.
It contends that the Public Service Act (Commonwealth Act No. 146) was patterned
after Act 2306 of the Philippine Commission, which, in turn, was borrowed from
American state public utility laws such as the New Jersey Public Utility Act. Hence,
it maintains that American jurisprudence on the inclusion of income taxes as a
lawful charge to operating expenses should be controlling. It cites the rule on
statutory construction that a statute adopted from a foreign country will be presumed

to be adopted with the construction placed upon it by the courts of that country
before its adoption.5
We are not persuaded. American decisions and authorities are not per se controlling
in this jurisdiction. At best, they are persuasive for no court holds a patent on
correct decisions. Our laws must be construed in accordance with the intention of
our own lawmakers and such intent may be deduced from the language of each law
and the context of other local legislation related thereto. More importantly, they
must be construed to serve our own public interest which is the be-all and the endall of all our laws. And it need not be stressed that our public interest is distinct and
different from others.
Rate regulation calls for a careful consideration of the totality of facts and
circumstances material to each application for an upward rate revision. Rate
regulators should strain to strike a balance between the clashing interests of the
public utility and the consuming public and the balance must assure a reasonable
rate of return to public utilities without being unreasonable to the consuming public.
What is reasonable or unreasonable depends on a calculus of changing
circumstances that ebb and flow with time. Yesterday cannot govern today, no more
than today can determine tomorrow.
Prescinding from these premises, we reject MERALCO's insistence that the noninclusion of income tax payments as a legitimate operating expense will deny public
utilities a fair return of their investment. This stubborn stance is belied by the report
submitted by the COA on the audit conducted on MERALCO's books of accounts
and the findings of the ERB.6
Upon the instructions of the ERB, the COA conducted an audit of the operations of
MERALCO covering the period from February 1, 1994 to January 31, 1995, or the
period immediately after the implementation of the provisional rate
increase.7 Hence, amounts culled by the COA from its examination of the books of
MERALCO already included the provisional rate increase of P0.184 granted by the
ERB.
From the figures submitted by the COA, the ERB was able to determine that
MERALCO derived excess revenueduring the test year in the amount
of P2,448,378,000.8 This means that during the test year, and after the rates were
increased by P0.184, MERALCO earned P2,448,378,000 or 8.15% more than the
amount it should have earned at a 12% rate of return on rate base. Accordingly,
based on this amount of excess revenue, the ERB determined that the provisional
rate granted by it to MERALCO was P0.167 per kwh more than the amount
MERALCO ought to charge its customers to obtain the prescribed 12% rate of
return on rate base. Thus, the ERB correspondingly lowered the provisional

increase by P0.167 per kwh and ordered MERALCO to increase its rates at a
reduced amount of P0.017 per kwh, computed as follows:9

Add: Total Operating expenses for Rate Determination

Purposes
At appraised value

Total Invested Capital Entitled

to Return
Add: Total Operating expenses
for Rate Determination

Computed Revenue
Actual Revenue
Excess Revenue

P 44,315,951,000

Excess Revenue

P 312,738,000
1.04%

Authorized Rate of Return

12.00%

Actual Rate of Return

13.04%

Be that as it may, MERALCO contends that considering income tax payments of

public utilities constitute one-third of their net income, public utilities will
effectively get, not the 12% rate of return on rate base allowed them, but only about
8%.14 Again, we are not persuaded.

Percent of Excess Revenue to

Invested Capital
Authorized Rate of Return
Actual Rate of Return
Total kwh sold
Ratio of Excess Revenue to
Total kwh Sold
In fact, even if MERALCO's income tax liability would be included as an operating
expense, MERALCO would still enjoy excess revenue of P312,738,000.00 or 1.04%
above the authorized rate of return of 12%. Based on its audit, the COA determined
that the provision for income tax liability of MERALCO amounted to
P2,135,639,000.00.12 Thus, even if such amount of income tax liability would be
included as operating expense,the amount of excess revenue earned by MERALCO
during the test year would be more than sufficient to cover the additional income tax
expense. Thus:
At appraised value
12% return thereon

P 44,003,213,000

Actual Revenue

It is crystal clear, therefore, that even if income tax is to be included as an operating

expense and hence, recoverable from the consuming public, MERALCO would still
enjoy a rate of return that is above the authorized rate of 12%. Public utilities cannot
be allowed to overcharge at the expense of the public and worse, they cannot
complain that they are not overcharging enough.

Purposes

Total Invested Capital Entitled to Return

Computed Revenue

Percent of Excess Revenue to Invested Capital

12% return thereon

P 40,396,059,00013

P 30,059,614,000
P 3,607,154,000

The foregoing argument assumes that the 12% return allowed to public utilities is
equivalent to its taxable incomewhich will be subject to income tax. The 12% rate of
return is computed only for the purpose of fixing the allowable rates to be charged
by a public utility and is in no way determinative of the income subject to income
tax of the public utility. The computation of a corporation's income tax liability is an
altogether different matter, with the corporation's taxable income derived by taking
into account the corporation's gross revenues less allowable deductions. 15
At any rate, even on the assumption that in the test year involved (February 1, 1994
to January 31, 1995), MERALCO's computed revenue of P 41,867,573,000 or the
amount that it is allowed to earn based on a 12% rate of return is its taxable income,
after payment of its income tax liability of P2,135,639,000.00, MERALCO would
still obtain an 11.38% rate of return or a return that is well within the 12% rate
allowed to public utilities.16
MERALCO also contends that even the successor of the ERB or the ERC created
under the Electric Power Industry Reform Act of 2001 (EPIRA) 17 "adheres to the
principle that income tax is part of operating expense." 18To bolster its argument,
MERALCO cites Article 36 of the EPIRA which charges the ERC with the
responsibility of unbundling the rates of the National Power Corporation (NPC) and

each distribution utility coming within the coverage of the law.19 MERALCO alleges
that pursuant to said provision, the ERC issued a set of Uniform Rate Filing
Requirements (UFR) containing guidelines to be followed with respect to rate
unbundling applications to be filed. MERALCO asserts that under the UFR, the
enumeration of the expenses which are to be recovered through the rates, and which
are to be separated or allocated for the purpose of unbundling of these rates include
income tax expenses.
Under Section 36 of the EPIRA, the NPC and every distribution facility covered by
the law is mandated to unbundle, segregate or itemize its rates according to the
various sectors of the electric power industry identified in the law, namely:
generation, transmission, distribution and supply.20 The law further directs the ERC
to regulate and facilitate the unbundling of rates prescribed by Section 36. Thus, on
October 30, 2001, the ERC issued guidelines prescribing the uniform rate filing
requirements to be followed by distribution facilities for the purposes of unbundling
rates.21
A proper appreciation of the UFR shows that it simply specifies a uniform
accounting system to be complied with by a distribution facility when filing an
application for revised rates under the EPIRA. As the EPIRA requires the
unbundling or segregation of rates according to the different sectors of the electric
power industry, the UFR seeks to facilitate this process by properly identifying the
accounts or information required for proper evaluation by the ERB. Thus, the
introductory statements of the UFR provide:
These uniform rate filing requirements are intended to promote
consistency and completeness in the rate filings required by Republic Act
No. 9136 (RA 9136), Section 36. To that end, the filing requirements only
specify minimum form and content. A rate application in all its aspects
continues to be subject to subsequent Commission review and
deliberation.22
At the onset, it is clear that the UFR does not seek to determine which accounting
method will be used by the ERC for determination of rate base or the items of
expenses that may be recovered by a public utility from its customers. The UFR only
seeks to prescribe a uniform system or format to standardize or facilitate the process
of unbundling of rates mandated by the EPIRA. At best, the UFR prescribes the set
of raw data or figures to be disclosed by a distribution facility that the ERC will
need to determine the authorized rates that a distribution facility may charge. The
UFR does not, in any way, determine the manner by which the set of data or figures
indicated in the rate application will be evaluated by the ERC for rate determination
purposes.

II
MERALCO also challenges the use of the "net average investment method" or the
"number of months use method" on the ground that MERALCO and the Public
Service Commission (PSC) have been consistently applying the "average investment
method" or "simple average", which it alleged was also affirmed by this Court in the
case of MERALCO v. PSC23 and Republic v. Medina.24
It is true that in MERALCO v. PSC,25 the issue of the proper valuation method to be
used in determining the value of MERALCO's utility plants for rate fixing purposes
was brought to fore. In the said case, MERALCO applied the "average investment
method" or "simple average" by obtaining the average value of the utility plants,
using its values at the beginning and at the end of the test year. In contrast, the
General Auditing Office used the "appraisal method" which fixes the value of the
utility plants by ascertaining the cost of production per kilowatt and multiplying the
same by the total capacity of said plants, less the corresponding depreciation. 26 In
upholding the "average investment method" used by MERALCO, this Court adopted
the findings of the PSC for being "by and large, supported by the records of the
case."27 This Court did not make an independent assessment of the validity or
applicability of the average investment method but simply did not disturb the
findings of the PSC for being supported by substantial evidence. To conclude that
the said decision "affirmed" the use of the "average investment method" thereby
implying that the said method is the only method to be applied in all instances, is a
strained reading of the decision.
In fact, in the case of Republic v. Medina,28 also cited by MERALCO to have
affirmed the use of the "average investment method", this Court ruled:
The decided weight of authority, however, is to the effect that property
valuation is not to be solved by formula but depends upon the particular
circumstances and relevant facts affecting each utility as to what
constitutes a just rate base and what would be a fair return, just to both the
utility and the public.29
Further, Mr. Justice Castro in his concurring opinion in the same case elucidated:
A regulatory commission's field of inquiry, however, is not confined to the
computation of the cost of service or capital nor to a mere prognostication
of the future behavior of the money and capital markets. It must also
balance investor and consumer expectations in such a way that broad
requirements of public interest may be meaningfully realized. It would
hence appear in keeping with its public duty if a regulatory body is

allowed wide discretion in the choice of methods rationally related to the

achievement of this end.30
Thus, the rule then as it is now, is that rate regulating authorities are not hidebound
to use any single formula or combination of formulas for property valuation
purposes because the rate-making process involves the balancing of investor and
consumer interests which takes into account various factors that may be unique or
peculiar to a particular rate revision application.
We again stress the long established doctrine that findings of administrative or
regulatory agencies on matters which are within their technical area of expertise are
generally accorded not only respect but at times even finality if such findings and
conclusions are supported by substantial evidence. 31 Rate fixing calls for a technical
examination and a specialized review of specific details which the courts are illequipped to enter, hence, such matters are primarily entrusted to the administrative
or regulating authority.32
Thus, this Court finds no reversible error on the part of the COA and the ERB in
adopting the "net average investment method" or the "number of months use
method" for property valuation purposes in the cases at bar.
III
MERALCO also rants against the retroactive application of the rate adjustment
ordered by the ERB and affirmed by this Court. In its decision, the ERB, after
authorizing MERALCO to adopt a rate adjustment in the amount of P0.017 per kwh,
directed MERALCO to refund or credit to its customers' future consumption the
excess average amount of P0.167 per kwh from its billing cycles beginning February
199433 until its billing cycles beginning February 1998.34 In the decision appealed
from, this Court likewise ordered that the refund in the average amount of P0.167
per kwh be made to retroact from MERALCO's billing cycles beginning February
1994.
MERALCO contends that the refund cannot be given retroactive effect as the figures
determined by the ERB only apply to the test year or the period subject of the COA
Audit, i.e., February 1, 1994 to January 31, 1995. It reasoned that the amounts used
to determine the proper rates to be charged by MERALCO would vary from year to
year and thus the computation of the excess average charge of P0.167 would hold
true only for the test year. Thus, MERALCO argues that if a refund of P0.167 would
be uniformly applied to its billing cycles beginning 1994, with respect to periods
after January 31, 1995, there will be instances wherein its operating revenues would
fall below the 12% authorized rate of return. MERALCO therefore suggests that the

dispositive portion be modified and order that "the refund applicable to the periods
after January 31, 1995 is to be computed on the basis of the excess collection in
proportion to the excess over the 12% return."35
The purpose of the audit procedures conducted in a rate application proceeding is to
determine whether the rate applied for will generate a reasonable return for the
public utility, which, in accordance with settled laws and jurisprudence, is 12% on
rate base or the present value of the assets used in the operations of a public utility.
For audit purposes, however, there is a need to obtain a sample set of data-- usually
derived from figures within a designated period of time-- to determine the amount of
returns obtained by a public utility during such period. In the cases at bar, the COA
conducted an audit for the test year beginning February 1, 1994 and ending January
31, 1995 or a 12-month period immediately after the order of the ERB granting a
provisional increase in the amount of P0.184 per kwh was issued. Thus, the ultimate
issue resolved by the COA when it conducted its audit was whether the provisional
increase granted by the ERB generated an amount of return well within the rates
authorized by law. As stated earlier, based on the findings of the ERB, with the
increase of P0.184 per kwh, MERALCO obtained a rate of return which was 8.15%
more than the authorized rate of return of 12%.36 Thus, a refund in the amount of
P0.167 was determined and ordered by ERB.
The essence of the use of a "test year" for auditing purposes is to obtain a sample or
representative set of figures to enable the examining authority to arrive at a
conclusion or finding based on the gathered data. The use of a "test year" does not
mean that the information and conclusions so derived would only be correct for that
year and would be incorrect on the succeeding years. The use of a "test year"
assumes that within a reasonable period after such test year, figures used to
determine the amount of return would only vary slightly from the figures culled
during the test year such that the impact on the utility's rate of return would not be
very significant. Thus, in the event that there is a substantial change in
circumstances significantly affecting the variable amounts that would determine the
reasonableness of a return, an event which would normally occur after a certain
period of time has elapsed, the public utility may subsequently apply for a rate
revision.
We agree with the Solicitor General that following MERALCO's reasoning that the
figures culled from a test year would only be relevant during such year, there would
be a need for public utilities to apply for a rate adjustmentevery year and perform an
audit examination on a public utility's books of accounts every year as the amount of
a utility's revenue may fall above or below the authorized rates at any given year.
Needless to say, the trajectory of MERALCO's arguments will lead to an absurdity.

From the time the order granting a provisional increase was issued by the ERB,
nowhere in the records does it appear that the subsequent refund of P0.167 per kwh
ordered by the ERB was ever implemented or executed by
MERALCO.37 Accordingly, from January 28, 1994 MERALCO imposed on its
customers a charge that is P0.167 in excess of the proper amount. In fact, any
application for rate adjustment that may have been applied for and/or granted to
MERALCO during the intervening period would have to be reckoned from rates
increased by P0.184 per kwh as these were the rates prevailing at the time any
application for rate adjustment was made by MERALCO.
While we agree that the amounts used to determine the utility's rate of return would
vary from year to year, we are unable to subscribe to the view that the refund
applicable to the periods after January 31, 1995 should be computed on the basis of
the excess collection in proportion to the excess over the 12% return. MERALCO's
contention that the refund for periods after January 31, 1995 should be computed on
the basis of revenue of each year in excess of the 12% authorized rate of return calls
for a year-by-year computation of MERALCO's revenues and assets which would be
contrary to the essence of an audit examination of a public utility based on a test
year. To grant MERALCO's prayer would, in effect, allow MERALCO the benefit of
a year-by-year adjustment of rates not normally enjoyed by any other public utility
required to adopt a subsequent rate modification. Indeed, had the ERB ordered
an increase in the provisional rates it previously granted, said increase in rates
would apply retroactively and would not have varied from year to year, depending
on the variable amounts used to determine the authorized rates that may be charged
by MERALCO. We find no significant circumstance prevailing in the cases at bar
that would justify the application of a yearly adjustment as requested by
MERALCO.
WHEREFORE, in view of the foregoing, the petitioner's Motion for
Reconsideration is DENIED WITH FINALITY.
SO ORDERED.
Sandoval-Gutierrez, Corona, and Carpio-Morales, JJ., concur.
Panganiban, J., please see separate opinion.

Separate Opinions
PANGANIBAN, J.:

After perusing the respondent's Motion for Reconsideration, the Comment thereon
by the Office of the Solicitor General (OSG) and the other pleadings filed by the
parties, I believe there are still lingering questions that need to be answered or
clarified before the Motion for Reconsideration should be resolved. Some of the
more important questions are the following:
Effect of ERC's
Self-Reversal
First, this case reached this Court because the Energy Regulatory Board (ERB), now
known as the Energy Regulatory Commission (ERC), appealed to us the Decision of
the Court of Appeals (CA), which upheld Meralco. In its Comment to Meralco's
Motion for Reconsideration, however, the OSG as counsel for ERC informed
this Court that ERC has reversed its position and now believes that "income
taxes . . . are reasonable costs that may be recoverable from the consuming public."
In the words of the ponencia, ERC "agrees with Meralco that to disallow public
utilities from recovering its income tax payments will effectively lower the return on
rate base enjoyed by a public utility to 8%."
1. By reversing itself, is the ERC effectively abandoning its appeal before
this Court? If so, is it still proper for this Court to uphold the old ERB
Decision? Be it remembered that our own Decision is anchored on the
theory that ERB should be affirmed, because it is the knowledgeable and
specialized government agency tasked with electric rate determination,
and thus its findings and opinions unless obviously faulty merit full
faith and credit.
2. Is the OSG, as counsel for the ERC and the government, authorized to
argue against its own clients' position and thereby leave them without any
lawyer?
Effects of New
EPIRA Law
Second, in its Comment, OSG informs us that a new law, RA 9136 the Electric
Power Industry Reform Act (EPIRA) was enacted on June 16, 2002. This law
allegedly authorizes ERC to determine rates that will "allow the recovery of a just
and reasonable return of rate base (RORB) to enable the entity to operate viably."
On this basis, ERC opines that actual income taxes paid should now be deemed
"reasonable costs" of operating a public utility.

1. Does this mean that effective June 16, 2002, ERC may allow the
deduction of income taxes from operating expenses? Does this render our
Decision obsolete?
Our Decision Allegedly
Reduce Earnings to Only 8%
Third, citing the report of the Commission on Audit (COA), the OSG originally
opined that MERALCO after the infusion of the provisional rate increase of 18.4
centavos would still earn 13% RORB if income taxes are not treated as operating
expenses, and 20% if they are deducted as operating expenses.
1. If this is so, why is Meralco still complaining that the old ERB
Decision, which this Court is affirming, bars it from earning the maximum
allowable profit of 12%? How accurate are the OSG and COA
computations? Or, is Meralco just misleading the Court?
2. In any event, despite the COA figures, the OSG contends that at least
theoretically Meralco's profit would be reduced by our Decision to a
maximum of only 8% RORB, instead of the allowable 12%. At the same
time, it justifies the 8% RORB by arguing that the World Bank and the
Asian Development Bank consider a public utility of 8% RORB still
viable (p. 42 of the OSG Comment). Which is which?
Special Privilege
to Meralco
Fourth, in its Comment, the OSG argues that other public utilities are not allowed to
deduct income taxes as operating expenses. Why then should Meralco be given this
special privilege, it rhetorically asks?
1. Is this true? If so, why has the ERC changed its position? Why is it now
allowing Meralco to deduct income tax payments as "reasonable costs" of
operation?
Oral Argument
Is the Proper Thing
The foregoing are the more important questions I posed when I asked the Third
Division to refer this case to the Court en banc and to conduct oral arguments on the
Motion for Reconsideration of Meralco. These questions were not fully taken up by

the pleadings of the parties. Thus, it would be pretentious for me to render an

opinion on them. On the other hand, I believe that a decision that does not take up
these questions would be incomplete.
Hearing the parties on Oral Argument before the entire Court or even by just the
Third Division, prior to resolving with finality the motion for reconsideration on a
very important matter such as the present case is not unusual. In fact, with due
respect, I believe that this is the proper thing to do.
After all, very recently in PLDT v. City of Davao (GR No. 143863, March 27, 1993),
the Court en banc conducted an Oral Argument on the Motion for Reconsideration
challenging the unanimous Decision of the Second Division. That case involved the
legality of whether a local government unit (LGU) like the City of Davao may
impose local taxes on the Philippine Long Distance Telephone Company. The
amount involved there was only about P4 million. On the other hand, the present
case involves the refund of about P2.5 billion per year starting 1994, or about P20
billion up to the year 2003.
Apart from the monetary consideration, I believe the issues raised including the
foregoing questions are important enough to merit a hearing also. May I stress
that this case will affect not only Meralco and its customers but all electric utilities
and all their customers all over the Philippines, which means this case will affect all
the people of this country.
Finally, it is interesting to note that the unanimous Second Division Decision in the
above cited PLDT case was upheld by the banc with some dissents led by the
herein ponente, Mr. Justice Reynato S. Puno himself, but only after a full hearing by
the full Court.
WHEREFORE, I regret I cannot cast my vote in favor of (or even against)
the ponencia until and unless an Oral Argument is first called, preferably by the full
Court, to clarify the above questions.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-6055

June 12, 1953

THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor General
Francisco Carreon for appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in the Court of
First Instance of Manila with the crime of falsification of a public and commercial
document in that, having been entrusted with the preparation and registration of the
article of incorporation of the Pacific Airways Corporation, a domestic corporation
organized for the purpose of engaging in business as a common carrier, he caused it
to appear in said article of incorporation that one Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 per cent of the subscribed capital
stock of the corporation when in reality, as the accused well knew, such was not the
case, the truth being that the owner of the portion of the capital stock subscribed to
by Baylon and the money paid thereon were American citizen whose name did not
appear in the article of incorporation, and that the purpose for making this false
statement was to circumvent the constitutional mandate that no corporation shall be
authorize to operate as a public utility in the Philippines unless 60 per cent of its
capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and a fine, the
accused has appealed to this Court.

The essential facts are not in dispute. On November 4,1946, the Pacific Airways
Corporation registered its articles of incorporation with the Securities and
Exchanged Commission. The article were prepared and the registration was effected
by the accused, who was in fact the organizer of the corporation. The article stated
that the primary purpose of the corporation was to carry on the business of a
common carrier by air, land or water; that its capital stock was P1,000,000,
represented by 9,000 preferred and 100,000 common shares, each preferred share
being of the par value of p100 and entitled to 1/3 vote and each common share, of
the par value of P1 and entitled to one vote; that the amount capital stock actually
subscribed was P200,000, and the names of the subscribers were Arsenio Baylon,
Eruin E. Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and
William H. Quasha, the first being a Filipino and the other five all Americans; that
Baylon's subscription was for 1,145 preferred shares, of the total value of P114,500,
and for 6,500 common shares, of the total par value of P6,500, while the aggregate
subscriptions of the American subscribers were for 200 preferred shares, of the total
par value of P20,000, and 59,000 common shares, of the total par value of P59,000;
and that Baylon and the American subscribers had already paid 25 per cent of their
respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent
of the subscribed capital stock of the corporation, Baylon nevertheless did not have
the controlling vote because of the difference in voting power between the preferred
shares and the common shares. Still, with the capital structure as it was, the article of
incorporation were accepted for registration and a certificate of incorporation was
issued by the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per cent of the
subscribed capital stock of the corporation. But it is admitted that the money paid on
his subscription did not belong to him but to the Americans subscribers to the
corporate stock. In explanation, the accused testified, without contradiction, that in
the process of organization Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon subscribed to
1,135 preferred shares with a total value of P1,135. Do you know how that
came to be?
A. Yes.
The people who were desirous of forming the corporation, whose names are listed
on page 7 of this certified copy came to my house, Messrs. Shannahan, Onstott,
O'Bannon, Caven, Perry and Anastasakas one evening. There was considerable
difficulty to get them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would be. Onstott had
invested a certain amount of money in airplane surplus property and they had

obtained a considerable amount of money on those planes and as I recall they were
desirous of getting a corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated that they could get
together that they feel that they had no time to settle their respective share holdings.
We discussed the matter and finally it was decided that the best way to handle the
things was not to put the shares in the name of anyone of the interested parties and
to have someone act as trustee for their respective shares holdings. So we looked
around for a trustee. And he said "There are a lot of people whom I trust." He said,
"Is there someone around whom we could get right away?" I said, "There is Arsenio.
He was my boy during the liberation and he cared for me when i was sick and i said
i consider him my friend." I said. They all knew Arsenio. He is a very kind man and
that was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection with article 171,
paragraph 4, of the Revised Penal Code, which read:
ART. 171. Falsification by public officer, employee, or notary or
ecclesiastic minister. The penalty ofprision mayor and a fine not to
exceed 5,000 pesos shall be imposed upon any public officer, employee, or
notary who, taking advantage of his official position, shall falsify a
document by committing any of the following acts:
xxx

xxx

xxx

4. Making untruthful statements in a narration of facts.

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

xxx

xxx

1. Any private individual who shall commit any of the falsifications

enumerated in the next preceding article in any public or official document
or letter of exchange or any other kind of commercial document.
Commenting on the above provision, Justice Albert, in his well-known work on the
Revised Penal Code ( new edition, pp. 407-408), observes, on the authority of U.S.
vs. Reyes, (1 Phil., 341), that the perversion of truth in the narration of facts must be
made with the wrongful intent of injuring a third person; and on the authority
of U.S. vs. Lopez (15 Phil., 515), the same author further maintains that even if such

wrongful intent is proven, still the untruthful statement will not constitute the crime
of falsification if there is no legal obligation on the part of the narrator to disclose
the truth. Wrongful intent to injure a third person and obligation on the part of the
narrator to disclose the truth are thus essential to a conviction for a crime of
falsification under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the present case
consists in not disclosing in the articles of incorporation that Baylon was a mere
trustee ( or dummy as the prosecution chooses to call him) of his American coincorporators, thus giving the impression that Baylon was the owner of the shares
subscribed to by him which, as above stated, amount to 60.005 per cent of the subscribed capital stock. This, in the opinion of the trial court, is a malicious perversion
of the truth made with the wrongful intent circumventing section 8, Article XIV of
the Constitution, which provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens
of the Philippines or to corporation or other entities organized under the law of the
Philippines, sixty per centum of the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first glance, this opinion loses
validity once it is noted that it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit the mere formation of a
public utility corporation without 60 per cent of its capital being owned by the
Filipinos, a mistaken belief which has induced the lower court to that the accused
was under obligation to disclose the whole truth about the nationality of the
subscribed capital stock of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and that in not making such
disclosure defendant's intention was to circumvent the Constitution to the detriment
of the public interests. Contrary to the lower court's assumption, the Constitution
does not prohibit the mere formation of a public utility corporation without the
required formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public utility to
a corporation already in existence but without the requisite proportion of Filipino
capital. This is obvious from the context, for the constitutional provision in question
qualifies the terms " franchise", "certificate", or "any other form of authorization"
with the phrase "for the operation of a public utility," thereby making it clear that the
franchise meant is not the "primary franchise" that invest a body of men with
corporate existence but the "secondary franchise" or the privilege to operate as a
public utility after the corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public utility
corporation with the alien capital, then how can the accused be charged with having
wrongfully intended to circumvent that fundamental law by not revealing in the
articles of incorporation that Baylon was a mere trustee of his American coincorporation and that for that reason the subscribed capital stock of the corporation
was wholly American? For the mere formation of the corporation such revelation

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

ceased to be an offense within the meaning of the law, so that defendant can no
longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed and the defendant
William H. Quasha acquitted, with costs de oficio.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo, and Labrador,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
G.R. No. 171396

May 3, 2006

PROF. RANDOLF S. DAVID, LORENZO TAADA III, RONALD LLAMAS,

H. HARRY L. ROQUE, JR., JOEL RUIZ BUTUYAN, ROGER R. RAYEL,
GARY S. MALLARI, ROMEL REGALADO BAGARES, CHRISTOPHER
F.C. BOLASTIG, Petitioners,
vs.
GLORIA MACAPAGAL-ARROYO, AS PRESIDENT AND COMMANDERIN-CHIEF, EXECUTIVE SECRETARY EDUARDO ERMITA, HON.
AVELINO CRUZ II, SECRETARY OF NATIONAL DEFENSE, GENERAL
GENEROSO SENGA, CHIEF OF STAFF, ARMED FORCES OF THE
PHILIPPINES, DIRECTOR GENERAL ARTURO LOMIBAO, CHIEF,
PHILIPPINE NATIONAL POLICE, Respondents.
x-------------------------------------x
G.R. No. 171409

May 3, 2006

NIEZ CACHO-OLIVARES AND TRIBUNE PUBLISHING CO.,

INC., Petitioners,
vs.
HONORABLE SECRETARY EDUARDO ERMITA AND HONORABLE
DIRECTOR GENERAL ARTURO C. LOMIBAO, Respondents.

CHIPECO, ROILO GOLEZ, DARLENE ANTONINO-CUSTODIO,

LORETTA ANN P. ROSALES, JOSEL G. VIRADOR, RAFAEL V.
MARIANO, GILBERT C. REMULLA, FLORENCIO G. NOEL, ANA
THERESIA HONTIVEROS-BARAQUEL, IMELDA C. NICOLAS, MARVIC
M.V.F. LEONEN, NERI JAVIER COLMENARES, MOVEMENT OF
CONCERNED CITIZENS FOR CIVIL LIBERTIES REPRESENTED BY
AMADO GAT INCIONG, Petitioners,
vs.
EDUARDO R. ERMITA, EXECUTIVE SECRETARY, AVELINO J. CRUZ,
JR., SECRETARY, DND RONALDO V. PUNO, SECRETARY, DILG,
GENEROSO SENGA, AFP CHIEF OF STAFF, ARTURO LOMIBAO, CHIEF
PNP,Respondents.
x-------------------------------------x
G.R. No. 171483

May 3, 2006

KILUSANG MAYO UNO, REPRESENTED BY ITS CHAIRPERSON

ELMER C. LABOG AND SECRETARY GENERAL JOEL MAGLUNSOD,
NATIONAL FEDERATION OF LABOR UNIONS KILUSANG MAYO UNO
(NAFLU-KMU), REPRESENTED BY ITS NATIONAL PRESIDENT,
JOSELITO V. USTAREZ, ANTONIO C. PASCUAL, SALVADOR T.
CARRANZA, EMILIA P. DAPULANG, MARTIN CUSTODIO, JR., AND
ROQUE M. TAN, Petitioners,
vs.
HER EXCELLENCY, PRESIDENT GLORIA MACAPAGAL-ARROYO, THE
HONORABLE EXECUTIVE SECRETARY, EDUARDO ERMITA, THE
CHIEF OF STAFF, ARMED FORCES OF THE PHILIPPINES, GENEROSO
SENGA, AND THE PNP DIRECTOR GENERAL, ARTURO
LOMIBAO, Respondents.
x-------------------------------------x

x-------------------------------------x

G.R. No. 171400

G.R. No. 171485

ALTERNATIVE LAW GROUPS, INC. (ALG), Petitioner,

vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, LT. GEN. GENEROSO
SENGA, AND DIRECTOR GENERAL ARTURO LOMIBAO, Respondents.

May 3, 2006

FRANCIS JOSEPH G. ESCUDERO, JOSEPH A. SANTIAGO, TEODORO A.

CASINO, AGAPITO A. AQUINO, MARIO J. AGUJA, SATUR C. OCAMPO,
MUJIV S. HATAMAN, JUAN EDGARDO ANGARA, TEOFISTO DL.
GUINGONA III, EMMANUEL JOSEL J. VILLANUEVA, LIZA L. MAZA,
IMEE R. MARCOS, RENATO B. MAGTUBO, JUSTIN MARC SB.

G.R. No. 171489

May 3, 2006

May 3, 2006

JOSE ANSELMO I. CADIZ, FELICIANO M. BAUTISTA, ROMULO R.

RIVERA, JOSE AMOR M. AMORADO, ALICIA A. RISOS-VIDAL,
FELIMON C. ABELITA III, MANUEL P. LEGASPI, J.B. JOVY C.
BERNABE, BERNARD L. DAGCUTA, ROGELIO V. GARCIA AND
INTEGRATED BAR OF THE PHILIPPINES (IBP),Petitioners,
vs.
HON. EXECUTIVE SECRETARY EDUARDO ERMITA, GENERAL
GENEROSO SENGA, IN HIS CAPACITY AS AFP CHIEF OF STAFF, AND
DIRECTOR GENERAL ARTURO LOMIBAO, IN HIS CAPACITY AS PNP
CHIEF,Respondents.

Once again, the Court is faced with an age-old but persistently modern
problem. How does the Constitution of a free people combine the degree of liberty,
without which, law becomes tyranny, with the degree of law, without which, liberty
becomes license?3
On February 24, 2006, as the nation celebrated the 20th Anniversary of the Edsa
People Power I, President Arroyo issued PP 1017 declaring a state of national
emergency, thus:

x-------------------------------------x
G.R. No. 171424

discretion. Petitioners contend that respondent officials of the Government, in their

professed efforts to defend and preserve democratic institutions, are actually
trampling upon the very freedom guaranteed and protected by the Constitution.
Hence, such issuances are void for being unconstitutional.

May 3, 2006

LOREN B. LEGARDA, Petitioner,

vs.
GLORIA MACAPAGAL-ARROYO, IN HER CAPACITY AS PRESIDENT
AND COMMANDER-IN-CHIEF; ARTURO LOMIBAO, IN HIS CAPACITY
AS DIRECTOR-GENERAL OF THE PHILIPPINE NATIONAL POLICE
(PNP); GENEROSO SENGA, IN HIS CAPACITY AS CHIEF OF STAFF OF
THE ARMED FORCES OF THE PHILIPPINES (AFP); AND EDUARDO
ERMITA, IN HIS CAPACITY AS EXECUTIVE SECRETARY, Respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
All powers need some restraint; practical adjustments rather than rigid formula are
necessary.1 Superior strength the use of force cannot make wrongs into rights. In
this regard, the courts should be vigilant in safeguarding the constitutional rights of
the citizens, specifically their liberty.
Chief Justice Artemio V. Panganibans philosophy of liberty is thus most relevant.
He said: "In cases involving liberty, the scales of justice should weigh heavily
against government and in favor of the poor, the oppressed, the marginalized,
the dispossessed and the weak." Laws and actions that restrict fundamental rights
come to the courts "with a heavy presumption against their constitutional validity." 2
These seven (7) consolidated petitions for certiorari and prohibition allege that in
issuing Presidential Proclamation No. 1017 (PP 1017) and General Order No. 5
(G.O. No. 5), President Gloria Macapagal-Arroyo committed grave abuse of

NOW, THEREFORE, I, Gloria Macapagal-Arroyo, President of the Republic of

the Philippines and Commander-in-Chief of the Armed Forces of the Philippines, by
virtue of the powers vested upon me by Section 18, Article 7 of the Philippine
Constitution which states that: "The President. . . whenever it becomes
necessary, . . . may call out (the) armed forces to prevent or suppress. .
.rebellion. . .," and in my capacity as their Commander-in-Chief, do hereby
command the Armed Forces of the Philippines, to maintain law and order
throughout the Philippines, prevent or suppress all forms of lawless violence as
well as any act of insurrection or rebellion and to enforce obedience to all the
laws and to all decrees, orders and regulations promulgated by me personally
or upon my direction; and as provided in Section 17, Article 12 of the
Constitution do hereby declare a State of National Emergency.
She cited the following facts as bases:
WHEREAS, over these past months, elements in the political opposition have
conspired with authoritarians of the extreme Left represented by the NDFCPP-NPA and the extreme Right, represented by military adventurists the
historical enemies of the democratic Philippine State who are now in a tactical
alliance and engaged in a concerted and systematic conspiracy, over a broad front, to
bring down the duly constituted Government elected in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down the President;
WHEREAS, the claims of these elements have been recklessly magnified by
certain segments of the national media;

WHEREAS, this series of actions is hurting the Philippine State by obstructing

governance including hindering the growth of the economy and sabotaging the
peoples confidence in government and their faith in the future of this country;

WHEREAS, these activities give totalitarian forces; of both the extreme Left and
extreme Right the opening to intensify their avowed aims to bring down the
democratic Philippine State;

WHEREAS, these actions are adversely affecting the economy;

WHEREAS, Article 2, Section 4 of our Constitution makes the defense and

preservation of the democratic institutions and the State the primary duty of
Government;

WHEREAS, these activities give totalitarian forces of both the extreme Left
and extreme Right the opening to intensify their avowed aims to bring down the
democratic Philippine State;
WHEREAS, Article 2, Section 4 of the our Constitution makes the defense and
preservation of the democratic institutions and the State the primary duty of
Government;
WHEREAS, the activities above-described, their consequences, ramifications and
collateral effects constitute aclear and present danger to the safety and the integrity
of the Philippine State and of the Filipino people;
On the same day, the President issued G. O. No. 5 implementing PP 1017, thus:
WHEREAS, over these past months, elements in the political opposition have
conspired with authoritarians of the extreme Left, represented by the NDF-CPPNPA and the extreme Right, represented by military adventurists - the historical
enemies of the democratic Philippine State and who are now in a tactical alliance
and engaged in a concerted and systematic conspiracy, over a broad front, to bring
down the duly-constituted Government elected in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down our republican
government;
WHEREAS, the claims of these elements have been recklessly magnified by certain
segments of the national media;
WHEREAS, these series of actions is hurting the Philippine State by obstructing
governance, including hindering the growth of the economy and sabotaging the
peoples confidence in the government and their faith in the future of this country;
WHEREAS, these actions are adversely affecting the economy;

WHEREAS, the activities above-described, their consequences, ramifications and

collateral effects constitute a clear and present danger to the safety and the integrity
of the Philippine State and of the Filipino people;
WHEREAS, Proclamation 1017 date February 24, 2006 has been issued declaring a
State of National Emergency;
NOW, THEREFORE, I GLORIA MACAPAGAL-ARROYO, by virtue of the
powers vested in me under the Constitution as President of the Republic of the
Philippines, and Commander-in-Chief of the Republic of the Philippines, and
pursuant to Proclamation No. 1017 dated February 24, 2006, do hereby call upon the
Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP), to
prevent and suppress acts of terrorism and lawless violence in the country;
I hereby direct the Chief of Staff of the AFP and the Chief of the PNP, as well as the
officers and men of the AFP and PNP, to immediately carry out the necessary and
appropriate actions and measures to suppress and prevent acts of terrorism
and lawless violence.
On March 3, 2006, exactly one week after the declaration of a state of national
emergency and after all these petitions had been filed, the President lifted PP 1017.
She issued Proclamation No. 1021 which reads:
WHEREAS, pursuant to Section 18, Article VII and Section 17, Article XII of the
Constitution, Proclamation No. 1017 dated February 24, 2006, was issued declaring
a state of national emergency;
WHEREAS, by virtue of General Order No.5 and No.6 dated February 24, 2006,
which were issued on the basis of Proclamation No. 1017, the Armed Forces of the
Philippines (AFP) and the Philippine National Police (PNP), were directed to
maintain law and order throughout the Philippines, prevent and suppress all form of
lawless violence as well as any act of rebellion and to undertake such action as may
be necessary;

WHEREAS, the AFP and PNP have effectively prevented, suppressed and quelled
the acts lawless violence and rebellion;
NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the
Republic of the Philippines, by virtue of the powers vested in me by law,
hereby declare that the state of national emergency has ceased to exist.
In their presentation of the factual bases of PP 1017 and G.O. No. 5, respondents
stated that the proximate cause behind the executive issuances was the conspiracy
among some military officers, leftist insurgents of the New Peoples Army (NPA),
and some members of the political opposition in a plot to unseat or assassinate
President Arroyo.4 They considered the aim to oust or assassinate the President and
take-over the reigns of government as a clear and present danger.
During the oral arguments held on March 7, 2006, the Solicitor General specified the
facts leading to the issuance of PP 1017 and G.O. No. 5. Significantly, there was no
refutation from petitioners counsels.
The Solicitor General argued that the intent of the Constitution is to give
full discretionary powers to the President in determining the necessity of calling
out the armed forces. He emphasized that none of the petitioners has shown that PP
1017 was without factual bases. While he explained that it is not respondents task to
state the facts behind the questioned Proclamation, however, they are presenting the
same, narrated hereunder, for the elucidation of the issues.
On January 17, 2006, Captain Nathaniel Rabonza and First Lieutenants Sonny
Sarmiento, Lawrence San Juan and Patricio Bumidang, members of the Magdalo
Group indicted in the Oakwood mutiny, escaped their detention cell in Fort
Bonifacio, Taguig City. In a public statement, they vowed to remain defiant and to
elude arrest at all costs. They called upon the people to "show and proclaim our
displeasure at the sham regime. Let us demonstrate our disgust, not only by going to
the streets in protest, but also by wearing red bands on our left arms." 5
On February 17, 2006, the authorities got hold of a document entitled "Oplan
Hackle I " which detailed plans for bombings and attacks during the Philippine
Military Academy Alumni Homecoming in Baguio City. The plot was to assassinate
selected targets including some cabinet members and President Arroyo
herself.6 Upon the advice of her security, President Arroyo decided not to attend the
Alumni Homecoming. The next day, at the height of the celebration, a bomb was
found and detonated at the PMA parade ground.

On February 21, 2006, Lt. San Juan was recaptured in a communist safehouse in
Batangas province. Found in his possession were two (2) flash disks containing
minutes of the meetings between members of the Magdalo Group and the National
Peoples Army (NPA), a tape recorder, audio cassette cartridges, diskettes, and
copies of subversive documents.7 Prior to his arrest, Lt. San Juan announced through
DZRH that the "Magdalos D-Day would be on February 24, 2006, the 20th
Anniversary of Edsa I."
On February 23, 2006, PNP Chief Arturo Lomibao intercepted information that
members of the PNP- Special Action Force were planning to defect. Thus, he
immediately ordered SAF Commanding General Marcelino Franco, Jr.
to "disavow" any defection. The latter promptly obeyed and issued a public
statement: "All SAF units are under the effective control of responsible and
trustworthy officers with proven integrity and unquestionable loyalty."
On the same day, at the house of former Congressman Peping Cojuangco, President
Cory Aquinos brother, businessmen and mid-level government officials plotted
moves to bring down the Arroyo administration. Nelly Sindayen of TIME Magazine
reported that Pastor Saycon, longtime Arroyo critic, called a U.S. government
official about his groups plans if President Arroyo is ousted. Saycon also phoned a
man code-named Delta. Saycon identified him as B/Gen. Danilo Lim, Commander
of the Armys elite Scout Ranger. Lim said "it was all systems go for the planned
movement against Arroyo."8
B/Gen. Danilo Lim and Brigade Commander Col. Ariel Querubin confided to Gen.
Generoso Senga, Chief of Staff of the Armed Forces of the Philippines (AFP), that a
huge number of soldiers would join the rallies to provide a critical mass and armed
component to the Anti-Arroyo protests to be held on February 24, 2005. According
to these two (2) officers, there was no way they could possibly stop the soldiers
because they too, were breaking the chain of command to join the forces foist to
unseat the President. However, Gen. Senga has remained faithful to his Commanderin-Chief and to the chain of command. He immediately took custody of B/Gen. Lim
and directed Col. Querubin to return to the Philippine Marines Headquarters in Fort
Bonifacio.
Earlier, the CPP-NPA called for intensification of political and revolutionary work
within the military and the police establishments in order to forge alliances with its
members and key officials. NPA spokesman Gregorio "Ka Roger" Rosal declared:
"The Communist Party and revolutionary movement and the entire people look
forward to the possibility in the coming year of accomplishing its immediate task of
bringing down the Arroyo regime; of rendering it to weaken and unable to rule that
it will not take much longer to end it."9

On the other hand, Cesar Renerio, spokesman for the National Democratic Front
(NDF) at North Central Mindanao, publicly announced: "Anti-Arroyo groups within
the military and police are growing rapidly, hastened by the economic difficulties
suffered by the families of AFP officers and enlisted personnel who undertake
counter-insurgency operations in the field." He claimed that with the forces of the
national democratic movement, the anti-Arroyo conservative political parties,
coalitions, plus the groups that have been reinforcing since June 2005, it is probable
that the Presidents ouster is nearing its concluding stage in the first half of 2006.
Respondents further claimed that the bombing of telecommunication towers and cell
sites in Bulacan and Bataan was also considered as additional factual basis for the
issuance of PP 1017 and G.O. No. 5. So is the raid of an army outpost in Benguet
resulting in the death of three (3) soldiers. And also the directive of the Communist
Party of the Philippines ordering its front organizations to join 5,000 Metro Manila
radicals and 25,000 more from the provinces in mass protests. 10
By midnight of February 23, 2006, the President convened her security advisers and
several cabinet members to assess the gravity of the fermenting peace and order
situation. She directed both the AFP and the PNP to account for all their men and
ensure that the chain of command remains solid and undivided. To protect the young
students from any possible trouble that might break loose on the streets, the
President suspended classes in all levels in the entire National Capital Region.
For their part, petitioners cited the events that followed after the issuance of PP
1017 and G.O. No. 5.
Immediately, the Office of the President announced the cancellation of all programs
and activities related to the 20th anniversary celebration of Edsa People Power I;
and revoked the permits to hold rallies issued earlier by the local governments.
Justice Secretary Raul Gonzales stated that political rallies, which to the Presidents
mind were organized for purposes of destabilization, are cancelled.Presidential Chief
of Staff Michael Defensor announced that "warrantless arrests and take-over of
facilities, including media, can already be implemented."11
Undeterred by the announcements that rallies and public assemblies would not be
allowed, groups of protesters (members of Kilusang Mayo Uno [KMU] and National
Federation of Labor Unions-Kilusang Mayo Uno [NAFLU-KMU]), marched from
various parts of Metro Manila with the intention of converging at the EDSA shrine.
Those who were already near the EDSA site were violently dispersed by huge
clusters of anti-riot police. The well-trained policemen used truncheons, big fiber
glass shields, water cannons, and tear gas to stop and break up the marching groups,
and scatter the massed participants. The same police action was used against the
protesters marching forward to Cubao, Quezon City and to the corner of Santolan

Street and EDSA. That same evening, hundreds of riot policemen broke up an
EDSA celebration rally held along Ayala Avenue and Paseo de Roxas Street in
Makati City.12
According to petitioner Kilusang Mayo Uno, the police cited PP 1017 as the ground
for the dispersal of their assemblies.
During the dispersal of the rallyists along EDSA, police arrested (without warrant)
petitioner Randolf S. David, a professor at the University of the Philippines and
newspaper columnist. Also arrested was his companion, Ronald Llamas, president of
party-list Akbayan.
At around 12:20 in the early morning of February 25, 2006, operatives of the
Criminal Investigation and Detection Group (CIDG) of the PNP, on the basis of PP
1017 and G.O. No. 5, raided the Daily Tribune offices in Manila. The raiding team
confiscated news stories by reporters, documents, pictures, and mock-ups of the
Saturday issue. Policemen from Camp Crame in Quezon City were stationed inside
the editorial and business offices of the newspaper; while policemen from the
Manila Police District were stationed outside the building. 13
A few minutes after the search and seizure at the Daily Tribune offices, the police
surrounded the premises of another pro-opposition paper, Malaya, and its sister
publication, the tabloid Abante.
The raid, according to Presidential Chief of Staff Michael Defensor, is "meant to
show a strong presence, to tell media outlets not to connive or do anything that
would help the rebels in bringing down this government." The PNP warned that it
would take over any media organization that would not follow "standards set by the
government during the state of national emergency." Director General Lomibao
stated that "if they do not follow the standards and the standards are - if they
would contribute to instability in the government, or if they do not subscribe to what
is in General Order No. 5 and Proc. No. 1017 we will recommend a
takeover." National Telecommunications Commissioner Ronald Solis urged
television and radio networks to "cooperate" with the government for the duration of
the state of national emergency. He asked for "balanced reporting" from
broadcasters when covering the events surrounding the coup attempt foiled by the
government. He warned that his agency will not hesitate to recommend the closure
of any broadcast outfit that violates rules set out for media coverage when the
national security is threatened.14
Also, on February 25, 2006, the police arrested Congressman Crispin Beltran,
representing the Anakpawis Party and Chairman of Kilusang Mayo Uno (KMU),

while leaving his farmhouse in Bulacan. The police showed a warrant for his arrest
dated 1985. Beltrans lawyer explained that the warrant, which stemmed from a case
of inciting to rebellion filed during the Marcos regime, had long been quashed.
Beltran, however, is not a party in any of these petitions.
When members of petitioner KMU went to Camp Crame to visit Beltran, they were
told they could not be admitted because of PP 1017 and G.O. No. 5. Two members
were arrested and detained, while the rest were dispersed by the police.
Bayan Muna Representative Satur Ocampo eluded arrest when the police went after
him during a public forum at the Sulo Hotel in Quezon City. But his two drivers,
identified as Roel and Art, were taken into custody.
Retired Major General Ramon Montao, former head of the Philippine
Constabulary, was arrested while with his wife and golfmates at the Orchard Golf
and Country Club in Dasmarias, Cavite.
Attempts were made to arrest Anakpawis Representative Satur Ocampo,
Representative Rafael Mariano, Bayan Muna Representative Teodoro Casio and
Gabriela Representative Liza Maza. Bayan Muna Representative Josel Virador was
arrested at the PAL Ticket Office in Davao City. Later, he was turned over to the
custody of the House of Representatives where the "Batasan 5" decided to stay
indefinitely.
Let it be stressed at this point that the alleged violations of the rights of
Representatives Beltran, Satur Ocampo,et al., are not being raised in these petitions.
On March 3, 2006, President Arroyo issued PP 1021 declaring that the state of
national emergency has ceased to exist.
In the interim, these seven (7) petitions challenging the constitutionality of PP 1017
and G.O. No. 5 were filed with this Court against the above-named respondents.
Three (3) of these petitions impleaded President Arroyo as respondent.
In G.R. No. 171396, petitioners Randolf S. David, et al. assailed PP 1017 on the
grounds that (1) it encroaches on the emergency powers of Congress; (2) itis a
subterfuge to avoid the constitutional requirements for the imposition of martial law;
and (3) it violates the constitutional guarantees of freedom of the press, of speech
and of assembly.

In G.R. No. 171409, petitioners Ninez Cacho-Olivares and Tribune Publishing Co.,
Inc. challenged the CIDGs act of raiding the Daily Tribune offices as a clear case of
"censorship" or "prior restraint." They also claimed that the term "emergency" refers
only to tsunami, typhoon, hurricane and similar occurrences, hence, there is
"absolutely no emergency" that warrants the issuance of PP 1017.
In G.R. No. 171485, petitioners herein are Representative Francis Joseph G.
Escudero, and twenty one (21) other members of the House of Representatives,
including Representatives Satur Ocampo, Rafael Mariano, Teodoro Casio, Liza
Maza, and Josel Virador. They asserted that PP 1017 and G.O. No. 5 constitute
"usurpation of legislative powers"; "violation of freedom of expression" and "a
declaration of martial law." They alleged that President Arroyo "gravely abused her
discretion in calling out the armed forces without clear and verifiable factual basis
of the possibility of lawless violence and a showing that there is necessity to do so."
In G.R. No. 171483,petitioners KMU, NAFLU-KMU, and their members averred
that PP 1017 and G.O. No. 5 are unconstitutional because (1) they arrogate unto
President Arroyo the power to enact laws and decrees; (2) their issuance was without
factual basis; and (3) they violate freedom of expression and the right of the people
to peaceably assemble to redress their grievances.
In G.R. No. 171400, petitioner Alternative Law Groups, Inc. (ALGI) alleged that PP
1017 and G.O. No. 5 are unconstitutional because they violate (a) Section 415 of
Article II, (b) Sections 1,16 2,17 and 418 of Article III, (c)Section 2319 of Article VI,
and (d) Section 1720 of Article XII of the Constitution.
In G.R. No. 171489, petitioners Jose Anselmo I. Cadiz et al., alleged that PP 1017 is
an "arbitrary and unlawful exercise by the President of her Martial Law powers."
And assuming that PP 1017 is not really a declaration of Martial Law, petitioners
argued that "it amounts to an exercise by the President of emergency powers without
congressional approval." In addition, petitioners asserted that PP 1017 "goes beyond
the nature and function of a proclamation as defined under the Revised
Administrative Code."
And lastly, in G.R. No. 171424,petitionerLoren B. Legarda maintained that PP 1017
and G.O. No. 5 are "unconstitutional for being violative of the freedom of
expression, including its cognate rights such as freedom of the press and the right to
access to information on matters of public concern, all guaranteed under Article III,
Section 4 of the 1987 Constitution." In this regard, she stated that these issuances
prevented her from fully prosecuting her election protest pending before the
Presidential Electoral Tribunal.

In respondents Consolidated Comment, the Solicitor General countered

that: first, the petitions should be dismissed for being moot; second,petitioners in
G.R. Nos. 171400 (ALGI), 171424 (Legarda), 171483 (KMU et al.), 171485
(Escudero et al.) and 171489 (Cadiz et al.) have no legal standing; third, it is not
necessary for petitioners to implead President Arroyo as respondent; fourth, PP 1017
has constitutional and legal basis; andfifth, PP 1017 does not violate the peoples
right to free expression and redress of grievances.
On March 7, 2006, the Court conducted oral arguments and heard the parties on the
above interlocking issues which may be summarized as follows:
A. PROCEDURAL:
1) Whether the issuance of PP 1021 renders the petitions moot and
academic.
2) Whether petitioners in 171485 (Escudero et al.), G.R. Nos.
171400 (ALGI), 171483 (KMU et al.), 171489(Cadiz et al.),
and 171424 (Legarda) have legal standing.

One of the greatest contributions of the American system to this country is the
concept of judicial review enunciated in Marbury v. Madison.21 This concept rests on
the extraordinary simple foundation -The Constitution is the supreme law. It was ordained by the people, the ultimate
source of all political authority. It confers limited powers on the national
government. x x x If the government consciously or unconsciously oversteps
these limitations there must be some authority competent to hold it in control,
to thwart its unconstitutional attempt, and thus to vindicate and preserve
inviolate the will of the people as expressed in the Constitution. This power the
courts exercise. This is the beginning and the end of the theory of judicial
review.22
But the power of judicial review does not repose upon the courts a "self-starting
capacity."23 Courts may exercise such power only when the following requisites are
present: first, there must be an actual case or controversy;second, petitioners have to
raise a question of constitutionality; third, the constitutional question must be raised
at the earliest opportunity; and fourth, the decision of the constitutional question
must be necessary to the determination of the case itself. 24
Respondents maintain that the first and second requisites are absent, hence, we shall
limit our discussion thereon.

B. SUBSTANTIVE:
1) Whetherthe Supreme Court can review the factual bases of PP 1017.
2) Whether PP 1017 and G.O. No. 5 are unconstitutional.
a. Facial Challenge
b. Constitutional Basis
c. As Applied Challenge
A. PROCEDURAL

An actual case or controversy involves a conflict of legal right, an opposite legal

claims susceptible of judicial resolution. It is "definite and concrete, touching the
legal relations of parties having adverse legal interest;" a real and substantial
controversy admitting of specific relief. 25 The Solicitor General refutes the existence
of such actual case or controversy, contending that the present petitions were
rendered "moot and academic" by President Arroyos issuance of PP 1021.
Such contention lacks merit.
A moot and academic case is one that ceases to present a justiciable controversy by
virtue of supervening events,26 so that a declaration thereon would be of no practical
use or value.27 Generally, courts decline jurisdiction over such case 28 or dismiss it on
ground of mootness.29

First, we must resolve the procedural roadblocks.

I- Moot and Academic Principle

The Court holds that President Arroyos issuance of PP 1021 did not render the
present petitions moot and academic. During the eight (8) days that PP 1017 was
operative, the police officers, according to petitioners, committed illegal acts in
implementing it. Are PP 1017 and G.O. No. 5 constitutional or valid? Do they
justify these alleged illegal acts? These are the vital issues that must be resolved in

the present petitions. It must be stressed that "an unconstitutional act is not a law,
it confers no rights, it imposes no duties, it affords no protection; it is in legal
contemplation, inoperative."30

stands to be benefited or injured by the judgment in the suit or the party

entitled to the avails of the suit."38 Succinctly put, the plaintiffs standing is based
on his own right to the relief sought.

The "moot and academic" principle is not a magical formula that can automatically
dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and
academic, if: first, there is a grave violation of the Constitution;31 second, the
exceptional character of the situation and the paramount public interest is
involved;32third, when constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public;33 and fourth, the case is
capable of repetition yet evading review.34

The difficulty of determining locus standi arises in public suits. Here, the plaintiff
who asserts a "public right" in assailing an allegedly illegal official action, does so
as a representative of the general public. He may be a person who is affected no
differently from any other person. He could be suing as a "stranger," or in the
category of a "citizen," or taxpayer." In either case, he has to adequately show that
he is entitled to seek judicial protection. In other words, he has to make out a
sufficient interest in the vindication of the public order and the securing of relief as a
"citizen" or "taxpayer.

All the foregoing exceptions are present here and justify this Courts assumption of
jurisdiction over the instant petitions. Petitioners alleged that the issuance of PP
1017 and G.O. No. 5 violates the Constitution. There is no question that the issues
being raised affect the publics interest, involving as they do the peoples basic rights
to freedom of expression, of assembly and of the press. Moreover, the Court has the
duty to formulate guiding and controlling constitutional precepts, doctrines or rules.
It has the symbolic function of educating the bench and the bar, and in the present
petitions, the military and the police, on the extent of the protection given by
constitutional guarantees.35 And lastly, respondents contested actions are capable of
repetition. Certainly, the petitions are subject to judicial review.
In their attempt to prove the alleged mootness of this case, respondents cited Chief
Justice Artemio V. Panganibans Separate Opinion in Sanlakas v. Executive
Secretary.36 However, they failed to take into account the Chief Justices very
statement that an otherwise "moot" case may still be decided "provided the party
raising it in a proper case has been and/or continues to be prejudiced or damaged
as a direct result of its issuance." The present case falls right within this exception to
the mootness rule pointed out by the Chief Justice.
II- Legal Standing
In view of the number of petitioners suing in various personalities, the Court deems
it imperative to have a more than passing discussion on legal standing or locus
standi.
Locus standi is defined as "a right of appearance in a court of justice on a given
question."37 In private suits, standing is governed by the "real-parties-in interest" rule
as contained in Section 2, Rule 3 of the 1997 Rules of Civil Procedure, as amended.
It provides that "every action must be prosecuted or defended in the name of the
real party in interest." Accordingly, the "real-party-in interest" is "the party who

Case law in most jurisdictions now allows both "citizen" and "taxpayer" standing in
public actions. The distinction was first laid down in Beauchamp v. Silk,39 where it
was held that the plaintiff in a taxpayers suit is in a different category from the
plaintiff in a citizens suit. In the former, the plaintiff is affected by the
expenditure of public funds, while in the latter, he is but the mere instrument of
the public concern. As held by the New York Supreme Court in People ex rel Case
v. Collins:40 "In matter of mere public right, howeverthe people are the real
partiesIt is at least the right, if not the duty, of every citizen to interfere and
see that a public offence be properly pursued and punished, and that a public
grievance be remedied." With respect to taxpayers suits, Terr v. Jordan41 held that
"the right of a citizen and a taxpayer to maintain an action in courts to restrain
the unlawful use of public funds to his injury cannot be denied."
However, to prevent just about any person from seeking judicial interference in any
official policy or act with which he disagreed with, and thus hinders the activities of
governmental agencies engaged in public service, the United State Supreme Court
laid down the more stringent "direct injury" test in Ex Parte Levitt,42 later
reaffirmed inTileston v. Ullman.43 The same Court ruled that for a private individual
to invoke the judicial power to determine the validity of an executive or legislative
action, he must show that he has sustained a direct injury as a result of that
action, and it is not sufficient that he has a general interest common to all
members of the public.
This Court adopted the "direct injury" test in our jurisdiction. In People v.
Vera,44 it held that the person who impugns the validity of a statute must have "a
personal and substantial interest in the case such that he has sustained, or will
sustain direct injury as a result." The Vera doctrine was upheld in a litany of cases,
such as,Custodio v. President of the Senate,45 Manila Race Horse Trainers
Association v. De la Fuente,46 Pascual v. Secretary of Public Works47 and AntiChinese League of the Philippines v. Felix.48

However, being a mere procedural technicality, the requirement of locus standi may
be waived by the Court in the exercise of its discretion. This was done in the 1949
Emergency Powers Cases, Araneta v. Dinglasan,49 where the "transcendental
importance" of the cases prompted the Court to act liberally. Such liberality was
neither a rarity nor accidental. In Aquino v. Comelec,50 this Court resolved to pass
upon the issues raised due to the "far-reaching implications" of the petition
notwithstanding its categorical statement that petitioner therein had no personality to
file the suit. Indeed, there is a chain of cases where this liberal policy has been
observed, allowing ordinary citizens, members of Congress, and civic organizations
to prosecute actions involving the constitutionality or validity of laws, regulations
and rulings.51
Thus, the Court has adopted a rule that even where the petitioners have failed to
show direct injury, they have been allowed to sue under the principle of
"transcendental importance." Pertinent are the following cases:
(1) Chavez v. Public Estates Authority,52 where the Court ruled that the
enforcement of the constitutional right to information and the
equitable diffusion of natural resources are matters of transcendental
importance which clothe the petitioner with locus standi;
(2) Bagong Alyansang Makabayan v. Zamora,53 wherein the Court held
that "given the transcendental importance of the issues involved, the
Court may relax the standing requirements and allow the suit to
prosper despite the lack of direct injury to the parties seeking judicial
review" of the Visiting Forces Agreement;
(3) Lim v. Executive Secretary,54 while the Court noted that the petitioners
may not file suit in their capacity as taxpayers absent a showing that
"Balikatan 02-01" involves the exercise of Congress taxing or spending
powers, it reiterated its ruling in Bagong Alyansang Makabayan v.
Zamora,55that in cases of transcendental importance, the cases must be
settled promptly and definitely and standing requirements may be
relaxed.
By way of summary, the following rules may be culled from the cases decided by
this Court. Taxpayers, voters, concerned citizens, and legislators may be accorded
standing to sue, provided that the following requirements are met:

(2) for taxpayers, there must be a claim of illegal disbursement of public

funds or that the tax measure is unconstitutional;
(3) for voters, there must be a showing of obvious interest in the validity
of the election law in question;
(4) for concerned citizens, there must be a showing that the issues raised
are of transcendental importance which must be settled early; and
(5) for legislators, there must be a claim that the official action
complained of infringes upon their prerogatives as legislators.
Significantly, recent decisions show a certain toughening in the Courts attitude
toward legal standing.
In Kilosbayan, Inc. v. Morato,56 the Court ruled that the status of Kilosbayan as a
peoples organization does not give it the requisite personality to question the
validity of the on-line lottery contract, more so where it does not raise any issue of
constitutionality. Moreover, it cannot sue as a taxpayer absent any allegation that
public funds are being misused. Nor can it sue as a concerned citizen as it does not
allege any specific injury it has suffered.
In Telecommunications and Broadcast Attorneys of the Philippines, Inc. v.
Comelec,57 the Court reiterated the "direct injury" test with respect to concerned
citizens cases involving constitutional issues. It held that "there must be a showing
that the citizen personally suffered some actual or threatened injury arising from the
alleged illegal official act."
In Lacson v. Perez,58 the Court ruled that one of the petitioners, Laban ng
Demokratikong Pilipino (LDP), is not a real party-in-interest as it had not
demonstrated any injury to itself or to its leaders, members or supporters.
In Sanlakas v. Executive Secretary,59 the Court ruled that only the petitioners who
are members of Congress have standing to sue, as they claim that the Presidents
declaration of a state of rebellion is a usurpation of the emergency powers of
Congress, thus impairing their legislative powers. As to petitioners Sanlakas,
Partido Manggagawa, and Social Justice Society, the Court declared them to be
devoid of standing, equating them with the LDP in Lacson.

(1) the cases involve constitutional issues;

Now, the application of the above principles to the present petitions.

The locus standi of petitioners in G.R. No. 171396, particularly David and Llamas,
is beyond doubt. The same holds true with petitioners in G.R. No. 171409, CachoOlivares and Tribune Publishing Co. Inc. They alleged "direct injury" resulting from
"illegal arrest" and "unlawful search" committed by police operatives pursuant to PP
1017. Rightly so, the Solicitor General does not question their legal standing.
In G.R. No. 171485, the opposition Congressmen alleged there was usurpation of
legislative powers. They also raised the issue of whether or not the concurrence of
Congress is necessary whenever the alarming powers incident to Martial Law are
used. Moreover, it is in the interest of justice that those affected by PP 1017 can be
represented by their Congressmen in bringing to the attention of the Court the
alleged violations of their basic rights.
In G.R. No. 171400, (ALGI), this Court applied the liberality rule in Philconsa v.
Enriquez,60 Kapatiran Ng Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v.
Tan,61 Association of Small Landowners in the Philippines, Inc. v. Secretary of
Agrarian Reform,62 Basco v. Philippine Amusement and Gaming
Corporation,63 and Taada v. Tuvera,64 that when the issue concerns a public right, it
is sufficient that the petitioner is a citizen and has an interest in the execution of the
laws.
In G.R. No. 171483, KMUs assertion that PP 1017 and G.O. No. 5 violated its right
to peaceful assembly may be deemed sufficient to give it legal
standing. Organizations may be granted standing to assert the rights of their
members.65 We take judicial notice of the announcement by the Office of the
President banning all rallies and canceling all permits for public assemblies
following the issuance of PP 1017 and G.O. No. 5.
In G.R. No. 171489, petitioners, Cadiz et al., who are national officers of the
Integrated Bar of the Philippines (IBP) have no legal standing, having failed to
allege any direct or potential injury which the IBP as an institution or its members
may suffer as a consequence of the issuance of PP No. 1017 and G.O. No. 5.
In Integrated Bar of the Philippines v. Zamora,66 the Court held that the mere
invocation by the IBP of its duty to preserve the rule of law and nothing more, while
undoubtedly true, is not sufficient to clothe it with standing in this case. This is too
general an interest which is shared by other groups and the whole citizenry.
However, in view of the transcendental importance of the issue, this Court declares
that petitioner have locus standi.
In G.R. No. 171424, Loren Legarda has no personality as a taxpayer to file the
instant petition as there are no allegations of illegal disbursement of public funds.
The fact that she is a former Senator is of no consequence. She can no longer sue as
a legislator on the allegation that her prerogatives as a lawmaker have been impaired

by PP 1017 and G.O. No. 5. Her claim that she is a media personality will not
likewise aid her because there was no showing that the enforcement of these
issuances prevented her from pursuing her occupation. Her submission that she has
pending electoral protest before the Presidential Electoral Tribunal is likewise of no
relevance. She has not sufficiently shown that PP 1017 will affect the proceedings or
result of her case. But considering once more the transcendental importance of the
issue involved, this Court may relax the standing rules.
It must always be borne in mind that the question of locus standi is but corollary to
the bigger question of proper exercise of judicial power. This is the underlying legal
tenet of the "liberality doctrine" on legal standing. It cannot be doubted that the
validity of PP No. 1017 and G.O. No. 5 is a judicial question which is of paramount
importance to the Filipino people. To paraphrase Justice Laurel, the whole of
Philippine society now waits with bated breath the ruling of this Court on this very
critical matter. The petitions thus call for the application of the "transcendental
importance" doctrine, a relaxation of the standing requirements for the petitioners
in the "PP 1017 cases."1avvphil.net
This Court holds that all the petitioners herein have locus standi.
Incidentally, it is not proper to implead President Arroyo as respondent. Settled is
the doctrine that the President, during his tenure of office or actual
incumbency,67 may not be sued in any civil or criminal case, and there is no need to
provide for it in the Constitution or law. It will degrade the dignity of the high office
of the President, the Head of State, if he can be dragged into court litigations while
serving as such. Furthermore, it is important that he be freed from any form of
harassment, hindrance or distraction to enable him to fully attend to the performance
of his official duties and functions. Unlike the legislative and judicial branch, only
one constitutes the executive branch and anything which impairs his usefulness in
the discharge of the many great and important duties imposed upon him by the
Constitution necessarily impairs the operation of the Government. However, this
does not mean that the President is not accountable to anyone. Like any other
official, he remains accountable to the people 68 but he may be removed from office
only in the mode provided by law and that is by impeachment. 69
B. SUBSTANTIVE
I. Review of Factual Bases
Petitioners maintain that PP 1017 has no factual basis. Hence, it was not "necessary"
for President Arroyo to issue such Proclamation.

The issue of whether the Court may review the factual bases of the Presidents
exercise of his Commander-in-Chief power has reached its distilled point - from the
indulgent days of Barcelon v. Baker70 and Montenegro v. Castaneda71 to the volatile
era of Lansang v. Garcia,72 Aquino, Jr. v. Enrile,73 and Garcia-Padilla v. Enrile.74 The
tug-of-war always cuts across the line defining "political questions," particularly
those questions "in regard to which full discretionary authority has been delegated to
the legislative or executive branch of the government." 75Barcelon and
Montenegro were in unison in declaring that the authority to decide whether an
exigency has arisen belongs to the President and his decision is final and
conclusive on the courts. Lansang took the opposite view. There, the members of
the Court were unanimous in the conviction that the Court has the authority to
inquire into the existence of factual bases in order to determine their constitutional
sufficiency. From the principle of separation of powers, it shifted the focus to
the system of checks and balances, "under which the President is supreme, x x x
only if and when he acts within the sphere allotted to him by the Basic Law, and
the authority to determine whether or not he has so acted is vested in the
Judicial Department, which in this respect, is, in turn,
constitutionally supreme."76 In 1973, the unanimous Court ofLansang was divided
in Aquino v. Enrile.77 There, the Court was almost evenly divided on the issue of
whether the validity of the imposition of Martial Law is a political or justiciable
question.78 Then came Garcia-Padilla v. Enrile which greatly diluted Lansang. It
declared that there is a need to re-examine the latter case, ratiocinating that "in times
of war or national emergency, the President must be given absolute control for
the very life of the nation and the government is in great peril. The President, it
intoned, is answerable only to his conscience, the People, and God."79
The Integrated Bar of the Philippines v. Zamora80 -- a recent case most pertinent to
these cases at bar -- echoed a principle similar to Lansang. While the Court
considered the Presidents "calling-out" power as a discretionary power solely
vested in his wisdom, it stressed that "this does not prevent an examination of
whether such power was exercised within permissible constitutional limits or
whether it was exercised in a manner constituting grave abuse of
discretion."This ruling is mainly a result of the Courts reliance on Section 1,
Article VIII of 1987 Constitution which fortifies the authority of the courts to
determine in an appropriate action the validity of the acts of the political
departments. Under the new definition of judicial power, the courts are authorized
not only "to settle actual controversies involving rights which are legally
demandable and enforceable," but also "to determine whether or not there has
been a grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of any branch or instrumentality of the government." The latter part of
the authority represents a broadening of judicial power to enable the courts of justice
to review what was before a forbidden territory, to wit, the discretion of the political
departments of the government. 81 It speaks of judicial prerogative not only in terms
of power but also of duty.82

As to how the Court may inquire into the Presidents exercise of

power, Lansang adopted the test that "judicial inquiry can go no further than to
satisfy the Court not that the Presidents decision is correct," but that "the President
did not act arbitrarily." Thus, the standard laid down is not correctness, but
arbitrariness.83 In Integrated Bar of the Philippines, this Court further ruled that "it
is incumbent upon the petitioner to show that the Presidents decision is totally
bereft of factual basis" and that if he fails, by way of proof, to support his assertion,
then "this Court cannot undertake an independent investigation beyond the
pleadings."
Petitioners failed to show that President Arroyos exercise of the calling-out power,
by issuing PP 1017, is totally bereft of factual basis. A reading of the Solicitor
Generals Consolidated Comment and Memorandum shows a detailed narration of
the events leading to the issuance of PP 1017, with supporting reports forming part
of the records. Mentioned are the escape of the Magdalo Group, their audacious
threat of the Magdalo D-Day, the defections in the military, particularly in the
Philippine Marines, and the reproving statements from the communist leaders. There
was also the Minutes of the Intelligence Report and Security Group of the Philippine
Army showing the growing alliance between the NPA and the military. Petitioners
presented nothing to refute such events. Thus, absent any contrary allegations, the
Court is convinced that the President was justified in issuing PP 1017 calling for
military aid.
Indeed, judging the seriousness of the incidents, President Arroyo was not expected
to simply fold her arms and do nothing to prevent or suppress what she believed was
lawless violence, invasion or rebellion. However, the exercise of such power or duty
must not stifle liberty.
II. Constitutionality of PP 1017 and G.O. No. 5
Doctrines of Several Political Theorists
on the Power of the President in Times of Emergency
This case brings to fore a contentious subject -- the power of the President in times
of emergency. A glimpse at the various political theories relating to this subject
provides an adequate backdrop for our ensuing discussion.
John Locke, describing the architecture of civil government, called upon the English
doctrine of prerogative to cope with the problem of emergency. In times of danger to
the nation, positive law enacted by the legislature might be inadequate or even a
fatal obstacle to the promptness of action necessary to avert catastrophe. In these
situations, the Crown retained a prerogative "power to act according to discretion
for the public good, without the proscription of the law and sometimes even
against it."84 But Locke recognized that this moral restraint might not suffice to

avoid abuse of prerogative powers. Who shall judge the need for resorting to the
prerogative and how may its abuse be avoided? Here, Locke readily admitted
defeat, suggesting that "the people have no other remedy in this, as in all other
cases where they have no judge on earth, but to appeal to Heaven."85
Jean-Jacques Rousseau also assumed the need for temporary suspension of
democratic processes of government in time of emergency. According to him:
The inflexibility of the laws, which prevents them from adopting themselves to
circumstances, may, in certain cases, render them disastrous and make them bring
about, at a time of crisis, the ruin of the State
It is wrong therefore to wish to make political institutions as strong as to render it
impossible to suspend their operation. Even Sparta allowed its law to lapse...
If the peril is of such a kind that the paraphernalia of the laws are an obstacle to their
preservation, the method is to nominate a supreme lawyer, who shall silence all the
laws and suspend for a moment the sovereign authority. In such a case, there is no
doubt about the general will, and it clear that the peoples first intention is that the
State shall not perish.86
Rosseau did not fear the abuse of the emergency dictatorship or "supreme
magistracy" as he termed it. For him, it would more likely be cheapened by
"indiscreet use." He was unwilling to rely upon an "appeal to heaven." Instead, he
relied upon a tenure of office of prescribed duration to avoid perpetuation of the
dictatorship.87
John Stuart Mill concluded his ardent defense of representative government: "I am
far from condemning, in cases of extreme necessity, the assumption of absolute
power in the form of a temporary dictatorship."88
Nicollo Machiavellis view of emergency powers, as one element in the whole
scheme of limited government, furnished an ironic contrast to the Lockean theory of
prerogative. He recognized and attempted to bridge this chasm in democratic
political theory, thus:
Now, in a well-ordered society, it should never be necessary to resort to extra
constitutional measures; for although they may for a time be beneficial, yet the
precedent is pernicious, for if the practice is once established for good objects, they
will in a little while be disregarded under that pretext but for evil purposes. Thus, no
republic will ever be perfect if she has not by law provided for everything, having a
remedy for every emergency and fixed rules for applying it. 89

Machiavelli in contrast to Locke, Rosseau and Mill sought to incorporate into

the constitution a regularized system of standby emergency powers to be invoked
with suitable checks and controls in time of national danger. He attempted
forthrightly to meet the problem of combining a capacious reserve of power and
speed and vigor in its application in time of emergency, with effective constitutional
restraints.90
Contemporary political theorists, addressing themselves to the problem of response
to emergency by constitutional democracies, have employed the doctrine of
constitutional dictatorship.91 Frederick M. Watkins saw "no reason why absolutism
should not be used as a means for the defense of liberal institutions," provided it
"serves to protect established institutions from the danger of permanent injury
in a period of temporary emergency and is followed by a prompt return to the
previous forms of political life."92 He recognized the two (2) key elements of the
problem of emergency governance, as well as all constitutional
governance: increasing administrative powers of the executive, while at the same
time "imposing limitation upon that power."93 Watkins placed his real faith in a
scheme of constitutional dictatorship. These are the conditions of success of such a
dictatorship: "The period of dictatorship must be relatively shortDictatorship
should always be strictly legitimate in characterFinal authority to determine
the need for dictatorship in any given case must never rest with the dictator
himself"94 and the objective of such an emergency dictatorship should be "strict
political conservatism."
Carl J. Friedrich cast his analysis in terms similar to those of Watkins. 95 "It is a
problem of concentrating power in a government where power has consciously
been divided to cope with situations of unprecedented magnitude and gravity.
There must be a broad grant of powers, subject to equally strong limitations as to
who shall exercise such powers, when, for how long, and to what end."96 Friedrich,
too, offered criteria for judging the adequacy of any of scheme of emergency
powers, to wit: "The emergency executive must be appointed by constitutional
means i.e., he must be legitimate; he should not enjoy power to determine the
existence of an emergency; emergency powers should be exercised under a
strict time limitation; and last, the objective of emergency action must be the
defense of the constitutional order."97
Clinton L. Rossiter, after surveying the history of the employment of emergency
powers in Great Britain, France, Weimar, Germany and the United States, reverted
to a description of a scheme of "constitutional dictatorship" as solution to the vexing
problems presented by emergency.98 Like Watkins and Friedrich, he stated a
priori the conditions of success of the "constitutional dictatorship," thus:

1) No general regime or particular institution of constitutional dictatorship

should be initiated unless it is necessary or even indispensable to the
preservation of the State and its constitutional order
2) the decision to institute a constitutional dictatorship should never be
in the hands of the man or men who will constitute the dictator
3) No government should initiate a constitutional dictatorship without
making specific provisions for its termination
4) all uses of emergency powers and all readjustments in the
organization of the government should be effected in pursuit of
constitutional or legal requirements
5) no dictatorial institution should be adopted, no right invaded, no
regular procedure altered any more than is absolutely necessary for the
conquest of the particular crisis . . .
6) The measures adopted in the prosecution of the a constitutional
dictatorship should never be permanent in character or effect
7) The dictatorship should be carried on by persons representative of every
part of the citizenry interested in the defense of the existing constitutional
order. . .
8) Ultimate responsibility should be maintained for every action taken
under a constitutional dictatorship. . .
9) The decision to terminate a constitutional dictatorship, like the decision
to institute one should never be in the hands of the man or men who
constitute the dictator. . .
10) No constitutional dictatorship should extend beyond the termination of
the crisis for which it was instituted
11) the termination of the crisis must be followed by a complete return
as possible to the political and governmental conditions existing prior to
the initiation of the constitutional dictatorship99
Rossiter accorded to legislature a far greater role in the oversight exercise of
emergency powers than did Watkins. He would secure to Congress final

responsibility for declaring the existence or termination of an emergency, and he

places great faith in the effectiveness of congressional investigating committees. 100
Scott and Cotter, in analyzing the above contemporary theories in light of recent
experience, were one in saying that, "the suggestion that democracies surrender
the control of government to an authoritarian ruler in time of grave danger to
the nation is not based upon sound constitutional theory." To appraise emergency
power in terms of constitutional dictatorship serves merely to distort the problem
and hinder realistic analysis. It matters not whether the term "dictator" is used in its
normal sense (as applied to authoritarian rulers) or is employed to embrace all chief
executives administering emergency powers. However used, "constitutional
dictatorship" cannot be divorced from the implication of suspension of the processes
of constitutionalism. Thus, they favored instead the "concept of constitutionalism"
articulated by Charles H. McIlwain:
A concept of constitutionalism which is less misleading in the analysis of problems
of emergency powers, and which is consistent with the findings of this study, is that
formulated by Charles H. McIlwain. While it does not by any means necessarily
exclude some indeterminate limitations upon the substantive powers of government,
full emphasis is placed upon procedural limitations, and political responsibility.
McIlwain clearly recognized the need to repose adequate power in government. And
in discussing the meaning of constitutionalism, he insisted that the historical and
proper test of constitutionalism was the existence of adequate processes for
keeping government responsible. He refused to equate constitutionalism with the
enfeebling of government by an exaggerated emphasis upon separation of powers
and substantive limitations on governmental power. He found that the really
effective checks on despotism have consisted not in the weakening of government
but, but rather in the limiting of it; between which there is a great and very
significant difference. In associating constitutionalism with "limited" as
distinguished from "weak" government, McIlwain meant government limited
to the orderly procedure of law as opposed to the processes of force. The two
fundamental correlative elements of constitutionalism for which all lovers of
liberty must yet fight are the legal limits to arbitrary power and a complete
political responsibility of government to the governed.101
In the final analysis, the various approaches to emergency of the above political
theorists - from Locks "theory of prerogative," to Watkins doctrine of
"constitutional dictatorship" and, eventually, to McIlwains "principle of
constitutionalism" --- ultimately aim to solve one real problem in emergency
governance, i.e., that of allotting increasing areas of discretionary power to the
Chief Executive, while insuring that such powers will be exercised with a sense
of political responsibility and under effective limitations and checks.

Our Constitution has fairly coped with this problem. Fresh from the fetters of a
repressive regime, the 1986 Constitutional Commission, in drafting the 1987
Constitution, endeavored to create a government in the concept of Justice Jacksons
"balanced power structure."102 Executive, legislative, and judicial powers are
dispersed to the President, the Congress, and the Supreme Court, respectively. Each
is supreme within its own sphere. But none has the monopoly of power in times of
emergency. Each branch is given a role to serve as limitation or check upon the
other. This system does not weaken the President, it just limits his power, using the
language of McIlwain. In other words, in times of emergency, our Constitution
reasonably demands that we repose a certain amount of faith in the basic integrity
and wisdom of the Chief Executive but, at the same time, it obliges him to operate
within carefully prescribed procedural limitations.
a. "Facial Challenge"
Petitioners contend that PP 1017 is void on its face because of its "overbreadth."
They claim that its enforcement encroached on both unprotected and protected rights
under Section 4, Article III of the Constitution and sent a "chilling effect" to the
citizens.
A facial review of PP 1017, using the overbreadth doctrine, is uncalled for.
First and foremost, the overbreadth doctrine is an analytical tool developed for
testing "on their faces" statutes infree speech cases, also known under the American
Law as First Amendment cases.103
A plain reading of PP 1017 shows that it is not primarily directed to speech or even
speech-related conduct. It is actually a call upon the AFP to prevent or suppress all
forms of lawless violence. In United States v. Salerno,104the US Supreme Court held
that "we have not recognized an overbreadth doctrine outside the limited
context of the First Amendment" (freedom of speech).
Moreover, the overbreadth doctrine is not intended for testing the validity of a law
that "reflects legitimate state interest in maintaining comprehensive control over
harmful, constitutionally unprotected conduct." Undoubtedly, lawless violence,
insurrection and rebellion are considered "harmful" and "constitutionally
unprotected conduct." InBroadrick v. Oklahoma,105 it was held:
It remains a matter of no little difficulty to determine when a law may properly be
held void on its face and when such summary action is inappropriate. But the
plain import of our cases is, at the very least, that facial overbreadth
adjudication is an exception to our traditional rules of practice and that its

function, a limited one at the outset, attenuates as the otherwise unprotected

behavior that it forbids the State to sanction moves from pure speech toward
conduct and that conduct even if expressive falls within the scope of
otherwise valid criminal laws that reflect legitimate state interests in
maintaining comprehensive controls over harmful, constitutionally unprotected
conduct.
Thus, claims of facial overbreadth are entertained in cases involving statutes
which, by their terms, seek to regulate only "spoken words" and again, that
"overbreadth claims, if entertained at all, have been curtailed when invoked
against ordinary criminal laws that are sought to be applied to protected
conduct."106Here, the incontrovertible fact remains that PP 1017 pertains to a
spectrum of conduct, not free speech, which is manifestly subject to state
regulation.
Second, facial invalidation of laws is considered as "manifestly strong medicine,"
to be used "sparingly and only as a last resort," and is "generally
disfavored;"107 The reason for this is obvious. Embedded in the traditional rules
governing constitutional adjudication is the principle that a person to whom a law
may be applied will not be heard to challenge a law on the ground that it may
conceivably be applied unconstitutionally to others, i.e., in other situations not
before the Court.108 A writer and scholar in Constitutional Law explains further:
The most distinctive feature of the overbreadth technique is that it marks an
exception to some of the usual rules of constitutional litigation. Ordinarily, a
particular litigant claims that a statute is unconstitutional as applied to him or
her; if the litigant prevails, the courts carve away the unconstitutional aspects
of the law by invalidating its improper applications on a case to case basis.
Moreover, challengers to a law are not permitted to raise the rights of third
parties and can only assert their own interests. In overbreadth analysis, those
rules give way; challenges are permitted to raise the rights of third parties; and
the court invalidates the entire statute "on its face," not merely "as applied for" so
that the overbroad law becomes unenforceable until a properly authorized court
construes it more narrowly. The factor that motivates courts to depart from the
normal adjudicatory rules is the concern with the "chilling;" deterrent effect of the
overbroad statute on third parties not courageous enough to bring suit. The Court
assumes that an overbroad laws "very existence may cause others not before the
court to refrain from constitutionally protected speech or expression." An
overbreadth ruling is designed to remove that deterrent effect on the speech of those
third parties.
In other words, a facial challenge using the overbreadth doctrine will require the
Court to examine PP 1017 and pinpoint its flaws and defects, not on the basis of its

actual operation to petitioners, but on the assumption or prediction that its very
existence may cause others not before the Court to refrain from constitutionally
protected speech or expression. In Younger v. Harris,109 it was held that:
[T]he task of analyzing a proposed statute, pinpointing its deficiencies, and requiring
correction of these deficiencies before the statute is put into effect, is rarely if ever
an appropriate task for the judiciary. The combination of the relative remoteness of
the controversy, the impact on the legislative process of the relief sought, and
above all the speculative and amorphous nature of the required line-by-line
analysis of detailed statutes,...ordinarily results in a kind of case that is wholly
unsatisfactory for deciding constitutional questions, whichever way they might be
decided.

"by virtue of the power vested upon me by Section 18, Artilce VII do hereby
command the Armed Forces of the Philippines, to maintain law and order
throughout the Philippines, prevent or suppress all forms of lawless violence as well
any act of insurrection or rebellion"
Second provision:
"and to enforce obedience to all the laws and to all decrees, orders and regulations
promulgated by me personally or upon my direction;"
Third provision:

And third, a facial challenge on the ground of overbreadth is the most difficult
challenge to mount successfully, since the challenger must establish that there can
be no instance when the assailed law may be valid. Here, petitioners did not even
attempt to show whether this situation exists.

"as provided in Section 17, Article XII of the Constitution do hereby declare a State
of National Emergency."

Petitioners likewise seek a facial review of PP 1017 on the ground of vagueness.

This, too, is unwarranted.

The first provision pertains to the Presidents calling-out power. In Sanlakas v.

Executive Secretary,111 this Court, through Mr. Justice Dante O. Tinga, held that
Section 18, Article VII of the Constitution reproduced as follows:

Related to the "overbreadth" doctrine is the "void for vagueness doctrine" which
holds that "a law is facially invalid if men of common intelligence must
necessarily guess at its meaning and differ as to its application."110 It is subject to
the same principles governing overbreadth doctrine. For one, it is also an analytical
tool for testing "on their faces" statutes in free speech cases. And like overbreadth,
it is said that a litigant may challenge a statute on its face only if it is vague in all its
possible applications. Again, petitioners did not even attempt to show that PP
1017 is vague in all its application. They also failed to establish that men of
common intelligence cannot understand the meaning and application of PP 1017.
b. Constitutional Basis of PP 1017
Now on the constitutional foundation of PP 1017.
The operative portion of PP 1017 may be divided into three important provisions,
thus:
First provision:

First Provision: Calling-out Power

Sec. 18. The President shall be the Commander-in-Chief of all armed forces of the
Philippines and whenever it becomes necessary, he may call out such armed
forces to prevent or suppress lawless violence, invasion or rebellion. In case of
invasion or rebellion, when the public safety requires it, he may, for a period not
exceeding sixty days, suspend the privilege of the writ of habeas corpus or place the
Philippines or any part thereof under martial law. Within forty-eight hours from the
proclamation of martial law or the suspension of the privilege of the writ of habeas
corpus, the President shall submit a report in person or in writing to the Congress.
The Congress, voting jointly, by a vote of at least a majority of all its Members in
regular or special session, may revoke such proclamation or suspension, which
revocation shall not be set aside by the President. Upon the initiative of the
President, the Congress may, in the same manner, extend such proclamation or
suspension for a period to be determined by the Congress, if the invasion or
rebellion shall persist and public safety requires it.
The Congress, if not in session, shall within twenty-four hours following such
proclamation or suspension, convene in accordance with its rules without need of a
call.

The Supreme Court may review, in an appropriate proceeding filed by any citizen,
the sufficiency of the factual bases of the proclamation of martial law or the
suspension of the privilege of the writ or the extension thereof, and must promulgate
its decision thereon within thirty days from its filing.

SEC. 4. Proclamations. Acts of the President fixing a date or declaring a status or

condition of public moment or interest, upon the existence of which the operation of
a specific law or regulation is made to depend, shall be promulgated in
proclamations which shall have the force of an executive order.

A state of martial law does not suspend the operation of the Constitution, nor
supplant the functioning of the civil courts or legislative assemblies, nor authorize
the conferment of jurisdiction on military courts and agencies over civilians where
civil courts are able to function, nor automatically suspend the privilege of the writ.

President Arroyos declaration of a "state of rebellion" was merely an act declaring a

status or condition of public moment or interest, a declaration allowed under Section
4 cited above. Such declaration, in the words ofSanlakas, is harmless, without legal
significance, and deemed not written. In these cases, PP 1017 is more than that. In
declaring a state of national emergency, President Arroyo did not only rely on
Section 18, Article VII of the Constitution, a provision calling on the AFP to prevent
or suppress lawless violence, invasion or rebellion. She also relied on Section 17,
Article XII, a provision on the States extraordinary power to take over privatelyowned public utility and business affected with public interest. Indeed, PP 1017 calls
for the exercise of an awesome power. Obviously, such Proclamation cannot be
deemed harmless, without legal significance, or not written, as in the case
of Sanlakas.

The suspension of the privilege of the writ shall apply only to persons judicially
charged for rebellion or offenses inherent in or directly connected with invasion.
During the suspension of the privilege of the writ, any person thus arrested or
detained shall be judicially charged within three days, otherwise he shall be released.
grants the President, as Commander-in-Chief, a "sequence" of graduated powers.
From the most to the least benign, these are: the calling-out power, the power to
suspend the privilege of the writ of habeas corpus, and the power to declare Martial
Law. Citing Integrated Bar of the Philippines v. Zamora,112 the Court ruled that the
only criterion for the exercise of the calling-out power is that "whenever it becomes
necessary," the President may call the armed forces "to prevent or suppress
lawless violence, invasion or rebellion." Are these conditions present in the instant
cases? As stated earlier, considering the circumstances then prevailing, President
Arroyo found it necessary to issue PP 1017. Owing to her Offices vast intelligence
network, she is in the best position to determine the actual condition of the country.
Under the calling-out power, the President may summon the armed forces to aid him
in suppressing lawless violence, invasion and rebellion. This involves ordinary
police action. But every act that goes beyond the Presidents calling-out power is
considered illegal or ultra vires. For this reason, a President must be careful in the
exercise of his powers. He cannot invoke a greater power when he wishes to act
under a lesser power. There lies the wisdom of our Constitution, the greater the
power, the greater are the limitations.
It is pertinent to state, however, that there is a distinction between the Presidents
authority to declare a "state of rebellion" (in Sanlakas) and the authority to proclaim
a state of national emergency. While President Arroyos authority to declare a "state
of rebellion" emanates from her powers as Chief Executive, the statutory authority
cited in Sanlakas was Section 4, Chapter 2, Book II of the Revised Administrative
Code of 1987, which provides:

Some of the petitioners vehemently maintain that PP 1017 is actually a declaration

of Martial Law. It is no so. What defines the character of PP 1017 are its wordings. It
is plain therein that what the President invoked was her calling-out power.
The declaration of Martial Law is a "warn[ing] to citizens that the military power
has been called upon by the executive to assist in the maintenance of law and order,
and that, while the emergency lasts, they must, upon pain of arrest and punishment,
not commit any acts which will in any way render more difficult the restoration of
order and the enforcement of law."113
In his "Statement before the Senate Committee on Justice" on March 13, 2006, Mr.
Justice Vicente V. Mendoza,114 an authority in constitutional law, said that of the
three powers of the President as Commander-in-Chief, the power to declare Martial
Law poses the most severe threat to civil liberties. It is a strong medicine which
should not be resorted to lightly. It cannot be used to stifle or persecute critics of the
government. It is placed in the keeping of the President for the purpose of enabling
him to secure the people from harm and to restore order so that they can enjoy their
individual freedoms. In fact, Section 18, Art. VII, provides:
A state of martial law does not suspend the operation of the Constitution, nor
supplant the functioning of the civil courts or legislative assemblies, nor authorize
the conferment of jurisdiction on military courts and agencies over civilians where
civil courts are able to function, nor automatically suspend the privilege of the writ.

Justice Mendoza also stated that PP 1017 is not a declaration of Martial Law. It is no
more than a call by the President to the armed forces to prevent or suppress lawless
violence. As such, it cannot be used to justify acts that only under a valid declaration
of Martial Law can be done. Its use for any other purpose is a perversion of its
nature and scope, and any act done contrary to its command is ultra vires.

Justice Mendoza further stated that specifically, (a) arrests and seizures without
judicial warrants; (b) ban on public assemblies; (c) take-over of news media and
agencies and press censorship; and (d) issuance of Presidential Decrees, are powers
which can be exercised by the President as Commander-in-Chief only where there is
a valid declaration of Martial Law or suspension of the writ of habeas corpus.

NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines

by virtue of the powers vested upon me by Article VII, Section 10, Paragraph (2) of
the Constitution, do hereby place the entire Philippines as defined in Article 1,
Section 1 of the Constitution under martial law and, in my capacity as their
Commander-in-Chief, do hereby command the Armed Forces of the Philippines,
to maintain law and order throughout the Philippines, prevent or suppress all
forms of lawless violence as well as any act of insurrection or rebellion and to
enforce obedience to all the laws and decrees, orders and regulations
promulgated by me personally or upon my direction.

Based on the above disquisition, it is clear that PP 1017 is not a declaration of

Martial Law. It is merely an exercise of President Arroyos calling-out power for
the armed forces to assist her in preventing or suppressing lawless violence.
Second Provision: "Take Care" Power
The second provision pertains to the power of the President to ensure that the laws
be faithfully executed. This is based on Section 17, Article VII which reads:
SEC. 17. The President shall have control of all the executive departments, bureaus,
and offices. He shall ensure that the laws be faithfully executed.
As the Executive in whom the executive power is vested, 115 the primary function of
the President is to enforce the laws as well as to formulate policies to be embodied
in existing laws. He sees to it that all laws are enforced by the officials and
employees of his department. Before assuming office, he is required to take an oath
or affirmation to the effect that as President of the Philippines, he will, among
others, "execute its laws."116 In the exercise of such function, the President, if
needed, may employ the powers attached to his office as the Commander-in-Chief of
all the armed forces of the country,117 including the Philippine National
Police118 under the Department of Interior and Local Government. 119
Petitioners, especially Representatives Francis Joseph G. Escudero, Satur Ocampo,
Rafael Mariano, Teodoro Casio, Liza Maza, and Josel Virador argue that PP 1017 is
unconstitutional as it arrogated upon President Arroyo the power to enact laws and
decrees in violation of Section 1, Article VI of the Constitution, which vests the
power to enact laws in Congress. They assail the clause "to enforce obedience to all
the laws and to all decrees, orders and regulations promulgated by me
personally or upon my direction."

Petitioners contention is understandable. A reading of PP 1017 operative clause

shows that it was lifted120 from Former President Marcos Proclamation No. 1081,
which partly reads:

We all know that it was PP 1081 which granted President Marcos legislative power.
Its enabling clause states: "to enforce obedience to all the laws and decrees,
orders and regulations promulgated by me personally or upon my
direction." Upon the other hand, the enabling clause of PP 1017 issued by President
Arroyo is: to enforce obedience to all the laws and to all decrees, orders and
regulations promulgated by me personally or upon my direction."
Is it within the domain of President Arroyo to promulgate "decrees"?
PP 1017 states in part: "to enforce obedience to all the laws and decrees x x
x promulgated by me personally or upon my direction."
The President is granted an Ordinance Power under Chapter 2, Book III of
Executive Order No. 292 (Administrative Code of 1987). She may issue any of the
following:
Sec. 2. Executive Orders. Acts of the President providing for rules of a general or
permanent character in implementation or execution of constitutional or statutory
powers shall be promulgated in executive orders.
Sec. 3. Administrative Orders. Acts of the President which relate to particular
aspect of governmental operations in pursuance of his duties as administrative head
shall be promulgated in administrative orders.

Sec. 4. Proclamations. Acts of the President fixing a date or declaring a status or

condition of public moment or interest, upon the existence of which the operation of
a specific law or regulation is made to depend, shall be promulgated in
proclamations which shall have the force of an executive order.

Third Provision: Power to Take Over

The pertinent provision of PP 1017 states:

Sec. 5. Memorandum Orders. Acts of the President on matters of administrative

detail or of subordinate or temporary interest which only concern a particular officer
or office of the Government shall be embodied in memorandum orders.

x x x and to enforce obedience to all the laws and to all decrees, orders, and
regulations promulgated by me personally or upon my direction; and as provided in
Section 17, Article XII of the Constitution do hereby declare a state of national
emergency.

Sec. 6. Memorandum Circulars. Acts of the President on matters relating to

internal administration, which the President desires to bring to the attention of all or
some of the departments, agencies, bureaus or offices of the Government, for
information or compliance, shall be embodied in memorandum circulars.

The import of this provision is that President Arroyo, during the state of national
emergency under PP 1017, can call the military not only to enforce obedience "to all
the laws and to all decrees x x x" but also to act pursuant to the provision of Section
17, Article XII which reads:

Sec. 7. General or Special Orders. Acts and commands of the President in his
capacity as Commander-in-Chief of the Armed Forces of the Philippines shall be
issued as general or special orders.

Sec. 17. In times of national emergency, when the public interest so requires, the
State may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately-owned public utility or
business affected with public interest.

President Arroyos ordinance power is limited to the foregoing issuances. She cannot
issue decrees similar to those issued by Former President Marcos under PP 1081.
Presidential Decrees are laws which are of the same category and binding force as
statutes because they were issued by the President in the exercise of his legislative
power during the period of Martial Law under the 1973 Constitution. 121
This Court rules that the assailed PP 1017 is unconstitutional insofar as it
grants President Arroyo the authority to promulgate "decrees." Legislative
power is peculiarly within the province of the Legislature. Section 1, Article VI
categorically states that "[t]he legislative power shall be vested in the Congress of
the Philippines which shall consist of a Senate and a House of Representatives."
To be sure, neither Martial Law nor a state of rebellion nor a state of emergency can
justify President Arroyos exercise of legislative power by issuing decrees.
Can President Arroyo enforce obedience to all decrees and laws through the
military?
As this Court stated earlier, President Arroyo has no authority to enact decrees. It
follows that these decrees are void and, therefore, cannot be enforced. With respect
to "laws," she cannot call the military to enforce or implement certain laws, such as
customs laws, laws governing family and property relations, laws on obligations and
contracts and the like. She can only order the military, under PP 1017, to enforce
laws pertinent to its duty to suppress lawless violence.

What could be the reason of President Arroyo in invoking the above provision when
she issued PP 1017?
The answer is simple. During the existence of the state of national emergency, PP
1017 purports to grant the President, without any authority or delegation from
Congress, to take over or direct the operation of any privately-owned public utility
or business affected with public interest.
This provision was first introduced in the 1973 Constitution, as a product of the
"martial law" thinking of the 1971 Constitutional Convention. 122 In effect at the time
of its approval was President Marcos Letter of Instruction No. 2 dated September
22, 1972 instructing the Secretary of National Defense to take over "the
management, control and operation of the Manila Electric Company, the Philippine
Long Distance Telephone Company, the National Waterworks and Sewerage
Authority, the Philippine National Railways, the Philippine Air Lines, Air Manila
(and) Filipinas Orient Airways . . . for the successful prosecution by the Government
of its effort to contain, solve and end the present national emergency."
Petitioners, particularly the members of the House of Representatives, claim that
President Arroyos inclusion of Section 17, Article XII in PP 1017 is an
encroachment on the legislatures emergency powers.

This is an area that needs delineation.

A distinction must be drawn between the Presidents authority to declare "a state of
national emergency" and toexercise emergency powers. To the first, as elucidated by
the Court, Section 18, Article VII grants the President such power, hence, no
legitimate constitutional objection can be raised. But to the second, manifold
constitutional issues arise.

Generally, Congress is the repository of emergency powers. This is evident in the

tenor of Section 23 (2), Article VI authorizing it to delegate such powers to the
President. Certainly, a body cannot delegate a power not reposed upon
it. However, knowing that during grave emergencies, it may not be possible or
practicable for Congress to meet and exercise its powers, the Framers of our
Constitution deemed it wise to allow Congress to grant emergency powers to the
President, subject to certain conditions, thus:

Section 23, Article VI of the Constitution reads:

(1) There must be a war or other emergency.

SEC. 23. (1) The Congress, by a vote of two-thirds of both Houses in joint session
assembled, voting separately, shall have the sole power to declare the existence of
a state of war.

(2) The delegation must be for a limited period only.

(2) In times of war or other national emergency, the Congress may, by law,
authorize the President, for a limited period and subject to such restrictions as it may
prescribe, to exercise powers necessary and proper to carry out a declared national
policy. Unless sooner withdrawn by resolution of the Congress, such powers shall
cease upon the next adjournment thereof.
It may be pointed out that the second paragraph of the above provision refers not
only to war but also to "other national emergency." If the intention of the Framers
of our Constitution was to withhold from the President the authority to declare a
"state of national emergency" pursuant to Section 18, Article VII (calling-out power)
and grant it to Congress (like the declaration of the existence of a state of war), then
the Framers could have provided so. Clearly, they did not intend that Congress
should first authorize the President before he can declare a "state of national
emergency." The logical conclusion then is that President Arroyo could validly
declare the existence of a state of national emergency even in the absence of a
Congressional enactment.
But the exercise of emergency powers, such as the taking over of privately owned
public utility or business affected with public interest, is a different matter. This
requires a delegation from Congress.
Courts have often said that constitutional provisions in pari materia are to be
construed together. Otherwise stated, different clauses, sections, and provisions of a
constitution which relate to the same subject matter will be construed together and
considered in the light of each other.123 Considering that Section 17 of Article XII
and Section 23 of Article VI, previously quoted, relate to national emergencies, they
must be read together to determine the limitation of the exercise of emergency
powers.

(3) The delegation must be subject to such restrictions as the Congress

may prescribe.
(4) The emergency powers must be exercised to carry out a national
policy declared by Congress.124
Section 17, Article XII must be understood as an aspect of the emergency powers
clause. The taking over of private business affected with public interest is just
another facet of the emergency powers generally reposed upon Congress. Thus,
when Section 17 states that the "the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct the operation
of any privately owned public utility or business affected with public interest,"
it refers to Congress, not the President. Now, whether or not the President may
exercise such power is dependent on whether Congress may delegate it to him
pursuant to a law prescribing the reasonable terms thereof. Youngstown Sheet &
Tube Co. et al. v. Sawyer,125 held:
It is clear that if the President had authority to issue the order he did, it must be
found in some provision of the Constitution. And it is not claimed that express
constitutional language grants this power to the President. The contention is that
presidential power should be implied from the aggregate of his powers under the
Constitution. Particular reliance is placed on provisions in Article II which say that
"The executive Power shall be vested in a President . . . .;" that "he shall take Care
that the Laws be faithfully executed;" and that he "shall be Commander-in-Chief of
the Army and Navy of the United States.
The order cannot properly be sustained as an exercise of the Presidents military
power as Commander-in-Chief of the Armed Forces. The Government attempts to
do so by citing a number of cases upholding broad powers in military commanders
engaged in day-to-day fighting in a theater of war. Such cases need not concern us

here.Even though "theater of war" be an expanding concept, we cannot with

faithfulness to our constitutional system hold that the Commander-in-Chief of
the Armed Forces has the ultimate power as such to take possession of private
property in order to keep labor disputes from stopping production. This is a job
for the nations lawmakers, not for its military authorities.

MR. GASCON. There is a question by Commissioner de los Reyes. What about

strikes and riots?

Nor can the seizure order be sustained because of the several constitutional
provisions that grant executive power to the President. In the framework of our
Constitution, the Presidents power to see that the laws are faithfully executed
refutes the idea that he is to be a lawmaker. The Constitution limits his
functions in the lawmaking process to the recommending of laws he thinks wise
and the vetoing of laws he thinks bad. And the Constitution is neither silent nor
equivocal about who shall make laws which the President is to execute. The
first section of the first article says that "All legislative Powers herein granted
shall be vested in a Congress of the United States. . ."126

MR. BENGZON. Unless they are of such proportions such that they would paralyze
government service.132

MR. VILLEGAS. Strikes, no; those would not be covered by the term "national
emergency."

xxxxxx
MR. TINGSON. May I ask the committee if "national emergency" refers to military
national emergency or could this be economic emergency?"
MR. VILLEGAS. Yes, it could refer to both military or economic dislocations.

Petitioner Cacho-Olivares, et al. contends that the term "emergency" under Section
17, Article XII refers to "tsunami," "typhoon," "hurricane"and"similar
occurrences." This is a limited view of "emergency."
Emergency, as a generic term, connotes the existence of conditions suddenly
intensifying the degree of existing danger to life or well-being beyond that which is
accepted as normal. Implicit in this definitions are the elements of intensity, variety,
and perception.127 Emergencies, as perceived by legislature or executive in the
United Sates since 1933, have been occasioned by a wide range of situations,
classifiable under three (3) principal heads: a)economic,128 b) natural
disaster,129 and c) national security.130
"Emergency," as contemplated in our Constitution, is of the same breadth. It may
include rebellion, economic crisis, pestilence or epidemic, typhoon, flood, or other
similar catastrophe of nationwide proportions or effect. 131This is evident in the
Records of the Constitutional Commission, thus:
MR. GASCON. Yes. What is the Committees definition of "national emergency"
which appears in Section 13, page 5? It reads:
When the common good so requires, the State may temporarily take over or direct
the operation of any privately owned public utility or business affected with public
interest.
MR. VILLEGAS. What I mean is threat from external aggression, for
example, calamities or natural disasters.

MR. TINGSON. Thank you very much.133

It may be argued that when there is national emergency, Congress may not be able to
convene and, therefore, unable to delegate to the President the power to take over
privately-owned public utility or business affected with public interest.
In Araneta v. Dinglasan,134 this Court emphasized that legislative power, through
which extraordinary measures are exercised, remains in Congress even in times of
crisis.
"x x x
After all the criticisms that have been made against the efficiency of the system of
the separation of powers, the fact remains that the Constitution has set up this form
of government, with all its defects and shortcomings, in preference to the
commingling of powers in one man or group of men. The Filipino people by
adopting parliamentary government have given notice that they share the faith of
other democracy-loving peoples in this system, with all its faults, as the ideal. The
point is, under this framework of government, legislation is preserved for Congress
all the time, not excepting periods of crisis no matter how serious. Never in the
history of the United States, the basic features of whose Constitution have been
copied in ours, have specific functions of the legislative branch of enacting laws
been surrendered to another department unless we regard as legislating the
carrying out of a legislative policy according to prescribed standards; no, not even
when that Republic was fighting a total war, or when it was engaged in a life-and-

death struggle to preserve the Union. The truth is that under our concept of
constitutional government, in times of extreme perils more than in normal
circumstances the various branches, executive, legislative, and judicial, given the
ability to act, are called upon to perform the duties and discharge the
responsibilities committed to them respectively."
Following our interpretation of Section 17, Article XII, invoked by President Arroyo
in issuing PP 1017, this Court rules that such Proclamation does not authorize her
during the emergency to temporarily take over or direct the operation of any
privately owned public utility or business affected with public interest without
authority from Congress.
Let it be emphasized that while the President alone can declare a state of national
emergency, however, without legislation, he has no power to take over privatelyowned public utility or business affected with public interest. The President cannot
decide whether exceptional circumstances exist warranting the take over of
privately-owned public utility or business affected with public interest. Nor can he
determine when such exceptional circumstances have ceased. Likewise, without
legislation, the President has no power to point out the types of businesses affected
with public interest that should be taken over. In short, the President has no absolute
authority to exercise all the powers of the State under Section 17, Article VII in the
absence of an emergency powers act passed by Congress.
c. "AS APPLIED CHALLENGE"
One of the misfortunes of an emergency, particularly, that which pertains to security,
is that military necessity and the guaranteed rights of the individual are often not
compatible. Our history reveals that in the crucible of conflict, many rights are
curtailed and trampled upon. Here, the right against unreasonable search and
seizure; the right against warrantless arrest; and the freedom of speech, of
expression, of the press, and of assemblyunder the Bill of Rights suffered the
greatest blow.
Of the seven (7) petitions, three (3) indicate "direct injury."
In G.R. No. 171396, petitioners David and Llamas alleged that, on February 24,
2006, they were arrested without warrants on their way to EDSA to celebrate the
20th Anniversary of People Power I. The arresting officers cited PP 1017 as basis of
the arrest.
In G.R. No. 171409, petitioners Cacho-Olivares and Tribune Publishing Co., Inc.
claimed that on February 25, 2006, the CIDG operatives "raided and ransacked

without warrant" their office. Three policemen were assigned to guard their office as
a possible "source of destabilization." Again, the basis was PP 1017.
And in G.R. No. 171483, petitioners KMU and NAFLU-KMU et al. alleged that
their members were "turned away and dispersed" when they went to EDSA and later,
to Ayala Avenue, to celebrate the 20th Anniversary of People Power I.
A perusal of the "direct injuries" allegedly suffered by the said petitioners shows that
they resulted from theimplementation, pursuant to G.O. No. 5, of PP 1017.
Can this Court adjudge as unconstitutional PP 1017 and G.O. No 5 on the basis of
these illegal acts? In general,does the illegal implementation of a law render it
unconstitutional?
Settled is the rule that courts are not at liberty to declare statutes invalid although
they may be abused and misabused135 and may afford an opportunity for abuse
in the manner of application.136 The validity of a statute or ordinance is to be
determined from its general purpose and its efficiency to accomplish the end
desired,not from its effects in a particular case.137 PP 1017 is merely an invocation
of the Presidents calling-out power. Its general purpose is to command the AFP to
suppress all forms of lawless violence, invasion or rebellion. It had accomplished the
end desired which prompted President Arroyo to issue PP 1021. But there is nothing
in PP 1017 allowing the police, expressly or impliedly, to conduct illegal arrest,
search or violate the citizens constitutional rights.
Now, may this Court adjudge a law or ordinance unconstitutional on the ground that
its implementor committed illegal acts? The answer is no. The criterion by which the
validity of the statute or ordinance is to be measured is the essential basis for the
exercise of power, and not a mere incidental result arising from its
exertion.138This is logical. Just imagine the absurdity of situations when laws maybe
declared unconstitutional just because the officers implementing them have acted
arbitrarily. If this were so, judging from the blunders committed by policemen in the
cases passed upon by the Court, majority of the provisions of the Revised Penal
Code would have been declared unconstitutional a long time ago.
President Arroyo issued G.O. No. 5 to carry into effect the provisions of PP 1017.
General orders are "acts and commands of the President in his capacity as
Commander-in-Chief of the Armed Forces of the Philippines." They are internal
rules issued by the executive officer to his subordinates precisely for
the proper and efficientadministration of law. Such rules and regulations create no
relation except between the official who issues them and the official who receives
them.139 They are based on and are the product of, a relationship in which power is

their source, and obedience, their object.140 For these reasons, one requirement for
these rules to be valid is that they must be reasonable, not arbitrary or capricious.
G.O. No. 5 mandates the AFP and the PNP to immediately carry out the "necessary
and appropriate actions and measures to suppress and prevent acts of
terrorism and lawless violence."
Unlike the term "lawless violence" which is unarguably extant in our statutes and the
Constitution, and which is invariably associated with "invasion, insurrection or
rebellion," the phrase "acts of terrorism" is still an amorphous and vague concept.
Congress has yet to enact a law defining and punishing acts of terrorism.
In fact, this "definitional predicament" or the "absence of an agreed definition of
terrorism" confronts not only our country, but the international community as well.
The following observations are quite apropos:
In the actual unipolar context of international relations, the "fight against terrorism"
has become one of the basic slogans when it comes to the justification of the use of
force against certain states and against groups operating internationally. Lists of
states "sponsoring terrorism" and of terrorist organizations are set up and constantly
being updated according to criteria that are not always known to the public, but are
clearly determined by strategic interests.
The basic problem underlying all these military actions or threats of the use of
force as the most recent by the United States against Iraq consists in the absence of
an agreed definition of terrorism.
Remarkable confusion persists in regard to the legal categorization of acts of
violence either by states, by armed groups such as liberation movements, or by
individuals.
The dilemma can by summarized in the saying "One countrys terrorist is another
countrys freedom fighter." The apparent contradiction or lack of consistency in the
use of the term "terrorism" may further be demonstrated by the historical fact that
leaders of national liberation movements such as Nelson Mandela in South Africa,
Habib Bourgouiba in Tunisia, or Ahmed Ben Bella in Algeria, to mention only a few,
were originally labeled as terrorists by those who controlled the territory at the time,
but later became internationally respected statesmen.
What, then, is the defining criterion for terrorist acts the differentia
specifica distinguishing those acts from eventually legitimate acts of national
resistance or self-defense?

Since the times of the Cold War the United Nations Organization has been trying in
vain to reach a consensus on the basic issue of definition. The organization has
intensified its efforts recently, but has been unable to bridge the gap between those
who associate "terrorism" with any violent act by non-state groups against civilians,
state functionaries or infrastructure or military installations, and those who believe
in the concept of the legitimate use of force when resistance against foreign
occupation or against systematic oppression of ethnic and/or religious groups within
a state is concerned.
The dilemma facing the international community can best be illustrated by reference
to the contradicting categorization of organizations and movements such as Palestine
Liberation Organization (PLO) which is a terrorist group for Israel and a liberation
movement for Arabs and Muslims the Kashmiri resistance groups who are
terrorists in the perception of India, liberation fighters in that of Pakistan the
earlier Contras in Nicaragua freedom fighters for the United States, terrorists for
the Socialist camp or, most drastically, the Afghani Mujahedeen (later to become
the Taliban movement): during the Cold War period they were a group of freedom
fighters for the West, nurtured by the United States, and a terrorist gang for the
Soviet Union. One could go on and on in enumerating examples of conflicting
categorizations that cannot be reconciled in any way because of opposing political
interests that are at the roots of those perceptions.
How, then, can those contradicting definitions and conflicting perceptions and
evaluations of one and the same group and its actions be explained? In our analysis,
the basic reason for these striking inconsistencies lies in the divergent interest of
states. Depending on whether a state is in the position of an occupying power or in
that of a rival, or adversary, of an occupying power in a given territory, the definition
of terrorism will "fluctuate" accordingly. A state may eventually see itself as
protector of the rights of a certain ethnic group outside its territory and will therefore
speak of a "liberation struggle," not of "terrorism" when acts of violence by this
group are concerned, and vice-versa.
The United Nations Organization has been unable to reach a decision on the
definition of terrorism exactly because of these conflicting interests of sovereign
states that determine in each and every instance how a particular armed movement
(i.e. a non-state actor) is labeled in regard to the terrorists-freedom fighter
dichotomy. A "policy of double standards" on this vital issue of international affairs
has been the unavoidable consequence.
This "definitional predicament" of an organization consisting of sovereign states
and not of peoples, in spite of the emphasis in the Preamble to the United Nations
Charter! has become even more serious in the present global power constellation:
one superpower exercises the decisive role in the Security Council, former great

powers of the Cold War era as well as medium powers are increasingly being
marginalized; and the problem has become even more acute since the terrorist
attacks of 11 September 2001 I the United States. 141
The absence of a law defining "acts of terrorism" may result in abuse and oppression
on the part of the police or military. An illustration is when a group of persons are
merely engaged in a drinking spree. Yet the military or the police may consider the
act as an act of terrorism and immediately arrest them pursuant to G.O. No. 5.
Obviously, this is abuse and oppression on their part. It must be remembered that an
act can only be considered a crime if there is a law defining the same as such and
imposing the corresponding penalty thereon.
So far, the word "terrorism" appears only once in our criminal laws, i.e., in P.D. No.
1835 dated January 16, 1981 enacted by President Marcos during the Martial Law
regime. This decree is entitled "Codifying The Various Laws on Anti-Subversion
and Increasing The Penalties for Membership in Subversive Organizations." The
word "terrorism" is mentioned in the following provision: "That one who conspires
with any other person for the purpose of overthrowing the Government of the
Philippines x x x by force, violence, terrorism, x x x shall be punished byreclusion
temporal x x x."
P.D. No. 1835 was repealed by E.O. No. 167 (which outlaws the Communist Party
of the Philippines) enacted by President Corazon Aquino on May 5, 1985. These two
(2) laws, however, do not define "acts of terrorism." Since there is no law defining
"acts of terrorism," it is President Arroyo alone, under G.O. No. 5, who has the
discretion to determine what acts constitute terrorism. Her judgment on this aspect is
absolute, without restrictions. Consequently, there can be indiscriminate arrest
without warrants, breaking into offices and residences, taking over the media
enterprises, prohibition and dispersal of all assemblies and gatherings unfriendly to
the administration. All these can be effected in the name of G.O. No. 5. These acts
go far beyond the calling-out power of the President. Certainly, they violate the due
process clause of the Constitution. Thus, this Court declares that the "acts of
terrorism" portion of G.O. No. 5 is unconstitutional.
Significantly, there is nothing in G.O. No. 5 authorizing the military or police to
commit acts beyond what arenecessary and appropriate to suppress and prevent
lawless violence, the limitation of their authority in pursuing the Order. Otherwise,
such acts are considered illegal.
We first examine G.R. No. 171396 (David et al.)

The Constitution provides that "the right of the people to be secured in their persons,
houses, papers and effects against unreasonable search and seizure of whatever
nature and for any purpose shall be inviolable, and no search warrant or warrant of
arrest shall issue except upon probable cause to be determined personally by the
judge after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be searched and
the persons or things to be seized."142 The plain import of the language of the
Constitution is that searches, seizures and arrests are normally unreasonable unless
authorized by a validly issued search warrant or warrant of arrest. Thus, the
fundamental protection given by this provision is that between person and police
must stand the protective authority of a magistrate clothed with power to issue or
refuse to issue search warrants or warrants of arrest. 143
In the Brief Account144 submitted by petitioner David, certain facts are
established: first, he was arrested without warrant; second, the PNP operatives
arrested him on the basis of PP 1017; third, he was brought at Camp Karingal,
Quezon City where he was fingerprinted, photographed and booked like a criminal
suspect; fourth,he was treated brusquely by policemen who "held his head and tried
to push him" inside an unmarked car; fifth, he was charged with Violation of Batas
Pambansa Bilang No. 880145 and Inciting to Sedition; sixth, he was detained for
seven (7) hours; and seventh,he was eventually released for insufficiency of
evidence.
Section 5, Rule 113 of the Revised Rules on Criminal Procedure provides:
Sec. 5. Arrest without warrant; when lawful. - A peace officer or a private person
may, without a warrant, arrest a person:
(a) When, in his presence, the person to be arrested has committed, is
actually committing, or is attempting to commit an offense.
(b) When an offense has just been committed and he has probable cause to
believe based on personal knowledge of facts or circumstances that the
person to be arrested has committed it; and
x x x.
Neither of the two (2) exceptions mentioned above justifies petitioner Davids
warrantless arrest. During the inquest for the charges of inciting to
sedition and violation of BP 880, all that the arresting officers could invoke was
their observation that some rallyists were wearing t-shirts with the invective "Oust
Gloria Now" and their erroneous assumption that petitioner David was the leader of

the rally.146 Consequently, the Inquest Prosecutor ordered his immediate release on
the ground of insufficiency of evidence. He noted that petitioner David was not
wearing the subject t-shirt and even if he was wearing it, such fact is insufficient to
charge him with inciting to sedition. Further, he also stated that there is insufficient
evidence for the charge of violation of BP 880 as it was not even known whether
petitioner David was the leader of the rally.147
But what made it doubly worse for petitioners David et al. is that not only was their
right against warrantless arrest violated, but also their right to peaceably assemble.
Section 4 of Article III guarantees:
No law shall be passed abridging the freedom of speech, of expression, or of the
press, or the right of the people peaceably to assemble and petition the government
for redress of grievances.
"Assembly" means a right on the part of the citizens to meet peaceably for
consultation in respect to public affairs. It is a necessary consequence of our
republican institution and complements the right of speech. As in the case of
freedom of expression, this right is not to be limited, much less denied, except on a
showing of a clear and present danger of a substantive evil that Congress has a
right to prevent. In other words, like other rights embraced in the freedom of
expression, the right to assemble is not subject to previous restraint or censorship. It
may not be conditioned upon the prior issuance of a permit or authorization from the
government authorities except, of course, if the assembly is intended to be held in a
public place, a permit for the use of such place, and not for the assembly itself, may
be validly required.
The ringing truth here is that petitioner David, et al. were arrested while they were
exercising their right to peaceful assembly. They were not committing any crime,
neither was there a showing of a clear and present danger that warranted the
limitation of that right. As can be gleaned from circumstances, the charges
of inciting to sedition and violation of BP 880 were mere afterthought. Even the
Solicitor General, during the oral argument, failed to justify the arresting officers
conduct. In De Jonge v. Oregon,148 it was held that peaceable assembly cannot be
made a crime, thus:
Peaceable assembly for lawful discussion cannot be made a crime. The holding of
meetings for peaceable political action cannot be proscribed. Those who assist in the
conduct of such meetings cannot be branded as criminals on that score. The
question, if the rights of free speech and peaceful assembly are not to be preserved,
is not as to the auspices under which the meeting was held but as to its purpose; not

as to the relations of the speakers, but whether their utterances transcend the bounds
of the freedom of speech which the Constitution protects. If the persons assembling
have committed crimes elsewhere, if they have formed or are engaged in a
conspiracy against the public peace and order, they may be prosecuted for their
conspiracy or other violations of valid laws. But it is a different matter when the
State, instead of prosecuting them for such offenses, seizes upon mere
participation in a peaceable assembly and a lawful public discussion as the
basis for a criminal charge.
On the basis of the above principles, the Court likewise considers the dispersal and
arrest of the members of KMU et al. (G.R. No. 171483) unwarranted. Apparently,
their dispersal was done merely on the basis of Malacaangs directive canceling all
permits previously issued by local government units. This is arbitrary. The wholesale
cancellation of all permits to rally is a blatant disregard of the principle that
"freedom of assembly is not to be limited, much less denied, except on a
showing of a clear and present danger of a substantive evil that the State has a
right to prevent."149 Tolerance is the rule and limitation is the exception. Only upon
a showing that an assembly presents a clear and present danger that the State may
deny the citizens right to exercise it. Indeed, respondents failed to show or convince
the Court that the rallyists committed acts amounting to lawless violence, invasion
or rebellion. With the blanket revocation of permits, the distinction between
protected and unprotected assemblies was eliminated.
Moreover, under BP 880, the authority to regulate assemblies and rallies is lodged
with the local government units. They have the power to issue permits and to revoke
such permits after due notice and hearing on the determination of the presence of
clear and present danger. Here, petitioners were not even notified and heard on the
revocation of their permits. 150 The first time they learned of it was at the time of the
dispersal. Such absence of notice is a fatal defect. When a persons right is restricted
by government action, it behooves a democratic government to see to it that the
restriction is fair, reasonable, and according to procedure.
G.R. No. 171409, (Cacho-Olivares, et al.) presents another facet of freedom of
speech i.e., the freedom of the press. Petitioners narration of facts, which the
Solicitor General failed to refute, established the following: first, theDaily
Tribunes offices were searched without warrant;second, the police operatives seized
several materials for publication; third, the search was conducted at about 1:00 o
clock in the morning of February 25, 2006; fourth,the search was conducted in the
absence of any official of the Daily Tribune except the security guard of the
building; and fifth, policemen stationed themselves at the vicinity of the Daily
Tribune offices.

Thereafter, a wave of warning came from government officials. Presidential Chief of

Staff Michael Defensor was quoted as saying that such raid was "meant to show a
strong presence, to tell media outlets not to connive or do anything that would
help the rebels in bringing down this government." Director General Lomibao
further stated that "if they do not follow the standards and the standards are if
they would contribute to instability in the government, or if they do not
subscribe to what is in General Order No. 5 and Proc. No. 1017 we will
recommend a takeover." National Telecommunications Commissioner Ronald
Solis urged television and radio networks to "cooperate" with the government for
the duration of the state of national emergency. He warned that his agency will not
hesitate to recommend the closure of any broadcast outfit that violates rules set
out for media coverage during times when the national security is threatened.151
The search is illegal. Rule 126 of The Revised Rules on Criminal Procedure lays
down the steps in the conduct of search and seizure. Section 4 requires that a search
warrant be issued upon probable cause in connection with one specific offence to
be determined personally by the judge after examination under oath or affirmation of
the complainant and the witnesses he may produce. Section 8 mandates that the
search of a house, room, or any other premise be made in the presence of
the lawful occupant thereof or any member of his family or in the absence of the
latter, in the presence of two (2) witnesses of sufficient age and discretion residing in
the same locality. And Section 9 states that the warrant must direct that it be served
in the daytime, unless the property is on the person or in the place ordered to be
searched, in which case a direction may be inserted that it be served at any time of
the day or night. All these rules were violated by the CIDG operatives.
Not only that, the search violated petitioners freedom of the press. The best gauge
of a free and democratic society rests in the degree of freedom enjoyed by its media.
In the Burgos v. Chief of Staff152 this Court held that --

While admittedly, the Daily Tribune was not padlocked and sealed like the
"Metropolitan Mail" and "We Forum" newspapers in the above case, yet it cannot be
denied that the CIDG operatives exceeded their enforcement duties. The search and
seizure of materials for publication, the stationing of policemen in the vicinity of
the The Daily Tribune offices, and the arrogant warning of government officials to
media, are plain censorship. It is that officious functionary of the repressive
government who tells the citizen that he may speak only if allowed to do so, and no
more and no less than what he is permitted to say on pain of punishment should he
be so rash as to disobey.153 Undoubtedly, the The Daily Tribune was subjected to
these arbitrary intrusions because of its anti-government sentiments. This Court
cannot tolerate the blatant disregard of a constitutional right even if it involves the
most defiant of our citizens. Freedom to comment on public affairs is essential to the
vitality of a representative democracy. It is the duty of the courts to be watchful for
the constitutional rights of the citizen, and against any stealthy encroachments
thereon. The motto should always be obsta principiis.154
Incidentally, during the oral arguments, the Solicitor General admitted that the
search of the Tribunes offices and the seizure of its materials for publication and
other papers are illegal; and that the same are inadmissible "for any purpose," thus:
JUSTICE CALLEJO:
You made quite a mouthful of admission when you said that the policemen, when
inspected the Tribune for the purpose of gathering evidence and you admitted that
the policemen were able to get the clippings. Is that not in admission of the
admissibility of these clippings that were taken from the Tribune?
SOLICITOR GENERAL BENIPAYO:

As heretofore stated, the premises searched were the business and printing offices of
the "Metropolitan Mail" and the "We Forum" newspapers. As a consequence of the
search and seizure, these premises were padlocked and sealed, with the further
result that the printing and publication of said newspapers were discontinued.

Under the law they would seem to be, if they were illegally seized, I think and I
know, Your Honor, and these are inadmissible for any purpose.155

Such closure is in the nature of previous restraint or censorship abhorrent to

the freedom of the press guaranteed under the fundamental law, and
constitutes a virtual denial of petitioners' freedom to express themselves in
print. This state of being is patently anathematic to a democratic framework
where a free, alert and even militant press is essential for the political
enlightenment and growth of the citizenry.

SR. ASSO. JUSTICE PUNO:

xxxxxxxxx

These have been published in the past issues of the Daily Tribune; all you have to do
is to get those past issues. So why do you have to go there at 1 oclock in the
morning and without any search warrant? Did they become suddenly part of the
evidence of rebellion or inciting to sedition or what?

SOLGEN BENIPAYO:

SOLICITOR GENERAL BENIPAYO:

Well, it was the police that did that, Your Honor. Not upon my instructions.

I dont know whether this will clarify. The acts, the supposed illegal or unlawful acts
committed on the occasion of 1017, as I said, it cannot be condoned. You cannot
blame the President for, as you said, a misapplication of the law. These are acts of
the police officers, that is their responsibility.157

SR. ASSO. JUSTICE PUNO:

Are you saying that the act of the policeman is illegal, it is not based on any law, and
it is not based on Proclamation 1017.
SOLGEN BENIPAYO:
It is not based on Proclamation 1017, Your Honor, because there is nothing in 1017
which says that the police could go and inspect and gather clippings from Daily
Tribune or any other newspaper.
SR. ASSO. JUSTICE PUNO:

The Dissenting Opinion states that PP 1017 and G.O. No. 5 are constitutional in
every aspect and "should result in no constitutional or statutory breaches if applied
according to their letter."
The Court has passed upon the constitutionality of these issuances. Its ratiocination
has been exhaustively presented. At this point, suffice it to reiterate that PP 1017 is
limited to the calling out by the President of the military to prevent or suppress
lawless violence, invasion or rebellion. When in implementing its provisions,
pursuant to G.O. No. 5, the military and the police committed acts which violate the
citizens rights under the Constitution, this Court has to declare such acts
unconstitutional and illegal.

Is it based on any law?

SOLGEN BENIPAYO:
As far as I know, no, Your Honor, from the facts, no.
SR. ASSO. JUSTICE PUNO:
So, it has no basis, no legal basis whatsoever?
SOLGEN BENIPAYO:
Maybe so, Your Honor. Maybe so, that is why I said, I dont know if it is premature
to say this, we do not condone this. If the people who have been injured by this
would want to sue them, they can sue and there are remedies for this.156
Likewise, the warrantless arrests and seizures executed by the police were,
according to the Solicitor General, illegal and cannot be condoned, thus:
CHIEF JUSTICE PANGANIBAN:
There seems to be some confusions if not contradiction in your theory.

In this connection, Chief Justice Artemio V. Panganibans concurring opinion,

attached hereto, is considered an integral part of this ponencia.
S U M M AT I O N
In sum, the lifting of PP 1017 through the issuance of PP 1021 a supervening event
would have normally rendered this case moot and academic. However, while PP
1017 was still operative, illegal acts were committed allegedly in pursuance thereof.
Besides, there is no guarantee that PP 1017, or one similar to it, may not again be
issued. Already, there have been media reports on April 30, 2006 that allegedly PP
1017 would be reimposed "if the May 1 rallies" become "unruly and violent."
Consequently, the transcendental issues raised by the parties should not be "evaded;"
they must now be resolved to prevent future constitutional aberration.
The Court finds and so holds that PP 1017 is constitutional insofar as it constitutes a
call by the President for the AFP to prevent or suppress lawless violence. The
proclamation is sustained by Section 18, Article VII of the Constitution and the
relevant jurisprudence discussed earlier. However, PP 1017s extraneous provisions
giving the President express or implied power (1) to issue decrees; (2) to direct the
AFP to enforce obedience to all laws even those not related to lawless violence as
well as decrees promulgated by the President; and (3) to impose standards on media
or any form of prior restraint on the press, are ultra vires and unconstitutional. The
Court also rules that under Section 17, Article XII of the Constitution, the President,

in the absence of a legislation, cannot take over privately-owned public utility and
private business affected with public interest.
In the same vein, the Court finds G.O. No. 5 valid. It is an Order issued by the
President acting as Commander-in-Chief addressed to subalterns in the AFP to
carry out the provisions of PP 1017. Significantly, it also provides a valid standard
that the military and the police should take only the "necessary and appropriate
actions and measures to suppress and prevent acts of lawless violence."But the
words "acts of terrorism" found in G.O. No. 5 have not been legally defined and
made punishable by Congress and should thus be deemed deleted from the said G.O.
While "terrorism" has been denounced generally in media, no law has been enacted
to guide the military, and eventually the courts, to determine the limits of the AFPs
authority in carrying out this portion of G.O. No. 5.
On the basis of the relevant and uncontested facts narrated earlier, it is also pristine
clear that (1) the warrantless arrest of petitioners Randolf S. David and Ronald
Llamas; (2) the dispersal of the rallies and warrantless arrest of the KMU and
NAFLU-KMU members; (3) the imposition of standards on media or any prior
restraint on the press; and (4) the warrantless search of the Tribune offices and the
whimsical seizures of some articles for publication and other materials, are not
authorized by the Constitution, the law and jurisprudence. Not even by the valid
provisions of PP 1017 and G.O. No. 5.
Other than this declaration of invalidity, this Court cannot impose any civil, criminal
or administrative sanctions on the individual police officers concerned. They have
not been individually identified and given their day in court. The civil complaints or
causes of action and/or relevant criminal Informations have not been presented
before this Court. Elementary due process bars this Court from making any specific
pronouncement of civil, criminal or administrative liabilities.
It is well to remember that military power is a means to an end and substantive
civil rights are ends in themselves. How to give the military the power it needs
to protect the Republic without unnecessarily trampling individual rights is one
of the eternal balancing tasks of a democratic state.During emergency,
governmental action may vary in breadth and intensity from normal times, yet they
should not be arbitrary as to unduly restrain our peoples liberty.
Perhaps, the vital lesson that we must learn from the theorists who studied the
various competing political philosophies is that, it is possible to grant government
the authority to cope with crises without surrendering the two vital principles of
constitutionalism: the maintenance of legal limits to arbitrary power,
and political responsibility of the government to the governed.158

WHEREFORE, the Petitions are partly granted. The Court rules that PP 1017
is CONSTITUTIONAL insofar as it constitutes a call by President Gloria
Macapagal-Arroyo on the AFP to prevent or suppress lawless violence. However,
the provisions of PP 1017 commanding the AFP to enforce laws not related to
lawless violence, as well as decrees promulgated by the President, are
declared UNCONSTITUTIONAL. In addition, the provision in PP 1017 declaring
national emergency under Section 17, Article VII of the Constitution
is CONSTITUTIONAL, but such declaration does not authorize the President to
take over privately-owned public utility or business affected with public interest
without prior legislation.
G.O. No. 5 is CONSTITUTIONAL since it provides a standard by which the AFP
and the PNP should implement PP 1017, i.e. whatever is "necessary and
appropriate actions and measures to suppress and prevent acts of lawless
violence." Considering that "acts of terrorism" have not yet been defined and made
punishable by the Legislature, such portion of G.O. No. 5 is
declared UNCONSTITUTIONAL.
The warrantless arrest of Randolf S. David and Ronald Llamas; the dispersal and
warrantless arrest of the KMU and NAFLU-KMU members during their rallies, in
the absence of proof that these petitioners were committing acts constituting lawless
violence, invasion or rebellion and violating BP 880; the imposition of standards on
media or any form of prior restraint on the press, as well as the warrantless search of
the Tribune offices and whimsical seizure of its articles for publication and other
materials, are declared UNCONSTITUTIONAL.
No costs.
SO ORDERED.

Respondent filed on October 24, 2002 an application with the NWRB for the
issuance of a Certificate of Public Convenience (CPC) to operate and maintain
waterworks system in sitios San Vicente, Fatima, and Sambag in Barangay Bulacao,
Cebu City.
At the initial hearing of December 16, 2002 during which respondent submitted
proof of compliance with jurisdictional requirements of notice and publication,
herein petitioner Metropolitan Cebu Water District, a government-owned and
controlled corporation created pursuant to P.D. 1981 which took effect upon its
issuance by then President Marcos on May 25, 1973, as amended, appeared through
its lawyers to oppose the application.
While petitioner filed a formal opposition by mail, a copy thereof had not, on
December 16, 2002, yet been received by the NWRB, the day of the hearing.
Counsel for respondent, who received a copy of petitioners Opposition dated
December 12, 2002 earlier that morning, volunteered to give a copy thereof to the
hearing officer.2

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 168914

July 4, 2007

METROPOLITAN CEBU WATER DISTRICT (MCWD), Petitioner,

vs.
MARGARITA A. ADALA, Respondent.
DECISION
CARPIO MORALES, J.:
The Decision of the Regional Trial Court (RTC) of Cebu dated February 10, 2005,
which affirmed in toto the Decision of the National Water Resources Board
(NWRB) dated September 22, 2003 in favor of Margarita A. Adala, respondent, is
being challenged in the present petition for review on certiorari.

In its Opposition, petitioner prayed for the denial of respondents application on the
following grounds: (1) petitioners Board of Directors had not consented to the
issuance of the franchise applied for, such consent being a mandatory condition
pursuant to P.D. 198, (2) the proposed waterworks would interfere with petitioners
water supply which it has the right to protect, and (3) the water needs of the
residents in the subject area was already being well served by petitioner.
After hearing and an ocular inspection of the area, the NWRB, by Decision dated
September 22, 2003, dismissed petitioners Opposition "for lack of merit and/or
failure to state the cause of action"3 and ruled in favor of respondent as follows:
PREMISES ALL CONSIDERED, and finding that Applicant is legally and
financially qualified to operate and maintain the subject waterworks system, and that
said operation shall redound to the benefit of the of the [sic] consumers of Sitios
San Vicente, Fatima and Sambag at Bulacao Pardo, Cebu City, thereby promoting
public service in a proper and suitable manner, the instant application for a
Certificate of Public Convenience (CPC) is, hereby, GRANTED for a period of five
(5) years with authority to charge the proposed rates herein set effective upon
approval as follows:
Consumption Blocks
0-10 cu. m.

Proposed Rates
P125.00(min. charge)

11-20 cu. m.

13.50 per cu. m.

21-30 cu. m.

14.50 per cu. m.

31-40 cu. m.

35.00 per cu. m.

41-50 cu. m.

37.00 per cu. m.

51-60 cu. m.

38.00 per cu. m.

61-70 cu. m.

40.00 per cu. m.

71-100 cu. m.

45.00 per cu. m.

Over 100 cu. m.

50.00 per cu. m.

The Rules and Regulations, hereto, attached for the operation of the waterworks
system should be strictly complied with.
Since the average production is below average day demand, it is recommended to
construct another well or increase the well horsepower from 1.5 - 3.00 Hp to satisfy
the water requirement of the consumers.
Moreover, the rates herein approved should be posted by GRANTEE at conspicuous
places within the area serviced by it, within seven (7) calendar days from notice of
this Decision.
SO ORDERED.4
Its motion for reconsideration having been denied by the NWRB by Resolution of
May 17, 2004, petitioner appealed the case to the RTC of Cebu City. As mentioned
early on, the RTC denied the appeal and upheld the Decision of the NWRB by
Decision dated February 10, 2005. And the RTC denied too petitioners motion for
reconsideration by Order of May 13, 2005.

ii. WHETHER THE TERM FRANCHISE AS USED IN SECTION 47 OF

PRESIDENTIAL DECREE 198, AS AMENDED MEANS A
FRANCHISE GRANTED BY CONGRESS THROUGH LEGISLATION
ONLY OR DOES IT ALSO INCLUDE IN ITS MEANING A
CERTIFICATE OF PUBLIC CONVENIENCE ISSUED BY THE
NATIONAL WATER RESOURCES BOARD FOR THE
MAINTENANCE OF WATERWORKS SYSTEM OR WATER SUPPLY
SERVICE?5
Before discussing these substantive issues, a resolution of the procedural grounds
raised by respondent for the outright denial of the petition is in order.
By respondents claim, petitioners General Manager, Engineer Armando H.
Paredes, who filed the present petition and signed the accompanying verification and
certification of non-forum shopping, was not specifically authorized for that
purpose. Respondent cites Premium Marble Resources v. Court of Appeals6 where
this Court held that, in the absence of a board resolution authorizing a person to act
for and in behalf of a corporation, the action filed in its behalf must fail since "the
power of the corporation to sue and be sued in any court is lodged with the board of
directors that exercises its corporate powers."
Respondent likewise cites ABS-CBN Broadcasting Corporation v. Court of
Appeals7 where this Court held that "[f]or such officers to be deemed fully clothed
by the corporation to exercise a power of the Board, the latter mustspecially
authorize them to do so." (Emphasis supplied by respondent)
That there is a board resolution authorizing Engineer Paredes to file cases in behalf
of petitioner is not disputed. Attached to the petition is petitioners Board of
Directors Resolution No. 015-2004, the relevant portion of which states:
RESOLVE[D], AS IT IS HEREBY RESOLVED, to authorize the General Manager,
ENGR. ARMANDO H. PAREDES, to file in behalf of the Metropolitan Cebu
Water District expropriation and other cases and to affirm and confirm abovestated authority with respect to previous cases filed by MCWD.

Hence, the present petition for review raising the following questions of law:
x x x x8 (Emphasis and underscoring supplied)
i. WHETHER OR NOT THE CONSENT OF THE BOARD OF
DIRECTORS OF THE WATER DISTRICT IS A CONDITION SINE
QUA NON TO THE GRANT OF CERTIFICATE OF PUBLIC
CONVENIENCE BY THE NATIONAL WATER RESOURCES BOARD
UPON OPERATORS OF WATERWORKS WITHIN THE SERVICE
AREA OF THE WATER DISTRICT?

To respondent, however, the board resolution is invalid and ineffective for being a
roving authority and not a specific resolution pursuant to the ruling in ABS-CBN.

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

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

Respondent, on the other hand, proffers that the same prohibition only applies to
franchises in the strict sense those granted by Congress by means of statute and
does not extend to CPCs granted by agencies such as the NWRB.

nature. In pursuance of this, it has been held that privileges conferred by grant
by local authorities as agents for the state constitute as much a legislative
franchise as though the grant had been made by an act of the Legislature.13

Respondent quotes the NWRB Resolution dated May 17, 2004 which distinguished
a franchise from a CPC, thus:

That the legislative authority in this instance, then President Marcos 14 intended
to delegate its power to issue franchises in the case of water districts is clear from
the fact that, pursuant to the procedure outlined in P.D. 198, it no longer plays a
direct role in authorizing the formation and maintenance of water districts, it having
vested the same to local legislative bodies and the Local Water Utilities
Administration (LWUA).

A CPC is formal written authority issued by quasi-judicial bodies for the operation
and maintenance of a public utility for which a franchise is not required by law and a
CPC issued by this Board is an authority to operate and maintain a waterworks
system or water supply service. On the other hand, a franchise is privilege or
authority to operate appropriate private property for public use vested by Congress
through legislation. Clearly, therefore, a CPC is different from a franchise and
Section 47 of Presidential Decree 198 refers only to franchise. Accordingly, the
possession of franchise by a water district does not bar the issuance of a CPC
for an area covered by the water district. (Emphasis and underscoring supplied by
respondent)
Petitioners position that an overly strict construction of the term "franchise" as used
in Section 47 of P.D. 198 would lead to an absurd result impresses. If franchises, in
this context, were strictly understood to mean an authorization issuing directly from
the legislature, it would follow that, while Congress cannot issue franchises for
operating waterworks systems without the water districts consent, the NWRB may
keep on issuing CPCs authorizing the very same act even without such consent. In
effect, not only would the NWRB be subject to less constraints than Congress in
issuing franchises. The exclusive character of the franchise provided for by Section
47 would be illusory.
Moreover, this Court, in Philippine Airlines, Inc. v. Civil Aeronautics Board,12 has
construed the term "franchise" broadly so as to include, not only authorizations
issuing directly from Congress in the form of statute, but also those granted by
administrative agencies to which the power to grant franchises has been delegated
by Congress, to wit:
Congress has granted certain administrative agencies the power to grant
licenses for, or to authorize the operation of certain public utilities. With the
growing complexity of modern life, the multiplication of the subjects of
governmental regulation, and the increased difficulty of administering the laws,
there is a constantly growing tendency towards the delegation of greater powers by
the legislature, and towards the approval of the practice by the courts. It is generally
recognized that a franchise may be derived indirectly from the state through a
duly designated agency, and to this extent, the power to grant franchises has
frequently been delegated, even to agencies other than those of a legislative

Sections 6 and 7 of P.D. 198, as amended, state:

SECTION 6. Formation of District. This Act is the source of authorization and
power to form and maintain a district. Once formed, a district is subject to the
provisions of this Act and not under the jurisdiction of any political subdivision. For
purposes of this Act, a district shall be considered as a quasi-public corporation
performing public service and supplying public wants. As such, a district shall
exercise the powers, rights and privileges given to private corporations under
existing laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act. To form a district, the legislative body of any city,
municipality or province shall enact a resolution containing the following:
(a) The name of the local water district, which shall include the name of
the city, municipality, or province, or region thereof, served by said
system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city or
municipality. A district may include one or more municipalities, cities or
provinces, or portions thereof: Provided, That such municipalities, cities or
provinces, or portions thereof, cover a contiguous area.
(c) A statement completely transferring any and all waterworks and/or
sewerage facilities managed, operated by or under the control of such city,
municipality or province to such district upon the filing of resolution
forming the district.
(d) A statement identifying the purpose for which the district is formed,
which shall include those purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of
expiration of the term of office for each which shall be on the 31st of
December of first, second, or third even-numbered year after assuming
office, as set forth in Section 11 hereof.
(f) A statement that the district may only be dissolved on the grounds and
under the conditions set forth in Section 45 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set
forth in Section 25 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative
body has the power to dissolve, alter or affect the district beyond that specifically
provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire
to form a single district, a similar resolution shall be adopted in each city,
municipality and province; or the city, municipality or province in which 75% of the
total active service connections are situated shall pass an initial resolution to be
concurred in by the other cities, municipalities or provinces.
SECTION 7. Filing of Resolution. A certified copy of the resolution or
resolutions forming a district shall be forwarded to the office of the Secretary of
Administration. If found by the Administration to conform to the requirements
of Section 6 and the policy objectives in Section 2, the resolution shall be duly
filed.The district shall be deemed duly formed and existing upon the date of
such filing. A certified copy of said resolution showing the stamp of the
Administration shall be maintained in the office of the district. Upon such filing, the
local government or governments concerned shall lose ownership, supervision and
control or any right whatsoever over the district except as provided herein.
(Emphasis and underscoring supplied)

Nonetheless, while the prohibition in Section 47 of P.D. 198 applies to the

issuance of CPCs for the reasons discussed above, the same provision must be
deemed void ab initio for being irreconcilable with Article XIV Section 5 of the
1973 Constitution which was ratified on January 17, 1973 the constitution in
force when P.D. 198 was issued on May 25, 1973. Thus, Section 5 of Art. XIV of the
1973 Constitution reads:
SECTION 5. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such citizens, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right be granted except
under the condition that it shall be subject to amendment, alteration, or repeal by the
Batasang Pambansa when the public interest so requires. The State shall encourage
equity participation in public utilities by the general public. The participation of
foreign investors in the governing body of any public utility enterprise shall be
limited to their proportionate share in the capital thereof. (Emphasis and
underscoring supplied)
This provision has been substantially reproduced in Article XII Section 11 of the
1987 Constitution, including the prohibition against exclusive franchises. 17
In view of the purposes for which they are established, 18 water districts fall under the
term "public utility" as defined in the case of National Power Corporation v. Court
of Appeals:191avvphil
A "public utility" is a business or service engaged in regularly supplying the public
with some commodity or service of public consequence such as electricity,
gas, water, transportation, telephone or telegraph service. x x x (Emphasis and
underscoring supplied)

It bears noting that once a district is "duly formed and existing" after following the
above procedure, it acquires the "exclusive franchise" referred to in Section 47.
Thus, P.D. 198 itself, in harmony with Philippine Airlines, Inc. v. Civil Aeronautics
Board,15 gives the name "franchise" to an authorization that does not proceed
directly from the legislature.

It bears noting, moreover, that as early as 1933, the Court held that a particular water
district the Metropolitan Water District is a public utility.20

It would thus be incongruous to adopt in this instance the strict interpretation

proffered by respondent and exclude from the scope of the term "franchise" the
CPCs issued by the NWRB.16

We agree with petitioner that the NAWASA is a public utility because its primary
function is to construct, maintain and operate water reservoirs and waterworks
for the purpose of supplying

The ruling in National Waterworks and Sewerage Authority v. NWSA Consolidated

Unions21 is also instructive:

water to the inhabitants, as well as consolidate and centralize all water supplies
and drainage systems in the Philippines. x x x (Emphasis supplied)
Since Section 47 of P.D. 198, which vests an "exclusive franchise" upon public
utilities, is clearly repugnant to Article XIV, Section 5 of the 1973 Constitution, 22 it
is unconstitutional and may not, therefore, be relied upon by petitioner in support of
its opposition against respondents application for CPC and the subsequent grant
thereof by the NWRB.
WHEREFORE, Section 47 of P.D. 198 is unconstitutional. The Petition is thus, in
light of the foregoing discussions, DISMISSED.
SO ORDERED.

This is a petition under Rule 65 of the Revised Rules of Court to prohibit

respondents from further implementing and enforcing the "Revised and Restated
Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA"
dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992
Revised and Restated Agreement To Build, Lease and Transfer a Light Rail Transit
System for EDSA" dated May 6, 1993.
Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members
of the Philippine Senate and are suing in their capacities as Senators and as
taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent Secretary of the
Department of Transportation and Communications (DOTC), while private
respondent EDSA LRT Corporation, Ltd. is a private corporation organized under
the laws of Hongkong.
I

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 114222 April 6, 1995

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

QUIASON, J.:

In 1989, DOTC planned to construct a light railway transit line along EDSA, a
major thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay,
Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit
III (EDSA LRT III), was intended to provide a mass transit system along EDSA and
alleviate the congestion and growing transportaion problem in the metropolis.
On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc.,
represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to
construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.
On March 15, 1990, Secretary Orbos invited Levin to send a technical team to
discuss the project with DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the Private
Sector, and For Other Purposes," was signed by President Corazon C. Aquino.
Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9,
1990.
Republic Act No. 6957 provides for two schemes for the financing, construction and
operation of government projects through private initiative and investment: BuildOperate-Transfer (BOT) or Build-Transfer (BT).
In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III
project underway, DOTC, on January 22, 1991 and March 14, 1991, issued

Department Orders Nos. 91-494 and 91-496, respectively creating the

Prequalification Bids and Awards Committee (PBAC) and the Technical Committee.

negotiate with the said firm for the contract pursuant to paragraph 14(b) of the
Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).

After its constitution, the PBAC issued guidelines for the prequalification of
contractors for the financing and implementation of the project The notice,
advertising the prequalification of bidders, was published in three newspapers of
general circulation once a week for three consecutive weeks starting February 21,
1991.

In July 1991, Executive Secretary Orbos, acting on instructions of the President,

issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991,
the EDSA LRT Consortium submitted its bid proposal to DOTC.

The deadline set for submission of prequalification documents was March 21, 1991,
later extended to April 1, 1991. Five groups responded to the invitation namely,
ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel
International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT
Consortium, composed of ten foreign and domestic corporations: namely, Kaiser
Engineers International, Inc., ACER Consultants (Far East) Ltd. and Freeman Fox,
Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI
Engineering All Asia Capital and Leasing Corporation, The Salim Group of Jakarta,
E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group, Inc,
and F. F. Cruz & co., Inc.
On the last day for submission of prequalification documents, the prequalification
criteria proposed by the Technical Committee were adopted by the PBAC. The
criteria totalling 100 percent, are as follows: (a) Legal aspects 10 percent; (b)
Management/Organizational capability 30 percent; and (c) Financial capability
30 percent; and (d) Technical capability 30 percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the BOT Law with the formulation
of the Implementation Rules and Regulations thereof, approved the same.
After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9,
1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the
requirements of garnering at least 21 points per criteria [sic], except for Legal
Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p.
146). The Legal Aspects referred to provided that the BOT/BT contractor-applicant
meet the requirements specified in the Constitution and other pertinent laws (Rollo,
p. 114).
Subsequently, Secretary Orbos was appointed Executive Secretary to the President
of the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter
sent to President Aquino two letters dated May 31, 1991 and June 14, 1991,
respectively recommending the award of the EDSA LRT III project to the sole
complying bidder, the EDSA LRT Consortium, and requesting for authority to

Finding this proposal to be in compliance with the bid requirements, DOTC and
respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT
Consortium, entered into an "Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).
Secretary Prado, thereafter, requested presidential approval of the contract.
In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced
Executive Secretary Orbos, informed Secretary Prado that the President could not
grant the requested approval for the following reasons: (1) that DOTC failed to
conduct actual public bidding in compliance with Section 5 of the BOT Law; (2)
that the law authorized public bidding as the only mode to award BOT projects, and
the prequalification proceedings was not the public bidding contemplated under the
law; (3) that Item 14 of the Implementing Rules and Regulations of the BOT Law
which authorized negotiated award of contract in addition to public bidding was of
doubtful legality; and (4) that congressional approval of the list of priority projects
under the BOT or BT Scheme provided in the law had not yet been granted at the
time the contract was awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon, the DOTC and private
respondents re-negotiated the agreement. On April 22, 1992, the parties entered into
a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail
Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are]
cognizant of the fact the DOTC has full authority to sign the Agreement without
need of approval by the President pursuant to the provisions of Executive Order No.
380 and that certain events [had] supervened since November 7, 1991 which
necessitate[d] the revision of the Agreement" (Rollo, p. 51). On May 6, 1992,
DOTC, represented by Secretary Jesus Garcia vice Secretary Prado, and private
respondent entered into a "Supplemental Agreement to the 22 April 1992 Revised
and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System
for EDSA" so as to "clarify their respective rights and responsibilities" and to submit
[the] Supplemental Agreement to the President, of the Philippines for his approval"
(Rollo, pp. 79-80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his
consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993,
approved the said Agreements, (Rollo, p. 194).
According to the agreements, the EDSA LRT III will use light rail vehicles from the
Czech and Slovak Federal Republics and will have a maximum carrying capacity of
450,000 passengers a day, or 150 million a year to be achieved-through 54 such
vehicles operating simultaneously. The EDSA LRT III will run at grade, or street
level, on the mid-section of EDSA for a distance of 17.8 kilometers from F.B.
Harrison, Pasay City to North Avenue, Quezon City. The system will have its own
power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will
also have thirteen (13) passenger stations and one depot in 16-hectare government
property at North Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the entire project required for a
complete operational light rail transit system (Revised and Restated Agreement, Sec.
4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years
from the implementation date of the contract inclusive of mobilization, site works,
initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p.
83). Upon full or partial completion and viability thereof, private respondent shall
deliver the use and possession of the completed portion to DOTC which shall
operate the same (Supplemental Agreement, Sec. 5; Revised and Restated
Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent
rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall
be determined by an independent and internationally accredited inspection firm to be
appointed by the parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As
agreed upon, private respondent's capital shall be recovered from the rentals to be
paid by the DOTC which, in turn, shall come from the earnings of the EDSA LRT
III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and
DOTC shall have completed payment of the rentals, ownership of the project shall
be transferred to the latter for a consideration of only U.S. $1.00 (Revised and
Restated Agreement, Sec. 11.1; Rollo, p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic
Act No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation
and Maintenance of Infrastructure Projects by the Private Sector, and for Other
Purposes" was signed into law by the President. The law was published in two
newspapers of general circulation on May 12, 1994, and took effect 15 days
thereafter or on May 28, 1994. The law expressly recognizes BLT scheme and
allows direct negotiation of BLT contracts.
II

In their petition, petitioners argued that:

(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED
BY THE SUPPLEMENTAL AGREEMENT OF MAY 6, 1993,
INSOFAR AS IT GRANTS EDSA LRT CORPORATION,
LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF
EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE
CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED
IN THE AGREEMENTS IS NOT DEFINED NOR
RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING
RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;
(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED
BASIS VIOLATES R; A. NO. 6957 AND, HENCE, IS
UNLAWFUL;
(4) THE AWARD OF THE CONTRACT IN FAVOR OF
RESPONDENT EDSA LRT CORPORATION, LTD.
VIOLATES THE REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND REGULATIONS OF THE
BOT LAW AND, HENCE, IS ILLEGAL;
(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO
380 FOR THEIR FAILURE TO BEAR PRESIDENTIAL
APPROVAL AND, HENCE, ARE ILLEGAL AND
INEFFECTIVE; AND
(6) THE AGREEMENTS ARE GROSSLY
DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp.
15-16).
Secretary Garcia and private respondent filed their comments separately and claimed
that:
(1) Petitioners are not the real parties-in-interest and have no legal standing to
institute the present petition;
(2) The writ of prohibition is not the proper remedy and the petition requires
ascertainment of facts;

(3) The scheme adopted in the Agreements is actually a build-transfer scheme

allowed by the BOT Law;

citizens and domestic corporations, not foreign corporations like

private respondent;

(4) The nationality requirement for public utilities mandated by the Constitution
does not apply to private respondent;

(2) the Build-Lease-Transfer (BLT) scheme provided in the

agreements is not the BOT or BT Scheme under the law;

(5) The Agreements executed by and between respondents have been approved by
President Ramos and are not disadvantageous to the government;

(3) the contract to construct the EDSA LRT III was awarded to
private respondent not through public bidding which is the only
mode of awarding infrastructure projects under the BOT law;
and

(6) The award of the contract to private respondent through negotiation and not
public bidding is allowed by the BOT Law; and
(7) Granting that the BOT Law requires public bidding, this has been amended by
R.A No. 7718 passed by the Legislature On May 12, 1994, which provides for direct
negotiation as a mode of award of infrastructure projects.
III
Respondents claimed that petitioners had no legal standing to initiate the instant
action. Petitioners, however, countered that the action was filed by them in their
capacity as Senators and as taxpayers.
The prevailing doctrines in taxpayer's suits are to allow taxpayers to question
contracts entered into by the national government or government-owned or
controlled corporations allegedly in contravention of the law (Kilosbayan, Inc. v.
Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal
contracts are involved (Bugnay Construction and Development Corporation v.
Laron, 176 SCRA. 240 [1989]).
For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no
choice but to follow it and uphold the legal standing of petitioners as taxpayers to
institute the present action.
IV
In the main, petitioners asserted that the Revised and Restated Agreement of April
22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and
invalid for the following reasons:
(1) the EDSA LRT III is a public utility, and the ownership and
operation thereof is limited by the Constitution to Filipino

(4) the agreements are grossly disadvantageous to the

government.
1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to
construct the EDSA LRT III was awarded by public respondent, is admittedly a
foreign corporation "duly incorporated and existing under the laws of Hongkong"
(Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is
constructed, private respondent, as lessor, will turn it over to DOTC, as lessee, for
the latter to operate the system and pay rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation, Ltd., a foreign
corporation own EDSA LRT III; a public utility? (Rollo, p. 17).
The phrasing of the question is erroneous; it is loaded. What private respondent
owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and
the power plant, not a public utility. While a franchise is needed to operate these
facilities to serve the public, they do not by themselves constitute a public utility.
What constitutes a public utility is not their ownership but their use to serve the
public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558
[1923]).
The Constitution, in no uncertain terms, requires a franchise for the operation of a
public utility. However, it does not require a franchise before one can own the
facilities needed to operate a public utility so long as it does not operate them to
serve the public.
Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for

the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per
centum of whose capital is owned by such citizens, nor shall
such franchise, certificate or authorization be exclusive character
or for a longer period than fifty years . . . (Emphasis supplied).
In law, there is a clear distinction between the "operation" of a public utility and the
ownership of the facilities and equipment used to serve the public.
Ownership is defined as a relation in law by virtue of which a thing pertaining to one
person is completely subjected to his will in everything not prohibited by law or the
concurrence with the rights of another (Tolentino, II Commentaries and
Jurisprudence on the Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is limited by law so that a
property cannot be operated and used to serve the public as a public utility unless the
operator has a franchise. The operation of a rail system as a public utility includes
the transportation of passengers from one point to another point, their loading and
unloading at designated places and the movement of the trains at pre-scheduled
times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7
A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d.
722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist independently and separately from the
ownership of the facilities thereof. One can own said facilities without operating
them as a public utility, or conversely, one may operate a public utility without
owning the facilities used to serve the public. The devotion of property to serve the
public may be done by the owner or by the person in control thereof who may not
necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the ownership of the
facilities used to serve the public can be very well appreciated when we consider the
transportation industry. Enfranchised airline and shipping companies may lease their
aircraft and vessels instead of owning them themselves.
While private respondent is the owner of the facilities necessary to operate the
EDSA. LRT III, it admits that it is not enfranchised to operate a public utility
(Revised and Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity,
private respondent and DOTC agreed that on completion date, private respondent
will immediately deliver possession of the LRT system by way of lease for 25 years,

during which period DOTC shall operate the same as a common carrier and private
respondent shall provide technical maintenance and repair services to DOTC
(Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62).
Technical maintenance consists of providing (1) repair and maintenance facilities for
the depot and rail lines, services for routine clearing and security; and (2) producing
and distributing maintenance manuals and drawings for the entire system (Revised
and Restated Agreement, Annex F).
Private respondent shall also train DOTC personnel for familiarization with the
operation, use, maintenance and repair of the rolling stock, power plant, substations,
electrical, signaling, communications and all other equipment as supplied in the
agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training
consists of theoretical and live training of DOTC operational personnel which
includes actual driving of light rail vehicles under simulated operating conditions,
control of operations, dealing with emergencies, collection, counting and securing
cash from the fare collection system (Revised and Restated Agreement, Annex E,
Secs. 2-3). Personnel of DOTC will work under the direction and control of private
respondent only during training (Revised and Restated Agreement, Annex E, Sec.
3.1). The training objectives, however, shall be such that upon completion of the
EDSA LRT III and upon opening of normal revenue operation, DOTC shall have in
their employ personnel capable of undertaking training of all new and replacement
personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by
the end of the three-year construction period and upon commencement of normal
revenue operation, DOTC shall be able to operate the EDSA LRT III on its own and
train all new personnel by itself.
Fees for private respondent' s services shall be included in the rent, which likewise
includes the project cost, cost of replacement of plant equipment and spare parts,
investment and financing cost, plus a reasonable rate of return thereon (Revised and
Restated Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and
liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold
harmless private respondent from any losses, damages, injuries or death which may
be claimed in the operation or implementation of the system, except losses,
damages, injury or death due to defects in the EDSA LRT III on account of the
defective condition of equipment or facilities or the defective maintenance of such
equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p.
68).
In sum, private respondent will not run the light rail vehicles and collect fees from
the riding public. It will have no dealings with the public and the public will have no
right to demand any services from it.

It is well to point out that the role of private respondent as lessor during the lease
period must be distinguished from the role of the Philippine Gaming Management
Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110
(1994). Therein, the Contract of Lease between PGMC and the Philippine Charity
Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement
prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the
lessor obligated itself to build, at its own expense, all the facilities necessary to
operate and maintain a nationwide on-line lottery system from whom PCSO was to
lease the facilities and operate the same. Upon due examination of the contract, the
Court found that PGMC's participation was not confined to the construction and
setting up of the on-line lottery system. It spilled over to the actual operation thereof,
becoming indispensable to the pursuit, conduct, administration and control of the
highly technical and sophisticated lottery system. In effect, the PCSO leased out its
franchise to PGMC which actually operated and managed the same.
Indeed, a mere owner and lessor of the facilities used by a public utility is not a
public utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930];
Chippewa Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903,
188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645,
646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator,
wine, poultry and beer cars who supply cars under contract to railroad companies
considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d
984, 987 [1946]).
Even the mere formation of a public utility corporation does not ipso
facto characterize the corporation as one operating a public utility. The moment for
determining the requisite Filipino nationality is when the entity applies for a
franchise, certificate or any other form of authorization for that purpose (People v.
Quasha, 93 Phil. 333 [1953]).
2. Petitioners further assert that the BLT scheme under the Agreements in question is
not recognized in the BOT Law and its Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT schemes as follows:
(a) Build-operate-and-transfer scheme A contractual
arrangement whereby the contractor undertakes the construction
including financing, of a given infrastructure facility, and the
operation and maintenance thereof. The contractor operates the
facility over a fixed term during which it is allowed to charge
facility users appropriate tolls, fees, rentals and charges
sufficient to enable the contractor to recover its operating and
maintenance expenses and its investment in the project plus a

reasonable rate of return thereon. The contractor transfers the

facility to the government agency or local government unit
concerned at the end of the fixed term which shall not exceed
fifty (50) years. For the construction stage, the contractor may
obtain financing from foreign and/or domestic sources and/or
engage the services of a foreign and/or Filipino constructor [sic]:
Provided, That the ownership structure of the contractor of an
infrastructure facility whose operation requires a public utility
franchise must be in accordance with the Constitution: Provided,
however, That in the case of corporate investors in the buildoperate-and-transfer corporation, the citizenship of each
stockholder in the corporate investors shall be the basis for the
computation of Filipino equity in the said corporation: Provided,
further, That, in the case of foreign constructors [sic], Filipino
labor shall be employed or hired in the different phases of the
construction where Filipino skills are available: Provided,
furthermore, that the financing of a foreign or foreign-controlled
contractor from Philippine government financing institutions
shall not exceed twenty percent (20%) of the total cost of the
infrastructure facility or project: Provided, finally, That
financing from foreign sources shall not require a guarantee by
the Government or by government-owned or controlled
corporations. The build-operate-and-transfer scheme shall
include a supply-and-operate situation which is a contractual
agreement whereby the supplier of equipment and machinery for
a given infrastructure facility, if the interest of the Government
so requires, operates the facility providing in the process
technology transfer and training to Filipino nationals.
(b) Build-and-transfer scheme "A contractual arrangement
whereby the contractor undertakes the construction including
financing, of a given infrastructure facility, and its turnover after
completion to the government agency or local government unit
concerned which shall pay the contractor its total investment
expended on the project, plus a reasonable rate of return thereon.
This arrangement may be employed in the construction of any
infrastructure project including critical facilities which for
security or strategic reasons, must be operated directly by the
government (Emphasis supplied).
The BOT scheme is expressly defined as one where the contractor undertakes the
construction and financing in infrastructure facility, and operates and maintains the
same. The contractor operates the facility for a fixed period during which it may
recover its expenses and investment in the project plus a reasonable rate of return

thereon. After the expiration of the agreed term, the contractor transfers the
ownership and operation of the project to the government.
In the BT scheme, the contractor undertakes the construction and financing of the
facility, but after completion, the ownership and operation thereof are turned over to
the government. The government, in turn, shall pay the contractor its total
investment on the project in addition to a reasonable rate of return. If payment is to
be effected through amortization payments by the government infrastructure agency
or local government unit concerned, this shall be made in accordance with a scheme
proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of the infrastructure
facility must comply with the citizenship requirement of the Constitution on the
operation of a public utility. No such a requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes bar any other
arrangement for the payment by the government of the project cost. The law must
not be read in such a way as to rule out or unduly restrict any variation within the
context of the two schemes. Indeed, no statute can be enacted to anticipate and
provide all the fine points and details for the multifarious and complex situations
that may be encountered in enforcing the law (Director of Forestry v. Munoz, 23
SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v.
Tupasi Molina, 29 Phil. 119 [1914]).
The BLT scheme in the challenged agreements is but a variation of the BT scheme
under the law.
As a matter of fact, the burden on the government in raising funds to pay for the
project is made lighter by allowing it to amortize payments out of the income from
the operation of the LRT System.
In form and substance, the challenged agreements provide that rentals are to be paid
on a monthly basis according to a schedule of rates through and under the terms of a
confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec.
6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made
to and received by private respondent, it shall transfer to DOTC, free from any lien
or encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00
(Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec;
7; Rollo, pp. 67, .87).
A lease is a contract where one of the parties binds himself to give to another the
enjoyment or use of a thing for a certain price and for a period which may be

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

The records show that only one applicant passed the prequalification process. Since
only one was left, to conduct a public bidding in accordance with Section 5 of the
BOT Law for that lone participant will be an absurb and pointless exercise
(cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT
Law in relation to Presidential Decree No. 1594 allows the negotiated award of
government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and
Regulations for Government Infrastructure Contracts," allows the negotiated award
of government projects in exceptional cases. Sections 4 of the said law reads as
follows:
Bidding. Construction projects shall generally be undertaken
by contract after competitive public bidding. Projects may be
undertaken by administration or force account or by negotiated
contract only in exceptional cases where time is of the essence,
or where there is lack of qualified bidders or contractors, or
where there is conclusive evidence that greater economy and
efficiency would be achieved through this arrangement, and in
accordance with provision of laws and acts on the matter,
subject to the approval of the Minister of Public Works and
Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be, if the
project cost is less than P1 Million, and the President of the
Philippines, upon recommendation of the Minister, if the project
cost is P1 Million or more (Emphasis supplied).
xxx xxx xxx

v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the
President, 205 SCRA 705 [1992]).
The challenged agreements have been approved by President Ramos himself.
Although then Executive Secretary Drilon may have disapproved the "Agreement to
Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing
in our laws that prohibits parties to a contract from renegotiating and modifying in
good faith the terms and conditions thereof so as to meet legal, statutory and
constitutional requirements. Under the circumstances, to require the parties to go
back to step one of the prequalification process would just be an idle ceremony.
Useless bureaucratic "red tape" should be eschewed because it discourages private
sector participation, the "main engine" for national growth and development (R.A.
No. 6957, Sec. 1), and renders the BOT Law nugatory.
Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof
as:
(e) Build-lease-and-transfer A contractual arrangement
whereby a project proponent is authorized to finance and
construct an infrastructure or development facility and upon its
completion turns it over to the government agency or local
government unit concerned on a lease arrangement for a fixed
period after which ownership of the facility is automatically
transferred to the government unit concerned.
Section 5-A of the law, which expressly allows direct negotiation of contracts,
provides:
Direct Negotiation of Contracts. Direct negotiation shall be
resorted to when there is only one complying bidder left as
defined hereunder.

Indeed, where there is a lack of qualified bidders or contractors, the award of

government infrastructure contracts may he made by negotiation. Presidential
Decree No. 1594 is the general law on government infrastructure contracts while the
BOT Law governs particular arrangements or schemes aimed at encouraging private
sector participation in government infrastructure projects. The two laws are not
inconsistent with each other but are inpari materia and should be read together
accordingly.

(a) If, after advertisement, only one contractor applies for

prequalification and it meets the prequalification requirements,
after which it is required to submit a bid proposal which is
subsequently found by the agency/local government unit (LGU)
to be complying.

In the instant case, if the prequalification process was actually tainted by foul play,
one wonders why none of the competing firms ever brought the matter before the
PBAC, or intervened in this case before us (cf. Malayan Integrated Industries Corp.

(b) If, after advertisement, more than one contractor applied for
prequalification but only one meets the prequalification
requirements, after which it submits bid/proposal which is found
by the agency/local government unit (LGU) to be complying.

(c) If, after prequalification of more than one contractor only

one submits a bid which is found by the agency/LGU to be
complying.
(d) If, after prequalification, more than one contractor submit
bids but only one is found by the agency/LGU to be complying.
Provided, That, any of the disqualified prospective bidder [sic]
may appeal the decision of the implementing agency,
agency/LGUs prequalification bids and awards committee
within fifteen (15) working days to the head of the agency, in
case of national projects or to the Department of the Interior and
Local Government, in case of local projects from the date the
disqualification was made known to the disqualified bidder:
Provided, furthermore, That the implementing agency/LGUs
concerned should act on the appeal within forty-five (45)
working days from receipt thereof.
Petitioners' claim that the BLT scheme and direct negotiation of contracts are not
contemplated by the BOT Law has now been rendered moot and academic by R.A.
No. 7718. Section 3 of this law authorizes all government infrastructure agencies,
government-owned and controlled corporations and local government units to enter
into contract with any duly prequalified proponent for the financing, construction,
operation and maintenance of any financially viable infrastructure or development
facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contractadd-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-andtransfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).
From the law itself, once and applicant has prequalified, it can enter into any of the
schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated
and defined therein (Sec. 3).
Republic Act No. 7718 is a curative statute. It is intended to provide financial
incentives and "a climate of minimum government regulations and procedures and
specific government undertakings in support of the private sector" (Sec. 1). A
curative statute makes valid that which before enactment of the statute was invalid.
Thus, whatever doubts and alleged procedural lapses private respondent and DOTC
may have engendered and committed in entering into the questioned contracts, these
have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v.
Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965];
Adong V. Cheong Seng Gee, 43 Phil. 43 [1922].
4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the
government because the rental rates are excessive and private respondent's

development rights over the 13 stations and the depot will rob DOTC of the best
terms during the most productive years of the project.
It must be noted that as part of the EDSA LRT III project, private respondent has
been granted, for a period of 25 years, exclusive rights over the depot and the air
space above the stations for development into commercial premises for lease,
sublease, transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 9192). For and in consideration of these development rights, private respondent shall
pay DOTC in Philippine currency guaranteed revenues generated therefrom in the
amounts set forth in the Supplemental Agreement (Sec. 11;Rollo, p. 93). In the event
that DOTC shall be unable to collect the guaranteed revenues, DOTC shall be
allowed to deduct any shortfalls from the monthly rent due private respondent for
the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp.
93-94). All rights, titles, interests and income over all contracts on the commercial
spaces shall revert to DOTC upon expiration of the 25-year period. (Supplemental
Agreement, Sec. 11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a painstaking study by DOTC. The
determination by the proper administrative agencies and officials who have acquired
expertise, specialized skills and knowledge in the performance of their functions
should be accorded respect absent any showing of grave abuse of discretion (Felipe
Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of
Medical Education v. Alfonso, 176 SCRA 304 [1989]).
Government officials are presumed to perform their functions with regularity and
strong evidence is necessary to rebut this presumption. Petitioners have not
presented evidence on the reasonable rentals to be paid by the parties to each other.
The matter of valuation is an esoteric field which is better left to the experts and
which this Court is not eager to undertake.
That the grantee of a government contract will profit therefrom and to that extent the
government is deprived of the profits if it engages in the business itself, is not
worthy of being raised as an issue. In all cases where a party enters into a contract
with the government, he does so, not out of charity and not to lose money, but to
gain pecuniarily.
5. Definitely, the agreements in question have been entered into by DOTC in the
exercise of its governmental function. DOTC is the primary policy, planning,
programming, regulating and administrative entity of the Executive branch of
government in the promotion, development and regulation of dependable and
coordinated networks of transportation and communications systems as well as in
the fast, safe, efficient and reliable postal, transportation and communications
services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the

Executive department, DOTC in particular that has the power, authority and
technical expertise determine whether or not a specific transportation or
communication project is necessary, viable and beneficial to the people. The
discretion to award a contract is vested in the government agencies entrusted with
that function (Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).
WHEREFORE, the petition is DISMISSED.
SO ORDERED
Bellosillo and Kapunan, JJ., concur.
Padilla and Regalado, JJ., concurs in the result.
Romero, J., is on leave.
Separate Opinions

MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do
not have standing to sue, I join to dismiss the petition in this case. I write only to set
forth what I understand the grounds for our decisions on the doctrine of standing are
and, why in accordance with these decisions, petitioners do not have the rights to
sue, whether as legislators, taxpayers or citizens. As members of Congress, because
they allege no infringement of prerogative as legislators. 1 As taxpayers because
petitioners allege neither an unconstitutional exercise of the taxing or spending
powers of Congress (Art VI, 24-25 and 29) 2 nor an illegal disbursement of public
money. 3 As this Court pointed out in Bugnay Const. and Dev. Corp. v. Laron, 4 a
party suing as taxpayer "must specifically prove that he has sufficient interest in
preventing the illegal expenditure of money raised by taxation and that he will
sustain a direct injury as a result of the enforcement of the questioned statute or
contract. It is not sufficient that he has merely a general interest common to all
members of the public." In that case, it was held that a contract, whereby a local
government leased property to a private party with the understanding that the latter
would build a market building and at the end of the lease would transfer the building
of the lessor, did not involve a disbursement of public funds so as to give taxpayer
standing to question the legality of the contract. I see no substantial difference, as far
as the standing is of taxpayers to question public contracts is concerned, between the
contract there and the build-lease-transfer (BLT) contract being questioned by
petitioners in this case.
Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which
citizens were authorized to sue, this Court found standing because it thought the
constitutional claims pressed for decision to be of "transcendental importance," as in
fact it subsequently granted relief to petitioners by invalidating the challenged
statutes or governmental actions. Thus in the Lotto case 6 relied upon by the majority
for upholding petitioners standing, this Court took into account the "paramount
public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive
effects of the envisioned on-line lottery system:" 7 Accordingly, the Court
invalidated the contract for the operation of lottery.
But in the case at bar, the Court precisely finds the opposite by finding petitioners'
substantive contentions to be without merit To the extent therefore that a party's
standing is affected by a determination of the substantive merit of the case or a
preliminary estimate thereof, petitioners in the case at bar must be held to be without
standing. This is in line with our ruling in Lawyers League for a Better Philippines
v. Aquino 8 and In re Bermudez 9 where we dismissed citizens' actions on the ground
that petitioners had no personality to sue and their petitions did not state a cause of
action. The holding that petitioners did not have standing followed from the finding
that they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally
has suffered some actual or threatened injury as a result of the allegedly illegal
conduct of the government; the injury is fairly traceable to the challenged action;
and the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme
Court has held:
Typically, . . . the standing inquiry requires careful judicial
examination of a complaint's allegation to ascertain whether the
particular plaintiff is entitled to an adjudication of the particular
claims asserted. Is the injury too abstract, or otherwise not
appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated?
Is the prospect of obtaining relief from the injury as a result of a
favorable ruling too speculative? These questions and any others
relevant to the standing inquiry must be answered by reference
to the Art III notion that federal courts may exercise power only
"in the last resort, and as a necessity, Chicago & Grand Trunk R.
Co. v. Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400
(1892), and only when adjudication is "consistent with a system
of separated powers and [the dispute is one] traditionally
thought to be capable of resolution through the judicial process,"
Flast v Cohen, 392 US 83, 97, 20 L Ed 2d 947, 88 S Ct 1942
(1968). See Valley Forge, 454 US, at 472-473, 70 L Ed 2d 700,
102 S Ct 752. 11
Today's holding that a citizen, qua citizen, has standing to question a government
contract unduly expands the scope of public actions and sweeps away the case and
controversy requirement so carefully embodied in Art. VIII, 5 in defining the
jurisdiction of this Court. The result is to convert the Court into an office of
ombudsman for the ventilation of generalized grievances. Consistent with the view
that this case has no merit I submit with respect that petitioners, as representatives of
the public interest, have no standing.

unable to joint majority in the well-written ponencia of Mr. Justice Camilo P.

Quiason.
I most respectfully submit that the challenged contract is void for at least two
reasons: (a) it is an-ultra-vires act of the Department of Transportation and
Communications (DOTC) since under R.A. 6957 the DOTC has no authority to
enter into a Build-Lease-and-Transfer (BLT) contract; and (b) even
assuming arguendo that it has, the contract was entered into without complying with
the mandatory requirement of public bidding.
I
Respondents admit that the assailed contract was entered into under R.A. 6957. This
law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation
and Maintenance of Infrastructure Projects by the Private Sector, and For Other
Purposes," recognizes only two (2) kinds of contractual arrangements between the
private sector and government infrastructure agencies: (a) the Build-Operate-andTransfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This
conclusion finds support in Section 2 thereof which defines only the BOT and BT
schemes, in Section 3 which explicitly provides for said schemes thus:
Sec. 3 Private Initiative in Infrastructure. All government
infrastructure agencies, including government-owned and
controlled corporations and local government units, are hereby
authorized to enter into contract with any duly prequalified
private contractor for the financing, construction, operation and
maintenance of any financially viable infrastructure
facilities through the build-operate-and transfer or build-andtransfer scheme, subject to the terms and conditions hereinafter
set forth; (Emphasis supplied).
and in Section 5 which requires public bidding of projects under both schemes.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.
All prior acts and negotiations leading to the perfection of the challenged contract
were clearly intended and pursued for such schemes.
DAVIDE, JR., J., dissenting:
After wading through the record of the vicissitudes of the challenged contract and
evaluating the issues raised and the arguments adduced by the parties, I find myself

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and
none of the aforesaid prior acts and negotiations were designed for such
unauthorized scheme. Hence, the DOTC is without any power or authority to enter
into the BLT contract in question.

The majority opinion maintains, however, that since "[t]here is no mention in the
BOT Law that the BOT and the BT schemes bar any other arrangement for the
payment by the government of the project cost," then "[t]he law must not be read in
such a way as to rule outer unduly restrict any variation within the context of the two
schemes." This interpretation would be correct if the law itself provides a room for
flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a
BLT scheme, then it should have so stated, for contracts of lease are not unknown in
our jurisdiction, and Congress has enacted several laws relating to leases. That the
BLT scheme was never intended as a permissible variation "within the context" of
the BOT and BT schemes is conclusively established by the passage of R.A. No.
7718 which amends:
a.

(1)
(2)
(3)
(4)
(5)
(6)
(7)

Section 2 by adding to the original BOT and BT schemes the

following schemes:

Build-own-and-operate (BOO)
Build-Lease-and-transfer (BLT)
Build-transfer-and-operate (BTO)
Contract-add-and-operate (CAO)
Develop-operate-and-transfer (DOT)
Rehabilitate-operate-and-transfer (ROT)
Rehabilitate-own-and-operate (ROO).

bidding for the projects so approved. In the case of a buildoperate-and-transfer arrangement, the contract shall be awarded
to the lowest complying bidder based on the present value of its
proposed tolls, fees, rentals, and charges over a fixed term for
the facility to be constructed, operated, and maintained
according to the prescribed minimum design and performance
standards plans, and specifications. For this purpose, the
winning contractor shall be automatically granted by the
infrastructure agency or local government unit the franchise to
operate and maintain the facility, including the collection of
tolls, fees, rentals; and charges in accordance with Section 6
hereof.
In the case of a build-and-transfer arrangement, the contract
shall be awarded to the lowest complying bidder based on the
present value of its proposed, schedule of amortization payments
for the facility to be constructed according to the prescribed
minimum design and performance standards, plans and
specifications: Provided, however, That a Filipino constructor
who submits an equally advantageous bid shall be given
preference.
A copy of each build-operate-and-transfer or build-and-transfer
contract shall forthwith be submitted to Congress for its
information.

b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase

"through the build-operate-and-transfer or build-and-transfer
scheme."
II
Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:
Sec. 5 Public Bidding of Projects. Upon approval of the
projects mentioned in Section 4 of this Act, the concerned head
of the infrastructure agency or local government unit shall
forthwith cause to be published, once every week for three (3)
consecutive weeks, in at least two (2) newspapers of general
circulation and in at least one (1) local newspaper which is
circulated in the region, province, city or municipality in which
the project is to be constructed a notice inviting all duly
prequalified infrastructure contractors to participate in the public

The requirement of public bidding is not an idle ceremony. It has been aptly said that
in our jurisdiction "public bidding is the policy and medium adhered to in
Government procurement and construction contracts under existing laws and
regulations. It is the accepted method for arriving at a fair and reasonable price and
ensures that overpricing, favoritism, and other anomalous practices are eliminated or
minimized. And any Government contract entered into without the required bidding
is null and void and cannot adversely affect the rights of third parties." (Bartolome
C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER
PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368
[1954]).
The Office of the President, through then Executive Secretary Franklin Drilon
Correctly disapproved the contract because no public bidding is strict compliance
with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon Further bluntly
stated that the provision of the Implementing Rules of said law authorizing
negotiated contracts was of doubtful legality. Indeed, it is null and void because the
law itself does not recognize or allow negotiated contracts.

However the majority opinion posits the view that since only private respondent
EDSA LRT was prequalified, then a public bidding would be "an absurd and
pointless exercise." I submit that the mandatory requirement of public bidding
cannot be legally dispensed with simply because only one was qualified to bid
during the prequalification proceedings. Section 5 mandates that the BOT or BT
contract should be awarded "to the lowest complying bidder," which logically means
that there must at least be two (2) bidders. If this minimum requirement is not met,
then the proposed bidding should be deferred and a new prequalification proceeding
be scheduled. Even those who were earlier disqualified may by then have qualified
because they may have, in the meantime, exerted efforts to meet all the
qualifications.
This view of the majority would open the floodgates to the rigging of
prequalification proceedings or to unholy conspiracies among prospective bidders,
which would even include dishonest government officials. They could just agree, for
a certain consideration, that only one of them qualify in order that the latter would
automatically corner the contract and obtain the award.
That section 5 admits of no exception and that no bidding could be validly had with
only one bidder is likewise conclusively shown by the amendments introduced by
R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was
introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section
reads:
Sec. 5-A. Direct Negotiation Of Contracts Direct negotiation,
shall be resorted to when there is only one complying bidder left
as defined hereunder.
(a) If, after advertisement, only one
contractor applies for prequalification
requirements, after which it is required to
submit a bid/proposal which subsequently
found by the agency/local government unit
(LGU) to be complying.
(b) If, after advertisement, more than one
contractor applied for prequalification but
only one meets the prequalification
requirements, after which it submits
bid/proposal which is found by the
agency/local government unit (LGU) to be
complying,

(c) If after prequalification of more than one

contractor only one submits a bid which is
found by the agency/LGU to be complying.
(d) If, after prequalification, more than one
contractor, only one submit bids but only
one is found by the agency/LGU to be
complying: Provided, That, any of the
disqualified prospective bidder may appeal
the decision contractor of the implementing
agency/LGUs prequalification bids an award
committee within fifteen (15) working days
to the head of the agency, in case of national
projects or to the Department of the Interior
and Local Government, in case of local
projects from the date the disqualification
was made known to the disqualified
bidder Provided, That the implementing
agency/LGUs concerned should act on the
appeal within forty-five (45) working days
from receipt thereof.
Can this amendment be given retroactive effect to the challenged contract so that it
may now be considered a permissible negotiated contract? I submit that it cannot be
R.A. No. 7718 does not provide that it should be given retroactive effect to preexisting contracts. Section 18 thereof says that it "shall take effect fifteen (15) days
after its publication in at least two (2) newspapers of general circulation." If it were
the intention of Congress to give said act retroactive effect then it would have so
expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."
The presumption is that all laws operate prospectively, unless the contrary clearly
appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In
every case of doubt, the doubt will be resolved against the retroactive application of
laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to
amendatory acts, or acts which change an existing statute, Sutherland states:
In accordance with the rule applicable to original acts, it is
presumed that provisions added by the amendment affecting
substantive rights are intended to operate prospectively.
Provisions added by the amendment that affect substantive
rights will not be construed to apply to transactions and events
completed prior to its enactment unless the legislature has

expressed its intent to that effect or such intent is clearly implied

by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr.,
SUTHERLAND'S STATUTES AND STATUTORY
CONSTRUCTION 434-436 [1943 ed.]).
I vote then to grant the instant petition and to declare void the challenged contract
and its supplement.
FELICIANO, J., dissenting:
After considerable study and effort, and with much reluctance, I find I must dissent
in the instant case. I agree with many of the things set out in the majority opinion
written by my distinguished brother in the Court Quiason, J. At the end of the day,
however, I find myself unable to join in the result reached by the majority.
I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is
appropriately drawn on fairly narrow grounds. At the same time; I wish to address
briefly one of the points made by Justice Quiason in the majority opinion in his
effort to meet the difficulties posed by Davide Jr., J.
I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11
June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for
Government Infrastructure Contracts" More specifically, the majority opinion
invokes paragraph 1 of Section 4 of this Degree which reads as follows:
Sec. 4. Bidding. Construction projects shall, generally be
undertaken by contract after competitive public bidding. Projects
may be undertaken by administration or force account or by
negotiated contract only in exceptional cases where time is of
the essence, or where there is lack of qualified bidders or
contractors, or where there is a conclusive evidence that greater
economy and efficiency would be achieved through this
arrangement, and in accordance with provisions of laws and acts
on the matter, subject to the approval of the Ministry of public
Works, Transportation and Communications, the Minister of
Public Highways, or the Minister of Energy, as the case may be,
if the project cost is less than P1 Million, and of the President of
the Philippines, upon the recommendation of the Minister, if the
project cost is P1 Million or more.
xxx xxx xxx

I understand the unspoken theory in the majority opinion to be that above Section 4
and presumably the rest of Presidential Decree No. 1594 continue to exist and to run
parallel to the provisions of Republic Act No. 6957, whether in its original form or
as amended by Republic Act No. 7718.
A principal difficulty with this approach is that Presidential Decree No. 1594
purports to apply to all "government contracts for infrastructure and
other construction projects." But Republic Act No. 6957 as amended by Republic
Act No. 7718, relates only to "infrastructure projects" which are financed,
constructed, operated and maintained "by the private sector" "through
the build/operate-and-transfer or build-and-transfer scheme" under Republic Act
No. 6597 and under a series of other comparable schemes under Republic Act No.
7718. In other words, Republic Act No. 6957 and Republic Act. No. 7718 must be
held, in my view, to be special statutes applicable to a more limited field of
"infrastructure projects" than the wide-ranging scope of application of the general
statute i.e., Presidential Decree No. 1594. Thus, the high relevance of the point made
by Mr. Justice Davide that Republic Act No. 6957 in specific connection with BCTand BLT type and BLT type of contracts imposed an unqualifiedrequirement of
public bidding set out in Section 5 thereof.
It should also be pointed out that under Presidential Decree No. 1594, projects may
be undertaken "by administration or force account or by negotiated contract only"
(1) in exceptional cases where time is of the essence; or
(2) where there is lack of bidders or contractors; or
(3) where there is a conclusive evidence that greater economy
and efficiency would be achieved through these arrangements,
and in accordance with provision[s] of laws and acts on the
matter.
It must, upon the one hand, be noted that the special law Republic Act No. 6957
made absolutely no mention of negotiated contracts being permitted to displace the
requirement of public bidding. Upon the other hand, Section 5-a, inserted in
Republic Act No. 6957 by the amending statute Republic Act No. 7718,
does not purport to authorize direct negotiation of contracts situations where there is
a lack of pre-qualified contractors or, complying bidders. Thus, even under the
amended special statute, entering into contracts by negotiation is not permissiblein
the other (2) categories of cases referred to in Section 4 of Presidential Decree
No. 1594, i.e., "in exceptional cases where time is of the essence" and "when there is

conclusive evidence that greater economy and efficiency would be achieved through
these arrangements, etc."
The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the
applicable public bidding requirement is that set out in Republic Act No. 6957
and, with respect to such type of contracts opened for pre-qualification and bidding
after the date of effectivity of Republic Act No. 7718, The provision of Republic Act
No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was
enacted.
The difficulties. of applying the provisions of Presidential Degree No. 1594 to the
Edsa LRT-type of contracts are aggravated when one considers the detailed
"Implementing Rules and Regulations as amended April 1988" issued under that
Presidential Decree. 1 For instance:
IB [2.5.2] 2.4.2 By Negotiated Contract
xxx xxx xxx
a. In times of emergencies arising from
natural calamities where immediate action is
necessary to prevent imminent loss of life
and/or property.
b. Failure to award the contract after
competitive public bidding for valid cause or
causes [such as where the prices obtained
through public bidding are all above the
AAE and the bidders refuse to reduce their
prices to the AAE].
In these cases, bidding may be undertaken through sealed
canvass of at least three (3) qualified contractors. Authority to
negotiate contracts for projects under these exceptional cases
shall be subject to prior approval by heads of agencies within
their limits of approving authority.
c. Where the subject project is adjacent or
contiguous to an on-going project and it
could be economically prosecuted by the
same contractor provided that he has no
negative slippage and has demonstrated a

satisfactory performance. (Emphasis

supplied).
Note that there is no reference at all in these Presidential Decree No. 1594
Implementing Rules and Regulations to absence of pre-qualified applicants and
bidders as justifying negotiation of contracts as distinguished from requiring public
bidding or a second public bidding.
Note also the following provision of the same Implementing Rules and Regulations:
IB 1 Prequalification
The following may be become contractors for government
projects:
1 Filipino
a. Citizens (single proprietorship)
b. Partnership of corporation duly organized under the laws of
the Philippines, and at least seventy five percent (75%) of the
capital stock of which belongs to Filipino citizens.
2. Contractors forming themselves into a joint venture, i.e., a
group of two or more contractors that intend to be jointly and
severally responsible for a particular contract, shall for purposes
of bidding/tendering comply with LOI 630, and, aside from
being currently and properly accredited by the Philippine
Contractors Accreditation Board, shall comply with the
provisions of R.A. 4566, provided that joint ventures in which
Filipino ownership is less than seventy five percent ( 75%) may
be prequalified where the structures to be built require
the application of techniques and/or technologies which are not
adequately possessed by a Filipino entity as defined above.
[The foregoing shall not negate any existing and future
commitments with respect to the bidding and aware of contracts
financed partly or wholly with funds from international lending
institutions like the Asian Development Bank and the Worlds
Bank as well as from bilateral and other similar sources.
(Emphases supplied)

The record of this case is entirely silent on the extent of Philippine equity in the
Edsa LRT Corporation; there is no suggestion that this corporation is organized
under Philippine law and is at least seventy-five (75%) percent owned by Philippine
citizens.
Public bidding is the normal method by which a government keeps contractors
honest and is able to assure itself that it would be getting the best possible value for
its money in any construction or similar project. It is not for nothing that multilateral
financial organizations like the World Bank and the Asian Development Bank
uniformly require projects financed by them to be implemented and carried out by
public bidding. Public bidding is much too important a requirement casually to
loosen by a latitudinarian exercise in statutory construction.
The instant petition should be granted and the challenged contract and its
supplement should be nullified and set aside. A true public bidding, complete with a
new prequalification proceeding, should be required for the Edsa LRT Project.

Separate Opinions
MENDOZA, J., concurring:

I concur in all but Part III of the majority opinion. Because I hold that petitioners do
not have standing to sue, I join to dismiss the petition in this case. I write only to set
forth what I understand the grounds for our decisions petitioners do not have the
rights to sue, whether as legislators, taxpayers or citizens. As members of Congress,
because they allege no infringement of prerogative as legislators. 1 As taxpayers
because petitioners allege neither an unconstitutional exercise of the taxing or
spending powers of Congress (Art VI, 24-25 and 29) 2 nor an illegal disbursement
of public money. 3 As this Court pointed out in Bugnay Const. and
Dev. Corp. v. Laron, 4 a party suing as taxpayer "must specifically prove that he has
sufficient interest in preventing the illegal expenditure of money raised by taxation
and that he will sustain a direct injury as a result of the enforcement of the
questioned statute or contract, It is not sufficient that has merely a general interest
common to all members of the public." In that case, it was held that a contract,
whereby a local government leased property to a private party with the
understanding that the latter would build a market building and at the end of the
lease would transfer the building of the lessor, did not involve a disbursement of
public funds so as to give taxpayer standing to question the legality of the contract
contracts I see no substantial difference, as far as the standing is of taxpayers is
concerned, between the contract there and the build-lease-transfer (BLT) contract
being questioned by petitioners in this case.
Nor do petitioners have standing to bring this suit as citizens. In the cases 5 in which
citizens were authorized to sue, this Court found standing because it thought the
constitutional claims pressed for decision to be of "transcendental importance," as in
fact it subsequently granted relief to petitioners by invalidating the challenged
statutes or governmental actions. Thus in the Lotto case 6 relied upon by the majority
for upholding petitioners standing, this Court took into account the "paramount
public interest" involved which "immeasurably affect[ed] the social, economic, and
moral well-being of the people . . . and the counter-productive and retrogressive
effects of the envisioned on-line lottery system:" 7 Accordingly, the Court
invalidated the contract for the operation of lottery.
But in the case at bar, the Court precisely finds the opposite by finding petitioners'
substantive contentions to be without merit To the extent therefore that a party's
standing is affected by a determination of the substantive merit of the case or a
preliminary estimate thereof, petitioners in the case at bar must be held to be without
standing. This is in line with our ruling in Lawyers League for a Better Philippines v.
Aquino 8 and In re Bermudez 9 where we dismissed citizens' actions on the ground
that petitioners had no personality to sue and their petitions did not state a cause of
action. The holding that petitioners did not have standing followed from the finding
that they did not have a cause of action.

In order that citizens' actions may be allowed a party must show that he personally
has suffered some actual or threatened injury as a result of the allegedly illegal
conduct of the government; the injury is fairly traceable to the challenged action;
and the injury is likely to be redressed by a favorable action. 10 As the U.S. Supreme
Court has held:
Typically, . . . the standing inquiry requires careful judicial
examination of a complaint's allegation to ascertain whether the
particular plaintiff is entitled to an adjudication of the particular
claims asserted. Is the injury too abstract, or otherwise not
appropriate, to be considered judicially cognizable? Is the line of
causation between the illegal conduct and injury too attenuated?
Is the prospect of obtaining relief from the injury as a result of a
favorable ruling too speculative? These questions and any others
relevant to the standing inquiry must be answered by reference
to the Art III notion that federal courts may exercise power only
"in the last resort, and as a necessity, Chicago & Grand Trunk R.
Co. v. Wellman, 143 US 339, 345, 36 L Ed 176,12 S Ct 400
(1892), and only when adjudication is "consistent with a system
of separated powers and [the dispute is one] traditionally
thought to be capable of resolution through the judicial process,"
Flast v Cohen, 392 US 83, 97, 20 L Ed 2d 947, .88 S Ct 1942
(1968). See Valley Forge, 454 US, at 472-473, 70 L Ed 2d 700,
102 S Ct 752. 11
Today's holding that a citizen, qua citizen, has standing to question a government
contract unduly expands the scope of public actions and sweeps away the case and
controversy requirement so carefully embodied in Art. VIII, 5 in defining the
jurisdiction of this Court. The result is to convert the Court into an office of
ombudsman for the ventilation of generalized grievances. Consistent with the view
that this case has no merit I submit with respect that petitioners, as representatives of
the public interest, have no standing.

I most respectfully submit that the challenged contract is void for at least two
reasons: (a) it is an-ultra-vires act of the Department of Transportation and
Communications (DOTC) since under R.A. 6957 the DOTC has no authority to
enter into a Build-Lease-and-Transfer (BLT) contract; and (b) even
assuming arguendo that it has, the contract was entered into without complying with
the mandatory requirement of public bidding.
I
Respondents admit that the assailed contract was entered into under R.A. 6957. This
law, fittingly entitled "An Act Authorizing the Financing, Construction, Operation
and Maintenance of Infrastructure Projects by the Private Sector, and For Other
Purposes," recognizes only two (2) kinds of contractual arrangements between the
private sector and government infrastructure agencies: (a) the Build-Operate-andTransfer (BOT) scheme and (b) the Build-and-Transfer (BT) scheme. This
conclusion finds support in Section 2 thereof which defines only the BOT and BT
schemes, in Section 3 which explicitly provides for said schemes thus:
Sec. 3 Private Initiative in Infrastructure. All government
infrastructure agencies, including government-owned and
controlled corporations and local government units, are hereby
authorized to enter into contract with any duly prequalified
private contractor for the financing, construction, operation and
maintenance of any financially viable infrastructure
facilities through the build-operate-and transfer or build-andtransfer scheme, subject to the terms and conditions hereinafter
set forth; (Emphasis supplied).
and in Section 5 which requires public bidding of projects under both schemes.
All prior acts and negotiations leading to the perfection of the challenged contract
were clearly intended and pursued for such schemes.

Narvasa, C.J., Bidin, Melo, Puno, Vitug and Francisco, JJ., concur.
DAVIDE, JR., J., dissenting:
After wading through the record of the vicissitudes of the challenged contract and
evaluating the issues raised and the arguments adduced by the parties, I find myself
unable to joint majority in the well-written ponencia of Mr. Justice Camilo P.
Quiason.

A Build-Lease-and-Transfer (BLT) scheme is not authorized under the said law, and
none of the aforesaid prior acts and negotiations were designed for such
unauthorized scheme. Hence, the DOTC is without any power or authority to enter
into the BLT contract in question.
The majority opinion maintains, however, that since "[t]here is no mention in the
BOT Law that the BOT and the BT schemes bar any other arrangement for the
payment by the government of the project cost," then "[t]he law must not be read in
such a way as to rule outer unduly restrict any variation within the context of the two

schemes." This interpretation would be correct if the law itself provides a room for
flexibility. We find no such provisions in R.A. No. 6957 if it intended to include a
BLT scheme, then it should have so stated, for contracts of lease are not unknown in
our jurisdiction, and Congress has enacted several laws relating to leases. That the
BLT scheme was never intended as a permissible variation "within the context" of
the BOT and BT schemes is conclusively established by the passage of R.A. No.
7718 which amends:
a.

1)
2)
3)
4)
5)
6)
7)

Section. 2 by adding to the original BOT and BT schemes the

following schemes:

Build-own-and-operate (BOO)
Build-Lease-and-transfer (BLT)
Build-transfer-and-operate (BTO)
Contract-add-and-operate (CAO)
Develop-operate-and-transfer (DOT)
Rehabilitate-operate-and-transfer (ROT)
Rehabilitate-own-and-operate (ROO).
b) Section 3 of R.A. No. 6957 by deleting therefrom the phrase
"through the build-operate-and-transfer or build-and-transfer
scheme.
II

Public bidding is mandatory in R.A. No. 6957. Section 5 thereof reads as follows:
Sec. 5 Public Bidding of Projects. Upon approval of the
projects mentioned in Section 4 of this Act, the concerned head
of the infrastructure agency or local government unit shall
forthwith cause to be published, once every week for three (3)
consecutive weeks, in at least two (2) newspapers of general
circulation and in at least one (1) local newspaper which is
circulated in the region, province, city or municipality in which
the project is to be constructed a notice inviting all duly
prequalified infrastructure contractors to participate in the public
bidding for the projects so approved. In the case of a buildoperate-and-transfer arrangement, the contract shall be awarded
to the lowest complying bidder based on the present value of its
proposed tolls, fees, rentals, and charges over a fixed term for

the facility to be constructed, operated, and maintained

according to the prescribed minimum design and performance
standards plans, and specifications. For this purpose, the
winning contractor shall be automatically granted by the
infrastructure agency or local government unit the franchise to
operate and maintain the facility, including the collection of
tolls, fees, rentals; and charges in accordance with Section 6
hereof.
In the case of a build-and-transfer arrangement, the contract
shall be awarded to the lowest complying bidder based on the
present value of its proposed, schedule of amortization payments
for the facility to be constructed according to the prescribed
minimum design and performance standards, plans and
specifications: Provided, however, That a Filipino constructor
who submits an equally advantageous bid shall be given
preference.
A copy of each build-operate-and-transfer or build-and-transfer
contract shall forthwith be submitted to Congress for its
information.
The requirement of public bidding is not an idle ceremony. It has been aptly said that
in our jurisdiction "public bidding is the policy and medium adhered to in
Government procurement and construction contracts under existing laws and
regulations. It is the accepted method for arriving at a fair and reasonable price and
ensures that overpricing, favoritism, and other anomalous practices are eliminated or
minimized. And any Government contract entered into without the required bidding
is null and void and cannot adversely affect the rights of third parties." (Bartolome
C. Fernandez, Jr., A TREATISE ON GOVERNMENT CONTRACTS UNDER
PHILIPPINE LAW 25 [rev. ed. 1991], citing Caltex vs. Delgado Bros., 96 Phil. 368
[1954]).
The Office of the president secretary through then Executive Secretary Franklin
Drilon Correctly disapproved the contract because no public bidding is strict
compliance with Section 5 of R.A. No. 6957 was conducted. Secretary Drilon
Further bluntly stated that the provision of the Implementing Rules of said law
authorizing negotiated contracts was of doubtful legality. Indeed, it is null and void
because the law itself does not recognize or allow negotiated contracts.
However the majority opinion posits the view that since only private respondent
EDSA LRT was prequalified, then a public bidding would be "an absurd and
pointless exercise." I submit that the mandatory requirement of public bidding

cannot be legally dispensed with simply because only one was qualified to bid
during the prequalification proceedings. Section 5 mandates that the BOT or BT
contract should be awarded "to the lowest complying bidder," which logically means
that there must at least be two (2) bidders. If this minimum requirement is not met,
then the proposed bidding should be deferred and a new prequalification proceeding
be scheduled. Even those who were earlier disqualified may by then have qualified
because they may have, in the meantime, exerted efforts to meet all the
qualifications.
This view of the majority would open the floodgates to the rigging of
prequalification proceedings or to unholy conspiracies among prospective bidders,
which would even include dishonest government officials. They could just agree, for
a certain consideration, that only one of them qualify in order that the latter would
automatically corner the contract and obtain the award.
That section 5 admits of no exception and that no bidding could be validly had with
only one bidder is likewise conclusively shown by the amendments introduced by
R.A. No. 7718 Per section 7 thereof, a new section denominated as Section 5-A was
introduced in R.A. No. 6957 to allow direct negotiation contracts. This new section
reads:
Sec. 5-A. Direct Negotiation Of Contracts Direct negotiation,
shall be resorted to when there is only one complying bidder left
as defined hereunder.
(a) If, after advertisement, only one
contractor applies for prequalification
requirements submit a bid/proposal which
subsequently found by the agency/local
government unit (LGU) to be complying.
(b) If, after advertisement, more than one
contractor applied for prequalification but
only one meets the prequalification
.requirements, after which it submits
bid/proposal which is found by the
agency/local government unit (LGU) to be
complying,
(c) If after prequalification of more than one
contractor only one submits a bid which is
found by the agency/LGU to be complying.

(d) If, after prequalification, more than one

contractor, only one submit bids but only
one is found by the agency/LGU to be
complying: Provided, That, any of the
disqualified prospective bidder may appeal
the decision contractor of the implementing
agency/LGUs prequalification bids an award
committee within fifteen (15) working days
to the head of the agency of national projects
or to the Department of the Interior and
Local Government, in case of local projects
from the date the disqualification was made
known to the disqualified
bidder Provided, That the implementing
agency/LGUs concerned should act on the
appeal within forty-five (45) working days
from receipt thereof.
Can this amendment be given retroactive effect to the challenged contract so that it
may now be considered a permissible negotiated contract? I submit that it cannot be
R.A. No. 7718 does not provide that it should be given retroactive effect to preexisting contracts. Section 18 thereof says that it "shall take effect fifteen (15) after
its publication in at least two (2) newspapers of general circulation." If it were the
intention of Congress to give said act retroactive effect then it would have so
expressly provided. Article 4 of the Civil Code provides that "[l]aws shall have no
retroactive effect, unless the contrary is provided."
The presumption is that all laws operate prospectively, unless the contrary clearly
appears or is clearly, plainly, and unequivocally expressed or necessarily implied. In
every case of doubt, the doubt will be resolved against the retroactive application of
laws. (Ruben E Agpalo, STATUTORY CONSTRUCTION 225 [2d ed. 1990]). As to
amendatory acts, or acts which change an existing statute, Sutherland states:
In accordance with the rule applicable to original acts, it is
presumed that provisions added by the amendment affecting
substantive rights are intended to operate prospectively.
Provisions added by the amendment that affect substantive
rights will not be construed to apply to transactions and events
completed prior to its enactment unless the legislature has
expressed its intent to that effect or such intent is clearly implied
by the language of the amendment or by the circumstances
surrounding its enactment. (1 Frank E. Horack, Jr.,

SUTHERLAND'S STATUTES AND STATUTORY

CONSTRUCTION 434-436 [1943 ed.]).
I vote then to grant the instant petition and to declare void the challenged contract
and its supplement.
FELICIANO, J., dissenting:
After considerable study and effort, and with much reluctance, I find I must dissent
in the instant case. I agree with many of the things set out in the majority opinion
written by my distinguished brother in the Court Quiason, J. At the end of the day,
however, I find myself unable to join in the result reached by the majority.
I join in the dissenting opinion written by Mr. Justice. Davide, Jr; which is
appropriately drawn on fairly narrow grounds. At the same time; I wish to address
briefly one of Justice Quiason in the majority opinion in his effort to meet the
difficulties posed by Davide Jr., J.
I refer to the invocation of the provisions of presidential Decree No. 1594 dated 11
June 1978 entitled: "Prescribing policies, Guidelines, Rules and Regulations for
Government Infrastructure Contracts" More specifically, the majority opinion
invokes paragraph 1 of Section 4 of this Degree which reads as follows:
Sec. 4. Bidding. Construction projects shall, generally be
undertaken by contract after competitive public bidding. Projects
may be undertaken by administration or force account or by
negotiated contract only in exceptional cases where time is of
the essence, or where there is lack of qualified bidders or
contractors, or where there is a conclusive evidence that greater
economy and efficiency would be achieved through this
arrangement, and in accordance with provisions of laws and acts
on the matter, subject to the approval of the Ministry of public
Works, Transportation and Communications, the Minister of
Public Highways, or the Minister of Energy, as the case may be,
if the project cost is less than P1 Million, and of the president of
the Philippines, upon the recommendation of the Minister, if the
project cost is P1 Million or more.
xxx xxx xxx
I understand the unspoken theory in the majority opinion utility and the ownership
of the facilities used to serve the public can be very w1594 continue to exist and to

run parallel to the provisions of Republic Act No. 6957, whether in its original form
or as amended by Republic Act No. 7718.
A principal difficulty with this approach is that Presidential Decree No. 1594
purports to apply to all "government contracts for infrastructure and
other construction projects" But Republic Act No. 6957 as amended by Republic Act
No. 7718, relates on to "infrastructure projects" which are financed, constructed,
operated and maintained "by the private sector" "through the build/operate-andtransfer or build-and-transfer scheme" under Republic Act No. 6597 and under a
series of other comparable schemes under Republic Act No. 7718. In other words,
Republic Act No. 6957 and Republic Act. No: 7718 must be held, in my view, to
be special statutes applicable to a more limited field of "infrastructure projects" than
the wide-ranging scope of application of the general statute i.e., Presidential Decree
No. 1594. Thus, the high relevance of the point made by Mr. Justice Davide that
Republic Act No. 6957 in specific connection with BCT- and BLT type and BLT type
of contracts imposed an unqualified requirement of public bidding set out in Section
5 thereof.
It should also be pointed out that under Presidential Decree No. 1594, projects may
be undertaken "by administration or force account or by negotiated contract only "
(1) in exceptional cases where time is of the essence; or
(2) where there is lack of bidders or contractors; or
(3) where there is a conclusive evidence that greater economy
and efficiency would be achieved through these arrangements,
and in accordance with provision[s] of laws and acts on the
matter.
It must, upon the one hand, be noted that the special law Republic Act- No. 6957
made absolutely no mention ofnegotiated contracts being permitted to displace the
requirement of public bidding. Upon the other hand, Section 5-a, inserted in
Republic Act No. 6957 by the amending statute Republic Act No. 7718,
does not purport to authorize direct negotiation of contracts situations where there is
a lack of pre-qualified contractors or, complying bidders. Thus, even under the
amended special statute, entering into contracts by negotiation is not permissiblein
the other (2) categories of cases referred to in Section 4 of Presidential Decree
No. 1594, i.e., "in exceptional cases where time is of the essence" and "when there is
conclusive evidence that greater economy and efficiency would be achieved through
these arrangements, etc."

The result I reach is that insofar as BOT, etc.-types of contracts are concerned, the
applicable public bidding requirement is that set out in Republic Act No. 6957
and, with respect to such type of contracts opened for pre-qualification and bidding
after the date of effectivity of Republic Act No. 7718. The provision of Republic Act
No. 7718. The assailed contract was entered into before Republic Act. No. 7718 was
enacted.
The difficulties. of applying the provisions of presidential Degree No. 1594 to the
Edsa LRT-type of contracts are aggravated when one considers the detailed"
Implementing Rules and Regulations as amended April 1988" issued under that
Presidential Decree. 1 For instance:
IB [2.5.2] 2.4.2 By Negotiated Contract
xxx xxx xxx
a. In times of emergencies arising from
natural calamities where immediate action is
necessary to prevent imminent loss of life
and/or property.
b. Failure to award the contract after
competitive public bidding for valid cause or
causes [such as where the prices obtained
through public bidding are all above the
AAE and the bidders refuse to reduce their
prices to the AAE].
In these cases, bidding may be undertaken through sealed
canvass of at least three (3) qualified contractors. Authority to
negotiate contracts for projects under these exceptional cases
shall be subject to prior approval by heads of agencies within
their limits of approving authority.
c. Where the subject project is adjacent or
contiguous to an on-going project and it
could be economically prosecuted by the
same contractor provided that he has no
negative slippage and has demonstrated a
satisfactory performance. (Emphasis
supplied).

Note that there is no reference at all in these presidential Decree No. 1594
Implementing Rules and Regulations to absence of pre-qualified applicants and
bidders as justifying negotiation of contracts as distinguished from requiring public
bidding or a second public bidding.
Note also the following provision of the same Implementing Rules and Regulations:
IB 1 Prequalification
The following may be become contractors for government
projects:
1 Filipino
a. Citizens (single proprietorship)
b. Partnership of corporation duly organized under the laws of
the Philippines, and at least seventy five percent (75%) of the
capital stock of which belongs to Filipino citizens.
2. Contractors forming themselves into a joint venture, i.e., a
group of two or more contractors that intend to be jointly and
severally responsible for a particular contract, shall for purposes
of bidding/tendering comply with LOI 630, and, aside from
being currently and properly accredited by the Philippine
Contractors Accreditation Board, shall comply with the
provisions of R.A. 4566, provided that joint ventures in which
Filipino ownership is less than seventy five percent ( 75%) may
be prequalified where the structures to be built require
the application of techniques and/or technologies which are not
adequately possessed by a Filipino entity as defined above.
[The foregoing shall not negate any existing and future
commitments with respect to the bidding and aware of contracts
financed partly or wholly with funds from international lending
institutions like the Asian Development Bank and the Worlds
Bank as well as from bilateral and other similar sources.
(Emphases supplied)
The record of this case is entirely silent on the extent of Philippine equity in the
Edsa LRT Corporation; there is no suggestion that this corporation is organized

under Philippine law and is at least seventy-five (75%) percent owned by Philippine
citizens. Public bidding is the normal method by which a government keeps
contractors honest and is able to assure itself that it would be getting the best
possible value for its money in any construction or similar project. It is not for
nothing that multilateral financial organizations like the World Bank and the Asian
Development Bank uniformly require projects financed by them to be implemented
and carried out by public bidding. Public bidding is much too important a
requirement casually to loosen by a latitudinarian exercise in statutory construction.
The instant petition should be granted and the challenged contract and its
supplement should be nullified and set aside. A true public bidding, complete with a
new prequalification proceeding, should be required for the Edsa LRT Project.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 125948 December 29, 1998

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

MARTINEZ, J.:
This petition for review on certiorari assails the Decision of the Court of
Appeals dated November 29, 1995, in CA-G.R. SP No. 36801, affirming the
decision of the Regional Trial Court of Batangas City, Branch 84, in Civil Case
No. 4293, which dismissed petitioners' complaint for a business tax refund
imposed by the City of Batangas.

Petitioner is a grantee of a pipeline concession under Republic Act No. 387, as

amended, to contract, install and operate oil pipelines. The original pipeline
concession was granted in 1967 1 and renewed by the Energy Regulatory Board
in 1992. 2
Sometime in January 1995, petitioner applied for a mayor's permit with the
Office of the Mayor of Batangas City. However, before the mayor's permit
could be issued, the respondent City Treasurer required petitioner to pay a
local tax based on its gross receipts for the fiscal year 1993 pursuant to the
Local Government Code 3. The respondent City Treasurer assessed a business
tax on the petitioner amounting to P956,076.04 payable in four installments
based on the gross receipts for products pumped at GPS-1 for the fiscal year
1993 which amounted to P181,681,151.00. In order not to hamper its
operations, petitioner paid the tax under protest in the amount of P239,019.01
for the first quarter of 1993.
On January 20, 1994, petitioner filed a letter-protest addressed to the
respondent City Treasurer, the pertinent portion of which reads:
Please note that our Company (FPIC) is a pipeline operator
with a government concession granted under the Petroleum
Act. It is engaged in the business of transporting petroleum
products from the Batangas refineries, via pipeline, to Sucat
and JTF Pandacan Terminals. As such, our Company is
exempt from paying tax on gross receipts under Section 133
of the Local Government Code of 1991 . . . .
Moreover, Transportation contractors are not included in
the enumeration of contractors under Section 131,
Paragraph (h) of the Local Government Code. Therefore,
the authority to impose tax "on contractors and other
independent contractors" under Section 143, Paragraph (e)
of the Local Government Code does not include the power to
levy on transportation contractors.
The imposition and assessment cannot be categorized as a
mere fee authorized under Section 147 of the Local
Government Code. The said section limits the imposition of
fees and charges on business to such amounts as may be
commensurate to the cost of regulation, inspection, and
licensing. Hence, assuming arguendo that FPIC is liable for
the license fee, the imposition thereof based on gross receipts
is violative of the aforecited provision. The amount of

P956,076.04 (P239,019.01 per quarter) is not commensurate

to the cost of regulation, inspection and licensing. The fee is
already a revenue raising measure, and not a mere
regulatory imposition. 4
On March 8, 1994, the respondent City Treasurer denied the protest contending
that petitioner cannot be considered engaged in transportation business, thus it
cannot claim exemption under Section 133 (j) of the Local Government Code. 5
On June 15, 1994, petitioner filed with the Regional Trial Court of Batangas
City a complaint 6 for tax refund with prayer for writ of preliminary injunction
against respondents City of Batangas and Adoracion Arellano in her capacity as
City Treasurer. In its complaint, petitioner alleged, inter alia, that: (1) the
imposition and collection of the business tax on its gross receipts violates
Section 133 of the Local Government Code; (2) the authority of cities to impose
and collect a tax on the gross receipts of "contractors and independent
contractors" under Sec. 141 (e) and 151 does not include the authority to collect
such taxes on transportation contractors for, as defined under Sec. 131 (h), the
term "contractors" excludes transportation contractors; and, (3) the City
Treasurer illegally and erroneously imposed and collected the said tax, thus
meriting the immediate refund of the tax paid. 7
Traversing the complaint, the respondents argued that petitioner cannot be
exempt from taxes under Section 133 (j) of the Local Government Code as said
exemption applies only to "transportation contractors and persons engaged in
the transportation by hire and common carriers by air, land and water."
Respondents assert that pipelines are not included in the term "common
carrier" which refers solely to ordinary carriers such as trucks, trains, ships
and the like. Respondents further posit that the term "common carrier" under
the said code pertains to the mode or manner by which a product is delivered to
its destination. 8
On October 3, 1994, the trial court rendered a decision dismissing the
complaint, ruling in this wise:
. . . Plaintiff is either a contractor or other independent
contractor.
. . . the exemption to tax claimed by the plaintiff has become
unclear. It is a rule that tax exemptions are to be strictly
construed against the taxpayer, taxes being the lifeblood of

the government. Exemption may therefore be granted only

by clear and unequivocal provisions of law.

functions with a
concomitant obligation
to accept certain
devolution of
powers, . . . So,
consistent with this
policy even franchise
grantees are taxed
(Sec. 137) and
contractors are also
taxed under Sec. 143
(e) and 151 of the
Code. 9

Plaintiff claims that it is a grantee of a pipeline concession

under Republic Act 387. (Exhibit A) whose concession was
lately renewed by the Energy Regulatory Board (Exhibit B).
Yet neither said law nor the deed of concession grant any tax
exemption upon the plaintiff.
Even the Local Government Code imposes a tax on franchise
holders under Sec. 137 of the Local Tax Code. Such being
the situation obtained in this case (exemption being unclear
and equivocal) resort to distinctions or other considerations
may be of help:
1. That the exemption
granted under Sec. 133
(j) encompasses
onlycommon carriers so
as not to overburden
the riding public or
commuters with
taxes. Plaintiff is not a
common carrier, but a
special carrier
extending its services
and facilities to a single
specific or "special
customer" under a
"special contract."

Petitioner assailed the aforesaid decision before this Court via a petition for
review. On February 27, 1995, we referred the case to the respondent Court of
Appeals for consideration and adjudication. 10 On November 29, 1995, the
respondent court rendered a decision 11 affirming the trial court's dismissal of
petitioner's complaint. Petitioner's motion for reconsideration was denied on
July 18, 1996. 12
Hence, this petition. At first, the petition was denied due course in a Resolution
dated November 11, 1996. 13 Petitioner moved for a reconsideration which was
granted by this Court in a Resolution 14 of January 22, 1997. Thus, the petition
was reinstated.
Petitioner claims that the respondent Court of Appeals erred in holding that (1)
the petitioner is not a common carrier or a transportation contractor, and (2)
the exemption sought for by petitioner is not clear under the law.
There is merit in the petition.

2. The Local Tax Code

of 1992 was basically
enacted to give more
and effective local
autonomy to local
governments than the
previous enactments,
to make them
economically and
financially viable to
serve the people and
discharge their

A "common carrier" may be defined, broadly, as one who holds himself out to
the public as engaged in the business of transporting persons or property from
place to place, for compensation, offering his services to the public generally.
Art. 1732 of the Civil Code defines a "common carrier" as "any person,
corporation, firm or association engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public."
The test for determining whether a party is a common carrier of goods is:

1. He must be engaged
in the business of
carrying goods for
others as a public
employment, and must
hold himself out as
ready to engage in the
transportation of
goods for person
generally as a business
and not as a casual
occupation;
2. He must undertake
to carry goods of the
kind to which his
business is confined;
3. He must undertake
to carry by the method
by which his business
is conducted and over
his established roads;
and
4. The transportation
must be for hire. 15
Based on the above definitions and requirements, there is no doubt that
petitioner is a common carrier. It is engaged in the business of transporting or
carrying goods, i.e. petroleum products, for hire as a public employment. It
undertakes to carry for all persons indifferently, that is, to all persons who
choose to employ its services, and transports the goods by land and for
compensation. The fact that petitioner has a limited clientele does not exclude it
from the definition of a common carrier. In De Guzman vs. Court of
Appeals 16 we ruled that:
The above article (Art. 1732, Civil Code)
makes no distinction between one whose
principal business activity is the carrying
of persons or goods or both, and one who
does such carrying only as an ancillary
activity (in local idiom, as a "sideline").

Article 1732 . . . avoids making any

distinction between a person or enterprise
offering transportation service on
a regular or scheduled basis and one
offering such service on an occasional,
episodic or unscheduled basis. Neither
does Article 1732 distinguish between a
carrier offering its services to the
"general public," i.e., the general
community or population, and one who
offers services or solicits business only
from a narrow segment of the general
population. We think that Article 1877
deliberately refrained from making such
distinctions.
So understood, the concept of "common
carrier" under Article 1732 may be seen
to coincide neatly with the notion of
"public service," under the Public Service
Act (Commonwealth Act No. 1416, as
amended) which at least partially
supplements the law on common carriers
set forth in the Civil Code. Under Section
13, paragraph (b) of the Public Service
Act, "public service" includes:
every person that now
or hereafter may own,
operate. manage, or
control in the
Philippines, for hire or
compensation, with
general or limited
clientele, whether
permanent, occasional
or accidental, and done
for general business
purposes, any common
carrier, railroad, street
railway, traction
railway, subway motor
vehicle, either for
freight or passenger, or

both, with or without

fixed route and
whatever may be its
classification, freight
or carrier service of
any class, express
service, steamboat, or
steamship line,
pontines, ferries and
water craft, engaged in
the transportation
of passengers or freight
or both, shipyard,
marine repair shop,
wharf or dock, ice
plant, ice-refrigeration
plant, canal, irrigation
system gas, electric
light heat and power,
water supply
and power
petroleum, sewerage
system, wire or
wireless
communications
systems, wire or
wireless broadcasting
stations and other
similar public services.
(Emphasis Supplied)
Also, respondent's argument that the term "common carrier" as used in
Section 133 (j) of the Local Government Code refers only to common carriers
transporting goods and passengers through moving vehicles or vessels either by
land, sea or water, is erroneous.
As correctly pointed out by petitioner, the definition of "common carriers" in
the Civil Code makes no distinction as to the means of transporting, as long as
it is by land, water or air. It does not provide that the transportation of the
passengers or goods should be by motor vehicle. In fact, in the United States, oil
pipe line operators are considered common carriers. 17

Under the Petroleum Act of the Philippines (Republic Act 387), petitioner is
considered a "common carrier." Thus, Article 86 thereof provides that:
Art. 86. Pipe line concessionaire as
common carrier. A pipe line shall have
the preferential right to utilize
installations for the transportation of
petroleum owned by him, but is obligated
to utilize the remaining transportation
capacity pro rata for the transportation of
such other petroleum as may be offered
by others for transport, and to charge
without discrimination such rates as may
have been approved by the Secretary of
Agriculture and Natural Resources.
Republic Act 387 also regards petroleum operation as a public utility. Pertinent
portion of Article 7 thereof provides:
that everything relating to the exploration
for and exploitation of petroleum . . . and
everything relating to the manufacture,
refining, storage, or transportation by
special methods of petroleum, is hereby
declared to be a public utility. (Emphasis
Supplied)
The Bureau of Internal Revenue likewise considers the petitioner a "common
carrier." In BIR Ruling No. 069-83, it declared:
. . . since [petitioner] is a pipeline
concessionaire that is engaged only in
transporting petroleum products, it is
considered a common carrier under
Republic Act No. 387 . . . . Such being the
case, it is not subject to withholding tax
prescribed by Revenue Regulations No.
13-78, as amended.
From the foregoing disquisition, there is no doubt that petitioner is a "common
carrier" and, therefore, exempt from the business tax as provided for in Section
133 (j), of the Local Government Code, to wit:

Sec. 133. Common Limitations on the

Taxing Powers of Local Government Units.
Unless otherwise provided herein, the
exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall
not extend to the levy of the following:

xxx xxx xxx

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water,
except as provided in this Code.
The deliberations conducted in the House of Representatives on the Local Government Code of 1991 are illuminating:
MR. AQUINO (A). Thank you, Mr. Speaker.
Mr. Speaker, we would like to proceed to page 95, line
1. It states: "SEC. 121 [now Sec. 131]. Common Limitations on the Taxing Powers of Local Government Units." . . .
MR. AQUINO (A.). Thank you Mr. Speaker.
Still on page 95, subparagraph 5, on taxes on the business of transportation. This appears to be one of those being deemed to be
exempted from the taxing powers of the local government units. May we know the reason why the transportation business is being
excluded from the taxing powers of the local government units?
MR. JAVIER (E.). Mr. Speaker, there is
an exception contained in Section 121
(now Sec. 131), line 16, paragraph 5. It
states that local government units may
not impose taxes on the business of
transportation, except as otherwise
provided in this code.
Now, Mr. Speaker, if the Gentleman
would care to go to page 98 of Book II,
one can see there that provinces have the
power to impose a tax on business
enjoying a franchise at the rate of not
more than one-half of 1 percent of the
gross annual receipts. So, transportation
contractors who are enjoying a franchise

would be subject to tax by the province.

That is the exception, Mr. Speaker.
What we want to guard against here, Mr.
Speaker, is the imposition of taxes by local
government units on the carrier business.
Local government units may impose taxes
on top of what is already being imposed
by the National Internal Revenue Code
which is the so-called "common carriers
tax." We do not want a duplication of this
tax, so we just provided for an exception
under Section 125 [now Sec. 137] that a
province may impose this tax at a specific
rate.

MR. AQUINO (A.). Thank you for that

clarification, Mr. Speaker. . . .
It is clear that the legislative intent in excluding
from the taxing power of the local government unit the imposition of business
tax against common carriers is to prevent a duplication of the so-called
"common carrier's tax."
Petitioner is already paying three (3%) percent common carrier's tax on its
gross sales/earnings under the National Internal Revenue Code. 19 To tax
petitioner again on its gross receipts in its transportation of petroleum business
would defeat the purpose of the Local Government Code.
WHEREFORE, the petition is hereby GRANTED. The decision of the
respondent Court of Appeals dated November 29, 1995 in CA-G.R. SP No.
36801 is REVERSED and SET ASIDE.
SO ORDERED.
Bellosillo, Puno and Mendoza, JJ., concur.
THIRD DIVISION

[G.R. No. 112287. December 12, 1997]

NATIONAL STEEL CORPORATION, petitioner, vs. COURT OF APPEALS

AND VLASONS SHIPPING, INC., respondents.

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

VLASONS SHIPPING, INC., petitioner, vs. COURT OF APPEALS AND

NATIONAL STEEL CORPORATION, respondents.

DECISION

SO ORDERED. [3]

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

The Case

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

Before us are two separate petitions for review filed by National Steel
Corporation (NSC) and Vlasons Shipping, Inc. (VSI), both of which assail the
August 12, 1993 Decision of the Court of Appeals. [1] The Court of Appeals
modified the decision of the Regional Trial Court of Pasig, Metro Manila, Branch
163 in Civil Case No. 23317. The RTC disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of defendant and against the
plaintiff dismissing the complaint with cost against plaintiff, and ordering plaintiff to
pay the defendant on the counterclaim as follows:

(1) On July 17, 1974, plaintiff National Steel Corporation (NSC) as Charterer and
defendant Vlasons Shipping, Inc. (VSI) as Owner, entered into a Contract of Voyage
Charter Hire (Exhibit B; also Exhibit 1) whereby NSC hired VSIs vessel, the MV
VLASONS I to make one (1) voyage to load steel products at Iligan City and
discharge them at North Harbor, Manila, under the following terms and
conditions, viz:
1. x x x x x x.

1. The sum of P75,000.00 as unpaid freight and P88,000.00 as

demurrage with interest at the legal rate on both amounts from April
7, 1976 until the same shall have been fully paid;

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

2. Attorneys fees and expenses of litigation in the sum of P100,000.00;

and

3. x x x x x x

3. Cost of suit.
SO ORDERED. [2]
On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the decision appealed from is modified by
reducing the award for demurrage to P44,000.00 and deleting the award for
attorneys fees and expenses of litigation. Except as thus modified, the decision is
AFFIRMED. There is no pronouncement as to costs.

4. Freight/Payment: P30.00 /metric ton, FIOST basis. Payment upon presentation of

Bill of Lading within fifteen (15) days.
5. Laydays/Cancelling: July 26, 1974/Aug. 5, 1974.
6. Loading/Discharging Rate: 750 tons per WWDSHINC. (Weather Working Day of
24 consecutive hours, Sundays and Holidays Included).
7. Demurrage/Dispatch: P8,000.00/P4,000.00 per day.
8. x x x x x x

9. Cargo Insurance: Charterers and/or Shippers must insure the cargoes. Shipowners
not responsible for losses/damages except on proven willful negligence of the
officers of the vessel.
10. Other terms:(a) All terms/conditions of NONYAZAI C/P [sic] or other
internationally recognized Charter Party Agreement shall form part of this Contract.
xxxxxxxxx
The terms F.I.O.S.T. which is used in the shipping business is a standard provision in
the NANYOZAI Charter Party which stands for Freight In and Out including
Stevedoring and Trading, which means that the handling, loading and unloading of
the cargoes are the responsibility of the Charterer. Under Paragraph 5 of the
NANYOZAI Charter Party, it states, Charterers to load, stow and discharge the
cargo free of risk and expenses to owners. x x x (Underscoring supplied).
Under paragraph 10 thereof, it is provided that (o)wners shall, before and at the
beginning of the voyage, exercise due diligence to make the vessel seaworthy and
properly manned, equipped and supplied and to make the holds and all other parts of
the vessel in which cargo is carried, fit and safe for its reception, carriage and
preservation. Owners shall not be liable for loss of or damage of the cargo arising or
resulting from: unseaworthiness unless caused by want of due diligence on the part
of the owners to make the vessel seaworthy, and to secure that the vessel is properly
manned, equipped and supplied and to make the holds and all other parts of the
vessel in which cargo is carried, fit and safe for its reception, carriage and
preservation; xxx; perils, dangers and accidents of the sea or other navigable waters;
xxx; wastage in bulk or weight or any other loss or damage arising from inherent
defect, quality or vice of the cargo; insufficiency of packing; xxx; latent defects not
discoverable by due diligence; any other cause arising without the actual fault or
privity of Owners or without the fault of the agents or servants of owners.
Paragraph 12 of said NANYOZAI Charter Party also provides that (o)wners shall
not be responsible for split, chafing and/or any damage unless caused by the
negligence or default of the master and crew.
(2) On August 6, 7 and 8, 1974, in accordance with the Contract of Voyage Charter
Hire, the MV VLASONS I loaded at plaintiffs pier at Iligan City, the NSCs shipment
of 1,677 skids of tinplates and 92 packages of hot rolled sheets or a total of 1,769
packages with a total weight of about 2,481.19 metric tons for carriage to
Manila. The shipment was placed in the three (3) hatches of the ship. Chief Mate
Gonzalo Sabando, acting as agent of the vessel[,] acknowledged receipt of the cargo

on board and signed the corresponding bill of lading, B.L.P.P. No. 0233 (Exhibit D)
on August 8, 1974.
(3) The vessel arrived with the cargo at Pier 12, North Harbor, Manila, on August
12, 1974. The following day, August 13, 1974, when the vessels three (3) hatches
containing the shipment were opened by plaintiffs agents, nearly all the skids of
tinplates and hot rolled sheets were allegedly found to be wet and rusty. The cargo
was discharged and unloaded by stevedores hired by the Charterer. Unloading was
completed only on August 24, 1974 after incurring a delay of eleven (11) days due
to the heavy rain which interrupted the unloading operations. (Exhibit E)
(4) To determine the nature and extent of the wetting and rusting, NSC called for a
survey of the shipment by the Manila Adjusters and Surveyors Company
(MASCO). In a letter to the NSC dated March 17, 1975 (Exhibit G), MASCO made
a report of its ocular inspection conducted on the cargo, both while it was still on
board the vessel and later at the NDC warehouse in Pureza St., Sta. Mesa, Manila
where the cargo was taken and stored. MASCO reported that it found wetting and
rusting of the packages of hot rolled sheets and metal covers of the tinplates; that
tarpaulin hatch covers were noted torn at various extents; that container/metal
casings of the skids were rusting all over. MASCO ventured the opinion that rusting
of the tinplates was caused by contact with SEA WATER sustained while still on
board the vessel as a consequence of the heavy weather and rough seas encountered
while en route to destination (Exhibit F). It was also reported that MASCOs
surveyors drew at random samples of bad order packing materials of the tinplates
and delivered the same to the M.I.T. Testing Laboratories for analysis. On August
31, 1974, the M.I.T. Testing Laboratories issued Report No. 1770 (Exhibit I) which
in part, states, The analysis of bad order samples of packing materials xxx shows
that wetting was caused by contact with SEA WATER.
(5) On September 6, 1974, on the basis of the aforesaid Report No. 1770, plaintiff
filed with the defendant its claim for damages suffered due to the downgrading of
the damaged tinplates in the amount ofP941,145.18. Then on October 3, 1974,
plaintiff formally demanded payment of said claim but defendant VSI refused and
failed to pay. Plaintiff filed its complaint against defendant on April 21, 1976 which
was docketed as Civil Case No. 23317, CFI, Rizal.
(6) In its complaint, plaintiff claimed that it sustained losses in the aforesaid amount
of P941,145.18 as a result of the act, neglect and default of the master and crew in
the management of the vessel as well as the want of due diligence on the part of the
defendant to make the vessel seaworthy and to make the holds and all other parts of
the vessel in which the cargo was carried, fit and safe for its reception, carriage and
preservation -- all in violation of defendants undertaking under their Contract of
Voyage Charter Hire.

(7) In its answer, defendant denied liability for the alleged damage claiming that the
MV VLASONS I was seaworthy in all respects for the carriage of plaintiffs cargo;
that said vessel was not a common carrier inasmuch as she was under voyage charter
contract with the plaintiff as charterer under the charter party; that in the course of
the voyage from Iligan City to Manila, the MV VLASONS I encountered very rough
seas, strong winds and adverse weather condition, causing strong winds and big
waves to continuously pound against the vessel and seawater to overflow on its deck
and hatch covers; that under the Contract of Voyage Charter Hire, defendant shall
not be responsible for losses/damages except on proven willful negligence of the
officers of the vessel, that the officers of said MV VLASONS I exercised due
diligence and proper seamanship and were not willfully negligent; that furthermore
the Voyage Charter Party provides that loading and discharging of the cargo was on
FIOST terms which means that the vessel was free of risk and expense in connection
with the loading and discharging of the cargo; that the damage, if any, was due to the
inherent defect, quality or vice of the cargo or to the insufficient packing thereof or
to latent defect of the cargo not discoverable by due diligence or to any other cause
arising without the actual fault or privity of defendant and without the fault of the
agents or servants of defendant; consequently, defendant is not liable; that the
stevedores of plaintiff who discharged the cargo in Manila were negligent and did
not exercise due care in the discharge of the cargo; and that the cargo was exposed to
rain and seawater spray while on the pier or in transit from the pier to plaintiffs
warehouse after discharge from the vessel; and that plaintiffs claim was highly
speculative and grossly exaggerated and that the small stain marks or sweat marks
on the edges of the tinplates were magnified and considered total loss of the
cargo. Finally, defendant claimed that it had complied with all its duties and
obligations under the Voyage Charter Hire Contract and had no responsibility
whatsoever to plaintiff. In turn, it alleged the following counterclaim:
(a) That despite the full and proper performance by defendant of its obligations
under the Voyage Charter Hire Contract, plaintiff failed and refused to pay the
agreed charter hire of P75,000.00 despite demands made by defendant;
(b) That under their Voyage Charter Hire Contract, plaintiff had agreed to pay
defendant the sum of P8,000.00 per day for demurrage. The vessel was on
demurrage for eleven (11) days in Manila waiting for plaintiff to discharge its cargo
from the vessel. Thus, plaintiff was liable to pay defendant demurrage in the total
amount of P88,000.00.
(c) For filing a clearly unfounded civil action against defendant, plaintiff should be
ordered to pay defendant attorneys fees and all expenses of litigation in the amount
of not less than P100,000.00.

(8) From the evidence presented by both parties, the trial court came out with the
following findings which were set forth in its decision:
(a) The MV VLASONS I is a vessel of Philippine registry engaged in the tramping
service and is available for hire only under special contracts of charter party as in
this particular case.
(b) That for purposes of the voyage covered by the Contract of Voyage Charter Hire
(Exh. 1), the MV VLASONS I was covered by the required seaworthiness
certificates including the Certification of Classification issued by an international
classification society, the NIPPON KAIJI KYOKAI (Exh. 4); Coastwise License
from the Board of Transportation (Exh. 5); International Loadline Certificate from
the Philippine Coast Guard (Exh. 6); Cargo Ship Safety Equipment Certificate also
from the Philippine Coast Guard (Exh. 7); Ship Radio Station License (Exh. 8);
Certificate of Inspection by the Philippine Coast Guard (Exh. 12); and Certificate of
Approval for Conversion issued by the Bureau of Customs (Exh. 9). That being a
vessel engaged in both overseas and coastwise trade, the MV VLASONS I has a
higher degree of seaworthiness and safety.
(c) Before it proceeded to Iligan City to perform the voyage called for by the
Contract of Voyage Charter Hire, the MV VLASONS I underwent drydocking in
Cebu and was thoroughly inspected by the Philippine Coast Guard. In fact, subject
voyage was the vessels first voyage after the drydocking. The evidence shows that
the MV VLASONS I was seaworthy and properly manned, equipped and supplied
when it undertook the voyage. It had all the required certificates of seaworthiness.
(d) The cargo/shipment was securely stowed in three (3) hatches of the ship. The
hatch openings were covered by hatchboards which were in turn covered by two or
double tarpaulins. The hatch covers were water tight. Furthermore, under the
hatchboards were steel beams to give support.
(e) The claim of the plaintiff that defendant violated the contract of carriage is not
supported by evidence. The provisions of the Civil Code on common carriers
pursuant to which there exists a presumption of negligence in case of loss or damage
to the cargo are not applicable. As to the damage to the tinplates which was
allegedly due to the wetting and rusting thereof, there is unrebutted testimony of
witness Vicente Angliongto that tinplates sweat by themselves when packed even
without being in contract (sic) with water from outside especially when the weather
is bad or raining. The rust caused by sweat or moisture on the tinplates may be
considered as a loss or damage but then, defendant cannot be held liable for it
pursuant to Article 1734 of the Civil Case which exempts the carrier from
responsibility for loss or damage arising from the character of the goods x x x. All
the 1,769 skids of the tinplates could not have been damaged by water as claimed by

plaintiff. It was shown as claimed by plaintiff that the tinplates themselves were
wrapped in kraft paper lining and corrugated cardboards could not be affected by
water from outside.
(f) The stevedores hired by the plaintiff to discharge the cargo of tinplates were
negligent in not closing the hatch openings of the MV VLASONS I when rains
occurred during the discharging of the cargo thus allowing rainwater to enter the
hatches. It was proven that the stevedores merely set up temporary tents to cover the
hatch openings in case of rain so that it would be easy for them to resume work
when the rains stopped by just removing the tent or canvas. Because of this
improper covering of the hatches by the stevedores during the discharging and
unloading operations which were interrupted by rains, rainwater drifted into the
cargo through the hatch openings. Pursuant to paragraph 5 of the NANYOSAI [sic]
Charter Party which was expressly made part of the Contract of Voyage Charter
Hire, the loading, stowing and discharging of the cargo is the sole responsibility of
the plaintiff charterer and defendant carrier has no liability for whatever damage
may occur or maybe [sic] caused to the cargo in the process.

I
The trial court erred in finding that the MV VLASONS I was seaworthy, properly
manned, equipped and supplied, and that there is no proof of willful negligence of
the vessels officers.
II
The trial court erred in finding that the rusting of NSCs tinplates was due to the
inherent nature or character of the goods and not due to contact with seawater.
III
The trial court erred in finding that the stevedores hired by NSC were negligent in
the unloading of NSCs shipment.
IV
The trial court erred in exempting VSI from liability on the ground of force majeure.
V

(g) It was also established that the vessel encountered rough seas and bad weather
while en route from Iligan City to Manila causing sea water to splash on the ships
deck on account of which the master of the vessel (Mr. Antonio C. Dumlao) filed a
Marine Protest on August 13, 1974 (Exh. 15) which can be invoked by defendant as
a force majeure that would exempt the defendant from liability.
(h) Plaintiff did not comply with the requirement prescribed in paragraph 9 of the
Voyage Charter Hire contract that it was to insure the cargo because it did not. Had
plaintiff complied with the requirement, then it could have recovered its loss or
damage from the insurer. Plaintiff also violated the charter party contract when it
loaded not only steel products, i.e. steel bars, angular bars and the like but also
tinplates and hot rolled sheets which are high grade cargo commanding a higher
freight. Thus plaintiff was able to ship high grade cargo at a lower freight rate.
(I) As regards defendants counterclaim, the contract of voyage charter hire under
paragraph 4 thereof, fixed the freight at P30.00 per metric ton payable to defendant
carrier upon presentation of the bill of lading within fifteen (15) days. Plaintiff has
not paid the total freight due of P75,000.00 despite demands. The evidence also
showed that the plaintiff was required and bound under paragraph 7 of the same
Voyage Charter Hire contract to pay demurrage of P8,000.00 per day of delay in the
unloading of the cargoes. The delay amounted to eleven (11) days thereby making
plaintiff liable to pay defendant for demurrage in the amount of P88,000.00.
Appealing the RTC decision to the Court of Appeals, NSC alleged six errors:

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

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

Questions of Law

1. Whether or not a charterer of a vessel is liable for demurrage due to

cargo unloading delays caused by weather interruption;

II. Whether or not the terms and conditions of the Contract of Voyage Charter Hire,
including the Nanyozai Charter, are valid and binding on both contracting parties.

2. Whether or not the alleged seaworthiness certificates (Exhibits 3, 4, 5,

6, 7, 8, 9, 11 and 12) were admissible in evidence and constituted
evidence of the vessels seaworthiness at the beginning of the
voyages; and

The foregoing issues raised by the parties will be discussed under the
following headings:

3. Whether or not a charterers failure to insure its cargo exempts the

shipowner from liability for cargo damage.

1. Questions of Fact
2. Effect of NSCs Failure to Insure the Cargo
3. Admissibility of Certificates Proving Seaworthiness
4. Demurrage and Attorneys Fees.

Questions of Fact
1. Whether or not the vessel was seaworthy and cargo-worthy;
2. Whether or not vessels officers and crew were negligent in handling
and caring for NSCs cargo;
3. Whether or not NSCs cargo of tinplates did sweat during the voyage
and, hence, rusted on their own; and
(4) Whether or not NSCs stevedores were negligent and caused the
wetting[/]rusting of NSCs tinplates.
In its separate petition, [9] VSI submits for the consideration of this Court the
following alleged errors of the CA:
A. The respondent Court of Appeals committed an error of law in reducing the
award of demurrage from P88,000.00 to P44,000.00.
B. The respondent Court of Appeals committed an error of law in deleting the award
of P100,000 for attorneys fees and expenses of litigation.
Amplifying the foregoing, VSI raises the following issues in its
memorandum: [10]
I. Whether or not the provisions of the Civil Code of the Philippines on common
carriers pursuant to which there exist[s] a presumption of negligence against the
common carrier in case of loss or damage to the cargo are applicable to a private
carrier.

The Courts Ruling

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

Preliminary Matter: Common Carrier or Private Carrier?

At the outset, it is essential to establish whether VSI contracted with NSC as a
common carrier or as a private carrier. The resolution of this preliminary question
determines the law, standard of diligence and burden of proof applicable to the
present case.
Article 1732 of the Civil Code defines a common carrier as persons,
corporations, firms or associations engaged in the business of carrying or
transporting passengers or goods or both, by land, water, or air, for compensation,
offering their services to the public. It has been held that the true test of a common
carrier is the carriage of passengers or goods, provided it has space, for all who opt
to avail themselves of its transportation service for a fee. [11] A carrier which does not
qualify under the above test is deemed a private carrier. Generally, private carriage is
undertaken by special agreement and the carrier does not hold himself out to carry
goods for the general public. The most typical, although not the only form of private
carriage, is the charter party, a maritime contract by which the charterer, a party
other than the shipowner, obtains the use and service of all or some part of a ship for
a period of time or a voyage or voyages. [12]

In the instant case, it is undisputed that VSI did not offer its services to the
general public. As found by the Regional Trial Court, it carried passengers or goods
only for those it chose under a special contract of charter party. [13] As correctly
concluded by the Court of Appeals, the MV Vlasons I was not a common but a
private carrier. [14] Consequently, the rights and obligations of VSI and NSC,
including their respective liability for damage to the cargo, are determined primarily
by stipulations in their contract of private carriage or charter party. [15]Recently, in
Valenzuela Hardwood and Industrial Supply, Inc., vs. Court of Appeals and Seven
Brothers Shipping Corporation, [16] the Court ruled:

exercise due diligence in making MV Vlasons I seaworthy and fit for holding,
carrying and safekeeping the cargo. Ineluctably, the burden of proof was placed on
NSC by the parties agreement.

x x x in a contract of private carriage, the parties may freely stipulate their duties
and obligations which perforce would be binding on them. Unlike in a contract
involving a common carrier, private carriage does not involve the general
public. Hence, the stringent provisions of the Civil Code on common carriers
protecting the general public cannot justifiably be applied to a ship transporting
commercial goods as a private carrier. Consequently, the public policy embodied
therein is not contravened by stipulations in a charter party that lessen or remove the
protection given by law in contracts involving common carriers. [17]

Therefore, the damage and impairment suffered by the goods during the
transportation, due to fortuitous event, force majeure, or the nature and inherent
defect of the things, shall be for the account and risk of the shipper.

Extent of VSIs Responsibility and Liability Over NSCs Cargo

It is clear from the parties Contract of Voyage Charter Hire, dated July 17,
1974, that VSI shall not be responsible for losses except on proven willful
negligence of the officers of the vessel. The NANYOZAI Charter Party, which was
incorporated in the parties contract of transportation, further provided that the
shipowner shall not be liable for loss of or damage to the cargo arising or resulting
from unseaworthiness, unless the same was caused by its lack of due diligence to
make the vessel seaworthy or to ensure that the same was properly manned,
equipped and supplied, and to make the holds and all other parts of the vessel in
which cargo [was] carried, fit and safe for its reception, carriage and
preservation. [18] The NANYOZAI Charter Party also provided that [o]wners shall
not be responsible for split, chafing and/or any damage unless caused by the
negligence or default of the master or crew.[19]

Burden of Proof
In view of the aforementioned contractual stipulations, NSC must prove that
the damage to its shipment was caused by VSIs willful negligence or failure to

This view finds further support in the Code of Commerce which pertinently
provides:
Art. 361. Merchandise shall be transported at the risk and venture of the shipper, if
the contrary has not been expressly stipulated.

The burden of proof of these accidents is on the carrier.

Art. 362. The carrier, however, shall be liable for damages arising from the cause
mentioned in the preceding article if proofs against him show that they occurred on
account of his negligence or his omission to take the precautions usually adopted by
careful persons, unless the shipper committed fraud in the bill of lading, making him
to believe that the goods were of a class or quality different from what they really
were.
Because the MV Vlasons I was a private carrier, the shipowners obligations are
governed by the foregoing provisions of the Code of Commerce and not by the Civil
Code which, as a general rule, places the prima facie presumption of negligence on a
common carrier. It is a hornbook doctrine that:
In an action against a private carrier for loss of, or injury to, cargo, the burden is on
the plaintiff to prove that the carrier was negligent or unseaworthy, and the fact that
the goods were lost or damaged while in the carriers custody does not put the burden
of proof on the carrier.
Since x x x a private carrier is not an insurer but undertakes only to exercise due
care in the protection of the goods committed to its care, the burden of proving
negligence or a breach of that duty rests on plaintiff and proof of loss of, or damage
to, cargo while in the carriers possession does not cast on it the burden of proving
proper care and diligence on its part or that the loss occurred from an excepted cause
in the contract or bill of lading. However, in discharging the burden of proof,
plaintiff is entitled to the benefit of the presumptions and inferences by which the
law aids the bailor in an action against a bailee, and since the carrier is in a better
position to know the cause of the loss and that it was not one involving its liability,

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

disturb the lower courts factual findings, as indeed NSC has not successfully proven
the application of any of the aforecited exceptions.

Was MV Vlasons I Seaworthy?

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

Who Were Negligent: Seamen or Stevedores?

First Issue: Questions of Fact

As noted earlier, the NSC had the burden of proving that the damage to the
cargo was caused by the negligence of the officers and the crew of MV Vlasons I in
making their vessel seaworthy and fit for the carriage of tinplates. NSC failed to
discharge this burden.

Based on the foregoing, the determination of the following factual questions is

manifestly relevant: (1) whether VSI exercised due diligence in making MV Vlasons
I seaworthy for the intended purpose under the charter party; (2) whether the
damage to the cargo should be attributed to the willful negligence of the officers and
crew of the vessel or of the stevedores hired by NSC; and (3) whether the rusting of
the tinplates was caused by its own sweat or by contact with seawater.

Before us, NSC relies heavily on its claim that MV Vlasons I had used an old
and torn tarpaulin or canvas to cover the hatches through which the cargo was
loaded into the cargo hold of the ship. It faults the Court of Appeals for failing to
consider such claim as an uncontroverted fact [26] and denies that MV Vlasons I was
equipped with new canvas covers in tandem with the old ones as indicated in the
Marine Protest xxx. [27] We disagree.

These questions of fact were threshed out and decided by the trial court, which
had the firsthand opportunity to hear the parties conflicting claims and to carefully
weigh their respective evidence. The findings of the trial court were subsequently
affirmed by the Court of Appeals. Where the factual findings of both the trial court
and the Court of Appeals coincide, the same are binding on this Court. [22] We stress
that, subject to some exceptional instances, [23] only questions of law -- not questions
of fact -- may be raised before this Court in a petition for review under Rule 45 of
the Rules of Court. After a thorough review of the case at bar, we find no reason to

The records sufficiently support VSIs contention that the ship used the old
tarpaulin, only in addition to the new one used primarily to make the ships hatches
watertight. The foregoing are clear from the marine protest of the master of the MV
Vlasons I, Antonio C. Dumlao, and the deposition of the ships boatswain, Jose
Pascua. The salient portions of said marine protest read:
x x x That the M/V VLASONS I departed Iligan City or or about 0730 hours of
August 8, 1974, loaded with approximately 2,487.9 tons of steel plates and tin plates
consigned to National Steel Corporation; that before departure, the vessel was

rigged, fully equipped and cleared by the authorities; that on or about August 9,
1974, while in the vicinity of the western part of Negros and Panay, we encountered
very rough seas and strong winds and Manila office was advised by telegram of the
adverse weather conditions encountered; that in the morning of August 10, 1974, the
weather condition changed to worse and strong winds and big waves continued
pounding the vessel at her port side causing sea water to overflow on deck andhatch
(sic) covers and which caused the first layer of the canvass covering to give way
while the new canvass covering still holding on;

Q: What is the hatch board made of?

That the weather condition improved when we reached Dumali Point protected by
Mindoro; that we re-secured the canvass covering back to position; that in the
afternoon of August 10, 1974, while entering Maricaban Passage, we were again
exposed to moderate seas and heavy rains; that while approaching Fortune Island,
we encountered again rough seas, strong winds and big waves which caused the
same canvass to give way and leaving the new canvass holding on;

A: It is made of steel, sir.

A: It is made of wood, with a handle.

Q: And aside from the hatch board, is there any other material there to
cover the hatch?
A: There is a beam supporting the hatch board.
Q: What is this beam made of?

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

xxx xxx xxx [28]

And the relevant portions of Jose Pascuas deposition are as follows:
Q: What is the purpose of the canvas cover?
A: So that the cargo would not be soaked with water.
A: And will you describe how the canvas cover was secured on the
hatch opening?
WITNESS
A: It was placed flat on top of the hatch cover, with a little canvas
flowing over the sides and we place[d] a flat bar over the canvas
on the side of the hatches and then we place[d] a stopper so that
the canvas could not be removed.
ATTY DEL ROSARIO
Q: And will you tell us the size of the hatch opening? The length and the
width of the hatch opening.
A: Forty-five feet by thirty-five feet, sir.
xxxxxxxxx
Q: How was the canvas supported in the middle of the hatch opening?
A: There is a hatch board.
ATTY DEL ROSARIO

A: There are five beams in one hatch opening.

ATTY DEL ROSARIO
Q: And on top of the beams you said there is a hatch board. How many
pieces of wood are put on top?
A: Plenty, sir, because there are several pieces on top of the hatch beam.
Q: And is there a space between the hatch boards?
A: There is none, sir.
Q: They are tight together?
A: Yes, sir.
Q: How tight?
A: Very tight, sir.
Q: Now, on top of the hatch boards, according to you, is the canvas
cover. How many canvas covers?
A: Two, sir. [29]
That due diligence was exercised by the officers and the crew of the MV
Vlasons I was further demonstrated by the fact that, despite encountering rough
weather twice, the new tarpaulin did not give way and the ships hatches and cargo
holds remained waterproof. As aptly stated by the Court of Appeals, xxx we find no
reason not to sustain the conclusion of the lower court based on overwhelming

evidence, that the MV VLASONS I was seaworthy when it undertook the voyage on
August 8, 1974 carrying on board thereof plaintiff-appellants shipment of 1,677
skids of tinplates and 92 packages of hot rolled sheets or a total of 1,769 packages
from NSCs pier in Iligan City arriving safely at North Harbor, Port Area, Manila, on
August 12, 1974; xxx. [30]
Indeed, NSC failed to discharge its burden to show negligence on the part of
the officers and the crew of MV Vlasons I. On the contrary, the records reveal that it
was the stevedores of NSC who were negligent in unloading the cargo from the ship.
The stevedores employed only a tent-like material to cover the hatches when
strong rains occasioned by a passing typhoon disrupted the unloading of the
cargo. This tent-like covering, however, was clearly inadequate for keeping rain and
seawater away from the hatches of the ship. Vicente Angliongto, an officer of VSI,
testified thus:
ATTY ZAMORA:
Q: Now, during your testimony on November 5, 1979, you stated on
August 14 you went on board the vessel upon notice from the
National Steel Corporation in order to conduct the inspection of
the cargo. During the course of the investigation, did you chance
to see the discharging operation?
WITNESS:
A: Yes, sir, upon my arrival at the vessel, I saw some of the tinplates
already discharged on the pier but majority of the tinplates were
inside the hall, all the hatches were opened.
Q: In connection with these cargoes which were unloaded, where is the
place.
A: At the Pier.
Q: What was used to protect the same from weather?
ATTY LOPEZ:
We object, your Honor, this question was already asked. This particular
matter . . . the transcript of stenographic notes shows the same was
covered in the direct examination.
ATTY ZAMORA:
Precisely, your Honor, we would like to go on detail, this is the serious
part of the testimony.
COURT:

All right, witness may answer.

ATTY LOPEZ:
Q: What was used in order to protect the cargo from the weather?
A: A base of canvas was used as cover on top of the tin plates, and tents
were built at the opening of the hatches.
Q: You also stated that the hatches were already opened and that there
were tents constructed at the opening of the hatches to protect the
cargo from the rain. Now, will you describe [to] the Court the tents
constructed.
A: The tents are just a base of canvas which look like a tent of an Indian
camp raise[d] high at the middle with the whole side separated
down to the hatch, the size of the hatch and it is soaks [sic] at the
middle because of those weather and this can be used only to
temporarily protect the cargo from getting wet by rains.
Q: Now, is this procedure adopted by the stevedores of covering tents
proper?
A: No, sir, at the time they were discharging the cargo, there was a
typhoon passing by and the hatch tent was not good enough to
hold all of it to prevent the water soaking through the canvas and
enter the cargo.
Q: In the course of your inspection, Mr. Anglingto [sic], did you see in
fact the water enter and soak into the canvas and tinplates.
A: Yes, sir, the second time I went there, I saw it.
Q: As owner of the vessel, did you not advise the National Steel
Corporation [of] the procedure adopted by its stevedores in
discharging the cargo particularly in this tent covering of the
hatches?
A: Yes, sir, I did the first time I saw it, I called the attention of the
stevedores but the stevedores did not mind at all, so, I called the
attention of the representative of the National Steel but nothing
was done, just the same. Finally, I wrote a letter to them. [31]
NSC attempts to discredit the testimony of Angliongto by questioning his
failure to complain immediately about the stevedores negligence on the first day of
unloading, pointing out that he wrote his letter to petitioner only seven days
later. [32] The Court is not persuaded. Angliongtos candid answer in his aforequoted
testimony satisfactorily explained the delay. Seven days lapsed because he first

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

Do Tinplates Sweat?
The trial court relied on the testimony of Vicente Angliongto in finding that
xxx tinplates sweat by themselves when packed even without being in contact with
water from outside especially when the weather is bad or raining xxx. [35] The Court
of Appeals affirmed the trial courts finding.
A discussion of this issue appears inconsequential and unnecessary. As
previously discussed, the damage to the tinplates was occasioned not by airborne
moisture but by contact with rain and seawater which the stevedores negligently
allowed to seep in during the unloading.

Second Issue: Effect of NSCs Failure to Insure the Cargo

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

Third Issue: Admissibility of Certificates Proving Seaworthiness

NSCs contention that MV Vlasons I was not seaworthy is anchored on the
alleged inadmissibility of the certificates of seaworthiness offered in evidence by
VSI. The said certificates include the following:
1. Certificate of Inspection of the Philippine Coast Guard at Cebu
2. Certificate of Inspection from the Philippine Coast Guard
3. International Load Line Certificate from the Philippine Coast Guard
4. Coastwise License from the Board of Transportation
5. Certificate of Approval for Conversion issued by the Bureau of
Customs. [36]

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

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

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

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

We find, however, that Exhibit 11 is admissible under a well-settled exception

to the hearsay rule per Section 44 of Rule 130 of the Rules of Court, which provides
that (e)ntries in official records made in the performance of a duty by a public
officer of the Philippines, or by a person in the performance of a duty specially
enjoined by law, are prima facie evidence of the facts therein stated. [38] Exhibit 11 is
an original certificate of the Philippine Coast Guard in Cebu issued by Lieutenant
Junior Grade Noli C. Flores to the effect that the vessel VLASONS I was drydocked
x x x and PCG Inspectors were sent on board for inspection x x x. After completion
of drydocking and duly inspected by PCG Inspectors, the vessel VLASONS I, a
cargo vessel, is in seaworthy condition, meets all requirements, fitted and equipped
for trading as a cargo vessel was cleared by the Philippine Coast Guard and sailed
for Cebu Port on July 10, 1974. (sic) NSCs claim, therefore, is obviously misleading
and erroneous.
At any rate, it should be stressed that that NSC has the burden of proving
that MV Vlasons I was not seaworthy. As observed earlier, the vessel was a private
carrier and, as such, it did not have the obligation of a common carrier to show that
it was seaworthy. Indeed, NSC glaringly failed to discharge its duty of proving the
willful negligence of VSI in making the ship seaworthy resulting in damage to its
cargo. Assailing the genuineness of the certificate of seaworthiness is not sufficient
proof that the vessel was not seaworthy.

Fourth Issue: Demurrage and Attorneys Fees

The contract of voyage charter hire provides inter alia:
xxx xxx xxx

xxx xxx xxx

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

The Court defined demurrage in its strict sense as the compensation provided
for in the contract of affreightment for the detention of the vessel beyond the laytime
or that period of time agreed on for loading and unloading of cargo. [40] It is given to
compensate the shipowner for the nonuse of the vessel. On the other hand, the
following is well-settled:
Laytime runs according to the particular clause of the charter party. x x x If laytime
is expressed in running days, this means days when the ship would be run
continuously, and holidays are not excepted. A qualification of weather permitting
excepts only those days when bad weather reasonably prevents the work
contemplated. [41]
In this case, the contract of voyage charter hire provided for a four-day
laytime; it also qualified laytime as WWDSHINC or weather working days Sundays
and holidays included. [42] The running of laytime was thus made subject to the
weather, and would cease to run in the event unfavorable weather interfered with the
unloading of cargo. [43] Consequently, NSC may not be held liable for demurrage as
the four-day laytime allowed it did not lapse, having been tolled by unfavorable
weather condition in view of the WWDSHINC qualification agreed upon by the
parties. Clearly, it was error for the trial court and the Court of Appeals to have
found and affirmed respectively that NSC incurred eleven days of delay in
unloading the cargo. The trial court arrived at this erroneous finding by subtracting
from the twelve days, specifically August 13, 1974 to August 24, 1974, the only day
of unloading unhampered by unfavorable weather or rain which was August 22,
1974. Based on our previous discussion, such finding is a reversible error. As
mentioned, the respondent appellate court also erred in ruling that NSC was liable to
VSI for demurrage, even if it reduced the amount by half.

Attorneys Fees

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

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

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-49407 August 19, 1988
NATIONAL DEVELOPMENT COMPANY, petitioner-appellant,
vs.
THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY
CORPORATION, respondents-appellees.

No. L-49469 August 19, 1988

MARITIME COMPANY OF THE PHILIPPINES, petitioner-appellant,
vs.
THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY
CORPORATION, respondents- appellees.
Balgos & Perez Law Office for private respondent in both cases.

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

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

The facts of these cases as found by the Court of Appeals, are as follows:
The evidence before us shows that in accordance with a
memorandum agreement entered into between defendants NDC
and MCP on September 13, 1962, defendant NDC as the first
preferred mortgagee of three ocean going vessels including one
with the name 'Dona Nati' appointed defendant MCP as its agent
to manage and operate said vessel for and in its behalf and
account (Exh. A). Thus, on February 28, 1964 the E. Philipp
Corporation of New York loaded on board the vessel "Dona
Nati" at San Francisco, California, a total of 1,200 bales of
American raw cotton consigned to the order of Manila Banking
Corporation, Manila and the People's Bank and Trust Company
acting for and in behalf of the Pan Asiatic Commercial
Company, Inc., who represents Riverside Mills Corporation
(Exhs. K-2 to K7-A & L-2 to L-7-A). Also loaded on the same
vessel at Tokyo, Japan, were the cargo of Kyokuto Boekui,
Kaisa, Ltd., consigned to the order of Manila Banking
Corporation consisting of 200 cartons of sodium lauryl sulfate
and 10 cases of aluminum foil (Exhs. M & M-1). En route to
Manila the vessel Dofia Nati figured in a collision at 6:04 a.m.
on April 15, 1964 at Ise Bay, Japan with a Japanese vessel 'SS
Yasushima Maru' as a result of which 550 bales of aforesaid
cargo of American raw cotton were lost and/or destroyed, of
which 535 bales as damaged were landed and sold on the
authority of the General Average Surveyor for Yen 6,045,-500
and 15 bales were not landed and deemed lost (Exh. G). The
damaged and lost cargoes was worth P344,977.86 which
amount, the plaintiff as insurer, paid to the Riverside Mills
Corporation as holder of the negotiable bills of lading duly
endorsed (Exhs. L-7-A, K-8-A, K-2-A, K-3-A, K-4-A, K-5-A,
A- 2, N-3 and R-3}. Also considered totally lost were the
aforesaid shipment of Kyokuto, Boekui Kaisa Ltd., consigned to
the order of Manila Banking Corporation, Manila, acting for
Guilcon, Manila, The total loss was P19,938.00 which the
plaintiff as insurer paid to Guilcon as holder of the duly
endorsed bill of lading (Exhibits M-1 and S-3). Thus, the
plaintiff had paid as insurer the total amount of P364,915.86 to
the consignees or their successors-in-interest, for the said lost or
damaged cargoes. Hence, plaintiff filed this complaint to recover
said amount from the defendants-NDC and MCP as owner and

ship agent respectively, of the said 'Dofia Nati' vessel. (Rollo, L49469, p.38)
On April 22, 1965, the Development Insurance and Surety Corporation filed before
the then Court of First Instance of Manila an action for the recovery of the sum of
P364,915.86 plus attorney's fees of P10,000.00 against NDC and MCP (Record on
Appeal), pp. 1-6).
Interposing the defense that the complaint states no cause of action and even if it
does, the action has prescribed, MCP filed on May 12, 1965 a motion to dismiss
(Record on Appeal, pp. 7-14). DISC filed an Opposition on May 21, 1965 to which
MCP filed a reply on May 27, 1965 (Record on Appeal, pp. 14-24). On June 29,
1965, the trial court deferred the resolution of the motion to dismiss till after the trial
on the merits (Record on Appeal, p. 32). On June 8, 1965, MCP filed its answer with
counterclaim and cross-claim against NDC.
NDC, for its part, filed its answer to DISC's complaint on May 27, 1965 (Record on
Appeal, pp. 22-24). It also filed an answer to MCP's cross-claim on July 16, 1965
(Record on Appeal, pp. 39-40). However, on October 16, 1965, NDC's answer to
DISC's complaint was stricken off from the record for its failure to answer DISC's
written interrogatories and to comply with the trial court's order dated August 14,
1965 allowing the inspection or photographing of the memorandum of agreement it
executed with MCP. Said order of October 16, 1965 likewise declared NDC in
default (Record on Appeal, p. 44). On August 31, 1966, NDC filed a motion to set
aside the order of October 16, 1965, but the trial court denied it in its order dated
September 21, 1966.
On November 12, 1969, after DISC and MCP presented their respective evidence,
the trial court rendered a decision ordering the defendants MCP and NDC to pay
jointly and solidarity to DISC the sum of P364,915.86 plus the legal rate of interest
to be computed from the filing of the complaint on April 22, 1965, until fully paid
and attorney's fees of P10,000.00. Likewise, in said decision, the trial court granted
MCP's crossclaim against NDC.
MCP interposed its appeal on December 20, 1969, while NDC filed its appeal on
February 17, 1970 after its motion to set aside the decision was denied by the trial
court in its order dated February 13,1970.

NDC's appeal was docketed as G.R. No. 49407, while that of MCP was docketed as
G.R. No. 49469. On July 25,1979, this Court ordered the consolidation of the above
cases (Rollo, p. 103). On August 27,1979, these consolidated cases were given due
course (Rollo, p. 108) and submitted for decision on February 29, 1980 (Rollo, p.
136).
In its brief, NDC cited the following assignments of error:
I
THE COURT OF APPEALS ERRED IN APPLYING ARTICLE 827 OF THE
CODE OF COMMERCE AND NOT SECTION 4(2a) OF COMMONWEALTH
ACT NO. 65, OTHERWISE KNOWN AS THE CARRIAGE OF GOODS BY SEA
ACT IN DETERMINING THE LIABILITY FOR LOSS OF CARGOES
RESULTING FROM THE COLLISION OF ITS VESSEL "DONA NATI" WITH
THE YASUSHIMA MARU"OCCURRED AT ISE BAY, JAPAN OR OUTSIDE
THE TERRITORIAL JURISDICTION OF THE PHILIPPINES.
II
THE COURT OF APPEALS ERRED IN NOT DISMISSING THE C0MPLAINT
FOR REIMBURSEMENT FILED BY THE INSURER, HEREIN PRIVATE
RESPONDENT-APPELLEE, AGAINST THE CARRIER, HEREIN PETITIONERAPPELLANT. (pp. 1-2, Brief for Petitioner-Appellant National Development
Company; p. 96, Rollo).
On its part, MCP assigned the following alleged errors:
I
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT
RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION
HAS NO CAUSE OF ACTION AS AGAINST PETITIONER MARITIME
COMPANY OF THE PHILIPPINES AND IN NOT DISMISSING THE
COMPLAINT.
II

On November 17,1978, the Court of Appeals promulgated its decision

affirming in toto the decision of the trial court.
Hence these appeals by certiorari.

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT

THE CAUSE OF ACTION OF RESPONDENT DEVELOPMENT INSURANCE
AND SURETY CORPORATION IF ANY EXISTS AS AGAINST HEREIN

PETITIONER MARITIME COMPANY OF THE PHILIPPINES IS BARRED BY

THE STATUTE OF LIMITATION AND HAS ALREADY PRESCRIBED.
III
THE RESPONDENT COURT OF APPEALS ERRED IN ADMITTING IN
EVIDENCE PRIVATE RESPONDENTS EXHIBIT "H" AND IN FINDING ON
THE BASIS THEREOF THAT THE COLLISION OF THE SS DONA NATI AND
THE YASUSHIMA MARU WAS DUE TO THE FAULT OF BOTH VESSELS
INSTEAD OF FINDING THAT THE COLLISION WAS CAUSED BY THE
FAULT, NEGLIGENCE AND LACK OF SKILL OF THE COMPLEMENTS OF
THE YASUSHIMA MARU WITHOUT THE FAULT OR NEGLIGENCE OF THE
COMPLEMENT OF THE SS DONA NATI
IV
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
UNDER THE CODE OF COMMERCE PETITIONER APPELLANT MARITIME
COMPANY OF THE PHILIPPINES IS A SHIP AGENT OR NAVIERO OF SS
DONA NATI OWNED BY CO-PETITIONER APPELLANT NATIONAL
DEVELOPMENT COMPANY AND THAT SAID PETITIONER-APPELLANT IS
SOLIDARILY LIABLE WITH SAID CO-PETITIONER FOR LOSS OF OR
DAMAGES TO CARGO RESULTING IN THE COLLISION OF SAID VESSEL,
WITH THE JAPANESE YASUSHIMA MARU.
V
THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT THE
LOSS OF OR DAMAGES TO THE CARGO OF 550 BALES OF AMERICAN
RAW COTTON, DAMAGES WERE CAUSED IN THE AMOUNT OF
P344,977.86 INSTEAD OF ONLY P110,000 AT P200.00 PER BALE AS
ESTABLISHED IN THE BILLS OF LADING AND ALSO IN HOLDING THAT
PARAGRAPH 1O OF THE BILLS OF LADING HAS NO APPLICATION IN THE
INSTANT CASE THERE BEING NO GENERAL AVERAGE TO SPEAK OF.
VI
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THE
PETITIONERS NATIONAL DEVELOPMENT COMPANY AND COMPANY OF
THE PHILIPPINES TO PAY JOINTLY AND SEVERALLY TO HEREIN
RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION
THE SUM OF P364,915.86 WITH LEGAL INTEREST FROM THE FILING OF

THE COMPLAINT UNTIL FULLY PAID PLUS P10,000.00 AS AND FOR

ATTORNEYS FEES INSTEAD OF SENTENCING SAID PRIVATE
RESPONDENT TO PAY HEREIN PETITIONERS ITS COUNTERCLAIM IN THE
AMOUNT OF P10,000.00 BY WAY OF ATTORNEY'S FEES AND THE COSTS.
(pp. 1-4, Brief for the Maritime Company of the Philippines; p. 121, Rollo)
The pivotal issue in these consolidated cases is the determination of which laws
govern loss or destruction of goods due to collision of vessels outside Philippine
waters, and the extent of liability as well as the rules of prescription provided
thereunder.
The main thrust of NDC's argument is to the effect that the Carriage of Goods by
Sea Act should apply to the case at bar and not the Civil Code or the Code of
Commerce. Under Section 4 (2) of said Act, the carrier is not responsible for the loss
or damage resulting from the "act, neglect or default of the master, mariner, pilot or
the servants of the carrier in the navigation or in the management of the ship." Thus,
NDC insists that based on the findings of the trial court which were adopted by the
Court of Appeals, both pilots of the colliding vessels were at fault and negligent,
NDC would have been relieved of liability under the Carriage of Goods by Sea Act.
Instead, Article 287 of the Code of Commerce was applied and both NDC and MCP
were ordered to reimburse the insurance company for the amount the latter paid to
the consignee as earlier stated.
This issue has already been laid to rest by this Court of Eastern Shipping Lines Inc.
v. IAC (1 50 SCRA 469-470 [1987]) where it was held under similar circumstance
"that the law of the country to which the goods are to be transported governs the
liability of the common carrier in case of their loss, destruction or deterioration"
(Article 1753, Civil Code). Thus, the rule was specifically laid down that for cargoes
transported from Japan to the Philippines, the liability of the carrier is governed
primarily by the Civil Code and in all matters not regulated by said Code, the rights
and obligations of common carrier shall be governed by the Code of commerce and
by laws (Article 1766, Civil Code). Hence, the Carriage of Goods by Sea Act, a
special law, is merely suppletory to the provision of the Civil Code.
In the case at bar, it has been established that the goods in question are transported
from San Francisco, California and Tokyo, Japan to the Philippines and that they
were lost or due to a collision which was found to have been caused by the
negligence or fault of both captains of the colliding vessels. Under the above ruling,
it is evident that the laws of the Philippines will apply, and it is immaterial that the
collision actually occurred in foreign waters, such as Ise Bay, Japan.
Under Article 1733 of the Civil Code, common carriers from the nature of their
business and for reasons of public policy are bound to observe extraordinary

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

bills of lading were transferred or assigned to the alleged subrogers; thus, they could
not possibly have transferred any right of action to said plaintiff- appellee in this
case. (Brief for the Maritime Company of the Philippines, p. 16).
The records show that the Riverside Mills Corporation and Guilcon, Manila are the
holders of the duly endorsed bills of lading covering the shipments in question and
an examination of the invoices in particular, shows that the actual consignees of the
said goods are the aforementioned companies. Moreover, no less than MCP itself
issued a certification attesting to this fact. Accordingly, as it is undisputed that the
insurer, plaintiff appellee paid the total amount of P364,915.86 to said consignees
for the loss or damage of the insured cargo, it is evident that said plaintiff-appellee
has a cause of action to recover (what it has paid) from defendant-appellant MCP
(Decision, CA-G.R. No. 46513-R, p. 10; Rollo, p. 43).
MCP next contends that it can not be liable solidarity with NDC because it is merely
the manager and operator of the vessel Dona Nati not a ship agent. As the general
managing agent, according to MCP, it can only be liable if it acted in excess of its
authority.
As found by the trial court and by the Court of Appeals, the Memorandum
Agreement of September 13, 1962 (Exhibit 6, Maritime) shows that NDC appointed
MCP as Agent, a term broad enough to include the concept of Ship-agent in
Maritime Law. In fact, MCP was even conferred all the powers of the owner of the
vessel, including the power to contract in the name of the NDC (Decision, CA G.R.
No. 46513, p. 12; Rollo, p. 40). Consequently, under the circumstances, MCP cannot
escape liability.
It is well settled that both the owner and agent of the offending vessel are liable for
the damage done where both are impleaded (Philippine Shipping Co. v. Garcia
Vergara, 96 Phil. 281 [1906]); that in case of collision, both the owner and the agent
are civilly responsible for the acts of the captain (Yueng Sheng Exchange and
Trading Co. v. Urrutia & Co., supra citing Article 586 of the Code of Commerce;
Standard Oil Co. of New York v. Lopez Castelo, 42 Phil. 256, 262 [1921]); that
while it is true that the liability of the naviero in the sense of charterer or agent, is
not expressly provided in Article 826 of the Code of Commerce, it is clearly
deducible from the general doctrine of jurisprudence under the Civil Code but more
specially as regards contractual obligations in Article 586 of the Code of Commerce.
Moreover, the Court held that both the owner and agent (Naviero) should be
declared jointly and severally liable, since the obligation which is the subject of the
action had its origin in a tortious act and did not arise from contract (Verzosa and
Ruiz, Rementeria y Cia v. Lim, 45 Phil. 423 [1923]). Consequently, the agent, even
though he may not be the owner of the vessel, is liable to the shippers and owners of
the cargo transported by it, for losses and damages occasioned to such cargo,

without prejudice, however, to his rights against the owner of the ship, to the extent
of the value of the vessel, its equipment, and the freight (Behn Meyer Y Co. v.
McMicking et al. 11 Phil. 276 [1908]).

SO ORDERED.
Melencio-Herrera, (Chairperson), Padilla, and Sarmiento, JJ., concur.

As to the extent of their liability, MCP insists that their liability should be limited to
P200.00 per package or per bale of raw cotton as stated in paragraph 17 of the bills
of lading. Also the MCP argues that the law on averages should be applied in
determining their liability.
MCP's contention is devoid of merit. The declared value of the goods was stated in
the bills of lading and corroborated no less by invoices offered as evidence ' during
the trial. Besides, common carriers, in the language of the court in Juan Ysmael &
Co., Inc. v. Barrette et al., (51 Phil. 90 [1927]) "cannot limit its liability for injury to
a loss of goods where such injury or loss was caused by its own negligence."
Negligence of the captains of the colliding vessel being the cause of the collision,
and the cargoes not being jettisoned to save some of the cargoes and the vessel, the
trial court and the Court of Appeals acted correctly in not applying the law on
averages (Articles 806 to 818, Code of Commerce).
MCP's claim that the fault or negligence can only be attributed to the pilot of the
vessel SS Yasushima Maru and not to the Japanese Coast pilot navigating the vessel
Dona Nati need not be discussed lengthily as said claim is not only at variance with
NDC's posture, but also contrary to the factual findings of the trial court affirmed no
less by the Court of Appeals, that both pilots were at fault for not changing their
excessive speed despite the thick fog obstructing their visibility.
Finally on the issue of prescription, the trial court correctly found that the bills of
lading issued allow trans-shipment of the cargo, which simply means that the date of
arrival of the ship Dona Nati on April 18,1964 was merely tentative to give
allowances for such contingencies that said vessel might not arrive on schedule at
Manila and therefore, would necessitate the trans-shipment of cargo, resulting in
consequent delay of their arrival. In fact, because of the collision, the cargo which
was supposed to arrive in Manila on April 18, 1964 arrived only on June 12, 13, 18,
20 and July 10, 13 and 15, 1964. Hence, had the cargoes in question been saved,
they could have arrived in Manila on the above-mentioned dates. Accordingly, the
complaint in the instant case was filed on April 22, 1965, that is, long before the
lapse of one (1) year from the date the lost or damaged cargo "should have been
delivered" in the light of Section 3, sub-paragraph (6) of the Carriage of Goods by
Sea Act.
PREMISES CONSIDERED, the subject petitions are DENIED for lack of merit and
the assailed decision of the respondent Appellate Court is AFFIRMED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 102316 June 30, 1997

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

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

It appears that on 16 January 1984, plaintiff (Valenzuela

Hardwood and Industrial Supply, Inc.) entered into an agreement
with the defendant Seven Brothers (Shipping Corporation)
whereby the latter undertook to load on board its vessel M/V
Seven Ambassador the former's lauan round logs numbering 940
at the port of Maconacon, Isabela for shipment to Manila.
On 20 January 1984, plaintiff insured the logs against loss
and/or damage with defendant South Sea Surety and Insurance
Co., Inc. for P2,000,000.00 and the latter issued its Marine
Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said
date.
On 24 January 1984, the plaintiff gave the check in payment of
the premium on the insurance policy to Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven Ambassador sank
on 25 January 1984 resulting in the loss of the plaintiff's insured
logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover
payment of the premium and documentary stamps due on the
policy was tendered due to the insurer but was not accepted.
Instead, the South Sea Surety and Insurance Co., Inc. cancelled
the insurance policy it issued as of the date of the inception for
non-payment of the premium due in accordance with Section 77
of the Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South
Sea Surety and Insurance Co., Inc. the payment of the proceeds
of the policy but the latter denied liability under the policy.
Plaintiff likewise filed a formal claim with defendant Seven
Brothers Shipping Corporation for the value of the lost logs but
the latter denied the claim.
After due hearing and trial, the court a quo rendered judgment in
favor of plaintiff and against defendants. Both defendants
shipping corporation and the surety company appealed.
Defendant-appellant Seven Brothers Shipping Corporation
impute (sic) to the court a quo the following assignment of
errors, to wit:

A. The lower court erred in holding that the proximate cause of

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

C. The trial court erred in not applying Section 77 of the

Insurance Code.
D. The trial court erred in disregarding the "receipt of payment
clause" attached to and forming part of the Marine Cargo
Insurance Policy No. 84/24229.
E. The trial court in disregarding the statement of account or bill
stating the amount of premium and documentary stamps to be
paid on the policy by the plaintiff-appellee.
F. The trial court erred in disregarding the endorsement of
cancellation of the policy due to non-payment of premium and
documentary stamps.
G. The trial court erred in ordering defendant-appellant South
Sea Surety and Insurance Company, Inc. to pay plaintiffappellee P2,000,000.00 representing value of the policy with
legal interest from 2 February 1984 until the amount is fully
paid,
H. The trial court erred in not awarding to the defendantappellant the attorney's fees alleged and proven in its
counterclaim.
The primary issue to be resolved before us is whether defendants
shipping corporation and the surety company are liable to the
plaintiff for the latter's lost logs. 4
The Court of Appeals affirmed in part the RTC judgment by sustaining the liability
of South Sea Surety and Insurance Company ("South Sea"), but modified it by
holding that Seven Brothers Shipping Corporation ("Seven Brothers") was not liable
for the lost cargo. 5 In modifying the RTC judgment, the respondent appellate court
ratiocinated thus:
It appears that there is a stipulation in the charter party that the
ship owner would be exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil
Code on common carriers to establish the liability of the
shipping corporation. The provisions on common carriers should

not be applied where the carrier is not acting as such but as a

private carrier.
Under American jurisprudence, a common carrier undertaking to
carry a special cargo or chartered to a special person only,
becomes a private carrier.
As a private carrier, a stipulation exempting the owner from
liability even for the negligence of its agent is valid (Home
Insurance Company, Inc. vs. American Steamship Agencies,
Inc., 23 SCRA 24).
The shipping corporation should not therefore be held liable for
the loss of the logs. 6
South Sea and herein Petitioner Valenzuela Hardwood and Industrial Supply, Inc.
("Valenzuela") filed separate petitions for review before this Court. In a Resolution
dated June 2, 1995, this Court denied the petition of South
Sea. 7 There the Court found no reason to reverse the factual findings of the trial
court and the Court of Appeals that Chua was indeed an authorized agent of South
Sea when he received Valenzuela's premium payment for the marine cargo insurance
policy which was thus binding on the insurer. 8
The Court is now called upon to resolve the petition for review filed by Valenzuela
assailing the CA Decision which exempted Seven Brothers from any liability for the
lost cargo.
The Issue
Petitioner Valenzuela's arguments resolve around a single issue: "whether or not
respondent Court (of Appeals) committed a reversible error in upholding the validity
of the stipulation in the charter party executed between the petitioner and the private
respondent exempting the latter from liability for the loss of petitioner's logs arising
from the negligence of its (Seven Brothers') captain." 9
The Court's Ruling
The petition is not meritorious.
Validity of Stipulation is Lis Mota

The charter party between the petitioner and private respondent stipulated that the
"(o)wners shall not be responsible for loss, split, short-landing, breakages and any
kind of damages to the cargo." 10 The validity of this stipulation is the lis mota of
this case.
It should be noted at the outset that there is no dispute between the parties that the
proximate cause of the sinking of M/V Seven Ambassadors resulting in the loss of its
cargo was the "snapping of the iron chains and the subsequent rolling of the logs to
the portside due to the negligence of the captain in stowing and securing the logs on
board the vessel and not due to fortuitous event." 11 Likewise undisputed is the status
of Private Respondent Seven Brothers as a private carrier when it contracted to
transport the cargo of Petitioner Valenzuela. Even the latter admits this in its
petition. 12
The trial court deemed the charter party stipulation void for being contrary to public
policy, 13 citing Article 1745 of the Civil Code which provides:
Art. 1745. Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to public policy:
(1) That the goods are transported at the risk of the owner or
shipper;
(2) That the common carrier will not be liable for any loss,
destruction, or deterioration of the goods;
(3) That the common carrier need not observe any diligence in
the custody of the goods;
(4) That the common carrier shall exercise a degree of diligence
less than that of a good father of a family, or of a man of
ordinary prudence in the vigilance over the movables
transported;
(5) That the common carrier shall not be responsible for the acts
or omissions of his or its employees;
(6) That the common carrier's liability for acts committed by
thieves, or of robbers who do not act with grave or irresistible
threat, violence or force, is dispensed with or diminished;

(7) That the common carrier is not responsible for the loss,
destruction, or deterioration of goods on account of the defective
condition of the car, vehicle, ship, airplane or other equipment
used in the contract of carriage.
Petitioner Valenzuela adds that the stipulation is void for being contrary to Articles
586 and 587 of the Code of Commerce 14 and Articles 1170 and 1173 of the Civil
Code. Citing Article 1306 and paragraph 1, Article 1409 of the Civil
Code, 15 petitioner further contends that said stipulation "gives no duty or obligation
to the private respondent to observe the diligence of a good father of a family in the
custody and transportation of the cargo."

The provisions of our Civil Code on common carriers were

taken from Anglo-American law. Under American
jurisprudence, a common carrier undertaking to carry a special
cargo or chartered to a special person only, becomes a private
carrier. As a private carrier, a stipulation exempting the owner
from liability for the negligence of its agent is not against public
policy, and is deemed valid.

The Court is not persuaded. As adverted to earlier, it is undisputed that private

respondent had acted as a private carrier in transporting petitioner's lauan logs.
Thus, Article 1745 and other Civil Code provisions on common carriers which were
cited by petitioner may not be applied unless expressly stipulated by the parties in
their charter party. 16

Such doctrine We find reasonable. The Civil Code provisions on

common carriers should not be applied where the carrier is not
acting as such but as a private carrier. The stipulation in the
charter party absolving the owner from liability for loss due to
the negligence of its agent would be void if the strict public
policy governing common carriers is applied. Such policy has
no force where the public at large is not involved, as in this case
of a ship totally chartered for the used of a single
party. 19(Emphasis supplied.)

In a contract of private carriage, the parties may validly stipulate that responsibility
for the cargo rests solely on the charterer, exempting the shipowner from liability for
loss of or damage to the cargo caused even by the negligence of the ship captain.
Pursuant to Article 1306 17 of the Civil Code, such stipulation is valid because it is
freely entered into by the parties and the same is not contrary to law, morals, good
customs, public order, or public policy. Indeed, their contract of private carriage is
not even a contract of adhesion. We stress that in a contract of private carriage, the
parties may freely stipulate their duties and obligations which perforce would be
binding on them. Unlike in a contract involving a common carrier, private carriage
does not involve the general public. Hence, the stringent provisions of the Civil
Code on common carriers protecting the general public cannot justifiably be applied
to a ship transporting commercial goods as a private carrier. Consequently, the
public policy embodied therein is not contravened by stipulations in a charter party
that lessen or remove the protection given by law in contracts involving common
carriers.

Indeed, where the reason for the rule ceases, the rule itself does not apply. The
general public enters into a contract of transportation with common carriers without
a hand or a voice in the preparation thereof. The riding public merely adheres to the
contract; even if the public wants to, it cannot submit its own stipulations for the
approval of the common carrier. Thus, the law on common carriers extends its
protective mantle against one-sided stipulations inserted in tickets, invoices or other
documents over which the riding public has no understanding or, worse, no choice.
Compared to the general public, a charterer in a contract of private carriage is not
similarly situated. It can and in fact it usually does enter into a free and
voluntary agreement. In practice, the parties in a contract of private carriage can
stipulate the carrier's obligations and liabilities over the shipment which, in turn,
determine the price or consideration of the charter. Thus, a charterer, in exchange for
convenience and economy, may opt to set aside the protection of the law on
common carriers. When the charterer decides to exercise this option, he takes a
normal business risk.

The issue posed in this case and the arguments raised by petitioner are not novel;
they were resolved long ago by this Court in Home Insurance Co. vs. American
Steamship Agencies, Inc. 18 In that case, the trial court similarly nullified a
stipulation identical to that involved in the present case for being contrary to public
policy based on Article 1744 of the Civil Code and Article 587 of the Code of
Commerce. Consequently, the trial court held the shipowner liable for damages
resulting for the partial loss of the cargo. This Court reversed the trial court and laid
down, through Mr. Justice Jose P. Bengzon, the following well-settled observation
and doctrine:

Petitioner contends that the rule in Home Insurance is not applicable to the present
case because it "covers only a stipulation exempting a private carrier from liability
for the negligence of his agent, but it does not apply to a stipulation exempting a
private carrier like private respondent from the negligence of his employee or
servant which is the situation in this case." 20 This contention of petitioner is bereft
of merit, for it raises a distinction without any substantive difference. The
case Home Insurance specifically dealt with "the liability of the shipowner for acts
or negligence of its captain and crew" 21 and a charter party stipulation which
"exempts the owner of the vessel from any loss or damage or delay arising from any

other source, even from the neglect or fault of the captain or crew or some other
person employed by the owner on
board, for whose acts the owner would ordinarily be liable except for said
paragraph." 22 Undoubtedly, Home Insurance is applicable to the case at bar.
The naked assertion of petitioner that the American rule enunciated in Home
Insurance is not the rule in the Philippines 23 deserves scant consideration. The Court
there categorically held that said rule was "reasonable" and proceeded to apply it in
the resolution of that case. Petitioner miserably failed to show such circumstances or
arguments which would necessitate a departure from a well-settled rule.
Consequently, our ruling in said case remains a binding judicial precedent based on
the doctrine of stare decisis and Article 8 of the Civil Code which provides that
"(j)udicial decisions applying or interpreting the laws or the Constitution shall form
part of the legal system of the Philippines."
In fine, the respondent appellate court aptly stated that "[in the case of] a private
carrier, a stipulation exempting the owner from liability even for the negligence of
its agents is valid." 24
Other Arguments
On the basis of the foregoing alone, the present petition may already be denied; the
Court, however, will discuss the other arguments of petitioner for the benefit and
satisfaction of all concerned.
Articles 586 and 587, Code of Commerce
Petitioner Valenzuela insists that the charter party stipulation is contrary to Articles
586 and 587 of the Code of Commerce which confer on petitioner the right to
recover damages from the shipowner and ship agent for the acts or conduct of the
captain. 25 We are not persuaded. Whatever rights petitioner may have under the
aforementioned statutory provisions were waived when it entered into the charter
party.
Article 6 of the Civil Code provides that "(r)ights may be waived, unless the waiver
is contrary to law, public order, public policy, morals, or good customs, or
prejudicial to a person with a right recognized by law." As a general rule,
patrimonial rights may be waived as opposed to rights to personality and family
rights which may not be made the subject of waiver. 26 Being patently and
undoubtedly patrimonial, petitioner's right conferred under said articles may be
waived. This, the petitioner did by acceding to the contractual stipulation that it is
solely responsible or any damage to the cargo, thereby exempting the private carrier

from any responsibility for loss or damage thereto. Furthermore, as discussed above,
the contract of private carriage binds petitioner and private respondent alone; it is
not imbued with public policy considerations for the general public or third persons
are not affected thereby.
Articles 1170 and 1173, Civil Code
Petitioner likewise argues that the stipulation subject of this controversy is void for
being contrary to Articles 1170 and 1173 of the Civil Code 27 which read:
Art. 1170. Those who in the performance of their obligations are
guilty of fraud, negligence, or delay, and those who in any
manner contravene the tenor thereof, are liable for damages
Art. 1173. The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the
persons, of the time and of the place. When negligence shows
bad faith, the provisions of articles 1171 and 2201, shall apply.
If the law does not state the diligence which is to be observed in
the performance, that which is expected of a good father of a
family shall be required.
The Court notes that the foregoing articles are applicable only to the obligor or the
one with an obligation to perform. In the instant case, Private Respondent Seven
Brothers is not an obligor in respect of the cargo, for this obligation to bear the loss
was shifted to petitioner by virtue of the charter party. This shifting of responsibility,
as earlier observed, is not void. The provisions cited by petitioner are, therefore,
inapplicable to the present case.
Moreover, the factual milieu of this case does not justify the application of the
second paragraph of Article 1173 of the Civil Code which prescribes the standard of
diligence to be observed in the event the law or the contract is silent. In the instant
case, Article 362 of the Code of Commerce 28 provides the standard of ordinary
diligence for the carriage of goods by a carrier. The standard of diligence under this
statutory provision may, however, be modified in a contract of private carriage as the
petitioner and private respondent had done in their charter party.
Cases Cited by Petitioner Inapplicable

Petitioner cites Shewaram vs. Philippine Airlines, Inc. 29 which, in turn, quoted Juan
Ysmael & Co. vs. Gabino Barreto & Co. 30 and argues that the public policy
considerations stated there vis-a-vis contractual stipulations limiting the carrier's
liability be applied "with equal force" to this case. 31 It also cites Manila Railroad
Co. vs. Compaia Transatlantica 32 and contends that stipulations exempting a party
from liability for damages due to negligence "should not be countenanced" and
should be "strictly construed" against the party claiming its benefit. 33 We disagree.
The cases of Shewaram and Ysmael both involve a common carrier; thus, they
necessarily justify the application of such policy considerations and concomitantly
stricter rules. As already discussed above, the public policy considerations behind
the rigorous treatment of common carriers are absent in the case of private carriers.
Hence, the stringent laws applicable to common carriers are not applied to private
carries. The case of Manila Railroad is also inapplicable because the action for
damages there does not involve a contract for transportation. Furthermore, the
defendant therein made a "promise to use due care in the lifting operations" and,
consequently, it was "bound by its undertaking"'; besides, the exemption was
intended to cover accidents due to hidden defects in the apparatus or other
unforseeable occurrences" not caused by its "personal negligence." This promise
was thus constructed to make sense together with the stipulation against liability for
damages. 34 In the present case, we stress that the private respondent made no such
promise. The agreement of the parties to exempt the shipowner from responsibility
for any damage to the cargo and place responsibility over the same to petitioner is
the lone stipulation considered now by this Court.
Finally, petitioner points to Standard Oil Co. of New York vs. Lopez
Costelo, 35 Walter A. Smith & Co. vs.Cadwallader Gibson Lumber
Co., 36 N. T . Hashim and Co. vs. Rocha and Co., 37 Ohta Development
Co. vs. Steamship "Pompey" 38 and Limpangco Sons vs. Yangco Steamship Co. 39 in
support of its contention that the shipowner be held liable for damages. 40 These
however are not on all fours with the present case because they do not involve a
similar factual milieu or an identical stipulation in the charter party expressly
exempting the shipowner form responsibility for any damage to the cargo.

1995 42 affirming the liability of South Sea does not, by itself, necessarily preclude
the petitioner from proceeding against private respondent. An aggrieved party may
still recover the deficiency for the person causing the loss in the event the amount
paid by the insurance company does not fully cover the loss. Article 2207 of the
Civil Code provides:
Art. 2207. If the plaintiff's property has been insured, and he has
received indemnity for the insurance company for the injury or
loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance
company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency form the person
causing the loss or injury.
WHEREFORE, premises considered, the petition is hereby DENIED for its utter
failure to show any reversible error on the part of Respondent Court. The assailed
Decision is AFFIRMED.
SO ORDERED. Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.
FIRST DIVISION

[G.R. No. 131621. September 28, 1999]

LOADSTAR SHIPPING CO., INC., petitioner, vs. COURT OF APPEALS and

THE MANILA INSURANCE CO., INC., respondents.

Effect of the South Sea Resolution

In its memorandum, Seven Brothers argues that petitioner has no cause of action
against it because this Court has earlier affirmed the liability of South Sea for the
loss suffered by petitioner. Private respondent submits that petitioner is not legally
entitled to collect twice for a single loss. 41 In view of the above disquisition
upholding the validity of the questioned charter party stipulation and holding that
petitioner may not recover from private respondent, the present issue is moot and
academic. It suffices to state that the Resolution of this Court dated June 2,

DECISION
DAVIDE, JR., C.J.:
Petitioner Loadstar Shipping Co., Inc. (hereafter LOADSTAR), in this petition
for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, seeks
to reverse and set aside the following:(a) the 30 January 1997 decision [1] of the Court
of Appeals in CA-G.R. CV No. 36401, which affirmed the decision of 4 October
1991[2] of the Regional Trial Court of Manila, Branch 16, in Civil Case No. 85-

29110, ordering LOADSTAR to pay private respondent Manila Insurance Co.

(hereafter MIC) the amount of P6,067,178, with legal interest from the filing of the
complaint until fully paid, P8,000 as attorneys fees, and the costs of the suit; and (b)
its resolution of 19 November 1997, [3] denying LOADSTARs motion for
reconsideration of said decision.
The facts are undisputed.
On 19 November 1984, LOADSTAR received on board its M/V Cherokee
(hereafter, the vessel) the following goods for shipment:
a) 705 bales of lawanit hardwood;
b) 27 boxes and crates of tilewood assemblies and others; and
c) 49 bundles of mouldings R & W (3) Apitong Bolidenized.
The goods, amounting to P6,067,178, were insured for the same amount with MIC
against various risks including TOTAL LOSS BY TOTAL LOSS OF THE VESSEL.
The vessel, in turn, was insured by Prudential Guarantee & Assurance, Inc.
(hereafter PGAI) for P4 million. On 20 November 1984, on its way to Manila from
the port of Nasipit, Agusan del Norte, the vessel, along with its cargo, sank off
Limasawa Island. As a result of the total loss of its shipment, the consignee made a
claim with LOADSTAR which, however, ignored the same. As the insurer, MIC
paid P6,075,000 to the insured in full settlement of its claim, and the latter executed
a subrogation receipt therefor.
On 4 February 1985, MIC filed a complaint against LOADSTAR and PGAI,
alleging that the sinking of the vessel was due to the fault and negligence of
LOADSTAR and its employees. It also prayed that PGAI be ordered to pay the
insurance proceeds from the loss of the vessel directly to MIC, said amount to be
deducted from MICs claim from LOADSTAR.

court noted that the charter of the vessel was limited to the ship, but
LOADSTAR retained control over its crew.[4]
2) As a common carrier, it is the Code of Commerce, not the Civil Code,
which should be applied in determining the rights and liabilities of
the parties.
3) The vessel was not seaworthy because it was undermanned on the day
of the voyage. If it had been seaworthy, it could have withstood the
natural and inevitable action of the sea on 20 November 1984, when
the condition of the sea was moderate. The vessel sank, not because
of force majeure, but because it was not seaworthy. LOADSTARS
allegation that the sinking was probably due to the convergence of
the winds, as stated by a PAGASA expert, was not duly proven at
the trial. The limited liability rule, therefore, is not applicable
considering that, in this case, there was an actual finding of
negligence on the part of the carrier.[5]
4) Between MIC and LOADSTAR, the provisions of the Bill of Lading
do not apply because said provisions bind only the
shipper/consignee and the carrier. When MIC paid the shipper for
the goods insured, it was subrogated to the latters rights as against
the carrier, LOADSTAR.[6]
5) There was a clear breach of the contract of carriage when the shippers
goods never reached their destination. LOADSTARs defense of
diligence of a good father of a family in the training and selection of
its crew is unavailing because this is not a proper or complete
defense in culpa contractual.

As stated at the outset, the court a quo rendered judgment in favor of MIC,
prompting LOADSTAR to elevate the matter to the Court of Appeals, which,
however, agreed with the trial court and affirmed its decision in toto.

6) Art. 361 (of the Code of Commerce) has been judicially construed to
mean that when goods are delivered on board a ship in good order
and condition, and the shipowner delivers them to the shipper in bad
order and condition, it then devolves upon the shipowner to both
allege and prove that the goods were damaged by reason of some
fact which legally exempts him from liability. Transportation of the
merchandise at the risk and venture of the shipper means that the
latter bears the risk of loss or deterioration of his goods arising from
fortuitous events, force majeure, or the inherent nature and defects
of the goods, but not those caused by the presumed negligence or
fault of the carrier, unless otherwise proved.[7]

In dismissing LOADSTARs appeal, the appellate court made the following

observations:

The errors assigned by LOADSTAR boil down to a determination of the

following issues:

In its answer, LOADSTAR denied any liability for the loss of the shippers
goods and claimed that the sinking of its vessel was due to force majeure. PGAI, on
the other hand, averred that MIC had no cause of action against it, LOADSTAR
being the party insured. In any event, PGAI was later dropped as a party defendant
after it paid the insurance proceeds to LOADSTAR.

1) LOADSTAR cannot be considered a private carrier on the sole

ground that there was a single shipper on that fateful voyage. The

(1) Is the M/V Cherokee a private or a common carrier?

(2) Did LOADSTAR observe due and/or ordinary diligence in these

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

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

chartered to a special person only. There was no charter party. The bills of lading
failed to show any special arrangement, but only a general provision to the effect
that the M/V Cherokee was a general cargo carrier.[14] Further, the bare fact that the
vessel was carrying a particular type of cargo for one shipper, which appears to be
purely coincidental, is not reason enough to convert the vessel from a common to a
private carrier, especially where, as in this case, it was shown that the vessel was
also carrying passengers.
Under the facts and circumstances obtaining in this case, LOADSTAR fits the
definition of a common carrier under Article 1732 of the Civil Code. In the case
of De Guzman v. Court of Appeals, [15] the Court juxtaposed the statutory definition
of common carriers with the peculiar circumstances of that case, viz.:
The Civil Code defines common carriers in the following terms:
Article 1732. Common carriers are persons, corporations, firms or associations
engaged in the business of carrying or transporting passengers or goods or both, by
land, water, or air for compensation, offering their services to the public.
The above article makes no distinction between one whose principal business
activity is the carrying of persons or goods or both, and one who does such carrying
only as an ancillary activity (in local idiom, as a sideline. Article 1732 also carefully
avoids making any distinction between a person or enterprise offering transportation
service on a regular or scheduled basis and one offering such service on
anoccasional, episodic or unscheduled basis. Neither does Article 1732 distinguish
between a carrier offering its services to the general public, i.e., the general
community or population, and one who offers services or solicits business only from
a narrow segment of the general population. We think that Article 1733 deliberately
refrained from making such distinctions.
xxx
It appears to the Court that private respondent is properly characterized as a
common carrier even though he merely back-hauled goods for other merchants from
Manila to Pangasinan, although such backhauling was done on a periodic or
occasional rather than regular or scheduled manner, and even though private
respondents principal occupation was not the carriage of goods for others. There is
no dispute that private respondent charged his customers a fee for hauling their
goods; that that fee frequently fell below commercial freight rates is not relevant
here.
The Court of Appeals referred to the fact that private respondent held no certificate
of public convenience, and concluded he was not a common carrier. This is palpable

error. A certificate of public convenience is not a requisite for the incurring of

liability under the Civil Code provisions governing common carriers. That liability
arises the moment a person or firm acts as a common carrier, without regard to
whether or not such carrier has also complied with the requirements of the
applicable regulatory statute and implementing regulations and has been granted a
certificate of public convenience or other franchise. To exempt private respondent
from the liabilities of a common carrier because he has not secured the necessary
certificate of public convenience, would be offensive to sound public policy; that
would be to reward private respondent precisely for failing to comply with
applicable statutory requirements. The business of a common carrier impinges
directly and intimately upon the safety and well being and property of those
members of the general community who happen to deal with such carrier. The law
imposes duties and liabilities upon common carriers for the safety and protection of
those who utilize their services and the law cannot allow a common carrier to render
such duties and liabilities merely facultative by simply failing to obtain the
necessary permits and authorizations.
Moving on to the second assigned error, we find that the M/V Cherokee was
not seaworthy when it embarked on its voyage on 19 November 1984. The vessel
was not even sufficiently manned at the time. For a vessel to be seaworthy, it must
be adequately equipped for the voyage and manned with a sufficient number of
competent officers and crew. The failure of a common carrier to maintain in
seaworthy condition its vessel involved in a contract of carriage is a clear breach of
its duty prescribed in Article 1755 of the Civil Code. [16]
Neither do we agree with LOADSTARs argument that the limited liability
theory should be applied in this case. The doctrine of limited liability does not apply
where there was negligence on the part of the vessel owner or agent. [17] LOADSTAR
was at fault or negligent in not maintaining a seaworthy vessel and in having
allowed its vessel to sail despite knowledge of an approaching typhoon. In any
event, it did not sink because of any storm that may be deemed as force majeure,
inasmuch as the wind condition in the area where it sank was determined to be
moderate. Since it was remiss in the performance of its duties, LOADSTAR cannot
hide behind the limited liability doctrine to escape responsibility for the loss of the
vessel and its cargo.
LOADSTAR also claims that the Court of Appeals erred in holding it liable
for the loss of the goods, in utter disregard of this Courts pronouncements in St.
Paul Fire & Marine Ins. Co. v. Macondray & Co., Inc., [18] and National Union Fire
Insurance v. Stolt-Nielsen Phils., Inc. [19] It was ruled in these two cases that after
paying the claim of the insured for damages under the insurance policy, the insurer
is subrogated merely to the rights of the assured, that is, it can recover only the
amount that may, in turn, be recovered by the latter. Since the right of the assured in
case of loss or damage to the goods is limited or restricted by the provisions in the
bills of lading, a suit by the insurer as subrogee is necessarily subject to the same

limitations and restrictions. We do not agree. In the first place, the cases relied on by
LOADSTAR involved a limitation on the carriers liability to an amount fixed in the
bill of lading which the parties may enter into, provided that the same was freely and
fairly agreed upon (Articles 1749-1750). On the other hand, the stipulation in the
case at bar effectively reduces the common carriers liability for the loss or
destruction of the goods to a degree less than extraordinary (Articles 1744 and
1745), that is, the carrier is not liable for any loss or damage to shipments made at
owners risk. Such stipulation is obviously null and void for being contrary to public
policy.[20] It has been said:
Three kinds of stipulations have often been made in a bill of lading. The first is one
exempting the carrier from any and all liability for loss or damage occasioned by its
own negligence. The second is one providing for an unqualified limitation of such
liability to an agreed valuation. And the third is one limiting the liability of the
carrier to an agreed valuation unless the shipper declares a higher value and pays a
higher rate of freight. According to an almost uniform weight of authority, the first
and second kinds of stipulations are invalid as being contrary to public policy, but
the third is valid and enforceable. [21]
Since the stipulation in question is null and void, it follows that when MIC paid the
shipper, it was subrogated to all the rights which the latter has against the common
carrier, LOADSTAR.
Neither is there merit to the contention that the claim in this case was barred
by prescription. MICs cause of action had not yet prescribed at the time it was
concerned. Inasmuch as neither the Civil Code nor the Code of Commerce states a
specific prescriptive period on the matter, the Carriage of Goods by Sea Act
(COGSA) which provides for a one-year period of limitation on claims for loss of,
or damage to, cargoes sustained during transit may be applied suppletorily to the
case at bar. This one-year prescriptive period also applies to the insurer of the good.
[22]
In this case, the period for filing the action for recovery has not yet
elapsed. Moreover, a stipulation reducing the one-year period is null and void; [23] it
must, accordingly, be struck down.
WHEREFORE, the instant petition is DENIED and the challenged decision
of 30 January 1997 of the Court of Appeals in CA-G.R. CV No. 36401 is
AFFIRMED. Costs against petitioner.
SO ORDERED.
Puno, Kapunan, Pardo, and Ynares-Santiago, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-69044 May 29, 1987
EASTERN SHIPPING LINES, INC., petitioner,
vs.
INTERMEDIATE APPELLATE COURT and DEVELOPMENT INSURANCE
& SURETY CORPORATION,respondents.
No. 71478 May 29, 1987
EASTERN SHIPPING LINES, INC., petitioner,
vs.
THE NISSHIN FIRE AND MARINE INSURANCE CO., and DOWA FIRE &
MARINE INSURANCE CO., LTD.,respondents.

MELENCIO-HERRERA, J.:
These two cases, both for the recovery of the value of cargo insurance, arose from
the same incident, the sinking of the M/S ASIATICA when it caught fire, resulting in
the total loss of ship and cargo.

On August 31, 1979, the Trial Court rendered judgment in favor of Development
Insurance in the amounts of P256,039.00 and P92,361.75, respectively, with legal
interest, plus P35,000.00 as attorney's fees and costs. Petitioner Carrier took an
appeal to the then Court of Appeals which, on August 14, 1984, affirmed.
Petitioner Carrier is now before us on a Petition for Review on Certiorari.

The basic facts are not in controversy:

G.R. NO. 71478
In G.R. No. 69044, sometime in or prior to June, 1977, the M/S ASIATICA, a vessel
operated by petitioner Eastern Shipping Lines, Inc., (referred to hereinafter as
Petitioner Carrier) loaded at Kobe, Japan for transportation to Manila, 5,000 pieces
of calorized lance pipes in 28 packages valued at P256,039.00 consigned to
Philippine Blooming Mills Co., Inc., and 7 cases of spare parts valued at
P92,361.75, consigned to Central Textile Mills, Inc. Both sets of goods were insured
against marine risk for their stated value with respondent Development Insurance
and Surety Corporation.
In G.R. No. 71478, during the same period, the same vessel took on board 128
cartons of garment fabrics and accessories, in two (2) containers, consigned to
Mariveles Apparel Corporation, and two cases of surveying instruments consigned
to Aman Enterprises and General Merchandise. The 128 cartons were insured for
their stated value by respondent Nisshin Fire & Marine Insurance Co., for US
$46,583.00, and the 2 cases by respondent Dowa Fire & Marine Insurance Co., Ltd.,
for US $11,385.00.
Enroute for Kobe, Japan, to Manila, the vessel caught fire and sank, resulting in the
total loss of ship and cargo. The respective respondent Insurers paid the
corresponding marine insurance values to the consignees concerned and were thus
subrogated unto the rights of the latter as the insured.

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

G.R. NO. 69044

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

Both Petitions were initially denied for lack of merit. G.R. No. 69044 on January 16,
1985 by the First Division, and G. R. No. 71478 on September 25, 1985 by the
Second Division. Upon Petitioner Carrier's Motion for Reconsideration, however,
G.R. No. 69044 was given due course on March 25, 1985, and the parties were
required to submit their respective Memoranda, which they have done.
On the other hand, in G.R. No. 71478, Petitioner Carrier sought reconsideration of
the Resolution denying the Petition for Review and moved for its consolidation with
G.R. No. 69044, the lower-numbered case, which was then pending resolution with
the First Division. The same was granted; the Resolution of the Second Division of
September 25, 1985 was set aside and the Petition was given due course.

At the outset, we reject Petitioner Carrier's claim that it is not the operator of the
M/S Asiatica but merely a charterer thereof. We note that in G.R. No. 69044,
Petitioner Carrier stated in its Petition:
There are about 22 cases of the "ASIATICA" pending in various
courts where various plaintiffs are represented by various
counsel representing various consignees or insurance
companies. The common defendant in these cases is petitioner
herein, being the operator of said vessel. ... 1
Petitioner Carrier should be held bound to said admission. As a general rule, the
facts alleged in a party's pleading are deemed admissions of that party and binding
upon it. 2 And an admission in one pleading in one action may be received in
evidence against the pleader or his successor-in-interest on the trial of another action
to which he is a party, in favor of a party to the latter action. 3
The threshold issues in both cases are: (1) which law should govern the Civil
Code provisions on Common carriers or the Carriage of Goods by Sea Act? and (2)
who has the burden of proof to show negligence of the carrier?

xxx xxx xxx 9

Petitioner Carrier claims that the loss of the vessel by fire exempts it from liability
under the phrase "natural disaster or calamity. " However, we are of the opinion that
fire may not be considered a natural disaster or calamity. This must be so as it arises
almost invariably from some act of man or by human means. 10 It does not fall
within the category of an act of God unless caused by lightning 11 or by other
natural disaster or calamity. 12 It may even be caused by the actual fault or privity of
the carrier. 13
Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous
event refers to leases of rural lands where a reduction of the rent is allowed when
more than one-half of the fruits have been lost due to such event, considering that
the law adopts a protection policy towards agriculture. 14
As the peril of the fire is not comprehended within the exception in Article
1734, supra, Article 1735 of the Civil Code provides that all cases than those
mention in Article 1734, the common carrier shall be presumed to have been at fault
or to have acted negligently, unless it proves that it has observed the extraordinary
deligence required by law.

On the Law Applicable

The law of the country to which the goods are to be transported governs the liability
of the common carrier in case of their loss, destruction or deterioration. 4 As the
cargoes in question were transported from Japan to the Philippines, the liability of
Petitioner Carrier is governed primarily by the Civil Code. 5 However, in all matters
not regulated by said Code, the rights and obligations of common carrier shall be
governed by the Code of Commerce and by special laws. 6 Thus, the Carriage of
Goods by Sea Act, a special law, is suppletory to the provisions of the Civil Code. 7
On the Burden of Proof
Under the Civil Code, common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence in the
vigilance over goods, according to all the circumstances of each case. 8 Common
carriers are responsible for the loss, destruction, or deterioration of the goods unless
the same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning or other natural disaster
or calamity;

In this case, the respective Insurers. as subrogees of the cargo shippers, have proven
that the transported goods have been lost. Petitioner Carrier has also proved that the
loss was caused by fire. The burden then is upon Petitioner Carrier to proved that it
has exercised the extraordinary diligence required by law. In this regard, the Trial
Court, concurred in by the Appellate Court, made the following Finding of fact:
The cargoes in question were, according to the witnesses
defendant placed in hatches No, 2 and 3 cf the vessel, Boatswain
Ernesto Pastrana noticed that smoke was coming out from hatch
No. 2 and hatch No. 3; that where the smoke was noticed, the
fire was already big; that the fire must have started twenty-four
24) our the same was noticed; that carbon dioxide was ordered
released and the crew was ordered to open the hatch covers of
No, 2 tor commencement of fire fighting by sea water: that all of
these effort were not enough to control the fire.
Pursuant to Article 1733, common carriers are bound to
extraordinary diligence in the vigilance over the goods. The
evidence of the defendant did not show that extraordinary
vigilance was observed by the vessel to prevent the occurrence
of fire at hatches numbers 2 and 3. Defendant's evidence did not

likewise show he amount of diligence made by the crew, on

orders, in the care of the cargoes. What appears is that after the
cargoes were stored in the hatches, no regular inspection was
made as to their condition during the voyage. Consequently, the
crew could not have even explain what could have caused the
fire. The defendant, in the Court's mind, failed to satisfactorily
show that extraordinary vigilance and care had been made by the
crew to prevent the occurrence of the fire. The defendant, as a
common carrier, is liable to the consignees for said lack of
deligence required of it under Article 1733 of the Civil Code. 15
Having failed to discharge the burden of proving that it had exercised the
extraordinary diligence required by law, Petitioner Carrier cannot escape liability for
the loss of the cargo.
And even if fire were to be considered a "natural disaster" within the meaning of
Article 1734 of the Civil Code, it is required under Article 1739 of the same Code
that the "natural disaster" must have been the "proximate and only cause of the loss,"
and that the carrier has "exercised due diligence to prevent or minimize the loss
before, during or after the occurrence of the disaster. " This Petitioner Carrier has
also failed to establish satisfactorily.
Nor may Petitioner Carrier seek refuge from liability under the Carriage of Goods
by Sea Act, It is provided therein that:
Sec. 4(2). Neither the carrier nor the ship shall be responsible for
loss or damage arising or resulting from
(b) Fire, unless caused by the actual fault or privity of the
carrier.
xxx xxx xxx
In this case, both the Trial Court and the Appellate Court, in effect, found, as a fact,
that there was "actual fault" of the carrier shown by "lack of diligence" in that "when
the smoke was noticed, the fire was already big; that the fire must have started
twenty-four (24) hours before the same was noticed; " and that "after the cargoes
were stored in the hatches, no regular inspection was made as to their condition
during the voyage." The foregoing suffices to show that the circumstances under
which the fire originated and spread are such as to show that Petitioner Carrier or its
servants were negligent in connection therewith. Consequently, the complete

defense afforded by the COGSA when loss results from fire is unavailing to
Petitioner Carrier.
On the US $500 Per Package Limitation:
Petitioner Carrier avers that its liability if any, should not exceed US $500 per
package as provided in section 4(5) of the COGSA, which reads:
(5) Neither the carrier nor the ship shall in any event be or
become liable for any loss or damage to or in connection with
the transportation of goods in an amount exceeding $500 per
package lawful money of the United States, or in case of goods
not shipped in packages, per customary freight unit, or the
equivalent of that sum in other currency, unless the nature and
value of such goods have been declared by the shipper before
shipment and inserted in bill of lading. This declaration if
embodied in the bill of lading shall be prima facie evidence, but
all be conclusive on the carrier.
By agreement between the carrier, master or agent of the carrier,
and the shipper another maximum amount than that mentioned
in this paragraph may be fixed: Provided, That such maximum
shall not be less than the figure above named. In no event shall
the carrier be Liable for more than the amount of damage
actually sustained.
xxx xxx xxx
Article 1749 of the New Civil Code also allows the limitations of liability in this
wise:
Art. 1749. A stipulation that the common carrier's liability as
limited to the value of the goods appearing in the bill of lading,
unless the shipper or owner declares a greater value, is binding.
It is to be noted that the Civil Code does not of itself limit the liability of the
common carrier to a fixed amount per package although the Code expressly permits
a stipulation limiting such liability. Thus, the COGSA which is suppletory to the
provisions of the Civil Code, steps in and supplements the Code by establishing a
statutory provision limiting the carrier's liability in the absence of a declaration of a
higher value of the goods by the shipper in the bill of lading. The provisions of the
Carriage of Goods by.Sea Act on limited liability are as much a part of a bill of

lading as though physically in it and as much a part thereof as though placed therein
by agreement of the parties. 16
In G.R. No. 69044, there is no stipulation in the respective Bills of Lading (Exhibits
"C-2" and "I-3") 1 7 limiting the carrier's liability for the loss or destruction of the
goods. Nor is there a declaration of a higher value of the goods. Hence, Petitioner
Carrier's liability should not exceed US $500 per package, or its peso equivalent, at
the time of payment of the value of the goods lost, but in no case "more than the
amount of damage actually sustained."
The actual total loss for the 5,000 pieces of calorized lance pipes was P256,039
(Exhibit "C"), which was exactly the amount of the insurance coverage by
Development Insurance (Exhibit "A"), and the amount affirmed to be paid by
respondent Court. The goods were shipped in 28 packages (Exhibit "C-2")
Multiplying 28 packages by $500 would result in a product of $14,000 which, at the
current exchange rate of P20.44 to US $1, would be P286,160, or "more than the
amount of damage actually sustained." Consequently, the aforestated amount of
P256,039 should be upheld.
With respect to the seven (7) cases of spare parts (Exhibit "I-3"), their actual value
was P92,361.75 (Exhibit "I"), which is likewise the insured value of the cargo
(Exhibit "H") and amount was affirmed to be paid by respondent Court. however,
multiplying seven (7) cases by $500 per package at the present prevailing rate of
P20.44 to US $1 (US $3,500 x P20.44) would yield P71,540 only, which is the
amount that should be paid by Petitioner Carrier for those spare parts, and not
P92,361.75.
In G.R. No. 71478, in so far as the two (2) cases of surveying instruments are
concerned, the amount awarded to DOWA which was already reduced to $1,000 by
the Appellate Court following the statutory $500 liability per package, is in order.
In respect of the shipment of 128 cartons of garment fabrics in two (2) containers
and insured with NISSHIN, the Appellate Court also limited Petitioner Carrier's
liability to $500 per package and affirmed the award of $46,583 to NISSHIN. it
multiplied 128 cartons (considered as COGSA packages) by $500 to arrive at the
figure of $64,000, and explained that "since this amount is more than the insured
value of the goods, that is $46,583, the Trial Court was correct in awarding said
amount only for the 128 cartons, which amount is less than the maximum limitation
of the carrier's liability."
We find no reversible error. The 128 cartons and not the two (2) containers should be
considered as the shipping unit.

In Mitsui & Co., Ltd. vs. American Export Lines, Inc. 636 F 2d 807 (1981), the
consignees of tin ingots and the shipper of floor covering brought action against the
vessel owner and operator to recover for loss of ingots and floor covering, which
had been shipped in vessel supplied containers. The U.S. District Court for the
Southern District of New York rendered judgment for the plaintiffs, and the
defendant appealed. The United States Court of Appeals, Second Division, modified
and affirmed holding that:
When what would ordinarily be considered packages are
shipped in a container supplied by the carrier and the number of
such units is disclosed in the shipping documents, each of those
units and not the container constitutes the "package" referred to
in liability limitation provision of Carriage of Goods by Sea Act.
Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A.& 1304(5).
Even if language and purposes of Carriage of Goods by Sea Act
left doubt as to whether carrier-furnished containers whose
contents are disclosed should be treated as packages, the interest
in securing international uniformity would suggest that they
should not be so treated. Carriage of Goods by Sea Act, 4(5), 46
U.S.C.A. 1304(5).
... After quoting the statement in Leather's Best, supra, 451 F 2d
at 815, that treating a container as a package is inconsistent with
the congressional purpose of establishing a reasonable minimum
level of liability, Judge Beeks wrote, 414 F. Supp. at 907
(footnotes omitted):
Although this approach has not completely
escaped criticism, there is, nonetheless,
much to commend it. It gives needed
recognition to the responsibility of the courts
to construe and apply the statute as enacted,
however great might be the temptation to
"modernize" or reconstitute it by artful
judicial gloss. If COGSA's package
limitation scheme suffers from internal
illness, Congress alone must undertake the
surgery. There is, in this regard, obvious
wisdom in the Ninth Circuit's conclusion in
Hartford that technological advancements,
whether or not forseeable by the COGSA
promulgators, do not warrant a distortion or

artificial construction of the statutory term

"package." A ruling that these large reusable
metal pieces of transport equipment qualify
as COGSA packages at least where, as
here, they were carrier owned and supplied
would amount to just such a distortion.
Certainly, if the individual crates or cartons
prepared by the shipper and containing his
goods can rightly be considered "packages"
standing by themselves, they do not
suddenly lose that character upon being
stowed in a carrier's container. I would liken
these containers to detachable stowage
compartments of the ship. They simply
serve to divide the ship's overall cargo
stowage space into smaller, more
serviceable loci. Shippers' packages are
quite literally "stowed" in the containers
utilizing stevedoring practices and materials
analogous to those employed in traditional
on board stowage.
In Yeramex International v. S.S. Tando,, 1977 A.M.C. 1807 (E.D.
Va.) rev'd on other grounds, 595 F 2nd 943 (4 Cir. 1979),
another district with many maritime cases followed Judge
Beeks' reasoning in Matsushita and similarly rejected the
functional economics test. Judge Kellam held that when rolls of
polyester goods are packed into cardboard cartons which are
then placed in containers, the cartons and not the containers are
the packages.
xxx xxx xxx
The case of Smithgreyhound v. M/V Eurygenes, 18 followed the Mitsui test:
Eurygenes concerned a shipment of stereo equipment packaged
by the shipper into cartons which were then placed by the
shipper into a carrier- furnished container. The number of
cartons was disclosed to the carrier in the bill of lading.
Eurygenes followed the Mitsui test and treated the cartons, not
the container, as the COGSA packages. However, Eurygenes
indicated that a carrier could limit its liability to $500 per

container if the bill of lading failed to disclose the number of

cartons or units within the container, or if the parties indicated,
in clear and unambiguous language, an agreement to treat the
container as the package.
(Admiralty Litigation in Perpetuum: The
Continuing Saga of Package Limitations and
Third World Delivery Problems by Chester
D. Hooper & Keith L. Flicker, published in
Fordham International Law Journal, Vol. 6,
1982-83, Number 1) (Emphasis supplied)
In this case, the Bill of Lading (Exhibit "A") disclosed the following data:
2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight Prepaid
Say: Two (2) Containers Only.
Considering, therefore, that the Bill of Lading clearly disclosed the contents of the
containers, the number of cartons or units, as well as the nature of the goods, and
applying the ruling in the Mitsui and Eurygenes cases it is clear that the 128 cartons,
not the two (2) containers should be considered as the shipping unit subject to the
$500 limitation of liability.
True, the evidence does not disclose whether the containers involved herein were
carrier-furnished or not. Usually, however, containers are provided by the
carrier. 19 In this case, the probability is that they were so furnished for Petitioner
Carrier was at liberty to pack and carry the goods in containers if they were not so
packed. Thus, at the dorsal side of the Bill of Lading (Exhibit "A") appears the
following stipulation in fine print:
11. (Use of Container) Where the goods receipt of which is
acknowledged on the face of this Bill of Lading are not already
packed into container(s) at the time of receipt, the Carrier shall
be at liberty to pack and carry them in any type of container(s).

The foregoing would explain the use of the estimate "Say: Two (2) Containers Only"
in the Bill of Lading, meaning that the goods could probably fit in two (2) containers
only. It cannot mean that the shipper had furnished the containers for if so, "Two (2)
Containers" appearing as the first entry would have sufficed. and if there is any
ambiguity in the Bill of Lading, it is a cardinal principle in the construction of
contracts that the interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity. 20 This applies with even greater force
in a contract of adhesion where a contract is already prepared and the other party
merely adheres to it, like the Bill of Lading in this case, which is draw. up by the
carrier. 21
On Alleged Denial of Opportunity to Present Deposition of Its Witnesses: (in G.R.
No. 69044 only)
Petitioner Carrier claims that the Trial Court did not give it sufficient time to take the
depositions of its witnesses in Japan by written interrogatories.
We do not agree. petitioner Carrier was given- full opportunity to present its
evidence but it failed to do so. On this point, the Trial Court found:
xxx xxx xxx
Indeed, since after November 6, 1978, to August 27, 1979, not to
mention the time from June 27, 1978, when its answer was
prepared and filed in Court, until September 26, 1978, when the
pre-trial conference was conducted for the last time, the
defendant had more than nine months to prepare its evidence. Its
belated notice to take deposition on written interrogatories of its
witnesses in Japan, served upon the plaintiff on August 25th, just
two days before the hearing set for August 27th, knowing fully
well that it was its undertaking on July 11 the that the deposition
of the witnesses would be dispensed with if by next time it had
not yet been obtained, only proves the lack of merit of the
defendant's motion for postponement, for which reason it
deserves no sympathy from the Court in that regard. The
defendant has told the Court since February 16, 1979, that it was
going to take the deposition of its witnesses in Japan. Why did it
take until August 25, 1979, or more than six months, to prepare
its written interrogatories. Only the defendant itself is to blame
for its failure to adduce evidence in support of its defenses.
xxx xxx xxx 22

Petitioner Carrier was afforded ample time to present its side of the case. 23 It cannot
complain now that it was denied due process when the Trial Court rendered its
Decision on the basis of the evidence adduced. What due process abhors is absolute
lack of opportunity to be heard. 24
On the Award of Attorney's Fees:
Petitioner Carrier questions the award of attorney's fees. In both cases, respondent
Court affirmed the award by the Trial Court of attorney's fees of P35,000.00 in favor
of Development Insurance in G.R. No. 69044, and P5,000.00 in favor of NISSHIN
and DOWA in G.R. No. 71478.
Courts being vested with discretion in fixing the amount of attorney's fees, it is
believed that the amount of P5,000.00 would be more reasonable in G.R. No. 69044.
The award of P5,000.00 in G.R. No. 71478 is affirmed.
WHEREFORE, 1) in G.R. No. 69044, the judgment is modified in that petitioner
Eastern Shipping Lines shall pay the Development Insurance and Surety
Corporation the amount of P256,039 for the twenty-eight (28) packages of calorized
lance pipes, and P71,540 for the seven (7) cases of spare parts, with interest at the
legal rate from the date of the filing of the complaint on June 13, 1978, plus P5,000
as attorney's fees, and the costs.
2) In G.R.No.71478,the judgment is hereby affirmed.
SO ORDERED.
Narvasa, Cruz, Feliciano and Gancayco, JJ., concur.

Separate Opinions

YAP, J., concurring and dissenting:

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

it was the shipper which loaded and counted the goods placed inside the container
and sealed the latter.
The two containers were delivered by the shipper to the carrier already sealed for
shipment, and the number of cartons said to be contained inside them was indicated
in the bill of lading, on the mere say-so of the shipper. The freight paid to the carrier
on the shipment was based on the measurement (by volume) of the two containers at
$34.50 per cubic meter. The shipper must have saved on the freight charges by using
containers for the shipment. Under the circumstances, it would be unfair to the
carrier to have the limitation of its liability under COGSA fixed on the number of
cartons inside the containers, rather than on the containers themselves, since the
freight revenue was based on the latter.
The Mitsui and Eurygenes decisions are not the last word on the subject. The
interpretation of the COGSA package limitation is in a state of flux, 1 as the courts
continue to wrestle with the troublesome problem of applying the statutory
limitation under COGSA to containerized shipments. The law was adopted before
modern technological changes have revolutionized the shipping industry. There is
need for the law itself to be updated to meet the changes brought about by the
container revolution, but this is a task which should be addressed by the legislative
body. Until then, this Court, while mindful of American jurisprudence on the
subject, should make its own interpretation of the COGSA provisions, consistent
with what is equitable to the parties concerned. There is need to balance the interests
of the shipper and those of the carrier.

In the case at bar, there is no evidence showing that the two containers in question
were carrier-supplied. This fact cannot be presumed. The facts of the case in fact
show that this was the only shipment placed in containers. The other shipment
involved in the case, consisting of surveying instruments, was packed in two
"cases."

In the case at bar, the shipper opted to ship the goods in two containers, and paid
freight charges based on the freight unit, i.e., cubic meters. The shipper did not
declare the value of the shipment, for that would have entailed higher freight
charges; instead of paying higher freight charges, the shipper protected itself by
insuring the shipment. As subrogee, the insurance company can recover from the
carrier only what the shipper itself is entitled to recover, not the amount it actually
paid the shipper under the insurance policy.

We cannot speculate on the meaning of the words "Say: Two (2) Containers Only, "
which appear in the bill of lading. Absent any positive evidence on this point, we
cannot say that those words constitute a mere estimate that the shipment could fit in
two containers, thereby showing that when the goods were delivered by the shipper,
they were not yet placed inside the containers and that it was the petitioner carrier
which packed the goods into its own containers, as authorized under paragraph 11
on the dorsal side of the bill of lading, Exhibit A. Such assumption cannot be made
in view of the following words clearly stamped in red ink on the face of the bill of
lading: "Shipper's Load, Count and Seal Said to Contain." This clearly indicates that

In our view, under the circumstances, the container should be regarded as the
shipping unit or "package" within the purview of COGSA. However, we realize that
this may not be equitable as far as the shipper is concerned. If the container is not
regarded as a "package" within the terms of COGSA, then, the $500.00 liability
limitation should be based on "the customary freight unit." Sec. 4 (5) of COGSA
provides that in case of goods not shipped in packages, the limit of the carrier's
liability shall be $500.00 "per customary freight unit." In the case at bar, the
petitioner's liability for the shipment in question based on "freight unit" would be
$21,950.00 for the shipment of 43.9 cubic meters.

I concur with the rest of the decision.

Sarmiento, J., concur.

stowage compartments of the ship." Cartons or crates placed inside carrier-furnished

containers are deemed stowed in the vessel itself, and do not lose their character as
individual units simply by being placed inside container provided by the carrier,
which are merely "detachable stowage compartments of the ship.
In the case at bar, there is no evidence showing that the two containers in question
were carrier-supplied. This fact cannot be presumed. The facts of the case in fact
show that this was the only shipment placed in containers. The other shipment
involved in the case, consisting of surveying instruments, was packed in two
"cases."

Separate Opinions

YAP, J., concurring and dissenting:

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

We cannot speculate on the meaning of the words "Say: Two (2) Containers Only, "
which appear in the bill of lading. Absent any positive evidence on this point, we
cannot say that those words constitute a mere estimate that the shipment could fit in
two containers, thereby showing that when the goods were delivered by the shipper,
they were not yet placed inside the containers and that it was the petitioner carrier
which packed the goods into its own containers, as authorized under paragraph 11
on the dorsal side of the bill of lading, Exhibit A. Such assumption cannot be made
in view of the following words clearly stamped in red ink on the face of the bill of
lading: "Shipper's Load, Count and Seal Said to Contain." This clearly indicates that
it was the shipper which loaded and counted the goods placed inside the container
and sealed the latter.
The two containers were delivered by the shipper to the carrier already sealed for
shipment, and the number of cartons said to be contained inside them was indicated
in the bill of lading, on the mere say-so of the shipper. The freight paid to the carrier
on the shipment was based on the measurement (by volume) of the two containers at
$34.50 per cubic meter. The shipper must have saved on the freight charges by using
containers for the shipment. Under the circumstances, it would be unfair to the
carrier to have the limitation of its liability under COGSA fixed on the number of
cartons inside the containers, rather than on the containers themselves, since the
freight revenue was based on the latter.
The Mitsui and Eurygenes decisions are not the last word on the subject. The
interpretation of the COGSA package limitation is in a state of flux, 1 as the courts
continue to wrestle with the troublesome problem of applying the statutory
limitation under COGSA to containerized shipments. The law was adopted before
modern technological changes have revolutionized the shipping industry. There is
need for the law itself to be updated to meet the changes brought about by the
container revolution, but this is a task which should be addressed by the legislative
body. Until then, this Court, while mindful of American jurisprudence on the
subject, should make its own interpretation of the COGSA provisions, consistent

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

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

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

ESTRELLITA M. BASCOS, petitioners,
vs.
COURT OF APPEALS and RODOLFO A. CIPRIANO, respondents.
Modesto S. Bascos for petitioner.

Pelaez, Adriano & Gregorio for private respondent.

SYLLABUS
1. CIVIL LAW; COMMON CARRIERS; DEFINED; TEST TO DETERMINE
COMMON CARRIER. Article 1732 of the Civil Code defines a common carrier
as "(a) person, corporation or firm, or association engaged in the business of
carrying or transporting passengers or goods or both, by land, water or air, for
compensation, offering their services to the public." The test to determine a common
carrier is "whether the given undertaking is a part of the business engaged in by the
carrier which he has held out to the general public as his occupation rather than the
quantity or extent of the business transacted." . . . The holding of the Court in De
Guzman vs. Court of Appeals is instructive. In referring to Article 1732 of the Civil
Code, it held thus: "The above article makes no distinction between one whose
principal business activity is the carrying of persons or goods or both, and one who
does such carrying only as an ancillary activity (in local idiom, as a "sideline").
Article 1732 also carefully avoids making any distinction between a person or
enterprise offering transportation service on a regular or scheduled basis and one
offering such service on an occasional, episodic or unscheduled basis. Neither does
Article 1732 distinguished between a carrier offering its services to the "general
public," i.e., the general community or population, and one who offers services or
solicits business only from a narrow segment of the general population. We think
that Article 1732 deliberately refrained from making such distinctions."
2. ID.; ID.; DILIGENCE REQUIRED IN VIGILANCE OVER GOODS
TRANSPORTED; WHEN PRESUMPTION OF NEGLIGENCE ARISES; HOW
PRESUMPTION OVERCAME; WHEN PRESUMPTION MADE ABSOLUTE.
Common carriers are obliged to observe extraordinary diligence in the vigilance
over the goods transported by them. Accordingly, they are presumed to have been at
fault or to have acted negligently if the goods are lost, destroyed or deteriorated.
There are very few instances when the presumption of negligence does not attach
and these instances are enumerated in Article 1734. In those cases where the
presumption is applied, the common carrier must prove that it exercised
extraordinary diligence in order to overcome the presumption . . . The presumption
of negligence was raised against petitioner. It was petitioner's burden to overcome it.
Thus, contrary to her assertion, private respondent need not introduce any evidence
to prove her negligence. Her own failure to adduce sufficient proof of extraordinary
diligence made the presumption conclusive against her.
3. ID.; ID.; HIJACKING OF GOODS; CARRIER PRESUMED NEGLIGENT;
HOW CARRIER ABSOLVED FROM LIABILITY. In De Guzman vs. Court of
Appeals, the Court held that hijacking, not being included in the provisions of
Article 1734, must be dealt with under the provisions of Article 1735 and thus, the

common carrier is presumed to have been at fault or negligent. To exculpate the

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

This is a petition for review on certiorari of the decision ** of the Court of Appeals
in "RODOLFO A. CIPRIANO, doing business under the name CIPRIANO
TRADING ENTERPRISES plaintiff-appellee, vs. ESTRELLITA M. BASCOS,
doing business under the name of BASCOS TRUCKING, defendant-appellant,"
C.A.-G.R. CV No. 25216, the dispositive portion of which is quoted hereunder:
"PREMISES considered, We find no reversible error in the decision appealed from,
which is hereby affirmed in toto. Costs against appellant." 1
The facts, as gathered by this Court, are as follows:
Rodolfo A. Cipriano representing Cipriano Trading Enterprise (CIPTRADE for
short) entered into a hauling contract 2 with Jibfair Shipping Agency Corporation
whereby the former bound itself to haul the latter's 2,000 m/tons of soya bean meal
from Magallanes Drive, Del Pan, Manila to the warehouse of Purefoods Corporation
in Calamba, Laguna. To carry out its obligation, CIPTRADE, through Rodolfo
Cipriano, subcontracted with Estrellita Bascos (petitioner) to transport and to deliver
400 sacks of soya bean meal worth P156,404.00 from the Manila Port Area to
Calamba, Laguna at the rate of P50.00 per metric ton. Petitioner failed to deliver the
said cargo. As a consequence of that failure, Cipriano paid Jibfair Shipping Agency
the amount of the lost goods in accordance with the contract which stated that:

6. That the amount due to the plaintiff in the above-entitled case is above all legal
counterclaims;"
The trial court granted the writ of preliminary attachment on February 17, 1987.
In her answer, petitioner interposed the following defenses: that there was no
contract of carriage since CIPTRADE leased her cargo truck to load the cargo from
Manila Port Area to Laguna; that CIPTRADE was liable to petitioner in the amount
of P11,000.00 for loading the cargo; that the truck carrying the cargo was hijacked
along Canonigo St., Paco, Manila on the night of October 21, 1988; that the
hijacking was immediately reported to CIPTRADE and that petitioner and the police
exerted all efforts to locate the hijacked properties; that after preliminary
investigation, an information for robbery and carnapping were filed against Jose
Opriano, et al.; and that hijacking, being a force majeure, exculpated petitioner from
any liability to CIPTRADE.
After trial, the trial court rendered a decision *** the dispositive portion of which
reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against
defendant ordering the latter to pay the former:

"1. CIPTRADE shall be held liable and answerable for any loss in bags due to theft,
hijacking and non-delivery or damages to the cargo during transport at market value,
. . ." 3

1. The amount of ONE HUNDRED FIFTY-SIX THOUSAND FOUR HUNDRED

FOUR PESOS (P156,404.00) as an (sic) for actual damages with legal interest of
12% per cent per annum to be counted from December 4, 1986 until fully paid;

Cipriano demanded reimbursement from petitioner but the latter refused to pay.
Eventually, Cipriano filed a complaint for a sum of money and damages with writ of
preliminary attachment 4 for breach of a contract of carriage. The prayer for a Writ
of Preliminary Attachment was supported by an affidavit 5 which contained the
following allegations:

2. The amount of FIVE THOUSAND PESOS (P5,000.00) as and for attorney's fees;
and

"4. That this action is one of those specifically mentioned in Sec. 1, Rule 57 the
Rules of Court, whereby a writ of preliminary attachment may lawfully issue,
namely:

The "Urgent Motion To Dissolve/Lift preliminary Attachment" dated March 10,

1987 filed by defendant is DENIED for being moot and academic.

3. The costs of the suit.

SO ORDERED." 6
"(e) in an action against a party who has removed or disposed of his property, or is
about to do so, with intent to defraud his creditors;"
5. That there is no sufficient security for the claim sought to be enforced by the
present action;

Petitioner appealed to the Court of Appeals but respondent Court affirmed the trial
court's judgment.
Consequently, petitioner filed this petition where she makes the following
assignment of errors; to wit:

"I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE

CONTRACTUAL RELATIONSHIP BETWEEN PETITIONER AND PRIVATE
RESPONDENT WAS CARRIAGE OF GOODS AND NOT LEASE OF CARGO
TRUCK.

We agree with the respondent Court in its finding that petitioner is a common carrier.

II. GRANTING, EX GRATIA ARGUMENTI, THAT THE FINDING OF THE

RESPONDENT COURT THAT THE CONTRACTUAL RELATIONSHIP
BETWEEN PETITIONER AND PRIVATE RESPONDENT WAS CARRIAGE OF
GOODS IS CORRECT, NEVERTHELESS, IT ERRED IN FINDING
PETITIONER LIABLE THEREUNDER BECAUSE THE LOSS OF THE CARGO
WAS DUE TO FORCE MAJEURE, NAMELY, HIJACKING.

Article 1732 of the Civil Code defines a common carrier as "(a) person, corporation
or firm, or association engaged in the business of carrying or transporting passengers
or goods or both, by land, water or air, for compensation, offering their services to
the public." The test to determine a common carrier is "whether the given
undertaking is a part of the business engaged in by the carrier which he has held out
to the general public as his occupation rather than the quantity or extent of the
business transacted." 12 In this case, petitioner herself has made the admission that
she was in the trucking business, offering her trucks to those with cargo to move.
Judicial admissions are conclusive and no evidence is required to prove the same. 13

III. THE RESPONDENT COURT ERRED IN AFFIRMING THE FINDING OF

THE TRIAL COURT THAT PETITIONER'S MOTION TO DISSOLVE/LIFT THE
WRIT OF PRELIMINARY ATTACHMENT HAS BEEN RENDERED MOOT
AND ACADEMIC BY THE DECISION OF THE MERITS OF THE CASE." 7

But petitioner argues that there was only a contract of lease because they offer their
services only to a select group of people and because the private respondents,
plaintiffs in the lower court, did not object to the presentation of affidavits by
petitioner where the transaction was referred to as a lease contract.

The petition presents the following issues for resolution: (1) was petitioner a
common carrier?; and (2) was the hijacking referred to a force majeure?

Regarding the first contention, the holding of the Court in De Guzman vs. Court of
Appeals 14 is instructive. In referring to Article 1732 of the Civil Code, it held thus:

The Court of Appeals, in holding that petitioner was a common carrier, found that
she admitted in her answer that she did business under the name A.M. Bascos
Trucking and that said admission dispensed with the presentation by private
respondent, Rodolfo Cipriano, of proofs that petitioner was a common carrier. The
respondent Court also adopted in toto the trial court's decision that petitioner was a
common carrier, Moreover, both courts appreciated the following pieces of evidence
as indicators that petitioner was a common carrier: the fact that the truck driver of
petitioner, Maximo Sanglay, received the cargo consisting of 400 bags of soya bean
meal as evidenced by a cargo receipt signed by Maximo Sanglay; the fact that the
truck helper, Juanito Morden, was also an employee of petitioner; and the fact that
control of the cargo was placed in petitioner's care.

"The above article makes no distinction between one whose principal business
activity is the carrying of persons or goods or both, and one who does such carrying
only as an ancillary activity (in local idiom, as a "sideline"). Article 1732 also
carefully avoids making any distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one offering such service
on an occasional, episodic or unscheduled basis. Neither does Article 1732
distinguish between a carrier offering its services to the "general public," i.e., the
general community or population, and one who offers services or solicits business
only from a narrow segment of the general population. We think that Article 1732
deliberately refrained from making such distinctions."

In disputing the conclusion of the trial and appellate courts that petitioner was a
common carrier, she alleged in this petition that the contract between her and
Rodolfo A. Cipriano, representing CIPTRADE, was lease of the truck. She cited as
evidence certain affidavits which referred to the contract as "lease". These affidavits
were made by Jesus Bascos 8 and by petitioner herself. 9 She further averred that
Jesus Bascos confirmed in his testimony his statement that the contract was a lease
contract. 10 She also stated that: she was not catering to the general public. Thus, in
her answer to the amended complaint, she said that she does business under the
same style of A.M. Bascos Trucking, offering her trucks for lease to those who have
cargo to move, not to the general public but to a few customers only in view of the
fact that it is only a small business. 11

Regarding the affidavits presented by petitioner to the court, both the trial and
appellate courts have dismissed them as self-serving and petitioner contests the
conclusion. We are bound by the appellate court's factual conclusions. Yet, granting
that the said evidence were not self-serving, the same were not sufficient to prove
that the contract was one of lease. It must be understood that a contract is what the
law defines it to be and not what it is called by the contracting parties. 15
Furthermore, petitioner presented no other proof of the existence of the contract of
lease. He who alleges a fact has the burden of proving it. 16
Likewise, We affirm the holding of the respondent court that the loss of the goods
was not due to force majeure.

Common carriers are obliged to observe extraordinary diligence in the vigilance

over the goods transported by them. 17 Accordingly, they are presumed to have been
at fault or to have acted negligently if the goods are lost, destroyed or deteriorated.
18 There are very few instances when the presumption of negligence does not attach
and these instances are enumerated in Article 1734. 19 In those cases where the
presumption is applied, the common carrier must prove that it exercised
extraordinary diligence in order to overcome the presumption.
In this case, petitioner alleged that hijacking constituted force majeure which
exculpated her from liability for the loss of the cargo. In De Guzman vs. Court of
Appeals, 20 the Court held that hijacking, not being included in the provisions of
Article 1734, must be dealt with under the provisions of Article 1735 and thus, the
common carrier is presumed to have been at fault or negligent. To exculpate the
carrier from liability arising from hijacking, he must prove that the robbers or the
hijackers acted with grave or irresistible threat, violence, or force. This is in
accordance with Article 1745 of the Civil Code which provides:
"Art. 1745. Any of the following or similar stipulations shall be considered
unreasonable, unjust and contrary to public policy;
xxx xxx xxx
(6) That the common carrier's liability for acts committed by thieves, or of robbers
who do not act with grave or irresistible threat, violences or force, is dispensed with
or diminished;"
In the same case, 21 the Supreme Court also held that:
"Under Article 1745 (6) above, a common carrier is held responsible and will not
be allowed to divest or to diminish such responsibility even for acts of strangers
like thieves or robbers except where such thieves or robbers in fact acted with grave
or irresistible threat, violence or force. We believe and so hold that the limits of the
duty of extraordinary diligence in the vigilance over the goods carried are reached
where the goods are lost as a result of a robbery which is attended by "grave or
irresistible threat, violence or force."
To establish grave and irresistible force, petitioner presented her accusatory
affidavit, 22 Jesus Bascos' affidavit, 23 and Juanito Morden's 24 "Salaysay".
However, both the trial court and the Court of Appeals have concluded that these
affidavits were not enough to overcome the presumption. Petitioner's affidavit about
the hijacking was based on what had been told her by Juanito Morden. It was not a
first-hand account. While it had been admitted in court for lack of objection on the

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

FIRST DIVISION

[G.R. No. 104685. March 14, 1996]

SABENA BELGIAN WORLD AIRLINES, petitioner, vs. HON. COURT OF

APPEALS and MA. PAULA SAN AGUSTIN, respondents.
DECISION
VITUG, J.:
The appeal before the Court involves the issue of an airlines liability for lost
luggage. The petition for review assails the decision of the Court Appeals, [1] dated 27
February 1992, affirming an award of damages made by the trial court in a
complaint filed by private respondent against petitioner.

The factual background of the case, narrated by the trial court and reproduced
at length by the appellate court, is hereunder quoted:
On August 21, 1987, plaintiff was a passenger on board Flight SN 284 of defendant
airline originating from Casablanca to Brussels, Belgium on her way back to Manila.
Plaintiff checked in her luggage which contained her valuables, namely: jewelries
valued at $2,350.00; clothes $1,500.00; shoes/bag $150; accessories $75; luggage
itself $10.00; or a total of $4,265.00, for which she was issued Tag No. 71423. She
stayed overnight in Brussels and her luggage was left on board Flight SN 284.
Plaintiff arrived at Manila International Airport on September 2, 1987 and
immediately submitted her Tag No. 71423 to facilitate the release of her luggage hut
the luggage was missing. She was advised to accomplish and submit a property
Irregularity Report which she submitted and filed on the same day.
She followed up her claim on September 14, 1987 but the luggage remained to be
missing.
On September 15, 1987, she filed her formal complaint with the office of Ferge
Massed, defendants Local Manager, demanding immediate attention (Exh. A).

at the counter would have advised her to secure an insurance on the alleged valuable
items and required her to pay additional charges, or would have refused acceptance
of her baggage as required by the generally accepted practices of international
carriers; that Section 9(a), Article IX of General Conditions of carriage requiring
passengers to collect their checked baggage at the place of stopover, plaintiff
neglected to claim her baggage at the Brussels Airport; that plaintiff should have
retrieved her undeclared valuables from her baggage at the Brussels Airport since
her flight from Brussels to Manila will still have to visit for confirmation inasmuch
as only her flight from Casablanca to Brussels was confirmed; that defendant
incorporated in all Sabena Plane Tickets, including Sabena Ticket No. 08242272502241 issued to plaintiff in Manila on August 21, 1987, a warning that Items of
value should be carried on your person and that some carriers assume no liability for
fragile, valuable or perishable articles and that further information may he obtained
from the carrier for guidance; that granting without conceding that defendant is
liable, its liability is limited only to US $20.00 per kilo due to plaintiffs failure to
declare a higher value on the contents of her checked in luggage and pay additional
charges thereon.[2]
The trial court rendered judgment ordering petitioner Sabena Belgian World
Airlines to pay private respondent Ma. Paula San Agustin
(a) x x x US$4,265.00 or its legal exchange in Philippine pesos;

On September 30, 1987, on the occasion of plaintiffs following up of her luggage

claim, she was furnished copies of defendants telexes with an information that the
Brussels Office of defendant found the luggage and that they have broken the locks
for identification (Exhibit B). Plaintiff was assured by the defendant that it has
notified its Manila Office that the luggage will be shipped to Manila on October 27,
1987. But unfortunately plaintiff was informed that the luggage was lost for the
second time (Exhibits C and C-1).
At the time of the filling of the complaint, the luggage with its content has not been
found.
Plaintiff demanded from the defendant the money value of the luggage and its
contents amounting to $4,265.00 or its exchange value, but defendant refused to
settle the claim.
Defendant asserts in its Answer and its evidence tend to show that while it admits
that the plaintiff was a passenger on board Flight No. SN 284 with a piece of
checked in luggage bearing Tag No. 71423, the loss of the luggage was due to
plaintiffs sole if not contributory negligence; that she did not declare the valuable
items in her checked-in luggage at the flight counter when she checked in for her
flight from Casablanca to Brussels so that either the representative of the defendant

(b) x x x P30,000.00 as moral damages;

(c) x x x P10,000.00 as exemplary damages;
(d) x x x P10,000.00 attorneys fees; and
(e) (t)he costs of the suit.[3]
Sabena appealed the decision of the Regional Trial Court to the Court of
Appeals. The appellate court, in its decision of 27 February 1992, affirmed in
toto the trial courts judgment.
Petitioner airline company, in contending that the alleged negligence of private
respondent should be considered the primary cause for the loss of her luggage, avers
that, despite her awareness that the flight ticket had been confirmed only for
Casablanca and Brussels, and that her flight from Brussels to Manila had yet to be
confirmed, she did not retrieve the luggage upon arrival in Brussels. Petitioner
insists that private respondent, being a seasoned international traveler, must have
likewise been familiar with the standard provisions contained in her flight ticket that

items of value are required to be hand-carried by the passenger and that the liability
of the airline or loss, delay or damage to baggage would be limited, in any event, to
only US$20.00 per kilo unless a higher value is declared in advance and
corresponding additional charges are paid thereon. At the Casablanca International
Airport, private respondent, in checking in her luggage, evidently did not declare its
contents or value. Petitioner cites Section 5(c), Article IX, of the General Conditions
of Carriage, signed at Warsaw, Poland, on 02 October 1929, as amended by the
Hague Protocol of 1955, generally observed by International carriers, stating, among
other things, that:

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

(3) Act or omission of the shipper or owner of the goods;
(4) The character of the goods or defects in the packing or in the containers;
(5) Order or act of competent public authority.
Not one of the above excepted causes obtains in this case. [5]

Passengers shall not include in his checked baggage, and the carrier may refuse to
carry as checked baggage, fragile or perishable articles, money, jewelry, precious
metals, negotiable papers, securities or other valuables. [4]
Fault or negligence consists in the omission of that diligence which is
demanded by the nature of an obligation and corresponds with the circumstances of
the person, of the time, and of the place. When the source of an obligation is derived
from a contract, the mere breach or non-fulfillment of the prestation gives rise to the
presumption of fault on the part of the obligor.This rule is not different in the case of
common carriers in the carriage of goods which, indeed, are bound to observe not
just the due diligence of a good father of a family but that of extraordinary care in
the vigilance over the goods. The appellate court has aptly observed:
x x x Art. 1733 of the [Civil] Code provides that from the very nature of their
business and by reasons of public policy, common carriers are bound to observe
extraordinary diligence in the vigilance over the goods transported by them. This
extraordinary responsibility, according to Art. 1736, lasts from the time the goods
are unconditionally placed in the possession of and received by the carrier until they
are delivered actually or constructively to the consignee or person who has the right
to receive them. Art. 1737 states that the common carriers duty to observe
extraordinary diligence in the vigilance over the goods transported by them remains
in full force and effect even when they are temporarily unloaded or stored in transit.
And Art. 1735 establishes the presumption that if the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they had observed extraordinary diligence as
required in Article 1733.
The only exceptions to the foregoing extraordinary responsibility of the common
carrier is when the loss, destruction, or deterioration of the goods is due to any of the
following causes:
(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

The above rules remain basically unchanged even when the contract is
breached by tort[6] although noncontradictory principles on quasi-delict may then be
assimilated as also forming part of the governing law. Petitioner is not thus entirely
off track when it has likewise raised in its defense the tort doctrine of proximate
cause. Unfortunately for petitioner, however, the doctrine cannot, in this particular
instance, support its case. Proximate cause is that which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces injury and without
which the result would not have occurred. The exemplification by the Court in one
case[7] is simple and explicit; viz:
(T)he proximate legal cause is that acting first and producing the injury, either
immediately or by setting other events in motion, all constituting a natural and
Continuous chain of events, each having a close causal Connection with its
immediate predecessor, the final event in the chain immediately affecting the injury
as a natural and probable result of the cause which first acted, under such
circumstances that the person responsible for the first event should, as an ordinarily
prudent, and intelligent person, have reasonable ground to expect at the moment of
his act or default that an injury to some person might probably result therefrom.
It remained undisputed that private respondents luggage was lost while it was
in the custody of petitioner. It was supposed to arrive on the same flight that private
respondent took in returning to Manila on 02 September 1987. When she discovered
that the luggage was missing, she promptly accomplished and filed a Property
Irregularity Report. She followed up her claim on 14 September 1987, and filed, on
the following day, a formal letter-complaint with petitioner. She felt relieved when,
on 23 October 1987, she was advised that her luggage had finally been found, with
its contents intact when examined, and that she could expect it to arrive on 27
October 1987. She then waited anxiously only to be told later that her luggage had
been lost for the second time. Thus, the appellate court, given all the facts before it,
sustained the trial court in finding petitioner ultimately guilty of gross negligence in
the handling of private respondents luggage. The loss of said baggage not only once

by twice, said the appellate court, underscores the wanton negligence and lack of
care on the part of the carrier.
The above findings, which certainly cannot be said to be without basis, foreclose
whatever rights petitioner might have had to the possible limitation of liabilities
enjoyed by international air carriers under the Warsaw Convention (Convention for
the Unification of Certain Rules Relating to International Carriage by Air, as
amended by the Hague Protocol of 1955, the Montreal Agreement of 1966, the
Guatemala Protocol of 1971 and the Montreal Protocols of 1975). In
Alitalia vs. Intermediate Appellate Court,[8] now Chief Justice Andres R. Narvasa,
speaking for the Court, has explained it well; he said:
The Warsaw Convention however denies to the carrier availment of the provisions
which exclude or limit his liability, if the damage is caused by his wilful misconduct
or by such default on his part as, in accordance with the law of the court seized of
the case, is considered to be equivalent to wilful misconduct, or if the damage is
(similarly) caused x x x by any agent of the carrier acting within the scope of his
employment. The Hague Protocol amended the Warsaw Convention by removing
the provision that if the airline took all necessary steps to avoid the damage, it could
exculpate itself completely, and declaring the stated limits of liability not applicable
if it is proved that the damage resulted from an act or omission of the carrier, its
servants or agents, done with intent to cause damage or recklessly and with
knowledge that damage would probably result. The same deletion was effected by
the Montreal Agreement of 1966, with the result that a passenger could recover
unlimited damages upon proof of wilful misconduct.
The Convention does not thus operate as an exclusive enumeration of the instances
of an airlines liability, or as an absolute limit of the extent of that liability. Such a
proposition is not borne out by the language of the Convention, as this Court has
now, and at an earlier time, pointed out. Moreover, slight reflection readily leads to
the conclusion that it should be deemed a limit of liability only in those cases where
the cause of the death or injury to person, or destruction, loss or damage to property
or delay in its transport is not attributable to or attended by any wilful misconduct,
bad faith, recklessness or otherwise improper conduct on the part of any official or
employee for which the carrier is responsible, and there is otherwise no special or
extraordinary form of resulting injury. The Contentions provisions, in short, do not
regulate or exclude liability for other breaches of contract by the carrier or
misconduct of its officers and employees, or for some particular or exceptional type
of damage. Otherwise, an air carrier would be exempt from any liability for damages
in the event of its absolute refusal, in bad faith, to comply with a contract of
carriage, which is absurd. Nor may it for a moment be supposed that if a member of
the aircraft complement should inflict some physical injury on a passenger, or
maliciously destroy or damage the latters property, the Convention might

successfully be pleaded as the sole gauge to determine the carriers liability to the
passenger. Neither may the Convention be invoked to justify the disregard of some
extraordinary sort of damage resulting to a passenger and preclude recovery therefor
beyond the limits set by said Convention. It is in this sense that the Convention has
been applied, or ignored, depending on the peculiar facts presented by each case.
The Court thus sees no error in the preponderant application to the instant case
by the appellate court, as well as by the trial court, of the usual rules on the extent of
recoverable damages beyond the Warsaw limitations. Under domestic law and
jurisprudence (the Philippines being the country of destination), the attendance of
gross negligence (given the equivalent of fraud or bad faith) holds the common
carrier liable for all damages which can be reasonably attributed, although
unforeseen, to the non-performance of the obligation, [9] including moral and
exemplary damages.[10]