[21] KUWAIT AIRWAYS V.
PHILIPPINE AIRLINES  Essentially, Kuwait Airways flight was authorized to board passengers
G.R. No. 156087 | May 8, 2009 | Tinga,J
TOPIC: Privatization of State-Operated Public Utilities
SUMMARY
PAL and Kuwait Airways initially entered into a Commercial Agreement part of which
granted the sharing of revenues between the two. However in 1995, the Philippine
Panel composed of CAB, DFA and 4 PAL officials entered into a Confidential
Memorandum of Understanding (CMU) with the Kuwait Government which removed
the revenue sharing scheme. PAL filed a complaint for a sum of money with the RTC
against Kuwait Airways stating that it cannot simply terminate the revenue sharing
scheme due to the commercial agreement. RTC ruled in favor of PAL. SC affirmed
the RTC and held that since PAL has become a private entity when the CMU was
entered into, the PH government cannot simply enter into agreements which would
infringe on PAL’s property rights without due process.
DOCTRINE
At the time of the execution of the Commercial Agreement in 1981 PAL was
controlled by the PH Government, hence as an owner, PH Govt can enter into
agreements that would prejudice the terms of commercial agreements between the
two airlines. However since PAL was already privatized at the time of the signing of
the CMU, the question of impairment of private rights may come into consideration.
Though subjected to regulations, infringement of infringement of property rights can
only avail with due process of law.
FACTS
 October 21, 1981: Kuwait Airways and Philippine Airlines entered into a
Commercial Agreement, annexed to which was a Joint Services
Agreement between the two airlines.
o The Commercial Agreement covered a twice weekly Kuwait
Airways flight on the route Kuwait-Bangkok-Manila and vice
versa.
o The agreement stipulated that "only 3rd and 4th freedom traffic
rights between Kuwait and Manila and vice versa will be
exercised. No 5th freedom traffic rights will be exercised between
Manila on the one hand and Bangkok on the other.
 Freedom Traffic Rights refers to the “five freedoms” contained in the
International Air Transport Agreement (IATA) signed in Chicago on
December 7, 1944. The IATA contains a stipulations which says that each
contracting state agreed to grant the other contracting state “five freedoms
of air”. Among these freedoms:
o Third Freedom: The privilege to put down passengers, mail and
cargo taken on in the territory of the State whose nationality the
aircraft possesses.
o Fourth Freedom: privilege to take on passengers, mail or cargo
destined for the territory of the State whose nationality the aircraft
possesses.
o Fifth Freedom: The right to carry passengers from one's own
country to a second country, and from that country to a third
country.
in Kuwait and deplane them in Manila, as well as to board passengers
in Manila and deplane them in Kuwait.
o At the same time, with the limitation in the exercise of Fifth
Freedom traffic rights, the flight was barred from boarding
passengers in Bangkok and deplaning them in Manila, or
boarding passengers in Manila and deplaning them in
Bangkok.
 By virtue of the Joint Services Agreement, Philippine Airlines was entitled to
seat allocations on specified Kuwait Airways sectors, special prorates for use
by Philippine Airlines to specified Kuwait Airways sectors, joint advertising by
both carriers in each other's timetables and other general advertising, and
mutual assistance to each other with respect to the development of traffic on
the route.
 Under Article 2.1 of the Commercial Agreement, Kuwait Airways
obligated itself to "share with Philippine Airlines revenue earned from
the uplift of passengers between Kuwait and Manila and vice versa".
 The Commercial Agreement and annexed Joint Service Agreement was
subsequently amended 6 times between 1981 and 1994.
 In April of 1995, delegations from the Philippines and Kuwait (Philippine
Panel and Kuwait Panel) met in Kuwait. The talks culminated in a
Confidential Memorandum of Understanding (CMU) entered into in
Kuwait on 12 April 1995.
o The members of the Philippine Panel consisted of the Civil
Aeronautics Board (CAB), the Department of Foreign Affairs (DFA)
and four officials of PAL.
 The controversy arises from the fourth paragraph of the CMU, which
read:
o 4. The two delegations agreed that the unilateral operation and the
exercise of third and fourth freedom traffic rights shall not be
subject to any royalty payment or commercial arrangements, as
from the date of signing of this [CMU].
The aeronautical authorities of the two Contracting Parties will bless
and encourage any cooperation between the two designated
airlines.
The designated airlines shall enter into commercial arrangements
for the unilateral exercise of 3fth freedom traFc rights. Such
arrangements will be subject to the approval of the aeronautical
authorities of both contracting parties.
 May 15 1995: PAL received a letter from Dawoud M. Al-Dawoud, the Deputy
Marketing & Sales Director for International Affairs of Kuwait Airways stating
that due to the CMU, the royalty agreement between Kuwait Airways and
PAL is no longer valid.
o However, PAL replies to this letter that according to Section 6.5 of
the Commercial Agreement it states that:
This agreement may be terminated by either party by giving ninety
(90) days notice in writing to the other party. However, any
termination date must be the last day of any traffic period, e.g.[,]
31st March or 31st October.
 Pursuant to this clause, PAL acknowledged the 15 May 1995 letter as the
requisite notice of termination. However, it also pointed out that the
 agreement could only be effectively terminated on 31 October 1995, or the
last day of the then current traffic period. PAL insisted that the provisions of
the Commercial Agreement “shall continue to be enforced until such date”.
 Subsequently, PAL insisted that Kuwait Airways pay it the principal sum
of US$1,092,690.00 as revenue for the uplift of passengers and cargo
for the period 13 April 1995 until 28 October 1995.
 Kuwait airways refused to pay so PAL filed a complaint with the RTC
seeking payment of the sum mentioned.
 RTC: Ruled in favor of PAL – PAL already has vested rights from the
Commercial Agreement entered into. The execution of CMU could not divest
its propriety rights under the Commercial Agreement.
 Hence, this petition for review filed by Kuwait Airways.
ISSUE
W/N the CMU entered into by the Philippine Government is superior to the
Commercial Agreement? - NO
RATIO
Court’s Review of Factual backdrop of the Agreement
 The Commercial Agreement was entered into in 1981 at a time when PAL
had not provided a route to Kuwait while Kuwait Airways had a route to
Manila.
o The Commercial Agreement established a joint commercial
arrangement where they both operate the Manila-Kuwait route.
o Kuwait at that time was interested in increasing its frequency of
flights to Manila
 As a result, the revenue-sharing agreement was reached between the two
airlines, an agreement which stood as an alternative to both carriers offering
competing flights servicing the Manila-Kuwait route.
 The CMU effectively sought to end the 1981 agreement between Philippine
Airlines and Kuwait Airways, by precluding any commercial arrangements in
the exercise of the Third and Fourth freedom traffic rights.
o As a result, both Kuwait and the Philippines had the respective
right to board passengers from their respective countries and
deplane them in the other country, without having to share any
revenue or enter into any commercial arrangements to exercise
such rights.
o In exchange, the designated airline of each country was entitled to
operate 6 frequencies per week in each direction and allowed to
enter into commercial arrangement for unilateral exercise of 5th
Freedom.
 At the time of the execution of the Commercial Agreement in 1981 PAL
was controlled by the PH Government (GSIS is majority share holder).
 However, in 1992, Philippine Airlines was privatized, with a private
consortium acquiring 67% of the shares of the carrier. Thus, at the
time of the signing of the CMU, Philippine Airlines was a private
corporation no longer controlled by the Government.
o Had Philippine Airlines remained a government owned or
controlled corporation at the time the CMU was executed in 1995,
its status as such would have bound Philippine Airlines to the
commitments made in the document by no less than the Philippine
government.
o But since it is now a private corporation, the question of
impairment of private rights may come into consideration.
Preambular Clause
 Kuwait Airways points out that the third Whereas clause of the 1981
Commercial Agreement stated: "NOW, it is hereby agreed, subject to and
without prejudice to any existing or future agreements between the
Government Authorities of the Contracting Parties hereto . . ."
 Preamble - manifests the reasons for the passage of the statute and aids in
the interpretation of any ambiguities within the statute to which it is prefixed,
it nonetheless is not an essential part of an act, and it neither enlarges nor
confers powers.
o PAL argues that the same holds true as to the preambular whereas
clauses of contract.
 SC: At the time the agreement was entered into, the PH Government, as the
owner, could enter into an agreement with the Kuwait Government that
would prejudice the terms of the commercial arrangements between the two
airlines. After all, PAL then would not have been in a position to challenge
the wishes of its majority stockholder – the PH Govt.
o However, ownership of PAL had already been transferred into
private hands at the time the CMU was entered into.
o With the change of ownership of Philippine Airlines, the
"Whereas" clause had ceased to be reflective of the current
situation as it now stands as a seeming invitation to the
Philippine government to erode private vested rights.
Regulation of PAL
 PAL is the grantee of a legislative franchise authorizing it to provide
domestic and international air services
o Sec. 8 of PD No. 1590 subjects PAL “to the laws of the PH now
existing or hereafter enacted. – statutory recognition was accorded
PAL as the national flag carrier.
 RA No. 776 or the Civil Aeronautics Act of the PH also grants the CAB “the
power to regulate the economic aspect of transportation” and that the CAB
"shall take into consideration the obligation assumed by the Republic of the
Philippines in any treaty, convention or agreement with foreign countries on
matters affecting civil aviation."
 There is also a very significant public interest in state regulation of air travel
in view of considerations of public safety, domestic and international
commerce.
Despite all these regulations the property rights of PAL cannot be infringed
upon without due process
 As with all regulatory subjects of the government, infringement of
property rights can only avail with due process of law.
 Legislative regulation of public utilities must not have the effect of
depriving an owner of his property without due process of law, nor of
confiscating or appropriating private property without due process of
 law, nor of confiscating or appropriating private property without just
compensation, nor of limiting or prescribing irrevocably vested rights or
privileges lawfully acquired under a charter or franchise. The power to
regulate is subject to these constitutional limits.
 There is no doubt that CAB, in the exercise of its statutory mandate, has
the power to compel PAL to immediately terminate its Commercial
Agreement with Kuwait Airways pursuant to CMU. However, the CMU
was entered into not in the exercise of CAB of its regulatory
authority.
o An officer of the CAB, acting in behalf not of the Board but
of the Philippine government, had committed to a foreign
nation the immediate abrogation of PAL’s commercial
agreement with Kuwait Airways.
o If President, or one of his alter egos, acceded to demands of
foreign counterpart and agreed to shut down a particular
Filipino business, this mere declaration does not have legal
effect in this jurisdiction unless and until due process is
observed.
o Even granting that the "agreement" between the two
governments or their representatives creates a binding
obligation under international law, it remains incumbent for
each contracting party to adhere to its own internal law in the
process of complying with its obligations.
 Had Philippine Airlines remained a government-owned or
controlled corporation, it would have been bound, as part of the
executive branch, to comply with the dictates of the President or
his alter egos since the President has executive control and
supervision over the components of the executive branch.
 Even granting that the police power of the State, as given flesh in the
various laws governing the regulation of the airline industry in the
Philippines, may be exercised to impair the vested rights of privately-
owned airlines, the deprivation of property still requires due process
of law.

RULING: WHEREFORE, the petition is DENIED. No pronouncement as to costs. SO

ORDERED.