TRANSPORTATION PRELIMINARIES DISCUSSION OUTLINE

SUBJECT COVERAGE:

The discussion on transportation will cover the following topics as outlined in the 2020 Bar
Syllabus for the combined 2020 and 2021 bar examinations: (a) common carriers, (b) bill of
lading, (c) maritime commerce, (d) Public Service Act, and (e) Warsaw Convention.

TRANSPORTATION DEFINED:

Generally speaking, it has been referred to as the movement of goods or persons from one
place to another, by a carrier.

Simply, it refers to the movement of persons or things from one place to another, and is
immaterial whether the carrying be over land, water or air. It includes waiting time, loading or
unloading, stopping in transit, and all other accessorial services in connection with the loaded
movement.1

As a contract, it is one whereby a person, natural or juridical, obligates himself to transport

persons, goods or both, from one place to another, by land, water or air, for a price or
compensation.

LAWS ON TRANSPORTATION THAT HAVE APPLICATION IN THE

PHILIPPINES

1. Whether transportation is by land, sea or air, the primary law are Articles 1732 to
1766 of the New Civil Code. The secondary laws, particularly as to the rights and obligations
of a common carrier are the Code of Commerce and/or special laws.

1.1 The specific aspects that will be discussed are: (a) Public Utilities as covered by the
Public Service Act2 (b) Common Carriers as covered by the Civil Code 3 (c) Commercial
Contracts for Transportation Overland4 (d) Maritime Commerce5

2. Both the primary and secondary laws however are subject to the Constitution as the
supreme law.

2.1 Section 11, Article XII- National Economy and Patrimony provides that the grant of
any franchise or any form of authorization to operate a public utility is limited to Filipinos or
Filipino corporations owned at least 60% by Filipinos. The participation of foreigners in the
equity and the governing body is thus limited to 40% but it is required that all executive and
managing officers must be Filipino. Note the ruling in the case of Gamboa v. Teves providing
for the determination of Filipino nationality.

2.2 The Constitution does not prohibit the mere formation of a public utility corporation
without the required proportion of Filipino capital. What is prohibited is the grant of a

1
87 C.J.S. Transportation
2
Commerce Act No. 146, as amended by the Warsaw Convention of 1929 as to carrier liability
3
Articles 1732-1766
4
Articles 349-379, Code of Commerce
5
Articles 673-736, Article 580-584, Code of Commerce as superseded by RA 6106, Articles 806-845,
Code of Commerce, Carriage of Goods by Sea Act, Commerce Act No. 65
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. 6

2.3 The Constitution does not require a franchise before one can own the facilities needed
to operate a public utility as long as it does not operate them to serve the public. The
ownership per se of the facilities of a public utility does not constitute the owner thereof as a
public utility. It is the use thereof to serve the public that will constitute it as a public utility. 7

2.4 There is a clear distinction between operation and ownership of facilities to serve the
public. Ownership is defined as a relation in law by virtue of which a thing pertaining to one
person is completely subject to his will in everything not prohibited by law or the concurrence
with the rights of another.8 This use as an incident of ownership is limited by law when it is to
be operated and used to serve the public as a public utility. 9 The right to operate may exist
independently and separately from ownership of the facilities. A person can thus own the
facility but not operate it as a utility or may operate a public utility without owning the
facilities, like in the lease of airplanes/vessels.

2.5 Hence, the mere formation of a public utility corporation does not ipso facto
characterize it as one that is operating a public utility. The moment of determination of
Filipino nationality is when it applies for a franchise to operate a public utility.

2.6 This grant is always subject to the condition that it may be amended, altered or
repealed when the common good so requires as Section 17, provides that in times of national
emergencies, when public interest requires and under reasonable terms, it may temporarily
take over the operation of a privately owned public utility or business affected with public
interest.

2.7 Under Section 18,10 if in the interest of national welfare or defense, upon payment of
just compensation, there may be a transfer to public ownership of utilities and other private
enterprises.

2.8 Under Section 19,11 the state may regulate or prohibit monopolies when the public
interest requires and no combination in restraint of trade or unfair competition shall be
allowed.12

COMMON CARRIERS DISCUSSION OUTLINE 1

COMMON CARRIER DEFINED

A common carrier is defined 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. 13

1.1 The elements of a common carrier are: (a) persons, corporations, firms or associations
(b) engaged in the business of carrying or transporting passengers, goods or both (c) the

6
People vs. Quasha, 93 Phil 333
7
Iloilo Ice and Cold Storage vs. Public Service Board, 44 Phil 551
8
Tolentino II, Commentaries and Jurisprudence on the Civil Code of the Philippines
9
Tatad vs. Garcia, 243 SCRA 436
10
Article XII, National Economy and Patrimony, 1987 Constitution
11
Article XII, National Economy and Patrimony, 1987 Constitution
12
NPC vs. Court of Appeals, GR No. 112702, September 26, 1977
13
Article 1732, Civil Code
means of carriage is by land, water or air (d) the carrying of passengers, goods or both is for
compensation (e) the service is offered to the public without distinction.

1.2 Engaged in the business is deemed to cover operations whether regular or scheduled,
occasional, episodic or unscheduled.

1.3 One is a common carrier even if he has no fixed and publicly known route, maintains
no terminals and issues no tickets.

1.4 The law does not make any distinction whether the carriage of goods or persons is the
principal or merely ancillary activity of the carrier as in the case of a junk dealer who back-
hauls cargo of merchants on its return trip.14
1.5 The true test of whether the character of the use is whether the public may enjoy it by
right or by permission. Note that the contract of transportation is a consensual contract.
Hence, a common carrier engages in a continuous offer. If you flag a common carrier down,
the contract becomes perfected and is consistent with the idea that entering with a contract
with the common carrier is a matter of right and not permission. You would know when the
carrier you are going to flag down is a common carrier because it should hold itself out
principally as such.

1.6 To further distinguish: (a) The common carrier holds himself out in common, that is,
to all persons who choose to employ him, ready to carry for hire while the private carrier or
special carrier agrees in some special case with some private individual to carry for hire (b) A
private carrier is not bound to carry for any reason unless it enters a special agreement to do
so. A common carrier is bound to carry for all who offer such goods as it is accustomed to
carry and tender reasonable compensation for carrying them (c) A common carrier is subject
to regulation as it is a public service. A private carrier is not (d) The common carrier is
bound to exercise extraordinary diligence while a private carrier owes only diligence of a
good father of a family (e) A common carrier cannot stipulate that it is exempt from liability
for the negligence of its agents or employees. Such stipulation is void as it is against public
policy. A private carrier may validly enter into such stipulation.

2. A common carrier is required to obtain a certificate of public convenience. 15However,

the absence thereof does not mean that it is not a common carrier nor is it required to incur
liability as a common carrier. The liability arises upon acting as a common carrier.

2.1 To exempt it from the liabilities because it has not obtained the necessary certificate
of public convenience is offensive to sound public policy; that would be to reward such
carrier precisely for failing to comply with the applicable statutory requirements. 16

DEGREE OF DILIGENCE REQUIRED OF A COMMON CARRIER

1. Regardless of whether the object are goods or passengers, a common carrier must
observe extra ordinary diligence.17

1.1 While there is no expressed definition, it should mean greater than ordinary diligence
as may be required by the nature of the obligation and the circumstances of persons, time and
place.

14
De Guzman vs. Court of Appeals, 168 SCRA 612
15
Section 15, Public Service Act
16
Loadstar Shipping Co. Inc., vs. CA, GR No. 131621, September 28, 1999
17
Article 1733, Civil Code
1.2 The requirement is such because of the nature of the business and by reason of public
policy.

2. The failure to exercise the required degree of diligence is a breach of the contract.

2.1 If loss, destruction or deterioration of the goods occurs or death or physical injuries is
suffered by a passenger, there is a presumption of negligence that arises.

2.2 If the damage does not fall within the instances stated, it does not mean that there is
no recovery against the common carrier. The grounds for recovery will have to be proven as
there is no presumption of negligence that arises. An example would be damages due to a
delay in delivery.

TRANSPORT NETWORK COMPANY AND TRANPORTATION NETWOR

VEHICLE SERVICE

1. A transport network company is an organization that utilizes a mobile application to

enable people to secure individual and carpooling rides from drivers who use their
own vehicles. They are also referred to as ride-hailing companies, while a transportation
network vehicle service (Tnvs) refers to the driver and his vehicle that is utilized to provide
the individual or carpooling ride that is arranged through the TNS.

1.1 Previously a TNVS was already considered a common carrier under Land
Transportation Franchising and Regulatory Board (LTFRB) Circular No. 2015-018-A, while
a TNC was defined in Department of Transportation Order No. 2015-011 as "an organization
whether a corporation, partnership, sole proprietor, that provides pre-arranged transportation
services for compensation using an internet-based technology application or digital platform
technology to connect passengers with drivers using their personal vehicles.”
  
Under Department of Transportation Order No. 2018-013, effective June 11, 2018, a TNC
and TNVS, are expressly considered as common carriers and classified as public utilities.  

2. The principal consequence of the classification is to require both to secure a

certificate of public convenience from the LTFRB. For this purpose, they must be considered
under the law as a Filipino citizen.

 
COMMON CARRIERS OUTLINE 2

WHEN THE CONTRACT AND EXERCISE OF DILIGENCE BEGINS AND ENDS

1. In a contract for carriage of goods – it commences from the time the goods are
unconditionally placed in the possession of, and received by the carrier for transportation until
the same shall have been delivered actually or constructively by the carrier to the consignee
who has the right to receive them. It is the unconditionally placing of the goods in the
possession of and receipt by the carrier that will signal perfection of the contract.

It remains in full force and effect even if they are temporarily off-loaded or stored in transit
unless the shipper or owner has made use of the right of stoppage in transit.

It continues even during the time they goods are stored in a warehouse of the carrier at the
place of destination until the consignee has been advised of the arrival and has had a
reasonable opportunity thereafter to remove or otherwise dispose of them.
2. In a contract for the carriage of passengers- it commences the moment the person
who purchases the ticket from the carrier presents himself at the proper place and in a proper
manner to be transported. This is when the contract of carriage is perfected.

Such person must have a bona fide intention to use the facilities of the carrier, possess
sufficient fare with which to pay for his passage, and present himself to the carrier for
transportation in the place and manner provided. If he does not do so, he will not be
considered a passenger and the carrier does not owe him extraordinary diligence.

When an airline issues a ticket to a passenger, confirmed for a particular flight on a certain
date, a contract of carriage arises. The passenger has every right to be transported on that
flight and that date, and it becomes the airline’s obligation to carry him and his luggage safely
to the agreed destination without delay. Further, the contract of carriage is perfected if it can
be established that the passenger has checked in at the departure counter, passed through
customs and immigration, boarded the shuttle bus and proceeded to the ramp of the aircraft
and that his baggage has already been loaded in the aircraft to be flown with the passenger to
his destination.

3. Prior to perfection of the contract of carriage of passengers, there is the contract to

carry, that is, an agreement to carry a passenger at some future date. This contract is
consensual and is therefore perfected by mere consent. In this instance, an action for damages
based on a breach of the contract to carry may be sustained, even if no ticket is issued.

SPECIFIC OBLIGATIONS OF A COMMON CARRIER

1. As far as goods, a common carrier is responsible for its loss, destruction or

deterioration.

The common carrier must exercise vigilance in the care and custody of the goods. Unless the
exceptions apply, a common carrier is presumed to have been at fault or acted negligently.

2. The exceptions is an exclusive list. No other justifications will excuse liablity:

2.1 Flood, storm, earthquake, lightning, or other natural disaster or calamity. For it to
apply, the following must be present: (a) such must be the proximate and only cause (b) due
diligence was exercised to prevent or minimize the loss, before, during and after its
occurrence, and (c) the common carrier is not guilty of delay in transporting the goods. Note
that fire is not a natural disaster or calamity unless cause by lightning or some other natural
disaster.

2.2 Act of the public enemy in war, whether international, one that presupposes the
existence of an actual state of war, and refers to the government of a foreign nation at war
with the country to which the carrier belongs, or civil, when parties in rebellion occupy and
hold in a hostile manner a certain portion of the territory, when they have declared
independence and have in the field a regularly organized force in armed hostility. For it to
apply, the following must be present: (a) such must be the proximate and only cause (b) due
diligence was exercised to prevent or minimize the loss, before, during and after the act of the
public enemy. Note that pirates on the high seas stand as an exception as they are considered
as enemies of all civilized nations, and their depredations on a common carrier will excuse
him from liability.

2.3 Act or omission of the shipper or owner of the goods. For it to apply, such must be
the proximate and only cause. If the shipper or owner merely contributed to the loss,
destruction or deterioration, the proximate cause being the negligence of the common carrier,
it shall still be liable for damages but it shall be equitably reduced. An example would be a
misdirection of the shipment by the shipper, or interference by the shipper with the goods
after acceptance. Note that a shipper who delivers the goods to the carrier during a storm is
not guilty of negligence so as to excuse the carrier which consents to receive them from
liability for loss sustained as a result of the storm.

2.4 The character of the goods or defects in the packaging or in the containers. For it to
apply, such must be the proximate and only cause. The common carrier must have protested if
visible and still exercise due diligence to forestall or lessen the loss. If the carrier accepts
despite the condition, it is not relieved of liability for loss or injury.

2.5 Order or act of competent authority resulting in the seizure or destruction. For it to
apply, the public authority must have the power to issue the order and that the same be lawful.

3. For passengers, a common carrier is bound to carry them safely as far as human care
and foresight can provide, using utmost diligence of a very cautious person with due regard
for all circumstances. In case of death or injury , common carriers are presumed to have been
at fault or to have acted negligently, unless they exercised extra-ordinary diligence.

The other known exception as to liability is when carriage is gratuitous where the parties can
stipulate against the presumption as liability for negligence may be limited, but it should not
include limitation of liability for willful acts or gross negligence. If the fare is just reduced, it
will not justify any limitation on liability.

3.1 The common carrier is also liable if the death or injury arises from the negligence or
willful acts of its employees, although the employees may have acted beyond the scope of
their authority or in violation of orders. The liability does not cease upon proof of the exercise
of diligence of a good father of the family in the selection and supervision of the employees.
This liability extends only to acts which the carrier could foresee or avoid through the
exercise of the degree of diligence required and neither can it be eliminated or limited by
stipulation, by the posting of notices, by statements on the ticket or otherwise. However, in a
like manner the passenger must observe the diligence of a good father of a family to avoid
injury to himself.

3.2 If the acts of the employee is not undertaken in the line of duty, the carrier is not
liable. However the rule on strangers or other passengers will apply as the common carrier is
liable for injuries suffered by a passenger on account of the wilful acts of other passengers or
strangers, if the common carrier’s employees through the exercise of the diligence of a good
father of a family, it could have prevented or stopped the act or omission.

3.3 The contributory negligence of a passenger is not a defense that will excuse a carrier
from liability for damages on account of death or injury, if the proximate cause thereof is the
negligence of the common carrier, but the amount shall be equitably be reduced. Hence, the
only effect of such is to mitigate the liability.

PROHIBITED AND ALLOWABLE STIPULATIONS IN A CONTRACT OF

CARRIAGE

1. The following or similar stipulations shall be considered unreasonable, unjust and

contrary to public policy: (a) that the common carrier shall not be responsible for the acts or
omissions of his or its employees (b) 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 (c) 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.

2. In a contract for the carriage of goods, the parties can stipulate on the exercise of a
lesser degree of diligence, but not that below the diligence of a good father of a family,
provided: (a) the stipulation be in writing and signed by both parties (b) that it be supported
by valuable consideration other than the service rendered by the common carrier, and (c) that
it be just and reasonable, and not contrary to law.

2.1 A stipulation limiting the common carrier’s liability for delay on account of strikes or
riots is valid.

2.2 A stipulation fixing the amount that may be recovered is allowed provided: (a) it is
reasonable and just under the circumstances, and (b) it is fairly and freely agreed upon.

2.3 A stipulation that the liability of the common carrier is limited to the value of the
goods as appearing in the bill of lading, unless the shipper or owner declares a greater value is
binding.

The agreement limiting liability may be annulled by the shipper or owner if the common
carrier refused to carry the goods, unless the former agreed to the stipulation.

If the common carrier, without just cause, delays transportation or changes the stipulated
route, the contract limiting liability cannot be availed of in case of loss, destruction or
deterioration.

3. In a contract for the carriage of passengers, there can be no stipulation dispensing

with responsibility or reducing the amount that may be recovered. This applies
notwithstanding the posting of notices or statements in the tickets.

RECOVERABLE DAMAGES AND PENALTIES

1. Damages may be recovered as provided for by the provisions on damages as found in

the Civil Code.

In case of death of a passenger or even if death does not result but the carrier is guilty of fraud
or bad faith, moral damages may be recovered. In the latter case, only the injured may
demand payment of the moral damages. If there is contributory negligence of the passenger,
moral damages cannot be recovered.

In breach of a contract of air carriage, moral damages may be recovered where (a) the mishap
results in the death of a passenger (b) carrier is guilty of fraud or bad faith (c) where
negligence is so gross and reckless as to virtually amount to bad faith. In addition, exemplary
damages may be recovered if it acted recklessly and malevolently in transporting its
passengers.

2. In addition, the carrier may also be liable for: (a) loss of earning capacity of the
deceased unless the deceased on account of a permanent physical disability not caused by the
defendant had no earning capacity at the time of his death (b) if the deceased was obliged to
give support according to Article 291, Civil Code, the recipient who is not an heir, may
demand support from the person causing death for a period not exceeding 5 years, the exact
period to be fixed by the court (c) the spouse, legitimate or illegitimate descendants and
ascendants may demand payment of moral damages for mental anguish by reason of death.
Prevailing jurisprudence has fixed indemnity for death at PHP 50,000.00.

The computation of net earning capacity is life expectancy [80 less the age of the deceased
multiplied by 2/3] multiplied by [gross annual income- necessary living expenses (in the
absence of proof it will be computed at 50% of gross annual income)].

Loss of earning capacity can also be held to apply when the breach by the carrier results in
plaintiff’s permanent incapacity.

2.1 Generally exemplary damages will be adjudged against a common carrier when: (a)
he authorized the wrongful acts of his agent, or (b) he ratifies the same thereafter.

2.2 Interest on a claim for damages for breach of a contract of carriage shall be computed
a 6% per annum as it is not based on loan or forbearance of money. However, after finality of
judgment until execution, interest shall be computed at 12% per annum.

3. The Public Service Commission (now the LTFRB) may on its motion or petition of
an interested party cancel the certificate of public convenience granted to a common carrier
that repeatedly fails to comply with the exercise of extra-ordinary diligence.

4. Concurring causes of action exist from the negligent act of the common carrier.

In culpa contractual, the carrier is primarily liable and not the driver as there is no privity
between the latter and the passenger. The defense of due diligence in the selection and
supervision of an employee is not available.

In culpa aquiliana, the breach of the contract is also a tort notwithstanding the contract. The
carrier and driver are solidary liable as joint tortfeasors. The defense of due diligence in the
selection and supervision of an employee is available. Exception is maritime tort resulting in a
collision.

In culpa delictual, the driver is primarily liable for the civil liability arising from the crime
and the carrier is only subsidiarily liable upon conviction and declaration of insolvency.

PASSENGER BAGGAGE

1. Passenger’s Baggage is deemed to include whatever articles a passenger usually takes

with him for his own personal use, comfort and convenience according to the habits or wants
of the particular class to which he belongs, either with reference to his immediate necessities
or the ultimate purpose of his journey. Baggage may be hand-carried or check-in or is
delivered to the carrier.

2. Baggage that is hand-carried and in the custody of the passenger will be considered as
a necessary deposit, where the carrier is responsible as a depository, provided that notice is
given to the carrier and that the passenger took the necessary precautions which the carrier
has advised him relative to care and vigilance.

In case of loss or injury that are caused by servants, employees as well as strangers, the carrier
would be liable, but not for that which may proceed from force majeure. The act of a thief or
robber, who entered the premises of the carrier is not force majeure unless done with the use
of arms or through an irresistible force.

If the loss or injury is caused by the acts of the passenger or those acting in his behalf or due
to the character of the thing, the carrier would not be liable.
2.1 The common carrier cannot free himself from this responsibility by posting notices to
the effect that he is not liable for the articles brought by the passenger. Any stipulation
whereby the responsibility set forth in Articles 1998 to 2001 of the Civil Code is suppressed
or diminished is void.

3. Checked-in baggage or baggage that is not in the personal custody of the passenger or
that of his employee will be governed by Articles 1733 to 1753. Thus it will be treated in the
same manner as goods that are being shipped and the carrier will be required to exercise
extra-ordinary diligence while they are in its custody and control.

4. The carrier cannot be said to be remiss in the exercise of the required degree of
diligence when it does not cause to be opened the luggage or baggage of its passengers, who
upon an inquiry have disclosed the contents to the satisfaction of the carrier. However, air
carriers are given the power to open and if the owner, shipper or their representative refuses to
have opened and inspected, they may be refused loading. Hence, their failure to exercise the
power amounts to a failure to exercise the required degree of diligence.

BILL OF LADING OUTLINE

PRELIMINARIES

1. Definition of overland transportation- the transport on land and on small bodies of

water, waterways, both natural and artificial including transport on rivers which are not very
large.

1.1 If it involves transport on sea, it will be referred to as maritime admiralty

2. The provisions of Articles 352-379 of the Code of Commerce involves commercial

contracts only. However, the applicability of laws shall be as follows:

2.1 Commercial contracts involving common carriers shall be governed primarily by the
Civil Code and supplemented by the Code of Commerce

2.2 Commercial contracts involving private carriers shall be governed primarily by the
Code of Commerce and supplemented by the Civil Code provisions.

3. A contract of transportation by land or waterways of any kind shall be considered

commercial when: (a) it involves merchandise or any object of commerce or (b) no matter
what its object may be, the carrier is a merchant or is customarily or habitually engaged in
transportation for the public or is a common carrier.

3.1 The transportation of persons or news will be deemed commercial only if it is

undertaken under (b)

3.2 A contract of air transportation may be regarded as commercial since it is analogous to

land and water transportation.

4. Art. 1766 of the Civil Code provides that in all matters not regulated by this Code, the
rights and obligations of common carriers shall be governed by the Code of Commerce and
by special laws.
BILL OF LADING DEFINED

1. A bill of lading may be defined as a written acknowledgment of the receipt of goods

and an agreement to transport and to deliver them at a specified place to a person named or on
his order. It comprehends all methods of transportation.

The nature of a Bill of Lading is as follows: (a) is a contract in itself and the parties are bound
by its terms (b) it is a receipt (c) it is a symbol of the goods covered by it

The bill of lading is the law between the parties and is legal evidence of the contract. As such
it is an actionable document.

As a receipt means that the issuance of a bill of lading carries the presumption that the goods
were delivered to the carrier issuing the bill, for immediate shipment and it is nowhere
questioned that a bill of lading is prima facie evidence of the receipt of the goods by the
carrier. Since it is a prima facie evidence of receipt, the carrier may be allowed to present
proof that he received the cargo on a date different from the date of the bill of lading.

Since it also is a symbol of the goods, it is considered a document of title to the goods.

A document of title is any document used in the ordinary course of business in the sale or
transfer of goods, as proof of the possession or control of goods, or authorizing the possessor
of the document to transfer or receive, either by endorsement or delivery, goods represented
by such document

2. The form of the bill of lading is not material. If it contains an acknowledgement by

the carrier of the receipt of goods for transportation, it is in legal effect, a bill of lading.

The Bill of Lading constitutes the legal evidence of the contract of transportation as all
disputes between the parties regarding the execution and performance of the contract shall be
decided by its contents. The law admits no exception other than falsity and material error in
its drafting.

But the execution of a bill of lading is not essential to a contract of transportation. The
making of such is not obligatory. The fact that a Bill of Lading is not issued does not preclude
the existence of a contract of transportation.

In the absence of a bill of lading, the respective claims of the parties shall be decided by the
legal proofs that each one may submit in support of his claims. However: (a) if the value is
PHP 300.00 or less, testimonial evidence is allowed (b)if the value exceeds PHP 300.00,
testimonial evidence is not sufficient, there should be proof through other writing/s.

Note that the Electronic Commerce Act allows data messages or electronic documents to be
used in lieu of transport writing or paper documents.

3. A ticket ordinarily refers to passengers but when it refers to a thing it covers baggage,
while a bill of lading always refers to goods that are denominated usually as cargo.

4. Distinguishing common kinds of bills of lading:

A clean bill of lading is one in common form without any memorandum in the margin or on
its face showing that the goods are to be carried on deck contains any defect. A foul bill of
lading is one that carried a memorandum.
On board bill of lading is one that states that the goods have been received on board the vessel
that will transport such goods. A received for shipment bill of lading is one that states that the
goods have been received without specifying the vessel that will transport the goods.

A custody bill of lading is one where the goods are already received by the carrier but the
vessel indicated therein has not yet arrived in port. A port bill of lading, the vessel indicated
in the bill of lading transporting the goods is already in port.

A through bill of lading is one issued by a carrier who is obliged to use the facilities of other
carriers as well as his own facilities for the purpose of transporting the goods from the city of
the seller to the city of the buyer, which bill of lading is honoured by the second and other
interested carriers who do not issue their own lading.

PARTIES TO A BILL OF LADING

1. The parties to a bill of lading are: (a) shipper/consignor – a person to be

transported or owner of the goods to be transported; one who gives rise to the contract of
transportation (b) carrier – one who binds himself to transport persons, things or news
as the case may be; one engaged in the business of carrying goods for others for hire
(c)consignee – the party to whom the carrier is to deliver the things being transported; one to
whom the carrier may lawfully make delivery in accordance with its contract of carriage.
Note that the shipper and consignee may be 1 person.

COMMENCEMENT OF THE RESPONSIBILITY OF THE CARRIER

1. Commencement of the responsibility of the carrier is upon receipt of the merchandise

from the shipper, either personally or through a person charged for that purpose, at the place
indicated for their reception.

1.1 This responsibility shall endure and continue after the arrival of the goods at their
destination until they are ready to be delivered at the usual place of delivery, and the owner or
consignee has a reasonable opportunity, when such goods are delivered, of examining them
sufficiently to judge from their outward appearance of their identity, and whether they are in a
proper condition, and take them away.

1.2 A common carrier cannot refuse a particular class of goods to the prejudice of the
traffic in those goods

1.3 The exception is when the goods are unfit for transportation but if transportation is
insisted upon, common carriers cannot refuse to carry them, but they shall be exempt from all
responsibility if their objections are made to appear in the bill of lading.

1.4 If by reason of well-founded suspicions of falsity in the declaration of the contents of

a package, the carrier should decide to examine it, he shall do so before witnesses, in the
presence of the shipper or the consignee. If the shipper or consignee cannot appear, it shall be
done before a notary. Expenses for the examination and repackaging shall be defrayed by the
carrier if the declaration of the shipper be correct and in a contrary case for the account of the
shipper.

RESPONSIBILITIES OF THE CARRIER

1. The responsibilities of a carrier are as follows: (a) If a common carrier, observe extra-
ordinary diligence (b) to deliver goods to the consignee without delay, otherwise, make
judicial deposit (c) to deliver goods in the same condition (c) not to deviate from the route (e)
to keep a registry (f) to comply with law and regulations during the whole course of the trip
and upon arrival at the port of destination, except when the failure shall arise on account of a
falsehood on the part of the shipper in the declaration of merchandise.

1.1 The responsibilities shall be equally applicable to those, who although do not
personally effect transportation, contract to do so through contractors for a particular and
definite operation or as agents for transportation and conveyances.

1.2 In such case, they are subrogated in the place of the carrier, with respect to
responsibilities and rights.

DELIVERY OF THE GOODS WITHOUT DELAY

1. Where a period is fixed for delivery: the carrier must deliver the goods within the
time fixed.

1.1 For failure to do so, the carrier shall pay the indemnity stipulated in the bill, neither
the shipper nor the consignee being entitled to anything else.

1.2 If no indemnity has been stipulated and the delay exceeds the time fixed in the bill,
the carrier shall be liable for the damages that the delay may have caused.

2. Where no period was fixed: the carrier shall be bound to forward them in the first
shipment of the same or similar goods which he makes to the point where he must deliver
them.

2.1 Should he not do so, the damages caused by the delay shall be for his account

3. Concept of Conversion: Where property in the hands of a carrier is not delivered

within a reasonable time after it has reached its destination, the carrier in the absence of any
legal exemption and after demand has been made and delivery refused, is liable for a
conversion of the property.

3.1 The consignee may waive title to the property and sue for conversion and is entitled
to the value of the goods at the time they should have been delivered to him. Subsequent
tender of the goods by the carrier is not available as a defense.

3.2 If there has been demand and the carrier tenders the goods, the consignee cannot
refuse to receive the goods and sue for conversion. His sole remedy is an action for damages
on account of the delay. There can only be conversion if there has been demand and the
carrier refuses delivery.

3.3 Note the remedy of judicial deposit when consignee cannot be found.

HOW AND TO WHOM DELIVERY IS MADE

1. Where the bill of lading is issued to the order of the shipper, the carrier is under no
duty to deliver the merchandise mentioned in the bill of lading except upon the presentation
of the bill of lading duly indorsed by the shipper.

1.1 Prior to the appearance of the consignee or legitimate holder of the bill of lading, with
such bill before the carrier, the consignee or legitimate bill holder is not a party to the
contract. The carrier is still subject to the orders of the shipper.
1.2 Hence, the shipper may, without changing the place where the delivery is to be made,
change the consignment of the goods delivered to the carrier, and the latter must comply with
his orders, provided that at the time of making the change of the consignee the bill of lading
subscribed by the carrier, if one was issued, be returned to him, exchanging it for another
containing the novation of the contract.

1.3 Hence, in case of conflicting orders of the shipper and the consignee, there is no other
recourse than to determine at what moment the right of the shipper to countermand the
shipment terminates. This moment can be no other than the time when the consignee or
legitimate holder of the bill appears with such bill before the carrier and makes himself a
party to the contract as prior to that time, he is a stranger to the contract.

2. A misdelivery occurs when delivery to a person different from that indicated in the
bill is made.

3. The carrier must deliver to the consignee without delay or obstruction, the goods
which he may have received, by the mere fact of being named in the bill of lading to receive
them, and if he does not do so, he shall be liable for damages which may be caused thereby.

3.1 If a consignee is not present upon arrival, he is entitled to reasonable notice from the
carrier of their arrival and a fair opportunity to take care of and remove them.

If the consignee is unknown to the carrier, the latter must use proper and reasonable diligence
to find him.

When the consignee cannot be found at the domicile indicated in the bill or should refuse to
pay the transportation charges and expenses, or to receive the goods, the deposit of said goods
shall be ordered by the municipal judge, to be placed at the disposal of the shipper or sender,
without prejudice to a person having a better right. This deposit shall have all the effects of a
delivery.

CONDITION OF THE GOODS UPON DELIVERY

1. The general rule is that the merchandise shall be transported at the risk and venture of
the shipper, if the contrary has not been expressly stipulated.

1.1 As a consequence, all losses and deterioration which may be suffered by the goods
through (a) fortuitous event (b) force majeure or (c) the inherent nature and defect of the
goods are for the account of the shipper.

1.2 Proof of these accidents is however incumbent upon the carrier.

1.3 Note that while the Code of Commerce appears to allow a contrary stipulation, the
same has been repealed by Article 1745 of the Civil Code by the requirement that a common
carrier should exercise extra-ordinary diligence, qualified by a stipulation that can allow for a
lesser degree of diligence not below that of a good father of a family under Article 1744 of
the Civil Code.

2. The carrier is liable for losses or damages resulting from its negligence or by the
failure to take precautions which usage has established among careful persons.

2.1 This liability will not arise if there is fraud committed by the shipper in the bill of
lading when he represented the goods to be of a kind or quality different from what they
really were.
2.2 Note the power given the carrier, who notwithstanding the exercise of the precautions
required, to sell the goods by placing them in the hands of judicial or appropriate authority
when they run the risk of loss due to their nature or unavoidable accident, there being no time
for their owners to sell them.

3. Consequently, with the exception of the causes mentioned in (1.1) and (2.1), the
carrier shall be obliged to deliver the goods transported in the same condition in which,
according to the bill of lading, they were at the time of their receipt, without any damage or
impairment, and should he not do so, he shall be obliged to pay the value of the goods not
delivered at the point where they should have been and at the time the delivery should have
taken place.

3.1 If only part of the goods transported should be delivered, the consignee may refuse to
receive them, when he proves that he cannot make use thereof without the others that were
not delivered.

3.2 The determination of the usefulness of the goods individually depends upon the
consignee, but he cannot be arbitrary and must justify his determination.

4. If the effect of the damage due should only be a reduction in the value of the goods,
the obligation of the carrier shall be reduced to the payment of the amount of said reduction in
value, after appraisal by experts.

5. If, on account of the damage, the goods are rendered useless for sale or consumption
for the use for which they are properly destined, the consignee shall not be bound to receive
them, and may leave them in the hands of the carrier, demanding payment of their value at the
current market price that day.

5.1 If among the goods damaged there should be some in good condition and without any
defect whatsoever, the foregoing provision shall be applicable with regard to the damaged
ones, and the consignee shall receive those which are sound, this separation being made by
distinct and separate articles, no object being divided for the purpose, unless the consignee
proves the impossibility of conveniently making use thereof in this form.

5.2 The same provision shall be applied to merchandise in bales or packages with
distinction of the packages which appear sound.

TIME FOR MAKING A CLAIM FOR DAMAGES

1. Within 24 hours following the receipt of the merchandise, a claim may be brought
against the carrier on account of damage or average found therein on opening the packages,
provided that the signs of the damage or average giving rise to the claim may not be known
from the exterior part of the packages, and in case that they may be so ascertained, said claim
shall only be admitted at the time of the receipt of the packages.

1.1 The periods prescribed shall commence to run only from the time the consignee is in
actual possession.

1.2 The 24-hour rule is counted from the receipt of goods except if: (a) the defect is due
to the packing of the goods or may be seen from outside the goods, or (b) owner/shipper
never received the goods as there can be no question as to the right to bring a claim.
1.3 The 24-hour rule of notice is not a prescriptive period, it is merely a condition
precedent before a complaint may be filed. Remember that failure to comply with a condition
precedent is a ground for dismissal, except when there is fraud. The prescriptive period for an
action based on written contracts is 10 years

1.4 After the periods mentioned have elapsed or after the transportation charges have
been paid, no claim whatsoever shall be admitted against the carrier with regard to the
condition in which the goods transported were delivered.

1.5 The periods may be the subject of a stipulation extending them.

2. If there should occur doubts and disputes between the consignee and the carrier with
regard to the condition of goods transported at the time of their delivery to the former, the
said goods shall be examined by experts appointed by the parties, and in case of
disagreement, a 3rd one appointed by the judicial authority.

2.1 The result of the examination being reduced to writing; and if the persons interested
should not agree to the report of the experts and could not settle the disputes, said judicial
authority shall order the deposit of the merchandise in a safe warehouse, and the parties
interested shall make use of their rights in the proper manner.

EFFECT OF DEVIATION FROM AGREED ROUTE

1. If there is an agreement, the carrier cannot change the route unless there is force
majeure. When there is no agreed route, the carrier must select 1 which may be the shortest,
least expensive and practically passable

2. Should the route be changed without such cause, the carried is liable for any damage
suffered by the goods transported for any cause whatsoever, besides paying the amount
which may be stipulated for such cause.

2.1 On the other hand, if such cause exists causing an increase in the transportation cost,
the carrier shall be reimbursed for the increase after formal proof.

RIGHTS AND OBLIGATIONS OF SEVERAL CARRIERS

1. The carrier who makes delivery by virtue of combined agreements or services shall
assume the obligations of those who preceded him. However, he has a right to proceed against
those who preceded him if he was not the party directly responsible.

2. The carrier who makes delivery shall also acquire all actions and rights of those who
preceded him.

3. The shipper and the consignee shall have an immediate right of action against the
carrier who executed the transportation contract, or against carriers who may have received
the goods without reservation. However, the reservation shall not relieve them for
responsibilities which they may have incurred by their own acts.
RIGHTS OF THE SHIPPER OR CONSIGNEE

1. A right to the payment of damages when goods are lost or mislaid.

1.1 The value of the goods stated in the bill is conclusive between the parties and the
shipper is not allowed to prove a higher value.
1.2 It is only when the carrier’s fault is so gross as to amount to actual fraud, that the
actual amount of the losses and damages suffered may be proved by the shipper against the
carrier.

2. A right to abandon exists in cases of delay on account of the fault of the carrier as the
consignee may leave the goods transported in the hands of the carrier, informing him thereof
in writing before the arrival of the same at the point of the destination.

2.1 It also exists when: (a) there is of partial non-delivery where the consignee proves
that he cannot make use of the goods capable of delivery independently of those not delivered
(b) where the goods are rendered useless for sale and consumption for the purposes for which
they are properly destined.

2.2 When this abandonment occurs, the carrier shall satisfy the total value of the goods,
as if they had been lost or mislaid

2.3 Should the abandonment not occur, the indemnity for loss and damages on account of
the delays cannot exceed the current price of the goods transported on the day and at the place
where the delivery was to have been made. The same provision shall be observed n all cases
where there this indemnity is due

OBLIGATION TO PAY FOR TRANSPORTATION CHARGES

1. The consignees to whom the remittance may have been made may not defer the
payment of the expenses and transportation charges on the goods that they received after 24
hours have elapsed from the time of the delivery.

1.1 In case of delay in making this payment, the carrier may demand the judicial sale of
the goods he transported to a sufficient amount to cover the transportation charges and the
expenses incurred.

2. The goods transported shall be specifically bound to answer for the transportation
charges and for the expenses and fees caused by the same during their transportation, and
until the time of their delivery.This special right shall be limited to 30 days after the delivery
has been made, and after said prescription, the carrier shall have no further right of action
than that corresponding to an ordinary creditor

3. The preference of the carrier to the payment of what is due him for the transportation
and expenses of the goods delivered to the consignee shall not be affected by the bankruptcy
of the latter, provided the action is brought within the specified 30 days. Once his preference
prescribes, his only remedy is by ordinary action.

OBLIGATION TO RETURN THE BILL OF LADING

1. The obligation to return the bill of lading arises after the contract has been complied
with.

1.1 The bill of lading shall be returned to the carrier who may have issued it, and by
virtue of the exchange of this title for the article transported, the respective obligations and
actions shall be considered cancelled, unless in the same act the claims which the parties may
wish to reserve are reduced to writing, with the exception of that provided by Article 366.
1.2 The claims referred to are those for damages that can be ascertained from the outside
of the packages at the time of receipt.

2. In case the consignee, upon receiving the goods, cannot return the bill of lading
because of its loss or of any other cause, he must give the latter a receipt for the goods
delivered, this receipt shall produce the same effects as the return of the bill of lading.

2.1 The bill of lading that has not been returned is called a spent bill of lading.

ADMIRALTY AND MARITIME COMMERCE OUTLINE

PRELIMINARIES

1. Origin of Maritime Law is found in the customary rules adopted and utilized by ports
and communities connected with the sea which eventually crossed boundaries because of the
merchants and shipowners who travelled the seas guided by the said rules.

1.1 They later came to be known as the law of the seas or the body of laws applied to
maritime cases.

2. Maritime Law is distinguished from Civil Law and Mercantile Law in general by its
real and hypothecary nature which means that the liability of the agent or shipowner in
relation to maritime contracts is limited to the res or the vessel.

2.1 Maritime law and Admiralty law are used synonymously.

2.2 It includes Book III of the Code of Commerce, Salvage law, Carriage of Goods by
Sea Act, Ship Mortgage Decree of 1978 and other special laws related to maritime commerce.

2.3 The Philippines also adopts the generally accepted principles of international law as
part of maritime law such as United Nations Convention on the Law of the Sea (UNCLOS),
International Conventions for the Safety of Life at Sea 1974 (SOLAS 1974) and the Tonnage
Convention of 1969.

2.4 There is also adherence to treaties not because of adoption but rather due to
observance by Philippine vessels as a matter of international custom such as the Convention
for the International Regulations on the Prevention of Collisions at Sea 1972 (COLREGS
1972).

REAL AND HYPOTHECARY NATURE OF MARITIME LAW

1. The effect is that the vessel is hypothecated or is the guarantee for the settlement for
obligations under maritime contracts.

1.2 This originated in the prevailing conditions of the maritime trade and sea voyages
during the medieval ages. To offset against the adverse conditions and to encourage
shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the
owner or the agent arising from the operation of the vessel to the vessel, its equipment, and
freight or insurance, if any, so that if the shipowner or agent abandoned the ship, equipment,
and freight, his liability was extinguished. This is known as the limited liability rule.

1.3 As a rule, subject to limited exceptions, if the vessel is lost, the ship owner or ship
agent will have no liability. If the vessel is not lost, the ship owner or the ship agent may
abandon the vessel to the creditors in satisfaction of their claim. A ship owner is the natural or
juridical person who owns the vessel, while the ship agent is the ship owner’s representative
in all the places where his vessel makes port.

The only person who could avail of the limited liability rule is the ship owner. He is the very
person whom the rule has conceived to protect and the charterer cannot invoke this as a
defense.

2. Under our laws, the ship owner and ship agent are primarily liable for the following
acts: (a) acts of the captain (b) contracts entered into by the captain to repair, equip and
provision the vessel, provided that the amount claimed was invested for the benefit of the
vessel (c) indemnities in favor of third persons which arise from the conduct of the captain in
the care of the goods or well as safety of the passengers, (d) damages to third persons for torts
or quasi-delict committed by the captain, except in a collision with another vessel (e) in case
of collision due to the fault, negligence or want of skill of the captain, sailing mate or any
member of the complement. These are the liabilities that would be extinguished by loss or
abandonment of the vessel.

The liability under (a) exists because the ship owner, in the person of the captain, has
complete and exclusive control of the crew and the navigation of the ship, as well as the
disposition of the cargo at the end of the voyage. It is therefore proper that any person has a
right of action directly against the ship owner for breach of any duty which the law may have
imposed on the captain with respect to his cargo.

The liabilities under (b), (c), (d) and (e) exists as these obligations arise as consequence of the
contract of agency between the captain and the ship agent. Liability under (b) and (c) is
subject to: (1) proof shown by the creditor that the amount claimed was invested for the
benefit of the vessel, and (2) the captain does not exceed the scope of his authority.

The qualification under (d) as to collisions is due to the fact that the owner of the vessel at
fault is liable for indemnification to the owner of the vessel which was not a fault but the
former may not actually be liable to pay as it may be extinguished by the loss of the vessel
which is bound for its payment.

3. A ship agent is liable notwithstanding the insolvency of the principal/owner. But the
ship agent may exempt himself from liability by abandoning the vessel with all her equipment
and the freight it may have earned during the voyage.

3.1 The effect of abandonment is to extinguish the liability of the ship agent. The ship
agent’s liability is confined to that which he is entitled as a matter of right to abandon: the
vessel with all her equipment and the freight it may have earned during the voyage and to the
insurance thereof. The limited liability will not be applicable when no abandonment of vessel
is made.

4. The abandonment of the vessel does not require any specific procedure.The ship
owner can just say he abandons the vessel in favor of the claimants. There is no prescriptive
period within which the ship owner can make an abandonment. He may do so for as long as
he is not estopped from invoking the same or do acts inconsistent with abandonment, like
salvage.

4.1 The effect of abandonment is that it amounts to an offer of the value of the vessel, of
her equipment, and freight money earned in satisfaction of the liabilities.

4.2 When the vessel is co-owned, a co-owner can exempt himself from liability by
abandonment, before a notary, of the part of the vessel belonging to him.

4.3 Abandonment cannot be refused by creditors.

5. The exceptions to the doctrine of limited liability: (a) where the ship owner is at fault
or is due to the concurring negligence of the ship owner and captain as the doctrine is
premised on the condition that the death or injury to the passenger occurred by reason of the
fault or negligence of the captain only (b) in cases of Workmen’s Compensation
(compensation for injury to an employee arising out of and in the course of employment) as
such compensation has nothing to do with maritime commerce, it is an item in the cost of
production which must be included in the budget of nay well-managed industry (c) when the
vessel is insured, the insurer cannot avoid liability. But if it is a claim of an insurer in
subrogation, it is avoided. (d) Total destruction of the vessel does not affect the liability of the
owner for repairs on the vessel completed before its loss as owners of a vessel are liable for
necessary repairs and it shall remain unaffected by the loss of the thing.

6. Any maritime lien is also extinguished by the total loss of the vessel as there is no
longer any res to which it can attach.

6.1 A maritime lien is a privileged claim or charge upon a ship, which claim or lien
travels with the ship secretively and unconditionally and may be enforced by an action in rem.
Once it attaches, it adheres to the res. Hence, any purchaser or charterer of the res takes title
to it subject to the maritime lien and he cannot plead want of notice to defeat the lien.

6.2 Examples of maritime liens are: (a) taxes, expenses, costs and fees imposed by the
state (b) wages of the crew (c) a general average (d) salvage (e) maritime liens prior in time to
the recording of a preferred ship mortgage (f) damages arising out of tort

SPECIAL CONTRACTS IN MARITIME COMMERCE

CHARTER PARTY

1. A Charter Party is a contract whereby the owner of a vessel lets a part thereof and/or
his complement and crew to a person named as a charterer which contract can be for a
specific time, known as a time charter or for a specific voyage, known as a voyage or trip
charter.

1.1 A time charter occurs when the vessel is leased for a specific period of time. The
owner and his crew continue to navigate and maage the vessel, but her carrying capacity is
taken by the charterer for a fixed time or on as many voyages as may fit into the charter
period. The master of the vessel is under a dual agency. Insofar as navigation and
seaworthiness are concerned, he remains the agent of the shipowner, but with respect to
loading, stowing and discharging the cargo at designated ports, he is an agent of the charterer.

1.2 A voyage charter occurs when the owner undertakes to provide a vessel for the
carriage of specified goods on one or several voyages between named ports. This is a contract
of affreightment. In this form, the ship is engaged to carry a full cargo on a single voyage.

1.3 There are 2 kinds of charter parties: (a) contract of affreightment – involves the use
of shipping space or vessels leased by the owner in part or as a whole, to carry goods for
others. Here the vessel is still a common carrier. (b)charter by demise or bareboat charter –
the whole vessel is let to the charterer with a transfer to him of its entire command and
possession and consequent control over its navigation, including the master and the crew, who
are his servants. The vessel in this case becomes a private carrier. The charterer in this case is
the owner "pro hac vice." Note though that while all bareboat charters are demise charters, the
term bareboat should not apply strictly speaking to a demise charter which provides that the
master and crew is to be provided by the ship owner, who become agents and servants of the
charterer.

2. The governing law in the Philippines are Articles 652-692 of the Code of Commerce,
as well as RA 913. However, in Companie Franco-Indochinoise v. Deutch, 39 Phil 474, a
charter party executed in Paris between a French shipper and a German carrier for the carriage
of goods from Saigon is not to be construed exclusively by Philippine law nor by the local
law of the country in which it was executed but by the general maritime law.

2.1 Consequently, freedom of contract is the rule in charter parties. As a rule though, time
and voyage charter parties are concluded on the basis of a standard contract form. That is
Gencon for a voyage charter party for dry cargo or Baltime for a time charter party for dry
cargo.

2.2 In every contract there are to be found two kinds of terms, (a) essential terms going to
the root of the contract, the breach of which avoids the contract as a whole which are called
conditions; (b) terms which though containing engagements are not of so essential a nature
that their breach should cause the whole contract to be invalidated. In the general law of
contract these are called warranties. The breach of a warranty entities the other party to
damages only.

2.3 Implied terms in contracts are: (1) Seaworthiness to ensure its fitness for the voyage,
and (2) Due Dispatch and Proper Route to ensure that the vessel will commence and carry
out her voyage with reasonable diligence and will not deviate from her route. Under Article
670 of the Code of Commerce, the shipowner is mandated to undertake the voyage at the time
agreed upon, or with 15 days from loading if not time is stipulated, even if the ship owner
whould not find any cargo to make up at least 3/5 of the amount which the vessel will hold,
where he fails to exercise the right to change the vessel. If applicable, under Article 673, the
ship owner answers for the losses arising from delay if the charterer shall judicially or
notarially request the same.

2.4 When the vessel is not seaworthy at the commencement of the contract, the captain
shall lose all rights to freightage. If it becomes unseaworthy later, the obligation of the captain
is charter another vessel as his expense. If he fails to do so due to malice of indolence, the
shippers themselves may charter another vessel. If notwithstanding due diligence, he is unable
to find a vessel, he must deposit the cargo at the disposal of the shippers, to whom he shall
communicate the facts at the first opportunity. If this happens, the captain wholly abandons
any claim for the payment of freight unless it has been made payble in advance or irrespective
of delivery. If made payble on delivery, no part of the freight is earned until it is delivered.

3. The charter-party evidences the hire of an entire ship, or at any rate, a large part of
her, such as a hold. It is clearly not a suitable form of contract for a person who wishes to
send small parcels of goods. Such person must look out for a ship which is carrying general
cargo to the port to which he wishes to send his goods. A vessel of this kind may be sailing
regularly along a certain line of ports at advertised items, in which case she is called a liner,
or may be sailing from port to port looking for cargo, in which case she is a called tramp.
Such ships are often called by lawyers “general ships” and by owners as “common carrier.”
The contract of affreightment in this case is made by a bill of lading which is usually issued
after the loading of the goods.

3.1 However, even in the case of chartered ships a bill of lading is invariably issued. It is
then not used as evidence of the terms of a contract but as evidence of the shipment of goods,
i.e. as a receipt. Moreover it has by mercantile usage come to represent the goods, in such a
way that the transfer of it to a third party may transfer to the latter the property in the goods
and the right to receive delivery of them from the ship at her port of discharge. This very
valuable quality on which the legal machinery of overseas commerce has largely been built, is
obviously just as useful to charterer shippers, as to shippers on general ships. For instance, a
Filipino importer buys a shipload of sardines from Portugal. He charters a ship, thus arranging
for its transport to this country. At the moment of his doing, so he may not yet know to whom
he is going to resell the goos but he expects to dispose of them to an ultimate buyer. The
transport takes some weeks. During that period, the importer will try to effect the resale, so
that on the arrival of the ship in Manila the ultimate buyer can take delivery immediately. To
this end the importer must have some means of transferring the cargo while afloat to his
buyer. This is done by means of the bill of lading, which the importer will transfer to the
buyer. The latter will, on arrival of the ship at her port of discharge, present the bill of lading
to the master and obtain delivery of the goods.

3.2 A time or voyage charter is a contract of affrieghtment. As a rule, a bill of lading is

the principal and only document evidencing shipment on a vessel, but often a bill of lading is
issued under a charter party. Hence, when a time charterer operates as vessel as a general ship
will issue through the master bills of lading to the shippers who engage his services. A voyage
charterer will frequently, for the purpose of making documentary presentation to banks or
buyers, take a bill of lading from the owner. This may create questions as to which of the
documents control: the charter agreement or the bill of lading.

BOTTOMRY OR RESPONDENTIA

1. Loans on Bottomry or Respondentia are contracts of loan whereby the ship owner
borrows money from a lender at an unusually high rate of interest whereby the ability of the
lender to recover depends on the safe return of the vessel. If the vessel is lost, the contract is
extinguished.

1.1 A loan on bottomry is a contract in the nature of a mortgage, by which the owner of
the ship borrows money for the use, equipment and repair of the vessel for a definite term,
and pledges the ship as a security for its repayment, with maritime or extraordinary interest on
account of the maritime risks to be borne by the lender, it being stipulated that if the ship be
lost in the course of the specific voyage or during the limited time, by any of the perils
enumerated in the contract, the lender shall also lose his money

1.2 A loan on respondentia is one made on the goods on board the ship, and which are to
be sold or exchanged in the course of the voyage, the borrower’s personal responsibility being
deemed the principal security for the performance of the contract. The lender must be paid his
principal and interest, though the ship perishes, provided that the goods are saved.

AVERAGES

1. Averages in shipping and maritime insurance refer to a loss.

2. An average may consist of either:

2.1 An expense to the carrier, in which case it must be: (a)extraordinary or accidental
(b)incurred during the voyage (c)incurred in order to preserve the vessel, cargo or both.

2.2 A damage or a deterioration, in which case it must: (a) have been suffered from the
time the vessel puts to sea from the port of departure until it casts anchor in the port of
destination, and (b) have been suffered by the merchandise from the time they are loaded
in the port of shipment until they are unloaded in the port of consignment

3. The kinds of averages are:

3.1 Simple or Particular which is an expense incurred or damage suffered which has not
inured to the common benefit and profit of all persons interested in the vessel and its cargo.
The effect is that no reimbursement is allowed. Examples of particular averages are: (a) The
losses suffered by the cargo from the time of its embarkation until it is unloaded, either on
account of inherent defect of the goods or by reason of an accident of the sea or force
majeure, and the expenses incurred to avoid and repair the same; (b) The losses and expenses
suffered by the vessel in its hull, rigging, arms, and equipment, for the same causes and
reasons, from the time it puts to sea from the port of departure until it anchors and lands in the
port of destination; (c) The losses suffered by the merchandise loaded on deck, except in
coastwise navigation, if the marine ordinances allow it; (d) The wages and victuals of the
crew when the vessel is detained or embargoed by legitimate order or force majeure , if the
charter has been contracted for a fixed sum for the voyage; (e) The necessary expenses on
arrival at a port, in order to make repairs or secure provisions; (f) The lowest value of the
goods sold by the captain in arrivals under stress for the payment of provisions and in order to
save the crew, or to meet any other need of the vessel, against which the proper amount shall
be charged; (g) The victuals and wages of the crew while the vessel is in quarantine; (h) The
loss inflicted upon the vessel or cargo by reason of an impact or collision with another, if it is
accidental and unavoidable. If the accident should occur through the fault or negligence of the
captain, the latter shall be liable for all the losses caused; (i) Any loss suffered by the cargo
through the fault, negligence, or barratry of the captain or of the crew, without prejudice to
the right of the owner to recover the corresponding indemnity from the captain, the vessel,
and the freightage.

3.2 General/Gross which is an expense or damages suffered deliberately in order to save

the vessel, its cargo or both from a real and known risk. It is the deliverance from an
immediate peril, by a common sacrifice, that constitutes the essence of general average. The
effect is that the person who incurred the damage/expense can ask reimbursement from those
who benefited, which of course, may include the ship owner. Examples of general or gross
averages shall include all the damages and expenses which are deliberately caused in order to
save the vessel, its cargo, or both at the same time, from a real and known risk, and
particularly the following: (a) The goods are cash or invested in the redemption of the vessel
or of the cargo captured by enemies, privateers, or pirates, and the provisions, wages, and
expenses of the vessel detained during the time the settlement or redemption is being made;
(b) The goods jettisoned to lighten the vessel, whether they belong to the cargo, to the vessel,
or to the crew, and the damage suffered through said act by the goods which are kept on
board; (c) The cables and masts which are cut or rendered useless, the anchors and the chains
which are abandoned, in order to save the cargo, the vessel, or both; (d) The expenses of
removing or transferring a portion of the cargo in order to lighten the vessel and place it in
condition to enter a port or roadstead, and the damage resulting therefrom to the goods
removed or transferred; (e)The damage suffered by the goods of the cargo by the opening
made in the vessel in order to drain it and prevent its sinking; (e) The expenses caused in
order to float a vessel intentionally stranded for the purpose of saying it; (f) The damage
caused to the vessel which had to be opened, scuttled or broken in order to save the cargo; (g)
The expenses for the treatment and subsistence of the members of the crew who may have
been wounded or crippled in defending or saying the vessel; (h) The wages of any member of
the crew held as hostage by enemies, privateers, or pirates, and the necessary expenses which
he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should
he prefer it; (i) The wages and victuals of the crew of a vessel chartered by the month, during
the time that it is embargoed or detained by force majeure or by order of the government, or
in order to repair the damage caused for the common benefit; (j) The depreciation resulting in
the value of the goods sold at arrival under stress in order to repair the vessel by reason of
gross average; (k) The expenses of the liquidation of the average.

3.3 Other general averages: (a) If in lightening a vessel on account of a storm, in order to
facilitate its entry into a port or roadstead, part of the cargo should be transferred to lighters or
barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss had
originated from a gross average, the amount thereof being distributed between the vessel and
cargo from which it came. If, on the contrary, the merchandise transferred should be saved
and the vessel should be lost, no liability may be demanded of the salvage. (b) If, as a
necessary measure to extinguish a fire in a port, roadstead, creek, or bay, it should be decided
to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall
contribute.

3.4 The requisites of a General Average are: (a) there must be a common danger,
meaning that the ship and cargo are subject to the same danger and that danger arises from
accidents of the sea, dispositions of the authorities or faults of men, provided that the
circumstances producing the peril should be ascertained and imminent (b) for the common
safety, part of the vessel or the cargo or both is sacrificed deliberately (c) from the expenses
or damages caused follows the successful saving of the vessel and cargo (d) the expenses or
damages should have been incurred or inflicted after taking legal steps and authority. In
summary: The general average must: (a) deliberately incurred (b)intended to save vessel and
cargo (c) real and known risk to which the shipper and the carrier must be exposed to (d)
success in saving the vessel and the remaining cargo. Note that if notwithstanding the jettison
of merchandise, breakage of masts, ropes, and equipment, the vessel shall be lost running the
same risk, no contribution whatsoever by jettison of gross average shall be proper. The
owners of the goods saved shall not be liable for indemnification of those jettisoned, lost or
damaged.

3.5 The formalities for incurring gross average: (a) There must be an assembly of the
sailing mate and other officers with the captain including those with interests in the cargo (b)
There must be a resolution of the captain (c)The resolution shall be entered in the log book,
with the reasons and motives and the votes for and against the resolution (d)The minutes shall
be signed by the parties (e) Within 24 hours upon arrival at the 1st port the captain
makes, he shall deliver 1 copy of these minutes to the maritime judicial authority thereat.

3.6 The distinctions between general or gross averages and simple or particular averages
are as follows: (a) In general or gross averages, both the ship and cargo are subject to the
same danger which is real and known, whereas in simple or particular averages, there is no
such common danger to both the vessel and the cargo; (b) In the former, part of the vessel or
of the cargo or both is sacrificed deliberately, whereas in the latter, the expenses and damage
caused to the vessel or to her cargo are neither deliberately made nor subject to any legal step
or authority; (c) In the former, from the expenses or damage caused follows the successful
saving of the vessel and her cargo, whereas in the latter, the expenses or damages suffered
have not inured to such common benefit; (d) In the former, all the persons having an interest
in the vessel and cargo saved shall contribute to indemnify the expenses or damages caused,
whereas in the latter, the owner of the things which gave rise to the expenses or suffered the
damages shall bear the same. As when: Expenses incurred towards refloating the vessel
after it was intentionally run aground to save it and the cargo is a general average. Compare
with expenses incurred in refloating the vessel after it accidentally ran aground in order to be
able to proceed to its destination, which is a particular average in the absence of imminent
danger to the ship and cargo.

4. The general average is borne by all persons pro-rata having an interest in the vessel
and cargo therein at the time of the occurrence of the average shall contribute.
4.1 Included are lenders on bottomry and respondentia who shall suffer, in proportion to
their respective interest, the general average which may take place in the goods on which the
loan is made.

4.2 Those entitled to receive the general average contribution are the owners of the goods
sacrificed. However, the following goods even if sacrificed are not covered: (a) goods carried
on deck, unless the rule, special law or customs allow the same (b) goods that are not
recorded on the books or records of the vessel, it being required that insofar as the cartgo
concerned that their existence on board be proven by a bill of lading and those belonging to
the vessel, by means of an inventory prepared before departure, and (c) fuel for the vessel if
there is more than sufficient fuel for the voyage.

4.3 The claims for payment of averages shall not be admitted if they do not exceed 5% of
the interest which the claimant may have on the vessel or in the cargo if it be a gross average
or 1% of the goods damaged if it be a particular average, deducting in both cases the expenses
of appraisal, unless there is an agreement to the contrary.

4.4 The extent of liability rule cannot be applied in determining liability when there is
negligence as common carriers cannot limit their liability for injury or loss caused by its own
negligence. Thus negligence must first be determined before applying the extent of liability
rule.

5. The order of jettison of the captains shall be in the following order: (a) those which
are on deck, beginning with those which embarrass the maneuver or damage the vessel,
preferring, if possible, the heaviest ones with least utility and value, then (b) those which are
below upper deck, always beginning with those of greatest weight and smallest value, to the
amount and number absolutely indispensable.

6. If, after the vessel has been saved from the risk which gave rise to the jettison, it
should be lost through another accident taking place during the voyage, the goods saved and
existing from the first risk shall continue to be liable to contribution by reason of the gross
average according to their value in the condition in which they may be found, deducting the
expenses incurred in saving them.

ARRIVALS UNDER STRESS

1. An Arrival Under Stress is the arrival of a vessel at the nearest and most convenient
port, if during the voyage the vessel cannot continue the trip to the port of destination due to:
(a) lack of provisions, except if the failure to take the necessary provisions was due to the
carrier’s fault like when it was not able to stow them properly or that there was a failure to
adequately determine what was required (b) well-founded fear of seizure of privateers or
pirates, except when the risk of privateers or pirates is well-known (c) by reason of any
accident of the sea disabling it to navigate except defect in vessel was due to captain’s fault
in failing to properly repair, rig, equip or prepare the vessel or some erroneous order of the
captain or when malice, negligence, want of foresight, or lack of skill on the part of the
captain exists in the act causing the damage.

2. The significance of determining whether the arrival is under stress or not is because
the same is a deviation. Hence, if it will not constitute an arrival under stress it is an improper
deviation and liability will ensue for the damages caused to the cargoes by such arrival under
stress.
2.1 The rule is that the expenses of an arrival under stress shall always be for the account
of the ship owner of agent, but they shall not be liable for the damages which may be caused
the shippers by reason of the arrival provided the latter is legitimate. Otherwise, the ship agent
and captain shall be jointly liable.

2.2 If in order to make repairs to the vessel or because there is a danger that the cargo
may suffer damages, it should be necessary to unload, the captain may request authorization
from a competent judge or court for the removal, and carry it out with the knowledge of the
person interested in the cargo, or his representative if there be any. In a foreign court, it shall
be the duty of the Philippine consul where there is one to give authorization. In the first case,
the expenses will be for the account of the ship agent or owner, and in the second case, they
shall be chargeable to the owners of the cargo for whose benefit the act was performed. If the
unloading be done for both reasons, the expenses shall be divided proportionately between
the value of the vessel and that of the cargo.

2.3 The custody of the cargo that is unloaded shall be entrusted to the captain who shall
be responsible for the same, except in cases of force majeure.

2.4 If the entire cargo or part thereof should appear to be damaged, or there is an
imminent danger of its being damaged, the captain may request of a competent judge, court or
consul, the sale of all or part of the goods.

3. The formalities for arrival under stress: (a) assembly of the officers including
all interested parties (b) drafting and entering in the log book the proper minutes, which shall
be signed by all (c) entry in the log book of the objections and protests of the persons
interested in the cargo

4. The captain has the duty to continue the voyage without delay after the cause of the
arrival under stress has ceased. Otherwise, he shall be liable for damages caused by the delay.

4.1 If the cause for arrival under stress should have been the fear of enemies, privateers,
or pirates, a deliberation and resolution in a meeting of the officers of the vessel and persons
interested in the cargo who may be present shall precede the departure.

COLLISIONS

1. A Collision refers to the impact of two vessels both of which are moving.

1.1 Allision refers to the striking of a moving vessel against one that is stationary.

1.2 Note though that a shipowner or ship agent can be held liable even if his vessel did not
hit or collide with another as Article 831 makes the owner of a third vessel liable if it forced
a vessel to hit another.

1.3 There are three zones in collision: (a) the first zone refers to all the time up to the
moment when the risk of collision may be said to have begun-no rule applies as each vessel is
free to navigate without reference to the movement of another vessel (b) the second zone
refers to the time between the moment when risk of collision begins and the moment it
becomes a practical certainty, and (c) the third zone covers the time of actual contact. If
during the third zone, the sailing vessel changed course to port in order to avoid, if possible,
the collision, the act may be said to be done in extremis, and even if wrong, the sailing vessel
is not responsible for the result.
1.4 Causes of Collision and the Legal Effects:

Cause Effect

Due to the fault, negligence or lack of skill The shipowner shall be liable for the
of the captain or the complement of the losses and damages
vessel

Due to the fault of both vessels Each vessel shall suffer its own losses, but
as regards the owners of the cargoes, both
vessels shall be jointly and severally liable

Where it cannot be determined which of Each vessel shall suffer its own losses, and
the 2 vessels is at fault both shall also be solidarily responsible for
the losses and damages caused to their
cargoes

Collision due to a fortuitous event or force Each vessel shall bear its own damages
majeure

A vessel which is properly anchored and
moored may collide with those nearby by
reason of a storm or other cause of force
majeure
The vessel run into shall suffer its own
damages and expenses
as they are considered as a particular
average of the vessel run into

Where 2 vessels collide with each other The owner of the 3rd vessel causing the
without their fault but by reason of the collision shall be liable for the losses and
fault of a 3rd vessel damages, the captain thereof being civilly
liable to the owner

1.6 In addition, when a vessel that is run into sinks immediately, as well as that which,
having been obliged to make port to repair the damages caused by a collision, is lost during
the voyage or is obliged to be stranded in order to be saved, it shall be presumed as lost be
reason of collision.

1.7 If the vessels colliding with each other should have pilots on board discharging their
duties at the time of the collision, their presence shall not exempt the captains from the
liabilities they incur, but they shall have a right to be indemnified by the pilots, without
prejudice to the criminal liability which the latter may incur.

3. Classes and Effects of Collisions: (a) Fortuitous when the vessels collide with
each other though fortuitous event or force majeure . Each vessel and each cargo shall bear its
own damages or a vessel which is properly anchored and moored may collide with those
nearby by reason of a storm or other cause of force majeure – vessel run into suffers its own
damages (b)Culpable when the collision is due to the fault, negligence or lack of skill of the
captain or the complement of the vessel – owner of the vessel at fault shall be liable for the
losses and damages or due to fault of both vessels – each vessel suffers its own losses
regardless of degree of fault, hence rules on contributory negligence does not apply, with
regard to the owners of the cargo, both vessels shall be jointly and severally liable even if
their cause of actions may be different or 2 vessels may collide with each other without their
fault but by reason of the fault of a 3 rd vessel – owner of the 3rd vessel will be liable (c)
Inscrutable where it cannot be determined which of the 2 vessels is at fault – each vessel
suffers its own losses and damages; both will be solidarily liable for losses and damages
caused to their cargoes. Hence the effect is that you treat it as a culpable collision.

3.1 The doctrines of contributory negligence and last clear chance are not applicable.
Article 827 of the Code of Commerce holds that if both vessels were negligently operated, it
does not matter if the other has the last clear chance of avoiding injury because each must
suffer its own damage. This applies although the negligence on the part of the mate of the
incoming vessel preceded the negligence on the part of the mate of the outgoing vessel by an
appreciable interval of time, the first vessel cannot on that account be absolved from liability.

4. A maritime protest is necessary as the action for recovery of losses and damages
arising from a collision cannot be admitted if a protest or declaration is not presented within
twenty four hours before the competent authority of the point where the collision took place,
or that of the first port of arrival of the vessel, if in Philippine territory, and to the consul of
the Republic of the Philippines, if it occurred in a foreign country.

4.1 However, with respect to damages caused to persons or to the cargo, the absence of a
protest may not prejudice the persons interested who were not on board or were not in a
condition to make known their wishes.

5. The civil liability incurred by ship owners in case of a collision shall be understood as
limited to the value of the vessel with all its appurtenances and the freightage earned during
the voyage.

6. Should a collision between Philippine vessels take place in foreign waters, or if

having taken place in the open seas, and the vessels should make foreign port, the Consul of
the Republic of the Philippines in said port shall hold a summary investigation of the
accident, forwarding proceedings to the Secretary of the Department of Foreign Affairs for
continuation and conclusion.

CARRIAGE OF GOODS BY SEA ACT

PRELIMINARIES

1. Was originally Public Act No. 521 as passed by the Congress of the USA on April
16, 1936 and subsequently adopted by the Philippine Commonwealth on October 22, 1936 as
Commonwealth Act No. 65.

2. Since the objective of the law is bring our laws on cargo covered by bills of lading by
vessels engaged in foreign trade in harmony with the rest of the international shipping
community, once a vessel is engaged in foreign trade, referring to contracts for the carriage of
goods by sea to and from Philippine ports, the law should be applied regardless of the
destination of the vessel. It applies up to the final port of destination even if the transhipment
was made on an inter-island vessel.

3. There is a need to take into consideration the Act Allowing Foreign Vessels To
Transport and Co-Load Foreign Cargoes For Domestic Transhippment And For Other
Purposes (RA 10668), that applies exclusively to foreign vessels carrying foreign container
vans or foreign cargoes as it explicitly provides that Carriage conducted in accordance with
this Act shall be governed by Commonwealth Act No. 65, otherwise known as the "Carriage
of Goods by Sea Act" with respect to the liability of the carrier for the loss of, or damage to,
goods carried.

3.1 The law allows a foreign vessel: (a) Arriving from a foreign port, shall be allowed to
carry a foreign cargo to its Philippine port of final destination, after being cleared at its port of
entry; (b) Arriving from a foreign port, shall be allowed to carry a foreign cargo by another
foreign vessel calling at the same port of entry to the Philippine port of final destination of
such foreign cargo; (c) Departing from a Philippine port of origin through another Philippine
port to its foreign port of final destination, shall be allowed to carry a foreign cargo intended
for export; and (d) Departing from a Philippine port of origin, shall be allowed to carry a
foreign cargo by another foreign vessel through a domestic transshipment port and transferred
at such domestic transshipment port to its foreign port of final destination.

For purposes of this Act, an empty foreign container van going to or coming from any
Philippine port, or going to or coming from a foreign port, and being transshipped between
two (2) Philippine ports shall be allowed.

3.3 Foreign vessels engaging in carriage conducted in accordance with this Act shall not
be considered common carriers as provided in Republic Act No. 386, otherwise known as the
"Civil Code of the Philippines"; neither shall such foreign vessels be considered as offering a
public service and thus shall fall outside the coverage of Republic Act No. 9295, otherwise
known as the "Domestic Shipping Development Act of 2004".

4. Note however that the when Article 1753 of the Civil Code was held to apply, it
would mean that a vessel coming to the Philippines would be subject to a higher standard of
care, while that destined for a foreign port would be subject to due diligence under COGSA.

4.1 Accordingly, Article 1753 regarding the applicability of the law of the country to
which the goods are shipped in case of loss, damage or deterioration or Article 1766, as to the
applicability of the Code of Commerce shall be limited to domestic carriage of goods over
water. In the same case, cargo shipped from New York, USA aboard with freight prepaid for
Cebu where the carrier transhipped the cargo on a domestic vessel from Manila to Cebu,
COGSA was held to apply.

4.2. Notwithstanding that the Civil Code applies to common carriers and COGSA applies
only to foreign trade, when parties to a contract of private carriage stipulate to apply the Civil
Code or COGSA, they do not apply “ex propio vigore” or of their own force but rather as
mere terms of a contract. This means that in case of dispute, they are simple contractual terms
which call out for judicial interpretation. This is a paramount clause.

5. The degree of diligence required is due diligence before and at the beginning of the
voyage to: (a) make the ship seaworthy (b) properly man, equip and supply the ship, and (c)
make the holds, refrigerating and cooling chambers, and all other parts of the ship in which
goods are carried, fit and safe for their reception, carriage and preservation.

5.1 Whenever loss or damage arises from unseaworthiness, the burden of proving the
exercise of due diligence is on the carrier and neither shall the carrier or ship be liable unless
it is caused by want of due diligence on its part to make the ship seaworthy.

6. To establish a prima facie case of liability against the carrier, the shipper has the
burden of proof that the cargo was received by the carrier in good condition and that it was
damaged upon delivery by the carrier at its destination.

6.1 The bill of lading is prima facie evidence of receipt of the goods as described therein
and creates a rebuttable presumption that the goods were delivered in good condition.

6.2 Once the shipper has made his prima facie case, the carrier has the burden of proving
that it exercised due diligence to prevent the damage and the loss was occasioned by one of
the excepting causes or immunities. Further, a deviation to save or attempt to save life or
property at sea is a reasonable deviation that will avoid liability for loss or damages.
However, a deviation to load or unload passengers or cargo, shall prima facie be regarded as
unreasonable.

6.3 The immunities can be grouped into three categories: (a) overwhelming outside
forces, i.e. acts of war, acts of public enemies, arrest of princess, quarantines, strikes,
lockouts, riots and civil commotions, (b) overwhelming natural forces, i.e. perils of the sea or
acts of God, and (c) faults of the shipper, i.e. act or omission of the shipper or his agents,
wastage in bulk or weight, losses due to inherent vice, insufficiency of packing, insufficiency
of marking and latent defects.

7. The term “carriage of goods” covers the period from the time the goods are loaded to
the time they are discharged.

7.1 This is the period within which the carrier is required to exercise due diligence.

8. The maximum liability of the carrier is $500 per package or per customary freight
unit, or its equivalent in other currency, unless the shipper or owner declares a greater value.
The liability of the carrier for the loss of the goods is limited to $500.00 even if the bill of
lading indicated the amount stated in the letter of credit obtained by the buyer, because it is
not a declaration of the value of the goods for the purposes of the bill of lading. A stipulation
in the bill of lading limiting the liability of the vessel to $500 per package does not apply if
the nature and value of the goods have been inserted in the bill of lading.

8.1 The parties, however, may stipulate a lesser amount in the bill of lading.

8.2 In no event will the carrier be liable for an amount more than the damage actually
sustained.

8.3 Neither will the carrier nor the ship be liable in any event for loss or damage to or in
connection with the transportation of the goods if the nature or value thereof has been
knowingly and fraudulently misstated by the shipper in the bill of lading.

8.4 Note the use of the term package defines the extent of liability as a container van can
be considered as a single package unless the contents and the number of packages or units are
disclosed. When the goods being shipped are packed in cartons placed in container supplied
by the carrier and the number of cartons is disclosed in the shipping documents, it is the
number of cartons and not of the containers that should be used in computing the liability of
the carrier for the loss of the goods, as it is the cartons that constitute the packages.

9. Notice as to damage on the goods should be given upon receipt of the goods, unless
such damage is not apparent or externally visible in which case notice should be given within
three (3) days from receipt of the goods.

9.1 No notice is required when the state of the goods has at the time of receipt been the
subject of a joint survey inspection.

9.2 When there is a failure to comply with a bill of lading provision that a notice of claim
must be given by the consignee to the carrier within 30 days from receipt of the cargo but the
action is nevertheless filed within one (1) year from delivery, the action was held to be
properly brought as the clause was deemed to be null and void for being contrary to COGSA.

9.3 The carrier and the ship shall be discharged from liability in respect to loss or damage
unless suit is brought within one (1) year after delivery of the goods or date when the goods
should have been delivered. Note thought that failure to give notice does not bar the filing
of the suit for loss or damage to the goods. Failure to file notice of loss does not bar an action
against the carrier if the action was filed within one year.

9.4 Loss is defined as a situation where no delivery at all was made because the same had
perished, gone out of commerce or disappeared in such a way that their existence is unknown
or they cannot be recovered. It however includes damages by reason of unreasonable delay in
the transportation so that if the goods are lost or damaged by reason of the delay, the carrier is
liable.

9.5 Loss does not include a situation where there is delivery but is made to the wrong
person. Hence,the prescriptive period will not apply to cases of misdelivery of the goods or
delivery to wrong person. What will apply is either the Civil Code provision prescribing ten
(10) years for breach of a written contract or four (4) years for quasi-delict.

9.6 An action under the Carriage of Goods by Sea Act must be filed within one year from
the date the last item was delivered to the consignee.

9.7 The period is counted from the date of the delivery of the goods. If no delivery was
made, from the date when the goods should have been delivered. To illustrate the latter, if the
carrier arrived on January 2, 2021 and left on January 4, 2021 without delivering the cargo, it
was on the latter date that the carrier had the opportunity to deliver the goods. The period then
commenced to run on January 5, 2021 and will expire on January 4, 2022.

9.8 The period will not interrupted by a written extrajudicial demand or claim by the
consignee to the carrier as it has been held that the provisions of Article 1155 cannot be made
to apply as its application would have the effect of extending the period of prescription and
would permit delays in the settlement of questions affecting transportation contrary to the
clear intent of the law. The provision in the Civil Code that a written demand tolls the
prescriptive period does not apply to the COGSA cases, since matters affecting the
transportation of goods by sea must be decided as soon as possible.

WARSAW CONVENTION OUTLINE

(INCLUDING MONTREAL CONVENTION)
WHAT IS THE WARSAW CONVENTION

1. The Warsaw Convention refers to the convention for the Unification of Certain Rules
Relating International Carriage by Air which was signed in Warsaw, Poland on October 12,
1929, and amended by the Hague Convention signed on September 28, 1955.

2. The Philippines is a party to the convention and it became applicable on February 9,

1951.

2.1 It does not operate as an exclusive enumeration of instances for declaring a carrier
liable for breach of the contract of carriage or as an absolute limit of the extent of that
liability. It must not be construed to preclude the operation of the Civil Code and other
pertinent laws. It does not regulate, much less exempt, the carrier from liability for damages
for violating the rights of passengers under the contract of carriage especially if wilful
misconduct on the part of the carrier’s employees is found or established.

2.2 However, on August 10, 2015, the Philippine Senate ratified the Convention for the
Unification of Certain Rules for International Carriage by Air (May 28, 1999-MC99). This
had the effect of, among others, superseding rules on jurisdiction and the the applicable
compensation in case of death or injury to passengers and loss, damages or delay of baggages.
This is referred to as Montreal Convention (MC99). It must be noted that while MC 99 is
suppose to have superseded the Warsaw Convention, this change has not been reflected in the
bar outline. For purposes of this outline, both conventions will be covered with emphasis on
the similarities and substantial differences.

3. It applies to international air carriage or transportation.

3.1 Under the Warsaw Convention there are two categories: (a) That where the place of
departure and place of destination are situated within the territories of two High Contracting
Parties regardless of whether or not there be a break in transportation or transhipment, and (b)
That where the place of departure and the place of destination are within the territory of a
single High Contracting Party if there is an agreed stopping place within the territory subject
to the sovereignty, mandate or authority of another power, even though the power is not party
to the Convention.

3.2 To illustrate: Plaintiffs purchased from TWA two tickets in Bangkok, Thailand for
LA-NY-Boston-St. Louis-Chicago. The domicile and place of business of TWA is Kansas
City, Missouri, USA. Plaintiffs left Manila via PAL to LA. From LA, they boarded TWA to
NY. Upon arrival in Boston, the plaintiffs were missing four of their luggages. An eventual
suit was filed in Manila against TWA, who moved to dismiss saying that jurisdiction is not
vested in the Manila court, which subsequently dismissed the action applying the rule on
venue as per the Warsaw Convention. Upon appeal, the dismissal was reversed as the
Convention was held inapplicable as the contract of transportation was not an international
one as LA, the place of departure and Chicago, the place of destination are within the territory
of the USA, neither does it fall in the second type as there was no agreed stopping point in
another territory.

3.3 Under Article 1, MC 99, the rule to determine whether it is international air carriage
remains basically the same, the qualifications pertaining to gratuitous transport and the effect
of successive carriage on the character of the carriage.

This Convention applies to all international carriage of persons, baggage or cargo performed
by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air
transport undertaking.
For the purposes of this Convention, the expression "international carriage" means any
carriage in which, according to the agreement between the parties, the place of departure and
the place of destination, whether or not there be a break in the carriage or a transhipment, are
situated either within the territories of two States Parties, or within the territory of a single
State Party if there is an agreed stopping place within the territory of another State, even if
that State is not a State Party. Carriage between two points within the territory of a single
State Party without an agreed stopping place within the territory of another State is not
international carriage for the purposes of this Convention.

Further, Carriage to be performed by several successive carriers is deemed, for the purposes
of this Convention, to be one undivided carriage if it has been regarded by the parties as a
single operation, whether it had been agreed upon under the form of a single contract or of a
series of contracts, and it does not lose its international character merely because one contract
or a series of contracts is to be performed entirely within the territory of the same State.

3.4 An action for a violation of a contract of international transportation by air must be

brought, at the option of the plaintiff, in the territory of one of the High Contracting Parties,
either before the court of domicile of the carrier or of his principal place of business or where
he has a place of business through which the contract has been made, or before the court at
the place of destination.

In addition, under Article 33 , Jurisdiction of MC 99 In respect of damage resulting from the

death or injury of a passenger, an action may be brought before one of the courts mentioned
in paragraph 1 of this Article, or in the territory of a State Party in which at the time of the
accident the passenger has his or her principal and permanent residence and to or from which
the carrier operates services for the carriage of passengers by air, either on its own aircraft or
on another carrier's aircraft pursuant to a commercial agreement, and in which that carrier
conducts its business of carriage of passengers by air from premises leased or owned by the
carrier itself or by another carrier with which it has a commercial agreement.

For this purposes: (a) "commercial agreement" means an agreement, other than an agency
agreement, made between carriers and relating to the provision of their joint services for
carriage of passengers by air; (b) "principal and permanent residence" means the one fixed
and permanent abode of the passenger at the time of the accident. The nationality of the
passenger shall not be the determining factor in this regard.

Questions of procedure shall be governed by the law of the court seized of the case.

3.5 Under Article 35, Limitation of Actions, MC 99 the right to damages shall be
extinguished if an action is not brought within a period of two years, reckoned from the date
of arrival at the destination, or from the date on which the aircraft ought to have arrived, or
from the date on which the carriage stopped. The method of calculating that period shall be
determined by the law of the court seized of the case.

3.6 Successive Carriages under Article 36, MC 99 In the case of carriage to be performed
by various successive carriers and falling within the definition set out in paragraph 3 of
Article 1, each carrier which accepts passengers, baggage or cargo is subject to the rules set
out in this Convention and is deemed to be one of the parties to the contract of carriage in so
far as the contract deals with that part of the carriage which is performed under its
supervision.

In the case of carriage of this nature, the passenger or any person entitled to compensation in
respect of him or her can take action only against the carrier which performed the carriage
during which the accident or the delay occurred, save in the case where, by express
agreement, the first carrier has assumed liability for the whole journey.

As regards baggage or cargo, the passenger or consignor will have a right of action against the
first carrier, and the passenger or consignee who is entitled to delivery will have a right of
action against the last carrier, and further, each may take action against the carrier which
performed the carriage during which the destruction, loss, damage or delay took place. These
carriers will be jointly and severally liable to the passenger or to the consignor or consignee.

3.7 To illustrate: Northwest is a foreign corporation with principal office in Minnesota,

USA and licensed to do business in the Philippines. A Filipino resident purchased a ticket in
San Francisco for his flight from San Francisco to Manila via Tokyo and back. Due to the
cancellation of his confirmed reservation for the Tokyo to Manila leg, he was waitlisted. He
brings suit against Northwest in the Manila. The court upon motion dismissed the action as it
should have been brought in either the USA, the carrier’s domicile, in Minnesota, USA, its
principal place of business, San Francisco, the place of business through which the contract
was made or the place destination.

AIR WAYBILL

1. An air waybill is a document serving as the prima facie evidence of the contract of
transportation and as the receipt of the goods carried by air carriers.

2. It has three (3) parts intended for the carrier, the consignor and the consignee of the
goods.

LIABILITY OF AN INTERNATIONAL AIR CARRIER

1. The carrier shall be liable for damages sustained in the event of death or bodily injury
suffered by a passenger on board the aircraft or in the course of embarkation or
disembarkation thereof, and of damage or loss of any checked baggage or any goods during
the transportation by air.

1.1 The liabilities are determined and defined as follows under Article 17, MC 99:

(a) The carrier is liable for damage sustained in case of death or bodily injury of a
passenger upon condition only that the accident which caused the death or injury took place
on board the aircraft or in the course of any of the operations of embarking or disembarking.

(b) The carrier liable for damage sustained in case of destruction or loss of, or of damage
to, checked baggage upon condition only that the event which caused the destruction, loss or
damage took place on board the aircraft or during any period within which the checked
baggage was in the charge of the carrier. However, the carrier is not liable if and to the extent
that the damage resulted from the inherent defect, quality or vice of the baggage. In the case
of unchecked baggage, including personal items, the carrier is liable if the damage resulted
from its fault or that of its servants or agents.

(c) If the carrier admits the loss of the checked baggage, or if the checked baggage has
not arrived at the expiration of twenty-one days after the date on which it ought to have
arrived, the passenger is entitled to enforce against the carrier the rights which flow from the
contract of carriage.
(d) Unless otherwise specified, in this Convention the term "baggage" means both
checked baggage and unchecked baggage.

2. The following are the limited liability of the carrier under the convention:(a) For each
passenger – up to SDR 113,100 and for (b) For baggage – SDR 19 per kilogram. SDR means
Special Drawing Rights as determined by the IMF, which as of April 2019 has a value of US$
1.39 or Philippine Peso 71.92

2.1 The liabiity to a passenger for death or injury cannot exceed the limit if the carrier
can prove that:(a) such damage was not due to the negligence or other wrongful act or
omission of the carrier or its servants or agents; or (b) such damage was solely due to the
negligence or other wrongful act or omission of a third party.

2.2 The limits are to be reviewed by the International Civil Aviation Organization
(ICAO) every five years. above limitations may be increased by agreement, but any provision
tending to relieve the carrier of its liability or to fix a lower limit shall be null and void.

3. Under Article 19, MC 99, the carrier is liable for damage occasioned by delay in the
carriage by air of passengers, baggage or cargo. Nevertheless, the carrier shall not be liable
for damage occasioned by delay if it proves that it and its servants and agents took all
measures that could reasonably be required to avoid the damage or that it was impossible for
it or them to take such measures.

3.1 The liability for delay as specified in Article 19 in the carriage of persons, for each
passenger is limited to SDR 1,000 for each passenger unless the passenger has made, at the
time when the checked baggage was handed over to the carrier, a special declaration of
interest in delivery at destination and has paid a supplementary sum if the case so requires. In
that case the carrier will be liable to pay a sum not exceeding the declared sum, unless it
proves that the sum is greater than the passenger's actual interest in delivery at destination.

4. A carrier can be exonerated from liability under Article 20, Exoneration if it proves
that the damage was caused or contributed to by the negligence or other wrongful act or
omission of the person claiming compensation, or the person from whom he or she derives his
or her rights, the carrier shall be wholly or partly exonerated from its liability to the claimant
to the extent that such negligence or wrongful act or omission caused or contributed to the
damage. When by reason of death or injury of a passenger compensation is claimed by a
person other than the passenger, the carrier shall likewise be wholly or partly exonerated from
its liability to the extent that it proves that the damage was caused or contributed to by the
negligence or other wrongful act or omission of that passenger. This Article applies to all the
liability provisions in this Convention, including paragraph 1 of Article 21.

5. The limits prescribed in Article 21 and in this Article shall not prevent the court from
awarding, in accordance with its own law, in addition, the whole or part of the court costs and
of the other expenses of the litigation incurred by the plaintiff, including interest. The
foregoing provision shall not apply if the amount of the damages awarded, excluding court
costs and other expenses of the litigation, does not exceed the sum which the carrier has
offered in writing to the plaintiff within a period of six months from the date of the
occurrence causing the damage, or before the commencement of the action, if that is later.

5.1 A carrier may stipulate that the contract of carriage shall be subject to higher limits of
liability than those provided for in this Convention or to no limits of liability whatsoever.
5.2 Any provision tending to relieve the carrier of liability or to fix a lower limit than that
which is laid down in this Convention shall be null and void, but the nullity of any such
provision does not involve the nullity of the whole contract, which shall remain subject to the
provisions of this Convention.18

5.3 Provided, that the limitations shall not apply if the damage is caused by the willful
misconduct of the carrier or his agents.

6. Illustrations of wilful misconduct that would hold an airline liable for compensatory,
moral, and exemplary damages and attorney’s fees: (a) Flight attendant rudely placed a
passenger with first class ticket in the economy section of the airplane. 19 (b) Flight attendant
ousted an asian passenger from the plane and substituted a caucasian passenger on his seat. 20
(c) Airline personnel subjected a passenger to rude and barbaric treatment, calling him a
monkey.21(d) Spouses and child, all with confirmed and reconfirmed reservations, were
placed on wait-list, with only one making it on the scheduled flight and the two others were
compelled to buy again tickets from a different airline. 22 (e) Loss of baggage due to carrier’s
negligence and tainted with bad faith by faking a retrieval receipt to bail itself out of having to
pay the passenger.23 (f) Where the passengers are upgraded from business class to first class
without their consent and would not be allowed to board unless they give in to the upgrade. 24

PUBLIC SERVICE ACT OUTLINE

PURPOSE OF THE LAW

1. The primary purpose of the law is to secure adequate, sustained service for the public
at least cost, and to protect and conserve investments which have already been made for that
purpose.

1.1 Hence, interested or qualified parties intending to operate as a public utility or

provide public service must: (a) must apply for, and obtain, a license or permit from the
Public Service Commission, and comply with certain defined terms and conditions, and (b)
Upon grant of the license, the operator must conform to, and comply with, all reasonable rules
and regulations of the Public Service Commission.

1.2 The law was enacted not only to protect the public against unreasonable charges and
poor, inefficient service, but also to prevent ruinous competition. 25

2. The object and purpose of such a commission, among other things, is to look out for,
and protect, the interests of the public, and, in the instant case, to provide it with safe and
suitable means of travel over the highways in question, in like manner that a railroad would
be operated under the same terms and conditions.

3. Note that the Public Service Commission has been replaced by the following
regulatory agencies: (a)Land Transportation Franchising Regulatory Board (LTFRB) for land
transportation (b) Maritime Industry Authority (MARINA) for water transportation

18
Article 26, Montreal Convention
19
Northwest Airlines, Inc. v. Cuenca, 14 SCRA 1063
20
Air France v. Carrascoso, 18 SCRA 155
21
Zulueta v. Pan-Am, 43 SCRA 397
22
Zalamea v. Court of Appeals, 228 SCRA 23
23
PAL v. Court of Appeals, 207 SCRA 100
24
Cathay Pacific Airways, Ltd v. Vasquez, 399 SCRA 207
25
Batangas Transportation Co. Vs. Orlanes, 52 Phil 455
(c)National Telecommunications Commission (NTC) for communication utilities and
services, radio communications systems, wire or wireless telephone and telegraph systems,
radio and television broadcasting systems and other similar public utilities (d) Energy
Regulatory Board (ERB) for electric or power companies (e)National Water Resources
Council (NWRC) for water resources (f)Civil Aeronautics Board (CAB) for air transportation

DEFINING A PUBLIC UTILITY

1. Simply, a public utility is a business or service engaged in regularly supplying the

public with some commodity or service of public consequence. 26 The term implies public use
and service. Examples are electricity, gas, water, transportation, telephone or telegraph
service.

1.1 They are enterprises which specially cater to the needs of the public and are
conducive to their comfort and convenience.

1.2 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, it submits to
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.”27

1.3 When, therefore, one devotes his property to a use in which the public has an interest,
he, in effect grants to the public an interest in that use, and must submit to the control by the
public for the common good, to the extent of the interest he has thus created. 28

2. A distinction must be made between the terms public service and public utility as
they do not have the same legal meaning, although are related:

2.1 The definition of “public service” in the Public Service Act, as last amended by
Republic Act No. 2677, includes every person who owns, operates, manages or controls, for
hire or compensation, 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 railway,
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 communication systems, broadcasting stations and other similar public services.

2.2 A “public utility,” on the other hand, is a business or service engaged in regularly
supplying in the public with some commodity or service of public consequence such as
electricity, gas, water, transportation, telephone or telegraph service.

2.3 Simply stated, a public utility provides a service or facility needed for present day
living which cannot be denied to anyone who is willing to pay for it. 29

26
Albano vs. Reyes, 175 SCRA 264
27
Republic of the Philippines vs. Manila Electric Company, G.R. No. 141314, April 9, 2003
28
Kilusang Mayo Uno Labor Center vs. Hon. Jesus Garcia, LTFRB, GR No. 115381, December 23, 1994
29
JG Summit Holdings, Inc. vs. Court of Appeals, 412 SCRA 10
2.4 Another dissimilarity is that a public utility requires a franchise, aside from a
certificate of public necessity and convenience, for its operation, while a public service which
is not a public utility requires only a certificate of public convenience.

2.5 However, laws may provide that an activity is not a public utility. An example is
Section 29 of the Electric Power Reform Act of 2001 (EPIRA) 30 which states “any law to the
contrary notwithstanding, supply of electricity to the contestable market shall not be
considered a public utility operation.” This means that independent power producers/power
generators are not considered public utilities that may be subject to regulatory policy.

CERTIFICATE OF PUBLIC CONVENIENCE AND CERTIFICATE OF

CONVENIENCE AND NECESSITY DEFINED AND DISTINGUISHED

1. A certificate of public convenience is any authorization to operate public service

issued by the Public Service Commission for which no franchise, either municipal or
legislative, is required by law.

1.1 The certificate of public convenience and necessity requires a franchise issued by the
legislative department.

1.2 Legislative franchise distinguished from a certificate of public convenience -A

franchise is distinguished from a certificate of public convenience in that the former is a grant
or privilege from the sovereign power, while the latter is a form of regulations through an
administrative agency.31

1.3 A legislative franchise is necessary before a public utility can be allowed to secure a
certificate of public convenience if there is a statute requiring it, otherwise, it would not be
required.

2. A certificate of public convenience is a mere license or a privilege and being neither

a franchise nor a contract, it confers no vested or property right or interest on the holder.
However, in its purely private aspect, it has value and may be considered property that can be
levied upon.

3. The grant of a certificate of public convenience or a certificate of public

convenience and necessity requires the concurrence of the following: (a) the applicant must
be a citizen of the Philippines, or a corporation, partnership, or joint stock company
constituted and organized under the laws of the Philippines, at least sixty percent (60%) of its
stock or paid-up capital belongs entirely to Filipino citizens (b) the applicant must be
financially capable of undertaking the proposed service and meeting the responsibilities
incident to its operation, and (c) the applicant must prove that the operation of the business
will promote the public interest in a proper and suitable manner.

RULES OBSERVED IN THE GRANT OF CERTIFICATES OF PUBLIC

CONVENIENCE/CERTIFICATES OF PUBLIC CONVENIENCE AND NECESSITY

1. The Prior Operator Rule contemplates that the first licensee will be protected in his
investment and will not be subjected to ruinous competition.

30
RA 9136
31
Associated Communications & Wireless Service-UBN v. NTC, 397 SCRA 574
1.1 It is not therefore, the policy of the law for the Public Service Commission to issue a
certificate of public convenience to a second operator when a prior operator is rendering
sufficient, adequate and satisfactory service, and who in all things and respects is complying
with the rules and regulations of the Commission.

1.2 The rule will not apply if the public interest is served better by a new operator where:
(a) the old operator failed to make an offer to meet the increase in traffic (b) where the
Certificate of Public Convenience is granted to a new operator is a maiden Certificate of
Public Convenience (c) where the application of the rule is conducive to a monopoly

1.3 Another form of the rule is the Old Operator Rule which mandates that before
permitting a new operator to invade the territory of another already established with a
certificate of public convenience, thereby entering into competition with it, the prior operator
must be given an opportunity to extend its service in order to meet the public. 32

1.4 Note that this rule only applies when the old operator offers to meet the increase in
the demand the moment it arises and not after another operator had offered to render the
additional service as was done in the present case.The rule protects those who are vigilant in
meeting the needs of the travelling public.33

2. The Prior Applicant Rule presupposes a situation where two or more interested
persons apply for a Certificate of Public Convenience in the same locality over which no
person has of yet been granted a Certificate of Public Convenience, the applications being
equal, the one who first applied will be preferred. 34

2.1 In relation to this rule, there is the Third Operator Rule which provides that where
two operators are more than serving the public, there is no reason to permit a third operator to
engage in competition with them. Thus, the fact that it is only one trip and of little
consequence, is not sufficient reason to grant the application. However, if later on
circumstances would change requiring the operation of new units or extending existing
facilities, the third operator rule would be subject to the prior applicant rule and also as to
who may best subserve the public interests.35

2.2 The rule where there are various applicants for a public utility over the same territory,
is that priority of application, while an element to be considered, does not necessarily control
the granting of a certificate of public convenience. The question to be considered in such
cases is which applicant can render the best service, considering the conditions and
qualifications of the applicant to furnish the same. But where other conditions are equal,
priority in the filing of the application for a certificate of public convenience becomes an
important factor in the granting or refusal of a certificate. 36

3. Protection of Investment Rule is likewise considered as one of the primary purposes

of the law is to protect and conserve investments which have already been made for that
purpose by public service operators.37

4. The grounds for a revocation of a certificate are: (a) The holder violates or
contumaciously refuses to comply with any order, rule or regulations of the commission (b)
The holder is a mere dummy (c) The holder ceases operations or abandons the service.

32
Javier vs. Orlanes, 53 Phil 468
33
Angat-Manila Transportation Company vs. Victoria vda. De Tengco, 95 Phil 58
34
Batangas Transportation Company vs. Orlanes, 52 Phil 455
35
Yangco vs. Esteban, 58 Phil 346
36
Cruz vs. Marcelo, L-15301, March 30, 1962
37
Batangas Transportation Company vs. Orlanes, 52 Phil 455
REGULATION OF PUBLIC UTILITIES

1. The regulation of public utilities is founded upon the police powers of the State and
statues prescribing rules for the control and regulation of public utilities are considered valid
exercise thereof. When private property is used for a public purpose and is affected with
public interest, it ceases to be juris privati only and becomes subject to regulation.

1.1 The regulation is to promote the common good. Submission to regulation may be
withdrawn by the owner by discontinuing use; but as long as use of the property is continued,
the same is subject to public regulation.38

2. In regulating rates charged by public utilities, the State seeks to protect the public
against arbitrary and excessive rates while maintaining the efficiency and quality of services
rendered.

2.1 However, the power to regulate rates does not give the State the right to prescribe
rates which are so low as to deprive the public utility of a reasonable return on investment.
Thus, the rates prescribed by the State must be one that yields a fair return on the public
utility upon the value of the property performing the service and one that is reasonable to the
public for the services rendered. The fixing of just and reasonable rates involves a balancing
of the investor and the consumer interests.

2.2 The standard that should be used when an administrative body fixes the rates of
public utilities is that the rate be reasonable and just. It has been held that even in the absence
of an express requirement as to reasonableness, this standard may be implied.

2.3 What a just and reasonable rate is a question of fact calling for the exercise of
discretion, good sense, and a fair, enlightened and independent judgment. The requirement of
reasonableness comprehends such rates which must not be so low as to be confiscatory, or too
high as to be oppressive. In determining whether a rate is confiscatory, it is essential also to
consider the given situation, requirements and opportunities of the utility.

2.4 Determinative factors that should be considered in determining just and reasonable
rates are: (a) rate of return; (b) rate base; and (c) the return itself or the computed revenue to
be earned by the public utility based on the rate of return and rate base. The rate of return is a
judgment percentage which, if multiplied with the rate base, provides a fair return on the
public utility for the use of its property for service to the public. The rate of return of a public
utility is not prescribed by statute but by administrative and judicial pronouncements.

2.5 The Supreme Court has consistently adopted a 12% rate of return for public utilities.
The rate base, on the other hand, is an evaluation of the property devoted by the utility to the
public service or the value of invested capital or property which the utility is entitled to a
return.

3. The Supreme Court ruled in a number of cases that an administrative agency may be
empowered by law to approve provisionally, when demanded by urgent public need, rates of
public utilities without a hearing. The reason is easily discerned from the fact that provisional
rates are by their nature temporary and subject to adjustment in conformity with the definitive
rates approved after final hearing. Thus, the Supreme Court sustained the provisional

38
Republic of the Philippines vs. Meralco, GR No. 141314, November 15, 2002
approval of increase rates by the Energy Regulatory Board, Land Franchising and Regulatory
Board and Toll Regulatory Board39

SALIENT FEATURES OF THE FOREIGN INVESTMENT ACT OF 1991

Republic Act 7042, as amended by Republic Act 8179

Preliminaries:

1. This is the law that allows foreigners to do business in the Philippines or for foreign
investments to be made in the Philippines, when it is not covered or does not seek incentives
under the Omnibus Investment Code.40

1.1 Those covered by EO 266 are those foreign investments which pertain to: (a)
Preferred Pioneer (up to 100% equity) or Non-Preferred Pioneer (up to 40% equity)
Economic Ares of Investment as determined in the Investment Priorities Plan (IPP) issued on
a yearly basis by the Board of Investments (BOI) (b) Regional or Area Headquarters (RHQ)
Investments (c) Multinational Companies establishing warehouses (d) Special Investor’s
Resident Visa for foreigners investing at least $ 75,000.00, and (d) Establishments in Export
Processing Zones

1.2 Note that EO 226 provisions have been supplanted by the Special Economic Zone
Act of 1995 or RA 7196.

2. The policies of the law are:

2.1 It is the policy of the State to attract, promote and welcome productive investments in
activities which significantly contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such activity by the
Constitution and relevant laws from (a)Foreign individuals (b)Partnerships (c) Corporations,
and (d) Governments, including their political subdivisions

2.2 Foreign investments shall be encouraged in the enterprises that significantly expand
livelihood and employment opportunities for Filipinos by: (a) Enhancing economic value of
farm products (b) Promoting the welfare of Filipino consumers (c) Expanding the
scope, quality and volume of exports and their access to foreign markets (d) And/or
transferring relevant technologies in agriculture, industry and support devices.

2.3 Foreign investments shall be welcome as a supplement to Filipino capital and

technology in those enterprises serving mainly the domestic market.

2.4 There are no restrictions on extent of foreign ownership of export enterprises. In

domestic market enterprises, foreigners can invest as much as 100% equity, except in areas
included in the negative list.

2.5 Foreign-owned firms catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation in their businesses by
(a) Taking in Filipino partners (b)Electing Filipinos to the board of directors (c)
39
Padua v. Ranada, GR No. 141949, October 14, 2002
40
Executive Order 226
 Implementing transfer of technology to Filipinos (d) Generating more
employment for the economy, and (e)Enhancing skills of Filipino workers.

Definition of Terms:

1. A foreign investment is an equity investment made by non-Philippine national in the

form of foreign exchange and/or other assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess and appraise the value of such assets other
than foreign exchange.

2. An export enterprise is an enterprise wherein a manufacturer, processor or service

(including tourism) enterprise exports sixty percent (60%) or more of its output, or wherein a
trader purchase products domestically and exports sixty percent (60%) or more of such
purchases. (Sec 3(e), R.A. 7042)

3. A domestic market enterprise is an enterprise which produces goods for sale, or

renders services to the domestic market entirely or if exporting a portion of its output fails to
consistency export at least 60% thereof. (Sec 3 (e), R.A. 7042)

4. Philippine nationals are: (a) A citizen of the Philippines (b) A domestic

partnership or association wholly owned by citizens of the Philippines (c) Corporations
organized under Philippine laws of which 60% of the capital stock outstanding and entitled to
vote is owned and held by Filipino citizens (d)Corporations organized abroad and registered
as doing business in the Philippines under the Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.

4.1 However, it provides that where a corporation and its non-Filipino stockholders own
stocks in a SEC-registered enterprise, at least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least 60% of the members of the board of directors
of both corporations must be Filipino citizens. This is the double 60% rule.

4.2 A non-Philippine national is one who does not belong to the definition of a Philippine
national.

5. “Doing or transacting business” in the Philippines for foreign corporations is

constituted by:

5.1 Soliciting orders, service contracts, and opening offices

5.2 Appointing representatives, distributors domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more

5.3 Participating in the management, supervision or control of any domestic business,

firm, entity, or corporation in the Philippines

5.4 Any act or acts that imply a continuity of commercial dealings or arrangements, and
contemplate to some extent the performance of acts or works or the exercise of some
functions normally incident to and in progressive prosecution of, the purpose and object of its
organization (Sec 3(c), R.A. 7042)
6. A foreign corporation is considered as “not doing or transacting business” in the
Philippines for foreign corporations when:

6.1 Mere investment as shareholder and exercise of rights as investor

6.2 Having a nominee director or officer to represent its interest in the corporation

6.3 Appointing a representative or distributor which transacts business in its own name
and for its own account

6.4 Publication of a general advertisement through any print or broadcast media

6.5 Maintaining a stock of goods in the Philippines solely for the purpose of having the
same processed by another entity in the Philippines

6.6 Consignment by the foreign corporation of equipment with a local company to be

used in the processing of products for export

6.7 Collecting information in the Philippines

6.8 Performing services auxiliary to an existing isolated contract of sale which are not on
a continuing basis.

7. The Negative List is the list containing areas of investment that foreigners cannot
invest in or requires the listing of foreign ownership. The list is not permanent as it is subject
to amendment every two years.

7.1 List A enumerates the areas of economic activities reserved for Philippine nationals
by mandate of the constitution and specific laws. These include exploitation of natural
resources, operation of public utilities, educational institutions, mass media, labor recruitment
and the retail trade.

7.2 List B enumerates those activities where foreign ownership is listed for reasons of
security, defense, risk to health and morals and protection of small and medium scale
enterprise. These include defense-related activities such as the manufacture and distribution
of firearms and explosives including the manufacture and distribution of dangerous drugs,
gambling, nightclubs, bathhouse, massage parlors and other similar activities.

List B also restricts the entry of foreign investment in small and medium sized domestic
market enterprises (i.e., those with paid in equity of less than the equivalent of US$200,000
unless they involve advanced technology as determined by the Department of Science and
Technology and they employ 50 direct employees with a minimum paid-in capital of
US$100,000.00); and export enterprises which utilize raw materials from depleting natural
resources, with paid-in equity of less than the equivalent of US$200,000.

7.3 Under the Second RFINL, cooperatives, private security agencies, small-scale mining
have been reclassified from Negative List A to Negative List B, which allows up to 40%
foreign ownership.

What remains in Negative List A, which expressly prohibits any foreign equity or investment,
are industries reserved solely for Filipino citizens and corporations, namely, mass media and
services involving the practice of licensed professions.
Manner of Application:

1. A foreign investor has to make a determination of the kind of enterprise that it wants
to enter into, which may be a Domestic Market Enterprise or an Export Enterprise.

2. If it decides to invest in a domestic market enterprise, foreigners can invest as much

as 100% equity except in areas included in Negative Lists.

2.1 If the activity is in the Negative Lists, foreign ownership in the enterprise is generally
limited to a maximum 40% unless the Constitution or other laws provide a lower limit.

2.2 The domestic market enterprise can later change its status to an export enterprise if
over a 3 year period it has consistently exported 60% or more of its output.

2.3 This ownership limitation for activities in the Negative List can be waived should the
foreign investor decide to invest in an enterprise that exports at least 60% or more of its
output. In this case, foreign ownership may reach 100%. However, the waiver on limitation
of foreign ownership will not apply where the economic activity is one for which the
Constitution or other laws provide for an absolute and definite limit on foreign ownership.

2.4 Note also the entry into small and medium domestic market enterprises (e.g. those
with paid-in equity capital of less than US$200,000.00) are restricted by Negative List B,
unless a certification is obtained from DOST that the enterprise involves advanced
technology. (Reduced further to US$100,000.00 under conditions set in Rep. Act 8179)

3. If it decides to enter an Export Enterprise: As a general rule, there are no restrictions

on the extent of foreign ownership (up to 100%) in export enterprises, unless the products and
services fall within Negative Lists A and B or utilize raw materials from depleting natural
resources.

4. Aside from direct investment participation discussed above, foreigners may “do
business” in the Philippines.

4.1 This mode of investment is not available for incentives and is, therefore, governed by
the FIA ’91 and the Corporation Code.

4.2 Any non-Philippine national or entity may do business in the Philippines up to 100%
of its capital provided: (a) It is doing business as a domestic market enterprise outside
the Negative List (b) It is doing business as an export enterprise whose products or services
do not fall within Lists A and B, except for defense-related activities which may be approved
or authorized, of the Negative List, and (c) Provided further that, as required by existing laws,
the country or state of the applicant must allow Filipino citizens and corporations to do
business therein.

5. When it is investing in a domestic enterprise up to 100% of its capital without need of

prior approval, it must register with the Securities and Exchange Commission (SEC) or with
the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of
Trade and Industry in the case of single proprietorship.

5.1 As a general rule, the SEC or BTRCP, as the case may be, shall not impose any
limitations on the extent of foreign ownership in an enterprise additional to those provided in
R.A. 7042.

5.2 The exceptions are: (a) That any enterprise seeking to avail of incentives under the
Omnibus Investment Code of 1987 must apply for registration with the Board of Investments
(BOI), which shall process such application for registration in accordance with the criteria for
evaluation prescribed in said Code (b)That a non-Philippine national intending to engage in
the same line of business as an existing joint venture, in which he or his majority shareholder
is a substantial partner, must disclose the fact and the names and addresses of the partners in
the existing joint venture in his application for registration with the SEC.

6. When they enter an export enterprise, non-Philippine nationals shall register with
BOI and submit the reports that may be required to ensure continuing compliance of the
export enterprise with its export requirement.

6.1 BOI shall advise SEC or BTRCP, as the case may be, of any export enterprise that
fails to meet the export ratio requirement.

6.2 The SEC or BTRCP shall thereupon order the non-complying export enterprise to
reduce its sales to the domestic market to not more than 40% of its total production; failure to
comply with such SEC or BTRCP order, without justifiable reason, shall subject the
enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in this
law. (Sec 6, R.A. 7042)

7. The penalties provided under R.A. 7042 are:

7.1 A person who violates any provision of R.A. 7042 or of the terms and conditions of
registration or of the rules and regulations issued pursuant thereto, or aids or abets in any
manner any violation shall be subject to a fine not exceeding P100,000.

7.2 If the offense is committed by a juridical entity, it shall be subject to a fine in an

amount not exceeding 1/2 of 1% of total paid-in capital but not more than P5,000,000.00 The
president and/or officials responsible thereof shall also be subject to a fine not exceeding
P200,000.00

7.3 In addition to the foregoing, any person, firm or juridical entity involved shall be
subject to forfeiture of all benefits granted under R.A. 7042. (Sec. 14)

PHILIPPINE COMPETITION ACT-RA 10667

DISCUSSION OUTLINE

(April 2018)

TITLE OF THE LAW

The title of the law is: “An act providing for a national competition policy prohibiting ant-
competitive agreements, abuse of dominant position and anti-competitive mergers and
acquisitions, establishing the Philippine Competition Commission and appropriating funds
therefor.”

EFFECTIVE DATE OF THE LAW

The effective date of the law is August 8, 2015. The subsequent implementing rules and
regulations went into effect on June 18, 2016 after its publication on June 13, 2016.

PROHIBITED ACTS UNDER THE LAW

1. The prohibited acts under the law are; (a) Anti-Competitive Agreements under
Section 14, and (b) Abuse of Dominant Position under Section 15.

2. In addition to the prohibited acts, the PCC shall have the power to review Mergers
and Acquisitions that substantially prevent, restrict or lessen competition in the relevant
market or in the market for goods or services.

3. The ultimate aim of the law is to protect the competitive process. When competition
is eliminated, the competitive process is brought to an end as competitors are excluded from
the market (exclusionary effect) and consumers are exploited (exploitative effect).

4. On the other hand, the law will permit an agreement or an act if it has: (a) efficiency
gains, and (b) consumer benefits. The agreement or act in this case has the object or effect of
“improving production or distribution of goods and services within the relevant market, or
promoting technical and economic progress, while allowing consumers a fair share of the
economic benefit. This is the rule of reason or efficiency gains with consumer benefits
justification.

ANTI-COMPETITIVE AGREEMENTS

1. The anti-competitive agreements are enumerated under Section 14:

a. The following agreements, between or among competitors, are per se prohibited: (1)
Restricting competition as to price, or components thereof, or other terms of trade; (2) Fixing
price at an auction or in any form of bidding including cover bidding, bid suppression, bid
rotation and market allocation and other analogous practices of bid manipulation;

b. The following agreements, between or among competitors which have the object or
effect of substantially preventing, restricting or lessening competition shall be prohibited: (1)
Setting, limiting or controlling production, markets, technical development, or investment; (2)
Dividing or sharing the market, whether by volume of sales or purchases, territory, type of
goods or services, buyers or sellers or any other means;
c. Agreement other than those specified in (a) and (b) of this section which have the
object or effect of substantially preventing, restricting or lessening competition shall also be
prohibited: Provided, Those which contribute to improving the production or distribution of
goods and services or to promoting technical or economic progress, while allowing
consumers a fair share of the resulting benefits, may not necessarily be deemed a violation of
this Act.

An entity that controls, is controlled by, or is under common control with another entity or
entities, have common economic interests, and are not otherwise able to decide or act
independently of each other, shall not be considered competitors for purposes of this section.

1.1 Anti-competitive acts are those agreements undertaken with the object or effect of
substantially preventing, restricting or lessening competition. This means that competitors are
inhibited from competing, or from growing, or staying in the market. When these occur, the
agreement is said to have a foreclosure object or effect on competition.

1.2 Foreclosure can be in the horizontal market, where the entity and its competitors
operate, or in the vertical market, the upstream or vertical market. In this case there is vertical
integration. However, there is no necessity for the entity to have market dominance in both
markets.

1.3 There is no need for actual foreclosure to occur as the law allows intervention even
before the act of the entity can have an effect on the market.

2. Section 14 has three subsections. Subsections (a) and (b) prohibit anti-competitive
agreements between or among competitors, while Subsection (c) prohibits agreements other
than those specified under (a) or (b).

2.1 The distinction is material as a violation of Subsections (a) and (b) are criminal in
nature, while that of Subsection (c) is not.

3. To resolve the issue as to whether a: (a) parent company and a subsidiary, or (b)
parent company and an affiliate company, or (c) subsidiaries or affiliates will be considered as
competitors, the law adopted the single economic entity doctrine which is defined under the
last paragraph of Section 14. In essence, the entities that are part of the single economic entity
are under the control of the ultimate parent entity.

3.1 The control required being the ability to substantially influence or direct the actions
or decisions of an entity, whether by contract, agency or otherwise.” This is known as
“decisive influence.”

Section 25 mandates that the PCC to presume control when: “the parent owns directly or
indirectly, through subsidiaries, more than one half (1/2) of the voting power of an entity,
unless in exceptional circumstances, it can clearly be demonstrated that such ownership does
not constitute control.”

It can also be presumed even if the entity owns one half (1/2) or less of the voting power of
another entity when: (a) There is power over more than one half (1/2) of the voting rights by
virtue of an agreement with investors; (b) There is power to direct or govern the financial and
operating policies of the entity under a statute or agreement; (c) There is power to appoint or
remove the majority of the members of the board of directors or equivalent governing body;
(d) There is power to cast the majority votes at meetings of the board of directors or
equivalent governing body; (e) There exists ownership over or the right to use all or a
significant part of the assets of the entity; (f) There exist rights or contracts which confer
decisive influence on the decision of the entity.

3.2 As a consequence, it must be realized that while affiliated companies may be shielded
from the consequences of their agreements as they are not competitors, the parent company
and related companies may be bound by the act of a subsidiary or an affiliate if it enters into a
prohibited agreement with a competitor.

3.3 Under Rule 4, Section 2, Par. (b) of the IRR for purposes of merger control, the
reorganization of several legal entities belonging to a single economic entity will not be
covered since there can be no “acquiring and acquired pre-acquisition ultimate parent
entities.” Consequently, they are not subject to the notification requirement.

3.4 For purposes of applying Section 15, the single economic entity shall be considered
collectively in relation to the definition of dominant position, referring to “a position of
economic strength that an entity or entities hold which makes it capable of controlling the
relevant market independently from any combination of the following: competitors,
customers, suppliers or consumers.” Since a competitor is defined as an entity outside of a
single economic entity. Consequently, a parent company cannot be accused of impermissible
conduct towards its subsidiaries and affiliates.

4. The penal sanction is imprisonment from 2 to 7 years, and a fine of no less than PHP
50,000,000.00 but not more than PHP 250,000,000.00.

4.1 Administrative penalties will range from PHP 50,000.00 to 2,000,000.00 per
violation.

ABUSE OF A DOMINANT POSITION

1. Abuse of Dominant Position is provided for under Section 15:

It shall prohibited for one or more entities to abuse their dominant position by engaging in
conduct that would substantially prevent, restrict or lessen competition:

(a) Selling goods or services below cost with the object of driving competition our of the
relevant market: Provided, that in the Commission’s evaluation of this fact, it shall consider
whether the entity or entities have no such object and the price established was in good faith
to meet or compete with the lower price of a competitor in the same market selling the same
or comparable product or service of like quality;

(b) Imposing barriers to entry or committing acts that prevent competitors from growing
within the market in an anti-competitive manner except those that develop in the market as a
result of or arising from a superior product or process, business acumen, or legal rights or
laws;

(c) Making a transaction subject to acceptance by the other parties of other obligations which,
by their nature or according to commercial usage, have no connection with the transaction;
(d) Setting prices or other terms or conditions that discriminate unreasonably between
customers or sellers of the same goods or services, where such customers or sellers are
contemporaneously trading on similar terms and conditions, where the effect may be to lessen
competition substantially: Provided, that the following shall be considered permissible
differentials:

1. Socialized pricing for the less fortunate sector of the economy;

2. Price differential which reasonably or approximately reflect differences in the cost of

manufacture, sale or delivery resulting from differing methods, technical conditions, or
quantities in which the goods or services are sold or delivered to the buyers or sellers;

3. Price differential or terms of sale offered in response to the competitive price of

payments, services or changes in the facilities furnished by a competitor; and

4. Price changes in response to changing market conditions, marketability of goods or

services, or volume:

(e) Imposing restrictions on the lease or contract for sale or trade of goods or services
concerning where, to whom, or in what forms goods or services may be sold or traded, such
as fixing prices, giving preferential discounts or rebate upon such price, or imposing
conditions not to deal with competing entities, where the object or effect of the restrictions is
to prevent, restrict or lessen competition substantially. Provided, that nothing contained in this
Act shall prohibit or render unlawful:

1. Permissible franchising, licensing, exclusive merchandising or exclusive

distributorship agreements such as those which give each party the right to unilaterally
terminate the agreement; or

2. Agreements protecting intellectual property rights, confidential information, or trade

secrets;

(f) Making supply of particular goods or services dependent upon the purchase of other goods
or services from the supplier which have no direct connection with the main goods or services
to be supplied;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of,
among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale
enterprises, and other marginalized service providers and producers;

(h) Directly of indirectly imposing unfair purchase or selling price on their competitors,
customers, suppliers or consumers, provided that prices that develop in the market as a result
of or due to a superior product or process, business acumen or legal rights or laws shall not be
considered unfair prices; and

(i) Limiting production, markets or technical development to the prejudice of consumers,

provided that limitations that develop in the market as a result of or due to a superior product
or process, business acumen or legal rights or laws shall not be a violation of this Act:

Provided, that nothing in this Act shall be construed or interpreted as a prohibition on having
a dominant position in a relevant market or on acquiring, maintaining and increasing market
share through legitimate means that do not substantially prevent, restrict or lessen
competition.

Provided, further, that any conduct which contributes to improving production or distribution
of goods or services within the relevant market, or promoting technical and economic
progress while allowing consumers a fair share of the resulting benefit may not necessarily be
considered an abuse of dominant position.

Provided, finally, that the foregoing shall not constrain the Commission or the relevant
regulator from pursuing measures that would promote fair competition or more competition
as provided in this Act.

2. What Section 15 forbids is abusive conduct by a coercive monopolist. These has the
following elements: (a) The entity must have market power or market dominance. This refers
to a situation where the entity has the capacity to control the market or stop competitors from
entering the market. Under Section 27, this can be presumed if the market share of the entity
is at least 50% unless a new market threshold is determined by the PCC. (b) The entity
commits abusive conduct. (c) The conduct must have substantial foreclosure effect on the
relevant market. (d) There is no objective justification for the conduct.

2.1 Dominant position need not be enjoyed by a single entity. The law will also be called
to apply under the concept of collective dominance. This is a situation where several entities
demonstrate a collective behavior towards the accomplishment of a particular object that is
prohibited. If they possess the ability to control the relevant market, the entities will have
collective dominance. It must be noted though that the IRR does not specifically address the
matter.

2.2 In an oligopoly, a market dominated by a few entities, there is diminished

competition and it may be normal for oligopolists to have parallel behavior. This does not
translate to ant-competitive behavior by those enjoying collective dominance unless the
behavior is the only reason for parallel behavior.

2.3 Section 15 does not forbid a monopoly. What it seeks to address is the abuse of a
monopoly as per the qualifying statements in the quoted section that allows it to maintain and
increase market share through legitimate means that do not substantially prevent, restrict or
lessen competition.

3. Potential abusive conduct as provided by Section 15 are: (a) Predatory Pricing, which
refers to the selling of goods or services below cost with the object of driving competition out
of the relevant market. (b) Imposing Barriers to Competition, which refers to barriers to entry
or committing acts that prevent competitors from growing within the market in an anti-
competitive manner. (c) Bundling or Tying, which refers to a situation where the consumer is
offered two or more products with inducements to take both, rather than separately or where
the sale of the second product is used as a condition for the sale of the first product. (d)
Discriminatory Pricing, which refers to setting prices or other terms and conditions that
discriminate unreasonably between customers or sellers of the same goods or services, (e)
Restrictive Vertical Agreements, which refers to distribution and supply agreements
providing prima facie restrictive clauses, such as exclusive dealing, minimum quantity
obligations, resale price maintenance, formal or de facto restriction on parallel trade, and
online sales bans. Resale Price Maintenance, refers to restrictions on the contract of sale
concerning where, to whom or in what forms goods and services may be sold or traded such
as fixing prices or the giving of preferential rebates or discounts. (f) Imposing Unfair Price,
which refers to a price that is higher or lower than what could objectively be justified insofar
as its contract with a marginalized supplier, who is one engaged in a subsistence activity (i.e
farmer) and whose annual net income does not exceed the NEDA poverty line for his region.
(g) Limiting production, markets or technical development which results in prejudice to
consumers, and is not the result of “ a superior product or process, business acumen, or legal
rights or laws.”

REVIEW OF MERGERS AND ACQUISITIONS

1. Section 16 gives the PCC the power to review mergers and acquisitions based on
factors which they deem to be relevant.

2. Section 17 provides for compulsory notification if the transaction has met the set
threshold of PHP 1,000,000,000.00 under the size of the person test and the size of the
transaction test.

2.1 The size of the person test refers to the acquiring or target entity, at least one of which
must have gross annual revenues in, into or from or assets in the Philippines worth PHP
1,000,000,000.00. This has been increased to PHP 5,000,000,000.00 under PCC Policy
Statement 18-01 effective March 20, 2018.

2.2 The size of the transaction test refers to object of transaction and must be worth PHP
2,000,000,000.00 as likewise revised under PVV Policy Statement 18-01.

These threshold amounts are temporarily increased under the Section 4 (eee) of Bayanihan to
Recover as One Act to PHP 50,000,000,000.00 for two years and suspends the motu propio
exercise of the power of review by the PCC for one year, both counted from the effectivity of
the law.

2.3 In case of acquisitions, to include de facto mergers or consolidations, compliance

with the size of the transaction test will require an inquiry as to the place of the subject assets,
as: (a) where all the subject assets are in the Philippines, the gross annual revenues or value of
assets must meet the threshold, (b) where all the subject assets are outside of the Philippines,
the gross annual revenues of such assets generated in or into the Philippines and the value of
assets in the Philippines of the acquiring entity must meet the threshold, and (c) where some
of the subject assets are inside and some are outside the Philippines, the gross annual
revenues generated in or into the Philippines by assets acquired in the Philippines and assets
acquired outside of the Philippines must collectively meet the threshold and the value of
assets in the Philippines of the acquiring entity must similarly meet the threshold.

2.4 In statutory mergers or consolidations, the size of the transaction test requires that the
enterprise value test and the control test be hurdled. In the enterprise value test, the gross
annual revenues from sales in, into or from the Philippines or the value of the assets in the
Philippines must meet the threshold. In the control test, the acquiring entity must directly or
indirectly gain control or further control of the subject enterprise. Both are subject to separate
notifications.
2.5 In case of a joint venture, the contributing entities are deemed acquiring entities and
the joint venture the acquired entity. Under Rule 4, Section 3, Par. (d), the acquiring entity in
the transaction will be subject to notification if either: (a) the aggregate value of assets
combined in the Philippines or contributed into the joint venture exceeds the threshold, or (b)
the gross revenues generated in the Philippines by assets combined in the Philippines of
contributed into the proposed joint venture exceeds the threshold.

3. Section 17 requires compulsory notification at least 30 days prior to the

consummation of the transaction. This will have the effect of prohibiting the parties from
consummating the transaction until 30 days after the PCC was provided notification. This
gives the PCC the opportunity to issue a decision, or if necessary, to request additional
information. In the latter case, the transaction cannot be consummated for an additional 60
days, beginning on the day the request for additional information is received. Provided, that in
no case shall the total period of review exceed 90 days from initial notification.

3.1 For creeping transactions, referring to merger or acquisitions consisting of successive

transactions or acquisition of parts of one or more entities wich shall take place with a 1 year
period, it shall be treated as one transaction. Notification must be on the basis of the
preliminary binding agreement, or if none, when the parties execute the agreement relating to
the last transaction which, when taken together with the preceding transactions, satisfies the
threshold.

4. If there is a failure to give notification, the law will impose an administrative fine
ranging from 1% to 5% of the transaction value. This may also result in gun-jumping or
premature consummation of the transaction without the requisite clearance from the PCC.

5. The PCC can permit an otherwise prohibited merger or acquisition under a rule of
reason and/or white knight justification. The former holds that the M & A has brought about
or is likely to bring about gains in efficiencies that are greater than the effects of any
limitation on competition, while the latter is a situation where a party is faced with actual or
imminent financial failure and the agreement is represents the least competitive arrangement
among known alternative uses for the failing entity’s assets.

6. A favorable ruling acquires a no-look back protection as the PCC ruling cannot be
challenged or reversed by the PCC except when it is obtained through fraud or false material
information.