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G.R. No.

141314
April 9, 2003
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY
REGULATORY BOARD, petitioner,
vs.
MANILA ELECTRIC COMPANY, respondent.
RESOLUTION
PUNO, J.:
The business and operations of a public utility are imbued with
public interest. In a very real sense, a public utility is engaged in
public service-- providing basic commodities and services
indispensable to the interest of the general public. For this reason,
a public utility submits to the regulation of government authorities
and surrenders certain business prerogatives, including the amount
of rates that may be charged by it. It is the imperative duty of the
State to interpose its protective power whenever too much profits
become the priority of public utilities.
For resolution is the Motion for Reconsideration filed by respondent
Manila Electric Company (MERALCO) on December 5, 2002 from the
decision of this Court dated November 15, 2002 reducing
MERALCO's rate adjustment in the amount of P0.017 per
kilowatthour (kwh) for its billing cycles beginning 1994 and further
directing MERALCO to credit the excess average amount of P0.167
per kwh to its customers starting with MERALCO's billing cycles
beginning February 1994.1
First, we leapfrog through the facts. On December 23, 1993,
MERALCO filed with the Energy Regulatory Board (ERB) an
application for revised rates, with an average increase of P0.21 per
kwh in its distribution charge. On January 28, 1994 the ERB granted
a provisional increase of P0.184 per kwh subject to the
condition that in the event the ERB determines that MERALCO is
entitled to a lesser increase in rates, all excess amounts collected
by MERALCO shall be refunded to its customers or credited in their
favor. The Commission on Audit (COA) conducted an examination of
the books of accounts and records of MERALCO and thereafter
recommended, among others, that: (1) income taxes paid by
MERALCO should not be included as part of MERALCO's operating
expenses and (2) the "net average investment method" or the
"number of months use method" should be applied in determining

the proportionate value of the properties used by MERALCO during


the test year.
In its decision dated February 16, 1998, the ERB adopted the
recommendations of the COA and authorized MERALCO to adopt a
rate adjustment of P0.017 per kilowatthour (kwh) for its billing
cycles beginning 1994. The ERB further directed MERALCO to credit
the excess average amount of P0.167 per kwh to its
customers starting with MERALCO's billing cycles beginning
February 1994. The said ruling of the ERB was affirmed by this
Court in its decision dated November 15, 2002.
In its Motion for Reconsideration, respondent MERALCO contends
that: (1) the deduction of income tax from revenues allowed for
rate determination of public utilities is part of its constitutional right
to property; (2) it correctly used the "average investment method"
or the "simple average" in computing the value of its properties
entitled to a return instead of the "net average investment method"
or the "number of months use method"; and (3) the decision of the
ERB ordering the refund of P0.167 per kwh to its customers should
not be given retroactive effect.2
The Republic of the Philippines through the ERB, now Energy
Regulatory Commission (ERC), represented by the Office of the
Solicitor General, filed its Comment on March 7, 2003. Surprisingly,
in its Comment, the ERC proffered a divergent view from the Office
of the Solicitor General. The ERC submits that income taxes are not
operating expenses but are reasonable costs that may be
recoverable from the consuming public. While the ERC admits that
"there is still no categorical determination on whether income tax
should indeed be deducted from revenues of a public utility," it
agrees with MERALCO that to disallow public utilities from
recovering its income tax payments will effectively lower the return
on rate base enjoyed by a public utility to 8%. The ERC, however,
agrees with this Court's ruling that the use of the "net average
investment method" or the "number of months use method" is not
unreasonable.3
The Office of the Solicitor General, under its solemn duty to protect
the interests of the people, defended the thesis that income tax
payments by a public utility should not be recovered as costs from
the consuming public. It contended that: (1) the foreign

jurisprudence cited by MERALCO in support of its position is not


applicable in this jurisdiction; (2) MERALCO was given a fair rate of
return; (3) the COA and the ERB followed the National Accounting
and Auditing Manual which expressly disallows the treatment of
income tax as operating expense; (4) Executive Order No. 72 does
not grant electric utilities the privilege of treating income tax as
operating expense; (5) the COA and the ERB have been consistent
in not allowing income tax as part of operating expenses; (6) ERB
decisions allowing the application of a tax recovery clause
are inapropos; (7) allowing MERALCO to treat income tax as an
operating expense would set a dangerous precedent; (8) assuming
that the disallowance of income tax as operating expense would
discourage foreign investors and lenders, the government is not
precluded from enacting laws and instituting measures to lure them
back; and (9) the findings and conclusions of the ERB carry great
weight and should be binding on the courts in the absence of grave
abuse of discretion. The Solicitor General agrees with the ERC that
the "net average investment method" is a reasonable method for
property valuation. Finally, the Solicitor General argues that the
ERB decision may be applied retroactively and the use of a test
period to determine the rate base and allowable rates to be
collected by a public utility is an accepted practice.4
We shall discuss the main issues in seriatim.
I
MERALCO argues that deduction of all kinds of taxes, including
income tax, from the gross revenues of a public utility is firmly
entrenched in American jurisprudence. It contends that the Public
Service Act (Commonwealth Act No. 146) was patterned after Act
2306 of the Philippine Commission, which, in turn, was borrowed
from American state public utility laws such as the New Jersey
Public Utility Act. Hence, it maintains that American jurisprudence
on the inclusion of income taxes as a lawful charge to operating
expenses should be controlling. It cites the rule on statutory
construction that a statute adopted from a foreign country will be
presumed to be adopted with the construction placed upon it by
the courts of that country before its adoption.5
We are not persuaded. American decisions and authorities are not
per se controlling in this jurisdiction. At best, they are persuasive

for no court holds a patent on correct decisions. Our laws must be


construed in accordance with the intention of our own lawmakers
and such intent may be deduced from the language of each law
and the context of other local legislation related thereto. More
importantly, they must be construed to serve our own public
interest which is the be-all and the end-all of all our laws. And it
need not be stressed that our public interest is distinct and
different from others.
Rate regulation calls for a careful consideration of the totality of
facts and circumstances material to each application for an upward
rate revision. Rate regulators should strain to strike a balance
between the clashing interests of the public utility and the
consuming public and the balance must assure a reasonable rate of
return to public utilities without being unreasonable to the
consuming public. What is reasonable or unreasonable depends on
a calculus of changing circumstances that ebb and flow with time.
Yesterday cannot govern today, no more than today can determine
tomorrow.
Prescinding from these premises, we reject MERALCO's insistence
that the non-inclusion of income tax payments as a legitimate
operating expense will deny public utilities a fair return of their
investment. This stubborn stance is belied by the report submitted
by the COA on the audit conducted on MERALCO's books of
accounts and the findings of the ERB.6
Upon the instructions of the ERB, the COA conducted an audit of
the operations of MERALCO covering the period from February 1,
1994 to January 31, 1995, or the period immediately after the
implementation of the provisional rate increase.7 Hence, amounts
culled by the COA from its examination of the books of MERALCO
already included the provisional rate increase of P0.184 granted by
the ERB.
From the figures submitted by the COA, the ERB was able to
determine that MERALCO derived excess revenue during the test
year in the amount of P2,448,378,000.8 This means that during the
test year, and after the rates were increased by P0.184, MERALCO
earnedP2,448,378,000 or 8.15% more than the amount it should
have earned at a 12% rate of return on rate base. Accordingly,
based on this amount of excess revenue, the ERB determined that

the provisional rate granted by it to MERALCO was P0.167 per kwh


more than the amount MERALCO ought to charge its customers to
obtain the prescribed 12% rate of return on rate base. Thus, the
ERB correspondingly lowered the provisional increase by P0.167
per kwh and ordered MERALCO to increase its rates at a reduced
amount of P0.017 per kwh, computed as follows:
At appraised value
Total Invested Capital Entitled

P 30,059,614,00010

to Return
12% return thereon
Add: Total Operating expenses

P 3,607,154,000
P 38,260,420,00011

for Rate Determination


Purposes
Computed Revenue

P 41,867,573,000

Actual Revenue

P 44,315,951,000

Excess Revenue

P 2,448,378,000

Percent of Excess Revenue to

8.15%

Invested Capital
Authorized Rate of Return

12.00%

Actual Rate of Return

20.15%

Total kwh sold

14,640,094,000

Ratio of Excess Revenue to


Total kwh Sold
P 0.167
In fact, even if MERALCO's income tax liability would be included as
an operating expense, MERALCO would still enjoy excess revenue
of P312,738,000.00 or 1.04% above the authorized rate of return of
12%. Based on its audit, the COA determined that the provision for
income
tax
liability
of
MERALCO
amounted
to
P2,135,639,000.00.12 Thus, even if such amount of income tax
liability would be included as operating expense, the amount of
excess revenue earned by MERALCO during the test year would be
more than sufficient to cover the additional income tax
expense. Thus:
At appraised value
Total Invested Capital Entitled to Return
12% return thereon

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

Add: Total Operating expenses for Rate


Determination Purposes

P 40,396,059,00013

Computed Revenue

P 44,003,213,000

Actual Revenue

P 44,315,951,000

Excess Revenue
Percent of Excess Revenue to Invested Capital
Authorized Rate of Return

P 312,738,000
1.04%
12.00%

Actual Rate of Return


13.04%
It is crystal clear, therefore, that even if income tax is to be
included as an operating expense and hence, recoverable from the
consuming public, MERALCO would still enjoy a rate of return that is
above the authorized rate of 12%. Public utilities cannot be allowed
to overcharge at the expense of the public and worse, they cannot
complain that they are not overcharging enough.
Be that as it may, MERALCO contends that considering income tax
payments of public utilities constitute one-third of their net income,
public utilities will effectively get, not the 12% rate of return on rate
base allowed them, but only about 8%.14 Again, we are not
persuaded.
The foregoing argument assumes that the 12% return allowed to
public utilities is equivalent to its taxable income which will be
subject to income tax. The 12% rate of return is computedonly for
the purpose of fixing the allowable rates to be charged by a public
utility and is in no way determinative of the income subject to
income tax of the public utility. The computation of a corporation's
income tax liability is an altogether different matter, with the
corporation's taxable income derived by taking into account the
corporation's gross revenues less allowable deductions.15
At any rate, even on the assumption that in the test year involved
(February 1, 1994 to January 31, 1995), MERALCO's computed
revenue of P 41,867,573,000 or the amount that it is allowed to
earn based on a 12% rate of return is its taxable income, after
payment of its income tax liability of P2,135,639,000.00, MERALCO
would still obtain an 11.38% rate of return or a return that is well
within the 12% rate allowed to public utilities.16
MERALCO also contends that even the successor of the ERB or the
ERC created under the Electric Power Industry Reform Act of 2001

(EPIRA)17 "adheres to the principle that income tax is part of


operating expense."18 To bolster its argument, MERALCO cites
Article 36 of the EPIRA which charges the ERC with the
responsibility of unbundling the rates of the National Power
Corporation (NPC) and each distribution utility coming within the
coverage of the law.19 MERALCO alleges that pursuant to said
provision, the ERC issued a set of Uniform Rate Filing Requirements
(UFR) containing guidelines to be followed with respect to rate
unbundling applications to be filed. MERALCO asserts that under
the UFR, the enumeration of the expenses which are to be
recovered through the rates, and which are to be separated or
allocated for the purpose of unbundling of these rates include
income tax expenses.
Under Section 36 of the EPIRA, the NPC and every distribution
facility covered by the law is mandated to unbundle, segregate or
itemize its rates according to the various sectors of the electric
power industry identified in the law, namely: generation,
transmission, distribution and supply.20 The law further directs the
ERC to regulate and facilitate the unbundling of rates prescribed by
Section 36. Thus, on October 30, 2001, the ERC issued guidelines
prescribing the uniform rate filing requirements to be followed by
distribution facilities for the purposes of unbundling rates.21
A proper appreciation of the UFR shows that it simply specifies a
uniform accounting system to be complied with by a distribution
facility when filing an application for revised rates under the EPIRA.
As the EPIRA requires the unbundling or segregation of rates
according to the different sectors of the electric power industry, the
UFR seeks to facilitate this process by properly identifying the
accounts or information required for proper evaluation by the ERB.
Thus, the introductory statements of the UFR provide:
These uniform rate filing requirements are intended to
promote consistency and completeness in the rate filings
required by Republic Act No. 9136 (RA 9136), Section 36. To
that end, the filing requirements only specify minimum form
and content. A rate application in all its aspects continues to
be subject to subsequent Commission review and
deliberation.22

At the onset, it is clear that the UFR does not seek to determine
which accounting method will be used by the ERC for
determination of rate base or the items of expenses that may be
recovered by a public utility from its customers. The UFR only seeks
to prescribe a uniform system or format to standardize or facilitate
the process of unbundling of rates mandated by the EPIRA. At best,
the UFR prescribes the set of raw data or figures to be disclosed by
a distribution facility that the ERC will need to determine the
authorized rates that a distribution facility may charge. The UFR
does not, in any way, determine the manner by which the set of
data or figures indicated in the rate application will be evaluated by
the ERC for rate determination purposes.
II
MERALCO also challenges the use of the "net average investment
method" or the "number of months use method" on the ground that
MERALCO and the Public Service Commission (PSC) have been
consistently applying the "average investment method" or "simple
average", which it alleged was also affirmed by this Court in the
case of MERALCO v. PSC23 and Republic v. Medina.24
It is true that in MERALCO v. PSC,25 the issue of the proper
valuation method to be used in determining the value of
MERALCO's utility plants for rate fixing purposes was brought to
fore. In the said case, MERALCO applied the "average investment
method" or "simple average" by obtaining the average value of the
utility plants, using its values at the beginning and at the end of the
test year. In contrast, the General Auditing Office used the
"appraisal method" which fixes the value of the utility plants by
ascertaining the cost of production per kilowatt and multiplying the
same by the total capacity of said plants, less the corresponding
depreciation.26 In upholding the "average investment method"
used by MERALCO, this Court adopted the findings of the PSC for
being "by and large, supported by the records of the case."27 This
Court did not make an independent assessment of the validity or
applicability of the average investment method but simply did not
disturb the findings of the PSC for being supported by substantial
evidence. To conclude that the said decision "affirmed" the use of
the "average investment method" thereby implying that the said

method is the only method to be applied in all instances, is a


strained reading of the decision.
In fact, in the case of Republic v. Medina,28 also cited by MERALCO
to have affirmed the use of the "average investment method", this
Court ruled:
The decided weight of authority, however, is to the effect
that property valuation is not to be solved by formula but
depends upon the particular circumstances and relevant
facts affecting each utility as to what constitutes a just rate
base and what would be a fair return, just to both the utility
and the public.29
Further, Mr. Justice Castro in his concurring opinion in the same
case elucidated:
A regulatory commission's field of inquiry, however, is not
confined to the computation of the cost of service or capital
nor to a mere prognostication of the future behavior of the
money and capital markets. It must also balance investor
and consumer expectations in such a way that broad
requirements of public interest may be meaningfully
realized. It would hence appear in keeping with its public
duty if a regulatory body is allowed wide discretion in the
choice of methods rationally related to the achievement of
this end.30
Thus, the rule then as it is now, is that rate regulating authorities
are not hidebound to use any single formula or combination of
formulas for property valuation purposes because the rate-making
process involves the balancing of investor and consumer interests
which takes into account various factors that may be unique or
peculiar to a particular rate revision application.
We again stress the long established doctrine that findings of
administrative or regulatory agencies on matters which are within
their technical area of expertise are generally accorded not only
respect but at times even finality if such findings and conclusions
are supported by substantial evidence.31 Rate fixing calls for a
technical examination and a specialized review of specific details
which the courts are ill-equipped to enter, hence, such matters are
primarily entrusted to the administrative or regulating authority.32

Thus, this Court finds no reversible error on the part of the COA and
the ERB in adopting the "net average investment method" or the
"number of months use method" for property valuation purposes in
the cases at bar.
III
MERALCO also rants against the retroactive application of the rate
adjustment ordered by the ERB and affirmed by this Court. In its
decision, the ERB, after authorizing MERALCO to adopt a rate
adjustment in the amount of P0.017 per kwh, directed MERALCO to
refund or credit to its customers' future consumption the excess
average amount of P0.167 per kwh from its billing cycles beginning
February 199433 until its billing cycles beginning February
1998.34 In the decision appealed from, this Court likewise ordered
that the refund in the average amount of P0.167 per kwh be made
to retroact from MERALCO's billing cycles beginning February 1994.
MERALCO contends that the refund cannot be given retroactive
effect as the figures determined by the ERB only apply to the test
year or the period subject of the COA Audit, i.e., February 1, 1994
to January 31, 1995. It reasoned that the amounts used to
determine the proper rates to be charged by MERALCO would vary
from year to year and thus the computation of the excess average
charge of P0.167 would hold true only for the test year. Thus,
MERALCO argues that if a refund of P0.167 would be uniformly
applied to its billing cycles beginning 1994, with respect to periods
after January 31, 1995, there will be instances wherein its operating
revenues would fall below the 12% authorized rate of return.
MERALCO therefore suggests that the dispositive portion be
modified and order that "the refund applicable to the periods after
January 31, 1995 is to be computed on the basis of the excess
collection in proportion to the excess over the 12% return."35
The purpose of the audit procedures conducted in a rate application
proceeding is to determine whether the rate applied for will
generate a reasonable return for the public utility, which, in
accordance with settled laws and jurisprudence, is 12% on rate
base or the present value of the assets used in the operations of a
public utility. For audit purposes, however, there is a need to obtain
a sample set of data-- usually derived from figures within a
designated period of time-- to determine the amount of returns

obtained by a public utility during such period. In the cases at bar,


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

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

G.R. No. L-6055


June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in
the Court of First Instance of Manila with the crime of falsification of
a public and commercial document in that, having been entrusted
with the preparation and registration of the article of incorporation
of the Pacific Airways Corporation, a domestic corporation
organized for the purpose of engaging in business as a common
carrier, he caused it to appear in said article of incorporation that
one Arsenio Baylon, a Filipino citizen, had subscribed to and was
the owner of 60.005 per cent of the subscribed capital stock of the

corporation when in reality, as the accused well knew, such was not
the case, the truth being that the owner of the portion of the capital
stock subscribed to by Baylon and the money paid thereon were
American citizen whose name did not appear in the article of
incorporation, and that the purpose for making this false statement
was to circumvent the constitutional mandate that no corporation
shall be authorize to operate as a public utility in the Philippines
unless 60 per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment
and a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the
Pacific Airways Corporation registered its articles of incorporation
with the Securities and Exchanged Commission. The article were
prepared and the registration was effected by the accused, who
was in fact the organizer of the corporation. The article stated that
the primary purpose of the corporation was to carry on the
business of a common carrier by air, land or water; that its capital
stock was P1,000,000, represented by 9,000 preferred and 100,000
common shares, each preferred share being of the par value of
p100 and entitled to 1/3 vote and each common share, of the par
value of P1 and entitled to one vote; that the amount capital stock
actually subscribed was P200,000, and the names of the
subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W.
Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha,
the first being a Filipino and the other five all Americans; that
Baylon's subscription was for 1,145 preferred shares, of the total
value of P114,500, and for 6,500 common shares, of the total par
value of P6,500, while the aggregate subscriptions of the American
subscribers were for 200 preferred shares, of the total par value of
P20,000, and 59,000 common shares, of the total par value of
P59,000; and that Baylon and the American subscribers had
already paid 25 per cent of their respective subscriptions.
Ostensibly the owner of, or subscriber to, 60.005 per cent of the
subscribed capital stock of the corporation, Baylon nevertheless did
not have the controlling vote because of the difference in voting
power between the preferred shares and the common shares. Still,
with the capital structure as it was, the article of incorporation were

accepted for registration and a certificate of incorporation was


issued by the Securities and Exchange Commission.
There is no question that Baylon actually subscribed to 60.005 per
cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong to
him but to the Americans subscribers to the corporate stock. In
explanation, the accused testified, without contradiction, that in the
process of organization Baylon was made a trustee for the
American incorporators, and that the reason for making Baylon
such trustee was as follows:
Q. According to this article of incorporation Arsenio Baylon
subscribed to 1,135 preferred shares with a total value of
P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose
names are listed on page 7 of this certified copy came to my house,
Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get
them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in airplane surplus
property and they had obtained a considerable amount of money
on those planes and as I recall they were desirous of getting a
corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated
that they could get together that they feel that they had no time to
settle their respective share holdings. We discussed the matter and
finally it was decided that the best way to handle the things was
not to put the shares in the name of anyone of the interested
parties and to have someone act as trustee for their respective
shares holdings. So we looked around for a trustee. And he said
"There are a lot of people whom I trust." He said, "Is there someone
around whom we could get right away?" I said, "There is Arsenio.
He was my boy during the liberation and he cared for me when i
was sick and i said i consider him my friend." I said. They all knew
Arsenio. He is a very kind man and that was what was done. That is
how it came about.

Defendant is accused under article 172 paragraph 1, in connection


with article 171, paragraph 4, of the Revised Penal Code, which
read:
ART. 171. Falsification by public officer, employee, or notary
or ecclesiastic minister. The penalty ofprision mayor and
a fine not to exceed 5,000 pesos shall be imposed upon any
public officer, employee, or notary who, taking advantage of
his official position, shall falsify a document by committing
any of the following acts:
xxx
xxx
xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of
falsified documents. The penalty of prision correccional in
its medium and maximum period and a fine of not more
than 5,000 pesos shall be imposed upon:
xxx
xxx
xxx
1. Any private individual who shall commit any of the
falsifications enumerated in the next preceding article in any
public or official document or letter of exchange or any other
kind of commercial document.
Commenting on the above provision, Justice Albert, in his wellknown work on the Revised Penal Code ( new edition, pp. 407-408),
observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the
perversion of truth in the narration of facts must be made with the
wrongful intent of injuring a third person; and on the authority
of U.S. vs. Lopez (15 Phil., 515), the same author further maintains
that even if such wrongful intent is proven, still the untruthful
statement will not constitute the crime of falsification if there is no
legal obligation on the part of the narrator to disclose the truth.
Wrongful intent to injure a third person and obligation on the part of
the narrator to disclose the truth are thus essential to a conviction
for a crime of falsification under the above article of the Revised
Penal Code.
Now, as we see it, the falsification imputed in the accused in the
present case consists in not disclosing in the articles of
incorporation that Baylon was a mere trustee ( or dummy as the
prosecution chooses to call him) of his American co-incorporators,
thus giving the impression that Baylon was the owner of the shares

subscribed to by him which, as above stated, amount to 60.005 per


cent of the sub-scribed capital stock. This, in the opinion of the trial
court, is a malicious perversion of the truth made with the wrongful
intent circumventing section 8, Article XIV of the Constitution,
which provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporation or other
entities organized under the law of the Philippines, sixty per
centum of the capital of which is owned by citizens of the
Philippines . . . ." Plausible though it may appear at first glance, this
opinion loses validity once it is noted that it is predicated on the
erroneous assumption that the constitutional provision just quoted
was meant to prohibit the mere formation of a public utility
corporation without 60 per cent of its capital being owned by the
Filipinos, a mistaken belief which has induced the lower court to
that the accused was under obligation to disclose the whole truth
about the nationality of the subscribed capital stock of the
corporation by revealing that Baylon was a mere trustee or dummy
of his American co-incorporators, and that in not making such
disclosure defendant's intention was to circumvent the Constitution
to the detriment of the public interests. Contrary to the lower
court's assumption, the Constitution does not prohibit the mere
formation of a public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of
a franchise or other form of authorization for the operation of a
public utility to a corporation already in existence but without the
requisite proportion of Filipino capital. This is obvious from the
context, for the constitutional provision in question qualifies the
terms " franchise", "certificate", or "any other form of
authorization" with the phrase "for the operation of a public utility,"
thereby making it clear that the franchise meant is not the "primary
franchise" that invest a body of men with corporate existence but
the "secondary franchise" or the privilege to operate as a public
utility after the corporation has already come into being.
If the Constitution does not prohibit the mere formation of a public
utility corporation with the alien capital, then how can the accused
be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation

that Baylon was a mere trustee of his American co-incorporation


and that for that reason the subscribed capital stock of the
corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the Corporation
Law does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation and of the
allege wrongful intent, defendant cannot be legally convicted of the
crime with which he is charged.
It is urged, however, that the formation of the corporation with 60
per cent of its subscribed capital stock appearing in the name of
Baylon was an indispensable preparatory step to the subversion of
the constitutional prohibition and the laws implementing the policy
expressed therein. This view is not correct. For a corporation to be
entitled to operate a public utility it is not necessary that it be
organized with 60 per cent of its capital owned by Filipinos from the
start. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer
of shares to Filipino citizens. conversely, a corporation originally
formed with Filipino capital may subsequently change the national
status of said capital through transfer of shares to foreigners. What
need is there then for a corporation that intends to operate a public
utility to have, at the time of its formation, 60 per cent of its capital
owned by Filipinos alone? That condition may anytime be attained
thru the necessary transfer of stocks. The moment for determining
whether a corporation is entitled to operate as a public utility is
when it applies for a franchise, certificate, or any other form of
authorization for that purpose. And that can be done after the
corporation has already come into being and not while it is still
being formed. And at that moment, the corporation must show that
it has complied not only with the requirement of the Constitution as
to the nationality of its capital, but also with the requirements of
the Civil Aviation Law if it is a common carrier by air, the Revised
Administrative Code if it is a common carrier by water, and the
Public Service Law if it is a common carrier by land or other kind of
public service.
Equally untenable is the suggestion that defendant should at least
be held guilty of an "impossible crime" under article 59 of the
Revised Penal Code. It not being possible to suppose that

defendant had intended to commit a crime for the simple reason


that the alleged constitutional prohibition which he is charged for
having tried to circumvent does not exist, conviction under that
article is out of the question.
The foregoing consideration can not but lead to the conclusion that
the defendant can not be held guilty of the crime charged. The
majority of the court, however, are also of the opinion that, even
supposing that the act imputed to the defendant constituted
falsification at the time it was perpetrated, still with the approval of
the Party Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens with
respect to the right to operate public utilities in the Philippines,
thus doing away with the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are concerned, the said
act has ceased to be an offense within the meaning of the law, so
that defendant can no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed
and the defendant William H. Quasha acquitted, with costs de
oficio.

G.R. No. 171396


May 3, 2006
PROF. RANDOLF S. DAVID, LORENZO TAADA III, RONALD
LLAMAS, H. HARRY L. ROQUE, JR., JOEL RUIZ BUTUYAN,
ROGER R. RAYEL, GARY S. MALLARI, ROMEL REGALADO
BAGARES, CHRISTOPHER F.C. BOLASTIG, Petitioners,
vs.
GLORIA MACAPAGAL-ARROYO, AS PRESIDENT AND
COMMANDER-IN-CHIEF, EXECUTIVE SECRETARY EDUARDO
ERMITA, HON. AVELINO CRUZ II, SECRETARY OF NATIONAL
DEFENSE, GENERAL GENEROSO SENGA, CHIEF OF STAFF,
ARMED FORCES OF THE PHILIPPINES, DIRECTOR GENERAL
ARTURO LOMIBAO, CHIEF, PHILIPPINE NATIONAL
POLICE, Respondents.
DECISION

SANDOVAL-GUTIERREZ, J.:
All powers need some restraint; practical adjustments rather than
rigid formula are necessary.1 Superior strength the use of force
cannot make wrongs into rights. In this regard, the courts should be
vigilant in safeguarding the constitutional rights of the citizens,
specifically their liberty.
Chief Justice Artemio V. Panganibans philosophy of liberty is thus
most relevant. He said: "In cases involving liberty, the scales
of justice should weigh heavily against government and in
favor of the poor, the oppressed, the marginalized, the
dispossessed and the weak." Laws and actions that restrict
fundamental rights come to the courts "with a heavy presumption
against their constitutional validity."2
These seven (7) consolidated petitions for certiorari and prohibition
allege that in issuing Presidential Proclamation No. 1017 (PP 1017)
and General Order No. 5 (G.O. No. 5), President Gloria MacapagalArroyo committed grave abuse of discretion. Petitioners contend
that respondent officials of the Government, in their professed
efforts to defend and preserve democratic institutions, are actually
trampling upon the very freedom guaranteed and protected by the
Constitution. Hence, such issuances are void for being
unconstitutional.
Once again, the Court is faced with an age-old but persistently
modern problem. How does the Constitution of a free people
combine the degree of liberty, without which, law becomes
tyranny, with the degree oflaw, without which, liberty becomes
license?3
On February 24, 2006, as the nation celebrated the 20th
Anniversary of the Edsa People Power I, President Arroyo issued PP
1017 declaring a state of national emergency, thus:
NOW, THEREFORE, I, Gloria Macapagal-Arroyo, President of the
Republic of the Philippines and Commander-in-Chief of the Armed
Forces of the Philippines, by virtue of the powers vested upon me
by Section 18, Article 7 of the Philippine Constitution which states
that: "The President. . . whenever it becomes necessary, . . . may
call out (the) armed forces to prevent or suppress. . .rebellion. . .,"
and in my capacity as their Commander-in-Chief, do hereby
command the Armed Forces of the Philippines, to maintain

law and order throughout the Philippines, prevent or


suppress all forms of lawless violence as well as any act of
insurrection or rebellion and to enforce obedience to all the
laws and to all decrees, orders and regulations
promulgated by me personally or upon my direction; and as
provided in Section 17, Article 12 of the Constitution do
hereby declare a State of National Emergency.
She cited the following facts as bases:
WHEREAS, over these past months, elements in the political
opposition have conspired with authoritarians of the
extreme Left represented by the NDF-CPP-NPA and the
extreme Right, represented by military adventurists the
historical enemies of the democratic Philippine State who
are now in a tactical alliance and engaged in a concerted and
systematic conspiracy, over a broad front, to bring down the duly
constituted Government elected in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down
the President;
WHEREAS, the claims of these elements have been
recklessly magnified by certain segments of the national
media;
WHEREAS, this series of actions is hurting the Philippine State by
obstructing governance including hindering the growth of the
economy and sabotaging the peoples confidence in
government and their faith in the future of this country;
WHEREAS, these actions are adversely affecting the
economy;
WHEREAS, these activities give totalitarian forces of both
the extreme Left and extreme Right the opening to
intensify their avowed aims to bring down the democratic
Philippine State;
WHEREAS, Article 2, Section 4 of the our Constitution makes the
defense and preservation of the democratic institutions and the
State the primary duty of Government;
WHEREAS, the activities above-described, their consequences,
ramifications and collateral effects constitute a clear and present
danger to the safety and the integrity of the Philippine State and
of the Filipino people;

On the same day, the President issued G. O. No. 5 implementing PP


1017, thus:
WHEREAS, over these past months, elements in the political
opposition have conspired with authoritarians of the extreme Left,
represented by the NDF-CPP-NPA and the extreme Right,
represented by military adventurists - the historical enemies of the
democratic Philippine State and who are now in a tactical alliance
and engaged in a concerted and systematic conspiracy, over a
broad front, to bring down the duly-constituted Government elected
in May 2004;
WHEREAS, these conspirators have repeatedly tried to bring down
our republican government;
WHEREAS, the claims of these elements have been recklessly
magnified by certain segments of the national media;
WHEREAS, these series of actions is hurting the Philippine State by
obstructing governance, including hindering the growth of the
economy and sabotaging the peoples confidence in the
government and their faith in the future of this country;
WHEREAS, these actions are adversely affecting the economy;
WHEREAS, these activities give totalitarian forces; of both the
extreme Left and extreme Right the opening to intensify their
avowed aims to bring down the democratic Philippine State;
WHEREAS, Article 2, Section 4 of our Constitution makes the
defense and preservation of the democratic institutions and the
State the primary duty of Government;
WHEREAS, the activities above-described, their consequences,
ramifications and collateral effects constitute a clear and present
danger to the safety and the integrity of the Philippine State and of
the Filipino people;
WHEREAS, Proclamation 1017 date February 24, 2006 has been
issued declaring a State of National Emergency;
NOW, THEREFORE, I GLORIA MACAPAGAL-ARROYO, by virtue
of the powers vested in me under the Constitution as President of
the Republic of the Philippines, and Commander-in-Chief of the
Republic of the Philippines, and pursuant to Proclamation No. 1017
dated February 24, 2006, do hereby call upon the Armed Forces of
the Philippines (AFP) and the Philippine National Police (PNP), to

prevent and suppress acts of terrorism and lawless violence in the


country;
I hereby direct the Chief of Staff of the AFP and the Chief of the
PNP, as well as the officers and men of the AFP and PNP, to
immediately carry out the necessary and appropriate
actions and measures to suppress and prevent acts of
terrorism and lawless violence.
On March 3, 2006, exactly one week after the declaration of a state
of national emergency and after all these petitions had been filed,
the President lifted PP 1017. She issued Proclamation No. 1021
which reads:
WHEREAS, pursuant to Section 18, Article VII and Section 17,
Article XII of the Constitution, Proclamation No. 1017 dated
February 24, 2006, was issued declaring a state of national
emergency;
WHEREAS, by virtue of General Order No.5 and No.6 dated
February 24, 2006, which were issued on the basis of Proclamation
No. 1017, the Armed Forces of the Philippines (AFP) and the
Philippine National Police (PNP), were directed to maintain law and
order throughout the Philippines, prevent and suppress all form of
lawless violence as well as any act of rebellion and to undertake
such action as may be necessary;
WHEREAS, the AFP and PNP have effectively prevented,
suppressed and quelled the acts lawless violence and rebellion;
NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President
of the Republic of the Philippines, by virtue of the powers vested in
me by law, hereby declare that the state of national
emergency has ceased to exist.
In their presentation of the factual bases of PP 1017 and G.O. No. 5,
respondents stated that the proximate cause behind the executive
issuances was the conspiracy among some military officers, leftist
insurgents of the New Peoples Army (NPA), and some members of
the political opposition in a plot to unseat or assassinate President
Arroyo.4 They considered the aim to oust or assassinate the
President and take-over the reigns of government as a clear and
present danger.
During the oral arguments held on March 7, 2006, the Solicitor
General specified the facts leading to the issuance of PP 1017 and

G.O. No. 5. Significantly, there was no refutation from


petitioners counsels.
The Solicitor General argued that the intent of the Constitution is to
give full discretionary powers to the President in determining the
necessity of calling out the armed forces. He emphasized that none
of the petitioners has shown that PP 1017 was without factual
bases. While he explained that it is not respondents task to state
the facts behind the questioned Proclamation, however, they are
presenting the same, narrated hereunder, for the elucidation of the
issues.
On January 17, 2006, Captain Nathaniel Rabonza and First
Lieutenants Sonny Sarmiento, Lawrence San Juan and Patricio
Bumidang, members of the Magdalo Group indicted in the Oakwood
mutiny, escaped their detention cell in Fort Bonifacio, Taguig City. In
a public statement, they vowed to remain defiant and to elude
arrest at all costs. They called upon the people to "show and
proclaim our displeasure at the sham regime. Let us demonstrate
our disgust, not only by going to the streets in protest, but also by
wearing red bands on our left arms." 5
On February 17, 2006, the authorities got hold of a document
entitled "Oplan Hackle I " which detailed plans for bombings and
attacks during the Philippine Military Academy Alumni Homecoming
in Baguio City. The plot was to assassinate selected targets
including some cabinet members and President Arroyo
herself.6 Upon the advice of her security, President Arroyo decided
not to attend the Alumni Homecoming. The next day, at the height
of the celebration, a bomb was found and detonated at the PMA
parade ground.
On February 21, 2006, Lt. San Juan was recaptured in a communist
safehouse in Batangas province. Found in his possession were two
(2) flash disks containing minutes of the meetings between
members of the Magdalo Group and the National Peoples Army
(NPA), a tape recorder, audio cassette cartridges, diskettes, and
copies of subversive documents.7Prior to his arrest, Lt. San Juan
announced through DZRH that the "Magdalos D-Day would be on
February 24, 2006, the 20th Anniversary of Edsa I."
On February 23, 2006, PNP Chief Arturo Lomibao intercepted
information that members of the PNP- Special Action Force were

planning to defect. Thus, he immediately ordered SAF Commanding


General Marcelino Franco, Jr. to "disavow" any defection. The latter
promptly obeyed and issued a public statement: "All SAF units are
under the effective control of responsible and trustworthy officers
with proven integrity and unquestionable loyalty."
On the same day, at the house of former Congressman Peping
Cojuangco, President Cory Aquinos brother, businessmen and midlevel government officials plotted moves to bring down the Arroyo
administration. Nelly Sindayen of TIME Magazine reported that
Pastor Saycon, longtime Arroyo critic, called a U.S. government
official about his groups plans if President Arroyo is ousted. Saycon
also phoned a man code-named Delta. Saycon identified him as
B/Gen. Danilo Lim, Commander of the Armys elite Scout Ranger.
Lim said "it was all systems go for the planned movement against
Arroyo."8
B/Gen. Danilo Lim and Brigade Commander Col. Ariel Querubin
confided to Gen. Generoso Senga, Chief of Staff of the Armed
Forces of the Philippines (AFP), that a huge number of soldiers
would join the rallies to provide a critical mass and armed
component to the Anti-Arroyo protests to be held on February 24,
2005. According to these two (2) officers, there was no way they
could possibly stop the soldiers because they too, were breaking
the chain of command to join the forces foist to unseat the
President. However, Gen. Senga has remained faithful to his
Commander-in-Chief and to the chain of command. He immediately
took custody of B/Gen. Lim and directed Col. Querubin to return to
the Philippine Marines Headquarters in Fort Bonifacio.
Earlier, the CPP-NPA called for intensification of political and
revolutionary work within the military and the police
establishments in order to forge alliances with its members and key
officials. NPA spokesman Gregorio "Ka Roger" Rosal declared: "The
Communist Party and revolutionary movement and the entire
people look forward to the possibility in the coming year of
accomplishing its immediate task of bringing down the Arroyo
regime; of rendering it to weaken and unable to rule that it will not
take much longer to end it."9
On the other hand, Cesar Renerio, spokesman for the National
Democratic Front (NDF) at North Central Mindanao, publicly

announced: "Anti-Arroyo groups within the military and police are


growing rapidly, hastened by the economic difficulties suffered by
the families of AFP officers and enlisted personnel who undertake
counter-insurgency operations in the field." He claimed that with
the forces of the national democratic movement, the anti-Arroyo
conservative political parties, coalitions, plus the groups that have
been reinforcing since June 2005, it is probable that the Presidents
ouster is nearing its concluding stage in the first half of 2006.
Respondents
further
claimed
that
the
bombing
of
telecommunication towers and cell sites in Bulacan and Bataan was
also considered as additional factual basis for the issuance of PP
1017 and G.O. No. 5. So is the raid of an army outpost in Benguet
resulting in the death of three (3) soldiers. And also the directive of
the Communist Party of the Philippines ordering its front
organizations to join 5,000 Metro Manila radicals and 25,000 more
from the provinces in mass protests.10
By midnight of February 23, 2006, the President convened her
security advisers and several cabinet members to assess the
gravity of the fermenting peace and order situation. She directed
both the AFP and the PNP to account for all their men and ensure
that the chain of command remains solid and undivided. To protect
the young students from any possible trouble that might break
loose on the streets, the President suspended classes in all levels in
the entire National Capital Region.
For their part, petitioners cited the events that followed
after the issuance of PP 1017 and G.O. No. 5.
Immediately, the Office of the President announced the cancellation
of all programs and activities related to the 20th anniversary
celebration of Edsa People Power I; and revoked the permits to hold
rallies issued earlier by the local governments. Justice Secretary
Raul Gonzales stated that political rallies, which to the Presidents
mind were organized for purposes of destabilization, are
cancelled.Presidential Chief of Staff Michael Defensor announced
that "warrantless arrests and take-over of facilities, including
media, can already be implemented."11
Undeterred by the announcements that rallies and public
assemblies would not be allowed, groups of protesters (members
of Kilusang Mayo Uno [KMU] and National Federation of Labor

Unions-Kilusang Mayo Uno [NAFLU-KMU]), marched from various


parts of Metro Manila with the intention of converging at the EDSA
shrine. Those who were already near the EDSA site were violently
dispersed by huge clusters of anti-riot police. The well-trained
policemen used truncheons, big fiber glass shields, water cannons,
and tear gas to stop and break up the marching groups, and scatter
the massed participants. The same police action was used against
the protesters marching forward to Cubao, Quezon City and to the
corner of Santolan Street and EDSA. That same evening, hundreds
of riot policemen broke up an EDSA celebration rally held along
Ayala Avenue and Paseo de Roxas Street in Makati City.12
According to petitioner Kilusang Mayo Uno, the police cited PP 1017
as the ground for the dispersal of their assemblies.
During the dispersal of the rallyists along EDSA, police arrested
(without warrant) petitioner Randolf S. David, a professor at the
University of the Philippines and newspaper columnist. Also
arrested was his companion, Ronald Llamas, president of partylist Akbayan.
At around 12:20 in the early morning of February 25, 2006,
operatives of the Criminal Investigation and Detection Group (CIDG)
of the PNP, on the basis of PP 1017 and G.O. No. 5, raided the Daily
Tribune offices in Manila. The raiding team confiscated news stories
by reporters, documents, pictures, and mock-ups of the Saturday
issue. Policemen from Camp Crame in Quezon City were stationed
inside the editorial and business offices of the newspaper; while
policemen from the Manila Police District were stationed outside
the building.13
A few minutes after the search and seizure at the Daily
Tribune offices, the police surrounded the premises of another proopposition paper, Malaya, and its sister publication, the tabloid
Abante.
The raid, according to Presidential Chief of Staff Michael Defensor,
is "meant to show a strong presence, to tell media outlets not to
connive or do anything that would help the rebels in bringing down
this government." The PNP warned that it would take over any
media organization that would not follow "standards set by the
government during the state of national emergency." Director
General Lomibao stated that "if they do not follow the standards

and the standards are - if they would contribute to instability in the


government, or if they do not subscribe to what is in General Order
No. 5 and Proc. No. 1017 we will recommend a
takeover." National Telecommunications Commissioner Ronald
Solis urged television and radio networks to "cooperate" with the
government for the duration of the state of national emergency. He
asked for "balanced reporting" from broadcasters when covering
the events surrounding the coup attempt foiled by the government.
He warned that his agency will not hesitate to recommend the
closure of any broadcast outfit that violates rules set out for media
coverage when the national security is threatened.14
Also, on February 25, 2006, the police arrested Congressman
Crispin Beltran, representing the Anakpawis Party and Chairman
of Kilusang Mayo Uno (KMU), while leaving his farmhouse in
Bulacan. The police showed a warrant for his arrest dated 1985.
Beltrans lawyer explained that the warrant, which stemmed from a
case of inciting to rebellion filed during the Marcos regime, had
long been quashed. Beltran, however, is not a party in any of these
petitions.
When members of petitioner KMU went to Camp Crame to visit
Beltran, they were told they could not be admitted because of PP
1017 and G.O. No. 5. Two members were arrested and detained,
while the rest were dispersed by the police.
Bayan Muna Representative Satur Ocampo eluded arrest when the
police went after him during a public forum at the Sulo Hotel in
Quezon City. But his two drivers, identified as Roel and Art, were
taken into custody.
Retired Major General Ramon Montao, former head of the
Philippine Constabulary, was arrested while with his wife and
golfmates at the Orchard Golf and Country Club in Dasmarias,
Cavite.
Attempts were made to arrest Anakpawis Representative Satur
Ocampo,
Representative
Rafael
Mariano, Bayan
Muna Representative Teodoro Casio and Gabriela Representative
Liza Maza.Bayan Muna Representative Josel Virador was arrested at
the PAL Ticket Office in Davao City. Later, he was turned over to the
custody of the House of Representatives where the "Batasan 5"
decided to stay indefinitely.

Let it be stressed at this point that the alleged violations of the


rights of Representatives Beltran, Satur Ocampo, et al., are not
being raised in these petitions.
On March 3, 2006, President Arroyo issued PP 1021 declaring that
the state of national emergency has ceased to exist.
In the interim, these seven (7) petitions challenging the
constitutionality of PP 1017 and G.O. No. 5 were filed with this
Court against the above-named respondents. Three (3) of these
petitions impleaded President Arroyo as respondent.
In G.R. No. 171396, petitioners Randolf S. David, et al. assailed PP
1017 on the grounds that (1) it encroaches on the emergency
powers of Congress; (2) itis a subterfuge to avoid the constitutional
requirements for the imposition of martial law; and (3) it violates
the constitutional guarantees of freedom of the press, of speech
and of assembly.
In G.R.
No.
171409,
petitioners
Ninez
Cacho-Olivares
and Tribune Publishing Co., Inc. challenged the CIDGs act of raiding
the Daily Tribune offices as a clear case of "censorship" or "prior
restraint." They also claimed that the term "emergency" refers only
to tsunami, typhoon, hurricane and similar occurrences, hence,
there is "absolutely no emergency" that warrants the issuance of PP
1017.
In G.R. No. 171485, petitioners herein are Representative Francis
Joseph G. Escudero, and twenty one (21) other members of the
House of Representatives, including Representatives Satur Ocampo,
Rafael Mariano, Teodoro Casio, Liza Maza, and Josel Virador. They
asserted that PP 1017 and G.O. No. 5 constitute "usurpation of
legislative powers"; "violation of freedom of expression" and "a
declaration of martial law." They alleged that President Arroyo
"gravely abused her discretion in calling out the armed forces
without clear and verifiable factual basis of the possibility of
lawless violence and a showing that there is necessity to do so."
In G.R. No. 171483,petitioners KMU, NAFLU-KMU, and their
members averred that PP 1017 and G.O. No. 5 are unconstitutional
because (1) they arrogate unto President Arroyo the power to
enact laws and decrees; (2) their issuance was without factual
basis; and (3) they violate freedom of expression and the right of
the people to peaceably assemble to redress their grievances.

In G.R. No. 171400, petitioner Alternative Law Groups, Inc. (ALGI)


alleged that PP 1017 and G.O. No. 5 are unconstitutional because
they violate (a) Section 415 of Article II, (b) Sections 1,162,17 and
418 of Article III, (c) Section 2319 of Article VI, and (d) Section
1720 of Article XII of the Constitution.
In G.R. No. 171489, petitioners Jose Anselmo I. Cadiz et
al., alleged that PP 1017 is an "arbitrary and unlawful exercise by
the President of her Martial Law powers." And assuming that PP
1017 is not really a declaration of Martial Law, petitioners argued
that "it amounts to an exercise by the President of emergency
powers without congressional approval." In addition, petitioners
asserted that PP 1017 "goes beyond the nature and function of a
proclamation as defined under the Revised Administrative Code."
And lastly, in G.R. No. 171424,petitionerLoren B. Legarda
maintained that PP 1017 and G.O. No. 5 are "unconstitutional for
being violative of the freedom of expression, including its cognate
rights such as freedom of the press and the right to access to
information on matters of public concern, all guaranteed under
Article III, Section 4 of the 1987 Constitution." In this regard, she
stated that these issuances prevented her from fully prosecuting
her election protest pending before the Presidential Electoral
Tribunal.
In respondents Consolidated Comment, the Solicitor General
countered that: first, the petitions should be dismissed for being
moot; second,petitioners in G.R. Nos. 171400 (ALGI), 171424
(Legarda), 171483 (KMU et al.), 171485 (Escudero et al.) and
171489 (Cadiz et al.) have no legal standing; third, it is not
necessary for petitioners to implead President Arroyo as
respondent; fourth, PP 1017 has constitutional and legal basis;
and fifth, PP 1017 does not violate the peoples right to free
expression and redress of grievances.
On March 7, 2006, the Court conducted oral arguments and heard
the parties on the above interlocking issues which may be
summarized as follows:
A. PROCEDURAL:
1) Whether the issuance of PP 1021 renders the petitions
moot and academic.

2) Whether petitioners in 171485 (Escudero et al.), G.R.


Nos.
171400 (ALGI), 171483 (KMU et
al.), 171489 (Cadiz et al.), and 171424 (Legarda) have
legal standing.
B. SUBSTANTIVE:
1) Whetherthe Supreme Court can review the factual bases
of PP 1017.
2) Whether PP 1017 and G.O. No. 5 are unconstitutional.
a. Facial Challenge
b. Constitutional Basis
c. As Applied Challenge
A. PROCEDURAL
First, we must resolve the procedural roadblocks.
I- Moot and Academic Principle
One of the greatest contributions of the American system to this
country is the concept of judicial review enunciated in Marbury v.
Madison.21 This concept rests on the extraordinary simple
foundation -The Constitution is the supreme law. It was ordained by the people,
the ultimate source of all political authority. It confers limited
powers on the national government. x x x If the government
consciously or unconsciously oversteps these limitations
there must be some authority competent to hold it in
control, to thwart its unconstitutional attempt, and thus to
vindicate and preserve inviolate the will of the people as
expressed in the Constitution. This power the courts
exercise. This is the beginning and the end of the theory of
judicial review.22
But the power of judicial review does not repose upon the courts a
"self-starting capacity."23Courts may exercise such power only
when the following requisites are present: first, there must be an
actual case or controversy; second, petitioners have to raise a
question of constitutionality; third, the constitutional question must
be raised at the earliest opportunity; and fourth, the decision of the
constitutional question must be necessary to the determination of
the case itself.24
Respondents maintain that the first and second requisites are
absent, hence, we shall limit our discussion thereon.

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


opposite legal claims susceptible of judicial resolution. It is "definite
and concrete, touching the legal relations of parties having adverse
legal interest;" a real and substantial controversy admitting of
specific relief.25 The Solicitor General refutes the existence of such
actual case or controversy, contending that the present petitions
were rendered "moot and academic" by President Arroyos issuance
of PP 1021.
Such contention lacks merit.
A moot and academic case is one that ceases to present a
justiciable controversy by virtue of supervening events,26 so that a
declaration thereon would be of no practical use or
value.27 Generally, courts decline jurisdiction over such case28 or
dismiss it on ground of mootness.29
The Court holds that President Arroyos issuance of PP 1021 did not
render the present petitions moot and academic. During the eight
(8) days that PP 1017 was operative, the police officers, according
to petitioners, committed illegal acts in implementing it. Are PP
1017 and G.O. No. 5 constitutional or valid? Do they justify
these alleged illegal acts? These are the vital issues that must
be resolved in the present petitions. It must be stressed that "an
unconstitutional act is not a law, it confers no rights, it
imposes no duties, it affords no protection; it is in legal
contemplation, inoperative."30
The "moot and academic" principle is not a magical formula that
can automatically dissuade the courts in resolving a case. Courts
will decide cases, otherwise moot and academic, if:first, there is a
grave violation of the Constitution;31 second, the exceptional
character of the situation and the paramount public interest is
involved;32 third, when constitutional issue raised requires
formulation of controlling principles to guide the bench, the bar,
and the public;33 and fourth, the case is capable of repetition yet
evading review.34
All the foregoing exceptions are present here and justify this
Courts assumption of jurisdiction over the instant petitions.
Petitioners alleged that the issuance of PP 1017 and G.O. No. 5
violates the Constitution. There is no question that the issues being
raised affect the publics interest, involving as they do the peoples

basic rights to freedom of expression, of assembly and of the press.


Moreover, the Court has the duty to formulate guiding and
controlling constitutional precepts, doctrines or rules. It has the
symbolic function of educating the bench and the bar, and in the
present petitions, the military and the police, on the extent of
the protection given by constitutional guarantees.35 And lastly,
respondents contested actions are capable of repetition. Certainly,
the petitions are subject to judicial review.
In their attempt to prove the alleged mootness of this case,
respondents cited Chief Justice Artemio V. Panganibans Separate
Opinion in Sanlakas v. Executive Secretary.36 However, they failed
to take into account the Chief Justices very statement that an
otherwise "moot" case may still be decided "provided the party
raising it in a proper case has been and/or continues to be
prejudiced or damaged as a direct result of its issuance." The
present case falls right within this exception to the mootness rule
pointed out by the Chief Justice.
II- Legal Standing
In view of the number of petitioners suing in various personalities,
the Court deems it imperative to have a more than passing
discussion on legal standing or locus standi.
Locus standi is defined as "a right of appearance in a court of
justice on a given question."37 In private suits, standing is
governed by the "real-parties-in interest" rule as contained in
Section 2, Rule 3 of the 1997 Rules of Civil Procedure, as amended.
It provides that "every action must be prosecuted or
defended in the name of the real party in interest."
Accordingly, the "real-party-in interest" is "the party who stands
to be benefited or injured by the judgment in the suit or the
party entitled to the avails of the suit."38 Succinctly put, the
plaintiffs standing is based on his own right to the relief sought.
The difficulty of determining locus standi arises in public suits.
Here, the plaintiff who asserts a "public right" in assailing an
allegedly illegal official action, does so as a representative of the
general public. He may be a person who is affected no differently
from any other person. He could be suing as a "stranger," or in the
category of a "citizen," or taxpayer." In either case, he has to
adequately show that he is entitled to seek judicial protection. In

other words, he has to make out a sufficient interest in the


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

Fuente,46 Pascual v. Secretary of Public Works47 and Anti-Chinese


League of the Philippines v. Felix.48
However, being a mere procedural technicality, the requirement
of locus standi may be waived by the Court in the exercise of its
discretion. This was done in the 1949 Emergency Powers
Cases, Araneta v. Dinglasan,49 where the "transcendental
importance" of the cases prompted the Court to act liberally. Such
liberality was neither a rarity nor accidental. In Aquino v.
Comelec,50this Court resolved to pass upon the issues raised due
to the "far-reaching implications" of the petition notwithstanding
its categorical statement that petitioner therein had no personality
to file the suit. Indeed, there is a chain of cases where this liberal
policy has been observed, allowing ordinary citizens, members of
Congress, and civic organizations to prosecute actions involving the
constitutionality or validity of laws, regulations and rulings.51
Thus, the Court has adopted a rule that even where the petitioners
have failed to show direct injury, they have been allowed to sue
under the principle of "transcendental importance." Pertinent
are the following cases:
(1) Chavez v. Public Estates Authority,52 where the Court
ruled that the enforcement of the constitutional right
to information and the equitable diffusion of natural
resources are matters of transcendental importance
which clothe the petitioner with locus standi;
(2) Bagong Alyansang Makabayan v. Zamora,53 wherein the
Court held that "given the transcendental importance
of the issues involved, the Court may relax the
standing requirements and allow the suit to prosper
despite the lack of direct injury to the parties seeking
judicial review" of the Visiting Forces Agreement;
(3) Lim v. Executive Secretary,54 while the Court noted that
the petitioners may not file suit in their capacity as
taxpayers absent a showing that "Balikatan 02-01" involves
the exercise of Congress taxing or spending powers, it
reiterated its ruling in Bagong Alyansang Makabayan v.
Zamora,55that in cases of transcendental importance,
the cases must be settled promptly and definitely and
standing requirements may be relaxed.

By way of summary, the following rules may be culled from the


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

they claim that the Presidents declaration of a state of rebellion is


a usurpation of the emergency powers of Congress, thus
impairing their legislative powers. As to petitioners Sanlakas,
Partido Manggagawa, and Social Justice Society, the Court declared
them to be devoid of standing, equating them with the LDP
in Lacson.
Now, the application of the above principles to the present
petitions.
The locus standi of petitioners in G.R. No. 171396, particularly
David and Llamas, is beyond doubt. The same holds true with
petitioners
in G.R.
No.
171409,
Cacho-Olivares
and Tribune Publishing Co. Inc. They alleged "direct injury" resulting
from "illegal arrest" and "unlawful search" committed by police
operatives pursuant to PP 1017. Rightly so, the Solicitor General
does not question their legal standing.
In G.R. No. 171485, the opposition Congressmen alleged there
was usurpation of legislative powers. They also raised the issue of
whether or not the concurrence of Congress is necessary whenever
the alarming powers incident to Martial Law are used. Moreover, it
is in the interest of justice that those affected by PP 1017 can be
represented by their Congressmen in bringing to the attention of
the Court the alleged violations of their basic rights.
In G.R. No. 171400, (ALGI), this Court applied the liberality rule
in Philconsa v. Enriquez,60 Kapatiran Ng Mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan,61 Association of Small
Landowners in the Philippines, Inc. v. Secretary of Agrarian
Reform,62 Basco
v.
Philippine
Amusement
and
Gaming
Corporation,63and Taada v. Tuvera,64 that when the issue
concerns a public right, it is sufficient that the petitioner is a citizen
and has an interest in the execution of the laws.
In G.R. No. 171483, KMUs assertion that PP 1017 and G.O. No. 5
violated its right to peaceful assembly may be deemed sufficient to
give it legal standing. Organizations may be granted standing
to assert the rights of their members.65 We take judicial
notice of the announcement by the Office of the President banning
all rallies and canceling all permits for public assemblies following
the issuance of PP 1017 and G.O. No. 5.

In G.R. No. 171489, petitioners, Cadiz et al., who are national


officers of the Integrated Bar of the Philippines (IBP) have no legal
standing, having failed to allege any direct or potential injury which
the IBP as an institution or its members may suffer as a
consequence of the issuance of PP No. 1017 and G.O. No. 5.
In Integrated Bar of the Philippines v. Zamora,66 the Court held
that the mere invocation by the IBP of its duty to preserve the rule
of law and nothing more, while undoubtedly true, is not sufficient to
clothe it with standing in this case. This is too general an interest
which is shared by other groups and the whole citizenry. However,
in view of the transcendental importance of the issue, this Court
declares that petitioner have locus standi.
In G.R. No. 171424, Loren Legarda has no personality as a
taxpayer to file the instant petition as there are no allegations of
illegal disbursement of public funds. The fact that she is a former
Senator is of no consequence. She can no longer sue as a legislator
on the allegation that her prerogatives as a lawmaker have been
impaired by PP 1017 and G.O. No. 5. Her claim that she is a media
personality will not likewise aid her because there was no showing
that the enforcement of these issuances prevented her from
pursuing her occupation. Her submission that she has pending
electoral protest before the Presidential Electoral Tribunal is
likewise of no relevance. She has not sufficiently shown that PP
1017 will affect the proceedings or result of her case. But
considering once more the transcendental importance of the issue
involved, this Court may relax the standing rules.
It must always be borne in mind that the question of locus standi is
but corollary to the bigger question of proper exercise of judicial
power. This is the underlying legal tenet of the "liberality doctrine"
on legal standing. It cannot be doubted that the validity of PP No.
1017 and G.O. No. 5 is a judicial question which is of paramount
importance to the Filipino people. To paraphrase Justice Laurel, the
whole of Philippine society now waits with bated breath the ruling
of this Court on this very critical matter. The petitions thus call for
the application of the "transcendental importance" doctrine, a
relaxation of the standing requirements for the petitioners in the
"PP 1017 cases."1avvphil.net
This Court holds that all the petitioners herein have locus standi.

Incidentally, it is not proper to implead President Arroyo as


respondent. Settled is the doctrine that the President, during his
tenure of office or actual incumbency,67 may not be sued
in any civil or criminal case, and there is no need to provide for it in
the Constitution or law. It will degrade the dignity of the high office
of the President, the Head of State, if he can be dragged into court
litigations while serving as such. Furthermore, it is important that
he be freed from any form of harassment, hindrance or distraction
to enable him to fully attend to the performance of his official
duties and functions. Unlike the legislative and judicial branch, only
one constitutes the executive branch and anything which impairs
his usefulness in the discharge of the many great and important
duties imposed upon him by the Constitution necessarily impairs
the operation of the Government. However, this does not mean
that the President is not accountable to anyone. Like any other
official, he remains accountable to the people68 but he may be
removed from office only in the mode provided by law and that is
by impeachment.69
B. SUBSTANTIVE
I. Review of Factual Bases
Petitioners maintain that PP 1017 has no factual basis. Hence, it
was not "necessary" for President Arroyo to issue such
Proclamation.
The issue of whether the Court may review the factual bases of the
Presidents exercise of his Commander-in-Chief power has reached
its distilled point - from the indulgent days ofBarcelon v.
Baker70 and Montenegro v. Castaneda71 to the volatile era
of Lansang v. Garcia,72 Aquino, Jr. v. Enrile,73 and Garcia-Padilla v.
Enrile.74 The tug-of-war always cuts across the line defining
"political questions," particularly those questions "in regard to
which full discretionary authority has been delegated to the
legislative or executive branch of the government."75Barcelon and
Montenegro were in unison in declaring that the authority to
decide whether an exigency has arisen belongs to the
President and his decision is final and conclusive on the
courts. Lansang took the opposite view. There, the members of the
Court were unanimous in the conviction that the Court has the
authority to inquire into the existence of factual bases in order to

determine their constitutional sufficiency. From the principle of


separation of powers, it shifted the focus to the system of
checks and balances, "under which the President is
supreme, x x x only if and whenhe acts within the sphere
allotted to him by the Basic Law, and the authority to
determine whether or not he has so acted is vested in the
Judicial Department, which in this respect, is, in turn,
constitutionally supreme."76 In 1973, the unanimous Court
of Lansang was divided in Aquino v. Enrile.77 There, the Court was
almost evenly divided on the issue of whether the validity of the
imposition of Martial Law is a political or justiciable
question.78 Then came Garcia-Padilla v. Enrile which greatly
diluted Lansang. It declared that there is a need to re-examine the
latter case, ratiocinating that "in times of war or national
emergency, the President must be given absolute control
for the very life of the nation and the government is in
great peril. The President, it intoned, is answerable only to
his conscience, the People, and God."79
The Integrated Bar of the Philippines v. Zamora80 -- a recent case
most pertinent to these cases at bar -- echoed a principle similar
to Lansang. While the Court considered the Presidents "calling-out"
power as a discretionary power solely vested in his wisdom, it
stressed that "this does not prevent an examination of
whether such power was exercised within permissible
constitutional limits or whether it was exercised in a
manner constituting grave abuse of discretion."This ruling is
mainly a result of the Courts reliance on Section 1, Article VIII of
1987 Constitution which fortifies the authority of the courts to
determine in an appropriate action the validity of the acts of the
political departments. Under the new definition of judicial power,
the courts are authorized not only "to settle actual controversies
involving rights which are legally demandable and enforceable,"
but also "to determine whether or not there has been a
grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or instrumentality of
the government." The latter part of the authority represents a
broadening of judicial power to enable the courts of justice to
review what was before a forbidden territory, to wit, the discretion

of the political departments of the government.81 It speaks of


judicial prerogative not only in terms of power but also of duty.82
As to how the Court may inquire into the Presidents exercise of
power, Lansang adopted the test that "judicial inquiry can go no
further than to satisfy the Court not that the Presidents decision
is correct," but that "the President did not act arbitrarily." Thus, the
standard
laid
down
is
not
correctness,
but
arbitrariness.83 In Integrated Bar of the Philippines, this Court
further ruled that "it is incumbent upon the petitioner to show
that the Presidents decision is totally bereft of factual
basis" and that if he fails, by way of proof, to support his assertion,
then "this Court cannot undertake an independent
investigation beyond the pleadings."
Petitioners failed to show that President Arroyos exercise of the
calling-out power, by issuing PP 1017, is totally bereft of factual
basis. A reading of the Solicitor Generals Consolidated Comment
and Memorandum shows a detailed narration of the events leading
to the issuance of PP 1017, with supporting reports forming part of
the records. Mentioned are the escape of the Magdalo Group, their
audacious threat of the Magdalo D-Day, the defections in the
military, particularly in the Philippine Marines, and the reproving
statements from the communist leaders. There was also the
Minutes of the Intelligence Report and Security Group of the
Philippine Army showing the growing alliance between the NPA and
the military. Petitioners presented nothing to refute such events.
Thus, absent any contrary allegations, the Court is convinced that
the President was justified in issuing PP 1017 calling for military aid.
Indeed, judging the seriousness of the incidents, President Arroyo
was not expected to simply fold her arms and do nothing to prevent
or suppress what she believed was lawless violence, invasion or
rebellion. However, the exercise of such power or duty must not
stifle liberty.
II. Constitutionality of PP 1017 and G.O. No. 5
Doctrines of Several Political Theorists
on the Power of the President in Times of Emergency
This case brings to fore a contentious subject -- the power of the
President in times of emergency. A glimpse at the various political

theories relating to this subject provides an adequate backdrop for


our ensuing discussion.
John Locke, describing the architecture of civil government, called
upon the English doctrine of prerogative to cope with the problem
of emergency. In times of danger to the nation, positive law
enacted by the legislature might be inadequate or even a fatal
obstacle to the promptness of action necessary to avert
catastrophe. In these situations, the Crown retained a prerogative
"power to act according to discretion for the public good,
without the proscription of the law and sometimes even
against it."84 But Locke recognized that this moral restraint might
not suffice to avoid abuse of prerogative powers. Who shall judge
the need for resorting to the prerogative and how may its
abuse be avoided? Here, Locke readily admitted defeat,
suggesting that "the people have no other remedy in this, as
in all other cases where they have no judge on earth, but to
appeal to Heaven."85
Jean-Jacques Rousseau also assumed the need for temporary
suspension of democratic processes of government in time of
emergency. According to him:
The inflexibility of the laws, which prevents them from adopting
themselves to circumstances, may, in certain cases, render them
disastrous and make them bring about, at a time of crisis, the ruin
of the State
It is wrong therefore to wish to make political institutions as strong
as to render it impossible to suspend their operation. Even Sparta
allowed its law to lapse...
If the peril is of such a kind that the paraphernalia of the laws are
an obstacle to their preservation, the method is to nominate a
supreme lawyer, who shall silence all the laws and suspend for a
moment the sovereign authority. In such a case, there is no doubt
about the general will, and it clear that the peoples first intention
is that the State shall not perish.86
Rosseau did not fear the abuse of the emergency dictatorship or
"supreme magistracy" as he termed it. For him, it would more
likely be cheapened by "indiscreet use." He was unwilling to rely
upon an "appeal to heaven." Instead, he relied upon a tenure of

office of prescribed duration to avoid perpetuation of the


dictatorship.87
John Stuart Mill concluded his ardent defense of representative
government: "I am far from condemning, in cases of extreme
necessity, the assumption of absolute power in the form of
a temporary dictatorship."88
Nicollo Machiavellis view of emergency powers, as one element in
the whole scheme of limited government, furnished an ironic
contrast to the Lockean theory of prerogative. He recognized and
attempted to bridge this chasm in democratic political theory, thus:
Now, in a well-ordered society, it should never be necessary to
resort to extra constitutional measures; for although they may for
a time be beneficial, yet the precedent is pernicious, for if the
practice is once established for good objects, they will in a little
while be disregarded under that pretext but for evil purposes. Thus,
no republic will ever be perfect if she has not by law provided for
everything, having a remedy for every emergency and fixed rules
for applying it.89
Machiavelli in contrast to Locke, Rosseau and Mill sought to
incorporate into the constitution a regularized system of standby
emergency powers to be invoked with suitable checks and controls
in time of national danger. He attempted forthrightly to meet the
problem of combining a capacious reserve of power and speed and
vigor in its application in time of emergency, with effective
constitutional restraints.90
Contemporary political theorists, addressing themselves to the
problem of response to emergency by constitutional democracies,
have
employed
the
doctrine
of
constitutional
dictatorship.91 Frederick M. Watkins saw "no reason why
absolutism should not be used as a means for the defense
of liberal institutions," provided it "serves to protect
established institutions from the danger of permanent
injury in a period of temporary emergency and is followed
by a prompt return to the previous forms of political
life."92 He recognized the two (2) key elements of the problem of
emergency
governance,
as
well
as
all
constitutional
governance: increasing
administrative
powers
of
the
executive, while at the same time "imposing limitation upon

that power."93 Watkins placed his real faith in a scheme of


constitutional dictatorship. These are the conditions of success of
such a dictatorship: "The period of dictatorship must be
relatively shortDictatorship should always be strictly
legitimate in characterFinal authority to determine the
need for dictatorship in any given case must never rest with
the dictator himself"94 and the objective of such an
emergency
dictatorship
should
be
"strict
political
conservatism."
Carl J. Friedrich cast his analysis in terms similar to those of
Watkins.95 "It is a problem of concentrating power in a
government where power has consciously been divided to cope
with situations of unprecedented magnitude and gravity. There
must be a broad grant of powers, subject to equally strong
limitations as to who shall exercise such powers, when, for how
long, and to what end."96 Friedrich, too, offered criteria for judging
the adequacy of any of scheme of emergency powers, to wit: "The
emergency executive must be appointed by constitutional
means i.e., he must be legitimate; he should not enjoy
power to determine the existence of an emergency;
emergency powers should be exercised under a strict time
limitation; and last, the objective of emergency action must
be the defense of the constitutional order."97
Clinton L. Rossiter, after surveying the history of the employment of
emergency powers in Great Britain, France, Weimar, Germany and
the United States, reverted to a description of a scheme of
"constitutional dictatorship" as solution to the vexing problems
presented by emergency.98 Like Watkins and Friedrich, he stated a
priori the conditions of success of the "constitutional dictatorship,"
thus:
1) No general regime or particular institution of
constitutional dictatorship should be initiated unless it is
necessary or even indispensable to the preservation of the
State and its constitutional order
2) the decision to institute a constitutional dictatorship
should never be in the hands of the man or men who will
constitute the dictator

3) No
government should
initiate
a
constitutional
dictatorship without making specific provisions for its
termination
4) all uses of emergency powers and all readjustments in
the organization of the government should be effected in
pursuit of constitutional or legal requirements
5) no dictatorial institution should be adopted, no right
invaded, no regular procedure altered any more than is
absolutely necessary for the conquest of the particular crisis
...
6) The measures adopted in the prosecution of the a
constitutional dictatorship should never be permanent in
character or effect
7) The dictatorship should be carried on by persons
representative of every part of the citizenry interested in the
defense of the existing constitutional order. . .
8) Ultimate responsibility should be maintained for every
action taken under a constitutional dictatorship. . .
9) The decision to terminate a constitutional dictatorship,
like the decision to institute one should never be in the
hands of the man or men who constitute the dictator. . .
10) No constitutional dictatorship should extend beyond the
termination of the crisis for which it was instituted
11) the termination of the crisis must be followed by a
complete return as possible to the political and
governmental conditions existing prior to the initiation of the
constitutional dictatorship99
Rossiter accorded to legislature a far greater role in the oversight
exercise of emergency powers than did Watkins. He would secure
to Congress final responsibility for declaring the existence or
termination of an emergency, and he places great faith in the
effectiveness of congressional investigating committees.100
Scott and Cotter, in analyzing the above contemporary theories in
light of recent experience, were one in saying that, "the
suggestion that democracies surrender the control of
government to an authoritarian ruler in time of grave
danger to the nation is not based upon sound constitutional
theory." To appraise emergency power in terms of constitutional

dictatorship serves merely to distort the problem and hinder


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

increasing areas of discretionary power to the Chief


Executive, while insuring that such powers will be exercised
with a sense of political responsibility and under effective
limitations and checks.
Our Constitution has fairly coped with this problem. Fresh from the
fetters of a repressive regime, the 1986 Constitutional Commission,
in drafting the 1987 Constitution, endeavored to create a
government in the concept of Justice Jacksons "balanced power
structure."102Executive, legislative, and judicial powers are
dispersed to the President, the Congress, and the Supreme Court,
respectively. Each is supreme within its own sphere. But none has
the monopoly of power in times of emergency. Each branch
is given a role to serve as limitation or check upon the
other. This
system
does
not weaken the
President,
it
just limits his power, using the language of McIlwain. In other
words, in times of emergency, our Constitution reasonably
demands that we repose a certain amount of faith in the basic
integrity and wisdom of the Chief Executive but, at the same
time, it obliges him to operate within carefully prescribed
procedural limitations.
a. "Facial Challenge"
Petitioners contend that PP 1017 is void on its face because of its
"overbreadth." They claim that its enforcement encroached on both
unprotected and protected rights under Section 4, Article III of the
Constitution and sent a "chilling effect" to the citizens.
A facial review of PP 1017, using the overbreadth doctrine, is
uncalled for.
First and foremost, the overbreadth doctrine is an analytical tool
developed for testing "on their faces" statutes in free speech
cases, also known under the American Law as First Amendment
cases.103
A plain reading of PP 1017 shows that it is not primarily directed to
speech or even speech-related conduct. It is actually a call upon
the
AFP
to
prevent
or
suppress
all
forms
of lawlessviolence. In United States v. Salerno,104 the US
Supreme Court held that "we have not recognized an
overbreadth doctrine outside the limited context of the
First Amendment" (freedom of speech).

Moreover, the overbreadth doctrine is not intended for testing the


validity of a law that "reflects legitimate state interest in
maintaining comprehensive control over harmful, constitutionally
unprotected conduct." Undoubtedly, lawless violence, insurrection
and rebellion are considered "harmful" and "constitutionally
unprotected conduct." In Broadrick v. Oklahoma,105 it was held:
It remains a matter of no little difficulty to determine when a law
may properly be held void on its face and when such summary
action is inappropriate. But the plain import of our cases is, at
the very least, that facial overbreadth adjudication is an
exception to our traditional rules of practice and that its
function, a limited one at the outset, attenuates as the
otherwise unprotected behavior that it forbids the State to
sanction moves from pure speech toward conduct and that
conduct even if expressive falls within the scope of
otherwise valid criminal laws that reflect legitimate state
interests in maintaining comprehensive controls over
harmful, constitutionally unprotected conduct.
Thus, claims of facial overbreadth are entertained in cases
involving statutes which, by their terms, seek to regulate only
"spoken words" and again, that "overbreadth claims, if
entertained at all, have been curtailed when invoked
against ordinary criminal laws that are sought to be applied
to protected conduct."106 Here, the incontrovertible fact
remains that PP 1017 pertains to a spectrum ofconduct, not free
speech, which is manifestly subject to state regulation.
Second, facial invalidation of laws is considered as "manifestly
strong medicine," to be used "sparingly and only as a last
resort," and is "generally disfavored;"107 The reason for this is
obvious. Embedded in the traditional rules governing constitutional
adjudication is the principle that a person to whom a law may be
applied will not be heard to challenge a law on the ground that it
may conceivably be applied unconstitutionally to others, i.e., in
other situations not before the Court.108 A writer and scholar
in Constitutional Law explains further:
The most distinctive feature of the overbreadth technique
is that it marks an exception to some of the usual rules of
constitutional litigation. Ordinarily, a particular litigant

claims that a statute is unconstitutional as applied to him


or her; if the litigant prevails, the courts carve away the
unconstitutional aspects of the law by invalidating its
improper applications on a case to case basis. Moreover,
challengers to a law are not permitted to raise the rights of
third parties and can only assert their own interests. In
overbreadth analysis, those rules give way; challenges are
permitted to raise the rights of third parties; and the court
invalidates the entire statute "on its face," not merely "as applied
for" so that the overbroad law becomes unenforceable until a
properly authorized court construes it more narrowly. The factor
that motivates courts to depart from the normal adjudicatory rules
is the concern with the "chilling;" deterrent effect of the overbroad
statute on third parties not courageous enough to bring suit. The
Court assumes that an overbroad laws "very existence may cause
others not before the court to refrain from constitutionally
protected speech or expression." An overbreadth ruling is designed
to remove that deterrent effect on the speech of those third parties.
In other words, a facial challenge using the overbreadth doctrine
will require the Court to examine PP 1017 and pinpoint its flaws and
defects, not on the basis of its actual operation to petitioners, but
on the assumption or prediction that its very existence may
cause others
not
before
the
Court to
refrain
from
constitutionally protected speech or expression. In Younger v.
Harris,109 it was held that:
[T]he task of analyzing a proposed statute, pinpointing its
deficiencies, and requiring correction of these deficiencies before
the statute is put into effect, is rarely if ever an appropriate task for
the judiciary. The combination of the relative remoteness of the
controversy, the impact on the legislative process of the
relief sought, and above all the speculative and amorphous
nature of the required line-by-line analysis of detailed
statutes,...ordinarily results in a kind of case that is wholly
unsatisfactory for deciding constitutional questions, whichever
way they might be decided.
And third, a facial challenge on the ground of overbreadth is the
most difficult challenge to mount successfully, since the challenger
must establish that there can be no instance when the

assailed law may be valid. Here, petitioners did not even


attempt to show whether this situation exists.
Petitioners likewise seek a facial review of PP 1017 on the ground of
vagueness. This, too, is unwarranted.
Related to the "overbreadth" doctrine is the "void for vagueness
doctrine" which holds that "a law is facially invalid if men of
common intelligence must necessarily guess at its meaning
and differ as to its application."110 It is subject to the same
principles governing overbreadth doctrine. For one, it is also an
analytical tool for testing "on their faces" statutes in free speech
cases. And like overbreadth, it is said that a litigant may challenge
a statute on its face only if it is vague in all its possible
applications. Again, petitioners did not even attempt to
show that PP 1017 is vague in all its application. They also
failed to establish that men of common intelligence cannot
understand the meaning and application of PP 1017.
b. Constitutional Basis of PP 1017
Now on the constitutional foundation of PP 1017.
The operative portion of PP 1017 may be divided into three
important provisions, thus:
First provision:
"by virtue of the power vested upon me by Section 18, Artilce VII
do hereby command the Armed Forces of the Philippines, to
maintain law and order throughout the Philippines, prevent or
suppress all forms of lawless violence as well any act of insurrection
or rebellion"
Second provision:
"and to enforce obedience to all the laws and to all decrees, orders
and regulations promulgated by me personally or upon my
direction;"
Third provision:
"as provided in Section 17, Article XII of the Constitution do hereby
declare a State of National Emergency."
First Provision: Calling-out Power
The first provision pertains to the Presidents calling-out power.
In Sanlakas v. Executive Secretary,111 this Court, through Mr.
Justice Dante O. Tinga, held that Section 18, Article VII of the
Constitution reproduced as follows:

Sec. 18. The President shall be the Commander-in-Chief of all


armed forces of the Philippines and whenever it becomes
necessary, he may call out such armed forces to prevent or
suppress lawless violence, invasion or rebellion. In case of
invasion or rebellion, when the public safety requires it, he may, for
a period not exceeding sixty days, suspend the privilege of the writ
of habeas corpus or place the Philippines or any part thereof under
martial law. Within forty-eight hours from the proclamation of
martial law or the suspension of the privilege of the writ of habeas
corpus, the President shall submit a report in person or in writing to
the Congress. The Congress, voting jointly, by a vote of at least a
majority of all its Members in regular or special session, may revoke
such proclamation or suspension, which revocation shall not be set
aside by the President. Upon the initiative of the President, the
Congress may, in the same manner, extend such proclamation or
suspension for a period to be determined by the Congress, if the
invasion or rebellion shall persist and public safety requires it.
The Congress, if not in session, shall within twenty-four hours
following such proclamation or suspension, convene in accordance
with its rules without need of a call.
The Supreme Court may review, in an appropriate proceeding filed
by any citizen, the sufficiency of the factual bases of the
proclamation of martial law or the suspension of the privilege of the
writ or the extension thereof, and must promulgate its decision
thereon within thirty days from its filing.
A state of martial law does not suspend the operation of the
Constitution, nor supplant the functioning of the civil courts or
legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are
able to function, nor automatically suspend the privilege of the writ.
The suspension of the privilege of the writ shall apply only to
persons judicially charged for rebellion or offenses inherent in or
directly connected with invasion.
During the suspension of the privilege of the writ, any person thus
arrested or detained shall be judicially charged within three days,
otherwise he shall be released.
grants the President, as Commander-in-Chief, a "sequence" of
graduated powers. From the most to the least benign, these are:

the calling-out power, the power to suspend the privilege of the


writ of habeas corpus, and the power to declare Martial Law.
Citing Integrated Bar of the Philippines v. Zamora,112 the Court
ruled that the only criterion for the exercise of the calling-out power
is that "whenever it becomes necessary," the President may
call the armed forces "to prevent or suppress lawless violence,
invasion or rebellion." Are these conditions present in the instant
cases? As stated earlier, considering the circumstances then
prevailing, President Arroyo found it necessary to issue PP 1017.
Owing to her Offices vast intelligence network, she is in the best
position to determine the actual condition of the country.
Under the calling-out power, the President may summon the armed
forces to aid him in suppressing lawless violence, invasion and
rebellion. This involves ordinary police action. But every act that
goes beyond the Presidents calling-out power is considered illegal
or ultra vires. For this reason, a President must be careful in the
exercise of his powers. He cannot invoke a greater power when he
wishes to act under a lesser power. There lies the wisdom of our
Constitution, the greater the power, the greater are the limitations.
It is pertinent to state, however, that there is a distinction between
the Presidents authority to declare a "state of rebellion"
(in Sanlakas) and the authority to proclaim a state of national
emergency. While President Arroyos authority to declare a "state of
rebellion" emanates from her powers as Chief Executive, the
statutory authority cited in Sanlakas was Section 4, Chapter 2,
Book II of the Revised Administrative Code of 1987, which provides:
SEC. 4. Proclamations. Acts of the President fixing a date or
declaring a status or condition of public moment or interest, upon
the existence of which the operation of a specific law or regulation
is made to depend, shall be promulgated in proclamations which
shall have the force of an executive order.
President Arroyos declaration of a "state of rebellion" was merely
an act declaring a status or condition of public moment or interest,
a declaration allowed under Section 4 cited above. Such
declaration, in the words of Sanlakas, is harmless, without legal
significance, and deemed not written. In these cases, PP 1017 is
more than that. In declaring a state of national emergency,
President Arroyo did not only rely on Section 18, Article VII of the

Constitution, a provision calling on the AFP to prevent or suppress


lawless violence, invasion or rebellion. She also relied on Section
17, Article XII, a provision on the States extraordinary power to
take over privately-owned public utility and business affected with
public interest. Indeed, PP 1017 calls for the exercise of
an awesome power. Obviously, such Proclamation cannot be
deemed harmless, without legal significance, or not written, as in
the case ofSanlakas.
Some of the petitioners vehemently maintain that PP 1017 is
actually a declaration of Martial Law. It is no so. What defines the
character of PP 1017 are its wordings. It is plain therein that what
the President invoked was her calling-out power.
The declaration of Martial Law is a "warn[ing] to citizens that the
military power has been called upon by the executive to assist in
the maintenance of law and order, and that, while the emergency
lasts, they must, upon pain of arrest and punishment, not commit
any acts which will in any way render more difficult the restoration
of order and the enforcement of law."113
In his "Statement before the Senate Committee on Justice" on
March 13, 2006, Mr. Justice Vicente V. Mendoza,114 an authority in
constitutional law, said that of the three powers of the President as
Commander-in-Chief, the power to declare Martial Law poses the
most severe threat to civil liberties. It is a strong medicine which
should not be resorted to lightly. It cannot be used to stifle or
persecute critics of the government. It is placed in the keeping of
the President for the purpose of enabling him to secure the people
from harm and to restore order so that they can enjoy their
individual freedoms. In fact, Section 18, Art. VII, provides:
A state of martial law does not suspend the operation of the
Constitution, nor supplant the functioning of the civil courts or
legislative assemblies, nor authorize the conferment of jurisdiction
on military courts and agencies over civilians where civil courts are
able to function, nor automatically suspend the privilege of the writ.
Justice Mendoza also stated that PP 1017 is not a declaration of
Martial Law. It is no more than a call by the President to the armed
forces to prevent or suppress lawless violence. As such, it cannot
be used to justify acts that only under a valid declaration of Martial
Law can be done. Its use for any other purpose is a perversion of its

nature and scope, and any act done contrary to its command
is ultra vires.
Justice Mendoza further stated that specifically, (a) arrests and
seizures without judicial warrants; (b) ban on public assemblies; (c)
take-over of news media and agencies and press censorship; and
(d) issuance of Presidential Decrees, are powers which can be
exercised by the President as Commander-in-Chief only where
there is a valid declaration of Martial Law or suspension of the writ
of habeas corpus.
Based on the above disquisition, it is clear that PP 1017 is not a
declaration of Martial Law. It is merely an exercise of President
Arroyos calling-out power for the armed forces to assist her in
preventing or suppressing lawless violence.
Second Provision: "Take Care" Power
The second provision pertains to the power of the President to
ensure that the laws be faithfully executed. This is based on Section
17, Article VII which reads:
SEC. 17. The President shall have control of all the executive
departments, bureaus, and offices. He shall ensure that the
laws be faithfully executed.
As the Executive in whom the executive power is vested,115 the
primary function of the President is to enforce the laws as well as to
formulate policies to be embodied in existing laws. He sees to it
that all laws are enforced by the officials and employees of his
department. Before assuming office, he is required to take an oath
or affirmation to the effect that as President of the Philippines, he
will, among others, "execute its laws."116 In the exercise of such
function, the President, if needed, may employ the powers attached
to his office as the Commander-in-Chief of all the armed forces of
the country,117 including the Philippine National Police118 under
the Department of Interior and Local Government.119
Petitioners, especially Representatives Francis Joseph G. Escudero,
Satur Ocampo, Rafael Mariano, Teodoro Casio, Liza Maza, and
Josel Virador argue that PP 1017 is unconstitutional as it arrogated
upon President Arroyo the power to enact laws and decrees in
violation of Section 1, Article VI of the Constitution, which vests the
power to enact laws in Congress. They assail the clause "to
enforce obedience to all the laws and to all decrees, orders

and regulations promulgated by me personally or upon my


direction."
\
Petitioners contention is understandable. A reading of PP 1017
operative clause shows that it was lifted120 from Former President
Marcos Proclamation No. 1081, which partly reads:
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the
Philippines by virtue of the powers vested upon me by Article VII,
Section 10, Paragraph (2) of the Constitution, do hereby place the
entire Philippines as defined in Article 1, Section 1 of the
Constitution under martial law and, in my capacity as their
Commander-in-Chief, do hereby command the Armed Forces
of the Philippines, to maintain law and order throughout
the Philippines, prevent or suppress all forms of lawless
violence as well as any act of insurrection or rebellion and
to enforce obedience to all the laws and decrees, orders
and regulations promulgated by me personally or upon my
direction.
We all know that it was PP 1081 which granted President Marcos
legislative power. Its enabling clause states: "to enforce
obedience to all the laws and decrees, orders and
regulations promulgated by me personally or upon my
direction." Upon the other hand, the enabling clause of PP 1017
issued by President Arroyo is: to enforce obedience to all the
laws
and to
all decrees,
orders
and
regulations
promulgated by me personally or upon my direction."
Is it within the domain of President Arroyo to promulgate
"decrees"?
PP 1017 states in part: "to enforce obedience to all the laws
and decrees x x x promulgated by me personally or upon my
direction."
The President is granted an Ordinance Power under Chapter 2,
Book III of Executive Order No. 292 (Administrative Code of 1987).
She may issue any of the following:
Sec. 2. Executive Orders. Acts of the President providing for rules
of a general or permanent character in implementation or
execution of constitutional or statutory powers shall be
promulgated in executive orders.

Sec. 3. Administrative Orders. Acts of the President which relate


to particular aspect of governmental operations in pursuance of his
duties as administrative head shall be promulgated in
administrative orders.
Sec. 4. Proclamations. Acts of the President fixing a date or
declaring a status or condition of public moment or interest, upon
the existence of which the operation of a specific law or regulation
is made to depend, shall be promulgated in proclamations which
shall have the force of an executive order.
Sec. 5. Memorandum Orders. Acts of the President on matters of
administrative detail or of subordinate or temporary interest which
only concern a particular officer or office of the Government shall
be embodied in memorandum orders.
Sec. 6. Memorandum Circulars. Acts of the President on matters
relating to internal administration, which the President desires to
bring to the attention of all or some of the departments, agencies,
bureaus or offices of the Government, for information or
compliance, shall be embodied in memorandum circulars.
Sec. 7. General or Special Orders. Acts and commands of the
President in his capacity as Commander-in-Chief of the Armed
Forces of the Philippines shall be issued as general or special
orders.
President Arroyos ordinance power is limited to the foregoing
issuances. She cannot issuedecrees similar to those issued by
Former President Marcos under PP 1081. Presidential Decrees are
laws which are of the same category and binding force as statutes
because they were issued by the President in the exercise of his
legislative power during the period of Martial Law under the 1973
Constitution.121
This Court
rules that
the assailed PP 1017 is
unconstitutional insofar as it grants President Arroyo the
authority to promulgate "decrees." Legislative power is
peculiarly within the province of the Legislature. Section 1, Article
VI categorically states that "[t]he legislative power shall be
vested in the Congress of the Philippines which shall
consist of a Senate and a House of Representatives." To be
sure, neither Martial Law nor a state of rebellion nor a state of

emergency can justify President Arroyos exercise of legislative


power by issuing decrees.
Can President Arroyo enforce obedience to all decrees and laws
through the military?
As this Court stated earlier, President Arroyo has no authority to
enact decrees. It follows that these decrees are void and, therefore,
cannot be enforced. With respect to "laws," she cannot call the
military to enforce or implement certain laws, such as customs
laws, laws governing family and property relations, laws on
obligations and contracts and the like. She can only order the
military, under PP 1017, to enforce laws pertinent to its duty to
suppress lawless violence.
Third Provision: Power to Take Over
The pertinent provision of PP 1017 states:
x x x and to enforce obedience to all the laws and to all decrees,
orders, and regulations promulgated by me personally or upon my
direction; and as provided in Section 17, Article XII of the
Constitution do hereby declare a state of national
emergency.
The import of this provision is that President Arroyo, during the
state of national emergency under PP 1017, can call the military
not only to enforce obedience "to all the laws and to all decrees x x
x" but also to act pursuant to the provision of Section 17, Article XII
which reads:
Sec. 17. In times of national emergency, when the public interest
so requires, the State may, during the emergency and under
reasonable terms prescribed by it, temporarily take over or direct
the operation of any privately-owned public utility or business
affected with public interest.
What could be the reason of President Arroyo in invoking the above
provision when she issued PP 1017?
The answer is simple. During the existence of the state of national
emergency, PP 1017 purports to grant the President, without any
authority or delegation from Congress, to take over or direct the
operation of any privately-owned public utility or business affected
with public interest.
This provision was first introduced in the 1973 Constitution, as a
product of the "martial law" thinking of the 1971 Constitutional

Convention.122 In effect at the time of its approval was President


Marcos Letter of Instruction No. 2 dated September 22, 1972
instructing the Secretary of National Defense to take over "the
management, control and operation of the Manila Electric
Company, the Philippine Long Distance Telephone Company, the
National Waterworks and Sewerage Authority, the Philippine
National Railways, the Philippine Air Lines, Air Manila (and) Filipinas
Orient Airways . . . for the successful prosecution by the
Government of its effort to contain, solve and end the present
national emergency."
Petitioners, particularly the members of the House of
Representatives, claim that President Arroyos inclusion of Section
17, Article XII in PP 1017 is an encroachment on the legislatures
emergency powers.
This is an area that needs delineation.
A distinction must be drawn between the Presidents authority
to declare "a
state
of
national
emergency"
and
to exercise emergency powers. To the first, as elucidated by the
Court, Section 18, Article VII grants the President such power,
hence, no legitimate constitutional objection can be raised. But to
the second, manifold constitutional issues arise.
Section 23, Article VI of the Constitution reads:
SEC. 23. (1) The Congress, by a vote of two-thirds of both Houses
in joint session assembled, voting separately, shall have the sole
power to declare the existence of a state of war.
(2) In times of war or other national emergency, the Congress
may, by law, authorize the President, for a limited period and
subject to such restrictions as it may prescribe, to exercise powers
necessary and proper to carry out a declared national policy. Unless
sooner withdrawn by resolution of the Congress, such powers shall
cease upon the next adjournment thereof.
It may be pointed out that the second paragraph of the above
provision refers not only to war but also to "other national
emergency." If the intention of the Framers of our Constitution
was to withhold from the President the authority to declare a "state
of national emergency" pursuant to Section 18, Article VII (callingout power) and grant it to Congress (like the declaration of the
existence of a state of war), then the Framers could have provided

so. Clearly, they did not intend that Congress should first authorize
the President before he can declare a "state of national
emergency." The logical conclusion then is that President Arroyo
could validly declare the existence of a state of national emergency
even in the absence of a Congressional enactment.
But the exercise of emergency powers, such as the taking over of
privately owned public utility or business affected with public
interest, is a different matter. This requires a delegation from
Congress.
Courts have often said that constitutional provisions in pari
materia are to be construed together. Otherwise stated, different
clauses, sections, and provisions of a constitution which relate to
the same subject matter will be construed together and considered
in the light of each other.123 Considering that Section 17 of Article
XII and Section 23 of Article VI, previously quoted, relate to national
emergencies, they must be read together to determine the
limitation of the exercise of emergency powers.
Generally, Congress is the repository of emergency powers.
This is evident in the tenor of Section 23 (2), Article VI authorizing it
to delegate such powers to the President. Certainly, a body
cannot delegate a power not reposed upon it. However,
knowing that during grave emergencies, it may not be possible or
practicable for Congress to meet and exercise its powers, the
Framers of our Constitution deemed it wise to allow Congress to
grant emergency powers to the President, subject to certain
conditions, thus:
(1) There must be a war or other emergency.
(2) The delegation must be for a limited period only.
(3) The delegation must be subject to such restrictions
as the Congress may prescribe.
(4) The emergency powers must be exercised to carry out
a national policy declared by Congress.124
Section 17, Article XII must be understood as an aspect of the
emergency powers clause. The taking over of private business
affected with public interest is just another facet of the emergency
powers generally reposed upon Congress. Thus, when Section 17
states that the "the State may, during the emergency and
under reasonable terms prescribed by it, temporarily take

over or direct the operation of any privately owned public


utility or business affected with public interest," it refers to
Congress, not the President. Now, whether or not the President may
exercise such power is dependent on whether Congress may
delegate it to him pursuant to a law prescribing the reasonable
terms thereof. Youngstown Sheet & Tube Co. et al. v.
Sawyer,125 held:
It is clear that if the President had authority to issue the order he
did, it must be found in some provision of the Constitution. And it is
not claimed that express constitutional language grants this power
to the President. The contention is that presidential power should
be implied from the aggregate of his powers under the Constitution.
Particular reliance is placed on provisions in Article II which say that
"The executive Power shall be vested in a President . . . .;" that "he
shall take Care that the Laws be faithfully executed;" and that he
"shall be Commander-in-Chief of the Army and Navy of the United
States.
The order cannot properly be sustained as an exercise of the
Presidents military power as Commander-in-Chief of the Armed
Forces. The Government attempts to do so by citing a number of
cases upholding broad powers in military commanders engaged in
day-to-day fighting in a theater of war. Such cases need not
concern us here. Even though "theater of war" be an
expanding concept, we cannot with faithfulness to our
constitutional system hold that the Commander-in-Chief of
the Armed Forces has the ultimate power as such to take
possession of private property in order to keep labor
disputes from stopping production. This is a job for the
nations lawmakers, not for its military authorities.
Nor can the seizure order be sustained because of the
several constitutional provisions that grant executive
power to the President. In the framework of our
Constitution, the Presidents power to see that the laws are
faithfully executed refutes the idea that he is to be a
lawmaker. The Constitution limits his functions in the
lawmaking process to the recommending of laws he thinks
wise and the vetoing of laws he thinks bad. And the
Constitution is neither silent nor equivocal about who shall

make laws which the President is to execute. The first


section of the first article says that "All legislative Powers
herein granted shall be vested in a Congress of the United
States. . ."126
Petitioner Cacho-Olivares, et
al. contends
that
the
term
"emergency" under Section 17, Article XII refers to "tsunami,"
"typhoon," "hurricane"and"similar occurrences." This is a
limited view of "emergency."
Emergency, as a generic term, connotes the existence of conditions
suddenly intensifying the degree of existing danger to life or wellbeing beyond that which is accepted as normal. Implicit in this
definitions are the elements of intensity, variety, and
perception.127Emergencies, as perceived by legislature or
executive in the United Sates since 1933, have been occasioned by
a wide range of situations, classifiable under three (3) principal
heads: a)economic,128 b) natural disaster,129 and c) national
security.130
"Emergency," as contemplated in our Constitution, is of the same
breadth. It may include rebellion, economic crisis, pestilence or
epidemic, typhoon, flood, or other similar catastrophe of nationwide
proportions or effect.131 This is evident in the Records of the
Constitutional Commission, thus:
MR. GASCON. Yes. What is the Committees definition of "national
emergency" which appears in Section 13, page 5? It reads:
When the common good so requires, the State may temporarily
take over or direct the operation of any privately owned public
utility or business affected with public interest.
MR. VILLEGAS. What I mean is threat from external aggression,
for example, calamities or natural disasters.
MR. GASCON. There is a question by Commissioner de los Reyes.
What about strikes and riots?
MR. VILLEGAS. Strikes, no; those would not be covered by the term
"national emergency."
MR. BENGZON. Unless they are of such proportions such that they
would paralyze government service.132
xxxxxx

MR. TINGSON. May I ask the committee if "national emergency"


refers
to military
national
emergency or
could
this
be economic emergency?"
MR. VILLEGAS. Yes, it could refer to both military or economic
dislocations.
MR. TINGSON. Thank you very much.133
It may be argued that when there is national emergency, Congress
may not be able to convene and, therefore, unable to delegate to
the President the power to take over privately-owned public utility
or business affected with public interest.
In Araneta v. Dinglasan,134 this Court emphasized that legislative
power, through which extraordinary measures are exercised,
remains in Congress even in times of crisis.
"x x x
After all the criticisms that have been made against the efficiency
of the system of the separation of powers, the fact remains that the
Constitution has set up this form of government, with all its defects
and shortcomings, in preference to the commingling of powers in
one man or group of men. The Filipino people by adopting
parliamentary government have given notice that they share the
faith of other democracy-loving peoples in this system, with all its
faults, as the ideal. The point is, under this framework of
government, legislation is preserved for Congress all the time, not
excepting periods of crisis no matter how serious. Never in the
history of the United States, the basic features of whose
Constitution have been copied in ours, have specific functions of
the legislative branch of enacting laws been surrendered to another
department unless we regard as legislating the carrying out of a
legislative policy according to prescribed standards; no, not even
when that Republic was fighting a total war, or when it was
engaged in a life-and-death struggle to preserve the Union. The
truth is that under our concept of constitutional government, in
times of extreme perils more than in normal circumstances the
various branches, executive, legislative, and judicial, given the
ability to act, are called upon to perform the duties and discharge
the responsibilities committed to them respectively."
Following our interpretation of Section 17, Article XII, invoked by
President Arroyo in issuing PP 1017, this Court rules that such

Proclamation does not authorize her during the emergency to


temporarily take over or direct the operation of any privately
owned public utility or business affected with public interest
without authority from Congress.
Let it be emphasized that while the President alone can declare a
state of national emergency, however, without legislation, he has
no power to take over privately-owned public utility or business
affected with public interest. The President cannot decide whether
exceptional circumstances exist warranting the take over of
privately-owned public utility or business affected with public
interest. Nor can he determine when such exceptional
circumstances have ceased. Likewise, without legislation, the
President has no power to point out the types of businesses
affected with public interest that should be taken over. In short, the
President has no absolute authority to exercise all the powers of the
State under Section 17, Article VII in the absence of an emergency
powers act passed by Congress.
c. "AS APPLIED CHALLENGE"
One of the misfortunes of an emergency, particularly, that which
pertains to security, is that military necessity and the guaranteed
rights of the individual are often not compatible. Our history reveals
that in the crucible of conflict, many rights are curtailed and
trampled upon. Here, the right against unreasonable search
and seizure; the right against warrantless arrest; and the
freedom of speech, of expression, of the press, and of
assembly under the Bill of Rights suffered the greatest blow.
Of the seven (7) petitions, three (3) indicate "direct injury."
In G.R. No. 171396, petitioners David and Llamas alleged that, on
February 24, 2006, they were arrested without warrants on their
way to EDSA to celebrate the 20th Anniversary of People Power
I. The arresting officers cited PP 1017 as basis of the arrest.
In G.R.
No.
171409,
petitioners
Cacho-Olivares
and Tribune Publishing Co., Inc. claimed that on February 25, 2006,
the CIDG operatives "raided and ransacked without warrant" their
office. Three policemen were assigned to guard their office as a
possible "source of destabilization." Again, the basis was PP 1017.
And in G.R. No. 171483, petitioners KMU and NAFLU-KMU et
al. alleged that their members were "turned away and dispersed"

when they went to EDSA and later, to Ayala Avenue, to celebrate


the 20th Anniversary of People Power I.
A perusal of the "direct injuries" allegedly suffered by the said
petitioners shows that they resulted from the implementation,
pursuant to G.O. No. 5, of PP 1017.
Can this Court adjudge as unconstitutional PP 1017 and G.O. No 5
on the basis of these illegal acts? In general,does the illegal
implementation of a law render it unconstitutional?
Settled is the rule that courts are not at liberty to declare statutes
invalid although
they
may
be
abused
and
misabused135 and may afford an opportunity for abuse in
the manner of application.136 The validity of a statute or
ordinance is to be determined from its general purpose and its
efficiency to accomplish the end desired, not from its effects in a
particular case.137 PP 1017 is merely an invocation of the
Presidents calling-out power. Its general purpose is to command
the AFP to suppress all forms of lawless violence, invasion or
rebellion. It had accomplished the end desired which prompted
President Arroyo to issue PP 1021. But there is nothing in PP 1017
allowing the police, expressly or impliedly, to conduct illegal arrest,
search or violate the citizens constitutional rights.
Now, may this Court adjudge a law or ordinance unconstitutional on
the ground that its implementor committed illegal acts? The answer
is no. The criterion by which the validity of the statute or ordinance
is to be measured is the essential basis for the exercise of
power,and not a mere incidental result arising from its
exertion.138 This is logical. Just imagine the absurdity of
situations when laws maybe declared unconstitutional just because
the officers implementing them have acted arbitrarily. If this were
so, judging from the blunders committed by policemen in the cases
passed upon by the Court, majority of the provisions of the Revised
Penal Code would have been declared unconstitutional a long time
ago.
President Arroyo issued G.O. No. 5 to carry into effect the provisions
of PP 1017. General orders are "acts and commands of the
President in his capacity as Commander-in-Chief of the Armed
Forces of the Philippines." They are internal rules issued by the
executive
officer
to
his
subordinates
precisely
for

the proper and efficient administration of law. Such rules and


regulations create no relation except between the official who
issues them and the official who receives them.139 They are based
on and are the product of, a relationship in which power is their
source, and obedience, their object.140 For these reasons, one
requirement for these rules to be valid is that they must
be reasonable, not arbitrary or capricious.
G.O. No. 5 mandates the AFP and the PNP to immediately carry out
the "necessary and appropriate actions and measures to
suppress
and
prevent
acts
of
terrorism
and
lawless violence."
Unlike the term "lawless violence" which is unarguably extant in our
statutes and the Constitution, and which is invariably associated
with "invasion, insurrection or rebellion," the phrase "acts of
terrorism" is still an amorphous and vague concept. Congress has
yet to enact a law defining and punishing acts of terrorism.
In fact, this "definitional predicament" or the "absence of an agreed
definition of terrorism" confronts not only our country, but the
international community as well. The following observations are
quite apropos:
In the actual unipolar context of international relations, the "fight
against terrorism" has become one of the basic slogans when it
comes to the justification of the use of force against certain states
and against groups operating internationally. Lists of states
"sponsoring terrorism" and of terrorist organizations are set up and
constantly being updated according to criteria that are not always
known to the public, but are clearly determined by strategic
interests.
The basic problem underlying all these military actions or threats
of the use of force as the most recent by the United States against
Iraq consists in the absence of an agreed definition of terrorism.
Remarkable confusion persists in regard to the legal categorization
of acts of violence either by states, by armed groups such as
liberation movements, or by individuals.
The dilemma can by summarized in the saying "One countrys
terrorist is another countrys freedom fighter." The apparent
contradiction or lack of consistency in the use of the term
"terrorism" may further be demonstrated by the historical fact that

leaders of national liberation movements such as Nelson Mandela


in South Africa, Habib Bourgouiba in Tunisia, or Ahmed Ben Bella in
Algeria, to mention only a few, were originally labeled as terrorists
by those who controlled the territory at the time, but later became
internationally respected statesmen.
What, then, is the defining criterion for terrorist acts
the differentia specifica distinguishing those acts from eventually
legitimate acts of national resistance or self-defense?
Since the times of the Cold War the United Nations Organization
has been trying in vain to reach a consensus on the basic issue of
definition. The organization has intensified its efforts recently, but
has been unable to bridge the gap between those who associate
"terrorism" with any violent act by non-state groups against
civilians, state functionaries or infrastructure or military
installations, and those who believe in the concept of the legitimate
use of force when resistance against foreign occupation or against
systematic oppression of ethnic and/or religious groups within a
state is concerned.
The dilemma facing the international community can best be
illustrated by reference to the contradicting categorization of
organizations and movements such as Palestine Liberation
Organization (PLO) which is a terrorist group for Israel and a
liberation movement for Arabs and Muslims the Kashmiri
resistance groups who are terrorists in the perception of India,
liberation fighters in that of Pakistan the earlier Contras in
Nicaragua freedom fighters for the United States, terrorists for the
Socialist camp or, most drastically, the Afghani Mujahedeen (later
to become the Taliban movement): during the Cold War period they
were a group of freedom fighters for the West, nurtured by the
United States, and a terrorist gang for the Soviet Union. One could
go on and on in enumerating examples of conflicting
categorizations that cannot be reconciled in any way because of
opposing political interests that are at the roots of those
perceptions.
How, then, can those contradicting definitions and conflicting
perceptions and evaluations of one and the same group and its
actions be explained? In our analysis, the basic reason for these
striking inconsistencies lies in the divergent interest of states.

Depending on whether a state is in the position of an occupying


power or in that of a rival, or adversary, of an occupying power in a
given territory, the definition of terrorism will "fluctuate"
accordingly. A state may eventually see itself as protector of the
rights of a certain ethnic group outside its territory and will
therefore speak of a "liberation struggle," not of "terrorism" when
acts of violence by this group are concerned, and vice-versa.
The United Nations Organization has been unable to reach a
decision on the definition of terrorism exactly because of these
conflicting interests of sovereign states that determine in each and
every instance how a particular armed movement (i.e. a non-state
actor) is labeled in regard to the terrorists-freedom fighter
dichotomy. A "policy of double standards" on this vital issue of
international affairs has been the unavoidable consequence.
This "definitional predicament" of an organization consisting of
sovereign states and not of peoples, in spite of the emphasis in
the Preamble to the United Nations Charter! has become even
more serious in the present global power constellation: one
superpower exercises the decisive role in the Security Council,
former great powers of the Cold War era as well as medium powers
are increasingly being marginalized; and the problem has become
even more acute since the terrorist attacks of 11 September 2001 I
the United States.141
The absence of a law defining "acts of terrorism" may result in
abuse and oppression on the part of the police or military. An
illustration is when a group of persons are merely engaged in a
drinking spree. Yet the military or the police may consider the act
as an act of terrorism and immediately arrest them pursuant to
G.O. No. 5. Obviously, this is abuse and oppression on their part. It
must be remembered that an act can only be considered a crime if
there is a law defining the same as such and imposing the
corresponding penalty thereon.
So far, the word "terrorism" appears only once in our criminal laws,
i.e., in P.D. No. 1835 dated January 16, 1981 enacted by President
Marcos during the Martial Law regime. This decree is entitled
"Codifying The Various Laws on Anti-Subversion and Increasing The
Penalties for Membership in Subversive Organizations." The word
"terrorism" is mentioned in the following provision: "That one who

conspires with any other person for the purpose of overthrowing


the Government of the Philippines x x x by force,
violence, terrorism, x x x shall be punished by reclusion
temporal x x x."
P.D. No. 1835 was repealed by E.O. No. 167 (which outlaws the
Communist Party of the Philippines) enacted by President Corazon
Aquino on May 5, 1985. These two (2) laws, however, do not define
"acts of terrorism." Since there is no law defining "acts of
terrorism," it is President Arroyo alone, under G.O. No. 5, who has
the discretion to determine what acts constitute terrorism. Her
judgment on this aspect is absolute, without restrictions.
Consequently, there can be indiscriminate arrest without warrants,
breaking into offices and residences, taking over the media
enterprises, prohibition and dispersal of all assemblies and
gatherings unfriendly to the administration. All these can be
effected in the name of G.O. No. 5. These acts go far beyond the
calling-out power of the President. Certainly, they violate the due
process clause of the Constitution. Thus, this Court declares that
the "acts of terrorism" portion of G.O. No. 5 is unconstitutional.
Significantly, there is nothing in G.O. No. 5 authorizing the military
or police to commit acts beyond what are necessary and
appropriate to suppress and prevent lawless violence, the
limitation of their authority in pursuing the Order. Otherwise, such
acts are considered illegal.
We first examine G.R. No. 171396 (David et al.)
The Constitution provides that "the right of the people to be
secured in their persons, houses, papers and effects against
unreasonable search and seizure of whatever nature and for any
purpose shall be inviolable, and no search warrant or warrant of
arrest shall issue except upon probable cause to be determined
personally by the judge after examination under oath or affirmation
of the complainant and the witnesses he may produce, and
particularly describing the place to be searched and the persons or
things to be seized."142 The plain import of the language of the
Constitution
is
that
searches,
seizures
and
arrests
are normally unreasonable unless authorized by a validly issued
search warrant or warrant of arrest. Thus, the fundamental
protection given by this provision is that between person and police

must stand the protective authority of a magistrate clothed with


power to issue or refuse to issue search warrants or warrants of
arrest.143
In the Brief Account144 submitted by petitioner David, certain facts
are established: first, he was arrested without warrant; second, the
PNP operatives arrested him on the basis of PP 1017; third, he was
brought at Camp Karingal, Quezon City where he was fingerprinted,
photographed and booked like a criminal suspect; fourth,he was
treated brusquely by policemen who "held his head and tried to
push him" inside an unmarked car; fifth, he was charged with
Violation of Batas Pambansa Bilang No. 880145 and Inciting to
Sedition; sixth, he
was
detained
for
seven
(7)
hours;
and seventh,he was eventually released for insufficiency of
evidence.
Section 5, Rule 113 of the Revised Rules on Criminal Procedure
provides:
Sec. 5. Arrest without warrant; when lawful. - A peace officer
or a private person may, without a warrant, arrest a person:
(a) When, in his presence, the person to be arrested has
committed, is actually committing, or is attempting to
commit an offense.
(b) When an offense has just been committed and he has
probable cause to believe based on personal knowledge of
facts or circumstances that the person to be arrested has
committed it; and
x x x.
Neither of the two (2) exceptions mentioned above justifies
petitioner Davids warrantless arrest. During the inquest for the
charges of inciting to sedition and violation of BP 880, all that
the arresting officers could invoke was their observation that some
rallyists were wearing t-shirts with the invective "Oust Gloria
Now" and their erroneous assumption that petitioner David was the
leader of the rally.146 Consequently, the Inquest Prosecutor
ordered his immediate release on the ground of insufficiency of
evidence. He noted that petitioner David was not wearing the
subject t-shirt and even if he was wearing it, such fact is insufficient
to charge him with inciting to sedition. Further, he also stated
that there is insufficient evidence for the charge of violation of BP

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

held but as to its purpose; not as to the relations of the speakers,


but whether their utterances transcend the bounds of the freedom
of speech which the Constitution protects. If the persons
assembling have committed crimes elsewhere, if they have formed
or are engaged in a conspiracy against the public peace and order,
they may be prosecuted for their conspiracy or other violations of
valid laws. But it is a different matter when the State,
instead of prosecuting them for such offenses, seizes upon
mere participation in a peaceable assembly and a lawful
public discussion as the basis for a criminal charge.
On the basis of the above principles, the Court likewise considers
the dispersal and arrest of the members of KMU et al. (G.R. No.
171483) unwarranted. Apparently, their dispersal was done merely
on the basis of Malacaangs directive canceling all permits
previously issued by local government units. This is arbitrary. The
wholesale cancellation of all permits to rally is a blatant disregard
of the principle that "freedom of assembly is not to be limited,
much less denied, except on a showing of a clear and
present danger of a substantive evil that the State has a
right to prevent."149 Tolerance is the rule and limitation is the
exception. Only upon a showing that an assembly presents a clear
and present danger that the State may deny the citizens right to
exercise it. Indeed, respondents failed to show or convince the
Court that the rallyists committed acts amounting to lawless
violence, invasion or rebellion. With the blanket revocation of
permits, the distinction between protected and unprotected
assemblies was eliminated.
Moreover, under BP 880, the authority to regulate assemblies and
rallies is lodged with the local government units. They have the
power to issue permits and to revoke such permitsafter due
notice and hearing on the determination of the presence of clear
and present danger. Here, petitioners were not even notified and
heard on the revocation of their permits.150 The first time they
learned of it was at the time of the dispersal. Such absence of
notice is a fatal defect. When a persons right is restricted by
government action, it behooves a democratic government to see to
it that the restriction is fair, reasonable, and according to
procedure.

G.R. No. 171409, (Cacho-Olivares, et al.) presents another facet


of freedom of speech i.e., the freedom of the press. Petitioners
narration of facts, which the Solicitor General failed to refute,
established the following: first, the Daily Tribunes offices were
searched without warrant;second, the police operatives seized
several materials for publication; third, the search was conducted
at about 1:00 o clock in the morning of February 25,
2006; fourth, the search was conducted in the absence of any
official of the Daily Tribune except the security guard of the
building; and fifth, policemen stationed themselves at the vicinity
of the Daily Tribune offices.
Thereafter, a wave of warning came from government officials.
Presidential Chief of Staff Michael Defensor was quoted as saying
that such raid was "meant to show a strong presence, to tell
media outlets not to connive or do anything that would help
the rebels in bringing down this government." Director
General Lomibao further stated that "if they do not follow the
standards and the standards are if they would contribute
to instability in the government, or if they do not subscribe
to what is in General Order No. 5 and Proc. No. 1017 we
will recommend a takeover." National Telecommunications
Commissioner Ronald Solis urged television and radio networks
to"cooperate" with the government for the duration of the state of
national emergency. He warned that his agency will not
hesitate to recommend the closure of any broadcast outfit
that violates rules set out for media coverage during times
when the national security is threatened.151
The search is illegal. Rule 126 of The Revised Rules on Criminal
Procedure lays down the steps in the conduct of search and
seizure. Section 4 requires that a search warrant be issued upon
probable cause in connection with one specific offence to be
determined personally by the judge after examination under oath
or affirmation of the complainant and the witnesses he may
produce. Section 8 mandates that the search of a house, room, or
any other premise be made in the presence of the lawful
occupant thereof or any member of his family or in the absence of
the latter, in the presence of two (2) witnesses of sufficient age and
discretion residing in the same locality. And Section 9 states that

the warrant must direct that it be served in thedaytime, unless the


property is on the person or in the place ordered to be searched, in
which case a direction may be inserted that it be served at any
time of the day or night. All these rules were violated by the CIDG
operatives.
Not only that, the search violated petitioners freedom of the press.
The best gauge of a free and democratic society rests in the degree
of freedom enjoyed by its media. In the Burgos v. Chief of
Staff152 this Court held that -As heretofore stated, the premises searched were the business and
printing offices of the "Metropolitan Mail" and the "We Forum"
newspapers. As a consequence of the search and seizure,these
premises were padlocked and sealed, with the further
result that the printing and publication of said newspapers
were discontinued.
Such closure is in the nature of previous restraint or
censorship abhorrent to the freedom of the press
guaranteed under the fundamental law, and constitutes a
virtual denial of petitioners' freedom to express themselves
in print. This state of being is patently anathematic to a
democratic framework where a free, alert and even militant
press is essential for the political enlightenment and
growth of the citizenry.
While admittedly, the Daily Tribune was not padlocked and sealed
like the "Metropolitan Mail" and "We Forum" newspapers in the
above case, yet it cannot be denied that the CIDG operatives
exceeded their enforcement duties. The search and seizure of
materials for publication, the stationing of policemen in the vicinity
of the The Daily Tribune offices, and the arrogant warning of
government officials to media, are plain censorship. It is that
officious functionary of the repressive government who tells the
citizen that he may speak only if allowed to do so, and no more and
no less than what he is permitted to say on pain of punishment
should he be so rash as to disobey.153 Undoubtedly, the The Daily
Tribune was subjected to these arbitrary intrusions because of its
anti-government sentiments. This Court cannot tolerate the blatant
disregard of a constitutional right even if it involves the most
defiant of our citizens. Freedom to comment on public affairs is

essential to the vitality of a representative democracy. It is the duty


of the courts to be watchful for the constitutional rights of the
citizen, and against any stealthy encroachments thereon. The
motto should always be obsta principiis.154
Incidentally, during the oral arguments, the Solicitor General
admitted that the search of theTribunes offices and the seizure of
its materials for publication and other papers are illegal; and that
the same are inadmissible "for any purpose," thus:
JUSTICE CALLEJO:
You made quite a mouthful of admission when you said that the
policemen, when inspected the Tribune for the purpose of gathering
evidence and you admitted that the policemen were able to get the
clippings. Is that not in admission of the admissibility of these
clippings that were taken from the Tribune?
SOLICITOR GENERAL BENIPAYO:
Under the law they would seem to be, if they were illegally seized, I
think and I know, Your Honor, and these are inadmissible for any
purpose.155
xxxxxxxxx
SR. ASSO. JUSTICE PUNO:
These have been published in the past issues of the Daily Tribune;
all you have to do is to get those past issues. So why do you have
to go there at 1 oclock in the morning and without any search
warrant? Did they become suddenly part of the evidence of
rebellion or inciting to sedition or what?
SOLGEN BENIPAYO:
Well, it was the police that did that, Your Honor. Not upon my
instructions.
SR. ASSO. JUSTICE PUNO:
Are you saying that the act of the policeman is illegal, it is not
based on any law, and it is not based on Proclamation 1017.
SOLGEN BENIPAYO:
It is not based on Proclamation 1017, Your Honor, because there is
nothing in 1017 which says that the police could go and inspect
and gather clippings from Daily Tribune or any other newspaper.
SR. ASSO. JUSTICE PUNO:
Is it based on any law?
SOLGEN BENIPAYO:

As far as I know, no, Your Honor, from the facts, no.


SR. ASSO. JUSTICE PUNO:
So, it has no basis, no legal basis whatsoever?
SOLGEN BENIPAYO:
Maybe so, Your Honor. Maybe so, that is why I said, I dont know if it
is premature to say this,we do not condone this. If the people
who have been injured by this would want to sue them,
they can sue and there are remedies for this.156
Likewise, the warrantless arrests and seizures executed by the
police were, according to the Solicitor General, illegal and cannot
be condoned, thus:
CHIEF JUSTICE PANGANIBAN:
There seems to be some confusions if not contradiction in your
theory.
SOLICITOR GENERAL BENIPAYO:
I dont know whether this will clarify. The acts, the supposed illegal
or unlawful acts committed on the occasion of 1017, as I said, it
cannot be condoned. You cannot blame the President for, as you
said, a misapplication of the law. These are acts of the police
officers, that is their responsibility.157
The Dissenting Opinion states that PP 1017 and G.O. No. 5 are
constitutional in every aspect and "should result in no constitutional
or statutory breaches if applied according to their letter."
The Court has passed upon the constitutionality of these issuances.
Its ratiocination has been exhaustively presented. At this point,
suffice it to reiterate that PP 1017 is limited to the calling out by the
President of the military to prevent or suppress lawless violence,
invasion or rebellion. When in implementing its provisions, pursuant
to G.O. No. 5, the military and the police committed acts which
violate the citizens rights under the Constitution, this Court has to
declare such acts unconstitutional and illegal.
In this connection, Chief Justice Artemio V. Panganibans concurring
opinion, attached hereto, is considered an integral part of
this ponencia.
SUMMATION
In sum, the lifting of PP 1017 through the issuance of PP 1021 a
supervening event would have normally rendered this case moot
and academic. However, while PP 1017 was still operative, illegal

acts were committed allegedly in pursuance thereof. Besides, there


is no guarantee that PP 1017, or one similar to it, may not again be
issued. Already, there have been media reports on April 30, 2006
that allegedly PP 1017 would be reimposed "if the May 1 rallies"
become "unruly and violent." Consequently, the transcendental
issues raised by the parties should not be "evaded;" they must now
be resolved to prevent future constitutional aberration.
The Court finds and so holds that PP 1017 is constitutional insofar
as it constitutes a call by the President for the AFP to prevent or
suppress lawless violence. The proclamation is sustained by
Section 18, Article VII of the Constitution and the relevant
jurisprudence discussed earlier. However, PP 1017s extraneous
provisions giving the President express or implied power (1) to
issue decrees; (2) to direct the AFP to enforce obedience to all
laws even those not related to lawless violence as well as decrees
promulgated by the President; and (3) to impose standards on
media or any form of prior restraint on the press, are ultra
vires andunconstitutional. The Court also rules that under Section
17, Article XII of the Constitution, the President, in the absence of a
legislation, cannot take over privately-owned public utility and
private business affected with public interest.
In the same vein, the Court finds G.O. No. 5 valid. It is an Order
issued by the President acting as Commander-in-Chief
addressed to subalterns in the AFP to carry out the provisions of PP
1017. Significantly, it also provides a valid standard that the
military and the police should take only the "necessary and
appropriate actions and measures to suppress and prevent
acts of lawless violence."But the words "acts of terrorism"
found in G.O. No. 5 have not been legally defined and made
punishable by Congress and should thus be deemed deleted from
the said G.O. While "terrorism" has been denounced generally in
media, no law has been enacted to guide the military, and
eventually the courts, to determine the limits of the AFPs authority
in carrying out this portion of G.O. No. 5.
On the basis of the relevant and uncontested facts narrated earlier,
it is also pristine clear that (1) the warrantless arrest of petitioners
Randolf S. David and Ronald Llamas; (2) the dispersal of the rallies
and warrantless arrest of the KMU and NAFLU-KMU members; (3)

the imposition of standards on media or any prior restraint on the


press; and (4) the warrantless search of the Tribune offices and the
whimsical seizures of some articles for publication and other
materials, are not authorized by the Constitution, the law and
jurisprudence. Not even by the valid provisions of PP 1017 and G.O.
No. 5.
Other than this declaration of invalidity, this Court cannot impose
any civil, criminal or administrative sanctions on the individual
police officers concerned. They have not been individually
identified and given their day in court. The civil complaints or
causes of action and/or relevant criminal Informations have not
been presented before this Court. Elementary due process bars this
Court from making any specific pronouncement of civil, criminal or
administrative liabilities.
It is well to remember that military power is a means to an
end and substantive civil rights are ends in themselves.
How to give the military the power it needs to protect the
Republic without unnecessarily trampling individual rights
is one of the eternal balancing tasks of a democratic
state.During emergency, governmental action may vary in breadth
and intensity from normal times, yet they should not be arbitrary as
to unduly restrain our peoples liberty.
Perhaps, the vital lesson that we must learn from the theorists who
studied the various competing political philosophies is that, it is
possible to grant government the authority to cope with crises
without
surrendering
the
two
vital
principles
of
constitutionalism: the maintenance of legal limits to arbitrary
power, and political responsibility of the government to the
governed.158
WHEREFORE, the Petitions are partly granted. The Court rules that
PP 1017 is CONSTITUTIONALinsofar as it constitutes a call by
President Gloria Macapagal-Arroyo on the AFP to prevent or
suppress lawless violence. However, the provisions of PP 1017
commanding the AFP to enforce laws not related to lawless
violence, as well as decrees promulgated by the President, are
declared UNCONSTITUTIONAL. In addition, the provision in PP
1017 declaring national emergency under Section 17, Article VII of
the Constitution is CONSTITUTIONAL, but such declaration does

not authorize the President to take over privately-owned public


utility or business affected with public interest without prior
legislation.
G.O. No. 5 is CONSTITUTIONAL since it provides a standard by
which the AFP and the PNP should implement PP 1017, i.e.
whatever is "necessary and appropriate actions and
measures to suppress and prevent acts of lawless
violence." Considering that "acts of terrorism" have not yet been
defined and made punishable by the Legislature, such portion of
G.O. No. 5 is declaredUNCONSTITUTIONAL.
The warrantless arrest of Randolf S. David and Ronald Llamas; the
dispersal and warrantless arrest of the KMU and NAFLU-KMU
members during their rallies, in the absence of proof that these
petitioners were committing acts constituting lawless violence,
invasion or rebellion and violating BP 880; the imposition of
standards on media or any form of prior restraint on the press, as
well as the warrantless search of the Tribune offices and whimsical
seizure of its articles for publication and other materials, are
declared UNCONSTITUTIONAL.
No costs.
SO ORDERED.

G.R. No. 168914

July 4, 2007

METROPOLITAN CEBU WATER DISTRICT (MCWD), Petitioner,


vs.
MARGARITA A. ADALA, Respondent.
DECISION
CARPIO MORALES, J.:
The Decision of the Regional Trial Court (RTC) of Cebu dated
February 10, 2005, which affirmed in toto the Decision of the
National Water Resources Board (NWRB) dated September 22, 2003
in favor of Margarita A. Adala, respondent, is being challenged in
the present petition for review on certiorari.
Respondent filed on October 24, 2002 an application with the
NWRB for the issuance of a Certificate of Public Convenience (CPC)
to operate and maintain waterworks system in sitios San Vicente,
Fatima, and Sambag in Barangay Bulacao, Cebu City.
At the initial hearing of December 16, 2002 during which
respondent submitted proof of compliance with jurisdictional
requirements of notice and publication, herein petitioner
Metropolitan Cebu Water District, a government-owned and
controlled corporation created pursuant to P.D. 1981 which took
effect upon its issuance by then President Marcos on May 25, 1973,
as amended, appeared through its lawyers to oppose the
application.
While petitioner filed a formal opposition by mail, a copy thereof
had not, on December 16, 2002, yet been received by the NWRB,
the day of the hearing. Counsel for respondent, who received a
copy of petitioners Opposition dated December 12, 2002 earlier
that morning, volunteered to give a copy thereof to the hearing
officer.2
In its Opposition, petitioner prayed for the denial of respondents
application on the following grounds: (1) petitioners Board of
Directors had not consented to the issuance of the franchise
applied for, such consent being a mandatory condition pursuant to
P.D. 198, (2) the proposed waterworks would interfere with
petitioners water supply which it has the right to protect, and (3)
the water needs of the residents in the subject area was already
being well served by petitioner.
After hearing and an ocular inspection of the area, the NWRB, by
Decision dated September 22, 2003, dismissed petitioners

Opposition "for lack of merit and/or failure to state the cause of


action"3 and ruled in favor of respondent as follows:
PREMISES ALL CONSIDERED, and finding that Applicant is legally
and financially qualified to operate and maintain the subject
waterworks system, and that said operation shall redound to the
benefit of the of the [sic] consumers of Sitios San Vicente, Fatima
and Sambag at Bulacao Pardo, Cebu City, thereby promoting public
service in a proper and suitable manner, the instant application for
a Certificate of Public Convenience (CPC) is, hereby, GRANTED for a
period of five (5) years with authority to charge the proposed rates
herein set effective upon approval as follows:
Consumption Blocks

Proposed Rates

0-10 cu. m.

P125.00(min. charge)

11-20 cu. m.

13.50 per cu. m.

21-30 cu. m.

14.50 per cu. m.

31-40 cu. m.

35.00 per cu. m.

41-50 cu. m.

37.00 per cu. m.

51-60 cu. m.

38.00 per cu. m.

61-70 cu. m.

40.00 per cu. m.

71-100 cu. m.

45.00 per cu. m.

Over 100 cu. m.

50.00 per cu. m.

The Rules and Regulations, hereto, attached for the operation of


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

2005. And the RTC denied too petitioners motion for


reconsideration by Order of May 13, 2005.
Hence, the present petition for review raising the following
questions of law:
i. WHETHER OR NOT THE CONSENT OF THE BOARD OF
DIRECTORS OF THE WATER DISTRICT IS A CONDITION SINE
QUA NON TO THE GRANT OF CERTIFICATE OF PUBLIC
CONVENIENCE BY THE NATIONAL WATER RESOURCES BOARD
UPON OPERATORS OF WATERWORKS WITHIN THE SERVICE
AREA OF THE WATER DISTRICT?
ii. WHETHER THE TERM FRANCHISE AS USED IN SECTION 47
OF PRESIDENTIAL DECREE 198, AS AMENDED MEANS A
FRANCHISE GRANTED BY CONGRESS THROUGH LEGISLATION
ONLY OR DOES IT ALSO INCLUDE IN ITS MEANING A
CERTIFICATE OF PUBLIC CONVENIENCE ISSUED BY THE
NATIONAL
WATER
RESOURCES
BOARD
FOR
THE
MAINTENANCE OF WATERWORKS SYSTEM OR WATER SUPPLY
SERVICE?5
Before discussing these substantive issues, a resolution of the
procedural grounds raised by respondent for the outright denial of
the petition is in order.
By respondents claim, petitioners General Manager, Engineer
Armando H. Paredes, who filed the present petition and signed the
accompanying verification and certification of non-forum shopping,
was not specifically authorized for that purpose. Respondent
cites Premium Marble Resources v. Court of Appeals6 where this
Court held that, in the absence of a board resolution authorizing a
person to act for and in behalf of a corporation, the action filed in
its behalf must fail since "the power of the corporation to sue and
be sued in any court is lodged with the board of directors that
exercises its corporate powers."
Respondent likewise cites ABS-CBN Broadcasting Corporation v.
Court of Appeals7 where this Court held that "[f]or such officers to
be deemed fully clothed by the corporation to exercise a power of
the Board, the latter must specially authorize them to do so."
(Emphasis supplied by respondent)
That there is a board resolution authorizing Engineer Paredes
to file cases in behalf of petitioner is not disputed. Attached to the

petition is petitioners Board of Directors Resolution No. 015-2004,


the relevant portion of which states:
RESOLVE[D], AS IT IS HEREBY RESOLVED, to authorize the General
Manager, ENGR. ARMANDO H. PAREDES, to file in behalf of the
Metropolitan Cebu Water District expropriation and other
cases and to affirm and confirm above-stated authority with
respect to previous cases filed by MCWD.
x x x x8 (Emphasis and underscoring supplied)
To respondent, however, the board resolution is invalid and
ineffective for being a roving authority and not a specific resolution
pursuant to the ruling in ABS-CBN.
That the subject board resolution does not authorize Engineer
Paredes to file the instant petition in particular but "expropriation
and other cases" does not, by itself, render the authorization
invalid or ineffective.
In BA Savings Bank v. Sia,9 the therein board resolution, couched in
words similar to the questioned resolution, authorized persons to
represent the corporation, not for a specific case, but for a general
class of cases. Significantly, the Court upheld its validity:
In the present case, the corporation's board of directors
issued a Resolution specifically authorizing its lawyers "to
act as their agents in any action or proceeding before the
Supreme Court, the Court of Appeals, or any other tribunal
or agency[;] and to sign, execute and deliver in connection
therewith the necessary pleadings, motions, verification, affidavit of
merit, certificate of non-forum shopping and other instruments
necessary for such action and proceeding." The Resolution was
sufficient to vest such persons with the authority to bind
the corporation and was specific enough as to the acts they
were empowered to do. (Emphasis and underscoring supplied,
italics in the original)
Nonetheless, while the questioned resolution sufficiently identifies
the kind of cases which Engineer Paredes may file in petitioners
behalf, the same does not authorize him for the specific act of
signing verifications and certifications against forum shopping. For
it merely authorizes Engineer Paredes to file cases in behalf of the
corporation. There is no mention of signing verifications and

certifications against forum shopping, or, for that matter, any


document of whatever nature.
A board resolution purporting to authorize a person to sign
documents in behalf of the corporation must explicitly vest such
authority. BPI Leasing Corporation v. Court of Appeals10 so
instructs:
Corporations have no powers except those expressly conferred
upon them by the Corporation Code and those that are implied by
or are incidental to its existence. These powers are exercised
through their board of directors and/or duly authorized
officers and agents. Hence, physical acts, like the signing of
documents, can be performed only by natural persons duly
authorized for the purpose by corporate bylaws or by
specific act of the board of directors.
The records are bereft of the authority of BLC's [BPI Leasing
Corporation] counsel to institute the present petition and to
sign the certification of non-forum shopping. While said
counsel may be the counsel of record for BLC, the representation
does not vest upon him the authority to execute the certification on
behalf of his client. There must be a resolution issued by the
board of directors thatspecifically authorizes him to
institute the petition and execute the certification, for it is
only then that his actions can be legally binding upon
BLC. (Emphasis, italics and underscoring supplied)
It bears noting, moreover, that Rule 13 Section 2 of the Rules of
Court merely defines filing as "the act of presenting the pleading or
other paper to the clerk of court." Since the signing of verifications
and certifications against forum shopping is not integral to the act
of filing, this may not be deemed as necessarily included in an
authorization merely to file cases.
Engineer Paredes not having been specifically authorized to sign
the verification and certification against forum shopping in
petitioners behalf, the instant petition may be dismissed outright.
Technicality aside, the petition just the same merits dismissal.
In support of its contention that the consent of its Board of
Directors is a condition sine qua non for the grant of the CPC
applied for by respondent, petitioner cites Section 47 of P.D.
19811 which states:

Sec. 47. Exclusive Franchise. No franchise shall be granted to


any other person or agency for domestic, industrial or commercial
water service within the district or any portion thereofunless and
except to the extent that the board of directors of said district
consents theretoby resolution duly adopted, such resolution,
however, shall be subject to review by the Administration.
(Emphasis and underscoring supplied)
There being no such consent on the part of its board of directors,
petitioner concludes that respondents application for CPC should
be denied.
Both parties arguments center, in the main, on the scope of the
word "franchise" as used in the above-quoted provision.
Petitioner contends that "franchise" should be broadly interpreted,
such that the prohibition against its grant to other entities without
the consent of the districts board of directors extends to the
issuance of CPCs. A contrary reading, petitioner adds, would result
in absurd consequences, for it would mean that Congress power to
grant franchises for the operation of waterworks systems cannot be
exercised without the consent of water districts.
Respondent, on the other hand, proffers that the same prohibition
only applies to franchises in the strict sense those granted by
Congress by means of statute and does not extend to CPCs
granted by agencies such as the NWRB.
Respondent quotes the NWRB Resolution dated May 17, 2004 which
distinguished a franchise from a CPC, thus:
A CPC is formal written authority issued by quasi-judicial bodies for
the operation and maintenance of a public utility for which a
franchise is not required by law and a CPC issued by this Board is
an authority to operate and maintain a waterworks system or water
supply service. On the other hand, a franchise is privilege or
authority to operate appropriate private property for public use
vested by Congress through legislation. Clearly, therefore, a CPC
is different from a franchise and Section 47 of Presidential
Decree 198 refers only to franchise. Accordingly, the
possession of franchise by a water district does not bar the
issuance of a CPC for an area covered by the water
district. (Emphasis and underscoring supplied by respondent)

Petitioners position that an overly strict construction of the term


"franchise" as used in Section 47 of P.D. 198 would lead to an
absurd result impresses. If franchises, in this context, were strictly
understood to mean an authorization issuing directly from the
legislature, it would follow that, while Congress cannot issue
franchises for operating waterworks systems without the water
districts consent, the NWRB may keep on issuing CPCs authorizing
the very same act even without such consent. In effect, not only
would the NWRB be subject to less constraints than Congress in
issuing franchises. The exclusive character of the franchise
provided for by Section 47 would be illusory.
Moreover, this Court, in Philippine Airlines, Inc. v. Civil Aeronautics
Board,12 has construed the term "franchise" broadly so as to
include, not only authorizations issuing directly from Congress in
the form of statute, but also those granted by administrative
agencies to which the power to grant franchises has been
delegated by Congress, to wit:
Congress has granted certain administrative agencies the
power to grant licenses for, or to authorize the operation of
certain public utilities. With the growing complexity of modern
life, the multiplication of the subjects of governmental regulation,
and the increased difficulty of administering the laws, there is a
constantly growing tendency towards the delegation of greater
powers by the legislature, and towards the approval of the practice
by the courts. It is generally recognized that a franchise may
be derived indirectly from the state through a duly
designated agency, and to this extent, the power to grant
franchises has frequently been delegated, even to agencies
other than those of a legislative nature. In pursuance of
this, it has been held that privileges conferred by grant by
local authorities as agents for the state constitute as much
a legislative franchise as though the grant had been made
by an act of the Legislature.13
That the legislative authority in this instance, then President
Marcos14 intended to delegate its power to issue franchises in the
case of water districts is clear from the fact that, pursuant to the
procedure outlined in P.D. 198, it no longer plays a direct role in
authorizing the formation and maintenance of water districts, it

having vested the same to local legislative bodies and the Local
Water Utilities Administration (LWUA).
Sections 6 and 7 of P.D. 198, as amended, state:
SECTION 6. Formation of District. This Act is the source
of authorization and power to form and maintain a
district. Once formed, a district is subject to the provisions of this
Act and not under the jurisdiction of any political subdivision. For
purposes of this Act, a district shall be considered as a quasi-public
corporation performing public service and supplying public wants.
As such, a district shall exercise the powers, rights and privileges
given to private corporations under existing laws, in addition to the
powers granted in, and subject to such restrictions imposed, under
this Act. To form a district, the legislative body of any city,
municipality or province shall enact a resolution containing
the following:
(a) The name of the local water district, which shall include
the name of the city, municipality, or province, or region
thereof, served by said system, followed by the words
"Water District".
(b) A description of the boundary of the district. In the case
of a city or municipality, such boundary may include all
lands within the city or municipality. A district may include
one or more municipalities, cities or provinces, or portions
thereof: Provided, That such municipalities, cities or
provinces, or portions thereof, cover a contiguous area.
(c) A statement completely transferring any and all
waterworks and/or sewerage facilities managed, operated
by or under the control of such city, municipality or province
to such district upon the filing of resolution forming the
district.
(d) A statement identifying the purpose for which the district
is formed, which shall include those purposes outlined in
Section 5 above.
(e) The names of the initial directors of the district with the
date of expiration of the term of office for each which shall
be on the 31st of December of first, second, or third evennumbered year after assuming office, as set forth in Section
11 hereof.

(f) A statement that the district may only be dissolved on


the grounds and under the conditions set forth in Section 45
of this Title.
(g) A statement acknowledging the powers, rights and
obligations as set forth in Section 25 of this Title.
Nothing in the resolution of formation shall state or infer that the
local legislative body has the power to dissolve, alter or affect the
district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any
combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and province;
or the city, municipality or province in which 75% of the total active
service connections are situated shall pass an initial resolution to
be concurred in by the other cities, municipalities or provinces.
SECTION 7. Filing of Resolution. A certified copy of the
resolution or resolutions forming a district shall be
forwarded to the office of the Secretary of Administration.
If found by the Administration to conform to the
requirements of Section 6 and the policy objectives in
Section 2, the resolution shall be duly filed. The district
shall be deemed duly formed and existing upon the date of
such filing. A certified copy of said resolution showing the stamp
of the Administration shall be maintained in the office of the
district. Upon such filing, the local government or governments
concerned shall lose ownership, supervision and control or any
right whatsoever over the district except as provided herein.
(Emphasis and underscoring supplied)
It bears noting that once a district is "duly formed and existing"
after following the above procedure, it acquires the "exclusive
franchise" referred to in Section 47. Thus, P.D. 198 itself, in
harmony with Philippine Airlines, Inc. v. Civil Aeronautics
Board,15 gives the name "franchise" to an authorization that does
not proceed directly from the legislature.
It would thus be incongruous to adopt in this instance the strict
interpretation proffered by respondent and exclude from the scope
of the term "franchise" the CPCs issued by the NWRB.16
Nonetheless, while the prohibition in Section 47 of P.D. 198
applies to the issuance of CPCs for the reasons discussed

above, the same provision must be deemed void ab


initio for being irreconcilable with Article XIV Section 5 of
the 1973 Constitution which was ratified on January 17,
1973 the constitution in force when P.D. 198 was issued on May
25, 1973. Thus, Section 5 of Art. XIV of the 1973 Constitution reads:
SECTION 5. No franchise, certificate, or any other form of
authorization for the operation of apublic utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least
sixty per centum of the capital of which is owned by such
citizens, nor
shall
such
franchise,
certificate,
or
authorization be exclusive in character or for a longer
period than fifty years. Neither shall any such franchise or right
be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by the Batasang Pambansa when
the public interest so requires. The State shall encourage equity
participation in public utilities by the general public. The
participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share
in the capital thereof. (Emphasis and underscoring supplied)
This provision has been substantially reproduced in Article XII
Section 11 of the 1987 Constitution, including the prohibition
against exclusive franchises.17
In view of the purposes for which they are established,18 water
districts fall under the term "public utility" as defined in the case
of National Power Corporation v. Court of Appeals:191avvphil
A "public utility" is a business or service engaged in
regularly supplying the public with some commodity or service of
public consequence such as electricity, gas, water, transportation,
telephone or telegraph service. x x x (Emphasis and underscoring
supplied)
It bears noting, moreover, that as early as 1933, the Court held that
a particular water district the Metropolitan Water District is a
public utility.20
The ruling in National Waterworks and Sewerage Authority v. NWSA
Consolidated Unions21 is also instructive:
We agree with petitioner that the NAWASA is a public
utility because its primary function is to construct, maintain

and operate water reservoirs and waterworks for the


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

G.R. No. 114222 April 6, 1995


FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G.
BIAZON, petitioners,
vs.
HON. JESUS B. GARCIA, JR., in his capacity as the Secretary
of the Department of Transportation and Communications,
and EDSA LRT CORPORATION, LTD., respondents.
QUIASON, J.:
This is a petition under Rule 65 of the Revised Rules of Court to
prohibit respondents from further implementing and enforcing the
"Revised and Restated Agreement to Build, Lease and Transfer a
Light Rail Transit System for EDSA" dated April 22, 1992, and the
"Supplemental Agreement to the 22 April 1992 Revised and
Restated Agreement To Build, Lease and Transfer a Light Rail Transit
System for EDSA" dated May 6, 1993.

Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G.


Biazon are members of the Philippine Senate and are suing in their
capacities as Senators and as taxpayers. Respondent Jesus B.
Garcia, Jr. is the incumbent Secretary of the Department of
Transportation and Communications (DOTC), while private
respondent EDSA LRT Corporation, Ltd. is a private corporation
organized under the laws of Hongkong.
I
In 1989, DOTC planned to construct a light railway transit line along
EDSA, a major thoroughfare in Metropolitan Manila, which shall
traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The
plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was
intended to provide a mass transit system along EDSA and alleviate
the congestion and growing transportation problem in the
metropolis.
On March 3, 1990, a letter of intent was sent by the Eli Levin
Enterprises, Inc., represented by Elijahu Levin to DOTC Secretary
Oscar Orbos, proposing to construct the EDSA LRT III on a BuildOperate-Transfer (BOT) basis.
On March 15, 1990, Secretary Orbos invited Levin to send a
technical team to discuss the project with DOTC.
On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing
the Financing, Construction, Operation and Maintenance of
Infrastructure Projects by the Private Sector, and For Other
Purposes," was signed by President Corazon C. Aquino. Referred to
as the Build-Operate-Transfer (BOT) Law, it took effect on October
9, 1990.
Republic Act No. 6957 provides for two schemes for the financing,
construction and operation of government projects through private
initiative and investment: Build-Operate-Transfer (BOT) or BuildTransfer (BT).
In accordance with the provisions of R.A. No. 6957 and to set the
EDSA LRT III project underway, DOTC, on January 22, 1991 and
March 14, 1991, issued Department Orders Nos. 91-494 and 91496, respectively creating the Prequalification Bids and Awards
Committee (PBAC) and the Technical Committee.
After its constitution, the PBAC issued guidelines for the
prequalification of contractors for the financing and implementation

of the project The notice, advertising the prequalification of


bidders, was published in three newspapers of general circulation
once a week for three consecutive weeks starting February 21,
1991.
The deadline set for submission of prequalification documents was
March 21, 1991, later extended to April 1, 1991. Five groups
responded to the invitation namely, ABB Trazione of Italy, Hopewell
Holdings Ltd. of Hongkong, Mansteel International of Mandaue,
Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium,
composed of ten foreign and domestic corporations: namely, Kaiser
Engineers International, Inc., ACER Consultants (Far East) Ltd. and
Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak
Federal Republics, TCGI Engineering All Asia Capital and Leasing
Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M.
Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz
& co., Inc.
On the last day for submission of prequalification documents, the
prequalification criteria proposed by the Technical Committee were
adopted by the PBAC. The criteria totalling 100 percent, are as
follows:
(a)
Legal
aspects

10
percent;
(b)
Management/Organizational capability 30 percent; and (c)
Financial capability 30 percent; and (d) Technical capability 30
percent (Rollo, p. 122).
On April 3, 1991, the Committee, charged under the BOT Law with
the formulation of the Implementation Rules and Regulations
thereof, approved the same.
After evaluating the prequalification, bids, the PBAC issued a
Resolution on May 9, 1991 declaring that of the five applicants,
only the EDSA LRT Consortium "met the requirements of garnering
at least 21 points per criteria [sic], except for Legal Aspects, and
obtaining an over-all passing mark of at least 82 points" (Rollo, p.
146). The Legal Aspects referred to provided that the BOT/BT
contractor-applicant meet the requirements specified in the
Constitution and other pertinent laws (Rollo, p. 114).
Subsequently, Secretary Orbos was appointed Executive Secretary
to the President of the Philippines and was replaced by Secretary
Pete Nicomedes Prado. The latter sent to President Aquino two
letters dated May 31, 1991 and June 14, 1991, respectively

recommending the award of the EDSA LRT III project to the sole
complying bidder, the EDSA LRT Consortium, and requesting for
authority to negotiate with the said firm for the contract pursuant
to paragraph 14(b) of the Implementing Rules and Regulations of
the BOT Law (Rollo, pp. 298-302).
In July 1991, Executive Secretary Orbos, acting on instructions of
the President, issued a directive to the DOTC to proceed with the
negotiations. On July 16, 1991, the EDSA LRT Consortium submitted
its bid proposal to DOTC.
Finding this proposal to be in compliance with the bid requirements,
DOTC and respondent EDSA LRT Corporation, Ltd., in substitution of
the EDSA LRT Consortium, entered into an "Agreement to Build,
Lease and Transfer a Light Rail Transit System for EDSA" under the
terms of the BOT Law (Rollo, pp. 147-177).
Secretary Prado, thereafter, requested presidential approval of the
contract.
In a letter dated March 13, 1992, Executive Secretary Franklin
Drilon, who replaced Executive Secretary Orbos, informed Secretary
Prado that the President could not grant the requested approval for
the following reasons: (1) that DOTC failed to conduct actual public
bidding in compliance with Section 5 of the BOT Law; (2) that the
law authorized public bidding as the only mode to award BOT
projects, and the prequalification proceedings was not the public
bidding contemplated under the law; (3) that Item 14 of the
Implementing Rules and Regulations of the BOT Law which
authorized negotiated award of contract in addition to public
bidding was of doubtful legality; and (4) that congressional
approval of the list of priority projects under the BOT or BT Scheme
provided in the law had not yet been granted at the time the
contract was awarded (Rollo, pp. 178-179).
In view of the comments of Executive Secretary Drilon, the DOTC
and private respondents re-negotiated the agreement. On April 22,
1992, the parties entered into a "Revised and Restated Agreement
to Build, Lease and Transfer a Light Rail Transit System for EDSA"
(Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the
fact the DOTC has full authority to sign the Agreement without
need of approval by the President pursuant to the provisions of
Executive Order No. 380 and that certain events [had] supervened

since November 7, 1991 which necessitate[d] the revision of the


Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by
Secretary
Jesus Garcia vice Secretary
Prado,
and
private
respondent entered into a "Supplemental Agreement to the 22 April
1992 Revised and Restated Agreement to Build, Lease and Transfer
a Light Rail Transit System for EDSA" so as to "clarify their
respective rights and responsibilities" and to submit [the]
Supplemental Agreement to the President, of the Philippines for his
approval" (Rollo, pp. 79-80).
Secretary Garcia submitted the two Agreements to President Fidel
V. Ramos for his consideration and approval. In a Memorandum to
Secretary Garcia on May 6, 1993, approved the said Agreements,
(Rollo, p. 194).
According to the agreements, the EDSA LRT III will use light rail
vehicles from the Czech and Slovak Federal Republics and will have
a maximum carrying capacity of 450,000 passengers a day, or 150
million a year to be achieved-through 54 such vehicles operating
simultaneously. The EDSA LRT III will run at grade, or street level,
on the mid-section of EDSA for a distance of 17.8 kilometers from
F.B. Harrison, Pasay City to North Avenue, Quezon City. The system
will have its own power facility (Revised and Restated Agreement,
Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger
stations and one depot in 16-hectare government property at North
Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
Private respondents shall undertake and finance the entire project
required for a complete operational light rail transit system
(Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target
completion date is 1,080 days or approximately three years from
the implementation date of the contract inclusive of mobilization,
site works, initial and final testing of the system (Supplemental
Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and
viability thereof, private respondent shall deliver the use and
possession of the completed portion to DOTC which shall operate
the same (Supplemental Agreement, Sec. 5; Revised and Restated
Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private
respondent rentals on a monthly basis through an Irrevocable
Letter of Credit. The rentals shall be determined by an independent
and internationally accredited inspection firm to be appointed by

the parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As


agreed upon, private respondent's capital shall be recovered from
the rentals to be paid by the DOTC which, in turn, shall come from
the earnings of the EDSA LRT III (Revised and Restated Agreement,
Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have
completed payment of the rentals, ownership of the project shall be
transferred to the latter for a consideration of only U.S. $1.00
(Revised and Restated Agreement, Sec. 11.1; Rollo, p. 67).
On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections
of Republic Act No. 6957, Entitled "An Act Authorizing the
Financing,
Construction,
Operation
and
Maintenance
of
Infrastructure Projects by the Private Sector, and for Other
Purposes" was signed into law by the President. The law was
published in two newspapers of general circulation on May 12,
1994, and took effect 15 days thereafter or on May 28, 1994. The
law expressly recognizes BLT scheme and allows direct negotiation
of BLT contracts.
II
In their petition, petitioners argued that:
(1) THE AGREEMENT OF APRIL 22, 1992, AS
AMENDED BY THE SUPPLEMENTAL AGREEMENT OF
MAY 6, 1993, INSOFAR AS IT GRANTS EDSA LRT
CORPORATION, LTD., A FOREIGN CORPORATION, THE
OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY,
VIOLATES THE CONSTITUTION AND, HENCE, IS
UNCONSTITUTIONAL;
(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED
IN THE AGREEMENTS IS NOT DEFINED NOR
RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING
RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;
(3) THE AWARD OF THE CONTRACT ON A
NEGOTIATED BASIS VIOLATES R; A. NO. 6957 AND,
HENCE, IS UNLAWFUL;
(4) THE AWARD OF THE CONTRACT IN FAVOR OF
RESPONDENT
EDSA
LRT
CORPORATION,
LTD.
VIOLATES THE REQUIREMENTS PROVIDED IN THE
IMPLEMENTING RULES AND REGULATIONS OF THE
BOT LAW AND, HENCE, IS ILLEGAL;

(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO


380 FOR THEIR FAILURE TO BEAR PRESIDENTIAL
APPROVAL AND, HENCE, ARE ILLEGAL AND
INEFFECTIVE; AND
(6)
THE
AGREEMENTS
ARE
GROSSLY
DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp.
15-16).
Secretary Garcia and private respondent filed their comments
separately and claimed that:
(1) Petitioners are not the real parties-in-interest and have no legal
standing to institute the present petition;
(2) The writ of prohibition is not the proper remedy and the petition
requires ascertainment of facts;
(3) The scheme adopted in the Agreements is actually a buildtransfer scheme allowed by the BOT Law;
(4) The nationality requirement for public utilities mandated by the
Constitution does not apply to private respondent;
(5) The Agreements executed by and between respondents have
been approved by President Ramos and are not disadvantageous to
the government;
(6) The award of the contract to private respondent through
negotiation and not public bidding is allowed by the BOT Law; and
(7) Granting that the BOT Law requires public bidding, this has
been amended by R.A No. 7718 passed by the Legislature On May
12, 1994, which provides for direct negotiation as a mode of award
of infrastructure projects.
III
Respondents claimed that petitioners had no legal standing to
initiate the instant action. Petitioners, however, countered that the
action was filed by them in their capacity as Senators and as
taxpayers.
The prevailing doctrines in taxpayer's suits are to allow taxpayers
to question contracts entered into by the national government or
government-owned or controlled corporations allegedly in
contravention of the law (Kilosbayan, Inc. v. Guingona, 232 SCRA
110 [1994]) and to disallow the same when only municipal
contracts are involved (Bugnay Construction and Development
Corporation v. Laron, 176 SCRA. 240 [1989]).

For as long as the ruling in Kilosbayan on locus standi is not


reversed, we have no choice but to follow it and uphold the legal
standing of petitioners as taxpayers to institute the present action.
IV
In the main, petitioners asserted that the Revised and Restated
Agreement of April 22, 1992 and the Supplemental Agreement of
May 6, 1993 are unconstitutional and invalid for the following
reasons:
(1) the EDSA LRT III is a public utility, and the
ownership and operation thereof is limited by the
Constitution to Filipino citizens and domestic
corporations, not foreign corporations like private
respondent;
(2) the Build-Lease-Transfer (BLT) scheme provided in
the agreements is not the BOT or BT Scheme under
the law;
(3) the contract to construct the EDSA LRT III was
awarded to private respondent not through public
bidding which is the only mode of awarding
infrastructure projects under the BOT law; and
(4) the agreements are grossly disadvantageous to
the government.
1. Private respondent EDSA LRT Corporation, Ltd. to whom the
contract to construct the EDSA LRT III was awarded by public
respondent, is admittedly a foreign corporation "duly incorporated
and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There
is also no dispute that once the EDSA LRT III is constructed, private
respondent, as lessor, will turn it over to DOTC, as lessee, for the
latter to operate the system and pay rentals for said use.
The question posed by petitioners is:
Can respondent EDSA LRT Corporation, Ltd., a foreign
corporation own EDSA LRT III; a public utility? (Rollo,
p. 17).
The phrasing of the question is erroneous; it is loaded. What private
respondent owns are the rail tracks, rolling stocks like the coaches,
rail stations, terminals and the power plant, not a public utility.
While a franchise is needed to operate these facilities to serve the
public, they do not by themselves constitute a public utility. What

constitutes a public utility is not their ownership but their use to


serve the public (Iloilo Ice & Cold Storage Co. v. Public Service
Board, 44 Phil. 551, 557 558 [1923]).
The Constitution, in no uncertain terms, requires a franchise for the
operation of a public utility. However, it does not require a franchise
before one can own the facilities needed to operate a public utility
so long as it does not operate them to serve the public.
Section 11 of Article XII of the Constitution provides:
No franchise, certificate or any other form of
authorization for the operation of a public utility shall
be granted except to citizens of the Philippines or to
corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose
capital is owned by such citizens, nor shall such
franchise, certificate or authorization be exclusive
character or for a longer period than fifty years . . .
(Emphasis supplied).
In law, there is a clear distinction between the "operation" of a
public utility and the ownership of the facilities and equipment used
to serve the public.
Ownership is defined as a relation in law by virtue of which a thing
pertaining to one person is completely subjected to his will in
everything not prohibited by law or the concurrence with the rights
of another (Tolentino, II Commentaries and Jurisprudence on the
Civil Code of the Philippines 45 [1992]).
The exercise of the rights encompassed in ownership is limited by
law so that a property cannot be operated and used to serve the
public as a public utility unless the operator has a franchise. The
operation of a rail system as a public utility includes the
transportation of passengers from one point to another point, their
loading and unloading at designated places and the movement of
the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v.
J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United
States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d
868, 2 A.L.R. 2d 1065 [1948]).
The right to operate a public utility may exist independently and
separately from the ownership of the facilities thereof. One can own
said facilities without operating them as a public utility, or

conversely, one may operate a public utility without owning the


facilities used to serve the public. The devotion of property to serve
the public may be done by the owner or by the person in control
thereof who may not necessarily be the owner thereof.
This dichotomy between the operation of a public utility and the
ownership of the facilities used to serve the public can be very well
appreciated when we consider the transportation industry.
Enfranchised airline and shipping companies may lease their
aircraft and vessels instead of owning them themselves.
While private respondent is the owner of the facilities necessary to
operate the EDSA. LRT III, it admits that it is not enfranchised to
operate a public utility (Revised and Restated Agreement, Sec.
3.2; Rollo, p. 57). In view of this incapacity, private respondent and
DOTC agreed that on completion date, private respondent will
immediately deliver possession of the LRT system by way of lease
for 25 years, during which period DOTC shall operate the same as a
common carrier and private respondent shall provide technical
maintenance and repair services to DOTC (Revised and Restated
Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62).
Technical maintenance consists of providing (1) repair and
maintenance facilities for the depot and rail lines, services for
routine clearing and security; and (2) producing and distributing
maintenance manuals and drawings for the entire system (Revised
and Restated Agreement, Annex F).
Private respondent shall also train DOTC personnel for
familiarization with the operation, use, maintenance and repair of
the rolling stock, power plant, substations, electrical, signaling,
communications and all other equipment as supplied in the
agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp.
66-67). Training consists of theoretical and live training of DOTC
operational personnel which includes actual driving of light rail
vehicles under simulated operating conditions, control of
operations, dealing with emergencies, collection, counting and
securing cash from the fare collection system (Revised and
Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC will
work under the direction and control of private respondent only
during training (Revised and Restated Agreement, Annex E, Sec.
3.1). The training objectives, however, shall be such that upon

completion of the EDSA LRT III and upon opening of normal revenue
operation, DOTC shall have in their employ personnel capable of
undertaking training of all new and replacement personnel (Revised
and Restated Agreement, Annex E Sec. 5.1). In other words, by the
end of the three-year construction period and upon commencement
of normal revenue operation, DOTC shall be able to operate the
EDSA LRT III on its own and train all new personnel by itself.
Fees for private respondent' s services shall be included in the rent,
which likewise includes the project cost, cost of replacement of
plant equipment and spare parts, investment and financing cost,
plus a reasonable rate of return thereon (Revised and Restated
Agreement, Sec. 1; Rollo, p. 54).
Since DOTC shall operate the EDSA LRT III, it shall assume all the
obligations and liabilities of a common carrier. For this purpose,
DOTC shall indemnify and hold harmless private respondent from
any losses, damages, injuries or death which may be claimed in the
operation or implementation of the system, except losses,
damages, injury or death due to defects in the EDSA LRT III on
account of the defective condition of equipment or facilities or the
defective maintenance of such equipment facilities (Revised and
Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).
In sum, private respondent will not run the light rail vehicles and
collect fees from the riding public. It will have no dealings with the
public and the public will have no right to demand any services
from it.
It is well to point out that the role of private respondent as lessor
during the lease period must be distinguished from the role of the
Philippine Gaming Management Corporation (PGMC) in the case
of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the
Contract of Lease between PGMC and the Philippine Charity
Sweepstakes Office (PCSO) was actually a collaboration or joint
venture agreement prescribed under the charter of the PCSO. In the
Contract of Lease; PGMC, the lessor obligated itself to build, at its
own expense, all the facilities necessary to operate and maintain a
nationwide on-line lottery system from whom PCSO was to lease
the facilities and operate the same. Upon due examination of the
contract, the Court found that PGMC's participation was not
confined to the construction and setting up of the on-line lottery

system. It spilled over to the actual operation thereof, becoming


indispensable to the pursuit, conduct, administration and control of
the highly technical and sophisticated lottery system. In effect, the
PCSO leased out its franchise to PGMC which actually operated and
managed the same.
Indeed, a mere owner and lessor of the facilities used by a public
utility is not a public utility (Providence and W.R. Co. v. United
States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad
Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925];
Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237
U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank,
refrigerator, wine, poultry and beer cars who supply cars under
contract to railroad companies considered as public utilities (Crystal
Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).
Even the mere formation of a public utility corporation does
not ipso facto characterize the corporation as one operating a
public utility. The moment for determining the requisite Filipino
nationality is when the entity applies for a franchise, certificate or
any other form of authorization for that purpose (People v. Quasha,
93 Phil. 333 [1953]).
2. Petitioners further assert that the BLT scheme under the
Agreements in question is not recognized in the BOT Law and its
Implementing Rules and Regulations.
Section 2 of the BOT Law defines the BOT and BT schemes as
follows:
(a)
Build-operate-and-transfer
scheme

A
contractual arrangement whereby the contractor
undertakes the construction including financing, of a
given infrastructure facility, and the operation and
maintenance thereof. The contractor operates the
facility over a fixed term during which it is allowed to
charge facility users appropriate tolls, fees, rentals
and charges sufficient to enable the contractor to
recover its operating and maintenance expenses and
its investment in the project plus a reasonable rate of
return thereon. The contractor transfers the facility to
the government agency or local government unit
concerned at the end of the fixed term which shall

not exceed fifty (50) years. For the construction


stage, the contractor may obtain financing from
foreign and/or domestic sources and/or engage the
services of a foreign and/or Filipino constructor [sic]:
Provided,That the ownership structure of the
contractor of an infrastructure facility whose
operation requires a public utility franchise must be
in accordance with the Constitution: Provided,
however, That in the case of corporate investors in
the
build-operate-and-transfer corporation,
the
citizenship of each stockholder in the corporate
investors shall be the basis for the computation of
Filipino equity in the said corporation: Provided,
further, That, in the case of foreign constructors [sic],
Filipino labor shall be employed or hired in the
different phases of the construction where Filipino
skills are available: Provided, furthermore, that the
financing of a foreign or foreign-controlled contractor
from Philippine government financing institutions
shall not exceed twenty percent (20%) of the total
cost of the infrastructure facility or project: Provided,
finally, That financing from foreign sources shall not
require a guarantee by the Government or by
government-owned or controlled corporations. The
build-operate-and-transfer scheme shall include a
supply-and-operate situation which is a contractual
agreement whereby the supplier of equipment and
machinery for a given infrastructure facility, if the
interest of the Government so requires, operates the
facility providing in the process technology transfer
and training to Filipino nationals.
(b) Build-and-transfer scheme "A contractual
arrangement whereby the contractor undertakes the
construction including financing, of a given
infrastructure facility, and its turnover after
completion to the government agency or local
government unit concerned which shall pay the
contractor its total investment expended on the

project, plus a reasonable rate of return thereon. This


arrangement may be employed in the construction of
any infrastructure project including critical facilities
which for security or strategic reasons, must be
operated directly by the government (Emphasis
supplied).
The BOT scheme is expressly defined as one where the contractor
undertakes the construction and financing in infrastructure facility,
and operates and maintains the same. The contractor operates the
facility for a fixed period during which it may recover its expenses
and investment in the project plus a reasonable rate of return
thereon. After the expiration of the agreed term, the contractor
transfers the ownership and operation of the project to the
government.
In the BT scheme, the contractor undertakes the construction and
financing of the facility, but after completion, the ownership and
operation thereof are turned over to the government. The
government, in turn, shall pay the contractor its total investment
on the project in addition to a reasonable rate of return. If payment
is to be effected through amortization payments by the
government infrastructure agency or local government unit
concerned, this shall be made in accordance with a scheme
proposed in the bid and incorporated in the contract (R.A. No. 6957,
Sec. 6).
Emphasis must be made that under the BOT scheme, the owner of
the infrastructure facility must comply with the citizenship
requirement of the Constitution on the operation of a public utility.
No such a requirement is imposed in the BT scheme.
There is no mention in the BOT Law that the BOT and BT schemes
bar any other arrangement for the payment by the government of
the project cost. The law must not be read in such a way as to rule
out or unduly restrict any variation within the context of the two
schemes. Indeed, no statute can be enacted to anticipate and
provide all the fine points and details for the multifarious and
complex situations that may be encountered in enforcing the law
(Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v.
Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29
Phil. 119 [1914]).

The BLT scheme in the challenged agreements is but a variation of


the BT scheme under the law.
As a matter of fact, the burden on the government in raising funds
to pay for the project is made lighter by allowing it to amortize
payments out of the income from the operation of the LRT System.
In form and substance, the challenged agreements provide that
rentals are to be paid on a monthly basis according to a schedule of
rates through and under the terms of a confirmed Irrevocable
Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo,
p. 85). At the end of 25 years and when full payment shall have
been made to and received by private respondent, it shall transfer
to DOTC, free from any lien or encumbrances, all its title to, rights
and interest in, the project for only U.S. $1.00 (Revised and
Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec;
7; Rollo, pp. 67, .87).
A lease is a contract where one of the parties binds himself to give
to another the enjoyment or use of a thing for a certain price and
for a period which may be definite or indefinite but not longer than
99 years (Civil Code of the Philippines, Art. 1643). There is no
transfer of ownership at the end of the lease period. But if the
parties stipulate that title to the leased premises shall be
transferred to the lessee at the end of the lease period upon the
payment of an agreed sum, the lease becomes a lease-purchase
agreement.
Furthermore, it is of no significance that the rents shall be paid in
United States currency, not Philippine pesos. The EDSA LRT III
Project is a high priority project certified by Congress and the
National Economic and Development Authority as falling under the
Investment Priorities Plan of Government (Rollo, pp. 310-311). It is,
therefore, outside the application of the Uniform Currency Act (R.A.
No. 529), which reads as follows:
Sec. 1. Every provision contained in, or made with
respect to, any domestic obligation to wit, any
obligation contracted in the Philippines which
provisions purports to give the obligee the right to
require payment in gold or in a particular kind of coin
or currency other than Philippine currency or in an
amount of money of the Philippines measured

thereby, be as it is hereby declared against public


policy, and null, void, and of no effect, and no such
provision shall be contained in, or made with respect
to, any obligation hereafter incurred. The above
prohibition shall not apply to (a) . . .; (b) transactions
affecting
high-priority
economic
projects
for
agricultural, industrial and power development as
may
be
determined
by
the National Economic Council which are financed by
or through foreign funds; . . . .
3. The fact that the contract for the construction of the EDSA LRT III
was awarded through negotiation and before congressional
approval on January 22 and 23, 1992 of the List of National Projects
to be undertaken by the private sector pursuant to the BOT Law
(Rollo, pp. 309-312) does not suffice to invalidate the award.
Subsequent congressional approval of the list including "rail-based
projects packaged with commercial development opportunities"
(Rollo, p. 310) under which the EDSA LRT III projects falls, amounts
to a ratification of the prior award of the EDSA LRT III contract
under the BOT Law.
Petitioners insist that the prequalifications process which led to the
negotiated award of the contract appears to have been rigged from
the very beginning to do away with the usual open international
public bidding where qualified internationally known applicants
could fairly participate.
The records show that only one applicant passed the
prequalification process. Since only one was left, to conduct a
public bidding in accordance with Section 5 of the BOT Law for that
lone participant will be an absurb and pointless exercise (cf. Deloso
v. Sandiganbayan, 217 SCRA 49, 61 [1993]).
Contrary to the comments of the Executive Secretary Drilon,
Section 5 of the BOT Law in relation to Presidential Decree No. 1594
allows the negotiated award of government infrastructure projects.
Presidential Decree No. 1594, "Prescribing Policies, Guidelines,
Rules and Regulations for Government Infrastructure Contracts,"
allows the negotiated award of government projects in exceptional
cases. Sections 4 of the said law reads as follows:

Bidding. Construction projects shall generally be


undertaken by contract after competitive public
bidding. Projects
may
be
undertaken
by
administration or force account or by negotiated
contract only in exceptional cases where time is of
the essence, or where there is lack of qualified
bidders or contractors, or where there is conclusive
evidence that greater economy and efficiency would
be achieved through this arrangement, and in
accordance with provision of laws and acts on the
matter, subject to the approval of the Minister of
Public
Works
and
Transportation
and
Communications, the Minister of Public Highways, or
the Minister of Energy, as the case may be, if the
project cost is less than P1 Million, and the President
of the Philippines, upon recommendation of the
Minister, if the project cost is P1 Million or more
(Emphasis supplied).
xxx xxx xxx
Indeed, where there is a lack of qualified bidders or contractors, the
award of government infrastructure contracts may he made by
negotiation. Presidential Decree No. 1594 is the general law on
government infrastructure contracts while the BOT Law governs
particular arrangements or schemes aimed at encouraging private
sector participation in government infrastructure projects. The two
laws are not inconsistent with each other but are in pari
materia and should be read together accordingly.
In the instant case, if the prequalification process was actually
tainted by foul play, one wonders why none of the competing firms
ever brought the matter before the PBAC, or intervened in this case
before us (cf. Malayan Integrated Industries Corp. v. Court of
Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the
President, 205 SCRA 705 [1992]).
The challenged agreements have been approved by President
Ramos himself. Although then Executive Secretary Drilon may have
disapproved the "Agreement to Build, Lease and Transfer a Light
Rail Transit System for EDSA," there is nothing in our laws that
prohibits parties to a contract from renegotiating and modifying in

good faith the terms and conditions thereof so as to meet legal,


statutory
and
constitutional
requirements.
Under
the
circumstances, to require the parties to go back to step one of the
prequalification process would just be an idle ceremony. Useless
bureaucratic "red tape" should be eschewed because it discourages
private sector participation, the "main engine" for national growth
and development (R.A. No. 6957, Sec. 1), and renders the BOT Law
nugatory.
Republic Act No. 7718 recognizes and defines a BLT scheme in
Section 2 thereof as:
(e)
Build-lease-and-transfer

A
contractual
arrangement whereby a project proponent is
authorized to finance and construct an infrastructure
or development facility and upon its completion turns
it over to the government agency or local
government unit concerned on a lease arrangement
for a fixed period after which ownership of the facility
is automatically transferred to the government unit
concerned.
Section 5-A of the law, which expressly allows direct negotiation of
contracts, provides:
Direct Negotiation of Contracts. Direct negotiation
shall be resorted to when there is only one complying
bidder left as defined hereunder.
(a) If, after advertisement, only one contractor
applies for prequalification and it meets the
prequalification requirements, after which it is
required to submit a bid proposal which is
subsequently found by the agency/local government
unit (LGU) to be complying.
(b) If, after advertisement, more than one contractor
applied for prequalification but only one meets the
prequalification requirements, after which it submits
bid/proposal which is found by the agency/local
government unit (LGU) to be complying.
(c) If, after prequalification of more than one
contractor only one submits a bid which is found by
the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor


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

96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong


V. Cheong Seng Gee, 43 Phil. 43 [1922].
4. Lastly, petitioners claim that the agreements are grossly
disadvantageous to the government because the rental rates are
excessive and private respondent's development rights over the 13
stations and the depot will rob DOTC of the best terms during the
most productive years of the project.
It must be noted that as part of the EDSA LRT III project, private
respondent has been granted, for a period of 25 years, exclusive
rights over the depot and the air space above the stations for
development into commercial premises for lease, sublease,
transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo,
pp. 91-92). For and in consideration of these development rights,
private respondent shall pay DOTC in Philippine currency
guaranteed revenues generated therefrom in the amounts set forth
in the Supplemental Agreement (Sec. 11; Rollo, p. 93). In the event
that DOTC shall be unable to collect the guaranteed revenues,
DOTC shall be allowed to deduct any shortfalls from the monthly
rent due private respondent for the construction of the EDSA LRT III
(Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights,
titles, interests and income over all contracts on the commercial
spaces shall revert to DOTC upon expiration of the 25-year period.
(Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).
The terms of the agreements were arrived at after a painstaking
study by DOTC. The determination by the proper administrative
agencies and officials who have acquired expertise, specialized
skills and knowledge in the performance of their functions should
be accorded respect absent any showing of grave abuse of
discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary,
190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176
SCRA 304 [1989]).
Government officials are presumed to perform their functions with
regularity and strong evidence is necessary to rebut this
presumption. Petitioners have not presented evidence on the
reasonable rentals to be paid by the parties to each other. The
matter of valuation is an esoteric field which is better left to the
experts and which this Court is not eager to undertake.

That the grantee of a government contract will profit therefrom and


to that extent the government is deprived of the profits if it
engages in the business itself, is not worthy of being raised as an
issue. In all cases where a party enters into a contract with the
government, he does so, not out of charity and not to lose money,
but to gain pecuniarily.
5. Definitely, the agreements in question have been entered into by
DOTC in the exercise of its governmental function. DOTC is the
primary
policy,
planning,
programming,
regulating
and
administrative entity of the Executive branch of government in the
promotion, development and regulation of dependable and
coordinated networks of transportation and communications
systems as well as in the fast, safe, efficient and reliable postal,
transportation and communications services (Administrative Code
of 1987, Book IV, Title XV, Sec. 2). It is the Executive department,
DOTC in particular that has the power, authority and technical
expertise determine whether or not a specific transportation or
communication project is necessary, viable and beneficial to the
people. The discretion to award a contract is vested in the
government agencies entrusted with that function (Bureau Veritas
v. Office of the President, 205 SCRA 705 [1992]).
WHEREFORE, the petition is DISMISSED.
SO ORDERED

G.R. No. 125948 December 29, 1998


FIRST PHILIPPINE INDUSTRIAL CORPORATION, petitioner,
vs.
COURT OF APPEALS, HONORABLE PATERNO V. TAC-AN,

BATANGAS CITY and ADORACION C. ARELLANO, in her


official capacity as City Treasurer of Batangas, respondents.
MARTINEZ, J.:
This petition for review on certiorari assails the Decision of the
Court of Appeals dated November 29, 1995, in CA-G.R. SP No.
36801, affirming the decision of the Regional Trial Court of
Batangas City, Branch 84, in Civil Case No. 4293, which dismissed
petitioners' complaint for a business tax refund imposed by the City
of Batangas.
Petitioner is a grantee of a pipeline concession under Republic Act
No. 387, as amended, to contract, install and operate oil pipelines.
The original pipeline concession was granted in 1967 1 and
renewed by the Energy Regulatory Board in 1992. 2
Sometime in January 1995, petitioner applied for a mayor's permit
with the Office of the Mayor of Batangas City. However, before the
mayor's permit could be issued, the respondent City Treasurer
required petitioner to pay a local tax based on its gross receipts for
the fiscal year 1993 pursuant to the Local Government Code 3. The
respondent City Treasurer assessed a business tax on the petitioner
amounting to P956,076.04 payable in four installments based on
the gross receipts for products pumped at GPS-1 for the fiscal year
1993 which amounted to P181,681,151.00. In order not to hamper
its operations, petitioner paid the tax under protest in the amount
of P239,019.01 for the first quarter of 1993.
On January 20, 1994, petitioner filed a letter-protest addressed to
the respondent City Treasurer, the pertinent portion of which reads:
Please note that our Company (FPIC) is a pipeline
operator with a government concession granted
under the Petroleum Act. It is engaged in the
business of transporting petroleum products from the
Batangas refineries, via pipeline, to Sucat and JTF
Pandacan Terminals. As such, our Company is exempt
from paying tax on gross receipts under Section 133
of the Local Government Code of 1991 . . . .
Moreover, Transportation contractors are not included
in the enumeration of contractors under Section 131,
Paragraph (h) of the Local Government Code.

Therefore, the authority to impose tax "on


contractors and other independent contractors"
under Section 143, Paragraph (e) of the Local
Government Code does not include the power to levy
on transportation contractors.
The
imposition
and
assessment
cannot
be
categorized as a mere fee authorized under Section
147 of the Local Government Code. The said section
limits the imposition of fees and charges on business
to such amounts as may be commensurate to the
cost of regulation, inspection, and licensing. Hence,
assuming arguendo that FPIC is liable for the license
fee, the imposition thereof based on gross receipts is
violative of the aforecited provision. The amount of
P956,076.04 (P239,019.01 per quarter) is not
commensurate to the cost of regulation, inspection
and licensing. The fee is already a revenue raising
measure, and not a mere regulatory imposition. 4
On March 8, 1994, the respondent City Treasurer denied the protest
contending that petitioner cannot be considered engaged in
transportation business, thus it cannot claim exemption under
Section 133 (j) of the Local Government Code. 5
On June 15, 1994, petitioner filed with the Regional Trial Court of
Batangas City a complaint 6 for tax refund with prayer for writ of
preliminary injunction against respondents City of Batangas and
Adoracion Arellano in her capacity as City Treasurer. In its
complaint, petitioner alleged, inter alia, that: (1) the imposition and
collection of the business tax on its gross receipts violates Section
133 of the Local Government Code; (2) the authority of cities to
impose and collect a tax on the gross receipts of "contractors and
independent contractors" under Sec. 141 (e) and 151 does not
include the authority to collect such taxes on transportation
contractors for, as defined under Sec. 131 (h), the term
"contractors" excludes transportation contractors; and, (3) the City
Treasurer illegally and erroneously imposed and collected the said
tax, thus meriting the immediate refund of the tax paid. 7
Traversing the complaint, the respondents argued that petitioner
cannot be exempt from taxes under Section 133 (j) of the Local

Government Code as said exemption applies only to "transportation


contractors and persons engaged in the transportation by hire and
common carriers by air, land and water." Respondents assert that
pipelines are not included in the term "common carrier" which
refers solely to ordinary carriers such as trucks, trains, ships and
the like. Respondents further posit that the term "common carrier"
under the said code pertains to the mode or manner by which a
product is delivered to its destination. 8
On October 3, 1994, the trial court rendered a decision dismissing
the complaint, ruling in this wise:
. . . Plaintiff is either a contractor or other independent
contractor.
. . . the exemption to tax claimed by the plaintiff has
become unclear. It is a rule that tax exemptions are to be
strictly construed against the taxpayer, taxes being the
lifeblood of the government. Exemption may therefore be
granted only by clear and unequivocal provisions of law.
Plaintiff claims that it is a grantee of a pipeline concession
under Republic Act 387. (Exhibit A) whose concession was
lately renewed by the Energy Regulatory Board (Exhibit
B). Yet neither said law nor the deed of concession grant
any tax exemption upon the plaintiff.
Even the Local Government Code imposes a tax on
franchise holders under Sec. 137 of the Local Tax Code.
Such being the situation obtained in this case (exemption
being unclear and equivocal) resort to distinctions or
other considerations may be of help:
1. That the exemption granted under Sec. 133 (j)
encompasses onlycommon carriers so as not to
overburden the riding public or commuters with
taxes. Plaintiff is not a common carrier, but a special
carrier extending its services and facilities to a single
specific or "special customer" under a "special
contract."
2. The Local Tax Code of 1992 was basically enacted
to give more and effective local autonomy to local
governments than the previous enactments, to make
them economically and financially viable to serve the

people and discharge their functions with a


concomitant obligation to accept certain devolution
of powers, . . . So, consistent with this policy even
franchise grantees are taxed (Sec. 137) and
contractors are also taxed under Sec. 143 (e) and
151 of the Code. 9
Petitioner assailed the aforesaid decision before this Court via a
petition for review. On February 27, 1995, we referred the case to
the respondent Court of Appeals for consideration and
adjudication. 10 On November 29, 1995, the respondent court
rendered a decision 11 affirming the trial court's dismissal of
petitioner's complaint. Petitioner's motion for reconsideration was
denied on July 18, 1996. 12
Hence, this petition. At first, the petition was denied due course in a
Resolution dated November 11, 1996.13 Petitioner moved for a
reconsideration which was granted by this Court in a
Resolution 14 of January 22, 1997. Thus, the petition was
reinstated.
Petitioner claims that the respondent Court of Appeals erred in
holding that (1) the petitioner is not a common carrier or a
transportation contractor, and (2) the exemption sought for by
petitioner is not clear under the law.
There is merit in the petition.
A "common carrier" may be defined, broadly, as one who holds
himself out to the public as engaged in the business of transporting
persons or property from place to place, for compensation, offering
his services to the public generally.
Art. 1732 of the Civil Code defines a "common carrier" as "any
person, corporation, firm or association engaged in the business of
carrying or transporting passengers or goods or both, by land,
water, or air, for compensation, offering their services to the
public."
The test for determining whether a party is a common carrier of
goods is:
1. He must be engaged in the business of carrying goods for
others as a public employment, and must hold himself out
as ready to engage in the transportation of goods for person
generally as a business and not as a casual occupation;

2. He must undertake to carry goods of the kind to which his


business is confined;
3. He must undertake to carry by the method by which his
business is conducted and over his established roads; and
4. The transportation must be for hire. 15
Based on the above definitions and requirements, there is no doubt
that petitioner is a common carrier. It is engaged in the business of
transporting or carrying goods, i.e. petroleum products, for hire as
a public employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to employ its
services, and transports the goods by land and for compensation.
The fact that petitioner has a limited clientele does not exclude it
from the definition of a common carrier. In De Guzman vs. Court of
Appeals 16we ruled that:
The above article (Art. 1732, Civil Code) makes no
distinction between one whose principal business activity is
the carrying of persons or goods or both, and one who does
such carrying only as an ancillary activity (in local idiom, as
a "sideline"). Article 1732 . . . avoids making any distinction
between a person or enterprise offering transportation
service on a regular or scheduled basis and one offering
such service on an occasional, episodic or unscheduled
basis. Neither does Article 1732 distinguish between a
carrier offering its services to the "general public," i.e., the
general community or population, and one who offers
services or solicits business only from a narrow segment of
the general population. We think that Article 1877
deliberately refrained from making such distinctions.
So understood, the concept of "common carrier" under
Article 1732 may be seen to coincide neatly with the notion
of "public service," under the Public Service Act
(Commonwealth Act No. 1416, as amended) which at least
partially supplements the law on common carriers set forth
in the Civil Code. Under Section 13, paragraph (b) of the
Public Service Act, "public service" includes:
every person that now or hereafter may own,
operate. manage, or control in the Philippines, for
hire or compensation, with general or limited

clientele, whether permanent, occasional or


accidental, and done for general business
purposes, any common carrier, railroad, street
railway, traction railway, subway motor vehicle,
either for freight or passenger, or both, with or
without fixed route and whatever may be its
classification, freight or carrier service of any
class, express service, steamboat, or steamship
line, pontines, ferries and water craft, engaged in
the transportation of passengers or freight or
both, shipyard, marine repair shop, wharf or dock,
ice plant, ice-refrigeration plant, canal, irrigation
system gas, electric light heat and power, water
supply andpower petroleum, sewerage system,
wire or wireless communications systems, wire or
wireless broadcasting stations and other similar
public services. (Emphasis Supplied)
Also, respondent's argument that the term "common carrier" as
used in Section 133 (j) of the Local Government Code refers only to
common carriers transporting goods and passengers through
moving vehicles or vessels either by land, sea or water, is
erroneous.
As correctly pointed out by petitioner, the definition of "common
carriers" in the Civil Code makes no distinction as to the means of
transporting, as long as it is by land, water or air. It does not
provide that the transportation of the passengers or goods should
be by motor vehicle. In fact, in the United States, oil pipe line
operators are considered common carriers. 17
Under the Petroleum Act of the Philippines (Republic Act 387),
petitioner is considered a "common carrier." Thus, Article 86 thereof
provides that:
Art. 86. Pipe line concessionaire as
common carrier. A pipe line shall
have the preferential right to utilize
installations for the transportation of
petroleum owned by him, but is
obligated to utilize the remaining
transportation capacity pro rata for the

transportation of such other petroleum


as may be offered by others for
transport, and to charge without
discrimination such rates as may have
been approved by the Secretary of
Agriculture and Natural Resources.
Republic Act 387 also regards petroleum operation as a public
utility. Pertinent portion of Article 7 thereof provides:
that
everything
relating
to
the
exploration for and exploitation of
petroleum . . . and everything relating
to the manufacture, refining, storage,
or transportation by special methods of
petroleum, is hereby declared to be
a public utility. (Emphasis Supplied)
The Bureau of Internal Revenue likewise considers the petitioner a
"common carrier." In BIR Ruling No. 069-83, it declared:
. . . since [petitioner] is a pipeline
concessionaire that is engaged only in
transporting petroleum products, it is
considered a common carrier under
Republic Act No. 387 . . . . Such being
the case, it is not subject to withholding
tax prescribed by Revenue Regulations
No. 13-78, as amended.
From the foregoing disquisition, there is no doubt that petitioner is
a "common carrier" and, therefore, exempt from the business tax
as provided for in Section 133 (j), of the Local Government Code, to
wit:
Sec. 133. Common Limitations on the
Taxing Powers of Local Government
Units. Unless otherwise provided
herein, the exercise of the taxing
powers
of
provinces,
cities,
municipalities, and barangays shall not
extend to the levy of the following:
xxx xxx xxx

(j) Taxes on the gross receipts


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

enjoying a franchise at the rate of not


more than one-half of 1 percent of the
gross
annual
receipts.
So,
transportation contractors who are
enjoying a franchise would be subject
to tax by the province. That is the
exception, Mr. Speaker.
What we want to guard against here,
Mr. Speaker, is the imposition of taxes
by local government units on the
carrier business. Local government
units may impose taxes on top of what
is already being imposed by the
National Internal Revenue Code which
is the so-called "common carriers tax."
We do not want a duplication of this
tax, so we just provided for an
exception under Section 125 [now Sec.
137] that a province may impose this
tax at a specific rate.
MR. AQUINO (A.). Thank you for that
clarification, Mr. Speaker. . . . 18
It is clear that the legislative intent in excluding from the taxing
power of the local government unit the imposition of business tax
against common carriers is to prevent a duplication of the so-called
"common carrier's tax."
Petitioner is already paying three (3%) percent common carrier's
tax on its gross sales/earnings under the National Internal Revenue
Code. 19 To tax petitioner again on its gross receipts in its
transportation of petroleum business would defeat the purpose of
the Local Government Code.
WHEREFORE, the petition is hereby GRANTED. The decision of the
respondent Court of Appeals dated November 29, 1995 in CA-G.R.
SP No. 36801 is REVERSED and SET ASIDE.
SO ORDERED.

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


NATIONAL STEEL CORPORATION, petitioner, vs. COURT OF
APPEALS AND VLASONS SHIPPING, INC., respondents.
DECISION
PANGANIBAN, J.:
The Court finds occasion to apply the rules on the
seaworthiness of a private carrier, its owners responsibility for
damage to the cargo and its liability for demurrage and attorneys
fees. The Court also reiterates the well-known rule that findings of
facts of trial courts, when affirmed by the Court of Appeals, are
binding on this Court.
The Case
Before us are two separate petitions for review filed by National
Steel Corporation (NSC) and Vlasons Shipping, Inc. (VSI), both of
which assail the August 12, 1993 Decision of the Court of
Appeals. [1] The Court of Appeals modified the decision of the
Regional Trial Court of Pasig, Metro Manila, Branch 163 in Civil Case
No. 23317. The RTC disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of defendant
and against the plaintiff dismissing the complaint with cost against
plaintiff, and ordering plaintiff to pay the defendant on the
counterclaim as follows:
1. The
sum
of P75,000.00
as
unpaid
freight
and P88,000.00 as demurrage with interest at the legal
rate on both amounts from April 7, 1976 until the same
shall have been fully paid;

2. Attorneys fees and expenses of litigation in the sum


of P100,000.00; and
3. Cost of suit.
SO ORDERED. [2]
On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the decision appealed from is
modified by reducing the award for demurrage to P44,000.00 and
deleting the award for attorneys fees and expenses of
litigation. Except as thus modified, the decision is AFFIRMED. There
is no pronouncement as to costs.
SO ORDERED. [3]
The Facts
The MV Vlasons I is a vessel which renders tramping service
and, as such, does not transport cargo or shipment for the general
public. Its services are available only to specific persons who enter
into a special contract of charter party with its owner. It is
undisputed that the ship is a private carrier. And it is in this
capacity that its owner, Vlasons Shipping, Inc., entered into a
contract of affreightment or contract of voyage charter hire with
National Steel Corporation.
The facts as found by Respondent Court of Appeals are as
follows:
(1) On July 17, 1974, plaintiff National Steel Corporation (NSC) as
Charterer and defendant Vlasons Shipping, Inc. (VSI) as Owner,
entered into a Contract of Voyage Charter Hire (Exhibit B; also
Exhibit 1) whereby NSC hired VSIs vessel, the MV VLASONS I to
make one (1) voyage to load steel products at Iligan City and
discharge them at North Harbor, Manila, under the following terms
and conditions, viz:
1. x x x x x x.
2. Cargo: Full cargo of steel products of not less than 2,500 MT,
10% more or less at Masters option.
3. x x x x x x
4. Freight/Payment: P30.00 /metric ton, FIOST basis. Payment upon
presentation of Bill of Lading within fifteen (15) days.
5. Laydays/Cancelling: July 26, 1974/Aug. 5, 1974.

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


Working Day of 24 consecutive hours, Sundays and Holidays
Included).
7. Demurrage/Dispatch: P8,000.00/P4,000.00 per day.
8. x x x x x x
9. Cargo Insurance: Charterers and/or Shippers must insure the
cargoes. Shipowners not responsible for losses/damages except on
proven willful negligence of the officers of the vessel.
10. Other terms:(a) All terms/conditions of NONYAZAI C/P [sic] or
other internationally recognized Charter Party Agreement shall form
part of this Contract.
xxxxxxxxx
The terms F.I.O.S.T. which is used in the shipping business is a
standard provision in the NANYOZAI Charter Party which stands for
Freight In and Out including Stevedoring and Trading, which means
that the handling, loading and unloading of the cargoes are the
responsibility of the Charterer. Under Paragraph 5 of the NANYOZAI
Charter Party, it states, Charterers to load, stow and discharge the
cargo free of risk and expenses to owners. x x x(Underscoring
supplied).
Under paragraph 10 thereof, it is provided that (o)wners shall,
before and at the beginning of the voyage, exercise due diligence
to make the vessel seaworthy and properly manned, equipped and
supplied and to make the holds and all other parts of the vessel in
which cargo is carried, fit and safe for its reception, carriage and
preservation. Owners shall not be liable for loss of or damage of the
cargo arising or resulting from: unseaworthiness unless caused by
want of due diligence on the part of the owners to make the vessel
seaworthy, and to secure that the vessel is properly manned,
equipped and supplied and to make the holds and all other parts of
the vessel in which cargo is carried, fit and safe for its reception,
carriage and preservation; xxx; perils, dangers and accidents of the
sea or other navigable waters; xxx; wastage in bulk or weight or
any other loss or damage arising from inherent defect, quality or
vice of the cargo; insufficiency of packing; xxx; latent defects not
discoverable by due diligence; any other cause arising without the
actual fault or privity of Owners or without the fault of the agents or
servants of owners.

Paragraph 12 of said NANYOZAI Charter Party also provides that


(o)wners shall not be responsible for split, chafing and/or any
damage unless caused by the negligence or default of the master
and crew.
(2) On August 6, 7 and 8, 1974, in accordance with the Contract of
Voyage Charter Hire, the MV VLASONS I loaded at plaintiffs pier at
Iligan City, the NSCs shipment of 1,677 skids of tinplates and 92
packages of hot rolled sheets or a total of 1,769 packages with a
total weight of about 2,481.19 metric tons for carriage to
Manila. The shipment was placed in the three (3) hatches of the
ship. Chief Mate Gonzalo Sabando, acting as agent of the vessel[,]
acknowledged receipt of the cargo on board and signed the
corresponding bill of lading, B.L.P.P. No. 0233 (Exhibit D) on August
8, 1974.
(3) The vessel arrived with the cargo at Pier 12, North Harbor,
Manila, on August 12, 1974. The following day, August 13, 1974,
when the vessels three (3) hatches containing the shipment were
opened by plaintiffs agents, nearly all the skids of tinplates and hot
rolled sheets were allegedly found to be wet and rusty. The cargo
was discharged and unloaded by stevedores hired by the
Charterer. Unloading was completed only on August 24, 1974 after
incurring a delay of eleven (11) days due to the heavy rain which
interrupted the unloading operations. (Exhibit E)
(4) To determine the nature and extent of the wetting and rusting,
NSC called for a survey of the shipment by the Manila Adjusters and
Surveyors Company (MASCO). In a letter to the NSC dated March
17, 1975 (Exhibit G), MASCO made a report of its ocular inspection
conducted on the cargo, both while it was still on board the vessel
and later at the NDC warehouse in Pureza St., Sta. Mesa, Manila
where the cargo was taken and stored. MASCO reported that it
found wetting and rusting of the packages of hot rolled sheets and
metal covers of the tinplates; that tarpaulin hatch covers were
noted torn at various extents; that container/metal casings of the
skids were rusting all over. MASCO ventured the opinion that
rusting of the tinplates was caused by contact with SEA WATER
sustained while still on board the vessel as a consequence of the
heavy weather and rough seas encountered while en route to
destination (Exhibit F). It was also reported that MASCOs surveyors

drew at random samples of bad order packing materials of the


tinplates and delivered the same to the M.I.T. Testing Laboratories
for analysis. On August 31, 1974, the M.I.T. Testing Laboratories
issued Report No. 1770 (Exhibit I) which in part, states, The
analysis of bad order samples of packing materials xxx shows that
wetting was caused by contact with SEA WATER.
(5) On September 6, 1974, on the basis of the aforesaid Report No.
1770, plaintiff filed with the defendant its claim for damages
suffered due to the downgrading of the damaged tinplates in the
amount of P941,145.18. Then on October 3, 1974, plaintiff formally
demanded payment of said claim but defendant VSI refused and
failed to pay. Plaintiff filed its complaint against defendant on April
21, 1976 which was docketed as Civil Case No. 23317, CFI, Rizal.
(6) In its complaint, plaintiff claimed that it sustained losses in the
aforesaid amount of P941,145.18 as a result of the act, neglect and
default of the master and crew in the management of the vessel as
well as the want of due diligence on the part of the defendant to
make the vessel seaworthy and to make the holds and all other
parts of the vessel in which the cargo was carried, fit and safe for
its reception, carriage and preservation -- all in violation of
defendants undertaking under their Contract of Voyage Charter
Hire.
(7) In its answer, defendant denied liability for the alleged damage
claiming that the MV VLASONS I was seaworthy in all respects for
the carriage of plaintiffs cargo; that said vessel was not a common
carrier inasmuch as she was under voyage charter contract with
the plaintiff as charterer under the charter party; that in the course
of the voyage from Iligan City to Manila, the MV VLASONS I
encountered very rough seas, strong winds and adverse weather
condition, causing strong winds and big waves to continuously
pound against the vessel and seawater to overflow on its deck and
hatch covers; that under the Contract of Voyage Charter Hire,
defendant shall not be responsible for losses/damages except on
proven willful negligence of the officers of the vessel, that the
officers of said MV VLASONS I exercised due diligence and proper
seamanship and were not willfully negligent; that furthermore the
Voyage Charter Party provides that loading and discharging of the
cargo was on FIOST terms which means that the vessel was free of

risk and expense in connection with the loading and discharging of


the cargo; that the damage, if any, was due to the inherent defect,
quality or vice of the cargo or to the insufficient packing thereof or
to latent defect of the cargo not discoverable by due diligence or to
any other cause arising without the actual fault or privity of
defendant and without the fault of the agents or servants of
defendant; consequently, defendant is not liable; that the
stevedores of plaintiff who discharged the cargo in Manila were
negligent and did not exercise due care in the discharge of the
cargo; and that the cargo was exposed to rain and seawater spray
while on the pier or in transit from the pier to plaintiffs warehouse
after discharge from the vessel; and that plaintiffs claim was highly
speculative and grossly exaggerated and that the small stain marks
or sweat marks on the edges of the tinplates were magnified and
considered total loss of the cargo. Finally, defendant claimed that it
had complied with all its duties and obligations under the Voyage
Charter Hire Contract and had no responsibility whatsoever to
plaintiff. In turn, it alleged the following counterclaim:
(a) That despite the full and proper performance by defendant of its
obligations under the Voyage Charter Hire Contract, plaintiff failed
and refused to pay the agreed charter hire of P75,000.00 despite
demands made by defendant;
(b) That under their Voyage Charter Hire Contract, plaintiff had
agreed to pay defendant the sum of P8,000.00 per day for
demurrage. The vessel was on demurrage for eleven (11) days in
Manila waiting for plaintiff to discharge its cargo from the
vessel. Thus, plaintiff was liable to pay defendant demurrage in the
total amount of P88,000.00.
(c) For filing a clearly unfounded civil action against defendant,
plaintiff should be ordered to pay defendant attorneys fees and all
expenses of litigation in the amount of not less than P100,000.00.
(8) From the evidence presented by both parties, the trial court
came out with the following findings which were set forth in its
decision:
(a) The MV VLASONS I is a vessel of Philippine registry engaged in
the tramping service and is available for hire only under special
contracts of charter party as in this particular case.

(b) That for purposes of the voyage covered by the Contract of


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

exempts the carrier from responsibility for loss or damage arising


from the character of the goods x x x. All the 1,769 skids of the
tinplates could not have been damaged by water as claimed by
plaintiff. It was shown as claimed by plaintiff that the tinplates
themselves were wrapped in kraft paper lining and corrugated
cardboards could not be affected by water from outside.
(f) The stevedores hired by the plaintiff to discharge the cargo of
tinplates were negligent in not closing the hatch openings of the
MV VLASONS I when rains occurred during the discharging of the
cargo thus allowing rainwater to enter the hatches. It was proven
that the stevedores merely set up temporary tents to cover the
hatch openings in case of rain so that it would be easy for them to
resume work when the rains stopped by just removing the tent or
canvas.Because of this improper covering of the hatches by the
stevedores during the discharging and unloading operations which
were interrupted by rains, rainwater drifted into the cargo through
the hatch openings. Pursuant to paragraph 5 of the NANYOSAI [sic]
Charter Party which was expressly made part of the Contract of
Voyage Charter Hire, the loading, stowing and discharging of the
cargo is the sole responsibility of the plaintiff charterer and
defendant carrier has no liability for whatever damage may occur
or maybe [sic] caused to the cargo in the process.
(g) It was also established that the vessel encountered rough seas
and bad weather while en route from Iligan City to Manila causing
sea water to splash on the ships deck on account of which the
master of the vessel (Mr. Antonio C. Dumlao) filed a Marine Protest
on August 13, 1974 (Exh. 15) which can be invoked by defendant
as a force majeure that would exempt the defendant from liability.
(h) Plaintiff did not comply with the requirement prescribed in
paragraph 9 of the Voyage Charter Hire contract that it was to
insure the cargo because it did not. Had plaintiff complied with the
requirement, then it could have recovered its loss or damage from
the insurer. Plaintiff also violated the charter party contract when it
loaded not only steel products, i.e. steel bars, angular bars and the
like but also tinplates and hot rolled sheets which are high grade
cargo commanding a higher freight. Thus plaintiff was able to ship
high grade cargo at a lower freight rate.

(I) As regards defendants counterclaim, the contract of voyage


charter hire under paragraph 4 thereof, fixed the freight at P30.00
per metric ton payable to defendant carrier upon presentation of
the bill of lading within fifteen (15) days. Plaintiff has not paid the
total freight due of P75,000.00 despite demands.The evidence also
showed that the plaintiff was required and bound under paragraph
7 of the same Voyage Charter Hire contract to pay demurrage
ofP8,000.00 per day of delay in the unloading of the cargoes. The
delay amounted to eleven (11) days thereby making plaintiff liable
to pay defendant for demurrage in the amount of P88,000.00.
Appealing the RTC decision to the Court of Appeals, NSC
alleged six errors:
I
The trial court erred in finding that the MV VLASONS I was
seaworthy, properly manned, equipped and supplied, and that
there is no proof of willful negligence of the vessels officers.
II
The trial court erred in finding that the rusting of NSCs tinplates
was due to the inherent nature or character of the goods and not
due to contact with seawater.
III
The trial court erred in finding that the stevedores hired by NSC
were negligent in the unloading of NSCs shipment.
IV
The trial court erred in exempting VSI from liability on the ground of
force majeure.
V
The trial court erred in finding that NSC violated the contract of
voyage charter hire.
VI
The trial court erred in ordering NSC to pay freight, demurrage and
attorneys fees, to VSI.[4]

As earlier stated, the Court of Appeals modified the decision of


the trial court by reducing the demurrage from P88,000.00
to P44,000.00 and deleting the award of attorneys fees and
expenses of litigation. NSC and VSI filed separate motions for
reconsideration. In a Resolution[5] dated October 20, 1993, the
appellate court denied both motions. Undaunted, NSC and VSI filed
their respective petitions for review before this Court. On motion of
VSI, the Court ordered on February 14, 1994 the consolidation of
these petitions.[6]

The Issues
In its petition[7] and memorandum,[8] NSC raises the following
questions of law and fact:
Questions of Law
1. Whether or not a charterer of a vessel is liable for
demurrage due to cargo unloading delays caused by
weather interruption;
2. Whether or not the alleged seaworthiness certificates
(Exhibits 3, 4, 5, 6, 7, 8, 9, 11 and 12) were admissible
in evidence and constituted evidence of the vessels
seaworthiness at the beginning of the voyages; and
3. Whether or not a charterers failure to insure its cargo
exempts the shipowner from liability for cargo damage
Questions of Fact
1. Whether or not the vessel was seaworthy and cargoworthy;
2. Whether or not vessels officers and crew were negligent
in handling and caring for NSCs cargo;
3. Whether or not NSCs cargo of tinplates did sweat during
the voyage and, hence, rusted on their own; and
(4) Whether or not NSCs stevedores were negligent and
caused the wetting[/]rusting of NSCs tinplates.

In its separate petition, [9] VSI submits for the consideration of


this Court the following alleged errors of the CA:
A. The respondent Court of Appeals committed an error of law in
reducing the award of demurrage from P88,000.00 to P44,000.00.
B. The respondent Court of Appeals committed an error of law in
deleting the award of P100,000 for attorneys fees and expenses of
litigation.
Amplifying the foregoing, VSI raises the following issues in its
memorandum: [10]
I. Whether or not the provisions of the Civil Code of the Philippines
on common carriers pursuant to which there exist[s] a presumption
of negligence against the common carrier in case of loss or damage
to the cargo are applicable to a private carrier.
II. Whether or not the terms and conditions of the Contract of
Voyage Charter Hire, including the Nanyozai Charter, are valid and
binding on both contracting parties.
The foregoing issues raised by the parties will be discussed
under the following headings:
1. Questions of Fact
2. Effect of NSCs Failure to Insure the Cargo
3. Admissibility of Certificates Proving Seaworthiness
4. Demurrage and Attorneys Fee
The Courts Ruling
The Court affirms the assailed Decision of the Court of Appeals,
except in respect of the demurrage.
Preliminary Matter: Common Carrier or Private Carrier?
At the outset, it is essential to establish whether VSI contracted
with NSC as a common carrier or as a private carrier.The resolution
of this preliminary question determines the law, standard of
diligence and burden of proof applicable to the present case.
Article 1732 of the Civil Code defines a common carrier as
persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both,

by land, water, or air, for compensation, offering their services to


the public. It has been held that the true test of a common carrier is
the carriage of passengers or goods, provided it has space,
for all who opt to avail themselves of its transportation service for a
fee. [11] A carrier which does not qualify under the above test is
deemed a private carrier. Generally, private carriage is undertaken
by special agreement and the carrier does not hold himself out to
carry goods for the general public. The most typical, although not
the only form of private carriage, is the charter party, a maritime
contract by which the charterer, a party other than the shipowner,
obtains the use and service of all or some part of a ship for a period
of time or a voyage or voyages. [12]
In the instant case, it is undisputed that VSI did not offer its
services to the general public. As found by the Regional Trial Court,
it carried passengers or goods only for those it chose under a
special contract of charter party. [13] As correctly concluded by the
Court of Appeals, the MV Vlasons I was not a common but a private
carrier. [14] Consequently, the rights and obligations of VSI and
NSC, including their respective liability for damage to the cargo, are
determined primarily by stipulations in their contract of private
carriage or charter party. [15] Recently, in Valenzuela Hardwood
and Industrial Supply, Inc., vs. Court of Appeals and Seven Brothers
Shipping Corporation, [16] the Court ruled:
x x x in a contract of private carriage, the parties may freely
stipulate their duties and obligations which perforce would be
binding on them. Unlike in a contract involving a common carrier,
private carriage does not involve the general public. Hence, the
stringent provisions of the Civil Code on common carriers
protecting the general public cannot justifiably be applied to a ship
transporting commercial goods as a private carrier. Consequently,
the public policy embodied therein is not contravened by
stipulations in a charter party that lessen or remove the protection
given by law in contracts involving common carriers.[17]
Extent of VSIs Responsibility and Liability Over NSCs Cargo
It is clear from the parties Contract of Voyage Charter Hire,
dated July 17, 1974, that VSI shall not be responsible for losses
except on proven willful negligence of the officers of the vessel. The

NANYOZAI Charter Party, which was incorporated in the parties


contract of transportation, further provided that the shipowner shall
not be liable for loss of or damage to the cargo arising or resulting
from unseaworthiness, unless the same was caused by its lack of
due diligence to make the vessel seaworthy or to ensure that the
same was properly manned, equipped and supplied, and to make
the holds and all other parts of the vessel in which cargo [was]
carried, fit and safe for its reception, carriage and
preservation. [18] The NANYOZAI Charter Party also provided that
[o]wners shall not be responsible for split, chafing and/or any
damage unless caused by the negligence or default of the master
or crew.[19]
Burden of Proof
In view of the aforementioned contractual stipulations, NSC
must prove that the damage to its shipment was caused by VSIs
willful negligence or failure to exercise due diligence in making MV
Vlasons I seaworthy and fit for holding, carrying and safekeeping
the cargo. Ineluctably, the burden of proof was placed on NSC by
the parties agreement.
This view finds further support in the Code of Commerce which
pertinently provides:
Art. 361. Merchandise shall be transported at the risk and venture
of the shipper, if the contrary has not been expressly stipulated.
Therefore, the damage and impairment suffered by the goods
during the transportation, due to fortuitous event, force majeure, or
the nature and inherent defect of the things, shall be for the
account and risk of the shipper.
The burden of proof of these accidents is on the carrier.
Art. 362. The carrier, however, shall be liable for damages arising
from the cause mentioned in the preceding article if proofs against
him show that they occurred on account of his negligence or his
omission to take the precautions usually adopted by careful
persons, unless the shipper committed fraud in the bill of lading,
making him to believe that the goods were of a class or quality
different from what they really were.

Because the MV Vlasons I was a private carrier, the shipowners


obligations are governed by the foregoing provisions of the Code of
Commerce and not by the Civil Code which, as a general rule,
places the prima facie presumption of negligence on a common
carrier. It is a hornbook doctrine that:
In an action against a private carrier for loss of, or injury to, cargo,
the burden is on the plaintiff to prove that the carrier was negligent
or unseaworthy, and the fact that the goods were lost or damaged
while in the carriers custody does not put the burden of proof on
the carrier.
Since x x x a private carrier is not an insurer but undertakes only to
exercise due care in the protection of the goods committed to its
care, the burden of proving negligence or a breach of that duty
rests on plaintiff and proof of loss of, or damage to, cargo while in
the carriers possession does not cast on it the burden of proving
proper care and diligence on its part or that the loss occurred from
an excepted cause in the contract or bill of lading. However, in
discharging the burden of proof, plaintiff is entitled to the benefit of
the presumptions and inferences by which the law aids the bailor in
an action against a bailee, and since the carrier is in a better
position to know the cause of the loss and that it was not one
involving its liability, the law requires that it come forward with the
information available to it, and its failure to do so warrants an
inference or presumption of its liability. However, such inferences
and presumptions, while they may affect the burden of coming
forward with evidence, do not alter the burden of proof which
remains on plaintiff, and, where the carrier comes forward with
evidence explaining the loss or damage, the burden of going
forward with the evidence is again on plaintiff.
Where the action is based on the shipowners warranty of
seaworthiness, the burden of proving a breach thereof and that
such breach was the proximate cause of the damage rests on
plaintiff, and proof that the goods were lost or damaged while in
the carriers possession does not cast on it the burden of proving
seaworthiness. x x x Where the contract of carriage exempts the
carrier from liability for unseaworthiness not discoverable by due
diligence, the carrier has the preliminary burden of proving the
exercise of due diligence to make the vessel seaworthy. [20]

In the instant case, the Court of Appeals correctly found that


NSC has not taken the correct position in relation to the question of
who has the burden of proof. Thus, in its brief (pp. 10-11), after
citing Clause 10 and Clause 12 of the NANYOZAI Charter Party
(incidentally plaintiff-appellants [NSCs] interpretation of Clause 12
is not even correct), it argues that a careful examination of the
evidence will show that VSI miserably failed to comply with any of
these obligations as if defendant-appellee [VSI] had the burden of
proof.[21]
First Issue: Questions of Fact
Based on the foregoing, the determination of the following
factual questions is manifestly relevant: (1) whether VSI exercised
due diligence in making MV Vlasons I seaworthy for the intended
purpose under the charter party; (2) whether the damage to the
cargo should be attributed to the willful negligence of the officers
and crew of the vessel or of the stevedores hired by NSC; and (3)
whether the rusting of the tinplates was caused by its own sweat or
by contact with seawater.
These questions of fact were threshed out and decided by the
trial court, which had the firsthand opportunity to hear the parties
conflicting claims and to carefully weigh their respective
evidence. The findings of the trial court were subsequently affirmed
by the Court of Appeals. Where the factual findings of both the trial
court and the Court of Appeals coincide, the same are binding on
this Court. [22] We stress that, subject to some exceptional
instances, [23] only questions of law -- not questions of fact -- may
be raised before this Court in a petition for review under Rule 45 of
the Rules of Court. After a thorough review of the case at bar, we
find no reason to disturb the lower courts factual findings, as
indeed NSC has not successfully proven the application of any of
the aforecited exceptions.
Was MV Vlasons I Seaworthy?
In any event, the records reveal that VSI exercised due
diligence to make the ship seaworthy and fit for the carriage of
NSCs cargo of steel and tinplates. This is shown by the fact that it
was drydocked and inspected by the Philippine Coast Guard before

it proceeded to Iligan City for its voyage to Manila under the


contract of voyage charter hire. [24] The vessels voyage from Iligan
to Manila was the vessels first voyage after drydocking. The
Philippine Coast Guard Station in Cebu cleared it asseaworthy,
fitted and equipped; it met all requirements for trading as cargo
vessel. [25] The Court of Appeals itself sustained the conclusion of
the trial court that MV Vlasons I was seaworthy. We find no reason
to modify or reverse this finding of both the trial and the appellate
courts.

Who Were Negligent: Seamen or Stevedores?


As noted earlier, the NSC had the burden of proving that the
damage to the cargo was caused by the negligence of the officers
and the crew of MV Vlasons I in making their vessel seaworthy and
fit for the carriage of tinplates. NSC failed to discharge this burden.
Before us, NSC relies heavily on its claim that MV Vlasons I had
used an old and torn tarpaulin or canvas to cover the hatches
through which the cargo was loaded into the cargo hold of the
ship. It faults the Court of Appeals for failing to consider such claim
as an uncontroverted fact [26] and denies that MV Vlasons I was
equipped with new canvas covers in tandem with the old ones as
indicated in the Marine Protest xxx. [27] We disagree.
The records sufficiently support VSIs contention that the ship
used the old tarpaulin, only in addition to the new
one usedprimarily to make the ships hatches watertight. The
foregoing are clear from the marine protest of the master of the MV
Vlasons I, Antonio C. Dumlao, and the deposition of the ships
boatswain, Jose Pascua. The salient portions of said marine protest
read:
x x x That the M/V VLASONS I departed Iligan City or or about 0730
hours of August 8, 1974, loaded with approximately 2,487.9 tons of
steel plates and tin plates consigned to National Steel Corporation;
that before departure, the vessel was rigged, fully equipped and
cleared by the authorities; that on or about August 9, 1974, while in
the vicinity of the western part of Negros and Panay, we
encountered very rough seas and strong winds and Manila office

was advised by telegram of the adverse weather conditions


encountered; that in the morning of August 10, 1974, the weather
condition changed to worse and strong winds and big waves
continued pounding the vessel at her port side causing sea water to
overflow on deck andhatch (sic) covers and which caused the first
layer of the canvass covering to give way while the new canvass
covering still holding on;
That the weather condition improved when we reached Dumali
Point protected by Mindoro; that we re-secured the canvass
covering back to position; that in the afternoon of August 10, 1974,
while entering Maricaban Passage, we were again exposed to
moderate seas and heavy rains; that while approaching Fortune
Island, we encountered again rough seas, strong winds and big
waves which caused the same canvass to give way and leaving the
new canvass holding on;
xxx xxx xxx [28]
And the relevant portions of Jose Pascuas deposition are as follows:
Q: What is the purpose of the canvas cover?
A: So that the cargo would not be soaked with water.
A: And will you describe how the canvas cover was secured on the
hatch opening?
WITNESS
A: It was placed flat on top of the hatch cover, with a little canvas
flowing over the sides and we place[d] a flat bar over the canvas on
the side of the hatches and then we place[d] a stopper so that the
canvas could not be removed.
ATTY DEL ROSARIO
Q: And will you tell us the size of the hatch opening? The length
and the width of the hatch opening.
A: Forty-five feet by thirty-five feet, sir.
xxxxxxxxx
Q: How was the canvas supported in the middle of the hatch
opening?
A: There is a hatch board.
ATTY DEL ROSARIO
Q: What is the hatch board made of?
A: It is made of wood, with a handle.
Q: And aside from the hatch board, is there any other material
there to cover the hatch?
A: There is a beam supporting the hatch board.
Q: What is this beam made of?
A: It is made of steel, sir.

Q: Is the beam that was placed in the hatch opening covering the
whole hatch opening?
A: No, sir.
Q: How many hatch beams were there placed across the opening?
A: There are five beams in one hatch opening.
ATTY DEL ROSARIO
Q: And on top of the beams you said there is a hatch board. How
many pieces of wood are put on top?
A: Plenty, sir, because there are several pieces on top of the hatch
beam.
Q: And is there a space between the hatch boards?
A: There is none, sir.
Q: They are tight together?
A: Yes, sir.
Q: How tight?
A: Very tight, sir.
Q: Now, on top of the hatch boards, according to you, is the canvas
cover. How many canvas covers?
A: Two, sir. [29]
That due diligence was exercised by the officers and the crew
of the MV Vlasons I was further demonstrated by the fact that,
despite encountering rough weather twice, the new tarpaulin did
not give way and the ships hatches and cargo holds remained
waterproof. As aptly stated by the Court of Appeals, xxx we find no
reason not to sustain the conclusion of the lower court based on
overwhelming evidence, that the MV VLASONS I was seaworthy
when it undertook the voyage on August 8, 1974 carrying on board
thereof plaintiff-appellants shipment of 1,677 skids of tinplates and
92 packages of hot rolled sheets or a total of 1,769 packages from
NSCs pier in Iligan City arriving safely at North Harbor, Port Area,
Manila, on August 12, 1974; xxx. [30]
Indeed, NSC failed to discharge its burden to show negligence
on the part of the officers and the crew of MV Vlasons I. On the
contrary, the records reveal that it was the stevedores of NSC who
were negligent in unloading the cargo from the ship.
The stevedores employed only a tent-like material to cover the
hatches when strong rains occasioned by a passing typhoon
disrupted the unloading of the cargo. This tent-like covering,
however, was clearly inadequate for keeping rain and seawater

away from the hatches of the ship. Vicente Angliongto, an officer of


VSI, testified thus:
ATTY ZAMORA:
Q: Now, during your testimony on November 5, 1979, you stated on
August 14 you went on board the vessel upon notice from the
National Steel Corporation in order to conduct the inspection of the
cargo. During the course of the investigation, did you chance to see
the discharging operation?
WITNESS:
A: Yes, sir, upon my arrival at the vessel, I saw some of the
tinplates already discharged on the pier but majority of the
tinplates were inside the hall, all the hatches were opened.
Q: In connection with these cargoes which were unloaded, where is
the place.
A: At the Pier.
Q: What was used to protect the same from weather?
ATTY LOPEZ:
We object, your Honor, this question was already asked. This
particular matter . . . the transcript of stenographic notes shows the
same was covered in the direct examination.
ATTY ZAMORA:
Precisely, your Honor, we would like to go on detail, this is the
serious part of the testimony.
COURT:
All right, witness may answer.
ATTY LOPEZ:
Q: What was used in order to protect the cargo from the weather?
A: A base of canvas was used as cover on top of the tin plates, and
tents were built at the opening of the hatches.
Q: You also stated that the hatches were already opened and that
there were tents constructed at the opening of the hatches to
protect the cargo from the rain. Now, will you describe [to] the
Court the tents constructed.
A: The tents are just a base of canvas which look like a tent of an
Indian camp raise[d] high at the middle with the whole side
separated down to the hatch, the size of the hatch and it is soaks
[sic] at the middle because of those weather and this can be used
only to temporarily protect the cargo from getting wet by rains.
Q: Now, is this procedure adopted by the stevedores of covering
tents proper?
A: No, sir, at the time they were discharging the cargo, there was a
typhoon passing by and the hatch tent was not good enough to
hold all of it to prevent the water soaking through the canvas and
enter the cargo.
Q: In the course of your inspection, Mr. Anglingto [sic], did you see

in fact the water enter and soak into the canvas and tinplates.
A: Yes, sir, the second time I went there, I saw it.
Q: As owner of the vessel, did you not advise the National Steel
Corporation [of] the procedure adopted by its stevedores in
discharging the cargo particularly in this tent covering of the
hatches?
A: Yes, sir, I did the first time I saw it, I called the attention of the
stevedores but the stevedores did not mind at all, so, I called the
attention of the representative of the National Steel but nothing
was done, just the same. Finally, I wrote a letter to them.[31]
NSC attempts to discredit the testimony of Angliongto by
questioning his failure to complain immediately about the
stevedores negligence on the first day of unloading, pointing out
that he wrote his letter to petitioner only seven days later.[32] The
Court is not persuaded. Angliongtos candid answer in his
aforequoted testimony satisfactorily explained the delay.Seven
days lapsed because he first called the attention of the stevedores,
then the NSCs representative, about the negligent and defective
procedure adopted in unloading the cargo. This series of actions
constitutes a reasonable response in accord with common sense
and ordinary human experience. Vicente Angliongto could not be
blamed for calling the stevedores attention first and then the NSCs
representative on location before formally informing NSC of the
negligence he had observed, because he was not responsible for
the stevedores or the unloading operations. In fact, he was merely
expressing concern for NSC which was ultimately responsible for
the stevedores it had hired and the performance of their task to
unload the cargo.
We see no reason to reverse the trial and the appellate courts
findings and conclusions on this point, viz:
In the THIRD assigned error, [NSC] claims that the trial court erred
in finding that the stevedores hired by NSC were negligent in the
unloading of NSCs shipment. We do not think so. Such negligence
according to the trial court is evident in the stevedores hired by
[NSC], not closing the hatch of MV VLASONS I when rains occurred
during the discharging of the cargo thus allowing rain water and
seawater spray to enter the hatches and to drift to and fall on the
cargo. It was proven that the stevedores merely set up temporary
tents or canvas to cover the hatch openings when it rained during

the unloading operations so that it would be easier for them to


resume work after the rains stopped by just removing said tents or
canvass. It has also been shown that on August 20, 1974, VSI
President Vicente Angliongto wrote [NSC] calling attention to the
manner the stevedores hired by [NSC] were discharging the cargo
on rainy days and the improper closing of the hatches which
allowed continuous heavy rain water to leak through and drip to the
tinplates covers and [Vicente Angliongto] also suggesting that due
to four (4) days continuos rains with strong winds that the hatches
be totally closed down and covered with canvas and the hatch
tents lowered. (Exh 13). This letter was received by [NSC] on 22
August 1974 while discharging operations were still going on
(Exhibit 13-A). [33]
The fact that NSC actually accepted and proceeded to remove
the cargo from the ship during unfavorable weather will not make
VSI liable for any damage caused thereby. In passing, it may be
noted that the NSC may seek indemnification, subject to the laws
on prescription, from the stevedoring company at fault in the
discharge operations. A stevedore company engaged in discharging
cargo xxx has the duty to load the cargo xxx in a prudent manner,
and it is liable for injury to, or loss of, cargo caused by its
negligence xxx and where the officers and members and crew of
the vessel do nothing and have no responsibility in the discharge of
cargo by stevedores xxx the vessel is not liable for loss of, or
damage
to,
the
cargo caused
by
the
negligence
of
the stevedores xxx [34] as in the instant case.
Do Tinplates Sweat?
The trial court relied on the testimony of Vicente Angliongto in
finding that xxx tinplates sweat by themselves when packed even
without being in contact with water from outside especially when
the weather is bad or raining xxx. [35] The Court of Appeals
affirmed the trial courts finding.
A discussion of this issue appears inconsequential and
unnecessary. As previously discussed, the damage to the tinplates
was occasioned not by airborne moisture but by contact with rain

and seawater which the stevedores negligently allowed to seep in


during the unloading.

Second Issue: Effect of NSCs Failure to Insure the Cargo


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

of

Certificates

Proving

NSCs contention that MV Vlasons I was not seaworthy is


anchored on the alleged inadmissibility of the certificates of
seaworthiness offered in evidence by VSI. The said certificates
include the following:
1. Certificate of Inspection of the Philippine Coast Guard at
Cebu
2. Certificate of Inspection from the Philippine Coast Guard
3. International Load Line Certificate from the Philippine
Coast Guard
4. Coastwise License from the Board of Transportation
5. Certificate of Approval for Conversion issued by the
Bureau of Customs. [36]
NSC argues that the certificates are hearsay for not having
been presented in accordance with the Rules of Court. It points out
that Exhibits 3, 4 and 11 allegedly are not written records or acts of
public officers; while Exhibits 5, 6, 7, 8, 9, 11 and 12 are not

evidenced by official publications or certified true copies as


required by Sections 25 and 26, Rule 132, of the Rules of
Court. [37]
After a careful examination of these exhibits, the Court rules
that Exhibits 3, 4, 5, 6, 7, 8, 9 and 12 are inadmissible, for they
have not been properly offered as evidence. Exhibits 3 and 4 are
certificates issued by private parties, but they have not been
proven by one who saw the writing executed, or by evidence of the
genuineness of the handwriting of the maker, or by a subscribing
witness. Exhibits 5, 6, 7, 8, 9, and 12 are photocopies, but their
admission under the best evidence rule have not been
demonstrated.
We find, however, that Exhibit 11 is admissible under a wellsettled exception to the hearsay rule per Section 44 of Rule 130 of
the Rules of Court, which provides that (e)ntries in official records
made in the performance of a duty by a public officer of the
Philippines, or by a person in the performance of a duty specially
enjoined by law, are prima facie evidence of the facts therein
stated. [38] Exhibit 11 is an original certificate of the Philippine
Coast Guard in Cebu issued by Lieutenant Junior Grade Noli C.
Flores to the effect that the vessel VLASONS I was drydocked x x x
and PCG Inspectors were sent on board for inspection x x x. After
completion of drydocking and duly inspected by PCG Inspectors,
the vessel VLASONS I, a cargo vessel, is in seaworthy condition,
meets all requirements, fitted and equipped for trading as a cargo
vessel was cleared by the Philippine Coast Guard and sailed for
Cebu Port on July 10, 1974. (sic) NSCs claim, therefore, is obviously
misleading and erroneous.
At any rate, it should be stressed that that NSC has the burden
of proving that MV Vlasons I was not seaworthy. As observed
earlier, the vessel was a private carrier and, as such, it did not have
the obligation of a common carrier to show that it was
seaworthy. Indeed, NSC glaringly failed to discharge its duty of
proving the willful negligence of VSI in making the ship seaworthy
resulting in damage to its cargo. Assailing the genuineness of the
certificate of seaworthiness is not sufficient proof that the vessel
was not seaworthy.

Fourth Issue: Demurrage and Attorneys Fees


The contract of voyage charter hire provides inter alia:
xxx xxx xxx
2. Cargo: Full cargo of steel products of not less than 2,500 MT,
10% more or less at Masters option.
xxx xxx xxx
6. Loading/Discharging Rate : 750 tons per WWDSHINC.
7. Demurrage/Dispatch : P8,000.00/P4,000.00 per day. [39]
The Court defined demurrage in its strict sense as the
compensation provided for in the contract of affreightment for the
detention of the vessel beyond the laytime or that period of time
agreed on for loading and unloading of cargo. [40] It is given to
compensate the shipowner for the nonuse of the vessel. On the
other hand, the following is well-settled:
Laytime runs according to the particular clause of the charter
party. x x x If laytime is expressed in running days, this means days
when the ship would be run continuously, and holidays are not
excepted. A qualification of weather permitting excepts only those
days when bad weather reasonably prevents the work
contemplated. [41]
In this case, the contract of voyage charter hire provided for a
four-day laytime; it also qualified laytime as WWDSHINC or weather
working days Sundays and holidays included. [42] The running of
laytime was thus made subject to the weather, and would cease to
run in the event unfavorable weather interfered with the unloading
of cargo. [43] Consequently, NSC may not be held liable for
demurrage as the four-day laytime allowed it did not lapse, having
been tolled by unfavorable weather condition in view of the
WWDSHINC qualification agreed upon by the parties. Clearly, it was
error for the trial court and the Court of Appeals to have found and
affirmed respectively that NSC incurred eleven days of delay in
unloading the cargo. The trial court arrived at this erroneous finding
by subtracting from the twelve days, specifically August 13, 1974
to August 24, 1974, the only day of unloading unhampered by
unfavorable weather or rain which was August 22, 1974. Based on
our previous discussion, such finding is a reversible error. As

mentioned, the respondent appellate court also erred in ruling that


NSC was liable to VSI for demurrage, even if it reduced the amount
by half.
Attorneys Fees
VSI assigns as error of law the Court of Appeals deletion of the
award of attorneys fees. We disagree. While VSI was compelled to
litigate to protect its rights, such fact by itself will not justify an
award of attorneys fees under Article 2208 of the Civil Code when x
x x no sufficient showing of bad faith would be reflected in a partys
persistence in a case other than an erroneous conviction of the
righteousness of his cause x x x. [44] Moreover, attorneys fees may
not be awarded to a party for the reason alone that the judgment
rendered was favorable to the latter, as this is tantamount to
imposing a premium on ones right to litigate or seek judicial
redress of legitimate grievances. [45]
Epilogue
At bottom, this appeal really hinges on a factual issue: when,
how and who caused the damage to the cargo? Ranged against
NSC are two formidable truths. First, both lower courts found that
such damage was brought about during the unloading process
when rain and seawater seeped through the cargo due to the fault
or negligence of the stevedores employed by it. Basic is the rule
that factual findings of the trial court, when affirmed by the Court
of Appeals, are binding on the Supreme Court. Although there are
settled exceptions, NSC has not satisfactorily shown that this case
is one of them.Second, the agreement between the parties -- the
Contract of Voyage Charter Hire -- placed the burden of proof for
such loss or damage upon the shipper, not upon the
shipowner. Such stipulation, while disadvantageous to NSC, is valid
because the parties entered into a contract of private charter, not
one of common carriage. Basic too is the doctrine that courts
cannot relieve a party from the effects of a private contract freely
entered into, on the ground that it is allegedly one-sided or unfair
to the plaintiff. The charter party is a normal commercial contract
and its stipulations are agreed upon in consideration of many
factors, not the least of which is the transport price which is

determined not only by the actual costs but also by the risks and
burdens assumed by the shipper in regard to possible loss or
damage to the cargo. In recognition of such factors, the parties
even stipulated that the shipper should insure the cargo to protect
itself from the risks it undertook under the charter party. That NSC
failed or neglected to protect itself with such insurance should not
adversely affect VSI, which had nothing to do with such failure or
neglect.
WHEREFORE, premises considered, the instant consolidated
petitions are hereby DENIED. The questioned Decision of the Court
of Appeals is AFFIRMED with the MODIFICATION that the demurrage
awarded to VSI is deleted. No pronouncement as to costs.
SO ORDERED.

G.R. No. L-49407 August 19, 1988


NATIONAL DEVELOPMENT COMPANY, petitioner-appellant,
vs.
THE COURT OF APPEALS and DEVELOPMENT INSURANCE &
SURETY CORPORATION, respondents-appellees.
PARAS, J.:
These are appeals by certiorari from the decision * of the Court of
Appeals in CA G.R. No: L- 46513-R entitled "Development Insurance
and Surety Corporation plaintiff-appellee vs. Maritime Company of
the Philippines and National Development Company defendantappellants," affirming in toto the decision ** in Civil Case No. 60641

of the then Court of First Instance of Manila, Sixth Judicial District,


the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering
the defendants National Development Company and
Maritime Company of the Philippines, to pay jointly
and severally, to the plaintiff Development Insurance
and Surety Corp., the sum of THREE HUNDRED SIXTY
FOUR THOUSAND AND NINE HUNDRED FIFTEEN
PESOS AND EIGHTY SIX CENTAVOS (364,915.86) with
the legal interest thereon from the filing of plaintiffs
complaint on April 22, 1965 until fully paid, plus TEN
THOUSAND PESOS (Pl0,000.00) by way of damages
as and for attorney's fee.
On defendant Maritime Company of the Philippines'
cross-claim
against
the
defendant
National
Development
Company,
judgment
is
hereby
rendered, ordering the National Development
Company to pay the cross-claimant Maritime
Company of the Philippines the total amount that the
Maritime Company of the Philippines may voluntarily
or by compliance to a writ of execution pay to the
plaintiff pursuant to the judgment rendered in this
case.
With costs against the defendant Maritime Company
of the Philippines.
(pp. 34-35, Rollo, GR No. L-49469)
The facts of these cases as found by the Court of Appeals, are as
follows:
The evidence before us shows that in accordance
with a memorandum agreement entered into
between defendants NDC and MCP on September 13,
1962, defendant NDC as the first preferred
mortgagee of three ocean going vessels including
one with the name 'Dona Nati' appointed defendant
MCP as its agent to manage and operate said vessel
for and in its behalf and account (Exh. A). Thus, on
February 28, 1964 the E. Philipp Corporation of New
York loaded on board the vessel "Dona Nati" at San

Francisco, California, a total of 1,200 bales of


American raw cotton consigned to the order of Manila
Banking Corporation, Manila and the People's Bank
and Trust Company acting for and in behalf of the Pan
Asiatic Commercial Company, Inc., who represents
Riverside Mills Corporation (Exhs. K-2 to K7-A & L-2 to
L-7-A). Also loaded on the same vessel at Tokyo,
Japan, were the cargo of Kyokuto Boekui, Kaisa, Ltd.,
consigned to the order of Manila Banking Corporation
consisting of 200 cartons of sodium lauryl sulfate and
10 cases of aluminum foil (Exhs. M & M-1). En route
to Manila the vessel Dofia Nati figured in a collision at
6:04 a.m. on April 15, 1964 at Ise Bay, Japan with a
Japanese vessel 'SS Yasushima Maru' as a result of
which 550 bales of aforesaid cargo of American raw
cotton were lost and/or destroyed, of which 535 bales
as damaged were landed and sold on the authority of
the General Average Surveyor for Yen 6,045,-500 and
15 bales were not landed and deemed lost (Exh. G).
The damaged and lost cargoes was worth
P344,977.86 which amount, the plaintiff as insurer,
paid to the Riverside Mills Corporation as holder of
the negotiable bills of lading duly endorsed (Exhs. L7-A, K-8-A, K-2-A, K-3-A, K-4-A, K-5-A, A- 2, N-3 and R3}. Also considered totally lost were the aforesaid
shipment of Kyokuto, Boekui Kaisa Ltd., consigned to
the order of Manila Banking Corporation, Manila,
acting for Guilcon, Manila, The total loss was
P19,938.00 which the plaintiff as insurer paid to
Guilcon as holder of the duly endorsed bill of lading
(Exhibits M-1 and S-3). Thus, the plaintiff had paid as
insurer the total amount of P364,915.86 to the
consignees or their successors-in-interest, for the
said lost or damaged cargoes. Hence, plaintiff filed
this complaint to recover said amount from the
defendants-NDC and MCP as owner and ship agent
respectively, of the said 'Dofia Nati' vessel. (Rollo, L49469, p.38)

On April 22, 1965, the Development Insurance and Surety


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

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


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

BARRED BY THE STATUTE OF LIMITATION AND HAS ALREADY


PRESCRIBED.
III
THE RESPONDENT COURT OF APPEALS ERRED IN ADMITTING IN
EVIDENCE PRIVATE RESPONDENTS EXHIBIT "H" AND IN FINDING ON
THE BASIS THEREOF THAT THE COLLISION OF THE SS DONA NATI
AND THE YASUSHIMA MARU WAS DUE TO THE FAULT OF BOTH
VESSELS INSTEAD OF FINDING THAT THE COLLISION WAS CAUSED
BY THE FAULT, NEGLIGENCE AND LACK OF SKILL OF THE
COMPLEMENTS OF THE YASUSHIMA MARU WITHOUT THE FAULT OR
NEGLIGENCE OF THE COMPLEMENT OF THE SS DONA NATI
IV
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
UNDER THE CODE OF COMMERCE PETITIONER APPELLANT
MARITIME COMPANY OF THE PHILIPPINES IS A SHIP AGENT OR
NAVIERO OF SS DONA NATI OWNED BY CO-PETITIONER APPELLANT
NATIONAL DEVELOPMENT COMPANY AND THAT SAID PETITIONERAPPELLANT IS SOLIDARILY LIABLE WITH SAID CO-PETITIONER FOR
LOSS OF OR DAMAGES TO CARGO RESULTING IN THE COLLISION OF
SAID VESSEL, WITH THE JAPANESE YASUSHIMA MARU.
V
THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT THE
LOSS OF OR DAMAGES TO THE CARGO OF 550 BALES OF AMERICAN
RAW COTTON, DAMAGES WERE CAUSED IN THE AMOUNT OF
P344,977.86 INSTEAD OF ONLY P110,000 AT P200.00 PER BALE AS
ESTABLISHED IN THE BILLS OF LADING AND ALSO IN HOLDING THAT
PARAGRAPH 1O OF THE BILLS OF LADING HAS NO APPLICATION IN
THE INSTANT CASE THERE BEING NO GENERAL AVERAGE TO SPEAK
OF.
VI
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THE
PETITIONERS NATIONAL DEVELOPMENT COMPANY AND COMPANY
OF THE PHILIPPINES TO PAY JOINTLY AND SEVERALLY TO HEREIN
RESPONDENT
DEVELOPMENT
INSURANCE
AND
SURETY
CORPORATION THE SUM OF P364,915.86 WITH LEGAL INTEREST
FROM THE FILING OF THE COMPLAINT UNTIL FULLY PAID PLUS
P10,000.00 AS AND FOR ATTORNEYS FEES INSTEAD OF
SENTENCING SAID PRIVATE RESPONDENT TO PAY HEREIN

PETITIONERS ITS COUNTERCLAIM IN THE AMOUNT OF P10,000.00


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

both captains of the colliding vessels. Under the above ruling, it is


evident that the laws of the Philippines will apply, and it is
immaterial that the collision actually occurred in foreign waters,
such as Ise Bay, Japan.
Under Article 1733 of the Civil Code, common carriers from the
nature of their business and for reasons of public policy are bound
to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them according
to all circumstances of each case. Accordingly, under Article 1735
of the same Code, in all other than those mentioned is Article 1734
thereof, the common carrier shall be presumed to have been at
fault or to have acted negigently, unless it proves that it has
observed the extraordinary diligence required by law.
It appears, however, that collision falls among matters not
specifically regulated by the Civil Code, so that no reversible error
can be found in respondent courses application to the case at bar
of Articles 826 to 839, Book Three of the Code of Commerce, which
deal exclusively with collision of vessels.
More specifically, Article 826 of the Code of Commerce provides
that where collision is imputable to the personnel of a vessel, the
owner of the vessel at fault, shall indemnify the losses and
damages incurred after an expert appraisal. But more in point to
the instant case is Article 827 of the same Code, which provides
that if the collision is imputable to both vessels, each one shall
suffer its own damages and both shall be solidarily responsible for
the losses and damages suffered by their cargoes.
Significantly, under the provisions of the Code of Commerce,
particularly Articles 826 to 839, the shipowner or carrier, is not
exempt from liability for damages arising from collision due to the
fault or negligence of the captain. Primary liability is imposed on
the shipowner or carrier in recognition of the universally accepted
doctrine that the shipmaster or captain is merely the representative
of the owner who has the actual or constructive control over the
conduct of the voyage (Y'eung Sheng Exchange and Trading Co. v.
Urrutia & Co., 12 Phil. 751 [1909]).
There is, therefore, no room for NDC's interpretation that the Code
of Commerce should apply only to domestic trade and not to
foreign trade. Aside from the fact that the Carriage of Goods by Sea

Act (Com. Act No. 65) does not specifically provide for the subject
of collision, said Act in no uncertain terms, restricts its application
"to all contracts for the carriage of goods by sea to and from
Philippine ports in foreign trade." Under Section I thereof, it is
explicitly provided that "nothing in this Act shall be construed as
repealing any existing provision of the Code of Commerce which is
now in force, or as limiting its application." By such incorporation, it
is obvious that said law not only recognizes the existence of the
Code of Commerce, but more importantly does not repeal nor limit
its application.
On the other hand, Maritime Company of the Philippines claims that
Development Insurance and Surety Corporation, has no cause of
action against it because the latter did not prove that its alleged
subrogers have either the ownership or special property right or
beneficial interest in the cargo in question; neither was it proved
that the bills of lading were transferred or assigned to the alleged
subrogers; thus, they could not possibly have transferred any right
of action to said plaintiff- appellee in this case. (Brief for the
Maritime Company of the Philippines, p. 16).
The records show that the Riverside Mills Corporation and Guilcon,
Manila are the holders of the duly endorsed bills of lading covering
the shipments in question and an examination of the invoices in
particular, shows that the actual consignees of the said goods are
the aforementioned companies. Moreover, no less than MCP itself
issued a certification attesting to this fact. Accordingly, as it is
undisputed that the insurer, plaintiff appellee paid the total amount
of P364,915.86 to said consignees for the loss or damage of the
insured cargo, it is evident that said plaintiff-appellee has a cause
of action to recover (what it has paid) from defendant-appellant
MCP (Decision, CA-G.R. No. 46513-R, p. 10; Rollo, p. 43).
MCP next contends that it can not be liable solidarity with NDC
because it is merely the manager and operator of the vessel Dona
Nati not a ship agent. As the general managing agent, according to
MCP, it can only be liable if it acted in excess of its authority.
As found by the trial court and by the Court of Appeals, the
Memorandum Agreement of September 13, 1962 (Exhibit 6,
Maritime) shows that NDC appointed MCP as Agent, a term broad
enough to include the concept of Ship-agent in Maritime Law. In

fact, MCP was even conferred all the powers of the owner of the
vessel, including the power to contract in the name of the NDC
(Decision, CA G.R. No. 46513, p. 12; Rollo, p. 40). Consequently,
under the circumstances, MCP cannot escape liability.
It is well settled that both the owner and agent of the offending
vessel are liable for the damage done where both are impleaded
(Philippine Shipping Co. v. Garcia Vergara, 96 Phil. 281 [1906]); that
in case of collision, both the owner and the agent are civilly
responsible for the acts of the captain (Yueng Sheng Exchange and
Trading Co. v. Urrutia & Co., supra citing Article 586 of the Code of
Commerce; Standard Oil Co. of New York v. Lopez Castelo, 42 Phil.
256, 262 [1921]); that while it is true that the liability of
the naviero in the sense of charterer or agent, is not expressly
provided in Article 826 of the Code of Commerce, it is clearly
deducible from the general doctrine of jurisprudence under the Civil
Code but more specially as regards contractual obligations in
Article 586 of the Code of Commerce. Moreover, the Court held that
both the owner and agent (Naviero) should be declared jointly and
severally liable, since the obligation which is the subject of the
action had its origin in a tortious act and did not arise from contract
(Verzosa and Ruiz, Rementeria y Cia v. Lim, 45 Phil. 423 [1923]).
Consequently, the agent, even though he may not be the owner of
the vessel, is liable to the shippers and owners of the cargo
transported by it, for losses and damages occasioned to such
cargo, without prejudice, however, to his rights against the owner
of the ship, to the extent of the value of the vessel, its equipment,
and the freight (Behn Meyer Y Co. v. McMicking et al. 11 Phil. 276
[1908]).
As to the extent of their liability, MCP insists that their liability
should be limited to P200.00 per package or per bale of raw cotton
as stated in paragraph 17 of the bills of lading. Also the MCP argues
that the law on averages should be applied in determining their
liability.
MCP's contention is devoid of merit. The declared value of the
goods was stated in the bills of lading and corroborated no less by
invoices offered as evidence ' during the trial. Besides, common
carriers, in the language of the court in Juan Ysmael & Co., Inc. v.
Barrette et al., (51 Phil. 90 [1927]) "cannot limit its liability for

injury to a loss of goods where such injury or loss was caused by its
own negligence." Negligence of the captains of the colliding vessel
being the cause of the collision, and the cargoes not being
jettisoned to save some of the cargoes and the vessel, the trial
court and the Court of Appeals acted correctly in not applying the
law on averages (Articles 806 to 818, Code of Commerce).
MCP's claim that the fault or negligence can only be attributed to
the pilot of the vessel SS Yasushima Maru and not to the Japanese
Coast pilot navigating the vessel Dona Nati need not be discussed
lengthily as said claim is not only at variance with NDC's posture,
but also contrary to the factual findings of the trial court affirmed
no less by the Court of Appeals, that both pilots were at fault for
not changing their excessive speed despite the thick fog
obstructing their visibility.
Finally on the issue of prescription, the trial court correctly found
that the bills of lading issued allow trans-shipment of the cargo,
which simply means that the date of arrival of the ship Dona Nati
on April 18,1964 was merely tentative to give allowances for such
contingencies that said vessel might not arrive on schedule at
Manila and therefore, would necessitate the trans-shipment of
cargo, resulting in consequent delay of their arrival. In fact,
because of the collision, the cargo which was supposed to arrive in
Manila on April 18, 1964 arrived only on June 12, 13, 18, 20 and July
10, 13 and 15, 1964. Hence, had the cargoes in question been
saved, they could have arrived in Manila on the above-mentioned
dates. Accordingly, the complaint in the instant case was filed on
April 22, 1965, that is, long before the lapse of one (1) year from
the date the lost or damaged cargo "should have been delivered" in
the light of Section 3, sub-paragraph (6) of the Carriage of Goods
by Sea Act.
PREMISES CONSIDERED, the subject petitions are DENIED for lack
of merit and the assailed decision of the respondent Appellate
Court is AFFIRMED.
SO ORDERED.

G.R. No. 102316 June 30, 1997


VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY
INC., petitioner,
vs.
COURT OF APPEALS AND SEVEN BROTHERS SHIPPING
CORPORATION, respondents.
PANGANIBAN, J.:
Is a stipulation in a charter party that the "(o)wners shall not be
responsible for loss, split, short-landing, breakages and any kind of
damages to the cargo" 1 valid? This is the main question raised in
this petition for review assailing the Decision of Respondent Court
of Appeals 2 in CA-G.R. No. CV-20156 promulgated on October 15,
1991. The Court of Appeals modified the judgment of the Regional
Trial Court of Valenzuela, Metro Manila, Branch 171, the dispositive
portion of which reads:
WHEREFORE, Judgment is hereby rendered ordering
South Sea Surety and Insurance Co., Inc. to pay
plaintiff the sum of TWO MILLION PESOS
(P2,000,000.00) representing the value of the policy
of the lost logs with legal interest thereon from the
date of demand on February 2, 1984 until the amount
is fully paid or in the alternative, defendant Seven
Brothers Shipping Corporation to pay plaintiff the
amount of TWO MILLION PESOS (2,000,000.00)
representing the value of lost logs plus legal interest

from the date of demand on April 24, 1984 until full


payment thereof; the reasonable attorney's fees in
the amount equivalent to five (5) percent of the
amount of the claim and the costs of the suit.
Plaintiff is hereby ordered to pay defendant Seven
Brothers Shipping Corporation the sum of TWO
HUNDRED THIRTY THOUSAND PESOS (P230,000.00)
representing the balance of the stipulated freight
charges.
Defendant South Sea Surety and Insurance
Company's counterclaim is hereby dismissed.
In its assailed Decision, Respondent Court of Appeals held:
WHEREFORE, the appealed judgment is hereby
AFFIRMED except in so far (sic) as the liability of the
Seven Brothers Shipping Corporation to the plaintiff is
concerned which is hereby REVERSED and SET
ASIDE. 3
The Facts
The factual antecedents of this case as narrated in the Court of
Appeals Decision are as follows:
It appears that on 16 January 1984, plaintiff
(Valenzuela Hardwood and Industrial Supply, Inc.)
entered into an agreement with the defendant Seven
Brothers (Shipping Corporation) whereby the latter
undertook to load on board its vessel M/V Seven
Ambassador the former's lauan round logs numbering
940 at the port of Maconacon, Isabela for shipment to
Manila.
On 20 January 1984, plaintiff insured the logs against
loss and/or damage with defendant South Sea Surety
and Insurance Co., Inc. for P2,000,000.00 and the
latter issued its Marine Cargo Insurance Policy No.
84/24229 for P2,000,000.00 on said date.
On 24 January 1984, the plaintiff gave the check in
payment of the premium on the insurance policy to
Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven
Ambassador sank on 25 January 1984 resulting in the

loss of the plaintiff's insured logs.


On 30 January 1984, a check for P5,625.00 (Exh. "E")
to cover payment of the premium and documentary
stamps due on the policy was tendered due to the
insurer but was not accepted. Instead, the South Sea
Surety and Insurance Co., Inc. cancelled the
insurance policy it issued as of the date of the
inception for non-payment of the premium due in
accordance with Section 77 of the Insurance Code.
On 2 February 1984, plaintiff demanded from
defendant South Sea Surety and Insurance Co., Inc.
the payment of the proceeds of the policy but the
latter denied liability under the policy. Plaintiff
likewise filed a formal claim with defendant Seven
Brothers Shipping Corporation for the value of the
lost logs but the latter denied the claim.
After due hearing and trial, the court a quo rendered
judgment in favor of plaintiff and against defendants.
Both defendants shipping corporation and the surety
company appealed.
Defendant-appellant
Seven
Brothers
Shipping
Corporation impute (sic) to the courta quo the
following assignment of errors, to wit:
A. The lower court erred in holding that the proximate
cause of the sinking of the vessel Seven
Ambassadors, was not due to fortuitous event but to
the negligence of the captain in stowing and securing
the logs on board, causing the iron chains to snap
and the logs to roll to the portside.
B. The lower court erred in declaring that the nonliability clause of the Seven Brothers Shipping
Corporation from logs (sic) of the cargo stipulated in
the charter party is void for being contrary to public
policy invoking article 1745 of the New Civil Code.
C. The lower court erred in holding defendantappellant Seven Brothers Shipping Corporation liable
in the alternative and ordering/directing it to pay
plaintiff-appellee the amount of two million

(2,000,000.00) pesos representing the value of the


logs plus legal interest from date of demand until
fully paid.
D. The lower court erred in ordering defendantappellant Seven Brothers Shipping Corporation to pay
appellee reasonable attorney's fees in the amount
equivalent to 5% of the amount of the claim and the
costs of the suit.
E. The lower court erred in not awarding defendantappellant Seven Brothers Corporation its counterclaim for attorney's fees.
F. The lower court erred in not dismissing the
complaint
against
Seven
Brothers
Shipping
Corporation.
Defendant-appellant South Sea Surety and Insurance Co., Inc.
assigns the following errors:
A. The trial court erred in holding that Victorio Chua
was an agent of defendant-appellant South Sea
Surety and Insurance Company, Inc. and likewise
erred in not holding that he was the representative of
the insurance broker Columbia Insurance Brokers,
Ltd.
B. The trial court erred in holding that Victorio Chua
received compensation/commission on the premiums
paid on the policies issued by the defendantappellant South Sea Surety and Insurance Company,
Inc.
C. The trial court erred in not applying Section 77 of
the Insurance Code.
D. The trial court erred in disregarding the "receipt of
payment clause" attached to and forming part of the
Marine Cargo Insurance Policy No. 84/24229.
E. The trial court in disregarding the statement of
account or bill stating the amount of premium and
documentary stamps to be paid on the policy by the
plaintiff-appellee.
F. The trial court erred in disregarding the
endorsement of cancellation of the policy due to non-

payment of premium and documentary stamps.


G. The trial court erred in ordering defendantappellant South Sea Surety and Insurance Company,
Inc.
to
pay
plaintiff-appellee
P2,000,000.00
representing value of the policy with legal interest
from 2 February 1984 until the amount is fully paid,
H. The trial court erred in not awarding to the
defendant-appellant the attorney's fees alleged and
proven in its counterclaim.
The primary issue to be resolved before us is whether
defendants shipping corporation and the surety
company are liable to the plaintiff for the latter's lost
logs. 4
The Court of Appeals affirmed in part the RTC judgment by
sustaining the liability of South Sea Surety and Insurance Company
("South Sea"), but modified it by holding that Seven Brothers
Shipping Corporation ("Seven Brothers") was not liable for the lost
cargo. 5 In modifying the RTC judgment, the respondent appellate
court ratiocinated thus:
It appears that there is a stipulation in the charter
party that the ship owner would be exempted from
liability in case of loss.
The court a quo erred in applying the provisions of
the Civil Code on common carriers to establish the
liability of the shipping corporation. The provisions on
common carriers should not be applied where the
carrier is not acting as such but as a private carrier.
Under American jurisprudence, a common carrier
undertaking to carry a special cargo or chartered to a
special person only, becomes a private carrier.
As a private carrier, a stipulation exempting the
owner from liability even for the negligence of its
agent is valid (Home Insurance Company, Inc. vs.
American Steamship Agencies, Inc., 23 SCRA 24).
The shipping corporation should not therefore be held
liable for the loss of the logs. 6
South Sea and herein Petitioner Valenzuela Hardwood and Industrial
Supply, Inc. ("Valenzuela") filed separate petitions for review before

this Court. In a Resolution dated June 2, 1995, this Court denied the
petition
of
South
Sea. 7 There the Court found no reason to reverse the factual
findings of the trial court and the Court of Appeals that Chua was
indeed an authorized agent of South Sea when he received
Valenzuela's premium payment for the marine cargo insurance
policy which was thus binding on the insurer. 8
The Court is now called upon to resolve the petition for review filed
by Valenzuela assailing the CA Decision which exempted Seven
Brothers from any liability for the lost cargo.
The Issue
Petitioner Valenzuela's arguments resolve around a single issue:
"whether or not respondent Court (of Appeals) committed a
reversible error in upholding the validity of the stipulation in the
charter party executed between the petitioner and the private
respondent exempting the latter from liability for the loss of
petitioner's logs arising from the negligence of its (Seven Brothers')
captain." 9
The Court's Ruling
The petition is not meritorious.
Validity of Stipulation is Lis Mota
The charter party between the petitioner and private respondent
stipulated that the "(o)wners shall not be responsible for loss, split,
short-landing, breakages and any kind of damages to the
cargo." 10 The validity of this stipulation is the lis mota of this case.
It should be noted at the outset that there is no dispute between
the parties that the proximate cause of the sinking of M/V Seven
Ambassadors resulting in the loss of its cargo was the "snapping of
the iron chains and the subsequent rolling of the logs to the
portside due to the negligence of the captain in stowing and
securing the logs on board the vessel and not due to fortuitous
event." 11 Likewise undisputed is the status of Private Respondent
Seven Brothers as a private carrier when it contracted to transport
the cargo of Petitioner Valenzuela. Even the latter admits this in its
petition. 12
The trial court deemed the charter party stipulation void for being
contrary to public policy, 13citing Article 1745 of the Civil Code
which provides:

Art. 1745. Any of the following or similar stipulations


shall be considered unreasonable, unjust and
contrary to public policy:
(1) That the goods are transported at the risk of the
owner or shipper;
(2) That the common carrier will not be liable for any
loss, destruction, or deterioration of the goods;
(3) That the common carrier need not observe any
diligence in the custody of the goods;
(4) That the common carrier shall exercise a degree
of diligence less than that of a good father of a
family, or of a man of ordinary prudence in the
vigilance over the movables transported;
(5) That the common carrier shall not be responsible
for the acts or omissions of his or its employees;
(6) That the common carrier's liability for acts
committed by thieves, or of robbers who do not act
with grave or irresistible threat, violence or force, is
dispensed with or diminished;
(7) That the common carrier is not responsible for the
loss, destruction, or deterioration of goods on
account of the defective condition of the car, vehicle,
ship, airplane or other equipment used in the
contract of carriage.
Petitioner Valenzuela adds that the stipulation is void for being
contrary to Articles 586 and 587 of the Code of Commerce 14 and
Articles 1170 and 1173 of the Civil Code. Citing Article 1306 and
paragraph 1, Article 1409 of the Civil Code, 15 petitioner further
contends that said stipulation "gives no duty or obligation to the
private respondent to observe the diligence of a good father of a
family in the custody and transportation of the cargo."
The Court is not persuaded. As adverted to earlier, it is undisputed
that private respondent had acted as a private carrier in
transporting petitioner's lauan logs. Thus, Article 1745 and other
Civil Code provisions on common carriers which were cited by
petitioner may not be applied unless expressly stipulated by the
parties in their charter party. 16
In a contract of private carriage, the parties may validly stipulate

that responsibility for the cargo rests solely on the charterer,


exempting the shipowner from liability for loss of or damage to the
cargo caused even by the negligence of the ship captain. Pursuant
to Article 1306 17 of the Civil Code, such stipulation is valid
because it is freely entered into by the parties and the same is not
contrary to law, morals, good customs, public order, or public
policy. Indeed, their contract of private carriage is not even a
contract of adhesion. We stress that in a contract of private
carriage, the parties may freely stipulate their duties and
obligations which perforce would be binding on them. Unlike in a
contract involving a common carrier, private carriage does not
involve the general public. Hence, the stringent provisions of the
Civil Code on common carriers protecting the general public cannot
justifiably be applied to a ship transporting commercial goods as a
private carrier. Consequently, the public policy embodied therein is
not contravened by stipulations in a charter party that lessen or
remove the protection given by law in contracts involving common
carriers.
The issue posed in this case and the arguments raised by petitioner
are not novel; they were resolved long ago by this Court in Home
Insurance Co. vs. American Steamship Agencies, Inc. 18 In that
case, the trial court similarly nullified a stipulation identical to that
involved in the present case for being contrary to public policy
based on Article 1744 of the Civil Code and Article 587 of the Code
of Commerce. Consequently, the trial court held the shipowner
liable for damages resulting for the partial loss of the cargo. This
Court reversed the trial court and laid down, through Mr. Justice
Jose P. Bengzon, the following well-settled observation and doctrine:
The provisions of our Civil Code on common carriers
were taken from Anglo-American law. Under
American
jurisprudence,
a
common
carrier
undertaking to carry a special cargo or chartered to a
special person only, becomes a private carrier. As a
private carrier, a stipulation exempting the owner
from liability for the negligence of its agent is not
against public policy, and is deemed valid.
Such doctrine We find reasonable. The Civil Code
provisions on common carriers should not be applied

where the carrier is not acting as such but as a


private carrier. The stipulation in the charter party
absolving the owner from liability for loss due to the
negligence of its agent would be void if the strict
public policy governing common carriers is
applied. Such policy has no force where the public at
large is not involved, as in this case of a ship totally
chartered for the used of a single party. 19(Emphasis
supplied.)
Indeed, where the reason for the rule ceases, the rule itself does
not apply. The general public enters into a contract of
transportation with common carriers without a hand or a voice in
the preparation thereof. The riding public merely adheres to the
contract; even if the public wants to, it cannot submit its own
stipulations for the approval of the common carrier. Thus, the law
on common carriers extends its protective mantle against onesided stipulations inserted in tickets, invoices or other documents
over which the riding public has no understanding or, worse, no
choice. Compared to the general public, a charterer in a contract of
private carriage is not similarly situated. It can and in fact it
usually does enter into a free and voluntary agreement. In
practice, the parties in a contract of private carriage can stipulate
the carrier's obligations and liabilities over the shipment which, in
turn, determine the price or consideration of the charter. Thus, a
charterer, in exchange for convenience and economy, may opt to
set aside the protection of the law on common carriers. When the
charterer decides to exercise this option, he takes a normal
business risk.
Petitioner contends that the rule in Home Insurance is not
applicable to the present case because it "covers only a stipulation
exempting a private carrier from liability for the negligence of his
agent, but it does not apply to a stipulation exempting a private
carrier like private respondent from the negligence of his employee
or servant which is the situation in this case." 20 This contention of
petitioner is bereft of merit, for it raises a distinction without any
substantive difference. The case Home Insurance specifically dealt
with "the liability of the shipowner for acts or negligence of its
captain and crew" 21 and a charter party stipulation which

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

may not be made the subject of waiver. 26 Being patently and


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

Article 362 of the Code of Commerce 28 provides the standard of


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

Development Co. vs. Steamship "Pompey" 38 and Limpangco Sons


vs. Yangco Steamship Co. 39 in support of its contention that the
shipowner be held liable for damages. 40 These however are not
on all fours with the present case because they do not involve a
similar factual milieu or an identical stipulation in the charter party
expressly exempting the shipowner form responsibility for any
damage to the cargo.
Effect of the South Sea Resolution
In its memorandum, Seven Brothers argues that petitioner has no
cause of action against it because this Court has earlier affirmed
the liability of South Sea for the loss suffered by petitioner. Private
respondent submits that petitioner is not legally entitled to collect
twice for a single loss. 41 In view of the above disquisition
upholding the validity of the questioned charter party stipulation
and holding that petitioner may not recover from private
respondent, the present issue is moot and academic. It suffices to
state that the Resolution of this Court dated June 2,
1995 42 affirming the liability of South Sea does not, by itself,
necessarily preclude the petitioner from proceeding against private
respondent. An aggrieved party may still recover the deficiency for
the person causing the loss in the event the amount paid by the
insurance company does not fully cover the loss. Article 2207 of the
Civil Code provides:
Art. 2207. If the plaintiff's property has been insured,
and he has received indemnity for the insurance
company for the injury or loss arising out of the
wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to
recover the deficiency form the person causing the
loss or injury.
WHEREFORE, premises considered, the petition is hereby DENIED
for its utter failure to show any reversible error on the part of
Respondent Court. The assailed Decision is AFFIRMED.
SO ORDERED.

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


LOADSTAR SHIPPING CO., INC., petitioner, vs. COURT OF
APPEALS and THE MANILA INSURANCE CO.,
INC., respondents.
DAVIDE, JR., C.J.:
Petitioner Loadstar Shipping Co., Inc. (hereafter LOADSTAR), in
this petition for review on certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, seeks to reverse and set aside the following: (a)
the 30 January 1997 decision[1] of the Court of Appeals in CA-G.R.
CV No. 36401, which affirmed the decision of 4 October 1991[2] of
the Regional Trial Court of Manila, Branch 16, in Civil Case No. 8529110, ordering LOADSTAR to pay private respondent Manila
Insurance Co. (hereafter MIC) the amount of P6,067,178, with legal
interest from the filing of the complaint until fully paid, P8,000 as
attorneys fees, and the costs of the suit; and (b) its resolution of 19
November 1997,[3] denying LOADSTARs motion for reconsideration
of said decision.
The facts are undisputed.
On 19 November 1984, LOADSTAR received on board its M/V
Cherokee (hereafter, the vessel) the following goods for shipment:
a) 705 bales of lawanit hardwood;
b) 27 boxes and crates of tilewood assemblies and others;
and
c) 49 bundles of mouldings R & W (3) Apitong Bolidenized.

The goods, amounting to P6,067,178, were insured for the same


amount with MIC against various risks including TOTAL LOSS BY
TOTAL LOSS OF THE VESSEL. The vessel, in turn, was insured by
Prudential Guarantee & Assurance, Inc. (hereafter PGAI) for P4
million. On 20 November 1984, on its way to Manila from the port
of Nasipit, Agusan del Norte, the vessel, along with its cargo, sank
off Limasawa Island. As a result of the total loss of its shipment, the
consignee made a claim with LOADSTAR which, however, ignored
the same. As the insurer, MIC paid P6,075,000 to the insured in full
settlement of its claim, and the latter executed a subrogation
receipt therefor.
On 4 February 1985, MIC filed a complaint against LOADSTAR
and PGAI, alleging that the sinking of the vessel was due to the
fault and negligence of LOADSTAR and its employees. It also prayed
that PGAI be ordered to pay the insurance proceeds from the loss of
the vessel directly to MIC, said amount to be deducted from MICs
claim from LOADSTAR.
In its answer, LOADSTAR denied any liability for the loss of the
shippers goods and claimed that the sinking of its vessel was due
to force majeure. PGAI, on the other hand, averred that MIC had no
cause of action against it, LOADSTAR being the party insured. In
any event, PGAI was later dropped as a party defendant after it
paid the insurance proceeds to LOADSTAR.
As stated at the outset, the court a quo rendered judgment in
favor of MIC, prompting LOADSTAR to elevate the matter to the
Court of Appeals, which, however, agreed with the trial court and
affirmed its decision in toto.
In dismissing LOADSTARs appeal, the appellate court made the
following observations:
1) LOADSTAR cannot be considered a private carrier on the
sole ground that there was a single shipper on that
fateful voyage. The court noted that the charter of the
vessel was limited to the ship, but LOADSTAR retained
control over its crew.[4]

2) As a common carrier, it is the Code of Commerce, not


the Civil Code, which should be applied in determining
the rights and liabilities of the parties.
3) The vessel was not seaworthy because it was
undermanned on the day of the voyage. If it had been
seaworthy, it could have withstood the natural and
inevitable action of the sea on 20 November 1984,
when the condition of the sea was moderate. The vessel
sank, not because of force majeure, but because it was
not seaworthy. LOADSTARS allegation that the sinking
was probably due to the convergence of the winds, as
stated by a PAGASA expert, was not duly proven at the
trial. The limited liability rule, therefore, is not
applicable considering that, in this case, there was an
actual finding of negligence on the part of the carrier.[5]
4) Between MIC and LOADSTAR, the provisions of the Bill of
Lading do not apply because said provisions bind only
the shipper/consignee and the carrier. When MIC paid
the shipper for the goods insured, it was subrogated to
the latters rights as against the carrier, LOADSTAR.[6]
5) There was a clear breach of the contract of carriage
when the shippers goods never reached their
destination. LOADSTARs defense of diligence of a good
father of a family in the training and selection of its
crew is unavailing because this is not a proper or
complete defense in culpa contractual.
6) Art. 361 (of the Code of Commerce) has been judicially
construed to mean that when goods are delivered on
board a ship in good order and condition, and the
shipowner delivers them to the shipper in bad order and
condition, it then devolves upon the shipowner to both
allege and prove that the goods were damaged by
reason of some fact which legally exempts him from
liability. Transportation of the merchandise at the risk
and venture of the shipper means that the latter bears
the risk of loss or deterioration of his goods arising from

fortuitous events, force majeure, or the inherent nature


and defects of the goods, but not those caused by the
presumed negligence or fault of the carrier, unless
otherwise proved.[7]
The errors assigned by LOADSTAR boil down to a determination
of the following issues:
(1) Is the M/V Cherokee a private or a common carrier?
(2) Did LOADSTAR observe due and/or ordinary diligence in
these premises?
Regarding the first issue, LOADSTAR submits that the vessel
was a private carrier because it was not issued a certificate of
public convenience, it did not have a regular trip or schedule nor a
fixed route, and there was only one shipper, one consignee for a
special cargo.
In refutation, MIC argues that the issue as to the classification
of the M/V Cherokee was not timely raised below; hence, it is
barred by estoppel. While it is true that the vessel had on board
only the cargo of wood products for delivery to one consignee, it
was also carrying passengers as part of its regular
business. Moreover, the bills of lading in this case made no mention
of any charter party but only a statement that the vessel was a
general cargo carrier. Neither was there any special arrangement
between LOADSTAR and the shipper regarding the shipment of the
cargo. The singular fact that the vessel was carrying a particular
type of cargo for one shipper is not sufficient to convert the vessel
into a private carrier.
As regards the second error, LOADSTAR argues that as a
private carrier, it cannot be presumed to have been negligent, and
the burden of proving otherwise devolved upon MIC.[8]
LOADSTAR
also
maintains
that
the
vessel
was
seaworthy. Before the fateful voyage on 19 November 1984, the
vessel was allegedly dry docked at Keppel Philippines Shipyard and
was duly inspected by the maritime safety engineers of the
Philippine Coast Guard, who certified that the ship was fit to
undertake a voyage. Its crew at the time was experienced, licensed

and unquestionably competent. With all these precautions, there


could be no other conclusion except that LOADSTAR exercised the
diligence of a good father of a family in ensuring the vessels
seaworthiness.
LOADSTAR further claims that it was not responsible for the
loss of the cargo, such loss being due to force majeure. It points out
that when the vessel left Nasipit, Agusan del Norte, on 19
November 1984, the weather was fine until the next day when the
vessel sank due to strong waves. MICs witness, Gracelia Tapel, fully
established the existence of two typhoons, WELFRING and YOLING,
inside the Philippine area of responsibility. In fact, on 20 November
1984, signal no. 1 was declared over Eastern Visayas, which
includes Limasawa Island. Tapel also testified that the convergence
of winds brought about by these two typhoons strengthened wind
velocity in the area, naturally producing strong waves and winds, in
turn, causing the vessel to list and eventually sink.
LOADSTAR goes on to argue that, being a private carrier, any
agreement limiting its liability, such as what transpired in this case,
is valid. Since the cargo was being shipped at owners risk,
LOADSTAR was not liable for any loss or damage to the
same. Therefore, the Court of Appeals erred in holding that the
provisions of the bills of lading apply only to the shipper and the
carrier, and not to the insurer of the goods, which conclusion runs
counter to the Supreme Courts ruling in the case of St. Paul Fire &
Marine Insurance Co. v. Macondray & Co., Inc.,[9] and National
Union Fire Insurance Company of Pittsburg v. Stolt-Nielsen Phils.,
Inc.[10]
Finally, LOADSTAR avers that MICs claim had already
prescribed, the case having been instituted beyond the period
stated in the bills of lading for instituting the same suits based
upon claims arising from shortage, damage, or non-delivery of
shipment shall be instituted within sixty days from the accrual of
the right of action. The vessel sank on 20 November 1984; yet, the
case for recovery was filed only on 4 February 1985.
MIC, on the other hand, claims that LOADSTAR was liable,
notwithstanding that the loss of the cargo was due to force

majeure, because the same concurred with LOADSTARs fault or


negligence.
Secondly, LOADSTAR did not raise the issue of prescription in
the court below; hence, the same must be deemed waived.
Thirdly, the limited liability theory is not applicable in the case
at bar because LOADSTAR was at fault or negligent, and because it
failed to maintain a seaworthy vessel. Authorizing the voyage
notwithstanding its knowledge of a typhoon is tantamount to
negligence.
We find no merit in this petition.
Anent the first assigned error, we hold that LOADSTAR is a
common carrier. It is not necessary that the carrier be issued a
certificate of public convenience, and this public character is not
altered by the fact that the carriage of the goods in question was
periodic, occasional, episodic or unscheduled.
In support of its position, LOADSTAR relied on the 1968 case
of Home Insurance Co. v. American Steamship Agencies, Inc.,
[11] where this Court held that a common carrier transporting
special cargo or chartering the vessel to a special person becomes
a private carrier that is not subject to the provisions of the Civil
Code. Any stipulation in the charter party absolving the owner from
liability for loss due to the negligence of its agent is void only if the
strict policy governing common carriers is upheld. Such policy has
no force where the public at large is not involved, as in the case of
a ship totally chartered for the use of a single party. LOADSTAR also
cited Valenzuela Hardwood and Industrial Supply, Inc. v. Court of
Appeals[12] and National Steel Corp. v. Court of Appeals,[13] both
of which upheld the Home Insurance doctrine.
These cases invoked by LOADSTAR are not applicable in the
case at bar for simple reason that the factual settings are
different. The records do not disclose that the M/V Cherokee, on the
date in question, undertook to carry a special cargo or was
chartered to a special person only. There was no charter party. The
bills of lading failed to show any special arrangement, but only a
general provision to the effect that the M/V Cherokee was a general

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

customers a fee for hauling their goods; that that fee frequently fell
below commercial freight rates is not relevant here.
The Court of Appeals referred to the fact that private respondent
held no certificate of public convenience, and concluded he was not
a common carrier. This is palpable error. A certificate of public
convenience is not a requisite for the incurring of liability under the
Civil Code provisions governing common carriers.That liability
arises the moment a person or firm acts as a common carrier,
without regard to whether or not such carrier has also complied
with the requirements of the applicable regulatory statute and
implementing regulations and has been granted a certificate of
public convenience or other franchise.To exempt private
respondent from the liabilities of a common carrier because he has
not secured the necessary certificate of public convenience, would
be offensive to sound public policy; that would be to reward private
respondent precisely for failing to comply with applicable statutory
requirements. The business of a common carrier impinges directly
and intimately upon the safety and well being and property of
those members of the general community who happen to deal with
such carrier. The law imposes duties and liabilities upon common
carriers for the safety and protection of those who utilize their
services and the law cannot allow a common carrier to render such
duties and liabilities merely facultative by simply failing to obtain
the necessary permits and authorizations.
Moving on to the second assigned error, we find that the M/V
Cherokee was not seaworthy when it embarked on its voyage on 19
November 1984. The vessel was not even sufficiently manned at
the time. For a vessel to be seaworthy, it must be adequately
equipped for the voyage and manned with a sufficient number of
competent officers and crew. The failure of a common carrier to
maintain in seaworthy condition its vessel involved in a contract of
carriage is a clear breach of its duty prescribed in Article 1755 of
the Civil Code.[16]
Neither do we agree with LOADSTARs argument that the
limited liability theory should be applied in this case. The doctrine
of limited liability does not apply where there was negligence on
the part of the vessel owner or agent.[17] LOADSTAR was at fault or

negligent in not maintaining a seaworthy vessel and in having


allowed its vessel to sail despite knowledge of an approaching
typhoon. In any event, it did not sink because of any storm that
may be deemed as force majeure, inasmuch as the wind condition
in the area where it sank was determined to be moderate. Since it
was remiss in the performance of its duties, LOADSTAR cannot hide
behind the limited liability doctrine to escape responsibility for the
loss of the vessel and its cargo.
LOADSTAR also claims that the Court of Appeals erred in
holding it liable for the loss of the goods, in utter disregard of this
Courts pronouncements in St. Paul Fire & Marine Ins. Co. v.
Macondray & Co., Inc.,[18] and National Union Fire Insurance v.
Stolt-Nielsen Phils., Inc.[19] It was ruled in these two cases that
after paying the claim of the insured for damages under the
insurance policy, the insurer is subrogated merely to the rights of
the assured, that is, it can recover only the amount that may, in
turn, be recovered by the latter. Since the right of the assured in
case of loss or damage to the goods is limited or restricted by the
provisions in the bills of lading, a suit by the insurer as subrogee is
necessarily subject to the same limitations and restrictions. We do
not agree. In the first place, the cases relied on by LOADSTAR
involved a limitation on the carriers liability to an amount fixed in
the bill of lading which the parties may enter into, provided that the
same was freely and fairly agreed upon (Articles 1749-1750). On
the other hand, the stipulation in the case at bar effectively
reduces the common carriers liability for the loss or destruction of
the goods to a degree less than extraordinary (Articles 1744 and
1745), that is, the carrier is not liable for any loss or damage to
shipments made at owners risk. Such stipulation is obviously null
and void for being contrary to public policy.[20] It has been said:
Three kinds of stipulations have often been made in a bill of
lading. The first is one exempting the carrier from any and all
liability for loss or damage occasioned by its own negligence. The
second is one providing for an unqualified limitation of such liability
to an agreed valuation. And the third is one limiting the liability of
the carrier to an agreed valuation unless the shipper declares a
higher value and pays a higher rate of freight. According to an
almost uniform weight of authority, the first and second kinds of

stipulations are invalid as being contrary to public policy, but the


third is valid and enforceable.[21]
Since the stipulation in question is null and void, it follows that
when MIC paid the shipper, it was subrogated to all the rights which
the latter has against the common carrier, LOADSTAR.
Neither is there merit to the contention that the claim in this
case was barred by prescription. MICs cause of action had not yet
prescribed at the time it was concerned.Inasmuch as neither the
Civil Code nor the Code of Commerce states a specific prescriptive
period on the matter, the Carriage of Goods by Sea Act (COGSA)
which provides for a one-year period of limitation on claims for loss
of, or damage to, cargoes sustained during transit may be applied
suppletorily to the case at bar. This one-year prescriptive period
also applies to the insurer of the good.[22] In this case, the period
for filing the action for recovery has not yet elapsed. Moreover, a
stipulation reducing the one-year period is null and void;[23] it
must, accordingly, be struck down. WHEREFORE, the instant
petition is DENIED. So ordered.
G.R. No. L-69044 May 29, 1987
EASTERN SHIPPING LINES, INC., petitioner,
vs.
INTERMEDIATE APPELLATE COURT and DEVELOPMENT
INSURANCE & SURETY CORPORATION,respondents.
MELENCIO-HERRERA, J.:
These two cases, both for the recovery of the value of cargo
insurance, arose from the same incident, the sinking of the M/S
ASIATICA when it caught fire, resulting in the total loss of ship and
cargo.
The basic facts are not in controversy:
In G.R. No. 69044, sometime in or prior to June, 1977, the M/S
ASIATICA, a vessel operated by petitioner Eastern Shipping Lines,
Inc., (referred to hereinafter as Petitioner Carrier) loaded at Kobe,
Japan for transportation to Manila, 5,000 pieces of calorized lance
pipes in 28 packages valued at P256,039.00 consigned to Philippine
Blooming Mills Co., Inc., and 7 cases of spare parts valued at
P92,361.75, consigned to Central Textile Mills, Inc. Both sets of

goods were insured against marine risk for their stated value with
respondent Development Insurance and Surety Corporation.
In G.R. No. 71478, during the same period, the same vessel took on
board 128 cartons of garment fabrics and accessories, in two (2)
containers, consigned to Mariveles Apparel Corporation, and two
cases of surveying instruments consigned to Aman Enterprises and
General Merchandise. The 128 cartons were insured for their stated
value by respondent Nisshin Fire & Marine Insurance Co., for US
$46,583.00, and the 2 cases by respondent Dowa Fire & Marine
Insurance Co., Ltd., for US $11,385.00.
Enroute for Kobe, Japan, to Manila, the vessel caught fire and sank,
resulting in the total loss of ship and cargo. The respective
respondent Insurers paid the corresponding marine insurance
values to the consignees concerned and were thus subrogated unto
the rights of the latter as the insured.
G.R. NO. 69044
On May 11, 1978, respondent Development Insurance & Surety
Corporation (Development Insurance, for short), having been
subrogated unto the rights of the two insured companies, filed suit
against petitioner Carrier for the recovery of the amounts it had
paid to the insured before the then Court of First instance of Manila,
Branch XXX (Civil Case No. 6087).
Petitioner-Carrier denied liability mainly on the ground that the loss
was due to an extraordinary fortuitous event, hence, it is not liable
under the law.
On August 31, 1979, the Trial Court rendered judgment in favor of
Development Insurance in the amounts of P256,039.00 and
P92,361.75, respectively, with legal interest, plus P35,000.00 as
attorney's fees and costs. Petitioner Carrier took an appeal to the
then Court of Appeals which, on August 14, 1984, affirmed.
Petitioner Carrier is now before us on a Petition for Review on
Certiorari.
G.R. NO. 71478
On June 16, 1978, respondents Nisshin Fire & Marine Insurance Co.
NISSHIN for short), and Dowa Fire & Marine Insurance Co., Ltd.
(DOWA, for brevity), as subrogees of the insured, filed suit against
Petitioner Carrier for the recovery of the insured value of the cargo
lost with the then Court of First Instance of Manila, Branch 11 (Civil

Case No. 116151), imputing unseaworthiness of the ship and nonobservance of extraordinary diligence by petitioner Carrier.
Petitioner Carrier denied liability on the principal grounds that the
fire which caused the sinking of the ship is an exempting
circumstance under Section 4(2) (b) of the Carriage of Goods by
Sea Act (COGSA); and that when the loss of fire is established, the
burden of proving negligence of the vessel is shifted to the cargo
shipper.
On September 15, 1980, the Trial Court rendered judgment in favor
of NISSHIN and DOWA in the amounts of US $46,583.00 and US
$11,385.00, respectively, with legal interest, plus attorney's fees of
P5,000.00 and costs. On appeal by petitioner, the then Court of
Appeals on September 10, 1984, affirmed with modification the
Trial Court's judgment by decreasing the amount recoverable by
DOWA to US $1,000.00 because of $500 per package limitation of
liability under the COGSA.
Hence, this Petition for Review on certiorari by Petitioner Carrier.
Both Petitions were initially denied for lack of merit. G.R. No. 69044
on January 16, 1985 by the First Division, and G. R. No. 71478 on
September 25, 1985 by the Second Division. Upon Petitioner
Carrier's Motion for Reconsideration, however, G.R. No. 69044 was
given due course on March 25, 1985, and the parties were required
to submit their respective Memoranda, which they have done.
On the other hand, in G.R. No. 71478, Petitioner Carrier sought
reconsideration of the Resolution denying the Petition for Review
and moved for its consolidation with G.R. No. 69044, the lowernumbered case, which was then pending resolution with the First
Division. The same was granted; the Resolution of the Second
Division of September 25, 1985 was set aside and the Petition was
given due course.
At the outset, we reject Petitioner Carrier's claim that it is not the
operator of the M/S Asiatica but merely a charterer thereof. We note
that in G.R. No. 69044, Petitioner Carrier stated in its Petition:
There are about 22 cases of the "ASIATICA" pending
in various courts where various plaintiffs are
represented by various counsel representing various
consignees or insurance companies. The common

defendant in these cases is petitioner herein, being


the operator of said vessel. ... 1
Petitioner Carrier should be held bound to said admission. As a
general rule, the facts alleged in a party's pleading are deemed
admissions of that party and binding upon it. 2 And an admission in
one pleading in one action may be received in evidence against the
pleader or his successor-in-interest on the trial of another action to
which he is a party, in favor of a party to the latter action. 3
The threshold issues in both cases are: (1) which law should govern
the Civil Code provisions on Common carriers or the Carriage of
Goods by Sea Act? and (2) who has the burden of proof to show
negligence of the carrier?
On the Law Applicable
The law of the country to which the goods are to be transported
governs the liability of the common carrier in case of their loss,
destruction or deterioration. 4 As the cargoes in question were
transported from Japan to the Philippines, the liability of Petitioner
Carrier is governed primarily by the Civil Code. 5 However, in all
matters not regulated by said Code, the rights and obligations of
common carrier shall be governed by the Code of Commerce and
by special laws. 6Thus, the Carriage of Goods by Sea Act, a special
law, is suppletory to the provisions of the Civil Code. 7
On the Burden of Proof
Under the Civil Code, common carriers, from the nature of their
business and for reasons of public policy, are bound to observe
extraordinary diligence in the vigilance over goods, according to all
the circumstances of each case. 8 Common carriers are responsible
for the loss, destruction, or deterioration of the goods unless the
same is due to any of the following causes only:
(1) Flood, storm, earthquake, lightning or other
natural disaster or calamity;
xxx xxx xxx 9
Petitioner Carrier claims that the loss of the vessel by fire exempts
it from liability under the phrase "natural disaster or calamity. "
However, we are of the opinion that fire may not be considered a
natural disaster or calamity. This must be so as it arises almost
invariably from some act of man or by human means. 10 It does
not fall within the category of an act of God unless caused by

lightning 11 or by other natural disaster or calamity. 12 It may


even be caused by the actual fault or privity of the carrier. 13
Article 1680 of the Civil Code, which considers fire as an
extraordinary fortuitous event refers to leases of rural lands where
a reduction of the rent is allowed when more than one-half of the
fruits have been lost due to such event, considering that the law
adopts a protection policy towards agriculture. 14
As the peril of the fire is not comprehended within the exception in
Article 1734, supra, Article 1735 of the Civil Code provides that all
cases than those mention in Article 1734, the common carrier shall
be presumed to have been at fault or to have acted negligently,
unless it proves that it has observed the extraordinary deligence
required by law.
In this case, the respective Insurers. as subrogees of the cargo
shippers, have proven that the transported goods have been lost.
Petitioner Carrier has also proved that the loss was caused by fire.
The burden then is upon Petitioner Carrier to proved that it has
exercised the extraordinary diligence required by law. In this
regard, the Trial Court, concurred in by the Appellate Court, made
the following Finding of fact:
The cargoes in question were, according to the
witnesses defendant placed in hatches No, 2 and 3 cf
the vessel, Boatswain Ernesto Pastrana noticed that
smoke was coming out from hatch No. 2 and hatch
No. 3; that where the smoke was noticed, the fire was
already big; that the fire must have started twentyfour 24) our the same was noticed; that carbon
dioxide was ordered released and the crew was
ordered to open the hatch covers of No, 2 tor
commencement of fire fighting by sea water: that all
of these effort were not enough to control the fire.
Pursuant to Article 1733, common carriers are bound
to extraordinary diligence in the vigilance over the
goods. The evidence of the defendant did not show
that extraordinary vigilance was observed by the
vessel to prevent the occurrence of fire at hatches
numbers 2 and 3. Defendant's evidence did not
likewise show he amount of diligence made by the

crew, on orders, in the care of the cargoes. What


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

are such as to show that Petitioner Carrier or its servants were


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

the Civil Code, steps in and supplements the Code by establishing a


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

limited Petitioner Carrier's liability to $500 per package and


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

of liability, Judge Beeks wrote, 414 F. Supp. at 907


(footnotes omitted):
Although this approach has not
completely escaped criticism, there is,
nonetheless, much to commend it. It
gives needed recognition to the
responsibility of the courts to construe
and apply the statute as enacted,
however great might be the temptation
to "modernize" or reconstitute it by
artful judicial gloss. If COGSA's package
limitation scheme suffers from internal
illness, Congress alone must undertake
the surgery. There is, in this regard,
obvious wisdom in the Ninth Circuit's
conclusion
in
Hartford
that
technological advancements, whether
or not forseeable by the COGSA
promulgators, do not warrant a
distortion or artificial construction of
the statutory term "package." A ruling
that these large reusable metal pieces
of transport equipment qualify as
COGSA packages at least where, as
here, they were carrier owned and
supplied would amount to just such
a distortion.
Certainly, if the individual crates or
cartons prepared by the shipper and
containing his goods can rightly be
considered "packages" standing by
themselves, they do not suddenly lose
that character upon being stowed in a
carrier's container. I would liken these
containers to detachable stowage
compartments of the ship. They simply
serve to divide the ship's overall cargo
stowage space into smaller, more

serviceable loci. Shippers' packages are


quite
literally
"stowed"
in
the
containers
utilizing
stevedoring
practices and materials analogous to
those employed in traditional on board
stowage.
In Yeramex International v. S.S. Tando,, 1977 A.M.C.
1807 (E.D. Va.) rev'd on other grounds, 595 F 2nd
943 (4 Cir. 1979), another district with many
maritime cases followed Judge Beeks' reasoning in
Matsushita and similarly rejected the functional
economics test. Judge Kellam held that when rolls of
polyester goods are packed into cardboard cartons
which are then placed in containers, the cartons and
not the containers are the packages.
xxx xxx xxx
The case of Smithgreyhound v. M/V Eurygenes, 18 followed the
Mitsui test:
Eurygenes concerned a shipment of stereo
equipment packaged by the shipper into cartons
which were then placed by the shipper into a carrierfurnished container. The number of cartons was
disclosed to the carrier in the bill of lading.
Eurygenes followed the Mitsui test and treated the
cartons, not the container, as the COGSA
packages.However, Eurygenes indicated that a
carrier could limit its liability to $500 per container if
the bill of lading failed to disclose the number of
cartons or units within the container, or if the parties
indicated, in clear and unambiguous language, an
agreement to treat the container as the package.
(Admiralty Litigation in Perpetuum: The
Continuing Saga of Package Limitations
and Third World Delivery Problems by
Chester D. Hooper & Keith L. Flicker,
published in Fordham International Law
Journal, Vol. 6, 1982-83, Number 1)
(Emphasis supplied)

In this case, the Bill of Lading (Exhibit "A") disclosed the following
data:
2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight
Prepaid
Say: Two (2) Containers Only.
Considering, therefore, that the Bill of Lading clearly disclosed the
contents of the containers, the number of cartons or units, as well
as the nature of the goods, and applying the ruling in
the Mitsui and Eurygenes cases it is clear that the 128 cartons, not
the two (2) containers should be considered as the shipping unit
subject to the $500 limitation of liability.
True, the evidence does not disclose whether the containers
involved herein were carrier-furnished or not. Usually, however,
containers are provided by the carrier. 19 In this case, the
probability is that they were so furnished for Petitioner Carrier was
at liberty to pack and carry the goods in containers if they were not
so packed. Thus, at the dorsal side of the Bill of Lading (Exhibit "A")
appears the following stipulation in fine print:
11. (Use of Container) Where the goods receipt of
which is acknowledged on the face of this Bill of
Lading are not already packed into container(s) at the
time of receipt, the Carrier shall be at liberty to pack
and carry them in any type of container(s).
The foregoing would explain the use of the estimate "Say: Two (2)
Containers Only" in the Bill of Lading, meaning that the goods could
probably fit in two (2) containers only. It cannot mean that the
shipper had furnished the containers for if so, "Two (2) Containers"
appearing as the first entry would have sufficed. and if there is any
ambiguity in the Bill of Lading, it is a cardinal principle in the
construction of contracts that the interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity. 20 This applies with even greater force in a contract of
adhesion where a contract is already prepared and the other party
merely adheres to it, like the Bill of Lading in this case, which is
draw. up by the carrier. 21

On Alleged Denial of Opportunity to Present Deposition of Its


Witnesses: (in G.R. No. 69044 only)
Petitioner Carrier claims that the Trial Court did not give it sufficient
time to take the depositions of its witnesses in Japan by written
interrogatories.
We do not agree. petitioner Carrier was given- full opportunity to
present its evidence but it failed to do so. On this point, the Trial
Court found:
xxx xxx xxx
Indeed, since after November 6, 1978, to August 27,
1979, not to mention the time from June 27, 1978,
when its answer was prepared and filed in Court, until
September 26, 1978, when the pre-trial conference
was conducted for the last time, the defendant had
more than nine months to prepare its evidence. Its
belated notice to take deposition on written
interrogatories of its witnesses in Japan, served upon
the plaintiff on August 25th, just two days before the
hearing set for August 27th, knowing fully well that it
was its undertaking on July 11 the that the deposition
of the witnesses would be dispensed with if by next
time it had not yet been obtained, only proves the
lack of merit of the defendant's motion for
postponement, for which reason it deserves no
sympathy from the Court in that regard. The
defendant has told the Court since February 16,
1979, that it was going to take the deposition of its
witnesses in Japan. Why did it take until August 25,
1979, or more than six months, to prepare its written
interrogatories. Only the defendant itself is to blame
for its failure to adduce evidence in support of its
defenses.
xxx xxx xxx 22
Petitioner Carrier was afforded ample time to present its side of the
case. 23 It cannot complain now that it was denied due process
when the Trial Court rendered its Decision on the basis of the
evidence adduced. What due process abhors is absolute lack of
opportunity to be heard.24

On the Award of Attorney's Fees:


Petitioner Carrier questions the award of attorney's fees. In both
cases, respondent Court affirmed the award by the Trial Court of
attorney's fees of P35,000.00 in favor of Development Insurance in
G.R. No. 69044, and P5,000.00 in favor of NISSHIN and DOWA in
G.R. No. 71478.
Courts being vested with discretion in fixing the amount of
attorney's fees, it is believed that the amount of P5,000.00 would
be more reasonable in G.R. No. 69044. The award of P5,000.00 in
G.R. No. 71478 is affirmed.
WHEREFORE, 1) in G.R. No. 69044, the judgment is modified in that
petitioner Eastern Shipping Lines shall pay the Development
Insurance and Surety Corporation the amount of P256,039 for the
twenty-eight (28) packages of calorized lance pipes, and P71,540
for the seven (7) cases of spare parts, with interest at the legal rate
from the date of the filing of the complaint on June 13, 1978, plus
P5,000 as attorney's fees, and the costs.
2) In G.R.No.71478,the judgment is hereby affirmed.
SO ORDERED.

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


ESTRELLITA M. BASCOS, petitioners,
vs.
COURT OF APPEALS and RODOLFO A. CIPRIANO,
respondents.
Modesto S. Bascos for petitioner.
Pelaez, Adriano & Gregorio for private respondent.
SYLLABUS
1. CIVIL LAW; COMMON CARRIERS; DEFINED; TEST TO DETERMINE
COMMON CARRIER. Article 1732 of the Civil Code defines a
common carrier as "(a) person, corporation or firm, or association
engaged in the business of carrying or transporting passengers or
goods or both, by land, water or air, for compensation, offering
their services to the public." The test to determine a common

carrier is "whether the given undertaking is a part of the business


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

Court of Appeals, the Court held that hijacking, not being included
in the provisions of Article 1734, must be dealt with under the
provisions of Article 1735 and thus, the common carrier is
presumed to have been at fault or negligent. To exculpate the
carrier from liability arising from hijacking, he must prove that the
robbers or the hijackers acted with grave or irresistible threat,
violence, or force. This is in accordance with Article 1745 of the
Civil Code which provides: "Art. 1745. Any of the following or
similar stipulations shall be considered unreasonable, unjust and
contrary to public policy . . . (6) That the common carrier's liability
for acts committed by thieves, or of robbers who do not act with
grave or irresistible threat, violences or force, is dispensed with or
diminished"; In the same case, the Supreme Court also held that:
"Under Article 1745 (6) above, a common carrier is held responsible
and will not be allowed to divest or to diminish such
responsibility even for acts of strangers like thieves or robbers,
except where such thieves or robbers in fact acted "with grave of
irresistible threat, violence of force," We believe and so hold that
the limits of the duty of extraordinary diligence in the vigilance
over the goods carried are reached where the goods are lost as a
result of a robbery which is attended by "grave or irresistible threat,
violence or force."
4. REMEDIAL LAW; EVIDENCE; JUDICIAL ADMISSIONS CONCLUSIVE.
In this case, petitioner herself has made the admission that she
was in the trucking business, offering her trucks to those with cargo
to move. Judicial admissions are conclusive and no evidence is
required to prove the same.
5. ID.; ID.; BURDEN OF PROOF RESTS WITH PARTY WHO ALLEGES A
FACT. Petitioner presented no other proof of the existence of the
contract of lease. He who alleges a fact has the burden of proving
it.
6. ID.; ID.; AFFIDAVITS NOT CONSIDERED BEST EVIDENCE IF
AFFIANTS AVAILABLE AS WITNESSES. While the affidavit of
Juanito Morden, the truck helper in the hijacked truck, was
presented as evidence in court, he himself was a witness as could
be gleaned from the contents of the petition. Affidavits are not
considered the best evidence if the affiants are available as
witnesses.

7. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT IS WHAT


LAW DEFINES IT TO BE. Granting that the said evidence were not
self-serving, the same were not sufficient to prove that the contract
was one of lease. It must be understood that a contract is what the
law defines it to be and not what it is called by the contracting
parties.
DECISION
CAMPOS, JR., J p:
This is a petition for review on certiorari of the decision ** of the
Court of Appeals in "RODOLFO A. CIPRIANO, doing business under
the name CIPRIANO TRADING ENTERPRISES plaintiff-appellee, vs.
ESTRELLITA M. BASCOS, doing business under the name of BASCOS
TRUCKING, defendant-appellant," C.A.-G.R. CV No. 25216, the
dispositive portion of which is quoted hereunder:
"PREMISES considered, We find no reversible error in the decision
appealed from, which is hereby affirmed in toto. Costs against
appellant." 1
The facts, as gathered by this Court, are as follows:
Rodolfo A. Cipriano representing Cipriano Trading Enterprise
(CIPTRADE for short) entered into a hauling contract 2 with Jibfair
Shipping Agency Corporation whereby the former bound itself to
haul the latter's 2,000 m/tons of soya bean meal from Magallanes
Drive, Del Pan, Manila to the warehouse of Purefoods Corporation in
Calamba, Laguna. To carry out its obligation, CIPTRADE, through
Rodolfo Cipriano, subcontracted with Estrellita Bascos (petitioner)
to transport and to deliver 400 sacks of soya bean meal worth
P156,404.00 from the Manila Port Area to Calamba, Laguna at the
rate of P50.00 per metric ton. Petitioner failed to deliver the said
cargo. As a consequence of that failure, Cipriano paid Jibfair
Shipping Agency the amount of the lost goods in accordance with
the contract which stated that:
"1. CIPTRADE shall be held liable and answerable for any loss in
bags due to theft, hijacking and non-delivery or damages to the
cargo during transport at market value, . . ." 3
Cipriano demanded reimbursement from petitioner but the latter
refused to pay. Eventually, Cipriano filed a complaint for a sum of
money and damages with writ of preliminary attachment 4 for
breach of a contract of carriage. The prayer for a Writ of Preliminary

Attachment was supported by an affidavit 5 which contained the


following allegations:
"4. That this action is one of those specifically mentioned in Sec. 1,
Rule 57 the Rules of Court, whereby a writ of preliminary
attachment may lawfully issue, namely:
"(e) in an action against a party who has removed or disposed of
his property, or is about to do so, with intent to defraud his
creditors;"
5. That there is no sufficient security for the claim sought to be
enforced by the present action;
6. That the amount due to the plaintiff in the above-entitled case is
above all legal counterclaims;"
The trial court granted the writ of preliminary attachment on
February 17, 1987.
In her answer, petitioner interposed the following defenses: that
there was no contract of carriage since CIPTRADE leased her cargo
truck to load the cargo from Manila Port Area to Laguna; that
CIPTRADE was liable to petitioner in the amount of P11,000.00 for
loading the cargo; that the truck carrying the cargo was hijacked
along Canonigo St., Paco, Manila on the night of October 21, 1988;
that the hijacking was immediately reported to CIPTRADE and that
petitioner and the police exerted all efforts to locate the hijacked
properties; that after preliminary investigation, an information for
robbery and carnapping were filed against Jose Opriano, et al.; and
that hijacking, being a force majeure, exculpated petitioner from
any liability to CIPTRADE.
After trial, the trial court rendered a decision *** the dispositive
portion of which reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendant ordering the latter to pay the former:
1. The amount of ONE HUNDRED FIFTY-SIX THOUSAND FOUR
HUNDRED FOUR PESOS (P156,404.00) as an (sic) for actual
damages with legal interest of 12% per cent per annum to be
counted from December 4, 1986 until fully paid;
2. The amount of FIVE THOUSAND PESOS (P5,000.00) as and for
attorney's fees; and
3. The costs of the suit.

The "Urgent Motion To Dissolve/Lift preliminary Attachment" dated


March 10, 1987 filed by defendant is DENIED for being moot and
academic.
SO ORDERED." 6
Petitioner appealed to the Court of Appeals but respondent Court
affirmed the trial court's judgment.
Consequently, petitioner filed this petition where she makes the
following assignment of errors; to wit:
"I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE
CONTRACTUAL RELATIONSHIP BETWEEN PETITIONER AND PRIVATE
RESPONDENT WAS CARRIAGE OF GOODS AND NOT LEASE OF
CARGO TRUCK.
II. GRANTING, EX GRATIA ARGUMENTI, THAT THE FINDING OF THE
RESPONDENT COURT THAT THE CONTRACTUAL RELATIONSHIP
BETWEEN PETITIONER AND PRIVATE RESPONDENT WAS CARRIAGE
OF GOODS IS CORRECT, NEVERTHELESS, IT ERRED IN FINDING
PETITIONER LIABLE THEREUNDER BECAUSE THE LOSS OF THE
CARGO WAS DUE TO FORCE MAJEURE, NAMELY, HIJACKING.
III. THE RESPONDENT COURT ERRED IN AFFIRMING THE FINDING OF
THE TRIAL COURT THAT PETITIONER'S MOTION TO DISSOLVE/LIFT
THE WRIT OF PRELIMINARY ATTACHMENT HAS BEEN RENDERED
MOOT AND ACADEMIC BY THE DECISION OF THE MERITS OF THE
CASE." 7
The petition presents the following issues for resolution: (1) was
petitioner a common carrier?; and (2) was the hijacking referred to
a force majeure?
The Court of Appeals, in holding that petitioner was a common
carrier, found that she admitted in her answer that she did business
under the name A.M. Bascos Trucking and that said admission
dispensed with the presentation by private respondent, Rodolfo
Cipriano, of proofs that petitioner was a common carrier. The
respondent Court also adopted in toto the trial court's decision that
petitioner was a common carrier, Moreover, both courts
appreciated the following pieces of evidence as indicators that
petitioner was a common carrier: the fact that the truck driver of
petitioner, Maximo Sanglay, received the cargo consisting of 400
bags of soya bean meal as evidenced by a cargo receipt signed by
Maximo Sanglay; the fact that the truck helper, Juanito Morden,

was also an employee of petitioner; and the fact that control of the
cargo was placed in petitioner's care.
In disputing the conclusion of the trial and appellate courts that
petitioner was a common carrier, she alleged in this petition that
the contract between her and Rodolfo A. Cipriano, representing
CIPTRADE, was lease of the truck. She cited as evidence certain
affidavits which referred to the contract as "lease". These affidavits
were made by Jesus Bascos 8 and by petitioner herself. 9 She
further averred that Jesus Bascos confirmed in his testimony his
statement that the contract was a lease contract. 10 She also
stated that: she was not catering to the general public. Thus, in her
answer to the amended complaint, she said that she does business
under the same style of A.M. Bascos Trucking, offering her trucks
for lease to those who have cargo to move, not to the general
public but to a few customers only in view of the fact that it is only
a small business. 11
We agree with the respondent Court in its finding that petitioner is
a common carrier.
Article 1732 of the Civil Code defines a common carrier as "(a)
person, corporation or firm, or association engaged in the business
of carrying or transporting passengers or goods or both, by land,
water or air, for compensation, offering their services to the public."
The test to determine a common carrier is "whether the given
undertaking is a part of the business engaged in by the carrier
which he has held out to the general public as his occupation rather
than the quantity or extent of the business transacted." 12 In this
case, petitioner herself has made the admission that she was in the
trucking business, offering her trucks to those with cargo to move.
Judicial admissions are conclusive and no evidence is required to
prove the same. 13
But petitioner argues that there was only a contract of lease
because they offer their services only to a select group of people
and because the private respondents, plaintiffs in the lower court,
did not object to the presentation of affidavits by petitioner where
the transaction was referred to as a lease contract.
Regarding the first contention, the holding of the Court in De
Guzman vs. Court of Appeals 14 is instructive. In referring to Article
1732 of the Civil Code, it held thus:

"The above article makes no distinction between one whose


principal business activity is the carrying of persons or goods or
both, and one who does such carrying only as an ancillary activity
(in local idiom, as a "sideline"). Article 1732 also carefully avoids
making any distinction between a person or enterprise offering
transportation service on a regular or scheduled basis and one
offering such service on an occasional, episodic or unscheduled
basis. Neither does Article 1732 distinguish between a carrier
offering its services to the "general public," i.e., the general
community or population, and one who offers services or solicits
business only from a narrow segment of the general population. We
think that Article 1732 deliberately refrained from making such
distinctions."
Regarding the affidavits presented by petitioner to the court, both
the trial and appellate courts have dismissed them as self-serving
and petitioner contests the conclusion. We are bound by the
appellate court's factual conclusions. Yet, granting that the said
evidence were not self-serving, the same were not sufficient to
prove that the contract was one of lease. It must be understood
that a contract is what the law defines it to be and not what it is
called by the contracting parties. 15 Furthermore, petitioner
presented no other proof of the existence of the contract of lease.
He who alleges a fact has the burden of proving it. 16
Likewise, We affirm the holding of the respondent court that the
loss of the goods was not due to force majeure.
Common carriers are obliged to observe extraordinary diligence in
the vigilance over the goods transported by them. 17 Accordingly,
they are presumed to have been at fault or to have acted
negligently if the goods are lost, destroyed or deteriorated. 18
There are very few instances when the presumption of negligence
does not attach and these instances are enumerated in Article
1734. 19 In those cases where the presumption is applied, the
common carrier must prove that it exercised extraordinary
diligence in order to overcome the presumption.
In this case, petitioner alleged that hijacking constituted force
majeure which exculpated her from liability for the loss of the
cargo. In De Guzman vs. Court of Appeals, 20 the Court held that
hijacking, not being included in the provisions of Article 1734, must

be dealt with under the provisions of Article 1735 and thus, the
common carrier is presumed to have been at fault or negligent. To
exculpate the carrier from liability arising from hijacking, he must
prove that the robbers or the hijackers acted with grave or
irresistible threat, violence, or force. This is in accordance with
Article 1745 of the Civil Code which provides:
"Art. 1745. Any of the following or similar stipulations shall be
considered unreasonable, unjust and contrary to public policy;
xxx xxx xxx
(6) That the common carrier's liability for acts committed by
thieves, or of robbers who do not act with grave or irresistible
threat, violences or force, is dispensed with or diminished;"
In the same case, 21 the Supreme Court also held that:
"Under Article 1745 (6) above, a common carrier is held responsible
and will not be allowed to divest or to diminish such
responsibility even for acts of strangers like thieves or robbers
except where such thieves or robbers in fact acted with grave or
irresistible threat, violence or force. We believe and so hold that the
limits of the duty of extraordinary diligence in the vigilance over
the goods carried are reached where the goods are lost as a result
of a robbery which is attended by "grave or irresistible threat,
violence or force."
To establish grave and irresistible force, petitioner presented her
accusatory affidavit, 22 Jesus Bascos' affidavit, 23 and Juanito
Morden's 24 "Salaysay". However, both the trial court and the Court
of Appeals have concluded that these affidavits were not enough to
overcome the presumption. Petitioner's affidavit about the hijacking
was based on what had been told her by Juanito Morden. It was not
a first-hand account. While it had been admitted in court for lack of
objection on the part of private respondent, the respondent Court
had discretion in assigning weight to such evidence. We are bound
by the conclusion of the appellate court. In a petition for review on
certiorari, We are not to determine the probative value of evidence
but to resolve questions of law. Secondly, the affidavit of Jesus
Bascos did not dwell on how the hijacking took place. Thirdly, while
the affidavit of Juanito Morden, the truck helper in the hijacked
truck, was presented as evidence in court, he himself was a witness
as could be gleaned from the contents of the petition. Affidavits are

not considered the best evidence if the affiants are available as


witnesses. 25 The subsequent filing of the information for
carnapping and robbery against the accused named in said
affidavits did not necessarily mean that the contents of the
affidavits were true because they were yet to be determined in the
trial of the criminal cases.
The presumption of negligence was raised against petitioner. It was
petitioner's burden to overcome it. Thus, contrary to her assertion,
private respondent need not introduce any evidence to prove her
negligence. Her own failure to adduce sufficient proof of
extraordinary diligence made the presumption conclusive against
her.
Having affirmed the findings of the respondent Court on the
substantial issues involved, We find no reason to disturb the
conclusion that the motion to lift/dissolve the writ of preliminary
attachment has been rendered moot and academic by the decision
on the merits.
In the light of the foregoing analysis, it is Our opinion that the
petitioner's claim cannot be sustained. The petition is DISMISSED
and the decision of the Court of Appeals is hereby AFFIRMED.
SO ORDERED.

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


SABENA BELGIAN WORLD AIRLINES, petitioner, vs. HON.
COURT OF APPEALS and MA. PAULA SAN
AGUSTIN,respondents.
VITUG, J.:
The appeal before the Court involves the issue of an airlines
liability for lost luggage. The petition for review assails the decision
of the Court Appeals,[1] dated 27 February 1992, affirming an
award of damages made by the trial court in a complaint filed by
private respondent against petitioner.
The factual background of the case, narrated by the trial court
and reproduced at length by the appellate court, is hereunder
quoted:
On August 21, 1987, plaintiff was a passenger on board Flight SN
284 of defendant airline originating from Casablanca to Brussels,
Belgium on her way back to Manila. Plaintiff checked in her luggage
which contained her valuables, namely: jewelries valued at
$2,350.00;
clothes
$1,500.00;
shoes/bag
$150;
accessories $75; luggage itself $10.00; or a total of $4,265.00, for
which she was issued Tag No. 71423. She stayed overnight in
Brussels and her luggage was left on board Flight SN 284.
Plaintiff arrived at Manila International Airport on September 2,
1987 and immediately submitted her Tag No. 71423 to facilitate the
release of her luggage hut the luggage was missing. She was
advised to accomplish and submit a property Irregularity Report
which she submitted and filed on the same day.
She followed up her claim on September 14, 1987 but the luggage
remained to be missing.
On September 15, 1987, she filed her formal complaint with the
office of Ferge Massed, defendants Local Manager, demanding
immediate attention (Exh. A).

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


her luggage claim, she was furnished copies of defendants telexes
with an information that the Brussels Office of defendant found the
luggage and that they have broken the locks for identification
(Exhibit B). Plaintiff was assured by the defendant that it has
notified its Manila Office that the luggage will be shipped to Manila
on October 27, 1987. But unfortunately plaintiff was informed that
the luggage was lost for the second time (Exhibits C and C-1).
At the time of the filling of the complaint, the luggage with its
content has not been found.
Plaintiff demanded from the defendant the money value of the
luggage and its contents amounting to $4,265.00 or its exchange
value, but defendant refused to settle the claim.
Defendant asserts in its Answer and its evidence tend to show that
while it admits that the plaintiff was a passenger on board Flight
No. SN 284 with a piece of checked in luggage bearing Tag No.
71423, the loss of the luggage was due to plaintiffs sole if not
contributory negligence; that she did not declare the valuable items
in her checked-in luggage at the flight counter when she checked in
for her flight from Casablanca to Brussels so that either the
representative of the defendant at the counter would have advised
her to secure an insurance on the alleged valuable items and
required her to pay additional charges, or would have refused
acceptance of her baggage as required by the generally accepted
practices of international carriers; that Section 9(a), Article IX of
General Conditions of carriage requiring passengers to collect their
checked baggage at the place of stopover, plaintiff neglected to
claim her baggage at the Brussels Airport; that plaintiff should have
retrieved her undeclared valuables from her baggage at the
Brussels Airport since her flight from Brussels to Manila will still
have to visit for confirmation inasmuch as only her flight from
Casablanca to Brussels was confirmed; that defendant incorporated
in all Sabena Plane Tickets, including Sabena Ticket No. 08242272502241 issued to plaintiff in Manila on August 21, 1987, a
warning that Items of value should be carried on your person and
that some carriers assume no liability for fragile, valuable or
perishable articles and that further information may he obtained
from the carrier for guidance; that granting without conceding that

defendant is liable, its liability is limited only to US $20.00 per kilo


due to plaintiffs failure to declare a higher value on the contents of
her checked in luggage and pay additional charges thereon.[2]
The trial court rendered judgment ordering petitioner Sabena
Belgian World Airlines to pay private respondent Ma. Paula San
Agustin
(a) x x x US$4,265.00 or its legal exchange in Philippine pesos;
(b) x x x P30,000.00 as moral damages;
(c) x x x P10,000.00 as exemplary damages;
(d) x x x P10,000.00 attorneys fees; and
(e) (t)he costs of the suit.[3]
Sabena appealed the decision of the Regional Trial Court to the
Court of Appeals. The appellate court, in its decision of 27 February
1992, affirmed in toto the trial courts judgment.
Petitioner airline company, in contending that the alleged
negligence of private respondent should be considered the primary
cause for the loss of her luggage, avers that, despite her awareness
that the flight ticket had been confirmed only for Casablanca and
Brussels, and that her flight from Brussels to Manila had yet to be
confirmed, she did not retrieve the luggage upon arrival in
Brussels. Petitioner insists that private respondent, being a
seasoned international traveler, must have likewise been familiar
with the standard provisions contained in her flight ticket that items
of value are required to be hand-carried by the passenger and that
the liability of the airline or loss, delay or damage to baggage
would be limited, in any event, to only US$20.00 per kilo unless a
higher value is declared in advance and corresponding additional
charges are paid thereon. At the Casablanca International Airport,
private respondent, in checking in her luggage, evidently did not
declare its contents or value. Petitioner cites Section 5(c), Article IX,
of the General Conditions of Carriage, signed at Warsaw, Poland, on
02 October 1929, as amended by the Hague Protocol
of 1955, generally observed by International carriers, stating,
among other things, that:
Passengers shall not include in his checked baggage, and the
carrier may refuse to carry as checked baggage, fragile or

perishable articles, money, jewelry, precious metals, negotiable


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

Not one of the above excepted causes obtains in this case.[5]


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

luggage. The loss of said baggage not only once by twice, said the
appellate court, underscores the wanton negligence and lack of
care on the part of the carrier.
The above findings, which certainly cannot be said to be without
basis, foreclose whatever rights petitioner might have had to the
possible limitation of liabilities enjoyed by international air carriers
under the Warsaw Convention (Convention for the Unification of
Certain Rules Relating to International Carriage by Air, as amended
by the Hague Protocol of 1955, the Montreal Agreement of 1966,
the Guatemala Protocol of 1971 and the Montreal Protocols of
1975). In Alitalia vs. Intermediate Appellate Court,[8] now Chief
Justice Andres R. Narvasa, speaking for the Court, has explained it
well; he said:
The Warsaw Convention however denies to the carrier availment of
the provisions which exclude or limit his liability, if the damage is
caused by his wilful misconduct or by such default on his part as, in
accordance with the law of the court seized of the case, is
considered to be equivalent to wilful misconduct, or if the damage
is (similarly) caused x x x by any agent of the carrier acting within
the scope of his employment. The Hague Protocol amended the
Warsaw Convention by removing the provision that if the airline
took all necessary steps to avoid the damage, it could exculpate
itself completely, and declaring the stated limits of liability not
applicable if it is proved that the damage resulted from an act or
omission of the carrier, its servants or agents, done with intent to
cause damage or recklessly and with knowledge that damage
would probably result. The same deletion was effected by the
Montreal Agreement of 1966, with the result that a passenger could
recover unlimited damages upon proof of wilful misconduct.
The Convention does not thus operate as an exclusive enumeration
of the instances of an airlines liability, or as an absolute limit of the
extent of that liability.Such a proposition is not borne out by the
language of the Convention, as this Court has now, and at an
earlier time, pointed out. Moreover, slight reflection readily leads to
the conclusion that it should be deemed a limit of liability only in
those cases where the cause of the death or injury to person, or
destruction, loss or damage to property or delay in its transport is
not attributable to or attended by any wilful misconduct, bad faith,

recklessness or otherwise improper conduct on the part of any


official or employee for which the carrier is responsible, and there is
otherwise no special or extraordinary form of resulting injury.The
Contentions provisions, in short, do not regulate or exclude liability
for other breaches of contract by the carrier or misconduct of its
officers and employees, or for some particular or exceptional type
of damage. Otherwise, an air carrier would be exempt from any
liability for damages in the event of its absolute refusal, in bad
faith, to comply with a contract of carriage, which is absurd. Nor
may it for a moment be supposed that if a member of the aircraft
complement should inflict some physical injury on a passenger, or
maliciously destroy or damage the latters property, the Convention
might successfully be pleaded as the sole gauge to determine the
carriers liability to the passenger. Neither may the Convention be
invoked to justify the disregard of some extraordinary sort of
damage resulting to a passenger and preclude recovery therefor
beyond the limits set by said Convention. It is in this sense that the
Convention has been applied, or ignored, depending on the peculiar
facts presented by each case.
The Court thus sees no error in the preponderant application to
the instant case by the appellate court, as well as by the trial court,
of the usual rules on the extent of recoverable damages beyond the
Warsaw limitations. Under domestic law and jurisprudence (the
Philippines being the country of destination), the attendance of
gross negligence (given the equivalent of fraud or bad faith) holds
the common carrier liable for all damages which can be reasonably
attributed, although unforeseen, to the non-performance of the
obligation,[9] including moral and exemplary damages.[10]
WHEREFORE, the decision appealed from is AFFIRMED. Costs
against petitioner.
SO ORDERED.