TRANSPORTATION AND PUBLIC UTILITIES3RD ASSIGNMENT

I. Topics

A. Common Provisions (Articles 1764 to 1766 of the New Civil Code)

Cases:Mara 1. Philippine Rabbit Bus Lines vs IAC 189 SCRA 158Ronald 2. Brinas vs People 125 SCRA 687Vaugn 3. Pangasinan Transportation Co., vs Legaspi 12 SCRA 592Encarnacion 4. Air France vs Carrascoso 18 SCRA 155lumanglas 5. Pan American Airways vs IAC 186 SCRA 687Ruedas 6. Fortune Express, Inc. vs CA 305 SCRA 14

7. Zulueta vs Pan-Am 49 SCRA 18. Korean Airlines Co., Ltd vs CA 154 SCRA 2119. Philippine Airlines, Inc. vs CA 188 SCRA 46110. Cervantes vs CA 304 SCRA 25

B. Air Transportation (Warsaw Convention)

Cases:1. Santos III vs Northwest Orient Airlines 210 SCRA 2562. Cathay Pacific Airways Ltd. Vs CA 219 SCRA 5203. Philippine Airlines, Inc. vs CA 257 SCRA 334. Mapa vs CA 275 SCRA 2865. Sabena Belgian World Airlines vs CA 255 SCRA 386. PAL vs CA 255 SCRA 487. KLM vs CA 65 SCRA 2378. Cathay vs Vasquez 399 SCRA 2079. Northwest Airlines vs Cuenca 14 SCRA 106310. PAL vs CA 214 SCRA 262

II. References:1. New Civil Code of the Philippines2. The Law on Transportation by Rufus B. Rodriguez3. Transportation Laws and Public Service Act by Hernando B. Perez4. Bar Review Materials in Commercial Law (13th edition) by Jorge V.

Miravite

Atty. Edgard E. Valdez, RME

SYNOPSIS

 Petitioner Fortune Express, Inc.  is a bus company in Northern Mindanao.  On November 18, 1989, one of its buses collided with a jeepney owned by a Maranao which resulted in the death of several passengers of the jeepney including two Maranaos.  In relation thereto, the Philippine Constabulary of Cagayan de Oro warned the petitioner, through its operations manager Diosdado Bravo, that the Maranaos were planning to take revenge on the petitioner by burning some of its buses.  Bravo assured them that the necessary precautions to ensure the safety of lives and properties of the passengers would be taken.  On November 22, 1989, three armed Maranaos who pretended to be passengers, seized and burned the bus of the petitioner at Linamon, Lanao del Norte while on its way to Iligan City which resulted in the death one of its passengers, Atty.  Talib Caorong.  Thus the heirs of Atty. Caorong filed before the Regional Trial Court, Branch VI, Iligan City a complaint for damages for breach of contract of carriage against the petitioner.   The trial court dismissed the complaint.  However, the Court of Appeals reversed the decision of the trial court.

 Hence, this petition for review.

 Article 1763 of the Civil Code provides that a common carrier is responsible for injuries suffered by a passenger on account of the wilful acts of other passengers, if the employees of the common carrier could have prevented the act through the exercise of the diligence of a good father of a family.  In the present case, it is clear that because of the negligence of petitioner’s employees, the seizure of the bus by Manggolo and his men was made possible.  Despite warning by the Philippine Constabulary at Cagayan de Oro that the Maranaos were planning to take revenge on the petitioner by burning some of its buses and the assurance of petitioner’s operations manager, Diosdado Bravo, that the necessary precautions would be taken, petitioner did nothing to protect the safety of its passengers.  Had petitioner and its employees been vigilant, they would not have filed to see that the malefactors had a large quantity of gasoline with

them.  Under the circumstances, simple precautionary measures to protect the safety of passengers, such as frisking passengers and inspecting their baggages, preferably with non-intrusive gadgets such as metal detectors, before allowing them on board could have been employed without violating the passenger’s constitutional rights.

 The decision of the Court of Appeals was AFFIRMED.

 SYLLABUS

 1. CIVIL LAW; SPECIAL CONTRACTS; COMMON CARRIER; RESPONSIBLE FOR INJURIES SUFFERED BY A PASSENGER ON ACCOUNT OF THE WILFUL ACTS OF OTHER PASSENGERS. - Article 1763 of the Civil Code provides that a common carrier is responsible for injuries suffered by a passenger on account of the wilful acts of other passengers, if the employees of the common carrier could have prevented the act through the exercise of the diligence of a good father of a family. 

 2. ID.; ID.; ID.; CASE AT BAR.- In the present case, it is clear that because of the negligence of petitioner's employees, the seizure of the bus by Mananggolo and his men was made possible.  Despite warning by the Philippine Constabulary at Cagayan de Oro that the Maranaos were planning to take revenge on the petitioner by burning some of its buses and the assurance of petitioner's operation manager, Diosdado Bravo, that the necessary precautions would be taken, petitioner did nothing to protect the safety of its passengers.  Had petitioner and its employees been vigilant they would not have failed to see that the malefactors had a large quantity of gasoline with them.   Under the circumstances, simple precautionary measures to protect the safety of passengers, such as frisking passengers and inspecting their baggages, preferably with non-intrusive gadgets such as metal detectors, before allowing them on board could have been employed without violating the passenger's constitutional rights.

 3. ID.; OBLIGATIONS AND CONTRACTS; FORTUITOUS EVENT; DEFINED. - Article 1174 of the Civil Code defines a fortuitous event as an occurrence which could not be foreseen or which though foreseen, is inevitable.  In Yobido v. Court of Appeals, we held that to be considered as fore majeure, it is necessary that: (1) the cause of the breach of the obligation must be independent of the human will; (2) the even must be either unforeseeable or unavoidable; (3) the occurrence must be such as to render it impossible for the debtor to fulfill the obligation in a normal manner; and (4) the obligor must be free of participation in, or aggravation of, the injury to the creditor.  The absence of any of the requisites mentioned above would prevent the obligor from being excused from liability.

 4. ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. - Thus, in Vasquez v. Court of Appeals, it was held that the common carrier was liable for its failure to take necessary precautions against an approaching typhoon, of which it was warned, resulting in the loss of the lives of several passengers.  The event was foreseeable, and, thus, the second requisite mentioned above was not fulfilled.  This ruling applies by analogy to the present case.  Despite the report of PC agent Generalao that the Maranaos were going to attack its buses, petitioner took no steps to safeguard the lives and properties of its passengers.  The seizure of the bus of the petitioner was foreseeable and, therefore, was not a fortuitous event which would exempt petitioner from liability.

 5. ID.; ID.; DAMAGES; DECEASED NOT GUILTY OF CONTRIBUTORY NEGLIGENCE. - The petitioner contends that Atty. Caorong was guilty of contributory negligence in returning to the bus to retrieve something.  But Atty. Caorong did not act recklessly.  It should be pointed out that the intended targets of the violence were petitioner and its employees, not its passengers.  The assailant's motive was to retaliate for the loss of life of two Maranaos as a result of the collision between petitioner's bus and the jeepney in which the two Maranaos were riding.  Mananggolo, the leader of the group which had hijacked the bus, ordered the passengers to get off the bus as they intended to burned it and its driver.  The armed men actually allowed Atty. Caorong to retrieve something from the bus.  What apparently angered them was his attempt to help the driver of the bus by pleading for his life.  He was playing the role of the good Samaritan.  Certainly, this act cannot be considered an act of negligence, let alone recklessness.

 6. ID.; ID.; ID.; INDEMNITY FOR DEATH. - Article 1764 of the Civil Code, in relation to Art. 2206 thereof, provides for the payment of indemnity for the death of passengers caused by the breach of contract of carriage by a common carrier.  Initially fixed in Art. 2206 at P3,000.00, the amount of the said indemnity for death has through the years been gradually increased in view of the declining value of the peso.  It is presently fixed at P50,000.00.  Private respondents are entitled to this amount.

 7. ID.; ID.; ID.; ACTUAL DAMAGES; CASE AT BAR. _ Article 2199 provides that except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved.  The trial court found that the private respondents spent P30,000.00 for the wake and burial of Atty.  Caorong.  Since petitioner does not question this finding of the trial court, it is liable to private respondents in the said amount as actual damages.

 8. ID.; ID.; ID.; MORAL DAMAGES. - Under Art. 2206, the spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral damages for mental anguish by reason of the death of the deceased. The trial Court found that private respondent Paulie Caorong suffered pain from the death of her husband and worry on how to provide support for their minor children, private respondents Yasser King, Rose Heinni, and Prince Alexander.  The petitioner likewise does not question this finding of the trial court.  Thus, in accordance with recent decisions of this Court, we hold that the petitioner is liable to the private respondents in the amount of  P100,000.00 as moral damages for the death of Atty. Caorong.

 9. ID.; ID.; ID.; EXEMPLARY DAMAGES. - Article 2232 provides that in contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent

manner.  In the present case, the petitioner acted in a wanton and reckless manner.  Despite warning that the Maranaos were planning to take revenge against the petitioner by burning some of its buses, and contrary to the assurance made by its operations manager that the necessary precautions would be taken, the petitioner and its employees did not nothing to protect the safety of passengers.  Under the circumstances, we deem it reasonable to award private respondents exemplary damages in the amount ofP100,000.00.

 10. ID.; ID.; ID.; ATTORNEY'S FEES MAY BE RECOVERED WHEN EXEMPLARY DAMAGES ARE AWARDED. - Pursuant to Art. 2208, attorney's fees may be recovered when, as in the instant case, exemplary damages are awarded .  In the recent case of Sulpicio Lines, Inc. v. Court of Appeals, we held an award of P50,000.00 as attorney's fees to be reasonable.  Hence, the private respondents are entitled to attorney's fees in that amount.

 11. ID.; ID.; ID.; COMPENSATION FOR LOSS OF EARNING CAPACITY. - Article 1764 of the Civil Code, in relation to Art. 2206 thereof, provides that in addition to the indemnity for death arising from the breach of contract of carriage by a common carrier, the defendant shall be liable for the loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of the latter.  The formula established in decided cases for computing net earning capacity is as follows: Net Earning Capacity = Life Expectancy x [Gross Annual Income - Necessary Living Expenses] Life expectancy is equivalent to two thirds (2/3) multiplied by the difference of eighty (80) and the age of the deceased.

SECOND DIVISION

[G.R. No. 119756.  March 18, 1999]

FORTUNE EXPRESS, INC., petitioner, vs. COURT OF APPEALS, PAULIE U. CAORONG, and minor children YASSER KING CAORONG, ROSE HEINNI and PRINCE ALEXANDER, all surnamed CAORONG, and represented by their mother PAULIE U. CAORONG, respondents.

D E C I S I O N

MENDOZA, J.:

This is an appeal by petition for review on certiorari of the decision, dated July 29, 1994, of the Court of Appeals, which reversed the decision of the Regional Trial Court, Branch VI, Iligan City.  The aforesaid decision of the trial court dismissed the complaint of private respondents against petitioner for damages for breach of contract of carriage filed on the ground that petitioner had not exercised the required degree of diligence in the operation of one of its buses.   Atty. Talib Caorong, whose heirs are private respondents herein, was a passenger of the bus and was killed in the ambush involving said bus.

The facts of the instant case are as follows:

Petitioner is a bus company in northern Mindanao.  Private respondent Paulie Caorong is the widow of Atty. Caorong, while private respondents Yasser King, Rose Heinni, and Prince Alexander are their minor children.

On November 18, 1989, a bus of petitioner figured in an accident with a jeepney in Kauswagan, Lanao del Norte, resulting in the death of several passengers of the jeepney, including two Maranaos.  Crisanto Generalao, a volunteer field agent of the Constabulary Regional Security Unit No. X, conducted an investigation of the accident.   He found that the owner of the jeepney was a Maranao residing in Delabayan, Lanao del Norte and that certain Maranaos were planning to take revenge on the petitioner by burning some of its buses.  Generalao rendered a report on his findings to Sgt. Reynaldo Bastasa of the Philippine Constabulary Regional Hearquarters at Cagayan de Oro.  Upon the instruction of Sgt. Bastasa, he went to see Diosdado Bravo, operations manager of petitioner, at its main office in Cagayan de Oro City.  Bravo assured him that the necessary precautions to insure the safety of lives and property would be taken.[1]

At about 6:45 P.M. on November 22, 1989, three armed Maranaos who pretended to be passengers, seized a bus of petitioner at Linamon, Lanao del Norte while on its way to Iligan City.  Among the passengers of the bus was Atty. Caorong.  The leader of the Maranaos, identified as one Bashier Mananggolo, ordered the driver, Godofredo Cabatuan, to stop the bus on the side of the highway.  Mananggolo then shot Cabatuan on the arm, which caused him to slump on the steering wheel.  Then one of the companions of Mananggolo started pouring gasoline inside the bus, as the other held the passengers at bay with a handgun.  Mananggolo then ordered the passengers to get off the bus.  The passengers, including Atty. Caorong, stepped out of the bus and went behind the bushes in a field some distance from the highway.[2]

However, Atty. Caorong returned to the bus to retrieve something from the overhead rack.  At that time, one of the armed men was pouring gasoline on the head of the driver.  Cabatuan, who had meantime regained consciousness, heard Atty. Caorong pleading with the armed men to spare the driver as he was innocent of any wrong doing and was only trying to make a living.  The armed men were, however, adamant as they repeated their warning that they were going to burn the bus along with its driver.  During this exchange between Atty. Caorong and the assailants, Cabatuan climbed out of the left window of the bus and crawled to the canal on the opposite side of the highway.   He heard shots from inside the

bus.  Larry de la Cruz, one of the passengers, saw that Atty. Caorong was hit.  Then the bus was set on fire.  Some of the passengers were able to pull Atty. Caorong out of the burning bus and rush him to the Mercy Community Hospital in Iligan City, but he died while undergoing operation.[3]

The private respondents brought this suit for breach of contract of carriage in the Regional Trial Court, Branch VI, Iligan City.  In his decision, dated December 28, 1990, the trial court dismissed the complaint, holding as follows:

The fact that defendant, through Operations Manager Diosdado Bravo, was informed of the “rumors” that the Moslems intended to take revenge by burning five buses of defendant is established since the latter also utilized Crisanto Generalaos as a witness.  Yet despite this information, the plaintiffs charge, defendant did not take proper precautions. . . .  Consequently, plaintiffs now fault the defendant for ignoring the report.  Their position is that the defendant should have provided its buses with security guards.  Does the law require common carriers to install security guards in its buses for the protection and safety of its passengers?  Is the failure to post guards an omission of the duty to “exercise the diligence of a good father of the family” which could have prevented the killing of Atty. Caorong?  To our mind, the diligence demanded by law does not include the posting of security guards in buses.  It is an obligation that properly belongs to the State.  Besides, will the presence of one or two security guards suffice to deter a determined assault of the lawless and thus prevent the injury complained of? Maybe so, but again, perhaps not.  In other words, the presence of a security guard is not a guarantee that the killing of Atty. Caorong would have been definitely avoided.

….

Accordingly, the failure of defendant to accord faith and credit to the report of Mr. Generalao and the fact that it did not provide security to its buses cannot, in the light of the circumstances, be characterized as negligence.

Finally, the evidence clearly shows that the assailants did not have the least intention of harming any of the passengers.  They ordered all the passengers to alight and set fire on the bus only after all the passengers were out of danger. The death of Atty. Caorong was an unexpected and unforseen occurrence over which defendant had no control.  Atty. Caorong performed an act of charity and heroism in coming to the succor of the driver even in the face of danger.  He deserves the undying gratitude of the driver whose life he saved.  No one should blame him for an act of extraordinary charity and altruism which cost his life.  But neither should any blame be laid on the doorstep of defendant.  His death was solely due to the willful acts of the lawless which defendant could neither prevent nor stop.

….

WHEREFORE, in view of the foregoing, the complaint is hereby dismissed.  For lack of merit, the counter-claim is likewise dismissed.  No cost.[4]

On appeal, however, the Court of Appeals reversed.  It held:

In the case at bench, how did defendant-appellee react to the tip or information that certain Maranao hotheads were planning to burn five of its buses out of revenge for the deaths of two Maranaos in an earlier collision involving appellee’s bus?  Except for the remarks of appellee’s operations manager that “we will have our action . . . . and I’ll be the one to settle it personally,” nothing concrete whatsoever was taken by appellee or its employees to prevent the execution of the threat.  Defendant-appellee never adopted even a single safety measure for the protection of its paying passengers.  Were there available safeguards?  Of course, there were: one was frisking passengers particularly those en route to the area where the threats were likely to be carried out such as where the earlier accident occurred or the place of influence of the victims or their locality.  If frisking was resorted to, even temporarily, . . . . appellee might be legally excused from liability.  Frisking of passengers picked up along the route could have been implemented by the bus conductor; for those boarding at the bus terminal, frisking could have been conducted by him and perhaps by additional personnel of defendant-appellee.  On hindsight, the handguns and especially the gallon of gasoline used by the felons all of which were brought inside the bus would have been discovered, thus preventing the burning of the bus and the fatal shooting of the victim.

Appellee’s argument that there is no law requiring it to provide guards on its buses and that the safety of citizens is the duty of the government, is not well taken.  To be sure, appellee is not expected to assign security guards on all of its buses; if at all, it has the duty to post guards only on its buses plying predominantly Maranao areas.  As discussed in the next preceding paragraph, the least appellee could have done in response to the report was to adopt a system of verification such as frisking of passengers boarding its buses.  Nothing, and to repeat, nothing at all, was done by defendant-appellee to protect its innocent passengers from the danger arising from the “Maranao threats.”  It must be observed that frisking is not a novelty as a safety measure in our society.  Sensitive places – in fact, nearly all important places – have applied this method of security enhancement. Gadgets and devices are available in the market for this purpose.  It would not have weighed much against the budget of the bus company if such items were made available to its personnel to cope up with situations such as the “Maranao threats.”

In view of the constitutional right to personal privacy, our pronouncement in this decision should not be construed as an advocacy of mandatory frisking in all public conveyances.  What we are saying is that given the circumstances obtaining in

the case at bench that: (a) two Maranaos died because of a vehicular collision involving one of appellee’s vehicles; (b) appellee received a written report from a member of the Regional Security Unit, Constabulary Security Group, that the tribal/ethnic group of the two deceased were planning to burn five buses of appellee out of revenge; and (c) appellee did nothing – absolutely nothing – for the safety of its passengers travelling in the area of influence of the victims, appellee has failed to exercise the degree of diligence required of common carriers.  Hence, appellee must be adjudged liable.

….

WHEREFORE, the decision appealed from is hereby REVERSED and another rendered ordering defendant-appellee to pay plaintiffs-appellants the following:

1) P3,399,649.20 as death indemnity;

2) P50,000.00 and P500.00 per appearance as attorney’s fees; and

Costs against defendant-appellee.[5]

Hence, this appeal.  Petitioner contends:

(A) THAT PUBLIC RESPONDENT ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT DATED DECEMBER 28, 1990 DISMISSING THE COMPLAINT AS WELL AS THE COUNTERCLAIM, AND FINDING FOR PRIVATE RESPONDENTS BY ORDERING PETITIONER TO PAY THE GARGANTUAN SUM OF P3,449,649.20 PLUS P500.00 PER APPEARANCE AS ATTORNEY’S FEES, AS WELL AS DENYING PETITIONER’S MOTION FOR  RECONSIDERATION AND THE SUPPLEMENT TO SAID MOTION, WHILE HOLDING, AMONG OTHERS, THAT PETITIONER BREACHED THE CONTRACT OF CARIAGE BY ITS FAILURE TO EXERCISE THE REQUIRED DEGREE OF DILIGENCE;

(B) THAT THE ACTS OF THE MARANAO OUTLAWS WERE SO GRAVE, IRRESISTIBLE, VIOLENT, AND FORCEFUL, AS TO BE REGARDED AS CASO FORTUITO; AND

(C) THAT PUBLIC RESPONDENT COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT PETITIONER COULD HAVE PROVIDED ADEQUATE SECURITY IN PREDOMINANTLY MUSLIM AREAS AS PART OF ITS DUTY TO OBSERVE EXTRA-ORDINARY DILIGENCE AS A COMMON CARRIER.

The instant petition has no merit.

First.  Petitioner’s Breach of the Contract of Carriage

Art. 1763 of the Civil Code provides that a common carrier is responsible for injuries suffered by a passenger on account of the wilful acts of other passengers, if the employees of the common carrier could have prevented the act the exercise of the diligence of a good father of a family.  In the present case, it is clear that because of the negligence of petitioner’s employees, the seizure of the bus by Mananggolo and his men was made possible.

Despite warning by the Philippine Constabulary at Cagayan de Oro that the Maranaos were planning to take revenge on the petitioner by burning some of its buses and the assurance of petitioner’s operation manager, Diosdado Bravo, that the necessary precautions would be taken, petitioner did nothing to protect the safety of its passengers.

Had petitioner and its employees been vigilant they would not have failed to see that the malefactors had a large quantity of gasoline with them.  Under the circumstances, simple precautionary measures to protect the safety of passengers, such as frisking passengers and inspecting their baggages, preferably with non-intrusive gadgets such as metal  detectors, before allowing them on board could have been employed without violating the passenger’s constitutional rights.  As this Court intimated in Gacal v. Philippine Air Lines, Inc.,[6] a common carrier can be held liable for failing to prevent a hijacking by frisking passengers and inspecting their baggages.

From the foregoing, it is evident that petitioner’s employees failed to prevent the attack on one of petitioner’s buses because they did not exercise the diligence of a good father of a family.  Hence, petitioner should be held liable for the death of Atty. Caorong.

Second.  Seizure of Petitioner’s Bus not a Case of Force Majeure

The petitioner contends that the seizure of its bus by the armed assailants was a fortuitous event for which it could not be held liable.

Art. 1174 of the Civil Code defines a fortuitous even as an occurrence which could not be foreseen or which though foreseen, is inevitable.  In Yobido v. Court of Appeals,[7] we held that to be considered as force majeure, it is necessary that: (1) the cause of the breach of the obligation must be independent of the human will; (2) the event must be either unforeseeable or unavoidable; (3) the occurrence must be such as to render it impossible for the debtor to fulfill the obligation in a normal manner; and (4) the obligor must be free of participation in, or aggravation of, the injury to the creditor.  The absence of any of the requisites mentioned above would prevent the obligor from being excused from liability.

Thus, in Vasquez v. Court of Appeals,[8] it was held that the common carrier was liable for its failure to take the necessary precautions against an approaching typhoon, of which it was warned, resulting in the loss of the lives of several passengers.  The event was foreseeable, and, thus, the second requisite mentioned above was not fulfilled.  This ruling applies by analogy to the present case.  Despite the report of PC agent Generalao that the Maranaos were going to attack its buses, petitioner took no steps to safeguard the lives and properties of its passengers.   The seizure of the bus of the petitioner was foreseeable and, therefore, was not a fortuitous event which would exempt petitioner from liability.

Petitioner invokes the ruling in Pilapil v. Court of Appeals[9] and De Guzman v. Court of Appeals[10] in support of its contention that the seizure of its bus by the assailants constitutes force majeure.  In Pilapil v. Court of Appeals,[11] it was held that a common carrier is not liable for failing to install window grills on its buses to protect passengers from injuries caused by rocks hurled at the bus by lawless elements.  On the other hand, in De Guzman v. Court of Appeals,[12] it was ruled that a common carrier is not responsible for goods lost as a result of a robbery which is attended by grave or irresistible threat, violence, or force.

It is clear that the cases of Pilapil and De Guzman do not apply to the present case.  Art. 1755 of the Civil Code provides that “a common carrier is bound to carry the passengers as far as human care and foresight can provide, using the utmost diligence of very cautious person, with due regard for all the circumstances.” Thus, we held in  Pilapil and De Guzman that the respondents therein were not negligent in failing to take special precautions against threats to the safety of passengers which could not be foreseen, such as tortious or criminal acts of third persons.   In the present case, this factor of unforeseeablility (the second requisite for an event to be considered force majeure) is lacking.  As already stated, despite the report of PC agent Generalao that the Maranaos were planning to burn some of petitioner’s buses and the assurance of petitioner’s operations manager (Diosdado Bravo) that the necessary precautions would be taken, nothing was really done by petitioner to protect the safety of passengers.

Third.  Deceased not Guilty of Contributory Negligence

The petitioner contends that Atty. Caorong was guilty of contributory negligence in returning to the bus to retrieve something.  But Atty. Caorong did not act recklessly.  It should be pointed out that the intended targets of the violence were petitioner and its employees, not its passengers.  The assailant’s motive was to retaliate for the loss of life of two Maranaos as a result of the collision between petitioner’s bus and the jeepney in which the two Maranaos were riding.  Mananggolo, the leader of the group which had hijacked the bus, ordered the passengers to get off the bus as they intended to burn it and its driver.  The armed men actually allowed Atty. Caorong to retrieve something from the bus.  What apparently angered them was his attempt to help the driver of the bus by pleading for his life.   He was playing the role of the good Samaritan.  Certainly, this act cannot be considered an act of negligence, let alone recklessness.

Fourth.  Petitioner Liable to Private Respondents for Damages

We now consider the question of damages that the heirs of Atty. Caorong, private respondents herein, are entitled to recover from the petitioner.

Indemnity for Death.  Art. 1764 of the Civil Code, in relation to Art. 2206 thereof, provides for the payment of indemnity for the death of passengers caused by the breached of contract of carriage by a common carrier.   Initially fixed in Art. 2206 at P3,000.00, the amount of the said indemnity for death has through the years been gradually increased in view of the declining value of the peso.  It is presently fixed at P50,000.00.[13]Private respondents are entitled to this amount.

Actual damages.  Art. 2199 provides that “Except as provided by law or by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him as he has duly proved.”  The trial court found that the private respondents spent P30,000.00 for the wake and burial of Atty. Caorong.[14] Since petitioner does not question this finding of the trial court, it is liable to private respondents in the said amount as actual damages.

Moral Damages.  Under Art. 2206, the “spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral damages for mental anguish by reason of the death of the deceased.” The trial court found that private respondent Paulie Caorong suffered pain from the death of her husband and worry on how to provide support for their minor children, private respondents Yasser King, Rose Heinni, and Prince Alexander. [15] The petitioner likewise does not question this finding of the trial court.  Thus, in accordance with recent decisions of this Court,[16] we hold that the

petitioner is liable to the private respondents in the amount of P100,000.00 as moral damages for the death of Atty. Caorong.

Exemplary Damages. Art. 2232 provides that “in contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.” In the present case, the petitioner acted in a wanton and reckless manner.  Despite warning that the Maranaos were planning to take revenge against the petitioner by burning some of its buses, and contrary to the assurance made by its operations manager that the necessary precautions would be taken, the petitioner and its employees did nothing to protect the safety of passengers.  Under the circumstances, we deem it reasonable to award private respondents exemplary damages in the amount of P100,000.00.[17]

Attorney’s Fees.  Pursuant to Art. 2208, attorney’s fees may be recovered when, as in the instant case, exemplary damages are awarded.  In the recent case of Sulpicio Lines, Inc. v. Court of Appeals,[18] we held an award of P50,000.00 as attorney’s fees to be reasonable.  Hence, the private respondents are entitled to attorney’s fees in that amount.

Compensation for Loss of Earning Capacity.  Art. 1764 of the Civil Code, in relation to Art. 2206 thereof, provides that in addition to the indemnity for death arising from the breach of contract of carriage by a common carrier, the “defendant shall be liable for the loss of the earning capacity of the deceased, and the indemnity shall be paid to the heirs of the latter.”  The formula established in decided cases for computing net earning capacity is as follows:[19]

                                                                                      Gross        NecessaryNet earning = Life          x     Annual    -   LivingCapacity       Expectancy      Income       Expenses

Life expectancy is equivalent to two thirds (2/3) multiplied by the difference of eighty (80) and the age of the deceased.[20] Since Atty. Caorong was 37 years old at the time of his death, [21] he had a life expectancy of 28 2/3 more years.[22] His projected gross annual income, computed based on his monthly salary of P11,385.00[23] as a lawyer in the Department of Agrarian Reform at the time of his death, was P148,005.00.[24] allowing for necessary living expenses of fifty percent (50%)[25]of his projected gross annual income, his total earning capacity amounts to P2,121,404.90.[26] Hence, the petitioner is liable to the private respondents in the said amount as compensation for loss of earning capacity.

WHEREFORE, the decision, dated July 29, 1994, of the Court of Appeals is hereby AFFIRMED with the MODIFICATION that petitioner Fortune Express, Inc. is ordered to pay the following amounts to private respondents Paulie, Yasser King, Rose Heinni, and Prince Alexander Caorong:

1.  death indemnity in the amount of fifty thousand pesos (P50,000.00);

2.  actual damages in the amount of thirty thousand pesos (P30,000.00);

3.  moral damages in the amount of one hundred thousand pesos(P100,000.00);

4.  exemplary damages in the amount of one hundred thousand pesos (P100,000.00);

5.  attorney’s fees in the amount of fifty thousand pesos (P50,000.00);

6.  compensation for loss of earning capacity in the amount of two million one hundred twenty-one thousand four hundred four pesos and ninety centavos (P2,121,404.90); and

7)  costs of suits.

SO ORDERED.

SYLLABUS

1.    COMMERCIAL LAW; COMMON CARRIERS; BILLS OF LADING; PROVISION LIMITING LIABILITY; VALIDITY UPHELD BUT WITH CAUTION. - Contracts of adhesion are not invalid per se. - The Court has on numerous occasions upheld the binding effect thereof.  The peculiar nature of such contracts behooves the Court to closely scrutinize the factual milieu to which the provisions are intended to apply.  Thus, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances.  The validity of provisions limiting the liability of carriers contained in bills of lading have been consistently upheld for the following reason: “x x x. The stipulation in the bill of lading limiting the common carrier’s liability to the value of goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding.  The limitation of the carrier’s liability is sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not contrary to law, morals, good customs and public policy. x x x.” However, the Court has likewise cautioned against blind reliance on adhesion contracts where the facts and circumstances warrant that they should be disregarded.

2.    ID.; ID.; OBLIGATION UPON CARGOES; ACCEPTANCE OF CARGO AS PACKED WITH ADVICE AGAINST THE NEED TO DECLARE ITS ACTUAL VALUE DOES NOT PRECLUDE RECOVERY OF HIGHER AMOUNT OF DAMAGES. - There is no absolute obligation on the part of a carrier to accept a cargo.  Where a common carrier accepts a cargo for shipment for valuable consideration, it takes the risk of delivering it in good condition as when it was loaded.  And if the fact of improper packing is known to the carrier or its personnel, or apparent upon observation

but it accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom.  The acceptance in due course by PAL of private respondent’s cargo as packed and its advice against the need for declaration of its actual value operated as an assurance to private respondent that in fact there was no need for such a declaration.  Petitioner, therefore, is estopped from blaming private respondent for not declaring the value of the cargo shipped and which would have otherwise entitled her to recover a higher amount of damages.

3.    ID.; ID.; FORMAL CLAIM FOR DAMAGES; REQUIREMENT OF ITS IMMEDIATE FILING DEEMED COMPLIED WITH WHEN DELAY WAS CAUSED BY COMMON CARRIER ITSELF. - Private respondent complied with the requirement for the immediate filing of a formal claim for damages as required in the air waybill or, at least, we find that there was substantial compliance therewith.  If there was any failure at all to file the formal claim within the prescriptive period contemplated in the air waybill, this was largely because of PAL’S own doing, the consequences of which cannot, in all fairness, be attributed to private respondent.  Even if the claim for damages was conditioned on the timely filing of a formal claim, under Article 1186 of the Civil Code that condition was deemed fulfilled, considering that the collective action, of PAL’S personnel in tossing around the claim and leaving it unresolved for an indefinite period of time was tantamount to “voluntarily preventing its fulfillment.”  On grounds of equity, the filing of the baggage freight claim, which sufficiently informed PAL of the damage sustained by private respondent’s cargo, constituted substantial compliance with the requirement in the contract for the filing of a formal claim.

4. ID.; ID.; LIABILITY; WARSAW CONVENTION; RECOGNITION THEREOF DOES NOT PRECLUDE APPLICATION OF LOCAL LAWS. - While the facts and circumstances of this case do not call for the direct application of the provisions of the Warsaw Convention, indeed, recognition of the Warsaw Convention does not preclude the operation of the Civil Code and other pertinent laws in the determination of the extent of liability of the common carrier.   The Warsaw Convention, being a treaty to which the Philippines is a signatory, is as much a part of Philippine law as the Civil Code, Code of Commerce and other municipal special laws.  The provisions therein contained, specifically on the limitation of carrier’s liability, are operative in thePhilippines but only in appropriate situations.

5.    ID.; ID.; PRESUMPTION OF NEGLIGENCE PRESENT WHEN ITEM RECEIVED IN GOOD CONDITION AND DELIVERED WITH DAMAGE WITHOUT EXPLANATION AS TO CAUSE; BAD FAITH PRESUMED FOR THE UNEXPLAINED DELAY IN ACTING ON CLAIM FOR DAMAGES. - Inasmuch as the subject item was received in apparent good condition, no contrary notation or exception having been made on the air waybill upon its acceptance for shipment, the fact that it was delivered with a broken glass door raises the presumption thatPAL’s personnel were negligent in the carriage and handling of the cargo.  Furthermore, there was glaringly no attempt whatsoever on the part of petitioner to explain the cause of the damage to the oven.  The unexplained cause of damage to private respondent’s cargo constitutes gross carelessness or negligence which by itself justifies the present award of damages.  The equally unexplained and inordinate delay in acting on the claim upon referral thereof to the claims officer, Atty. Paco, and the noncommittal responses to private respondent’s entreaties for settlement of her claim for damages belies petitioner’s pretension that there was no bad faith on its part.  This unprofessional indifference of PAL’s personnel despite full and actual knowledge of the damage to private respondent’s cargo, just to be exculpated from liability on pure technicality and bureaucratic subterfuge, smacks of willful misconduct and insensitivity to a passenger’s plight tantamount to bad faith and renders unquestionable petitioner’s liability for damages.

[G.R. No. 119706.  March 14, 1996]

PHILIPPINE AIRLINES, INC., petitioner, vs. COURT OF APPEALS and GILDA C. MEJIA, respondents.

D E C I S I O N

REGALADO, J.:

This is definitely not a case of first impression.  The incident which eventuated in the present controversy is a drama of common contentious occurrence between passengers and carriers whenever loss is sustained by the former.   Withal, the exposition of the factual ambience and the legal precepts in this adjudication may hopefully channel the assertiveness of passengers and the intransigence of carriers into the realization that at times a bad extrajudicial compromise could be better than a good judicial victory.

Assailed in this petition for review is the decision of respondent Court of Appeals in CA-G.R. CV No. 42744 [1] which affirmed the decision of the lower court[2] finding petitioner Philippine Air Lines, Inc. (PAL) liable as follows:

“ACCORDINGLY, judgment is hereby rendered ordering defendant Philippine Air Lines, Inc., to pay plaintiff Gilda C. Mejia:

(1)     P30,000.00 by way of actual damages of the microwave oven;

(2)     P10,000.00 by way of moral damages;

(3)     P20,000.00 by way of exemplary damages;

(4)     P10,000.00 as attorney’s fee;

all in addition to the costs of the suit.

Defendant’s counterclaim is hereby dismissed for lack of merit.”[3]

The facts as found by respondent Court of Appeals are as follows:

“On January 27, 1990, plaintiff Gilda C. Mejia shipped thru defendant, Philippine Airlines, one (1) unit microwave oven, with a gross weight of 33 kilograms from San Francisco, U.S.A. to Manila, Philippines. Upon arrival, however, of said article in Manila, Philippines, plaintiff discovered that its front glass door was broken and the damage rendered it unserviceable. Demands both oral and written were made by plaintiff against the defendant for the reimbursement of the value of the damaged microwave oven, and transportation charges paid by plaintiff to defendant company.  But these demands fell on deaf ears.

“On September 25, 1990, plaintiff Gilda C. Mejia filed the instant action for damages against defendant in the lower court.

“In its answer, defendant Airlines alleged inter alia, by way of special and affirmative defenses, that the court has no jurisdiction over the case; that plaintiff has no valid cause of action against defendant since it acted only in good faith and in compliance with the requirements of the law, regulations, conventions and contractual commitments; and that defendant had always exercised the required diligence in the selection, hiring and supervision of its employees.”[4]

What had theretofore transpired at the trial in the court a quo is narrated as follows:

“Plaintiff Gilda Mejia testified that sometime on January 27, 1990, she took defendant’s plane from San Francisco, U.S.A. for Manila, Philippines (Exh. ‘F’). Amongst her baggages (sic) was a slightly used microwave oven with the brand name ‘Sharp’ under PAL Air Waybill No. 0-79-1013008-3 (Exh. ‘A’). When shipped, defendant’s office at San Francisco inspected it.  It was in good condition with its front glass intact. She did not declare its value upon the advice of defendant’s personnel at San Francisco.

“When she arrived in Manila, she gave her sister Concepcion C. Diño authority to claim her baggag(e) (Exh. ‘G’) and took a connecting flight for Bacolod City.

“When Concepcion C. Dino claimed the baggag(e) (Exh. ‘B’) with defendant, then with the Bureau of Customs, the front glass of the microwave oven was already broken and cannot be repaired because of the danger of radiation.   They demanded from defendant thru Atty. Paco P30,000.00 for the damages although a brand new one costs P40,000.00, but defendant refused to pay.

“Hence, plaintiff engaged the services of counsel. Despite demand (Exh. ‘E’) by counsel, defendant still refused to pay.

“The damaged oven is still with defendant. Plaintiff is engaged in (the) catering and restaurant business.  Hence, the necessity of the oven.  Plaintiff suffered sleepless nights when defendant refused to pay her (for) the broken oven and claims P 10,000.00 moral damages, P20,000.00 exemplary damages, P10,000.00 attorney’s fees plus P300.00 per court appearance and P15,000.00 monthly loss of income in her business beginning February, 1990.

“Defendant Philippine Airlines thru its employees Rodolfo Pandes and Vicente Villaruz posited that plaintiff’s claim was not investigated until after the filing of the formal claim on August 13, 1990 (Exh. ‘6’ also Exh. ‘E’). During the investigations, plaintiff failed to submit positive proof of the value of the cargo.  Hence her claim was denied.

“Also plaintiff’s claim was filed out of time under paragraph 12, a(1) of the Air Waybill (Exh. ‘A’, also Exh. ‘1’) which provides: ‘(a) the person entitled to delivery must make a complaint to the carrier in writing in case: (1) of visible damage to the goods, immediately after discovery of the damage and at the latest within 14 days from the receipt of the goods.”[5]

As stated at the outset, respondent Court of Appeals similarly ruled in favor of private respondent by affirming in full the trial court’s judgment in Civil Case No. 6210, with costs against petitioner.[6] Consequently, petitioner now impugns respondent appellate court’s ruling insofar as it agrees with (1) the conclusions of the trial court that since the air waybill is a contract of adhesion, its provisions should be strictly construed against herein petitioner; (2) the finding of the trial court that herein petitioner’s liability is not limited by the provisions of the air waybill; and (3) the award by the trial court to private respondent of moral and exemplary damages, attorney’s fees and litigation expenses.

The trial court relied on the ruling in the case of Fieldmen’s Insurance Co., Inc. vs. Vda. De Songco, et al.[7] in finding that the provisions of the air waybill should be strictly construed against petitioner.  More particularly, the court below stated its findings thus:

“In this case, it is seriously doubted whether plaintiff had read the printed conditions at the back of the Air Waybill (Exh. ‘1’), or even if she had, if she was given a chance to negotiate on the conditions for loading her microwave oven. Instead she was advised by defendant’s employee at San Francisco, U.S.A., that there is no need to declare the value of her oven since it is not brand new.  Further, plaintiff testified that she immediately submitted a formal claim for P30,000.00 with defendant. But their claim was referred from one employee to another th(e)n told to come back the next day, and the next day, until she was referred to a certain Atty. Paco. When they got tired and frustrated of coming without a settlement of their claim in sight, they consulted a lawyer who demanded from defendant on August 13, 1990 (Exh. ‘E’, an[d] Exh. ‘6’).

“The conclusion that inescapably emerges from the above findings of fact is to concede it with credence. x x x.”[8]

Respondent appellate court approved said findings of the trial court in this manner:

“We cannot agree with defendant-appellant’s above contention. Under our jurisprudence, the Air Waybill is a contract of adhesion considering that all the provisions thereof are prepared and drafted only by the carrier (Sweet Lines  v. Teves, 83 SCRA 361).  The only participation left of the other party is to affix his signature thereto (BPI Credit Corporation vs. Court of Appeals, 204 SCRA 601; Saludo, Jr. vs. C.A., 207 SCRA 498;Maersk vs. Court of Appeals, 222 SCRA 108, among the recent cases).  In the earlier case of Angeles v. Calasanz, 135 SCRA 323, the Supreme Court ruled that ‘the terms of a contract (of adhesion) must be interpreted against the party who drafted the same.’ x x x.”[9]

Petitioner airlines argues that the legal principle enunciated in Fieldmen’s Insurance does not apply to the present case because the provisions of the contract involved here are neither ambiguous nor obscure.  The front portion of the air waybill contains a simple warning that the shipment is subject to the conditions of the contract on the dorsal portion thereof regarding the limited liability of the carrier unless a higher valuation is declared, as well as the reglementary period within which to submit a written claim to the carrier in case of damage or loss to the cargo. Granting that the air waybill is a contract of adhesion, it has been ruled by the Court that such contracts are not entirely prohibited and are in fact binding regardless of whether or not respondent herein read the provisions thereof.  Having contracted the services of petitioner carrier instead of other airlines, private respondent in effect negotiated the terms of the contract and thus became bound thereby.[10]

Counsel for private respondent refutes these arguments by saying that due to her eagerness to ship the microwave oven to Manila, private respondent assented to the terms and conditions of the contract without any opportunity to question or change its terms which are practically on a “take-it-or-leave-it” basis, her only participation therein being the affixation of her signature.  Further, reliance on the Fieldmen’s insurance case is misplaced since it is not the ambiguity or obscurity of the stipulation that renders necessary the strict interpretation of a contract of adhesion against the drafter, but the peculiarity of the transaction wherein one party, normally a corporation, drafts all the provisions of the contract without any participation whatsoever on the part of the other party other than affixment of signature.[11]

A review of jurisprudence on the matter reveals the consistent holding of the Court that contracts of adhesion are not invalid per se and that it has on numerous occasions upheld the binding effect thereof.[12] As explained in Ong Yiu vs. Court of Appeals, et al., supra:

“x x x. Such provisions have been held to be a part of the contract of carriage, and valid and binding upon the passenger regardless of the latter’s lack of knowledge or assent to the regulation.  It is what is known as a contract of ‘adhesion,’ in regards which it has been said that contracts of adhesion wherein one party imposes a ready-made form of contract on the other, as the plane ticket in the case at bar, are contracts not entirely prohibited.   The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. x x x, a contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence.”

As rationalized in Saludo, Jr. vs. Court of Appeals, et al., supra:

“x x x, it should be borne in mind that a contract of adhesion may be struck down as void and unenforceable, for being subversive of public policy, only when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing. x x x.”

but subject to the caveat that –

”x x x. Just because we have said that Condition No. 5 of the airway bill is binding upon the parties to and fully operative in this transaction, it does not mean, and let this serve as fair warning to respondent carriers, that they can at all times whimsically seek refuge from liability in the exculpatory sanctuary of said Condition No. 5 x x x.”

The peculiar nature of such contracts behooves the Court to closely scrutinize the factual milieu to which the provisions are intended to apply.  Thus, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof when justified in light of the operative facts and surrounding circumstances.[13]

We find nothing objectionable about the lower court’s reliance upon the Fieldmen’s Insurance case, the principles wherein squarely apply to the present petition.  The parallelism between the aforementioned case and this one is readily apparent for, just as in the instant case, it is the binding effect of the provisions in a contract of adhesion (an insurance policy in Fieldmen’s Insurance)that is put to test.

A judicious reading of the case reveals that what was pivotal in the judgment of liability against petitioner insurance company therein, and necessarily interpreting the provisions of the insurance policy as ineffective, was the finding that the representations made by the agent of the insurance company rendered it impossible to comply with the conditions of the contract in question, rather than the mere ambiguity of its terms.  The extended pronouncements regarding strict construction of ambiguous provisions in an adhesion contract against its drafter, which although made by the Court as an aside but has perforce evolved into a judicial tenet over time, was actually an incidental statement intended to emphasize the duty of the court to protect the weaker, as against the more dominant, party to a contract, as well as to prevent the iniquitous situation wherein the will of one party is imposed upon the other in the course of negotiation.

Thus, there can be no further question as to the validity of the terms of the air waybill, even if the same constitutes a contract of adhesion.  Whether or not the provisions thereof particularly on the limited liability of the carrier are binding on private respondent in this instance must be determined from the facts and circumstances involved vis-a-vis the nature of the provisions sought to be enforced, taking care that equity and fair play should characterize the transaction under review.

On petitioner’s insistence that its liability for the damage to private respondent’s microwave oven, if any, should be limited by the provisions of the air waybill, the lower court had this to say:

“By and large, defendant’s evidence is anchored principally on plaintiff’s alleged failure to comply with paragraph 12,  a(1) (Exh. ‘1-C-2’) of the Air waybill (Exh. ‘A,’ also Exh. ‘1’), by filing a formal claim immediately after discovery of the damage. Plaintiff filed her formal claim only on August 13, 1990 (Exh. ‘6’, also Exh. ‘E’). And, failed to present positive proof on the value of the damaged microwave oven. Hence, the denial of her claim.

“This Court has misgivings about these pretensions of defendant.

xxx    xxx      xxx

“Finally, the Court finds no merit to defendant’s contention that under the Warsaw Convention, its liability if any, cannot exceed U.S. $20.00 based on weight as plaintiff did not declare the contents of her baggage nor pay additional charges before the flight.”[14]

The appellate court declared correct the non-application by the trial court of the limited liability of therein defendant-appellant under the “Conditions of the Contract” contained in the air waybill , based on the ruling in  Cathay Pacific Airways, Ltd. vs. Court of Appeals, et al.,[15] which substantially enunciates the rule that while the Warsaw Convention has the force and effect of law in the Philippines, being a treaty commitment by the government and as a signatory thereto, the same does not operate as an exclusive enumeration of the instances when a carrier shall be liable for breach of contract or as an absolute limit of the extent of liability, nor does it preclude the operation of the Civil Code or other pertinent laws.

Petitioner insists that both respondent court and the trial court erred in finding that petitioner’s liability, if any, is not limited by the provisions of the air waybill, for, as evidence of the contract of carriage between petitioner and private respondent, it substantially states that the shipper certifies to the correctness of the entries contained therein and accepts that the carrier’s liability is limited to US$20 per kilogram of goods lost, damaged or destroyed unless a value is declared and a supplementary charge paid. Inasmuch as no such declaration was made by private respondent, as she admitted during cross-examination, the liability of petitioner, if any, should be limited to 28 kilograms multiplied by US$20, or $560. Moreover, the validity of these conditions has been upheld in the leading case of Ong Yiu vs. Court of Appeals, et al., supra, and subsequent cases, for being a mere reiteration of the limitation of liability under the. Warsaw Convention, which treaty has the force and effect of law.[16]

It is additionally averred that since private respondent was merely advised, not ordered, that she need not declare a higher value for her cargo, the final decision of refraining from making such a declaration fell on private respondent and should not put the petitioner in estoppel from invoking its limited liability.[17]

In refutation, private respondent explains that the reason for the absence of a declaration of a higher value was precisely because petitioner’s personnel in San Francisco, U.S.A. advised her not to declare the value of her cargo, which testimony has not at all been rebutted by petitioner.  This being so, petitioner is estopped from faulting private respondent for her failure to declare the value of the microwave oven.[18]

The validity of provisions limiting the liability of carriers contained in bills of lading have been consistently upheld for the following reason:

“x x x. The stipulation in the bill of lading limiting the common carrier’s liability to the value of goods appearing in the bill, unless the shipper or owner declares a greater value, is valid and binding.  The limitation of the carrier’s liability is sanctioned by the freedom of the contracting parties to establish such stipulations, clauses, terms, or conditions as they may deem convenient, provided they are not contrary to law, morals, good customs and public policy. x x x.”[19]

However, the Court has likewise cautioned against blind reliance on adhesion contracts where the facts and circumstances warrant that they should be disregarded.[20]

In the case at bar, it will be noted that private respondent signified an intention to declare the value of the microwave oven prior to shipment, but was explicitly advised against doing so byPAL’s personnel in San Francisco, U.S.A., as borne out by her testimony in court:

xxx xxx    xxx

“Q  Did you declare the value of the shipment?

A     No. I was advised not to.

Q    Who advised you?

A     At the PAL Air Cargo.”[21]

It cannot be denied that the attention of PAL through its personnel in San Francisco was sufficiently called to the fact that private respondent’s cargo was highly susceptible to breakage as would necessitate the declaration of its actual value.  Petitioner had all the opportunity to check the condition and manner of packing prior to acceptance for shipment,[22] as well as during the preparation of the air waybill by PAL’s Acceptance Personnel based on information supplied by the shipper,[23] and to reject the cargo if the contents or the packing did not meet the company’s required specifications.  Certainly, PAL could not have been otherwise prevailed upon to merely accept the cargo.

While Vicente Villaruz, officer-in-charge of the PAL Import Section at the time of incident, posited that there may have been inadequate and improper packing of the cargo,[24] which by itself could be a ground for refusing carriage of the goods presented for shipment, he nonetheless admitted on cross-examination that private respondent’s cargo was accepted by PAL in its San Francisco office:

“ATTY. VINCO

So that, be that as it may, my particular concern is that, it is the PAL personnel that accepts the baggage?

WITNESS

Yes, sir.

ATTY. VINCO

Also, if he comes from abroad like in this particular case, it is the PAL personnel who accepts the baggage?

WITNESS

Yes, sir.

ATTY. VINCO

And the PAL personnel may or may not accept the baggage?

WITNESS

Yes, sir.

ATTY. VINCO

According to what is stated as in the acceptance of the cargo, it is to the best interest of the airlines, that is, he want(s) also that the airlines would be free from any liability.  Could that be one of the grounds for not admitting a baggage?

WITNESS

Safety is number one (I)

xxx xxx    xxx

ATTY. VINCO

So, this baggage was accepted and admitted in San Francisco?

WITNESS

Yes, sir.

ATTY. VINCO

And you could not show any document to the Court that would suggest that this baggage was denied admittance by your office at San Francisco?

WITNESS

No, I cannot show.

ATTY. VINCO

Now, can you show any document that would suggest that there was insufficient pac(k)aging on this particular baggage from abroad?

WITNESS

No, sir.”[25]

In response to the trial court’s questions during the trial, he also stated that while the passenger’s declaration regarding the general or fragile character of the cargo is to a certain extent determinative of its classification, PAL nevertheless has and exercises discretion as to the manner of handling required by the nature of the cargo it accepts for carriage.  He further opined that the microwave oven was only a general, not a fragile, cargo which did not require any special handling.[26]

There is no absolute obligation on the part of a carrier to accept a cargo.  Where a common carrier accepts a cargo for shipment for valuable consideration, it takes the risk of delivering it in good condition as when it was loaded.   And if the fact of improper packing is known to the carrier or its personnel, or apparent upon observation but it accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom.[27]

The acceptance in due course by PAL of private respondent’s cargo as packed and its advice against the need for declaration of its actual value operated as an assurance to private respondent that in fact there was no need for such a declaration.  Petitioner can hardly be faulted for relying on the representations of PAL’s own personnel.

In other words, private respondent Mejia could and would have complied with the conditions stated in the air waybill, i.e., declaration of a higher value and payment of supplemental transportation charges, entitling her to recovery of damages beyond the stipulated limit of US$20 per kilogram of cargo in the event of loss or damage, had she not been effectively prevented from doing so upon the advice of PAL’s personnel for reasons best known to themselves.

As pointed out by private respondent, the aforestated facts were not denied by PAL in any of its pleadings nor rebutted by way of evidence presented in the course of the trial, and thus in effect it judicially admitted that such an advice was given by its personnel in San Francisco, U.S.A.  Petitioner, therefore, is estopped from blaming private respondent for not declaring the value of the cargo shipped and which would have otherwise entitled her to recover a higher amount of damages.  The Court’s bidding in the Fieldmen’s Insurance case once again rings true:

“x x x. As estoppel is primarily based on the doctrine of good faith and the avoidance of harm that will befall an innocent party due to its injurious reliance, the failure to apply it in this case would result in gross travesty of justice.”

We likewise uphold the lower court’s finding that private respondent complied with the requirement for the immediate filing of a formal claim for damages as required in the air waybill or, at least, we find that there was substantial compliance therewith.

Private respondent testified that she authorized her sister, Concepcion Diño, to claim her cargo consisting of a microwave oven since the former had to take a connecting flight to BacolodCity on the very same afternoon of the day of her arrival.[28] As instructed, Concepcion Diño promptly proceeded to PAL’s Import Section the next day to claim the oven.  Upon discovering that the glass door was broken, she immediately filed a claim by way of the baggage freight claim[29] on which was duly annotated the damage sustained by the oven.[30]

Her testimony relates what took place thereafter:

“ATTY. VINCO

So, after that inspection, what did you do?

WITNESS

After that annotation placed by Mr. Villaruz, I went home and I followed it up the next day with the Clerk of PAL cargo office.

ATTY. VINCO

What did the clerk tell you?

WITNESS

She told me that the claim was being processed and I made several phone calls after that. I started my follow-ups February up to June 1990.

ATTY. VINCO

And what results did those follow-ups produce?

WITNESS

All they said (was) that the document was being processed, that they were waiting for Atty. Paco to report to the office and they could refer the matter to Atty. Paco.

ATTY. VINCO

Who is this Atty. Paco?

WITNESS

He was the one in-charge of approving our claim.

ATTY. VINCO

Were you able to see Atty. Paco?

WITNESS

Yes, sir. I personally visited Atty. Paco together with my auntie who was a former PAL employee.

xxx xxx    xxx

ATTY. VINCO

So, what did you do, did you make a report or did you tell Atty. Paco of your scouting around for a possible replacement?

WITNESS

I did call him back at his office. I made a telephone call.

ATTY. VINCO

And what answer did Atty. Paco make after you have reported back to him?

WITNESS

They told me that they were going to process the claim based on the price that I gave them but there was no definite result.

ATTY. VINCO

How many times did you go and see Atty. Paco regarding the claim of your sister?

WITNESS

I made one personal visit and several follow-up calls. With Atty. Paco, I made one phone call but I made several phone calls with his secretary or the clerk at PAL cargo office and I was trying to locate him but unfortunately, he was always out of his office.”[31]

PAL claims processor, Rodolfo Pandes,* confirmed having received the baggage freight claim on January 30, 1990[32] and the referral to and extended pendency of the private respondent’s claim with the office of Atty. Paco, to wit:

“ATTY. VINCO:

Q    And you did instruct the claimant to see the Claim Officer of the company, right?

WITNESS:

A     Yes, sir.

ATTY. VINCO:

Q    And the Claim Officer happened to be Atty. Paco?

WITNESS:

A     Yes, sir.

ATTY. VINCO:

Q    And you know that the plaintiff thru her authorized representative Concepcion Diño, who is her sister had many times gone to Atty. Paco, in connection with this claim of her sister?

WITNESS:

A     Yes, sir.

ATTY. VINCO:

Q    As a matter of fact even when the complaint was already filed here in Court the claimant had continued to call about the settlement of her claim with Atty. Paco, is that correct?

xxx xxx    xxx

WITNESS:

A     Yes, sir.

ATTY. VINCO.

Q    You know this fact because a personnel saw you in one of the pre-trial here when this case was heard before the sala of Judge Moscardon, is that correct?

WITNESS:

A     Yes.

ATTY. VINCO:

Q    In other words, the plaintiff rather had never stop(ped) in her desire for your company to settle this claim, right?

WITNESS

A     Yes, sir.”[33]

Considering the abovementioned incidents and private respondent Mejia’s own zealous efforts in following up the claim,[34] it was clearly not her fault that the letter of demand for damages could only be filed, after months of exasperating follow-up of the claim, on August 13, 1990. [35] If there was any failure at all to file the formal claim within the prescriptive period contemplated in the air waybill, this was largely because of PAL’s own doing, the consequences of which cannot, in all fairness, be attributed to private respondent.

Even if the claim for damages was conditioned on the timely filing of a formal claim, under Article 1186 of the Civil Code that condition was deemed fulfilled, considering that the collective action of PAL’s personnel in tossing around the claim and leaving it unresolved for an indefinite period of time was tantamount to “voluntarily preventing its fulfillment.” On grounds of equity, the filing of the baggage freight claim, which sufficiently informed PAL of the damage sustained by private respondent’s cargo, constituted substantial compliance with the requirement in the contract for the filing of a formal claim.

All told, therefore, respondent appellate court did not err in ruling that the provision on limited liability is not applicable in this case.  We, however, note in passing that while the facts and circumstances of this case do not call for the direct application of the provisions of the Warsaw Convention, it should be stressed that, indeed, recognition of the Warsaw Convention does not preclude the operation of the Civil Code and other pertinent laws in the determination of the extent of liability of the common carrier.[36]

The Warsaw Convention, being a treaty to which the Philippines is a signatory, is as much a part of Philippine law as the Civil Code, Code of Commerce and other municipal special laws. [37]The provisions therein contained, specifically on the limitation of carrier’s liability, are operative in the Philippines but only in appropriate situations.

Petitioner ascribes ultimate error in the award of moral exemplary damages and attorney’s fees in favor of private respondent in that other than the statement of the trial court that petitioner acted in bad faith in denying private respondent’s claim, which was affirmed by the Court of Appeals, there is no evidence on record that the same is true.  The denial of private respondent’s claim was supposedly in the honest belief that the same had prescribed, there being no timely formal claim filed; and despite having been given an opportunity to submit positive proof of the value of the damaged microwave oven, no such proof was submitted.  Petitioner insists that its failure to deliver the oven in the condition in which it was shipped could hardly be considered as amounting to bad faith.[38]

Private respondent counters that petitioner’s failure to deliver the microwave oven in the condition in which it was received can be describe as gross negligence amounting to bad faith, on the further consideration that it failed to prove that it exercised the extraordinary diligence required by law, and that no explanation whatsoever was given as to why the front glass of the oven was broken.[39]

The trial court justified its award of actual, moral and exemplary damages, and attorney’s fees in favor of private respondent in this wise:

“Since the plaintiff’s baggage destination was the Philippines, Philippine law governs the liability of the defendant for damages for the microwave oven.

“The provisions of the New Civil Code on common carriers are Article(s) 1733, 1735 and 1753 x x x.

xxx    xxx      xxx

“In this case, defendant failed to overcome, not only the presumption but more importantly, plaintiff’s evidence that defendant’s negligence was the proximate cause of the damages of the microwave oven.  Further, plaintiff has established that defendant acted in bad faith when it denied the former’s claim on the ground that the formal claim was filed beyond the period as provided in paragraph 12 (a-1) (Exh. ‘1-C-2’) of the Air Waybill (Exh.‘1’, also Exh ‘A’), when actually, Concepcion Diño, sister of plaintiff has immediately filed the formal claim upon discovery of the damage.”[40]

Respondent appellate court was in full agreement with the trial court’s finding of bad faith on the part of petitioner as a basis for the award of the aforestated damages, declaring that:

“As to the last assigned error, a perusal of the facts and law of the case reveals that the lower court’s award of moral and exemplary damages, attorney’s fees and costs of suit to plaintiff-appellee is in accordance with current laws and jurisprudence on the matter.  Indeed, aside from the fact that defendant-appellant acted in bad faith in breaching the contract and in denying plaintiff’s valid claim for damages, plaintiff-appellee underwent profound distress, sleepless nights, and anxiety upon knowledge of her damaged microwave oven in possession of defendant-appellant, entitling her to the award of moral and exemplary damages (Cathay Pacific Airways, Ltd. vs. C.A., supra; Arts. 2219 & 2221, New Civil Code), and certainly plaintiff-appellant’s unjust refusal to comply with her valid demand for payment, thereby also entitling her to reasonable attorney’s fees [Art. 2208 (2) and (11), id.].”[41]’

It will be noted that petitioner never denied that the damage to the microwave oven was sustained while the same was in its custody.  The possibility that said damage was due to causes beyond the control of PAL has effectively been ruled out since the entire process in handling of the cargo - from the unloading thereof from the plane, the towing and transfer to the PAL warehouse, the transfer to the Customs examination area, and its release thereafter to the shipper - was done almost exclusively by, and with the intervention or, at the very least, under the direct supervision of a responsible PAL personnel.[42]

The very admissions of PAL, through Vicente Villaruz of its Import Section, as follows:

“ATTY. VINCO

So that, you now claim, Mr. Witness, that from the time the cargo was unloaded from the plane until the time it reaches the Customs counter where it was inspected, all the way, it was the PAL personnel who did all these things?

WITNESS

Yes, however, there is also what we call the Customs storekeeper and the Customs guard along with the cargo.

ATTY. VINCO

You made mention about a locator?

WITNESS

Yes, sir.

ATTY. VINCO

This locator, is he an employee of the PAL or the Customs?

WITNESS

He is a PAL employee.”[43]

lead to the inevitable conclusion that whatever damage may have been sustained by the cargo is due to causes attributable to PAL’s personnel or, at all events, under their responsibility.

Moreover, the trial court underscored the fact that petitioner was not able to overcome the statutory presumption of negligence in Article 1735 which, as a common carrier, it was laboring under in case of loss, destruction or deterioration of goods, through proper showing of the exercise of extraordinary diligence.  Neither did it prove that the damage to the microwave oven was because of any of the excepting causes under Article 1734, all of the same Code.  Inasmuch as the subject item was received in apparent good condition, no contrary notation or exception having been made on the air waybill upon its acceptance for shipment, the fact that it was delivered with a broken glass door raises the presumption that PAL’s personnel were negligent in the carriage and handling of the cargo.[44]

Furthermore, there was glaringly no attempt what so ever on the part of petitioner to explain the cause of the damage to the oven.  The unexplained cause of damage to private respondent’s cargo constitutes gross carelessness or negligence which by itself justifies the present award of damages.[45] The equally unexplained and inordinate delay in acting on the claim upon referral thereof to the claims officer, Atty. Paco, and the noncommittal responses to private respondent’s entreaties for settlement of her claim for damages belies petitioner’s pretension that there was no bad faith on its part.  This unprofessional indifference of PAL’s personnel despite full and actual knowledge of the damage to private respondent’s cargo, just to be exculpated from liability on pure technicality and bureaucratic subterfuge, smacks of willful misconduct and insensitivity to a passenger’s plight tantamount to bad faith [46] and renders unquestionable petitioner’s liability for damages. In sum, there is no reason to disturb the findings of the trial court in this case, especially with its full affirmance by respondent Court of Appeals.

On this note, the case at bar goes into the annals of our jurisprudence after six years and recedes into the memories of our legal experience as just another inexplicable inevitability.  We will never know exactly how many man-hours went into the preparation, litigation and adjudication of this simple dispute over an oven, which the parties will no doubt insist they contested as a matter of principle.  One thing, however, is certain.  As long as the first letter in “principle” is somehow outplaced by the peso sign, the courts will always have to resolve similar controversies although mutual goodwill could have dispensed with judicial recourse.

IN VIEW OF ALL OF THE FOREGOING, the assailed judgment of respondent Court of Appeals is AFFIRMED in toto.

SO ORDERED.

[G.R. No. 150843.  March 14, 2003]

CATHAY PACIFIC AIRWAYS, LTD., petitioner, vs. SPOUSES DANIEL VAZQUEZ and MARIA LUISA MADRIGAL VAZQUEZ, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

Is an involuntary upgrading of an airline passenger’s accommodation from one class to a more superior class at no extra cost a breach of contract of carriage that would entitle the passenger to an award of damages? This is a novel question that has to be resolved in this case.

The facts in this case, as found by the Court of Appeals and adopted by petitioner Cathay Pacific Airways, Ltd., (hereinafter Cathay) are as follows:

Cathay is a common carrier engaged in the business of transporting passengers and goods by air.   Among the many routes it services is the Manila-Hongkong-Manila course.  As part of its marketing strategy, Cathay accords its frequent flyers membership in its Marco Polo Club.  The members enjoy several privileges, such as priority for upgrading of booking without any extra charge whenever an opportunity arises.  Thus, a frequent flyer booked in the Business Class has priority for upgrading to First Class if the Business Class Section is fully booked.

Respondents-spouses Dr. Daniel Earnshaw Vazquez and Maria Luisa Madrigal Vazquez are frequent flyers of Cathay and are Gold Card members of its Marco Polo Club.  On 24 September 1996, the Vazquezes, together with their maid and two friends Pacita Cruz and Josefina Vergel de Dios, went to Hongkong for pleasure and business.

For their return flight to Manila on 28 September 1996, they were booked on Cathay’s Flight CX-905, with departure time at 9:20 p.m.  Two hours before their time of departure, the Vazquezes and their companions checked in their luggage at Cathay’s check-in counter at Kai Tak Airport and were given their respective boarding passes, to wit, Business Class boarding passes for the Vazquezes and their two friends, and Economy Class for their maid.   They then proceeded to the Business Class passenger lounge.

When boarding time was announced, the Vazquezes and their two friends went to Departure Gate No. 28, which was designated for Business Class passengers.  Dr. Vazquez presented his boarding pass to the ground stewardess, who in turn inserted it into an electronic machine reader or computer at the gate. The ground stewardess was assisted by a ground attendant by the name of Clara Lai Han Chiu.  When Ms. Chiu glanced at the computer monitor, she saw a message that there was a “seat change” from Business Class to First Class for the Vazquezes.

Ms. Chiu approached Dr. Vazquez and told him that the Vazquezes’ accommodations were upgraded to First Class.  Dr. Vazquez refused the upgrade, reasoning that it would not look nice for them as hosts to travel in First Class and their guests, in the Business Class; and moreover, they were going to discuss business matters during the flight.   He also told Ms. Chiu that she could have other passengers instead transferred to the First Class Section.   Taken aback by the refusal for upgrading, Ms. Chiu consulted her supervisor, who told her to handle the situation and convince the Vazquezes

to accept the upgrading.  Ms. Chiu informed the latter that the Business Class was fully booked, and that since they were Marco Polo Club members they had the priority to be upgraded to the First Class.   Dr. Vazquez continued to refuse, so Ms. Chiu told them that if they would not avail themselves of the privilege, they would not be allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in.  He and Mrs. Vazquez then proceeded to the First Class Cabin.

Upon their return to Manila, the Vazquezes, in a letter of 2 October 1996 addressed to Cathay’s Country Manager, demanded that they be indemnified in the amount of P1million for the “humiliation and embarrassment” caused by its employees. They also demanded “a written apology from the management of Cathay, preferably a responsible person with a rank of no less than the Country Manager, as well as the apology from Ms. Chiu” within fifteen days from receipt of the letter.

In his reply of 14 October 1996, Mr. Larry Yuen, the assistant to Cathay’s Country Manager Argus Guy Robson, informed the Vazquezes that Cathay would investigate the incident and get back to them within a week’s time.

On 8 November 1996, after Cathay’s failure to give them any feedback within its self-imposed deadline, the Vazquezes instituted before the Regional Trial Court of Makati City an action for damages against Cathay, praying for the payment to each of them the amounts of P250,000 as temperate damages; P500,000 as moral damages; P500,000 as exemplary or corrective damages; and P250,000 as attorney’s fees.

In their complaint, the Vazquezes alleged that when they informed Ms. Chiu that they preferred to stay in Business Class, Ms. Chiu “obstinately, uncompromisingly and in a loud, discourteous and harsh voice threatened” that they could not board and leave with the flight unless they go to First Class, since the Business Class was overbooked.  Ms. Chiu’s loud and stringent shouting annoyed, embarrassed, and humiliated them because the incident was witnessed by all the other passengers waiting for boarding.  They also claimed that they were unjustifiably delayed to board the plane, and when they were finally permitted to get into the aircraft, the forward storage compartment was already full.   A flight stewardess instructed Dr. Vazquez to put his roll-on luggage in the overhead storage compartment.  Because he was not assisted by any of the crew in putting up his luggage, his bilateral carpal tunnel syndrome was aggravated, causing him extreme pain on his arm and wrist.  The Vazquezes also averred that they “belong to the uppermost and absolutely top elite of both Philippine Society and the Philippine financial community, [and that] they were among the wealthiest persons in the Philippine[s].”

In its answer, Cathay alleged that it is a practice among commercial airlines to upgrade passengers to the next better class of accommodation, whenever an opportunity arises, such as when a certain section is fully booked.   Priority in upgrading is given to its frequent flyers, who are considered favored passengers like the Vazquezes.   Thus, when the Business Class Section of Flight CX-905 was fully booked, Cathay’s computer sorted out the names of favored passengers for involuntary upgrading to First Class. When Ms. Chiu informed the Vazquezes that they were upgraded to First Class, Dr. Vazquez refused. He then stood at the entrance of the boarding apron, blocking the queue of passengers from boarding the plane, which inconvenienced other passengers. He shouted that it was impossible for him and his wife to be upgraded without his two friends who were traveling with them. Because of Dr. Vazquez’s outburst, Ms. Chiu thought of upgrading the traveling companions of the Vazquezes.  But when she checked the computer, she learned that the Vazquezes’ companions did not have priority for upgrading.  She then tried to book the Vazquezes again to their original seats. However, since the Business Class Section was already fully booked, she politely informed Dr. Vazquez of such fact and explained that the upgrading was in recognition of their status as Cathay’s valued passengers. Finally, after talking to their guests, the Vazquezes eventually decided to take the First Class accommodation.

Cathay also asserted that its employees at the Hong Kong airport acted in good faith in dealing with the Vazquezes; none of them shouted, humiliated, embarrassed, or committed any act of disrespect against them (the Vazquezes).  Assuming that there was indeed a breach of contractual obligation, Cathay acted in good faith, which negates any basis for their claim for temperate, moral, and exemplary damages and attorney’s fees.  Hence, it prayed for the dismissal of the complaint and for payment of P100,000 for exemplary damages and P300,000 as attorney’s fees and litigation expenses.

During the trial, Dr. Vazquez testified to support the allegations in the complaint.  His testimony was corroborated by his two friends who were with him at the time of the incident, namely, Pacita G. Cruz and Josefina Vergel de Dios.

For its part, Cathay presented documentary evidence and the testimonies of Mr. Yuen; Ms. Chiu; Norma Barrientos, Comptroller of its retained counsel; and Mr. Robson.  Yuen and Robson testified on Cathay’s policy of upgrading the seat accommodation of its Marco Polo Club members when an opportunity arises.  The upgrading of the Vazquezes to First Class was done in good faith; in fact, the First Class Section is definitely much better than the Business Class in terms of comfort, quality of food, and service from the cabin crew.  They also testified that overbooking is a widely accepted practice in the airline industry and is in accordance with the International Air Transport Association (IATA) regulations.  Airlines overbook because a lot of passengers do not show up for their flight.  With respect to Flight CX-905, there was no overall overbooking to a degree that a passenger was bumped off or downgraded.  Yuen and Robson also stated that the demand letter of the Vazquezes was immediately acted upon.  Reports were gathered from their office in Hong Kong and immediately forwarded to their counsel Atty. Remollo for legal advice. However, Atty. Remollo begged off because his services were likewise retained by the Vazquezes; nonetheless, he undertook to solve the problem in behalf of Cathay. But nothing happened until Cathay received a copy of the complaint in this case.  For her part, Ms. Chiu denied that she shouted or used foul or impolite language against the Vazquezes.  Ms. Barrientos testified on the amount of attorney’s fees and other litigation expenses, such as those for the taking of the depositions of Yuen and Chiu.

In its decision[1] of 19 October 1998, the trial court found for the Vazquezes and decreed as follows:

WHEREFORE, finding preponderance of evidence to sustain the instant complaint, judgment is hereby rendered in favor of plaintiffs Vazquez spouses and against defendant Cathay Pacific Airways, Ltd., ordering the latter to pay each plaintiff the following:

a)           Nominal damages in the amount of P100,000.00 for each plaintiff;

b)           Moral damages in the amount of P2,000,000.00 for each plaintiff;

c)           Exemplary damages in the amount of P5,000,000.00 for each plaintiff;

d)           Attorney’s fees and expenses of litigation in the amount of P1,000,000.00 for each plaintiff; and

e)           Costs of suit.

SO ORDERED.

According to the trial court, Cathay offers various classes of seats from which passengers are allowed to choose regardless of their reasons or motives, whether it be due to budgetary constraints or whim.  The choice imposes a clear obligation on Cathay to transport the passengers in the class chosen by them.  The carrier cannot, without exposing itself to liability, force a passenger to involuntarily change his choice.  The upgrading of the Vazquezes’ accommodation over and above their vehement objections was due to the overbooking of the Business Class.   It was a pretext to pack as many passengers as possible into the plane to maximize Cathay’s revenues.  Cathay’s actuations in this case displayed deceit, gross negligence, and bad faith, which entitled the Vazquezes to awards for damages.

On appeal by the petitioners, the Court of Appeals, in its decision of 24 July 2001, [2] deleted the award for exemplary damages; and it reduced the awards for moral and nominal damages for each of the Vazquezes to  P250,000 and P50,000, respectively, and the attorney’s fees and litigation expenses to P50,000 for both of  them.

The Court of Appeals ratiocinated that by upgrading the Vazquezes to First Class, Cathay novated the contract of carriage without the former’s consent. There was a breach of contract not because Cathay overbooked the Business Class Section of Flight CX-905 but because the latter pushed through with the upgrading despite the objections of the Vazquezes.

However, the Court of Appeals was not convinced that Ms. Chiu shouted at, or meant to be discourteous to, Dr. Vazquez, although it might seemed that way to the latter, who was a member of the elite in Philippine society and was not therefore used to being harangued by anybody. Ms. Chiu was a Hong Kong Chinese whose fractured Chinese was difficult to understand and whose manner of speaking might sound harsh or shrill to Filipinos because of cultural differences. But the Court of Appeals did not find her to have acted with deliberate malice, deceit, gross negligence, or bad faith.   If at all, she was negligent in not offering the First Class accommodations to other passengers.   Neither can the flight stewardess in the First Class Cabin be said to have been in bad faith when she failed to assist Dr. Vazquez in lifting his baggage into the overhead storage bin.  There is no proof that he asked for help and was refused even after saying that he was suffering from “bilateral carpal tunnel syndrome.”  Anent the delay of Yuen in responding to the demand letter of the Vazquezes, the Court of Appeals found it to have been sufficiently explained.

The Vazquezes and Cathay separately filed motions for a reconsideration of the decision, both of which were denied by the Court of Appeals.

Cathay seasonably filed with us this petition in this case.  Cathay maintains that the award for moral damages has no basis, since the Court of Appeals found that there was no “wanton, fraudulent, reckless and oppressive” display of manners on the part of its personnel; and that the breach of contract was not attended by fraud, malice, or bad faith. If any damage had been suffered by the Vazquezes, it was damnum absque injuria, which is damage without injury, damage or injury inflicted without injustice, loss or damage without violation of a legal right, or a wrong done to a man for which the law provides no remedy. Cathay also invokes our decision in United Airlines, Inc. v. Court of Appeals [3]  where we recognized that, in accordance with the Civil Aeronautics Board’s Economic Regulation No. 7, as amended, an overbooking that does not exceed ten percent cannot be considered deliberate and done in bad faith. We thus deleted in that case the awards for moral and exemplary damages, as well as attorney’s fees, for lack of proof of overbooking exceeding ten percent or of bad faith on the part of the airline carrier.

On the other hand, the Vazquezes assert that the Court of Appeals was correct in granting awards for moral and nominal damages and attorney’s fees in view of the breach of contract committed by Cathay for transferring them from the Business Class to First Class Section without prior notice or consent and over their vigorous objection. They likewise argue that the issuance of passenger tickets more than the seating capacity of each section of the plane is in itself fraudulent, malicious and tainted with bad faith.

The key issues for our consideration are whether (1) by upgrading the seat accommodation of the Vazquezes from Business Class to First Class Cathay breached its contract of carriage with the Vazquezes; (2) the upgrading was tainted with fraud or bad faith; and (3) the Vazquezes are entitled to damages.

We resolve the first issue in the affirmative.

A contract is a meeting of minds between two persons whereby one agrees to give something or render some service to another for a consideration. There is no contract unless the following requisites concur: (1) consent of the contracting parties; (2) an object certain which is the subject of the contract; and (3) the cause of the obligation which is established.[4] Undoubtedly, a contract of carriage existed between Cathay and the Vazquezes. They voluntarily and freely gave their consent to an agreement whose object was the transportation of the Vazquezes from Manila to Hong Kong and back to Manila, with seats in the Business Class Section of the aircraft, and whose cause or consideration was the fare paid by the Vazquezes to Cathay.

The only problem is the legal effect of the upgrading of the seat accommodation of the Vazquezes.   Did it constitute a breach of contract?

Breach of contract is defined as the “failure without legal reason to comply with the terms of a contract.”[5]  It is also defined as the “[f]ailure, without legal excuse, to perform any promise which forms the whole or part of the contract.”[6]

In previous cases, the breach of contract of carriage consisted in either the bumping off of a passenger with confirmed reservation or the downgrading of a passenger’s seat accommodation from one class to a lower class.  In this case, what happened was the reverse.  The contract between the parties was for Cathay to transport the Vazquezes to Manila on a Business Class accommodation in Flight CX-905.  After checking-in their luggage at the Kai Tak Airport in Hong Kong, the Vazquezes were given boarding cards indicating their seat assignments in the Business Class Section.  However, during the boarding time, when the Vazquezes presented their boarding passes, they were informed that they had a seat change from Business Class to First Class.  It turned out that the Business Class was overbooked in that there were more passengers than the number of seats.  Thus, the seat assignments of the Vazquezes were given to waitlisted passengers, and the Vazquezes, being members of the Marco Polo Club, were upgraded from Business Class to First Class. 

We note that in all their pleadings, the Vazquezes never denied that they were members of Cathay’s Marco Polo Club. They knew that as members of the Club, they had priority for upgrading of their seat accommodation at no extra cost when an opportunity arises. But, just like other privileges, such priority could be waived.  The Vazquezes should have been consulted first whether they wanted to avail themselves of the privilege or would consent to a change of seat accommodation before their seat assignments were given to other passengers.  Normally, one would appreciate and accept an upgrading, for it would mean a better accommodation.  But, whatever their reason was and however odd it might be, the Vazquezes had every right to decline the upgrade and insist on the Business Class accommodation they had booked for and which was designated in their boarding passes.   They clearly waived their priority or preference when they asked that other passengers be given the upgrade. It should not have been imposed on them over their vehement objection.  By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes.

We are not, however, convinced that the upgrading or the breach of contract was attended by fraud or bad faith. Thus, we resolve the second issue in the negative.

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so conveniently and casually invoked, and that is why they are never presumed. They amount to mere slogans or mudslinging unless convincingly substantiated by whoever is alleging them.

Fraud has been defined to include an inducement through insidious machination.  Insidious machination refers to a deceitful scheme or plot with an evil or devious purpose.  Deceit exists where the party, with intent to deceive, conceals or omits to state material facts and, by reason of such omission or concealment, the other party was induced to give consent that would not otherwise have been given.[7]

Bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of a known duty through some motive or interest or ill will that partakes of the nature of fraud.[8]

We find no persuasive proof of fraud or bad faith in this case.  The Vazquezes were not induced to agree to the upgrading through insidious words or deceitful machination or through willful concealment of material facts. Upon boarding, Ms. Chiu told the Vazquezes that their accommodations were upgraded to First Class in view of their being Gold Card members of Cathay’s Marco Polo Club. She was honest in telling them that their seats were already given to other passengers and the Business Class Section was fully booked.  Ms. Chiu might have failed to consider the remedy of offering the First Class seats to other passengers. But, we find no bad faith in her failure to do so, even if that amounted to an exercise of poor judgment.

Neither was the transfer of the Vazquezes effected for some evil or devious purpose.  As testified to by Mr. Robson, the First Class Section is better than the Business Class Section in terms of comfort, quality of food, and service from the cabin crew; thus, the difference in fare between the First Class and Business Class at that time was $250. [9] Needless to state, an upgrading is for the better condition and, definitely, for the benefit of the passenger.

We are not persuaded by the Vazquezes’ argument that the overbooking of the Business Class Section constituted bad faith on the part of Cathay. Section 3 of the Economic Regulation No. 7 of the Civil Aeronautics Board, as amended, provides:

Sec 3. Scope. – This regulation shall apply to every Philippine and foreign air carrier with respect to its operation of flights or portions of flights originating from or terminating at, or serving a point within the territory of the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for which he holds confirmed reserved space.  Furthermore, this Regulation is designed to cover only honest mistakes on

the part of the carriers and excludes deliberate and willful acts of non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating capacity of the aircraft shall not be considered as a deliberate and willful act of non-accommodation.

It is clear from this section that an overbooking that does not exceed ten percent is not considered deliberate and therefore does not amount to bad faith.[10] Here, while there was admittedly an overbooking of the Business Class, there was no evidence of overbooking of the plane beyond ten percent, and no passenger was ever bumped off or was refused to board the aircraft.

Now we come to the third issue on damages.

The Court of Appeals awarded each of the Vazquezes moral damages in the amount of P250,000. Article 2220 of the Civil Code provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.

Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.  Although incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant’s wrongful act or omission. [11] Thus, case law establishes the following requisites for the award of moral damages: (1) there must be an injury clearly sustained by the claimant, whether physical, mental or psychological; (2) there must be a culpable act or omission factually established; (3) the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) the award for damages is predicated on any of the cases stated in Article 2219 of the Civil Code.[12]

Moral damages predicated upon a breach of contract of carriage may only be recoverable in instances where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a passenger. [13] Where in breaching the contract of carriage the airline is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could have reasonably foreseen.  In such a case the liability does not include moral and exemplary damages.[14]

In this case, we have ruled that the breach of contract of carriage, which consisted in the involuntary upgrading of the Vazquezes’ seat accommodation, was not attended by fraud or bad faith. The Court of Appeals’ award of moral damages has, therefore, no leg to stand on.

The deletion of the award for exemplary damages by the Court of Appeals is correct.   It is a requisite in the grant of exemplary damages that the act of the offender must be accompanied by bad faith or done in wanton, fraudulent or malevolent manner.[15] Such requisite is absent in this case. Moreover, to be entitled thereto the claimant must first establish his right to moral, temperate, or compensatory damages. [16] Since the Vazquezes are not entitled to any of these damages, the award for exemplary damages has no legal basis.  And where the awards for moral and exemplary damages are eliminated, so must the award for attorney’s fees.[17]

The most that can be adjudged in favor of the Vazquezes for Cathay’s breach of contract is an award for nominal damages under Article 2221 of the Civil Code, which reads as follows:

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

Worth noting is the fact that in Cathay’s Memorandum filed with this Court, it prayed only for the deletion of the award for moral damages.  It deferred to the Court of Appeals’ discretion in awarding nominal damages; thus:

As far as the award of nominal damages is concerned, petitioner respectfully defers to the Honorable Court of Appeals’ discretion.  Aware as it is that somehow, due to the resistance of respondents-spouses to the normally-appreciated gesture of petitioner to upgrade their accommodations, petitioner may have disturbed the respondents-spouses’ wish to be with their companions (who traveled to Hong Kong with them) at the Business Class on their flight to Manila.  Petitioner regrets that in its desire to provide the respondents-spouses with additional amenities for the one and one-half (1 1/2) hour flight to Manila, unintended tension ensued.[18]

Nonetheless, considering that the breach was intended to give more benefit and advantage to the Vazquezes by upgrading their Business Class accommodation to First Class because of their valued status as Marco Polo members, we reduce the award for nominal damages to P5,000.

Before writing finis to this decision, we find it well-worth to quote the apt observation of the Court of Appeals regarding the awards adjudged by the trial court:

We are not amused but alarmed at the lower court’s unbelievable alacrity, bordering on the scandalous, to award excessive amounts as damages.  In their complaint, appellees asked for P1 million as moral damages but the lower court awarded P4 million; they asked for P500,000.00 as exemplary damages but the lower court cavalierly awarded a whooping P10 million; they asked for P250,000.00 as attorney’s fees but were awarded P2 million; they did not ask for nominal damages but were awarded P200,000.00.  It is as if the lower court went on a rampage, and why it acted that way is beyond all tests of reason.  In fact the excessiveness of the total award invites the suspicion that it was the result of “prejudice or corruption on the part of the trial court.”

The presiding judge of the lower court is enjoined to hearken to the Supreme Court’s admonition in Singson vs. CA (282 SCRA 149 [1997]), where it said:

The well-entrenched principle is that the grant of moral damages depends upon the discretion of the court based on the circumstances of each case.  This discretion is limited by the principle that the amount awarded should not be palpably and scandalously excessive as to indicate that it was the result of prejudice or corruption on the part of the trial court….

and in Alitalia Airways vs. CA (187 SCRA 763 [1990], where it was held:

Nonetheless, we agree with the injunction expressed by the Court of Appeals that passengers must not prey on international airlines for damage awards, like “trophies in a safari.”  After all neither the social standing nor prestige of the passenger should determine the extent to which he would suffer because of a wrong done, since the dignity affronted in the individual is a quality inherent in him and not conferred by these social indicators. [19]

We adopt as our own this observation of the Court of Appeals.

WHEREFORE, the instant petition is hereby partly GRANTED.  The Decision of the Court of Appeals of 24 July 2001 in CA-G.R. CV No. 63339 is hereby MODIFIED, and as modified, the awards for moral damages and attorney’s fees are set aside and deleted, and the award for nominal damages is reduced to P5,000.

No pronouncement on costs.

SO ORDERED.