G.R. No. 141314 April 9, 2003 REPUBLIC OF THE PHILIPPINES, REPRESENTED BY ENERGY REGULATORY BOARD, petitioner, vs. MANILA ELECTRIC COMPANY, respondent.

The business and operations of a public utility are imbued with public interest. In a very real sense, a public utility is engaged in public service-- providing basic commodities and services indispensable to the interest of the general public. For this reason, a public utility submits to the regulation of government authorities and surrenders certain business prerogatives, including the amount of rates that may be charged by it. It is the imperative duty of the State to interpose its protective power whenever too much profits become the priority of public utilities.

For resolution is the Motion for Reconsideration filed by respondent Manila Electric Company (MERALCO) on December 5, 2002 from the decision of this Court dated November 15, 2002 reducing MERALCO's rate adjustment in the amount of P0.017 per kilowatthour (kwh) for its billing cycles beginning 1994 and further directing MERALCO to credit the excess average amount of P0.167 per kwh to its customers starting with MERALCO's billing cycles beginning February 1994.1

First, we leapfrog through the facts. On December 23, 1993, MERALCO filed with the Energy Regulatory Board (ERB) an application for revised rates, with an average increase of P0.21 per kwh in its distribution charge. On January 28, 1994 the ERB granted a provisional increase of P0.184 per kwh subject to the condition that in the event the ERB determines that MERALCO is entitled to a lesser increase in rates, all excess amounts collected by MERALCO shall be refunded to its customers or credited in their favor. The Commission on Audit (COA) conducted an examination of the books of accounts and records of MERALCO and thereafter recommended, among others, that: (1) income taxes paid by MERALCO should not be included as part of MERALCO's operating expenses and (2) the "net average investment method" or the "number of months use method" should be applied in determining the proportionate value of the properties used by MERALCO during the test year.

In its decision dated February 16, 1998, the ERB adopted the recommendations of the COA and authorized MERALCO to adopt a rate adjustment of P0.017 per kilowatthour (kwh) for its billing cycles beginning 1994. The ERB further directed MERALCO to credit the excess average amount of P0.167 per kwh to its customers starting with MERALCO's billing cycles beginning February 1994. The said ruling of the ERB was affirmed by this Court in its decision dated November 15, 2002.

In its Motion for Reconsideration, respondent MERALCO contends that: (1) the deduction of income tax from revenues allowed for rate determination of public utilities is part of its constitutional right to property; (2) it correctly used the "average investment method" or the "simple average" in computing the value of its properties entitled to a return instead of the "net average investment method" or the "number of months use method"; and (3) the decision of the ERB ordering the refund of P0.167 per kwh to its customers should not be given retroactive effect.2

The Republic of the Philippines through the ERB, now Energy Regulatory Commission (ERC), represented by the Office of the Solicitor General, filed its Comment on March 7, 2003. Surprisingly, in its Comment, the ERC proffered a divergent view from the Office of the Solicitor General. The ERC submits that income taxes are not operating expenses but are reasonable costs that may be recoverable from the consuming public. While the ERC admits that "there is still no categorical determination on whether income tax should indeed be deducted from revenues of a public utility," it agrees with MERALCO that to disallow

public utilities from recovering its income tax payments will effectively lower the return on rate base enjoyed by a public utility to 8%. The ERC, however, agrees with this Court's ruling that the use of the "net average investment method" or the "number of months use method" is not unreasonable.3

The Office of the Solicitor General, under its solemn duty to protect the interests of the people, defended the thesis that income tax payments by a public utility should not be recovered as costs from the consuming public. It contended that: (1) the foreign jurisprudence cited by MERALCO in support of its position is not applicable in this jurisdiction; (2) MERALCO was given a fair rate of return; (3) the COA and the ERB followed the National Accounting and Auditing Manual which expressly disallows the treatment of income tax as operating expense; (4) Executive Order No. 72 does not grant electric utilities the privilege of treating income tax as operating expense; (5) the COA and the ERB have been consistent in not allowing income tax as part of operating expenses; (6) ERB decisions allowing the application of a tax recovery clause are inapropos; (7) allowing MERALCO to treat income tax as an operating expense would set a dangerous precedent; (8) assuming that the disallowance of income tax as operating expense would discourage foreign investors and lenders, the government is not precluded from enacting laws and instituting measures to lure them back; and (9) the findings and conclusions of the ERB carry great weight and should be binding on the courts in the absence of grave abuse of discretion. The Solicitor General agrees with the ERC that the "net average investment method" is a reasonable method for property valuation. Finally, the Solicitor General argues that the ERB decision may be applied retroactively and the use of a test period to determine the rate base and allowable rates to be collected by a public utility is an accepted practice.4

We shall discuss the main issues in seriatim.

I

MERALCO argues that deduction of all kinds of taxes, including income tax, from the gross revenues of a public utility is firmly entrenched in American jurisprudence. It contends that the Public Service Act (Commonwealth Act No. 146) was patterned after Act 2306 of the Philippine Commission, which, in turn, was borrowed from American state public utility laws such as the New Jersey Public Utility Act. Hence, it maintains that American jurisprudence on the inclusion of income taxes as a lawful charge to operating expenses should be controlling. It cites the rule on statutory construction that a statute adopted from a foreign country will be presumed to be adopted with the construction placed upon it by the courts of that country before its adoption.5

We are not persuaded. American decisions and authorities are not per se controlling in this jurisdiction. At best, they are persuasive for no court holds a patent on correct decisions. Our laws must be construed in accordance with the intention of our own lawmakers and such intent may be deduced from the language of each law and the context of other local legislation related thereto. More importantly, they must be construed to serve our own public interest which is the be-all and the end-all of all our laws. And it need not be stressed that our public interest is distinct and different from others.

Rate regulation calls for a careful consideration of the totality of facts and circumstances material to each application for an upward rate revision. Rate regulators should strain to strike a balance between the clashing interests of the public utility and the consuming public and the balance must assure a reasonable rate of return to public utilities without being unreasonable to the consuming public. What is reasonable or unreasonable depends on a calculus of changing circumstances that ebb and flow with time. Yesterday cannot govern today, no more than today can determine tomorrow.

Prescinding from these premises, we reject MERALCO's insistence that the non-inclusion of income tax payments as a legitimate operating expense will deny public utilities a fair return of their investment. This stubborn stance is belied by the report submitted by the COA on the audit conducted on MERALCO's books of accounts and the findings of the ERB.6

Upon the instructions of the ERB, the COA conducted an audit of the operations of MERALCO covering the period from February 1, 1994 to January 31, 1995, or the period immediately after the implementation of the provisional rate increase.7 Hence, amounts culled by the COA from its examination of the books of MERALCO already included the provisional rate increase of P0.184 granted by the ERB.

From the figures submitted by the COA, the ERB was able to determine that MERALCO derived excess revenue during the test year in the amount of P2,448,378,000.8 This means that during the test year, and after the rates were increased by P0.184, MERALCO earned P2,448,378,000 or 8.15% more than the amount it should have earned at a 12% rate of return on rate base. Accordingly, based on this amount of excess revenue, the ERB determined that the provisional rate granted by it to MERALCO was P0.167 per kwh more than the amount MERALCO ought to charge its customers to obtain the prescribed 12% rate of return on rate base. Thus, the ERB correspondingly lowered the provisional increase by P0.167 per kwh and ordered MERALCO to increase its rates at a reduced amount of P0.017 per kwh, computed as follows:9

At appraised value

Total Invested Capital Entitled P 30,059,614,00010

to Return

12% return thereon P 3,607,154,000

Add: Total Operating expenses P 38,260,420,00011

for Rate Determination

Purposes

Computed Revenue

P 41,867,573,000

Actual Revenue P 44,315,951,000

Excess Revenue P 2,448,378,000

Percent of Excess Revenue to 8.15%

Invested Capital

Authorized Rate of Return 12.00%

Actual Rate of Return 20.15%

Total kwh sold 14,640,094,000

Ratio of Excess Revenue to

Total kwh Sold P 0.167

In fact, even if MERALCO's income tax liability would be included as an operating expense, MERALCO would still enjoy excess revenue of P312,738,000.00 or 1.04% above the authorized rate of return of 12%. Based on its audit, the COA determined that the provision for income tax liability of MERALCO amounted to

P2,135,639,000.00.12 Thus, even if such amount of income tax liability would be included as operating expense, the amount of excess revenue earned by MERALCO during the test year would be more than sufficient to cover the additional income tax expense. Thus:

At appraised value

Total Invested Capital Entitled to Return P 30,059,614,000

12% return thereon P 3,607,154,000

Add: Total Operating expenses for Rate Determination Purposes

P 40,396,059,00013

Computed Revenue P 44,003,213,000

Actual Revenue P 44,315,951,000

Excess Revenue P 312,738,000

Percent of Excess Revenue to Invested Capital 1.04%

Authorized Rate of Return 12.00%

Actual Rate of Return 13.04%

It is crystal clear, therefore, that even if income tax is to be included as an operating expense and hence, recoverable from the consuming public, MERALCO would still enjoy a rate of return that is above the authorized rate of 12%. Public utilities cannot be allowed to overcharge at the expense of the public and worse, they cannot complain that they are not overcharging enough.

Be that as it may, MERALCO contends that considering income tax payments of public utilities constitute one-third of their net income, public utilities will effectively get, not the 12% rate of return on rate base allowed them, but only about 8%.14 Again, we are not persuaded.

The foregoing argument assumes that the 12% return allowed to public utilities is equivalent to its taxable income which will be subject to income tax. The 12% rate of return is computed only for the purpose of fixing the allowable rates to be charged by a public utility and is in no way determinative of the income subject to income tax of the public utility. The computation of a corporation's income tax liability is an altogether different matter, with the corporation's taxable income derived by taking into account the corporation's gross revenues less allowable deductions.15

At any rate, even on the assumption that in the test year involved (February 1, 1994 to January 31, 1995), MERALCO's computed revenue of P 41,867,573,000 or the amount that it is allowed to earn based on a 12% rate of return is its taxable income, after payment of its income tax liability of P2,135,639,000.00, MERALCO would still obtain an 11.38% rate of return or a return that is well within the 12% rate allowed to public utilities.16

MERALCO also contends that even the successor of the ERB or the ERC created under the Electric Power Industry Reform Act of 2001 (EPIRA)17 "adheres to the principle that income tax is part of operating expense."18 To bolster its argument, MERALCO cites Article 36 of the EPIRA which charges the ERC with the responsibility of unbundling the rates of the National Power Corporation (NPC) and each distribution utility coming within the coverage of the law.19 MERALCO alleges that pursuant to said provision, the ERC issued a set of Uniform Rate Filing Requirements (UFR) containing guidelines to be followed with respect

to rate unbundling applications to be filed. MERALCO asserts that under the UFR, the enumeration of the expenses which are to be recovered through the rates, and which are to be separated or allocated for the purpose of unbundling of these rates include income tax expenses.

Under Section 36 of the EPIRA, the NPC and every distribution facility covered by the law is mandated to unbundle, segregate or itemize its rates according to the various sectors of the electric power industry identified in the law, namely: generation, transmission, distribution and supply.20 The law further directs the ERC to regulate and facilitate the unbundling of rates prescribed by Section 36. Thus, on October 30, 2001, the ERC issued guidelines prescribing the uniform rate filing requirements to be followed by distribution facilities for the purposes of unbundling rates.21

A proper appreciation of the UFR shows that it simply specifies a uniform accounting system to be complied with by a distribution facility when filing an application for revised rates under the EPIRA. As the EPIRA requires the unbundling or segregation of rates according to the different sectors of the electric power industry, the UFR seeks to facilitate this process by properly identifying the accounts or information required for proper evaluation by the ERB. Thus, the introductory statements of the UFR provide:

These uniform rate filing requirements are intended to promote consistency and completeness in the rate filings required by Republic Act No. 9136 (RA 9136), Section 36. To that end, the filing requirements only specify minimum form and content. A rate application in all its aspects continues to be subject to subsequent Commission review and deliberation.22

At the onset, it is clear that the UFR does not seek to determine which accounting method will be used by the ERC for determination of rate base or the items of expenses that may be recovered by a public utility from its customers. The UFR only seeks to prescribe a uniform system or format to standardize or facilitate the process of unbundling of rates mandated by the EPIRA. At best, the UFR prescribes the set of raw data or figures to be disclosed by a distribution facility that the ERC will need to determine the authorized rates that a distribution facility may charge. The UFR does not, in any way, determine the manner by which the set of data or figures indicated in the rate application will be evaluated by the ERC for rate determination purposes.

II

MERALCO also challenges the use of the "net average investment method" or the "number of months use method" on the ground that MERALCO and the Public Service Commission (PSC) have been consistently applying the "average investment method" or "simple average", which it alleged was also affirmed by this Court in the case of MERALCO v. PSC23 and Republic v. Medina.24

It is true that in MERALCO v. PSC,25 the issue of the proper valuation method to be used in determining the value of MERALCO's utility plants for rate fixing purposes was brought to fore. In the said case, MERALCO applied the "average investment method" or "simple average" by obtaining the average value of the utility plants, using its values at the beginning and at the end of the test year. In contrast, the General Auditing Office used the "appraisal method" which fixes the value of the utility plants by ascertaining the cost of production per kilowatt and multiplying the same by the total capacity of said plants, less the corresponding depreciation.26 In upholding the "average investment method" used by MERALCO, this Court adopted the findings of the PSC for being "by and large, supported by the records of the case."27 This Court did not make an independent assessment of the validity or applicability of the

average investment method but simply did not disturb the findings of the PSC for being supported by substantial evidence. To conclude that the said decision "affirmed" the use of the "average investment method" thereby implying that the said method is the only method to be applied in all instances, is a strained reading of the decision.

In fact, in the case of Republic v. Medina,28 also cited by MERALCO to have affirmed the use of the "average investment method", this Court ruled:

The decided weight of authority, however, is to the effect that property valuation is not to be solved by formula but depends upon the particular circumstances and relevant facts affecting each utility as to what constitutes a just rate base and what would be a fair return, just to both the utility and the public.29

Further, Mr. Justice Castro in his concurring opinion in the same case elucidated:

A regulatory commission's field of inquiry, however, is not confined to the computation of the cost of service or capital nor to a mere prognostication of the future behavior of the money and capital markets. It must also balance investor and consumer expectations in such a way that broad requirements of public interest may be meaningfully realized. It would hence appear in keeping with its public duty if a regulatory body is allowed wide discretion in the choice of methods rationally related to the achievement of this end.30

Thus, the rule then as it is now, is that rate regulating authorities are not hidebound to use any single formula or combination of formulas for property valuation purposes because the rate-making process involves the balancing of investor and consumer interests which takes into account various factors that may be unique or peculiar to a particular rate revision application.

We again stress the long established doctrine that findings of administrative or regulatory agencies on matters which are within their technical area of expertise are generally accorded not only respect but at times even finality if such findings and conclusions are supported by substantial evidence.31 Rate fixing calls for a technical examination and a specialized review of specific details which the courts are ill-equipped to enter, hence, such matters are primarily entrusted to the administrative or regulating authority.32

Thus, this Court finds no reversible error on the part of the COA and the ERB in adopting the "net average investment method" or the "number of months use method" for property valuation purposes in the cases at bar.

III

MERALCO also rants against the retroactive application of the rate adjustment ordered by the ERB and affirmed by this Court. In its decision, the ERB, after authorizing MERALCO to adopt a rate adjustment in the amount of P0.017 per kwh, directed MERALCO to refund or credit to its customers' future consumption the excess average amount of P0.167 per kwh from its billing cycles beginning February 199433 until its billing cycles beginning February 1998.34 In the decision appealed from, this Court likewise ordered that the refund in the average amount of P0.167 per kwh be made to retroact from MERALCO's billing cycles beginning February 1994.

MERALCO contends that the refund cannot be given retroactive effect as the figures determined by the ERB only apply to the test year or the period subject of the COA Audit, i.e., February 1, 1994 to January 31, 1995. It reasoned that the amounts used to determine the proper rates to be charged by MERALCO would vary from year to year and thus the computation of the excess average charge of P0.167 would hold true only for the test year. Thus, MERALCO argues that if a refund of P0.167 would be uniformly applied to its billing cycles beginning 1994, with respect to periods after January 31, 1995, there will be instances wherein its operating revenues would fall below the 12% authorized rate of return. MERALCO therefore suggests that the dispositive portion be modified and order that "the refund applicable to the periods after January 31, 1995 is to be computed on the basis of the excess collection in proportion to the excess over the 12% return."35

The purpose of the audit procedures conducted in a rate application proceeding is to determine whether the rate applied for will generate a reasonable return for the public utility, which, in accordance with settled laws and jurisprudence, is 12% on rate base or the present value of the assets used in the operations of a public utility. For audit purposes, however, there is a need to obtain a sample set of data-- usually derived from figures within a designated period of time-- to determine the amount of returns obtained by a public utility during such period. In the cases at bar, the COA conducted an audit for the test year beginning February 1, 1994 and ending January 31, 1995 or a 12-month period immediately after the order of the ERB granting a provisional increase in the amount of P0.184 per kwh was issued. Thus, the ultimate issue resolved by the COA when it conducted its audit was whether the provisional increase granted by the ERB generated an amount of return well within the rates authorized by law. As stated earlier, based on the findings of the ERB, with the increase of P0.184 per kwh, MERALCO obtained a rate of return which was 8.15% more than the authorized rate of return of 12%.36 Thus, a refund in the amount of P0.167 was determined and ordered by ERB.

The essence of the use of a "test year" for auditing purposes is to obtain a sample or representative set of figures to enable the examining authority to arrive at a conclusion or finding based on the gathered data. The use of a "test year" does not mean that the information and conclusions so derived would only be correct for that year and would be incorrect on the succeeding years. The use of a "test year" assumes that within a reasonable period after such test year, figures used to determine the amount of return would only vary slightly from the figures culled during the test year such that the impact on the utility's rate of return would not be very significant. Thus, in the event that there is a substantial change in circumstances significantly affecting the variable amounts that would determine the reasonableness of a return, an event which would normally occur after a certain period of time has elapsed, the public utility may subsequently apply for a rate revision.

We agree with the Solicitor General that following MERALCO's reasoning that the figures culled from a test year would only be relevant during such year, there would be a need for public utilities to apply for a rate adjustment every year and perform an audit examination on a public utility's books of accounts every year as the amount of a utility's revenue may fall above or below the authorized rates at any given year. Needless to say, the trajectory of MERALCO's arguments will lead to an absurdity.

From the time the order granting a provisional increase was issued by the ERB, nowhere in the records does it appear that the subsequent refund of P0.167 per kwh ordered by the ERB was ever implemented or executed by MERALCO.37 Accordingly, from January 28, 1994 MERALCO imposed on its customers a charge that is P0.167 in excess of the proper amount. In fact, any application for rate adjustment that may have been applied for and/or granted to MERALCO during the intervening period would have to be

reckoned from rates increased by P0.184 per kwh as these were the rates prevailing at the time any application for rate adjustment was made by MERALCO.

While we agree that the amounts used to determine the utility's rate of return would vary from year to year, we are unable to subscribe to the view that the refund applicable to the periods after January 31, 1995 should be computed on the basis of the excess collection in proportion to the excess over the 12% return. MERALCO's contention that the refund for periods after January 31, 1995 should be computed on the basis of revenue of each year in excess of the 12% authorized rate of return calls for a year-by-year computation of MERALCO's revenues and assets which would be contrary to the essence of an audit examination of a public utility based on a test year. To grant MERALCO's prayer would, in effect, allow MERALCO the benefit of a year-by-year adjustment of rates not normally enjoyed by any other public utility required to adopt a subsequent rate modification. Indeed, had the ERB ordered an increase in the provisional rates it previously granted, said increase in rates would apply retroactively and would not have varied from year to year, depending on the variable amounts used to determine the authorized rates that may be charged by MERALCO. We find no significant circumstance prevailing in the cases at bar that would justify the application of a yearly adjustment as requested by MERALCO.

WHEREFORE, in view of the foregoing, the petitioner's Motion for Reconsideration is DENIED WITH FINALITY.

SO ORDERED.

G.R. No. L-6055 June 12, 1953 THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. WILLIAM H. QUASHA, defendant-appellant.

William H. Quasha, a member of the Philippine bar, was charged in the Court of First Instance of Manila with the crime of falsification of a public and commercial document in that, having been entrusted with the preparation and registration of the article of incorporation of the Pacific Airways Corporation, a domestic corporation organized for the purpose of engaging in business as a common carrier, he caused it to appear in said article of incorporation that one Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 60.005 per cent of the subscribed capital stock of the corporation when in reality, as the accused well knew, such was not the case, the truth being that the owner of the portion of the capital stock subscribed to by Baylon and the money paid thereon were American citizen whose name did not appear in the article of incorporation, and that the purpose for making this false statement was to circumvent the constitutional mandate that no corporation shall be authorize to operate as a public utility in the Philippines unless 60 per cent of its capital stock is owned by Filipinos.

Found guilty after trial and sentenced to a term of imprisonment and a fine, the accused has appealed to this Court.

The essential facts are not in dispute. On November 4,1946, the Pacific Airways Corporation registered its articles of incorporation with the Securities and Exchanged Commission. The article were prepared and the registration was effected by the accused, who was in fact the organizer of the corporation. The article stated that the primary purpose of the corporation was to carry on the business of a common carrier by air, land or water; that its capital stock was P1,000,000, represented by 9,000 preferred and 100,000 common shares, each preferred share being of the par value of p100 and entitled to 1/3 vote and each common share, of the par value of P1 and entitled to one vote; that the amount capital stock actually subscribed was P200,000, and the names of the subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino and the other five all Americans; that Baylon's subscription was for 1,145 preferred shares, of the total value of P114,500, and for 6,500 common shares, of the total par value of P6,500, while the aggregate subscriptions of the American subscribers were for 200 preferred shares, of the total par value of P20,000, and 59,000 common shares, of the total par value of P59,000; and that Baylon and the American subscribers had already paid 25 per cent of their respective subscriptions. Ostensibly the owner of, or subscriber to, 60.005 per cent of the subscribed capital stock of the corporation, Baylon nevertheless did not have the controlling vote because of the difference in voting power between the preferred shares and the common shares. Still, with the capital structure as it was, the article of incorporation were accepted for registration and a certificate of incorporation was issued by the Securities and Exchange Commission.

There is no question that Baylon actually subscribed to 60.005 per cent of the subscribed capital stock of the corporation. But it is admitted that the money paid on his subscription did not belong to him but to the Americans subscribers to the corporate stock. In explanation, the accused testified, without contradiction, that in the process of organization Baylon was made a trustee for the American incorporators, and that the reason for making Baylon such trustee was as follows:

Q. According to this article of incorporation Arsenio Baylon subscribed to 1,135 preferred shares with a total value of P1,135. Do you know how that came to be? A. Yes.

The people who were desirous of forming the corporation, whose names are listed on page 7 of this certified copy came to my house, Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and Anastasakas one evening. There was considerable difficulty to get them all together at one time because they were pilots. They had difficulty in deciding what their respective share holdings would be. Onstott had invested a certain amount of money in airplane surplus property and they had obtained a considerable amount of money on those planes and as I recall they were desirous of getting a corporation formed right away. And they wanted to have their respective shares holdings resolved at a latter date. They stated that they could get together that they feel that they had no time to settle their respective share holdings. We discussed the matter and finally it was decided that the best way to handle the things was not to put the shares in the name of anyone of the interested parties and to have someone act as trustee for their respective shares holdings. So we looked around for a trustee. And he said "There are a lot of people whom I trust." He said, "Is there someone around whom we could get right away?" I said, "There is Arsenio. He was my boy during the liberation and he cared for me when i was sick and i said i consider him my friend." I said. They all knew Arsenio. He is a very kind man and that was what was done. That is how it came about.

Defendant is accused under article 172 paragraph 1, in connection with article 171, paragraph 4, of the Revised Penal Code, which read:

ART. 171. Falsification by public officer, employee, or notary or ecclesiastic minister. — The penalty of prision mayor and a fine not to exceed 5,000 pesos shall be imposed upon any public officer, employee, or notary who, taking advantage of his official position, shall falsify a document by committing any of the following acts:

x x x x x x x x x

4. Making untruthful statements in a narration of facts.

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

x x x x x x x x x

1. Any private individual who shall commit any of the falsifications enumerated in the next preceding article in any public or official document or letter of exchange or any other kind of commercial document.

Commenting on the above provision, Justice Albert, in his well-known work on the Revised Penal Code ( new edition, pp. 407-408), observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the perversion of truth in the narration of facts must be made with the wrongful intent of injuring a third person; and on the authority of U.S. vs. Lopez (15 Phil., 515), the same author further maintains that even if such wrongful intent is proven, still the untruthful statement will not constitute the crime of falsification if there is no legal obligation on the part of the narrator to disclose the truth. Wrongful intent to injure a third person and obligation on the part of the narrator to disclose the truth are thus essential to a conviction for a crime of falsification under the above article of the Revised Penal Code.

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

If the Constitution does not prohibit the mere formation of a public utility corporation with the alien capital, then how can the accused be charged with having wrongfully intended to circumvent that fundamental law by not revealing in the articles of incorporation that Baylon was a mere trustee of his American co-incorporation and that for that reason the subscribed capital stock of the corporation was wholly American? For the mere formation of the corporation such revelation was not essential, and the Corporation Law does not require it. Defendant was, therefore, under no obligation to make it. In the absence of such obligation and of the allege wrongful intent, defendant cannot be legally convicted of the crime with which he is charged.

It is urged, however, that the formation of the corporation with 60 per cent of its subscribed capital stock appearing in the name of Baylon was an indispensable preparatory step to the subversion of the constitutional prohibition and the laws implementing the policy expressed therein. This view is not correct. For a corporation to be entitled to operate a public utility it is not necessary that it be organized with 60 per cent of its capital owned by Filipinos from the start. A corporation formed with capital that is entirely alien may subsequently change the nationality of its capital through transfer of shares to Filipino citizens. conversely, a corporation originally formed with Filipino capital may subsequently change the national status of said capital through transfer of shares to foreigners. What need is there then for a corporation that intends to operate a public utility to have, at the time of its formation, 60 per cent of its capital owned by Filipinos alone? That condition may anytime be attained thru the necessary transfer of stocks. The moment for determining whether a corporation is entitled to operate as a public utility is when it applies for a franchise, certificate, or any other form of authorization for that purpose. And that can be done after the corporation has already come into being and not while it is still being formed. And at that

moment, the corporation must show that it has complied not only with the requirement of the Constitution as to the nationality of its capital, but also with the requirements of the Civil Aviation Law if it is a common carrier by air, the Revised Administrative Code if it is a common carrier by water, and the Public Service Law if it is a common carrier by land or other kind of public service.

Equally untenable is the suggestion that defendant should at least be held guilty of an "impossible crime" under article 59 of the Revised Penal Code. It not being possible to suppose that defendant had intended to commit a crime for the simple reason that the alleged constitutional prohibition which he is charged for having tried to circumvent does not exist, conviction under that article is out of the question.

The foregoing consideration can not but lead to the conclusion that the defendant can not be held guilty of the crime charged. The majority of the court, however, are also of the opinion that, even supposing that the act imputed to the defendant constituted falsification at the time it was perpetrated, still with the approval of the Party Amendment to the Constitution in March, 1947, which placed Americans on the same footing as Filipino citizens with respect to the right to operate public utilities in the Philippines, thus doing away with the prohibition in section 8, Article XIV of the Constitution in so far as American citizens are concerned, the said act has ceased to be an offense within the meaning of the law, so that defendant can no longer be held criminally liable therefor.

In view of the foregoing, the judgment appealed from is reversed and the defendant William H. Quasha acquitted, with costs de oficio.

G.R. No. 171396 May 3, 2006 PROF. RANDOLF S. DAVID, LORENZO TAÑADA III, RONALD LLAMAS, H. HARRY L. ROQUE, JR., JOEL RUIZ BUTUYAN, ROGER R. RAYEL, GARY S. MALLARI, ROMEL REGALADO BAGARES, CHRISTOPHER F.C. BOLASTIG, Petitioners, vs. GLORIA MACAPAGAL-ARROYO, AS PRESIDENT AND COMMANDER-IN-CHIEF, EXECUTIVE SECRETARY EDUARDO ERMITA, HON. AVELINO CRUZ II, SECRETARY OF NATIONAL DEFENSE, GENERAL GENEROSO SENGA, CHIEF OF STAFF, ARMED FORCES OF THE PHILIPPINES, DIRECTOR GENERAL ARTURO LOMIBAO, CHIEF, PHILIPPINE NATIONAL POLICE, Respondents. x-------------------------------------x

All powers need some restraint; practical adjustments rather than rigid formula are necessary.1 Superior strength – the use of force – cannot make wrongs into rights. In this regard, the courts should be vigilant in safeguarding the constitutional rights of the citizens, specifically their liberty.

Chief Justice Artemio V. Panganiban’s philosophy of liberty is thus most relevant. He said: "In cases involving liberty, the scales of justice should weigh heavily against government and in favor of the poor, the oppressed, the marginalized, the dispossessed and the weak." Laws and actions that restrict fundamental rights come to the courts "with a heavy presumption against their constitutional validity."2

These seven (7) consolidated petitions for certiorari and prohibition allege that in issuing Presidential Proclamation No. 1017 (PP 1017) and General Order No. 5 (G.O. No. 5), President Gloria Macapagal-Arroyo committed grave abuse of discretion. Petitioners contend that respondent officials of the Government, in their professed efforts to defend and preserve democratic institutions, are actually trampling upon the very freedom guaranteed and protected by the Constitution. Hence, such issuances are void for being unconstitutional.

Once again, the Court is faced with an age-old but persistently modern problem. How does the Constitution of a free people combine the degree of liberty, without which, law becomes tyranny, with the degree of law, without which, liberty becomes license?3

On February 24, 2006, as the nation celebrated the 20th Anniversary of the Edsa People Power I, President Arroyo issued PP 1017 declaring a state of national emergency, thus:

NOW, THEREFORE, I, Gloria Macapagal-Arroyo, President of the Republic of the Philippines and Commander-in-Chief of the Armed Forces of the Philippines, by virtue of the powers vested upon me by Section 18, Article 7 of the Philippine Constitution which states that: "The President. . . whenever it becomes necessary, . . . may call out (the) armed forces to prevent or suppress. . .rebellion. . .," and in my capacity as their Commander-in-Chief, do hereby command the Armed Forces of the Philippines, to maintain law and order throughout the Philippines, prevent or suppress all forms of lawless violence as well as any act of insurrection or rebellion and to enforce obedience to all the laws and to all decrees, orders and regulations promulgated by me personally or upon my direction; and as provided in Section 17, Article 12 of the Constitution do hereby declare a State of National Emergency.

She cited the following facts as bases:

WHEREAS, over these past months, elements in the political opposition have conspired with authoritarians of the extreme Left represented by the NDF-CPP-NPA and the extreme Right, represented by military adventurists – the historical enemies of the democratic Philippine State – who are now in a tactical alliance and engaged in a concerted and systematic conspiracy, over a broad front, to bring down the duly constituted Government elected in May 2004;

WHEREAS, these conspirators have repeatedly tried to bring down the President;

WHEREAS, the claims of these elements have been recklessly magnified by certain segments of the national media;

WHEREAS, this series of actions is hurting the Philippine State – by obstructing governance including hindering the growth of the economy and sabotaging the people’s confidence in government and their faith in the future of this country;

WHEREAS, these actions are adversely affecting the economy;

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

WHEREAS, Article 2, Section 4 of the our Constitution makes the defense and preservation of the democratic institutions and the State the primary duty of Government;

WHEREAS, the activities above-described, their consequences, ramifications and collateral effects constitute a clear and present danger to the safety and the integrity of the Philippine State and of the Filipino people;

On the same day, the President issued G. O. No. 5 implementing PP 1017, thus:

WHEREAS, over these past months, elements in the political opposition have conspired with authoritarians of the extreme Left, represented by the NDF-CPP-NPA and the extreme Right, represented by military adventurists - the historical enemies of the democratic Philippine State – and who are now in a tactical alliance and engaged in a concerted and systematic conspiracy, over a broad front, to bring down the duly-constituted Government elected in May 2004;

WHEREAS, these conspirators have repeatedly tried to bring down our republican government;

WHEREAS, the claims of these elements have been recklessly magnified by certain segments of the national media;

WHEREAS, these series of actions is hurting the Philippine State by obstructing governance, including hindering the growth of the economy and sabotaging the people’s confidence in the government and their faith in the future of this country;

WHEREAS, these actions are adversely affecting the economy;

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

WHEREAS, Article 2, Section 4 of our Constitution makes the defense and preservation of the democratic institutions and the State the primary duty of Government;

WHEREAS, the activities above-described, their consequences, ramifications and collateral effects constitute a clear and present danger to the safety and the integrity of the Philippine State and of the Filipino people;

WHEREAS, Proclamation 1017 date February 24, 2006 has been issued declaring a State of National Emergency;

NOW, THEREFORE, I GLORIA MACAPAGAL-ARROYO, by virtue of the powers vested in me under the Constitution as President of the Republic of the Philippines, and Commander-in-Chief of the Republic of the Philippines, and pursuant to Proclamation No. 1017 dated February 24, 2006, do hereby call upon the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP), to prevent and suppress acts of terrorism and lawless violence in the country;

I hereby direct the Chief of Staff of the AFP and the Chief of the PNP, as well as the officers and men of the AFP and PNP, to immediately carry out the necessary and appropriate actions and measures to suppress and prevent acts of terrorism and lawless violence.

On March 3, 2006, exactly one week after the declaration of a state of national emergency and after all these petitions had been filed, the President lifted PP 1017. She issued Proclamation No. 1021 which reads:

WHEREAS, pursuant to Section 18, Article VII and Section 17, Article XII of the Constitution, Proclamation No. 1017 dated February 24, 2006, was issued declaring a state of national emergency;

WHEREAS, by virtue of General Order No.5 and No.6 dated February 24, 2006, which were issued on the basis of Proclamation No. 1017, the Armed Forces of the Philippines (AFP) and the Philippine National Police (PNP), were directed to maintain law and order throughout the Philippines, prevent and suppress all form of lawless violence as well as any act of rebellion and to undertake such action as may be necessary;

WHEREAS, the AFP and PNP have effectively prevented, suppressed and quelled the acts lawless violence and rebellion;

NOW, THEREFORE, I, GLORIA MACAPAGAL-ARROYO, President of the Republic of the Philippines, by virtue of the powers vested in me by law, hereby declare that the state of national emergency has ceased to exist.

In their presentation of the factual bases of PP 1017 and G.O. No. 5, respondents stated that the proximate cause behind the executive issuances was the conspiracy among some military officers, leftist insurgents of the New People’s Army (NPA), and some members of the political opposition in a plot to unseat or

assassinate President Arroyo.4 They considered the aim to oust or assassinate the President and take-over the reigns of government as a clear and present danger.

During the oral arguments held on March 7, 2006, the Solicitor General specified the facts leading to the issuance of PP 1017 and G.O. No. 5. Significantly, there was no refutation from petitioners’ counsels.

The Solicitor General argued that the intent of the Constitution is to give full discretionary powers to the President in determining the necessity of calling out the armed forces. He emphasized that none of the petitioners has shown that PP 1017 was without factual bases. While he explained that it is not respondents’ task to state the facts behind the questioned Proclamation, however, they are presenting the same, narrated hereunder, for the elucidation of the issues.

On January 17, 2006, Captain Nathaniel Rabonza and First Lieutenants Sonny Sarmiento, Lawrence San Juan and Patricio Bumidang, members of the Magdalo Group indicted in the Oakwood mutiny, escaped their detention cell in Fort Bonifacio, Taguig City. In a public statement, they vowed to remain defiant and to elude arrest at all costs. They called upon the people to "show and proclaim our displeasure at the sham regime. Let us demonstrate our disgust, not only by going to the streets in protest, but also by wearing red bands on our left arms." 5

On February 17, 2006, the authorities got hold of a document entitled "Oplan Hackle I " which detailed plans for bombings and attacks during the Philippine Military Academy Alumni Homecoming in Baguio City. The plot was to assassinate selected targets including some cabinet members and President Arroyo herself.6 Upon the advice of her security, President Arroyo decided not to attend the Alumni Homecoming. The next day, at the height of the celebration, a bomb was found and detonated at the PMA parade ground.

On February 21, 2006, Lt. San Juan was recaptured in a communist safehouse in Batangas province. Found in his possession were two (2) flash disks containing minutes of the meetings between members of the Magdalo Group and the National People’s Army (NPA), a tape recorder, audio cassette cartridges, diskettes, and copies of subversive documents.7 Prior to his arrest, Lt. San Juan announced through DZRH that the "Magdalo’s D-Day would be on February 24, 2006, the 20th Anniversary of Edsa I."

On February 23, 2006, PNP Chief Arturo Lomibao intercepted information that members of the PNP- Special Action Force were planning to defect. Thus, he immediately ordered SAF Commanding General Marcelino Franco, Jr. to "disavow" any defection. The latter promptly obeyed and issued a public statement: "All SAF units are under the effective control of responsible and trustworthy officers with proven integrity and unquestionable loyalty."

On the same day, at the house of former Congressman Peping Cojuangco, President Cory Aquino’s brother, businessmen and mid-level government officials plotted moves to bring down the Arroyo administration. Nelly Sindayen of TIME Magazine reported that Pastor Saycon, longtime Arroyo critic, called a U.S. government official about his group’s plans if President Arroyo is ousted. Saycon also phoned a man code-named Delta. Saycon identified him as B/Gen. Danilo Lim, Commander of the Army’s elite Scout Ranger. Lim said "it was all systems go for the planned movement against Arroyo."8

B/Gen. Danilo Lim and Brigade Commander Col. Ariel Querubin confided to Gen. Generoso Senga, Chief of Staff of the Armed Forces of the Philippines (AFP), that a huge number of soldiers would join the rallies

to provide a critical mass and armed component to the Anti-Arroyo protests to be held on February 24, 2005. According to these two (2) officers, there was no way they could possibly stop the soldiers because they too, were breaking the chain of command to join the forces foist to unseat the President. However, Gen. Senga has remained faithful to his Commander-in-Chief and to the chain of command. He immediately took custody of B/Gen. Lim and directed Col. Querubin to return to the Philippine Marines Headquarters in Fort Bonifacio.

Earlier, the CPP-NPA called for intensification of political and revolutionary work within the military and the police establishments in order to forge alliances with its members and key officials. NPA spokesman Gregorio "Ka Roger" Rosal declared: "The Communist Party and revolutionary movement and the entire people look forward to the possibility in the coming year of accomplishing its immediate task of bringing down the Arroyo regime; of rendering it to weaken and unable to rule that it will not take much longer to end it."9

On the other hand, Cesar Renerio, spokesman for the National Democratic Front (NDF) at North Central Mindanao, publicly announced: "Anti-Arroyo groups within the military and police are growing rapidly, hastened by the economic difficulties suffered by the families of AFP officers and enlisted personnel who undertake counter-insurgency operations in the field." He claimed that with the forces of the national democratic movement, the anti-Arroyo conservative political parties, coalitions, plus the groups that have been reinforcing since June 2005, it is probable that the President’s ouster is nearing its concluding stage in the first half of 2006.

Respondents further claimed that the bombing of telecommunication towers and cell sites in Bulacan and Bataan was also considered as additional factual basis for the issuance of PP 1017 and G.O. No. 5. So is the raid of an army outpost in Benguet resulting in the death of three (3) soldiers. And also the directive of the Communist Party of the Philippines ordering its front organizations to join 5,000 Metro Manila radicals and 25,000 more from the provinces in mass protests.10

By midnight of February 23, 2006, the President convened her security advisers and several cabinet members to assess the gravity of the fermenting peace and order situation. She directed both the AFP and the PNP to account for all their men and ensure that the chain of command remains solid and undivided. To protect the young students from any possible trouble that might break loose on the streets, the President suspended classes in all levels in the entire National Capital Region.

For their part, petitioners cited the events that followed after the issuance of PP 1017 and G.O. No. 5.

Immediately, the Office of the President announced the cancellation of all programs and activities related to the 20th anniversary celebration of Edsa People Power I; and revoked the permits to hold rallies issued earlier by the local governments. Justice Secretary Raul Gonzales stated that political rallies, which to the President’s mind were organized for purposes of destabilization, are cancelled.Presidential Chief of Staff Michael Defensor announced that "warrantless arrests and take-over of facilities, including media, can already be implemented."11

Undeterred by the announcements that rallies and public assemblies would not be allowed, groups of protesters (members of Kilusang Mayo Uno [KMU] and National Federation of Labor Unions-Kilusang Mayo Uno [NAFLU-KMU]), marched from various parts of Metro Manila with the intention of converging at the EDSA shrine. Those who were already near the EDSA site were violently dispersed by huge clusters

of anti-riot police. The well-trained policemen used truncheons, big fiber glass shields, water cannons, and tear gas to stop and break up the marching groups, and scatter the massed participants. The same police action was used against the protesters marching forward to Cubao, Quezon City and to the corner of Santolan Street and EDSA. That same evening, hundreds of riot policemen broke up an EDSA celebration rally held along Ayala Avenue and Paseo de Roxas Street in Makati City.12

According to petitioner Kilusang Mayo Uno, the police cited PP 1017 as the ground for the dispersal of their assemblies.

During the dispersal of the rallyists along EDSA, police arrested (without warrant) petitioner Randolf S. David, a professor at the University of the Philippines and newspaper columnist. Also arrested was his companion, Ronald Llamas, president of party-list Akbayan.

At around 12:20 in the early morning of February 25, 2006, operatives of the Criminal Investigation and Detection Group (CIDG) of the PNP, on the basis of PP 1017 and G.O. No. 5, raided the Daily Tribune offices in Manila. The raiding team confiscated news stories by reporters, documents, pictures, and mock-ups of the Saturday issue. Policemen from Camp Crame in Quezon City were stationed inside the editorial and business offices of the newspaper; while policemen from the Manila Police District were stationed outside the building.13

A few minutes after the search and seizure at the Daily Tribune offices, the police surrounded the premises of another pro-opposition paper, Malaya, and its sister publication, the tabloid Abante.

The raid, according to Presidential Chief of Staff Michael Defensor, is "meant to show a ‘strong presence,’ to tell media outlets not to connive or do anything that would help the rebels in bringing down this government." The PNP warned that it would take over any media organization that would not follow "standards set by the government during the state of national emergency." Director General Lomibao stated that "if they do not follow the standards – and the standards are - if they would contribute to instability in the government, or if they do not subscribe to what is in General Order No. 5 and Proc. No. 1017 – we will recommend a ‘takeover.’" National Telecommunications’ Commissioner Ronald Solis urged television and radio networks to "cooperate" with the government for the duration of the state of national emergency. He asked for "balanced reporting" from broadcasters when covering the events surrounding the coup attempt foiled by the government. He warned that his agency will not hesitate to recommend the closure of any broadcast outfit that violates rules set out for media coverage when the national security is threatened.14

Also, on February 25, 2006, the police arrested Congressman Crispin Beltran, representing the Anakpawis Party and Chairman of Kilusang Mayo Uno (KMU), while leaving his farmhouse in Bulacan. The police showed a warrant for his arrest dated 1985. Beltran’s lawyer explained that the warrant, which stemmed from a case of inciting to rebellion filed during the Marcos regime, had long been quashed. Beltran, however, is not a party in any of these petitions.

When members of petitioner KMU went to Camp Crame to visit Beltran, they were told they could not be admitted because of PP 1017 and G.O. No. 5. Two members were arrested and detained, while the rest were dispersed by the police.

Bayan Muna Representative Satur Ocampo eluded arrest when the police went after him during a public forum at the Sulo Hotel in Quezon City. But his two drivers, identified as Roel and Art, were taken into custody.

Retired Major General Ramon Montaño, former head of the Philippine Constabulary, was arrested while with his wife and golfmates at the Orchard Golf and Country Club in Dasmariñas, Cavite.

Attempts were made to arrest Anakpawis Representative Satur Ocampo, Representative Rafael Mariano, Bayan Muna Representative Teodoro Casiño and Gabriela Representative Liza Maza. Bayan Muna Representative Josel Virador was arrested at the PAL Ticket Office in Davao City. Later, he was turned over to the custody of the House of Representatives where the "Batasan 5" decided to stay indefinitely.

Let it be stressed at this point that the alleged violations of the rights of Representatives Beltran, Satur Ocampo, et al., are not being raised in these petitions.

On March 3, 2006, President Arroyo issued PP 1021 declaring that the state of national emergency has ceased to exist.

In the interim, these seven (7) petitions challenging the constitutionality of PP 1017 and G.O. No. 5 were filed with this Court against the above-named respondents. Three (3) of these petitions impleaded President Arroyo as respondent.

In G.R. No. 171396, petitioners Randolf S. David, et al. assailed PP 1017 on the grounds that (1) it encroaches on the emergency powers of Congress; (2) itis a subterfuge to avoid the constitutional requirements for the imposition of martial law; and (3) it violates the constitutional guarantees of freedom of the press, of speech and of assembly.

In G.R. No. 171409, petitioners Ninez Cacho-Olivares and Tribune Publishing Co., Inc. challenged the CIDG’s act of raiding the Daily Tribune offices as a clear case of "censorship" or "prior restraint." They also claimed that the term "emergency" refers only to tsunami, typhoon, hurricane and similar occurrences, hence, there is "absolutely no emergency" that warrants the issuance of PP 1017.

In G.R. No. 171485, petitioners herein are Representative Francis Joseph G. Escudero, and twenty one (21) other members of the House of Representatives, including Representatives Satur Ocampo, Rafael Mariano, Teodoro Casiño, Liza Maza, and Josel Virador. They asserted that PP 1017 and G.O. No. 5 constitute "usurpation of legislative powers"; "violation of freedom of expression" and "a declaration of martial law." They alleged that President Arroyo "gravely abused her discretion in calling out the armed forces without clear and verifiable factual basis of the possibility of lawless violence and a showing that there is necessity to do so."

In G.R. No. 171483,petitioners KMU, NAFLU-KMU, and their members averred that PP 1017 and G.O. No. 5 are unconstitutional because (1) they arrogate unto President Arroyo the power to enact laws and decrees; (2) their issuance was without factual basis; and (3) they violate freedom of expression and the right of the people to peaceably assemble to redress their grievances.

In G.R. No. 171400, petitioner Alternative Law Groups, Inc. (ALGI) alleged that PP 1017 and G.O. No. 5 are unconstitutional because they violate (a) Section 415 of Article II, (b) Sections 1,16 2,17 and 418 of Article III, (c) Section 2319 of Article VI, and (d) Section 1720 of Article XII of the Constitution.

In G.R. No. 171489, petitioners Jose Anselmo I. Cadiz et al., alleged that PP 1017 is an "arbitrary and unlawful exercise by the President of her Martial Law powers." And assuming that PP 1017 is not really a declaration of Martial Law, petitioners argued that "it amounts to an exercise by the President of emergency powers without congressional approval." In addition, petitioners asserted that PP 1017 "goes beyond the nature and function of a proclamation as defined under the Revised Administrative Code."

And lastly, in G.R. No. 171424,petitionerLoren B. Legarda maintained that PP 1017 and G.O. No. 5 are "unconstitutional for being violative of the freedom of expression, including its cognate rights such as freedom of the press and the right to access to information on matters of public concern, all guaranteed under Article III, Section 4 of the 1987 Constitution." In this regard, she stated that these issuances prevented her from fully prosecuting her election protest pending before the Presidential Electoral Tribunal.

In respondents’ Consolidated Comment, the Solicitor General countered that: first, the petitions should be dismissed for being moot; second,petitioners in G.R. Nos. 171400 (ALGI), 171424 (Legarda), 171483 (KMU et al.), 171485 (Escudero et al.) and 171489 (Cadiz et al.) have no legal standing; third, it is not necessary for petitioners to implead President Arroyo as respondent; fourth, PP 1017 has constitutional and legal basis; and fifth, PP 1017 does not violate the people’s right to free expression and redress of grievances.

On March 7, 2006, the Court conducted oral arguments and heard the parties on the above interlocking issues which may be summarized as follows:

A. PROCEDURAL:

1) Whether the issuance of PP 1021 renders the petitions moot and academic.

2) Whether petitioners in 171485 (Escudero et al.), G.R. Nos. 171400 (ALGI), 171483 (KMU et al.), 171489 (Cadiz et al.), and 171424 (Legarda) have legal standing.

B. SUBSTANTIVE:

1) Whetherthe Supreme Court can review the factual bases of PP 1017.

2) Whether PP 1017 and G.O. No. 5 are unconstitutional.

a. Facial Challenge

b. Constitutional Basis

c. As Applied Challenge

A. PROCEDURAL

First, we must resolve the procedural roadblocks.

I- Moot and Academic Principle

One of the greatest contributions of the American system to this country is the concept of judicial review enunciated in Marbury v. Madison.21 This concept rests on the extraordinary simple foundation --

The Constitution is the supreme law. It was ordained by the people, the ultimate source of all political authority. It confers limited powers on the national government. x x x If the government consciously or unconsciously oversteps these limitations there must be some authority competent to hold it in control, to thwart its unconstitutional attempt, and thus to vindicate and preserve inviolate the will of the people as expressed in the Constitution. This power the courts exercise. This is the beginning and the end of the theory of judicial review.22

But the power of judicial review does not repose upon the courts a "self-starting capacity."23 Courts may exercise such power only when the following requisites are present: first, there must be an actual case or controversy; second, petitioners have to raise a question of constitutionality; third, the constitutional question must be raised at the earliest opportunity; and fourth, the decision of the constitutional question must be necessary to the determination of the case itself.24

Respondents maintain that the first and second requisites are absent, hence, we shall limit our discussion thereon.

An actual case or controversy involves a conflict of legal right, an opposite legal claims susceptible of judicial resolution. It is "definite and concrete, touching the legal relations of parties having adverse legal interest;" a real and substantial controversy admitting of specific relief.25 The Solicitor General refutes the existence of such actual case or controversy, contending that the present petitions were rendered "moot and academic" by President Arroyo’s issuance of PP 1021.

Such contention lacks merit.

A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening events,26 so that a declaration thereon would be of no practical use or value.27 Generally, courts decline jurisdiction over such case28 or dismiss it on ground of mootness.29

The Court holds that President Arroyo’s issuance of PP 1021 did not render the present petitions moot and academic. During the eight (8) days that PP 1017 was operative, the police officers, according to petitioners, committed illegal acts in implementing it. Are PP 1017 and G.O. No. 5 constitutional or valid? Do they justify these alleged illegal acts? These are the vital issues that must be resolved in the present petitions. It must be stressed that "an unconstitutional act is not a law, it confers no rights, it imposes no duties, it affords no protection; it is in legal contemplation, inoperative."30

The "moot and academic" principle is not a magical formula that can automatically dissuade the courts in resolving a case. Courts will decide cases, otherwise moot and academic, if: first, there is a grave violation of the Constitution;31 second, the exceptional character of the situation and the paramount public interest

is involved;32 third, when constitutional issue raised requires formulation of controlling principles to guide the bench, the bar, and the public;33 and fourth, the case is capable of repetition yet evading review.34

All the foregoing exceptions are present here and justify this Court’s assumption of jurisdiction over the instant petitions. Petitioners alleged that the issuance of PP 1017 and G.O. No. 5 violates the Constitution. There is no question that the issues being raised affect the public’s interest, involving as they do the people’s basic rights to freedom of expression, of assembly and of the press. Moreover, the Court has the duty to formulate guiding and controlling constitutional precepts, doctrines or rules. It has the symbolic function of educating the bench and the bar, and in the present petitions, the military and the police, on the extent of the protection given by constitutional guarantees.35 And lastly, respondents’ contested actions are capable of repetition. Certainly, the petitions are subject to judicial review.

In their attempt to prove the alleged mootness of this case, respondents cited Chief Justice Artemio V. Panganiban’s Separate Opinion in Sanlakas v. Executive Secretary.36 However, they failed to take into account the Chief Justice’s very statement that an otherwise "moot" case may still be decided "provided the party raising it in a proper case has been and/or continues to be prejudiced or damaged as a direct result of its issuance." The present case falls right within this exception to the mootness rule pointed out by the Chief Justice.

II- Legal Standing

In view of the number of petitioners suing in various personalities, the Court deems it imperative to have a more than passing discussion on legal standing or locus standi.

Locus standi is defined as "a right of appearance in a court of justice on a given question."37 In private suits, standing is governed by the "real-parties-in interest" rule as contained in Section 2, Rule 3 of the 1997 Rules of Civil Procedure, as amended. It provides that "every action must be prosecuted or defended in the name of the real party in interest." Accordingly, the "real-party-in interest" is "the party who stands to be benefited or injured by the judgment in the suit or the party entitled to the avails of the suit."38 Succinctly put, the plaintiff’s standing is based on his own right to the relief sought.

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

Case law in most jurisdictions now allows both "citizen" and "taxpayer" standing in public actions. The distinction was first laid down in Beauchamp v. Silk,39 where it was held that the plaintiff in a taxpayer’s suit is in a different category from the plaintiff in a citizen’s suit. In the former, the plaintiff is affected by the expenditure of public funds, while in the latter, he is but the mere instrument of the public concern. As held by the New York Supreme Court in People ex rel Case v. Collins:40 "In matter of mere public right, however…the people are the real parties…It is at least the right, if not the duty, of every citizen to interfere and see that a public offence be properly pursued and punished, and that a public grievance be remedied." With respect to taxpayer’s suits, Terr v. Jordan41 held that "the right of a citizen and a

taxpayer to maintain an action in courts to restrain the unlawful use of public funds to his injury cannot be denied."

However, to prevent just about any person from seeking judicial interference in any official policy or act with which he disagreed with, and thus hinders the activities of governmental agencies engaged in public service, the United State Supreme Court laid down the more stringent "direct injury" test in Ex Parte Levitt,42 later reaffirmed in Tileston v. Ullman.43 The same Court ruled that for a private individual to invoke the judicial power to determine the validity of an executive or legislative action, he must show that he has sustained a direct injury as a result of that action, and it is not sufficient that he has a general interest common to all members of the public.

This Court adopted the "direct injury" test in our jurisdiction. In People v. Vera,44 it held that the person who impugns the validity of a statute must have "a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result." The Vera doctrine was upheld in a litany of cases, such as, Custodio v. President of the Senate,45 Manila Race Horse Trainers’ Association v. De la Fuente,46 Pascual v. Secretary of Public Works47 and Anti-Chinese League of the Philippines v. Felix.48

However, being a mere procedural technicality, the requirement of locus standi may be waived by the Court in the exercise of its discretion. This was done in the 1949 Emergency Powers Cases, Araneta v. Dinglasan,49 where the "transcendental importance" of the cases prompted the Court to act liberally. Such liberality was neither a rarity nor accidental. In Aquino v. Comelec,50 this Court resolved to pass upon the issues raised due to the "far-reaching implications" of the petition notwithstanding its categorical statement that petitioner therein had no personality to file the suit. Indeed, there is a chain of cases where this liberal policy has been observed, allowing ordinary citizens, members of Congress, and civic organizations to prosecute actions involving the constitutionality or validity of laws, regulations and rulings.51

Thus, the Court has adopted a rule that even where the petitioners have failed to show direct injury, they have been allowed to sue under the principle of "transcendental importance." Pertinent are the following cases:

(1) Chavez v. Public Estates Authority,52 where the Court ruled that the enforcement of the constitutional right to information and the equitable diffusion of natural resources are matters of transcendental importance which clothe the petitioner with locus standi;

(2) Bagong Alyansang Makabayan v. Zamora,53 wherein the Court held that "given the transcendental importance of the issues involved, the Court may relax the standing requirements and allow the suit to prosper despite the lack of direct injury to the parties seeking judicial review" of the Visiting Forces Agreement;

(3) Lim v. Executive Secretary,54 while the Court noted that the petitioners may not file suit in their capacity as taxpayers absent a showing that "Balikatan 02-01" involves the exercise of Congress’ taxing or spending powers, it reiterated its ruling in Bagong Alyansang Makabayan v. Zamora,55that in cases of transcendental importance, the cases must be settled promptly and definitely and standing requirements may be relaxed.

By way of summary, the following rules may be culled from the cases decided by this Court. Taxpayers, voters, concerned citizens, and legislators may be accorded standing to sue, provided that the following requirements are met:

(1) the cases involve constitutional issues;

(2) for taxpayers, there must be a claim of illegal disbursement of public funds or that the tax measure is unconstitutional;

(3) for voters, there must be a showing of obvious interest in the validity of the election law in question;

(4) for concerned citizens, there must be a showing that the issues raised are of transcendental importance which must be settled early; and

(5) for legislators, there must be a claim that the official action complained of infringes upon their prerogatives as legislators.

Significantly, recent decisions show a certain toughening in the Court’s attitude toward legal standing.

In Kilosbayan, Inc. v. Morato,56 the Court ruled that the status of Kilosbayan as a people’s organization does not give it the requisite personality to question the validity of the on-line lottery contract, more so where it does not raise any issue of constitutionality. Moreover, it cannot sue as a taxpayer absent any allegation that public funds are being misused. Nor can it sue as a concerned citizen as it does not allege any specific injury it has suffered.

In Telecommunications and Broadcast Attorneys of the Philippines, Inc. v. Comelec,57 the Court reiterated the "direct injury" test with respect to concerned citizens’ cases involving constitutional issues. It held that "there must be a showing that the citizen personally suffered some actual or threatened injury arising from the alleged illegal official act."

In Lacson v. Perez,58 the Court ruled that one of the petitioners, Laban ng Demokratikong Pilipino (LDP), is not a real party-in-interest as it had not demonstrated any injury to itself or to its leaders, members or supporters.

In Sanlakas v. Executive Secretary,59 the Court ruled that only the petitioners who are members of Congress have standing to sue, as they claim that the President’s declaration of a state of rebellion is a usurpation of the emergency powers of Congress, thus impairing their legislative powers. As to petitioners Sanlakas, Partido Manggagawa, and Social Justice Society, the Court declared them to be devoid of standing, equating them with the LDP in Lacson.

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

The locus standi of petitioners in G.R. No. 171396, particularly David and Llamas, is beyond doubt. The same holds true with petitioners in G.R. No. 171409, Cacho-Olivares and Tribune Publishing Co. Inc. They alleged "direct injury" resulting from "illegal arrest" and "unlawful search" committed by police operatives pursuant to PP 1017. Rightly so, the Solicitor General does not question their legal standing.

In G.R. No. 171485, the opposition Congressmen alleged there was usurpation of legislative powers. They also raised the issue of whether or not the concurrence of Congress is necessary whenever the alarming powers incident to Martial Law are used. Moreover, it is in the interest of justice that those affected by PP 1017 can be represented by their Congressmen in bringing to the attention of the Court the alleged violations of their basic rights.

In G.R. No. 171400, (ALGI), this Court applied the liberality rule in Philconsa v. Enriquez,60 Kapatiran Ng Mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,61 Association of Small Landowners in the Philippines, Inc. v. Secretary of Agrarian Reform,62 Basco v. Philippine Amusement and Gaming Corporation,63 and Tañada v. Tuvera,64 that when the issue concerns a public right, it is sufficient that the petitioner is a citizen and has an interest in the execution of the laws.

In G.R. No. 171483, KMU’s assertion that PP 1017 and G.O. No. 5 violated its right to peaceful assembly may be deemed sufficient to give it legal standing. Organizations may be granted standing to assert the rights of their members.65 We take judicial notice of the announcement by the Office of the President banning all rallies and canceling all permits for public assemblies following the issuance of PP 1017 and G.O. No. 5.

In G.R. No. 171489, petitioners, Cadiz et al., who are national officers of the Integrated Bar of the Philippines (IBP) have no legal standing, having failed to allege any direct or potential injury which the IBP as an institution or its members may suffer as a consequence of the issuance of PP No. 1017 and G.O. No. 5. In Integrated Bar of the Philippines v. Zamora,66 the Court held that the mere invocation by the IBP of its duty to preserve the rule of law and nothing more, while undoubtedly true, is not sufficient to clothe it with standing in this case. This is too general an interest which is shared by other groups and the whole citizenry. However, in view of the transcendental importance of the issue, this Court declares that petitioner have locus standi.

In G.R. No. 171424, Loren Legarda has no personality as a taxpayer to file the instant petition as there are no allegations of illegal disbursement of public funds. The fact that she is a former Senator is of no consequence. She can no longer sue as a legislator on the allegation that her prerogatives as a lawmaker have been impaired by PP 1017 and G.O. No. 5. Her claim that she is a media personality will not likewise aid her because there was no showing that the enforcement of these issuances prevented her from pursuing her occupation. Her submission that she has pending electoral protest before the Presidential Electoral Tribunal is likewise of no relevance. She has not sufficiently shown that PP 1017 will affect the proceedings or result of her case. But considering once more the transcendental importance of the issue involved, this Court may relax the standing rules.

It must always be borne in mind that the question of locus standi is but corollary to the bigger question of proper exercise of judicial power. This is the underlying legal tenet of the "liberality doctrine" on legal standing. It cannot be doubted that the validity of PP No. 1017 and G.O. No. 5 is a judicial question which is of paramount importance to the Filipino people. To paraphrase Justice Laurel, the whole of Philippine society now waits with bated breath the ruling of this Court on this very critical matter. The petitions thus call for the application of the "transcendental importance" doctrine, a relaxation of the standing requirements for the petitioners in the "PP 1017 cases."1avvphil.net

This Court holds that all the petitioners herein have locus standi.

Incidentally, it is not proper to implead President Arroyo as respondent. Settled is the doctrine that the President, during his tenure of office or actual incumbency,67 may not be sued in any civil or criminal case, and there is no need to provide for it in the Constitution or law. It will degrade the dignity of the high office of the President, the Head of State, if he can be dragged into court litigations while serving as such. Furthermore, it is important that he be freed from any form of harassment, hindrance or distraction to enable him to fully attend to the performance of his official duties and functions. Unlike the legislative and judicial branch, only one constitutes the executive branch and anything which impairs his usefulness in the discharge of the many great and important duties imposed upon him by the Constitution necessarily impairs the operation of the Government. However, this does not mean that the President is not accountable to anyone. Like any other official, he remains accountable to the people68 but he may be removed from office only in the mode provided by law and that is by impeachment.69

B. SUBSTANTIVE

I. Review of Factual Bases

Petitioners maintain that PP 1017 has no factual basis. Hence, it was not "necessary" for President Arroyo to issue such Proclamation.

The issue of whether the Court may review the factual bases of the President’s exercise of his Commander-in-Chief power has reached its distilled point - from the indulgent days of Barcelon v. Baker70 and Montenegro v. Castaneda71 to the volatile era of Lansang v. Garcia,72 Aquino, Jr. v. Enrile,73 and Garcia-Padilla v. Enrile.74 The tug-of-war always cuts across the line defining "political questions," particularly those questions "in regard to which full discretionary authority has been delegated to the legislative or executive branch of the government."75 Barcelon and Montenegro were in unison in declaring that the authority to decide whether an exigency has arisen belongs to the President and his decision is final and conclusive on the courts. Lansang took the opposite view. There, the members of the Court were unanimous in the conviction that the Court has the authority to inquire into the existence of factual bases in order to determine their constitutional sufficiency. From the principle of separation of powers, it shifted the focus to the system of checks and balances, "under which the President is supreme, x x x only if and when he acts within the sphere allotted to him by the Basic Law, and the authority to determine whether or not he has so acted is vested in the Judicial Department, which in this respect, is, in turn, constitutionally supreme."76 In 1973, the unanimous Court of Lansang was divided in Aquino v. Enrile.77 There, the Court was almost evenly divided on the issue of whether the validity of the imposition of Martial Law is a political or justiciable question.78 Then came Garcia-Padilla v. Enrile which greatly diluted Lansang. It declared that there is a need to re-examine the latter case, ratiocinating that "in times of war or national emergency, the President must be given absolute control for the very life of the nation and the government is in great peril. The President, it intoned, is answerable only to his conscience, the People, and God."79

The Integrated Bar of the Philippines v. Zamora80 -- a recent case most pertinent to these cases at bar -- echoed a principle similar to Lansang. While the Court considered the President’s "calling-out" power as a discretionary power solely vested in his wisdom, it stressed that "this does not prevent an examination of whether such power was exercised within permissible constitutional limits or whether it was exercised in a manner constituting grave abuse of discretion."This ruling is mainly a result of the Court’s reliance on Section 1, Article VIII of 1987 Constitution which fortifies the authority of the courts to determine in an appropriate action the validity of the acts of the political departments. Under the new definition of judicial power, the courts are authorized not only "to settle actual controversies involving

rights which are legally demandable and enforceable," but also "to determine whether or not there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the government." The latter part of the authority represents a broadening of judicial power to enable the courts of justice to review what was before a forbidden territory, to wit, the discretion of the political departments of the government.81 It speaks of judicial prerogative not only in terms of power but also of duty.82

As to how the Court may inquire into the President’s exercise of power, Lansang adopted the test that "judicial inquiry can go no further than to satisfy the Court not that the President’s decision is correct," but that "the President did not act arbitrarily." Thus, the standard laid down is not correctness, but arbitrariness.83 In Integrated Bar of the Philippines, this Court further ruled that "it is incumbent upon the petitioner to show that the President’s decision is totally bereft of factual basis" and that if he fails, by way of proof, to support his assertion, then "this Court cannot undertake an independent investigation beyond the pleadings."

Petitioners failed to show that President Arroyo’s exercise of the calling-out power, by issuing PP 1017, is totally bereft of factual basis. A reading of the Solicitor General’s Consolidated Comment and Memorandum shows a detailed narration of the events leading to the issuance of PP 1017, with supporting reports forming part of the records. Mentioned are the escape of the Magdalo Group, their audacious threat of the Magdalo D-Day, the defections in the military, particularly in the Philippine Marines, and the reproving statements from the communist leaders. There was also the Minutes of the Intelligence Report and Security Group of the Philippine Army showing the growing alliance between the NPA and the military. Petitioners presented nothing to refute such events. Thus, absent any contrary allegations, the Court is convinced that the President was justified in issuing PP 1017 calling for military aid.

Indeed, judging the seriousness of the incidents, President Arroyo was not expected to simply fold her arms and do nothing to prevent or suppress what she believed was lawless violence, invasion or rebellion. However, the exercise of such power or duty must not stifle liberty.

II. Constitutionality of PP 1017 and G.O. No. 5 Doctrines of Several Political Theorists

on the Power of the President in Times of Emergency

This case brings to fore a contentious subject -- the power of the President in times of emergency. A glimpse at the various political theories relating to this subject provides an adequate backdrop for our

ensuing discussion.

John Locke, describing the architecture of civil government, called upon the English doctrine of prerogative to cope with the problem of emergency. In times of danger to the nation, positive law enacted by the legislature might be inadequate or even a fatal obstacle to the promptness of action necessary to avert catastrophe. In these situations, the Crown retained a prerogative "power to act according to discretion for the public good, without the proscription of the law and sometimes even against it."84 But Locke recognized that this moral restraint might not suffice to avoid abuse of prerogative powers. Who shall judge the need for resorting to the prerogative and how may its abuse be avoided? Here, Locke readily admitted defeat, suggesting that "the people have no other remedy in this, as in all other cases where they have no judge on earth, but to appeal to Heaven."85

Jean-Jacques Rousseau also assumed the need for temporary suspension of democratic processes of government in time of emergency. According to him:

The inflexibility of the laws, which prevents them from adopting themselves to circumstances, may, in certain cases, render them disastrous and make them bring about, at a time of crisis, the ruin of the State…

It is wrong therefore to wish to make political institutions as strong as to render it impossible to suspend their operation. Even Sparta allowed its law to lapse...

If the peril is of such a kind that the paraphernalia of the laws are an obstacle to their preservation, the method is to nominate a supreme lawyer, who shall silence all the laws and suspend for a moment the sovereign authority. In such a case, there is no doubt about the general will, and it clear that the people’s first intention is that the State shall not perish.86

Rosseau did not fear the abuse of the emergency dictatorship or "supreme magistracy" as he termed it. For him, it would more likely be cheapened by "indiscreet use." He was unwilling to rely upon an "appeal to heaven." Instead, he relied upon a tenure of office of prescribed duration to avoid perpetuation of the dictatorship.87

John Stuart Mill concluded his ardent defense of representative government: "I am far from condemning, in cases of extreme necessity, the assumption of absolute power in the form of a temporary dictatorship."88

Nicollo Machiavelli’s view of emergency powers, as one element in the whole scheme of limited government, furnished an ironic contrast to the Lockean theory of prerogative. He recognized and attempted to bridge this chasm in democratic political theory, thus:

Now, in a well-ordered society, it should never be necessary to resort to extra –constitutional measures; for although they may for a time be beneficial, yet the precedent is pernicious, for if the practice is once established for good objects, they will in a little while be disregarded under that pretext but for evil purposes. Thus, no republic will ever be perfect if she has not by law provided for everything, having a remedy for every emergency and fixed rules for applying it.89

Machiavelli – in contrast to Locke, Rosseau and Mill – sought to incorporate into the constitution a regularized system of standby emergency powers to be invoked with suitable checks and controls in time of national danger. He attempted forthrightly to meet the problem of combining a capacious reserve of power and speed and vigor in its application in time of emergency, with effective constitutional restraints.90

Contemporary political theorists, addressing themselves to the problem of response to emergency by constitutional democracies, have employed the doctrine of constitutional dictatorship.91 Frederick M. Watkins saw "no reason why absolutism should not be used as a means for the defense of liberal institutions," provided it "serves to protect established institutions from the danger of permanent injury in a period of temporary emergency and is followed by a prompt return to the previous forms of political life."92 He recognized the two (2) key elements of the problem of emergency governance, as well as all constitutional governance: increasing administrative powers of the executive, while at the same time "imposing limitation upon that power."93 Watkins placed his real faith in a scheme of constitutional

dictatorship. These are the conditions of success of such a dictatorship: "The period of dictatorship must be relatively short…Dictatorship should always be strictly legitimate in character…Final authority to determine the need for dictatorship in any given case must never rest with the dictator himself…"94 and the objective of such an emergency dictatorship should be "strict political conservatism."

Carl J. Friedrich cast his analysis in terms similar to those of Watkins.95 "It is a problem of concentrating power – in a government where power has consciously been divided – to cope with… situations of unprecedented magnitude and gravity. There must be a broad grant of powers, subject to equally strong limitations as to who shall exercise such powers, when, for how long, and to what end."96 Friedrich, too, offered criteria for judging the adequacy of any of scheme of emergency powers, to wit: "The emergency executive must be appointed by constitutional means – i.e., he must be legitimate; he should not enjoy power to determine the existence of an emergency; emergency powers should be exercised under a strict time limitation; and last, the objective of emergency action must be the defense of the constitutional order."97

Clinton L. Rossiter, after surveying the history of the employment of emergency powers in Great Britain, France, Weimar, Germany and the United States, reverted to a description of a scheme of "constitutional dictatorship" as solution to the vexing problems presented by emergency.98 Like Watkins and Friedrich, he stated a priori the conditions of success of the "constitutional dictatorship," thus:

1) No general regime or particular institution of constitutional dictatorship should be initiated unless it is necessary or even indispensable to the preservation of the State and its constitutional order…

2) …the decision to institute a constitutional dictatorship should never be in the hands of the man or men who will constitute the dictator…

3) No government should initiate a constitutional dictatorship without making specific provisions for its termination…

4) …all uses of emergency powers and all readjustments in the organization of the government should be effected in pursuit of constitutional or legal requirements…

5) … no dictatorial institution should be adopted, no right invaded, no regular procedure altered any more than is absolutely necessary for the conquest of the particular crisis . . .

6) The measures adopted in the prosecution of the a constitutional dictatorship should never be permanent in character or effect…

7) The dictatorship should be carried on by persons representative of every part of the citizenry interested in the defense of the existing constitutional order. . .

8) Ultimate responsibility should be maintained for every action taken under a constitutional dictatorship. . .

9) The decision to terminate a constitutional dictatorship, like the decision to institute one should never be in the hands of the man or men who constitute the dictator. . .

10) No constitutional dictatorship should extend beyond the termination of the crisis for which it was instituted…

11) …the termination of the crisis must be followed by a complete return as possible to the political and governmental conditions existing prior to the initiation of the constitutional dictatorship…99

Rossiter accorded to legislature a far greater role in the oversight exercise of emergency powers than did Watkins. He would secure to Congress final responsibility for declaring the existence or termination of an emergency, and he places great faith in the effectiveness of congressional investigating committees.100

Scott and Cotter, in analyzing the above contemporary theories in light of recent experience, were one in saying that, "the suggestion that democracies surrender the control of government to an authoritarian ruler in time of grave danger to the nation is not based upon sound constitutional theory." To appraise emergency power in terms of constitutional dictatorship serves merely to distort the problem and hinder realistic analysis. It matters not whether the term "dictator" is used in its normal sense (as applied to authoritarian rulers) or is employed to embrace all chief executives administering emergency powers. However used, "constitutional dictatorship" cannot be divorced from the implication of suspension of the processes of constitutionalism. Thus, they favored instead the "concept of constitutionalism" articulated by Charles H. McIlwain:

A concept of constitutionalism which is less misleading in the analysis of problems of emergency powers, and which is consistent with the findings of this study, is that formulated by Charles H. McIlwain. While it does not by any means necessarily exclude some indeterminate limitations upon the substantive powers of government, full emphasis is placed upon procedural limitations, and political responsibility. McIlwain clearly recognized the need to repose adequate power in government. And in discussing the meaning of constitutionalism, he insisted that the historical and proper test of constitutionalism was the existence of adequate processes for keeping government responsible. He refused to equate constitutionalism with the enfeebling of government by an exaggerated emphasis upon separation of powers and substantive limitations on governmental power. He found that the really effective checks on despotism have consisted not in the weakening of government but, but rather in the limiting of it; between which there is a great and very significant difference. In associating constitutionalism with "limited" as distinguished from "weak" government, McIlwain meant government limited to the orderly procedure of law as opposed to the processes of force. The two fundamental correlative elements of constitutionalism for which all lovers of liberty must yet fight are the legal limits to arbitrary power and a complete political responsibility of government to the governed.101

In the final analysis, the various approaches to emergency of the above political theorists –- from Lock’s "theory of prerogative," to Watkins’ doctrine of "constitutional dictatorship" and, eventually, to McIlwain’s "principle of constitutionalism" --- ultimately aim to solve one real problem in emergency governance, i.e., that of allotting increasing areas of discretionary power to the Chief Executive, while insuring that such powers will be exercised with a sense of political responsibility and under effective limitations and checks.

Our Constitution has fairly coped with this problem. Fresh from the fetters of a repressive regime, the 1986 Constitutional Commission, in drafting the 1987 Constitution, endeavored to create a government in the concept of Justice Jackson’s "balanced power structure."102 Executive, legislative, and judicial powers are dispersed to the President, the Congress, and the Supreme Court, respectively. Each is

supreme within its own sphere. But none has the monopoly of power in times of emergency. Each branch is given a role to serve as limitation or check upon the other. This system does not weaken the President, it just limits his power, using the language of McIlwain. In other words, in times of emergency, our Constitution reasonably demands that we repose a certain amount of faith in the basic integrity and wisdom of the Chief Executive but, at the same time, it obliges him to operate within carefully prescribed procedural limitations.

a. "Facial Challenge"

Petitioners contend that PP 1017 is void on its face because of its "overbreadth." They claim that its enforcement encroached on both unprotected and protected rights under Section 4, Article III of the Constitution and sent a "chilling effect" to the citizens.

A facial review of PP 1017, using the overbreadth doctrine, is uncalled for.

First and foremost, the overbreadth doctrine is an analytical tool developed for testing "on their faces" statutes in free speech cases, also known under the American Law as First Amendment cases.103

A plain reading of PP 1017 shows that it is not primarily directed to speech or even speech-related conduct. It is actually a call upon the AFP to prevent or suppress all forms of lawless violence. In United States v. Salerno,104 the US Supreme Court held that "we have not recognized an ‘overbreadth’ doctrine outside the limited context of the First Amendment" (freedom of speech).

Moreover, the overbreadth doctrine is not intended for testing the validity of a law that "reflects legitimate state interest in maintaining comprehensive control over harmful, constitutionally unprotected conduct." Undoubtedly, lawless violence, insurrection and rebellion are considered "harmful" and "constitutionally unprotected conduct." In Broadrick v. Oklahoma,105 it was held:

It remains a ‘matter of no little difficulty’ to determine when a law may properly be held void on its face and when ‘such summary action’ is inappropriate. But the plain import of our cases is, at the very least, that facial overbreadth adjudication is an exception to our traditional rules of practice and that its function, a limited one at the outset, attenuates as the otherwise unprotected behavior that it forbids the State to sanction moves from ‘pure speech’ toward conduct and that conduct –even if expressive – falls within the scope of otherwise valid criminal laws that reflect legitimate state interests in maintaining comprehensive controls over harmful, constitutionally unprotected conduct.

Thus, claims of facial overbreadth are entertained in cases involving statutes which, by their terms, seek to regulate only "spoken words" and again, that "overbreadth claims, if entertained at all, have been curtailed when invoked against ordinary criminal laws that are sought to be applied to protected conduct."106 Here, the incontrovertible fact remains that PP 1017 pertains to a spectrum of conduct, not free speech, which is manifestly subject to state regulation.

Second, facial invalidation of laws is considered as "manifestly strong medicine," to be used "sparingly and only as a last resort," and is "generally disfavored;"107 The reason for this is obvious. Embedded in the traditional rules governing constitutional adjudication is the principle that a person to whom a law may be applied will not be heard to challenge a law on the ground that it may conceivably be applied

unconstitutionally to others, i.e., in other situations not before the Court.108 A writer and scholar in Constitutional Law explains further:

The most distinctive feature of the overbreadth technique is that it marks an exception to some of the usual rules of constitutional litigation. Ordinarily, a particular litigant claims that a statute is unconstitutional as applied to him or her; if the litigant prevails, the courts carve away the unconstitutional aspects of the law by invalidating its improper applications on a case to case basis. Moreover, challengers to a law are not permitted to raise the rights of third parties and can only assert their own interests. In overbreadth analysis, those rules give way; challenges are permitted to raise the rights of third parties; and the court invalidates the entire statute "on its face," not merely "as applied for" so that the overbroad law becomes unenforceable until a properly authorized court construes it more narrowly. The factor that motivates courts to depart from the normal adjudicatory rules is the concern with the "chilling;" deterrent effect of the overbroad statute on third parties not courageous enough to bring suit. The Court assumes that an overbroad law’s "very existence may cause others not before the court to refrain from constitutionally protected speech or expression." An overbreadth ruling is designed to remove that deterrent effect on the speech of those third parties.

In other words, a facial challenge using the overbreadth doctrine will require the Court to examine PP 1017 and pinpoint its flaws and defects, not on the basis of its actual operation to petitioners, but on the assumption or prediction that its very existence may cause others not before the Court to refrain from constitutionally protected speech or expression. In Younger v. Harris,109 it was held that:

[T]he task of analyzing a proposed statute, pinpointing its deficiencies, and requiring correction of these deficiencies before the statute is put into effect, is rarely if ever an appropriate task for the judiciary. The combination of the relative remoteness of the controversy, the impact on the legislative process of the relief sought, and above all the speculative and amorphous nature of the required line-by-line analysis of detailed statutes,...ordinarily results in a kind of case that is wholly unsatisfactory for deciding constitutional questions, whichever way they might be decided.

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

Petitioners likewise seek a facial review of PP 1017 on the ground of vagueness. This, too, is unwarranted.

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

b. Constitutional Basis of PP 1017

Now on the constitutional foundation of PP 1017.

The operative portion of PP 1017 may be divided into three important provisions, thus:

First provision:

"by virtue of the power vested upon me by Section 18, Artilce VII … do hereby command the Armed Forces of the Philippines, to maintain law and order throughout the Philippines, prevent or suppress all forms of lawless violence as well any act of insurrection or rebellion"

Second provision:

"and to enforce obedience to all the laws and to all decrees, orders and regulations promulgated by me personally or upon my direction;"

Third provision:

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

First Provision: Calling-out Power

The first provision pertains to the President’s calling-out power. In Sanlakas v. Executive Secretary,111 this Court, through Mr. Justice Dante O. Tinga, held that Section 18, Article VII of the Constitution reproduced as follows:

Sec. 18. The President shall be the Commander-in-Chief of all armed forces of the Philippines and whenever it becomes necessary, he may call out such armed forces to prevent or suppress lawless violence, invasion or rebellion. In case of invasion or rebellion, when the public safety requires it, he may, for a period not exceeding sixty days, suspend the privilege of the writ of habeas corpus or place the Philippines or any part thereof under martial law. Within forty-eight hours from the proclamation of martial law or the suspension of the privilege of the writ of habeas corpus, the President shall submit a report in person or in writing to the Congress. The Congress, voting jointly, by a vote of at least a majority of all its Members in regular or special session, may revoke such proclamation or suspension, which revocation shall not be set aside by the President. Upon the initiative of the President, the Congress may, in the same manner, extend such proclamation or suspension for a period to be determined by the Congress, if the invasion or rebellion shall persist and public safety requires it.

The Congress, if not in session, shall within twenty-four hours following such proclamation or suspension, convene in accordance with its rules without need of a call.

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

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

The suspension of the privilege of the writ shall apply only to persons judicially charged for rebellion or offenses inherent in or directly connected with invasion.

During the suspension of the privilege of the writ, any person thus arrested or detained shall be judicially charged within three days, otherwise he shall be released.

grants the President, as Commander-in-Chief, a "sequence" of graduated powers. From the most to the least benign, these are: the calling-out power, the power to suspend the privilege of the writ of habeas corpus, and the power to declare Martial Law. Citing Integrated Bar of the Philippines v. Zamora,112 the Court ruled that the only criterion for the exercise of the calling-out power is that "whenever it becomes necessary," the President may call the armed forces "to prevent or suppress lawless violence, invasion or rebellion." Are these conditions present in the instant cases? As stated earlier, considering the circumstances then prevailing, President Arroyo found it necessary to issue PP 1017. Owing to her Office’s vast intelligence network, she is in the best position to determine the actual condition of the country.

Under the calling-out power, the President may summon the armed forces to aid him in suppressing lawless violence, invasion and rebellion. This involves ordinary police action. But every act that goes beyond the President’s calling-out power is considered illegal or ultra vires. For this reason, a President must be careful in the exercise of his powers. He cannot invoke a greater power when he wishes to act under a lesser power. There lies the wisdom of our Constitution, the greater the power, the greater are the limitations.

It is pertinent to state, however, that there is a distinction between the President’s authority to declare a "state of rebellion" (in Sanlakas) and the authority to proclaim a state of national emergency. While President Arroyo’s authority to declare a "state of rebellion" emanates from her powers as Chief Executive, the statutory authority cited in Sanlakas was Section 4, Chapter 2, Book II of the Revised Administrative Code of 1987, which provides:

SEC. 4. – Proclamations. – Acts of the President fixing a date or declaring a status or condition of public moment or interest, upon the existence of which the operation of a specific law or regulation is made to depend, shall be promulgated in proclamations which shall have the force of an executive order.

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

Some of the petitioners vehemently maintain that PP 1017 is actually a declaration of Martial Law. It is no so. What defines the character of PP 1017 are its wordings. It is plain therein that what the President invoked was her calling-out power.

The declaration of Martial Law is a "warn[ing] to citizens that the military power has been called upon by the executive to assist in the maintenance of law and order, and that, while the emergency lasts, they must, upon pain of arrest and punishment, not commit any acts which will in any way render more difficult the restoration of order and the enforcement of law."113

In his "Statement before the Senate Committee on Justice" on March 13, 2006, Mr. Justice Vicente V. Mendoza,114 an authority in constitutional law, said that of the three powers of the President as Commander-in-Chief, the power to declare Martial Law poses the most severe threat to civil liberties. It is a strong medicine which should not be resorted to lightly. It cannot be used to stifle or persecute critics of the government. It is placed in the keeping of the President for the purpose of enabling him to secure the people from harm and to restore order so that they can enjoy their individual freedoms. In fact, Section 18, Art. VII, provides:

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

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

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

Based on the above disquisition, it is clear that PP 1017 is not a declaration of Martial Law. It is merely an exercise of President Arroyo’s calling-out power for the armed forces to assist her in preventing or suppressing lawless violence.

Second Provision: "Take Care" Power

The second provision pertains to the power of the President to ensure that the laws be faithfully executed. This is based on Section 17, Article VII which reads:

SEC. 17. The President shall have control of all the executive departments, bureaus, and offices. He shall ensure that the laws be faithfully executed.

As the Executive in whom the executive power is vested,115 the primary function of the President is to enforce the laws as well as to formulate policies to be embodied in existing laws. He sees to it that all laws are enforced by the officials and employees of his department. Before assuming office, he is required to take an oath or affirmation to the effect that as President of the Philippines, he will, among others, "execute its laws."116 In the exercise of such function, the President, if needed, may employ the powers attached to his office as the Commander-in-Chief of all the armed forces of the country,117 including the Philippine National Police118 under the Department of Interior and Local Government.119

Petitioners, especially Representatives Francis Joseph G. Escudero, Satur Ocampo, Rafael Mariano, Teodoro Casiño, Liza Maza, and Josel Virador argue that PP 1017 is unconstitutional as it arrogated upon President Arroyo the power to enact laws and decrees in violation of Section 1, Article VI of the Constitution, which vests the power to enact laws in Congress. They assail the clause "to enforce obedience to all the laws and to all decrees, orders and regulations promulgated by me personally or upon my direction."

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Petitioners’ contention is understandable. A reading of PP 1017 operative clause shows that it was lifted120 from Former President Marcos’ Proclamation No. 1081, which partly reads:

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

We all know that it was PP 1081 which granted President Marcos legislative power. Its enabling clause states: "to enforce obedience to all the laws and decrees, orders and regulations promulgated by me personally or upon my direction." Upon the other hand, the enabling clause of PP 1017 issued by President Arroyo is: to enforce obedience to all the laws and to all decrees, orders and regulations promulgated by me personally or upon my direction."

Is it within the domain of President Arroyo to promulgate "decrees"?

PP 1017 states in part: "to enforce obedience to all the laws and decrees x x x promulgated by me personally or upon my direction."

The President is granted an Ordinance Power under Chapter 2, Book III of Executive Order No. 292 (Administrative Code of 1987). She may issue any of the following:

Sec. 2. Executive Orders. — Acts of the President providing for rules of a general or permanent character in implementation or execution of constitutional or statutory powers shall be promulgated in executive orders.

Sec. 3. Administrative Orders. — Acts of the President which relate to particular aspect of governmental operations in pursuance of his duties as administrative head shall be promulgated in administrative orders.

Sec. 4. Proclamations. — Acts of the President fixing a date or declaring a status or condition of public moment or interest, upon the existence of which the operation of a specific law or regulation is made to depend, shall be promulgated in proclamations which shall have the force of an executive order.

Sec. 5. Memorandum Orders. — Acts of the President on matters of administrative detail or of subordinate or temporary interest which only concern a particular officer or office of the Government shall be embodied in memorandum orders.

Sec. 6. Memorandum Circulars. — Acts of the President on matters relating to internal administration, which the President desires to bring to the attention of all or some of the departments, agencies, bureaus or offices of the Government, for information or compliance, shall be embodied in memorandum circulars.

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

President Arroyo’s ordinance power is limited to the foregoing issuances. She cannot issue decrees similar to those issued by Former President Marcos under PP 1081. Presidential Decrees are laws which are of the same category and binding force as statutes because they were issued by the President in the exercise of his legislative power during the period of Martial Law under the 1973 Constitution.121

This Court rules that the assailed PP 1017 is unconstitutional insofar as it grants President Arroyo the authority to promulgate "decrees." Legislative power is peculiarly within the province of the Legislature. Section 1, Article VI categorically states that "[t]he legislative power shall be vested in the Congress of the Philippines which shall consist of a Senate and a House of Representatives." To be sure, neither Martial Law nor a state of rebellion nor a state of emergency can justify President Arroyo’s exercise of legislative power by issuing decrees.

Can President Arroyo enforce obedience to all decrees and laws through the military?

As this Court stated earlier, President Arroyo has no authority to enact decrees. It follows that these decrees are void and, therefore, cannot be enforced. With respect to "laws," she cannot call the military to enforce or implement certain laws, such as customs laws, laws governing family and property relations, laws on obligations and contracts and the like. She can only order the military, under PP 1017, to enforce laws pertinent to its duty to suppress lawless violence.

Third Provision: Power to Take Over

The pertinent provision of PP 1017 states:

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

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

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

What could be the reason of President Arroyo in invoking the above provision when she issued PP 1017?

The answer is simple. During the existence of the state of national emergency, PP 1017 purports to grant the President, without any authority or delegation from Congress, to take over or direct the operation of any privately-owned public utility or business affected with public interest.

This provision was first introduced in the 1973 Constitution, as a product of the "martial law" thinking of the 1971 Constitutional Convention.122 In effect at the time of its approval was President Marcos’ Letter of Instruction No. 2 dated September 22, 1972 instructing the Secretary of National Defense to take over "the management, control and operation of the Manila Electric Company, the Philippine Long Distance Telephone Company, the National Waterworks and Sewerage Authority, the Philippine National Railways, the Philippine Air Lines, Air Manila (and) Filipinas Orient Airways . . . for the successful prosecution by the Government of its effort to contain, solve and end the present national emergency."

Petitioners, particularly the members of the House of Representatives, claim that President Arroyo’s inclusion of Section 17, Article XII in PP 1017 is an encroachment on the legislature’s emergency powers.

This is an area that needs delineation.

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

Section 23, Article VI of the Constitution reads:

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

(2) In times of war or other national emergency, the Congress may, by law, authorize the President, for a limited period and subject to such restrictions as it may prescribe, to exercise powers necessary and proper to carry out a declared national policy. Unless sooner withdrawn by resolution of the Congress, such powers shall cease upon the next adjournment thereof.

It may be pointed out that the second paragraph of the above provision refers not only to war but also to "other national emergency." If the intention of the Framers of our Constitution was to withhold from the President the authority to declare a "state of national emergency" pursuant to Section 18, Article VII (calling-out power) and grant it to Congress (like the declaration of the existence of a state of war), then the Framers could have provided so. Clearly, they did not intend that Congress should first authorize the President before he can declare a "state of national emergency." The logical conclusion then is that President Arroyo could validly declare the existence of a state of national emergency even in the absence of a Congressional enactment.

But the exercise of emergency powers, such as the taking over of privately owned public utility or business affected with public interest, is a different matter. This requires a delegation from Congress.

Courts have often said that constitutional provisions in pari materia are to be construed together. Otherwise stated, different clauses, sections, and provisions of a constitution which relate to the same subject matter will be construed together and considered in the light of each other.123 Considering that Section 17 of Article XII and Section 23 of Article VI, previously quoted, relate to national emergencies, they must be read together to determine the limitation of the exercise of emergency powers.

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

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

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

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

(4) The emergency powers must be exercised to carry out a national policy declared by Congress.124

Section 17, Article XII must be understood as an aspect of the emergency powers clause. The taking over of private business affected with public interest is just another facet of the emergency powers generally reposed upon Congress. Thus, when Section 17 states that the "the State may, during the emergency and under reasonable terms prescribed by it, temporarily take over or direct the operation of any privately owned public utility or business affected with public interest," it refers to Congress, not the President. Now, whether or not the President may exercise such power is dependent on whether Congress may delegate it to him pursuant to a law prescribing the reasonable terms thereof. Youngstown Sheet & Tube Co. et al. v. Sawyer,125 held:

It is clear that if the President had authority to issue the order he did, it must be found in some provision of the Constitution. And it is not claimed that express constitutional language grants this power to the President. The contention is that presidential power should be implied from the aggregate of his powers under the Constitution. Particular reliance is placed on provisions in Article II which say that "The executive Power shall be vested in a President . . . .;" that "he shall take Care that the Laws be faithfully executed;" and that he "shall be Commander-in-Chief of the Army and Navy of the United States.

The order cannot properly be sustained as an exercise of the President’s military power as Commander-in-Chief of the Armed Forces. The Government attempts to do so by citing a number of cases upholding broad powers in military commanders engaged in day-to-day fighting in a theater of war. Such cases need not concern us here. Even though "theater of war" be an expanding concept, we cannot with faithfulness to our constitutional system hold that the Commander-in-Chief of the Armed Forces has the ultimate power as such to take possession of private property in order to keep labor disputes from stopping production. This is a job for the nation’s lawmakers, not for its military authorities.

Nor can the seizure order be sustained because of the several constitutional provisions that grant executive power to the President. In the framework of our Constitution, the President’s power to see

that the laws are faithfully executed refutes the idea that he is to be a lawmaker. The Constitution limits his functions in the lawmaking process to the recommending of laws he thinks wise and the vetoing of laws he thinks bad. And the Constitution is neither silent nor equivocal about who shall make laws which the President is to execute. The first section of the first article says that "All legislative Powers herein granted shall be vested in a Congress of the United States. . ."126

Petitioner Cacho-Olivares, et al. contends that the term "emergency" under Section 17, Article XII refers to "tsunami," "typhoon," "hurricane"and"similar occurrences." This is a limited view of "emergency."

Emergency, as a generic term, connotes the existence of conditions suddenly intensifying the degree of existing danger to life or well-being beyond that which is accepted as normal. Implicit in this definitions are the elements of intensity, variety, and perception.127 Emergencies, as perceived by legislature or executive in the United Sates since 1933, have been occasioned by a wide range of situations, classifiable under three (3) principal heads: a) economic,128 b) natural disaster,129 and c) national security.130

"Emergency," as contemplated in our Constitution, is of the same breadth. It may include rebellion, economic crisis, pestilence or epidemic, typhoon, flood, or other similar catastrophe of nationwide proportions or effect.131 This is evident in the Records of the Constitutional Commission, thus:

MR. GASCON. Yes. What is the Committee’s definition of "national emergency" which appears in Section 13, page 5? It reads:

When the common good so requires, the State may temporarily take over or direct the operation of any privately owned public utility or business affected with public interest.

MR. VILLEGAS. What I mean is threat from external aggression, for example, calamities or natural disasters.

MR. GASCON. There is a question by Commissioner de los Reyes. What about strikes and riots?

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

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

x x x x x x

MR. TINGSON. May I ask the committee if "national emergency" refers to military national emergency or could this be economic emergency?"

MR. VILLEGAS. Yes, it could refer to both military or economic dislocations.

MR. TINGSON. Thank you very much.133

It may be argued that when there is national emergency, Congress may not be able to convene and, therefore, unable to delegate to the President the power to take over privately-owned public utility or business affected with public interest.

In Araneta v. Dinglasan,134 this Court emphasized that legislative power, through which extraordinary measures are exercised, remains in Congress even in times of crisis.

"x x x

After all the criticisms that have been made against the efficiency of the system of the separation of powers, the fact remains that the Constitution has set up this form of government, with all its defects and shortcomings, in preference to the commingling of powers in one man or group of men. The Filipino people by adopting parliamentary government have given notice that they share the faith of other democracy-loving peoples in this system, with all its faults, as the ideal. The point is, under this framework of government, legislation is preserved for Congress all the time, not excepting periods of crisis no matter how serious. Never in the history of the United States, the basic features of whose Constitution have been copied in ours, have specific functions of the legislative branch of enacting laws been surrendered to another department – unless we regard as legislating the carrying out of a legislative policy according to prescribed standards; no, not even when that Republic was fighting a total war, or when it was engaged in a life-and-death struggle to preserve the Union. The truth is that under our concept of constitutional government, in times of extreme perils more than in normal circumstances ‘the various branches, executive, legislative, and judicial,’ given the ability to act, are called upon ‘to perform the duties and discharge the responsibilities committed to them respectively."

Following our interpretation of Section 17, Article XII, invoked by President Arroyo in issuing PP 1017, this Court rules that such Proclamation does not authorize her during the emergency to temporarily take over or direct the operation of any privately owned public utility or business affected with public interest without authority from Congress.

Let it be emphasized that while the President alone can declare a state of national emergency, however, without legislation, he has no power to take over privately-owned public utility or business affected with public interest. The President cannot decide whether exceptional circumstances exist warranting the take over of privately-owned public utility or business affected with public interest. Nor can he determine when such exceptional circumstances have ceased. Likewise, without legislation, the President has no power to point out the types of businesses affected with public interest that should be taken over. In short, the President has no absolute authority to exercise all the powers of the State under Section 17, Article VII in the absence of an emergency powers act passed by Congress.

c. "AS APPLIED CHALLENGE"

One of the misfortunes of an emergency, particularly, that which pertains to security, is that military necessity and the guaranteed rights of the individual are often not compatible. Our history reveals that in the crucible of conflict, many rights are curtailed and trampled upon. Here, the right against unreasonable search and seizure; the right against warrantless arrest; and the freedom of speech, of expression, of the press, and of assembly under the Bill of Rights suffered the greatest blow.

Of the seven (7) petitions, three (3) indicate "direct injury."

In G.R. No. 171396, petitioners David and Llamas alleged that, on February 24, 2006, they were arrested without warrants on their way to EDSA to celebrate the 20th Anniversary of People Power I. The arresting officers cited PP 1017 as basis of the arrest.

In G.R. No. 171409, petitioners Cacho-Olivares and Tribune Publishing Co., Inc. claimed that on February 25, 2006, the CIDG operatives "raided and ransacked without warrant" their office. Three policemen were assigned to guard their office as a possible "source of destabilization." Again, the basis was PP 1017.

And in G.R. No. 171483, petitioners KMU and NAFLU-KMU et al. alleged that their members were "turned away and dispersed" when they went to EDSA and later, to Ayala Avenue, to celebrate the 20th Anniversary of People Power I.

A perusal of the "direct injuries" allegedly suffered by the said petitioners shows that they resulted from the implementation, pursuant to G.O. No. 5, of PP 1017.

Can this Court adjudge as unconstitutional PP 1017 and G.O. No 5 on the basis of these illegal acts? In general, does the illegal implementation of a law render it unconstitutional?

Settled is the rule that courts are not at liberty to declare statutes invalid although they may be abused and misabused135 and may afford an opportunity for abuse in the manner of application.136 The validity of a statute or ordinance is to be determined from its general purpose and its efficiency to accomplish the end desired, not from its effects in a particular case.137 PP 1017 is merely an invocation of the President’s calling-out power. Its general purpose is to command the AFP to suppress all forms of lawless violence, invasion or rebellion. It had accomplished the end desired which prompted President Arroyo to issue PP 1021. But there is nothing in PP 1017 allowing the police, expressly or impliedly, to conduct illegal arrest, search or violate the citizens’ constitutional rights.

Now, may this Court adjudge a law or ordinance unconstitutional on the ground that its implementor committed illegal acts? The answer is no. The criterion by which the validity of the statute or ordinance is to be measured is the essential basis for the exercise of power, and not a mere incidental result arising from its exertion.138 This is logical. Just imagine the absurdity of situations when laws maybe declared unconstitutional just because the officers implementing them have acted arbitrarily. If this were so, judging from the blunders committed by policemen in the cases passed upon by the Court, majority of the provisions of the Revised Penal Code would have been declared unconstitutional a long time ago.

President Arroyo issued G.O. No. 5 to carry into effect the provisions of PP 1017. General orders are "acts and commands of the President in his capacity as Commander-in-Chief of the Armed Forces of the Philippines." They are internal rules issued by the executive officer to his subordinates precisely for the proper and efficient administration of law. Such rules and regulations create no relation except between the official who issues them and the official who receives them.139 They are based on and are the product of, a relationship in which power is their source, and obedience, their object.140 For these reasons, one requirement for these rules to be valid is that they must be reasonable, not arbitrary or capricious.

G.O. No. 5 mandates the AFP and the PNP to immediately carry out the "necessary and appropriate actions and measures to suppress and prevent acts of terrorism and lawless violence."

Unlike the term "lawless violence" which is unarguably extant in our statutes and the Constitution, and which is invariably associated with "invasion, insurrection or rebellion," the phrase "acts of terrorism" is still an amorphous and vague concept. Congress has yet to enact a law defining and punishing acts of terrorism.

In fact, this "definitional predicament" or the "absence of an agreed definition of terrorism" confronts not only our country, but the international community as well. The following observations are quite apropos:

In the actual unipolar context of international relations, the "fight against terrorism" has become one of the basic slogans when it comes to the justification of the use of force against certain states and against groups operating internationally. Lists of states "sponsoring terrorism" and of terrorist organizations are set up and constantly being updated according to criteria that are not always known to the public, but are clearly determined by strategic interests.

The basic problem underlying all these military actions – or threats of the use of force as the most recent by the United States against Iraq – consists in the absence of an agreed definition of terrorism.

Remarkable confusion persists in regard to the legal categorization of acts of violence either by states, by armed groups such as liberation movements, or by individuals.

The dilemma can by summarized in the saying "One country’s terrorist is another country’s freedom fighter." The apparent contradiction or lack of consistency in the use of the term "terrorism" may further be demonstrated by the historical fact that leaders of national liberation movements such as Nelson Mandela in South Africa, Habib Bourgouiba in Tunisia, or Ahmed Ben Bella in Algeria, to mention only a few, were originally labeled as terrorists by those who controlled the territory at the time, but later became internationally respected statesmen.

What, then, is the defining criterion for terrorist acts – the differentia specifica distinguishing those acts from eventually legitimate acts of national resistance or self-defense?

Since the times of the Cold War the United Nations Organization has been trying in vain to reach a consensus on the basic issue of definition. The organization has intensified its efforts recently, but has been unable to bridge the gap between those who associate "terrorism" with any violent act by non-state groups against civilians, state functionaries or infrastructure or military installations, and those who believe in the concept of the legitimate use of force when resistance against foreign occupation or against systematic oppression of ethnic and/or religious groups within a state is concerned.

The dilemma facing the international community can best be illustrated by reference to the contradicting categorization of organizations and movements such as Palestine Liberation Organization (PLO) – which is a terrorist group for Israel and a liberation movement for Arabs and Muslims – the Kashmiri resistance groups – who are terrorists in the perception of India, liberation fighters in that of Pakistan – the earlier Contras in Nicaragua – freedom fighters for the United States, terrorists for the Socialist camp – or, most drastically, the Afghani Mujahedeen (later to become the Taliban movement): during the Cold War period they were a group of freedom fighters for the West, nurtured by the United States, and a terrorist gang for the Soviet Union. One could go on and on in enumerating examples of conflicting categorizations that cannot be reconciled in any way – because of opposing political interests that are at the roots of those perceptions.

How, then, can those contradicting definitions and conflicting perceptions and evaluations of one and the same group and its actions be explained? In our analysis, the basic reason for these striking inconsistencies lies in the divergent interest of states. Depending on whether a state is in the position of an occupying power or in that of a rival, or adversary, of an occupying power in a given territory, the definition of

terrorism will "fluctuate" accordingly. A state may eventually see itself as protector of the rights of a certain ethnic group outside its territory and will therefore speak of a "liberation struggle," not of "terrorism" when acts of violence by this group are concerned, and vice-versa.

The United Nations Organization has been unable to reach a decision on the definition of terrorism exactly because of these conflicting interests of sovereign states that determine in each and every instance how a particular armed movement (i.e. a non-state actor) is labeled in regard to the terrorists-freedom fighter dichotomy. A "policy of double standards" on this vital issue of international affairs has been the unavoidable consequence.

This "definitional predicament" of an organization consisting of sovereign states – and not of peoples, in spite of the emphasis in the Preamble to the United Nations Charter! – has become even more serious in the present global power constellation: one superpower exercises the decisive role in the Security Council, former great powers of the Cold War era as well as medium powers are increasingly being marginalized; and the problem has become even more acute since the terrorist attacks of 11 September 2001 I the United States.141

The absence of a law defining "acts of terrorism" may result in abuse and oppression on the part of the police or military. An illustration is when a group of persons are merely engaged in a drinking spree. Yet the military or the police may consider the act as an act of terrorism and immediately arrest them pursuant to G.O. No. 5. Obviously, this is abuse and oppression on their part. It must be remembered that an act can only be considered a crime if there is a law defining the same as such and imposing the corresponding penalty thereon.

So far, the word "terrorism" appears only once in our criminal laws, i.e., in P.D. No. 1835 dated January 16, 1981 enacted by President Marcos during the Martial Law regime. This decree is entitled "Codifying The Various Laws on Anti-Subversion and Increasing The Penalties for Membership in Subversive Organizations." The word "terrorism" is mentioned in the following provision: "That one who conspires with any other person for the purpose of overthrowing the Government of the Philippines x x x by force, violence, terrorism, x x x shall be punished by reclusion temporal x x x."

P.D. No. 1835 was repealed by E.O. No. 167 (which outlaws the Communist Party of the Philippines) enacted by President Corazon Aquino on May 5, 1985. These two (2) laws, however, do not define "acts of terrorism." Since there is no law defining "acts of terrorism," it is President Arroyo alone, under G.O. No. 5, who has the discretion to determine what acts constitute terrorism. Her judgment on this aspect is absolute, without restrictions. Consequently, there can be indiscriminate arrest without warrants, breaking into offices and residences, taking over the media enterprises, prohibition and dispersal of all assemblies and gatherings unfriendly to the administration. All these can be effected in the name of G.O. No. 5. These acts go far beyond the calling-out power of the President. Certainly, they violate the due process clause of the Constitution. Thus, this Court declares that the "acts of terrorism" portion of G.O. No. 5 is unconstitutional.

Significantly, there is nothing in G.O. No. 5 authorizing the military or police to commit acts beyond what are necessary and appropriate to suppress and prevent lawless violence, the limitation of their authority in pursuing the Order. Otherwise, such acts are considered illegal.

We first examine G.R. No. 171396 (David et al.)

The Constitution provides that "the right of the people to be secured in their persons, houses, papers and effects against unreasonable search and seizure of whatever nature and for any purpose shall be inviolable, and no search warrant or warrant of arrest shall issue except upon probable cause to be determined personally by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized."142 The plain import of the language of the Constitution is that searches, seizures and arrests are normally unreasonable unless authorized by a validly issued search warrant or warrant of arrest. Thus, the fundamental protection given by this provision is that between person and police must stand the protective authority of a magistrate clothed with power to issue or refuse to issue search warrants or warrants of arrest.143

In the Brief Account144 submitted by petitioner David, certain facts are established: first, he was arrested without warrant; second, the PNP operatives arrested him on the basis of PP 1017; third, he was brought at Camp Karingal, Quezon City where he was fingerprinted, photographed and booked like a criminal suspect; fourth,he was treated brusquely by policemen who "held his head and tried to push him" inside an unmarked car; fifth, he was charged with Violation of Batas Pambansa Bilang No. 880145 and Inciting to Sedition; sixth, he was detained for seven (7) hours; and seventh,he was eventually released for insufficiency of evidence.

Section 5, Rule 113 of the Revised Rules on Criminal Procedure provides:

Sec. 5. Arrest without warrant; when lawful. - A peace officer or a private person may, without a warrant, arrest a person:

(a) When, in his presence, the person to be arrested has committed, is actually committing, or is attempting to commit an offense.

(b) When an offense has just been committed and he has probable cause to believe based on personal knowledge of facts or circumstances that the person to be arrested has committed it; and

x x x.

Neither of the two (2) exceptions mentioned above justifies petitioner David’s warrantless arrest. During the inquest for the charges of inciting to sedition and violation of BP 880, all that the arresting officers could invoke was their observation that some rallyists were wearing t-shirts with the invective "Oust Gloria Now" and their erroneous assumption that petitioner David was the leader of the rally.146 Consequently, the Inquest Prosecutor ordered his immediate release on the ground of insufficiency of evidence. He noted that petitioner David was not wearing the subject t-shirt and even if he was wearing it, such fact is insufficient to charge him with inciting to sedition. Further, he also stated that there is insufficient evidence for the charge of violation of BP 880 as it was not even known whether petitioner David was the leader of the rally.147

But what made it doubly worse for petitioners David et al. is that not only was their right against warrantless arrest violated, but also their right to peaceably assemble.

Section 4 of Article III guarantees:

No law shall be passed abridging the freedom of speech, of expression, or of the press, or the right of the people peaceably to assemble and petition the government for redress of grievances.

"Assembly" means a right on the part of the citizens to meet peaceably for consultation in respect to public affairs. It is a necessary consequence of our republican institution and complements the right of speech. As in the case of freedom of expression, this right is not to be limited, much less denied, except on a showing of a clear and present danger of a substantive evil that Congress has a right to prevent. In other words, like other rights embraced in the freedom of expression, the right to assemble is not subject to previous restraint or censorship. It may not be conditioned upon the prior issuance of a permit or authorization from the government authorities except, of course, if the assembly is intended to be held in a public place, a permit for the use of such place, and not for the assembly itself, may be validly required.

The ringing truth here is that petitioner David, et al. were arrested while they were exercising their right to peaceful assembly. They were not committing any crime, neither was there a showing of a clear and present danger that warranted the limitation of that right. As can be gleaned from circumstances, the charges of inciting to sedition and violation of BP 880 were mere afterthought. Even the Solicitor General, during the oral argument, failed to justify the arresting officers’ conduct. In De Jonge v. Oregon,148 it was held that peaceable assembly cannot be made a crime, thus:

Peaceable assembly for lawful discussion cannot be made a crime. The holding of meetings for peaceable political action cannot be proscribed. Those who assist in the conduct of such meetings cannot be branded as criminals on that score. The question, if the rights of free speech and peaceful assembly are not to be preserved, is not as to the auspices under which the meeting was held but as to its purpose; not as to the relations of the speakers, but whether their utterances transcend the bounds of the freedom of speech which the Constitution protects. If the persons assembling have committed crimes elsewhere, if they have formed or are engaged in a conspiracy against the public peace and order, they may be prosecuted for their conspiracy or other violations of valid laws. But it is a different matter when the State, instead of prosecuting them for such offenses, seizes upon mere participation in a peaceable assembly and a lawful public discussion as the basis for a criminal charge.

On the basis of the above principles, the Court likewise considers the dispersal and arrest of the members of KMU et al. (G.R. No. 171483) unwarranted. Apparently, their dispersal was done merely on the basis of Malacañang’s directive canceling all permits previously issued by local government units. This is arbitrary. The wholesale cancellation of all permits to rally is a blatant disregard of the principle that "freedom of assembly is not to be limited, much less denied, except on a showing of a clear and present danger of a substantive evil that the State has a right to prevent."149 Tolerance is the rule and limitation is the exception. Only upon a showing that an assembly presents a clear and present danger that the State may deny the citizens’ right to exercise it. Indeed, respondents failed to show or convince the Court that the rallyists committed acts amounting to lawless violence, invasion or rebellion. With the blanket revocation of permits, the distinction between protected and unprotected assemblies was eliminated.

Moreover, under BP 880, the authority to regulate assemblies and rallies is lodged with the local government units. They have the power to issue permits and to revoke such permits after due notice and hearing on the determination of the presence of clear and present danger. Here, petitioners were not even notified and heard on the revocation of their permits.150 The first time they learned of it was at the time of the dispersal. Such absence of notice is a fatal defect. When a person’s right is restricted by

government action, it behooves a democratic government to see to it that the restriction is fair, reasonable, and according to procedure.

G.R. No. 171409, (Cacho-Olivares, et al.) presents another facet of freedom of speech i.e., the freedom of the press. Petitioners’ narration of facts, which the Solicitor General failed to refute, established the following: first, the Daily Tribune’s offices were searched without warrant;second, the police operatives seized several materials for publication; third, the search was conducted at about 1:00 o’ clock in the morning of February 25, 2006; fourth, the search was conducted in the absence of any official of the Daily Tribune except the security guard of the building; and fifth, policemen stationed themselves at the vicinity of the Daily Tribune offices.

Thereafter, a wave of warning came from government officials. Presidential Chief of Staff Michael Defensor was quoted as saying that such raid was "meant to show a ‘strong presence,’ to tell media outlets not to connive or do anything that would help the rebels in bringing down this government." Director General Lomibao further stated that "if they do not follow the standards –and the standards are if they would contribute to instability in the government, or if they do not subscribe to what is in General Order No. 5 and Proc. No. 1017 – we will recommend a ‘takeover.’" National Telecommunications Commissioner Ronald Solis urged television and radio networks to "cooperate" with the government for the duration of the state of national emergency. He warned that his agency will not hesitate to recommend the closure of any broadcast outfit that violates rules set out for media coverage during times when the national security is threatened.151

The search is illegal. Rule 126 of The Revised Rules on Criminal Procedure lays down the steps in the conduct of search and seizure. Section 4 requires that a search warrant be issued upon probable cause in connection with one specific offence to be determined personally by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce. Section 8 mandates that the search of a house, room, or any other premise be made in the presence of the lawful occupant thereof or any member of his family or in the absence of the latter, in the presence of two (2) witnesses of sufficient age and discretion residing in the same locality. And Section 9 states that the warrant must direct that it be served in the daytime, unless the property is on the person or in the place ordered to be searched, in which case a direction may be inserted that it be served at any time of the day or night. All these rules were violated by the CIDG operatives.

Not only that, the search violated petitioners’ freedom of the press. The best gauge of a free and democratic society rests in the degree of freedom enjoyed by its media. In the Burgos v. Chief of Staff152 this Court held that --

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

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

While admittedly, the Daily Tribune was not padlocked and sealed like the "Metropolitan Mail" and "We Forum" newspapers in the above case, yet it cannot be denied that the CIDG operatives exceeded their enforcement duties. The search and seizure of materials for publication, the stationing of policemen in the vicinity of the The Daily Tribune offices, and the arrogant warning of government officials to media, are plain censorship. It is that officious functionary of the repressive government who tells the citizen that he may speak only if allowed to do so, and no more and no less than what he is permitted to say on pain of punishment should he be so rash as to disobey.153 Undoubtedly, the The Daily Tribune was subjected to these arbitrary intrusions because of its anti-government sentiments. This Court cannot tolerate the blatant disregard of a constitutional right even if it involves the most defiant of our citizens. Freedom to comment on public affairs is essential to the vitality of a representative democracy. It is the duty of the courts to be watchful for the constitutional rights of the citizen, and against any stealthy encroachments thereon. The motto should always be obsta principiis.154

Incidentally, during the oral arguments, the Solicitor General admitted that the search of the Tribune’s offices and the seizure of its materials for publication and other papers are illegal; and that the same are inadmissible "for any purpose," thus:

JUSTICE CALLEJO:

You made quite a mouthful of admission when you said that the policemen, when inspected the Tribune for the purpose of gathering evidence and you admitted that the policemen were able to get the clippings. Is that not in admission of the admissibility of these clippings that were taken from the Tribune?

SOLICITOR GENERAL BENIPAYO:

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

x x x x x x x x x

SR. ASSO. JUSTICE PUNO:

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

SOLGEN BENIPAYO:

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

SR. ASSO. JUSTICE PUNO:

Are you saying that the act of the policeman is illegal, it is not based on any law, and it is not based on Proclamation 1017.

SOLGEN BENIPAYO:

It is not based on Proclamation 1017, Your Honor, because there is nothing in 1017 which says that the police could go and inspect and gather clippings from Daily Tribune or any other newspaper.

SR. ASSO. JUSTICE PUNO:

Is it based on any law?

SOLGEN BENIPAYO:

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

SR. ASSO. JUSTICE PUNO:

So, it has no basis, no legal basis whatsoever?

SOLGEN BENIPAYO:

Maybe so, Your Honor. Maybe so, that is why I said, I don’t know if it is premature to say this, we do not condone this. If the people who have been injured by this would want to sue them, they can sue and there are remedies for this.156

Likewise, the warrantless arrests and seizures executed by the police were, according to the Solicitor General, illegal and cannot be condoned, thus:

CHIEF JUSTICE PANGANIBAN:

There seems to be some confusions if not contradiction in your theory.

SOLICITOR GENERAL BENIPAYO:

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

The Dissenting Opinion states that PP 1017 and G.O. No. 5 are constitutional in every aspect and "should result in no constitutional or statutory breaches if applied according to their letter."

The Court has passed upon the constitutionality of these issuances. Its ratiocination has been exhaustively presented. At this point, suffice it to reiterate that PP 1017 is limited to the calling out by the President of the military to prevent or suppress lawless violence, invasion or rebellion. When in implementing its provisions, pursuant to G.O. No. 5, the military and the police committed acts which violate the citizens’ rights under the Constitution, this Court has to declare such acts unconstitutional and illegal.

In this connection, Chief Justice Artemio V. Panganiban’s concurring opinion, attached hereto, is considered an integral part of this ponencia.

S U M M A T I O N

In sum, the lifting of PP 1017 through the issuance of PP 1021 – a supervening event – would have normally rendered this case moot and academic. However, while PP 1017 was still operative, illegal acts were committed allegedly in pursuance thereof. Besides, there is no guarantee that PP 1017, or one similar to it, may not again be issued. Already, there have been media reports on April 30, 2006 that allegedly PP 1017 would be reimposed "if the May 1 rallies" become "unruly and violent." Consequently, the transcendental issues raised by the parties should not be "evaded;" they must now be resolved to prevent future constitutional aberration.

The Court finds and so holds that PP 1017 is constitutional insofar as it constitutes a call by the President for the AFP to prevent or suppress lawless violence. The proclamation is sustained by Section 18, Article VII of the Constitution and the relevant jurisprudence discussed earlier. However, PP 1017’s extraneous provisions giving the President express or implied power (1) to issue decrees; (2) to direct the AFP to enforce obedience to all laws even those not related to lawless violence as well as decrees promulgated by the President; and (3) to impose standards on media or any form of prior restraint on the press, are ultra vires and unconstitutional. The Court also rules that under Section 17, Article XII of the Constitution, the President, in the absence of a legislation, cannot take over privately-owned public utility and private business affected with public interest.

In the same vein, the Court finds G.O. No. 5 valid. It is an Order issued by the President – acting as Commander-in-Chief – addressed to subalterns in the AFP to carry out the provisions of PP 1017. Significantly, it also provides a valid standard – that the military and the police should take only the "necessary and appropriate actions and measures to suppress and prevent acts of lawless violence."But the words "acts of terrorism" found in G.O. No. 5 have not been legally defined and made punishable by Congress and should thus be deemed deleted from the said G.O. While "terrorism" has been denounced generally in media, no law has been enacted to guide the military, and eventually the courts, to determine the limits of the AFP’s authority in carrying out this portion of G.O. No. 5.

On the basis of the relevant and uncontested facts narrated earlier, it is also pristine clear that (1) the warrantless arrest of petitioners Randolf S. David and Ronald Llamas; (2) the dispersal of the rallies and warrantless arrest of the KMU and NAFLU-KMU members; (3) the imposition of standards on media or any prior restraint on the press; and (4) the warrantless search of the Tribune offices and the whimsical seizures of some articles for publication and other materials, are not authorized by the Constitution, the law and jurisprudence. Not even by the valid provisions of PP 1017 and G.O. No. 5.

Other than this declaration of invalidity, this Court cannot impose any civil, criminal or administrative sanctions on the individual police officers concerned. They have not been individually identified and given their day in court. The civil complaints or causes of action and/or relevant criminal Informations have not been presented before this Court. Elementary due process bars this Court from making any specific pronouncement of civil, criminal or administrative liabilities.

It is well to remember that military power is a means to an end and substantive civil rights are ends in themselves. How to give the military the power it needs to protect the Republic without unnecessarily trampling individual rights is one of the eternal balancing tasks of a democratic state.During emergency, governmental action may vary in breadth and intensity from normal times, yet they should not be arbitrary as to unduly restrain our people’s liberty.

Perhaps, the vital lesson that we must learn from the theorists who studied the various competing political philosophies is that, it is possible to grant government the authority to cope with crises without surrendering the two vital principles of constitutionalism: the maintenance of legal limits to arbitrary power, and political responsibility of the government to the governed.158

WHEREFORE, the Petitions are partly granted. The Court rules that PP 1017 is CONSTITUTIONAL insofar as it constitutes a call by President Gloria Macapagal-Arroyo on the AFP to prevent or suppress lawless violence. However, the provisions of PP 1017 commanding the AFP to enforce laws not related to lawless violence, as well as decrees promulgated by the President, are declared UNCONSTITUTIONAL. In addition, the provision in PP 1017 declaring national emergency under Section 17, Article VII of the Constitution is CONSTITUTIONAL, but such declaration does not authorize the President to take over privately-owned public utility or business affected with public interest without prior legislation.

G.O. No. 5 is CONSTITUTIONAL since it provides a standard by which the AFP and the PNP should implement PP 1017, i.e. whatever is "necessary and appropriate actions and measures to suppress and prevent acts of lawless violence." Considering that "acts of terrorism" have not yet been defined and made punishable by the Legislature, such portion of G.O. No. 5 is declared UNCONSTITUTIONAL.

The warrantless arrest of Randolf S. David and Ronald Llamas; the dispersal and warrantless arrest of the KMU and NAFLU-KMU members during their rallies, in the absence of proof that these petitioners were committing acts constituting lawless violence, invasion or rebellion and violating BP 880; the imposition of standards on media or any form of prior restraint on the press, as well as the warrantless search of the Tribune offices and whimsical seizure of its articles for publication and other materials, are declared UNCONSTITUTIONAL.

No costs.

SO ORDERED.

G.R. No. 168914 July 4, 2007 METROPOLITAN CEBU WATER DISTRICT (MCWD), Petitioner, vs. MARGARITA A. ADALA, Respondent.

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

Respondent filed on October 24, 2002 an application with the NWRB for the issuance of a Certificate of Public Convenience (CPC) to operate and maintain waterworks system in sitios San Vicente, Fatima, and Sambag in Barangay Bulacao, Cebu City.

At the initial hearing of December 16, 2002 during which respondent submitted proof of compliance with jurisdictional requirements of notice and publication, herein petitioner Metropolitan Cebu Water District, a government-owned and controlled corporation created pursuant to P.D. 1981 which took effect upon its issuance by then President Marcos on May 25, 1973, as amended, appeared through its lawyers to oppose the application.

While petitioner filed a formal opposition by mail, a copy thereof had not, on December 16, 2002, yet been received by the NWRB, the day of the hearing. Counsel for respondent, who received a copy of petitioner’s Opposition dated December 12, 2002 earlier that morning, volunteered to give a copy thereof to the hearing officer.2

In its Opposition, petitioner prayed for the denial of respondent’s application on the following grounds: (1) petitioner’s Board of Directors had not consented to the issuance of the franchise applied for, such consent being a mandatory condition pursuant to P.D. 198, (2) the proposed waterworks would interfere with petitioner’s water supply which it has the right to protect, and (3) the water needs of the residents in the subject area was already being well served by petitioner.

After hearing and an ocular inspection of the area, the NWRB, by Decision dated September 22, 2003, dismissed petitioner’s Opposition "for lack of merit and/or failure to state the cause of action"3 and ruled in favor of respondent as follows:

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

Consumption Blocks Proposed Rates

0-10 cu. m. P125.00(min. charge)

11-20 cu. m. 13.50 per cu. m.

21-30 cu. m. 14.50 per cu. m.

31-40 cu. m. 35.00 per cu. m.

41-50 cu. m. 37.00 per cu. m.

51-60 cu. m. 38.00 per cu. m.

61-70 cu. m. 40.00 per cu. m.

71-100 cu. m. 45.00 per cu. m.

Over 100 cu. m. 50.00 per cu. m.

The Rules and Regulations, hereto, attached for the operation of the waterworks system should be strictly complied with.

Since the average production is below average day demand, it is recommended to construct another well or increase the well horsepower from 1.5 - 3.00 Hp to satisfy the water requirement of the consumers.

Moreover, the rates herein approved should be posted by GRANTEE at conspicuous places within the area serviced by it, within seven (7) calendar days from notice of this Decision.

SO ORDERED.4

Its motion for reconsideration having been denied by the NWRB by Resolution of May 17, 2004, petitioner appealed the case to the RTC of Cebu City. As mentioned early on, the RTC denied the appeal and upheld the Decision of the NWRB by Decision dated February 10, 2005. And the RTC denied too petitioner’s motion for reconsideration by Order of May 13, 2005.

Hence, the present petition for review raising the following questions of law:

i. WHETHER OR NOT THE CONSENT OF THE BOARD OF DIRECTORS OF THE WATER DISTRICT IS A CONDITION SINE QUA NON TO THE GRANT OF CERTIFICATE OF PUBLIC CONVENIENCE BY THE NATIONAL WATER RESOURCES BOARD UPON OPERATORS OF WATERWORKS WITHIN THE SERVICE AREA OF THE WATER DISTRICT?

ii. WHETHER THE TERM FRANCHISE AS USED IN SECTION 47 OF PRESIDENTIAL DECREE 198, AS AMENDED MEANS A FRANCHISE GRANTED BY CONGRESS THROUGH LEGISLATION ONLY OR DOES IT ALSO INCLUDE IN ITS MEANING A CERTIFICATE OF PUBLIC CONVENIENCE ISSUED BY THE NATIONAL WATER RESOURCES BOARD FOR THE MAINTENANCE OF WATERWORKS SYSTEM OR WATER SUPPLY SERVICE?5

Before discussing these substantive issues, a resolution of the procedural grounds raised by respondent for the outright denial of the petition is in order.

By respondent’s claim, petitioner’s General Manager, Engineer Armando H. Paredes, who filed the present petition and signed the accompanying verification and certification of non-forum shopping, was not specifically authorized for that purpose. Respondent cites Premium Marble Resources v. Court of Appeals6 where this Court held that, in the absence of a board resolution authorizing a person to act for and in

behalf of a corporation, the action filed in its behalf must fail since "the power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers."

Respondent likewise cites ABS-CBN Broadcasting Corporation v. Court of Appeals7 where this Court held that "[f]or such officers to be deemed fully clothed by the corporation to exercise a power of the Board, the latter must specially authorize them to do so." (Emphasis supplied by respondent)

That there is a board resolution authorizing Engineer Paredes to file cases in behalf of petitioner is not disputed. Attached to the petition is petitioner’s Board of Director’s Resolution No. 015-2004, the relevant portion of which states:

RESOLVE[D], AS IT IS HEREBY RESOLVED, to authorize the General Manager, ENGR. ARMANDO H. PAREDES, to file in behalf of the Metropolitan Cebu Water District expropriation and other cases and to affirm and confirm above-stated authority with respect to previous cases filed by MCWD.

x x x x8 (Emphasis and underscoring supplied)

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

That the subject board resolution does not authorize Engineer Paredes to file the instant petition in particular but "expropriation and other cases" does not, by itself, render the authorization invalid or ineffective.

In BA Savings Bank v. Sia,9 the therein board resolution, couched in words similar to the questioned resolution, authorized persons to represent the corporation, not for a specific case, but for a general class of cases. Significantly, the Court upheld its validity:

In the present case, the corporation's board of directors issued a Resolution specifically authorizing its lawyers "to act as their agents in any action or proceeding before the Supreme Court, the Court of Appeals, or any other tribunal or agency[;] and to sign, execute and deliver in connection therewith the necessary pleadings, motions, verification, affidavit of merit, certificate of non-forum shopping and other instruments necessary for such action and proceeding." The Resolution was sufficient to vest such persons with the authority to bind the corporation and was specific enough as to the acts they were empowered to do. (Emphasis and underscoring supplied, italics in the original)

Nonetheless, while the questioned resolution sufficiently identifies the kind of cases which Engineer Paredes may file in petitioner’s behalf, the same does not authorize him for the specific act of signing verifications and certifications against forum shopping. For it merely authorizes Engineer Paredes to file cases in behalf of the corporation. There is no mention of signing verifications and certifications against forum shopping, or, for that matter, any document of whatever nature.

A board resolution purporting to authorize a person to sign documents in behalf of the corporation must explicitly vest such authority. BPI Leasing Corporation v. Court of Appeals10 so instructs:

Corporations have no powers except those expressly conferred upon them by the Corporation Code and those that are implied by or are incidental to its existence. These powers are exercised through their

board of directors and/or duly authorized officers and agents. Hence, physical acts, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate bylaws or by specific act of the board of directors.

The records are bereft of the authority of BLC's [BPI Leasing Corporation] counsel to institute the present petition and to sign the certification of non-forum shopping. While said counsel may be the counsel of record for BLC, the representation does not vest upon him the authority to execute the certification on behalf of his client. There must be a resolution issued by the board of directors that specifically authorizes him to institute the petition and execute the certification, for it is only then that his actions can be legally binding upon BLC. (Emphasis, italics and underscoring supplied)

It bears noting, moreover, that Rule 13 Section 2 of the Rules of Court merely defines filing as "the act of presenting the pleading or other paper to the clerk of court." Since the signing of verifications and certifications against forum shopping is not integral to the act of filing, this may not be deemed as necessarily included in an authorization merely to file cases.

Engineer Paredes not having been specifically authorized to sign the verification and certification against forum shopping in petitioner’s behalf, the instant petition may be dismissed outright.

Technicality aside, the petition just the same merits dismissal.

In support of its contention that the consent of its Board of Directors is a condition sine qua non for the grant of the CPC applied for by respondent, petitioner cites Section 47 of P.D. 19811 which states:

Sec. 47. Exclusive Franchise. — No franchise shall be granted to any other person or agency for domestic, industrial or commercial water service within the district or any portion thereof unless and except to the extent that the board of directors of said district consents thereto by resolution duly adopted, such resolution, however, shall be subject to review by the Administration. (Emphasis and underscoring supplied)

There being no such consent on the part of its board of directors, petitioner concludes that respondent’s application for CPC should be denied.

Both parties’ arguments center, in the main, on the scope of the word "franchise" as used in the above-quoted provision.

Petitioner contends that "franchise" should be broadly interpreted, such that the prohibition against its grant to other entities without the consent of the district’s board of directors extends to the issuance of CPCs. A contrary reading, petitioner adds, would result in absurd consequences, for it would mean that Congress’ power to grant franchises for the operation of waterworks systems cannot be exercised without the consent of water districts.

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

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

A CPC is formal written authority issued by quasi-judicial bodies for the operation and maintenance of a public utility for which a franchise is not required by law and a CPC issued by this Board is an authority to operate and maintain a waterworks system or water supply service. On the other hand, a franchise is privilege or authority to operate appropriate private property for public use vested by Congress through legislation. Clearly, therefore, a CPC is different from a franchise and Section 47 of Presidential Decree 198 refers only to franchise. Accordingly, the possession of franchise by a water district does not bar the issuance of a CPC for an area covered by the water district. (Emphasis and underscoring supplied by respondent)

Petitioner’s position that an overly strict construction of the term "franchise" as used in Section 47 of P.D. 198 would lead to an absurd result impresses. If franchises, in this context, were strictly understood to mean an authorization issuing directly from the legislature, it would follow that, while Congress cannot issue franchises for operating waterworks systems without the water district’s consent, the NWRB may keep on issuing CPCs authorizing the very same act even without such consent. In effect, not only would the NWRB be subject to less constraints than Congress in issuing franchises. The exclusive character of the franchise provided for by Section 47 would be illusory.

Moreover, this Court, in Philippine Airlines, Inc. v. Civil Aeronautics Board,12 has construed the term "franchise" broadly so as to include, not only authorizations issuing directly from Congress in the form of statute, but also those granted by administrative agencies to which the power to grant franchises has been delegated by Congress, to wit:

Congress has granted certain administrative agencies the power to grant licenses for, or to authorize the operation of certain public utilities. With the growing complexity of modern life, the multiplication of the subjects of governmental regulation, and the increased difficulty of administering the laws, there is a constantly growing tendency towards the delegation of greater powers by the legislature, and towards the approval of the practice by the courts. It is generally recognized that a franchise may be derived indirectly from the state through a duly designated agency, and to this extent, the power to grant franchises has frequently been delegated, even to agencies other than those of a legislative nature. In pursuance of this, it has been held that privileges conferred by grant by local authorities as agents for the state constitute as much a legislative franchise as though the grant had been made by an act of the Legislature.13

That the legislative authority – in this instance, then President Marcos14 – intended to delegate its power to issue franchises in the case of water districts is clear from the fact that, pursuant to the procedure outlined in P.D. 198, it no longer plays a direct role in authorizing the formation and maintenance of water districts, it having vested the same to local legislative bodies and the Local Water Utilities Administration (LWUA).

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

SECTION 6. Formation of District. — This Act is the source of authorization and power to form and maintain a district. Once formed, a district is subject to the provisions of this Act and not under the jurisdiction of any political subdivision. For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the

powers granted in, and subject to such restrictions imposed, under this Act. To form a district, the legislative body of any city, municipality or province shall enact a resolution containing the following:

(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words "Water District".

(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof: Provided, That such municipalities, cities or provinces, or portions thereof, cover a contiguous area.

(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of such city, municipality or province to such district upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above.

(e) The names of the initial directors of the district with the date of expiration of the term of office for each which shall be on the 31st of December of first, second, or third even-numbered year after assuming office, as set forth in Section 11 hereof.

(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 45 of this Title.

(g) A statement acknowledging the powers, rights and obligations as set forth in Section 25 of this Title.

Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province; or the city, municipality or province in which 75% of the total active service connections are situated shall pass an initial resolution to be concurred in by the other cities, municipalities or provinces.

SECTION 7. Filing of Resolution. — A certified copy of the resolution or resolutions forming a district shall be forwarded to the office of the Secretary of Administration. If found by the Administration to conform to the requirements of Section 6 and the policy objectives in Section 2, the resolution shall be duly filed. The district shall be deemed duly formed and existing upon the date of such filing. A certified copy of said resolution showing the stamp of the Administration shall be maintained in the office of the district. Upon such filing, the local government or governments concerned shall lose ownership, supervision and control or any right whatsoever over the district except as provided herein. (Emphasis and underscoring supplied)

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

It would thus be incongruous to adopt in this instance the strict interpretation proffered by respondent and exclude from the scope of the term "franchise" the CPCs issued by the NWRB.16

Nonetheless, while the prohibition in Section 47 of P.D. 198 applies to the issuance of CPCs for the reasons discussed above, the same provision must be deemed void ab initio for being irreconcilable with Article XIV Section 5 of the 1973 Constitution which was ratified on January 17, 1973 – the constitution in force when P.D. 198 was issued on May 25, 1973. Thus, Section 5 of Art. XIV of the 1973 Constitution reads:

SECTION 5. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of the capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Batasang Pambansa when the public interest so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in the capital thereof. (Emphasis and underscoring supplied)

This provision has been substantially reproduced in Article XII Section 11 of the 1987 Constitution, including the prohibition against exclusive franchises.17

In view of the purposes for which they are established,18 water districts fall under the term "public utility" as defined in the case of National Power Corporation v. Court of Appeals:191avvphil

A "public utility" is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. x x x (Emphasis and underscoring supplied)

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

The ruling in National Waterworks and Sewerage Authority v. NWSA Consolidated Unions21 is also instructive:

We agree with petitioner that the NAWASA is a public utility because its primary function is to construct, maintain and operate water reservoirs and waterworks for the purpose of supplying water to the inhabitants, as well as consolidate and centralize all water supplies and drainage systems in the Philippines. x x x (Emphasis supplied)

Since Section 47 of P.D. 198, which vests an "exclusive franchise" upon public utilities, is clearly repugnant to Article XIV, Section 5 of the 1973 Constitution,22 it is unconstitutional and may not, therefore, be relied upon by petitioner in support of its opposition against respondent’s application for CPC and the subsequent grant thereof by the NWRB.

WHEREFORE, Section 47 of P.D. 198 is unconstitutional. The Petition is thus, in light of the foregoing discussions, DISMISSED. SO ORDERED.

G.R. No. 114222 April 6, 1995 FRANCISCO S. TATAD, JOHN H. OSMENA and RODOLFO G. BIAZON, petitioners, vs. HON. JESUS B. GARCIA, JR., in his capacity as the Secretary of the Department of Transportation and Communications, and EDSA LRT CORPORATION, LTD., respondents.

This is a petition under Rule 65 of the Revised Rules of Court to prohibit respondents from further implementing and enforcing the "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" dated April 22, 1992, and the "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement To Build, Lease and Transfer a Light Rail Transit System for EDSA" dated May 6, 1993.

Petitioners Francisco S. Tatad, John H. Osmena and Rodolfo G. Biazon are members of the Philippine Senate and are suing in their capacities as Senators and as taxpayers. Respondent Jesus B. Garcia, Jr. is the incumbent Secretary of the Department of Transportation and Communications (DOTC), while private respondent EDSA LRT Corporation, Ltd. is a private corporation organized under the laws of Hongkong.

I

In 1989, DOTC planned to construct a light railway transit line along EDSA, a major thoroughfare in Metropolitan Manila, which shall traverse the cities of Pasay, Quezon, Mandaluyong and Makati. The plan, referred to as EDSA Light Rail Transit III (EDSA LRT III), was intended to provide a mass transit system along EDSA and alleviate the congestion and growing transportation problem in the metropolis.

On March 3, 1990, a letter of intent was sent by the Eli Levin Enterprises, Inc., represented by Elijahu Levin to DOTC Secretary Oscar Orbos, proposing to construct the EDSA LRT III on a Build-Operate-Transfer (BOT) basis.

On March 15, 1990, Secretary Orbos invited Levin to send a technical team to discuss the project with DOTC.

On July 9, 1990, Republic Act No. 6957 entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and For Other Purposes," was signed by President Corazon C. Aquino. Referred to as the Build-Operate-Transfer (BOT) Law, it took effect on October 9, 1990.

Republic Act No. 6957 provides for two schemes for the financing, construction and operation of government projects through private initiative and investment: Build-Operate-Transfer (BOT) or Build-Transfer (BT).

In accordance with the provisions of R.A. No. 6957 and to set the EDSA LRT III project underway, DOTC, on January 22, 1991 and March 14, 1991, issued Department Orders Nos. 91-494 and 91-496, respectively creating the Prequalification Bids and Awards Committee (PBAC) and the Technical Committee.

After its constitution, the PBAC issued guidelines for the prequalification of contractors for the financing and implementation of the project The notice, advertising the prequalification of bidders, was published

in three newspapers of general circulation once a week for three consecutive weeks starting February 21, 1991.

The deadline set for submission of prequalification documents was March 21, 1991, later extended to April 1, 1991. Five groups responded to the invitation namely, ABB Trazione of Italy, Hopewell Holdings Ltd. of Hongkong, Mansteel International of Mandaue, Cebu, Mitsui & Co., Ltd. of Japan, and EDSA LRT Consortium, composed of ten foreign and domestic corporations: namely, Kaiser Engineers International, Inc., ACER Consultants (Far East) Ltd. and Freeman Fox, Tradeinvest/CKD Tatra of the Czech and Slovak Federal Republics, TCGI Engineering All Asia Capital and Leasing Corporation, The Salim Group of Jakarta, E. L. Enterprises, Inc., A.M. Oreta & Co. Capitol Industrial Construction Group, Inc, and F. F. Cruz & co., Inc.

On the last day for submission of prequalification documents, the prequalification criteria proposed by the Technical Committee were adopted by the PBAC. The criteria totalling 100 percent, are as follows: (a) Legal aspects — 10 percent; (b) Management/Organizational capability — 30 percent; and (c) Financial capability — 30 percent; and (d) Technical capability — 30 percent (Rollo, p. 122).

On April 3, 1991, the Committee, charged under the BOT Law with the formulation of the Implementation Rules and Regulations thereof, approved the same.

After evaluating the prequalification, bids, the PBAC issued a Resolution on May 9, 1991 declaring that of the five applicants, only the EDSA LRT Consortium "met the requirements of garnering at least 21 points per criteria [sic], except for Legal Aspects, and obtaining an over-all passing mark of at least 82 points" (Rollo, p. 146). The Legal Aspects referred to provided that the BOT/BT contractor-applicant meet the requirements specified in the Constitution and other pertinent laws (Rollo, p. 114).

Subsequently, Secretary Orbos was appointed Executive Secretary to the President of the Philippines and was replaced by Secretary Pete Nicomedes Prado. The latter sent to President Aquino two letters dated May 31, 1991 and June 14, 1991, respectively recommending the award of the EDSA LRT III project to the sole complying bidder, the EDSA LRT Consortium, and requesting for authority to negotiate with the said firm for the contract pursuant to paragraph 14(b) of the Implementing Rules and Regulations of the BOT Law (Rollo, pp. 298-302).

In July 1991, Executive Secretary Orbos, acting on instructions of the President, issued a directive to the DOTC to proceed with the negotiations. On July 16, 1991, the EDSA LRT Consortium submitted its bid proposal to DOTC.

Finding this proposal to be in compliance with the bid requirements, DOTC and respondent EDSA LRT Corporation, Ltd., in substitution of the EDSA LRT Consortium, entered into an "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" under the terms of the BOT Law (Rollo, pp. 147-177).

Secretary Prado, thereafter, requested presidential approval of the contract.

In a letter dated March 13, 1992, Executive Secretary Franklin Drilon, who replaced Executive Secretary Orbos, informed Secretary Prado that the President could not grant the requested approval for the following reasons: (1) that DOTC failed to conduct actual public bidding in compliance with Section 5 of the BOT Law; (2) that the law authorized public bidding as the only mode to award BOT projects, and the prequalification proceedings was not the public bidding contemplated under the law; (3) that Item 14 of

the Implementing Rules and Regulations of the BOT Law which authorized negotiated award of contract in addition to public bidding was of doubtful legality; and (4) that congressional approval of the list of priority projects under the BOT or BT Scheme provided in the law had not yet been granted at the time the contract was awarded (Rollo, pp. 178-179).

In view of the comments of Executive Secretary Drilon, the DOTC and private respondents re-negotiated the agreement. On April 22, 1992, the parties entered into a "Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" (Rollo, pp. 47-78) inasmuch as "the parties [are] cognizant of the fact the DOTC has full authority to sign the Agreement without need of approval by the President pursuant to the provisions of Executive Order No. 380 and that certain events [had] supervened since November 7, 1991 which necessitate[d] the revision of the Agreement" (Rollo, p. 51). On May 6, 1992, DOTC, represented by Secretary Jesus Garcia vice Secretary Prado, and private respondent entered into a "Supplemental Agreement to the 22 April 1992 Revised and Restated Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA" so as to "clarify their respective rights and responsibilities" and to submit [the] Supplemental Agreement to the President, of the Philippines for his approval" (Rollo, pp. 79-80).

Secretary Garcia submitted the two Agreements to President Fidel V. Ramos for his consideration and approval. In a Memorandum to Secretary Garcia on May 6, 1993, approved the said Agreements, (Rollo, p. 194).

According to the agreements, the EDSA LRT III will use light rail vehicles from the Czech and Slovak Federal Republics and will have a maximum carrying capacity of 450,000 passengers a day, or 150 million a year to be achieved-through 54 such vehicles operating simultaneously. The EDSA LRT III will run at grade, or street level, on the mid-section of EDSA for a distance of 17.8 kilometers from F.B. Harrison, Pasay City to North Avenue, Quezon City. The system will have its own power facility (Revised and Restated Agreement, Sec. 2.3 (ii); Rollo p. 55). It will also have thirteen (13) passenger stations and one depot in 16-hectare government property at North Avenue (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

Private respondents shall undertake and finance the entire project required for a complete operational light rail transit system (Revised and Restated Agreement, Sec. 4.1; Rollo, p. 58). Target completion date is 1,080 days or approximately three years from the implementation date of the contract inclusive of mobilization, site works, initial and final testing of the system (Supplemental Agreement, Sec. 5; Rollo, p. 83). Upon full or partial completion and viability thereof, private respondent shall deliver the use and possession of the completed portion to DOTC which shall operate the same (Supplemental Agreement, Sec. 5; Revised and Restated Agreement, Sec. 5.1; Rollo, pp. 61-62, 84). DOTC shall pay private respondent rentals on a monthly basis through an Irrevocable Letter of Credit. The rentals shall be determined by an independent and internationally accredited inspection firm to be appointed by the parties (Supplemental Agreement, Sec. 6; Rollo, pp. 85-86) As agreed upon, private respondent's capital shall be recovered from the rentals to be paid by the DOTC which, in turn, shall come from the earnings of the EDSA LRT III (Revised and Restated Agreement, Sec. 1, p. 5; Rollo, p. 54). After 25 years and DOTC shall have completed payment of the rentals, ownership of the project shall be transferred to the latter for a consideration of only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Rollo, p. 67).

On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of Republic Act No. 6957, Entitled "An Act Authorizing the Financing, Construction, Operation and Maintenance of Infrastructure Projects by the Private Sector, and for Other Purposes" was signed into law by the President. The law was published in

two newspapers of general circulation on May 12, 1994, and took effect 15 days thereafter or on May 28, 1994. The law expressly recognizes BLT scheme and allows direct negotiation of BLT contracts.

II

In their petition, petitioners argued that:

(1) THE AGREEMENT OF APRIL 22, 1992, AS AMENDED BY THE SUPPLEMENTAL AGREEMENT OF MAY 6, 1993, INSOFAR AS IT GRANTS EDSA LRT CORPORATION, LTD., A FOREIGN CORPORATION, THE OWNERSHIP OF EDSA LRT III, A PUBLIC UTILITY, VIOLATES THE CONSTITUTION AND, HENCE, IS UNCONSTITUTIONAL;

(2) THE BUILD-LEASE-TRANSFER SCHEME PROVIDED IN THE AGREEMENTS IS NOT DEFINED NOR RECOGNIZED IN R.A. NO. 6957 OR ITS IMPLEMENTING RULES AND REGULATIONS AND, HENCE, IS ILLEGAL;

(3) THE AWARD OF THE CONTRACT ON A NEGOTIATED BASIS VIOLATES R; A. NO. 6957 AND, HENCE, IS UNLAWFUL;

(4) THE AWARD OF THE CONTRACT IN FAVOR OF RESPONDENT EDSA LRT CORPORATION, LTD. VIOLATES THE REQUIREMENTS PROVIDED IN THE IMPLEMENTING RULES AND REGULATIONS OF THE BOT LAW AND, HENCE, IS ILLEGAL;

(5) THE AGREEMENTS VIOLATE EXECUTIVE ORDER NO 380 FOR THEIR FAILURE TO BEAR PRESIDENTIAL APPROVAL AND, HENCE, ARE ILLEGAL AND INEFFECTIVE; AND

(6) THE AGREEMENTS ARE GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT (Rollo, pp. 15-16).

Secretary Garcia and private respondent filed their comments separately and claimed that:

(1) Petitioners are not the real parties-in-interest and have no legal standing to institute the present petition;

(2) The writ of prohibition is not the proper remedy and the petition requires ascertainment of facts;

(3) The scheme adopted in the Agreements is actually a build-transfer scheme allowed by the BOT Law;

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

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

(6) The award of the contract to private respondent through negotiation and not public bidding is allowed by the BOT Law; and

(7) Granting that the BOT Law requires public bidding, this has been amended by R.A No. 7718 passed by the Legislature On May 12, 1994, which provides for direct negotiation as a mode of award of infrastructure projects.

III

Respondents claimed that petitioners had no legal standing to initiate the instant action. Petitioners, however, countered that the action was filed by them in their capacity as Senators and as taxpayers.

The prevailing doctrines in taxpayer's suits are to allow taxpayers to question contracts entered into by the national government or government-owned or controlled corporations allegedly in contravention of the law (Kilosbayan, Inc. v. Guingona, 232 SCRA 110 [1994]) and to disallow the same when only municipal contracts are involved (Bugnay Construction and Development Corporation v. Laron, 176 SCRA. 240 [1989]).

For as long as the ruling in Kilosbayan on locus standi is not reversed, we have no choice but to follow it and uphold the legal standing of petitioners as taxpayers to institute the present action.

IV

In the main, petitioners asserted that the Revised and Restated Agreement of April 22, 1992 and the Supplemental Agreement of May 6, 1993 are unconstitutional and invalid for the following reasons:

(1) the EDSA LRT III is a public utility, and the ownership and operation thereof is limited by the Constitution to Filipino citizens and domestic corporations, not foreign corporations like private respondent;

(2) the Build-Lease-Transfer (BLT) scheme provided in the agreements is not the BOT or BT Scheme under the law;

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

(4) the agreements are grossly disadvantageous to the government.

1. Private respondent EDSA LRT Corporation, Ltd. to whom the contract to construct the EDSA LRT III was awarded by public respondent, is admittedly a foreign corporation "duly incorporated and existing under the laws of Hongkong" (Rollo, pp. 50, 79). There is also no dispute that once the EDSA LRT III is constructed, private respondent, as lessor, will turn it over to DOTC, as lessee, for the latter to operate the system and pay rentals for said use.

The question posed by petitioners is:

Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own EDSA LRT III; a public utility? (Rollo, p. 17).

The phrasing of the question is erroneous; it is loaded. What private respondent owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals and the power plant, not a public utility. While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public (Iloilo Ice & Cold Storage Co. v. Public Service Board, 44 Phil. 551, 557 558 [1923]).

The Constitution, in no uncertain terms, requires a franchise for the operation of a public utility. However, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public.

Section 11 of Article XII of the Constitution provides:

No franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate or authorization be exclusive character or for a longer period than fifty years . . . (Emphasis supplied).

In law, there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public.

Ownership is defined as a relation in law by virtue of which a thing pertaining to one person is completely subjected to his will in everything not prohibited by law or the concurrence with the rights of another (Tolentino, II Commentaries and Jurisprudence on the Civil Code of the Philippines 45 [1992]).

The exercise of the rights encompassed in ownership is limited by law so that a property cannot be operated and used to serve the public as a public utility unless the operator has a franchise. The operation of a rail system as a public utility includes the transportation of passengers from one point to another point, their loading and unloading at designated places and the movement of the trains at pre-scheduled times (cf. Arizona Eastern R.R. Co. v. J.A.. Matthews, 20 Ariz 282, 180 P.159, 7 A.L.R. 1149 [1919] ;United States Fire Ins. Co. v. Northern P.R. Co., 30 Wash 2d. 722, 193 P. 2d 868, 2 A.L.R. 2d 1065 [1948]).

The right to operate a public utility may exist independently and separately from the ownership of the facilities thereof. One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof.

This dichotomy between the operation of a public utility and the ownership of the facilities used to serve the public can be very well appreciated when we consider the transportation industry. Enfranchised airline and shipping companies may lease their aircraft and vessels instead of owning them themselves.

While private respondent is the owner of the facilities necessary to operate the EDSA. LRT III, it admits that it is not enfranchised to operate a public utility (Revised and Restated Agreement, Sec. 3.2; Rollo, p. 57). In view of this incapacity, private respondent and DOTC agreed that on completion date, private respondent will immediately deliver possession of the LRT system by way of lease for 25 years, during which period DOTC shall operate the same as a common carrier and private respondent shall provide

technical maintenance and repair services to DOTC (Revised and Restated Agreement, Secs. 3.2, 5.1 and 5.2; Rollo, pp. 57-58, 61-62). Technical maintenance consists of providing (1) repair and maintenance facilities for the depot and rail lines, services for routine clearing and security; and (2) producing and distributing maintenance manuals and drawings for the entire system (Revised and Restated Agreement, Annex F).

Private respondent shall also train DOTC personnel for familiarization with the operation, use, maintenance and repair of the rolling stock, power plant, substations, electrical, signaling, communications and all other equipment as supplied in the agreement (Revised and Restated Agreement, Sec. 10; Rollo, pp. 66-67). Training consists of theoretical and live training of DOTC operational personnel which includes actual driving of light rail vehicles under simulated operating conditions, control of operations, dealing with emergencies, collection, counting and securing cash from the fare collection system (Revised and Restated Agreement, Annex E, Secs. 2-3). Personnel of DOTC will work under the direction and control of private respondent only during training (Revised and Restated Agreement, Annex E, Sec. 3.1). The training objectives, however, shall be such that upon completion of the EDSA LRT III and upon opening of normal revenue operation, DOTC shall have in their employ personnel capable of undertaking training of all new and replacement personnel (Revised and Restated Agreement, Annex E Sec. 5.1). In other words, by the end of the three-year construction period and upon commencement of normal revenue operation, DOTC shall be able to operate the EDSA LRT III on its own and train all new personnel by itself.

Fees for private respondent' s services shall be included in the rent, which likewise includes the project cost, cost of replacement of plant equipment and spare parts, investment and financing cost, plus a reasonable rate of return thereon (Revised and Restated Agreement, Sec. 1; Rollo, p. 54).

Since DOTC shall operate the EDSA LRT III, it shall assume all the obligations and liabilities of a common carrier. For this purpose, DOTC shall indemnify and hold harmless private respondent from any losses, damages, injuries or death which may be claimed in the operation or implementation of the system, except losses, damages, injury or death due to defects in the EDSA LRT III on account of the defective condition of equipment or facilities or the defective maintenance of such equipment facilities (Revised and Restated Agreement, Secs. 12.1 and 12.2; Rollo, p. 68).

In sum, private respondent will not run the light rail vehicles and collect fees from the riding public. It will have no dealings with the public and the public will have no right to demand any services from it.

It is well to point out that the role of private respondent as lessor during the lease period must be distinguished from the role of the Philippine Gaming Management Corporation (PGMC) in the case of Kilosbayan Inc. v. Guingona, 232 SCRA 110 (1994). Therein, the Contract of Lease between PGMC and the Philippine Charity Sweepstakes Office (PCSO) was actually a collaboration or joint venture agreement prescribed under the charter of the PCSO. In the Contract of Lease; PGMC, the lessor obligated itself to build, at its own expense, all the facilities necessary to operate and maintain a nationwide on-line lottery system from whom PCSO was to lease the facilities and operate the same. Upon due examination of the contract, the Court found that PGMC's participation was not confined to the construction and setting up of the on-line lottery system. It spilled over to the actual operation thereof, becoming indispensable to the pursuit, conduct, administration and control of the highly technical and sophisticated lottery system. In effect, the PCSO leased out its franchise to PGMC which actually operated and managed the same.

Indeed, a mere owner and lessor of the facilities used by a public utility is not a public utility (Providence and W.R. Co. v. United States, 46 F. 2d 149, 152 [1930]; Chippewa Power Co. v. Railroad Commission of Wisconsin, 205 N.W. 900, 903, 188 Wis. 246 [1925]; Ellis v. Interstate Commerce Commission, Ill 35 S. Ct. 645, 646, 237 U.S. 434, 59 L. Ed. 1036 [1914]). Neither are owners of tank, refrigerator, wine, poultry and beer cars who supply cars under contract to railroad companies considered as public utilities (Crystal Car Line v. State Tax Commission, 174 p. 2d 984, 987 [1946]).

Even the mere formation of a public utility corporation does not ipso facto characterize the corporation as one operating a public utility. The moment for determining the requisite Filipino nationality is when the entity applies for a franchise, certificate or any other form of authorization for that purpose (People v. Quasha, 93 Phil. 333 [1953]).

2. Petitioners further assert that the BLT scheme under the Agreements in question is not recognized in the BOT Law and its Implementing Rules and Regulations.

Section 2 of the BOT Law defines the BOT and BT schemes as follows:

(a) Build-operate-and-transfer scheme — A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and the operation and maintenance thereof. The contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon. The contractor transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years. For the construction stage, the contractor may obtain financing from foreign and/or domestic sources and/or engage the services of a foreign and/or Filipino constructor [sic]: Provided, That the ownership structure of the contractor of an infrastructure facility whose operation requires a public utility franchise must be in accordance with the Constitution: Provided, however, That in the case of corporate investors in the build-operate-and-transfer corporation, the citizenship of each stockholder in the corporate investors shall be the basis for the computation of Filipino equity in the said corporation: Provided, further, That, in the case of foreign constructors [sic], Filipino labor shall be employed or hired in the different phases of the construction where Filipino skills are available: Provided, furthermore, that the financing of a foreign or foreign-controlled contractor from Philippine government financing institutions shall not exceed twenty percent (20%) of the total cost of the infrastructure facility or project: Provided, finally, That financing from foreign sources shall not require a guarantee by the Government or by government-owned or controlled corporations. The build-operate-and-transfer scheme shall include a supply-and-operate situation which is a contractual agreement whereby the supplier of equipment and machinery for a given infrastructure facility, if the interest of the Government so requires, operates the facility providing in the process technology transfer and training to Filipino nationals.

(b) Build-and-transfer scheme — "A contractual arrangement whereby the contractor undertakes the construction including financing, of a given infrastructure facility, and its turnover after completion to the government agency or local government unit concerned which shall pay the contractor its total investment expended on the project, plus a

reasonable rate of return thereon. This arrangement may be employed in the construction of any infrastructure project including critical facilities which for security or strategic reasons, must be operated directly by the government (Emphasis supplied).

The BOT scheme is expressly defined as one where the contractor undertakes the construction and financing in infrastructure facility, and operates and maintains the same. The contractor operates the facility for a fixed period during which it may recover its expenses and investment in the project plus a reasonable rate of return thereon. After the expiration of the agreed term, the contractor transfers the ownership and operation of the project to the government.

In the BT scheme, the contractor undertakes the construction and financing of the facility, but after completion, the ownership and operation thereof are turned over to the government. The government, in turn, shall pay the contractor its total investment on the project in addition to a reasonable rate of return. If payment is to be effected through amortization payments by the government infrastructure agency or local government unit concerned, this shall be made in accordance with a scheme proposed in the bid and incorporated in the contract (R.A. No. 6957, Sec. 6).

Emphasis must be made that under the BOT scheme, the owner of the infrastructure facility must comply with the citizenship requirement of the Constitution on the operation of a public utility. No such a requirement is imposed in the BT scheme.

There is no mention in the BOT Law that the BOT and BT schemes bar any other arrangement for the payment by the government of the project cost. The law must not be read in such a way as to rule out or unduly restrict any variation within the context of the two schemes. Indeed, no statute can be enacted to anticipate and provide all the fine points and details for the multifarious and complex situations that may be encountered in enforcing the law (Director of Forestry v. Munoz, 23 SCRA 1183 [1968]; People v. Exconde, 101 Phil. 1125 [1957]; United States v. Tupasi Molina, 29 Phil. 119 [1914]).

The BLT scheme in the challenged agreements is but a variation of the BT scheme under the law.

As a matter of fact, the burden on the government in raising funds to pay for the project is made lighter by allowing it to amortize payments out of the income from the operation of the LRT System.

In form and substance, the challenged agreements provide that rentals are to be paid on a monthly basis according to a schedule of rates through and under the terms of a confirmed Irrevocable Revolving Letter of Credit (Supplemental Agreement, Sec. 6; Rollo, p. 85). At the end of 25 years and when full payment shall have been made to and received by private respondent, it shall transfer to DOTC, free from any lien or encumbrances, all its title to, rights and interest in, the project for only U.S. $1.00 (Revised and Restated Agreement, Sec. 11.1; Supplemental Agreement, Sec; 7; Rollo, pp. 67, .87).

A lease is a contract where one of the parties binds himself to give to another the enjoyment or use of a thing for a certain price and for a period which may be definite or indefinite but not longer than 99 years (Civil Code of the Philippines, Art. 1643). There is no transfer of ownership at the end of the lease period. But if the parties stipulate that title to the leased premises shall be transferred to the lessee at the end of the lease period upon the payment of an agreed sum, the lease becomes a lease-purchase agreement.

Furthermore, it is of no significance that the rents shall be paid in United States currency, not Philippine pesos. The EDSA LRT III Project is a high priority project certified by Congress and the National Economic and Development Authority as falling under the Investment Priorities Plan of Government (Rollo, pp. 310-311). It is, therefore, outside the application of the Uniform Currency Act (R.A. No. 529), which reads as follows:

Sec. 1. — Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provisions purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) . . .; (b) transactions affecting high-priority economic projects for agricultural, industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; . . . .

3. The fact that the contract for the construction of the EDSA LRT III was awarded through negotiation and before congressional approval on January 22 and 23, 1992 of the List of National Projects to be undertaken by the private sector pursuant to the BOT Law (Rollo, pp. 309-312) does not suffice to invalidate the award.

Subsequent congressional approval of the list including "rail-based projects packaged with commercial development opportunities" (Rollo, p. 310) under which the EDSA LRT III projects falls, amounts to a ratification of the prior award of the EDSA LRT III contract under the BOT Law.

Petitioners insist that the prequalifications process which led to the negotiated award of the contract appears to have been rigged from the very beginning to do away with the usual open international public bidding where qualified internationally known applicants could fairly participate.

The records show that only one applicant passed the prequalification process. Since only one was left, to conduct a public bidding in accordance with Section 5 of the BOT Law for that lone participant will be an absurb and pointless exercise (cf. Deloso v. Sandiganbayan, 217 SCRA 49, 61 [1993]).

Contrary to the comments of the Executive Secretary Drilon, Section 5 of the BOT Law in relation to Presidential Decree No. 1594 allows the negotiated award of government infrastructure projects.

Presidential Decree No. 1594, "Prescribing Policies, Guidelines, Rules and Regulations for Government Infrastructure Contracts," allows the negotiated award of government projects in exceptional cases. Sections 4 of the said law reads as follows:

Bidding. — Construction projects shall generally be undertaken by contract after competitive public bidding. Projects may be undertaken by administration or force account or by negotiated contract only in exceptional cases where time is of the essence, or where there is lack of qualified bidders or contractors, or where there is conclusive evidence that greater economy and efficiency would be achieved through this arrangement, and in accordance with provision of laws and acts on the matter, subject to the approval of the Minister of Public Works and Transportation and Communications,

the Minister of Public Highways, or the Minister of Energy, as the case may be, if the project cost is less than P1 Million, and the President of the Philippines, upon recommendation of the Minister, if the project cost is P1 Million or more (Emphasis supplied).

xxx xxx xxx

Indeed, where there is a lack of qualified bidders or contractors, the award of government infrastructure contracts may he made by negotiation. Presidential Decree No. 1594 is the general law on government infrastructure contracts while the BOT Law governs particular arrangements or schemes aimed at encouraging private sector participation in government infrastructure projects. The two laws are not inconsistent with each other but are in pari materia and should be read together accordingly.

In the instant case, if the prequalification process was actually tainted by foul play, one wonders why none of the competing firms ever brought the matter before the PBAC, or intervened in this case before us (cf. Malayan Integrated Industries Corp. v. Court of Appeals, 213 SCRA 640 [1992]; Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

The challenged agreements have been approved by President Ramos himself. Although then Executive Secretary Drilon may have disapproved the "Agreement to Build, Lease and Transfer a Light Rail Transit System for EDSA," there is nothing in our laws that prohibits parties to a contract from renegotiating and modifying in good faith the terms and conditions thereof so as to meet legal, statutory and constitutional requirements. Under the circumstances, to require the parties to go back to step one of the prequalification process would just be an idle ceremony. Useless bureaucratic "red tape" should be eschewed because it discourages private sector participation, the "main engine" for national growth and development (R.A. No. 6957, Sec. 1), and renders the BOT Law nugatory.

Republic Act No. 7718 recognizes and defines a BLT scheme in Section 2 thereof as:

(e) Build-lease-and-transfer — A contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure or development facility and upon its completion turns it over to the government agency or local government unit concerned on a lease arrangement for a fixed period after which ownership of the facility is automatically transferred to the government unit concerned.

Section 5-A of the law, which expressly allows direct negotiation of contracts, provides:

Direct Negotiation of Contracts. — Direct negotiation shall be resorted to when there is only one complying bidder left as defined hereunder.

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

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

(c) If, after prequalification of more than one contractor only one submits a bid which is found by the agency/LGU to be complying.

(d) If, after prequalification, more than one contractor submit bids but only one is found by the agency/LGU to be complying. Provided, That, any of the disqualified prospective bidder [sic] may appeal the decision of the implementing agency, agency/LGUs prequalification bids and awards committee within fifteen (15) working days to the head of the agency, in case of national projects or to the Department of the Interior and Local Government, in case of local projects from the date the disqualification was made known to the disqualified bidder: Provided, furthermore, That the implementing agency/LGUs concerned should act on the appeal within forty-five (45) working days from receipt thereof.

Petitioners' claim that the BLT scheme and direct negotiation of contracts are not contemplated by the BOT Law has now been rendered moot and academic by R.A. No. 7718. Section 3 of this law authorizes all government infrastructure agencies, government-owned and controlled corporations and local government units to enter into contract with any duly prequalified proponent for the financing, construction, operation and maintenance of any financially viable infrastructure or development facility through a BOT, BT, BLT, BOO (Build-own-and-operate), CAO (Contract-add-operate), DOT (Develop-operate-and-transfer), ROT (Rehabilitate-operate-and-transfer), and ROO (Rehabilitate-own-operate) (R.A. No. 7718, Sec. 2 [b-j]).

From the law itself, once and applicant has prequalified, it can enter into any of the schemes enumerated in Section 2 thereof, including a BLT arrangement, enumerated and defined therein (Sec. 3).

Republic Act No. 7718 is a curative statute. It is intended to provide financial incentives and "a climate of minimum government regulations and procedures and specific government undertakings in support of the private sector" (Sec. 1). A curative statute makes valid that which before enactment of the statute was invalid. Thus, whatever doubts and alleged procedural lapses private respondent and DOTC may have engendered and committed in entering into the questioned contracts, these have now been cured by R.A. No. 7718 (cf. Development Bank of the Philippines v. Court of Appeals, 96 SCRA 342 [1980]; Santos V. Duata, 14 SCRA 1041 [1965]; Adong V. Cheong Seng Gee, 43 Phil. 43 [1922].

4. Lastly, petitioners claim that the agreements are grossly disadvantageous to the government because the rental rates are excessive and private respondent's development rights over the 13 stations and the depot will rob DOTC of the best terms during the most productive years of the project.

It must be noted that as part of the EDSA LRT III project, private respondent has been granted, for a period of 25 years, exclusive rights over the depot and the air space above the stations for development into commercial premises for lease, sublease, transfer, or advertising (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92). For and in consideration of these development rights, private respondent shall pay DOTC in Philippine currency guaranteed revenues generated therefrom in the amounts set forth in the Supplemental Agreement (Sec. 11; Rollo, p. 93). In the event that DOTC shall be unable to collect the guaranteed revenues, DOTC shall be allowed to deduct any shortfalls from the monthly rent due private respondent for the construction of the EDSA LRT III (Supplemental Agreement, Sec. 11; Rollo, pp. 93-94). All rights, titles, interests and income over all contracts on the commercial spaces shall revert to DOTC upon expiration of the 25-year period. (Supplemental Agreement, Sec. 11; Rollo, pp. 91-92).

The terms of the agreements were arrived at after a painstaking study by DOTC. The determination by the proper administrative agencies and officials who have acquired expertise, specialized skills and knowledge in the performance of their functions should be accorded respect absent any showing of grave abuse of discretion (Felipe Ysmael, Jr. & Co. v. Deputy Executive Secretary, 190 SCRA 673 [1990]; Board of Medical Education v. Alfonso, 176 SCRA 304 [1989]).

Government officials are presumed to perform their functions with regularity and strong evidence is necessary to rebut this presumption. Petitioners have not presented evidence on the reasonable rentals to be paid by the parties to each other. The matter of valuation is an esoteric field which is better left to the experts and which this Court is not eager to undertake.

That the grantee of a government contract will profit therefrom and to that extent the government is deprived of the profits if it engages in the business itself, is not worthy of being raised as an issue. In all cases where a party enters into a contract with the government, he does so, not out of charity and not to lose money, but to gain pecuniarily.

5. Definitely, the agreements in question have been entered into by DOTC in the exercise of its governmental function. DOTC is the primary policy, planning, programming, regulating and administrative entity of the Executive branch of government in the promotion, development and regulation of dependable and coordinated networks of transportation and communications systems as well as in the fast, safe, efficient and reliable postal, transportation and communications services (Administrative Code of 1987, Book IV, Title XV, Sec. 2). It is the Executive department, DOTC in particular that has the power, authority and technical expertise determine whether or not a specific transportation or communication project is necessary, viable and beneficial to the people. The discretion to award a contract is vested in the government agencies entrusted with that function (Bureau Veritas v. Office of the President, 205 SCRA 705 [1992]).

WHEREFORE, the petition is DISMISSED.

SO ORDERED

G.R. No. 125948 December 29, 1998 FIRST PHILIPPINE INDUSTRIAL CORPORATION, petitioner, vs. COURT OF APPEALS, HONORABLE PATERNO V. TAC-AN, BATANGAS CITY and ADORACION C. ARELLANO, in her official capacity as City Treasurer of Batangas, respondents.

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

Petitioner is a grantee of a pipeline concession under Republic Act No. 387, as amended, to contract, install and operate oil pipelines. The original pipeline concession was granted in 1967 1 and renewed by the Energy Regulatory Board in 1992. 2

Sometime in January 1995, petitioner applied for a mayor's permit with the Office of the Mayor of Batangas City. However, before the mayor's permit could be issued, the respondent City Treasurer required petitioner to pay a local tax based on its gross receipts for the fiscal year 1993 pursuant to the Local Government Code 3. The respondent City Treasurer assessed a business tax on the petitioner amounting to P956,076.04 payable in four installments based on the gross receipts for products pumped at GPS-1 for the fiscal year 1993 which amounted to P181,681,151.00. In order not to hamper its operations, petitioner paid the tax under protest in the amount of P239,019.01 for the first quarter of 1993.

On January 20, 1994, petitioner filed a letter-protest addressed to the respondent City Treasurer, the pertinent portion of which reads:

Please note that our Company (FPIC) is a pipeline operator with a government concession granted under the Petroleum Act. It is engaged in the business of transporting petroleum products from the Batangas refineries, via pipeline, to Sucat and JTF Pandacan Terminals. As such, our Company is exempt from paying tax on gross receipts under Section 133 of the Local Government Code of 1991 . . . .

Moreover, Transportation contractors are not included in the enumeration of contractors under Section 131, Paragraph (h) of the Local Government Code. Therefore, the authority to impose tax "on contractors and other independent contractors" under Section 143, Paragraph (e) of the Local Government Code does not include the power to levy on transportation contractors.

The imposition and assessment cannot be categorized as a mere fee authorized under Section 147 of the Local Government Code. The said section limits the imposition of fees and charges on business to such amounts as may be commensurate to the cost of regulation, inspection, and licensing. Hence, assuming arguendo that FPIC is liable for the license fee, the imposition thereof based on gross receipts is violative of the aforecited provision. The amount of P956,076.04 (P239,019.01 per quarter) is not commensurate to the cost of regulation, inspection and licensing. The fee is already a revenue raising measure, and not a mere regulatory imposition. 4

On March 8, 1994, the respondent City Treasurer denied the protest contending that petitioner cannot be considered engaged in transportation business, thus it cannot claim exemption under Section 133 (j) of the Local Government Code. 5

On June 15, 1994, petitioner filed with the Regional Trial Court of Batangas City a complaint 6 for tax refund with prayer for writ of preliminary injunction against respondents City of Batangas and Adoracion Arellano in her capacity as City Treasurer. In its complaint, petitioner alleged, inter alia, that: (1) the imposition and collection of the business tax on its gross receipts violates Section 133 of the Local Government Code; (2) the authority of cities to impose and collect a tax on the gross receipts of "contractors and independent contractors" under Sec. 141 (e) and 151 does not include the authority to collect such taxes on transportation contractors for, as defined under Sec. 131 (h), the term "contractors" excludes transportation contractors; and, (3) the City Treasurer illegally and erroneously imposed and collected the said tax, thus meriting the immediate refund of the tax paid. 7

Traversing the complaint, the respondents argued that petitioner cannot be exempt from taxes under Section 133 (j) of the Local Government Code as said exemption applies only to "transportation contractors and persons engaged in the transportation by hire and common carriers by air, land and water." Respondents assert that pipelines are not included in the term "common carrier" which refers solely to ordinary carriers such as trucks, trains, ships and the like. Respondents further posit that the term "common carrier" under the said code pertains to the mode or manner by which a product is delivered to its destination. 8

On October 3, 1994, the trial court rendered a decision dismissing the complaint, ruling in this wise:

. . . Plaintiff is either a contractor or other independent contractor.

. . . the exemption to tax claimed by the plaintiff has become unclear. It is a rule that tax exemptions are to be strictly construed against the taxpayer, taxes being the lifeblood of the government. Exemption may therefore be granted only by clear and unequivocal provisions of law.

Plaintiff claims that it is a grantee of a pipeline concession under Republic Act 387. (Exhibit A) whose concession was lately renewed by the Energy Regulatory Board (Exhibit B). Yet neither said law nor the deed of concession grant any tax exemption upon the plaintiff.

Even the Local Government Code imposes a tax on franchise holders under Sec. 137 of the Local Tax Code. Such being the situation obtained in this case (exemption being unclear and equivocal) resort to distinctions or other considerations may be of help:

1. That the exemption granted under Sec. 133 (j) encompasses only common carriers so as not to overburden the riding public or commuters with taxes. Plaintiff is not a common carrier, but a special carrier extending its services and facilities to a single specific or "special customer" under a "special contract."

2. The Local Tax Code of 1992 was basically enacted to give more and effective local autonomy to local governments than the previous enactments, to make them economically and financially viable to serve the people and discharge their functions with a concomitant obligation to accept certain devolution of powers, . . . So, consistent with this policy even franchise grantees are taxed (Sec. 137) and contractors are also taxed under Sec. 143 (e) and 151 of the Code. 9

Petitioner assailed the aforesaid decision before this Court via a petition for review. On February 27, 1995, we referred the case to the respondent Court of Appeals for consideration and adjudication. 10 On November 29, 1995, the respondent court rendered a decision 11 affirming the trial court's dismissal of petitioner's complaint. Petitioner's motion for reconsideration was denied on July 18, 1996. 12

Hence, this petition. At first, the petition was denied due course in a Resolution dated November 11, 1996. 13 Petitioner moved for a reconsideration which was granted by this Court in a Resolution 14 of January 22, 1997. Thus, the petition was reinstated.

Petitioner claims that the respondent Court of Appeals erred in holding that (1) the petitioner is not a common carrier or a transportation contractor, and (2) the exemption sought for by petitioner is not clear under the law.

There is merit in the petition.

A "common carrier" may be defined, broadly, as one who holds himself out to the public as engaged in the business of transporting persons or property from place to place, for compensation, offering his services to the public generally.

Art. 1732 of the Civil Code defines a "common carrier" as "any person, corporation, firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public."

The test for determining whether a party is a common carrier of goods is:

1. He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for person generally as a business and not as a casual occupation;

2. He must undertake to carry goods of the kind to which his business is confined;

3. He must undertake to carry by the method by which his business is conducted and over his established roads; and

4. The transportation must be for hire. 15

Based on the above definitions and requirements, there is no doubt that petitioner is a common carrier. It is engaged in the business of transporting or carrying goods, i.e. petroleum products, for hire as a public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose to employ its services, and transports the goods by land and for compensation. The fact that petitioner has a limited clientele does not exclude it from the definition of a common carrier. In De Guzman vs. Court of Appeals 16 we ruled that:

The above article (Art. 1732, Civil Code) makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as a "sideline"). Article 1732 . . . avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the "general public," i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population. We think that Article 1877 deliberately refrained from making such distinctions.

So understood, the concept of "common carrier" under Article 1732 may be seen to coincide neatly with the notion of "public service," under the Public Service Act (Commonwealth Act No. 1416, as amended) which at least partially supplements the law on common carriers set forth in the Civil Code. Under Section 13, paragraph (b) of the Public Service Act, "public service" includes:

every person that now or hereafter may own, operate. manage, or control in the Philippines, for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier, railroad, street railway, traction railway, subway motor vehicle, either for freight or passenger, or both, with or without fixed route and whatever may be its classification, freight or carrier service of any class, express service, steamboat, or steamship line, pontines, ferries and water craft, engaged in the transportation of passengers or freight or both, shipyard, marine repair shop, wharf or dock, ice plant, ice-refrigeration plant, canal, irrigation system gas, electric light heat and power, water supply and power petroleum, sewerage system, wire or wireless communications systems, wire or wireless broadcasting stations and other similar public services. (Emphasis Supplied)

Also, respondent's argument that the term "common carrier" as used in Section 133 (j) of the Local Government Code refers only to common carriers transporting goods and passengers through moving vehicles or vessels either by land, sea or water, is erroneous.

As correctly pointed out by petitioner, the definition of "common carriers" in the Civil Code makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation of the passengers or goods should be by motor vehicle. In fact, in the United States, oil pipe line operators are considered common carriers. 17

Under the Petroleum Act of the Philippines (Republic Act 387), petitioner is considered a "common carrier." Thus, Article 86 thereof provides that:

Art. 86. Pipe line concessionaire as common carrier. — A pipe line shall have the preferential right to utilize installations for the transportation of petroleum owned by him, but is obligated to utilize the remaining transportation capacity pro rata for the transportation of such other petroleum as may be offered by others for transport, and to charge without discrimination such rates as may have been approved by the Secretary of Agriculture and Natural Resources.

Republic Act 387 also regards petroleum operation as a public utility. Pertinent portion of Article 7 thereof provides:

that everything relating to the exploration for and exploitation of petroleum . . . and everything relating to the manufacture, refining, storage, or transportation by special methods of petroleum, is hereby declared to be a public utility. (Emphasis Supplied)

The Bureau of Internal Revenue likewise considers the petitioner a "common carrier." In BIR Ruling No. 069-83, it declared:

. . . since [petitioner] is a pipeline concessionaire that is engaged only in transporting petroleum products, it is considered a common carrier under Republic Act No. 387 . . . . Such being the case, it is not subject to withholding tax prescribed by Revenue Regulations No. 13-78, as amended.

From the foregoing disquisition, there is no doubt that petitioner is a "common carrier" and, therefore, exempt from the business tax as provided for in Section 133 (j), of the Local Government Code, to wit:

Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

xxx xxx xxx

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code.

The deliberations conducted in the House of Representatives on the Local Government Code of 1991 are illuminating:

MR. AQUINO (A). Thank you, Mr. Speaker.

Mr. Speaker, we would like to proceed to page 95, line

1. It states: "SEC. 121 [now Sec. 131]. Common Limitations on the Taxing Powers of Local Government Units." . . .

MR. AQUINO (A.). Thank you Mr. Speaker.

Still on page 95, subparagraph 5, on taxes on the business of transportation. This appears to be one of those being deemed to be exempted from the taxing powers of the local government units. May we know the reason why the transportation business is being excluded from the taxing powers of the local government units?

MR. JAVIER (E.). Mr. Speaker, there is an exception contained in Section 121 (now Sec. 131), line 16, paragraph 5. It states that local government units may not impose taxes on the business of transportation, except as otherwise provided in this code.

Now, Mr. Speaker, if the Gentleman would care to go to page 98 of Book II, one can see there that provinces have the power to impose a tax on business enjoying a franchise at the rate of not more than one-half of 1 percent of the gross annual receipts. So, transportation contractors who are enjoying a franchise would be subject to tax by the province. That is the exception, Mr. Speaker.

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

MR. AQUINO (A.). Thank you for that clarification, Mr. Speaker. . . . 18

It is clear that the legislative intent in excluding from the taxing power of the local government unit the imposition of business tax against common carriers is to prevent a duplication of the so-called "common carrier's tax."

Petitioner is already paying three (3%) percent common carrier's tax on its gross sales/earnings under the National Internal Revenue Code. 19 To tax petitioner again on its gross receipts in its transportation of petroleum business would defeat the purpose of the Local Government Code.

WHEREFORE, the petition is hereby GRANTED. The decision of the respondent Court of Appeals dated November 29, 1995 in CA-G.R. SP No. 36801 is REVERSED and SET ASIDE.

SO ORDERED.

G.R. No. 112287 December 12, 1997 NATIONAL STEEL CORPORATION, petitioner, vs. COURT OF APPEALS AND VLASONS SHIPPING, INC., respondents. G.R. No. 112350 December 12, 1997 VLASONS SHIPPING, INC., petitioner, vs. COURT OF APPEALS AND NATIONAL STEEL CORPORATION, respondents.

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

The Case

Before us are two separate petitions for review filed by National Steel Corporation (NSC) and Vlasons Shipping, Inc. (VSI), both of which assail the August 12, 1993 Decision of the Court of Appeals. 1 The Court of Appeals modified the decision of the Regional Trial Court of Pasig, Metro Manila, Branch 163 in Civil Case No. 23317. The RTC disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of defendant and against the plaintiff dismissing the complaint with cost against plaintiff, and ordering plaintiff to pay the defendant on the counterclaim as follows:

1. The sum of P75,000.00 as unpaid freight and P88,000.00 as demurrage with interest at the legal rate on both amounts from April 7, 1976 until the same shall have been fully paid;

2. Attorney's fees and expenses of litigation in the sum of P100,000.00; and

3. Costs of suit.

SO ORDERED. 2

On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the decision appealed from is modified by reducing the award for demurrage to P44,000.00 and deleting the award for attorney's fees and expenses of litigation. Except as thus modified, the decision is AFFIRMED. There is no pronouncement as to costs.

SO ORDERED. 3

The Facts

The MV Vlasons I is a vessel which renders tramping service and, as such, does not transport cargo or shipment for the general public. Its services are available only to specific persons who enter into a special contract of charter party with its owner. It is undisputed that the ship is a private carrier. And it is in the

capacity that its owner, Vlasons Shipping, Inc., entered into a contract of affreightment or contract of voyage charter hire with National Steel Corporation.

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

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

1. . . .

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

3. . . .

4. Freight/Payment: P30.00/metric ton, FIOST basis. Payment upon presentation of Bill of Lading within fifteen (15) days.

5. Laydays/Cancelling: July 26, 1974/Aug. 5, 1974.

6. Loading/Discharging Rate: 750 tons per WWDSHINC. (Weather Working Day of 24 consecutive hours, Sundays and Holidays Included).

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

8. . . .

9. Cargo Insurance: Charterer's and/or Shipper's must insure the cargoes. Shipowners not responsible for losses/damages except on proven willful negligence of the officers of the vessel.

10. Other terms: (a) All terms/conditions of NONYAZAI C/P [sic] or other internationally recognized Charter Party Agreement shall form part of this Contract.

xxx xxx xxx

The terms "F.I.O.S.T." which is used in the shipping business is a standard provision in the NANYOZAI Charter Party which stands for "Freight In and Out including Stevedoring and Trading", which means that the handling, loading and unloading of the cargoes are the responsibility of the Charterer. Under Paragraph 5 of the NANYOZAI Charter Party, it states, "Charterers to load, stow and discharge the cargo free of risk and expenses to owners. . . . (Emphasis supplied).

Under paragraph 10 thereof, it is provided that "(o)wners shall, before and at the beginning of the voyage, exercise due diligence to make the vessel seaworthy and properly manned, equipped and supplied and to make the holds and all other parts of the vessel in which cargo is carried, fit

and safe for its reception, carriage and preservation. Owners shall not be liable for loss of or damage of the cargo arising or resulting from: unseaworthiness unless caused by want of due diligence on the part of the owners to make the vessel seaworthy, and to secure that the vessel is properly manned, equipped and supplied and to make the holds and all other parts of the vessel in which cargo is carried, fit and safe for its reception, carriage and preservation; . . . ; perils, dangers and accidents of the sea or other navigable waters; . . . ; wastage in bulk or weight or any other loss or damage arising from inherent defect, quality or vice of the cargo; insufficiency of packing; . . . ; latent defects not discoverable by due diligence; any other cause arising without the actual fault or privity of Owners or without the fault of the agents or servants of owners."

Paragraph 12 of said NANYOZAI Charter Party also provides that "(o)wners shall not be responsible for split, chafing and/or any damage unless caused by the negligence or default of the master and crew."

(2) On August 6, 7 and 8, 1974, in accordance with the Contract of Voyage Charter Hire, the MV "VLASONS I" loaded at plaintiffs pier at Iligan City, the NSC's shipment of 1,677 skids of tinplates and 92 packages of hot rolled sheets or a total of 1,769 packages with a total weight of about 2,481.19 metric tons for carriage to Manila. The shipment was placed in the three (3) hatches of the ship. Chief Mate Gonzalo Sabando, acting as agent of the vessel[,] acknowledged receipt of the cargo on board and signed the corresponding bill of lading, B.L.P.P. No. 0233 (Exhibit "D") on August 8, 1974.

(3) The vessel arrived with the cargo at Pier 12, North Harbor, Manila, on August 12, 1974. The following day, August 13, 1974, when the vessel's three (3) hatches containing the shipment were opened by plaintiff's agents, nearly all the skids of tinplates and hot rolled sheets were allegedly found to be wet and rusty. The cargo was discharged and unloaded by stevedores hired by the Charterer. Unloading was completed only on August 24, 1974 after incurring a delay of eleven (11) days due to the heavy rain which interrupted the unloading operations. (Exhibit "E")

(4) To determine the nature and extent of the wetting and rusting, NSC called for a survey of the shipment by the Manila Adjusters and Surveyors Company (MASCO). In a letter to the NSC dated March 17, 1975 (Exhibit "G"), MASCO made a report of its ocular inspection conducted on the cargo, both while it was still on board the vessel and later at the NDC warehouse in Pureza St., Sta. Mesa, Manila where the cargo was taken and stored. MASCO reported that it found wetting and rusting of the packages of hot rolled sheets and metal covers of the tinplates; that tarpaulin hatch covers were noted torn at various extents; that container/metal casings of the skids were rusting all over. MASCO ventured the opinion that "rusting of the tinplates was caused by contact with SEA WATER sustained while still on board the vessel as a consequence of the heavy weather and rough seas encountered while en route to destination (Exhibit "F"). It was also reported that MASCO's surveyors drew at random samples of bad order packing materials of the tinplates and delivered the same to the M.I.T. Testing Laboratories for analysis. On August 31, 1974, the M.I.T. Testing Laboratories issued Report No. 1770 (Exhibit "I") which in part, states, "The analysis of bad order samples of packing materials . . . shows that wetting was caused by contact with SEA WATER".

(5) On September 6, 1974, on the basis of the aforesaid Report No. 1770, plaintiff filed with the defendant its claim for damages suffered due to the downgrading of the damaged tinplates in the amount of P941,145.18. Then on October 3, 1974, plaintiff formally demanded payment of said

claim but defendant VSI refused and failed to pay. Plaintiff filed its complaint against defendant on April 21, 1976 which was docketed as Civil Case No. 23317, CFI, Rizal.

(6) In its complaint, plaintiff claimed that it sustained losses in the aforesaid amount of P941,145.18 as a result of the act, neglect and default of the master and crew in the management of the vessel as well as the want of due diligence on the part of the defendant to make the vessel seaworthy and to make the holds and all other parts of the vessel in which the cargo was carried, fit and safe for its reception, carriage and preservation — all in violation of defendant's undertaking under their Contract of Voyage Charter Hire.

(7) In its answer, defendant denied liability for the alleged damage claiming that the MV "VLASONS I" was seaworthy in all respects for the carriage of plaintiff's cargo; that said vessel was not a "common carrier" inasmuch as she was under voyage charter contract with the plaintiff as charterer under the charter party; that in the course of the voyage from Iligan City to Manila, the MV "VLASONS I" encountered very rough seas, strong winds and adverse weather condition, causing strong winds and big waves to continuously pound against the vessel and seawater to overflow on its deck and hatch covers, that under the Contract of Voyage Charter Hire, defendant shall not be responsible for losses/damages except on proven willful negligence of the officers of the vessel, that the officers of said MV "VLASONS I" exercised due diligence and proper seamanship and were not willfully negligent; that furthermore the Voyage Charter Party provides that loading and discharging of the cargo was on FIOST terms which means that the vessel was free of risk and expense in connection with the loading and discharging of the cargo; that the damage, if any, was due to the inherent defect, quality or vice of the cargo or to the insufficient packing thereof or to latent defect of the cargo not discoverable by due diligence or to any other cause arising without the actual fault or privity of defendant and without the fault of the agents or servants of defendant; consequently, defendant is not liable; that the stevedores of plaintiff who discharged the cargo in Manila were negligent and did not exercise due care in the discharge of the cargo; land that the cargo was exposed to rain and seawater spray while on the pier or in transit from the pier to plaintiff's warehouse after discharge from the vessel; and that plaintiff's claim was highly speculative and grossly exaggerated and that the small stain marks or sweat marks on the edges of the tinplates were magnified and considered total loss of the cargo. Finally, defendant claimed that it had complied with all its duties and obligations under the Voyage Charter Hire Contract and had no responsibility whatsoever to plaintiff. In turn, it alleged the following counterclaim:

(a) That despite the full and proper performance by defendant of its obligations under the Voyage Charter Hire Contract, plaintiff failed and refused to pay the agreed charter hire of P75,000.00 despite demands made by defendant;

(b) That under their Voyage Charter Hire Contract, plaintiff had agreed to pay defendant the sum of P8,000.00 per day for demurrage. The vessel was on demurrage for eleven (11) days in Manila waiting for plaintiff to discharge its cargo from the vessel. Thus, plaintiff was liable to pay defendant demurrage in the total amount of P88,000.00.

(c) For filing a clearly unfounded civil action against defendant, plaintiff should be ordered to pay defendant attorney's fees and all expenses of litigation in the amount of not less than P100,000.00.

(8) From the evidence presented by both parties, the trial court came out with the following findings which were set forth in its decision:

(a) The MV "VLASONS I" is a vessel of Philippine registry engaged in the tramping service and is available for hire only under special contracts of charter party as in this particular case.

(b) That for purposes of the voyage covered by the Contract of Voyage Charter Hire (Exh. "1"), the MV VLASONS I" was covered by the required seaworthiness certificates including the Certification of Classification issued by an international classification society, the NIPPON KAIJI KYOKAI (Exh. "4"); Coastwise License from the Board of Transportation (Exh. "5"); International Loadline Certificate from the Philippine Coast Guard (Exh. "6"); Cargo Ship Safety Equipment Certificate also from the Philippine Coast Guard (Exh. "7"); Ship Radio Station License (Exh. "8"); Certificate of Inspection by the Philippine Coast Guard (Exh. "12"); and Certificate of Approval for Conversion issued by the Bureau of Customs (Exh. "9"). That being a vessel engaged in both overseas and coastwise trade, the MV "VLASONS I" has a higher degree of seaworthiness and safety.

(c) Before it proceeded to Iligan City to perform the voyage called for by the Contract of Voyage Charter Hire, the MV "VLASONS I" underwent drydocking in Cebu and was thoroughly inspected by the Philippine Coast Guard. In fact, subject voyage was the vessel's first voyage after the drydocking. The evidence shows that the MV "VLASONS I" was seaworthy and properly manned, equipped and supplied when it undertook the voyage. It has all the required certificates of seaworthiness.

(d) The cargo/shipment was securely stowed in three (3) hatches of the ship. The hatch openings were covered by hatchboards which were in turn covered by two or double tarpaulins. The hatch covers were water tight. Furthermore, under the hatchboards were steel beams to give support.

(e) The claim of the plaintiff that defendant violated the contract of carriage is not supported by evidence. The provisions of the Civil Code on common carriers pursuant to which there exists a presumption of negligence in case of loss or damage to the cargo are not applicable. As to the damage to the tinplates which was allegedly due to the wetting and rusting thereof, there is unrebutted testimony of witness Vicente Angliongto that tinplates "sweat" by themselves when packed even without being in contract (sic) with water from outside especially when the weather is bad or raining. The trust caused by sweat or moisture on the tinplates may be considered as a loss or damage but then, defendant cannot be held liable for it pursuant to Article 1734 of the Civil Case which exempts the carrier from responsibility for loss or damage arising from the "character of the goods . . ." All the 1,769 skids of the tinplates could not have been damaged by water as claimed by plaintiff. It was shown as claimed by plaintiff that the tinplates themselves were wrapped in kraft paper lining and corrugated cardboards could not be affected by water from outside.

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

(g) It was also established that the vessel encountered rough seas and bad weather while en route from Iligan City to Manila causing sea water to splash on the ship's deck on account of which the master of the vessel (Mr. Antonio C. Dumlao) filed a "Marine Protest" on August 13, 1974 (Exh. "15"); which can be invoked by defendant as a force majeure that would exempt the defendant from liability.

(h) Plaintiff did not comply with the requirement prescribed in paragraph 9 of the Voyage Charter Hire contract that it was to insure the cargo because it did not. Had plaintiff complied with the requirement, then it could have recovered its loss or damage from the insurer. Plaintiff also violated the charter party contract when it loaded not only "steel products", i.e. steel bars, angular bars and the like but also tinplates and hot rolled sheets which are high grade cargo commanding a higher freight. Thus plaintiff was able to ship grade cargo at a lower freight rate.

(i) As regards defendant's counterclaim, the contract of voyage charter hire under Paragraph 4 thereof, fixed the freight at P30.00 per metric ton payable to defendant carrier upon presentation of the bill of lading within fifteen (15) days. Plaintiff has not paid the total freight due of P75,000.00 despite demands. The evidence also showed that the plaintiff was required and bound under paragraph 7 of the same Voyage Charter Hire contract to pay demurrage of P8,000.00 per day of delay in the unloading of the cargoes. The delay amounted to eleven (11) days thereby making plaintiff liable to pay defendant for demurrage in the amount of P88,000.00.

Appealing the RTC decision to the Court of Appeals, NSC alleged six errors:

I

The trial court erred in finding that the MV "VLASONS I" was seaworthy, properly manned, equipped and supplied, and that there is no proof of willful negligence of the vessel's officers.

II

The trial court erred in finding that the rusting of NSC's tinplates was due to the inherent nature or character of the goods and not due to contact with seawater.

III

The trial court erred in finding that the stevedores hired by NSC were negligent in the unloading of NSC's shipment.

IV

The trial court erred in exempting VSI from liability on the ground of force majeure.

V

The trial court erred in finding that NSC violated the contract of voyage charter hire.

VI

The trial court erred in ordering NSC to pay freight, demurrage and attorney's fees, to VSI. 4

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

The Issues

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

Questions of Law

1. Whether or not a charterer of a vessel is liable for demurrage due to cargo unloading delays caused by weather interruption;

2. Whether or not the alleged "seaworthiness certificates" (Exhibits "3", "4", "5", "6", "7", "8", "9", "11" and "12") were admissible in evidence and constituted evidence of the vessel's seaworthiness at the beginning of the voyages; and

3. Whether or not a charterer's failure to insure its cargo exempts the shipowner from liability for cargo damage.

Questions of Fact

1. Whether or not the vessel was seaworthy and cargo-worthy;

2. Whether or not vessel's officers and crew were negligent in handling and caring for NSC's cargo;

3. Whether or not NSC's cargo of tinplates did sweat during the voyage and, hence, rusted on their own; and

4. Whether or not NSC's stevedores were negligent and caused the wetting[/]rusting of NSC's tinplates.

In its separate petition, 9 VSI submits for the consideration of this Court the following alleged errors of the CA:

A. The respondent Court of Appeals committed an error of law in reducing the award of demurrage from P88,000.00 to P44,000.00.

B. The respondent Court of Appeals committed an error of law in deleting the award of P100,000 for attorney's fees and expenses of litigation.

Amplifying the foregoing, VSI raises the following issues in its memorandum: 10

I. Whether or not the provisions of the Civil Code of the Philippines on common carriers pursuant to which there exist[s] a presumption of negligence against the common carrier in case of loss or damage to the cargo are applicable to a private carrier.

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

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

1. Questions of Fact

2. Effect of NSC's Failure to Insure the Cargo

3. Admissibility of Certificates Proving Seaworthiness

4. Demurrage and Attorney's Fees.

The Court's Ruling

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

Preliminary Matter: Common Carrier or Private Carrier?

At the outset, it is essential to establish whether VSI contracted with NSC as a common carrier or as a private carrier. The resolution of this preliminary question determines the law, standard of diligence and burden of proof applicable to the present case.

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

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

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

Extent of VSI's Responsibility and Liability Over NSC's Cargo

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

Burden of Proof

In view of the aforementioned contractual stipulations, NSC must prove that the damage to its shipment was caused by VSI's willful negligence or failure to exercise due diligence in making MV Vlasons I seaworthy and fit for holding, carrying and safekeeping the cargo. Ineluctably, the burden of proof was placed on NSC by the parties' agreement.

This view finds further support in the Code of Commerce which pertinently provides:

Art. 361. Merchandise shall be transported at the risk and venture of the shipper, if the contrary has not been expressly stipulated.

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

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

Art. 362. The carrier, however, shall be liable for damages arising from the cause mentioned in the preceding article if proofs against him show that they occurred on account of his negligence or his omission to take the precautions usually adopted by careful persons, unless the shipper committed fraud in the bill of lading, making him to believe that the goods were of a class or quality different from what they really were.

Because the MV Vlasons I was a private carrier, the shipowner's obligations are governed by the foregoing provisions of the Code of Commerce and not by the Civil Code which, as a general rule, places the prima facie presumption of negligence on a common carrier. It is a hornbook doctrine that:

In an action against a private carrier for loss of, or injury to, cargo, the burden is on the plaintiff to prove that the carrier was negligent or unseaworthy, and the fact that the goods were lost or damaged while in the carrier's custody does not put the burden of proof on the carrier.

Since . . . a private carrier is not an insurer but undertakes only to exercise due care in the protection of the goods committed to its care, the burden of proving negligence or a breach of that duty rests on plaintiff and proof of loss of, or damage to, cargo while in the carrier's possession does not cast on it the burden of proving proper care and diligence on its part or that the loss occurred from an excepted cause in the contract or bill of lading. However, in discharging the burden of proof, plaintiff is entitled to the benefit of the presumptions and inferences by which the law aids the bailor in an action against a bailee, and since the carrier is in a better position to know the cause of the loss and that it was not one involving its liability, the law requires that it come forward with the information available to it, and its failure to do so warrants an inference or presumption of its liability. However, such inferences and presumptions, while they may affect the burden of coming forward with evidence, do not alter the burden of proof which remains on plaintiff, and, where the carrier comes forward with evidence explaining the loss or damage, the burden of going forward with the evidence is again on plaintiff.

Where the action is based on the shipowner's warranty of seaworthiness, the burden of proving a breach thereof and that such breach was the proximate cause of the damage rests on plaintiff, and proof that the goods were lost or damaged while in the carrier's possession does not cast on it the burden of proving seaworthiness. . . . Where the contract of carriage exempts the carrier from liability for unseaworthiness not discoverable by due diligence, the carrier has the preliminary burden of proving the exercise of due diligence to make the vessel seaworthy. 20

In the instant case, the Court of Appeals correctly found the NSC "has not taken the correct position in relation to the question of who has the burden of proof. Thus, in its brief (pp. 10-11), after citing Clause 10 and Clause 12 of the NANYOZAI Charter Party (incidentally plaintiff-appellant's [NSC's] interpretation

of Clause 12 is not even correct), it argues that 'a careful examination of the evidence will show that VSI miserably failed to comply with any of these obligation's as if defendant-appellee [VSI] had the burden of proof." 21

First Issue: Questions of Fact

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

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

Was MV Vlasons I Seaworthy?

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

Who Were Negligent: Seamen or Stevedores?

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

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

The records sufficiently support VSI's contention that the ship used the old tarpaulin, only in addition to the new one used primarily to make the ship's hatches watertight. The foregoing are clear from the marine

protest of the master of the MV Vlasons I, Antonio C. Dumlao, and the deposition of the ship's boatswain, Jose Pascua. The salient portions of said marine protest read:

. . . That the M/V "VLASONS I" departed Iligan City or about 0730 hours of August 8, 1974, loaded with approximately 2,487.9 tons of steel plates and tin plates consigned to National Steel Corporation; that before departure, the vessel was rigged, fully equipped and cleared by the authorities; that on or about August 9, 1974, while in the vicinity of the western part of Negros and Panay, we encountered very rough seas and strong winds and Manila office was advised by telegram of the adverse weather conditions encountered; that in the morning of August 10, 1974, the weather condition changed to worse and strong winds and big waves continued pounding the vessel at her port side causing sea water to overflow on deck andhatch (sic) covers and which caused the first layer of the canvass covering to give way while the new canvass covering still holding on;

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

xxx xxx xxx 28

And the relevant portions of Jose Pascua's deposition are as follows:

q What is the purpose of the canvas cover?

a So that the cargo would not be soaked with water.

q And will you describe how the canvas cover was secured on the hatch opening?

WITNESS

a It was placed flat on top of the hatch cover, with a little canvas flowing over the sides and we place[d] a flat bar over the canvas on the side of the hatches and then we place[d] a stopper so that the canvas could not be removed.

ATTY DEL ROSARIO

q And will you tell us the size of the hatch opening? The length and the width of the hatch opening.

a Forty-five feet by thirty-five feet, sir.

xxx xxx xxx

q How was the canvas supported in the middle of the hatch opening?

a There is a hatch board.

ATTY DEL ROSARIO

q What is the hatch board made of?

a It is made of wood, with a handle.

q And aside from the hatch board, is there any other material there to cover the hatch?

a There is a beam supporting the hatch board.

q What is this beam made of?

a It is made of steel, sir.

q Is the beam that was placed in the hatch opening covering the whole hatch opening?

a No, sir.

q How many hatch beams were there placed across the opening?

a There are five beams in one hatch opening.

ATTY DEL ROSARIO

q And on top of the beams you said there is a hatch board. How many pieces of wood are put on top?

a Plenty, sir, because there are several pieces on top of the hatch beam.

q And is there a space between the hatch boards?

a There is none, sir.

q They are tight together?

a Yes, sir.

q How tight?

a Very tight, sir.

q Now, on top of the hatch boards, according to you, is the canvass cover. How many canvas covers?

a Two, sir. 29

That due diligence was exercised by the officers and the crew of the MV Vlasons I was further demonstrated by the fact that, despite encountering rough weather twice, the new tarpaulin did not give way and the ship's hatches and cargo holds remained waterproof. As aptly stated by the Court of Appeals, ". . . we find no reason not to sustain the conclusion of the lower court based on overwhelming evidence, that the MV 'VLASONS I' was seaworthy when it undertook the voyage on August 8, 1974 carrying on board thereof plaintiff-appellant's shipment of 1,677 skids of tinplates and 92 packages of hot rolled sheets or a total of 1,769 packages from NSC's pier in Iligan City arriving safely at North Harbor, Port Area, Manila, on August 12, 1974; . . . 30

Indeed, NSC failed to discharge its burden to show negligence on the part of the officers and the crew of MV Vlasons I. On the contrary, the records reveal that it was the stevedores of NSC who were negligent in unloading the cargo from the ship.

The stevedores employed only a tent-like material to cover the hatches when strong rains occasioned by a passing typhoon disrupted the unloading of the cargo. This tent-like covering, however, was clearly inadequate for keeping rain and seawater away from the hatches of the ship. Vicente Angliongto, an officer of VSI, testified thus:

ATTY ZAMORA:

Q Now, during your testimony on November 5, 1979, you stated on August 14 you went on board the vessel upon notice from the National Steel Corporation in order to conduct the inspection of the cargo. During the course of the investigation, did you chance to see the discharging operation?

WITNESS:

A Yes, sir, upon my arrival at the vessel, I saw some of the tinplates already discharged on the pier but majority of the tinplates were inside the hall, all the hatches were opened.

Q In connection with these cargoes which were unloaded, where is the place.

A At the Pier.

Q What was used to protect the same from weather?

ATTY LOPEZ:

We object, your Honor, this question was already asked. This particular matter . . . the transcript of stenographic notes shows the same was covered in the direct examination.

ATTY ZAMORA:

Precisely, your Honor, we would like to go on detail, this is the serious part of the testimony.

COURT:

All right, witness may answer.

ATTY LOPEZ:

Q What was used in order to protect the cargo from the weather?

A A base of canvas was used as cover on top of the tin plates, and tents were built at the opening of the hatches.

Q You also stated that the hatches were already opened and that there were tents constructed at the opening of the hatches to protect the cargo from the rain. Now, will you describe [to] the Court the tents constructed.

A The tents are just a base of canvas which look like a tent of an Indian camp raise[d] high at the middle with the whole side separated down to the hatch, the size of the hatch and it is soaks [sic] at the middle because of those weather and this can be used only to temporarily protect the cargo from getting wet by rains.

Q Now, is this procedure adopted by the stevedores of covering tents proper?

A No, sir, at the time they were discharging the cargo, there was a typhoon passing by and the hatch tent was not good enough to hold all of it to prevent the water soaking through the canvass and enter the cargo.

Q In the course of your inspection, Mr. Anglingto [sic], did you see in fact the water enter and soak into the canvass and tinplates.

A Yes, sir, the second time I went there, I saw it.

Q As owner of the vessel, did you not advise the National Steel Corporation [of] the procedure adopted by its stevedores in discharging the cargo particularly in this tent covering of the hatches?

A Yes, sir, I did the first time I saw it, I called the attention of the stevedores but the stevedores did not mind at all, so, called the attention of the representative of the National Steel but nothing was done, just the same. Finally, I wrote a letter to them. 31

NSC attempts to discredit the testimony of Angliongto by questioning his failure to complain immediately about the stevedores' negligence on the first day of unloading, pointing out that he wrote his letter to

petitioner only seven days later. 32 The Court is not persuaded. Angliongto's candid answer in his aforequoted testimony satisfactorily explained the delay. Seven days lapsed because he first called the attention of the stevedores, then the NSC's representative, about the negligent and defective procedure adopted in unloading the cargo. This series of actions constitutes a reasonable response in accord with common sense and ordinary human experience. Vicente Angliongto could not be blamed for calling the stevedores' attention first and then the NSC's representative on location before formally informing NSC of the negligence he had observed, because he was not responsible for the stevedores or the unloading operations. In fact, he was merely expressing concern for NSC which was ultimately responsible for the stevedores it had hired and the performance of their task to unload the cargo.

We see no reason to reverse the trial and the appellate courts' findings and conclusions on this point, viz:

In the THIRD assigned error, [NSC] claims that the trial court erred in finding that the stevedores hired by NSC were negligent in the unloading of NSC's shipment. We do not think so. Such negligence according to the trial court is evident in the stevedores hired by [NSC], not closing the hatch of MV 'VLASONS I' when rains occurred during the discharging of the cargo thus allowing rain water and seawater spray to enter the hatches and to drift to and fall on the cargo. It was proven that the stevedores merely set up temporary tents or canvas to cover the hatch openings when it rained during the unloading operations so that it would be easier for them to resume work after the rains stopped by just removing said tents or canvass. It has also been shown that on August 20, 1974, VSI President Vicente Angliongto wrote [NSC] calling attention to the manner the stevedores hired by [NSC] were discharging the cargo on rainy days and the improper closing of the hatches which allowed continuous heavy rain water to leak through and drip to the tinplates' covers and [Vicente Angliongto] also suggesting that due to four (4) days continuos rains with strong winds that the hatches be totally closed down and covered with canvas and the hatch tents lowered. (Exh. "13"). This letter was received by [NSC] on 22 August 1974 while discharging operations were still going on (Exhibit "13-A"). 33

The fact that NSC actually accepted and proceeded to remove the cargo from the ship during unfavorable weather will not make VSI liable for any damage caused thereby. In passing, it may be noted that the NSC may seek indemnification, subject to the laws on prescription, from the stevedoring company at fault in the discharge operations. "A stevedore company engaged in discharging cargo . . . has the duty to load the cargo . . . in a prudent manner, and it is liable for injury to, or loss of, cargo caused by its negligence . . . and where the officers and members and crew of the vessel do nothing and have no responsibility in the discharge of cargo by stevedores . . . the vessel is not liable for loss of, or damage to, the cargo caused by the negligence of the stevedores . . ." 34 as in the instant case.

Do Tinplates "Sweat"?

The trial court relied on the testimony of Vicente Angliongto in finding that ". . . tinplates 'sweat' by themselves when packed even without being in contact with water from outside especially when the weather is bad or raining . . ." 35 The Court of Appeals affirmed the trial court's finding.

A discussion of this issue appears inconsequential and unnecessary. As previously discussed, the damage to the tinplates was occasioned not by airborne moisture but by contact with rain and seawater which the stevedores negligently allowed to seep in during the unloading.

Second Issue: Effect of NSC's Failure to Insure the Cargo

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

Third Issue: Admissibility of Certificates Proving Seaworthiness

NSC's contention that MV Vlasons I was not seaworthy is anchored on the alleged inadmissibility of the certificates of seaworthiness offered in evidence by VSI. The said certificates include the following:

1. Certificate of Inspection of the Philippines Coast Guard at Cebu

2. Certificate of Inspection from the Philippine Coast Guard

3. International Load Line Certificate from the Philippine Coast Guard

4. Coastwise License from the Board of Transportation

5. Certificate of Approval for Conversion issued by the Bureau of Customs 36

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

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

We find, however, that Exhibit 11 is admissible under a well-settled exception to the hearsay rule per Section 44 of Rule 130 of the Rules of Court, which provides that "(e)ntries in official records made in the performance of a duty by a public officer of the Philippines, or by a person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein stated." 38 Exhibit 11 is an original certificate of the Philippine Coast Guard in Cebu issued by Lieutenant Junior Grade Noli C. Flores to the effect that "the vessel 'VLASONS I' was drydocked . . . and PCG Inspectors were sent on board for inspection . . . After completion of drydocking and duly inspected by PCG Inspectors, the vessel 'VLASONS I', a cargo vessel, is in seaworthy condition, meets all requirements, fitted and equipped for trading as a

cargo vessel was cleared by the Philippine Coast Guard and sailed for Cebu Port on July 10, 1974." (sic) NSC's claim, therefore, is obviously misleading and erroneous.

At any rate, it should be stressed that NSC has the burden of proving that MV Vlasons I was not seaworthy. As observed earlier, the vessel was a private carrier and, as such, it did not have the obligation of a common carrier to show that it was seaworthy. Indeed, NSC glaringly failed to discharge its duty of proving the willful negligence of VSI in making the ship seaworthy resulting in damage to its cargo. Assailing the genuineness of the certificate of seaworthiness is not sufficient proof that the vessel was not seaworthy.

Fourth Issue: Demurrage and Attorney's Fees

The contract of voyage charter hire provides inter alia:

xxx xxx xxx

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

xxx xxx xxx

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

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

The Court defined demurrage in its strict sense as the compensation provided for in the contract of affreightment for the detention of the vessel beyond the laytime or that period of time agreed on for loading and unloading of cargo. 40 It is given to compensate the shipowner for the nonuse of the vessel. On the other hand, the following is well-settled:

Laytime runs according to the particular clause of the charter party. . . . If laytime is expressed in "running days," this means days when the ship would be run continuously, and holidays are not excepted. A qualification of "weather permitting" excepts only those days when bad weather reasonably prevents the work contemplated. 41

In this case, the contract of voyage charter hire provided for a four-day laytime; it also qualified laytime as WWDSHINC or weather working days Sundays and holidays included. 42 The running of laytime was thus made subject to the weather, and would cease to run in the event unfavorable weather interfered with the unloading of cargo. 43 Consequently, NSC may not be held liable for demurrage as the four-day laytime allowed it did not lapse, having been tolled by unfavorable weather condition in view of the WWDSHINC qualification agreed upon by the parties. Clearly, it was error for the trial court and the Court of Appeals to have found and affirmed respectively that NSC incurred eleven days of delay in unloading the cargo. The trial court arrived at this erroneous finding by subtracting from the twelve days, specifically August 13, 1974 to August 24, 1974, the only day of unloading unhampered by unfavorable weather or rain, which was August 22, 1974. Based on our previous discussion, such finding is a reversible error. As mentioned, the respondent appellate court also erred in ruling that NSC was liable to VSI for demurrage, even if it reduced the amount by half.

Attorney's Fees

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

Epilogue

At bottom, this appeal really hinges on a factual issue: when, how and who caused the damage to the cargo? Ranged against NSC are two formidable truths. First, both lower courts found that such damage was brought about during the unloading process when rain and seawater seeped through the cargo due to the fault or negligence of the stevedores employed by it. Basic is the rule that factual findings of the trial court, when affirmed by the Court of Appeals, are binding on the Supreme Court. Although there are settled exceptions, NSC has not satisfactorily shown that this case is one of them. Second, the agreement between the parties — the Contract of Voyage Charter Hire — placed the burden of proof for such loss or damage upon the shipper, not upon the shipowner. Such stipulation, while disadvantageous to NSC, is valid because the parties entered into a contract of private charter, not one of common carriage. Basic too is the doctrine that courts cannot relieve a parry from the effects of a private contract freely entered into, on the ground that it is allegedly one-sided or unfair to the plaintiff. The charter party is a normal commercial contract and its stipulations are agreed upon in consideration of many factors, not the least of which is the transport price which is determined not only by the actual costs but also by the risks and burdens assumed by the shipper in regard to possible loss or damage to the cargo. In recognition of such factors, the parties even stipulated that the shipper should insure the cargo to protect itself from the risks it undertook under the charter party. That NSC failed or neglected to protect itself with such insurance should not adversely affect VSI, which had nothing to do with such failure or neglect.

WHEREFORE, premises considered, the instant consolidated petitions are hereby DENIED. The questioned Decision of the Court of Appeals is AFFIRMED with the MODIFICATION that the demurrage awarded to VSI is deleted. No pronouncement as to costs.

SO ORDERED.

G.R. No. L-49407 August 19, 1988 NATIONAL DEVELOPMENT COMPANY, petitioner-appellant, vs. THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY CORPORATION, respondents-appellees. No. L-49469 August 19, 1988 MARITIME COMPANY OF THE PHILIPPINES, petitioner-appellant, vs. THE COURT OF APPEALS and DEVELOPMENT INSURANCE & SURETY CORPORATION, respondents- appellees.

These are appeals by certiorari from the decision * of the Court of Appeals in CA G.R. No: L- 46513-R entitled "Development Insurance and Surety Corporation plaintiff-appellee vs. Maritime Company of the Philippines and National Development Company defendant-appellants," affirming in toto the decision ** in Civil Case No. 60641 of the then Court of First Instance of Manila, Sixth Judicial District, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered ordering the defendants National Development Company and Maritime Company of the Philippines, to pay jointly and severally, to the plaintiff Development Insurance and Surety Corp., the sum of THREE HUNDRED SIXTY FOUR THOUSAND AND NINE HUNDRED FIFTEEN PESOS AND EIGHTY SIX CENTAVOS (364,915.86) with the legal interest thereon from the filing of plaintiffs complaint on April 22, 1965 until fully paid, plus TEN THOUSAND PESOS (Pl0,000.00) by way of damages as and for attorney's fee.

On defendant Maritime Company of the Philippines' cross-claim against the defendant National Development Company, judgment is hereby rendered, ordering the National Development Company to pay the cross-claimant Maritime Company of the Philippines the total amount that the Maritime Company of the Philippines may voluntarily or by compliance to a writ of execution pay to the plaintiff pursuant to the judgment rendered in this case.

With costs against the defendant Maritime Company of the Philippines.

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

The facts of these cases as found by the Court of Appeals, are as follows:

The evidence before us shows that in accordance with a memorandum agreement entered into between defendants NDC and MCP on September 13, 1962, defendant NDC as the first preferred mortgagee of three ocean going vessels including one with the name 'Dona Nati' appointed defendant MCP as its agent to manage and operate said vessel for and in its behalf and account (Exh. A). Thus, on February 28, 1964 the E. Philipp Corporation of New York loaded on board the vessel "Dona Nati" at San Francisco, California, a total of 1,200 bales of American raw cotton consigned to the order of Manila Banking Corporation, Manila and the People's Bank and Trust Company acting for and in behalf of the Pan Asiatic Commercial Company, Inc., who represents Riverside Mills

Corporation (Exhs. K-2 to K7-A & L-2 to L-7-A). Also loaded on the same vessel at Tokyo, Japan, were the cargo of Kyokuto Boekui, Kaisa, Ltd., consigned to the order of Manila Banking Corporation consisting of 200 cartons of sodium lauryl sulfate and 10 cases of aluminum foil (Exhs. M & M-1). En route to Manila the vessel Dofia Nati figured in a collision at 6:04 a.m. on April 15, 1964 at Ise Bay, Japan with a Japanese vessel 'SS Yasushima Maru' as a result of which 550 bales of aforesaid cargo of American raw cotton were lost and/or destroyed, of which 535 bales as damaged were landed and sold on the authority of the General Average Surveyor for Yen 6,045,-500 and 15 bales were not landed and deemed lost (Exh. G). The damaged and lost cargoes was worth P344,977.86 which amount, the plaintiff as insurer, paid to the Riverside Mills Corporation as holder of the negotiable bills of lading duly endorsed (Exhs. L-7-A, K-8-A, K-2-A, K-3-A, K-4-A, K-5-A, A- 2, N-3 and R-3}. Also considered totally lost were the aforesaid shipment of Kyokuto, Boekui Kaisa Ltd., consigned to the order of Manila Banking Corporation, Manila, acting for Guilcon, Manila, The total loss was P19,938.00 which the plaintiff as insurer paid to Guilcon as holder of the duly endorsed bill of lading (Exhibits M-1 and S-3). Thus, the plaintiff had paid as insurer the total amount of P364,915.86 to the consignees or their successors-in-interest, for the said lost or damaged cargoes. Hence, plaintiff filed this complaint to recover said amount from the defendants-NDC and MCP as owner and ship agent respectively, of the said 'Dofia Nati' vessel. (Rollo, L-49469, p.38)

On April 22, 1965, the Development Insurance and Surety Corporation filed before the then Court of First Instance of Manila an action for the recovery of the sum of P364,915.86 plus attorney's fees of P10,000.00 against NDC and MCP (Record on Appeal), pp. 1-6).

Interposing the defense that the complaint states no cause of action and even if it does, the action has prescribed, MCP filed on May 12, 1965 a motion to dismiss (Record on Appeal, pp. 7-14). DISC filed an Opposition on May 21, 1965 to which MCP filed a reply on May 27, 1965 (Record on Appeal, pp. 14-24). On June 29, 1965, the trial court deferred the resolution of the motion to dismiss till after the trial on the merits (Record on Appeal, p. 32). On June 8, 1965, MCP filed its answer with counterclaim and cross-claim against NDC.

NDC, for its part, filed its answer to DISC's complaint on May 27, 1965 (Record on Appeal, pp. 22-24). It also filed an answer to MCP's cross-claim on July 16, 1965 (Record on Appeal, pp. 39-40). However, on October 16, 1965, NDC's answer to DISC's complaint was stricken off from the record for its failure to answer DISC's written interrogatories and to comply with the trial court's order dated August 14, 1965 allowing the inspection or photographing of the memorandum of agreement it executed with MCP. Said order of October 16, 1965 likewise declared NDC in default (Record on Appeal, p. 44). On August 31, 1966, NDC filed a motion to set aside the order of October 16, 1965, but the trial court denied it in its order dated September 21, 1966.

On November 12, 1969, after DISC and MCP presented their respective evidence, the trial court rendered a decision ordering the defendants MCP and NDC to pay jointly and solidarity to DISC the sum of P364,915.86 plus the legal rate of interest to be computed from the filing of the complaint on April 22, 1965, until fully paid and attorney's fees of P10,000.00. Likewise, in said decision, the trial court granted MCP's crossclaim against NDC.

MCP interposed its appeal on December 20, 1969, while NDC filed its appeal on February 17, 1970 after its motion to set aside the decision was denied by the trial court in its order dated February 13,1970.

On November 17,1978, the Court of Appeals promulgated its decision affirming in toto the decision of the trial court.

Hence these appeals by certiorari.

NDC's appeal was docketed as G.R. No. 49407, while that of MCP was docketed as G.R. No. 49469. On July 25,1979, this Court ordered the consolidation of the above cases (Rollo, p. 103). On August 27,1979, these consolidated cases were given due course (Rollo, p. 108) and submitted for decision on February 29, 1980 (Rollo, p. 136).

In its brief, NDC cited the following assignments of error:

I

THE COURT OF APPEALS ERRED IN APPLYING ARTICLE 827 OF THE CODE OF COMMERCE AND NOT SECTION 4(2a) OF COMMONWEALTH ACT NO. 65, OTHERWISE KNOWN AS THE CARRIAGE OF GOODS BY SEA ACT IN DETERMINING THE LIABILITY FOR LOSS OF CARGOES RESULTING FROM THE COLLISION OF ITS VESSEL "DONA NATI" WITH THE YASUSHIMA MARU"OCCURRED AT ISE BAY, JAPAN OR OUTSIDE THE TERRITORIAL JURISDICTION OF THE PHILIPPINES.

II

THE COURT OF APPEALS ERRED IN NOT DISMISSING THE C0MPLAINT FOR REIMBURSEMENT FILED BY THE INSURER, HEREIN PRIVATE RESPONDENT-APPELLEE, AGAINST THE CARRIER, HEREIN PETITIONER-APPELLANT. (pp. 1-2, Brief for Petitioner-Appellant National Development Company; p. 96, Rollo).

On its part, MCP assigned the following alleged errors:

I

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION HAS NO CAUSE OF ACTION AS AGAINST PETITIONER MARITIME COMPANY OF THE PHILIPPINES AND IN NOT DISMISSING THE COMPLAINT.

II

THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CAUSE OF ACTION OF RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION IF ANY EXISTS AS AGAINST HEREIN PETITIONER MARITIME COMPANY OF THE PHILIPPINES IS BARRED BY THE STATUTE OF LIMITATION AND HAS ALREADY PRESCRIBED.

III

THE RESPONDENT COURT OF APPEALS ERRED IN ADMITTING IN EVIDENCE PRIVATE RESPONDENTS EXHIBIT "H" AND IN FINDING ON THE BASIS THEREOF THAT THE COLLISION OF THE SS DONA NATI AND THE YASUSHIMA MARU WAS DUE TO THE FAULT OF BOTH VESSELS INSTEAD OF FINDING THAT THE

COLLISION WAS CAUSED BY THE FAULT, NEGLIGENCE AND LACK OF SKILL OF THE COMPLEMENTS OF THE YASUSHIMA MARU WITHOUT THE FAULT OR NEGLIGENCE OF THE COMPLEMENT OF THE SS DONA NATI

IV

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT UNDER THE CODE OF COMMERCE PETITIONER APPELLANT MARITIME COMPANY OF THE PHILIPPINES IS A SHIP AGENT OR NAVIERO OF SS DONA NATI OWNED BY CO-PETITIONER APPELLANT NATIONAL DEVELOPMENT COMPANY AND THAT SAID PETITIONER-APPELLANT IS SOLIDARILY LIABLE WITH SAID CO-PETITIONER FOR LOSS OF OR DAMAGES TO CARGO RESULTING IN THE COLLISION OF SAID VESSEL, WITH THE JAPANESE YASUSHIMA MARU.

V

THE RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT THE LOSS OF OR DAMAGES TO THE CARGO OF 550 BALES OF AMERICAN RAW COTTON, DAMAGES WERE CAUSED IN THE AMOUNT OF P344,977.86 INSTEAD OF ONLY P110,000 AT P200.00 PER BALE AS ESTABLISHED IN THE BILLS OF LADING AND ALSO IN HOLDING THAT PARAGRAPH 1O OF THE BILLS OF LADING HAS NO APPLICATION IN THE INSTANT CASE THERE BEING NO GENERAL AVERAGE TO SPEAK OF.

VI

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THE PETITIONERS NATIONAL DEVELOPMENT COMPANY AND COMPANY OF THE PHILIPPINES TO PAY JOINTLY AND SEVERALLY TO HEREIN RESPONDENT DEVELOPMENT INSURANCE AND SURETY CORPORATION THE SUM OF P364,915.86 WITH LEGAL INTEREST FROM THE FILING OF THE COMPLAINT UNTIL FULLY PAID PLUS P10,000.00 AS AND FOR ATTORNEYS FEES INSTEAD OF SENTENCING SAID PRIVATE RESPONDENT TO PAY HEREIN PETITIONERS ITS COUNTERCLAIM IN THE AMOUNT OF P10,000.00 BY WAY OF ATTORNEY'S FEES AND THE COSTS. (pp. 1-4, Brief for the Maritime Company of the Philippines; p. 121, Rollo)

The pivotal issue in these consolidated cases is the determination of which laws govern loss or destruction of goods due to collision of vessels outside Philippine waters, and the extent of liability as well as the rules of prescription provided thereunder.

The main thrust of NDC's argument is to the effect that the Carriage of Goods by Sea Act should apply to the case at bar and not the Civil Code or the Code of Commerce. Under Section 4 (2) of said Act, the carrier is not responsible for the loss or damage resulting from the "act, neglect or default of the master, mariner, pilot or the servants of the carrier in the navigation or in the management of the ship." Thus, NDC insists that based on the findings of the trial court which were adopted by the Court of Appeals, both pilots of the colliding vessels were at fault and negligent, NDC would have been relieved of liability under the Carriage of Goods by Sea Act. Instead, Article 287 of the Code of Commerce was applied and both NDC and MCP were ordered to reimburse the insurance company for the amount the latter paid to the consignee as earlier stated.

This issue has already been laid to rest by this Court of Eastern Shipping Lines Inc. v. IAC (1 50 SCRA 469-470 [1987]) where it was held under similar circumstance "that the law of the country to which the goods are to be transported governs the liability of the common carrier in case of their loss, destruction or deterioration" (Article 1753, Civil Code). Thus, the rule was specifically laid down that for cargoes

transported from Japan to the Philippines, the liability of the carrier is governed primarily by the Civil Code and in all matters not regulated by said Code, the rights and obligations of common carrier shall be governed by the Code of commerce and by laws (Article 1766, Civil Code). Hence, the Carriage of Goods by Sea Act, a special law, is merely suppletory to the provision of the Civil Code.

In the case at bar, it has been established that the goods in question are transported from San Francisco, California and Tokyo, Japan to the Philippines and that they were lost or due to a collision which was found to have been caused by the negligence or fault of both captains of the colliding vessels. Under the above ruling, it is evident that the laws of the Philippines will apply, and it is immaterial that the collision actually occurred in foreign waters, such as Ise Bay, Japan.

Under Article 1733 of the Civil Code, common carriers from the nature of their business and for reasons of public policy are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them according to all circumstances of each case. Accordingly, under Article 1735 of the same Code, in all other than those mentioned is Article 1734 thereof, the common carrier shall be presumed to have been at fault or to have acted negigently, unless it proves that it has observed the extraordinary diligence required by law.

It appears, however, that collision falls among matters not specifically regulated by the Civil Code, so that no reversible error can be found in respondent courses application to the case at bar of Articles 826 to 839, Book Three of the Code of Commerce, which deal exclusively with collision of vessels.

More specifically, Article 826 of the Code of Commerce provides that where collision is imputable to the personnel of a vessel, the owner of the vessel at fault, shall indemnify the losses and damages incurred after an expert appraisal. But more in point to the instant case is Article 827 of the same Code, which provides that if the collision is imputable to both vessels, each one shall suffer its own damages and both shall be solidarily responsible for the losses and damages suffered by their cargoes.

Significantly, under the provisions of the Code of Commerce, particularly Articles 826 to 839, the shipowner or carrier, is not exempt from liability for damages arising from collision due to the fault or negligence of the captain. Primary liability is imposed on the shipowner or carrier in recognition of the universally accepted doctrine that the shipmaster or captain is merely the representative of the owner who has the actual or constructive control over the conduct of the voyage (Y'eung Sheng Exchange and Trading Co. v. Urrutia & Co., 12 Phil. 751 [1909]).

There is, therefore, no room for NDC's interpretation that the Code of Commerce should apply only to domestic trade and not to foreign trade. Aside from the fact that the Carriage of Goods by Sea Act (Com. Act No. 65) does not specifically provide for the subject of collision, said Act in no uncertain terms, restricts its application "to all contracts for the carriage of goods by sea to and from Philippine ports in foreign trade." Under Section I thereof, it is explicitly provided that "nothing in this Act shall be construed as repealing any existing provision of the Code of Commerce which is now in force, or as limiting its application." By such incorporation, it is obvious that said law not only recognizes the existence of the Code of Commerce, but more importantly does not repeal nor limit its application.

On the other hand, Maritime Company of the Philippines claims that Development Insurance and Surety Corporation, has no cause of action against it because the latter did not prove that its alleged subrogers have either the ownership or special property right or beneficial interest in the cargo in question; neither

was it proved that the bills of lading were transferred or assigned to the alleged subrogers; thus, they could not possibly have transferred any right of action to said plaintiff- appellee in this case. (Brief for the Maritime Company of the Philippines, p. 16).

The records show that the Riverside Mills Corporation and Guilcon, Manila are the holders of the duly endorsed bills of lading covering the shipments in question and an examination of the invoices in particular, shows that the actual consignees of the said goods are the aforementioned companies. Moreover, no less than MCP itself issued a certification attesting to this fact. Accordingly, as it is undisputed that the insurer, plaintiff appellee paid the total amount of P364,915.86 to said consignees for the loss or damage of the insured cargo, it is evident that said plaintiff-appellee has a cause of action to recover (what it has paid) from defendant-appellant MCP (Decision, CA-G.R. No. 46513-R, p. 10; Rollo, p. 43).

MCP next contends that it can not be liable solidarity with NDC because it is merely the manager and operator of the vessel Dona Nati not a ship agent. As the general managing agent, according to MCP, it can only be liable if it acted in excess of its authority.

As found by the trial court and by the Court of Appeals, the Memorandum Agreement of September 13, 1962 (Exhibit 6, Maritime) shows that NDC appointed MCP as Agent, a term broad enough to include the concept of Ship-agent in Maritime Law. In fact, MCP was even conferred all the powers of the owner of the vessel, including the power to contract in the name of the NDC (Decision, CA G.R. No. 46513, p. 12; Rollo, p. 40). Consequently, under the circumstances, MCP cannot escape liability.

It is well settled that both the owner and agent of the offending vessel are liable for the damage done where both are impleaded (Philippine Shipping Co. v. Garcia Vergara, 96 Phil. 281 [1906]); that in case of collision, both the owner and the agent are civilly responsible for the acts of the captain (Yueng Sheng Exchange and Trading Co. v. Urrutia & Co., supra citing Article 586 of the Code of Commerce; Standard Oil Co. of New York v. Lopez Castelo, 42 Phil. 256, 262 [1921]); that while it is true that the liability of the naviero in the sense of charterer or agent, is not expressly provided in Article 826 of the Code of Commerce, it is clearly deducible from the general doctrine of jurisprudence under the Civil Code but more specially as regards contractual obligations in Article 586 of the Code of Commerce. Moreover, the Court held that both the owner and agent (Naviero) should be declared jointly and severally liable, since the obligation which is the subject of the action had its origin in a tortious act and did not arise from contract (Verzosa and Ruiz, Rementeria y Cia v. Lim, 45 Phil. 423 [1923]). Consequently, the agent, even though he may not be the owner of the vessel, is liable to the shippers and owners of the cargo transported by it, for losses and damages occasioned to such cargo, without prejudice, however, to his rights against the owner of the ship, to the extent of the value of the vessel, its equipment, and the freight (Behn Meyer Y Co. v. McMicking et al. 11 Phil. 276 [1908]).

As to the extent of their liability, MCP insists that their liability should be limited to P200.00 per package or per bale of raw cotton as stated in paragraph 17 of the bills of lading. Also the MCP argues that the law on averages should be applied in determining their liability.

MCP's contention is devoid of merit. The declared value of the goods was stated in the bills of lading and corroborated no less by invoices offered as evidence ' during the trial. Besides, common carriers, in the language of the court in Juan Ysmael & Co., Inc. v. Barrette et al., (51 Phil. 90 [1927]) "cannot limit its liability for injury to a loss of goods where such injury or loss was caused by its own negligence." Negligence of the captains of the colliding vessel being the cause of the collision, and the cargoes not

being jettisoned to save some of the cargoes and the vessel, the trial court and the Court of Appeals acted correctly in not applying the law on averages (Articles 806 to 818, Code of Commerce).

MCP's claim that the fault or negligence can only be attributed to the pilot of the vessel SS Yasushima Maru and not to the Japanese Coast pilot navigating the vessel Dona Nati need not be discussed lengthily as said claim is not only at variance with NDC's posture, but also contrary to the factual findings of the trial court affirmed no less by the Court of Appeals, that both pilots were at fault for not changing their excessive speed despite the thick fog obstructing their visibility.

Finally on the issue of prescription, the trial court correctly found that the bills of lading issued allow trans-shipment of the cargo, which simply means that the date of arrival of the ship Dona Nati on April 18,1964 was merely tentative to give allowances for such contingencies that said vessel might not arrive on schedule at Manila and therefore, would necessitate the trans-shipment of cargo, resulting in consequent delay of their arrival. In fact, because of the collision, the cargo which was supposed to arrive in Manila on April 18, 1964 arrived only on June 12, 13, 18, 20 and July 10, 13 and 15, 1964. Hence, had the cargoes in question been saved, they could have arrived in Manila on the above-mentioned dates. Accordingly, the complaint in the instant case was filed on April 22, 1965, that is, long before the lapse of one (1) year from the date the lost or damaged cargo "should have been delivered" in the light of Section 3, sub-paragraph (6) of the Carriage of Goods by Sea Act.

PREMISES CONSIDERED, the subject petitions are DENIED for lack of merit and the assailed decision of the respondent Appellate Court is AFFIRMED.

SO ORDERED.

G.R. No. 102316 June 30, 1997 VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY INC., petitioner, vs. COURT OF APPEALS AND SEVEN BROTHERS SHIPPING CORPORATION, respondents.

Is a stipulation in a charter party that the "(o)wners shall not be responsible for loss, split, short-landing, breakages and any kind of damages to the cargo" 1 valid? This is the main question raised in this petition for review assailing the Decision of Respondent Court of Appeals 2 in CA-G.R. No. CV-20156 promulgated on October 15, 1991. The Court of Appeals modified the judgment of the Regional Trial Court of Valenzuela, Metro Manila, Branch 171, the dispositive portion of which reads:

WHEREFORE, Judgment is hereby rendered ordering South Sea Surety and Insurance Co., Inc. to pay plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) representing the value of the policy of the lost logs with legal interest thereon from the date of demand on February 2, 1984 until the amount is fully paid or in the alternative, defendant Seven Brothers Shipping Corporation to pay plaintiff the amount of TWO MILLION PESOS (2,000,000.00) representing the value of lost logs plus legal interest from the date of demand on April 24, 1984 until full payment thereof; the reasonable attorney's fees in the amount equivalent to five (5) percent of the amount of the claim and the costs of the suit.

Plaintiff is hereby ordered to pay defendant Seven Brothers Shipping Corporation the sum of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00) representing the balance of the stipulated freight charges.

Defendant South Sea Surety and Insurance Company's counterclaim is hereby dismissed.

In its assailed Decision, Respondent Court of Appeals held:

WHEREFORE, the appealed judgment is hereby AFFIRMED except in so far (sic) as the liability of the Seven Brothers Shipping Corporation to the plaintiff is concerned which is hereby REVERSED and SET ASIDE. 3

The Facts

The factual antecedents of this case as narrated in the Court of Appeals Decision are as follows:

It appears that on 16 January 1984, plaintiff (Valenzuela Hardwood and Industrial Supply, Inc.) entered into an agreement with the defendant Seven Brothers (Shipping Corporation) whereby the latter undertook to load on board its vessel M/V Seven Ambassador the former's lauan round logs numbering 940 at the port of Maconacon, Isabela for shipment to Manila.

On 20 January 1984, plaintiff insured the logs against loss and/or damage with defendant South Sea Surety and Insurance Co., Inc. for P2,000,000.00 and the latter issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said date.

On 24 January 1984, the plaintiff gave the check in payment of the premium on the insurance policy to Mr. Victorio Chua.

In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984 resulting in the loss of the plaintiff's insured logs.

On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the premium and documentary stamps due on the policy was tendered due to the insurer but was not accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance policy it issued as of the date of the inception for non-payment of the premium due in accordance with Section 77 of the Insurance Code.

On 2 February 1984, plaintiff demanded from defendant South Sea Surety and Insurance Co., Inc. the payment of the proceeds of the policy but the latter denied liability under the policy. Plaintiff likewise filed a formal claim with defendant Seven Brothers Shipping Corporation for the value of the lost logs but the latter denied the claim.

After due hearing and trial, the court a quo rendered judgment in favor of plaintiff and against defendants. Both defendants shipping corporation and the surety company appealed.

Defendant-appellant Seven Brothers Shipping Corporation impute (sic) to the court a quo the following assignment of errors, to wit:

A. The lower court erred in holding that the proximate cause of the sinking of the vessel Seven Ambassadors, was not due to fortuitous event but to the negligence of the captain in stowing and securing the logs on board, causing the iron chains to snap and the logs to roll to the portside.

B. The lower court erred in declaring that the non-liability clause of the Seven Brothers Shipping Corporation from logs (sic) of the cargo stipulated in the charter party is void for being contrary to public policy invoking article 1745 of the New Civil Code.

C. The lower court erred in holding defendant-appellant Seven Brothers Shipping Corporation liable in the alternative and ordering/directing it to pay plaintiff-appellee the amount of two million (2,000,000.00) pesos representing the value of the logs plus legal interest from date of demand until fully paid.

D. The lower court erred in ordering defendant-appellant Seven Brothers Shipping Corporation to pay appellee reasonable attorney's fees in the amount equivalent to 5% of the amount of the claim and the costs of the suit.

E. The lower court erred in not awarding defendant-appellant Seven Brothers Corporation its counter-claim for attorney's fees.

F. The lower court erred in not dismissing the complaint against Seven Brothers Shipping Corporation.

Defendant-appellant South Sea Surety and Insurance Co., Inc. assigns the following errors:

A. The trial court erred in holding that Victorio Chua was an agent of defendant-appellant South Sea Surety and Insurance Company, Inc. and likewise erred in not holding that he was the representative of the insurance broker Columbia Insurance Brokers, Ltd.

B. The trial court erred in holding that Victorio Chua received compensation/commission on the premiums paid on the policies issued by the defendant-appellant South Sea Surety and Insurance Company, Inc.

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

D. The trial court erred in disregarding the "receipt of payment clause" attached to and forming part of the Marine Cargo Insurance Policy No. 84/24229.

E. The trial court in disregarding the statement of account or bill stating the amount of premium and documentary stamps to be paid on the policy by the plaintiff-appellee.

F. The trial court erred in disregarding the endorsement of cancellation of the policy due to non-payment of premium and documentary stamps.

G. The trial court erred in ordering defendant-appellant South Sea Surety and Insurance Company, Inc. to pay plaintiff-appellee P2,000,000.00 representing value of the policy with legal interest from 2 February 1984 until the amount is fully paid,

H. The trial court erred in not awarding to the defendant-appellant the attorney's fees alleged and proven in its counterclaim.

The primary issue to be resolved before us is whether defendants shipping corporation and the surety company are liable to the plaintiff for the latter's lost logs. 4

The Court of Appeals affirmed in part the RTC judgment by sustaining the liability of South Sea Surety and Insurance Company ("South Sea"), but modified it by holding that Seven Brothers Shipping Corporation ("Seven Brothers") was not liable for the lost cargo. 5 In modifying the RTC judgment, the respondent appellate court ratiocinated thus:

It appears that there is a stipulation in the charter party that the ship owner would be exempted from liability in case of loss.

The court a quo erred in applying the provisions of the Civil Code on common carriers to establish the liability of the shipping corporation. The provisions on common carriers should not be applied where the carrier is not acting as such but as a private carrier.

Under American jurisprudence, a common carrier undertaking to carry a special cargo or chartered to a special person only, becomes a private carrier.

As a private carrier, a stipulation exempting the owner from liability even for the negligence of its agent is valid (Home Insurance Company, Inc. vs. American Steamship Agencies, Inc., 23 SCRA 24).

The shipping corporation should not therefore be held liable for the loss of the logs. 6

South Sea and herein Petitioner Valenzuela Hardwood and Industrial Supply, Inc. ("Valenzuela") filed separate petitions for review before this Court. In a Resolution dated June 2, 1995, this Court denied the petition of South Sea. 7 There the Court found no reason to reverse the factual findings of the trial court and the Court of Appeals that Chua was indeed an authorized agent of South Sea when he received Valenzuela's premium payment for the marine cargo insurance policy which was thus binding on the insurer. 8

The Court is now called upon to resolve the petition for review filed by Valenzuela assailing the CA Decision which exempted Seven Brothers from any liability for the lost cargo.

The Issue

Petitioner Valenzuela's arguments resolve around a single issue: "whether or not respondent Court (of Appeals) committed a reversible error in upholding the validity of the stipulation in the charter party executed between the petitioner and the private respondent exempting the latter from liability for the loss of petitioner's logs arising from the negligence of its (Seven Brothers') captain." 9

The Court's Ruling

The petition is not meritorious.

Validity of Stipulation is Lis Mota

The charter party between the petitioner and private respondent stipulated that the "(o)wners shall not be responsible for loss, split, short-landing, breakages and any kind of damages to the cargo." 10 The validity of this stipulation is the lis mota of this case.

It should be noted at the outset that there is no dispute between the parties that the proximate cause of the sinking of M/V Seven Ambassadors resulting in the loss of its cargo was the "snapping of the iron chains and the subsequent rolling of the logs to the portside due to the negligence of the captain in stowing and securing the logs on board the vessel and not due to fortuitous event." 11 Likewise undisputed is the status of Private Respondent Seven Brothers as a private carrier when it contracted to transport the cargo of Petitioner Valenzuela. Even the latter admits this in its petition. 12

The trial court deemed the charter party stipulation void for being contrary to public policy, 13 citing Article 1745 of the Civil Code which provides:

Art. 1745. Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy:

(1) That the goods are transported at the risk of the owner or shipper;

(2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods;

(3) That the common carrier need not observe any diligence in the custody of the goods;

(4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported;

(5) That the common carrier shall not be responsible for the acts or omissions of his or its employees;

(6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished;

(7) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage.

Petitioner Valenzuela adds that the stipulation is void for being contrary to Articles 586 and 587 of the Code of Commerce 14 and Articles 1170 and 1173 of the Civil Code. Citing Article 1306 and paragraph 1, Article 1409 of the Civil Code, 15 petitioner further contends that said stipulation "gives no duty or obligation to the private respondent to observe the diligence of a good father of a family in the custody and transportation of the cargo."

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

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

The issue posed in this case and the arguments raised by petitioner are not novel; they were resolved long ago by this Court in Home Insurance Co. vs. American Steamship Agencies, Inc. 18 In that case, the trial court similarly nullified a stipulation identical to that involved in the present case for being contrary to

public policy based on Article 1744 of the Civil Code and Article 587 of the Code of Commerce. Consequently, the trial court held the shipowner liable for damages resulting for the partial loss of the cargo. This Court reversed the trial court and laid down, through Mr. Justice Jose P. Bengzon, the following well-settled observation and doctrine:

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

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

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

Petitioner contends that the rule in Home Insurance is not applicable to the present case because it "covers only a stipulation exempting a private carrier from liability for the negligence of his agent, but it does not apply to a stipulation exempting a private carrier like private respondent from the negligence of his employee or servant which is the situation in this case." 20 This contention of petitioner is bereft of merit, for it raises a distinction without any substantive difference. The case Home Insurance specifically dealt with "the liability of the shipowner for acts or negligence of its captain and crew" 21 and a charter party stipulation which "exempts the owner of the vessel from any loss or damage or delay arising from any other source, even from the neglect or fault of the captain or crew or some other person employed by the owner on board, for whose acts the owner would ordinarily be liable except for said paragraph." 22 Undoubtedly, Home Insurance is applicable to the case at bar.

The naked assertion of petitioner that the American rule enunciated in Home Insurance is not the rule in the Philippines 23 deserves scant consideration. The Court there categorically held that said rule was "reasonable" and proceeded to apply it in the resolution of that case. Petitioner miserably failed to show such circumstances or arguments which would necessitate a departure from a well-settled rule. Consequently, our ruling in said case remains a binding judicial precedent based on the doctrine of stare

decisis and Article 8 of the Civil Code which provides that "(j)udicial decisions applying or interpreting the laws or the Constitution shall form part of the legal system of the Philippines."

In fine, the respondent appellate court aptly stated that "[in the case of] a private carrier, a stipulation exempting the owner from liability even for the negligence of its agents is valid." 24

Other Arguments

On the basis of the foregoing alone, the present petition may already be denied; the Court, however, will discuss the other arguments of petitioner for the benefit and satisfaction of all concerned.

Articles 586 and 587, Code of Commerce

Petitioner Valenzuela insists that the charter party stipulation is contrary to Articles 586 and 587 of the Code of Commerce which confer on petitioner the right to recover damages from the shipowner and ship agent for the acts or conduct of the captain. 25 We are not persuaded. Whatever rights petitioner may have under the aforementioned statutory provisions were waived when it entered into the charter party.

Article 6 of the Civil Code provides that "(r)ights may be waived, unless the waiver is contrary to law, public order, public policy, morals, or good customs, or prejudicial to a person with a right recognized by law." As a general rule, patrimonial rights may be waived as opposed to rights to personality and family rights which may not be made the subject of waiver. 26 Being patently and undoubtedly patrimonial, petitioner's right conferred under said articles may be waived. This, the petitioner did by acceding to the contractual stipulation that it is solely responsible or any damage to the cargo, thereby exempting the private carrier from any responsibility for loss or damage thereto. Furthermore, as discussed above, the contract of private carriage binds petitioner and private respondent alone; it is not imbued with public policy considerations for the general public or third persons are not affected thereby.

Articles 1170 and 1173, Civil Code

Petitioner likewise argues that the stipulation subject of this controversy is void for being contrary to Articles 1170 and 1173 of the Civil Code 27 which read:

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of articles 1171 and 2201, shall apply.

If the law does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required.

The Court notes that the foregoing articles are applicable only to the obligor or the one with an obligation to perform. In the instant case, Private Respondent Seven Brothers is not an obligor in respect of the

cargo, for this obligation to bear the loss was shifted to petitioner by virtue of the charter party. This shifting of responsibility, as earlier observed, is not void. The provisions cited by petitioner are, therefore, inapplicable to the present case.

Moreover, the factual milieu of this case does not justify the application of the second paragraph of Article 1173 of the Civil Code which prescribes the standard of diligence to be observed in the event the law or the contract is silent. In the instant case, Article 362 of the Code of Commerce 28 provides the standard of ordinary diligence for the carriage of goods by a carrier. The standard of diligence under this statutory provision may, however, be modified in a contract of private carriage as the petitioner and private respondent had done in their charter party.

Cases Cited by Petitioner Inapplicable

Petitioner cites Shewaram vs. Philippine Airlines, Inc. 29 which, in turn, quoted Juan Ysmael & Co. vs. Gabino Barreto & Co. 30 and argues that the public policy considerations stated there vis-a-vis contractual stipulations limiting the carrier's liability be applied "with equal force" to this case. 31 It also cites Manila Railroad Co. vs. Compañia Transatlantica 32 and contends that stipulations exempting a party from liability for damages due to negligence "should not be countenanced" and should be "strictly construed" against the party claiming its benefit. 33 We disagree.

The cases of Shewaram and Ysmael both involve a common carrier; thus, they necessarily justify the application of such policy considerations and concomitantly stricter rules. As already discussed above, the public policy considerations behind the rigorous treatment of common carriers are absent in the case of private carriers. Hence, the stringent laws applicable to common carriers are not applied to private carries. The case of Manila Railroad is also inapplicable because the action for damages there does not involve a contract for transportation. Furthermore, the defendant therein made a "promise to use due care in the lifting operations" and, consequently, it was "bound by its undertaking"'; besides, the exemption was intended to cover accidents due to hidden defects in the apparatus or other unforseeable occurrences" not caused by its "personal negligence." This promise was thus constructed to make sense together with the stipulation against liability for damages. 34 In the present case, we stress that the private respondent made no such promise. The agreement of the parties to exempt the shipowner from responsibility for any damage to the cargo and place responsibility over the same to petitioner is the lone stipulation considered now by this Court.

Finally, petitioner points to Standard Oil Co. of New York vs. Lopez Costelo, 35 Walter A. Smith & Co. vs. Cadwallader Gibson Lumber Co., 36 N. T . Hashim and Co. vs. Rocha and Co., 37 Ohta Development Co. vs. Steamship "Pompey" 38 and Limpangco Sons vs. Yangco Steamship Co. 39 in support of its contention that the shipowner be held liable for damages. 40 These however are not on all fours with the present case because they do not involve a similar factual milieu or an identical stipulation in the charter party expressly exempting the shipowner form responsibility for any damage to the cargo.

Effect of the South Sea Resolution

In its memorandum, Seven Brothers argues that petitioner has no cause of action against it because this Court has earlier affirmed the liability of South Sea for the loss suffered by petitioner. Private respondent submits that petitioner is not legally entitled to collect twice for a single loss. 41 In view of the above disquisition upholding the validity of the questioned charter party stipulation and holding that petitioner

may not recover from private respondent, the present issue is moot and academic. It suffices to state that the Resolution of this Court dated June 2, 1995 42 affirming the liability of South Sea does not, by itself, necessarily preclude the petitioner from proceeding against private respondent. An aggrieved party may still recover the deficiency for the person causing the loss in the event the amount paid by the insurance company does not fully cover the loss. Article 2207 of the Civil Code provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity for the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency form the person causing the loss or injury.

WHEREFORE, premises considered, the petition is hereby DENIED for its utter failure to show any reversible error on the part of Respondent Court. The assailed Decision is AFFIRMED.

SO ORDERED.

G.R. No. 131621 September 28, 1999 LOADSTAR SHIPPING CO., INC., petitioner, vs. COURT OF APPEALS and THE MANILA INSURANCE CO., INC., respondents.

Petitioner Loadstar Shipping Co., Inc. (hereafter LOADSTAR), in this petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, seeks to reverse and set aside the following: (a) the 30 January 1997 decision 1 of the Court of Appeals in CA-G.R. CV No. 36401, which affirmed the decision of 4 October 1991 2 of the Regional Trial Court of Manila, Branch 16, in Civil Case No. 85-29110, ordering LOADSTAR to pay private respondent Manila Insurance Co. (hereafter MIC) the amount of P6,067,178, with legal interest from the filing of the compliant until fully paid, P8,000 as attorney's fees, and the costs of the suit; and (b) its resolution of 19 November 1997, 3 denying LOADSTAR's motion for reconsideration of said decision.

The facts are undisputed.

On 19 November 1984, LOADSTAR received on board its M/V "Cherokee" (hereafter, the vessel) the following goods for shipment:

a) 705 bales of lawanit hardwood;

b) 27 boxes and crates of tilewood assemblies and the others ;and

c) 49 bundles of mouldings R & W (3) Apitong Bolidenized.

The goods, amounting to P6,067,178, were insured for the same amount with MIC against various risks including "TOTAL LOSS BY TOTAL OF THE LOSS THE VESSEL." The vessel, in turn, was insured by Prudential Guarantee & Assurance, Inc. (hereafter PGAI) for P4 million. On 20 November 1984, on its way to Manila from the port of Nasipit, Agusan del Norte, the vessel, along with its cargo, sank off Limasawa Island. As a result of the total loss of its shipment, the consignee made a claim with LOADSTAR which, however, ignored the same. As the insurer, MIC paid P6,075,000 to the insured in full settlement of its claim, and the latter executed a subrogation receipt therefor.

On 4 February 1985, MIC filed a complaint against LOADSTAR and PGAI, alleging that the sinking of the vessel was due to the fault and negligence of LOADSTAR and its employees. It also prayed that PGAI be ordered to pay the insurance proceeds from the loss the vessel directly to MIC, said amount to be deducted from MIC's claim from LOADSTAR.

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

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

In dismissing LOADSTAR's appeal, the appellate court made the following observations:

1) LOADSTAR cannot be considered a private carrier on the sole ground that there was a single shipper on that fateful voyage. The court noted that the charter of the vessel was limited to the ship, but LOADSTAR retained control over its crew. 4

2) As a common carrier, it is the Code of Commerce, not the Civil Code, which should be applied in determining the rights and liabilities of the parties.

3) The vessel was not seaworthy because it was undermanned on the day of the voyage. If it had been seaworthy, it could have withstood the "natural and inevitable action of the sea" on 20 November 1984, when the condition of the sea was moderate. The vessel sank, not because of force majeure, but because it was not seaworthy. LOADSTAR'S allegation that the sinking was probably due to the "convergence of the winds," as stated by a PAGASA expert, was not duly proven at the trial. The "limited liability" rule, therefore, is not applicable considering that, in this case, there was an actual finding of negligence on the part of the carrier. 5

4) Between MIC and LOADSTAR, the provisions of the Bill of Lading do not apply because said provisions bind only the shipper/consignee and the carrier. When MIC paid the shipper for the goods insured, it was subrogated to the latter's rights as against the carrier, LOADSTAR. 6

5) There was a clear breach of the contract of carriage when the shipper's goods never reached their destination. LOADSTAR's defense of "diligence of a good father of a family" in the training and selection of its crew is unavailing because this is not a proper or complete defense in culpa contractual.

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

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

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

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

Regarding the first issue, LOADSTAR submits that the vessel was a private carrier because it was not issued certificate of public convenience, it did not have a regular trip or schedule nor a fixed route, and there was only "one shipper, one consignee for a special cargo."

In refutation, MIC argues that the issue as to the classification of the M/V "Cherokee" was not timely raised below; hence, it is barred by estoppel. While it is true that the vessel had on board only the cargo of wood products for delivery to one consignee, it was also carrying passengers as part of its regular business. Moreover, the bills of lading in this case made no mention of any charter party but only a statement that the vessel was a "general cargo carrier." Neither was there any "special arrangement" between LOADSTAR and the shipper regarding the shipment of the cargo. The singular fact that the vessel was carrying a particular type of cargo for one shipper is not sufficient to convert the vessel into a private carrier.

As regards the second error, LOADSTAR argues that as a private carrier, it cannot be presumed to have been negligent, and the burden of proving otherwise devolved upon MIC. 8

LOADSTAR also maintains that the vessel was seaworthy. Before the fateful voyage on 19 November 1984, the vessel was allegedly dry docked at Keppel Philippines Shipyard and was duly inspected by the maritime safety engineers of the Philippine Coast Guard, who certified that the ship was fit to undertake a voyage. Its crew at the time was experienced, licensed and unquestionably competent. With all these precautions, there could be no other conclusion except that LOADSTAR exercised the diligence of a good father of a family in ensuring the vessel's seaworthiness.

LOADSTAR further claims that it was not responsible for the loss of the cargo, such loss being due to force majeure. It points out that when the vessel left Nasipit, Agusan del Norte, on 19 November 1984, the weather was fine until the next day when the vessel sank due to strong waves. MCI's witness, Gracelia Tapel, fully established the existence of two typhoons, "WELFRING" and "YOLING," inside the Philippine area of responsibility. In fact, on 20 November 1984, signal no. 1 was declared over Eastern Visayas, which includes Limasawa Island. Tapel also testified that the convergence of winds brought about by these two typhoons strengthened wind velocity in the area, naturally producing strong waves and winds, in turn, causing the vessel to list and eventually sink.

LOADSTAR goes on to argue that, being a private carrier, any agreement limiting its liability, such as what transpired in this case, is valid. Since the cargo was being shipped at "owner's risk," LOADSTAR was not liable for any loss or damage to the same. Therefore, the Court of Appeals erred in holding that the provisions of the bills of lading apply only to the shipper and the carrier, and not to the insurer of the goods, which conclusion runs counter to the Supreme Court's ruling in the case of St. Paul Fire & Marine Co. v. Macondray & Co., Inc., 9 and National Union Fire Insurance Company of Pittsburgh v. Stolt-Nielsen Phils., Inc. 10

Finally, LOADSTAR avers that MIC's claim had already prescribed, the case having been instituted beyond the period stated in the bills of lading for instituting the same — suits based upon claims arising from shortage, damage, or non-delivery of shipment shall be instituted within sixty days from the accrual of the

right of action. The vessel sank on 20 November 1984; yet, the case for recovery was filed only on 4 February 1985.

MIC, on the other hand, claims that LOADSTAR was liable, notwithstanding that the loss of the cargo was due to force majeure, because the same concurred with LOADSTAR's fault or negligence.

Secondly, LOADSTAR did not raise the issue of prescription in the court below; hence, the same must be deemed waived.

Thirdly, the " limited liability " theory is not applicable in the case at bar because LOADSTAR was at fault or negligent, and because it failed to maintain a seaworthy vessel. Authorizing the voyage notwithstanding its knowledge of a typhoon is tantamount to negligence.

We find no merit in this petition.

Anent the first assigned error, we hold that LOADSTAR is a common carrier. It is not necessary that the carrier be issued a certificate of public convenience, and this public character is not altered by the fact that the carriage of the goods in question was periodic, occasional, episodic or unscheduled.

In support of its position, LOADSTAR relied on the 1968 case of Home Insurance Co. v. American Steamship Agencies, Inc., 11 where this Court held that a common carrier transporting special cargo or chartering the vessel to a special person becomes a private carrier that is not subject to the provisions of the Civil Code. Any stipulation in the charter party absolving the owner from liability for loss due to the negligence of its agent is void only if the strict policy governing common carriers is upheld. Such policy has no force where the public at is not involved, as in the case of a ship totally chartered for the use of a single party. LOADSTAR also cited Valenzuela Hardwood and Industrial Supply, Inc. v. Court of Appeals 12 and National Steel Corp. v. Court of Appeals, 13 both of which upheld the Home Insurance doctrine.

These cases invoked by LOADSTAR are not applicable in the case at bar for the simple reason that the factual settings are different. The records do not disclose that the M/V "Cherokee," on the date in question, undertook to carry a special cargo or was chartered to a special person only. There was no charter party. The bills of lading failed to show any special arrangement, but only a general provision to the effect that the M/V"Cherokee" was a "general cargo carrier." 14 Further, the bare fact that the vessel was carrying a particular type of cargo for one shipper, which appears to be purely coincidental, is not reason enough to convert the vessel from a common to a private carrier, especially where, as in this case, it was shown that the vessel was also carrying passengers.

Under the facts and circumstances obtaining in this case, LOADSTAR fits the definition of a common carrier under Article 1732 of the Civil Code. In the case of De Guzman v. Court of Appeals, 15 the Court juxtaposed the statutory definition of "common carriers" with the peculiar circumstances of that case, viz.:

The Civil Code defines "common carriers" in the following terms:

Art. 1732. Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air for compensation, offering their services to the public.

The above article makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as ancillary activity (in local idiom, as "a sideline". Article 1732 also carefully avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does Article 1732 distinguish between a carrier offering its services to the "general public," i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population. We think that Article 1733 deliberately refrained from making such distinctions.

xxx xxx xxx

It appears to the Court that private respondent is properly characterized as a common carrier even though he merely "back-hauled" goods for other merchants from Manila to Pangasinan, although such backhauling was done on a periodic or occasional rather than regular or scheduled manner, and eventhough private respondent's principal occupation was not the carriage of goods for others. There is no dispute that private respondent charged his customers a fee for hauling their goods; that fee frequently fell below commercial freight rates is not relevant here.

The Court of Appeals referred to the fact that private respondent held no certificate of public convenience, and concluded he was not a common carrier. This is palpable error. A certificate of public convenience is not a requisite for the incurring of liability under the Civil Code provisions governing common carriers. That liability arises the moment a person or firm acts as a common carrier, without regard to whether or not such carrier has also complied with the requirements of the applicable regulatory statute and implementing regulations and has been granted a certificate of public convenience or other franchise. To exempt private respondent from the liabilities of a common carrier because he has not secured the necessary certificate of public convenience, would be offensive to sound public policy; that would be to reward private respondent precisely for failing to comply with applicable statutory requirements The business of a common carrier impinges directly and intimately upon the safety and well being and property of those members of the general community who happen to deal with such carrier. The law imposes duties and liabilities upon common carriers for the safety and protection of those who utilize their services and the law cannot allow a common carrier to render such duties and liabilities merely facultative by simply failing to obtain the necessary permits and authorizations.

Moving on to the second assigned error, we find that the M/V "Cherokee" was not seaworthy when it embarked on its voyage on 19 November 1984. The vessel was not even sufficiently manned at the time. "For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned with a sufficient number of competent officers and crew. The failure of a common carrier to maintain in seaworthy condition its vessel involved in a contract of carriage is a clear breach of its duty prescribed in Article 1755 of the Civil Code." 16

Neither do we agree with LOADSTAR's argument that the "limited liability" theory should be applied in this case. The doctrine of limited liability does not apply where there was negligence on the part of the vessel owner or agent. 17 LOADSTAR was at fault or negligent in not maintaining a seaworthy vessel and

in having allowed its vessel to sail despite knowledge of an approaching typhoon. In any event, it did not sink because of any storm that may be deemed as force majeure, inasmuch as the wind condition in the performance of its duties, LOADSTAR cannot hide behind the "limited liability" doctrine to escape responsibility for the loss of the vessel and its cargo.

LOADSTAR also claims that the Court of Appeals erred in holding it liable for the loss of the goods, in utter disregard of this Court's pronouncements in St. Paul Fire & Marine Ins. Co. v. Macondray & Co., Inc., 18 and National Union Fire Insurance v. Stolt-Nielsen Phils., Inc. 19 It was ruled in these two cases that after paying the claim of the insured for damages under the insurance policy, the insurer is subrogated merely to the rights of the assured, that is, it can recover only the amount that may, in turn, be recovered by the latter. Since the right of the assured in case of loss or damage to the goods is limited or restricted by the provisions in the bills of lading, a suit by the insurer as subrogee is necessarily subject to the same limitations and restrictions. We do not agree. In the first place, the cases relied on by LOADSTAR involved a limitation on the carrier's liability to an amount fixed in the bill of lading which the parties may enter into, provided that the same was freely and fairly agreed upon (Articles 1749-1750). On the other hand, the stipulation in the case at bar effectively reduces the common carrier's liability for the loss or destruction of the goods to a degree less than extraordinary (Articles 1744 and 1745), that is, the carrier is not liable for any loss or damage to shipments made at "owner's risk." Such stipulation is obviously null and void for being contrary to public policy." 20 It has been said:

Three kinds of stipulations have often been made in a bill of lading. The first one exempting the carrier from any and all liability for loss or damage occasioned by its own negligence. The second is one providing for an unqualified limitation of such liability to an agreed valuation. And the third is one limiting the liability of the carrier to an agreed valuation unless the shipper declares a higher value and pays a higher rate of. freight. According to an almost uniform weight of authority, the first and second kinds of stipulations are invalid as being contrary to public policy, but the third is valid and enforceable. 21

Since the stipulation in question is null and void, it follows that when MIC paid the shipper, it was subrogated to all the rights which the latter has against the common carrier, LOADSTAR.

Neither is there merit to the contention that the claim in this case was barred by prescription. MIC's cause of action had not yet prescribed at the time it was concerned. Inasmuch as neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA) — which provides for a one-year period of limitation on claims for loss of, or damage to, cargoes sustained during transit — may be applied suppletorily to the case at bar. This one-year prescriptive period also applies to the insurer of the goods. 22 In this case, the period for filing the action for recovery has not yet elapsed. Moreover, a stipulation reducing the one-year period is null and void; 23 it must, accordingly, be struck down.

WHEREFORE, the instant petition is DENIED and the challenged decision of 30 January 1997 of the Court of Appeals in CA-G.R. CV No. 36401 is AFFIRMED. Costs against petitioner.

SO ORDERED.

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

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

The basic facts are not in controversy:

In G.R. No. 69044, sometime in or prior to June, 1977, the M/S ASIATICA, a vessel operated by petitioner Eastern Shipping Lines, Inc., (referred to hereinafter as Petitioner Carrier) loaded at Kobe, Japan for transportation to Manila, 5,000 pieces of calorized lance pipes in 28 packages valued at P256,039.00 consigned to Philippine Blooming Mills Co., Inc., and 7 cases of spare parts valued at P92,361.75, consigned to Central Textile Mills, Inc. Both sets of goods were insured against marine risk for their stated value with respondent Development Insurance and Surety Corporation.

In G.R. No. 71478, during the same period, the same vessel took on board 128 cartons of garment fabrics and accessories, in two (2) containers, consigned to Mariveles Apparel Corporation, and two cases of surveying instruments consigned to Aman Enterprises and General Merchandise. The 128 cartons were insured for their stated value by respondent Nisshin Fire & Marine Insurance Co., for US $46,583.00, and the 2 cases by respondent Dowa Fire & Marine Insurance Co., Ltd., for US $11,385.00.

Enroute for Kobe, Japan, to Manila, the vessel caught fire and sank, resulting in the total loss of ship and cargo. The respective respondent Insurers paid the corresponding marine insurance values to the consignees concerned and were thus subrogated unto the rights of the latter as the insured.

G.R. NO. 69044

On May 11, 1978, respondent Development Insurance & Surety Corporation (Development Insurance, for short), having been subrogated unto the rights of the two insured companies, filed suit against petitioner Carrier for the recovery of the amounts it had paid to the insured before the then Court of First instance of Manila, Branch XXX (Civil Case No. 6087).

Petitioner-Carrier denied liability mainly on the ground that the loss was due to an extraordinary fortuitous event, hence, it is not liable under the law.

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

Petitioner Carrier is now before us on a Petition for Review on Certiorari.

G.R. NO. 71478

On June 16, 1978, respondents Nisshin Fire & Marine Insurance Co. NISSHIN for short), and Dowa Fire & Marine Insurance Co., Ltd. (DOWA, for brevity), as subrogees of the insured, filed suit against Petitioner Carrier for the recovery of the insured value of the cargo lost with the then Court of First Instance of Manila, Branch 11 (Civil Case No. 116151), imputing unseaworthiness of the ship and non-observance of extraordinary diligence by petitioner Carrier.

Petitioner Carrier denied liability on the principal grounds that the fire which caused the sinking of the ship is an exempting circumstance under Section 4(2) (b) of the Carriage of Goods by Sea Act (COGSA); and that when the loss of fire is established, the burden of proving negligence of the vessel is shifted to the cargo shipper.

On September 15, 1980, the Trial Court rendered judgment in favor of NISSHIN and DOWA in the amounts of US $46,583.00 and US $11,385.00, respectively, with legal interest, plus attorney's fees of P5,000.00 and costs. On appeal by petitioner, the then Court of Appeals on September 10, 1984, affirmed with modification the Trial Court's judgment by decreasing the amount recoverable by DOWA to US $1,000.00 because of $500 per package limitation of liability under the COGSA.

Hence, this Petition for Review on certiorari by Petitioner Carrier.

Both Petitions were initially denied for lack of merit. G.R. No. 69044 on January 16, 1985 by the First Division, and G. R. No. 71478 on September 25, 1985 by the Second Division. Upon Petitioner Carrier's Motion for Reconsideration, however, G.R. No. 69044 was given due course on March 25, 1985, and the parties were required to submit their respective Memoranda, which they have done.

On the other hand, in G.R. No. 71478, Petitioner Carrier sought reconsideration of the Resolution denying the Petition for Review and moved for its consolidation with G.R. No. 69044, the lower-numbered case, which was then pending resolution with the First Division. The same was granted; the Resolution of the Second Division of September 25, 1985 was set aside and the Petition was given due course.

At the outset, we reject Petitioner Carrier's claim that it is not the operator of the M/S Asiatica but merely a charterer thereof. We note that in G.R. No. 69044, Petitioner Carrier stated in its Petition:

There are about 22 cases of the "ASIATICA" pending in various courts where various plaintiffs are represented by various counsel representing various consignees or insurance companies. The common defendant in these cases is petitioner herein, being the operator of said vessel. ... 1

Petitioner Carrier should be held bound to said admission. As a general rule, the facts alleged in a party's pleading are deemed admissions of that party and binding upon it. 2 And an admission in one pleading in one action may be received in evidence against the pleader or his successor-in-interest on the trial of another action to which he is a party, in favor of a party to the latter action. 3

The threshold issues in both cases are: (1) which law should govern — the Civil Code provisions on Common carriers or the Carriage of Goods by Sea Act? and (2) who has the burden of proof to show negligence of the carrier?

On the Law Applicable

The law of the country to which the goods are to be transported governs the liability of the common carrier in case of their loss, destruction or deterioration. 4 As the cargoes in question were transported from Japan to the Philippines, the liability of Petitioner Carrier is governed primarily by the Civil Code. 5 However, in all matters not regulated by said Code, the rights and obligations of common carrier shall be governed by the Code of Commerce and by special laws. 6 Thus, the Carriage of Goods by Sea Act, a special law, is suppletory to the provisions of the Civil Code. 7

On the Burden of Proof

Under the Civil Code, common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over goods, according to all the circumstances of each case. 8 Common carriers are responsible for the loss, destruction, or deterioration of the goods unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning or other natural disaster or calamity;

xxx xxx xxx 9

Petitioner Carrier claims that the loss of the vessel by fire exempts it from liability under the phrase "natural disaster or calamity. " However, we are of the opinion that fire may not be considered a natural disaster or calamity. This must be so as it arises almost invariably from some act of man or by human means. 10 It does not fall within the category of an act of God unless caused by lightning 11 or by other natural disaster or calamity. 12 It may even be caused by the actual fault or privity of the carrier. 13

Article 1680 of the Civil Code, which considers fire as an extraordinary fortuitous event refers to leases of rural lands where a reduction of the rent is allowed when more than one-half of the fruits have been lost due to such event, considering that the law adopts a protection policy towards agriculture. 14

As the peril of the fire is not comprehended within the exception in Article 1734, supra, Article 1735 of the Civil Code provides that all cases than those mention in Article 1734, the common carrier shall be presumed to have been at fault or to have acted negligently, unless it proves that it has observed the extraordinary deligence required by law.

In this case, the respective Insurers. as subrogees of the cargo shippers, have proven that the transported goods have been lost. Petitioner Carrier has also proved that the loss was caused by fire. The burden then is upon Petitioner Carrier to proved that it has exercised the extraordinary diligence required by law. In this regard, the Trial Court, concurred in by the Appellate Court, made the following Finding of fact:

The cargoes in question were, according to the witnesses defendant placed in hatches No, 2 and 3 cf the vessel, Boatswain Ernesto Pastrana noticed that smoke was coming out from hatch No. 2 and hatch No. 3; that where the smoke was noticed, the fire was already

big; that the fire must have started twenty-four 24) our the same was noticed; that carbon dioxide was ordered released and the crew was ordered to open the hatch covers of No, 2 tor commencement of fire fighting by sea water: that all of these effort were not enough to control the fire.

Pursuant to Article 1733, common carriers are bound to extraordinary diligence in the vigilance over the goods. The evidence of the defendant did not show that extraordinary vigilance was observed by the vessel to prevent the occurrence of fire at hatches numbers 2 and 3. Defendant's evidence did not likewise show he amount of diligence made by the crew, on orders, in the care of the cargoes. What appears is that after the cargoes were stored in the hatches, no regular inspection was made as to their condition during the voyage. Consequently, the crew could not have even explain what could have caused the fire. The defendant, in the Court's mind, failed to satisfactorily show that extraordinary vigilance and care had been made by the crew to prevent the occurrence of the fire. The defendant, as a common carrier, is liable to the consignees for said lack of deligence required of it under Article 1733 of the Civil Code. 15

Having failed to discharge the burden of proving that it had exercised the extraordinary diligence required by law, Petitioner Carrier cannot escape liability for the loss of the cargo.

And even if fire were to be considered a "natural disaster" within the meaning of Article 1734 of the Civil Code, it is required under Article 1739 of the same Code that the "natural disaster" must have been the "proximate and only cause of the loss," and that the carrier has "exercised due diligence to prevent or minimize the loss before, during or after the occurrence of the disaster. " This Petitioner Carrier has also failed to establish satisfactorily.

Nor may Petitioner Carrier seek refuge from liability under the Carriage of Goods by Sea Act, It is provided therein that:

Sec. 4(2). Neither the carrier nor the ship shall be responsible for loss or damage arising or resulting from

(b) Fire, unless caused by the actual fault or privity of the carrier.

xxx xxx xxx

In this case, both the Trial Court and the Appellate Court, in effect, found, as a fact, that there was "actual fault" of the carrier shown by "lack of diligence" in that "when the smoke was noticed, the fire was already big; that the fire must have started twenty-four (24) hours before the same was noticed; " and that "after the cargoes were stored in the hatches, no regular inspection was made as to their condition during the voyage." The foregoing suffices to show that the circumstances under which the fire originated and spread are such as to show that Petitioner Carrier or its servants were negligent in connection therewith. Consequently, the complete defense afforded by the COGSA when loss results from fire is unavailing to Petitioner Carrier.

On the US $500 Per Package Limitation:

Petitioner Carrier avers that its liability if any, should not exceed US $500 per package as provided in section 4(5) of the COGSA, which reads:

(5) Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in bill of lading. This declaration if embodied in the bill of lading shall be prima facie evidence, but all be conclusive on the carrier.

By agreement between the carrier, master or agent of the carrier, and the shipper another maximum amount than that mentioned in this paragraph may be fixed: Provided, That such maximum shall not be less than the figure above named. In no event shall the carrier be Liable for more than the amount of damage actually sustained.

xxx xxx xxx

Article 1749 of the New Civil Code also allows the limitations of liability in this wise:

Art. 1749. A stipulation that the common carrier's liability as limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.

It is to be noted that the Civil Code does not of itself limit the liability of the common carrier to a fixed amount per package although the Code expressly permits a stipulation limiting such liability. Thus, the COGSA which is suppletory to the provisions of the Civil Code, steps in and supplements the Code by establishing a statutory provision limiting the carrier's liability in the absence of a declaration of a higher value of the goods by the shipper in the bill of lading. The provisions of the Carriage of Goods by.Sea Act on limited liability are as much a part of a bill of lading as though physically in it and as much a part thereof as though placed therein by agreement of the parties. 16

In G.R. No. 69044, there is no stipulation in the respective Bills of Lading (Exhibits "C-2" and "I-3") 1 7 limiting the carrier's liability for the loss or destruction of the goods. Nor is there a declaration of a higher value of the goods. Hence, Petitioner Carrier's liability should not exceed US $500 per package, or its peso equivalent, at the time of payment of the value of the goods lost, but in no case "more than the amount of damage actually sustained."

The actual total loss for the 5,000 pieces of calorized lance pipes was P256,039 (Exhibit "C"), which was exactly the amount of the insurance coverage by Development Insurance (Exhibit "A"), and the amount affirmed to be paid by respondent Court. The goods were shipped in 28 packages (Exhibit "C-2") Multiplying 28 packages by $500 would result in a product of $14,000 which, at the current exchange rate of P20.44 to US $1, would be P286,160, or "more than the amount of damage actually sustained." Consequently, the aforestated amount of P256,039 should be upheld.

With respect to the seven (7) cases of spare parts (Exhibit "I-3"), their actual value was P92,361.75 (Exhibit "I"), which is likewise the insured value of the cargo (Exhibit "H") and amount was affirmed to be paid by respondent Court. however, multiplying seven (7) cases by $500 per package at the present prevailing rate of P20.44 to US $1 (US $3,500 x P20.44) would yield P71,540 only, which is the amount that should be paid by Petitioner Carrier for those spare parts, and not P92,361.75.

In G.R. No. 71478, in so far as the two (2) cases of surveying instruments are concerned, the amount awarded to DOWA which was already reduced to $1,000 by the Appellate Court following the statutory $500 liability per package, is in order.

In respect of the shipment of 128 cartons of garment fabrics in two (2) containers and insured with NISSHIN, the Appellate Court also limited Petitioner Carrier's liability to $500 per package and affirmed the award of $46,583 to NISSHIN. it multiplied 128 cartons (considered as COGSA packages) by $500 to arrive at the figure of $64,000, and explained that "since this amount is more than the insured value of the goods, that is $46,583, the Trial Court was correct in awarding said amount only for the 128 cartons, which amount is less than the maximum limitation of the carrier's liability."

We find no reversible error. The 128 cartons and not the two (2) containers should be considered as the shipping unit.

In Mitsui & Co., Ltd. vs. American Export Lines, Inc. 636 F 2d 807 (1981), the consignees of tin ingots and the shipper of floor covering brought action against the vessel owner and operator to recover for loss of ingots and floor covering, which had been shipped in vessel — supplied containers. The U.S. District Court for the Southern District of New York rendered judgment for the plaintiffs, and the defendant appealed. The United States Court of Appeals, Second Division, modified and affirmed holding that:

When what would ordinarily be considered packages are shipped in a container supplied by the carrier and the number of such units is disclosed in the shipping documents, each of those units and not the container constitutes the "package" referred to in liability limitation provision of Carriage of Goods by Sea Act. Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A.& 1304(5).

Even if language and purposes of Carriage of Goods by Sea Act left doubt as to whether carrier-furnished containers whose contents are disclosed should be treated as packages, the interest in securing international uniformity would suggest that they should not be so treated. Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A. 1304(5).

... After quoting the statement in Leather's Best, supra, 451 F 2d at 815, that treating a container as a package is inconsistent with the congressional purpose of establishing a reasonable minimum level of liability, Judge Beeks wrote, 414 F. Supp. at 907 (footnotes omitted):

Although this approach has not completely escaped criticism, there is, nonetheless, much to commend it. It gives needed recognition to the responsibility of the courts to construe and apply the statute as enacted, however great might be the temptation to "modernize" or reconstitute it by artful judicial gloss. If COGSA's package limitation scheme suffers from

internal illness, Congress alone must undertake the surgery. There is, in this regard, obvious wisdom in the Ninth Circuit's conclusion in Hartford that technological advancements, whether or not forseeable by the COGSA promulgators, do not warrant a distortion or artificial construction of the statutory term "package." A ruling that these large reusable metal pieces of transport equipment qualify as COGSA packages — at least where, as here, they were carrier owned and supplied — would amount to just such a distortion.

Certainly, if the individual crates or cartons prepared by the shipper and containing his goods can rightly be considered "packages" standing by themselves, they do not suddenly lose that character upon being stowed in a carrier's container. I would liken these containers to detachable stowage compartments of the ship. They simply serve to divide the ship's overall cargo stowage space into smaller, more serviceable loci. Shippers' packages are quite literally "stowed" in the containers utilizing stevedoring practices and materials analogous to those employed in traditional on board stowage.

In Yeramex International v. S.S. Tando,, 1977 A.M.C. 1807 (E.D. Va.) rev'd on other grounds, 595 F 2nd 943 (4 Cir. 1979), another district with many maritime cases followed Judge Beeks' reasoning in Matsushita and similarly rejected the functional economics test. Judge Kellam held that when rolls of polyester goods are packed into cardboard cartons which are then placed in containers, the cartons and not the containers are the packages.

xxx xxx xxx

The case of Smithgreyhound v. M/V Eurygenes, 18 followed the Mitsui test:

Eurygenes concerned a shipment of stereo equipment packaged by the shipper into cartons which were then placed by the shipper into a carrier- furnished container. The number of cartons was disclosed to the carrier in the bill of lading. Eurygenes followed the Mitsui test and treated the cartons, not the container, as the COGSA packages. However, Eurygenes indicated that a carrier could limit its liability to $500 per container if the bill of lading failed to disclose the number of cartons or units within the container, or if the parties indicated, in clear and unambiguous language, an agreement to treat the container as the package.

(Admiralty Litigation in Perpetuum: The Continuing Saga of Package Limitations and Third World Delivery Problems by Chester D. Hooper & Keith L. Flicker, published in Fordham International Law Journal, Vol. 6, 1982-83, Number 1) (Emphasis supplied)

In this case, the Bill of Lading (Exhibit "A") disclosed the following data:

2 Containers

(128) Cartons)

Men's Garments Fabrics and Accessories Freight Prepaid

Say: Two (2) Containers Only.

Considering, therefore, that the Bill of Lading clearly disclosed the contents of the containers, the number of cartons or units, as well as the nature of the goods, and applying the ruling in the Mitsui and Eurygenes cases it is clear that the 128 cartons, not the two (2) containers should be considered as the shipping unit subject to the $500 limitation of liability.

True, the evidence does not disclose whether the containers involved herein were carrier-furnished or not. Usually, however, containers are provided by the carrier. 19 In this case, the probability is that they were so furnished for Petitioner Carrier was at liberty to pack and carry the goods in containers if they were not so packed. Thus, at the dorsal side of the Bill of Lading (Exhibit "A") appears the following stipulation in fine print:

11. (Use of Container) Where the goods receipt of which is acknowledged on the face of this Bill of Lading are not already packed into container(s) at the time of receipt, the Carrier shall be at liberty to pack and carry them in any type of container(s).

The foregoing would explain the use of the estimate "Say: Two (2) Containers Only" in the Bill of Lading, meaning that the goods could probably fit in two (2) containers only. It cannot mean that the shipper had furnished the containers for if so, "Two (2) Containers" appearing as the first entry would have sufficed. and if there is any ambiguity in the Bill of Lading, it is a cardinal principle in the construction of contracts that the interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. 20 This applies with even greater force in a contract of adhesion where a contract is already prepared and the other party merely adheres to it, like the Bill of Lading in this case, which is draw. up by the carrier. 21

On Alleged Denial of Opportunity to Present Deposition of Its Witnesses: (in G.R. No. 69044 only)

Petitioner Carrier claims that the Trial Court did not give it sufficient time to take the depositions of its witnesses in Japan by written interrogatories.

We do not agree. petitioner Carrier was given- full opportunity to present its evidence but it failed to do so. On this point, the Trial Court found:

xxx xxx xxx

Indeed, since after November 6, 1978, to August 27, 1979, not to mention the time from June 27, 1978, when its answer was prepared and filed in Court, until September 26, 1978, when the pre-trial conference was conducted for the last time, the defendant had more

than nine months to prepare its evidence. Its belated notice to take deposition on written interrogatories of its witnesses in Japan, served upon the plaintiff on August 25th, just two days before the hearing set for August 27th, knowing fully well that it was its undertaking on July 11 the that the deposition of the witnesses would be dispensed with if by next time it had not yet been obtained, only proves the lack of merit of the defendant's motion for postponement, for which reason it deserves no sympathy from the Court in that regard. The defendant has told the Court since February 16, 1979, that it was going to take the deposition of its witnesses in Japan. Why did it take until August 25, 1979, or more than six months, to prepare its written interrogatories. Only the defendant itself is to blame for its failure to adduce evidence in support of its defenses.

xxx xxx xxx 22

Petitioner Carrier was afforded ample time to present its side of the case. 23 It cannot complain now that it was denied due process when the Trial Court rendered its Decision on the basis of the evidence adduced. What due process abhors is absolute lack of opportunity to be heard. 24

On the Award of Attorney's Fees:

Petitioner Carrier questions the award of attorney's fees. In both cases, respondent Court affirmed the award by the Trial Court of attorney's fees of P35,000.00 in favor of Development Insurance in G.R. No. 69044, and P5,000.00 in favor of NISSHIN and DOWA in G.R. No. 71478.

Courts being vested with discretion in fixing the amount of attorney's fees, it is believed that the amount of P5,000.00 would be more reasonable in G.R. No. 69044. The award of P5,000.00 in G.R. No. 71478 is affirmed.

WHEREFORE, 1) in G.R. No. 69044, the judgment is modified in that petitioner Eastern Shipping Lines shall pay the Development Insurance and Surety Corporation the amount of P256,039 for the twenty-eight (28) packages of calorized lance pipes, and P71,540 for the seven (7) cases of spare parts, with interest at the legal rate from the date of the filing of the complaint on June 13, 1978, plus P5,000 as attorney's fees, and the costs.

2) In G.R.No.71478,the judgment is hereby affirmed.

SO ORDERED.

G.R. No. 101089. April 7, 1993. ESTRELLITA M. BASCOS, petitioners, vs. COURT OF APPEALS and RODOLFO A. CIPRIANO, respondents.

This is a petition for review on certiorari of the decision ** of the Court of Appeals in "RODOLFO A. CIPRIANO, doing business under the name CIPRIANO TRADING ENTERPRISES plaintiff-appellee, vs. ESTRELLITA M. BASCOS, doing business under the name of BASCOS TRUCKING, defendant-appellant," C.A.-G.R. CV No. 25216, the dispositive portion of which is quoted hereunder:

"PREMISES considered, We find no reversible error in the decision appealed from, which is hereby affirmed in toto. Costs against appellant." 1

The facts, as gathered by this Court, are as follows:

Rodolfo A. Cipriano representing Cipriano Trading Enterprise (CIPTRADE for short) entered into a hauling contract 2 with Jibfair Shipping Agency Corporation whereby the former bound itself to haul the latter's 2,000 m/tons of soya bean meal from Magallanes Drive, Del Pan, Manila to the warehouse of Purefoods Corporation in Calamba, Laguna. To carry out its obligation, CIPTRADE, through Rodolfo Cipriano, subcontracted with Estrellita Bascos (petitioner) to transport and to deliver 400 sacks of soya bean meal worth P156,404.00 from the Manila Port Area to Calamba, Laguna at the rate of P50.00 per metric ton. Petitioner failed to deliver the said cargo. As a consequence of that failure, Cipriano paid Jibfair Shipping Agency the amount of the lost goods in accordance with the contract which stated that:

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

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

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

"(e) in an action against a party who has removed or disposed of his property, or is about to do so, with intent to defraud his creditors;"

5. That there is no sufficient security for the claim sought to be enforced by the present action;

6. That the amount due to the plaintiff in the above-entitled case is above all legal counterclaims;"

The trial court granted the writ of preliminary attachment on February 17, 1987.

In her answer, petitioner interposed the following defenses: that there was no contract of carriage since CIPTRADE leased her cargo truck to load the cargo from Manila Port Area to Laguna; that CIPTRADE was liable to petitioner in the amount of P11,000.00 for loading the cargo; that the truck carrying the cargo

was hijacked along Canonigo St., Paco, Manila on the night of October 21, 1988; that the hijacking was immediately reported to CIPTRADE and that petitioner and the police exerted all efforts to locate the hijacked properties; that after preliminary investigation, an information for robbery and carnapping were filed against Jose Opriano, et al.; and that hijacking, being a force majeure, exculpated petitioner from any liability to CIPTRADE.

After trial, the trial court rendered a decision *** the dispositive portion of which reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant ordering the latter to pay the former:

1. The amount of ONE HUNDRED FIFTY-SIX THOUSAND FOUR HUNDRED FOUR PESOS (P156,404.00) as an (sic) for actual damages with legal interest of 12% per cent per annum to be counted from December 4, 1986 until fully paid;

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

3. The costs of the suit.

The "Urgent Motion To Dissolve/Lift preliminary Attachment" dated March 10, 1987 filed by defendant is DENIED for being moot and academic.

SO ORDERED." 6

Petitioner appealed to the Court of Appeals but respondent Court affirmed the trial court's judgment.

Consequently, petitioner filed this petition where she makes the following assignment of errors; to wit:

"I. THE RESPONDENT COURT ERRED IN HOLDING THAT THE CONTRACTUAL RELATIONSHIP BETWEEN PETITIONER AND PRIVATE RESPONDENT WAS CARRIAGE OF GOODS AND NOT LEASE OF CARGO TRUCK.

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

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

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

The Court of Appeals, in holding that petitioner was a common carrier, found that she admitted in her answer that she did business under the name A.M. Bascos Trucking and that said admission dispensed with the presentation by private respondent, Rodolfo Cipriano, of proofs that petitioner was a common carrier. The respondent Court also adopted in toto the trial court's decision that petitioner was a common

carrier, Moreover, both courts appreciated the following pieces of evidence as indicators that petitioner was a common carrier: the fact that the truck driver of petitioner, Maximo Sanglay, received the cargo consisting of 400 bags of soya bean meal as evidenced by a cargo receipt signed by Maximo Sanglay; the fact that the truck helper, Juanito Morden, was also an employee of petitioner; and the fact that control of the cargo was placed in petitioner's care.

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

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

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

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

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

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

Regarding the affidavits presented by petitioner to the court, both the trial and appellate courts have dismissed them as self-serving and petitioner contests the conclusion. We are bound by the appellate court's factual conclusions. Yet, granting that the said evidence were not self-serving, the same were not sufficient to prove that the contract was one of lease. It must be understood that a contract is what the

law defines it to be and not what it is called by the contracting parties. 15 Furthermore, petitioner presented no other proof of the existence of the contract of lease. He who alleges a fact has the burden of proving it. 16

Likewise, We affirm the holding of the respondent court that the loss of the goods was not due to force majeure.

Common carriers are obliged to observe extraordinary diligence in the vigilance over the goods transported by them. 17 Accordingly, they are presumed to have been at fault or to have acted negligently if the goods are lost, destroyed or deteriorated. 18 There are very few instances when the presumption of negligence does not attach and these instances are enumerated in Article 1734. 19 In those cases where the presumption is applied, the common carrier must prove that it exercised extraordinary diligence in order to overcome the presumption.

In this case, petitioner alleged that hijacking constituted force majeure which exculpated her from liability for the loss of the cargo. In De Guzman vs. Court of Appeals, 20 the Court held that hijacking, not being included in the provisions of Article 1734, must be dealt with under the provisions of Article 1735 and thus, the common carrier is presumed to have been at fault or negligent. To exculpate the carrier from liability arising from hijacking, he must prove that the robbers or the hijackers acted with grave or irresistible threat, violence, or force. This is in accordance with Article 1745 of the Civil Code which provides:

"Art. 1745. Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy;

xxx xxx xxx

(6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violences or force, is dispensed with or diminished;"

In the same case, 21 the Supreme Court also held that:

"Under Article 1745 (6) above, a common carrier is held responsible — and will not be allowed to divest or to diminish such responsibility — even for acts of strangers like thieves or robbers except where such thieves or robbers in fact acted with grave or irresistible threat, violence or force. We believe and so hold that the limits of the duty of extraordinary diligence in the vigilance over the goods carried are reached where the goods are lost as a result of a robbery which is attended by "grave or irresistible threat, violence or force."

To establish grave and irresistible force, petitioner presented her accusatory affidavit, 22 Jesus Bascos' affidavit, 23 and Juanito Morden's 24 "Salaysay". However, both the trial court and the Court of Appeals have concluded that these affidavits were not enough to overcome the presumption. Petitioner's affidavit about the hijacking was based on what had been told her by Juanito Morden. It was not a first-hand account. While it had been admitted in court for lack of objection on the part of private respondent, the respondent Court had discretion in assigning weight to such evidence. We are bound by the conclusion of the appellate court. In a petition for review on certiorari, We are not to determine the probative value of evidence but to resolve questions of law. Secondly, the affidavit of Jesus Bascos did not dwell on how the

hijacking took place. Thirdly, while the affidavit of Juanito Morden, the truck helper in the hijacked truck, was presented as evidence in court, he himself was a witness as could be gleaned from the contents of the petition. Affidavits are not considered the best evidence if the affiants are available as witnesses. 25 The subsequent filing of the information for carnapping and robbery against the accused named in said affidavits did not necessarily mean that the contents of the affidavits were true because they were yet to be determined in the trial of the criminal cases.

The presumption of negligence was raised against petitioner. It was petitioner's burden to overcome it. Thus, contrary to her assertion, private respondent need not introduce any evidence to prove her negligence. Her own failure to adduce sufficient proof of extraordinary diligence made the presumption conclusive against her.

Having affirmed the findings of the respondent Court on the substantial issues involved, We find no reason to disturb the conclusion that the motion to lift/dissolve the writ of preliminary attachment has been rendered moot and academic by the decision on the merits.

In the light of the foregoing analysis, it is Our opinion that the petitioner's claim cannot be sustained. The petition is DISMISSED and the decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

G.R. No. 104685 March 14, 1996 SABENA BELGIAN WORLD AIRLINES, petitioner, vs. HON. COURT OF APPEALS and MA. PAULA SAN AGUSTIN, respondents.

The appeal before the Court involves the issue of an airline's liability for lost luggage. The petition for review assails the decision of the Court of Appeals, 1 dated 27 February 1992, affirming an award of damages made by the trial court in a complaint filed by private respondent against petitioner.

The factual background of the case, narrated by the trial court and reproduced at length by the appellate court, is hereunder quoted:

On August 21, 1987, plaintiff was a passenger on board Flight SN 284 of defendant airline originating from Casablanca to Brussels, Belgium on her way back to Manila. Plaintiff checked in her luggage which contained her valuables, namely: jewelries valued at $2,350.00; clothes $1,500.00 shoes/bag $150; accessories $75; luggage itself $10.00; or a total of $4,265.00, for which she was issued Tag No. 71423. She stayed overnight in Brussels and her luggage was left on board Flight SN 284.

Plaintiff arrived at Manila International Airport on September 2, 1987 and immediately submitted her Tag No. 71423 to facilitate the release of her luggage but the luggage was missing. She was advised to accomplish and submit a property Irregularity Report which she submitted and filed on the same day.

She followed up her claim on September 14, 1987 but the luggage remained to be missing.

On September 15, 1987, she filed her formal complaint with the office of Ferge Massed, defendant's Local Manager, demanding immediate attention (Exh. "A").

On September 30, 1987, on the occasion of plaintiffs following up of her luggage claim, she was furnished copies of defendant's telexes with an information that the Burssel's Office of defendant found the luggage and that they have broken the locks for identification (Exhibit "B"). Plaintiff was assured by the defendant that it has notified its Manila Office that the luggage will be shipped to Manila on October 27, 1987. But unfortunately plaintiff was informed that the luggage was lost for the second time (Exhibits "C" and "C-1").

At the time of the filing of the complaint, the luggage with its content has not been found.

Plaintiff demanded from the defendant the money value of the luggage and its contents amounting to $4,265.00 or its exchange value, but defendant refused to settle the claim.

Defendant asserts in its Answer and its evidence tend to show that while it admits that the plaintiff was a passenger on board Flight No. SN 284 with a piece of checked in luggage bearing Tag No. 71423, the loss of the luggage was due to plaintiff's sole if not contributory negligence; that she did not declare the valuable items in her checked in luggage at the flight counter when she checked in for her flight from Casablanca to

Brussels so that either the representative of the defendant at the counter would have advised her to secure an insurance on the alleged valuable items and required her to pay additional charges, or would have refused acceptance of her baggage as required by the generally accepted practices of international carriers; that Section 9(a), Article IX of General Conditions of carriage requiring passengers to collect their checked baggage at the place of stop over, plaintiff neglected to claim her baggage at the Brussels Airport; that plaintiff should have retrieved her undeclared valuables from her baggage at the Brussels Airport since her flight from Brussels to Manila will still have to visit for confirmation inasmuch as only her flight from Casablanca to Brussels was confirmed; that defendant incorporated in all Sabena Plane Tickets, including Sabena Ticket No. 082422-72502241 issued to plaintiff in Manila on August 21, 1987, a warning that "Items of value should be carried on your person" and that some carriers assume no liability for fragile, valuable or perishable articles and that further information may be obtained from the carrier for guidance;' that granting without conceding that defendant is liable, its liability is limited only to US $20.00 per kilo due to plaintiffs failure to declare a higher value on the contents of her checked in luggage and pay additional charges thereon. 2

The trial court rendered judgment ordering petitioner Sabena Belgian World Airlines to pay private respondent Ma. Paula San Agustin —

(a) . . . US $4,265.00 or its legal exchange in Philippine pesos;

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

(c) . . . P10,000.00 as exemplary damages;

(d) . . . P10,000.00 as attorney's fees; and

(e) (t)he costs of the suit. 3

Sabena appealed the decision of the Regional Trial Court to the Court of Appeals. The appellate court, in its decision of 27 February 1992, affirmed in toto the trial court's judgment.

Petitioner airline company, in contending that the alleged negligence of private respondent should be considered the primary cause for the loss of her luggage, avers that, despite her awareness that the flight ticket had been confirmed only for Casablanca and Brussels, and that her flight from Brussels to Manila had yet to be confirmed, she did not retrieve the luggage upon arrival in Brussels. Petitioner insists that private respondent, being a seasoned international traveler, must have likewise been familiar with the standard provisions contained in her flight ticket that items of value are required to be hand-carried by the passenger and that the liability of the airline for loss, delay or damage to baggage would be limited, in any event, to only US $20.00 per kilo unless a higher value is declared in advance and corresponding additional charges are paid thereon. At the Casablanca International Airport, private respondent, in checking in her luggage, evidently did not declare its contents or value. Petitioner cites Section 5(c), Article IX, of the General Conditions of Carriage, signed at Warsaw, Poland, on 02 October 1929, as amended by the Hague Protocol of 1955, generally observed by International carriers, stating, among other things, that:

Passengers shall not include in his checked baggage, and the carrier may refuse to carry as checked baggage, fragile or perishable articles, money, jewelry, precious metals, negotiable papers, securities or other valuable. 4

Fault or negligence consists in the omission of that diligence which is demanded by the nature of an obligation and corresponds with the circumstances of the person, of the time, and of the place. When the source of an obligation is derived from a contract, the mere breach or non-fulfillment of the prestation gives rise to the presumption of fault on the part of the obligor. This rule is no different in the case of common carriers in the carriage of goods which, indeed, are bound to observe not just the due diligence of a good father of a family but that of "extraordinary" care in the vigilance over the goods. The appellate court has aptly observed:

. . . Art. 1733 of the [Civil] Code provides that from the very nature of their business and by reasons of public policy, common carriers are bound to observe extraordinary diligence in the vigilance over the goods transported by them. This extraordinary responsibility, according to Art. 1736, lasts from the time the goods are unconditionally placed in the possession of and received by the carrier until they are delivered actually or constructively to the consignee or person who has the right to receive them. Art. 1737 states that the common carrier's duty to observe extraordinary diligence in the vigilance over the goods transported by them remains in full force and effect even when they are temporarily unloaded or stored in transit. And Art. 1735 establishes the presumption that if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they had observed extraordinary diligence as required in Article 1733.

The only exceptions to the foregoing extraordinary responsibility of the common carrier is when the loss, destruction, or deterioration of the goods is due to any of the following causes:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

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

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

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

The above rules remain basically unchanged even when the contract is breached by tort 6 although noncontradictory principles on quasi-delict may then be assimilated as also forming part of the governing law. Petitioner is not thus entirely off track when it has likewise raised in its defense the tort doctrine of proximate cause. Unfortunately for petitioner, however, the doctrine cannot, in this particular instance, support its case. Proximate cause is that which, in natural and continuous sequence, unbroken by any

efficient intervening cause, produces injury and without which the result would not have occurred. The exemplification by the Court in one case 7 is simple and explicit; viz:

(T)he proximate legal cause is that acting first and producing the injury, either immediately or by setting other events in motion, all constituting a natural and continuous chain of events, each having a close causal connection with its immediate predecessor, the final event in the chain immediately affecting the injury as a natural and probable result of the cause which first acted, under such circumstances that the person responsible for the first event should, as an ordinarily prudent and intelligent person, have reasonable ground to expect at the moment of his act or default that an injury to some person might probably result therefrom.

It remained undisputed that private respondent's luggage was lost while it was in the custody of petitioner. It was supposed to arrive on the same flight that private respondent took in returning to Manila on 02 September 1987. When she discovered that the luggage was missing, she promptly accomplished and filed a Property Irregularity Report. She followed up her claim on 14 September 1987, and filed, on the following day, a formal letter-complaint with petitioner. She felt relieved when, on 23 October 1987, she was advised that her luggage had finally been found, with its contents intact when examined, and that she could expect it to arrive on 27 October 1987. She then waited anxiously only to be told later that her luggage had been lost for the second time. Thus, the appellate court, given all the facts before it, sustained the trial court in finding petitioner ultimately guilty of "gross negligence" in the handling of private respondent's luggage. The "loss of said baggage not only once but twice, said the appellate court, "underscores the wanton negligence and lack of care" on the part of the carrier.

The above findings, which certainly cannot be said to be without basis, foreclose whatever rights petitioner might have had to the possible limitation of liabilities enjoyed by international air carriers under the Warsaw Convention (Convention for the Unification of Certain Rules Relating to International Carriage by Air, as amended by the Hague Protocol of 1955, the Montreal Agreement of 1966, the Guatemala Protocol of 1971 and the Montreal Protocols of 1975). In Alitalia vs. Intermediate Appellate Court, 8 now Chief Justice Andres R. Narvasa, speaking for the Court, has explained it well; he said:

The Warsaw Convention however denies to the carrier availment of the provisions which exclude or limit his liability, if the damage is caused by his wilful misconduct or by such default on his part as, in accordance with the law of the court seized of the case, is considered to be equivalent to wilful misconduct, or if the damage is (similarly) caused . . . by any agent of the carrier acting within the scope of his employment. The Hague Protocol amended the Warsaw Convention by removing the provision that if the airline took all necessary steps to avoid the damage, it could exculpate itself completely, and declaring the stated limits of liability not applicable if it is proved that the damage resulted from an act or omission of the carrier, its servants or agents, done with intent to cause damage or recklessly and with knowledge that damage would probably result. The same deletion was effected by the Montreal Agreement of 1966, with the result that a passenger could recover unlimited damages upon proof of wilful misconduct.

The Convention does not thus operate as an exclusive enumeration of the instances of an airline's liability, or as an absolute limit of the extent of that liability. Such a proposition is not borne out by the language of the Convention, as this Court has now, and at an earlier time, pointed out. Moreover, slight reflection readily leads to the conclusion that it should

be deemed a limit of liability only in those cases where the cause of the death or injury to person, or destruction, loss or damage to property or delay in its transport is not attributable to or attended by any wilful misconduct, bad faith, recklessness, or otherwise improper conduct on the part of any official or employee for which the carrier is responsible, and there is otherwise no special or extraordinary form of resulting injury. The Convention's provisions, in short, do not regulate or exclude liability for other breaches of contract by the carrier or misconduct of its officers and employees, or for some particular or exceptional type of damage. Otherwise, an air carrier would be exempt from any liability for damages in the event of its absolute refusal, in bad faith, to comply with a contract of carriage, which is absurd. Nor may it for a moment be supposed that if a member of the aircraft complement should inflict some physical injury on a passenger, or maliciously destroy or damage the latter's property, the Convention might successfully be pleaded as the sole gauge to determine the carrier's liability to the passenger. Neither may the Convention be invoked to justify the disregard of some extraordinary sort of damage resulting to a passenger and preclude recovery therefor beyond the limits set by said Convention. It is in this sense that the Convention has been applied, or ignored, depending on the peculiar facts presented by each case.

The Court thus sees no error in the preponderant application to the instant case by the appellate court, as well as by the trial court, of the usual rules on the extent of recoverable damages beyond the Warsaw limitations. Under domestic law and jurisprudence (the Philippines being the country of destination), the attendance of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier liable for all damages which can be reasonably attributed, although unforeseen, to the non-performance of the obligation, 9 including moral and exemplary damages. 10

WHEREFORE, the decision appealed from is AFFIRMED. Costs against petitioner.

SO ORDERED.