G.R. No.

138060 September 1, 2004

WILLIAM TIU, doing business under the name and style of "D’ Rough Riders," and VIRGILIO TE
LAS PIÑASpetitioners,
vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX
SURETY AND INSURANCE, INC., respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision 1 of the
Court of Appeals in CA-G.R. CV No. 54354 affirming with modification the Decision2 of the Regional Trial
Court, 7th Judicial Region, Cebu City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of
carriage, damages and attorney’s fees, and the Resolution dated February 26, 1999 denying the motion
for reconsideration thereof.

The following facts are undisputed:

At about 10:00 p.m. of March 15, 1987, the cargo truck marked "Condor Hollow Blocks and
General Merchandise" bearing plate number GBP-675 was loaded with firewood in Bogo, Cebu
and left for Cebu City. Upon reaching Sitio Aggies, Poblacion, Compostela, Cebu, just as the
truck passed over a bridge, one of its rear tires exploded. The driver, Sergio Pedrano, then
parked along the right side of the national highway and removed the damaged tire to have it
vulcanized at a nearby shop, about 700 meters away.3 Pedrano left his helper, Jose Mitante, Jr.
to keep watch over the stalled vehicle, and instructed the latter to place a spare tire six fathoms
away4 behind the stalled truck to serve as a warning for oncoming vehicles. The truck’s tail lights
were also left on. It was about 12:00 a.m., March 16, 1987.

At about 4:45 a.m., D’ Rough Riders passenger bus with plate number PBP-724 driven by Virgilio Te
Laspiñas was cruising along the national highway of Sitio Aggies, Poblacion, Compostela, Cebu. The
passenger bus was also bound for Cebu City, and had come from Maya, Daanbantayan, Cebu. Among
its passengers were the Spouses Pedro A. Arriesgado and Felisa Pepito Arriesgado, who were seated at
the right side of the bus, about three (3) or four (4) places from the front seat.

As the bus was approaching the bridge, Laspiñas saw the stalled truck, which was then about 25 meters
away.5 He applied the breaks and tried to swerve to the left to avoid hitting the truck. But it was too late;
the bus rammed into the truck’s left rear. The impact damaged the right side of the bus and left several
passengers injured. Pedro Arriesgado lost consciousness and suffered a fracture in his right colles. 6 His
wife, Felisa, was brought to the Danao City Hospital. She was later transferred to the Southern Island
Medical Center where she died shortly thereafter.7

Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of carriage, damages and
attorney’s fees before the Regional Trial Court of Cebu City, Branch 20, against the petitioners, D’ Rough
Riders bus operator William Tiu and his driver, Virgilio Te Laspiñas on May 27, 1987. The respondent
alleged that the passenger bus in question was cruising at a fast and high speed along the national road,
and that petitioner Laspiñas did not take precautionary measures to avoid the accident. 8 Thus:

6. That the accident resulted to the death of the plaintiff’s wife, Felisa Pepito Arriesgado, as
evidenced by a Certificate of Death, a xerox copy of which is hereto attached as integral part
hereof and marked as ANNEX – "A", and physical injuries to several of its passengers, including
plaintiff himself who suffered a "COLLES FRACTURE RIGHT," per Medical Certificate, a xerox
copy of which is hereto attached as integral part hereof and marked as ANNEX – "B" hereof.
 7. That due to the reckless and imprudent driving by defendant Virgilio Te Laspiñas of the said
Rough Riders passenger bus, plaintiff and his wife, Felisa Pepito Arriesgado, failed to safely
reach their destination which was Cebu City, the proximate cause of which was defendant-
driver’s failure to observe utmost diligence required of a very cautious person under all
circumstances.

8. That defendant William Tiu, being the owner and operator of the said Rough Riders passenger
bus which figured in the said accident, wherein plaintiff and his wife were riding at the time of the
accident, is therefore directly liable for the breach of contract of carriage for his failure to transport
plaintiff and his wife safely to their place of destination which was Cebu City, and which failure in
his obligation to transport safely his passengers was due to and in consequence of his failure to
exercise the diligence of a good father of the family in the selection and supervision of his
employees, particularly defendant-driver Virgilio Te Laspiñas.9

The respondent prayed that judgment be rendered in his favor and that the petitioners be condemned to
pay the following damages:

1). To pay to plaintiff, jointly and severally, the amount of ₱30,000.00 for the death and untimely
demise of plaintiff’s wife, Felisa Pepito Arriesgado;

2). To pay to plaintiff, jointly and severally, the amount of ₱38,441.50, representing actual
expenses incurred by the plaintiff in connection with the death/burial of plaintiff’s wife;

3). To pay to plaintiff, jointly and severally, the amount of ₱1,113.80, representing
medical/hospitalization expenses incurred by plaintiff for the injuries sustained by him;

4). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 for moral damages;

5). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 by way of exemplary
damages;

6). To pay to plaintiff, jointly and severally, the amount of ₱20,000.00 for attorney’s fees;

7). To pay to plaintiff, jointly and severally, the amount of ₱5,000.00 for litigation expenses.

PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES IN LAW AND
EQUITY.10

The petitioners, for their part, filed a Third-Party Complaint11 on August 21, 1987 against the following:
respondent Philippine Phoenix Surety and Insurance, Inc. (PPSII), petitioner Tiu’s insurer; respondent
Benjamin Condor, the registered owner of the cargo truck; and respondent Sergio Pedrano, the driver of
the truck. They alleged that petitioner Laspiñas was negotiating the uphill climb along the national
highway of Sitio Aggies, Poblacion, Compostela, in a moderate and normal speed. It was further alleged
that the truck was parked in a slanted manner, its rear portion almost in the middle of the highway, and
that no early warning device was displayed. Petitioner Laspiñas promptly applied the brakes and swerved
to the left to avoid hitting the truck head-on, but despite his efforts to avoid damage to property and
physical injuries on the passengers, the right side portion of the bus hit the cargo truck’s left rear. The
petitioners further alleged, thus:

5. That the cargo truck mentioned in the aforequoted paragraph is owned and registered in the
name of the third-party defendant Benjamin Condor and was left unattended by its driver Sergio
Pedrano, one of the third-party defendants, at the time of the incident;
 6. That third-party defendant Sergio Pedrano, as driver of the cargo truck with marked (sic)
"Condor Hollow Blocks & General Merchandise," with Plate No. GBP-675 which was recklessly
and imprudently parked along the national highway of Compostela, Cebu during the vehicular
accident in question, and third-party defendant Benjamin Condor, as the registered owner of the
cargo truck who failed to exercise due diligence in the selection and supervision of third-party
defendant Sergio Pedrano, are jointly and severally liable to the third-party plaintiffs for whatever
liability that may be adjudged against said third-party plaintiffs or are directly liable of (sic) the
alleged death of plaintiff’s wife;

7. That in addition to all that are stated above and in the answer which are intended to show
reckless imprudence on the part of the third-party defendants, the third-party plaintiffs hereby
declare that during the vehicular accident in question, third-party defendant was clearly violating
Section 34, par. (g) of the Land Transportation and Traffic Code…

10. That the aforesaid passenger bus, owned and operated by third-party plaintiff William Tiu, is
covered by a common carrier liability insurance with Certificate of Cover No. 054940 issued by
Philippine Phoenix Surety and Insurance, Inc., Cebu City Branch, in favor of third-party plaintiff
William Tiu which covers the period from July 22, 1986 to July 22, 1987 and that the said
insurance coverage was valid, binding and subsisting during the time of the aforementioned
incident (Annex "A" as part hereof);

11. That after the aforesaid alleged incident, third-party plaintiff notified third-party defendant
Philippine Phoenix Surety and Insurance, Inc., of the alleged incident hereto mentioned, but to no
avail;

12. That granting, et arguendo et arguendi, if herein third-party plaintiffs will be adversely
adjudged, they stand to pay damages sought by the plaintiff and therefore could also look up to
the Philippine Phoenix Surety and Insurance, Inc., for contribution, indemnification and/or
reimbursement of any liability or obligation that they might [be] adjudged per insurance coverage
duly entered into by and between third-party plaintiff William Tiu and third-party defendant
Philippine Phoenix Surety and Insurance, Inc.;…12

The respondent PPSII, for its part, admitted that it had an existing contract with petitioner Tiu, but averred
that it had already attended to and settled the claims of those who were injured during the incident. 13 It
could not accede to the claim of respondent Arriesgado, as such claim was way beyond the scheduled
indemnity as contained in the contract of insurance.14

After the parties presented their respective evidence, the trial court ruled in favor of respondent
Arriesgado. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff as

against defendant William Tiu ordering the latter to pay the plaintiff the following amounts:

1 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as moral damages;

2 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as exemplary damages;

3 - The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-ONE PESOS

(₱38,441.00) as actual damages;

4 - The sum of TWENTY THOUSAND PESOS (₱20,000.00) as attorney’s fees;

 5 - The sum of FIVE THOUSAND PESOS (₱5,000.00) as costs of suit;

SO ORDERED.15

According to the trial court, there was no dispute that petitioner William Tiu was engaged in business as a
common carrier, in view of his admission that D’ Rough Rider passenger bus which figured in the
accident was owned by him; that he had been engaged in the transportation business for 25 years with a
sole proprietorship; and that he owned 34 buses. The trial court ruled that if petitioner Laspiñas had not
been driving at a fast pace, he could have easily swerved to the left to avoid hitting the truck, thus,
averting the unfortunate incident. It then concluded that petitioner Laspiñas was negligent.

The trial court also ruled that the absence of an early warning device near the place where the truck was
parked was not sufficient to impute negligence on the part of respondent Pedrano, since the tail lights of
the truck were fully on, and the vicinity was well lighted by street lamps. 16 It also found that the testimony
of petitioner Tiu, that he based the selection of his driver Laspiñas on efficiency and in-service training,
and that the latter had been so far an efficient and good driver for the past six years of his employment,
was insufficient to prove that he observed the diligence of a good father of a family in the selection and
supervision of his employees.

After the petitioner’s motion for reconsideration of the said decision was denied, the petitioners elevated
the case to the Court of Appeals on the following issues:

I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS RECKLESS AND

IMPRUDENT WHEN HE PARKED THE CARGO TRUCK IN AN OBLIQUE MANNER;

II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND SEVERALLY LIABLE
DIRECTLY TO PLAINTIFF-APPELLEE OR TO DEFENDANTS-APPELLANTS FOR WHATEVER
LIABILITY THAT MAY BE ADJUDGED TO THE SAID DEFENDANTS-APPELLANTS;

III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIÑAS WAS GUILTY OF GROSS

NEGLIGENCE;

IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD EXERCISED THE DUE

DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF
HIS DRIVERS;

V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-APPELLANT WILLIAM TIU

IS LIABLE TO PLAINTIFF-APPELLEE, WHETHER THERE IS LEGAL AND FACTUAL BASIS IN
AWARDING EXCESSIVE MORAL DAMAGES, EX[E]MPLARY DAMAGES, ATTORNEY’S FEES
AND LITIGATION EXPENSES TO PLAINTIFF-APPELLEE;

VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX SURETY AND

INSURANCE, INC. IS LIABLE TO DEFENDANT- APPELLANT WILLIAM TIU.17

The appellate court rendered judgment affirming the trial court’s decision with the modification that the
awards for moral and exemplary damages were reduced to ₱25,000. The dispositive portion reads:

WHEREFORE, the appealed Decision dated November 6, 1995 is hereby MODIFIED such that
the awards for moral and exemplary damages are each reduced to ₱25,000.00 or a total of
₱50,000.00 for both. The judgment is AFFIRMED in all other respects.

SO ORDERED.18
According to the appellate court, the action of respondent Arriesgado was based not on quasi-delict but
on breach of contract of carriage. As a common carrier, it was incumbent upon petitioner Tiu to prove that
extraordinary diligence was observed in ensuring the safety of passengers during transportation. Since
the latter failed to do so, he should be held liable for respondent Arriesgado’s claim. The CA also ruled
that no evidence was presented against the respondent PPSII, and as such, it could not be held liable for
respondent Arriesgado’s claim, nor for contribution, indemnification and/or reimbursement in case the
petitioners were adjudged liable.

The petitioners now come to this Court and ascribe the following errors committed by the appellate court:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING RESPONDENTS

BENJAMIN CONDOR AND SERGIO PEDRANO GUILTY OF NEGLIGENCE AND HENCE,
LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR TO PETITIONERS FOR WHATEVER
LIABILITY THAT MAY BE ADJUDGED AGAINST THEM.

II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS GUILTY OF

NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A. ARRIESGADO.

III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONER WILLIAM TIU
LIABLE FOR EXEMPLARY DAMAGES, ATTORNEY’S FEES AND LITIGATION EXPENSES.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT

PHILIPPINE PHOENIX SURETY AND INSURANCE, INC. LIABLE TO RESPONDENT PEDRO
A. ARRIESGADO OR TO PETITIONER WILLIAM TIU.19

According to the petitioners, the appellate court erred in failing to appreciate the absence of an early
warning device and/or built-in reflectors at the front and back of the cargo truck, in clear violation of
Section 34, par. (g) of the Land Transportation and Traffic Code. They aver that such violation is only a
proof of respondent Pedrano’s negligence, as provided under Article 2185 of the New Civil Code. They
also question the appellate court’s failure to take into account that the truck was parked in an oblique
manner, its rear portion almost at the center of the road. As such, the proximate cause of the incident was
the gross recklessness and imprudence of respondent Pedrano, creating the presumption of negligence
on the part of respondent Condor in supervising his employees, which presumption was not rebutted. The
petitioners then contend that respondents Condor and Pedrano should be held jointly and severally liable
to respondent Arriesgado for the payment of the latter’s claim.

The petitioners, likewise, aver that expert evidence should have been presented to prove that petitioner
Laspiñas was driving at a very fast speed, and that the CA could not reach such conclusion by merely
considering the damages on the cargo truck. It was also pointed out that petitioner Tiu presented
evidence that he had exercised the diligence of a good father of a family in the selection and supervision
of his drivers.

The petitioners further allege that there is no legal and factual basis to require petitioner Tiu to pay
exemplary damages as no evidence was presented to show that the latter acted in a fraudulent, reckless
and oppressive manner, or that he had an active participation in the negligent act of petitioner Laspiñas.

Finally, the petitioners contend that respondent PPSII admitted in its answer that while it had attended to
and settled the claims of the other injured passengers, respondent Arriesgado’s claim remained unsettled
as it was beyond the scheduled indemnity under the insurance contract. The petitioners argue that said
respondent PPSII should have settled the said claim in accordance with the scheduled indemnity instead
of just denying the same.

On the other hand, respondent Arriesgado argues that two of the issues raised by the petitioners involved
questions of fact, not reviewable by the Supreme Court: the finding of negligence on the part of the
petitioners and their liability to him; and the award of exemplary damages, attorney’s fees and litigation
expenses in his favor. Invoking the principle of equity and justice, respondent Arriesgado pointed out that
if there was an error to be reviewed in the CA decision, it should be geared towards the restoration of the
moral and exemplary damages to ₱50,000 each, or a total of ₱100,000 which was reduced by the Court
of Appeals to ₱25,000 each, or a total of only ₱50,000.

Respondent Arriesgado also alleged that respondents Condor and Pedrano, and respondent Phoenix
Surety, are parties with whom he had no contract of carriage, and had no cause of action against. It was
pointed out that only the petitioners needed to be sued, as driver and operator of the ill-fated bus, on
account of their failure to bring the Arriesgado Spouses to their place of destination as agreed upon in the
contract of carriage, using the utmost diligence of very cautious persons with due regard for all
circumstances.

Respondents Condor and Pedrano point out that, as correctly ruled by the Court of Appeals, the
proximate cause of the unfortunate incident was the fast speed at which petitioner Laspiñas was driving
the bus owned by petitioner Tiu. According to the respondents, the allegation that the truck was not
equipped with an early warning device could not in any way have prevented the incident from happening.
It was also pointed out that respondent Condor had always exercised the due diligence required in the
selection and supervision of his employees, and that he was not a party to the contract of carriage
between the petitioners and respondent Arriesgado.

Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu, it settled all the
claims of those injured in accordance with the insurance contract. It further avers that it did not deny
respondent Arriesgado’s claim, and emphasizes that its liability should be within the scheduled limits of
indemnity under the said contract. The respondent concludes that while it is true that insurance contracts
are contracts of indemnity, the measure of the insurer’s liability is determined by the insured’s compliance
with the terms thereof.

The Court’s Ruling

At the outset, it must be stressed that this Court is not a trier of facts. 20 Factual findings of the Court of
Appeals are final and may not be reviewed on appeal by this Court, except when the lower court and the
CA arrived at diverse factual findings.21 The petitioners in this case assail the finding of both the trial and
the appellate courts that petitioner Laspiñas was driving at a very fast speed before the bus owned by
petitioner Tiu collided with respondent Condor’s stalled truck. This is clearly one of fact, not reviewable by
the Court in a petition for review under Rule 45.22

On this ground alone, the petition is destined to fail.

However, considering that novel questions of law are likewise involved, the Court resolves to examine
and rule on the merits of the case.

Petitioner Laspiñas
Was negligent in driving
The Ill-fated bus

In his testimony before the trial court, petitioner Laspiñas claimed that he was traversing the two-lane
road at Compostela, Cebu at a speed of only forty (40) to fifty (50) kilometers per hour before the incident
occurred.23 He also admitted that he saw the truck which was parked in an "oblique position" at about 25
meters before impact,24and tried to avoid hitting it by swerving to the left. However, even in the absence
of expert evidence, the damage sustained by the truck 25 itself supports the finding of both the trial court
and the appellate court, that the D’ Rough Rider bus driven by petitioner Laspiñas was traveling at a fast
pace. Since he saw the stalled truck at a distance of 25 meters, petitioner Laspiñas had more than
enough time to swerve to his left to avoid hitting it; that is, if the speed of the bus was only 40 to 50
kilometers per hour as he claimed. As found by the Court of Appeals, it is easier to believe that petitioner
Laspiñas was driving at a very fast speed, since at 4:45 a.m., the hour of the accident, there were no
oncoming vehicles at the opposite direction. Petitioner Laspiñas could have swerved to the left lane with
proper clearance, and, thus, could have avoided the truck.26 Instinct, at the very least, would have
prompted him to apply the breaks to avert the impending disaster which he must have foreseen when he
caught sight of the stalled truck. As we had occasion to reiterate:

A man must use common sense, and exercise due reflection in all his acts; it is his duty to be
cautious, careful and prudent, if not from instinct, then through fear of recurring punishment. He is
responsible for such results as anyone might foresee and for acts which no one would have
performed except through culpable abandon. Otherwise, his own person, rights and property, and
those of his fellow beings, would ever be exposed to all manner of danger and injury. 27

We agree with the following findings of the trial court, which were affirmed by the CA on appeal:

A close study and evaluation of the testimonies and the documentary proofs submitted by the
parties which have direct bearing on the issue of negligence, this Court as shown by
preponderance of evidence that defendant Virgilio Te Laspiñas failed to observe extraordinary
diligence as a driver of the common carrier in this case. It is quite hard to accept his version of the
incident that he did not see at a reasonable distance ahead the cargo truck that was parked when
the Rough Rider [Bus] just came out of the bridge which is on an (sic) [more] elevated position
than the place where the cargo truck was parked. With its headlights fully on, defendant driver of
the Rough Rider was in a vantage position to see the cargo truck ahead which was parked and
he could just easily have avoided hitting and bumping the same by maneuvering to the left
without hitting the said cargo truck. Besides, it is (sic) shown that there was still much room or
space for the Rough Rider to pass at the left lane of the said national highway even if the cargo
truck had occupied the entire right lane thereof. It is not true that if the Rough Rider would
proceed to pass through the left lane it would fall into a canal considering that there was much
space for it to pass without hitting and bumping the cargo truck at the left lane of said national
highway. The records, further, showed that there was no incoming vehicle at the opposite lane of
the national highway which would have prevented the Rough Rider from not swerving to its left in
order to avoid hitting and bumping the parked cargo truck. But the evidence showed that the
Rough Rider instead of swerving to the still spacious left lane of the national highway plowed
directly into the parked cargo truck hitting the latter at its rear portion; and thus, the (sic) causing
damages not only to herein plaintiff but to the cargo truck as well. 28

Indeed, petitioner Laspiñas’ negligence in driving the bus is apparent in the records. By his own
admission, he had just passed a bridge and was traversing the highway of Compostela, Cebu at a speed
of 40 to 50 kilometers per hour before the collision occurred. The maximum speed allowed by law on a
bridge is only 30 kilometers per hour.29And, as correctly pointed out by the trial court, petitioner Laspiñas
also violated Section 35 of the Land Transportation and Traffic Code, Republic Act No. 4136, as
amended:1avvphil.net

Sec. 35. Restriction as to speed. – (a) Any person driving a motor vehicle on a highway shall
drive the same at a careful and prudent speed, not greater nor less than is reasonable and
proper, having due regard for the traffic, the width of the highway, and or any other condition then
and there existing; and no person shall drive any motor vehicle upon a highway at such speed as
to endanger the life, limb and property of any person, nor at a speed greater than will permit him
to bring the vehicle to a stop within the assured clear distance ahead. 30

Under Article 2185 of the Civil Code, a person driving a vehicle is presumed negligent if at the time of the
mishap, he was violating any traffic regulation.31
Petitioner Tiu failed to
Overcome the presumption
Of negligence against him as
One engaged in the business
Of common carriage

The rules which common carriers should observe as to the safety of their passengers are set forth in the
Civil Code, Articles 1733,32 175533 and 1756.34 In this case, respondent Arriesgado and his deceased wife
contracted with petitioner Tiu, as owner and operator of D’ Rough Riders bus service, for transportation
from Maya, Daanbantayan, Cebu, to Cebu City for the price of ₱18.00.35 It is undisputed that the
respondent and his wife were not safely transported to the destination agreed upon. In actions for breach
of contract, only the existence of such contract, and the fact that the obligor, in this case the common
carrier, failed to transport his passenger safely to his destination are the matters that need to be
proved.36 This is because under the said contract of carriage, the petitioners assumed the express
obligation to transport the respondent and his wife to their destination safely and to observe extraordinary
diligence with due regard for all circumstances.37 Any injury suffered by the passengers in the course
thereof is immediately attributable to the negligence of the carrier. 38 Upon the happening of the accident,
the presumption of negligence at once arises, and it becomes the duty of a common carrier to prove that
he observed extraordinary diligence in the care of his passengers.39 It must be stressed that in requiring
the highest possible degree of diligence from common carriers and in creating a presumption of
negligence against them, the law compels them to curb the recklessness of their drivers.40

While evidence may be submitted to overcome such presumption of negligence, it must be shown that
the carrier observed the required extraordinary diligence, which means that the carrier must show the
utmost diligence of very cautious persons as far as human care and foresight can provide, or that the
accident was caused by fortuitous event.41 As correctly found by the trial court, petitioner Tiu failed to
conclusively rebut such presumption. The negligence of petitioner Laspiñas as driver of the passenger
bus is, thus, binding against petitioner Tiu, as the owner of the passenger bus engaged as a common
carrier.42

The Doctrine of
Last Clear Chance
Is Inapplicable in the
Case at Bar

Contrary to the petitioner’s contention, the principle of last clear chance is inapplicable in the instant case,
as it only applies in a suit between the owners and drivers of two colliding vehicles. It does not arise
where a passenger demands responsibility from the carrier to enforce its contractual obligations, for it
would be inequitable to exempt the negligent driver and its owner on the ground that the other driver was
likewise guilty of negligence.43 The common law notion of last clear chance permitted courts to grant
recovery to a plaintiff who has also been negligent provided that the defendant had the last clear chance
to avoid the casualty and failed to do so. Accordingly, it is difficult to see what role, if any, the common
law of last clear chance doctrine has to play in a jurisdiction where the common law concept of
contributory negligence as an absolute bar to recovery by the plaintiff, has itself been rejected, as it has
been in Article 2179 of the Civil Code.44

Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgado’s wife due to the
negligence of petitioner Laspiñas, his employee, on this score.

Respondents Pedrano and

Condor were likewise
Negligent
In Phoenix Construction, Inc. v. Intermediate Appellate Court,45 where therein respondent Dionisio
sustained injuries when his vehicle rammed against a dump truck parked askew, the Court ruled that the
improper parking of a dump truck without any warning lights or reflector devices created an unreasonable
risk for anyone driving within the vicinity, and for having created such risk, the truck driver must be held
responsible. In ruling against the petitioner therein, the Court elucidated, thus:

… In our view, Dionisio’s negligence, although later in point of time than the truck driver’s
negligence, and therefore closer to the accident, was not an efficient intervening or independent
cause. What the petitioners describe as an "intervening cause" was no more than a foreseeable
consequence of the risk created by the negligent manner in which the truck driver had parked the
dump truck. In other words, the petitioner truck driver owed a duty to private respondent Dionisio
and others similarly situated not to impose upon them the very risk the truck driver had created.
Dionisio’s negligence was not that of an independent and overpowering nature as to cut, as it
were, the chain of causation in fact between the improper parking of the dump truck and the
accident, nor to sever the juris vinculum of liability. …

We hold that private respondent Dionisio’s negligence was "only contributory," that the
"immediate and proximate cause" of the injury remained the truck driver’s "lack of due care."… 46

In this case, both the trial and the appellate courts failed to consider that respondent Pedrano was also
negligent in leaving the truck parked askew without any warning lights or reflector devices to alert
oncoming vehicles, and that such failure created the presumption of negligence on the part of his
employer, respondent Condor, in supervising his employees properly and adequately. As we ruled in
Poblete v. Fabros:47

It is such a firmly established principle, as to have virtually formed part of the law itself, that the
negligence of the employee gives rise to the presumption of negligence on the part of the
employer. This is the presumed negligence in the selection and supervision of employee. The
theory of presumed negligence, in contrast with the American doctrine of respondeat superior,
where the negligence of the employee is conclusively presumed to be the negligence of the
employer, is clearly deducible from the last paragraph of Article 2180 of the Civil Code which
provides that the responsibility therein mentioned shall cease if the employers prove that they
observed all the diligence of a good father of a family to prevent damages. …48

The petitioners were correct in invoking respondent Pedrano’s failure to observe Article IV, Section 34(g)
of the Rep. Act No. 4136, which provides:1avvphil.net

(g) Lights when parked or disabled. – Appropriate parking lights or flares visible one hundred
meters away shall be displayed at a corner of the vehicle whenever such vehicle is parked on
highways or in places that are not well-lighted or is placed in such manner as to endanger
passing traffic.

The manner in which the truck was parked clearly endangered oncoming traffic on both sides,
considering that the tire blowout which stalled the truck in the first place occurred in the wee hours of the
morning. The Court can only now surmise that the unfortunate incident could have been averted had
respondent Condor, the owner of the truck, equipped the said vehicle with lights, flares, or, at the very
least, an early warning device.49 Hence, we cannot subscribe to respondents Condor and Pedrano’s
claim that they should be absolved from liability because, as found by the trial and appellate courts, the
proximate cause of the collision was the fast speed at which petitioner Laspiñas drove the bus. To accept
this proposition would be to come too close to wiping out the fundamental principle of law that a man
must respond for the foreseeable consequences of his own negligent act or omission. Indeed, our law on
quasi-delicts seeks to reduce the risks and burdens of living in society and to allocate them among its
members. To accept this proposition would be to weaken the very bonds of society.50

The Liability of
Respondent PPSII
as Insurer

The trial court in this case did not rule on the liability of respondent PPSII, while the appellate court ruled
that, as no evidence was presented against it, the insurance company is not liable.

A perusal of the records will show that when the petitioners filed the Third-Party Complaint against
respondent PPSII, they failed to attach a copy of the terms of the insurance contract itself. Only
Certificate of Cover No. 05494051 issued in favor of "Mr. William Tiu, Lahug, Cebu City" signed by Cosme
H. Boniel was appended to the third-party complaint. The date of issuance, July 22, 1986, the period of
insurance, from July 22, 1986 to July 22, 1987, as well as the following items, were also indicated therein:

SCHEDULED VEHICLE

MODEL MAKE TYPE OF COLOR BLT FILE NO.

Isuzu Forward BODY blue mixed
Bus

PLATE SERIAL/CHASSIS MOTOR NO. AUTHORIZED UNLADEN

NO. NO. 677836 CAPACITY WEIGHT
PBP-724 SER450-1584124 50 6 Cyls. Kgs.

SECTION 1/11 *LIMITS OF LIABILITY PREMIUMS

₱50,000.00 PAID
A. THIRD PARTY LIABILITY ₱540.0052

B. PASSENGER LIABILITY Per Person Per Accident

₱12,000.00 ₱50,000

In its Answer53 to the Third-Party Complaint, the respondent PPSII admitted the existence of the contract
of insurance, in view of its failure to specifically deny the same as required under then Section 8(a), Rule
8 of the Rules of Court,54 which reads:

Sec. 8. How to contest genuineness of such documents. When an action or defense is founded
upon a written instrument copied in or attached to the corresponding pleading as provided in the
preceding section, the genuineness and due execution of the instrument shall be deemed
admitted unless the adverse party, under oath, specifically denies them, and sets forth what he
claims to be the facts; but the requirement of an oath does not apply when the adverse party
does not appear to be a party to the instrument or when compliance with an order for inspection
of the original instrument is refused.

In fact, respondent PPSII did not dispute the existence of such contract, and admitted that it was liable
thereon. It claimed, however, that it had attended to and settled the claims of those injured during the
incident, and set up the following as special affirmative defenses:

Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates and
incorporates by way of reference the preceding paragraphs and further states THAT:-
 8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and Neptali
Palces who sustained injuries during the incident in question. In fact, it settled financially
their claims per vouchers duly signed by them and they duly executed Affidavit[s] of
Desistance to that effect, xerox copies of which are hereto attached as Annexes 1, 2, 3,
4, 5, and 6 respectively;

9. With respect to the claim of plaintiff, herein answering third party defendant through its
authorized insurance adjuster attended to said claim. In fact, there were negotiations to
that effect. Only that it cannot accede to the demand of said claimant considering that the
claim was way beyond the scheduled indemnity as per contract entered into with third
party plaintiff William Tiu and third party defendant (Philippine Phoenix Surety and
Insurance, Inc.). Third party Plaintiff William Tiu knew all along the limitation as earlier
stated, he being an old hand in the transportation business; 55…

Considering the admissions made by respondent PPSII, the existence of the insurance contract and the
salient terms thereof cannot be dispatched. It must be noted that after filing its answer, respondent PPSII
no longer objected to the presentation of evidence by respondent Arriesgado and the insured petitioner
Tiu. Even in its Memorandum 56 before the Court, respondent PPSII admitted the existence of the
contract, but averred as follows:

Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification and/or
reimbursement. This has no basis under the contract. Under the contract, PPSII will pay all sums
necessary to discharge liability of the insured subject to the limits of liability but not to exceed the
limits of liability as so stated in the contract. Also, it is stated in the contract that in the event of
accident involving indemnity to more than one person, the limits of liability shall not exceed the
aggregate amount so specified by law to all persons to be indemnified. 57

As can be gleaned from the Certificate of Cover, such insurance contract was issued pursuant to the
Compulsory Motor Vehicle Liability Insurance Law. It was expressly provided therein that the limit of the
insurer’s liability for each person was ₱12,000, while the limit per accident was pegged at ₱50,000. An
insurer in an indemnity contract for third party liability is directly liable to the injured party up to the extent
specified in the agreement but it cannot be held solidarily liable beyond that amount. 58 The respondent
PPSII could not then just deny petitioner Tiu’s claim; it should have paid ₱12,000 for the death of Felisa
Arriesgado,59 and respondent Arriesgado’s hospitalization expenses of ₱1,113.80, which the trial court
found to have been duly supported by receipts. The total amount of the claims, even when added to that
of the other injured passengers which the respondent PPSII claimed to have settled,60 would not exceed
the ₱50,000 limit under the insurance agreement.

Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended to
provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a
result of the negligent operation and use of motor vehicles. The victims and/or their dependents are
assured of immediate financial assistance, regardless of the financial capacity of motor vehicle
owners.61 As the Court, speaking through Associate Justice Leonardo A. Quisumbing, explained in
Government Service Insurance System v. Court of Appeals:62

However, although the victim may proceed directly against the insurer for indemnity, the third
party liability is only up to the extent of the insurance policy and those required by law. While it is
true that where the insurance contract provides for indemnity against liability to third persons, and
such persons can directly sue the insurer, the direct liability of the insurer under indemnity
contracts against third party liability does not mean that the insurer can be held liable in solidum
with the insured and/or the other parties found at fault. For the liability of the insurer is based on
contract; that of the insured carrier or vehicle owner is based on tort. …
 Obviously, the insurer could be held liable only up to the extent of what was provided for by the
contract of insurance, in accordance with the CMVLI law. At the time of the incident, the schedule
of indemnities for death and bodily injuries, professional fees and other charges payable under a
CMVLI coverage was provided for under the Insurance Memorandum Circular (IMC) No. 5-78
which was approved on November 10, 1978. As therein provided, the maximum indemnity for
death was twelve thousand (₱12,000.00) pesos per victim. The schedules for medical expenses
were also provided by said IMC, specifically in paragraphs (C) to (G). 63

Damages to be
Awarded

The trial court correctly awarded moral damages in the amount of ₱50,000 in favor of respondent
Arriesgado. The award of exemplary damages by way of example or correction of the public good, 64 is
likewise in order. As the Court ratiocinated in Kapalaran Bus Line v. Coronado: 65

…While the immediate beneficiaries of the standard of extraordinary diligence are, of course, the
passengers and owners of cargo carried by a common carrier, they are not the only persons that
the law seeks to benefit. For if common carriers carefully observed the statutory standard of
extraordinary diligence in respect of their own passengers, they cannot help but simultaneously
benefit pedestrians and the passengers of other vehicles who are equally entitled to the safe and
convenient use of our roads and highways. The law seeks to stop and prevent the slaughter and
maiming of people (whether passengers or not) on our highways and buses, the very size and
power of which seem to inflame the minds of their drivers. Article 2231 of the Civil Code explicitly
authorizes the imposition of exemplary damages in cases of quasi-delicts "if the defendant acted
with gross negligence."…66

The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa Arriesgado, is entitled to
indemnity in the amount of ₱50,000.00.67

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and
severally liable for said amount, conformably with the following pronouncement of the Court in Fabre, Jr.
vs. Court of Appeals:68

The same rule of liability was applied in situations where the negligence of the driver of the bus
on which plaintiff was riding concurred with the negligence of a third party who was the driver of
another vehicle, thus causing an accident. In Anuran v. Buño, Batangas Laguna Tayabas Bus
Co. v. Intermediate Appellate Court, and Metro Manila Transit Corporation v. Court of Appeals,
the bus company, its driver, the operator of the other vehicle and the driver of the vehicle were
jointly and severally held liable to the injured passenger or the latter’s heirs. The basis of this
allocation of liability was explained in Viluan v. Court of Appeals, thus:

"Nor should it make difference that the liability of petitioner [bus owner] springs from
contract while that of respondents [owner and driver of other vehicle] arises from quasi-
delict. As early as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in
case of injury to a passenger due to the negligence of the driver of the bus on which he
was riding and of the driver of another vehicle, the drivers as well as the owners of the
two vehicles are jointly and severally liable for damages. Some members of the Court,
though, are of the view that under the circumstances they are liable on quasi-delict."69

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court
of Appeals is AFFIRMED with MODIFICATIONS:
 (1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner William Tiu are
ORDERED to pay, jointly and severally, respondent Pedro A. Arriesgado the total amount of
₱13,113.80;

(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are ORDERED to
pay, jointly and severally, respondent Pedro A. Arriesgado ₱50,000.00 as indemnity; ₱26,441.50
as actual damages; ₱50,000.00 as moral damages; ₱50,000.00 as exemplary damages; and
₱20,000.00 as attorney’s fees.

SO ORDERED.

G.R. No. 144274 September 20, 2004

NOSTRADAMUS VILLANUEVA, petitioner,

vs.
PRISCILLA R. DOMINGO and LEANDRO LUIS R. DOMINGO, respondents.

DECISION

CORONA, J.:

This is a petition to review the decision1 of the Court of Appeals in CA-G.R. CV No. 52203 affirming in
turn the decision of the trial court finding petitioner liable to respondent for damages. The dispositive
portion read:

WHEREFORE, the appealed decision is hereby AFFIRMED except the award of attorney’s fees
including appearance fees which is DELETED.

SO ORDERED.2

The facts of the case, as summarized by the Court of Appeals, are as follows:
 [Respondent] Priscilla R. Domingo is the registered owner of a silver Mitsubishi Lancer Car model
1980 bearing plate No. NDW 781 ’91 with [co-respondent] Leandro Luis R. Domingo as
authorized driver. [Petitioner] Nostradamus Villanueva was then the registered "owner" of a green
Mitsubishi Lancer bearing Plate No. PHK 201 ’91.

On 22 October 1991 at about 9:45 in the evening, following a green traffic light, [respondent]
Priscilla Domingo’s silver Lancer car with Plate No. NDW 781 ’91 then driven by [co-respondent]
Leandro Luis R. Domingo was cruising along the middle lane of South Superhighway at moderate
speed from north to south. Suddenly, a green Mitsubishi Lancer with plate No. PHK 201 ’91
driven by Renato Dela Cruz Ocfemia darted from Vito Cruz Street towards the South
Superhighway directly into the path of NDW 781 ’91 thereby hitting and bumping its left front
portion. As a result of the impact, NDW 781 ’91 hit two (2) parked vehicles at the roadside, the
second hitting another parked car in front of it.

Per Traffic Accident Report prepared by Traffic Investigator Pfc. Patrocinio N. Acido, Renato dela
Cruz Ocfemia was driving with expired license and positive for alcoholic breath. Hence, Manila
Assistant City Prosecutor Oscar A. Pascua recommended the filing of information for reckless
imprudence resulting to (sic) damage to property and physical injuries.

The original complaint was amended twice: first, impleading Auto Palace Car Exchange as
commercial agent and/or buyer-seller and second, impleading Albert Jaucian as principal
defendant doing business under the name and style of Auto Palace Car Exchange.

Except for Ocfemia, all the defendants filed separate answers to the complaint. [Petitioner]
Nostradamus Villanueva claimed that he was no longer the owner of the car at the time of the
mishap because it was swapped with a Pajero owned by Albert Jaucian/Auto Palace Car
Exchange. For her part, Linda Gonzales declared that her presence at the scene of the accident
was upon the request of the actual owner of the Mitsubishi Lancer (PHK 201 ’91) [Albert Jaucian]
for whom she had been working as agent/seller. On the other hand, Auto Palace Car Exchange
represented by Albert Jaucian claimed that he was not the registered owner of the car. Moreover,
it could not be held subsidiary liable as employer of Ocfemia because the latter was off-duty as
utility employee at the time of the incident. Neither was Ocfemia performing a duty related to his
employment.3

After trial, the trial court found petitioner liable and ordered him to pay respondent actual, moral and
exemplary damages plus appearance and attorney’s fees:

WHEREFORE, judgment is hereby rendered for the plaintiffs, ordering Nostradamus Villanueva
to pay the amount of ₱99,580 as actual damages, ₱25,000.00 as moral damages, ₱25,000.00 as
exemplary damages and attorney’s fees in the amount of ₱10,000.00 plus appearance fees of
₱500.00 per hearing with legal interest counted from the date of judgment. In conformity with the
law on equity and in accordance with the ruling in First Malayan Lending and Finance Corporation
vs. Court of Appeals (supra), Albert Jaucian is hereby ordered to indemnify Nostradamus
Villanueva for whatever amount the latter is hereby ordered to pay under the judgment.

SO ORDERED.4

The CA upheld the trial court’s decision but deleted the award for appearance and attorney’s fees
because the justification for the grant was not stated in the body of the decision. Thus, this petition for
review which raises a singular issue:

MAY THE REGISTERED OWNER OF A MOTOR VEHICLE BE HELD LIABLE FOR DAMAGES
ARISING FROM A VEHICULAR ACCIDENT INVOLVING HIS MOTOR VEHICLE WHILE BEING
 OPERATED BY THE EMPLOYEE OF ITS BUYER WITHOUT THE LATTER’S CONSENT AND
KNOWLEDGE?5

Yes.

We have consistently ruled that the registered owner of any vehicle is directly and primarily responsible to
the public and third persons while it is being operated. 6 The rationale behind such doctrine was explained
way back in 1957 in Erezo vs. Jepte7:

The principle upon which this doctrine is based is that in dealing with vehicles registered under the Public
Service Law, the public has the right to assume or presume that the registered owner is the actual owner
thereof, for it would be difficult for the public to enforce the actions that they may have for injuries caused
to them by the vehicles being negligently operated if the public should be required to prove who the actual
owner is. How would the public or third persons know against whom to enforce their rights in case of
subsequent transfers of the vehicles? We do not imply by his doctrine, however, that the registered owner
may not recover whatever amount he had paid by virtue of his liability to third persons from the person to
whom he had actually sold, assigned or conveyed the vehicle.

Under the same principle the registered owner of any vehicle, even if not used for a public
service, should primarily be responsible to the public or to third persons for injuries caused the
latter while the vehicle is being driven on the highways or streets. The members of the Court are
in agreement that the defendant-appellant should be held liable to plaintiff-appellee for the injuries
occasioned to the latter because of the negligence of the driver, even if the defendant-appellant
was no longer the owner of the vehicle at the time of the damage because he had previously sold
it to another. What is the legal basis for his (defendant-appellant’s) liability?

There is a presumption that the owner of the guilty vehicle is the defendant-appellant as he is the
registered owner in the Motor Vehicles Office. Should he not be allowed to prove the truth, that he had
sold it to another and thus shift the responsibility for the injury to the real and actual owner? The
defendant holds the affirmative of this proposition; the trial court held the negative.

The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that no vehicle may be used or
operated upon any public highway unless the same is property registered. It has been stated that the
system of licensing and the requirement that each machine must carry a registration number,
conspicuously displayed, is one of the precautions taken to reduce the danger of injury to pedestrians and
other travelers from the careless management of automobiles. And to furnish a means of ascertaining the
identity of persons violating the laws and ordinances, regulating the speed and operation of machines
upon the highways (2 R.C.L. 1176). Not only are vehicles to be registered and that no motor vehicles are
to be used or operated without being properly registered for the current year, but that dealers in motor
vehicles shall furnish thee Motor Vehicles Office a report showing the name and address of each
purchaser of motor vehicle during the previous month and the manufacturer’s serial number and motor
number. (Section 5(c), Act No. 3992, as amended.)

Registration is required not to make said registration the operative act by which ownership in vehicles is
transferred, as in land registration cases, because the administrative proceeding of registration does not
bear any essential relation to the contract of sale between the parties (Chinchilla vs. Rafael and
Verdaguer, 39 Phil. 888), but to permit the use and operation of the vehicle upon any public highway
(section 5 [a], Act No. 3992, as amended). The main aim of motor vehicle registration is to identify the
owner so that if any accident happens, or that any damage or injury is caused by the vehicle on the public
highways, responsibility therefore can be fixed on a definite individual, the registered owner. Instances
are numerous where vehicles running on public highways caused accidents or injuries to pedestrians or
other vehicles without positive identification of the owner or drivers, or with very scant means of
identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the
motor vehicle registration is primarily ordained, in the interest of the determination of persons responsible
for damages or injuries caused on public highways:

One of the principal purposes of motor vehicles legislation is identification of the vehicle and of the
operator, in case of accident; and another is that the knowledge that means of detection are always
available may act as a deterrent from lax observance of the law and of the rules of conservative and safe
operation. Whatever purpose there may be in these statutes, it is subordinate at the last to the primary
purpose of rendering it certain that the violator of the law or of the rules of safety shall not escape
because of lack of means to discover him. The purpose of the statute is thwarted, and the displayed
number becomes a "share and delusion," if courts would entertain such defenses as that put forward by
appellee in this case. No responsible person or corporation could be held liable for the most outrageous
acts of negligence, if they should be allowed to pace a "middleman" between them and the public, and
escape liability by the manner in which they recompense servants. (King vs. Brenham Automobile Co.,
Inc. 145 S.W. 278, 279.)

With the above policy in mind, the question that defendant-appellant poses is: should not the registered
owner be allowed at the trial to prove who the actual and real owner is, and in accordance with such proof
escape or evade responsibility by and lay the same on the person actually owning the vehicle? We hold
with the trial court that the law does not allow him to do so; the law, with its aim and policy in mind, does
not relieve him directly of the responsibility that the law fixes and places upon him as an incident or
consequence of registration. Were a registered owner allowed to evade responsibility by proving who the
supposed transferee or owner is, it would be easy for him, by collusion with others or otherwise, to
escape said responsibility and transfer the same to an indefinite person, or to one who possesses no
property with which to respond financially for the damage or injury done. A victim of recklessness on the
public highways is usually without means to discover or identify the person actually causing the injury or
damage. He has no means other than by a recourse to the registration in the Motor Vehicles Office to
determine who is the owner. The protection that the law aims to extend to him would

become illusory were the registered owner given the opportunity to escape liability by disproving his
ownership. If the policy of the law is to be enforced and carried out, the registered owner should not be
allowed to prove the contrary to the prejudice of the person injured, that is, to prove that a third person or
another has become the owner, so that he may thereby be relieved of the responsibility to the injured
person.

The above policy and application of the law may appear quite harsh and would seem to conflict with truth
and justice. We do not think it is so. A registered owner who has already sold or transferred a vehicle has
the recourse to a third-party complaint, in the same action brought against him to recover for the damage
or injury done, against the vendee or transferee of the vehicle. The inconvenience of the suit is no
justification for relieving him of liability; said inconvenience is the price he pays for failure to comply with
the registration that the law demands and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily responsible
for the damage caused to the vehicle of the plaintiff-appellee, but he (defendant-appellant) has a right to
be indemnified by the real or actual owner of the amount that he may be required to pay as damage for
the injury caused to the plaintiff-appellant.8

Petitioner insists that he is not liable for damages since the driver of the vehicle at the time of the accident
was not an authorized driver of the new (actual) owner of the vehicle. He claims that the ruling in First
Malayan Leasing and Finance Corporation vs. CA9 implies that to hold the registered owner liable for
damages, the driver of the vehicle must have been authorized, allowed and permitted by its actual owner
to operate and drive it. Thus, if the vehicle is driven without the knowledge and consent of the actual
owner, then the registered owner cannot be held liable for damages.
He further argues that this was the underlying theory behind Duavit vs. CA10 wherein the court absolved
the registered owner from liability after finding that the vehicle was virtually stolen from the owner’s
garage by a person who was neither authorized nor employed by the owner. Petitioner concludes that the
ruling in Duavit and not the one in First Malayan should be applicable to him.

Petitioner’s argument lacks merit. Whether the driver is authorized or not by the actual owner is irrelevant
to determining the liability of the registered owner who the law holds primarily and directly responsible for
any accident, injury or death caused by the operation of the vehicle in the streets and highways. To
require the driver of the vehicle to be authorized by the actual owner before the registered owner can be
held accountable is to defeat the very purpose why motor vehicle legislations are enacted in the first
place.

Furthermore, there is nothing in First Malayan which even remotely suggests that the driver must be
authorized before the registered owner can be held accountable. In First Malayan, the registered owner,
First Malayan Corporation, was held liable for damages arising from the accident even if the vehicle
involved was already owned by another party:

This Court has consistently ruled that regardless of who the actual owner is of a motor vehicle
might be, the registered owner is the operator of the same with respect to the public and third
persons, and as such, directly and primarily responsible for the consequences of its operation. In
contemplation of law, the owner/operator of record is the employer of the driver, the actual
operator and employer being considered merely as his agent (MYC-Agro-Industrial Corporation
vs. Vda. de Caldo, 132 SCRA 10, citing Vargas vs. Langcay, 6 SCRA 174; Tamayo vs. Aquino,
105 Phil. 949).

‘We believe that it is immaterial whether or not the driver was actually employed by the
operator of record. It is even not necessary to prove who the actual owner of the vehicle
and the employer of the driver is. Granting that, in this case, the father of the driver is the
actual owner and that he is the actual employer, following the well-settled principle that
the operator of record continues to be the operator of the vehicle in contemplation of law,
as regards the public and third person, and as such is responsible for the consequences
incident to its operation, we must hold and consider such owner-operator of record as the
employer, in contemplation of law, of the driver. And, to give effect to this policy of law as
enunciated in the above cited decisions of this Court, we must now extend the same and
consider the actual operator and employer as the agent of the operator of record.’ 11

Contrary to petitioner’s position, the First Malayan ruling is applicable to him since the case involves the
same set of facts ― the registered owner had previously sold the vehicle to someone else and was being
driven by an employee of the new (actual) owner. Duavit is inapplicable since the vehicle there was not
transferred to another; the registered and the actual owner was one and the same person. Besides,
in Duavit, the defense of the registered owner, Gilberto Duavit, was that the vehicle was practically stolen
from his garage by Oscar Sabiano, as affirmed by the latter:

Defendant Sabiano, in his testimony, categorically admitted that he took the jeep from the garage
of defendant Duavit without the consent and authority of the latter. He testified further that Duavit
even filed charges against him for the theft of the jeep but which Duavit did not push through as
his (Sabiano’s) parents apologized to Duavit on his behalf.12

As correctly pointed out by the CA, the Duavit ruling is not applicable to petitioner’s case since the
circumstance of unauthorized use was not present. He in fact voluntarily delivered his car to Albert
Jaucian as part of the downpayment for a vehicle he purchased from Jaucian. Thus, he could not claim
that the vehicle was stolen from him since he voluntarily ceded possession thereof to Jaucian. It was the
latter, as the new (actual) owner, who could have raised the defense of theft to prove that he was not
liable for the acts of his employee Ocfemia. Thus, there is no reason to apply the Duavit ruling to this
case.

The ruling in First Malayan has been reiterated in BA Finance Corporation vs. CA13 and more recently
in Aguilar, Sr. vs. Commercial Savings Bank.14 In BA Finance, we held the registered owner liable even if,
at the time of the accident, the vehicle was leased by another party and was driven by the lessee’s
employee. In Aguilar, the registered owner-bank answered for damages for the accident even if the
vehicle was being driven by the Vice-President of the Bank in his private capacity and not as an officer of
the Bank, as claimed by the Bank. We find no reason to deviate from these decisions.

The main purpose of vehicle registration is the easy identification of the owner who can be held
responsible for any accident, damage or injury caused by the vehicle. Easy identification prevents
inconvenience and prejudice to a third party injured by one who is unknown or unidentified. To allow a
registered owner to escape liability by claiming that the driver was not authorized by the new (actual)
owner results in the public detriment the law seeks to avoid.

Finally, the issue of whether or not the driver of the vehicle during the accident was authorized is not at all
relevant to determining the liability of the registered owner. This must be so if we are to comply with the
rationale and principle behind the registration requirement under the motor vehicle law.

WHEREFORE, the petition is hereby DENIED. The January 26, 2000 decision of the Court of Appeals
is AFFIRMED.

SO ORDERED.

G.R. No. 162267 July 4, 2008

PCI LEASING AND FINANCE, INC., petitioner,

vs.
UCPB GENERAL INSURANCE CO., INC., respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking a
reversal of the Decision1 of the Court of Appeals (CA) dated December 12, 2003 affirming with
modification the Decision of the Regional Trial Court (RTC) of Makati City which ordered petitioner and
Renato Gonzaga (Gonzaga) to pay, jointly and severally, respondent the amount of P244,500.00 plus
interest; and the CA Resolution2 dated February 18, 2004 denying petitioner's Motion for
Reconsideration.

The facts, as found by the CA, are undisputed:

On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer car with Plate Number PHD-206
owned by United Coconut Planters Bank was traversing the Laurel Highway, Barangay
Balintawak, Lipa City. The car was insured with plantiff-appellee [UCPB General Insurance Inc.],
then driven by Flaviano Isaac with Conrado Geronimo, the Asst. Manager of said bank, was hit
and bumped by an 18-wheeler Fuso Tanker Truck with Plate No. PJE-737 and Trailer Plate No.
 NVM-133, owned by defendants-appellants PCI Leasing & Finance, Inc. allegedly leased to and
operated by defendant-appellant Superior Gas & Equitable Co., Inc. (SUGECO) and driven by its
employee, defendant appellant Renato Gonzaga.

The impact caused heavy damage to the Mitsubishi Lancer car resulting in an explosion of the
rear part of the car. The driver and passenger suffered physical injuries. However, the driver
defendant-appellant Gonzaga continued on its [sic] way to its [sic] destination and did not bother
to bring his victims to the hospital.

Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing the insurance
coverage of the damaged car.

As the 18-wheeler truck is registered under the name of PCI Leasing, repeated demands were
made by plaintiff-appellee for the payment of the aforesaid amounts. However, no payment was
made. Thus, plaintiff-appellee filed the instant case on March 13, 1991.3

PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held liable for the
collision, since the driver of the truck, Gonzaga, was not its employee, but that of its co-defendant
Superior Gas & Equitable Co., Inc. (SUGECO).4 In fact, it was SUGECO, and not petitioner, that was the
actual operator of the truck, pursuant to a Contract of Lease signed by petitioner and
SUGECO.5 Petitioner, however, admitted that it was the owner of the truck in question. 6

After trial, the RTC rendered its Decision dated April 15, 1999,7 the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff UCPB

General Insurance [respondent], ordering the defendants PCI Leasing and Finance, Inc.,
[petitioner] and Renato Gonzaga, to pay jointly and severally the former the following amounts:
the principal amount of P244,500.00 with 12% interest as of the filing of this complaint until the
same is paid; P50,000.00 as attorney's fees; and P20,000.00 as costs of suit.

SO ORDERED.8

Aggrieved by the decision of the trial court, petitioner appealed to the CA.

In its Decision dated December 12, 2003, the CA affirmed the RTC's decision, with certain modifications,
as follows:

WHEREFORE, the appealed decision dated April 15, 1999 is hereby AFFIRMED with
modification that the award of attorney's fees is hereby deleted and the rate of interest shall be
six percent (6%) per annum computed from the time of the filing of the complaint in the trial court
until the finality of the judgment. If the adjudged principal and the interest remain unpaid
thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the
judgment becomes final and executory until it is fully satisfied.

SO ORDERED.9

Petitioner filed a Motion for Reconsideration which the CA denied in its Resolution dated February 18,
2004.

Hence, herein Petition for Review.

The issues raised by petitioner are purely legal:

 Whether petitioner, as registered owner of a motor vehicle that figured in a quasi-delict may be
held liable, jointly and severally, with the driver thereof, for the damages caused to third parties.

Whether petitioner, as a financing company, is absolved from liability by the enactment of

Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998.

Anent the first issue, the CA found petitioner liable for the damage caused by the collision since under the
Public Service Act, if the property covered by a franchise is transferred or leased to another without
obtaining the requisite approval, the transfer is not binding on the Public Service Commission and, in
contemplation of law, the grantee continues to be responsible under the franchise in relation to the
operation of the vehicle, such as damage or injury to third parties due to collisions.10

Petitioner claims that the CA's reliance on the Public Service Act is misplaced, since the said law applies
only to cases involving common carriers, or those which have franchises to operate as public utilities. In
contrast, the case before this Court involves a private commercial vehicle for business use, which is not
offered for service to the general public.11

Petitioner's contention has partial merit, as indeed, the vehicles involved in the case at bar are not
common carriers, which makes the Public Service Act inapplicable.

However, the registered owner of the vehicle driven by a negligent driver may still be held liable under
applicable jurisprudence involving laws on compulsory motor vehicle registration and the liabilities of
employers for quasi-delicts under the Civil Code.

The principle of holding the registered owner of a vehicle liable for quasi-delicts resulting from its use is
well-established in jurisprudence. Erezo v. Jepte,12 with Justice Labrador as ponente, wisely explained
the reason behind this principle, thus:

Registration is required not to make said registration the operative act by which ownership in
vehicles is transferred, as in land registration cases, because the administrative proceeding of
registration does not bear any essential relation to the contract of sale between the parties
(Chinchilla vs. Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of the
vehicle upon any public highway (section 5 [a], Act No. 3992, as amended.) The main aim of
motor vehicle registration is to identify the owner so that if any accident happens, or that any
damage or injury is caused by the vehicle on the public highways, responsibility therefor can be
fixed on a definite individual, the registered owner. Instances are numerous where vehicles
running on public highways caused accidents or injuries to pedestrians or other vehicles without
positive identification of the owner or drivers, or with very scant means of identification. It is to
forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle
registration is primarily ordained, in the interest of the determination of persons responsible for
damages or injuries caused on public highways.

"'One of the principal purposes of motor vehicles legislation is identification of the vehicle
and of the operator, in case of accident; and another is that the knowledge that means of
detection are always available may act as a deterrent from lax observance of the law and
of the rules of conservative and safe operation. Whatever purpose there may be in these
statutes, it is subordinate at the last to the primary purpose of rendering it certain that the
violator of the law or of the rules of safety shall not escape because of lack of means to
discover him.' The purpose of the statute is thwarted, and the displayed number becomes
a 'snare and delusion,' if courts would entertain such defenses as that put forward by
appellee in this case. No responsible person or corporation could be held liable for the
most outrageous acts of negligence, if they should be allowed to place a 'middleman'
between them and the public, and escape liability by the manner in which they
recompense their servants." (King vs. Brenham Automobile Co., 145 S.W. 278, 279.)
 With the above policy in mind, the question that defendant-appellant poses is: should not the
registered owner be allowed at the trial to prove who the actual and real owner is, and in
accordance with such proof escape or evade responsibility and lay the same on the person
actually owning the vehicle? We hold with the trial court that the law does not allow him to do so;
the law, with its aim and policy in mind, does not relieve him directly of the responsibility that the
law fixes and places upon him as an incident or consequence of registration. Were a registered
owner allowed to evade responsibility by proving who the supposed transferee or owner is, it
would be easy for him, by collusion with others or otherwise, to escape said responsibility and
transfer the same to an indefinite person, or to one who possesses no property with which to
respond financially for the damage or injury done. A victim of recklessness on the public
highways is usually without means to discover or identify the person actually causing the injury or
damage. He has no means other than by a recourse to the registration in the Motor Vehicles
Office to determine who is the owner. The protection that the law aims to extend to him would
become illusory were the registered owner given the opportunity to escape liability by disproving
his ownership. If the policy of the law is to be enforced and carried out, the registered owner
should not be allowed to prove the contrary to the prejudice of the person injured, that is, to prove
that a third person or another has become the owner, so that he may thereby be relieved of the
responsibility to the injured person.

The above policy and application of the law may appear quite harsh and would seem to conflict
with truth and justice. We do not think it is so. A registered owner who has already sold or
transferred a vehicle has the recourse to a third-party complaint, in the same action brought
against him to recover for the damage or injury done, against the vendee or transferee of the
vehicle. The inconvenience of the suit is no justification for relieving him of liability; said
inconvenience is the price he pays for failure to comply with the registration that the law demands
and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily
responsible for the damage caused to the vehicle of the plaintiff-appellee, but he (defendant-
appellant) has a right to be indemnified by the real or actual owner of the amount that he may be
required to pay as damage for the injury caused to the plaintiff-appellant.13

The case is still good law and has been consistently cited in subsequent cases.14 Thus, there is no good
reason to depart from its tenets.

For damage or injuries arising out of negligence in the operation of a motor vehicle, the registered owner
may be held civilly liable with the negligent driver either 1) subsidiarily, if the aggrieved party seeks relief
based on a delict or crime under Articles 100 and 103 of the Revised Penal Code; or 2) solidarily, if the
complainant seeks relief based on a quasi-delict under Articles 2176 and 2180 of the Civil Code. It is the
option of the plaintiff whether to waive completely the filing of the civil action, or institute it with the
criminal action, or file it separately or independently of a criminal action;15 his only limitation is that he
cannot recover damages twice for the same act or omission of the defendant.16

In case a separate civil action is filed, the long-standing principle is that the registered owner of a motor
vehicle is primarily and directly responsible for the consequences of its operation, including the
negligence of the driver, with respect to the public and all third persons. 17 In contemplation of law, the
registered owner of a motor vehicle is the employer of its driver, with the actual operator and employer,
such as a lessee, being considered as merely the owner's agent. 18 This being the case, even if a sale has
been executed before a tortious incident, the sale, if unregistered, has no effect as to the right of the
public and third persons to recover from the registered owner. 19 The public has the right to conclusively
presume that the registered owner is the real owner, and may sue accordingly. 20

In the case now before the Court, there is not even a sale of the vehicle involved, but a mere lease, which
remained unregistered up to the time of the occurrence of the quasi-delict that gave rise to the case.
Since a lease, unlike a sale, does not even involve a transfer of title or ownership, but the mere use or
enjoyment of property, there is more reason, therefore, in this instance to uphold the policy behind the
law, which is to protect the unwitting public and provide it with a definite person to make accountable for
losses or injuries suffered in vehicular accidents.21 This is and has always been the rationale behind
compulsory motor vehicle registration under the Land Transportation and Traffic Code and similar laws,
which, as early as Erezo, has been guiding the courts in their disposition of cases involving motor
vehicular incidents. It is also important to emphasize that such principles apply to all vehicles in general,
not just those offered for public service or utility. 22

The Court recognizes that the business of financing companies has a legitimate and commendable
purpose.23 In earlier cases, it considered a financial lease or financing lease a legal contract, 24 though
subject to the restrictions of the so-called Recto Law or Articles 1484 and 1485 of the Civil Code.25 In
previous cases, the Court adopted the statutory definition of a financial lease or financing lease, as:

[A] mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the leased property, x x x but with no obligation or
option on his part to purchase the leased property from the owner-lessor at the end of the lease
contract. 26

Petitioner presented a lengthy discussion of the purported trend in other jurisdictions, which apparently
tends to favor absolving financing companies from liability for the consequences of quasi-delictual acts or
omissions involving financially leased property.27 The petition adds that these developments have been
legislated in our jurisdiction in Republic Act (R.A.) No. 8556, 28 which provides:

Section 12. Liability of lessors. - Financing companies shall not be liable for loss, damage or
injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or other property leased
to a third person or entity except when the motor vehicle, aircraft, vessel, equipment or other
property is operated by the financing company, its employees or agents at the time of the loss,
damage or injury.1avvphi1

Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of the new Sec. 12 to
the old law, is deemed to have absolved petitioner from liability, fails to convince the Court.

These developments, indeed, point to a seeming emancipation of financing companies from the
obligation to compensate claimants for losses suffered from the operation of vehicles covered by their
lease. Such, however, are not applicable to petitioner and do not exonerate it from liability in the present
case.

The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not supersede or
repeal the law on compulsory motor vehicle registration. No part of the law expressly repeals Section 5(a)
and (e) of R.A. No. 4136, as amended, otherwise known as the Land Transportation and Traffic Code, to
wit:

Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer of any
type used or operated on or upon any highway of the Philippines must be registered with the
Bureau of Land Transportation (now the Land Transportation Office, per Executive Order No.
125, January 30, 1987, and Executive Order No. 125-A, April 13, 1987) for the current year in
accordance with the provisions of this Act.

xxxx
 (e) Encumbrances of motor vehicles. - Mortgages, attachments, and other encumbrances of
motor vehicles, in order to be valid against third parties must be recorded in the Bureau (now
the Land Transportation Office). Voluntary transactions or voluntary encumbrances shall likewise
be properly recorded on the face of all outstanding copies of the certificates of registration of the
vehicle concerned.

Cancellation or foreclosure of such mortgages, attachments, and other encumbrances shall

likewise be recorded, and in the absence of such cancellation, no certificate of registration shall
be issued without the corresponding notation of mortgage, attachment and/or other
encumbrances.

x x x x (Emphasis supplied)

Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is frowned upon,
unless there is clear showing that the later statute is so irreconcilably inconsistent and repugnant to the
existing law that they cannot be reconciled and made to stand together. 29 There is nothing in R.A. No.
4136 that is inconsistent and incapable of reconciliation.

Thus, the rule remains the same: a sale, lease, or financial lease, for that matter, that is not registered
with the Land Transportation Office, still does not bind third persons who are aggrieved in tortious
incidents, for the latter need only to rely on the public registration of a motor vehicle as conclusive
evidence of ownership.30 A lease such as the one involved in the instant case is an encumbrance in
contemplation of law, which needs to be registered in order for it to bind third parties. 31 Under this policy,
the evil sought to be avoided is the exacerbation of the suffering of victims of tragic vehicular accidents in
not being able to identify a guilty party. A contrary ruling will not serve the ends of justice. The failure to
register a lease, sale, transfer or encumbrance, should not benefit the parties responsible, to the
prejudice of innocent victims.

The non-registration of the lease contract between petitioner and its lessee precludes the former from
enjoying the benefits under Section 12 of R.A. No. 8556.

This ruling may appear too severe and unpalatable to leasing and financing companies, but the Court
believes that petitioner and other companies so situated are not entirely left without recourse. They may
resort to third-party complaints against their lessees or whoever are the actual operators of their vehicles.
In the case at bar, there is, in fact, a provision in the lease contract between petitioner and SUGECO to
the effect that the latter shall indemnify and hold the former free and harmless from any "liabilities,
damages, suits, claims or judgments" arising from the latter's use of the motor vehicle. 32 Whether
petitioner would act against SUGECO based on this provision is its own option.

The burden of registration of the lease contract is minuscule compared to the chaos that may result if
registered owners or operators of vehicles are freed from such responsibility. Petitioner pays the price for
its failure to obey the law on compulsory registration of motor vehicles for registration is a pre-requisite for
any person to even enjoy the privilege of putting a vehicle on public roads.

WHEREFORE, the petition is DENIED. The Decision dated December 12, 2003 and Resolution dated
February 18, 2004 of the Court of Appeals are AFFIRMED.

Costs against petitioner.

SO ORDERED.
G.R. No. 161946 November 14, 2008

MEDARDO AG. CADIENTE, petitioner,

vs.
BITHUEL MACAS, respondent.

DECISION

QUISUMBING, Acting C.J.:

For review on certiorari are the Decision1 dated September 16, 2002 and the Resolution2 dated
December 18, 2003 of the Court of Appeals in CA-G.R. CV No. 64103, which affirmed the Decision3of the
Regional Trial Court (RTC) of Davao City, Branch 10, in Civil Case No. 23,723-95.

The facts are undisputed.

Eyewitness Rosalinda Palero testified that on July 19, 1994, at about 4:00 p.m., at the intersection of
Buhangin and San Vicente Streets in Davao City, 15-year old high school student Bithuel Macas, herein
respondent, was standing on the shoulder of the road. She was about two and a half meters away from
the respondent when he was bumped and run over by a Ford Fiera, driven by Chona C. Cimafranca.
Rosalinda and another unidentified person immediately came to the respondent's rescue and told
Cimafranca to take the victim to the hospital. Cimafranca rushed the respondent to the Davao Medical
Center.

Dr. Hilario Diaz, the orthopedic surgeon who attended to the respondent, testified that the respondent
suffered severe muscular and major vessel injuries, as well as open bone fractures in both thighs and
other parts of his legs. In order to save his life, the surgeon had to amputate both legs up to the groins. 4
Cimafranca had since absconded and disappeared. Records showed that the Ford Fiera was registered
in the name of herein petitioner, Atty. Medardo Ag. Cadiente. However, Cadiente claimed that when the
accident happened, he was no longer the owner of the Ford Fiera. He alleged that he sold the vehicle to
Engr. Rogelio Jalipa on March 28, 1994,5 and turned over the Certificate of Registration and Official
Receipt to Jalipa, with the understanding that the latter would be the one to cause the transfer of the
registration.

The victim's father, Samuel Macas, filed a complaint6 for torts and damages against Cimafranca and
Cadiente before the RTC of Davao City, Branch 10. Cadiente later filed a third-party complaint7against
Jalipa.

In answer, Jalipa claimed that he was no longer the owner of the Ford Fiera at the time of the accident.
He alleged that he sold the vehicle to Abraham Abubakar on June 20, 1994.8 He thus filed a fourth-party
complaint9 against Abubakar.

After trial, the court ruled:

WHEREFORE, judgment is rendered in favor of the plaintiff declaring Atty. Medardo Ag. Cadiente
and Engr. Rogelio Jalipa jointly and severally liable for damages to the plaintiff for their own
negligence as stated above, and ordering them to indemnify the plaintiff jointly and severally as
follows:

(a) P300,000.00 as compensatory damages for the permanent and almost total disability
being suffered by him;

(b) P150,000.00 for moral damages;

(c) P18,982.85 as reimbursement of medical expenses;

(d) P30,000.00 for attorney's fees; and

(e) costs of suit.

SO ORDERED.10

On appeal, the Court of Appeals held that the findings of the trial court were in accordance with the
established facts and was supported by the evidence on record. Thus, it decreed as follows:

WHEREFORE, premises considered, the instant appeal is DENIED and the decision of the
Regional Trial Court of Davao City in Civil Case No. 23723-95 is hereby AFFIRMED.

SO ORDERED.11

From the aforequoted decision of the Court of Appeals and the subsequent denial of the motion for
reconsideration, only Cadiente appealed to this Court.

The instant petition alleges that the Court of Appeals committed serious errors of law in affirming the
decision of the trial court. Petitioner Cadiente raises the following as issues:

I.

WAS THERE … CONTRIBUTORY NEGLIGENCE ON THE PART OF THE INJURED PARTY?

 II.

ARE BOTH DEFENDANT CADIENTE AND THIRD-PARTY DEFENDANT JOINTLY AND

SEVERALLY LIABLE TO THE INJURED PARTY?

III.

THE HONORABLE COURT OF APPEAL[S] COMMIT[T]ED GRAVE LEGAL ERROR IN

ORDERING DEFENDANT CADIENTE AND THIRD-PARTY DEFENDANT JALIPA JOINTLY
AND SEVERALLY LIABLE.12

Essentially, the issues to be resolved are: (1) Whether there was contributory negligence on the part of
the victim; and (2) whether the petitioner and third-party defendant Jalipa are jointly and severally liable to
the victim.

The petitioner contends that the victim's negligence contributed to his own mishap. The petitioner
theorizes that if witness Rosalinda Palero, who was only two and a half meters away from the victim, was
not hit by the Ford Fiera, then the victim must have been so negligent as to be bumped and run over by
the said vehicle.13

The petitioner further argues that having filed a third-party complaint against Jalipa, to whom he had sold
the Ford Fiera, the Court of Appeals should have ordered the latter to reimburse him for any amount he
would be made to pay the victim, instead of ordering him solidarily liable for damages. 14

The respondent, for his part, counters that the immediate and proximate cause of the injuries he suffered
was the recklessly driven Ford Fiera, which was registered in the petitioner's name. He insists that when
he was hit by the vehicle, he was standing on the uncemented portion of the highway, which was exactly
where pedestrians were supposed to be.15

The respondent stresses that as the registered owner of the Ford Fiera which figured in the accident, the
petitioner is primarily liable for the injury caused by the said vehicle. He maintains that the alleged sale of
the vehicle to Jalipa was tainted with irregularity, which indicated collusion between the petitioner and
Jalipa.16

After a careful consideration of the parties' submissions, we find the petition without merit.

Article 2179 of the Civil Code provides:

When the plaintiff's own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.

The underlying precept on contributory negligence is that a plaintiff who is partly responsible for his own
injury should not be entitled to recover damages in full, but must proportionately bear the consequences
of his own negligence. The defendant is thus held liable only for the damages actually caused by his
negligence.17

In this case, records show that when the accident happened, the victim was standing on the shoulder,
which was the uncemented portion of the highway. As noted by the trial court, the shoulder was intended
for pedestrian use alone. Only stationary vehicles, such as those loading or unloading passengers may
use the shoulder. Running vehicles are not supposed to pass through the said uncemented portion of the
highway. However, the Ford Fiera in this case, without so much as slowing down, took off from the
cemented part of the highway, inexplicably swerved to the shoulder, and recklessly bumped and ran over
an innocent victim. The victim was just where he should be when the unfortunate event transpired.

Cimafranca, on the other hand, had no rightful business driving as recklessly as she did. The respondent
cannot be expected to have foreseen that the Ford Fiera, erstwhile speeding along the cemented part of
the highway would suddenly swerve to the shoulder, then bump and run him over. Thus, we are unable to
accept the petitioner's contention that the respondent was negligent.

Coming now to the second and third issues, this Court has recently reiterated in PCI Leasing and
Finance, Inc. v. UCPB General Insurance Co., Inc.,18 that the registered owner of any vehicle, even if he
had already sold it to someone else, is primarily responsible to the public for whatever damage or injury
the vehicle may cause. We explained,

…Were a registered owner allowed to evade responsibility by proving who the supposed
transferee or owner is, it would be easy for him, by collusion with others or otherwise, to escape
said responsibility and transfer the same to an indefinite person, or to one who possesses no
property with which to respond financially for the damage or injury done. A victim of recklessness
on the public highways is usually without means to discover or identify the person actually
causing the injury or damage. He has no means other than by a recourse to the registration in the
Motor Vehicles Office to determine who is the owner. The protection that the law aims to extend
to him would become illusory were the registered owner given the opportunity to escape liability
by disproving his ownership.19

In the case of Villanueva v. Domingo,20 we said that the policy behind vehicle registration is the easy
identification of the owner who can be held responsible in case of accident, damage or injury caused by
the vehicle. This is so as not to inconvenience or prejudice a third party injured by one whose identity
cannot be secured.21

Therefore, since the Ford Fiera was still registered in the petitioner's name at the time when the
misfortune took place, the petitioner cannot escape liability for the permanent injury it caused the
respondent, who had since stopped schooling and is now forced to face life with nary but two remaining
limbs.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated September 16, 2002
and Resolution dated December 18, 2003 of the Court of Appeals in CA-G.R. CV No. 64103 are
hereby AFFIRMED. Costs against the petitioner.

SO ORDERED.

G.R. No. 160110 June 18, 2014

MARIANO C. MENDOZA and ELVIRA LIM, Petitioners,

vs.
SPOUSES LEONORA J. GOMEZ and GABRIEL V. GOMEZ, Respondents.
 DECISION

PEREZ, J.:

Assailed in the present appeal by certiorari is the Decision1 dated 29 September 2003 of the Special
Fourth Division of the Court of Appeals (CA) in CA-G.R. CV No. 71877, which affirmed with modification
the Decision2 dated 31 January 2001 of the Regional Trial Court (RTC), Branch 172, Valenzuela City in
Civil Case No. 5352-V-97, and which effectively allowed the award of actual, moral, and exemplary
damages, as well as attorney's fees and costs of the suit in favor of respondent Spouses Leonora and
Gabriel Gomez (respondents).

Antecedent Facts

On 7 March 1997, an Isuzu Elf truck (Isuzu truck) with plate number UAW 582,3 owned by respondent
Leonora J. Gomez (Leonora)4 and driven by Antenojenes Perez (Perez),5 was hit by a Mayamy
Transportation bus (Mayamy bus) with temporary plate number 1376-1280,6 registered under the name of
petitioner Elvira Lim (Lim)7 and driven by petitioner Mariano C. Mendoza (Mendoza).8

Owing to the incident, an Information for reckless imprudence resulting in damage to property and
multiple physical injuries was filed against Mendoza.9 Mendoza, however, eluded arrest, thus,
respondents filed a separate complaint for damages against Mendoza and Lim, seeking actual damages,
compensation for lost income, moral damages, exemplary damages, attorney’s fees and costs of the
suit.10 This was docketed as Civil Case No. 5352-V-97.

According to PO1 Melchor F. Rosales (PO1 Rosales), investigating officer of the case, at around 5:30
a.m., the Isuzu truck, coming from Katipunan Road and heading towards E. Rodriguez, Sr. Avenue, was
travelling along the downward portion of Boni Serrano Avenue when, upon reaching the corner of Riviera
Street, fronting St. Ignatius Village, its left front portion was hit by the Mayamy bus. 11 According to PO1
Rosales, the Mayamy bus, while traversing the opposite lane, intruded on the lane occupied by the Isuzu
truck.12

PO1 Rosales also reported that Mendoza tried to escape by speeding away, but he was apprehended in
Katipunan Road corner C. P. Garcia Avenue by one Traffic Enforcer Galante and a security guard of St.
Ignatius Village.13

As a result of the incident, Perez,as well as the helpers on board the Isuzu truck, namely Melchor V. Anla
(Anla), Romeo J. Banca (Banca), and Jimmy Repisada (Repisada), sustained injuries necessitating
medical treatment amounting to ₱11,267.35,which amount was shouldered by respondents. Moreover,
the Isuzu truck sustained extensive damages on its cowl, chassis, lights and steering wheel, amounting to
₱142,757.40.14

Additionally, respondents averred that the mishap deprived them of a daily income of ₱1,000.00.
Engaged in the business of buying plastic scraps and delivering them to recycling plants, respondents
claimed that the Isuzu truck was vital in the furtherance of their business.

For their part, petitioners capitalized on the issue of ownership of the bus in question. Respondents
argued that although the registered owner was Lim, the actual owner of the bus was SPO1 Cirilo
Enriquez (Enriquez), who had the bus attached with Mayamy Transportation Company (Mayamy
Transport) under the so-called "kabit system." Respondents then impleaded both Lim and Enriquez.

Petitioners, on the other hand, presented Teresita Gutierrez (Gutierrez), whose testimony was offered to
prove that Mayamy Bus or Mayamy Transport is a business name registered under her name, and that
such business is a sole proprietorship. Such was presented by petitioners to rebut the allegation of
respondents that Mayamy Transport is a corporation;15 and to show, moreover, that although Gutierrez is
the sole proprietor of Mayamy Transport, she was not impleaded by respondents in the case at bar. 16

After weighing the evidence, the RTC found Mendoza liable for direct personal negligence under Article
2176 of the Civil Code, and it also found Lim vicariously liable under Article 2180 of the same Code.

As regards Lim, the RTC relied on the Certificate of Registration issued by the Land Transportation Office
on 9 December 199617 in concluding that she is the registered owner of the bus in question. Although
actually owned by Enriquez, following the established principle in transportation law, Lim, as the
registered owner, is the one who can be held liable.

Thus, the RTC disposed of the case as follows:

WHEREFORE, judgment is hereby rendered in favor of the [respondents] and against the [petitioners]:

1. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the costs
of repair of the damaged vehicle in the amount of ₱142,757.40;

2. Ordering the defendants except Enriquez to pay [respondents], jointly and severally, the
amount of ₱1,000.00 per day from March 7, 1997 up to November 1997 representing the
unrealized income of the [respondents] when the incident transpired up to the time the damaged
Isuzu truck was repaired;

3. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the
amount of ₱100,000.00 as moral damages, plus a separate amount of ₱50,000.00 as exemplary
damages;

4. Ordering the [petitioners] except Enriquez to pay [respondents], jointly and severally, the
amount of ₱50,000.00 as attorney’s fees; 5. Ordering the [petitioners] except Enriquez to pay
[respondents] the costs of suit.18

Displeased, petitioners appealed to the CA, which appeal was docketed as CA-G.R. CV No. 71877. After
evaluating the damages awarded by the RTC, such were affirmed by the CA with the exception of the
award of unrealized income which the CA ordered deleted, viz:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The judgment of the Regional
Trial Court of Valenzuela City, Branch 172 dated January 31, 2001, is MODIFIED, in that the award of
₱1,000.00 per day from March 1997 up to November 1997 representing unrealized income is DELETED.
The award of ₱142,757.40 for the cost of repair of the damaged vehicle, the award of ₱100,000.00 as
moral damages, the award of ₱50,000.00 as exemplary damages, the award of ₱50,000.00 as attorney’s
fees and the costs of the suit are hereby MAINTAINED.19

The Present Petition

Unsatisfied with the CA ruling, petitioners filed an appeal by certiorari before the Court, raising the
following issues:20

1. The court a quo has decided questions of substance in a way not in accord with law or with the
applicable decisions of the Supreme Court when it awarded:

a. Moral damages in spite of the fact that the [respondents’] cause of action is clearly
based on quasi-delict and [respondents] did not sustain physical injuries to be entitled
thereto pursuant to Article 2219 (2) of the New Civil Code and pertinent decisions of the
 Supreme Court to that effect. The court a quo erroneously concluded that the driver acted
in bad faith and erroneously applied the provision of Article 21 of the same code to justify
the award for bad faith is not consistent with quasi-delict which is founded on fault or
negligence.

b. Exemplary damages in spite of the fact that there is no finding that the vehicular
accident was due to petitioner-driver’s gross negligence to be entitled thereto pursuant to
Article 2231 of the New Civil Code and pertinent decisions of the Supreme Court to that
effect. The factual basis of the court a quo that "the act of the driver of the bus in
attempting to escape after causing the accident in wanton disregard of the consequences
of his negligent act is such gross negligence that justifies an award of exemplary
damages" is an act after the fact which is not within the contemplation of Article 2231 of
the New Civil Code.

c. Attorney’s fees in spite of the fact that the assailed decisions of the trial court and the
court a quo are bereft with jurisdictions for the award of attorney’s fees pursuant to the
pertinent decisions of the Supreme Court on the matter and provision Article 2208 of the
New Civil Code. The court a quo erroneously applied the decision of the Supreme Court
in Bañas, Jr. vs. Court of Appeals, 325 SCRA 259.

The Court’s Ruling

The petition is partially meritorious.

Respondents anchor their claim for damages on Mendoza’s negligence, banking on Article 2176 of the
Civil Code, to wit:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the
parties, is called a quasi-delict and is governed by the provisions of this Chapter.

In impleading Lim, on the other hand, respondents invoke the latter’s vicarious liability as espoused in
Article 2180 of the same Code:

The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions, but also
for those of persons for whom one is responsible.

xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged in any business of
industry.

The first question to address, then, is whether or not Mendoza’s negligence was duly proven. Negligence
is defined as the failure to observe for the protection of the interests of another person, that degree of
care, precaution and vigilance which the circumstances justly demand, whereby such other person
suffers injury.21

As found by the RTC, and affirmed by the CA, Mendoza was negligent in driving the subject Mayamy bus,
as demonstrated by the fact that, at the time of the collision, the bus intruded on the lane intended for the
Isuzu truck. Having encroached on the opposite lane, Mendoza was clearly in violation of traffic laws.
Article2185 of the Civil Code provides that unless there is proof to the contrary, it is presumed that a
person driving a motor vehicle has been negligent if at the time of the mishap, he was violating any traffic
regulation. In the case at bar, Mendoza’s violation of traffic laws was the proximate cause of the harm.

Proximate cause is defined as that cause, which, in natural and continuous sequence, unbroken by any
efficient intervening cause, produces the injury, and without which the result would not have occurred.
And more comprehensively, the 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 effecting 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 ordinary 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.22

The evidence on record shows that before the collision, the Isuzu truck was in its rightful lane, and was
even at a stop, having been flagged down by a security guard of St. Ignatius Village.23 The mishap
occurred when the Mayamy bus, travelling at a fast speed as shown by the impact of the collision, and
going in the opposite direction as that of the Isuzu truck, encroached on the lane rightfully occupied by
said Isuzu truck, and caused the latter to spin, injuring Perez, Anla, Banca, and Repisada, and
considerably damaging the Isuzu truck.

Having settled the fact of Mendoza’s negligence, then, the next question that confronts us is who may
beheld liable. According to Manresa, liability for personal acts and omissions is founded on that
indisputable principle of justice recognized by all legislations that when a person by his act or omission
causes damage or prejudice to another, a juridical relation is created by virtue of which the injured person
acquires a right to be indemnified and the person causing the damage is charged with the corresponding
duty of repairing the damage. The reason for this is found in the obvious truth that man should
subordinate his acts to the precepts of prudence and if he fails to observe them and causes damage to
another, he must repair the damage.24 His negligence having caused the damage, Mendoza is certainly
liable to repair said damage.

Additionally, Mendoza’s employer may also be held liable under the doctrine of vicarious liability or
imputed negligence. Under such doctrine, a person who has not committed the act or omission which
caused damage or injury to another may nevertheless be held civilly liable to the latter either directly or
subsidiarily under certain circumstances.25 In our jurisdiction, vicarious liability or imputed negligence is
embodied in Article 2180 of the Civil Code and the basis for damages in the action under said article is
the direct and primary negligence of the employer in the selection or supervision, or both, of his
employee.26

In the case at bar, who is deemed as Mendoza’s employer? Is it Enriquez, the actual owner of the bus or
Lim, the registered owner of the bus?

In Filcar Transport Services v. Espinas,27 we held that the registered owner is deemed the employer of
the negligent driver, and is thus vicariously liable under Article 2176, in relation to Article 2180, of the Civil
Code. Citing Equitable Leasing Corporation v. Suyom,28 the Court ruled that in so far as third persons are
concerned, the registered owner of the motor vehicle is the employer of the negligent driver, and the
actual employer is considered merely as an agent of such owner. Thus, whether there is an employer-
employee relationship between the registered owner and the driver is irrelevant in determining the liability
of the registered owner who the law holds primarily and directly responsible for any accident, injury or
death caused by the operation of the vehicle in the streets and highways. 29

As early as Erezo v. Jepte,30 the Court, speaking through Justice Alejo Labrador summarized the
justification for holding the registered owner directly liable, to wit:
x x x The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or
that any damage or injury is caused by the vehicles on the public highways, responsibility therefore can
be fixed on a definite individual, the registered owner. Instances are numerous where vehicle running on
public highways caused accidents or injuries to pedestrians or other vehicles without positive
identification of the owner or drivers, or with very scant means of identification. It is to forestall these
circumstances, so inconvenient or prejudicial to the public, that the motor vehicle registration is primarily
ordained, in the interest of the determination of persons responsible for damages or injuries caused on
public highways.

"‘One of the principal purposes of motor vehicles legislation is identification of the vehicle and of the
operator, in case of accident; and another is that the knowledge that means of detection are always
available may act as a deterrent from lax observance of the law and of the rules of conservative and safe
operation. Whatever purpose there may be in these statutes, it is subordinate at the last to the primary
purpose of rendering it certain that the violator of the law or of the rules of safety shall not escape
because of lack of means to discover him." The purpose of the statute is thwarted, and the displayed
number becomes a "snare and delusion," if courts will entertain such defenses as that put forward by
appellee in this case. No responsible person or corporation could be held liable for the most outrageous
acts of negligence, if they should be allowed to place a "middleman" between them and the public, and
escape liability by the manner in which they recompense their servants. 31

Generally, when an injury is caused by the negligence of a servant or employee, there instantly arises a
presumption of law that there was negligence on the part of the master or employer either in the selection
of the servant or employee (culpa in eligiendo) or in the supervision over him after the selection (culpa
vigilando), or both. The presumption is juris tantum and not juris et de jure; consequently, it may be
rebutted. Accordingly, the general rule is that if the employer shows to the satisfaction of the court that in
the selection and supervision of his employee he has exercised the care and diligence of a good father of
a family, the presumption is overcome and he is relieved of liability.32 However, with the enactment of the
motor vehicle registration law, the defenses available under Article 2180 of the Civil Code - that the
employee acts beyond the scope of his assigned task or that it exercised the due diligence of a good
father of a family to prevent damage – are no longer available to the registered owner of the motor
vehicle, because the motor vehicle registration law, to a certain extent, modified Article 2180.33

As such, there can be no other conclusion but to hold Lim vicariously liable with Mendoza.

This does not mean, however, that Lim is left without any recourse against Enriquez and Mendoza. Under
the civil law principle of unjust enrichment, the registered owner of the motor vehicle has a right to be
indemnified by the actual employer of the driver; and under Article 2181 of the Civil Code, whoever pays
for the damage caused by his dependents or employees may recover from the latter what he has paid or
delivered in satisfaction of the claim.

Having identified the persons liable, our next question is what may be awarded.

Actual or Compensatory Damages. Actual or compensatory damages are those awarded in satisfaction
of, or in recompense for, loss or injury sustained. They simply make good or replace the loss caused by
the wrong.34

Article 2202 of the Civil Code provides that in crimes and quasi delicts, the defendant shall be liable for all
damages which are the natural and probable consequences of the act or omission complained of. It is not
necessary that such damages have been foreseen or could have reasonably been foreseen by the
defendant. Article 2199 of the same Code, however, sets the limitation that, except as provided by law or
by stipulation, one is entitled to an adequate compensation only for such pecuniary loss suffered by him
as he has duly proved. As such, to warrant an award of actual or compensatory damages, the claimant
must prove that the damage sustained is the natural and probable consequences of the negligent act
and, moreover, the claimant must adequately prove the amount of such damage.
In the case at bar, the RTC, basing on the receipts submitted by respondents and which receipts
petitioners had the opportunity to examine, found that the total repairs on the Isuzu truck amounted to
₱142,757.40, and that the full hospitalization and medical expenses of Perez, Anla, Banca, and Repisada
amounted to ₱11,267.35. As such, these are the amounts that respondents are entitled to as actual and
compensatory damages.

Although respondents alleged in their complaint that the damage to their Isuzu truck caused them the loss
of a daily income of ₱1,000.00, such claim was not duly substantiated by any evidence on record, and
thus cannot be awarded in their favor.

Moral Damages. Moral damages are awarded to enable the injured party to obtain means, diversions or
amusements that will serve to alleviate the moral suffering he has undergone, by reason of the
defendant's culpable action.35

In prayers for moral damages, however, recovery is more an exception rather than the rule. Moral
damages are not meant to be punitive but are designed to compensate and alleviate the physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar harm unjustly caused to a person. To be entitled to such an award, the
claimant must satisfactorily prove that he has suffered damages and that the injury causing it has sprung
from any of the cases listed in Articles 2219 and 2220 of the Civil Code. Moreover, the damages must be
shown to be the proximate result of a wrongful act or omission. The claimant must thus establish the
factual basis of the damages and its causal tie with the acts of the defendant. 36

In fine, an award of moral damages calls for the presentation of 1) evidence of besmirched reputation or
physical, mental or psychological suffering sustained by the claimant; 2)a culpable act or omission
factually established; 3) proof that the wrongful act or omission of the defendant is the proximate cause of
the damages sustained by the claimant; and 4) the proof that the act is predicated on any of the instances
expressed or envisioned by Article 2219 and Article 2220 of the Civil Code. 37

A review of the complaint and the transcript of stenographic notes yields the pronouncement that
respondents neither alleged nor offered any evidence of besmirched reputation or physical, mental or
psychological suffering incurred by them. All that Leonora and her counsel had to say on the matter of
damages other than actual or compensatory damages is this:38

Q: Did you ever spend covering attorney’s fees?

A: Yes, sir. ₱50,000.00.

Q: Aside from the actual damage that you have mentioned x x x, how much more would you like this
Court to award you by way of moral damages?

A: ₱100,000.00, sir.

Q: How about exemplary damages?

A: ₱50,000.00, sir.

Q: What happened to you, what did you feel when the defendants failed to immediately repair your
vehicle that was damaged Madam Witness?

A: I have incurred expenses and I was forced to apply for a loan, sir.
In Kierulf v. CA,39 we observed that this Court cannot remind the bench and the bar often enough that in
order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental
anguish, fright and the like. Citing Francisco v. GSIS,40 the Court held that there must be clear testimony
on the anguish and other forms of mental suffering. Thus, if the plaintiff fails to take the witness stand and
testify as to his social humiliation, wounded feelings and anxiety, moral damages cannot be awarded.

Moreover, respondents were not able to show that their claim properly falls under Articles 2219 and 2220
of the Civil Code. Respondents cannot rely on Article 2219 (2) of the Civil Code which allows moral
damages in quasi-delicts causing physical injuries because in physical injuries, moral damages are
recoverable only by the injured party,41and in the case at bar, herein respondents were not the ones who
were actually injured.

In B.F. Metal (Corp.) v. Sps. Lomotan, et al.,42 the Court, in a claim for damages based on quasi-delict
causing physical injuries, similarly disallowed an award of moral damages to the owners of the damaged
vehicle, when neither of them figured in the accident and sustained injuries.

Neither can respondents rely on Article 21 of the Civil Code as the RTC erroneously did. Article 21 deals
with acts contra bonus mores, and has the following elements: (1) There is an act which is legal; (2) but
which is contrary to morals, good custom, public order, or public policy; (3) and it is done with intent to
injure.43 In the present case, it can hardly be said that Mendoza’s negligent driving and violation of traffic
laws are legal acts. Moreover, it was not proven that Mendoza intended to injure Perez, et al. Thus,
Article 21 finds no application to the case at bar. All in all, we find that the RTC and the CA erred in
granting moral damages to respondents. Exemplary Damages. Article 2229 of the Civil Code provides
that exemplary or corrective damages are imposed, by way of example or correction for the public good,
in addition to moral, temperate, liquidated or compensatory damages. Article 2231 of the same Code
further states that in quasi-delicts, exemplary damages may be granted if the defendant acted with gross
negligence.

Our jurisprudence sets certain conditions when exemplary damages may be awarded: First, they may be
imposed by way of example or correction only in addition, among others, to compensatory damages, and
cannot be recovered as a matter of right, their determination depending upon the amount of
compensatory damages that may be awarded to the claimant. Second, the claimant must first establish
his right to moral, temperate, liquidated or compensatory damages. Third, the wrongful act must be
accompanied by bad faith, and the award would be allowed only if the guilty party acted in a wanton,
fraudulent, reckless, oppressive or malevolent manner.44

In motor vehicle accident cases, exemplary damages may be awarded where the defendant’s misconduct
is so flagrant as to transcend simple negligence and be tantamount to positive or affirmative misconduct
rather than passive or negative misconduct. In characterizing the requisite positive misconduct which will
support a claim for punitive damages, the courts have used such descriptive terms as willful, wanton,
grossly negligent, reckless, or malicious, either alone or in combination. 45

Gross negligence is the absence of care or diligence as to amount to a reckless disregard of the safety of
persons or property. It evinces a thoughtless disregard of consequences without exerting any effort to
avoid them.46

In the case at bar, having established respondents’ right to compensatory damages, exemplary damages
are also in order, given the fact that Mendoza was grossly negligent in driving the Mayamy bus. His act of
intruding or encroaching on the lane rightfully occupied by the Isuzu truck shows his reckless disregard
for safety.

In Baño v. Bachelor Express, Inc., et al.,47 where an erring bus, in the process of overtaking a jeepney,
also encroached on the opposite lane, and consequently collided with a dump truck, the Court held the
driver of the bus grossly negligent and affirmed the award of exemplary damages. Attorney’s Fees. Article
2208 of the Civil Code enumerates the instances when attorney’s fees may be recovered:

Art. 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons
or to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s
valid and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmen’s compensation and employer’s liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney’s fees and
expenses of litigation should be recovered;

In all cases, the attorney’s fees and expenses of litigation must be reasonable.

From the very opening sentence of Article 2208 of the Civil Code, it is clearly intended to retain the award
of attorney’s fees as the exception in our law, as the general rule remains that attorney’s fees are not
recoverable in the absence of a stipulation thereto, the reason being that it is not sound policy to set a
premium on the right to litigate.48

As such, in Spouses Agustin v. CA,49 we held that, the award of attorney’s fees being an exception rather
than the general rule, it is necessary for the court to make findings of facts and law that would bring the
case within the exception and justify the grant of such award. Thus, the reason for the award of attorney’s
fees must be stated in the text of the court’s decision; otherwise, if it is stated only in the dispositive
portion of the decision, the same must be disallowed on appeal.

In the case at bar, the RTC Decision had nil discussion on the propriety of attorney’s fees, and it merely
awarded such in the dispositive. The CA Decision, on the other hand, merely stated that the award of
attorney’s fees is merited as such is allowed when exemplary damages are awarded.50 Following
established jurisprudence,51however, the CA should have disallowed on appeal said award of attorney’s
fees as the RTC failed to substantiate said award. Costs of suit. The Rules of Court provide that,
generally, costs shall be allowed to the prevailing party as a matter of course, thus:52
Section 1. Costs ordinarily follow results of suit.- Unless otherwise provided in these rules, costs shall be
allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons,
to adjudge that either party shall pay the costs of an action, or that the same be divided, as may be
equitable. No costs shall be allowed against the Republic of the Philippines, unless otherwise provided by
law.

In the present case, the award of costs of suit to respondents, as the prevailing party, is in order.
Interests.1âwphi1 Interest by way of damages has been defined as interest allowed in actions for breach
of contractor tort for the unlawful detention of money already due. This type of interest is frequently called
"moratory interest." Interest as a part of damage, is allowed, not by application of arbitrary rules, but as a
result of the justice of the individual case and as compensation to the injured party. 53

The legal provision on interests in quasi-delicts is Article 2211 of the Civil Code which provides that in
crimes and quasi-delicts, interest as part of the damage, may, in a proper case, be adjudicated in the
discretion of the court.

Generally, interest is allowed as a matter of right for failure to pay liquidated claims when due. 54 For
unliquidated claims, however, Article 2213 of the Civil Code provides that interest cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with reasonable
certainty.

In the case at bar, although the award of exemplary damages is unliquidated in the sense that petitioners
cannot know for sure, before judgment, the exact amount that they are required to pay to respondents,
the award of actual or compensatory damages, however, such as the truck repairs and medical
expenses, is arguably liquidated in that they can be measured against a reasonably certain
standard.55 Moreover, justice would seem to require that the delay in paying for past losses which can be
made reasonably certain should be compensated through an award of interest.56

WHEREFORE, premises considered, the Court Resolves to PARTIALLY GRANT the appeal by certiorari,
as follows:

1) DECLARE Mariano Mendoza and Elvira Lim solidarily liable to respondent Spouses Leonora
and Gabriel Gomez;

2) MAINTAIN the award of actual or compensatory damages in the amount of ₱142,757.40 for
the repair of the Isuzu Elf truck, with legal interest beginning 31 January 2001 until fully paid;

3) GRANT additional actual or compensatory damages in the amount of ₱11,267.35 for the
medical expenses shouldered by respondent Spouses Leonora and Gabriel Gomez, with legal
interest beginning 31 January 2001 until fully paid;

4) DELETE the award of moral damages;

5) MAINTAIN the award of exemplary damages at ₱50,000.00;

6) DELETE the award of attorney's fees; and

7) MAINTAIN the award of costs of suit.

SO ORDERED.
G.R. No. 134514 December 8, 1999

INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., petitioner,

vs.
PRUDENTIAL GUARANTEE & ASSURANCE CO., INC., respondent.

PANGANIBAN, J.:

When cargo is placed on a vessel at the "shipper's load and count," the arrastre operator is required only
to deliver to the consignee the container van received from the shipper, not to verify or to compare the
contents thereof with those declared by the shipper. A claim for reimbursement for the loss, damage or
misdelivery of goods must be filed within 15 days from the date the consignee learns of such problem(s).

The Case

For the resolution of the Court is a Petition for Review under Rule 45 of the Rules of Court assailing the
March 10, 1998 Decision and the June 23, 1998 Resolution both promulgated by the Court of Appeals in
CA-GR CV No. 52129 reversing the trial court's dismissal of the Complaint for the collection of a sum of
money filed by Prudential Guarantee & Insurance Co., Inc. (Prudential) against International Container
Terminal Services, Inc. (ICTSI).

The Facts

The challenged Decision sets forth the facts of this case as follows:

On April 25, 1990, mother vessel "Tao He" loaded and received on board in San
Francisco, California, a shipment of five (5) lots of canned foodstuff complete and in good
order and condition for transport to Manila in favor of Duel Food Enterprises ("consignee"
for brevity). China Ocean Shipping Company issued the corresponding bill of lading
therefor.

Consignee insured the shipment with Prudential Guarantee and Assurance, Inc. against
all risks for P1,921,827.00 under Marine Insurance Policy No. 20RN-3011/90.

On May 30, 1990, the shipment arrived at the Port of Manila and discharged by [the]
vessel MS "Wei He" in favor of International Container Terminal Services, Inc. for
safekeeping.

On June 1, 1990, A. D. Reyna Customs Brokerage ("defendant brokerage" for brevity)

withdrew the shipment and delivered the same to [the] consignee. An inspection thereof
revealed that 161 cartons were missing valued at P85,984.40.
 Claim for indemnification of the loss having been denied by [ICTSI] and [the] brokerage,
consignee sought payment from [Prudential] under the marine cargo policy. Consignee
received a compromised sum of P66,730.12 in settlement thereof. As subrogee,
[Prudential] instituted the instant complaint against said defendants [ICTSI and
brokerage].

Traversing the complaint, [ICTSI] counters that it observed extraordinary diligence over
the subject shipment while under its custody; that the loss is not attributable to its fault or
its agent, representative or employee; that consignee failed to file a formal claim against
it in accordance with PPA Administrative Order No. 10-81; and that the complaint states
no cause of action. By way of crossclaim, it sought reimbursement from defendant
brokerage in the event it is adjudged to pay the loss.

In its Order dated March 3, 1992, the court a quo upon [Prudential's] motion, declared
defendant brokerage in default for failure to file [it's] answer within the reglementary
period. Acting on [ICTSI's] motion, the court a quo, in its Order dated May 27, 1992,
allowed the former to present its evidence ex-parte against defendant brokerage relative
to the cross claim.

On May 19, 1993, the court a quo rendered a decision dismissing the complaint against
defendant brokerage for lack of evidence.

In its Order of July 12, 1993, the court a quo, upon motion of [ICTSI] and [Prudential],
vacated the decision dated May 19, 1993 and set the case for hearing to give [ICTSI] an
opportunity to cross examine [Prudential's] witnesses. 1

On November 8, 1995, the trial court 2 rendered a Decision dismissing Prudential's Complaint against
ICTSI in this wise: 3

Failure on the part of the consignee to comply with the terms and conditions of the
contract with [ICTSI], [Prudential] is not placed in a better position than the consignee
who cannot claim damages against [ICTSI]. Hence, the complaint is hereby DISMISSED.

Reconsideration was denied by the Regional Trial Court in its Order dated December 27, 1995. 4

Disposing of the appeal, the CA 5 ruled:

WHEREFORE, the decision appealed from is hereby REVERSED and SET ASIDE and,
in lieu thereof, judgment is hereby rendered ordering [appellee] International [C]ontainer
Terminal Services, Inc. (ICTSI) to pay appellant the sum of P66,730.12 with legal interest
from May 13, 1991, until fully paid, plus 10% of . . . said claim by way of attorney's fee. 6

Reconsideration of the CA Decision was denied in the herein challenged June 23, 1998 Resolution. 7

Ruling of the Court of Appeals

The appellate court found ICTSI negligent in its duty to exercise due diligence over the shipment. It
concluded that the shortage was due to pilferage of the shipment while the sea vans were stored at the
container yard of ICTSI.

It also ruled that the filing of a claim depended on the issuance of a certificate of loss by ICTSI based on
the liability clause printed on the back of the arrastre and wharfage receipt. Since ICTSI did not issue
such a certificate despite being informed of the shortage, the 15-day period given to the consignee for
filing a formal claim never began. By subrogation, Prudential, as insurer of the consignee, was entitled to
hold the ICTSI liable for the shortage.

Assignment of Errors

Petitioner claims that the appellate court committed reversible errors (1) in ruling that ICTSI failed to
adduce convincing evidence to rebut the finding of the independent adjuster and (2) in allowing the
Complaint despite the failure of the consignee to file a formal claim within the period stated on the dorsal
side of the arrastre and wharfage receipt. 8

This Court's Ruling

The Petition is meritorious.

First Issue: Proof of Negligence

The legal relationship between an arrastre operator and a consignee is akin to that between a
warehouseman and a depositor. 9 As to both the nature of the functions and the place of their
performance, an arrastre operator's services are clearly not maritime in character. 10

In a claim for loss filed by a consignee, the burden of proof to show compliance with the obligation to
deliver the goods to the appropriate party devolves upon the arrastre operator. 11 Since the safekeeping
of the goods rests within its knowledge, it must prove that the losses were not due to its negligence or
that of its employees. 12

To discharge this burden, petitioner presented five Arrastre and Wharfage Bill/Receipts, which also
doubled as container yard gate passes, covering the whole shipment in question. The short-landed
shipment was covered by the gate pass marked "Exhibit 5." 13 The latter bore the signature of a
representative of the consignee, acknowledging receipt of the shipment in good order and condition (Exh.
"5-e"). Thus, we see no reason to dispute the finding of the trial court that "the evidence adduced by the
parties will show that the consignee received the container vans . . . in good condition (Exhs. 1-6)." 14

By its signature on the gate pass and by its failure to protest on time, the consignee is deemed to have
acknowledged receipt of the goods in good order and condition.

Lamberto Cortez, petitioner's witness, testified that he personally examined the shipment and identified
the gate pass which covered the delivery of the shipment and which was countersigned by the
consignee's representative. He explained the import of his examination as follows: 15

A: Before I sign this gate pass, sir, the representative of the consignee
[gives] it to me then I write down the items, the goods to be delivered so
that it will be mounted in the truck of the consignee. After mounting it, it
will go to our office then I will check the number of the container if it is
properly padlocked, and if it is okay, I will place there okay and I will sign
it to be countersigned by the representative of the consignee, sir.

Q: In other words, Mr. Witness, you said that this particular shipment was
padlocked?

A: Yes, sir.

xxx xxx xxx

 Q: You also stated that the shipment was okay, will you point to that
particular portion of the gate pass?

A: After the physical check-up, I placed there okay, meaning it ha[d] no

damage, sir.

The assailed Decision ruled that the petitioner was negligent as evidenced by the loss of the original seal
and padlock of the container, which were subsequently replaced with safety wire while the shipment was
still stored at the ICTSI compound. 16

The appellate court cites, as proof of petitioner's negligence, the Survey/Final Report of the independent
adjuster, Tan-Gatue Adjustment Company, Inc. (Exh. "F"). 17 The Report stated:

The 3,439 cartons comprising [the] balance of the shipment were found
and accepted by consignee's representative in good order.

In our opinion, shortage sustained by the shipment was due to pilferage

whilst the sea vans containing the shipment were stored at [the]
[c]ontainer [y]ard of the [petitioner], [at] North Harbor, Manila but we
cannot categorically state as to when and who undertook [it] due to the
absence of documentary evidence.

The customs safety wire as well as the padlock of Sea Van No. HTMU-
803515-6 where the short (missing) cartons discovered may have been
tampered [with]/opened and returned/re-closed with finesse which [was]
unfortunately not noticed during delivery and prior to opening at
consignee's warehouse.

All the sea vans were reportedly full of contents when examined by the
customs examiner for tax evaluation of contents.

The [ship agents] and arrastre contractors['] representative reportedly

refused the invitation of the consignee to witness the stripping/withdrawal
of the same from the sea vans at their warehouse averring that the
shipment per Bill of Lading was shipped under ["]Shipper's Load and
Count" hence, loss/damage, if any, to the shipment is not their liability.

We thoroughly investigate[d] this particular case at International

Container Terminal Services, Inc., North Harbor, Manila[,] but up to this
time no person(s) and/or group(s) could be pinpointed liable [for] the
shortage of 161 cartons, hence, the delay [in the] issuance of this
report. 18

The adjuster insists that the shipment was complete when the customs examiner opened the sea vans for
tax evaluation. However, the latter's report was not presented. Hence, there is no basis for comparing the
cartons subjected to customs examination and those which were delivered to the consignee.

More important, the cosigned goods were shipped under "Shipper's Load and Count." This means that
the shipper was solely responsible for the loading of the container, while the carrier was oblivious to the
contents of the
shipment. 19 Protection against pilferage of the shipment was the consignee's lookout. The arrastre
operator was, like any ordinary depositary, duty-bound to take good care of the goods received from the
vessel and to turn the same over to the party entitled to their possession, subject to such qualifications as
may have validly been imposed in the contract between the parties. 20 The arrastre operator was not
required to verify the contents of the container received and to compare them with those declared by the
shipper because, as earlier stated, the cargo was at the shipper's load and count. The arrastre operator
was expected to deliver to the consignee only the container received from the carrier.

Petitioner claims that the absence of a request for a bad order survey belied the consignee's assertion
that the shipment was filched while in ICTSI's custody, and that such absence did not stop the 15-day
period from running. Normally, a request for a bad order survey is made in case there is an apparent or
presumed loss or damage. The consignee made no such request despite being provided by the petitioner
a form therefor.

The lack of a bad order survey does not toll the prescriptive period for filing a claim for loss, because the
consignee can always file a provisional claim within 15 days from the time it discovers the loss or
damage. Such a claim would place the arrastre operator on notice that the shipment sustained damage or
loss, even if the exact amount thereof could not be specified at the moment. In this manner, the arrastre
operator can immediately verify its culpability and liability. A provisional claim seasonably filed is sufficient
compliance with the liability clause. 21

From the foregoing discussion, it is clear that the appellate court erred in concluding that the shortage
was due to the negligence of the arrastre operator.

Second Issue:

Period to File a Claim for Loss

Petitioner contends that the appellate court misconstrued the liability clause printed on the dorsal side of
the Arrastre and Wharfage Bill/Receipt. The contentious provision of this document reads:

"Liability Clause"

The duly authorized representative of herein named CONSIGNEE, and

ICTSI hereby certify to the correctness of the description of the
containerized cargo covered by this CY GATEPASS, the issuance of
which constitutes delivery to and receipt by Consignee of the
containerized cargo as described in this CY GATEPASS, in good order
and condition, unless otherwise indicated. This CY GATEPASS is
subject to all terms and conditions defined in the Existing Management
Contract between the PPA & ICTSI[;] PPA Administrative Order No. 10-
81, ICTSI shall, however, be liable to the extent of the local invoice value
of each package but not to exceed P3,500 Philippine currency for
imported cargoes and P1,000 for domestic cargoes (consistent with
Administrative Order 10-81 unless revised), unless the value thereof is
otherwise specified or manifested or communicated in writing together
with the invoice value and supported by a certified packing list to ICTSI
by any interested party/ies before the discharge of the cargo and
corresponding port charges ha[ve] been fully paid. This provision shall
only apply upon filing of a formal claim within 15 days from the date of
issuance of the Bad Order Certificate or certificate of loss, damage or
non-delivery by ICTSI. 22

Petitioner argues that the 15-day limitation for filing a claim against the arrastre operator should run from
the time of the delivery of the goods to the consignee, and that the latter's failure to file a claim within said
period is sufficient ground to deny the claim for loss.
On the other hand, the appellate court overruled the trial court, because the filing of the claim was
dependent upon the issuance of a certificate of loss, damage or nondelivery. Since the petitioner did not
issue such certificate, the 15-day limit, the CA opined, did not begin to run against the consignee. Private
respondent argues that the clear and unambiguous language of the liability clause does not support
petitioner's construction.

We agree with the petitioner. In order to hold the arrastre operator liable for lost or damaged goods, the
claimant should file with the operator a claim for the value of said goods "within fifteen (15) days from the
date of discharge of the last package from the carrying vessel . . . ." 23 The filing of the claim for loss
within the 15-day period is in the nature of a prescriptive period for bringing an action and is a condition
precedent to holding the arrastre operator liable. This requirement is a defense made available to the
arrastre operator, who may use or waive it as a matter of personal discretion. 24

The said requirement is not an empty formality. It gives the arrastre contractor a reasonable opportunity
to check the validity of the claim, while the facts are still fresh in the minds of the persons who took part in
the transaction, and while the pertinent documents are still available. Such period is sufficient for the
consignee to file a provisional claim after the discharge of the goods from the vessel. 25 For this reason,
we believe that the 15-day limit is reasonable.

We should hasten to add that while a literal reading of the liability clause makes the time limit run from the
moment the shipment is discharged from the carrying vessel, this Court has chosen to interpret this
condition liberally in an endeavor to promote fairness, equity and justness. 26 A long line of cases has
held that the 15-day period for filing claims should be counted from the date the consignee learns of the
loss, damage or misdelivery of goods. 27

In the case at bar, the consignee had all the time to make a formal claim from the day it discovered the
shortage in the shipment, which was June 4, 1990, as shown by the records. According to the
independent adjuster, the stripping or opening of the sea vans containing the shipped canned goods was
made at the consignee's place upon receipt of the shipment. After discovering the loss, the consignee
asked the adjuster to investigate the reason for the short-landing of the shipment. By the time the claim
for loss was filed on October 2, 1990, four months had already elapsed from the date of delivery, June 4,
1990.

Prudential did not explain the delay. It did not even allege or prove that the discovery of the shortage was
made by the consignee only 15-days before October 2, 1990. The latter had to wait for the independent
adjuster's survey report dated September 7, 1990, before filing the claim with the former. By that time,
however, it was clearly too late, as the 15-day period had expired.

In any event, within 15 days from the time the loss was discovered, the consignee could have filed a
provisional claim, which would have constituted substantial compliance with the rule. 28 Its failure to do so
relieved the arrastre operator of any liability for the nondelivery of the goods. 29 More specifically, the
failure to file a provisional claim bars a subsequent action in court. 30 The rationale behind the time limit is
that, without it, a consignee could too easily concoct or fabricate claims and deprive the arrastre operator
of the best opportunity to probe immediately their veracity.

WHEREFORE, the Petition is hereby GRANTED. The assailed Decision and Resolution are SET ASIDE,
and the trial court's Decision is REINSTATED. No pronouncement as to costs.

SO ORDERED.
G.R. No. 200289 November 25, 2013

WESTWIND SHIPPING CORPORATION, Petitioner,

vs.
UCPB GENERAL INSURANCE CO., INC. and ASIAN TERMINALS INC., Respondents.

x-----------------------x

G.R. No. 200314

ORIENT FREIGHT INTERNATIONAL INC., Petitioner,

vs.
UCPB GENERAL INSURANCE CO., INC. and ASIAN TERMINALS INC., Respondents.

DECISION

PERALTA, J.:

These two consolidated cases challenge, by way of petition for certiorari under Rule 45 of the 1997 Rules
of Civil Procedure, September 13, 2011 Decision1 and January 19, 2012 Resolution2 of the Court of
Appeals (CA) in CA-G.R. CV No. 86752, which reversed and set aside the January 27, 2006 Decision 3 of
the Manila City Regional Trial Court Branch (RTC) 30. The facts, as established by the records, are as
follows:

On August 23, 1993, Kinsho-Mataichi Corporation shipped from the port of Kobe, Japan, 197 metal
containers/skids of tin-free steel for delivery to the consignee, San Miguel Corporation (SMC). The
shipment, covered by Bill of Lading No. KBMA-1074,4 was loaded and received clean on board M/V
Golden Harvest Voyage No. 66, a vessel owned and operated by Westwind Shipping Corporation
(Westwind).

SMC insured the cargoes against all risks with UCPB General Insurance Co., Inc. (UCPB) for US Dollars:
One Hundred Eighty-Four Thousand Seven Hundred Ninety-Eight and Ninety-Seven Centavos
(US$184,798.97), which, at the time, was equivalent to Philippine Pesos: Six Million Two Hundred Nine
Thousand Two Hundred Forty-Five and Twenty-Eight Centavos (₱6,209,245.28).

The shipment arrived in Manila, Philippines on August 31, 1993 and was discharged in the custody of the
arrastre operator, Asian Terminals, Inc. (ATI), formerly Marina Port Services, Inc.5 During the unloading
operation, however, six containers/skids worth Philippine Pesos: One Hundred Seventeen Thousand
Ninety-Three and Twelve Centavos (₱117,093.12) sustained dents and punctures from the forklift used
by the stevedores of Ocean Terminal Services, Inc. (OTSI) in centering and shuttling the containers/skids.
As a consequence, the local ship agent of the vessel, Baliwag Shipping Agency, Inc., issued two Bad
Order Cargo Receipt dated September 1, 1993.

On September 7, 1993, Orient Freight International, Inc. (OFII), the customs broker of SMC, withdrew
from ATI the 197 containers/skids, including the six in damaged condition, and delivered the same at
SMC’s warehouse in Calamba, Laguna through J.B. Limcaoco Trucking (JBL). It was discovered upon
discharge that additional nine containers/skids valued at Philippine Pesos: One Hundred Seventy-Five
Thousand Six Hundred Thirty-Nine and Sixty-Eight Centavos (₱175,639.68) were also damaged due to
the forklift operations; thus, making the total number of 15 containers/skids in bad order.

Almost a year after, on August 15, 1994, SMC filed a claim against UCPB, Westwind, ATI, and OFII to
recover the amount corresponding to the damaged 15 containers/skids. When UCPB paid the total sum
of Philippine Pesos: Two Hundred Ninety-Two Thousand Seven Hundred Thirty-Two and Eighty
Centavos (₱292,732.80), SMC signed the subrogation receipt. Thereafter, in the exercise of its right of
subrogation, UCPB instituted on August 30, 1994 a complaint for damages against Westwind, ATI, and
OFII.6

After trial, the RTC dismissed UCPB’s complaint and the counterclaims of Westwind, ATI, and OFII. It
ruled that the right, if any, against ATI already prescribed based on the stipulation in the 16 Cargo Gate
Passes issued, as well as the doctrine laid down in International Container Terminal Services, Inc. v.
Prudential Guarantee & Assurance Co. Inc.7 that a claim for reimbursement for damaged goods must be
filed within 15 days from the date of consignee’s knowledge. With respect to Westwind, even if the action
against it is not yet barred by prescription, conformably with Section 3 (6) of the Carriage of Goods by
Sea Act (COGSA) and Our rulings in E.E. Elser, Inc., et al. v. Court of Appeals, et al.8 and Belgian
Overseas Chartering and Shipping N.V. v. Phil. First Insurance Co., Inc.,9 the court a quo still opined that
Westwind is not liable, since the discharging of the cargoes were done by ATI personnel using forklifts
and that there was no allegation that it (Westwind) had a hand in the conduct of the stevedoring
operations. Finally, the trial court likewise absolved OFII from any liability, reasoning that it never
undertook the operation of the forklifts which caused the dents and punctures, and that it merely
facilitated the release and delivery of the shipment as the customs broker and representative of SMC.

On appeal by UCPB, the CA reversed and set aside the trial court. The fallo of its September 13, 2011
Decision directed:

WHEREFORE, premises considered, the instant appeal is hereby GRANTED. The Decision dated
January 27, 2006 rendered by the court a quo is REVERSED AND SET ASIDE. Appellee Westwind
Shipping Corporation is hereby ordered to pay to the appellant UCPB General Insurance Co., Inc., the
amount of One Hundred Seventeen Thousand and Ninety-Three Pesos and Twelve Centavos
(Php117,093.12), while Orient Freight International, Inc. is hereby ordered to pay to UCPB the sum of
One Hundred Seventy-Five Thousand Six Hundred Thirty-Nine Pesos and Sixty-Eight Centavos
(Php175,639.68). Both sums shall bear interest at the rate of six (6%) percent per annum, from the filing
of the complaint on August 30, 1994 until the judgment becomes final and executory. Thereafter, an
interest rate of twelve (12%) percent per annum shall be imposed from the time this decision becomes
final and executory until full payment of said amounts.

SO ORDERED.10

While the CA sustained the RTC judgment that the claim against ATI already prescribed, it rendered a
contrary view as regards the liability of Westwind and OFII. For the appellate court, Westwind, not ATI, is
responsible for the six damaged containers/skids at the time of its unloading. In its rationale, which
substantially followed Philippines First Insurance Co., Inc. v. Wallem Phils. Shipping, Inc., 11 it concluded
that the common carrier, not the arrastre operator, is responsible during the unloading of the cargoes
from the vessel and that it is not relieved from liability and is still bound to exercise extraordinary diligence
at the time in order to see to it that the cargoes under its possession remain in good order and condition.
The CA also considered that OFII is liable for the additional nine damaged containers/skids, agreeing with
UCPB’s contention that OFII is a common carrier bound to observe extraordinary diligence and is
presumed to be at fault or have acted negligently for such damage. Noting the testimony of OFII’s own
witness that the delivery of the shipment to the consignee is part of OFII’s job as a cargo forwarder, the
appellate court ruled that Article 1732 of the New Civil Code (NCC) does not distinguish between one
whose principal business activity is the carrying of persons or goods or both and one who does so as an
ancillary activity. The appellate court further ruled that OFII cannot excuse itself from liability by insisting
that JBL undertook the delivery of the cargoes to SMC’s warehouse. It opined that the delivery receipts
signed by the inspector of SMC showed that the containers/skids were received from OFII, not JBL. At
the most, the CA said, JBL was engaged by OFII to supply the trucks necessary to deliver the shipment,
under its supervision, to SMC.

Only Westwind and OFII filed their respective motions for reconsideration, which the CA denied; hence,
they elevated the case before Us via petitions docketed as G.R. Nos. 200289 and 200314, respectively.

Westwind argues that it no longer had actual or constructive custody of the containers/skids at the time
they were damaged by ATI’s forklift operator during the unloading operations. In accordance with the
stipulation of the bill of lading, which allegedly conforms to Article 1736 of the NCC, it contends that its
responsibility already ceased from the moment the cargoes were delivered to ATI, which is reckoned from
the moment the goods were taken into the latter’s custody. Westwind adds that ATI, which is a completely
independent entity that had the right to receive the goods as exclusive operator of stevedoring and
arrastre functions in South Harbor, Manila, had full control over its employees and stevedores as well as
the manner and procedure of the discharging operations.

As for OFII, it maintains that it is not a common carrier, but only a customs broker whose participation is
limited to facilitating withdrawal of the shipment in the custody of ATI by overseeing and documenting the
turnover and counterchecking if the quantity of the shipments were in tally with the shipping documents at
hand, but without participating in the physical withdrawal and loading of the shipments into the delivery
trucks of JBL. Assuming that it is a common carrier, OFII insists that there is no need to rely on the
presumption of the law – that, as a common carrier, it is presumed to have been at fault or have acted
negligently in case of damaged goods – considering the undisputed fact that the damages to the
containers/skids were caused by the forklift blades, and that there is no evidence presented to show that
OFII and Westwind were the owners/operators of the forklifts. It asserts that the loading to the trucks were
made by way of forklifts owned and operated by ATI and the unloading from the trucks at the SMC
warehouse was done by way of forklifts owned and operated by SMC employees. Lastly, OFII avers that
neither the undertaking to deliver nor the acknowledgment by the consignee of the fact of delivery makes
a person or entity a common carrier, since delivery alone is not the controlling factor in order to be
considered as such.

Both petitions lack merit.

The case of Philippines First Insurance Co., Inc. v. Wallem Phils. Shipping, Inc. 12 applies, as it settled the
query on which between a common carrier and an arrastre operator should be responsible for damage or
loss incurred by the shipment during its unloading. We elucidated at length:

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 transported by them. Subject to certain exceptions
enumerated under Article 1734 of the Civil Code, common carriers are responsible for the loss,
destruction, or deterioration of the goods. The extraordinary responsibility of the common carrier lasts
from the time the goods are unconditionally placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or constructively, by the carrier to the consignee, or to
the person who has a right to receive them.

For marine vessels, Article 619 of the Code of Commerce provides that the ship captain is liable for the
cargo from the time it is turned over to him at the dock or afloat alongside the vessel at the port of
loading, until he delivers it on the shore or on the discharging wharf at the port of unloading, unless
agreed otherwise. In Standard Oil Co. of New York v. Lopez Castelo, the Court interpreted the ship
captain’s liability as ultimately that of the shipowner by regarding the captain as the representative of the
shipowner.
Lastly, Section 2 of the COGSA provides that under every contract of carriage of goods by sea, the
carrier in relation to the loading, handling, stowage, carriage, custody, care, and discharge of such goods,
shall be subject to the responsibilities and liabilities and entitled to the rights and immunities set forth in
the Act. Section 3 (2) thereof then states that among the carriers’ responsibilities are to properly and
carefully load, handle, stow, carry, keep, care for, and discharge the goods carried.

xxxx

On the other hand, the functions of an arrastre operator involve the handling of cargo deposited on the
wharf or between the establishment of the consignee or shipper and the ship's tackle. Being the custodian
of the goods discharged from a vessel, an arrastre operator's duty is to take good care of the goods and
to turn them over to the party entitled to their possession.

Handling cargo is mainly the arrastre operator's principal work so its drivers/operators or employees
should observe the standards and measures necessary to prevent losses and damage to shipments
under its custody.

In Fireman’s Fund Insurance Co. v. Metro Port Service, Inc., the Court explained the relationship and
responsibility of an arrastre operator to a consignee of a cargo, to quote:

The legal relationship between the consignee and the arrastre operator is akin to that of a depositor and
warehouseman. The relationship between the consignee and the common carrier is similar to that of the
consignee and the arrastre operator. Since it is the duty of the ARRASTRE to take good care of the
goods that are in its custody and to deliver them in good condition to the consignee, such responsibility
also devolves upon the CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with
and obligated to deliver the goods in good condition to the consignee. (Emphasis supplied) (Citations
omitted)

The liability of the arrastre operator was reiterated in Eastern Shipping Lines, Inc. v. Court of Appeals with
the clarification that the arrastre operator and the carrier are not always and necessarily solidarily liable
as the facts of a case may vary the rule.

Thus, in this case, the appellate court is correct insofar as it ruled that an arrastre operator and a carrier
may not be held solidarily liable at all times. But the precise question is which entity had custody of the
shipment during its unloading from the vessel?

The aforementioned Section 3 (2) of the COGSA states that among the carriers’ responsibilities are to
properly and carefully load, care for and discharge the goods carried. The bill of lading covering the
subject shipment likewise stipulates that the carrier’s liability for loss or damage to the goods ceases after
its discharge from the vessel. Article 619 of the Code of Commerce holds a ship captain liable for the
cargo from the time it is turned over to him until its delivery at the port of unloading.

In a case decided by a U.S. Circuit Court, Nichimen Company v. M/V Farland, it was ruled that like the
duty of seaworthiness, the duty of care of the cargo is non-delegable, and the carrier is accordingly
responsible for the acts of the master, the crew, the stevedore, and his other agents. It has also been
held that it is ordinarily the duty of the master of a vessel to unload the cargo and place it in readiness for
delivery to the consignee, and there is an implied obligation that this shall be accomplished with sound
machinery, competent hands, and in such manner that no unnecessary injury shall be done thereto. And
the fact that a consignee is required to furnish persons to assist in unloading a shipment may not relieve
the carrier of its duty as to such unloading.

xxxx
It is settled in maritime law jurisprudence that cargoes while being unloaded generally remain under the
custody of the carrier x x x.13

In Regional Container Lines (RCL) of Singapore v. The Netherlands Insurance Co. (Philippines),
Inc.14 and Asian Terminals, Inc. v. Philam Insurance Co., Inc.,15 the Court echoed the doctrine that
cargoes, while being unloaded, generally remain under the custody of the carrier. We cannot agree with
Westwind’s disputation that "the carrier in Wallem clearly exercised supervision during the discharge of
the shipment and that is why it was faulted and held liable for the damage incurred by the shipment
during such time." What Westwind failed to realize is that the extraordinary responsibility of the common
carrier lasts until the time the goods are actually or constructively delivered by the carrier to the consignee
or to the person who has a right to receive them. There is actual delivery in contracts for the transport of
goods when possession has been turned over to the consignee or to his duly authorized agent and a
reasonable time is given him to remove the goods.16 In this case, since the discharging of the
containers/skids, which were covered by only one bill of lading, had not yet been completed at the time
the damage occurred, there is no reason to imply that there was already delivery, actual or constructive,
of the cargoes to ATI. Indeed, the earlier case of Delsan Transport Lines, Inc. v. American Home
Assurance Corp.17 serves as a useful guide, thus:

Delsan’s argument that it should not be held liable for the loss of diesel oil due to backflow because the
same had already been actually and legally delivered to Caltex at the time it entered the shore tank holds
no water. It had been settled that the subject cargo was still in the custody of Delsan because the
discharging thereof has not yet been finished when the backflow occurred. Since the discharging of the
cargo into the depot has not yet been completed at the time of the spillage when the backflow occurred,
there is no reason to imply that there was actual delivery of the cargo to the consignee. Delsan is
straining the issue by insisting that when the diesel oil entered into the tank of Caltex on shore, there was
legally, at that moment, a complete delivery thereof to Caltex. To be sure, the extraordinary responsibility
of common carrier lasts from the time the goods are unconditionally placed in the possession of, and
received by, the carrier for transportation until the same are delivered, actually or constructively, by the
carrier to the consignee, or to a person who has the right to receive them. The discharging of oil products
to Caltex Bulk Depot has not yet been finished, Delsan still has the duty to guard and to preserve the
cargo. The carrier still has in it the responsibility to guard and preserve the goods, a duty incident to its
having the goods transported.

To recapitulate, common carriers, from the nature of their business and for reasons of public policy, are
bound to observe extraordinary diligence in vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case. The mere proof of delivery of
goods in good order to the carrier, and their arrival in the place of destination in bad order, make out a
prima facie case against the carrier, so that if no explanation is given as to how the injury occurred, the
carrier must be held responsible. It is incumbent upon the carrier to prove that the loss was due to
accident or some other circumstances inconsistent with its liability.18

The contention of OFII is likewise untenable. A customs broker has been regarded as a common carrier
because transportation of goods is an integral part of its business. 19 In Schmitz Transport & Brokerage
Corporation v. Transport Venture, Inc.,20 the Court already reiterated: It is settled that under a given set of
facts, a customs broker may be regarded as a common carrier.1âwphi1 Thus, this Court, in A.F. Sanchez
Brokerage, Inc. v. The Honorable Court of Appeals held:

The appellate court did not err in finding petitioner, a customs broker, to be also a common carrier, as
defined under Article 1732 of the Civil Code, to wit, 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.

xxxx
Article 1732 does not distinguish between one whose principal business activity is the carrying of goods
and one who does such carrying only as an ancillary activity. The contention, therefore, of petitioner that it
is not a common carrier but a customs broker whose principal function is to prepare the correct customs
declaration and proper shipping documents as required by law is bereft of merit. It suffices that petitioner
undertakes to deliver the goods for pecuniary consideration.

And in Calvo v. UCPB General Insurance Co. Inc., this Court held that as the transportation of goods is
an integral part of a customs broker, the customs broker is also a common carrier. For to declare
otherwise "would be to deprive those with whom [it] contracts the protection which the law affords them
notwithstanding the fact that the obligation to carry goods for [its] customers, is part and parcel of
petitioner’s business."21

That OFII is a common carrier is buttressed by the testimony of its own witness, Mr. Loveric Panganiban
Cueto, that part of the services it offers to clients is cargo forwarding, which includes the delivery of the
shipment to the consignee.22 Thus, for undertaking the transport of cargoes from ATI to SMC’s
warehouse in Calamba, Laguna, OFII is considered a common carrier. As long as a person or corporation
holds itself to the public for the purpose of transporting goods as a business, it is already considered a
common carrier regardless of whether it owns the vehicle to be used or has to actually hire one.

As a common carrier, OFII is mandated to observe, under Article 1733 of the Civil Code,23 extraordinary
diligence in the vigilance over the goods24 it transports according to the peculiar circumstances of each
case. In the event that the goods are lost, destroyed or deteriorated, it is presumed to have been at fault
or to have acted negligently unless it proves that it observed extraordinary diligence.25 In the case at bar it
was established that except for the six containers/skids already damaged OFII received the cargoes from
ATI in good order and condition; and that upon its delivery to SMC additional nine containers/skids were
found to be in bad order as noted in the Delivery Receipts issued by OFII and as indicated in the Report
of Cares Marine Cargo Surveyors. Instead of merely excusing itself from liability by putting the blame to
ATI and SMC it is incumbent upon OFII to prove that it actively took care of the goods by exercising
extraordinary diligence in the carriage thereof. It failed to do so. Hence its presumed negligence under
Article 1735 of the Civil Code remains unrebutted.

WHEREFORE, premises considered the petitions of Westwind and OFII in G.R. Nos. 200289 and 200314
respectively are DENIED. The September 13 2011 Decision and January 19 2012 Resolution of the Court
of Appeals in CA-G.R. CV No. 86752 which reversed and set aside the January 27 2006 Decision of the
Manila City Regional Trial Court Branch 30 are AFFIRMED.

SO ORDERED.
G.R. No. 185964 June 16, 2014

ASIAN TERMINALS, INC., Petitioner,

vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.

DECISION

REYES, J.:

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and set
aside the Decision2 dated October 10, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99021 which
adjudged petitioner Asian Terminals, Inc. (ATI) liable to pay the money claims of respondent First
Lepanto-Taisho Insurance Corporation (FIRST LEPANTO).

The Undisputed Facts

On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags complete
and in good condition were loaded and received on board M/V "Da Feng" owned by China Ocean
Shipping Co. (COSCO) in favor of consignee, Grand Asian Sales, Inc. (GASI). Based on a Certificate of
Insurance4 dated August 24, 1995, it appears that the shipment was insured against all risks by GASI with
FIRST LEPANTO for ₱7,959,550.50 under Marine Open Policy No. 0123.

The shipment arrived in Manila on July 18, 1996 and was discharged into the possession and custody of
ATI, a domestic corporation engaged in arrastre business. The shipment remained for quite some time at
ATI’s storage area until it was withdrawn by broker, Proven Customs Brokerage Corporation (PROVEN),
on August 8 and 9, 1996 for delivery to the consignee. Upon receipt of the shipment, 5 GASI subjected the
same to inspection and found that the delivered goods incurred shortages of 8,600 kilograms and spillage
of 3,315 kg for a total of11,915 kg of loss/damage valued at ₱166,772.41.

GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping Lines, Inc. (SMITH
BELL),6ATI7 and PROVEN8 but was denied. Hence, it pursued indemnification from the shipment’s
insurer.9

After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the amount of ₱165,772.40
as insurance indemnity.10
Thereafter, GASI executed a Release of Claim 11 discharging FIRST LEPANTO from any and all liabilities
pertaining to the lost/damaged shipment and subrogating it to all the rights of recovery and claims the
former may have against any person or corporation in relation to the lost/damaged shipment.

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in the Philippines,
SMITH BELL, PROVEN and ATI, reimbursement of the amount it paid to GASI. When FIRST LEPANTO’s
demands were not heeded, it filed on May 29, 1997 a Complaint12 for sum of money before the
Metropolitan Trial Court (MeTC) of Manila, Branch 3. FIRST LEPANTO sought that it be reimbursed the
amount of 166,772.41, twenty-five percent (25%) thereof as attorney’s fees, and costs of suit.

ATI denied liability for the lost/damaged shipment and claimed that it exercised due diligence and care in
handling the same.13 ATI averred that upon arrival of the shipment, SMITH BELL requested for its
inspection14 and it was discovered that one jumbo bag thereof sustained loss/damage while in the
custody of COSCO as evidenced by Turn Over Survey of Bad Order Cargo No. 47890 dated August 6,
199615 jointly executed by the respective representatives of ATI and COSCO. During the withdrawal of
the shipment by PROVEN from ATI’s warehouse, the entire shipment was re-examined and it was found
to be exactly in the same condition as when it was turned over to ATI such that one jumbo bag was
damaged. To bolster this claim, ATI submitted Request for Bad Order Survey No. 40622 dated August 9,
199616 jointly executed by the respective representatives of ATI and PROVEN. ATI also submitted
various Cargo Gate Passes17 showing that PROVEN was able to completely withdraw all the shipment
from ATI’s warehouse in good order condition except for that one damaged jumbo bag.

In the alternative, ATI asserted that even if it is found liable for the lost/damaged portion of the shipment,
its contract for cargo handling services limits its liability to not more than ₱5,000.00 per package. ATI
interposed a counterclaim of ₱20,000.00 against FIRST LEPANTO as and for attorney’s fees. It also filed
a cross-claim against its co-defendants COSCO and SMITH BELL in the event that it is made liable to
FIRST LEPANTO.18

PROVEN denied any liability for the lost/damaged shipment and averred that the complaint alleged no
specific acts or omissions that makes it liable for damages. PROVEN claimed that the damages in the
shipment were sustained before they were withdrawn from ATI’s custody under which the shipment was
left in an open area exposed to the elements, thieves and vandals. PROVEN contended that it exercised
due diligence and prudence in handling the shipment. PROVEN also filed a counterclaim for attorney’s
fees and damages.19

Despite receipt of summons on December 4, 1996,20 COSCO and SMITH BELL failed to file an answer to
the complaint. FIRST LEPANTO thus moved that they be declared in default21 but the motion was denied
by the MeTC on the ground that under Rule 9, Section 3 of the Rules of Civil Procedure, "when a
pleading asserting a claim states a common cause of action against several defending parties, some of
whom answer and the other fail to do so, the Court shall try the case against all upon the answers thus
filed, and render judgment upon the evidence presented."22

Ruling of the MeTC

In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any liability and instead
found COSCO to be the party at fault and hence liable for the loss/damage sustained by the subject
shipment. However, the MeTC ruled it has no jurisdiction over COSCO because it is a foreign corporation.
Also, it cannot enforce judgment upon SMITH BELL because no evidence was presented establishing
that it is indeed the Philippine agent of COSCO. There is also no evidence attributing any fault to SMITH
BELL. Consequently, the complaint was dismissed in this wise:

WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING the instant case for
failure of [FIRST LEPANTO] to sufficiently establish its cause o faction against [ATI, COSCO, SMITH
BELL, and PROVEN].
The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal basis.

No pronouncement as to cost.

SO ORDERED.24

Ruling of the Regional Trial Court

On appeal, the Regional Trial Court (RTC) reversed the MeTC’s findings. In its Decision 25 dated January
26, 2007, the RTC of Manila, Branch 21, in Civil Case No. 06-116237, rejected the contentions of ATI
upon its observation that the same is belied by its very own documentary evidence. The RTC remarked
that, if, as alleged by ATI, one jumbo bag was already in bad order condition upon its receipt of the
shipment from COSCO on July 18, 1996, then how come that the Request for Bad Order Survey and the
Turn Over Survey of Bad Order Cargo were prepared only weeks thereafter or on August 9, 1996 and
August 6, 1996, respectively. ATI was adjudged unable to prove that it exercised due diligence while in
custody of the shipment and hence, negligent and should be held liable for the damages caused to GASI
which, in turn, is subrogated by FIRST LEPANTO.

The RTC rejected ATI’s contention that its liability is limited only to ₱5,000.00 per package because its
Management Contract with the Philippine Ports Authority (PPA) purportedly containing the same was not
presented as evidence. More importantly, FIRST LEPANTO or GASI cannot be deemed bound thereby
because they were not parties thereto. Lastly, the RTC did not give merit to ATI’s defense that any claim
against it has already prescribed because GASI failed to file any claim within the 15-day period stated in
the gate pass issued by ATI to GASI’s broker, PROVEN. Accordingly, the RTC disposed thus:

WHEREFORE, in light of the foregoing, the judgment on appeal is hereby REVERSED.

[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40 with legal interest
until fully paid, to pay [FIRST LEPANTO] 10% of the amount due the latter as and for attorney’s fees plus
the costs of suit.

The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack of evidence against
them. The counterclaim and cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.

SO ORDERED.26

Ruling of the CA

ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO was validly
subrogated to the rights of GASI with respect to the lost/damaged shipment. ATI argued that there was no
valid subrogation because FIRSTLEPANTO failed to present a valid, existing and enforceable Marine
Open Policy or insurance contract. ATI reasoned that the Certificate of Insurance or Marine Cover Note
submitted by FIRST LEPANTO as evidence is not the same as an actual insurance contract.

In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that the Release of Claim
and the Certificate of Insurance presented by FIRST LEPANTO sufficiently established its relationship
with the consignee and that upon proof of payment of the latter’s claim for damages, FIRST LEPANTO
was subrogated to its rights against those liable for the lost/damaged shipment.

The CA also affirmed the ruling of the RTC that the subject shipment was damaged while in the custody
of ATI. Thus, the CA disposed as follows:
WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and the instant petition
is DENIED for lack of merit.

SO ORDERED.28

ATI moved for reconsideration but the motion was denied in the CA Resolution 29 dated January 12, 2009.
Hence, this petition arguing that:

(a) The presentation of the insurance policy is indispensable in proving the right of FIRST LEPANTO to
be subrogated to the right of the consignee pursuant to the ruling in Wallem Philippines Shipping, Inc. v.
Prudential Guarantee and Assurance Inc.;30

(b) ATI cannot be barred from invoking the defense of prescription as provided for in the gate passes in
consonance with the ruling in International Container Terminal Services, Inc. v. Prudential Guarantee and
Assurance Co, Inc.31

Ruling of the Court

The Court denies the petition.

ATI failed to prove that it exercised

due care and diligence while the
shipment was under its custody,
control and possession as arrastre
operator.

It must be emphasized that factual questions pertaining to ATI’s liability for the loss/damage sustained by
GASI has already been settled in the uniform factual findings of the RTC and the CA that: ATI failed to
prove by preponderance of evidence that it exercised due diligence in handling the shipment.

Such findings are binding and conclusive upon this Court since a review thereof is proscribed by the
nature of the present petition. Only questions of law are allowed in petitions for review on certiorari under
Rule 45 of the Rules of Court. It is not the Court’s duty to review, examine, and evaluate or weigh all over
again the probative value of the evidence presented, especially where the findings of the RTC are
affirmed by the CA, as in this case.32

There are only specific instances when the Court deviates from the rule and conducts a review of the
courts a quo’s factual findings, such as when: (1) the inference made is manifestly mistaken, absurd or
impossible; (2) there is grave abuse of discretion;(3) the findings are grounded entirely on speculations,
surmises or conjectures; (4) the judgment of the CA is based on misapprehension of facts; (5) the CA, in
making its findings, went beyond the issues of the case and the same is contrary to the admissions of
both appellant and appellee; (6) the findings of fact are conclusions without citation of specific evidence
on which they are based; (7) the CA manifestly overlooked certain relevant facts not disputed by the
parties and which, if properly considered, would justify a different conclusion; and (8) the findings of fact
of the CA are premised on the absence of evidence and are contradicted by the evidence on record. 33

None of these instances, however, are present in this case. Moreover, it is unmistakable that ATI has
already conceded to the factual findings of RTC and CA adjudging it liable for the shipment’s
loss/damage considering the absence of arguments pertaining to such issue in the petition at bar.

These notwithstanding, the Court scrutinized the records of the case and found that indeed, ATI is liable
as the arrastre operator for the lost/damaged portion of the shipment.
The relationship between the consignee and the arrastre operator is akin to that existing between the
consignee and/or the owner of the shipped goods and the common carrier, or that between a depositor
and a warehouseman. Hence, in the performance of its obligations, an arrastre operator should observe
the same degree of diligence as that required of a common carrier and a warehouseman. Being the
custodian of the goods discharged from a vessel, an arrastre operator’s duty is to take good care of the
goods and to turn them over to the party entitled to their possession. 34

In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with the
obligation to deliver the goods to the appropriate party devolves upon the arrastre operator. Since the
safekeeping of the goods is its responsibility, it must prove that the losses were not due to its negligence
or to that of its employees. To avoid liability, the arrastre operator must prove that it exercised diligence
and due care in handling the shipment.35

ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the
basis of the Request for Bad Order Survey dated August 9, 1996 purportedly showing that when ATI
received the shipment, one jumbo bag thereof was already in damaged condition.

The RTC and CA were both correct in concluding that ATI’s contention was improbable and illogical. As
judiciously discerned by the courts a quo, the date of the document was too distant from the date when
the shipment was actually received by ATI from COSCO on July 18, 1996. In fact, what the document
established is that when the loss/damage was discovered, the shipment has been in ATI’s custody for at
least two weeks. This circumstance, coupled with the undisputed declaration of PROVEN’s witnesses that
while the shipment was in ATI’s custody, it was left in an open area exposed to the elements, thieves and
vandals,36 all generate the conclusion that ATI failed to exercise due care and diligence while the subject
shipment was under its custody, control and possession as arrastre operator.

To prove the exercise of diligence in handling the subject cargoes, an arrastre operator must do more
than merely show the possibility that some other party could be responsible for the loss or the
damage.37 It must prove that it used all reasonable means to handle and store the shipment with due care
and diligence including safeguarding it from weather elements, thieves or vandals.

Non-presentation of the insurance

contract is not fatal to FIRST
LEPANTO’s cause of action for
reimbursement as subrogee.

It is conspicuous from the records that ATI put in issue the submission of the insurance contract for the
first time before the CA. Despite opportunity to study FIRST LEPANTO’s complaint before the MeTC, ATI
failed to allege in its answer the necessity of the insurance contract. Neither was the same considered
during pre-trial as one of the decisive matters in the case. Further, ATI never challenged the relevancy or
materiality of the Certificate of Insurance presented by FIRST LEPANTO as evidence during trial as proof
of its right to be subrogated in the consignee’s stead. Since it was not agreed during the pre-trial
proceedings that FIRST LEPANTO will have to prove its subrogation rights by presenting a copy of the
insurance contract, ATI is barred from pleading the absence of such contract in its appeal. It is imperative
for the parties to disclose during pre-trial all issues they intend to raise during the trial because, they are
bound by the delimitation of such issues. The determination of issues during the pre-trial conference bars
the consideration of other questions, whether during trial or on appeal. 38

A faithful adherence to the rule by litigants is ensured by the equally settled principle that a party cannot
change his theory on appeal as such act violates the basic rudiments of fair play and due process. As
stressed in Jose v. Alfuerto:39

[A] party cannot change his theory ofthe case or his cause of action on appeal. Points of law, theories,
issues and arguments not brought to the attention of the lower court will not be considered by the
reviewing court. The defenses not pleaded in the answer cannot, on appeal, change fundamentally the
nature of the issue in the case. To do so would be unfair to the adverse party, who had no opportunity to
present evidence in connection with the new theory; this would offend the basic rules of due process and
fair play.40 (Citation omitted)

While the Court may adopt a liberal stance and relax the rule, no reasonable explanation, however, was
introduced to justify ATI’s failure to timely question the basis of FIRST LEPANTO’s rights as a subrogee.

The fact that the CA took cognizance of and resolved the said issue did not cure or ratify ATI’s faux pas.
"[A] judgment that goes beyond the issues and purports to adjudicate something on which the court did
not hear the parties, is not only irregular but also extrajudicial and invalid." 41 Thus, for resolving an issue
not framed during the pre-trial and on which the parties were not heard during the trial, that portion of the
CA’s judgment discussing the necessity of presenting an insurance contract was erroneous.

At any rate, the non-presentation of the insurance contract is not fatal to FIRST LEPANTO’s right to
collect reimbursement as the subrogee of GASI.

"Subrogation is the substitution of one person in the place of another with reference to a lawful claim or
right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities."42 The right of subrogation springs from Article 2207 of the Civil Code
which states:

Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from 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 wrong-doer 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 from the person causing the loss or injury.

As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may
recover the insured value of the lost/damaged cargo in the exercise of its subrogatory right. In Malayan
Insurance Co., Inc. v.Regis Brokerage Corp.,43 the Court stated that the presentation of the contract
constitutive of the insurance relationship between the consignee and insurer is critical because it is the
legal basis of the latter’s right to subrogation.44

In Home Insurance Corporation v. CA,45 the Court also held that the insurance contract was necessary to
prove that it covered the hauling portion of the shipment and was not limited to the transport of the cargo
while at sea. The shipment in that case passed through six stages with different parties involved in each
stage until it reached the consignee. The insurance contract, which was not presented in evidence, was
necessary to determine the scope of the insurer’s liability, if any, since no evidence was adduced
indicating at what stage in the handling process the damage to the cargo was sustained. 46

An analogous disposition was arrived at in the Wallem 47 case cited by ATI wherein the Court held that the
insurance contract must be presented in evidence in order to determine the extent of its coverage. It was
further ruled therein that the liability of the carrier from whom reimbursement was demanded was not
established with certainty because the alleged shortage incurred by the cargoes was not definitively
determined.48

Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted exceptions by
declaring that a marine insurance policy is dispensable evidence in reimbursement claims instituted by
the insurer.

In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation accrues simply upon
payment by the insurance company of the insurance claim. Hence, presentation in evidence of the marine
insurance policy is not indispensable before the insurer may recover from the common carrier the insured
value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, was held
sufficient to establish not only the relationship between the insurer and consignee, but also the amount
paid to settle the insurance claim. The presentation of the insurance contract was deemed not fatal to the
insurer’s cause of action because the loss of the cargo undoubtedly occurred while on board the
petitioner’s vessel.50

The same rationale was the basis of the judgment in International Container Terminal Services, Inc. v.
FGU Insurance Corporation,51 wherein the arrastre operator was found liable for the lost shipment despite
the failure of the insurance company to offer in evidence the insurance contract or policy. As in Delsan, it
was certain that the loss of the cargo occurred while in the petitioner’s custody. 52

Based on the attendant facts of the instant case, the application of the exception is warranted.1âwphi1 As
discussed above, it is already settled that the loss/damage to the GASI’s shipment occurred while they
were in ATI’s custody, possession and control as arrastre operator. Verily, the Certificate of
Insurance53 and the Release of Claim 54presented as evidence sufficiently established FIRST LEPANTO’s
right to collect reimbursement as the subrogee of the consignee, GASI.

With ATI’s liability having been positively established, to strictly require the presentation of the insurance
contract will run counter to the principle of equity upon which the doctrine of subrogation is premised.
Subrogation is designed to promote and to accomplish justice and is the mode which equity adopts to
compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay. 55

The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the
remedies which the insured may have against the third party whose negligence or wrongful act caused
the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract or
upon payment by the insurance company of the insurance claim. It accrues simply upon payment by the
insurance company of the insurance claim.56

ATI cannot invoke prescription

ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from seeking payment for the
lost/damaged shipment because the claim letter of GASI to ATI was served only on September 27, 1996
or more than one month from the date the shipment was delivered to the consignee’s warehouse on
August 9, 1996. The claim of GASI was thus filed beyond the 15-day period stated in ATI’s Management
Contract with PPA which in turn was reproduced in the gate passes issued to the consignee’s broker,
PROVEN, as follows:

Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the goods as described
above in good order and condition unless an accompanying x x x certificates duly issued and noted on
the face of this Gate Pass appeals. [sic]

This Gate pass is subject to all terms and conditions defined in the Management Contract between the
Philippine Port[s] Authority and Asian Terminals, Inc. and amendment thereto and alterations thereof
particularly but not limited to the [A]rticle VI thereof, limiting the contractor’s liability to [P]5,000.00 per
package unless the importation is otherwise specified or manifested or communicated in writing together
with the invoice value and supported by a certified packing list to the contractor by the interested party or
parties before the discharge of the goods and corresponding arrastre charges have been paid providing
exception or restrictions from liability releasing the contractor from liability among others unless a formal
claim with the required annexes shall have been filed with the contractor within fifteen (15) days from date
of issuance by the contractors or certificate of loss, damages, injury, or Certificate of non-delivery.57

The contention is bereft of merit. As clarified in Insurance Company of North America v. Asian Terminals,
Inc.,58substantial compliance with the 15-day time limitation is allowed provided that the consignee has
made a provisional claim thru a request for bad order survey or examination report, viz:
Although the formal claim was filed beyond the 15-day period from the issuance of the examination report
on the request for bad order survey, the purpose of the time limitations for the filing of claims had already
been fully satisfied by the request of the consignee’s broker for a bad order survey and by the
examination report of the arrastre operator on the result thereof, as the arrastre operator had become
aware of and had verified the facts giving rise to its liability. Hence, the arrastre operator suffered no
prejudice by the lack of strict compliance with the 15-day limitation to file the formal complaint.59 (Citations
omitted)

In the present case, ATI was notified of the loss/damage to the subject shipment as early as August 9,
1996 thru a Request for Bad Order Survey60 jointly prepared by the consignee’s broker, PROVEN, and
the representatives of ATI. For having submitted a provisional claim, GASI is thus deemed to have
substantially complied with the notice requirement to the arrastre operator notwithstanding that a formal
claim was sent to the latter only on September 27, 1996. ATI was not deprived the best opportunity to
probe immediately the veracity of such claims. Verily then, GASI, thru its subrogee FIRST LEPANTO, is
not barred by filing the herein action in court.

ATI cannot rely on the ruling in Prudentiat61 because the consignee therein made no provisional claim
thru request for bad order survey and instead filed a claim for the first time after four months from receipt
of the shipment.

Attorney's fees and interests

All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40 representing the insurance
indemnity paid by the latter to GASI. Pursuant to Nacar v. Gallery Frames,62 the said amount shall earn a
legal interest at the rate of six percent (6%) per annum from the date of finality of this judgment until its
full satisfaction.

As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment award is reasonable as
and for attorney's fees considering the length of time that has passed in prosecuting the claim. 63

WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated October 10,
2008 of the Court of Appeals in CA-G.R. SP No. 99021 is hereby AFFIRMED insofar as it adjudged liable
and ordered Asian Terminals, Inc., to pay First Lepanto-Taisho Insurance Corp., the amount of
₱165,772.40, ten percent (10%) thereof as and for attorney's fees, plus costs of suit. The said amount
shall earn legal interest at the rate of six percent ( 6%) per annum from the date of finality of this judgment
until its full satisfaction.

SO ORDERED.
G.R. No. 115381 December 23, 1994

KILUSANG MAYO UNO LABOR CENTER, petitioner,

vs.
HON. JESUS B. GARCIA, JR., the LAND TRANSPORTATION FRANCHISING AND REGULATORY
BOARD, and the PROVINCIAL BUS OPERATORS ASSOCIATION OF THE
PHILIPPINES, respondents.

Potenciano A. Flores for petitioner.

Robert Anthony C. Sison, Cesar B. Brillantes and Jose Z. Galsim for private respondent.

Jose F. Miravite for movants.

KAPUNAN, J.:

Public utilities are privately owned and operated businesses whose service are essential to the general
public. They are enterprises which specially cater to the needs of the public and conduce to their comfort
and convenience. As such, public utility services are impressed with public interest and concern. The
same is true with respect to the business of common carrier which holds such a peculiar relation to the
public interest that there is superinduced upon it the right of public regulation when private properties are
affected with public interest, hence, they cease to be juris privati only. When, therefore, one devotes his
property to a use in which the public has an interest, he, in effect grants to the public an interest in that
use, and must submit to the control by the public for the common good, to the extent of the interest he
has thus created.1

An abdication of the licensing and regulatory government agencies of their functions as the instant
petition seeks to show, is indeed lamentable. Not only is it an unsound administrative policy but it is
inimical to public trust and public interest as well.

The instant petition for certiorari assails the constitutionality and validity of certain memoranda, circulars
and/or orders of the Department of Transportation and Communications (DOTC) and the Land
Transportation Franchising and Regulatory Board LTFRB)2 which, among others, (a) authorize provincial
bus and jeepney operators to increase or decrease the prescribed transportation fares without application
therefor with the LTFRB and without hearing and approval thereof by said agency in violation of Sec.
16(c) of Commonwealth Act No. 146, as amended, otherwise known as the Public Service Act, and in
derogation of LTFRB's duty to fix and determine just and reasonable fares by delegating that function to
bus operators, and (b) establish a presumption of public need in favor of applicants for certificates of
public convenience (CPC) and place on the oppositor the burden of proving that there is no need for the
proposed service, in patent violation not only of Sec. 16(c) of CA 146, as amended, but also of Sec. 20(a)
of the same Act mandating that fares should be "just and reasonable." It is, likewise, violative of the Rules
of Court which places upon each party the burden to prove his own affirmative allegations. 3 The offending
provisions contained in the questioned issuances pointed out by petitioner, have resulted in the
introduction into our highways and thoroughfares thousands of old and smoke-belching buses, many of
which are right-hand driven, and have exposed our consumers to the burden of spiraling costs of public
transportation without hearing and due process.

The following memoranda, circulars and/or orders are sought to be nullified by the instant petition, viz: (a)
DOTC Memorandum Order 90-395, dated June 26, 1990 relative to the implementation of a fare range
scheme for provincial bus services in the country; (b) DOTC Department Order No.
92-587, dated March 30, 1992, defining the policy framework on the regulation of transport services; (c)
DOTC Memorandum dated October 8, 1992, laying down rules and procedures to implement Department
Order No. 92-587; (d) LTFRB Memorandum Circular No. 92-009, providing implementing guidelines on
the DOTC Department Order No. 92-587; and (e) LTFRB Order dated March 24, 1994 in Case No. 94-
3112.

The relevant antecedents are as follows:

On June 26, 1990; then Secretary of DOTC, Oscar M. Orbos, issued Memorandum Circular No. 90-395 to
then LTFRB Chairman, Remedios A.S. Fernando allowing provincial bus operators to charge passengers
rates within a range of 15% above and 15% below the LTFRB official rate for a period of one (1) year.
The text of the memorandum order reads in full:

One of the policy reforms and measures that is in line with the thrusts and the priorities
set out in the Medium-Term Philippine Development Plan (MTPDP) 1987 — 1992) is the
liberalization of regulations in the transport sector. Along this line, the Government
intends to move away gradually from regulatory policies and make progress towards
greater reliance on free market forces.

Based on several surveys and observations, bus companies are already charging
passenger rates above and below the official fare declared by LTFRB on many provincial
routes. It is in this context that some form of liberalization on public transport fares is to
be tested on a pilot basis.

In view thereof, the LTFRB is hereby directed to immediately publicize a fare range
scheme for all provincial bus routes in country (except those operating within Metro
Manila). Transport Operators shall be allowed to charge passengers within a range of
fifteen percent (15%) above and fifteen percent (15%) below the LTFRB official rate for a
period of one year.

Guidelines and procedures for the said scheme shall be prepared by LTFRB in
coordination with the DOTC Planning Service.

The implementation of the said fare range scheme shall start on 6 August 1990.

For compliance. (Emphasis ours.)

Finding the implementation of the fare range scheme "not legally feasible," Remedios A.S. Fernando
submitted the following memorandum to Oscar M. Orbos on July 24, 1990, to wit:

With reference to DOTC Memorandum Order No. 90-395 dated 26 June 1990 which the
LTFRB received on 19 July 1990, directing the Board "to immediately publicize a fare
range scheme for all provincial bus routes in the country (except those operating within
Metro Manila)" that will allow operators "to charge passengers within a range of fifteen
percent (15%) above and fifteen percent (15%) below the LTFRB official rate for a period
of one year" the undersigned is respectfully adverting the Secretary's attention to the
following for his consideration:

1. Section 16(c) of the Public Service Act prescribes the following for the
fixing and determination of rates — (a) the rates to be approved should
be proposed by public service operators; (b) there should be a
publication and notice to concerned or affected parties in the territory
affected; (c) a public hearing should be held for the fixing of the rates;
hence, implementation of the proposed fare range scheme on August 6
 without complying with the requirements of the Public Service Act may
not be legally feasible.

2. To allow bus operators in the country to charge fares fifteen (15%)

above the present LTFRB fares in the wake of the devastation, death
and suffering caused by the July 16 earthquake will not be socially
warranted and will be politically unsound; most likely public criticism
against the DOTC and the LTFRB will be triggered by the untimely motu
propioimplementation of the proposal by the mere expedient of
publicizing the fare range scheme without calling a public hearing, which
scheme many as early as during the Secretary's predecessor know
through newspaper reports and columnists' comments to be Asian
Development Bank and World Bank inspired.

3. More than inducing a reduction in bus fares by fifteen percent (15%)

the implementation of the proposal will instead trigger an upward
adjustment in bus fares by fifteen percent (15%) at a time when
hundreds of thousands of people in Central and Northern Luzon,
particularly in Central Pangasinan, La Union, Baguio City, Nueva Ecija,
and the Cagayan Valley are suffering from the devastation and havoc
caused by the recent earthquake.

4. In lieu of the said proposal, the DOTC with its agencies involved in
public transportation can consider measures and reforms in the industry
that will be socially uplifting, especially for the people in the areas
devastated by the recent earthquake.

In view of the foregoing considerations, the undersigned respectfully suggests that the
implementation of the proposed fare range scheme this year be further studied and
evaluated.

On December 5, 1990, private respondent Provincial Bus Operators Association of the Philippines, Inc.
(PBOAP) filed an application for fare rate increase. An across-the-board increase of eight and a half
centavos (P0.085) per kilometer for all types of provincial buses with a minimum-maximum fare range of
fifteen (15%) percent over and below the proposed basic per kilometer fare rate, with the said minimum-
maximum fare range applying only to ordinary, first class and premium class buses and a fifty-centavo
(P0.50) minimum per kilometer fare for aircon buses, was sought.

On December 6, 1990, private respondent PBOAP reduced its applied proposed fare to an across-the-
board increase of six and a half (P0.065) centavos per kilometer for ordinary buses. The decrease was
due to the drop in the expected price of diesel.

The application was opposed by the Philippine Consumers Foundation, Inc. and Perla C. Bautista
alleging that the proposed rates were exorbitant and unreasonable and that the application contained no
allegation on the rate of return of the proposed increase in rates.

On December 14, 1990, public respondent LTFRB rendered a decision granting the fare rate increase in
accordance with the following schedule of fares on a straight computation method, viz:

AUTHORIZED FARES

LUZON
MIN. OF 5 KMS. SUCCEEDING KM.
 REGULAR P1.50 P0.37
STUDENT P1.15 P0.28

VISAYAS/MINDANAO

REGULAR P1.60 P0.375

STUDENT P1.20 P0.285
FIRST CLASS (PER KM.)
LUZON P0.385
VISAYAS/
MINDANAO P0.395
PREMIERE CLASS (PER KM.)
LUZON P0.395
VISAYAS/
MINDANAO P0.405

AIRCON (PER KM.) P0.415.4

On March 30, 1992, then Secretary of the Department of Transportation and Communications Pete
Nicomedes Prado issued Department Order No.
92-587 defining the policy framework on the regulation of transport services. The full text of the said order
is reproduced below in view of the importance of the provisions contained therein:

WHEREAS, Executive Order No. 125 as amended, designates the Department of

Transportation and Communications (DOTC) as the primary policy, planning, regulating
and implementing agency on transportation;

WHEREAS, to achieve the objective of a viable, efficient, and dependable transportation

system, the transportation regulatory agencies under or attached to the DOTC have to
harmonize their decisions and adopt a common philosophy and direction;

WHEREAS, the government proposes to build on the successful liberalization measures

pursued over the last five years and bring the transport sector nearer to a balanced
longer term regulatory framework;

NOW, THEREFORE, pursuant to the powers granted by laws to the DOTC, the following
policies and principles in the economic regulation of land, air, and water transportation
services are hereby adopted:

1. Entry into and exit out of the industry. Following the Constitutional dictum against
monopoly, no franchise holder shall be permitted to maintain a monopoly on any route. A
minimum of two franchise holders shall be permitted to operate on any route.

The requirements to grant a certificate to operate, or certificate of public convenience,

shall be: proof of Filipino citizenship, financial capability, public need, and sufficient
insurance cover to protect the riding public.

In determining public need, the presumption of need for a service shall be deemed in
favor of the applicant. The burden of proving that there is no need for a proposed service
shall be with the oppositor(s).

In the interest of providing efficient public transport services, the use of the "prior
operator" and the "priority of filing" rules shall be discontinued. The route measured
 capacity test or other similar tests of demand for vehicle/vessel fleet on any route shall be
used only as a guide in weighing the merits of each franchise application and not as a
limit to the services offered.

Where there are limitations in facilities, such as congested road space in urban areas, or
at airports and ports, the use of demand management measures in conformity with
market principles may be considered.

The right of an operator to leave the industry is recognized as a business decision,

subject only to the filing of appropriate notice and following a phase-out period, to inform
the public and to minimize disruption of services.

2. Rate and Fare Setting. Freight rates shall be freed gradually from government
controls. Passenger fares shall also be deregulated, except for the lowest class of
passenger service (normally third class passenger transport) for which the government
will fix indicative or reference fares. Operators of particular services may fix their own
fares within a range 15% above and below the indicative or reference rate.

Where there is lack of effective competition for services, or on specific routes, or for the
transport of particular commodities, maximum mandatory freight rates or passenger fares
shall be set temporarily by the government pending actions to increase the level of
competition.

For unserved or single operator routes, the government shall contract such services in
the most advantageous terms to the public and the government, following public bids for
the services. The advisability of bidding out the services or using other kinds of incentives
on such routes shall be studied by the government.

3. Special Incentives and Financing for Fleet Acquisition. As a matter of policy, the
government shall not engage in special financing and incentive programs, including direct
subsidies for fleet acquisition and expansion. Only when the market situation warrants
government intervention shall programs of this type be considered. Existing programs
shall be phased out gradually.

The Land Transportation Franchising and Regulatory Board, the Civil Aeronautics Board,
the Maritime Industry Authority are hereby directed to submit to the Office of the
Secretary, within forty-five (45) days of this Order, the detailed rules and procedures for
the Implementation of the policies herein set forth. In the formulation of such rules, the
concerned agencies shall be guided by the most recent studies on the subjects, such as
the Provincial Road Passenger Transport Study, the Civil Aviation Master Plan, the
Presidential Task Force on the Inter-island Shipping Industry, and the Inter-island Liner
Shipping Rate Rationalization Study.

For the compliance of all concerned. (Emphasis ours)

On October 8, 1992, public respondent Secretary of the Department of Transportation and

Communications Jesus B. Garcia, Jr. issued a memorandum to the Acting Chairman of the LTFRB
suggesting swift action on the adoption of rules and procedures to implement above-quoted Department
Order No. 92-587 that laid down deregulation and other liberalization policies for the transport sector.
Attached to the said memorandum was a revised draft of the required rules and procedures covering (i)
Entry Into and Exit Out of the Industry and (ii) Rate and Fare Setting, with comments and suggestions
from the World Bank incorporated therein. Likewise, resplendent from the said memorandum is the
statement of the DOTC Secretary that the adoption of the rules and procedures is a pre-requisite to the
approval of the Economic Integration Loan from the World Bank.5
On February 17, 1993, the LTFRB issued Memorandum Circular
No. 92-009 promulgating the guidelines for the implementation of DOTC Department Order No. 92-587.
The Circular provides, among others, the following challenged portions:

xxx xxx xxx

IV. Policy Guidelines on the Issuance of Certificate of Public Convenience.

The issuance of a Certificate of Public Convenience is determined by public need. The

presumption of public need for a service shall be deemed in favor of the applicant, while
burden of proving that there is no need for the proposed service shall be the
oppositor'(s).

xxx xxx xxx

V. Rate and Fare Setting

The control in pricing shall be liberalized to introduce price competition complementary

with the quality of service, subject to prior notice and public hearing. Fares shall not be
provisionally authorized without public hearing.

A. On the General Structure of Rates

1. The existing authorized fare range system of plus or minus 15 per cent for provincial
buses and jeepneys shall be widened to 20% and -25% limit in 1994 with the authorized
fare to be replaced by an indicative or reference rate as the basis for the expanded fare
range.

2. Fare systems for aircon buses are liberalized to cover first class and premier services.

xxx xxx xxx

(Emphasis ours).

Sometime in March, 1994, private respondent PBOAP, availing itself of the deregulation policy of the
DOTC allowing provincial bus operators to collect plus 20% and minus 25% of the prescribed fare without
first having filed a petition for the purpose and without the benefit of a public hearing, announced a fare
increase of twenty (20%) percent of the existing fares. Said increased fares were to be made effective on
March 16, 1994.

On March 16, 1994, petitioner KMU filed a petition before the LTFRB opposing the upward adjustment of
bus fares.

On March 24, 1994, the LTFRB issued one of the assailed orders dismissing the petition for lack of merit.
The dispositive portion reads:

PREMISES CONSIDERED, this Board after considering the arguments of the parties,
hereby DISMISSES FOR LACK OF MERIT the petition filed in the above-entitled case.
This petition in this case was resolved with dispatch at the request of petitioner to enable
it to immediately avail of the legal remedies or options it is entitled under existing laws.

SO ORDERED.6
Hence, the instant petition for certiorari with an urgent prayer for issuance of a temporary restraining
order.

The Court, on June 20, 1994, issued a temporary restraining order enjoining, prohibiting and preventing
respondents from implementing the bus fare rate increase as well as the questioned orders and
memorandum circulars. This meant that provincial bus fares were rolled back to the levels duly authorized
by the LTFRB prior to March 16, 1994. A moratorium was likewise enforced on the issuance of franchises
for the operation of buses, jeepneys, and taxicabs.

Petitioner KMU anchors its claim on two (2) grounds. First, the authority given by respondent LTFRB to
provincial bus operators to set a fare range of plus or minus fifteen (15%) percent, later increased to plus
twenty (20%) and minus twenty-five (-25%) percent, over and above the existing authorized fare without
having to file a petition for the purpose, is unconstitutional, invalid and illegal. Second, the establishment
of a presumption of public need in favor of an applicant for a proposed transport service without having to
prove public necessity, is illegal for being violative of the Public Service Act and the Rules of Court.

In its Comment, private respondent PBOAP, while not actually touching upon the issues raised by the
petitioner, questions the wisdom and the manner by which the instant petition was filed. It asserts that the
petitioner has no legal standing to sue or has no real interest in the case at bench and in obtaining the
reliefs prayed for.

In their Comment filed by the Office of the Solicitor General, public respondents DOTC Secretary Jesus
B. Garcia, Jr. and the LTFRB asseverate that the petitioner does not have the standing to maintain the
instant suit. They further claim that it is within DOTC and LTFRB's authority to set a fare range scheme
and establish a presumption of public need in applications for certificates of public convenience.

We find the instant petition impressed with merit.

At the outset, the threshold issue of locus standi must be struck. Petitioner KMU has the standing to sue.

The requirement of locus standi inheres from the definition of judicial power. Section 1 of Article VIII of the
Constitution provides:

xxx xxx xxx

Judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and 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.

In Lamb v. Phipps,7 we ruled that judicial power is the power to hear and decide causes pending between
parties who have the right to sue in the courts of law and equity. Corollary to this provision is the principle
of locus standi of a party litigant. One who is directly affected by and whose interest is immediate and
substantial in the controversy has the standing to sue. The rule therefore requires that a party must show
a personal stake in the outcome of the case or an injury to himself that can be redressed by a favorable
decision so as to warrant an invocation of the court's jurisdiction and to justify the exercise of the court's
remedial powers in his behalf.8

In the case at bench, petitioner, whose members had suffered and continue to suffer grave and
irreparable injury and damage from the implementation of the questioned memoranda, circulars and/or
orders, has shown that it has a clear legal right that was violated and continues to be violated with the
enforcement of the challenged memoranda, circulars and/or orders. KMU members, who avail of the use
of buses, trains and jeepneys everyday, are directly affected by the burdensome cost of arbitrary increase
in passenger fares. They are part of the millions of commuters who comprise the riding public. Certainly,
their rights must be protected, not neglected nor ignored.

Assuming arguendo that petitioner is not possessed of the standing to sue, this court is ready to brush
aside this barren procedural infirmity and recognize the legal standing of the petitioner in view of the
transcendental importance of the issues raised. And this act of liberality is not without judicial precedent.
As early as the Emergency Powers Cases, this Court had exercised its discretion and waived the
requirement of proper party. In the recent case of Kilosbayan, Inc., et al. v. Teofisto Guingona, Jr., et
al.,9 we ruled in the same lines and enumerated some of the cases where the same policy was
adopted, viz:

. . . A party's standing before this Court is a procedural technicality which it may, in the
exercise of its discretion, set aside in view of the importance of the issues raised. In the
landmark Emergency Powers Cases, [G.R. No. L-2044 (Araneta v. Dinglasan); G.R. No.
L-2756 (Araneta
v. Angeles); G.R. No. L-3054 (Rodriguez v. Tesorero de Filipinas); G.R. No. L-3055
(Guerrero v. Commissioner of Customs); and G.R. No. L-3056 (Barredo v. Commission
on Elections), 84 Phil. 368 (1949)], this Court brushed aside this technicality because "the
transcendental importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside, if we must, technicalities of procedure. (Avelino
vs. Cuenco, G.R. No. L-2621)." Insofar as taxpayers' suits are concerned, this Court had
declared that it "is not devoid of discretion as to whether or not it should be entertained,"
(Tan v. Macapagal, 43 SCRA 677, 680 [1972]) or that it "enjoys an open discretion to
entertain the same or not." [Sanidad v. COMELEC, 73 SCRA 333 (1976)].

xxx xxx xxx

In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members of
Congress, and even association of planters, and
non-profit civic organizations were allowed to initiate and prosecute actions before this
court to question the constitutionality or validity of laws, acts, decisions, rulings, or orders
of various government agencies or instrumentalities. Among such cases were those
assailing the constitutionality of (a) R.A. No. 3836 insofar as it allows retirement gratuity
and commutation of vacation and sick leave to Senators and Representatives and to
elective officials of both Houses of Congress (Philippine Constitution Association, Inc. v.
Gimenez, 15 SCRA 479 [1965]); (b) Executive Order No. 284, issued by President
Corazon C. Aquino on 25 July 1987, which allowed members of the cabinet, their
undersecretaries, and assistant secretaries to hold other government offices or positions
(Civil Liberties Union v. Executive Secretary, 194 SCRA 317 [1991]); (c) the automatic
appropriation for debt service in the General Appropriations Act (Guingona v. Carague,
196 SCRA 221 [1991]; (d) R.A. No. 7056 on the holding of desynchronized elections
(Osmeña v. Commission on Elections, 199 SCRA 750 [1991]); (e) P.D. No. 1869 (the
charter of the Philippine Amusement and Gaming Corporation) on the ground that it is
contrary to morals, public policy, and order (Basco v. Philippine Amusement and Gaming
Corp., 197 SCRA 52 [1991]); and (f) R.A. No. 6975, establishing the Philippine National
Police. (Carpio v. Executive Secretary, 206 SCRA 290 [1992]).

Other cases where we have followed a liberal policy regarding locus standi include those
attacking the validity or legality of (a) an order allowing the importation of rice in the light
of the prohibition imposed by R.A. No. 3452 (Iloilo Palay and Corn Planters Association,
Inc. v. Feliciano, 13 SCRA 377 [1965]; (b) P.D. Nos. 991 and 1033 insofar as they
proposed amendments to the Constitution and P.D. No. 1031 insofar as it directed the
COMELEC to supervise, control, hold, and conduct the referendum-plebiscite on 16
October 1976 (Sanidad v. Commission on Elections, supra); (c) the bidding for the sale of
the 3,179 square meters of land at Roppongi, Minato-ku, Tokyo, Japan (Laurel v. Garcia,
 187 SCRA 797 [1990]); (d) the approval without hearing by the Board of Investments of
the amended application of the Bataan Petrochemical Corporation to transfer the site of
its plant from Bataan to Batangas and the validity of such transfer and the shift of
feedstock from naphtha only to naphtha and/or liquefied petroleum gas (Garcia v. Board
of Investments, 177 SCRA 374 [1989]; Garcia v. Board of Investments, 191 SCRA 288
[1990]); (e) the decisions, orders, rulings, and resolutions of the Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs,
and the Fiscal Incentives Review Board exempting the National Power Corporation from
indirect tax and duties (Maceda v. Macaraig, 197 SCRA 771 [1991]); (f) the orders of the
Energy Regulatory Board of 5 and 6 December 1990 on the ground that the hearings
conducted on the second provisional increase in oil prices did not allow the petitioner
substantial cross-examination; (Maceda v. Energy Regulatory Board, 199 SCRA 454
[1991]); (g) Executive Order No. 478 which levied a special duty of P0.95 per liter of
imported oil products (Garcia v. Executive Secretary, 211 SCRA 219 [1992]); (h)
resolutions of the Commission on Elections concerning the apportionment, by district, of
the number of elective members of Sanggunians (De Guia vs. Commission on Elections,
208 SCRA 420 [1992]); and (i) memorandum orders issued by a Mayor affecting the
Chief of Police of Pasay City (Pasay Law and Conscience Union, Inc. v. Cuneta, 101
SCRA 662 [1980]).

In the 1975 case of Aquino v. Commission on Elections (62 SCRA 275 [1975]), this
Court, despite its unequivocal ruling that the petitioners therein had no personality to file
the petition, resolved nevertheless to pass upon the issues raised because of the far-
reaching implications of the petition. We did no less in De Guia v. COMELEC
(Supra) where, although we declared that De Guia "does not appear to have locus standi,
a standing in law, a personal or substantial interest," we brushed aside the procedural
infirmity "considering the importance of the issue involved, concerning as it does the
political exercise of qualified voters affected by the apportionment, and petitioner alleging
abuse of discretion and violation of the Constitution by respondent."

Now on the merits of the case.

On the fare range scheme.

Section 16(c) of the Public Service Act, as amended, reads:

Sec. 16. Proceedings of the Commission, upon notice and hearing. — The Commission
shall have power, upon proper notice and hearing in accordance with the rules and
provisions of this Act, subject to the limitations and exceptions mentioned and saving
provisions to the contrary:

xxx xxx xxx

(c) To fix and determine individual or joint rates, tolls, charges, classifications, or
schedules thereof, as well as commutation, mileage kilometrage, and other special rates
which shall be imposed, observed, and followed thereafter by any public
service: Provided, That the Commission may, in its discretion, approve rates proposed by
public services provisionally and without necessity of any hearing; but it shall call a
hearing thereon within thirty days thereafter, upon publication and notice to the concerns
operating in the territory affected: Provided, further, That in case the public service
equipment of an operator is used principally or secondarily for the promotion of a private
business, the net profits of said private business shall be considered in relation with the
public service of such operator for the purpose of fixing the rates. (Emphasis ours).
 xxx xxx xxx

Under the foregoing provision, the Legislature delegated to the defunct Public Service
Commission the power of fixing the rates of public services. Respondent LTFRB, the existing
regulatory body today, is likewise vested with the same under Executive Order No. 202 dated
June 19, 1987. Section 5(c) of the said executive order authorizes LTFRB "to determine,
prescribe, approve and periodically review and adjust, reasonable fares, rates and other related
charges, relative to the operation of public land transportation services provided by motorized
vehicles."

Such delegation of legislative power to an administrative agency is permitted in order to adapt to the
increasing complexity of modern life. As subjects for governmental regulation multiply, so does the
difficulty of administering the laws. Hence, specialization even in legislation has become necessary.
Given the task of determining sensitive and delicate matters as
route-fixing and rate-making for the transport sector, the responsible regulatory body is entrusted with the
power of subordinate legislation. With this authority, an administrative body and in this case, the LTFRB,
may implement broad policies laid down in a statute by "filling in" the details which the Legislature may
neither have time or competence to provide. However, nowhere under the aforesaid provisions of law are
the regulatory bodies, the PSC and LTFRB alike, authorized to delegate that power to a common carrier,
a transport operator, or other public service.

In the case at bench, the authority given by the LTFRB to the provincial bus operators to set a fare range
over and above the authorized existing fare, is illegal and invalid as it is tantamount to an undue
delegation of legislative authority. Potestas delegata non delegari potest. What has been delegated
cannot be delegated. This doctrine is based on the ethical principle that such a delegated power
constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his
own judgment and not through the intervening mind of another.10 A further delegation of such power
would indeed constitute a negation of the duty in violation of the trust reposed in the delegate mandated
to discharge it directly.11 The policy of allowing the provincial bus operators to change and increase their
fares at will would result not only to a chaotic situation but to an anarchic state of affairs. This would leave
the riding public at the mercy of transport operators who may increase fares every hour, every day, every
month or every year, whenever it pleases them or whenever they deem it "necessary" to do so. In Panay
Autobus Co. v. Philippine Railway Co.,12 where respondent Philippine Railway Co. was granted by the
Public Service Commission the authority to change its freight rates at will, this Court categorically
declared that:

In our opinion, the Public Service Commission was not authorized by law to delegate to
the Philippine Railway Co. the power of altering its freight rates whenever it should find it
necessary to do so in order to meet the competition of road trucks and autobuses, or to
change its freight rates at will, or to regard its present rates as maximum rates, and to fix
lower rates whenever in the opinion of the Philippine Railway Co. it would be to its
advantage to do so.

The mere recital of the language of the application of the Philippine Railway Co. is
enough to show that it is untenable. The Legislature has delegated to the Public Service
Commission the power of fixing the rates of public services, but it has not authorized the
Public Service Commission to delegate that power to a common carrier or other public
service. The rates of public services like the Philippine Railway Co. have been approved
or fixed by the Public Service Commission, and any change in such rates must be
authorized or approved by the Public Service Commission after they have been shown to
be just and reasonable. The public service may, of course, propose new rates, as the
Philippine Railway Co. did in case No. 31827, but it cannot lawfully make said new rates
effective without the approval of the Public Service Commission, and the Public Service
Commission itself cannot authorize a public service to enforce new rates without the prior
approval of said rates by the commission. The commission must approve new rates when
 they are submitted to it, if the evidence shows them to be just and reasonable, otherwise
it must disapprove them. Clearly, the commission cannot determine in advance whether
or not the new rates of the Philippine Railway Co. will be just and reasonable, because it
does not know what those rates will be.

In the present case the Philippine Railway Co. in effect asked for permission to change
its freight rates at will. It may change them every day or every hour, whenever it deems it
necessary to do so in order to meet competition or whenever in its opinion it would be to
its advantage. Such a procedure would create a most unsatisfactory state of affairs and
largely defeat the purposes of the public service law.13(Emphasis ours).

One veritable consequence of the deregulation of transport fares is a compounded fare. If transport
operators will be authorized to impose and collect an additional amount equivalent to 20% over and
above the authorized fare over a period of time, this will unduly prejudice a commuter who will be made to
pay a fare that has been computed in a manner similar to those of compounded bank interest rates.

Picture this situation. On December 14, 1990, the LTFRB authorized provincial bus operators to collect a
thirty-seven (P0.37) centavo per kilometer fare for ordinary buses. At the same time, they were allowed to
impose and collect a fare range of plus or minus 15% over the authorized rate. Thus P0.37 centavo per
kilometer authorized fare plus P0.05 centavos (which is 15% of P0.37 centavos) is equivalent to P0.42
centavos, the allowed rate in 1990. Supposing the LTFRB grants another five (P0.05) centavo increase
per kilometer in 1994, then, the base or reference for computation would have to be P0.47 centavos
(which is P0.42 + P0.05 centavos). If bus operators will exercise their authority to impose an additional
20% over and above the authorized fare, then the fare to be collected shall amount to P0.56 (that is,
P0.47 authorized LTFRB rate plus 20% of P0.47 which is P0.29). In effect, commuters will be
continuously subjected, not only to a double fare adjustment but to a compounding fare as well. On their
part, transport operators shall enjoy a bigger chunk of the pie. Aside from fare increase applied for, they
can still collect an additional amount by virtue of the authorized fare range. Mathematically, the situation
translates into the following:

Year** LTFRB authorized Fare Range Fare to be

rate*** collected per
kilometer

1990 P0.37 15% (P0.05) P0.42

1994 P0.42 + 0.05 = 0.47 20% (P0.09) P0.56
1998 P0.56 + 0.05 = 0.61 20% (P0.12) P0.73
2002 P0.73 + 0.05 = 0.78 20% (P0.16) P0.94

Moreover, rate making or rate fixing is not an easy task. It is a delicate and sensitive government function
that requires dexterity of judgment and sound discretion with the settled goal of arriving at a just and
reasonable rate acceptable to both the public utility and the public. Several factors, in fact, have to be
taken into consideration before a balance could be achieved. A rate should not be confiscatory as would
place an operator in a situation where he will continue to operate at a loss. Hence, the rate should enable
public utilities to generate revenues sufficient to cover operational costs and provide reasonable return on
the investments. On the other hand, a rate which is too high becomes discriminatory. It is contrary to
public interest. A rate, therefore, must be reasonable and fair and must be affordable to the end user who
will utilize the services.

Given the complexity of the nature of the function of rate-fixing and its far-reaching effects on millions of
commuters, government must not relinquish this important function in favor of those who would benefit
and profit from the industry. Neither should the requisite notice and hearing be done away with. The
people, represented by reputable oppositors, deserve to be given full opportunity to be heard in their
opposition to any fare increase.
The present administrative procedure, 14 to our mind, already mirrors an orderly and satisfactory
arrangement for all parties involved. To do away with such a procedure and allow just one party, an
interested party at that, to determine what the rate should be, will undermine the right of the other parties
to due process. The purpose of a hearing is precisely to determine what a just and reasonable rate
is.15 Discarding such procedural and constitutional right is certainly inimical to our fundamental law and to
public interest.

On the presumption of public need.

A certificate of public convenience (CPC) is an authorization granted by the LTFRB for the operation of
land transportation services for public use as required by law. Pursuant to Section 16(a) of the Public
Service Act, as amended, the following requirements must be met before a CPC may be granted, to wit:
(i) the applicant must be a citizen of the Philippines, or a corporation or co-partnership, association or
joint-stock company constituted and organized under the laws of the Philippines, at least 60 per
centum of its stock or paid-up capital must belong entirely to citizens of the Philippines; (ii) the applicant
must be financially capable of undertaking the proposed service and meeting the responsibilities incident
to its operation; and (iii) the applicant must prove that the operation of the public service proposed and
the authorization to do business will promote the public interest in a proper and suitable manner. It is
understood that there must be proper notice and hearing before the PSC can exercise its power to issue
a CPC.

While adopting in toto the foregoing requisites for the issuance of a CPC, LTFRB Memorandum Circular
No. 92-009, Part IV, provides for yet incongruous and contradictory policy guideline on the issuance of a
CPC. The guidelines states:

The issuance of a Certificate of Public Convenience is determined by public need. The

presumption of public need for a service shall be deemed in favor of the applicant, while
the burden of proving that there is no need for the proposed service shall be the
oppositor's. (Emphasis ours).

The above-quoted provision is entirely incompatible and inconsistent with Section 16(c)(iii) of the Public
Service Act which requires that before a CPC will be issued, the applicant must prove by proper notice
and hearing that the operation of the public service proposed will promote public interest in a proper and
suitable manner. On the contrary, the policy guideline states that the presumption of public need for a
public service shall be deemed in favor of the applicant. In case of conflict between a statute and an
administrative order, the former must prevail.

By its terms, public convenience or necessity generally means something fitting or suited to the public
need.16 As one of the basic requirements for the grant of a CPC, public convenience and necessity exists
when the proposed facility or service meets a reasonable want of the public and supply a need which the
existing facilities do not adequately supply. The existence or
non-existence of public convenience and necessity is therefore a question of fact that must be
established by evidence, real and/or testimonial; empirical data; statistics and such other means
necessary, in a public hearing conducted for that purpose. The object and purpose of such procedure,
among other things, is to look out for, and protect, the interests of both the public and the existing
transport operators.

Verily, the power of a regulatory body to issue a CPC is founded on the condition that after full-dress
hearing and investigation, it shall find, as a fact, that the proposed operation is for the convenience of the
public.17 Basic convenience is the primary consideration for which a CPC is issued, and that fact alone
must be consistently borne in mind. Also, existing operators in subject routes must be given an
opportunity to offer proof and oppose the application. Therefore, an applicant must, at all times, be
required to prove his capacity and capability to furnish the service which he has undertaken to
render. 18 And all this will be possible only if a public hearing were conducted for that purpose.
Otherwise stated, the establishment of public need in favor of an applicant reverses well-settled and
institutionalized judicial, quasi-judicial and administrative procedures. It allows the party who initiates the
proceedings to prove, by mere application, his affirmative allegations. Moreover, the offending provisions
of the LTFRB memorandum circular in question would in effect amend the Rules of Court by adding
another disputable presumption in the enumeration of 37 presumptions under Rule 131, Section 5 of the
Rules of Court. Such usurpation of this Court's authority cannot be countenanced as only this Court is
mandated by law to promulgate rules concerning pleading, practice and procedure. 19

Deregulation, while it may be ideal in certain situations, may not be ideal at all in our country given the
present circumstances. Advocacy of liberalized franchising and regulatory process is tantamount to an
abdication by the government of its inherent right to exercise police power, that is, the right of government
to regulate public utilities for protection of the public and the utilities themselves.

While we recognize the authority of the DOTC and the LTFRB to issue administrative orders to regulate
the transport sector, we find that they committed grave abuse of discretion in issuing DOTC Department
Order
No. 92-587 defining the policy framework on the regulation of transport services and LTFRB
Memorandum Circular No. 92-009 promulgating the implementing guidelines on DOTC Department Order
No. 92-587, the said administrative issuances being amendatory and violative of the Public Service Act
and the Rules of Court. Consequently, we rule that the twenty (20%) per centum fare increase imposed
by respondent PBOAP on March 16, 1994 without the benefit of a petition and a public hearing is null and
void and of no force and effect. No grave abuse of discretion however was committed in the issuance of
DOTC Memorandum Order No. 90-395 and DOTC Memorandum dated October 8, 1992, the same being
merely internal communications between administrative officers.

WHEREFORE, in view of the foregoing, the instant petition is hereby GRANTED and the challenged
administrative issuances and orders, namely: DOTC Department Order No. 92-587, LTFRB
Memorandum Circular
No. 92-009, and the order dated March 24, 1994 issued by respondent LTFRB are hereby DECLARED
contrary to law and invalid insofar as they affect provisions therein (a) delegating to provincial bus and
jeepney operators the authority to increase or decrease the duly prescribed transportation fares; and (b)
creating a presumption of public need for a service in favor of the applicant for a certificate of public
convenience and placing the burden of proving that there is no need for the proposed service to the
oppositor.

The Temporary Restraining Order issued on June 20, 1994 is hereby MADE PERMANENT insofar as it
enjoined the bus fare rate increase granted under the provisions of the aforementioned administrative
circulars, memoranda and/or orders declared invalid.

No pronouncement as to costs.

SO ORDERED.

G.R. No. L-5458 September 16, 1953

LUZON STEVEDORING CO., INC., and VISAYAN STEVEDORE TRANSPORTATION CO., petitioners,
vs.
THE PUBLIC SERVICES COMMISSION and THE PHILIPPINE SHIPOWNERS'
ASSOCIATION, respondents.
Perkins, Ponce Enrile, Contreras and Enrique Belo for petitioners..

Ozaeta, Roxas, Lichauco, Picazo, Juan H. Paulino and Gerardo M. Alfonso for respondent Philippine
Shipowners Association.
A. H. Aspillera for respondent Public Service Commission.

TUASON, J.:

Petitioners apply for review of a decision of the Public Service Commission restraining them "from further
operating their watercraft to transport goods for hire or compensation between points in the Philippines
until the rates they propose to charge are approved by this Commission."

The facts are summarized by the Commission as follows:.

... respondents are corporations duly organized and existing under the laws of the Philippines,
mainly engaged in the stevedoring or lighterage and harbor towage business. At the same time,
they are engaged in interisland service which consists of hauling cargoes such as sugar, oil,
fertilizer and other commercial commodities which are loaded in their barges and towed by their
tugboats from Manila to various points in the Visayan Islands, Particularly in the Provinces of
Negros Occidental and Capiz, and from said places to manila. For this service respondents
charge freightage on a unit price with rates ranging from P0.50 to P0.62 1/2 per bag or picul of
sugar loaded or on a unit price per ton in the case of fertilizer or sand. There is no fixed route in
the transportation of these cargoes, the same being left at the indication of the owner or shipper
of the goods. the barge and the tugboats are manned by the crew of respondents and, in case of
damage to the goods in transit caused by the negligence of said crews, respondents are liable
therefore. The service for which respondents charge freightage covers the hauling or carriage of
the goods from the point of embarkation to the point of disembarkation either in Manila or in any
point in the Visayan Islands, as the case may be.

The evidence also sufficiently establishes that respondents are regularly engaged in this hauling
business serving a limited portion of the public. Respondent Luzon Stevedoring Company, Inc.,
has among its regular customers the San Miguel Glass Factory, PRATRA, Shell Co., of P. I., Ltd.,
Standard Oil Co., of New York and Philippine-Hawaiian; while respondent Visayan Stevedore
transportation Co., has among its regular customers the Insular Lumber, Shell Company, Ltd.,
Kim Kee Chua Yu & Co., PRATRA and Luzon Merchandising Corporation. During the period from
January, 1949 and up to the present, respondents Luzon Stevedoring Co. Inc., has been
rendering to PRATRA regularly and on many occasions such service by carrying fertilizer from
Manila to various points in the Provinces of Negros Occidental and Capiz, such as Hinigatan,
Silay, Fabrica, Marayo, Mambaquid, Victorias and Pilar, and on the return services, as evidenced
by Exhibits A, A-1, A-2, A-3 and A-4, respondent Luzon Stevedoring Company, Inc., charged
PRATRA at the rate of P0.60 per picul or bag of sugar and, according to Mr. Mauricio Rodriquez,
chief of the division in charge of sugar and fertilizer of the PRATRA, for the transportation of
fertilizer, this respondent charged P12 per metric ton. During practically the same period,
respondent Visayan Stevedore Transportation Company transported in its barges and towed by
its tugboats sugar for Kim Kee Chua Yu & Company coming from Victorias, Marayo and Pilar to
Manila, and for Luzon Merchandising Corporation, from Hinigaran, Bacolod, Marayo and Victorias
to Manila. For such service respondent Visayan Stevedore Transportation Company charge Kim
Kee Chua Yu Company for freightage P0.60 per picul or bag as shown in Exhibits C, C-1, C-2, C-
3, C-4, C-5, C-6, C-7 and C-8, and Luzon Merchandising Corporation was also charged for the
same service and at the same rate as shown in Exhibits B, B-1 and B-2.
It was upon these findings that the Commission made the order now sought to be reviewed, upon
complaint of the Philippine Shipowners' Association charging that the then respondent were engaged in
the transportation of cargo in the Philippines for hire or compensation without authority or approval of the
Commission, having adopted, fixed and collected freight charges at the rate of P0.60 per bag or picul,
particularly sugar, loaded and transported in their lighters and towed by their tugboats between different
points in the Province of Negros Occidental and Manila, which said rates resulted in ruinous competition
with complainant..

Section 13 (b) of the Public Service Law (Commonwealth Act No. 146) defines public service thus:

The term "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 purpose 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
small water craft, engaged in the transportation of passengers and freight, shipyard, marine
railway, marine repair shop, warehouse, wharf or dock, ice plant, ice-refrigeration plant, canal,
irrigation system, sewerage, gas, electric light, hear and power, water supply and power,
petroleum, sewerage system, telephone, wire or wireless telegraph system and broadcasting
radio stations.

It is not necessary, under this definition, that one holds himself out as serving or willing to serve the public
in order to be considered public service. .

In Luzon Brokerage Company vs. Public Service Commission (40 Off. Gaz., 7th Supplement, p. 271), this
court declared that "Act 454 is clear in including in the definition of a public service that which is rendered
for compensation, although limited exclusively to the customers of the petitioner."

In that case, the Luzon Brokerage Company, a customs broker, had been receiving, depositing and
delivering goods discharged from ships at the pier to its customers. As here, the Luzon Brokerage was
then rendering transportation service for compensation to a limited clientele, not to the public at large..

In the United States where, it is said, there is no fixed definition of what constitutes public service or
public utility it is also held that it is no always necessary, in order to be a public service, that an
organization be dedicated to public use, i.e., ready and willing to serve the public as a class. It is only
necessary that it must in some way be impressed with a public interest; and whether the operation of a
given business is a public utility depends upon whether or not the service rendered by it is a public as a
class. It is only necessary that it must in some way be impressed with a public interest; and whether the
operation of a given business is a public utility depends upon whether or not the service rendered by it is
of a public character and of public consequence and concern. (51 C. J. 5.) Thus, a business may be
affected with public interest and regulated for public good although not under any duty to serve the public.
(43 Am. Jur., 572.) .

It can scarcely be denied that the contracts between the owners of the barges and the owners of the
cargo at bar were ordinary contracts of transportation and not of lease. Petitioners' watercraft was
manned entirely by crews in their employ and payroll, and the operation of the said craft was under their
direction and control, the customers assuming no responsibility for the goods handled on the barges. The
great preponderance of the evidence contradicts the assertion that there was any physical or symbolic
conveyance of the possessing of the tugboats and barges to the shippers. Whether the agreements were
written or verbal, the manner of payment of freight charges, the question who loaded and unloaded the
cargo, the propriety of the admission of certain receipts in evidence, etc., to all of which the parties have
given much attention — these are matters of form which do not alter the essential nature of the
relationship of the parties to the transactions as revealed by the fundamental facts to record..
It is contended that "if the Public Service Act were to be construed in such manner as to include private
lease contracts, said law would be unconstitutional," seemingly implying that, to prevent the law from
being in contravention of the Constitution, it should be so read as to embrace only those persons and
companies that are in fact engaged in public service" with its corresponding qualification of an offer to
serve indiscriminately the public.".

It has been already shown that the petitioners' lighters and tugboats were not leased, but used to carry
goods for compensation at a fixed rate for a fixed weight. At the very least, they were hired, hired in the
sense that the shippers did not have directions, control and maintenance thereof, which is a characteristic
feature of lease..

On the second proposition, the Public Service Commission has, in our judgment, interpreted the law in
accordance with legislative intent. Commonwealth Act No. 146 declares in unequivocal language that an
enterprise of any of the kinds therein enumerated is a public service if conducted for hire or compensation
even if the operator deals only with a portion of the public or limited clientele.

It has been seen that public utility, even where the term is not defined by statute, is not determined by the
number of people actually served. Nor does the mere fact that service is rendered only under contract
prevent a company from being a public utility. (43 Am. Jur., 573.) on the other hand, casual or incidental
service devoid of public character and interest, it must be admitted, is not brought within the category of
public utility. The demarcation line is not susceptible of exact description or definition, each case being
governed by its peculiar circumstances..

"It is impossible to lay down any general rule on the subject whether the rendering of incidental service to
member of the public by an individual or corporation whose principal business is of a different nature
constitute cases are in conflict, as the question involved depends on such factor as the extent of service,
whether such person or company has held himself or itself out as ready to serve the public or a portion of
the public generally, or in other ways conducted himself or itself as a public utility. In several cases, it has
been held that the incidental service rendered to others constituted such person or corporation a public
utility, but in other cases, a contrary decision has been reached." (43 Am. Jur., 573.).

The transportation service which was the subject of complaint was not casual or incidental. It had been
carried on regularly for two years at almost uniform rates of charges. Although the number of the
petitioners' customers was limited, the value of goods transported was not inconsiderable. Petitioners did
not have the same customers all the time embraced in the complaint, and there was no reason to believe
that they would not accept, and there was nothing to prevent them from accepting, new customers that
might be willing to avail of their service to the extent of their capacity. Upon the well-established facts as
applied to the plain letter of Commonwealth Act No. 146, we are of the opinion that the Public Service
Commission's order does not invade private rights of property or contract..

In at least one respect, the business complained of was a matter of public concern. The Public Service
Law was enacted not only to protect the public against unreasonable charges and poor, inefficient
service, but also to prevent ruinous competition. That, we venture to say, is the main purpose in bringing
under the jurisdiction of the Public Service Commission motor vehicles, other means of transportation, ice
plants, etc., which cater to a limited portion of the public under private agreements. To the extent that
such agreement may tent to wreck or impair the financial stability and efficiency of public utilities who do
offer service to the public in general, they are affected with interest and come within the police power of
the state to regulate..

Just as the legislature may not "declare a company or enterprises to be a public utility when it is not
inherently such," a public utility may not evade control and supervision of its operation by the government
by selecting its customers under the guise of private transactions.1âwphïl.nêt
For the rest, the constitutionality of Commonwealth Act No. 146 was upheld, implicitly in Luzon Brokerage
Company vs. Public Service Commission, supra, and explicitly in Pangasinan Transportation Company
vs. Public Service Commission (70 Phil., 221).

Where there serious doubts, the court should still be reluctant to invalidate the Public Service Law of any
provision thereof. Although the legislature can not, by its mere declaration, make something a utility which
is not a fact such, "the public policy of the state as announced by the legislature will be given due weight,
and the determination of the legislature that a particular business is subject to the regulatory power,
because the public welfare is dependent upon its proper conduct and regulation, will not lightly be
disregarded by the court." (51 C. J. 5.).

The objection to the designation of Attorney Aspillera as commissioner to take the evidence was tardy. It
was made for the first time after decision was rendered, following a prolonged hearing in which the
petitioners cross-examined the complainant's witnesses and presented their own evidence..

The point is procedural, not jurisdictional, and may be waived by express consent or acquiescence. So it
was held in Everett Steamship Corporation vs. Chua Hiong, 90 Phil. 64 and La Paz Ice Plant and Cold
Storage Company vs. Commission de Utilidades Publicas et al., 89 Phil., 109..

Upon the foregoing considerations, the appealed order of the Public Service Commission is affirmed, with
costs against the petitioners. .
G.R. No. 176579 October 9, 2012

HEIRS OF WILSON P. GAMBOA,* Petitioners,

vs.
FINANCE SECRETARYMARGARITO B. TEVES, FINANCE UNDERSECRETARYJOHN P. SEVILLA,
AND COMMISSIONER RICARDO ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD
GOVERNMENT(PCGG) I N THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY, OF
THE PRIVATIZATION COUNCIL, CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY (PLDT) IN HIS CAPACITY
AS MANAGING DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L. NAZARENO
OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, CHAIR FE BARIN OF THE SECURITIES
AND EXCHANGE COMMISSION, and PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK
EXCHANGE, Respondents.

PABLITO V. SANIDAD and ARNO V. SANIDAD, Petitioner-in-Intervention.

RESOLUTION

CARPIO, J.:

This resolves the motions for reconsideration of the 28 June 2011 Decision filed by (1) the Philippine
Stock Exchange's (PSE) President, 1 (2) Manuel V. Pangilinan (Pangilinan),2 (3) Napoleon L. Nazareno
(Nazareno ),3 and ( 4) the Securities and Exchange Commission (SEC) 4 (collectively, movants ).

The Office of the Solicitor General (OSG) initially filed a motion for reconsideration on behalf of the
SEC,5 assailing the 28 June 2011 Decision. However, it subsequently filed a Consolidated Comment on
behalf of the State,6declaring expressly that it agrees with the Court's definition of the term "capital" in
Section 11, Article XII of the Constitution. During the Oral Arguments on 26 June 2012, the OSG
reiterated its position consistent with the Court's 28 June 2011 Decision.

We deny the motions for reconsideration.

 I.
Far-reaching implications of the legal issue justify
treatment of petition for declaratory relief as one for mandamus.

As we emphatically stated in the 28 June 2011 Decision, the interpretation of the term "capital" in Section
11, Article XII of the Constitution has far-reaching implications to the national economy. In fact, a
resolution of this issue will determine whether Filipinos are masters, or second-class citizens, in their own
country. What is at stake here is whether Filipinos or foreigners will have effective control of the
Philippine national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the threshold legal issue presented in this case.

Contrary to Pangilinan’s narrow view, the serious economic consequences resulting in the interpretation
of the term "capital" in Section 11, Article XII of the Constitution undoubtedly demand an immediate
adjudication of this issue. Simply put, the far-reaching implications of this issue justify the treatment
of the petition as one for mandamus.7

In Luzon Stevedoring Corp. v. Anti-Dummy Board,8 the Court deemed it wise and expedient to resolve the
case although the petition for declaratory relief could be outrightly dismissed for being procedurally
defective. There, appellant admittedly had already committed a breach of the Public Service Act in
relation to the Anti-Dummy Law since it had been employing non- American aliens long before the
decision in a prior similar case. However, the main issue in Luzon Stevedoring was of transcendental
importance, involving the exercise or enjoyment of rights, franchises, privileges, properties and
businesses which only Filipinos and qualified corporations could exercise or enjoy under the Constitution
and the statutes. Moreover, the same issue could be raised by appellant in an appropriate action. Thus,
in Luzon Stevedoring the Court deemed it necessary to finally dispose of the case for the guidance of all
concerned, despite the apparent procedural flaw in the petition.

The circumstances surrounding the present case, such as the supposed procedural defect of the petition
and the pivotal legal issue involved, resemble those in Luzon Stevedoring. Consequently, in the interest
of substantial justice and faithful adherence to the Constitution, we opted to resolve this case for the
guidance of the public and all concerned parties.

II.
No change of any long-standing rule;
thus, no redefinition of the term "capital."

Movants contend that the term "capital" in Section 11, Article XII of the Constitution has long been settled
and defined to refer to the total outstanding shares of stock, whether voting or non-voting. In fact,
movants claim that the SEC, which is the administrative agency tasked to enforce the 60-40 ownership
requirement in favor of Filipino citizens in the Constitution and various statutes, has consistently adopted
this particular definition in its numerous opinions. Movants point out that with the 28 June 2011 Decision,
the Court in effect introduced a "new" definition or "midstream redefinition"9 of the term "capital" in Section
11, Article XII of the Constitution.

This is egregious error.

For more than 75 years since the 1935 Constitution, the Court has not interpreted or defined the term
"capital" found in various economic provisions of the 1935, 1973 and 1987 Constitutions. There has never
been a judicial precedent interpreting the term "capital" in the 1935, 1973 and 1987 Constitutions, until
now. Hence, it is patently wrong and utterly baseless to claim that the Court in defining the term "capital"
in its 28 June 2011 Decision modified, reversed, or set aside the purported long-standing definition of the
term "capital," which supposedly refers to the total outstanding shares of stock, whether voting or non-
voting. To repeat, until the present case there has never been a Court ruling categorically defining the
term "capital" found in the various economic provisions of the 1935, 1973 and 1987 Philippine
Constitutions.

The opinions of the SEC, as well as of the Department of Justice (DOJ), on the definition of the term
"capital" as referring to both voting and non-voting shares (combined total of common and preferred
shares) are, in the first place, conflicting and inconsistent. There is no basis whatsoever to the claim that
the SEC and the DOJ have consistently and uniformly adopted a definition of the term "capital" contrary to
the definition that this Court adopted in its 28 June 2011 Decision.

In DOJ Opinion No. 130, s. 1985,10 dated 7 October 1985, the scope of the term "capital" in Section 9,
Article XIV of the 1973 Constitution was raised, that is, whether the term "capital" includes "both preferred
and common stocks." The issue was raised in relation to a stock-swap transaction between a Filipino and
a Japanese corporation, both stockholders of a domestic corporation that owned lands in the Philippines.
Then Minister of Justice Estelito P. Mendoza ruled that the resulting ownership structure of the
corporation would be unconstitutional because 60% of the voting stock would be owned by Japanese
while Filipinos would own only 40% of the voting stock, although when the non-voting stock is added,
Filipinos would own 60% of the combined voting and non-voting stock. This ownership structure is
remarkably similar to the current ownership structure of PLDT. Minister Mendoza ruled:

xxxx

Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and
preferred) while the Japanese investors control sixty percent (60%) of the common (voting) shares.

It is your position that x x x since Section 9, Article XIV of the Constitution uses the word
"capital," which is construed "to include both preferred and common shares" and "that where the
law does not distinguish, the courts shall not distinguish."

xxxx

In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question
may not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate
shares into common voting shares and preferred non-voting shares, any arrangement which attempts to
defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which
would place ownership of 60%11 of the common (voting) shares in the Japanese group, while
retaining 60% of the total percentage of common and preferred shares in Filipino hands would
amount to circumvention of the principle of control by Philippine stockholders that is implicit in
the 60% Philippine nationality requirement in the Constitution. (Emphasis supplied)

In short, Minister Mendoza categorically rejected the theory that the term "capital" in Section 9, Article
XIV of the 1973 Constitution includes "both preferred and common stocks" treated as the same class of
shares regardless of differences in voting rights and privileges. Minister Mendoza stressed that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution is not complied with unless the
corporation "satisfies the criterion of beneficial ownership" and that in applying the same "the
primordial consideration is situs of control."

On the other hand, in Opinion No. 23-10 dated 18 August 2010, addressed to Castillo Laman Tan
Pantaleon & San Jose, then SEC General Counsel Vernette G. Umali-Paco applied the Voting Control
Test, that is, using only the voting stock to determine whether a corporation is a Philippine national. The
Opinion states:

Applying the foregoing, particularly the Control Test, MLRC is deemed as a Philippine national
because: (1) sixty percent (60%) of its outstanding capital stock entitled to vote is owned by a
Philippine national, the Trustee; and (2) at least sixty percent (60%) of the ERF will accrue to the benefit
of Philippine nationals. Still pursuant to the Control Test, MLRC’s investment in 60% of BFDC’s
outstanding capital stock entitled to vote shall be deemed as of Philippine nationality, thereby
qualifying BFDC to own private land.

Further, under, and for purposes of, the FIA, MLRC and BFDC are both Philippine nationals, considering
that: (1) sixty percent (60%) of their respective outstanding capital stock entitled to vote is owned by a
Philippine national (i.e., by the Trustee, in the case of MLRC; and by MLRC, in the case of BFDC); and
(2) at least 60% of their respective board of directors are Filipino citizens. (Boldfacing and italicization
supplied)

Clearly, these DOJ and SEC opinions are compatible with the Court’s interpretation of the 60-40
ownership requirement in favor of Filipino citizens mandated by the Constitution for certain economic
activities. At the same time, these opinions highlight the conflicting, contradictory, and inconsistent
positions taken by the DOJ and the SEC on the definition of the term "capital" found in the economic
provisions of the Constitution.

The opinions issued by SEC legal officers do not have the force and effect of SEC rules and regulations
because only the SEC en banc can adopt rules and regulations. As expressly provided in Section 4.6 of
the Securities Regulation Code,12 the SEC cannot delegate to any of its individual Commissioner or staff
the power to adopt any rule or regulation. Further, under Section 5.1 of the same Code, it is the SEC
as a collegial body, and not any of its legal officers, that is empowered to issue opinions and
approve rules and regulations. Thus:

4.6. The Commission may, for purposes of efficiency, delegate any of its functions to any department or
office of the Commission, an individual Commissioner or staff member of the Commission except its
review or appellate authority and its power to adopt, alter and supplement any rule or regulation.

The Commission may review upon its own initiative or upon the petition of any interested party any action
of any department or office, individual Commissioner, or staff member of the Commission.

SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act with transparency and
shall have the powers and functions provided by this Code, Presidential Decree No. 902-A, the
Corporation Code, the Investment Houses Law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following powers and functions:

xxxx

(g) Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and
provide guidance on and supervise compliance with such rules, regulations and orders;

x x x x (Emphasis supplied)

Thus, the act of the individual Commissioners or legal officers of the SEC in issuing opinions that have
the effect of SEC rules or regulations is ultra vires. Under Sections 4.6 and 5.1(g) of the Code, only the
SEC en banc can "issue opinions" that have the force and effect of rules or regulations. Section 4.6 of the
Code bars the SEC en banc from delegating to any individual Commissioner or staff the power to adopt
rules or regulations. In short, any opinion of individual Commissioners or SEC legal officers does
not constitute a rule or regulation of the SEC.

The SEC admits during the Oral Arguments that only the SEC en banc, and not any of its individual
commissioners or legal staff, is empowered to issue opinions which have the same binding effect as SEC
rules and regulations, thus:
JUSTICE CARPIO:

So, under the law, it is the Commission En Banc that can issue an

SEC Opinion, correct?

COMMISSIONER GAITE:13

That’s correct, Your Honor.

JUSTICE CARPIO:

Can the Commission En Banc delegate this function to an SEC officer?

COMMISSIONER GAITE:

Yes, Your Honor, we have delegated it to the General Counsel.

JUSTICE CARPIO:

It can be delegated. What cannot be delegated by the Commission En Banc to a

commissioner or an individual employee of the Commission?

COMMISSIONER GAITE:

Novel opinions that [have] to be decided by the En Banc...

JUSTICE CARPIO:

What cannot be delegated, among others, is the power to adopt or amend rules and
regulations, correct?

COMMISSIONER GAITE:

That’s correct, Your Honor.

JUSTICE CARPIO:

So, you combine the two (2), the SEC officer, if delegated that power, can issue an
opinion but that opinion does not constitute a rule or regulation, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, all of these opinions that you mentioned they are not rules and regulations,
correct?

COMMISSIONER GAITE:
 They are not rules and regulations.

JUSTICE CARPIO:

If they are not rules and regulations, they apply only to that particular situation and will
not constitute a precedent, correct?

COMMISSIONER GAITE:

Yes, Your Honor.14 (Emphasis supplied)

Significantly, the SEC en banc, which is the collegial body statutorily empowered to issue rules and
opinions on behalf of the SEC, has adopted even the Grandfather Rule in determining compliance with
the 60-40 ownership requirement in favor of Filipino citizens mandated by the Constitution for certain
economic activities. This prevailing SEC ruling, which the SEC correctly adopted to thwart any
circumvention of the required Filipino "ownership and control," is laid down in the 25 March 2010
SEC en banc ruling in Redmont Consolidated Mines, Corp. v. McArthur Mining, Inc., et al.,15 to wit:

The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural
resources. Necessarily, therefore, the Rule interpreting the constitutional provision should not
diminish that right through the legal fiction of corporate ownership and control. But the
constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored foreigners
contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to
accurately determine the actual participation, both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or business.

Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined
by ascertaining if 60% of the investing corporation’s outstanding capital stock is owned by "Filipino
citizens", or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn
owned to some extent by another investing corporation, the same process must be observed. One must
not stop until the citizenships of the individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the Grandfather Rule.

Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule. In
one of the discussions on what is now Article XII of the present Constitution, the framers made the
following exchange:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with the question: ‘Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital
stock of a corporation’? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is
‘60 percent of voting stock.’

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation,
say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the
Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes. (Boldfacing and underscoring supplied; italicization in the original)

This SEC en banc ruling conforms to our 28 June 2011 Decision that the 60-40 ownership requirement in
favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to
voting control of the corporation, but also to the beneficial ownership of the corporation. Thus, in our
28 June 2011 Decision we stated:

Mere legal title is insufficient to meet the 60 percent Filipinoowned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

Both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a
corporation is a "Philippine national."

The interpretation by legal officers of the SEC of the term "capital," embodied in various opinions which
respondents relied upon, is merely preliminary and an opinion only of such officers. To repeat, any such
opinion does not constitute an SEC rule or regulation. In fact, many of these opinions contain a disclaimer
which expressly states: "x x x the foregoing opinion is based solely on facts disclosed in your query and
relevant only to the particular issue raised therein and shall not be used in the nature of a standing
rule binding upon the Commission in other cases whether of similar or dissimilar
circumstances."16 Thus, the opinions clearly make a caveat that they do not constitute binding
precedents on any one, not even on the SEC itself.

Likewise, the opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither
conclusive nor controlling and thus, do not bind the Court. It is hornbook doctrine that any interpretation of
the law that administrative or quasi-judicial agencies make is only preliminary, never conclusive on the
Court. The power to make a final interpretation of the law, in this case the term "capital" in Section 11,
Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.

In his motion for reconsideration, the PSE President cites the cases of National Telecommunications
Commission v. Court of Appeals17 and Philippine Long Distance Telephone Company v. National
Telecommunications Commission18 in arguing that the Court has already defined the term "capital" in
Section 11, Article XII of the 1987 Constitution.19

The PSE President is grossly mistaken. In both cases of National Telecommunications v. Court of
Appeals20 and Philippine Long Distance Telephone Company v. National Telecommunications
Commission,21 the Court did not define the term "capital" as found in Section 11, Article XII of the 1987
Constitution. In fact, these two cases never mentioned, discussed or cited Section 11, Article XII of
the Constitution or any of its economic provisions, and thus cannot serve as precedent in the
interpretation of Section 11, Article XII of the Constitution. These two cases dealt solely with the
determination of the correct regulatory fees under Section 40(e) and (f) of the Public Service Act, to wit:
(e) For annual reimbursement of the expenses incurred by the Commission in the supervision of other
public services and/or in the regulation or fixing of their rates, twenty centavos for each one hundred
pesos or fraction thereof, of the capital stock subscribed or paid, or if no shares have been issued, of
the capital invested, or of the property and equipment whichever is higher.

(f) For the issue or increase of capital stock, twenty centavos for each one hundred pesos or fraction
thereof, of the increased capital. (Emphasis supplied)

The Court’s interpretation in these two cases of the terms "capital stock subscribed or paid," "capital
stock" and "capital" does not pertain to, and cannot control, the definition of the term "capital" as used in
Section 11, Article XII of the Constitution, or any of the economic provisions of the Constitution where the
term "capital" is found. The definition of the term "capital" found in the Constitution must not be taken out
of context. A careful reading of these two cases reveals that the terms "capital stock subscribed or paid,"
"capital stock" and "capital" were defined solely to determine the basis for computing the supervision and
regulation fees under Section 40(e) and (f) of the Public Service Act.

III.
Filipinization of Public Utilities

The Preamble of the 1987 Constitution, as the prologue of the supreme law of the land, embodies the
ideals that the Constitution intends to achieve.22 The Preamble reads:

We, the sovereign Filipino people, imploring the aid of Almighty God, in order to build a just and humane
society, and establish a Government that shall embody our ideals and aspirations, promote the common
good, conserve and develop our patrimony, and secure to ourselves and our posterity, the blessings of
independence and democracy under the rule of law and a regime of truth, justice, freedom, love, equality,
and peace, do ordain and promulgate this Constitution. (Emphasis supplied)

Consistent with these ideals, Section 19, Article II of the 1987 Constitution declares as State policy the
development of a national economy "effectively controlled" by Filipinos:

Section 19. The State shall develop a self-reliant and independent national economy effectively
controlled by Filipinos.

Fortifying the State policy of a Filipino-controlled economy, the Constitution decrees:

Section 10. The Congress shall, upon recommendation of the economic and planning agency, when the
national interest dictates, reserve to citizens of the Philippines or to corporations or associations at least
sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments. The Congress shall enact measures that will encourage the
formation and operation of enterprises whose capital is wholly owned by Filipinos.

In the grant of rights, privileges, and concessions covering the national economy and patrimony, the State
shall give preference to qualified Filipinos.

The State shall regulate and exercise authority over foreign investments within its national jurisdiction and
in accordance with its national goals and priorities.23

Under Section 10, Article XII of the 1987 Constitution, Congress may "reserve to citizens of the
Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such
citizens, or such higher percentage as Congress may prescribe, certain areas of investments." Thus, in
numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations
at least sixty percent of the "capital" of which is owned by Filipino citizens. Some of these laws are: (1)
Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or
R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine
Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004
or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship
Mortgage Decree or P.D. No. 1521.

With respect to public utilities, the 1987 Constitution specifically ordains:

Section 11. 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 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 Congress when the common
good 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 its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines. (Emphasis supplied)

This provision, which mandates the Filipinization of public utilities, requires that any form of authorization
for the operation of public utilities shall be granted only 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." "The provision is [an express] recognition of the sensitive and vital
position of public utilities both in the national economy and for national security." 24

The 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino
citizens, or (2) corporations or associations at least 60 percent of whose "capital" is owned by Filipino
citizens. Hence, in the case of individuals, only Filipino citizens can validly own and operate a public
utility. In the case of corporations or associations, at least 60 percent of their "capital" must be owned by
Filipino citizens. In other words, under Section 11, Article XII of the 1987 Constitution, to own and
operate a public utility a corporation’s capital must at least be 60 percent owned by Philippine
nationals.

IV.
Definition of "Philippine National"

Pursuant to the express mandate of Section 11, Article XII of the 1987 Constitution, Congress enacted
Republic Act No. 7042 or the Foreign Investments Act of 1991 (FIA), as amended, which defined a
"Philippine national" as follows:

SEC. 3. Definitions. - As used in this Act:

a. The term "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which one hundred percent
(100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order that the corporation, shall be considered a
"Philippine national." (Boldfacing, italicization and underscoring supplied)

Thus, the FIA clearly and unequivocally defines a "Philippine national" as a Philippine citizen, or a
domestic corporation at least "60% of the capital stock outstanding and entitled to vote" is owned by
Philippine citizens.

The definition of a "Philippine national" in the FIA reiterated the meaning of such term as provided in its
predecessor statute, Executive Order No. 226 or the Omnibus Investments Code of 1987,25 which was
issued by then President Corazon C. Aquino. Article 15 of this Code states:

Article 15. "Philippine national" shall mean a citizen of the Philippines or a diplomatic partnership or
association wholly-owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 48(3)26 of the Omnibus Investments Code of 1987, "no corporation x x x which is not a
‘Philippine national’ x x x shall do business

x x x in the Philippines x x x without first securing from the Board of Investments a written certificate to the
effect that such business or economic activity x x x would not conflict with the Constitution or laws of the
Philippines."27 Thus, a "non-Philippine national" cannot own and operate a reserved economic activity like
a public utility. This means, of course, that only a "Philippine national" can own and operate a public
utility.

In turn, the definition of a "Philippine national" under Article 15 of the Omnibus Investments Code of 1987
was a reiteration of the meaning of such term as provided in Article 14 of the Omnibus Investments Code
of 1981,28 to wit:

Article 14. "Philippine national" shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty per cent (60%) of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
per cent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders own stock in a registered enterprise, at least sixty per cent
(60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held
by the citizens of the Philippines and at least sixty per cent (60%) of the members of the Board of
Directors of both corporations must be citizens of the Philippines in order that the corporation shall be
considered a Philippine national. (Boldfacing, italicization and underscoring supplied)

Under Article 69(3) of the Omnibus Investments Code of 1981, "no corporation x x x which is not a
‘Philippine national’ x x x shall do business x x x in the Philippines x x x without first securing a written
certificate from the Board of Investments to the effect that such business or economic activity x x x
would not conflict with the Constitution or laws of the Philippines."29 Thus, a "non-Philippine national"
cannot own and operate a reserved economic activity like a public utility. Again, this means that only a
"Philippine national" can own and operate a public utility.
Prior to the Omnibus Investments Code of 1981, Republic Act No. 518630 or the Investment Incentives
Act, which took effect on 16 September 1967, contained a similar definition of a "Philippine national," to
wit:

(f) "Philippine National" shall mean a citizen of the Philippines; or a partnership or association wholly
owned by citizens of the Philippines; or a corporation organized under the laws of the Philippines of
which at least sixty per cent of the capital stock outstanding and entitled to vote is owned and
held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine National and at least sixty per cent of the fund will
accrue to the benefit of Philippine Nationals: Provided, That where a corporation and its non-Filipino
stockholders own stock in a registered enterprise, at least sixty per cent of the capital stock outstanding
and entitled to vote of both corporations must be owned and held by the citizens of the Philippines and at
least sixty per cent of the members of the Board of Directors of both corporations must be citizens of the
Philippines in order that the corporation shall be considered a Philippine National. (Boldfacing, italicization
and underscoring supplied)

Under Section 3 of Republic Act No. 5455 or the Foreign Business Regulations Act, which took effect on
30 September 1968, if the investment in a domestic enterprise by non-Philippine nationals exceeds 30%
of its outstanding capital stock, such enterprise must obtain prior approval from the Board of Investments
before accepting such investment. Such approval shall not be granted if the investment "would conflict
with existing constitutional provisions and laws regulating the degree of required ownership by Philippine
nationals in the enterprise."31 A "non-Philippine national" cannot own and operate a reserved economic
activity like a public utility. Again, this means that only a "Philippine national" can own and operate a
public utility.

The FIA, like all its predecessor statutes, clearly defines a "Philippine national" as a Filipino citizen, or
a domestic corporation "at least sixty percent (60%) of the capital stock outstanding and entitled
to vote" is owned by Filipino citizens. A domestic corporation is a "Philippine national" only if at least 60%
of its voting stock is owned by Filipino citizens. This definition of a "Philippine national" is crucial in the
present case because the FIA reiterates and clarifies Section 11, Article XII of the 1987 Constitution,
which limits the ownership and operation of public utilities to Filipino citizens or to corporations or
associations at least 60% Filipino-owned.

The FIA is the basic law governing foreign investments in the Philippines, irrespective of the nature of
business and area of investment. The FIA spells out the procedures by which non-Philippine nationals
can invest in the Philippines. Among the key features of this law is the concept of a negative list or the
Foreign Investments Negative List.32 Section 8 of the law states:

SEC. 8. List of Investment Areas Reserved to Philippine Nationals [Foreign Investment Negative
List]. - The Foreign Investment Negative List shall have two 2 component lists: A and B:

a. List A shall enumerate the areas of activities reserved to Philippine nationals by mandate of the
Constitution and specific laws.

b. List B shall contain the areas of activities and enterprises regulated pursuant to law:

1. which are defense-related activities, requiring prior clearance and authorization from the Department of
National Defense [DND] to engage in such activity, such as the manufacture, repair, storage and/or
distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics and
similar materials; unless such manufacturing or repair activity is specifically authorized, with a substantial
export component, to a non-Philippine national by the Secretary of National Defense; or
2. which have implications on public health and morals, such as the manufacture and distribution of
dangerous drugs; all forms of gambling; nightclubs, bars, beer houses, dance halls, sauna and steam
bathhouses and massage clinics. (Boldfacing, underscoring and italicization supplied)

Section 8 of the FIA enumerates the investment areas "reserved to Philippine nationals." Foreign
Investment Negative List A consists of "areas of activities reserved to Philippine nationals by
mandate of the Constitution and specific laws," where foreign equity participation in any
enterprise shall be limited to the maximum percentage expressly prescribed by the Constitution
and other specific laws. In short, to own and operate a public utility in the Philippines one must be
a "Philippine national" as defined in the FIA. The FIA is abundant notice to foreign investors to
what extent they can invest in public utilities in the Philippines.

To repeat, among the areas of investment covered by the Foreign Investment Negative List A is the
ownership and operation of public utilities, which the Constitution expressly reserves to Filipino citizens
and to corporations at least 60% owned by Filipino citizens. In other words, Negative List A of the FIA
reserves the ownership and operation of public utilities only to "Philippine nationals," defined in
Section 3(a) of the FIA as "(1) a citizen of the Philippines; x x x or (3) a corporation organized under
the laws of the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or (4) a
corporation organized abroad and registered as doing business in the Philippines under the Corporation
Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals."

Clearly, from the effectivity of the Investment Incentives Act of 1967 to the adoption of the Omnibus
Investments Code of 1981, to the enactment of the Omnibus Investments Code of 1987, and to the
passage of the present Foreign Investments Act of 1991, or for more than four decades, the statutory
definition of the term "Philippine national" has been uniform and consistent: it means a Filipino
citizen, or a domestic corporation at least 60% of the voting stock is owned by Filipinos. Likewise,
these same statutes have uniformly and consistently required that only "Philippine nationals"
could own and operate public utilities in the Philippines. The following exchange during the Oral
Arguments is revealing:

JUSTICE CARPIO:

Counsel, I have some questions. You are aware of the Foreign Investments Act of 1991,
x x x? And the FIA of 1991 took effect in 1991, correct? That’s over twenty (20) years
ago, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And Section 8 of the Foreign Investments Act of 1991 states that []only Philippine
nationals can own and operate public utilities[], correct?

COMMISSIONER GAITE:

Yes, Your Honor.

JUSTICE CARPIO:

And the same Foreign Investments Act of 1991 defines a "Philippine national" either as a
citizen of the Philippines, or if it is a corporation at least sixty percent (60%) of the voting
stock is owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And, you are also aware that under the predecessor law of the Foreign Investments Act
of 1991, the Omnibus Investments Act of 1987, the same provisions apply: x x x only
Philippine nationals can own and operate a public utility and the Philippine national, if it is
a corporation, x x x sixty percent (60%) of the capital stock of that corporation must be
owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to the Omnibus Investments Act of 1987, under the Omnibus Investments
Act of 1981, the same rules apply: x x x only a Philippine national can own and operate a
public utility and a Philippine national, if it is a corporation, sixty percent (60%) of its x x x
voting stock, must be owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

And even prior to that, under [the]1967 Investments Incentives Act and the Foreign
Company Act of 1968, the same rules applied, correct?

COMMISSIONER GAITE:

Correct, Your Honor.

JUSTICE CARPIO:

So, for the last four (4) decades, x x x, the law has been very consistent – only a
Philippine national can own and operate a public utility, and a Philippine national,
if it is a corporation, x x x at least sixty percent (60%) of the voting stock must be
owned by citizens of the Philippines, correct?

COMMISSIONER GAITE:

Correct, Your Honor.33 (Emphasis supplied)

Government agencies like the SEC cannot simply ignore Sections 3(a) and 8 of the FIA which
categorically prescribe that certain economic activities, like the ownership and operation of public utilities,
are reserved to corporations "at least sixty percent (60%) of the capital stock outstanding and entitled to
vote is owned and held by citizens of the Philippines." Foreign Investment Negative List A refers to
"activities reserved to Philippine nationals by mandate of the Constitution and specific laws." The FIA is
the basic statute regulating foreign investments in the Philippines. Government agencies tasked
with regulating or monitoring foreign investments, as well as counsels of foreign investors, should start
with the FIA in determining to what extent a particular foreign investment is allowed in the Philippines.
Foreign investors and their counsels who ignore the FIA do so at their own peril. Foreign investors and
their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so also at
their own peril.

Occasional opinions of SEC legal officers that obviously contradict the FIA should immediately raise a red
flag. There are already numerous opinions of SEC legal officers that cite the definition of a "Philippine
national" in Section 3(a) of the FIA in determining whether a particular corporation is qualified to own and
operate a nationalized or partially nationalized business in the Philippines. This shows that SEC legal
officers are not only aware of, but also rely on and invoke, the provisions of the FIA in ascertaining the
eligibility of a corporation to engage in partially nationalized industries. The following are some of such
opinions:

1. Opinion of 23 March 1993, addressed to Mr. Francis F. How;

2. Opinion of 14 April 1993, addressed to Director Angeles T. Wong of the Philippine Overseas
Employment Administration;

3. Opinion of 23 November 1993, addressed to Messrs. Dominador Almeda and Renato S.

Calma;

4. Opinion of 7 December 1993, addressed to Roco Bunag Kapunan Migallos & Jardeleza;

5. SEC Opinion No. 49-04, addressed to Romulo Mabanta Buenaventura Sayoc & De Los
Angeles;

6. SEC-OGC Opinion No. 17-07, addressed to Mr. Reynaldo G. David; and

7. SEC-OGC Opinion No. 03-08, addressed to Attys. Ruby Rose J. Yusi and Rudyard S.
Arbolado.

The SEC legal officers’ occasional but blatant disregard of the definition of the term "Philippine national"
in the FIA signifies their lack of integrity and competence in resolving issues on the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

The PSE President argues that the term "Philippine national" defined in the FIA should be limited and
interpreted to refer to corporations seeking to avail of tax and fiscal incentives under investment
incentives laws and cannot be equated with the term "capital" in Section 11, Article XII of the 1987
Constitution. Pangilinan similarly contends that the FIA and its predecessor statutes do not apply to
"companies which have not registered and obtained special incentives under the schemes established by
those laws."

Both are desperately grasping at straws. The FIA does not grant tax or fiscal incentives to any enterprise.
Tax and fiscal incentives to investments are granted separately under the Omnibus Investments Code of
1987, not under the FIA. In fact, the FIA expressly repealed Articles 44 to 56 of Book II of the Omnibus
Investments Code of 1987, which articles previously regulated foreign investments in nationalized or
partially nationalized industries.

The FIA is the applicable law regulating foreign investments in nationalized or partially nationalized
industries. There is nothing in the FIA, or even in the Omnibus Investments Code of 1987 or its
predecessor statutes, that states, expressly or impliedly, that the FIA or its predecessor statutes do not
apply to enterprises not availing of tax and fiscal incentives under the Code. The FIA and its predecessor
statutes apply to investments in all domestic enterprises, whether or not such enterprises enjoy tax and
fiscal incentives under the Omnibus Investments Code of 1987 or its predecessor statutes. The reason is
quite obvious – mere non-availment of tax and fiscal incentives by a non-Philippine national
cannot exempt it from Section 11, Article XII of the Constitution regulating foreign investments in
public utilities. In fact, the Board of Investments’ Primer on Investment Policies in the
Philippines,34 which is given out to foreign investors, provides:

PART III. FOREIGN INVESTMENTS WITHOUT INCENTIVES

Investors who do not seek incentives and/or whose chosen activities do not qualify for incentives, (i.e.,
the activity is not listed in the IPP, and they are not exporting at least 70% of their production) may go
ahead and make the investments without seeking incentives. They only have to be guided by the
Foreign Investments Negative List (FINL).

The FINL clearly defines investment areas requiring at least 60% Filipino ownership. All other areas
outside of this list are fully open to foreign investors. (Emphasis supplied)

V.
Right to elect directors, coupled with beneficial ownership,
translates to effective control.

The 28 June 2011 Decision declares that the 60 percent Filipino ownership required by the Constitution to
engage in certain economic activities applies not only to voting control of the corporation, but also to the
beneficial ownership of the corporation. To repeat, we held:

Mere legal title is insufficient to meet the 60 percent Filipino-owned "capital" required in the
Constitution. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the
outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional
mandate. Otherwise, the corporation is "considered as non-Philippine national[s]." (Emphasis supplied)

This is consistent with Section 3 of the FIA which provides that where 100% of the capital stock is held by
"a trustee of funds for pension or other employee retirement or separation benefits," the trustee is a
Philippine national if "at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals." Likewise, Section 1(b) of the Implementing Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights, is essential."

Since the constitutional requirement of at least 60 percent Filipino ownership applies not only to voting
control of the corporation but also to the beneficial ownership of the corporation, it is therefore imperative
that such requirement apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital
stock35 consists of all classes of shares issued to stockholders, that is, common shares as well as
preferred shares, which may have different rights, privileges or restrictions as stated in the articles of
incorporation.36
The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows
denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the
election of directors, while preferred shares may be denied such right. Nonetheless, preferred shares,
even if denied the right to vote in the election of directors, are entitled to vote on the following corporate
matters: (1) amendment of articles of incorporation; (2) increase and decrease of capital stock; (3)
incurring, creating or increasing bonded indebtedness; (4) sale, lease, mortgage or other disposition of
substantially all corporate assets; (5) investment of funds in another business or corporation or for a
purpose other than the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.37

Since a specific class of shares may have rights and privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the Constitution must apply not only to shares with voting rights but also to shares without voting
rights. Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to
vote on the eight specific corporate matters mentioned above. Thus, if a corporation, engaged in a
partially nationalized industry, issues a mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares
must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership
requirement in favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of Filipino citizens clearly breathes life to the
constitutional command that the ownership and operation of public utilities shall be reserved exclusively
to corporations at least 60 percent of whose capital is Filipino-owned. Applying uniformly the 60-40
ownership requirement in favor of Filipino citizens to each class of shares, regardless of differences in
voting rights, privileges and restrictions, guarantees effective Filipino control of public utilities, as
mandated by the Constitution.

Moreover, such uniform application to each class of shares insures that the "controlling interest" in public
utilities always lies in the hands of Filipino citizens. This addresses and extinguishes Pangilinan’s worry
that foreigners, owning most of the non-voting shares, will exercise greater control over fundamental
corporate matters requiring two-thirds or majority vote of all shareholders.

VI.
Intent of the framers of the Constitution

While Justice Velasco quoted in his Dissenting Opinion38 a portion of the deliberations of the
Constitutional Commission to support his claim that the term "capital" refers to the total outstanding
shares of stock, whether voting or non-voting, the following excerpts of the deliberations reveal otherwise.
It is clear from the following exchange that the term "capital" refers to controlling interest of a
corporation, thus:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: "Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital
stock of a corporation"? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law
Center who provided us a draft. The phrase that is contained here which we adopted from the UP
draft is "60 percent of voting stock."
MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared
delinquent, unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.39

xxxx

MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase "voting stock or
controlling interest."

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: "corporations or
associations at least sixty percent of whose CAPITAL is owned by such citizens."

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be
owned by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say
40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own
the nonvoting shares. So we can have a situation where the corporation is controlled by
foreigners despite being the minority because they have the voting capital. That is the anomaly
that would result here.

MR. BENGZON. No, the reason we eliminated the word "stock" as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not have
stocks. That is why we say "CAPITAL."

MR. AZCUNA. We should not eliminate the phrase "controlling interest."

MR. BENGZON. In the case of stock corporations, it is assumed.40 (Boldfacing and underscoring
supplied)

Thus, 60 percent of the "capital" assumes, or should result in, a "controlling interest" in the corporation.
The use of the term "capital" was intended to replace the word "stock" because associations without
stocks can operate public utilities as long as they meet the 60-40 ownership requirement in favor of
Filipino citizens prescribed in Section 11, Article XII of the Constitution. However, this did not change the
intent of the framers of the Constitution to reserve exclusively to Philippine nationals the "controlling
interest" in public utilities.

During the drafting of the 1935 Constitution, economic protectionism was "the battle-cry of the nationalists
in the Convention."41 The same battle-cry resulted in the nationalization of the public utilities. 42 This is also
the same intent of the framers of the 1987 Constitution who adopted the exact formulation embodied in
the 1935 and 1973 Constitutions on foreign equity limitations in partially nationalized industries.

The OSG, in its own behalf and as counsel for the State,43 agrees fully with the Court’s interpretation of
the term "capital." In its Consolidated Comment, the OSG explains that the deletion of the phrase
"controlling interest" and replacement of the word "stock" with the term "capital" were intended specifically
to extend the scope of the entities qualified to operate public utilities to include associations without
stocks. The framers’ omission of the phrase "controlling interest" did not mean the inclusion of all shares
of stock, whether voting or non-voting. The OSG reiterated essentially the Court’s declaration that the
Constitution reserved exclusively to Philippine nationals the ownership and operation of public utilities
consistent with the State’s policy to "develop a self-reliant and independent national economy effectively
controlled by Filipinos."

As we held in our 28 June 2011 Decision, to construe broadly the term "capital" as the total outstanding
capital stock, treated as a single class regardless of the actual classification of shares, grossly
contravenes the intent and letter of the Constitution that the "State shall develop a self-reliant and
independent national economy effectively controlled by Filipinos." We illustrated the glaring anomaly
which would result in defining the term "capital" as the total outstanding capital stock of a corporation,
treated as a single class of shares regardless of the actual classification of shares, to wit:

Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting
preferred shares owned by Filipinos, with both classes of share having a par value of one peso (₱ 1.00)
per share. Under the broad definition of the term "capital," such corporation would be considered
compliant with the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino
owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001
percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999
percent of the equity, cannot vote in the election of directors and hence, have no control over the public
utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language
of the Constitution, to place the control of public utilities in the hands of Filipinos. x x x

Further, even if foreigners who own more than forty percent of the voting shares elect an all-Filipino board
of directors, this situation does not guarantee Filipino control and does not in any way cure the violation of
the Constitution. The independence of the Filipino board members so elected by such foreign
shareholders is highly doubtful. As the OSG pointed out, quoting Justice George Sutherland’s words
in Humphrey’s Executor v. US,44 "x x x it is quite evident that one who holds his office only during the
pleasure of another cannot be depended upon to maintain an attitude of independence against the latter’s
will." Allowing foreign shareholders to elect a controlling majority of the board, even if all the directors are
Filipinos, grossly circumvents the letter and intent of the Constitution and defeats the very purpose of our
nationalization laws.

VII.
Last sentence of Section 11, Article XII of the Constitution
The last sentence of Section 11, Article XII of the 1987 Constitution reads:

The participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines.

During the Oral Arguments, the OSG emphasized that there was never a question on the intent of the
framers of the Constitution to limit foreign ownership, and assure majority Filipino ownership and control
of public utilities. The OSG argued, "while the delegates disagreed as to the percentage threshold to
adopt, x x x the records show they clearly understood that Filipino control of the public utility corporation
can only be and is obtained only through the election of a majority of the members of the board."

Indeed, the only point of contention during the deliberations of the Constitutional Commission on 23
August 1986 was the extent of majority Filipino control of public utilities. This is evident from the following
exchange:

THE PRESIDENT. Commissioner Jamir is recognized.

MR. JAMIR. Madam President, my proposed amendment on lines 20 and 21 is to delete the phrase "two
thirds of whose voting stock or controlling interest," and instead substitute the words "SIXTY PERCENT
OF WHOSE CAPITAL" so that the sentence will read: "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 PERCENT OF
WHOSE CAPITAL is owned by such citizens."

xxxx

THE PRESIDENT: Will Commissioner Jamir first explain?

MR. JAMIR. Yes, in this Article on National Economy and Patrimony, there were two previous sections in
which we fixed the Filipino equity to 60 percent as against 40 percent for foreigners. It is only in this
Section 15 with respect to public utilities that the committee proposal was increased to two-thirds. I think it
would be better to harmonize this provision by providing that even in the case of public utilities, the
minimum equity for Filipino citizens should be 60 percent.

MR. ROMULO. Madam President.

THE PRESIDENT. Commissioner Romulo is recognized.

MR. ROMULO. My reason for supporting the amendment is based on the discussions I have had with
representatives of the Filipino majority owners of the international record carriers, and the subsequent
memoranda they submitted to me. x x x

Their second point is that under the Corporation Code, the management and control of a corporation is
vested in the board of directors, not in the officers but in the board of directors. The officers are only
agents of the board. And they believe that with 60 percent of the equity, the Filipino majority stockholders
undeniably control the board. Only on important corporate acts can the 40-percent foreign equity exercise
a veto, x x x.

x x x x45

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. Commissioner Rosario Braid is recognized.

MS. ROSARIO BRAID. Yes, in the interest of equal time, may I also read from a memorandum by the
spokesman of the Philippine Chamber of Communications on why they would like to maintain the present
equity, I am referring to the 66 2/3. They would prefer to have a 75-25 ratio but would settle for 66 2/3. x x
x

xxxx

THE PRESIDENT. Just to clarify, would Commissioner Rosario Braid support the proposal of two-thirds
rather than the 60 percent?

MS. ROSARIO BRAID. I have added a clause that will put management in the hands of Filipino citizens.

x x x x46

While they had differing views on the percentage of Filipino ownership of capital, it is clear that the
framers of the Constitution intended public utilities to be majority Filipino-owned and controlled. To
ensure that Filipinos control public utilities, the framers of the Constitution approved, as additional
safeguard, the inclusion of the last sentence of Section 11, Article XII of the Constitution commanding that
"[t]he participation of foreign investors in the governing body of any public utility enterprise shall be limited
to their proportionate share in its capital, and all the executive and managing officers of such corporation
or association must be citizens of the Philippines." In other words, the last sentence of Section 11, Article
XII of the Constitution mandates that (1) the participation of foreign investors in the governing body of the
corporation or association shall be limited to their proportionate share in the capital of such entity; and (2)
all officers of the corporation or association must be Filipino citizens.

Commissioner Rosario Braid proposed the inclusion of the phrase requiring the managing officers of the
corporation or association to be Filipino citizens specifically to prevent management contracts, which
were designed primarily to circumvent the Filipinization of public utilities, and to assure Filipino control of
public utilities, thus:

MS. ROSARIO BRAID. x x x They also like to suggest that we amend this provision by adding a phrase
which states: "THE MANAGEMENT BODY OF EVERY CORPORATION OR ASSOCIATION SHALL IN
ALL CASES BE CONTROLLED BY CITIZENS OF THE PHILIPPINES." I have with me their position
paper.

THE PRESIDENT. The Commissioner may proceed.

MS. ROSARIO BRAID. The three major international record carriers in the Philippines, which
Commissioner Romulo mentioned – Philippine Global Communications, Eastern Telecommunications,
Globe Mackay Cable – are 40-percent owned by foreign multinational companies and 60-percent owned
by their respective Filipino partners. All three, however, also have management contracts with these
foreign companies – Philcom with RCA, ETPI with Cable and Wireless PLC, and GMCR with ITT. Up to
the present time, the general managers of these carriers are foreigners. While the foreigners in these
common carriers are only minority owners, the foreign multinationals are the ones managing and
controlling their operations by virtue of their management contracts and by virtue of their strength in the
governing bodies of these carriers.47

xxxx

MR. OPLE. I think a number of us have agreed to ask Commissioner Rosario Braid to propose an
amendment with respect to the operating management of public utilities, and in this amendment, we are
associated with Fr. Bernas, Commissioners Nieva and Rodrigo. Commissioner Rosario Braid will state
this amendment now.

Thank you.

MS. ROSARIO BRAID. Madam President.

THE PRESIDENT. This is still on Section 15.

MS. ROSARIO BRAID. Yes.

MR. VILLEGAS. Yes, Madam President.

xxxx

MS. ROSARIO BRAID. Madam President, I propose a new section to read: ‘THE MANAGEMENT BODY
OF EVERY CORPORATION OR ASSOCIATION SHALL IN ALL CASES BE CONTROLLED BY
CITIZENS OF THE PHILIPPINES."

This will prevent management contracts and assure control by Filipino citizens. Will the committee
assure us that this amendment will insure that past activities such as management contracts will no
longer be possible under this amendment?

xxxx

FR. BERNAS. Madam President.

THE PRESIDENT. Commissioner Bernas is recognized.

FR. BERNAS. Will the committee accept a reformulation of the first part?

MR. BENGZON. Let us hear it.

FR. BERNAS. The reformulation will be essentially the formula of the 1973 Constitution which reads:
"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 AND..."

MR. VILLEGAS. "ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH CORPORATIONS
AND ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. BENGZON. Will Commissioner Bernas read the whole thing again?

FR. BERNAS. "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..." I do not have the rest of the copy.

MR. BENGZON. "AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES." Is that correct?

MR. VILLEGAS. Yes.

MR. BENGZON. Madam President, I think that was said in a more elegant language. We accept the
amendment. Is that all right with Commissioner Rosario Braid?

MS. ROSARIO BRAID. Yes.

xxxx

MR. DE LOS REYES. The governing body refers to the board of directors and trustees.

MR. VILLEGAS. That is right.

MR. BENGZON. Yes, the governing body refers to the board of directors.

MR. REGALADO. It is accepted.

MR. RAMA. The body is now ready to vote, Madam President.

VOTING

xxxx

The results show 29 votes in favor and none against; so the proposed amendment is approved.

xxxx

THE PRESIDENT. All right. Can we proceed now to vote on Section 15?

MR. RAMA. Yes, Madam President.

THE PRESIDENT. Will the chairman of the committee please read Section 15?

MR. VILLEGAS. The entire Section 15, as amended, reads: "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 60 PERCENT OF
WHOSE CAPITAL is owned by such citizens." May I request Commissioner Bengzon to please continue
reading.

MR. BENGZON. "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 AND ALL THE EXECUTIVE AND MANAGING OFFICERS OF SUCH
CORPORATIONS OR ASSOCIATIONS MUST BE CITIZENS OF THE PHILIPPINES."

MR. VILLEGAS. "NOR SHALL SUCH FRANCHISE, CERTIFICATE OR AUTHORIZATION BE

EXCLUSIVE IN CHARACTER OR FOR A PERIOD LONGER THAN TWENTY-FIVE YEARS
RENEWABLE FOR NOT MORE THAN TWENTY-FIVE 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
Congress when the common good so requires. The State shall encourage equity participation in public
utilities by the general public."

VOTING

xxxx
The results show 29 votes in favor and 4 against; Section 15, as amended, is approved.48 (Emphasis
supplied)

The last sentence of Section 11, Article XII of the 1987 Constitution, particularly the provision on the
limited participation of foreign investors in the governing body of public utilities, is a reiteration of the last
sentence of Section 5, Article XIV of the 1973 Constitution,49 signifying its importance in reserving
ownership and control of public utilities to Filipino citizens.

VIII.
The undisputed facts

There is no dispute, and respondents do not claim the contrary, that (1) foreigners own 64.27% of the
common shares of PLDT, which class of shares exercises the sole right to vote in the election of
directors, and thus foreigners control PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares,
constituting a minority of the voting stock, and thus Filipinos do not control PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends
that common shares earn;50 (5) preferred shares have twice the par value of common shares; and (6)
preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%.

Despite the foregoing facts, the Court did not decide, and in fact refrained from ruling on the question of
whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article
XII of the 1987 Constitution. Such question indisputably calls for a presentation and determination of
evidence through a hearing, which is generally outside the province of the Court’s jurisdiction, but well
within the SEC’s statutory powers. Thus, for obvious reasons, the Court limited its decision on the purely
legal and threshold issue on the definition of the term "capital" in Section 11, Article XII of the Constitution
and directed the SEC to apply such definition in determining the exact percentage of foreign ownership in
PLDT.

IX.
PLDT is not an indispensable party;
SEC is impleaded in this case.

In his petition, Gamboa prays, among others:

xxxx

5. For the Honorable Court to issue a declaratory relief that ownership of common or voting shares is the
sole basis in determining foreign equity in a public utility and that any other government rulings, opinions,
and regulations inconsistent with this declaratory relief be declared unconstitutional and a violation of the
intent and spirit of the 1987 Constitution;

6. For the Honorable Court to declare null and void all sales of common stocks to foreigners in excess of
40 percent of the total subscribed common shareholdings; and

7. For the Honorable Court to direct the Securities and Exchange Commission and Philippine Stock
Exchange to require PLDT to make a public disclosure of all of its foreign shareholdings and their
actual and real beneficial owners.

Other relief(s) just and equitable are likewise prayed for. (Emphasis supplied)

As can be gleaned from his prayer, Gamboa clearly asks this Court to compel the SEC to perform its
statutory duty to investigate whether "the required percentage of ownership of the capital stock to be
owned by citizens of the Philippines has been complied with [by PLDT] as required by x x x the
Constitution."51 Such plea clearly negates SEC’s argument that it was not impleaded.

Granting that only the SEC Chairman was impleaded in this case, the Court has ample powers to order
the SEC’s compliance with its directive contained in the 28 June 2011 Decision in view of the far-reaching
implications of this case. In Domingo v. Scheer,52 the Court dispensed with the amendment of the
pleadings to implead the Bureau of Customs considering (1) the unique backdrop of the case; (2) the
utmost need to avoid further delays; and (3) the issue of public interest involved. The Court held:

The Court may be curing the defect in this case by adding the BOC as party-petitioner. The petition
should not be dismissed because the second action would only be a repetition of the first. In Salvador, et
al., v. Court of Appeals, et al., we held that this Court has full powers, apart from that power and authority
which is inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-
plaintiff the real party-in-interest. The Court has the power to avoid delay in the disposition of this
case, to order its amendment as to implead the BOC as party-respondent. Indeed, it may no longer
be necessary to do so taking into account the unique backdrop in this case, involving as it does
an issue of public interest. After all, the Office of the Solicitor General has represented the petitioner in
the instant proceedings, as well as in the appellate court, and maintained the validity of the deportation
order and of the BOC’s Omnibus Resolution. It cannot, thus, be claimed by the State that the BOC was
not afforded its day in court, simply because only the petitioner, the Chairperson of the BOC, was the
respondent in the CA, and the petitioner in the instant recourse. In Alonso v. Villamor, we had the
occasion to state:

There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose
is to facilitate the application of justice to the rival claims of contending parties. They were created,
not to hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute
the thing itself, which courts are always striving to secure to litigants. They are designed as the means
best adapted to obtain that thing. In other words, they are a means to an end. When they lose the
character of the one and become the other, the administration of justice is at fault and courts are
correspondingly remiss in the performance of their obvious duty.53 (Emphasis supplied)

In any event, the SEC has expressly manifested54 that it will abide by the Court’s decision and
defer to the Court’s definition of the term "capital" in Section 11, Article XII of the Constitution.
Further, the SEC entered its special appearance in this case and argued during the Oral
Arguments, indicating its submission to the Court’s jurisdiction. It is clear, therefore, that there
exists no legal impediment against the proper and immediate implementation of the Court’s
directive to the SEC.

PLDT is an indispensable party only insofar as the other issues, particularly the factual questions, are
concerned. In other words, PLDT must be impleaded in order to fully resolve the issues on (1) whether
the sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of
PLDT; (2) whether the sale of common shares to foreigners exceeded the 40 percent limit on foreign
equity in PLDT; and (3) whether the total percentage of the PLDT common shares with voting rights
complies with the 60-40 ownership requirement in favor of Filipino citizens under the Constitution for the
ownership and operation of PLDT. These issues indisputably call for an examination of the parties’
respective evidence, and thus are clearly within the jurisdiction of the SEC. In short, PLDT must be
impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues
will be thoroughly threshed out and resolved.

Notably, the foregoing issues were left untouched by the Court. The Court did not rule on the factual
issues raised by Gamboa, except the single and purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the Constitution. The Court confined the resolution of the instant case to this
threshold legal issue in deference to the fact-finding power of the SEC.
Needless to state, the Court can validly, properly, and fully dispose of the fundamental legal issue in this
case even without the participation of PLDT since defining the term "capital" in Section 11, Article XII of
the Constitution does not, in any way, depend on whether PLDT was impleaded. Simply put, PLDT is not
indispensable for a complete resolution of the purely legal question in this case.55 In fact, the Court, by
treating the petition as one for mandamus,56 merely directed the SEC to apply the Court’s definition of the
term "capital" in Section 11, Article XII of the Constitution in determining whether PLDT committed any
violation of the said constitutional provision. The dispositive portion of the Court’s ruling is addressed
not to PLDT but solely to the SEC, which is the administrative agency tasked to enforce the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII of the Constitution.

Since the Court limited its resolution on the purely legal issue on the definition of the term "capital" in
Section 11, Article XII of the 1987 Constitution, and directed the SEC to investigate any violation by PLDT
of the 60-40 ownership requirement in favor of Filipino citizens under the Constitution, 57 there is no
deprivation of PLDT’s property or denial of PLDT’s right to due process, contrary to Pangilinan and
Nazareno’s misimpression. Due process will be afforded to PLDT when it presents proof to the SEC that it
complies, as it claims here, with Section 11, Article XII of the Constitution.

X.
Foreign Investments in the Philippines

Movants fear that the 28 June 2011 Decision would spell disaster to our economy, as it may result in a
sudden flight of existing foreign investors to "friendlier" countries and simultaneously deterring new
foreign investors to our country. In particular, the PSE claims that the 28 June 2011 Decision may result
in the following: (1) loss of more than ₱ 630 billion in foreign investments in PSE-listed shares; (2)
massive decrease in foreign trading transactions; (3) lower PSE Composite Index; and (4) local investors
not investing in PSE-listed shares.58

Dr. Bernardo M. Villegas, one of the amici curiae in the Oral Arguments, shared movants’ apprehension.
Without providing specific details, he pointed out the depressing state of the Philippine economy
compared to our neighboring countries which boast of growing economies. Further, Dr. Villegas explained
that the solution to our economic woes is for the government to "take-over" strategic industries, such as
the public utilities sector, thus:

JUSTICE CARPIO:

I would like also to get from you Dr. Villegas if you have additional information on whether this high
FDI59 countries in East Asia have allowed foreigners x x x control [of] their public utilities, so that we can
compare apples with apples.

DR. VILLEGAS:

Correct, but let me just make a comment. When these neighbors of ours find an industry strategic, their
solution is not to "Filipinize" or "Vietnamize" or "Singaporize." Their solution is to make sure that those
industries are in the hands of state enterprises. So, in these countries, nationalization means the
government takes over. And because their governments are competent and honest enough to the
public, that is the solution. x x x 60 (Emphasis supplied)

If government ownership of public utilities is the solution, then foreign investments in our public utilities
serve no purpose. Obviously, there can never be foreign investments in public utilities if, as Dr. Villegas
claims, the "solution is to make sure that those industries are in the hands of state enterprises." Dr.
Villegas’s argument that foreign investments in telecommunication companies like PLDT are badly
needed to save our ailing economy contradicts his own theory that the solution is for government to take
over these companies. Dr. Villegas is barking up the wrong tree since State ownership of public utilities
and foreign investments in such industries are diametrically opposed concepts, which cannot possibly be
reconciled.

In any event, the experience of our neighboring countries cannot be used as argument to decide the
present case differently for two reasons. First, the governments of our neighboring countries have, as
claimed by Dr. Villegas, taken over ownership and control of their strategic public utilities like the
telecommunications industry. Second, our Constitution has specific provisions limiting foreign ownership
in public utilities which the Court is sworn to uphold regardless of the experience of our neighboring
countries.

In our jurisdiction, the Constitution expressly reserves the ownership and operation of public utilities to
Filipino citizens, or corporations or associations at least 60 percent of whose capital belongs to Filipinos.
Following Dr. Villegas’s claim, the Philippines appears to be more liberal in allowing foreign investors to
own 40 percent of public utilities, unlike in other Asian countries whose governments own and operate
such industries.

XI.
Prospective Application of Sanctions

In its Motion for Partial Reconsideration, the SEC sought to clarify the reckoning period of the application
and imposition of appropriate sanctions against PLDT if found violating Section 11, Article XII of the
Constitution.1avvphi1

As discussed, the Court has directed the SEC to investigate and determine whether PLDT violated
Section 11, Article XII of the Constitution. Thus, there is no dispute that it is only after the SEC has
determined PLDT’s violation, if any exists at the time of the commencement of the administrative case or
investigation, that the SEC may impose the statutory sanctions against PLDT. In other words, once the 28
June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after
due hearing that, at the start of the administrative case or investigation, there is an existing violation of
Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail to comply
with the nationality requirement under Section 11, Article XII and the FIA can cure their deficiencies prior
to the start of the administrative case or investigation.61

XII.
Final Word

The Constitution expressly declares as State policy the development of an economy "effectively
controlled" by Filipinos. Consistent with such State policy, the Constitution explicitly reserves the
ownership and operation of public utilities to Philippine nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or corporations or associations at least 60 percent of whose
capital with voting rights belongs to Filipinos. The FIA’s implementing rules explain that "[f]or stocks to
be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to
meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate
voting rights is essential." In effect, the FIA clarifies, reiterates and confirms the interpretation that the
term "capital" in Section 11, Article XII of the 1987 Constitution refers to shares with voting rights, as
well as with full beneficial ownership. This is precisely because the right to vote in the election of
directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.

Any other construction of the term "capital" in Section 11, Article XII of the Constitution contravenes the
letter and intent of the Constitution. Any other meaning of the term "capital" openly invites alien
domination of economic activities reserved exclusively to Philippine nationals. Therefore, respondents’
interpretation will ultimately result in handing over effective control of our national economy to foreigners
in patent violation of the Constitution, making Filipinos second-class citizens in their own country.
Filipinos have only to remind themselves of how this country was exploited under the Parity Amendment,
which gave Americans the same rights as Filipinos in the exploitation of natural resources, and in the
ownership and control of public utilities, in the Philippines. To do this the 1935 Constitution, which
contained the same 60 percent Filipino ownership and control requirement as the present 1987
Constitution, had to be amended to give Americans parity rights with Filipinos. There was bitter opposition
to the Parity Amendment62 and many Filipinos eagerly awaited its expiration. In late 1968, PLDT was one
of the American-controlled public utilities that became Filipino-controlled when the controlling American
stockholders divested in anticipation of the expiration of the Parity Amendment on 3 July 1974. 63 No
economic suicide happened when control of public utilities and mining corporations passed to Filipinos’
hands upon expiration of the Parity Amendment.

Movants’ interpretation of the term "capital" would bring us back to the same evils spawned by the Parity
Amendment, effectively giving foreigners parity rights with Filipinos, but this time even without
any amendment to the present Constitution. Worse, movants’ interpretation opens up our national
economy to effective control not only by Americans but also by all foreigners, be they Indonesians,
Malaysians or Chinese, even in the absence of reciprocal treaty arrangements. At least the Parity
Amendment, as implemented by the Laurel-Langley Agreement, gave the capital-starved Filipinos
theoretical parity – the same rights as Americans to exploit natural resources, and to own and control
public utilities, in the United States of America. Here, movants’ interpretation would effectively mean
a unilateral opening up of our national economy to all foreigners, without any reciprocal
arrangements. That would mean that Indonesians, Malaysians and Chinese nationals could effectively
control our mining companies and public utilities while Filipinos, even if they have the capital, could not
control similar corporations in these countries.

The 1935, 1973 and 1987 Constitutions have the same 60 percent Filipino ownership and control
requirement for public utilities like PLOT. Any deviation from this requirement necessitates an amendment
to the Constitution as exemplified by the Parity Amendment. This Court has no power to amend the
Constitution for its power and duty is only to faithfully apply and interpret the Constitution.

WHEREFORE, we DENY the motions for reconsideration WITH FINALITY. No further pleadings shall be
entertained.