Legal Relationship of Common Carriers and Passengers/Shippers in Maritime Commerce

The legal relationship between common carriers and their passengers or shippers in maritime commerce
is governed by the following:

1. Civil Code Provisions on Common Carriers: These outline the general obligations and liabilities
of common carriers, emphasizing their duty to exercise extraordinary diligence in transporting
passengers and goods.

2. Code of Commerce: This contains specific regulations applicable to maritime commerce,

including provisions on contracts of carriage, liabilities, and remedies for breach of obligations.

3. Terms and Conditions of the Bill of Lading: The bill of lading serves as the contract of carriage,
stipulating the terms under which the goods are transported, including the rights and
responsibilities of the parties involved.

Charter Parties in Maritime Commerce

What is a Charter Party?

A charter party is a contract where the shipowner leases an entire vessel or a principal part of it to
another person for a specific time or purpose. This agreement governs the use of the ship for
transporting goods or passengers.

Types of Charter Parties

1. Contract of Affreightment:

o The shipowner leases the vessel (in whole or in part) for the transport of goods.

o Two subtypes exist:

 Time Charter: The vessel is hired for a specific period.

 Voyage Charter: The vessel is hired for one or more specific voyages.

o In this arrangement:

 The shipowner provides the crew, supplies, and maintenance.

 The shipowner, as a common carrier, remains liable for the goods during
transportation.

 The charterer is not responsible for third-party claims.

2. Bareboat Charter (Charter by Demise):

o The entire vessel is handed over to the charterer, including control over its navigation
and crew.

o The charterer provides the crew and assumes all operational responsibilities, effectively
becoming the owner for the duration of the charter.
 o The shipowner becomes a lessor and is not liable for any damage or loss of goods or
injury to passengers.

Liability in Charter Party Agreements

1. Presumption of Fault:

o Under a time or voyage charter, the shipowner retains the status of a common carrier.
This means a presumption of negligence applies in cases of loss, damage, or injury
unless proven otherwise.

o In a bareboat charter, the shipowner is not presumed to be at fault, as they are not
involved in the shipment or transportation contract.

2. Responsibility for Loss or Damage:

o When the carrier and shipowner are separate entities, the carrier is liable to the shipper
or charterer for breach of the contract of carriage.

o The shipper or charterer is not required to determine the ownership of the vessel. The
carrier cannot evade liability by claiming non-ownership of the vessel.

Liability of Ship Owners and Shipping Agents

Who is a Ship Agent?

A ship agent is a person responsible for provisioning or representing a vessel while it is in a port. The
ship agent acts on behalf of either the shipowner or the charterer, depending on the circumstances, and
may be held liable for their actions in that capacity.

Types of Ship Agents

Republic Act No. 9515 defines two main types of ship agents:

1. General Agent:

o Appointed by the shipowner or carrier for vessels in liner service (regular and fixed
routes).

o Responsibilities include:

 Soliciting cargo and freight.

 Paying loading or discharging expenses.

 Collecting shipping charges.

 Issuing and releasing bills of lading and cargo manifests.

o Acts on behalf of the shipowner or carrier across multiple voyages.

 2. Tramp Agent:

o Appointed for vessels in tramp service (irregular routes and schedules, often carrying
bulk cargo).

o Limited authority to handle procedures for the vessel’s entry, stay, and departure at a
port.

o Does not assume the shipowner’s or carrier’s obligations regarding shippers or receivers
of the cargo.

o Must assist shippers or receivers in making claims for cargo-related liabilities against the
shipowner, charterer, or carrier. Failure to do so may result in administrative sanctions.

Liabilities of Ship Agents

The liabilities of ship agents are governed by the Code of Commerce and RA No. 9515.

1. Under the Code of Commerce:

o Article 586: The shipowner and ship agent are civilly liable for the acts of the captain
and obligations incurred for repairs, equipment, or provisioning of the vessel, provided it
benefits the vessel.

o Article 587: The ship agent is civilly liable for third-party claims arising from the
captain’s handling of goods onboard. The agent may avoid liability by abandoning the
vessel along with its equipment and freight earned during the voyage.

2. Under RA No. 9515:

o The liabilities of ship agents (general and tramp) remain subject to the Code of
Commerce.

o Tramp agents:

 Are not liable for obligations of the shipowner, charterer, or carrier regarding
shippers or receivers of goods.

 Must assist shippers or receivers with claims for cargo liability.

 May face administrative penalties for failing to fulfill this duty, as per the
Implementing Rules and Regulations (IRR) formulated by MARINA and the
Philippine Shippers Bureau.

Key Terms

 Liner Service: Regular, scheduled shipping routes.

 Tramp Service: Irregular, on-demand shipping routes, typically for bulk or breakbulk cargo.
  Abandonment: A legal mechanism allowing the ship agent to relinquish the vessel, equipment,
and freight to avoid further liabilities.

Liability for Acts of the Captain

1. Liability of the Shipowner and Ship Agent

The shipowner and ship agent are civilly liable for the acts and obligations of the ship captain,
specifically:

 Contracts entered into by the captain for repairing, equipping, or provisioning the vessel, as
long as the creditor proves that the amounts borrowed were actually used for these purposes.

2. Instances of Liability for the Captain’s Acts (Culpa Contractual)

a. Jettison of Cargo
If the captain orders the jettison (throwing overboard) of cargo without valid reason or breaches his
duty, the shipowner can be held liable for the damage to the cargo owner's property.

b. Abandonment of Vessel Without Cause

When the captain willfully abandons a vessel without justification (e.g., in calm weather without
accidents or storms), causing its loss, the shipowner and ship agent are responsible for the damage.

c. Negligence in Handling Cargo

If the captain’s negligence leads to the improper unloading of cargo, such as leaving it on the pier where
it is damaged or lost, the shipowner and ship agent are accountable.

Case Examples

3. Drunken Captain and Collision

 Scenario:
Captain Pablo Esparadon, while drunk on duty, causes the M/V Don Jose to collide with another
vessel, resulting in both ships sinking. Cargo owners sue the shipowner for damages.

 Ruling:
The shipowner is not liable beyond the value of the ship. Under the Limited Liability Rule, the
shipowner’s liability ends when the vessel becomes a total loss. Without a vessel, there is no
liability ("No vessel, no liability").

4. Misappropriation of Funds by the Captain

 Scenario:
Captain Z borrows ₱20,000 from X, claiming it is for ship repairs, but uses it for personal benefit.
  Ruling:
The shipowner is not liable since the borrowed funds were not used for the ship’s repair,
equipping, or provisioning. This is a personal liability of the captain.

5. Shortages in Cargo Delivery

 Scenario:
SS Negros, chartered by XXO Trading Co., delivers sugar to Coca-Cola with shortages. The
Regional Trial Court holds the ship agent liable under the Code of Commerce. Coca-Cola appeals.

 Ruling:
The appeal will not prosper. The ship agent can only avoid liability by abandoning the vessel,
equipment, and freight to creditors. If there was a bareboat charter, where the public is not
affected, an exemption clause in the charter party is valid and enforceable.

The Limited Liability Rule

6. Definition

The Limited Liability Rule limits a shipowner's or ship agent’s liability to the value of the vessel, its
equipment, freight, and any insurance proceeds.

 If the ship is a total loss and unrecoverable, the owner or agent’s liability is extinguished unless
insurance exists.

7. Rationale

This rule encourages investment in maritime trade by offsetting the risks and high costs of shipbuilding.
It protects shipowners and agents from overwhelming liabilities by confining their obligations to the
value of their maritime assets.

8. Principle

 “No vessel, no liability.”

If the ship is lost or abandoned with its freight and equipment, the owner or agent’s liability is
extinguished.

Key Takeaways

 The shipowner and ship agent are liable for the captain’s acts but can limit this liability through
abandonment or the total loss of the vessel.

 The Limited Liability Rule ensures maritime commerce remains viable by restricting liabilities to
the vessel and its earnings.

 Claims against shipowners must align with the conditions for liability under maritime law.
Limited Liability Rule: Explanation and Examples

What is the Limited Liability Rule?

The Limited Liability Rule, also known as the real or hypothecary nature of maritime law, states that a
shipowner's or ship agent's liability for losses related to maritime operations is limited to their interest in
the vessel, which serves as collateral or guaranty for settling claims.

 Key Concept:
The shipowner or agent’s liability is confined to the value of the vessel, its equipment, and the
freight earned during the voyage.

 If the vessel is lost, the liability is extinguished.

 If insurance exists, surrendering the insurance proceeds to creditors can discharge the liability.

Rationale Behind the Rule

This rule aims to:

1. Encourage maritime commerce: Maritime trade is inherently risky and expensive. Limiting
liability helps reduce financial exposure for shipowners, making investment in maritime ventures
more attractive.

2. Balance risks and rewards: By tying liability to the vessel itself, the rule ensures creditors can
recover losses from the ship’s value without imposing overwhelming personal liability on
shipowners.

Doctrine in Action: "No Vessel, No Liability"

This principle means that the liability of a shipowner or agent ceases if:

 The vessel is completely lost (e.g., sunk and irretrievable).

 The owner or agent abandons the vessel, equipment, and freight to creditors.

Examples

1. Total Loss of the Vessel

 Scenario:
A cargo ship, M/V Liberty, carrying goods sinks during a storm and is irretrievable. The shipowner
is sued for damages by cargo owners.

 Application of the Rule:

Since the vessel is a total loss, the shipowner’s liability is extinguished. Cargo owners cannot
claim beyond the value of the vessel, which is now zero.
2. Vessel Abandoned to Creditors

 Scenario:
The shipowner of M/V Voyager faces claims for damage caused by a fire on board during a
voyage. To settle these claims, the shipowner abandons the vessel, its remaining equipment, and
freight earnings to creditors.

 Application of the Rule:

By abandoning the vessel and associated earnings, the shipowner discharges liability, as these
assets fully cover the guaranty for claims.

3. Insured Vessel with Total Loss

 Scenario:
M/V Oceanic sinks in an accident, but the ship is insured. The shipowner surrenders the
insurance proceeds to creditors to settle outstanding claims.

 Application of the Rule:

The shipowner’s liability is extinguished after the creditors receive the insurance payout, even
though the vessel is a total loss.

4. Claims Exceeding Vessel Value

 Scenario:
The vessel M/V Navigator damages a dock and goods during an accident. The total claims
amount to ₱50 million, but the vessel, equipment, and freight are worth only ₱30 million.

 Application of the Rule:

The shipowner’s liability is limited to ₱30 million, the total value of the vessel and related assets.
The remaining ₱20 million cannot be claimed from the shipowner’s personal assets.

Charterer’s Use of the Limited Liability Rule Against the Shipowner

Can the Charterer Use the Limited Liability Rule Against the Shipowner?

No, the charterer cannot invoke the Limited Liability Rule against the shipowner. The doctrine was
specifically designed to protect the shipowner, as its purpose is to encourage maritime commerce by
limiting the shipowner's liability to the value of the vessel, its equipment, and freight. Allowing the
charterer to use this rule against the shipowner would defeat its intended purpose.

Reasoning:

1. Protection for Shipowners:

The rule is intended for the benefit of the shipowner, not third parties like charterers, even in
 cases of a bareboat or demise charter, where the vessel’s possession, management, and
navigation are temporarily surrendered to the charterer. The ownership and ultimate control of
the vessel still remain with the shipowner.

2. Limited Rights of Charterers:

The charterer does not acquire full ownership rights over the vessel under a charter agreement.
Instead, their possession is akin to a lease, lacking dominion over the vessel. As such, the
charterer cannot invoke a protection meant solely for the vessel’s owner.

3. Legal Doctrine:
Since the Limited Liability Rule aims to protect shipowners from undue risks, it would be
inconsistent and illogical to allow the rule to be used against them by charterers, who merely
operate the vessel under a contractual agreement.

Exceptions to the Limited Liability Rule

While the Limited Liability Rule generally shields shipowners from excessive liability, it does not apply in
the following cases:

1. Shipowner’s Fault or Negligence

The rule cannot be invoked if the loss or damage results from the shipowner’s own fault or negligence.
Examples include:

 Reconfiguring the ship’s bulkhead to overload cargo, rendering it unseaworthy.

 Allowing the vessel to sail despite knowledge of hazardous conditions, such as an approaching
typhoon.

 Employing an unqualified captain or engineer, leading to avoidable accidents.

2. Failure to Abandon the Vessel

The shipowner must abandon the vessel, equipment, and freight to claim the rule’s protection. If no
abandonment occurs, the rule does not apply.

3. Claims Under Statutory Employment Laws

The rule is inapplicable to claims under labor laws or contracts, such as:

 Workmen’s compensation claims for injuries or deaths of crew members.

 Death benefits under the Philippine Overseas Employment Administration Standard Employment
Contract (POEA-SEC), which are separate from maritime law liabilities.

4. Insurance Proceeds

If the vessel is insured, creditors may claim from the insurance proceeds. In such cases, the shipowner's
liability is limited to the extent of the insurance coverage.

5. Non-Maritime Voyages
The rule does not apply to voyages conducted in rivers, bays, or gulfs, as these are not considered
maritime in nature.

6. Vessel Not a Common Carrier

If the vessel is not engaged as a common carrier, the rule cannot be invoked.

Judgment Enforcement for a Sinking Incident

Scenario:

Judgment creditors seek to enforce claims against a sunken vessel, but the shipowner argues that
execution must wait until all related cases are resolved.

Ruling:

The shipowner’s claim is valid. Creditors must wait for the resolution of all related cases to ensure that
all claims are equitably satisfied from the vessel’s insurance proceeds and remaining freightage.

 Comparison: This process is similar to distributing the assets of an insolvent corporation among
its creditors. No single creditor can gain precedence by completing their action earlier than
others.

Outcome:

Execution of judgments, even those final and executory, must be stayed until all claims arising from the
sinking have been collated and equitably addressed.

Accidents and Damages in Maritime Commerce

What are Averages?

In maritime commerce, averages refer to extraordinary or accidental expenses incurred during a voyage
to preserve the vessel, the cargo, or both. This term also includes damages or deterioration that may
affect the vessel from departure to destination or the goods from loading to unloading.

Key Points:

 Ordinary navigation expenses (e.g., fuel, crew wages) are not considered averages and are
typically borne by the shipowner unless otherwise agreed.

 Extraordinary expenses or damages are categorized into two types: General Averages and
Particular Averages.

General and Particular Averages

What is a Simple (Particular) Average?

A particular average refers to expenses or damages affecting the vessel or cargo that do not benefit
everyone involved in the maritime venture. These are borne exclusively by the owner of the affected
property.

Example:
Damage to cargo due to its inherent defect, or expenses incurred to repair damage caused by a maritime
accident or force majeure.

What is a General Average?

A general average involves expenses or damages that are deliberately incurred to save the vessel,
cargo, or both from a common peril. The costs are shared proportionally by all parties with an interest in
the vessel and its cargo.

Examples:

 Jettisoning cargo to lighten the ship and ensure safety.

 Damage caused to cargo during efforts to enter a port or make repairs.

Requisites for a General Average

For a situation to qualify as a general average, the following must be met:

1. Common Danger: There must be a shared threat to the ship and cargo.

2. Deliberate Sacrifice: A part of the vessel, cargo, or both is intentionally sacrificed for the
common good.

3. Successful Rescue: The ship and cargo must ultimately be saved.

4. Formalities Complied With: As per Articles 813 and 814 of the Code of Commerce:

o The captain calls a meeting of cargo owners and vessel officers.

o Deliberations are held, and a resolution is made by the captain.

o The decision is documented in the ship's logbook.

o Minutes are submitted to the maritime authority at the first port of arrival, with
ratification under oath by the captain.

Distinctions Between Particular and General Averages

Aspect Particular Average General Average

Benefit Affects only the damaged property owner. Inures to the benefit of all parties
Aspect Particular Average General Average

involved.

Deliberately caused for the common

Cause May occur due to accidents or inherent defects.
safety.

Borne solely by the owner of the affected Shared by all with an interest in the
Cost Burden
property. voyage.

Rules on Collision of Vessels

Definition and General Principles

1. Collision vs. Allision

o A collision occurs when two moving vessels come into contact.

o An allision happens when a moving vessel strikes a stationary object or vessel.

o For practical purposes, the term "collision" is broadly used to include allision.

2. Fault-Based Liability

o The vessel at fault must compensate for damages or losses caused by the collision.

3. Both Vessels at Fault

o If both vessels are at fault, each bears its own damages.

o Both vessels are solidarily liable for losses or damages to cargo aboard either vessel.

o A common carrier involved cannot invoke the defense of due diligence in selecting and
supervising employees in claims by shippers of the other vessel.

4. Inscrutable Fault

o If it is unclear which vessel is at fault, liability is treated as if both vessels are at fault.
This is known as the doctrine of inscrutable fault.

Charterer’s Liability in Collisions

 In time or voyage charters, the carrier (not the charterer) is responsible for the vessel’s
seaworthiness. Hence, the charterer is not liable for damages from a collision.

 In a bareboat or demise charter, the charterer assumes responsibility for ensuring the
seaworthiness of the vessel and is liable for damages caused by collisions resulting from
unseaworthiness.
Protest Requirement

 For damages arising from a collision, a protest or declaration must be filed within 24 hours to
the appropriate authority:

o The port where the collision occurred, or

o The first port of arrival (if in the Philippines), or

o A Filipino consul (if in a foreign port).

 Exception: The absence of a protest does not prejudice claims for damages to persons or cargo
by those not onboard or unable to express their wishes.

Liability of Shipowners

1. Doctrine of Limited Liability

o The shipowner's liability is limited to:

 The value of the vessel, including appurtenances, and

 Freight earned during the voyage.

o If the vessel is lost, liability for loss, damage to goods, or death/injury is extinguished.

2. Insurance Exception

o If the vessel is insured, the insurance proceeds substitute the vessel, and the shipowner
becomes liable up to the amount collected.

o If uninsured, freights earned will cover civil liabilities.

3. Liability for Passenger Injury or Death

o The shipowner's liability for injuries or deaths caused by the captain's negligence is
limited to their interest in the vessel.

o Total loss of the vessel results in the extinction of liability, unless there was actual or
contributory negligence by the shipowner.

Rules and Liability in Vessel Collisions: Scenarios and Principles

1. Collision Involving Vessels "U" and "V"

Scenario: Vessels "U" and "V" collided, causing damage to both. Vessel "U" had the last clear chance to
avoid the collision but failed to do so.
Question: Is the doctrine of last clear chance applicable, and who bears liability?
Answer:
(a) Applicability of Last Clear Chance Doctrine:
The doctrine of last clear chance, typically used in tort law, does not apply to vessel collisions under the
Code of Commerce. When two vessels collide, the incident is treated as if both vessels are at fault unless
there is clear evidence to the contrary. Each vessel must bear its own damage, and they are solidarily
liable for the damage to any cargo onboard.

(b) Negligence of Captains:

If the captain of vessel "U" is primarily negligent and the captain of vessel "V" is only contributorily
negligent, liability for the collision remains imputed to both vessels under the Code of Commerce. This
principle arises because the doctrine of contributory negligence in tort law also does not apply to
maritime collisions. Each vessel suffers its own damage, and both are solidarily liable for cargo damage.

2. Collision Between M/T Manila and M/V Don Claro

Scenario: M/T Manila and M/V Don Claro collided, resulting in the sinking of M/V Don Claro and the loss
of its cargo. The collision was due to violations of maritime rules, including M/T Manila’s improper
maneuvering and the captain of M/V Don Claro being off-duty.
Question: Who bears liability?

Answer:
Both vessels are liable for the collision due to their negligence.

 Faults Identified: M/T Manila violated Rule 19 of the International Rules of the Road, steering to
port instead of starboard. Meanwhile, M/V Don Claro’s captain’s negligence contributed to the
accident.

 Shared Liability: Both vessels are considered negligent under the doctrine of inscrutable fault,
where neither can absolve themselves of responsibility. Consequently, both vessels are solidarily
liable for the damage to cargo and passengers.

3. Collision Caused by Fortuitous Event

Question: If a collision is due to a fortuitous event (e.g., severe weather), who bears the damage?

Answer:
If a fortuitous event is the sole cause of the collision, each vessel bears its own damages. Neither party is
held liable for the losses, as the law recognizes that the carrier is not an insurer against uncontrollable
natural forces.

4. Presumption of Negligence in Vessel Collisions

Question: Is there a presumption of negligence against a moving vessel striking a stationary object?
Answer:
True. A moving vessel is presumed negligent if it strikes a stationary object (e.g., dock or navigational
aid). This presumption can only be rebutted if the vessel proves it was not at fault or that the collision
was caused by an inevitable accident.

5. Collision During a Typhoon

Scenario: SS Masdaam and M/V Princess collided during a typhoon. The typhoon was a major factor, but
both captains exhibited negligence.
Question: Who bears liability?

Answer:
Both shipowners must bear their respective losses for vessel damage. For cargo losses, both shipowners
are solidarily liable since the negligence of both captains contributed to the collision, despite the
typhoon being a factor.

6. Requirement of Abandonment for Limited Liability

Question: Is abandonment necessary to invoke the limited liability rule?

Answer:
Yes, abandonment of the vessel is required to invoke the limited liability rule under Articles 587, 590,
and 837 of the Code of Commerce, except when the vessel is totally lost, in which case abandonment is
unnecessary as liability is extinguished by the total loss.

7. Failure to File a Maritime Protest

Scenario: Passenger A and shipper B suffered losses from a collision. Neither filed a maritime protest.
Question: Can they recover their losses?

Answer:
(a) Maritime Protest Definition:
A maritime protest is a sworn declaration detailing the circumstances of a collision, filed within 24 hours
with the competent authority at the site of the accident or the first port of arrival.

(b) Recovery of Damages:

 Passenger A cannot recover damages due to the failure to file a maritime protest, as passengers
are expected to report the circumstances.

 Shipper B can recover damages because the filing of a maritime protest is not required for cargo
shippers who were not present during the incident or unable to make their wishes known.
This summary ensures clarity of maritime collision rules, emphasizing liability principles and procedural
requirements under the Code of Commerce.
Carriage of Goods by Sea Act (COGSA)

COGSA applies to contracts involving the transportation of goods by sea, specifically to or from Philippine
ports in foreign trade. Its provisions set standards for liability, prescription periods, and claims related to
loss or damage of goods during shipment.

1. Application of COGSA

COGSA governs contracts of carriage of goods by sea in foreign trade.

 To what contracts does it apply?

o COGSA applies to all shipments to and from Philippine ports in foreign trade.

o It also applies if there is a transshipment to an interisland vessel as long as the

destination remains foreign.

 Limitations on application:

o Shipments from the Philippines to a foreign port are governed primarily by the Civil
Code of the Philippines and not COGSA. The laws of the destination country may also
apply.

Example:

 A shipment of electronics from Singapore to Manila is covered by COGSA.

 However, a shipment of goods from Manila to the U.S. is primarily governed by the Civil Code of
the Philippines.

2. Legal Consequences of COGSA Application

a. Prescriptive Period:
Under COGSA, claims for loss or damage to goods must be filed within 1 year of delivery or the expected
delivery date. This ensures quick resolution of maritime disputes.

b. Liability Limit:
The shipper can only recover up to USD 500 per package unless the nature and value of the goods were
declared and included in the bill of lading.

Example:

 A shipment of medical equipment valued at $1,000 is damaged during transit. If the value was
not declared in the bill of lading, the maximum recoverable amount is $500.

3. Governing Law for Loss of Goods

The Civil Code takes precedence for goods transported from a foreign country to the Philippines.
  COGSA acts as a supplementary law to the Civil Code.

 The liability of the carrier is based on the destination country's laws.

Example:

 A cargo shipped from Japan to the Philippines faces damage during transit. Liability is
determined under the Civil Code, supplemented by COGSA provisions.

4. Definition of "Loss" under COGSA

The term "loss" under COGSA means the goods are entirely undelivered because they perished,
disappeared, or cannot be recovered.

 Delays or reduction in value (e.g., late arrival) are not considered "loss" under COGSA.

 Such cases may fall under the Civil Code with longer prescriptive periods.

Example:

 Ladies' wear shipped from Manila to France arrived late and was sold at a reduced price. This is
not "loss" under COGSA but may be covered under the Civil Code's 10-year prescription period.

5. Case Example: Fertilizer Shipment

 Situation:
Prilled Urea Fertilizer shipped from Ukraine to Tabaco, Albay, had a shortage of 349.65 metric
tons. The shortage was attributed to melting caused by bad weather.

 Applicable Law:
As the shipment was from a foreign country to the Philippines, the liability is governed by the
Civil Code.

Why not COGSA?

The Civil Code governs because Article 1753 specifies that the law of the destination country (in this
case, the Philippines) applies to the carrier’s liability.

Key Points to Remember:

 COGSA applies primarily to foreign trade shipments to/from Philippine ports.

 For outbound shipments, the Civil Code and laws of the destination govern.

 Prescriptive periods under COGSA are 1 year for loss/damage, but 10 years under the Civil Code
for other breaches.
Explanation

Under the law, not all adverse weather conditions qualify as “storms” or “perils of the sea” that exempt
common carriers from liability under the Civil Code and the Carriage of Goods by Sea Act (COGSA).

1. What qualifies as a storm?

o In Central Shipping Co., Inc. v. Insurance Company of North America, the Court referred
to standards set by PAGASA (the Philippine Atmospheric, Geophysical, and Astronomical
Services Administration). According to PAGASA, a storm has a wind force of 48-55 knots
or 10-11 on the Beaufort Scale, which translates to 55-63 miles per hour.

o In the present case, the second mate of the vessel reported winds at force 7-8 on the
Beaufort Scale. This indicates strong winds, but not a storm. Such conditions are
considered ordinary for sea voyages and do not meet the threshold of a “storm.”

2. What qualifies as a peril of the sea?

o Perils of the sea refer to weather or events that are so unusual, unexpected, or
catastrophic that they are beyond reasonable anticipation. Courts in the U.S., which
have persuasive authority, limit the term to such extreme conditions.

o Strong winds and waves, unless extraordinary for the specific sea area and season, are
not automatically considered perils of the sea.

3. Why is Transimex Co. still liable?

Even if the weather encountered was severe, Transimex Co. did not prove:

o The weather was the sole and proximate cause of the damage.

o It exercised the diligence required of common carriers to protect the shipment.

Example

Imagine that a vessel carrying perishable goods from Manila to Cebu encounters strong monsoon winds
during the voyage. The shipment arrives in Cebu with significant damage.

 The carrier claims the loss was due to a "storm."

 However, weather reports confirm the winds were at force 7 on the Beaufort Scale, typical for
that region during monsoon season.

 The carrier also fails to show it took appropriate measures, such as securing the cargo or altering
the route.

In this scenario, the carrier cannot invoke a defense of perils of the sea and will be held liable for the
loss.
Notice of Loss and Legal Deadlines Under COGSA

1. When must notice be given?

If the loss is not apparent, notice must be given within three (3) days of delivery.

2. Is notice always necessary?

o No, notice is not required if the goods were subject to a joint survey inspection upon
delivery.

o Failure to give notice does not bar a shipper from suing, as long as the action is filed
within the one (1)-year prescriptive period.

3. One-Year Prescriptive Period

The one-year deadline to file a case begins either from:

o The date the goods were delivered, or

o The date the goods should have been delivered (if undelivered).

4. When does the period pause?

o Filing an action in court interrupts the period. If the case is dismissed not on the merits,
a new action can be filed within the remaining time.

o If both parties agree that an extrajudicial claim will toll the period, this agreement will
suspend the deadline.

5. Insurance Claims
Filing an insurance claim does not pause the one-year prescriptive period. Insurers must
promptly act on claims to avoid delays that could prejudice the consignee.

Case 1: Prescription Period under COGSA vs. Extrajudicial Demand

Scenario:
A consignee filed a claim against a carrier for lost shipment under the Carriage of Goods by Sea Act
(COGSA) after the one-year prescriptive period. The consignee argued that the period was interrupted by
a written extrajudicial demand within the year, citing Article 1155 of the Civil Code.

Explanation:
The consignee's claim has prescribed because the one-year period under COGSA is absolute and cannot
be interrupted by an extrajudicial demand. Article 1155 of the Civil Code applies only to prescription
periods under the Civil Code, not to special laws like COGSA unless expressly provided.
COGSA aims to promote swift resolution of claims related to maritime transport, ensuring stability and
avoiding prolonged litigation.
Example:
If goods shipped on June 1, 2023 were delivered on June 15, 2023, any claim must be filed before June
15, 2024, regardless of whether a demand was made during the year.

Case 2: Liability of Arrastre Operator under COGSA

Scenario:
After damaged steel sheets were unloaded from a vessel, the consignee’s insurer (NA Insurance)
demanded damages from the arrastre operator (ATI). ATI claimed COGSA’s one-year prescriptive period
applied, while NA Insurance argued otherwise.

Explanation:
NA Insurance is correct. COGSA governs the carrier’s responsibility during transport, from loading until
unloading. Once the goods are discharged and in the custody of an arrastre operator, the carrier’s
liability under COGSA ends. The arrastre operator’s liability is governed by its contract with the Philippine
Ports Authority, which typically allows claims to be filed within four years.
Example:
If goods were delivered to ATI on January 21, 2021, and found damaged during withdrawal, a claim
against ATI could be filed until January 21, 2025, subject to contract terms.

Case 3: Applicability of COGSA’s Prescription Period to Insurer Claims

Scenario:
A cargo shipment was insured and damaged during transport. The insurer sued the carrier after one year,
arguing that the prescriptive period should not apply.

Explanation:
The one-year prescription under COGSA applies to claims against carriers, including those by insurers as
subrogees. However, claims against the insurer are based on the insurance contract and prescribe in 10
years under Article 1144 of the Civil Code. The insurer cannot escape liability by invoking COGSA’s
prescriptive period against the insured.
Example:
If the carrier delivered damaged goods on March 1, 2023, the consignee’s suit against the carrier must
be filed by March 1, 2024. However, the consignee’s claim against the insurer could be filed up to March
1, 2033.

Case 4: Adding a New Party Beyond the Prescriptive Period

Scenario:
ABC, Inc. sued a carrier on March 11, 1993, for a cargo shortage but later amended the complaint on
June 7, 1993, to include the carrier’s agent. The carrier’s agent argued that the claim was time-barred
under COGSA.

Explanation:
The action against the carrier’s agent cannot prosper. Amending a complaint to add a new party does not
relate back to the date of the original filing. For the agent, the prescriptive period of one year lapsed on
April 15, 1993, and the claim filed on June 7, 1993, was already time-barred.
Example:
If cargo was delivered on April 15, 1992, any claim against the carrier or its agent had to be filed before
April 15, 1993. Adding the agent on June 7, 1993, was too late.

Case Analysis (164):

Scenario:
Chillies Export House Ltd. shipped 250 bags of chili to BSFIL in the Philippines, insured by Pioneer
Insurance. Upon delivery, 76 bags were damaged and declared unfit for consumption. BSFIL claimed
against APL (carrier) and Pioneer Insurance. Pioneer, after compensating BSFIL, sought reimbursement
from APL. APL refused, citing a nine-month prescriptive period in the Bill of Lading. Pioneer argued for a
one-year prescriptive period under the Carriage of Goods by Sea Act (COGSA).

Ruling:
The nine-month period in the Bill of Lading does not apply when a law, like COGSA, mandates a different
prescriptive period. Since COGSA sets a one-year prescriptive period for loss or damage claims, it
prevails.

Example:
If a shipment of electronics is delivered damaged, and the carrier's Bill of Lading states a six-month claim
limit, but a law requires one year, the one-year period applies.

Meaning of "Package" (165):

Question:
Does "package" mean the entire container or the individual items inside it?

Answer:
"Package" refers to the container unless the Bill of Lading specifies the contents, such as the number of
cartons or units. If specified, each disclosed unit is considered a "package."

Example:

 If 10 laptops are shipped in one container and the Bill of Lading only mentions "1 container,"
liability is limited per container.

 If the Bill of Lading states "10 laptops in 1 container," liability applies to each laptop as a
"package."

Liability Limitation Binding Nature (166):

Question:
Is the $500 per package liability limit under COGSA binding even if not in the Bill of Lading?
Answer:
Yes, the $500 limit is binding because COGSA supplements the Civil Code and automatically applies to
the contract of carriage, regardless of whether it is explicitly stated in the Bill of Lading.

Example:
In a shipment of steel sheets:

 If the Bill of Lading does not specify the value, the carrier's liability is capped at $500 per
package.

 A notation in the Bill of Lading referencing a Letter of Credit (e.g., "L/C No. 90/02447") does not
count as a value declaration, so the $500 limit still applies.

Practical Takeaways:

1. For Shippers: Declare the value of goods in the Bill of Lading if they exceed the $500 per package
limit.

2. For Carriers: Ensure compliance with COGSA and clarify liability limits in the Bill of Lading.

3. For Consignees/Insurers: File claims within the prescriptive periods dictated by law, not just the
Bill of Lading terms.
Definition of Public Utility

Definition and Distinction

The term "public service" refers to any person or entity in the Philippines that owns, operates,
manages, or controls, for hire or compensation, any of the following for general or specific business
purposes:
1. Transportation Services:

o Common carriers (freight or passenger).

o Railways, subways, or motor vehicles (fixed routes or otherwise).

o Steamboats, ferries, or other watercraft engaged in transporting passengers or goods.

2. Infrastructure and Facilities:

o Shipyards, marine railways, and repair shops.

o Wharfs, docks, canals, and irrigation systems.

3. Utilities and Communication:

o Gas, electricity, heating, and water supply systems.

o Petroleum and sewerage services.

o Telephone, wireless communications, and broadcasting systems.

4. Other Similar Public Services:

o Ice plants, refrigeration plants, and other facilities for public use.

A public utility is a business or service that provides commodities or services essential for the public's
daily life, such as electricity, water, gas, or transportation. Unlike the term public service, which is
specifically defined by Commonwealth Act No. 146 (Public Service Act), the definition of public utility is
based on jurisprudence. The Supreme Court describes a public utility as:

"A business or service engaged in regularly supplying the public with some commodity or service of
public consequence such as electricity, gas, water, transportation, telephone, or telegraph service. The
term implies public use and service."

Public Service vs. Public Utility

While both concepts overlap, public services cover a broader range of services offered for public benefit,
including businesses like marine railways, ice plants, or telephone systems. However, not all public
services qualify as public utilities.

Example

Electricity providers, like MERALCO, are considered public utilities because they serve the general public
and are essential to daily life. Conversely, a private courier company, while providing public service, is not
a public utility because it can select its clients.
Does Promoting Public Good Make a Business a Public Utility?

Legal Criteria for Public Utility

Merely offering services or goods that benefit the public does not automatically classify a business as a
public utility. To be a public utility, the facility must be essential to life and provide services to the public
at large or a significant portion of it. The distinguishing factor is the obligation to serve anyone who seeks
its services with reasonable efficiency and proper charges.

 Public Use: A public utility must serve the general public or a substantial segment of it without
discrimination.

 Legal Obligation: Unlike private businesses, public utilities are bound by law to offer their
services to all who seek them.

Example

 A water distribution company serving households within a city is a public utility because it
provides an essential service to the public with a legal obligation to serve.

 A private gym offering memberships does not qualify as a public utility, even if it promotes public
health, because it can limit its clientele.

Can a Shipyard Be Considered a Public Utility?

Nature of Shipyards

No, a shipyard is not a public utility. Although it may publicly offer its services, it does not have a legal
obligation to serve everyone indiscriminately. A shipyard’s clientele is typically limited to specific
individuals or companies, and it retains the discretion to choose its clients.

 Public Utility vs. Private Business: Public utilities must serve the general public on demand,
while a shipyard can reject a client without breaching any legal duty.

 Public Right to Demand Service: A key characteristic of a public utility is the public’s legal right to
demand service, which is absent in the case of a shipyard.

Example

A ferry service transporting passengers across islands qualifies as a public utility because it serves the
public at large. However, a shipyard that repairs or constructs ferries is not a public utility, as its services
are limited to specific clients.

Purposes of Enacting the Public Service Act

The Public Service Act (PSA) was created to establish a legal framework ensuring public services operate
in a way that benefits the general welfare. Its key purposes are:
 1. Securing Adequate and Affordable Public Service
To ensure the public receives consistent and quality services at the least possible cost.

o Example: Regulating electricity prices to prevent overcharging.

2. Protecting the Public from Unfair Practices

To safeguard the public against unreasonable charges, poor quality, and inefficient service.

o Example: Government intervention when water providers fail to meet standards.

3. Safeguarding Investments in Public Services

To create a secure and attractive environment for investors, ensuring the sustainability of public
services.

o Example: Protecting investors' rights in utilities like telecommunications while ensuring

compliance with regulations.

4. Preventing Harmful Competition

To avoid excessive competition that could undermine the quality or stability of services.

o Example: The "first operator rule" gives priority to the first provider in a service area,
limiting other providers unless public interest demands it.

These objectives are fulfilled through State-regulated rates for services such as water and electricity, and
by determining service providers based on public interest.

Case Analysis

1. Ordinance Affecting a Certificate of Public Convenience

Case Scenario: X, a bus operator with a Certificate of Public Convenience (CPC), challenges a Manila
ordinance prohibiting provincial buses within city limits, arguing it alters his CPC without Public Service
Commission (PSC) approval.

Issues:

 Can X rely on Section 16(m) of the PSA, granting PSC authority to amend CPCs?

 Can X invoke Section 17(j), claiming only the PSC can enforce ordinances?

Ruling:

 First Issue: No. The City of Manila's authority under its Revised Charter to regulate streets
overrides the PSC's powers. Local governments retain control over local traffic matters.

 Second Issue: No. The PSA does not diminish local governments' regulatory powers over streets
and traffic.

2. Ordinance Regulating Provincial Bus Operations

Case Scenario: A bus operator, granted a CPC by the Board of Transportation, challenges a municipal
ordinance restricting provincial buses' entry into Manila during peak hours, claiming vested rights.

Ruling:
The ordinance is valid. The City of Manila, under its Charter, has authority over its streets. This authority
supersedes the BOT’s power. The operator’s CPC does not confer a vested right, as public convenience
certificates are subject to regulatory adjustments for public welfare.

Certificates of Public Convenience and Necessity

Definition:

 Certificate of Public Convenience (CPC): A license allowing entities to provide public services,
such as bus or water services.

 Certificate of Public Convenience and Necessity (CPCN): A specific license for services requiring
legislative franchises, e.g., telecommunications or airlines.

Exempted Industries:

Certain services do not require CPC/CPCN, including:

 Warehouses

 Animal-drawn vehicles

 Tugboats and lighters

 Public markets

Key Features:

 CPC/CPCNs are privileges, not property rights. They may be altered or revoked without violating
rights, as they remain under State authority.

Examples:

1. Electric Power: Batong Bakal Corp. can operate an electric plant within its factory compound
without a legislative franchise but must comply with CPC requirements.

2. Transportation: Local entities like tricycle operators obtain CPCs from their local government
(e.g., Sangguniang Bayan), while larger operators apply to regulatory agencies like the LTFRB.

Conclusion:

The PSA ensures public services align with national interests while balancing regulatory oversight and
operational freedom. The law provides mechanisms for fair competition, quality service, and investment
protection, all while respecting the powers of local governments.
Industries Exempted from the Requirement of a Certificate of Public Convenience and Necessity
(CPCN/CPC)

Certain industries are not required to secure a Certificate of Public Convenience and/or Necessity
(CPCN/CPC) to operate public services. These exemptions reflect the nature of the industries or their
limited impact on public interests. Below are the exempted industries:

a. Warehouses
Warehousing operations are typically private services used for storage and logistics, not directly serving
the public in the same manner as public utilities.

Example: A storage facility used for private goods storage does not require a CPCN/CPC to function.

b. Animal-drawn vehicles, bancas moved by oar or sail, tugboats, and lighters

Traditional, non-motorized, or limited-use transport methods are exempt due to their minimal regulatory
needs and localized usage.

Example: A horse-drawn carriage operating in a tourist area does not need a CPCN to carry passengers.

c. Airships within the Philippines (except for maximum rates on freight and passengers)
Airships (e.g., blimps) used domestically do not need a CPCN unless the government is regulating their
rates.

Example: A private company using a blimp for advertising campaigns does not require a CPCN unless it
charges for passenger or freight services.

d. Radio companies (except for rate-fixing)

Radio broadcasting entities are generally exempt except when it comes to fixing their rates.

Example: A local FM radio station does not need a CPCN to broadcast but may be regulated for
advertising rates.

e. Public services owned or operated by the government (except for rate-fixing)

Government-operated public services, like state-run hospitals or certain infrastructure projects, are
exempt except when their rates are subject to regulation.

Example: A government-operated public transit system does not require a CPCN unless its fare rates
need fixing by a regulatory agency.

f. Ice plants
Ice plants, often used for preserving food in fishing and agricultural areas, are exempt due to their
limited public utility scope.
Example: A private ice plant serving fishing communities does not need a CPCN to operate.

g. Public markets
Municipal public markets, which serve as hubs for local commerce, are exempt from the CPCN
requirement.

Example: A city-managed public market does not require a CPCN but remains subject to local
government ordinances.

Does the Issuance of a CPCN/CPC Confer Property Rights?

No, the issuance of a CPCN or CPC does not confer property rights. These certificates are merely licenses
or privileges that allow operators to provide public service. They do not create any proprietary interest
or vested right in the operation or route.

Explanation:
The government reserves the authority to impose new conditions, alter, or revoke the certificate as
necessary for public welfare. The certificate holder cannot claim a permanent right to operate based
solely on possession of the certificate.

Example: If a bus operator's CPCN is revoked due to non-compliance with safety regulations, the
operator cannot claim damages for losing their route or operations.

Where Should Entities Obtain Certificates of Public Convenience?

Entities engaged in transportation services must secure CPCs from specific government agencies:

a. Land transportation services (motorized vehicles) – Land Transportation Franchising and Regulatory
Board (LTFRB).
Example: A bus operator running routes between provinces must apply to the LTFRB.

b. Domestic and overseas water carriers – Maritime Industry Authority (MARINA).

Example: A ferry service operating between islands must secure approval from MARINA.

c. Air transportation (foreign or domestic) – Civil Aeronautics Board (CAB).

Example: An airline offering local and international flights must apply to the CAB.

d. Land transportation by tricycles – Local Sangguniang Bayan or Sangguniang Panglungsod.

Example: A tricycle operator serving a municipality applies to the local council for a franchise.

Government Agencies Regulating Public Services (Non-Transportation)

For other public services, the following agencies govern operations:

a. Telecommunications (radio, TV, and telephones) – National Telecommunications Commission (NTC).
b. Electric utilities and cooperatives – National Electrification Administration (NEA).
c. Local water utilities – Local Water Utilities Administration (LWUA).
d. Express or messenger services – Philippine Postal Corporation.

Revocation or Cancellation of a CPCN/CPC

The government may revoke or cancel a CPCN/CPC for the following reasons:

1. Misrepresentation or material changes: If the certificate was obtained based on false or

changed circumstances.
Example: An operator falsely claims compliance with emission standards to secure a CPCN.

2. Violation of rules or laws: Willful refusal to follow government orders or laws.

Example: A utility company repeatedly ignores safety mandates.

3. Dummy operator: If the operator is merely a front for a foreign entity.

Example: A local transport operator owned by a foreign national using a proxy.

4. Ceased operation/storage: If the operator has stopped providing services.

Example: A bus operator who stores their fleet without operating for months.

5. Abandonment: Total discontinuation of the service.

Example: An operator permanently stops using a licensed route without justifiable cause.

Requisites for Granting a Certificate of Public Convenience (CPC)

Under the Public Service Act, several requirements must be met before a Certificate of Public
Convenience (CPC) can be granted. These ensure that the applicant is qualified to operate and serve the
public effectively.

1. Citizenship Requirement

The applicant must either:

 Be a citizen of the Philippines, or

 Be a corporation, partnership, or association organized under Philippine laws, with at least 60%
of its capital owned by Filipino citizens.

Explanation:
This requirement is rooted in Section 11, Article XII of the 1987 Constitution, which aims to maintain
Filipino control over public utilities and limit foreign participation.

Example:
A bus company applying for a CPC must show that 60% of its shares are owned by Filipino nationals to
qualify.
2. Public Necessity

The applicant must prove that the proposed service meets a public necessity.

Explanation:
This means the service should fulfill an essential need or provide significant benefits to the public.

Example:
A ferry service proposing to connect underserved coastal towns must demonstrate the lack of
transportation options and the demand for their service.

3. Promotion of Public Interest

The applicant must demonstrate that the operation will promote public welfare in a proper and suitable
manner.

Explanation:
Public interest ensures that the service aligns with societal needs and contributes to overall community
well-being.

Example:
An electric utility proposing to expand to rural areas must show how their services will improve access to
energy and enhance economic opportunities.

4. Financial Capability

The applicant must be financially capable of operating the proposed service and fulfilling its obligations.

Explanation:
This ensures that the applicant has sufficient resources to maintain operations without compromising
service quality or public safety.

Example:
A telecommunications company must present financial statements proving it can sustain network
expansion and operational costs.

Citizenship Requirement for Public Utilities

Constitutional Basis

The citizenship requirement is governed by Section 11, Article XII of the 1987 Constitution, which states:

1. At least 60% of the capital of a public utility must be owned by Filipino citizens.

2. Only Filipinos or Filipino-majority corporations can be granted a CPC or franchise.

 3. Executive and managing officers of public utility corporations must be Filipino.

Explanation:
This provision ensures Filipino control over critical industries and restricts undue foreign influence in
essential public services.

Definition of "Capital"

"Capital" refers to shares with voting rights and full beneficial ownership. This ensures that Filipino
nationals have effective control over public utilities.

Example:
In a public utility corporation, 60% of voting shares and ownership must be held by Filipinos to meet this
constitutional requirement.

Distinction Between "Operation" and "Ownership"

1. Operation of Public Utility

o Requires a franchise or CPC.

o Refers to the actual provision of public service using facilities or equipment.

2. Ownership of Facilities

o Does not require a franchise, provided the facilities are not used to serve the public
directly.

Example:
A foreign company may own telecom towers but cannot operate them as a public utility without
obtaining a franchise. Conversely, a local operator with a CPC may lease these towers to provide service.

Primordial Consideration: Public Interest

The primary criterion for granting a CPC is whether the service promotes public interest and
convenience.

Explanation:
Public utilities must prioritize societal welfare, ensuring their services are accessible, reliable, and aligned
with community needs.

Example:
A water service provider must show that granting a CPC will address shortages in underserved
communities.
Financial Capability

The applicant must demonstrate sufficient financial resources to support the proposed operation and its
related responsibilities.

Explanation:
This requirement ensures that the public will not be affected by the operator’s inability to sustain
services or manage operations effectively.

Example:
A company applying to operate a railway system must present a robust financial plan, including funding
for infrastructure, maintenance, and employee salaries.

These requisites reflect the government's commitment to ensuring that only qualified and capable
entities operate public services in a manner that benefits the Filipino people.

What is the Prior Operator Rule?

The Prior Operator Rule is a principle that gives an existing public utility franchise operator a preferential
right to continue serving within its authorized territory. This rule applies as long as the operator provides
satisfactory, adequate, and economical service. It ensures that current operators are shielded from
harmful competition and given a chance to improve their services before new operators are allowed to
enter the same area.

If an operator’s service is found inadequate, the operator must first be given an opportunity to address
the deficiencies. If they fail or neglect to do so despite the opportunity, new operators may then be
allowed to operate to meet the public demand.

Example:

Hallelujah Transit has been operating in Quezon City and providing satisfactory service. A new applicant,
Mangasiwa, applies for a certificate to operate jeepneys on the same route. Under the Prior Operator
Rule, Hallelujah Transit may oppose the application, claiming the right to continue operations in the area
as long as their service remains satisfactory.

What is the Prior Applicant Rule?

The Prior Applicant Rule applies when multiple parties are applying to operate a public utility in a
territory not yet served. If the qualifications of the applicants are equal, the certificate of public
convenience is granted to the first applicant who filed their application.

Example:

Two companies, Green Bus and Blue Bus, both apply to operate a new route. If both are equally
qualified, the certificate will be granted to the company that submitted its application first.
Conflict Between Prior Operator Rule and Prior Applicant Rule

When there is a conflict between these rules, the Prior Operator Rule generally prevails, provided the
existing operator renders satisfactory and economical service. However, if the prior operator fails to
meet service standards, the new applicant may be favored under public interest considerations.

Example:

Mangasiwa applies to operate jeepneys in a territory already served by Hallelujah Transit. If Hallelujah
Transit is providing adequate service, they can invoke the Prior Operator Rule to oppose Mangasiwa’s
application. However, if Hallelujah Transit’s service is deficient, the Prior Applicant Rule might support
Mangasiwa’s application.

Limitations and Exceptions to the Prior Operator Rule

The Prior Operator Rule does not always apply. Exceptions include:

1. Public Interest Exception

If the public interest would be better served by a new operator (e.g., if the current operator fails
to provide adequate service despite being given time to improve).

o Example: Bayan Bus Lines operates between Manila and Tarlac but cannot meet public
demand even after improvements. Pasok Transportation may be allowed to operate in
the same area.

2. Failure to Meet Increased Demand

If the existing operator does not offer to accommodate increased traffic or demand.

o Example: A surge in passengers along a route leads to new operators applying to meet
demand unmet by the existing service.

3. Maiden Certificate
The Prior Operator Rule does not apply when the certificate being granted to a new operator is
for a maiden operation in an area.

o Example: A new road is opened between two cities, and a new operator applies to serve
the route.

4. Preventing Monopolies
If applying the rule would lead to a monopoly and undermine healthy competition.

o Example: Limiting operations to one company may result in overpricing or reduced

service quality, so allowing competitors ensures better service for the public.

Case Analysis: Bayan Bus Lines vs. Pasok Transportation

In this scenario, Bayan Bus Lines claims the Prior Operator Rule against Pasok Transportation. However,
Bayan Bus Lines’ service is deemed inadequate despite efforts to improve. Consequently, Pasok
Transportation should be allowed to operate in the area to provide efficient services. This exception
aligns with public interest, which overrides the Prior Operator Rule when the existing service fails to
meet public needs.

Ruinous Competition: Simplified Explanation, Policy Context, and Example

What is Ruinous Competition?

Ruinous competition refers to excessive and unnecessary competition among public utility operators in
the same service area. This can lead to inefficiency, decreased service quality, or financial instability of
operators. The principle aims to ensure that public utilities operate effectively and sustainably without
endangering existing investments or causing disruption in service delivery.

Policy Context: The Prior Operator Rule

The Prior Operator Rule is rooted in the goal of avoiding ruinous competition. It seeks to protect existing
operators who are already providing adequate and satisfactory service by giving them the chance to
improve before a new operator is permitted to enter their service area. However, this protection is not
absolute; the overriding priority is always public convenience and welfare. If the existing operator fails
to meet public needs, new entrants may be allowed.

Example:

Consider a situation where City Transport Co. operates buses between two towns, and their service is
deemed satisfactory. A new company, Metro Express, applies to serve the same route. The government
would initially protect City Transport Co. from Metro Express to prevent financial losses due to
unnecessary competition. However, if City Transport Co. fails to upgrade its services to meet growing
demand, Metro Express may be permitted to operate.

The Policy Behind the Prior Operator Rule

The policy behind the Prior Operator Rule is to shield public utility operators from ruinous competition,
ensuring that investments already made by existing operators are protected. This creates stability in
service provision, avoids wastage of resources, and prioritizes efficient and economical public service.

Nonetheless, public convenience and necessity take precedence. If the existing operator fails to meet
public demand or provide adequate service, new operators are allowed to enter to improve service
delivery.

Illustrative Example:

Imagine a rural town where a single company provides electricity. The operator, Energy Pioneer Co., has
built infrastructure and serves the town adequately. To prevent wasteful duplication of efforts, another
company, Bright Future Energy, is not immediately granted a franchise. However, if Energy Pioneer fails
to provide consistent service due to outdated equipment or neglect, Bright Future Energy can be given
an opportunity to step in.
What is the "Protection of Investment" Rule?

The Protection of Investment Rule ensures that investments made by public utility operators are
safeguarded. This is a legal policy under the Public Service Act, aimed at maintaining operational stability
for businesses that have already committed resources to serve the public.

Key Consideration:

This rule supports the idea that utility operators who have invested heavily in infrastructure and service
improvement deserve protection from premature competition that might harm their financial viability.

What is a "Rate"?

A rate is the price or charge fixed by a public utility for its services, such as water, electricity, or
transportation. Rates must be just and reasonable for both the public and the utility provider.

How are rates fixed?

Rates are determined based on factors such as:

 Rate of Return: The percentage profit that the utility is allowed to earn.

 Rate Base: The value of the utility’s invested capital or property used in providing public services.

 Operating expenses that directly contribute to revenue generation.

Policy on Rates:
The government regulates rates to strike a balance between protecting consumers from excessive
charges and ensuring that utility providers receive a fair return on their investments.

Example of Rate Fixing:

If a water company invested heavily in infrastructure, the government may allow a rate increase to
ensure the company earns a reasonable return, but it must remain affordable for consumers.

By understanding these concepts, policymakers and service providers can balance the interests of
investors, operators, and the general public effectively.

Boundary System

Definition:

The boundary system is an arrangement in which a vehicle owner (or operator) engages a driver to
operate their vehicle. The driver pays a fixed fee—referred to as the "boundary"—to the owner for the
use of the vehicle. The driver's earnings beyond this amount become his income.

Illustration:
Baldo, a driver under the boundary system, operates a taxi owned by Yellow Cab Company. While driving
along South Expressway, Baldo is involved in a collision, causing the death of his passenger, Pietro.
Pietro’s heirs file a claim against Yellow Cab Company for damages.

Resolution:
Yellow Cab Company is liable. Despite its claim that Baldo is not an employee, the law establishes an
employer-employee relationship under the boundary system. According to Article 103 of the Revised
Penal Code, the employer is subsidiarily liable for the acts of the employee. Furthermore, exempting
owners from liability would undermine public safety, leaving the riding public unprotected against the
recklessness encouraged by the boundary system.

Kabit System

Definition:

The kabit system is an arrangement where a person holding a certificate of public convenience (CPC)
allows another, who owns a motor vehicle, to operate the vehicle under the certificate for a fee or share
of the earnings.

Legal Consequences:

1. Contrary to Public Policy:

The kabit system violates public policy and is void under Article 1409 of the Civil Code. It
undermines the purpose of the CPC, which ensures financial accountability in public
transportation.

2. Liability:
Both the registered owner and the actual owner are held jointly and severally liable for damages
caused by the vehicle’s negligent operation.

3. In Pari Delicto Principle:

Parties to the kabit system cannot seek legal recourse against each other because both are at
fault.

4. Public Safety Protection:

The registered owner cannot disown liability by claiming another is the actual owner, as this
would compromise the safety and compensation rights of the public.

Illustration:

Procopio purchased a jeepney from Enteng, who held a CPC for public transportation. However, Procopio
did not transfer the vehicle’s registration or secure a CPC in his name. When the jeepney collided with a
truck, Procopio sued the truck’s owner, Emmanuel, for damages.

Resolution:
The motion to dismiss filed by Emmanuel should be denied. Procopio is the real party in interest as the
actual owner of the jeepney, even though he falls under the kabit system. The kabit system's illegality
does not apply here because public deception is not an issue.
Approval for Sale, Lease, or Encumbrance of Public Utilities

Rules:

1. Under Section 20 of the Public Service Act:

o Public utilities cannot sell, lease, mortgage, or encumber their properties, franchises, or
rights without the Commission’s prior approval.

o Approval is granted after a public hearing if the transaction is shown to serve public
interest.

2. The transaction is valid between the contracting parties even without approval but is not
enforceable against the public or the Commission.

Illustration:

If a public utility sells its property without securing the Commission’s approval, the sale is valid between
the seller and buyer. However, it cannot affect the public or the regulatory oversight until such approval
is obtained.

Certificate of Public Convenience

Rules Governing CPCs:

1. A CPC is property and can be sold or levied on execution to satisfy judgments, provided the sale
or levy is approved by the Commission.

2. Approval ensures:

o The buyer is qualified to operate the utility.

o Public interest is preserved.

Illustration:

A CPC holder who owes a court judgment may have their CPC levied for execution. However, the transfer
to the judgment creditor requires the Commission’s approval to ensure compliance with public service
standards.
The Warsaw and Montreal Conventions: Governing Air Transportation Laws

1. What laws govern persons engaged in the air transportation business?

Explanation:
For air transportation businesses operating within the Philippines, the Civil Code provisions on common
carriers govern their obligations if both the place of departure and destination are in the Philippines,
without any agreed stopover in a foreign country adhering to the Warsaw Convention or its successor,
the Montreal Convention. If the departure or destination is in a signatory country to these conventions,
international treaties like the Montreal Convention govern, as they override domestic laws in matters of
international air carriage.

The Montreal Convention, ratified by the Philippines in 2015, modernizes and replaces the outdated
Warsaw system, establishing uniform rules for international air carrier liability for passenger injuries,
baggage loss, and delays.

Example:
If a flight departs from Manila to Cebu, the Civil Code governs. However, if the flight is from Manila to
Tokyo, the Montreal Convention applies.

2. What are the obligations of a common carrier under a contract of air carriage?

Explanation:
Airlines, like all common carriers, must exercise extraordinary diligence to ensure the safety of
passengers and their belongings. This means taking the utmost care and precautions possible under all
circumstances. For cargo, airlines must preserve goods entrusted to them with exceptional care.

Example:
If an airline fails to secure a passenger's luggage, leading to its loss, the airline is liable, even without
proof of negligence, as the contract imposes a strict duty to deliver the baggage safely.

3. When is a contract of air carriage perfected?

Explanation:
A contract of air carriage is perfected when an airline issues a ticket to a passenger, confirming their
booking for a specific flight. From this point, the airline is obligated to transport the passenger and their
luggage to the agreed destination safely. Failure to do so constitutes a breach of contract, for which the
airline may be held liable.

Example:
If a passenger books a flight, receives a ticket, and the airline cancels the flight or mishandles their
baggage, the airline is responsible for damages arising from this non-performance.

4. When does the obligation to exercise extraordinary diligence commence?

Explanation:
In air transportation, an airline's duty to exercise extraordinary diligence begins when a passenger checks
in for the flight and their baggage is placed under the airline's custody. It does not apply while the
passenger is on their way to the airport.

Example:
If a passenger sustains injuries after checking in and boarding the aircraft, the airline is obligated to
ensure their safety under the extraordinary diligence standard.

5. What governs the relationship between passengers/consignors and the air carrier?

Explanation:
The relationship is governed by air transportation laws such as the Montreal Convention and the Civil
Code, and the specific terms of the contract of carriage, which outline the responsibilities of the airline
and the rights of passengers or consignors.

Case Studies

1. Morris and Whittier vs. Scandinavian Airlines System (SAS):

Morris and Whittier arrived late for check-in, missing the airline’s cut-off time for boarding. SAS
denied them boarding due to the closure of the flight manifest. The court ruled in favor of SAS,
finding no bad faith or negligence in denying boarding to late-arriving passengers.

2. Ongsiako vs. Pan American (PAN AM):

Ongsiako's luggage was left in Manila due to late check-in. PAN AM argued insufficient time to
load his bag. However, accepting the baggage without ensuring it would be transported was
deemed gross negligence. PAN AM was held liable for damages, as their actions amounted to
bad faith.

Key Takeaways:
  For domestic flights, the Civil Code applies.

 For international flights, the Montreal Convention governs liability.

 Airlines must exercise extraordinary diligence in handling passengers and cargo.

 Breaches of air carriage contracts, such as delays, lost luggage, or downgraded accommodations,
may lead to liability.

When is the Warsaw Convention Applicable?

The Warsaw Convention governs the international carriage of persons, luggage, or goods by aircraft,
whether for payment or as a gratuitous service performed by an air transport enterprise. It applies
specifically to "international carriage," as defined by the Convention.

Definition of International Carriage

A carriage is considered international if, according to the contract of carriage:

1. Place of Departure and Destination: These are in the territories of two different countries that
are parties to the Warsaw Convention (High Contracting Parties), or

2. Agreed Stopping Place: If the departure and destination are in the same country, but there is an
agreed stopping place in another country, whether or not that country is a High Contracting
Party.

If no such stopping place is agreed upon, the carriage is not deemed international under the Warsaw
Convention.

Example

 Applicable: A passenger travels from Manila, Philippines, to Tokyo, Japan, under a contract
specifying these points as departure and destination. Both countries are High Contracting
Parties.

 Not Applicable: A passenger flies domestically within the Philippines, from Manila to Cebu, with
no agreed stopping place outside the country. This is not considered international carriage under
the Warsaw Convention.

Liabilities of Air Carriers Under the Warsaw Convention

The Warsaw Convention imposes liabilities on air carriers in the following situations:

1. Death or Injury to Passengers

o Occurring while on board the aircraft, embarking, or disembarking.

2. Loss, Destruction, or Damage to Baggage

o Covers incidents during the period baggage is under the carrier's custody, including
airports.
 3. Flight Delays

o Carriers are liable for damages caused by delays but not for incidents like "bumping off,"
where passengers with confirmed reservations are denied boarding.

Example

 Loss or Damage: A checked-in suitcase is damaged during transit. The carrier is liable for
compensation.

 Delay: A flight from Manila to Tokyo is delayed by several hours, causing a missed connection.
The carrier is responsible for the resulting inconvenience.

Legal Effects of the Warsaw Convention

1. Time Limits for Filing Claims

o A claim must be filed within two years from:

 The date of the aircraft's arrival at the destination,

 The date it should have arrived, or

 The date when the transportation was interrupted.

2. Liability Limits

o Under the Warsaw Convention:

 For goods: US$20 per kilogram.

 For unchecked baggage: US$400.

 For death or injury: US$25,000.

o The Montreal Convention later revised these limits, increasing them significantly and
adopting a two-tier system for passenger injury or death claims.

Example

A passenger's luggage is destroyed in transit, and the carrier offers compensation based on the liability
limit. Under the Warsaw Convention, the passenger could claim up to US$20 per kilogram unless a
higher value was declared.

Rewritten Explanation and Example: Liability Under the Montreal Convention

The Montreal Convention establishes a modern framework for airline liability, enhancing passenger
rights compared to its predecessor, the Warsaw Convention. Key aspects include:

A. Death or Injury to Passengers

The liability framework under the Montreal Convention for passenger death or bodily injury consists of
two tiers:

1. First Tier: Strict Liability

o Conditions: The airline is liable for damages if the accident causing death or injury
occurred onboard the aircraft or during embarking/disembarking operations.

o Liability Limit: Up to 113,100 Special Drawing Rights (SDRs) (approximately USD

170,000).

o Key Points:

 The airline is liable regardless of negligence.

 Liability may be reduced or waived if the passenger’s contributory negligence

caused the damage.

2. Second Tier: Conditional Liability

o Conditions: For damages exceeding 113,100 SDRs, the airline is liable unless it proves:

 The accident was not due to its negligence or wrongful act.

 The damage was caused solely by a third party's negligence.

o Burden of Proof: The airline must demonstrate its lack of fault.

Example:

o A passenger suffers fatal injuries during a flight due to turbulence caused by the airline's
failure to inspect the aircraft properly. Under the first tier, the airline must pay damages
up to 113,100 SDRs. For claims exceeding this amount, the airline must prove it was not
negligent to avoid additional liability.

B. Damage to Baggage

1. Checked Baggage:

o The airline is liable if destruction, loss, or damage occurs while the baggage is in its
custody.

o Exceptions: No liability if damage arises from the baggage’s inherent defects or poor
quality.

2. Unchecked Baggage (e.g., carry-on items):

o The airline is liable only if damage is due to its negligence or that of its agents.

3. Liability Limit:
 o The airline's liability is capped at 1,131 SDRs per passenger (around USD 70 per kilogram
of baggage).

o Higher Recovery: Passengers can claim beyond this limit if:

 They declare the baggage's value at check-in and pay a supplementary fee.

Example:

o A passenger’s checked baggage containing expensive jewelry is damaged during transit.

If the passenger did not declare its value at check-in, the airline’s liability is limited to
1,131 SDRs.

C. Filing a Legal Action

Under the Montreal Convention, a passenger may file a claim for damages in:

1. The court where the airline is domiciled.

2. The court where the airline has its principal place of business.

3. The court where the contract for carriage was made.

4. The court of the passenger’s destination.

5. The court where the passenger has permanent residence, provided the airline operates services
to and from that location.

Example:

o A passenger injured in an airline accident can file a claim in their home country if the
airline services that jurisdiction.

D. Transition from the Warsaw Convention

1. Increased Limits: Liability under the Montreal Convention is significantly higher than the Warsaw
Convention’s limit of $25,000.

2. No Full Defense: Airlines can no longer avoid liability by claiming they took all reasonable
measures to prevent damage.

Example:

o If a passenger's baggage is lost under the Warsaw Convention, compensation was

capped at $20 per kilogram. Under the Montreal Convention, this amount has increased
to approximately $70 per kilogram.

E. Local Law Claims

The Montreal Convention preempts local laws for claims it covers. Once the 2-year statute of limitations
expires, a passenger cannot file a claim under local law.

Example:

 A passenger cannot pursue a claim under Philippine law for lost baggage if the 2-year period for
filing under the Montreal Convention has lapsed.

Simplified Explanation with a Clear Example and Jurisprudence

The Warsaw Convention regulates specific cases of liability for international air carriers, such as
passenger injuries, deaths, or damage to baggage. However, the Supreme Court has ruled that the
Warsaw Convention does not apply exclusively to all disputes involving air travel. In particular, it does
not cover instances involving tortious acts, bad faith, or misconduct by airline employees or agents. In
such cases, the provisions of the Civil Code of the Philippines may apply instead. This allows for broader
claims, including compensation for emotional harm or injuries caused by willful misconduct.

Key Cases and Examples

Case 1: KLM Royal Dutch Airlines and Aer Lingus

In this case, passengers Consuelo and Rufino were offloaded from a flight and insulted by an airline
manager who referred to them as "ignorant Filipinos." The Supreme Court ruled that the Warsaw
Convention did not apply because there was no "accident or delay" as defined by the Convention.
Instead, the manager's willful misconduct constituted a tort under the Civil Code, for which KLM was
held liable as Aer Lingus’ principal.

Takeaway: When damages arise from bad faith or intentional misconduct, the Civil Code, not the
Warsaw Convention, governs the claim.

Case 2: Dr. Felipa Pablo vs. ALITALIA

Dr. Pablo, a professor, missed an important United Nations conference because ALITALIA delayed
returning her luggage containing critical materials for her presentation. The Court held that the Warsaw
Convention could not limit liability because the harm caused went beyond a mere delay—it was a special
injury to her reputation and professional standing.

Takeaway: When harm results in reputational damage or other significant injuries beyond material loss,
the Warsaw Convention does not apply, and the Civil Code may provide a remedy.

Case 3: Mejia vs. Philippine Airlines (PAL)

A passenger’s microwave oven was damaged during transport. Despite the Convention's limitations on
liability, PAL was held liable for the full amount of damages because its personnel had misled the
passenger into not declaring the value of the item.
Takeaway: When an airline's own actions prevent a passenger from protecting their interests, the Civil
Code governs the claim, and liability can exceed the Convention's limitations.

Case 4: Simplicio vs. PAL and Singapore Airlines

A passenger was prevented from boarding a connecting flight due to the airline’s failure to endorse his
ticket. The resulting distress, humiliation, and inability to join an event were ruled as compensable under
the Civil Code’s provisions on torts, not under the Warsaw Convention.

Takeaway: Claims involving emotional harm or gross negligence fall outside the Warsaw Convention’s
scope.

Key Jurisprudence:

1. Philippine Airlines, Inc. v. Simplicio G. Abaya (G.R. No. 178027, February 13, 2009)

o Emotional harm caused by negligence or bad faith can be compensated under the Civil
Code.

2. KLM Royal Dutch Airlines v. Court of Appeals (G.R. No. L-20903, December 2, 1974)

o Tortious conduct or willful misconduct by airline agents is not governed by the Warsaw
Convention.

3. ALITALIA v. Felipa Pablo (G.R. No. 127253, March 16, 2000)

o Special injuries caused by breach of contract may be compensated outside the Warsaw
Convention.

Conclusion

While the Warsaw Convention provides a framework for claims involving passenger injuries, delays, or
baggage loss during international flights, it is not all-encompassing. Claims involving bad faith,
misconduct, or special injuries fall outside its coverage and are governed by the Civil Code or other
applicable laws. The same principles apply under the Montreal Convention, which replaced the Warsaw
Convention in many jurisdictions.

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