Philippine Air Lines vs. Miano

In an action for breach of contract of carriage by air, moral damages are recoverable only if the carrier acted fraudulently or in bad faith; bad faith may not be presumed and must be established by clear and convincing evidence. Exemplary damages likewise require proof that the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Attorney’s fees cannot be awarded solely on the ground that a party was compelled to litigate and incur expenses to protect his rights.

On August 31, 1988, Florante A. Miano took Philippine Air Lines (PAL) flight PR 722, Mabuhay Class, from Manila to Frankfurt, Germany, with an onward connecting Lufthansa flight to Vienna, Austria. He checked in a suitcase weighing twenty kilograms without declaring a higher valuation. The suitcase failed to arrive with him in Vienna. It was delivered eleven days later at his hotel in Piestany, Czechoslovakia. Miano demanded compensation for a lost camera, transport costs, and damages. PAL disclaimed liability beyond the Warsaw Convention limit, asserting no bad faith. The trial court found no bad faith but nonetheless awarded moral and exemplary damages and attorney’s fees.

• The Flight and Missing Baggage: On August 31, 1988, Florante A. Miano took PAL flight PR 722 from Manila to Frankfurt in Mabuhay Class, with an immediate onward Lufthansa flight LH 1452 to Vienna. He checked in one brown suitcase weighing 20 kilograms without declaring a higher valuation. The suitcase contained money, documents, a Nikkon camera with zoom lens, suits, sweaters, shirts, pants, shoes, and other accessories.

• Non-Arrival and Eventual Delivery: Upon arrival in Vienna, Miano’s checked baggage was missing. He reported the loss to Lufthansa authorities and waited three hours before proceeding to Piestany, Czechoslovakia. The suitcase was delivered to his hotel in Piestany eleven days later, on September 11, 1988. Miano claimed that due to the delay he was forced to borrow money for clothes, incurred US$200.00 in transport costs for the luggage from Vienna to Piestany, and lost his Nikkon camera.

• Demand and PAL’s Response: In November 1988, Miano wrote PAL demanding P10,000.00 for the lost camera, US$200.00 for transporting the luggage, and P100,000.00 in damages. PAL replied that his letter had been forwarded to its legal department for investigation. Feeling his demand was ignored, Miano sued for damages.

• PAL’s Defense: PAL denied liability, asserting it received no report of mishandled baggage on flight PR 722 and no tracer telex from its Vienna station. It contended that if liable at all, its obligation was limited by the Warsaw Convention rate. PAL also impleaded Lufthansa via a third-party complaint, which was dismissed for failure to prosecute.

• Investigation and Cause of Delay: PAL’s Manager for Administration of Airport Services, Miguel Ebio, testified that Manila, the originating station, received no tracer telex. A tracer telex is an inter-station message regarding a passenger’s missing baggage. Upon inquiry from the Frankfurt station, it was discovered that the interline tag of Miano’s baggage had been accidentally removed. The usual practice was for destination stations to hold tagless baggage until properly identified; without a tracer telex, identification relied on the color and type of the baggage, leading to the eleven-day delay.

• Trial Court’s Findings: The trial court made an unequivocal finding that PAL did not act in bad faith or with malice. It observed that PAL exerted effort to assist Miano, conducted an investigation, and relayed information to him. Despite this finding, the trial court awarded moral damages of P40,000.00 as “just and fair,” exemplary damages of P20,000.00, attorney’s fees of P15,000.00, and US$200.00 as cost of transport.

• Absence of Bad Faith and Fraud: PAL maintained that it did not act with bad faith or malice; the delay resulted from the accidental removal of the baggage tag, and the carrier took reasonable steps to trace and deliver the suitcase. Thus, moral and exemplary damages were unwarranted.

• Limitation under Warsaw Convention: PAL contended that its liability, if any, was limited to the Warsaw Convention rate because the passenger did not declare a higher valuation and there was no showing of willful misconduct.

• Improper Award of Attorney’s Fees: PAL argued that attorney’s fees could not be based solely on the fact that the plaintiff was compelled to litigate.

• Entitlement to Damages: Miano maintained that the eleven-day delay caused him material prejudice, compelling him to borrow money, incur additional transport costs, and suffer the loss of a camera, thereby justifying the award of moral and exemplary damages and attorney’s fees as granted by the trial court.

• Moral Damages: Whether moral damages may be awarded in a breach of contract of carriage by air absent a finding of fraud or bad faith on the part of the carrier.

• Exemplary Damages: Whether exemplary damages may be granted where the carrier’s conduct was not shown to be wanton, fraudulent, reckless, oppressive, or malevolent.

• Attorney’s Fees: Whether attorney’s fees are recoverable simply because the plaintiff was compelled to litigate to enforce his claim.

• Moral Damages: The award of moral damages was deleted. Under Article 2220 of the Civil Code, moral damages in breach of contract are recoverable only where the defendant acted fraudulently or in bad faith. Bad faith cannot be presumed; it must be proved by clear and convincing evidence. The trial court itself categorically declared that PAL’s conduct was not attended by bad faith or malice. The uncontroverted evidence showed that PAL coordinated with its Central Baggage Services, traced the suitcase, and delivered it, and that the delay was caused by an accidentally removed interline tag—not by ill will or a dishonest purpose. Where bad faith is absent, liability for damages is limited to the natural and probable consequences of the breach and does not include moral damages.

• Exemplary Damages: The award of exemplary damages was deleted. Under Article 2232 of the Civil Code, exemplary damages in contractual or quasi-contractual cases require that the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The undisputed facts did not warrant such characterization. The mere fact of delay, without more, did not rise to the level of wanton or oppressive conduct.

• Attorney’s Fees: The award of attorney’s fees was deleted for lack of legal basis. The general rule is that attorney’s fees cannot be recovered as part of damages merely because a party was compelled to litigate. No other ground under the Civil Code was shown to justify the award. Since the awards of moral and exemplary damages were eliminated, attorney’s fees, being accessory, necessarily fell. PAL was willing to pay the just claim of US$200.00 under the Warsaw Convention, and no bad faith tainted its conduct to sustain a separate award of attorney’s fees.

• Bad Faith Cannot Be Presumed; Clear and Convincing Evidence Required — Under the Civil Code, bad faith in breach of contract is not presumed. It must be established by clear and convincing evidence. The unbroken jurisprudence holds that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach, which do not include moral damages. This doctrine was applied to negate the award of moral damages because the trial court itself found no bad faith.

• Requisites for Moral Damages in Breach of Contract (Art. 2220, Civil Code) — Moral damages in breach of contract are awarded only upon proof of fraud or bad faith on the part of the defendant. Bad faith implies a breach of a known duty through some motive of interest or ill will. In the absence of such showing, moral damages are unavailable.

• Requisites for Exemplary Damages in Contracts and Quasi-Contracts (Art. 2232, Civil Code) — Exemplary damages are recoverable only where the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The mere non-performance or delay, without an accompanying abusive or deliberate disregard of the plaintiff’s rights, is insufficient.

• Attorney’s Fees Not Recoverable for Mere Litigation — Attorney’s fees are not recoverable as part of damages simply because a party was compelled to litigate or incurred expenses to protect and enforce a claim. A legal basis independent of the fact of litigation must exist. The policy disfavors placing a premium on the right to litigate.

• “Bad faith under the law cannot be presumed; it must be established by clear and convincing evidence. Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the breach of the obligation which the parties had foreseen or could reasonably have foreseen. The damages, however, will not include liability for moral damages.”

• “Absent a finding as to the bad intention of defendant PAL, this court finds it appropriate to apply the Warsaw Convention with respect to the liability of Air Carriers.” (Quoting the RTC’s own finding, which the Supreme Court treated as fatal to the award of moral damages.)

• “The fact that private respondent was compelled to litigate and incur expenses to protect and enforce his claim did not justify the award of attorney’s fees. The general rule is that attorney’s fees cannot be recovered as part of damages because of the policy that no premium should be placed on the right to litigate.”

• LBC vs. Court of Appeals, G.R. No. 108670, September 21, 1994 — Followed. Articulated the rule that bad faith must be proved by clear and convincing evidence and that absent such proof, moral damages are not recoverable in breach of contract.

• Lopez, et al. vs. Pan American World Airways, No. L-22415, March 30, 1966, 16 SCRA 431 — Cited for the definition of bad faith as a breach of a known duty through some motive of interest or ill will.

• Albenson Enterprises Corp. vs. Court of Appeals, G.R. No. 88694, January 11, 1993, 217 SCRA 16 — Cited for the requirement that exemplary damages in contract or quasi-contract require wanton, fraudulent, reckless, oppressive, or malevolent conduct.

• Firestone Tire & Rubber Company of the Philippines vs. Ines Chaves, No. L-17106, October 19, 1966, 18 SCRA 356 — Cited for the rule that attorney’s fees are not recoverable merely because a party was compelled to litigate.

• Article 2220, Civil Code — Provides that moral damages are recoverable in breaches of contract where the defendant acted fraudulently or in bad faith. Applied to hold that the trial court’s express negation of bad faith barred moral damages.

• Article 2232, Civil Code — Provides that in contracts and quasi-contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to delete exemplary damages due to absence of such conduct.

• Warsaw Convention — The international convention governing liability of air carriers. The trial court and the Supreme Court recognized its applicability, limiting PAL’s liability to US$200.00 for the transportation cost of the delayed luggage, there being no finding of willful misconduct.

Narvasa, C.J., Bidin, Regalado, and Mendoza, JJ., concurred.

None. The decision was unanimous.