CHAPTER I

I. TRANSPORATION IN GENERAL

What is transportation?

Transportation simply defined, is the movement of things or

persons from one place to another, whether by land, by
water or by air. The word “transportation” in its practical
signification includes waiting time, loading and
unloading, stopping in transit, and all other accessorial
services in connection with the loaded movement.

What laws govern contracts of transportation by land, sea or

air within the Philippines? (1966 & 1969 Bar Exams)

The applicable laws to contracts of transportation by land, sea or

air within the Philippines are:

(1) The New Civil Code, particularly the section on Common

Carriers (Arts.1732-1766);
(2) On matters not regulated by the New Civil Code, the Code of
Commerce; and
(3) Special laws such as the Carriage of Goods by Sea Act;
Salvage Law; Public Service Act; Land Transportation and
Traffic Code; Tariff and Customs Code and the Civil
Aeronautics Act.

What is the nature of a contract of transportation or

carriage?
A contract of transportation generates a relation attended with
public duty. Hence, neglect or malfeasance of the carrier’s
employees gives ground for an action for damages.

Read: Pan American World Airways, Inc. v. IAC, 153 SCRA

521;
Zulueta vs. Pan American World Airways, Inc., 43 SCRA 397

What is a carrier in transportation?

A carrier is one who undertakes the transfer of persons or

property from one place to another for hire, or gratuitously.
He may either be a common carrier or a private carrier.

PUBLIC UTILITIES

What is a Public Utility?

A public utility is a business or service engaged in

regularly supplying the public with one commodity or
service of public consequence such as electricity, gas,
water, transportation, telephone or telegraph service.

To constitute a public utility, the facility must be

necessary for the maintenance of life and occupation of the
residents. However, the fact that a business offers services
or goods that promote public good and serve the interest of
the public does not automatically make it a public utility.
 Public use is not synonymous with public interest. The
term public utility implies public use and service to the
public. The principal determinative characteristic of a
public utility is that of service to or readiness to serve an
indefinite public or portion of the public as such which
has a legal right to demand and receive its services or
commodities.

Constitutional Provisions on Public Utilities

“NATIONALITY RULE”

Section 6. The use of property bears a social function, and all

economic agents shall contribute to the common good.
Individuals and private groups, including corporations,
cooperatives, and similar collective organizations, shall have the
right to own, establish, and operate economic enterprises,
subject to the duty of the State to promote distributive justice
and to intervene when the common good so desires. (Article XII,
1987 Constitution)

Section 11. No franchise, certificate, or any other form of

authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens;
nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under
the condition that it shall be subject to amendment, alteration, or
repeal by the Congress when the common good so requires. The
State shall encourage equity participation in public utilities by
the general public (i.e., initial public offering or IPO of shares).
The participation of foreign investors in the governing body of
any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be
citizens of the Philippines.

Section 17. In times of national emergency, when the public

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

Example: (1) During Martial Law – takeover of MERALCO,

PLDT, radio stations, etc; (2) During the water crisis in Manila
(1994) – temporary takeover of Maynilad for rehabilitation

Section 19. The State shall regulate or prohibit monopolies

when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.
A. Definition, coverage and discussion of transportation law
in general

A.1 Nature of a Certificate of Public Convenience

1. Cogeo-Cubao Operator & Drivers Association v. CA, 207

SCRA 343;

Under the Public Service Law, a certificate of public

convenience can be sold by the holder thereof
because it has considerable material value and is
considered a valuable asset. Although there is no
doubt that it is a private property, it is affected
with public interest and must be submitted to the
control of the government for the common good.

Hence insofar as the interest of the State is involved, a certificate

of public convenience does not confer upon the
holder any proprietary right or interest or
franchise in the route covered thereby and in the
public highways.

However, with respect to other persons and other public utilities,

a certificate of public convenience as property,
which represents the right and authority to
operate its facilities for public service, cannot be
taken or interfered with without due process of
 law. Appropriate actions may be maintained in
courts by the holder of the certificate against
those who have not been authorized in
competition with the former and those who
invade the rights which the former has pursuant
to the authority granted by the Public Service
Commission.

Lastly, a certificate of public convenience could not be sold

when the subject of the certificate was no longer
operational.
(Cohon v. CA, 188 SCRA 719).

A.2 Scope of a Franchise

Certificates of public convenience have come to have a

considerable material value. They are valuable assets. In many
cases, the certificates constitute the cornerstone on which are
built the business of bus transportation. Certificates of public
convenience are included in term “property” in the broad sense
of the term and as species of property, are liable to execution.
(Raymundo v. Luneta Motor, 58 Phil 889)

A.2.1 Bar Problem 1995

Q. What requirements must be met before a certificate of public

convenience may be granted under the Public Service Act?

A: The following are the requirements for the granting of a

certificate of public convenience, to wit:
(a) The applicant must be a citizen of the Philippines, or a
corporation, co-partnership or association organized under the
laws of the Philippines and at least 60% of the stock or paid-up
capital of which must belong to the citizens of the Philippines.
(Sec. 16[a], CA 146, as amended);
(b) The applicant must prove public necessity;
(c) The applicant must prove that the operation of the public
service proposed and the authorization to do business will
promote the public interest in a proper and suitable manner. (Sec
16[a], CA 146, as amended);
(d) The applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its
operation.

A.2.2 Is the sea an extension of the highway?

Case: San Pablo v. Pantranco South Express, Inc., 153 SCRA

199;

FACTS: Pantranco is engaged in the land transportation business

to operate buses from Metro Manila to Bicol Region
and Eastern Samar. In 1980, it wrote MARINA
requesting authority to lease/purchase a vessel to be
issued for its project to operate a ferry boat service
from Matnog, Sorsogon, to Allen, Samar that will
provide service to company buses and freight trucks to
cross San Bernardo Strait. It justified this by saying
that the sea is an extension of the highway.
ISSUE: Whether the sea is a continuation of the highway.

HELD: No. The conveyance of passengers, trucks and cargo

from Matnog to Allen is certainly not a ferry boat
service but a coastwise or interisland shipping service.
Under no circumstance can the sea between Matnog
and Allen be considered a continuation of the
highway. While a ferryboat service has been
considered a continuation of the highway when
crossing rivers or even lakes, which are small body of
waters separating the land, however, when as in this
case the two terminals, Matnog and Allen are
separated by an open sea it cannot be considered as a
continuation of a highway.

The applicant should secure a separate certificate of public

convenience for the operation of an interisland of
coastwise shipping service in accordance with the
provisions of law. Its certificate of public convenience
as a bus transportation cannot be merely amended to
include this water service under the guise that it is a
mere private ferry service.

A.2.3 Grounds for revocation of certificate of public

convenience

Case: Marzanal v. Ausejo, 164 SCRA 36;

Certificate of public convenience may be validly revoked when
there is willful and contumacious violation of the
order, rule or regulation of the Commission or any
provision of the Act.

A.3 Prior Operator Rule

“Prior Operator Rule” means that before permitting a

new operator to invade the territory of another already
established with a certificate of public convenience, the prior
operator must first be given the opportunity to extend its service
in order to meet public needs in the matter of transportation
(Mandaluyong Bus vs. Francisco, 32 SCRA 405; Javier vs.
Orlanes, 53 Phil 368)

It means that a public utility operator should be shielded

from ruinous competition by affording him an opportunity to
improve his equipment and service before allowing a new
operator to serve in the same territory he covers. (Mandaluyong
Bus vs. Francisco, 32 SCRA 405)

Thus, where two operators are more than enough to serve

the public, there is no reason to permit a third operator to engage
in competition with them. (Yangco vs. Esteban, 58 Phil. 346)

A.3.1 “Ruinous Competition”

 In order to prove ruinous competition, the mere possibility
of reduction in income of an existing operator holding a public
service does not, of itself, establish that issuing a permit to
another to operate within the same territory will result in ruinous
competition.

To prove the latter, it should be shown that the oppositor

will not obtain sufficient profits to pay a dividend or reasonable
interest upon invested capital (Halili vs. Ice and Cold Storage
Industries, Inc., 77 phil. 823)

A claim, therefore, by older operators that ruinous

competition would result from extending or making permanent
the certificates of more taxi cab in the Manila area could not be
seriously considered in the absence of clear-cut evidence of
resultant loss (Manila Yellow Taxicab vs. P.S.C, L-2875, Oct 31,
1951)

A.3.1 When will the prior operator rule not apply

(a) Where public interest would be better served by the new

operator (Guico vs. Estate of F.P. Buan, L-9769, August 30,
1979), as when the operator has failed, despite ample time and
opportunity given to it by the Commission, to render adequate,
sufficient and satisfactory service and had violated the important
conditions of its certificate. The protection given to prior
operators refer only to operators of good standing (Rizal light &
Co., Inc. vs. Mun. of Morong, Rizal, 25 SCRA 286). The Prior
Operator Rule cannot take precedence over the convenience of
the public if the resulting competition will benefit the public
through the improvement in the service and reduction in retail
prices. (Intestate Estate of Teofilo M. Tiongson vs. Public
Service Commission, 36 SCRA 241)

(b) Where the old operator has failed to make an offer or to meet
the increase in traffic (Yellow Taxicab Co., Inc. vs. Castelo,
L-13910, May 30, 1960)

(c) The prior operator rule does not apply where the certificate
of public convenience granted to the applicant is a maiden
franchise, which does not overlap with the entire route of the old
operator but only a short portion thereof as convergence point.
(Mandbusco, Inc. v. Francisco, 32 SCRA 405)

(d) If the application of the rule will be conducive to monopoly

of the service, and contrary to the principle that promotes
healthy competition (Villa Rey Transit, Inc. vs. Pangasinan
Trans. Co., Inc., 5 SCRA 234)

(e) The prior operator rule applies only when the old operator
has made an offer to meet the increase in traffic and not when
another operator, even a new one, has made the offer to service
the new line or increase the service of said line (Yellow Taxicab
Co., Inc. vs. Castelo, L-13910, May 30, 1960). The rule protects
only those who are vigilant in meeting the needs of the
travelling public (Raymundo Transportation Co. vs. Cerda,
L-7880, May 18, 1956)
(f) While as a rule, a pioneer operator should be given the
preference to cover the required units when expansion is needed,
such cannot favor him where he has completely failed to comply
with the requirement to register and operate the additional units
for more than 3 years, thus giving the impression that he has
completely abandoned the service insofar as the units in
question are concerned. (Halili v. Heras, 10 SCRA 769)

A.3.2 Bar Problem (1979)

Q: A bus line’s service between Manila and Malolos is

satisfactory. A new road is opened between said points, and
a new carrier applies for a certificate of public convenience
to operate a bus line along the new road. The old bus line
opposes, claiming that it should first be given an
opportunity to extend its service. Which party should
prevail? Reason.

A: Where all conditions being equal, priority in the

filing of application for certificate of public convenience
becomes an important factor in the granting thereof; so the
new carrier who applies first should prevail. (See:
Batangas Transportation v. Olanes, 52 Phil 455)

A.4 Kabit System

A.4.1 Definition and Nature of the Kabit System

 Lita Enterprises vs. Intermediate Appellate
Court
(129 SCRA 464)

FACTS:

Spouses Nicasio Ocampo and Francisca Garcia

(private respondents) purchased in installment from
the Delta Motor Sales Corporation five (5) Toyota
Corona Standard cars to be used as taxi. Since they
had no franchise to operate taxicabs, they contracted
with petitioner Lita Enterprise, Inc., through its
representative Manuel Concordia, for the use of the
latter’s certificate of public convenience for a
consideration of P1, 000.00 and a monthly rental of
P200.00/taxicab unit. For the agreement to take effect,
the cars were registered in the name of Lita
Enterprises, Inc. The possession, however, remains
with spouses Ocampo and Garcia who operated and
maintained the same under Acme Taxi, petitioner’s
trade name.

A year later, one of the taxicabs, driven by their

employee, Emeterio Martin, collided with a
motorcycle. Unfortunately the driver of the
motorcycle, Florante Galvez died from the injuries it
sustained.

Criminal case was filed against Emeterio Martin,

while a civil case was filed by the heir of the victim
against Lita Enterprises. In the decision of the lower
court Lita Enterprises was held liable for damages for
the amount of P25, 000.00 and P7, 000.00 for
attorney’s fees.

A writ of execution for the decision followed, 2

of the cars of the respondent’s spouses were levied and
were sold to a public auction.

On March 1973, respondent Ocampo decided to

register his taxicabs in his own name. The manager of
petitioner refused to give him the registration papers.
Thus, making spouses file a complaint against
petitioner. In the decision, Lita Enterprise was ordered
to return the three certificate of registration not levied
in the prior case.

Petitioner now prays that private respondent be

held liable to pay the amount they have given to the
heir of Galvez.

ISSUE: Whether or not petitioner can recover

from private respondent, knowing they are in an
arrangement known as “kabit system”.

HELD: “Kabit system” is defined as, when a

person who has been granted a certificate of
convenience allows another person who owns a motor
vehicle to operate under such franchise for a fee. This
system is not penalized as a criminal offense but is
recognized as one that is against public policy;
therefore, it is void and inexistent.

It is fundamental that the court will not aid either

of the party to enforce an illegal contract, but will
leave them both where it finds them. Upon this
premise, it was flagrant error on the part of both trial
and appellate courts to have accorded the parties relief
from their predicament. Specifically, Article 1412
states that:

“If the act in which the unlawful or forbidden

cause consists does not constitute a criminal offense,
the following rules shall be observed: “when the fault,
is on the part of both contracting parties, neither may
recover what he has given by virtue of the contract, or
demand the performance of the other’s undertaking.”

The principle of in pari delicto is evident in this

case. “the proposition is universal that no action arises,
in equity or at law, from an illegal contract; no suit can
be maintained for its specific performance, or to
recover the property agreed to sold or delivered, or
damages for its property agreed to be sold or
delivered, or damages for its violation.” The parties in
this case are in pari delicto, therefore no affirmative
relief can be granted to them.

See also: Baliwag Transit, Inc. v. CA, 147 SCRA

82)
The “kabit system” has been identified as one of the root causes
of the prevalence of graft and corruption in the
government transportation offices. In the words of
Chief Justice Makalintal, “this is a pernicious system
that cannot be too severely condemned. It constitutes
an imposition upon the good faith of the government.”

Case: Teja Marketing v Intermediate Appellate

Court, 148 SCRA 347;

FACTS:

The defendant bought from the plaintiff a

motorcycle with complete accessories and a sidecar.
Defendant gave a down-payment of P1,700.00 with a
promise that he would pay plaintiff the balance within
sixty days. The defendant, however, failed to comply
with his promise and so upon his own request, the
period of paying the balance was extended to one year
in monthly installments until January 1976 when he
stopped paying anymore. The plaintiff made demands
but just the same the defendant failed to comply with
the same thus forcing the plaintiff to consult a lawyer
and file this action for his damage... a chattel mortgage
(Exhibit 1) was constituted as a security for the
payment of the balance of the purchase price.

The records of the LTC show that the motorcycle

sold to the defendant was first mortgaged to the Teja
Marketing by Angel Jaucian though... the Teja
Marketing and Angel Jaucian are one and the same,
because it was made to appear that way only as the
defendant had no franchise of his own and he attached
the unit to the plaintiff's MCH Line. The agreement
also of the... parties here was for the plaintiff to
undertake the yearly registration of the motorcycle
with the Land Transportation Commission.

The plaintiff, however failed to register the

motorcycle... the plaintiff saying that the defendant
was hiding the motorcycle from him. Lastly, the
plaintiff explained also that though the ownership of
the motorcycle was... already transferred to the
defendant the vehicle was still mortgaged with the
consent of the defendant to the Rural Bank of
Camaligan for the reason that all motorcycle
purchased from the plaintiff on credit was
rediscounted with the bank.

Defendant purchased the motorcycle in question,

particularly for the purpose of engaging and using the
same in the transportation business and for this
purpose said trimobile unit was... attached to the
 plaintiff's transportation line who had the franchise, so
much so that in the registration certificate, the plaintiff
appears to be the owner of the unit.

petitioner Teja Marketing and/or Angel Jaucian

filed an action for "Sum of Money with Damages"
against private respondent Pedro N. Nale

ISSUES:

Whether or not respondent court erred in

applying the doctrine of "pari... delicto."

HELD: Although not outrightly penalized as a

criminal offense, the “kabit system” is invariably
recognized as being contrary to public policy and,
therefore, void and inexistent under Article 1409 of the
Civil Code. It is a fundamental principle that the court
will not aid either party to enforce an illegal contract, but
will leave them both where it finds them. Upon this
premise, it was flagrant error on the part of both the trial
and appellate courts to have accorded the parties relief
from their predicament. Article 1422 of the Civil Code
denies them such aid.

“Ex pacto illicit non oritur action.” [No action

arises out of an illicit bargain] is the time-honored
maxim that must be applied to the parties in the case at
bar. Having entered into an illegal contract, neither can
 seek relief from the courts, and each must bear the
consequences of his acts.

A.4.2 Effect in case of an accident

Where a jeepney is registered in the name of

authorized public utility operator but is actually owned
by another (a so-called “kabit” operator) and the same
bumped somebody thru the negligence of its driver, such
a jeepney can be sold at public auction to satisfy the
court’s award. It cannot be considered as a stranger’s
property. (Santos v. Sibug, 104 SCRA 520)

A.4.3 The “Kabit System” renders a certificate of public

convenience illusory

One of the primary factors considered in the granting

of a certificate of public convenience for the business of
public transportation is the financial capacity of the
holder of the license, so that liabilities arising from
accidents may be duly compensated. The kabit system
renders illusory such purpose and worse, may still be
availed by grantee to escape civil liability caused by a
negligent use of a vehicle owned by another and
operated under his license. If a registered owner is
allowed to escape liability by proving who the supposed
owner of the vehicle is, it would be easy for him to
transfer the subject vehicle to another who possesses no
 property with which to respond financially for the
damage done. Thus, for the safety of the passengers and
the public who may have been wronged and deceived
through the baneful kabit system, the registered owner of
the vehicle is not allowed to prove that another person
has become the owner so that he may thereby be relieved
of responsibility.

A.4.4 Bar Problem (2005)

Q: Procopio purchased an Isuzu passenger jeepney from Enteng,

a holder of a certificate of public convenience for the
operation of public utility vehicle plying the Calamba-Los
Baños route. While Procopio continued offering the
jeepney for public transport services he did not have the
registration of the vehicle transferred in his name. Neither
did he secure for himself a certificate of public convenience
for its operation. Thus, per records of the Land
Transportation Franchising and Regulatory Board, Enteng
remained its registered owner and operator. One day, while
the jeepney was travelling southbound, it collided with a
ten-wheeler truck owned by Emmanuel. The driver of the
truck admitted responsibility for the accident, explaining
that the truck lost its brakes.

Procopio sued Emmanuel for damages, but the latter moved to

dismiss the case on the ground that Procopio is not the real
party in interest since he is not the registered owner of the
jeepney.
Resolve the motion with reasons.

A: The motion to dismiss should be denied. The rule enjoining

the registered owner of the motor vehicle under the “kabit
system” from proving another person is the owner is
intended to protect third parties. Since this case does not
involve liability of the registered owner to third parties, and
it is the owner of the motor vehicle whi is seeking
compensation for damages, the rule is not applicable. (Lim
v. CA, 373 SCRA 394)