Lopez vs. Pan American World Airways

An airline that knowingly conceals the cancellation of confirmed first-class reservations and allows passengers to purchase and rely on first-class tickets it cannot honor is liable for breach of contract in bad faith, warranting moral and exemplary damages. Bad faith may consist of a breach of a known duty through a motive of interest or ill-will, and gross negligence may amount to bad faith.

The plaintiffs were Senator Fernando Lopez, his wife Maria J. Lopez, and their son-in-law and daughter, Alfredo Montelibano, Jr. and Milagros Lopez Montelibano; the defendant was Pan American World Airways, an international carrier. Their dispute concerned a contract of carriage for first-class accommodations on an international flight.

Senator Fernando Lopez, his wife Maria J. Lopez, their son-in-law Alfredo Montelibano, Jr., and their daughter Milagros Lopez Montelibano held reservations for first-class accommodations on PAN-AM Flight No. 2 from Tokyo to San Francisco on May 24, 1960. The reservations were made on March 29, 1960 through “Your Travel Guide” agency, specifically by Delfin Faustino, and PAN-AM’s San Francisco head office confirmed them on March 31, 1960. First-class tickets were subsequently issued by PAN-AM on May 21 and 23, 1960, and the total fare of P9,444 for all of them was fully paid before the tickets were issued.

As scheduled, Senator Lopez and party left Manila by Northwest Airlines on May 24, 1960, arriving in Tokyo at 5:30 P.M. of that day. As soon as they arrived, Senator Lopez requested Minister Busuego of the Philippine Embassy to contact PAN-AM’s Tokyo office regarding their first-class accommodations for that evening’s flight. PAN-AM’s Tokyo office informed Minister Busuego that it could not accommodate Senator Lopez and party in that trip as first-class passengers because the first-class seats were all booked up. Senator Lopez thereupon gave their first-class tickets to Minister Busuego to show to PAN-AM’s Tokyo office, but the latter firmly reiterated that there was no accommodation for them in first class, stating that they could not go in that flight unless they took the tourist class.

Due to pressing engagements awaiting Senator Lopez and his wife in the United States — he had to attend a business conference in San Francisco the next day and she had to undergo a medical check-up at Mayo Clinic, Rochester, Minnesota, on May 28, 1960 and needed three days rest before that in San Francisco — Senator Lopez and party were constrained to take PAN-AM’s flight from Tokyo to San Francisco as tourist passengers. Senator Lopez made it clear, as indicated in his letter to PAN-AM’s Tokyo office on that date (Exh. A), that they did so “under protest” and without prejudice to further action against the airline.

PAN-AM’s evidence sought to establish honest mistake. The first-class reservations of Senator Lopez and party were made on March 29, 1960 together with those of four members of the Rufino family, for a total of eight seats, as shown in their joint reservation card (Exh. 1). Subsequently, on March 30, 1960, two other Rufinos secured reservations and were given a separate reservation card (Exh. 2), and a new two-page reservation card (Exhs. 3 and 4) was then made for the original eight passengers, namely, Senator Lopez and party and four members of the Rufino family. On April 18, 1960, “Your Travel Guide” cancelled the reservations of the Rufinos, and Mariano Herranz, PAN-AM’s reservations employee at its Escolta, Manila office, sent a telex message to PAN-AM’s head office at San Francisco but mistakenly cancelled all the seats that had been reserved, including those of Senator Lopez and party. The next day Herranz discovered his mistake upon seeing the reservation card newly prepared by his co-employee Pedro Asensi for Senator Lopez and party to the exclusion of the Rufinos (Exh. 5), and he sent another telex wire to the San Francisco head office stating his error and asking for reinstatement of the four first-class seats reserved for Senator Lopez and party. San Francisco head office replied on April 22, 1960 that Senator Lopez and party were waitlisted and that it was unable to reinstate them. Herranz forgot the matter and told no one about it except his co-employee, either Armando Davila or Pedro Asensi or both. On April 27, 1960, Davila phoned PAN-AM’s ticket sellers at its Manila Hotel office and confirmed the reservations of Senator Lopez and party. PAN-AM’s reservations supervisor Alberto Jose discovered Herranz’s mistake after “Your Travel Guide” phoned on May 18, 1960 to state that Senator Lopez and party were going to depart as scheduled. Jose sent telex wires to the San Francisco head office on May 18 and 19, 1960 to report the error and ask that the reservations be held, but San Francisco replied on May 19, 1960 that it regretted being unable to confirm Senator Lopez and party because the flight was solidly booked (Exh. 7). Jose sent a third telex wire on May 20, 1960 to PAN-AM’s offices at San Francisco, New York (Idlewild Airport), Tokyo and Hongkong, asking all-out assistance towards restoring the cancelled spaces and for report of cancellations at their end. San Francisco head office reiterated on May 20, 1960 that it could not reinstate the spaces and referred Jose to the Tokyo and Hongkong offices (Exh. 8), while the Tokyo office wired Jose on May 20 that it would do everything possible (Exh. 9). Expecting that some cancellations would be made before flight time, Jose decided to withhold from Senator Lopez and party, or their agent, the information that their reservations had been cancelled. Because Davila had previously confirmed the first-class reservations to PAN-AM’s ticket sellers at the Manila Hotel office, the latter sold and issued the corresponding first-class tickets on May 21 and 23, 1960.

According to plaintiffs, PAN-AM acted in bad faith because it deliberately refused to comply with its contract to provide first-class accommodations out of racial prejudice against Orientals, and they adduced evidence of two previous instances of alleged racial discrimination by PAN-AM against Filipinos in favor of “white” passengers. Benito Jalbuena bought a first-class ticket from PAN-AM on April 13, 1960, confirmed it on April 15, 1960 for the Tokyo-Hongkong flight of April 20, 1960, and PAN-AM confirmed it on April 20, 1960; at the airport he and another Oriental, Mr. Tung, were asked to step aside while other passengers, including “white” passengers, boarded, and PAN-AM officials told them that one of them had to stay behind, and since Mr. Tung was going all the way to London, Jalbuena was chosen to be left behind, with PAN-AM officials explaining only that there was “some mistake.” Cenon S. Cervantes and his wife, on PAN-AM Flight No. 6 on September 29, 1958 from Bangkok to Hongkong, had to take tourist class although they had first-class tickets, which they had previously confirmed, because their seats in first class were given to “passengers from London.” The tickets issued to Alfredo Montelibano, Jr. on May 21, 1960 (Exh. 22) and to Mrs. Alfredo Montelibano, Jr. on May 23, 1960 (Exh. 23) stated the reservation status as “OK.” PAN-AM subsequently promoted Herranz, giving him a salary increase in June of the following year, without investigating or suspending him. The CFI found PAN-AM liable and acted in bad faith in breaching its contracts with plaintiffs.

• Bad Faith and Racial Discrimination: Plaintiffs-appellants argued that PAN-AM deliberately refused to comply with its contract to provide first-class accommodations out of racial prejudice against Orientals, and they cited the Jalbuena and Cervantes incidents as evidence of an oft-repeated practice of racial discrimination by PAN-AM against Filipinos in favor of “white” passengers.
• Damages: Plaintiffs-appellants argued that the damages awarded in their favor were insufficient and sought an increase to a total of P650,000; in their motion for reconsideration they asked that moral damages be increased to P400,000 and that 6% interest per annum on the amount of the award be granted.

• Bad Faith: Defendant-appellant admitted from the start that it breached its contracts with plaintiffs to provide first-class accommodations, but took issue with the finding that it acted in bad faith, asserting that its failure to provide first-class accommodations was due to honest error of its employees.
• Counterclaim: Defendant interposed a counterclaim for attorney’s fees of P25,000.

• Bad Faith: Whether PAN-AM acted in bad faith in breaching its contracts to provide first-class accommodations to plaintiffs.
• Moral Damages: Whether moral damages are recoverable and, if so, in what amounts for each plaintiff.
• Exemplary Damages: Whether exemplary or corrective damages may be awarded and in what amount.
• Attorney’s Fees: Whether the stipulated attorney’s fees are reasonable and recoverable.
• Interest: Whether legal interest should be imposed on the damages and from what date.

• Bad Faith: Yes. PAN-AM breached its contracts in bad faith because it knowingly withheld the cancellation of plaintiffs’ first-class reservations and allowed them to believe those reservations remained valid; even its mistakes amounted to gross and reckless negligence.
• Moral Damages: Yes. Moral damages are recoverable in breach of contract where the defendant acted fraudulently or in bad faith under Art. 2220, New Civil Code; the SC awarded a total of P200,000 divided as P100,000 for Fernando Lopez, P50,000 for Maria J. Lopez, and P25,000 each for Alfredo Montelibano, Jr. and Milagros Lopez Montelibano.
• Exemplary Damages: Yes. Exemplary or corrective damages may be imposed in addition to moral damages where the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner under Arts. 2229 and 2232, New Civil Code; the SC awarded P75,000.
• Attorney’s Fees: Yes. A written contract for attorney’s services controls unless unconscionable or unreasonable under Sec. 24, Rule 138, Rules of Court; the SC awarded P50,000.
• Interest: Yes. The SC imposed legal interest at 6% per annum on the moral and exemplary damages from December 14, 1963, the date of the amended decision, until fully paid.

• Bad Faith: The SC defined bad faith as “a breach of a known duty through some motive of interest or ill-will” and held that self-enrichment may be malice. It found from PAN-AM’s own evidence that PAN-AM first cancelled plaintiffs’ reservations by mistake and thereafter deliberately and intentionally withheld the fact of cancellation, letting plaintiffs believe their first-class reservations stood valid and confirmed. PAN-AM misled them into purchasing first-class tickets when it had none, placing itself in a position to breach unless there was a last-minute cancellation. Alberto Jose knew as of May 18, 1960 that the reservations had been cancelled and by May 20, 1960 that San Francisco finally could not reinstate them, yet decided to withhold the information; the tickets stated “OK”; Herranz was promoted. Even granting the mistakes, the negligence was gross and reckless as to amount to malice or bad faith under Fores vs. Miranda and Necesito vs. Paras. The SC found it unnecessary to further discuss plaintiffs’ evidence of racial discrimination because the facts admitted in defendant’s evidence already established bad faith, and facts admitted in the course of trial need not be proved under Sec. 2, Rule 129, Rules of Court.
• Moral Damages: Under Art. 2220, moral damages are recoverable in breach of contract where defendant acted fraudulently or in bad faith. The SC found plaintiffs suffered social humiliation, wounded feelings, serious anxiety, and mental anguish because they had first-class tickets but were compelled to travel tourist class; at stop-overs they were expected to be among first-class passengers by those awaiting them. For Senator Lopez, the SC considered his position as Senate President Pro Tempore, former Vice-President, and his engagements in the United States, including a banquet in his honor, and awarded P100,000. For Mrs. Lopez, the SC considered her shared prestige and humiliation and physical discomfort during the 13-hour trip, with narrower tourist seating and little reclining space, and awarded P50,000. For the Montelibanos, the SC considered their shared prestige and humiliation; although they allegedly asked to change to tourist class, they had paid for first class and expected it; they asked P37,500 each on appeal but had been satisfied with P25,000 each in their motion for reconsideration, so the SC awarded P25,000 each.
• Exemplary Damages: Under Arts. 2229 and 2232, exemplary or corrective damages may be imposed in addition to moral damages in breach of contract where defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner. The SC found PAN-AM breached in bad faith and imposed P75,000 as exemplary or corrective damages, in an amount sufficient to effectively deter similar breaches in the future by PAN-AM or other airlines.
• Attorney’s Fees: Under Sec. 24, Rule 138, a written contract for attorney’s services controls the amount to be paid unless found unconscionable or unreasonable. The SC found the June 1, 1960 written contract (Exh. F) with Atty. Vicente J. Francisco stipulated P25,000 upon termination of the case in the CFI and an additional P25,000 if appealed to the SC. Considering the subject matter, counsel’s professional standing, and the extent of services rendered—including 22 days of trial over three years, preparation of pleadings, depositions, memoranda, and briefs of 45 and 265 printed pages—the SC found the amount reasonable and awarded P50,000. It also noted that defendant’s counsel valued his own services at P50,000.
• Interest: The SC imposed interest at the legal rate of 6% per annum on the moral and exemplary damages from December 14, 1963, the date of the amended decision of the CFI Rizal, until said damages are fully paid.

• Bad faith in breach of contract — Bad faith means a breach of a known duty through some motive of interest or ill-will; self-enrichment or fraternal interest, and not personal ill-will, may be the motive but it is malice nevertheless. The SC applied it to PAN-AM’s deliberate withholding of the cancellation to retain the Lopez party as passengers.
• Gross negligence as bad faith — Even granting mistakes, negligence so gross and reckless as to amount to malice or bad faith may support an award of moral and exemplary damages. The SC applied it to the series of errors and the failure to notify plaintiffs.
• Moral damages in breach of contract — Moral damages are recoverable in breach of contract where the defendant acted fraudulently or in bad faith under Art. 2220, New Civil Code. The SC awarded them for social humiliation, wounded feelings, serious anxiety, mental anguish, and physical discomfort.
• Exemplary damages in breach of contract — Exemplary or corrective damages may be imposed by way of example or correction for the public good, in addition to moral damages, where the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner under Arts. 2229 and 2232, New Civil Code. The SC awarded P75,000 to deter similar breaches by airlines.
• Stipulated attorney’s fees — A written contract for attorney’s services controls the amount to be paid unless found by the court to be unconscionable or unreasonable under Sec. 24, Rule 138, Rules of Court. The SC upheld the P50,000 stipulated fees as reasonable.
• Damages and party standing — In determining damages, the SC considered the official, political, social, and financial standing of the offended parties on one hand and the business and financial position of the offender on the other, citing Domingding vs. Ng. The SC applied this to the Lopez party and PAN-AM.

• “For bad faith means a breach of a known duty through some motive of interest or ill-will (Spiegel vs. Beacon Participations, 8 NE 2d 895, 907).” — The SC’s definition of bad faith, which it used to characterize PAN-AM’s deliberate withholding of the cancellation.
• “Self-enrichment or fraternal interest, and not personal ill-will, may well have been the motive; but it is malice nevertheless.” — The SC quoted this to show that a motive of self-interest, not personal ill-will, can still amount to bad faith.
• “It may not be humiliating to travel as tourist passengers; it is humiliating to be compelled to travel as such, contrary to what is rightfully to be expected from the contractual undertaking.” — The SC used this to justify moral damages for the Lopez party’s forced tourist-class travel despite first-class tickets.
• “A written contract for an attorney’s services shall control the amount to be paid therefor unless found by the court to be unconscionable or unreasonable.” — The SC applied this rule in upholding the stipulated attorney’s fees.

• Spiegel vs. Beacon Participations, 8 NE 2d 895, 907 — Cited for the definition of bad faith as a breach of a known duty through some motive of interest or ill-will.
• Kamm vs. Flink, 113 N.J.L. 582, 175 A. 62, 99 A.L.R. 1, 7 — Cited for the proposition that self-enrichment or fraternal interest may be malice even without personal ill-will.
• Fores vs. Miranda, L-12163, March 4, 1959 — Cited for the rule that gross and reckless negligence may amount to malice or bad faith.
• Necesito vs. Paras, L-10605-06, June 30, 1958 — Cited together with Fores vs. Miranda for the same rule on gross negligence amounting to bad faith.
• Domingding vs. Ng, 55 O.G. 10 — Cited for considering the official, political, social, and financial standing of the offended parties and the business and financial position of the offender in determining damages.

• Article 2220, New Civil Code — Moral damages are recoverable in breach of contract where the defendant acted fraudulently or in bad faith; applied to award moral damages to the Lopez party.
• Articles 2229 and 2232, New Civil Code — Exemplary or corrective damages may be imposed in addition to moral damages in breach of contract where the defendant acted in a wanton, fraudulent, reckless, oppressive or malevolent manner; applied to award P75,000.
• Section 24, Rule 138, Rules of Court — A written contract for attorney’s services controls the amount to be paid unless unconscionable or unreasonable; applied to uphold the P50,000 attorney’s fees.
• Section 2, Rule 129, Rules of Court — Facts admitted in the course of trial need not be proved; applied because PAN-AM’s evidence admitted facts amounting to bad faith.
• Section 17, paragraph 3[5], Judiciary Act — Direct appeal to the SC may be taken where the value in controversy exceeds P200,000; applied to the appeals from the CFI Rizal.