United Airlines, Inc. vs. Court of Appeals

Under the doctrine of lex loci contractus, Philippine law governs a contract of carriage where the airline ticket was purchased in Manila, even if performance occurred in the United States; recovery for denied boarding requires proof that the passenger complied with the carrier's check-in and reconfirmation procedures and that the carrier acted with fraud or bad faith, and overbooking not exceeding 10% of seating capacity is not deliberate bad faith.

Aniceto Fontanilla purchased from United Airlines, through its Manila agent Philippine Travel Bureau, three "Visit the U.S.A." tickets for himself, his wife, and his minor son Mychal, for travel within the United States. The dispute concerns the legal consequences of denied boarding and the applicable law and regulations governing compensation when an airline overbooks a flight. The Civil Aeronautics Board's Economic Regulations No. 7, as amended, provides the Philippine regulatory framework for boarding priority and denied boarding compensation, including exceptions for passengers who fail to comply with check-in and reconfirmation procedures and a 10% overbooking threshold for deliberate non-accommodation.

On March 1, 1989, Aniceto Fontanilla purchased from United Airlines, through the Philippine Travel Bureau in Manila, three "Visit the U.S.A." tickets for himself, his wife, and his minor son Mychal. The tickets covered routes from San Francisco to Washington on April 15, 1989; Washington to Chicago on April 25, 1989; Chicago to Los Angeles on April 29, 1989; and Los Angeles to San Francisco on May 1, 1989 for his wife and May 5, 1989 for Aniceto and his son. All flights had been confirmed by United Airlines. The family traveled to the United States as planned and used the first coupon from San Francisco to Washington.

On April 24, 1989, Aniceto bought two additional coupons each for himself, his wife, and his son from United Airlines at its Washington Dulles Airport office. After paying the penalty for rewriting their tickets, they were issued tickets with corresponding boarding passes bearing the words "CHECK-IN REQUIRED" for United Airlines Flight No. 1108, scheduled to leave Los Angeles to San Francisco at 10:30 a.m. on May 5, 1989. The cause of their non-boarding on that flight became the controversy.

According to private respondents, on May 5, 1989, Aniceto and his son arrived at the Los Angeles Airport and proceeded to the United Airlines counter, where an employee wearing a nameplate "LINDA" examined their tickets, punched something into her computer, and told them boarding would be in fifteen minutes. When the flight was called, they proceeded to the plane, but the stewardess at the gate did not allow them to board because they had no assigned seat numbers. They were directed back to the check-in counter, where Linda informed them the flight had been overbooked and asked them to wait. After they tried to explain their circumstances, Linda allegedly told them in an arrogant manner, "So what, I can not do anything about it." Three other passengers with Caucasian features were then graciously allowed to board. The plane took off with the Fontanillas' baggage, leaving them behind. When they complained, Linda allegedly gave them an ugly stare and said, "It's not my fault. It's the fault of the company. Just sit down and wait." She then allegedly retorted, "Who do you think you are? You lousy Flips are good for nothing beggars. You always ask for American aid," and remarked, "Don't worry about your baggage. Anyway there is nothing in there. What are you doing here anyway? I will report you to immigration. You Filipinos should go home." These statements were allegedly made in front of other people, causing shame, humiliation, and embarrassment, and the younger Fontanilla broke into tears. Linda later offered them $50.00 each with the words "Take it or leave it," which they declined. They went to the customer service counter, where a male employee shouted that he was ready for it and left. They were not booked on the next flight at 11:00 a.m. and were able to leave Los Angeles only at 12:00 noon on United Airlines Flight No. 803.

United Airlines gave a different version. According to United, the Fontanillas did not initially go to the check-in counter to get seat assignments for Flight 1108; they instead joined the queue boarding the aircraft without first securing seat assignments as required in their ticket and boarding passes. Having no seat assignments, the stewardess at the plane door instructed them to go to the check-in counter. When they did, Linda Allen, the United Airlines Customer Representative, informed them the flight was overbooked. She booked them on the next available flight and offered denied boarding compensation. Allen denied uttering the derogatory and racist words attributed to her.

The incident prompted the Fontanillas to file Civil Case No. 89-4268 for damages before the Regional Trial Court of Makati. After trial, the trial court found that the Fontanillas failed to check in as expressly required in their boarding passes, which was the reason they were not given seat numbers and were denied boarding. It also found that their claim of discriminatory remarks and insults was supported only by Aniceto Fontanilla's testimony, without corroboration from people who saw or heard the remarks, and that they had not proven by preponderance of evidence their entitlement to P1,650,000.00 in damages. The Court of Appeals, on the other hand, found an admission by United that the Fontanillas observed the check-in requirement, ruled that even assuming a failure to check in, United failed to comply with denied boarding procedures, and gave credence to Aniceto's claim that United's employees were discourteous, arbitrary, and discriminatory.

• Admission / Check-In Requirement: Petitioner argued that the Court of Appeals gravely erred in ruling that the trial court was wrong in failing to consider the alleged admission that private respondent observed the check-in requirement.
• Denied Boarding Rules: Petitioner argued that the Court of Appeals gravely erred in ruling that private respondent's failure to check in will not defeat his claims because the denied boarding rules were not complied with.
• Moral Damages: Petitioner argued that the Court of Appeals gravely erred in awarding P200,000.00 moral damages.
• Exemplary Damages: Petitioner argued that the Court of Appeals gravely erred in awarding P200,000.00 exemplary damages.
• Attorney's Fees: Petitioner argued that the Court of Appeals gravely erred in awarding P50,000.00 attorney's fees.

• Admission / Check-In Requirement: Whether the Court of Appeals erred in ruling that the trial court was wrong in failing to consider the alleged admission that private respondent observed the check-in requirement.
• Effect of Failure to Check In / Denied Boarding Rules: Whether the Court of Appeals erred in ruling that private respondent's failure to check in will not defeat his claims because the denied boarding rules were not complied with.
• Moral Damages: Whether the Court of Appeals erred in awarding P200,000.00 moral damages.
• Exemplary Damages: Whether the Court of Appeals erred in awarding P200,000.00 exemplary damages.
• Attorney's Fees: Whether the Court of Appeals erred in awarding P50,000.00 attorney's fees.

• Admission / Check-In Requirement: Yes. The Court of Appeals erred in treating United Airlines' answer as an implied admission that private respondents observed the check-in requirement. The no-knowledge denial did not apply because the fact was necessarily within United's knowledge, and private respondents waived the admission rule by presenting evidence and allowing rebuttal evidence.
• Effect of Failure to Check In / Denied Boarding Rules: Yes. The Court of Appeals erred. Philippine law applies under lex loci contractus, and under CAB Economic Regulations No. 7, a passenger must have complied with check-in and reconfirmation procedures; overbooking not exceeding 10% is not deliberate bad faith.
• Moral Damages: Yes. The Court of Appeals erred in awarding P200,000.00 moral damages. Private respondents failed to prove fraud or bad faith, including willful or deliberate overbooking exceeding 10% or the alleged discriminatory treatment.
• Exemplary Damages: Yes. The Court of Appeals erred in awarding P200,000.00 exemplary damages. Exemplary damages cannot be awarded absent proof of bad faith and entitlement to moral damages.
• Attorney's Fees: Yes. The Court of Appeals erred in awarding P50,000.00 attorney's fees, which lacked legal and factual basis.

• Admission / Check-In Requirement: The Court of Appeals concluded that United Airlines impliedly admitted the Fontanillas' check-in because paragraph 7 of the complaint alleged they checked in at 9:45 a.m. and United's answer admitted the allegation except to deny the 9:45 a.m. time for lack of knowledge or information. That conclusion was rejected. The rule allowing a no-knowledge answer to operate as a denial does not apply where the fact is so plainly and necessarily within the defendant's knowledge that an averment of ignorance must be palpably untrue. Whether private respondents checked in at United's designated counter at 9:45 a.m. on May 5, 1989 was necessarily within United's knowledge. Although there was no specific denial of compliance with the check-in requirement, United presented evidence that there was no compliance. Private respondents waived the rule on admission by presenting evidence of compliance and by allowing United to present rebuttal evidence. Under Yu Chuck vs. Kong Li Po, the object of the rule is to relieve a party of proving a fact necessarily within the adverse party's knowledge, but the plaintiff may waive the rule by introducing evidence and failing to object to the defendant's evidence in refutation; all such evidence is competent and the case must be decided thereon. Thus, the appellate court's implied-admission ruling was erroneous.
• Effect of Failure to Check In / Denied Boarding Rules: The Court of Appeals relied on the U.S. Code of Federal Regulation Part on Oversales, Section 250.6, which excepts from denied boarding compensation a passenger who does not comply with the carrier's contract of carriage or tariff provisions regarding ticketing, reconfirmation, check-in, and acceptability for transportation. That reliance was misplaced because Philippine law governs. Although the contract of carriage was to be performed in the United States, the tickets were purchased through United's agent in Manila. The later rewriting of the tickets in Washington, D.C. did not change the nature of the original contract of carriage entered into in Manila. Under Zalamea vs. Court of Appeals, the doctrine of lex loci contractus provides that the law of the place where a contract is made or entered into governs its nature and validity, obligation, and interpretation, even if the place of performance is different. The court should apply the law of the place where the airline ticket was issued when the passengers are residents and nationals of the forum and the ticket is issued in that State by the defendant airline. The applicable law is therefore Economic Regulations No. 7, as amended by the Boarding Priority and Denied Boarding Compensation of the Civil Aeronautics Board. Section 5 requires carriers to pay denied boarding compensation to passengers holding confirmed reserved space who presented themselves at the proper place and time and fully complied with the carrier's check-in and reconfirmation procedures and who are acceptable for carriage but were denied boarding for lack of space. Private respondents did not comply with the check-in requirement. Their boarding pass expressly stated "Check-In Required" and did not indicate any seat number. Aniceto Fontanilla's assertion that he immediately proceeded to the check-in counter upon arrival at 9:45 a.m. and that Linda Allen punched something into the computer was specious and unsupported by the evidence. The trial court correctly observed that the failure to check in, as expressly required in the boarding passes, was the reason no seat numbers were given and boarding was denied. Consequently, the failure to comply with the check-in requirement defeated the claim.
• Moral Damages: For a plaintiff to be entitled to moral damages arising from a breach of contract of carriage, the carrier must have acted with fraud or bad faith. The Court of Appeals predicated the award on Zalamea vs. Court of Appeals, which stated that overbooking amounts to bad faith and entitles passengers to moral damages, citing Alitalia Airways vs. Court of Appeals. That ruling must be read in consonance with Economic Regulations No. 7, Section 3, as amended. The regulation applies to every Philippine and foreign air carrier with respect to flights or portions originating from or terminating at, or serving a point within the Philippines, insofar as it denies boarding to a passenger on a flight inside or outside the Philippines for which the passenger holds confirmed reserved space. It covers only honest mistakes on the part of carriers and excludes deliberate and willful acts of non-accommodation. Overbooking not exceeding 10% of the seating capacity of the aircraft is not considered a deliberate and willful act of non-accommodation. Bad faith is willful and deliberate overbooking. While there may have been overbooking in this case, private respondents did not prove that the overbooking on United Airlines Flight 1108 exceeded 10%. They also did not prove that they were subjected to coarse and harsh treatment by United's ground crew. Their narration of harsh and derogatory remarks seemed incredulous, and they limited their evidence to Aniceto Fontanilla's testimony without corroboration from people who saw or heard the alleged discriminatory remarks and insults. Thus, no fraud or bad faith was established, and the award of moral damages was improper.
• Exemplary Damages: The award of exemplary damages was likewise improper. Since private respondents failed to prove bad faith and were not entitled to moral damages, there was no legal basis for exemplary damages. The Court of Appeals erred in awarding P200,000.00 as exemplary damages.
• Attorney's Fees: The award of attorney's fees was denied for lack of any legal and factual basis. With no proven bad faith, breach of contract in bad faith, or entitlement to moral and exemplary damages, the award of P50,000.00 attorney's fees could not stand.

• Lex loci contractus — As a general rule, the law of the place where a contract is made or entered into governs with respect to its nature and validity, obligation, and interpretation, even though the place where the contract was made is different from the place where it is to be performed. In this case, the airline tickets were purchased through United Airlines' agent in Manila, and the later rewriting of the tickets in Washington, D.C. did not change the nature of the original contract of carriage entered into in Manila. Philippine law, therefore, governed the denied boarding claim, not the U.S. federal oversales regulation.
• Denied boarding compensation and check-in compliance — Under Economic Regulations No. 7, Section 5, as amended by the Boarding Priority and Denied Boarding Compensation of the Civil Aeronautics Board, carriers must pay denied boarding compensation to passengers holding confirmed reserved space who presented themselves at the proper place and time and fully complied with the carrier's check-in and reconfirmation procedures and who are acceptable for carriage but were denied boarding for lack of space. The Fontanillas' boarding pass expressly required check-in and contained no seat number; their failure to comply with the check-in requirement defeated their claim for compensation.
• Bad faith in overbooking — Only willful and deliberate overbooking constitutes bad faith. Economic Regulations No. 7, Section 3, as amended, provides that overbooking not exceeding 10% of the seating capacity of the aircraft is not considered a deliberate and willful act of non-accommodation. Because private respondents did not prove that the overbooking on United Airlines Flight 1108 exceeded 10%, no bad faith was established, and moral and exemplary damages were improper.
• Waiver of the implied admission rule — A party may waive the rule that material averments not specifically denied are deemed admitted by introducing evidence on the fact and failing to object to the opponent's evidence in refutation; all such evidence becomes competent and the case must be decided thereon. Private respondents waived the rule by presenting evidence of compliance with the check-in requirement and allowing United Airlines to present rebuttal evidence.
• Appellate deference to trial court factual findings — Appellate courts should not, unless for strong and cogent reasons, reverse the findings of fact of trial courts, because trial judges are in a better position to examine real evidence and observe the actuation and demeanor of witnesses. The Supreme Court reinstated the trial court's factual findings over the contrary findings of the Court of Appeals.
• Moral damages in breach of contract of carriage — For a plaintiff to be entitled to moral damages arising from a breach of contract of carriage, the carrier must have acted with fraud or bad faith. The Fontanillas failed to prove fraud or bad faith, so the award of moral damages was improper.
• Preponderance of evidence and burden of proof — In civil cases, the party having the burden of proof of an essential fact must produce a preponderance of evidence thereon; a judgment cannot be entered in favor of the plaintiff if his evidence is not sufficient to sustain his cause of action, and he must rely on the strength of his own evidence and not on the weakness of the defendant's. Private respondents failed to prove breach of contract in bad faith by preponderant evidence.

• "According to the doctrine, as a general rule, the law of the place where a contract is made or entered into governs with respect to its nature and validity, obligation and interpretation." — States the doctrine of lex loci contractus, which the Supreme Court used to hold that Philippine law governed the contract of carriage despite performance in the United States.
• "What this Court considers as bad faith is the willful and deliberate overbooking on the part of the airline carrier. The above-mentioned law clearly states that when the overbooking does not exceed ten percent (10%), it is not considered as deliberate and therefore does not amount to bad faith." — Defines the bad-faith standard for overbooking and establishes the 10% threshold under Economic Regulations No. 7.
• "For the plaintiff to be entitled to an award of moral damages arising from a breach of contract of carriage, the carrier must have acted with fraud or bad faith." — States the requisite for moral damages in a breach of contract of carriage, which the Fontanillas failed to satisfy.
• "The rule authorizing an answer that the defendant has no knowledge or information sufficient to form a belief as to the truth of an averment and giving such answer the effect of a denial, does not apply where the fact as to which want of knowledge is asserted is so plainly and necessarily within the defendant's knowledge that his averment of ignorance must be palpably untrue." — States the exception to the no-knowledge answer, which the Supreme Court used to reject the Court of Appeals' implied-admission finding.

• Zalamea vs. Court of Appeals, 228 SCRA 23 (1993) — Applied for the doctrine of lex loci contractus; also cited as authority on overbooking as bad faith, but the Supreme Court read it in consonance with Economic Regulations No. 7 and its 10% overbooking threshold.
• Alitalia Airways vs. Court of Appeals — Cited in Zalamea for the rule that deliberate overbooking amounts to bad faith and entitles a passenger refused a confirmed seat at the last minute to moral damages; the Supreme Court qualified this by requiring proof that overbooking exceeded 10%.
• Yu Chuck vs. Kong Li Po, 46 Phil. 608, 613 — Cited for the rule on implied admission and waiver, including that a plaintiff may waive the rule by introducing evidence and failing to object to the defendant's evidence in refutation.
• Warner Barnes and Co. Ltd. vs. Reyes, 103 Phil. 662 (1958); PNB vs. Utility Assurance and Surety Co., Inc., 177 SCRA 210 (1989) — Cited for the exception that a no-knowledge answer does not apply where the fact is plainly and necessarily within the defendant's knowledge.
• Matuguina Integrated Wood Products, Inc. vs. CA, 263 SCRA 490 (1996), citing Bael vs. IAC, 169 SCRA 617 (1989) — Cited for the rule that appellate courts should not reverse trial court findings of fact unless for strong and cogent reasons.
• Nolan vs. Jalandoni, 23 Phil. 292 — Cited for the rule that a plaintiff must rely on the strength of his own evidence and not on the weakness of the defendant's evidence.

• Rule 9, Section 1, Rules of Court — Material averments in the complaint, other than those as to the amount of damages, are deemed admitted when not specifically denied. The Court of Appeals relied on this to find an implied admission; the Supreme Court found the no-knowledge denial exception and waiver applied.
• Economic Regulations No. 7, Section 5, as amended by the Boarding Priority and Denied Boarding Compensation of the Civil Aeronautics Board — Requires carriers to pay denied boarding compensation to passengers holding confirmed reserved space who presented themselves at the proper place and time and fully complied with the carrier's check-in and reconfirmation procedures and who are acceptable for carriage but were denied boarding for lack of space. Applied to deny recovery because private respondents did not comply with check-in.
• Economic Regulations No. 7, Section 3, as amended — Applies to every Philippine and foreign air carrier with respect to flights or portions originating from or terminating at, or serving a point within the Philippines insofar as it denies boarding to a passenger on a flight inside or outside the Philippines for which the passenger holds confirmed reserved space; covers only honest mistakes and excludes deliberate and willful acts of non-accommodation; overbooking not exceeding 10% of seating capacity is not considered deliberate and willful. Applied to find no bad faith.
• Code of Federal Regulation Part on Oversales, Section 250.6 — Provides exceptions to eligibility for denied boarding compensation, including when the passenger does not comply with the carrier's contract of carriage or tariff provisions regarding ticketing, reconfirmation, check-in, and acceptability for transportation. The Court of Appeals relied on it, but the Supreme Court held it was error to apply U.S. law instead of Philippine law.

Davide, Jr., C.J. (Chairman), Puno, J., and Ynares-Santiago, J., concurred. Pardo, J., was on sick leave.