Yau Yue Commercial Bank Ltd (YY) of Hong Kong agreed to sell 140 packages of galvanised steel durzinc sheets to Herminio G Teves for USD 32,458.26. The agreement provided that: (a) the purchase price would be covered by a bank draft paid by Teves in exchange for the corresponding bill of lading to be deposited with a local bank, the Manila branch of the Hongkong & Shanghai Bank; (b) upon arrival of the goods in Manila, Teves would be notified and would have to pay the amount called for in the draft, after which the bill of lading would be delivered to him; and (c) Teves would present the bill of lading to the carrier's agent, American Steamship Agencies Inc (American), which would then issue the corresponding permit to deliver imported articles to be presented to the Bureau of Customs to obtain the release of the articles.

YY shipped the goods through Tokyo Boeki Ltd at Yawata, Japan, on 30 April 1961, on the SS Tensai Maru, belonging to Nissho Shipping Co Ltd, whose Philippines agent was American, under a bill of lading consigned 'to order of the shipper with Herminio G. Teves as the party to be notified of the arrival of the 140 packages of galvanized steel durzinc sheets in Manila'. The bill of lading was indorsed to the order of, and delivered to, YY by the shipper. YY drew a demand draft, together with the bill of lading, against Teves through the Hongkong & Shanghai Bank. When the articles arrived in Manila on or about 9 May 1961, Hongkong & Shanghai Bank notified Teves of the arrival of the goods and requested payment of the demand draft. Teves, however, did not pay, prompting the bank to make a protest. The bank returned the bill of lading and demand draft to YY, which then indorsed the bill of lading to Domingo Ang.

Meanwhile, despite non-payment of the purchase price of the goods, Teves was able to obtain a bank guarantee in favour of American, to the effect that he would surrender the original and negotiable bill of lading duly indorsed by YY. On the strength of this guarantee, Teves succeeded in securing a permit to deliver imported articles from American, which he presented to the Bureau of Customs, which in turn released the goods to him. Subsequently, Ang claimed the goods from American by presenting the indorsed bill of lading, but was informed by American that it had already delivered the articles to Teves.

On 30 October 1963, Ang filed a complaint in the Court of First Instance of Manila against American for having wrongfully delivered and/or converted the goods covered by the bill of lading belonging to Ang. American filed a motion to dismiss on the ground that Ang's cause of action had prescribed under the Carriage of Goods by Sea Act (COGSA), more particularly s 3(6), which provides:

In any event, the carrier and the ship shall be discharged from all liability in respect to loss or damage unless suit is brought within one year, after delivery of the goods or the date when the goods should have been delivered.

American argued that the cargo should have been delivered to the person entitled to the delivery (meaning Ang) on 9 May 1961, the date of the vessel's arrival in Manila, and that even after allowing a reasonable time after such arrival within which to make delivery, the action commenced on 30 October 1963 was filed beyond the prescribed period of one year. The lower Court dismissed Ang's action on the ground of prescription. Ang appealed directly to this Court on a question of law: has Ang's cause of action prescribed under s 3(6) of COGSA?

Held: Appeal allowed. The decision of the lower Court is reversed and set aside and this case is remanded to the Court for further proceedings.

Section 3(6) speaks of 'loss or damage'. There was no damage caused to the goods, which were delivered intact to Teves, who did not file any notice of damage. What is to be resolved here is whether there was 'loss' of the goods. Nowhere is 'loss' defined in COGSA. Therefore, recourse must be had to the Civil Code, which provides in art 18 that: 'In matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provisions of this Code.'

Article 1189 of the Civil Code defines the word 'loss' in cases where conditions have been imposed with the intention of suspending the efficacy of an obligation to give. The contract of carriage under consideration entered into between American and YY (which later endorsed the bill of lading to Ang), is one involving an obligation to give or to deliver the goods 'to the order of shipper', that is, upon the presentation and surrender of the bill of lading. This being so, art 1189 of the Civil Code can be applied to the present controversy, more specifically para 2 which provides that 'it is understood that a thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence unknown or it cannot be recovered'.

As defined in the Civil Code and as applied to s 3(6) of COGSA, 'loss' contemplates merely a situation where no delivery at all was made by the shipper of the goods because they had perished, gone out of commerce, or disappeared such that their existence is unknown or they cannot be recovered. It does not include a situation where there was indeed delivery - but delivery to the wrong person, or a misdelivery, as alleged in this case. The distinction between non-delivery and misdelivery has reference to bills of lading. As this Court held in Tan Pho v Hassamal Dalamal, 67 Phil 555, 557-558:

Considering that the bill of lading covering the goods in question has been made to order, which means that said goods cannot be delivered without previous payment of the value thereof, it is evident that, the said goods having been delivered to Aldeguer without paying the price of the same, these facts constitute misdelivery and not nondelivery, because there was in fact delivery of merchandise. We do not believe it can be seriously and reasonably argued that what took place, as contended of by the petitioner, is a case of misdelivery with respect to Aldeguer and at the same time nondelivery with respect to the PNB who had the bill of lading, because the only thing to consider in this question is whether Enrique Aldeguer was entitled to get the merchandise or whether, on the contrary, the PNB is the one entitled thereto. Under the facts, the defendant petitioner should not have delivered the goods to Aldeguer but to the Philippine National Bank. Having made the delivery to Aldeguer, the delivery is a case of misdelivery. If the goods have been delivered, it cannot at the same time be said that they have not been delivered.

According to the bill of lading in this case, the carrier was under a duty not to deliver the merchandise mentioned in the bill of lading except upon presentation of the bill of lading duly endorsed by the shipper. (10 C.J., 259) Hence, the defendant-petitioner Tan Pho having delivered the goods to Enrique Aldeguer without the presentation by the latter of the bill of lading duly endorsed to him by the shipper, the said defendant made a misdelivery and violated the bill of lading, because his duty was not only to transport the goods entrusted to him safely, but to deliver them to the person indicated in the bill of lading. [Emphasis added by the Court.]

Here, the goods cannot be deemed 'lost'. They were delivered to Teves, so that there can only be either delivery, if Teves really was entitled to receive them, or misdelivery, if he was not so entitled. It is not for this Court now to resolve whether delivery of the goods to Teves was proper, that is, whether there was rightful delivery or misdelivery. The point that matters here is that the situation is either delivery or misdelivery, but not non-delivery. Thus, the goods were either rightly delivered, or misdelivered, but they were not lost. There being no loss or damage to the goods, s 3(6) of COGSA does not apply. The reason is not difficult to see. The one-year period of limitation is designed to meet the exigencies of maritime hazards. In a case where the goods shipped were neither lost nor damaged in transit but were, on the contrary, delivered in port to someone who claimed to be entitled to them, the situation is different, and the special need for the short period of limitation in cases of loss or damage caused by maritime perils does not obtain.

It follows that for suits predicated, not upon loss or damage, but on alleged misdelivery (or conversion) of the goods, the applicable rule on prescription is that found in the Civil Code, namely, either 10 years for breach of a written contract or four years for quasi-delict: arts 1144(1), 1146 of the Civil Code. In either case, Ang's cause of action has not vet prescribed, since his right of action would have accrued at the earliest on 9 May 1961, when the ship arrived in Manila, and he filed suit on 30 October 1963.