On 19 December 2000, Novartis Consumer Health Philippines Inc (Novartis) imported 19 pallets of 200 rolls of Ovaltine Power 18 G laminated plastic packaging material from Jinsuk Trading Co Ltd (Jinsuk) in South Korea. Jinsuk engaged the services of Protop Shipping Corp (Protop), a South Korean freight forwarder, to forward the goods. According to the bill of lading issued by Protop, the carriage was on freight prepaid basis, and on 'shipper's load and count'. Sagawa Express Philippines Inc (Sagawa) was designated as the entity in the Philippines which would take delivery of the goods.

Protop shipped the cargo through Dongnama Shipping Co Ltd (Dongnama), which in turn loaded it onto the M/V Heung-A Bangkok V-019, owned and operated by Heung-A Shipping Corp (Heung-A), a Korean corporation, pursuant to a slot charter agreement. Wallem Philippines Shipping Inc (Wallem) was the ship agent of Heung-A in the Philippines. Novartis insured the shipment with Philam Insurance Co Inc (Philam, now Chartis Philippines Insurance Inc) for all risks. On arrival, the cargo was discharged into the possession, custody and care of Asian Terminals Inc (ATI) as the customs arrastre operator. [An arrastre is defined by the Philippine Ports Authority as a 'person/entity who/which performs portside cargo handling operations, e.g. receiving, handling, custody, security and delivery of cargo passing over piers, quays or wharves, transit sheds/warehouses and open storages within the jurisdictional area of responsibility of the authorized contractor/operator'.] After the shipment was withdrawn by Stephanie Customs Brokerage Corp (Stephanie) and inspected, Novartis found that the container van was locked, with its load intact. However, the boxes of the shipment were wet and damp. The boxes on one side of the van were in disarray, while others were opened or damaged due to the dampness. Parts of the container van were damaged and rusty. There were also water droplets on the walls and the floor was wet. Since the damaged packaging materials might contaminate the product they were meant to hold, Novartis rejected the entire shipment.

Philam paid out the insured value of the shipment of PHP 1,904,613.20 and filed a complaint for damages against Protop, as the issuer of the bill of lading, its Philippines ship agent, Sagawa, as consignee, ATI and Stephanie. Wallem and Heung-A were also impleaded.

The regional trial Court ruled that the damage to the shipment occurred on the vessel while in transit from Korea to the Philippines. Heung-A was adjudged as the common carrier of the shipment The Court observed that Heung-A failed to present evidence showing that it exercised the diligence required of a common carrier in ensuring the safety of the shipment. Wallem was held liable as Heung-A's ship agent in the Philippines, while Protop was adjudged liable because the damage sustained by the shipment was due to the bad condition of the container van. ATI, Stephanie and Sagawa were found not liable. Judgment was ordered in favour of Philam for the full value of the cargo. On appeal, the Court of Appeals (CA) agreed that Protop, Heung-A and Wallem were liable for the damaged shipment. The fact that Heung-A was not a party to the bill of lading did not negate the existence of a contract of carriage between Heung-A and/or Wallem and Novartis. By agreeing to transport the goods contained in the sea van provided by Dongnama, Heung-A impliedly entered into a contract of carriage with Novartis. However, the CA limited liability to USD 8,500 pursuant to the liability limitation under COGSA, since the shipper failed to declare the value of the cargo in the bill of lading, and since the carriers could not be made answerable for the two unaccounted pallets, because the shipment was on a 'shipper’s load, count and seal' basis.

Philam appealed to the Supreme Court.

Held: The CA decision is affirmed, with a modification to the rate of interest ordered.

The CA did not err in applying the provisions of COGSA - specifically, the rule on package liability limitation. Under art 1753 of the Civil Code, the law of the country to which the goods are to be transported governs the liability of the common carrier for their loss, destruction or deterioration. Since the shipment was being transported from South Korea to the Philippines, the Civil Code provisions apply. In all matters not regulated by the Civil Code, the rights and obligations of common carriers are governed by the Code of Commerce and by special laws, such as COGSA.

While the Civil Code contains provisions making the common carrier liable for loss/damage to the goods transported, it fails to outline the manner of determining the amount of such liability. Article 372 of the Code of Commerce fills in this gap: 'The value of the goods which the carrier must pay in cases if loss or misplacement shall be determined in accordance with that declared in the bill of lading, the shipper not being allowed to present proof that among the goods declared therein there were articles of greater value and money.'

In case, however, of the shipper's failure to declare the value of the goods in the bill of lading, s 4(5) of COGSA provides:

Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or in case of goods not shipped in packages, per customary freight unit, or the equivalent of that sum in other currency, unless the nature and value of such goods have been declared by the shipper before shipment and inserted in the bill of lading. This declaration, if embodied in the bill of lading shall be prima facie evidence, but shall be conclusive on the carrier.

Hence, when there is loss/damage to goods covered by contracts of carriage from a foreign port to a Philippine port, and in the absence a shipper's declaration of the value of the goods in the bill of lading, as in the present case, the foregoing provision of COGSA applies. The CA, therefore, did not err in ruling that Heung-A, Wallem and Protop's liability is limited to USD 500 per package or pallet.

The Court likewise affirms the CA in pronouncing these parties liable only for the lost/damaged 17 pallets instead of 19 pallets stated in the bill of lading. This is because, per the 'Shipper's Load and Count' arrangement, the contents are not required to be checked and inventoried by the carrier at the port of loading or before the carrier enters the port of unloading in the Philippines, since it is the shipper who has the sole responsibility for the quantity, description and condition of the cargoes shipped in container vans. As such, the carrier cannot be held responsible for any discrepancy if the description in the bill of lading is different from the actual contents of the container.

Consonant with the ruling in Asian Terminals Inc v Philam Insurance Co Inc (CMI1498), the prescriptive period for filing an action for lost/damaged goods governed by contracts of carriage by sea to and from Philippine ports in foreign trade is governed by s 3(6) of COGSA. It was further ruled in Asian Terminals that pursuant to s 3(6) of COGSA, failure to comply with the notice requirement does not affect or prejudice the right of the shipper to bring suit within one year after delivery of the goods.

The consignee, Novartis, received the shipment on 5 January 2001. Philam, as the subrogee of Novartis, filed a claim against Protop on 4 June 2001, against Wallem on 12 October 2001, and against Heung-A on 11 December 2001, all within the one-year prescriptive period. Despite Novartis' failure to comply with the three-day notice requirement, its subrogee Philam is not barred from seeking reimbursement, because the demands for payment were filed in time.