CATHAY PACIFIC AIRWAYS, LTD., PETITIONER, VS. SPOUSES DANIEL VAZQUEZ AND MARIA LUISA MADRIGAL VAZQUEZ, RESPONDENTS.

Cathay Pacific Airways versus Vazquez

The Case

This is a petition for review filed with the Supreme Court by Cathay Pacific Airways, Limited, against the spouses Daniel Vazquez and Maria Luisa Madrigal Vazquez, arising from a complaint for damages rooted in a contract of carriage. The Vazquezes had booked Business Class seats on a Cathay flight from Hong Kong to Manila, but at the boarding gate they were involuntarily upgraded to First Class over their vigorous objection. The case matters because it presents a novel question: whether an upgrading of a passenger's accommodation to a more superior class, at no extra cost, can itself constitute a breach of contract of carriage, and if so, what damages may be awarded. It is a staple in civil law and transportation law examinations on breach of contract, bad faith, and the requisites for moral, exemplary, and nominal damages.

Procedural History

The Vazquezes instituted an action for damages before the Regional Trial Court of Makati City. In its decision of 19 October 1998, the trial court found for the Vazquezes and ordered Cathay to pay each of them nominal damages of 100,000 pesos, moral damages of 2,000,000 pesos, exemplary damages of 5,000,000 pesos, and attorney's fees and expenses of litigation of 1,000,000 pesos, plus costs of suit. Cathay appealed to the Court of Appeals. In its decision of 24 July 2001, the Court of Appeals deleted the award of exemplary damages and reduced the awards for moral and nominal damages to 250,000 pesos and 50,000 pesos for each of the Vazquezes, respectively, and the attorney's fees and litigation expenses to 50,000 pesos for both of them. Both parties filed motions for reconsideration, which the Court of Appeals denied. Cathay then seasonably filed with the Supreme Court the petition for review that gave rise to this decision.

Facts

Cathay is a common carrier engaged in air transportation, and among its routes is the Manila to Hong Kong and back course. As part of its marketing strategy, it accords its frequent flyers membership in its Marco Polo Club, whose members enjoy privileges such as priority for upgrading of booking without extra charge whenever an opportunity arises. The Vazquezes were frequent flyers and Gold Card members of the Club. On 24 September 1996, they went to Hong Kong for pleasure and business, together with their maid and two friends, Pacita Cruz and Josefina Vergel de Dios.

For their return flight to Manila on 28 September 1996, they were booked on Cathay's Flight CX-905. Two hours before departure, they checked in their luggage at Kai Tak Airport and were given their boarding passes: Business Class for the Vazquezes and their two friends, and Economy Class for their maid. When boarding time was announced, they went to the departure gate for Business Class passengers. When Dr. Vazquez presented his boarding pass, the ground attendant, Clara Lai Han Chiu, saw on the computer monitor a message that there was a seat change from Business Class to First Class for the Vazquezes. Ms. Chiu told Dr. Vazquez of the upgrade, but he refused, reasoning that it would not look nice for them as hosts to travel in First Class while their guests traveled in Business Class, and that they were going to discuss business matters during the flight. He suggested that other passengers be transferred to First Class instead. Ms. Chiu consulted her supervisor, who told her to convince the Vazquezes to accept. She informed them that the Business Class was fully booked and that, as Marco Polo Club members, they had priority to be upgraded. When Dr. Vazquez continued to refuse, she told them that if they would not avail themselves of the privilege, they would not be allowed to take the flight. Eventually, after talking to his two friends, Dr. Vazquez gave in, and he and his wife proceeded to the First Class cabin.

Upon returning to Manila, the Vazquezes demanded by letter indemnification of 1,000,000 pesos for humiliation and embarrassment, and a written apology. Cathay replied that it would investigate and get back to them within a week, but no feedback came within that period. On 8 November 1996, the Vazquezes instituted the action for damages. They alleged that Ms. Chiu had obstinately and in a loud, discourteous and harsh voice threatened that they could not board unless they went to First Class, that they were embarrassed and humiliated before other passengers, and that Dr. Vazquez's carpal tunnel syndrome was aggravated when no crew member assisted him in lifting his luggage. Cathay countered that the upgrading was done in good faith in recognition of their status as valued passengers, that overbooking is a widely accepted practice in the airline industry, and that no passenger was bumped off or downgraded.

Issues

• Whether or not, by upgrading the seat accommodation of the Vazquezes from Business Class to First Class, Cathay breached its contract of carriage with them.
• Whether or not the upgrading was tainted with fraud or bad faith.
• Whether or not the Vazquezes are entitled to damages.

Applicable Provisions

Section 3 of Economic Regulation No. 7 of the Civil Aeronautics Board, as amended, provides:

Section 3. Scope. This regulation shall apply to every Philippine and foreign air carrier with respect to its operation of flights or portions of flights originating from or terminating at, or serving a point within the territory of the Republic of the Philippines insofar as it denies boarding to a passenger on a flight, or portion of a flight inside or outside the Philippines, for which he holds confirmed reserved space. Furthermore, this Regulation is designed to cover only honest mistakes on the part of the carriers and excludes deliberate and willful acts of non-accommodation. Provided, however, that overbooking not exceeding 10% of the seating capacity of the aircraft shall not be considered as a deliberate and willful act of non-accommodation.

This provision bears on the case because it fixes the threshold at which overbooking ceases to be an honest mistake and becomes a deliberate act amounting to bad faith.

Article 2220 of the Civil Code provides:

Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith.

This provision governs whether moral damages may be awarded for a breach of contract of carriage, which requires fraud or bad faith on the part of the carrier.

Article 2221 of the Civil Code provides:

Article 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.

This provision supplies the basis for the only damages the Court ultimately awarded, namely nominal damages for the vindication of the Vazquezes' violated right.

Ruling

On the first issue, the Court ruled in the affirmative. A contract of carriage existed between Cathay and the Vazquezes, whose object was transportation with seats in the Business Class Section, and whose cause was the fare paid. The Court defined breach of contract as the failure without legal reason to comply with the terms of a contract. While in previous cases the breach consisted in bumping off a passenger or downgrading a seat, here the reverse happened. The Court held that the Vazquezes had every right to decline the upgrade and insist on the Business Class accommodation they had booked and which was designated in their boarding passes. They had waived their priority when they asked that other passengers be given the upgrade, and it should not have been imposed on them over their vehement objection. By insisting on the upgrade, Cathay breached its contract of carriage.

On the second issue, the Court ruled in the negative. Bad faith and fraud are allegations of fact that demand clear and convincing proof and are never presumed. The Court found no persuasive proof of fraud or bad faith. The Vazquezes were not induced to agree through insidious words or deceitful machination, and Ms. Chiu was honest in telling them that their seats had been given to other passengers and that the Business Class was fully booked. Her failure to consider offering the First Class seats to other passengers, even if poor judgment, was not bad faith. Neither was the transfer effected for an evil or devious purpose, since an upgrading is for the better condition and for the benefit of the passenger. As to overbooking, the Court applied the regulation quoted above and held that an overbooking not exceeding ten percent is not considered deliberate and therefore does not amount to bad faith; here there was no evidence of overbooking beyond ten percent, and no passenger was bumped off or refused boarding.

On the third issue, the Court held that the Vazquezes are not entitled to moral, exemplary, or attorney's fees, but only to nominal damages. Moral damages predicated on a breach of contract of carriage are recoverable only where the carrier is guilty of fraud or bad faith or where the mishap resulted in the death of a passenger. Since the breach was not attended by fraud or bad faith, the award of moral damages had no leg to stand on. The deletion of exemplary damages was correct, because bad faith or a wanton, fraudulent or malevolent manner is required, and the claimant must first establish a right to moral, temperate, or compensatory damages. Where the awards for moral and exemplary damages are eliminated, so must the award for attorney's fees. The most that can be adjudged is nominal damages under Article 2221, and Cathay itself deferred to the Court of Appeals' discretion on nominal damages.

Doctrine

A contract of carriage binds the carrier to transport the passenger in the class of accommodation chosen and booked, and an involuntary upgrading to a superior class, imposed over the passenger's vehement objection, is a breach of that contract. The passenger's priority for upgrading as a frequent flyer is a privilege that may be waived, and it cannot be forced upon him. However, a breach of contract of carriage entitles the passenger to moral damages only where the carrier acted fraudulently or in bad faith, or where the mishap resulted in death, consistent with Article 2220 of the Civil Code. Fraud and bad faith are never presumed and must be proved by clear and convincing evidence. Overbooking not exceeding ten percent of the seating capacity is not a deliberate and willful act of non-accommodation and does not amount to bad faith. Absent fraud or bad faith, the most a passenger may recover for the violated right is nominal damages under Article 2221, and the awards for exemplary damages and attorney's fees must likewise fall.

Disposition

The petition was granted in part: the awards for moral damages, exemplary damages, and attorney's fees were deleted, and only the award of nominal damages in favor of the Vazquezes was sustained.

Remember This

Memorize this line: an involuntary upgrading over the passenger's objection is a breach of contract of carriage, but absent fraud or bad faith the passenger recovers only nominal damages. Examiners use this case to test the rule that moral and exemplary damages in breach of carriage require fraud or bad faith, and that overbooking not exceeding ten percent is not bad faith.