G.R. No. 104235 November 18, 1993
SPOUSES CESAR & SUTHIRA ZALAMEA and LIANA ZALAMEA, petitioners, vs. HONORABLE COURT OF APPEALS and TRANSWORLD AIRLINES, INC., respondents.

FACTS

Petitioners, spouses Cesar and Suthira Zalamea and their daughter Liana, purchased three confirmed airline tickets from the Manila agent of respondent TransWorld Airlines, Inc. (TWA) for a flight from New York to Los Angeles on June 6, 1984. The spouses’ tickets were purchased at a 75% discount, while Liana’s was a full-fare ticket. Their reservations were reconfirmed on June 4, 1984. On the flight date, petitioners checked in an hour early but were placed on a wait-list because the flight was overbooked. Liana was No. 13 on the list, and the spouses were listed as No. 34 for a party of two. Only the first 22 on the wait-list were accommodated. Cesar Zalamea, who was inadvertently holding his daughter’s full-fare ticket, was allowed to board. Suthira and Liana, holding discounted tickets, were denied boarding. They could not be accommodated on the next TWA flight and were constrained to purchase two tickets from American Airlines for $918.00 to reach Los Angeles. Petitioners filed an action for damages based on breach of contract of carriage before the Regional Trial Court of Makati. The trial court ruled in favor of petitioners, finding breach of contract characterized by bad faith, and awarded various damages. On appeal, the Court of Appeals modified the decision, eliminating the award of moral and exemplary damages, ruling that while there was a breach, there was no fraud or bad faith because overbooking was allegedly allowed under the U.S. Code of Federal Regulations.

ISSUE

Whether respondent TWA acted in bad faith, thereby making it liable for moral and exemplary damages, and whether petitioners are entitled to a refund of the unused TWA tickets and reimbursement for the American Airlines tickets.

RULING

The Supreme Court GRANTED the petition and MODIFIED the decision of the Court of Appeals. The Court held that TWA acted in bad faith. The defense that overbooking is allowed under U.S. regulations failed because the alleged Code of Federal Regulations was not properly proved as required by law. Even assuming such a regulation existed, the principle of lex loci contractus applies; since the tickets were issued in the Philippines, Philippine law governs. Overbooking amounts to bad faith, as established in jurisprudence (Alitalia Airways v. CA, Korean Airlines Co., Ltd. v. CA), because it violates the contract of carriage and the passenger’s right to expect transportation on a confirmed flight. A contract of carriage involves a public duty, and the carrier’s failure to inform passengers of overbooking policies constitutes bad faith. Petitioners are entitled to reimbursement for the American Airlines tickets ($918.00) as actual damages, but not to a refund of the unused TWA tickets, as this would allow them to fly without paying any fare. Moral damages (P50,000.00) and exemplary damages (P50,000.00) are awarded, as the breach was attended by bad faith. Attorney’s fees (P50,000.00) are also justified under Article 2208(2) of the Civil Code.