G.R. No. 156087; May 8, 2009
KUWAIT AIRWAYS, CORPORATION, Petitioner, vs. PHILIPPINE AIRLINES, INC., Respondent.

FACTS

Petitioner Kuwait Airways Corporation (KAC) and respondent Philippine Airlines, Inc. (PAL) entered into a Commercial Agreement with an annexed Joint Services Agreement on October 21, 1981, covering flights between Kuwait and Manila. The agreement obligated KAC to share with PAL revenue earned from the uplift of passengers and cargo between the two points. This agreement was amended several times between 1981 and 1994. In April 1995, aeronautical delegations from the Philippines and Kuwait, which included officials from PAL, negotiated and signed a Confidential Memorandum of Understanding (CMU). Paragraph 4 of the CMU stated that the unilateral exercise of third and fourth freedom traffic rights “shall not be subject to any royalty payment or commercial arrangements” from the date of its signing. Relying on this CMU, KAC informed PAL that their revenue-sharing agreement was terminated effective April 12, 1995, and ceased remitting PAL’s share.
PAL filed a complaint for collection of sum of money against KAC before the Makati RTC, arguing that the CMU did not automatically terminate their private commercial contract. PAL contended that the CMU was a state-to-state agreement governing traffic rights, not a private contract abrogating existing revenue-sharing obligations. The RTC ruled in favor of PAL, ordering KAC to pay the unremitted revenue share. KAC appealed, arguing the CMU extinguished its obligation to share revenue.

ISSUE

Did the Confidential Memorandum of Understanding (CMU) between the Philippine and Kuwaiti delegations automatically terminate the revenue-sharing obligations under the private Commercial Agreement between Kuwait Airways and Philippine Airlines?

RULING

No. The Supreme Court affirmed the RTC’s decision, holding that the CMU did not automatically terminate the private contract. The Court explained that the CMU was an agreement between the aeronautical authorities of the two states, negotiated within the framework of the bilateral air services agreement. Its primary purpose was to govern the exchange of traffic rights (freedoms of the air) between the contracting parties, a sovereign prerogative. The stipulation that third and fourth freedom traffic rights “shall not be subject to any royalty payment” was a directive to the states’ respective aeronautical authorities not to impose such requirements as a condition for granting these traffic rights.
In contrast, the Commercial Agreement between KAC and PAL was a private contract creating reciprocal obligations of a different nature. The revenue-sharing scheme was a commercial arrangement voluntarily entered into by the airlines to govern their joint services and business relationship. The CMU did not contain any explicit language mandating the abrogation of existing private contracts. The Court emphasized that the intent to abrogate or modify a private contract must be clear and express; it cannot be lightly inferred from an inter-governmental instrument. Since the airlines did not mutually agree to terminate their contract following the CMU, KAC’s unilateral cessation of payments constituted a breach of its contractual obligation to PAL.