G.R. No. L-26409, L-26550, L-26587, L-31157. July 31, 1972.
Union Insurance Society of Canton, Ltd. vs. Republic of the Philippines, et al.; Domestic Insurance Company of the Philippines vs. Republic of the Philippines; Insurance Company of North America vs. Republic of the Philippines, et al.; British Traders Insurance Co., Ltd. vs. Republic of the Philippines, et al.

FACTS

These consolidated cases involve insurance companies, as subrogees of consignees, suing to recover the value of imported goods lost or damaged while in the custody of the arrastre service at the Port of Manila. The defendants are the Republic of the Philippines, the Bureau of Customs, and the Customs Arrastre Service. The plaintiffs allege that shipments were discharged into the custody of these government entities, which operated the arrastre service, and that losses occurred due to shortages or pilferage. After indemnifying the consignees, the insurers filed suits for recovery.
The Republic, through the Solicitor General, moved to dismiss the complaints based on state immunity from suit. The lower courts rendered conflicting judgments; some dismissed the cases on the ground of non-suability, while others held the government liable, treating the arrastre operation as a proprietary function.

ISSUE

Whether the Republic of the Philippines, or its agencies (the Bureau of Customs and the Customs Arrastre Service), may be sued for claims arising from their arrastre operations without its consent.

RULING

No. The Republic cannot be sued without its consent. The Court, en banc, ruled that the operation of the arrastre service by the Bureau of Customs is a governmental function incidental to its prime governmental duty of assessing and collecting lawful revenues from imported articles. It is an integral part of the customs service and the process of taxation. Therefore, such activity is an exercise of sovereign powers, not a proprietary or business operation.
The legal logic is anchored on the principle of state immunity. Engaging in arrastre service as a necessary component of customs administration does not constitute a descent from the level of a sovereign to that of a private corporation susceptible to suit. The Court distinguished this from cases involving government-owned corporations created for business purposes, which may be sued. Since the arrastre operation here is a governmental function, the state retains its immunity. Furthermore, the Court noted that the plaintiffs failed to comply with the statutory condition precedent of filing their money claims with the Auditor General before instituting suit. The decision in L-26409 (dismissal) was affirmed, and the decisions holding the government liable in the other cases were reversed.