These two petitions for review on certiorari arose from the same incident, the sinking of the M/S Asiatica when it caught fire, resulting in the total loss of the ship and its cargo. The vessel was operated by the petitioner, Eastern Shipping Lines Inc.

In GR No 69044 the petitioner loaded 5,000 pieces of calorised lance pipes in 28 packages, valued at PHP 256,039 and consigned to Philippine Blooming Mills Co Inc, and seven cases of spare parts valued at PHP 92,361.75, consigned to Central Textile Mills Inc, at Kobe, Japan, for transportation to Manila. Both cargoes were insured against marine risk with Development Insurance & Surety Corp. In GR No 71478, the same vessel took on board 128 cartons of garment fabrics and accessories, in two containers, consigned to Mariveles Apparel Corp, and two cases of surveying instruments consigned to Aman Enterprises & General Merchandise. The 128 cartons were insured by Nisshin Fire & Marine Insurance Co, and the two cases by Dowa Fire & Marine Insurance Co Ltd (Dowa).

The respective insurers paid out and then sued the petitioner. The trial Courts found in favour of the insurers. The trial Court judgments were affirmed on appeal, except that in GR No 71478, the Court of Appeals decreased the amount recoverable by Dowa to USD 1,000 because of the USD 500 per package limitation of liability under COGSA. The petitioner appealed to the Supreme Court.

Held (by a majority of Melencio-Herrera, Narvasa, Cruz, Feliciano, Gancayco JJ): 1) in GR No 69044, the judgment is modified in that the petitioner shall pay the insurer PHP 256,039 for the 28 packages of calorised lance pipes, and PHP 71,540 for the seven cases of spare parts. 2) In GR No 71478, the CA judgment is affirmed.

The threshold issues in both cases are: (1) which law should govern: the Civil Code provisions on common carriers or COGSA?; and (2) who has the burden of proof to show negligence of the carrier?

The law of the country to which the goods are to be transported governs the liability of the common carrier in case of their loss, destruction or deterioration. As the cargoes in question were transported from Japan to the Philippines, the liability of the petitioner is governed primarily by the Civil Code. However, in all matters not regulated by the Code, the rights and obligations of the common carrier are governed by the Code of Commerce and by special laws. Thus, COGSA, a special law, is suppletory to the provisions of the Civil Code.

In this case, the insurers have proven that the transported goods have been lost. The petitioner has also proved that the loss was caused by fire. The burden then is upon the petitioner to proved that it has exercised the extraordinary diligence required by law. It has failed to do so. Even if fire were to be considered a 'natural disaster' within the meaning of art 1734 of the Civil Code, it is required under art 1739 of the same Code that the 'natural disaster' must have been the 'proximate and only cause of the loss', and that the carrier has 'exercised due diligence to prevent or minimize the loss before, during or after the occurrence of the disaster'. This the petitioner has also failed to establish satisfactorily.

Nor may the petitioner seek refuge from liability under s 4.2.b of COGSA, which provides that '[n]either the carrier nor the ship shall be responsible for loss or damage arising or resulting from ... [f]ire, unless caused by the actual fault or privity of the carrier'. In this case, both the trial Court and the CA found that there was 'actual fault' of the carrier shown by 'lack of diligence' in that 'when the smoke was noticed, the fire was already big; ... the fire must have started twenty-four (24) hours before the same was noticed;' and that 'after the cargoes were stored in the hatches, no regular inspection was made as to their condition during the voyage'. The foregoing suffices to show that the circumstances under which the fire originated and spread are such as to demonstrate that the petitioner or its servants were negligent in connection therewith. Consequently, the complete defence afforded by COGSA when loss results from fire is unavailing to the petitioner.

The petitioner avers that its liability, if any, should not exceed USD 500 per package as provided in s 4(5) of COGSA. Article 1749 of the New Civil Code also allows for limitations of liability: 'A stipulation that the common carrier's liability as limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding.' The Civil Code does not of itself limit the liability of the common carrier to a fixed amount per package, although the Code expressly permits a stipulation limiting such liability. Thus, COGSA, which is suppletory to the provisions of the Civil Code, steps in and supplements the Code by establishing a statutory provision limiting the carrier's liability in the absence of a declaration of a higher value of the goods by the shipper in the bill of lading. The provisions of COGSA on limited liability are as much a part of a bill of lading as though physically in it and as much a part thereof as though placed therein by agreement of the parties.

In GR No 69044, there is no stipulation in the respective bills of lading limiting the carrier's liability for the loss or destruction of the goods. Nor is there a declaration of a higher value of the goods. Hence, the petitioner's liability should not exceed USD 500 per package, or its PHP equivalent, at the time of payment of the value of the goods lost, but in no case 'more than the amount of damage actually sustained'.

The actual total loss for the 5,000 pieces of calorised lance pipes was PHP 256,039. The goods were shipped in 28 packages. Multiplying 28 packages by USD 500 results in a limit of USD 14,000 which, at the current exchange rate, would be PHP 286,160, or 'more than the amount of damage actually sustained'. Consequently, the amount of PHP 256,039 should be upheld.

With respect to the seven cases of spare parts, their actual value was PHP 92,361.75. However, multiplying seven cases by USD 500 per package at the prevailing rate of exchange yields PHP 71,540 only, which is the amount that should be paid by the petitioner for those spare parts, not PHP 92,361.75.

In GR No 71478, in so far as the two cases of surveying instruments are concerned, the amount awarded was already reduced to USD 1,000 by the CA following the statutory USD 500 liability per package. That is in order. In respect of the shipment of 128 cartons of garment fabrics in two containers, the CA also limited the petitioner's liability to USD 500 per package and affirmed the award of USD 46,583. The CA multiplied 128 cartons (considered as COGSA packages) by USD 500 to arrive at the figure of USD 64,000, and explained that 'since this amount is more than the insured value of the goods, that is $46,583, the Trial Court was correct in awarding said amount only for the 128 cartons, which amount is less than the maximum limitation of the carrier's liability'.

That is correct. The 128 cartons and not the two containers should be considered as the shipping unit. In Mitsui & Co Ltd v American Export Lines Inc 636 F 2d 807 (1981), the consignees of tin ingots and the shipper of floor covering brought action against the vessel owner and operator to recover for loss of ingots and floor covering, which had been shipped in vessel-supplied containers. The District Court for the Southern District of New York rendered judgment for the plaintiffs, and the defendant appealed. The Court of Appeals, Second Circuit, modified and affirmed holding that:

When what would ordinarily be considered packages are shipped in a container supplied by the carrier and the number of such units is disclosed in the shipping documents, each of those units and not the container constitutes the 'package' referred to in liability limitation provision of Carriage of Goods by Sea Act. Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A.& 1304(5).

Even if the language and purposes of Carriage of Goods by Sea Act left doubt as to whether carrier-furnished containers whose contents are disclosed should be treated as packages, the interest in securing international uniformity would suggest that they should not be so treated. Carriage of Goods by Sea Act, 4(5), 46 U.S.C.A. 1304(5).

In this case, the bill of lading disclosed the following data:

2 Containers
(128) Cartons)
Men's Garments Fabrics and Accessories Freight Prepaid
Say: Two (2) Containers Only.

Considering, therefore, that the Bill of Lading clearly disclosed the contents of the containers, the number of cartons or units, as well as the nature of the goods, it is clear that the 128 cartons, not the two containers should be considered as the shipping unit subject to the USD 500 limitation of liability.

Dissent (by Yap and Sarmiento JJ): With respect to GR No 71478, the majority opinion holds that the 128 cartons of textile materials, and not the two containers, should be considered as the shipping unit for the purpose of applying the USD 500 limitation under the Carriage of Goods by Sea Act (COGSA). However, in our view the container should be regarded as the shipping unit or 'package' within the purview of COGSA. This may not be equitable as far as the shipper is concerned. If the container is not regarded as a 'package' within the terms of COGSA, then, the USD 500 liability limitation should be based on the customary freight unit. Section 4(5) of COGSA provides that in case of goods not shipped in packages, the limit of the carrier's liability shall be USD 500 'per customary freight unit'. In this case, the petitioner's liability for the shipment in question based on the freight unit would be USD 21,950 for the shipment of 43.9 cubic metres.

The majority opinion followed and applied the interpretation of the COGSA package limitation adopted by the Second Circuit in Mitsui & Co Ltd v American Export Lines Inc 636 F 2d 807 (1981) and Smithgreyhound v M/V Eurygenes 666 F 2d 746. Both cases adopted the rule that carrier-furnished containers whose contents are fully disclosed are not 'packages' within the meaning of s 4(5) of COGSA. However, the facts in those cases differ materially from those obtaining in this case, and the rule laid down in those two cases is by no means settled doctrine.

In Mitsui and Eurygenes, the containers were supplied by the carrier or shipping company. In the case at bar, there is no evidence showing that the two containers in question were carrier-supplied. This fact cannot be presumed. The two containers were delivered by the shipper to the carrier already sealed for shipment, and the number of cartons said to be contained inside them was indicated in the bill of lading, on the mere say-so of the shipper. The freight paid to the carrier on the shipment was based on the measurement (by volume) of the two containers at USD 34.50 per cubic metre. The shipper must have saved on the freight charges by using containers for the shipment. Under the circumstances, it would be unfair to the carrier to have the limitation of its liability under COGSA fixed on the number of cartons inside the containers, rather than on the containers themselves, since the freight revenue was based on the latter.

The Mitsui and Eurygenes decisions are not the last word on the subject. The interpretation of the COGSA package limitation is in a state of flux, as the courts continue to wrestle with the troublesome problem of applying the statutory limitation under COGSA to containerised shipments. The law was adopted before modern technological changes have revolutionised the shipping industry. There is a need for the law itself to be updated to meet the changes brought about by the container revolution, but this is a task which should be addressed by the legislative body. Until then, this Court, while mindful of US jurisprudence on the subject, should make its own interpretation of the COGSA provisions, consistent with what is equitable to the parties concerned. There is a need to balance the interests of the shipper and those of the carrier.

In this case, the shipper opted to ship the goods in two containers, and paid freight charges based on the freight unit, ie, cubic metres. The shipper did not declare the value of the shipment, for that would have entailed higher freight charges; instead of paying higher freight charges, the shipper protected itself by insuring the shipment. As subrogee, the insurance company can recover from the carrier only what the shipper itself is entitled to recover, not the amount it actually paid the shipper under the insurance policy.