Whereas...

Is the “whereas clause” an essential part of a contract that can enlarge or confer rights and obligations? This is one of the issues raised in this case between two major airline companies, Kuwait Airways Corporation (KAC) and the Philippine Air Lines Inc. (PAL).

In 1981, when PAL was still under the control of the Government through the GSIS, and at a time when it had not provided a route to Kuwait, it entered into a Commercial Agreement (Agreement) with KAC which had already a route to Manila. Under the Agreement, PAL and KAC were to jointly operate the Manila-Kuwait (and vice versa) route utilizing the planes and services of KAC until such time as PAL commences its operations to or via Kuwait. So instead of offering competing flights servicing Manila- Kuwait route, the two airlines agreed on revenue sharing with PAL being entitled to seat allocations on specified KAC sectors. This is in accordance with the 3rd and 4th freedom traffic rights of the 1944 International Air Transport Agreement (IATA). Hence KAC flights were authorized to board and deplane passengers from Kuwait to Manila and vice versa except that the flight was barred from boarding passengers in Bangkok and deplaning them in Manila or boarding them in Manila and deplaning them in Bangkok under the 5th freedom traffic rights.

The whereas clauses showed that KAC’s purpose in entering into the Agreement was to increase its Manila flights to two; that after a “cordial and frank discussions” the joint service agreement emerged as the most desirable alternative option; and that it is subject and without prejudice to any existing or future agreements between the Government Authorities of the Contracting Parties hereto.

No serious disagreements relating to the contract occurred until April 1995 when the Philippine and Kuwait Government, through their respective panels of delegates entered into a Confidential Memorandum of Understanding (CMU). Pursuant to the CMU, the unilateral operations and the exercise of the 3rd and 4th freedom traffic rights shall not be subject to any royalty payments or commercial arrangement anymore as of April 12, 1995.

So on May 15, 1995 KAC notified PAL terminating the royalty payment for the 3rd and 4th freedom traffic but maintaining the joint venture block space agreement with some modifications. To this notification, PAL called the attention of KAC that under the Commercial Agreement (par. 6.5) it can be terminated only on the last day of any traffic period, which is 31st March or 31st October after giving 90 days notice.

So PAL considered the May 15, 1995 letter as the requisite notice of termination for 31 October 1995 the last day of the current traffic period and insisted that KAC pay it the revenue for the uplift of passengers and cargo between April 13, 1995 and October 28, 1995 amounting to US$1,092,690.

KAC however refused and insisted that the bilateral agreement between Kuwait and Philippine Government (CMU) is superior to the Commercial Agreement. In fact under the third whereas clause of the said Agreement, it is subject and without prejudice to any existing or future agreements between the governments of the two parties. Was KAC correct?

No. In forging that whereas clause and the contexts it was understood in 1981, the intention of the parties and their contemporaneous and subsequent acts, as well as the relations existing between them at that time shall be principally considered. In 1981, PAL was still owned by the Philippine Government. In that context, it is evident that the Philippine Government, as owner of PAL could enter into Agreements with the Kuwait Government that would supersede the Commercial Agreement entered into by one of its GOCCs, a scenario that changed once PAL fell to private ownership.

So when PAL was transferred into private hands, the controverted “whereas clause” had taken a different complexion. It had ceased to be reflective of the current situation because it now stands as a seeming invitation to the Philippine Government to erode private vested rights. KAC’s interpretation of the “whereas” clause would have been acceptable had it still been reflective of the original intent to waive vested rights of private persons, rather than the rights in favor of the government by a GOCC. But that is not the case here. The said whereas clause cannot be interpreted in a manner that does not reflect the original intention of the parties.

In the case of a statute, a “whereas” clause manifests the reasons for its passage and aids in the interpretation of any ambiguities therein; nonetheless the said clause is still not one of its essential part and it neither enlarges nor confers powers. The same holds true as to the whereas clauses of a contract (Kuwait Airways vs. Philippine Airlines, G.R. 156087, May 8, 2009).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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