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UNITED MERCHANTS CORP. V. COUNTRY BANKERS INSURANCE

The Case This Petition for Review on Certiorari[1] seeks to reverse the Court of Appeals Decision[2] dated 16 June 2011 and its Resolution[3] dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals reversed the Decision[4] of the Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim on the Insurance Policy is void.

The Facts 

The facts, as culled from the records, are as follows: Petitioner United Merchants Corporation (UMC) is engaged in the business of buying, selling, and manufacturing Christmas lights. UMC leased a warehouse at 19-B Dagot Street, San Jose Subdivision, Barrio Manresa, Quezon City, where UMC assembled and stored its products. On 6 September 1995, UMCs General Manager Alfredo Tan insured UMCs stocks in trade of Christmas lights against fire with defendant Country Bankers Insurance Corporation (CBIC) for P15,000,000.00. The Fire Insurance Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No. 12959A, valid until 6 September 1996, states: 

AMOUNT OF INSURANCE: FIFTEENMILLION PESOSPHILIPPINECURRENCY 

x x x 

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the properties of the Assured or held by them in trust, on commissions, or on joint account with others and/or for which they are responsible in the event of loss and/or damage during the currency of this policy, whilst contained in the building of one lofty storey in height, constructed of concrete and/or hollow blocks with portion of galvanized iron sheets, under galvanized iron rood, occupied as Christmas lights storage.[5]

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to form part of the Insurance Policy. Endorsement F/96-154 provides that UMCs stocks

in trade were insured against additional perils, to wit: typhoon, flood, ext. cover, and full earthquake. The sum insured was also increased to P50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC issued Endorsement F/96-157 where the name of the assured was changed from Alfredo Tan to UMC. On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment Corporation (CRM) to investigate and evaluate UMCs loss by reason of the fire. CBICs reinsurer, Central Surety, likewise requested the National Bureau of Investigation (NBI) to conduct a parallel investigation. On 6 July 1996, UMC, through CRM, submitted to CBIC its Sworn Statement of Formal Claim, with proofs of its loss. On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from CBIC. On 25 February 1997, UMC received CBICs letter, dated 10 January 1997, rejecting UMCs claim due to breach of Condition No. 15 of the Insurance Policy. Condition No. 15 states:

 If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any benefit under this Policy; or if the loss or damage be occasioned by the willful act, or with the connivance of the Insured, all the benefits under this Policy shall be forfeited.[6]

 On 19 February 1998, UMC filed a Complaint[7] against CBIC with the RTC of Manila. UMC anchored its insurance claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted, and the Certification dated 24 July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J. Garcia of the Bureau of Fire Protection. The Certification dated 24 July 1996 provides that: 

This is to certify that according to available records of this office, on or about 6:10 P.M. of July 3, 1996, a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of Fifty-Five Million Pesos (P55,000,000.00) to the building and contents, while

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the reported insurance coverage amounted to Fifty Million Pesos (P50,000,000.00) with Country Bankers Insurance Corporation.The Bureau further certifies that no evidence was gathered to prove that the establishment was willfully, feloniously and intentionally set on fire.

 That the investigation of the fire incident is already closed being ACCIDENTAL in nature.[8]

In its Answer with Compulsory Counterclaim[9] dated 4 March 1998, CBIC admitted the issuance of the Insurance Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of action; (2) that UMCs claim has already prescribed; and (3) that UMCs fire claim is tainted with fraud. CBIC alleged that UMCs claim was fraudulent because UMCs Statement of Inventory showed that it had no stocks in trade as of 31 December 1995, and that UMCs suspicious purchases for the year 1996 did not even amount to P25,000,000.00. UMCs GIS and Financial Reports further revealed that it had insufficient capital, which meant UMC could not afford the alleged P50,000,000.00 worth of stocks in trade. In its Reply[10] dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy. UMC claimed that it did not make any false declaration because the invoices were genuine and the Statement of Inventory was for internal revenue purposes only, not for its insurance claim.During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMCs disbursing officer. Ebora testified that UMCs stocks in trade, at the time of the fire, consisted of: (1) raw materials for its Christmas lights; (2) Christmas lights already assembled; and (3) Christmas lights purchased from local suppliers. These stocks in trade were delivered from August 1995 to May 1996. She stated that Straight Cargo Commercial Forwarders delivered the imported materials to the warehouse, evidenced by delivery receipts. However, for the year 1996, UMC had no importations and only bought from its local suppliers. Ebora identified the suppliers as Fiber Technology Corporation from which UMC bought stocks worth P1,800,000.00 on 20 May 1996; Fuze Industries Manufacturer Philippines from which UMC bought stocks worth P19,500,000.00 from 20 January 1996 to 23 February 1996; and Tomco Commercial Press from which UMC bought several Christmas boxes. Ebora testified that all these deliveries were not

yet paid. Ebora also presented UMCs Balance Sheet, Income Statement and Statement of Cash Flow. Per her testimony, UMCs purchases amounted to P608,986.00 in 1994; P827,670.00 in 1995; and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales only from its fruits business but no sales from its Christmas lights for the year 1995. The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers to assemble and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third witness, Metropolitan Bank and Trust Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters of credit with MBTC for the year 1995 only. The fourth witness presented was Ernesto Luna (Luna), the delivery checker of Straight Commercial Cargo Forwarders. Luna affirmed the delivery of UMCs goods to its warehouse on 13 August 1995, 6 September 1995, 8 September 1995, 24 October 1995, 27 October 1995, 9 November 1995, and 19 December 1995. Lastly, CRMs adjuster Dominador Victorio testified that he inspected UMCs warehouse and prepared preliminary reports in this connection. On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a Securities and Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and NBI Investigator Arnold Lazaro (Lazaro). Caguindagan testified that he inspected the burned warehouse on 5 July 1996, took pictures of it and referred the claim to an independent adjuster. The SEC representatives testimony was dispensed with, since the parties stipulated on the existence of certain documents, to wit: (1) UMCs GIS for 1994-1997; (2) UMCs Financial Report as of 31 December 1996; (3) SEC Certificate that UMC did not file GIS or Financial Reports for certain years; and (4) UMCs Statement of Inventory as of 31 December 1995 filed with the BIR. Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMCs claim. On 19 November 1996, they concluded that arson was committed based from their interview with barangay officials and the pictures showing that blackened surfaces were present at different parts of the warehouse. On cross-examination, Lazaro admitted that they did not conduct a forensic investigation of the warehouse, nor did they file a case for arson. For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of UCPB

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General Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner. When asked to bring documents related to the insurance of Perfect Investment Company, Inc., Batallones brought the papers of Perpetual Investment, Inc.

 The Ruling of the Regional Trial Court

 On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive portion of which reads: 

WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering defendant to pay plaintiff:

 a) the sum of P43,930,230.00 as indemnity with interest thereon at 6% per annum from November 2003 until fully paid;b) the sum of P100,000.00 for exemplary damages;c) the sum of P100,000.00 for attorneys fees; andd) the costs of suit. Defendants counterclaim is denied for lack of merit.

 SO ORDERED.[11]

  

The RTC found no dispute as to UMCs fire insurance contract with CBIC. Thus, the RTC ruled for UMCs entitlement to the insurance proceeds, as follows: 

Fraud is never presumed but must be proved by clear and convincing evidence. (see Alonso v. Cebu Country Club, 417 SCRA 115 [2003]) Defendant failed to establish by clear and convincing evidence that the documents submitted to the SEC and BIR were true. It is common business practice for corporations to have 2 sets of reports/statements for tax purposes. The stipulated documents of plaintiff (Exhs. 2 8) may not have been accurate.

 The conflicting findings of defendants adjuster, CRM Adjustment [with stress] and that made by Atty. Cabrera & Mr. Lazaro for Central Surety shall be resolved in favor of the former. Definitely

the formers finding is more credible as it was made soon after the fire while that of the latter was done 4 months later. Certainly it would be a different situation as the site was no longer the same after the clearing up operation which is normal after a fire incident. The Christmas lights and parts could have been swept away. Hence the finding of the latter appears to be speculative to benefit the reinsurer and which defendant wants to adopt to avoid liability.

 The CRM Adjustment report found no arson and confirmed substantial stocks in the burned warehouse (Exhs. QQQ) [underscoring supplied]. This is bolstered by the BFP certification that there was no proof of arson and the fire was accidental (Exhs. PPP). The certification by a government agency like BFP is presumed to be a regular performance of official duty. Absent convincing evidence to the contrary, the presumption of regularity in the performance of official functions has to be upheld. (People vs. Lapira, 255 SCRA 85) The report of UCPB General Insurances adjuster also found no arson so that the burned warehouse owner PIC was indemnified.[12]

  

Hence, CBIC filed an appeal with the Court of Appeals (CA). 

The Ruling of the Court of Appeals 

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the Decision reads:

WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and the Decision of the Regional Trial Court, of the National Judicial Capital Region, Branch 3 of the City of Manila dated June 16, 2005 in Civil Case No. 98-87370 is REVERSED and SET ASIDE. The plaintiff-appellees claim upon its insurance policy is deemed avoided.

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 SO ORDERED.[13]

The CA ruled that UMCs claim under the Insurance Policy is void. The CA found that the fire was intentional in origin, considering the array of evidence submitted by CBIC, particularly the pictures taken and the reports of Cabrera and Lazaro, as opposed to UMCs failure to explain the details of the alleged fire accident. In addition, it found that UMCs claim was overvalued through fraudulent transactions. The CA ruled:

 We have meticulously gone over the entirety of the evidence submitted by the parties and have come up with a conclusion that the claim of the plaintiff-appellee was indeed overvalued by transactions which were fraudulently concocted so that the full coverage of the insurance policy will have to be fully awarded to the plaintiff-appellee.

 First, We turn to the backdrop of the plaintiff-appellees case, thus, [o]n September 6, 1995 its stocks-in-trade were insured for Fifteen Million Pesos and on May 7, 1996 the same was increased to 50 Million Pesos. Two months thereafter, a fire gutted the plaintiff-appellees warehouse.

 Second, We consider the reported purchases of the plaintiff-appellee as shown in its financial report dated December 31, 1996 vis--vis the testimony of Ms. Ebora thus:

 1994- P608,986.001995- P827,670.00

1996- P20,000,000.00 (more or less) which were purchased for a period of one month.

 Third, We shall also direct our attention to the alleged true and complete purchases of the plaintiff-appellee as well as the value of all stock-in-trade it had at the time that the fire occurred. Thus:< TABLE>

Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly looking through the pieces of evidence that it adduced

during the trial. The latter alleged that fraud is present in the case at bar as shown by the discrepancy of the alleged purchases from that of the reported purchases made by plaintiff-appellee. It had also averred that fraud is present when upon verification of the address of Fuze Industries, its office is nowhere to be found. Also, the defendant-appellant expressed grave doubts as to the purchases of the plaintiff-appellee sometime in 1996 when such purchases escalated to a high 19.5 Million Pesos without any contract to back it up.[14]

 On 7 July 2011, UMC filed a Motion for

Reconsideration,[15] which the CA denied in its Resolution dated 8 September 2011. Hence, this petition. 

The Issues UMC seeks a reversal and raises the following issues for resolution: 

I.WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW, APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON AND FRAUD IN THE ABSENCE OF MATERIALLY CONVINCING EVIDENCE.

II.WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW, APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER BREACHED ITS WARRANTY.[16]

 The Ruling of the Court

 At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court to review are questions of fact. However, UMC argues that where the findings of the CA are in conflict with those of the trial court, a review of the facts may be made. On this procedural issue, we find UMCs claim meritorious. A petition for review under Rule 45 of the Rules of Court specifically provides that only questions of law may be raised. The findings of fact of the CA are final and conclusive and this Court will not

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review them on appeal,[17] subject to exceptions as when the findings of the appellate court conflict with the findings of the trial court.[18] Clearly, the present case falls under the exception. Since UMC properly raised the conflicting findings of the lower courts, it is proper for this Court to resolve such contradiction. Having settled the procedural issue, we proceed to the primordial issue which boils down to whether UMC is entitled to claim from CBIC the full coverage of its fire insurance policy. UMC contends that because it had already established a prima facie case against CBIC which failed to prove its defense, UMC is entitled to claim the full coverage under the Insurance Policy. On the other hand, CBIC contends that because arson and fraud attended the claim, UMC is not entitled to recover under Condition No. 15 of the Insurance Policy.Burden of proof is the duty of any party to present evidence to establish his claim or defense by the amount of evidence required by law,[19] which is preponderance of evidence in civil cases.[20] The party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of proof to obtain a favorable judgment.[21] Particularly, ininsurance cases, once an insured makes out a prima facie case in its favor, the burden of evidence shifts to the insurer to controvert the insureds prima facie case.[22] In the present case, UMC established a prima facie case against CBIC. CBIC does not dispute that UMCs stocks in trade were insured against fire under the Insurance Policy and that the warehouse, where UMCs stocks in trade were stored, was gutted by fire on 3 July 1996, within the duration of the fire insurance. However, since CBIC alleged an excepted risk, then the burden of evidence shifted to CBIC to prove such exception. An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the burden of establishing that the loss comes within the purview of the exception or limitation.[23] If loss is proved apparently within a contract of insurance, the burden is upon the insurer to establish that the loss arose from a cause of loss which is excepted or for which it is not liable, or from a cause which limits its liability.[24] In the present case, CBIC failed to discharge its primordial burden of establishing that the damage or loss was caused by arson, a limitation in the policy. 

In prosecutions for arson, proof of the crime charged is complete where the evidence establishes: (1) the corpus delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants as the one responsible for the crime.[25] Corpus delicti means the substance of the crime, the fact that a crime has actually been committed.[26] This is satisfied by proof of the bare occurrence of the fire and of its having been intentionally caused.[27]

 In the present case, CBICs evidence did not prove that the fire was intentionally caused by the insured. First, the findings of CBICs witnesses, Cabrera and Lazaro, were based on an investigation conducted more than four months after the fire. The testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene as told to them by barangayofficials, are hearsay because the barangay officials were not presented in court. Cabrera and Lazaro even admitted that they did not conduct a forensic investigation of the warehouse nor did they file a case for arson.[28] Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM, states that the cause of the fire was faulty electrical wiring/accidental in nature. CBIC is bound by this evidence because in its Answer, it admitted that it designated CRM to evaluate UMCs loss. Third, the Certification by the Bureau of Fire Protection states that the fire was accidental in origin. This Certification enjoys the presumption of regularity, which CBIC failed to rebut. Contrary to UMCs allegation, CBICs failure to prove arson does not mean that it also failed to prove fraud. Qua Chee Gan v. Law Union[29] does not apply in the present case. InQua Chee Gan,[30] the Court dismissed the allegation of fraud based on the dismissal of the arson case against the insured, because the evidence was identical in both cases, thus:

 While the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurers evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer cannot be materially less convincing than that required in order to convict the insured of the crime of arson (Bachrach vs. British American Assurance Co., 17 Phil. 536). [31]

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 In the present case, arson and fraud are two separate grounds based on two different sets of evidence, either of which can void the insurance claim of UMC. The absence of one does not necessarily result in the absence of the other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals. Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be forfeited, if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, to wit: 

15. If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any benefit under this Policy; or if the loss or damage be occasioned by the willful act, or with the connivance of the Insured, all the benefits under this Policy shall be forfeited.

 In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32] the Court held that where a fire insurance policy provides that if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under this Policy, and the evidence is conclusive that the proof of claim which the insured submitted was false and fraudulent both as to the kind, quality and amount of the goods and their value destroyed by the fire, such a proof of claim is a bar against the insured from recovering on the policy even for the amount of his actual loss.

 In the present case, as proof of its loss of

stocks in trade amounting to P50,000,000.00, UMC submitted its Sworn Statement of Formal Claim together with the following documents: (1) letters of credit and invoices for raw materials, Christmas lights and cartons purchased; (2) charges for assembling the Christmas lights; and (3) delivery receipts of the raw materials. However, the charges for assembling the Christmas lights and delivery receipts could not support its insurance claim. The Insurance Policy provides that CBIC agreed to insure UMCs stocks in trade. UMC defined stock in trade as tangible personal property kept for sale or traffic.

[33] Applying UMCs definition, only the letters of credit and invoices for raw materials, Christmas lights and cartons may be considered. 

The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade purchased for 1996 amounts to P20,000,000.00 which were purchased in one month. Thus, UMC needs to prove purchases amounting to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in the Statement of Inventory it submitted to the BIR, which is considered an entry in official records,[34] UMC stated that it had no stocks in trade as of 31 December 1995. In its defense, UMC alleged that it did not include as stocks in trade the raw materials to be assembled as Christmas lights, which it had on 31 December 1995. However, as proof of its loss, UMC submitted invoices for raw materials, knowing that the insurance covers only stocks in trade.Equally important, the invoices (Exhibits P-DD) from Fuze Industries Manufacturer Phils. were suspicious. The purchases, based on the invoices and without any supporting contract, amounted to P19,550,400.00 worth of Christmas lights from 20 January 1996 to 23 February 1996. The uncontroverted testimony of Cabrera revealed that there was no Fuze Industries Manufacturer Phils. located at 55 Mahinhin St., Teachers Village, Quezon City, the business address appearing in the invoices and the records of the Department of Trade & Industry. Cabrera testified that:

 A: Then we went personally to the address as I stated a while ago appearing in the record furnished by the United Merchants Corporation to the adjuster, and the adjuster in turn now, gave us our basis in conducting investigation, so we went to this place which according to the records, the address of this company but there was no office of this company.

 Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and discover the address indicated by the United Merchants as the place of business of Fuze Industries Manufacturer, Phils. was a residential place, what then did you do after determining that it was a residential place?

 

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A: We went to the owner of the alleged company as appearing in the Department of Trade & Industry record, and as appearing a certain Chinese name Mr. Huang, and the address as appearing there is somewhere in Binondo. We went personally there together with the NBI Agent and I am with them when the subpoena was served to them, but a male person approached us and according to him, there was no Fuze Industries Manufacturer, Phils., company in that building sir.[35]

 In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,[36] the Court ruled that the submission of false invoices to the adjusters establishes a clear case of fraud and misrepresentation which voids the insurers liability as per condition of the policy. Their falsity is the best evidence of the fraudulent character of plaintiffs claim.[37] In Verendia v. Court of Appeals,[38] where the insured presented a fraudulent lease contract to support his claim for insurance benefits, the Court held that by its false declaration, the insured forfeited all benefits under the policy provision similar to Condition No. 15 of the Insurance Policy in this case. Furthermore, UMCs Income Statement indicated that the purchases or costs of sales are P827,670.00 for 1995 and P1,109,190.00 for 1996 or a total of P1,936,860.00.[39] To corroborate this fact, Ebora testified that:

 Q: Based on your 1995 purchases, how much were the purchases made in 1995?A: The purchases made by United Merchants Corporation for the last year 1995 is   P 827,670.[00] sir Q: And how about in 1994?A: In 1994, its P608,986.00 sir. Q: These purchases were made for the entire year of 1995 and 1994 respectively, am I correct?A: Yes sir, for the year 1994 and 1995.[40] (Emphasis supplied)

 In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed during the 4 December 2002 hearing, it had P1,050,862.71 as total assets andP167,058.47 as total liabilities.[41]

 Thus, either amount in UMCs Income Statement or Financial Reports is twenty-five times the claim UMC seeks to enforce. The RTC itself recognized that UMC padded its claim when it only allowed P43,930,230.00 as insurance claim. UMC supported its claim of P50,000,000.00 with the Certification from the Bureau of Fire Protection stating that x x x a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of Fifty- Five Million Pesos (P55,000,000.00) to the building and contents x x x. However, this Certification only proved that the estimated damage of P55,000,000.00 is shared by both the building and the stocks in trade.It has long been settled that a false and material statement made with an intent to deceive or defraud voids an insurance policy.[42] In Yu Cua v. South British Insurance Co.,[43]the claim was fourteen times bigger than the real loss; in Go Lu v. Yorkshire Insurance Co,[44] eight times; and in Tuason v. North China Insurance Co.,[45] six times. In the present case, the claim is twenty five times the actual claim proved. The most liberal human judgment cannot attribute such difference to mere innocent error in estimating or counting but to a deliberate intent to demand from insurance companies payment for indemnity of goods not existing at the time of the fire.[46] This constitutes the so-called fraudulent claim which, by express agreement between the insurers and the insured, is a ground for the exemption of insurers from civil liability.[47]

 In its Reply, UMC admitted the discrepancies when it stated that discrepancies in its statements were not covered by the warranty such that any discrepancy in the declaration in other instruments or documents as to matters that may have some relation to the insurance coverage voids the policy.[48]

 On UMCs allegation that it did not breach any warranty, it may be argued that the discrepancies do not, by themselves, amount to a breach of warranty. However, the Insurance Code provides that a policy may declare that a violation of specified provisions thereof shall avoid it.[49] Thus, in fire insurance policies, which contain provisions such as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy between the actual loss and that claimed in the proof of loss voids the insurance policy. Mere filing of such a claim will exonerate the insurer.[50]

Considering that all the circumstances point to the inevitable conclusion that UMC padded its

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claim and was guilty of fraud, UMC violated Condition No. 15 of the Insurance Policy. Thus, UMC forfeited whatever benefits it may be entitled under the Insurance Policy, including its insurance claim. While it is a cardinal principle of insurance law that a contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company,[51]contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used.[52] If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. Courts are not permitted to make contracts for the parties; the function and duty of the courts is simply to enforce and carry out the contracts actually made.[53]

 WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8 September 2011 Resolution of the Court of Appeals in CA-G.R. CV No. 85777. SO ORDERED.

TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner, vs. HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.

D E C I S I O NHERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision[1] of respondent Court of Appeals[2] affirming in toto the judgment[3] of the Regional Trial Court[4] in an action for damages[5] filed by private respondent Vicente Mendoza, Jr. as heir of his mother who was killed in a vehicular accident.

Before the trial court, the complainant lumped the erring taxicab driver, the owner of the taxicab, and the alleged insurer of the vehicle which featured in the vehicular accident into one complaint. The erring taxicab was allegedly covered by a third-party liability insurance policy issued by petitioner Travellers Insurance & Surety Corporation.

The evidence presented before the trial court established the following facts:At about 5:30 oclock in the morning of July 20, 1980, a 78-year old woman by the name of Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman Cathedral. While walking along Tayuman corner Gregorio Perfecto Streets, she was bumped by a taxi that was running fast. Several persons witnessed the accident, among whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After the bumping, the

old woman was seen sprawled on the pavement. Right away, the good Samaritan that he was, Marvilla ran towards the old woman and held her on his lap to inquire from her what had happened, but obviously she was already in shock and could not talk. At this moment, a private jeep stopped. With the driver of that vehicle, the two helped board the old woman on the jeep and brought her to the Mary Johnston Hospital in Tondo.x x x Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It was on his return trip from Rizal Avenue when Lopez saw the plaintiff and his brother who were crying near the scene of the accident. Upon learning that the two were the sons of the old woman, Lopez told them what had happened. The Mendoza brothers were then able to trace their mother at the Mary Johnston Hospital where they were advised by the attending physician that they should bring the patient to the National Orthopedic Hospital because of her fractured bones. Instead, the victim was brought to the U.S.T. Hospital where she expired at 9:00 oclock that same morning. Death was caused by traumatic shock as a result of the severe injuries she sustained x x x x.x x x The evidence shows that at the moment the victim was bumped by the vehicle, the latter was running fast, so much so that because of the strong impact the old woman was thrown away and she fell on the pavement. x x x In truth, in that related criminal case against defendant Dumlao x x x the trial court found as a fact that therein accused was driving the subject taxicab in a careless, reckless and imprudent manner and at a speed greater than what was reasonable and proper without taking the necessary precaution to avoid accident to persons x x x considering the condition of the traffic at the place at the time aforementioned x x x. Moreover, the driver fled from the scene of the accident and without rendering assistance to the victim. x x xx x x Three (3) witnesses who were at the scene at the time identified the taxi involved, though not necessarily the driver thereof. Marvilla saw a lone taxi speeding away just after the bumping which, when it passed by him, said witness noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage bar attached on the baggage compartment and with an antenae[sic] attached at the right rear side.The same descriptions were revealed by Ernesto Lopez, who further described the taxi to have x x x reflectorized decorations on the edges of the glass at the back. x x x A third witness in the person of Eulogio Tabalno x x x made similar descriptions although, because of the fast speed of the taxi, he

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was only able to detect the last digit of the plate number which is 8. x x x [T]he police proceeded to the garage of Lady Love Taxi and then and there they took possession of such a taxi and later impounded it in the impounding area of the agency concerned. x x x [T]he eyewitnesses x x x were unanimous in pointing to that Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.x x x During the investigation, defendant Armando Abellon, the registered owner of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact that the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao x x x x x x It was on the basis of this affidavit of the registered owner that caused the police to apprehend Rodrigo Dumlao, and consequently to have him prosecuted and eventually convicted of the offense x x x. x x x [S]aid Dumlao absconded in that criminal case, specially at the time of the promulgation of the judgment therein so much so that he is now a fugitive from justice.[6]

Private respondent filed a complaint for damages against Armando Abellon as the owner of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private respondents mother. Subsequently, private respondent amended his complaint to include petitioner as the compulsory insurer of the said taxicab under Certificate of Cover No. 1447785-3.

After trial, the trial court rendered judgment in favor of private respondent, the dispositive portion of which reads:WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more particularly the Heirs of the late Feliza Vineza de Mendoza, and against defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and Surety Corporation, by ordering the latter to pay, jointly and severally, the former the following amounts:(a) The sum of P2,924.70, as actual and compensatory damages, with interest thereon at the rate of 12% per annum from October 17, 1980, when the complaint was filed, until the said amount is fully paid;(b) P30,000.00 as death indemnity;(c) P25,000.00 as moral damages;(d) P10,000.00 as by way of corrective or exemplary damages; and(e) Another P10,000.00 by way of attorneys fees and other litigation expenses.Defendants are further ordered to pay, jointly and severally, the costs of this suit.SO ORDERED.[7]

Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The decision of the trial court was affirmed by respondent appellate court. Petitioners Motion for

Reconsideration[8] of September 22, 1987 was denied in a Resolution[9] dated February 9, 1988.

Hence this petition.Petitioner mainly contends that it did not

issue an insurance policy as compulsory insurer of the Lady Love Taxi and that, assuming arguendo that it had indeed covered said taxicab for third-party liability insurance, private respondent failed to file a written notice of claim with petitioner as required by Section 384 of P.D. No. 612, otherwise known as the Insurance Code.

We find the petition to be meritorious.I

When private respondent filed his amended complaint to implead petitioner as party defendant and therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab that fatally hit private respondents mother, private respondent did not attach a copy of the insurance contract to the amended complaint. Private respondent does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue the insurer depends on whether the contract of insurance is intended to benefit third persons also or only the insured.[A] policy x x x whereby the insurer agreed to indemnify the insured against all sums x x x which the Insured shall become legally liable to pay in respect of: a. death of or bodily injury to any person x x x is one for indemnity against liability; from the fact then that the insured is liable to the third person, such third person is entitled to sue the insurer.The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of insurance is intended to benefit third persons also or on the insured. And the test applied has been this: Where the contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable can sue the insurer. Where the contract is for indemnity against actual loss or payment, then third persons cannot proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him thru payment to third persons, said third persons recourse being thus limited to the insured alone.[10]

Since private respondent failed to attach a copy of the insurance contract to his complaint, the trial court could not have been able to apprise itself of the real nature and pecuniary limits of petitioners liability. More importantly, the trial court could not have possibly ascertained the right of private respondent as third person to sue petitioner as insurer of the Lady Love taxicab

10

because the trial court never saw nor read the insurance contract and learned of its terms and conditions.

Petitioner, understandably, did not volunteer to present any insurance contract covering the Lady Love taxicab that fatally hit private respondents mother, considering that petitioner precisely presented the defense of lack of insurance coverage before the trial court. Neither did the trial court issue a subpoena duces tecum to have the insurance contract produced before it under pain of contempt.

We thus find hardly a basis in the records for the trial court to have validly found petitioner liable jointly and severally with the owner and the driver of the Lady Love taxicab, for damages accruing to private respondent.

Apparently, the trial court did not distinguish between the private respondents cause of action against the owner and the driver of the Lady Love taxicab and his cause of action against petitioner. The former is based on torts and quasi-delicts while the latter is based on contract. Confusing these two sources of obligations as they arise from the same act of the taxicab fatally hitting private respondents mother, and in the face of overwhelming evidence of the reckless imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its ignorance of the terms and conditions of the insurance contract and forthwith found all three - the driver of the taxicab, the owner of the taxicab, and the alleged insurer of the taxicab - jointly and severally liable for actual, moral and exemplary damages as well as attorneys fees and litigation expenses. This is clearly a misapplication of the law by the trial court, and respondent appellate court grievously erred in not having reversed the trial court on this ground.While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third-party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort.[11]

Applying this principle underlying solidary obligation and insurance contracts, we ruled in one case that:In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand, insurance is defined as a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioners liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,103.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third-party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary is an evident breach of the concept of a solidary obligation.[12]

The above principles take on more significance in the light of the counter-allegation of petitioner that, assuming arguendo that it is the insurer of the Lady Love taxicab in question, its liability is limited to only P50,000.00, this being its standard amount of coverage in vehicle insurance policies. It bears repeating that no copy of the insurance contract was ever proffered before the trial court by the private respondent, notwithstanding knowledge of the fact that the latters complaint against petitioner is one under a written contract. Thus, the trial court proceeded to hold petitioner liable for an award of damages exceeding its limited liability of P50,000.00. This only shows beyond doubt that the trial court was under the erroneous presumption that petitioner could be found liable absent proof of the contract and based merely on the proof of reckless imprudence on the part of the driver of the Lady Love taxicab that fatally hit private respondents mother.

IIPetitioner did not tire in arguing before the

trial court and the respondent appellate court that, assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private respondents cause of action against petitioner did not successfully accrue because he failed to file with petitioner a written notice of claim within six (6) months from the date of the accident as required by Section 384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private respondents mother, during which time the Insurance Code had not yet been amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as follows:

11

Any person having any claim upon the policy issued pursuant to this chapter shall, without any unnecessary delay, present to the insurance company concerned a written notice of claim setting forth the amount of his loss, and/or the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from date of the accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commission or the Courts within one year from date of accident, otherwise the claimants right of action shall prescribe [emphasis and underscoring supplied].

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman,[13] we ruled that the one year prescription period to bring suit in court against the insurer should be counted from the time that the insurer rejects the written claim filed therewith by the insured, the beneficiary or the third person interested under the insurance policy. We explained:It is very obvious that petitioner company is trying to use Section 384 of the Insurance Code as a cloak to hide itself from its liabilities. The facts of these cases evidently reflect the deliberate efforts of petitioner company to prevent the filing of a formal action against it. Bearing in mind that if it succeeds in doing so until one year lapses from the date of the accident it could set up the defense of prescription, petitioner company made private respondents believe that their claims would be settled in order that the latter will not find it necessary to immediately bring suit. In violation of its duties to adopt and implement reasonable standards for the prompt investigation of claims and to effectuate prompt, fair and equitable settlement of claims, and with manifest bad faith, petitioner company devised means and ways of stalling the settlement proceedings. x x x [N]o steps were taken to process the claim and no rejection of said claim was ever made even if private respondent had already complied with all the requirements. x x xThis Court has made the observation that some insurance companies have been inventing excuses to avoid their just obligations and it is only the State that can give the protection which the insuring public needs from possible abuses of the insurers.[14]

It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to categorically provide that action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commissioner or the Courts within one year from denial of the

claim, otherwise the claimants right of action shall prescribe [emphasis ours].[15]

We have certainly ruled with consistency that the prescriptive period to bring suit in court under an insurance policy, begins to run from the date of the insurers rejection of the claim filed by the insured, the beneficiary or any person claiming under an insurance contract. This ruling is premised upon the compliance by the persons suing under an insurance contract, with the indispensable requirement of having filed the written claim mandated by Section 384 of the Insurance Code before and after its amendment. Absent such written claim filed by the person suing under an insurance contract, no cause of action accrues under such insurance contract, considering that it is the rejection of that claim that triggers the running of the one-year prescriptive period to bring suit in court, and there can be no opportunity for the insurer to even reject a claim if none has been filed in the first place, as in the instant case.The one-year period should instead be counted from the date of rejection by the insurer as this is the time when the cause of action accrues. x x xIn Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:The plaintiffs cause of action did not accrue until his claim was finally rejected by the insurance company. This is because, before such final rejection, there was no real necessity for bringing suit.The philosophy of the above pronouncement was pointed out in the case of ACCFA vs. Alpha Insurance and Surety Co., viz.:Since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative obligation of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty.[16]

When petitioner asseverates, thus, that no written claim was filed by private respondent and rejected by petitioner, and private respondent does not dispute such asseveration through a denial in his pleadings, we are constrained to rule that respondent appellate court committed reversible error in finding petitioner liable under an insurance contract the existence of which had not at all been proven in court. Even if there were such a contract, private respondents cause of action can not prevail because he failed to file the written claim mandated by Section 384 of the Insurance Code. He is deemed, under this legal provision, to have waived his rights as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in

12

CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are REVERSED and SET ASIDE insofar as Travellers Insurance & Surety Corporation was found jointly and severally liable to pay actual, moral and exemplary damages, death indemnity, attorneys fees and litigation expenses in Civil Case No. 135486. The complaint against Travellers Insurance & Surety Corporation in said case is hereby ordered dismissed.

No pronouncement as to costs.SO ORDERED.

SUN INSURANCE OFFICE, LTD., petitioner, vs.COURT OF APPEALS and EMILIO TAN, respondents.

This is a petition for review on certiorari of the June 20, 1989 decision 1 of the Court of Appeals in CA-G.R. SP. Case No. 13848 affirming the November 3, 1987 and January 14, 1988 orders of the Regional Trial Court 2 of Iloilo, Branch 27, in Civil Case No. 16817, denying the motion to dismiss and the subsequent motion for reconsideration; and the August 22, 1989 resolution of the same court denying the motion for reconsideration.

On August 15, 1983, herein private respondent Emilio Tan took from herein petitioner a P300,000.00 property insurance policy to cover his interest in the electrical supply store of his brother housed in a building in Iloilo City. Four (4) days after the issuance of the policy, the building was burned including the insured store. On August 20, 1983, Tan filed his claim for fire loss with petitioner, but on February 29, 1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan wrote petitioner, seeking reconsideration of the denial of his claim. On September 3, 1985, Tan's counsel wrote the Insurer inquiring about the status of his April 3, 1984 request for reconsideration. Petitioner answered the letter on October 11, 1985, advising Tan's counsel that the Insurer's denial of Tan's claim remained unchanged, enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985 (response to petition for reconsideration). On November 20, 1985, Tan filed Civil Case No. 16817 with the Regional Trial Court of Iloilo, Branch 27 but petitioner filed a motion to dismiss on the alleged ground that the action had already prescribed. Said motion was denied in an order dated November 3, 1987; and petitioner's motion for reconsideration was also denied in an order dated January 14, 1988.

Petitioner went to the Court of Appeals and sought the nullification of the said Nov. 3, 1987 and January 14, 1988 orders, but the Court of Appeals, in its June 20, 1989 decision denied the petition and held that the court a quo may continue until its final termination.

A motion for reconsideration was filed, but the same was denied by the Court of Appeals in its resolution of August 22, 1989 (Rollo, pp. 42-43).

Hence, the instant petition.

The Second Division of this Court, in its resolution of December 18, 1989 resolved to give due course to the petition and to require the parties to submit simultaneous memoranda (Ibid., p. 56).

Petitioner raised two (2) issues which may be stated in substance, as follows:

I

WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION INTERRUPTS THE TWELVE (12) MONTHS PRESCRIPTIVE PERIOD TO CONTEST THE DENIAL OF THE INSURANCE CLAIM; and

II

WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED FINAL ONLY IF IT CONTAINS WORDS TO THE EFFECT THAT THE DENIAL IS FINAL.

The answer to the first issue is in the negative.

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly against the insurer company, yet, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense (Pacific Banking Corp. v. Court of Appeals, 168 SCRA 1 [1988]).

Condition 27 of the Insurance Policy, which is the subject of the conflicting contentions of the parties, reads:

27. Action or suit clause — If a claim be made and rejected and an action or suit be not commenced either in the Insurance Commission or in any court of competent

13

jurisdiction within twelve (12) months from receipt of notice of such rejection, or in case of arbitration taking place as provided herein, within twelve (12) months after due notice of the award made by the arbitrator or arbitrators or umpire, then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.

As the terms are very clear and free from any doubt or ambiguity whatsoever, it must be taken and understood in its plain, ordinary and popular sense pursuant to the above-cited principle laid down by this Court.

Respondent Tan, in his letter addressed to the petitioner insurance company dated April 3, 1984 (Rollo, pp. 50-52), admitted that he received a copy of the letter of rejection on April 2, 1984. Thus, the 12-month prescriptive period started to run from the said date of April 2, 1984, for such is the plain meaning and intention of Section 27 of the insurance policy.

While the question of whether or not the insured was definitely advised of the rejection of his claim through the letter (Rollo, pp. 48-49) of petitioner dated February 29, 1984, may arise, the certainty of the denial of Tan's claim was clearly manifested in said letter, the pertinent portion of which reads:

We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz, Iloilo City.

We now have the report of our adjusters and after a thorough and careful review of the same and the accompanying documents at hand, we are rejecting, much to our regrets, liability for the claim under our policies for one or more of the following reasons:

1. xxx xxx xxx

2. xxx xxx xxx

For your information, we have referred all these matters to our lawyers for their opinion as to the compensability of your claim, particularly referring to the above violations. It is their opinion and in fact their strong recomendation to us to deny your claim. By this letter, we do not intend to waive or relinquish any of our rights or defenses under our policies of insurance.

It is also important to note the principle laid down by this Court in the case of Ang v. Fulton Fire Insurance Co., (2 SCRA 945 [1961]), to wit:

The condition contained in an insurance policy that claims must be presented within one year after rejection is not merely a procedural requirement but an important matter essential to a prompt settlement of claims against insurance companies as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of destruction have not yet disappeared.

In enunciating the above-cited principle, this Court had definitely settled the rationale for the necessity of bringing suits against the Insurer within one year from the rejection of the claim. The contention of the respondents that the one-year prescriptive period does not start to run until the petition for reconsideration had been resolved by the insurer, runs counter to the declared purpose for requiting that an action or suit be filed in the Insurance Commission or in a court of competent jurisdiction from the denial of the claim. To uphold respondents' contention would contradict and defeat the very principle which this Court had laid down. Moreover, it can easily be used by insured persons as a scheme or device to waste time until any evidence which may be considered against them is destroyed.

It is apparent that Section 27 of the insurance policy was stipulated pursuant to Section 63 of the Insurance Code, which states that:

Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void.

The crucial issue in this case is: When does the cause of action accrue?

In support of private respondent's view, two rulings of this Court have been cited, namely, the case of Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where the Court held:

The right of the insured to the payment of his loss accrues from the happening of the loss. However, the cause of action in an insurance contract does not accrue until the insured's claim is finally rejected by the insurer. This is because before such

14

final rejection there is no real necessity for bringing suit.

and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968], holding that:

Since "cause of action" requires as essential elements not only a legal right of the plaintiff and a correlated obligation of the defendant in violation of the said legal right, the cause of action does not accrue until the party obligated (surety) refuses, expressly or impliedly, to comply with its duty (in this case to pay the amount of the bond).

Indisputably, the above-cited pronouncements of this Court may be taken to mean that the insured's cause of action or his right to file a claim either in the Insurance Commission or in a court of competent jurisdiction commences from the time of the denial of his claim by the Insurer, either expressly or impliedly.

But as pointed out by the petitioner insurance company, the rejection referred to should be construed as the rejection, in the first instance, for if what is being referred to is a reiterated rejection conveyed in a resolution of a petition for reconsideration, such should have been expressly stipulated.

Thus, to allow the filing of a motion for reconsideration to suspend the running of the prescriptive period of twelve months, a whole new body of rules on the matter should be promulgated so as to avoid any conflict that may be brought by it, such as:

a) whether the mere filing of a plea for reconsideration of a denial is sufficient or must it be supported by arguments/affidavits/material evidence;

b) how many petitions for reconsideration should be permitted?

While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final rejection", the same cannot be taken to mean the rejection of a petition for reconsideration as insisted by respondents. Such was clearly not the meaning contemplated by this Court. The Insurance policy in said case provides that the insured should file his claim, first, with the carrier and then with the insurer. The "final rejection" being referred to in said case is the rejection by the insurance company.

PREMISES CONSIDERED, the questioned decision of the Court of Appeals is REVERSED and SET ASIDE, and Civil Case No. 16817 filed with the Regional Trial Court is hereby DISMISSED.

SO ORDERED.

FIREMAN'S FUND INSURANCE COMPANY and FIRESTONE TIRE AND RUBBER COMPANY OF THE PHILIPPINES, plaintiffs-appellants, vs.JAMILA & COMPANY, INC. and FIRST QUEZON CITY INSURANCE CO., INC., defendants-appellees.

Conrado R. Ayuyao for plaintiffs-appellees.

Ponciano U. Pitargue for defendant-appellee First quezon City Insurance Co., Inc.

Fernando B. Zamora for defendant-appellee Jamila & Company, Inc.

 

AQUINO, J.:

Fireman's Fund and Insurance Company (Fireman's Fund for short) and Firestone Tire and Rubber Company of the Philippines appealed from the order dated October 18, 1966 of the Court of First Instance of Manila, dismissing their complaint against Jamila & Co., Inc. (hereinafter called Jamila) for the recovery of the sum of P11,925.00 plus interest, damages and attorney's fees (Civil Case No. 65658).

The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security Agency contracted to supply security guards to Firestone; that Jamila assumed responsibility for the acts of its security guards; that First Quezon City Insurance Co., Inc. executed a bond in the sum of P20,000.00 to guarantee Jamila's obligations under that contract; that on May 18, 1963 properties of Firestone valued at P11,925.00 were lost allegedly due to the acts of its employees who connived with Jamila's security guard; that Fireman's Fund, as insurer, paid to Firestone the amount of the loss; that Fireman's Fund was subrogated to Firestone's right to get reimbursement from Jamila, and that Jamila and its surety, First Quezon City Insurance Co., Inc., failed to pay the amount of the loss in spite of repeated demands.

Upon defendants' motions, the lower court in its order of July 22, 1966 dismissed the complaint as to Jamila on the ground that there was no

15

allegation that it had consented to the subrogation and, therefore, Fireman's Fund had no cause of action against it.

In the same order the lower court dismissed the complaint as to First Quezon City Insurance Co., Inc. on the ground of res judicata. It appears that the same action was previously filed in Civil Case No. 56311 which was dismiss because of the failure of the same plaintiffs and their counsel to appear at the pre trial.

Firestone and Fireman's Fund moved for the reconsideration of the order of dismissal. The lower court on September 3, 1966 set aside its order of dismissal. It sustained plaintiffs' contention that there was no res judicataas to First Quezon City Insurance Co., Inc. because Civil Case No. 56311 was dismissed without prejudice. Later, First Quezon City Insurance Co., Inc. filed its answer to the complaint.

However, due to inadvertence, the lower court did not state in its order of September 3, 1966 why it set aside its prior order dismissing the complaint with respect to Jamila.

What is now to be recounted shows the lack of due care on the part of the lower court and the opposing lawyers in their management of the case. Such lack of due care has given the case a farcical ambiance and might partially explain the long delay in its adjudication.

Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory without any reason therefor, filed a motion for reconsideration. It had originally moved for the dismissal of the complaint on the ground of lack of cause of action. Its contention was based on two grounds, to wit: (1) that the complaint did not allege that Firestone, pursuant to the contractual stipulation quoted in the complaint, had investigated the loss and that Jamila was represented in the investigation and (2) that Jamila did not consent to the subrogation of Fireman's Fund to Firestone's right to get reimbursement from Jamila and its surety. The lower court in its order of dismissal had sustained the second ground.

Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked the first ground which had never been passed upon by the lower court. Firestone and Fireman's Fund in their opposition joined battle, in a manner of speaking, on that first ground.

But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration, completely ignored that first ground. It reverted to the second ground which was relied upon in its order of September 3, 1966. The lower court reiterated its order of July 22, 1966 that Fireman's Fund had no cause of action against Jamila because Jamila did not consent to the subrogation. The court did not mention Firestone, the co-plaintiff of Fireman's Fund.

At this juncture, it may be noted that motions for reconsideration become interminable when the court's orders follow a seesaw pattern. That phenomenon took place in this case.

Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of October 18, 1966 on the ground that Fireman's Fund Insurance Company was suing on the basis of legal subrogation whereas the lower court erroneously predicated its dismissal order on the theory that there was no conventional subrogation because the debtor's consent was lacking.

The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract".

The lower court denied plaintiffs' motion. They filed a second motion for reconsideration. In that motion they sensibly called the lower court's attention to the fact that the issue of subrogation was of no moment because Firestone, the subrogor, is a party-plaintiff and could sue directly Jamila in its own right. Without resolving that contention, the lower court denied plaintiffs' second motion for reconsideration.

In this appeal Firestone and Fireman's Fund contend that the trial court's dismissal of their complaint is contrary to the aforementioned article 2207 which provides for legal subrogation.

Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires the debtor's consent; that legal subrogation takes place in the cases mentioned in article 1302 of the Civil Code and the instant case is not among the three cases enumerated in that article, and that there could be no subrogation in this case

16

because according to the plaintiffs the contract between. Jamila and Firestone was entered into on June 1, 1965 but the loss complained of occurred on May 18, 1963.

With respect to the factual point raised by Jamila, it should be stated that plaintiffs' counsel gratuitously alleged in their brief that Firestone and Jamila entered into a "contract of guard services" on June 1, 1965. That allegation, which was uncalled for because it is not found in the complaint, created confusion which heretofore did not exist. No copy of the contract was annexed to the complaint.

That confusing statement was an obvious error since it was expressly alleged in the complaint that the loss occurred on May 18, 1963. The fact that such an error was committed is another instance substantiating our previous observation that plaintiffs' counsel had not exercised due care in the presentation of his case.

The issue is whether the complaint of Firestone and Fireman's Fund states a cause of action against Jamila.

We hold that Firestone is really a nominal, party in this case. It had already been indemnified for the loss which it had sustained. Obviously, it joined as a party-plaintiff in order to help Fireman's Fund to recover the amount of the loss from Jamila and First Quezon City Insurance Co., Inc. Firestone had tacitly assigned to Fireman's Fund its cause of action against Jamila for breach of contract. Sufficient ultimate facts are alleged in the complaint to sustain that cause of action.

On the other hand, Fireman's Fund's action against Jamila is squarely sanctioned by article 2207. As the insurer, Fireman's Fund is entitled to go after the person or entity that violated its contractual commitment to answer for the loss insured against (Cf. Philippine Air Lines, Inc. vs. Heald Lumber Co., 101 Phil. 1032; Rizal Surety & Insurance Co. vs. Manila Railroad Company, L-24043, April 25, 1968, 23 SCRA 205).

The trial court erred in applying to this case the rules on novation. The plaintiffs in alleging in their complaint that Fireman's Fund "became a party in interest in this case by virtue of a subrogation right given in its favor by" Firestone, were not relying on the novation by change of creditors as contemplated in articles 1291 and 1300 to 1303 of the Civil Code but rather on article 2207.

Article 2207 is a restatement of a settled principle of American jurisprudence. Subrogation has been referred to as the doctrine of substitution. It "is an arm of equity that may guide or even force one to pay a debt for which an obligation was incurred but which was in whole or in part paid by another" (83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State Compensation Insurance Fund, 209 Pac. 2d 55).

"Subrogation is founded on principles of justice and equity, and its operation is governed by principles of equity. It rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form"(83 C.J.S. 579- 80)

Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose. negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U. S. 294, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

"Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N. C. 456,142 SE 2d 18).

Whether the plaintiffs would be able to prove their cause of action against Jamila is another question.

17

Finding the trial court's order of dismissal to be legally untenable, the same is set aside with costs against defendant-appellee Jamila & Co., Inc.

SO ORDERED.

MALAYAN INSURANCE CO., INC., petitioner, vs.THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.

Freqillana Jr. for petitioner.

B.F. Estrella & Associates for respondent Martin Vallejos.

Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.

Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

 

PADILLA, J.:

Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.

The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00.

During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured

vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep.

As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees.

Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.

Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.

Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to pay.

Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an

18

employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.

After trial, judgment was rendered as follows:

WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:

(a) P4,103 as actual damages;

(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years;

(c) P5,000.00 as moral damages;

(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.

The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00.

As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved.1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been

ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2

Hence, the present recourse by petitioner insurance company.

The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy.

The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3

However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.

Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy.

As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.

We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of

19

the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads:

Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible.

xxx xxx xxx

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged ill any business or industry.

xxx xxx xxx

The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage.

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. 4

On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third

20

party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts.

In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co.

vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of contract (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

21

He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded.

xxx xxx xxx

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.

To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 )

WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.

SO ORDERED.

SULPICIO LINES, INC., petitioner, vs. FIRST LEPANTO-TAISHO INSURANCE CORPORATION, respondent.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is a Petition for Review on Certiorari assailing the Decision[1] of the Court of Appeals reversing the Decision[2] of the Regional Trial Court (RTC) of Manila, Branch XIV, dismissing the complaint for damages for failure of the plaintiff to prove its case with a preponderance of evidence. Assailed as well is the Resolution[3] of the Court of Appeals denying petitioners Motion for Reconsideration.

THE FACTS

On 25 February 1992, Taiyo Yuden Philippines, Inc. (owner of the goods) and Delbros, Inc. (shipper) entered into a contract, evidenced by Bill of Lading No. CEB/SIN-008/92 issued by the latter in favor of the owner of the goods, for Delbros, Inc. to transport a shipment of goods consisting of three (3) wooden crates containing one hundred thirty-six (136) cartons of inductors and LC compound on board the V Singapore V20 from Cebu City to Singapore in favor of the consignee, Taiyo Yuden Singapore Pte, Ltd.

For the carriage of said shipment from Cebu City to Manila, Delbros, Inc. engaged the services of the vessel M/V Philippine Princess, owned and operated by petitioner Sulpicio Lines, Inc. (carrier). The vessel arrived at the North Harbor, Manila, on 24 February 1992.

During the unloading of the shipment, one crate containing forty-two (42) cartons dropped from the cargo hatch to the pier apron. The owner of the goods examined the dropped cargo, and upon an alleged finding that the contents of the crate were no longer usable for their intended purpose, they were rejected as a total loss and returned to Cebu City.

The owner of the goods filed a claim with herein petitioner-carrier for the recovery of the value of the rejected cargo which was refused by the latter. Thereafter, the owner of the goods sought payment from respondent First Lepanto-Taisho Insurance Corporation (insurer) under a marine insurance policy issued to the former. Respondent-insurer paid the claim less thirty-five percent (35%) salvage value or P194, 220.31.

The payment of the insurance claim of the owner of the goods by the respondent-insurer subrogated the latter to whatever right or legal action the owner of the goods may have against Delbros, Inc. and petitioner-carrier, Sulpicio Lines, Inc. Thus, respondent-insurer then filed claims for reimbursement from Delbros, Inc. and petitioner-carrier Sulpicio Lines, Inc. which were subsequently denied.

On 04 November 1992, respondent-insurer filed a suit for damages docketed as Civil Case No. 92-63337 with the trial court against Delbros, Inc. and herein petitioner-carrier. On 05 February 1993, petitioner-carrier filed its Answer with Counterclaim. Delbros, Inc. filed on 15 April 1993 its Answer with Counterclaim and Cross-claim, alleging that assuming the contents of the crate in question were truly in bad order, fault is with

22

herein petitioner-carrier which was responsible for the unloading of the crates.

Petitioner-carrier filed its Answer to Delbros, Inc.s cross-claim asserting that it observed extraordinary diligence in the handling, storage and general care of the shipment and that subsequent inspection of the shipment by the Manila Adjusters and Surveyors Company showed that the contents of the third crate that had fallen were found to be in apparent sound condition, except that 2 cello bags each of 50 pieces ferri inductors No. LC FL 112270K-60 (c) were unaccounted for and missing as per packaging list.

After hearing, the trial court dismissed the complaint for damages as well as the counterclaim filed by therein defendant Sulpicio Lines, Inc. and the cross-claim filed by Delbros, Inc. According to the RTC:

The plaintiff has failed to prove its case. The first witness for the plaintiff merely testified about the payment of the claim based on the documents accompanying the claim which were the Packing List, Commercial Invoices, Bill of Lading, Claims Statement, Marine Policies, Survey Report, Marine Risk Note, and the letter to Third Party carriers and shipping lines (Exhibit A-J).

The check was paid and delivered to the assured as evidenced by the check voucher and the subrogation receipt.

On cross-examination by counsel for the Sulpicio Lines, he said that their company paid the claim less 35% salvage value based on the adjuster report. This testimony is hearsay.

The second witness for the plaintiff, Arturo Valdez, testified, among others, that he, together with a co-surveyor and a representative of Sulpicio Lines had conducted a survey of the shipment at the compound of Sulpicio Lines. He prepared a survey report (Exhibits G and G-1) and took a picture of shipment (Exhibit G-2).

On cross-examination, he said that two cartons were torn at the sides with top portion flaps opened and the 41 cartons were properly sealed and in good order conditions. Two cartons were already opened and slightly damaged. He merely looked at them but did not conduct an inspection of the contents. What he was referring to as slightly damaged were the cartons only and not the contents.

From the foregoing evidence, it is apparent that the plaintiff had failed to prove its case with a preponderance of evidence.

.

WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered dismissing the Complaint, defendant Sulpicio Lines counterclaim and defendant Delbros Inc.s cross-claim.[4]

A Motion for Reconsideration was then filed by herein respondent-insurer and subsequently denied by the trial court in an Order dated 07 February 1995 on the ground that it did not raise any new issue. Thus, respondent-insurer instituted an appeal with the Court of Appeals, which reversed the dismissal of the complaint by the lower court, the decretal portion of which reads:

WHEREFORE, the appeal is granted. The decision appealed from is REVERSED. Defendants-appellees Delbros and Sulpicio Lines are hereby ordered to pay, jointly and severally, plaintiff-appellant the sum of P194,220.31 representing actual damages, plus legal interest counted from the filing of the complaint until fully paid.[5]

The appellate court disposed of the issues in the case in this wise:

Furthermore, the evidence shows that one of the three crates fell during the unloading at the pier in Manila. The wooden crate which fell was damaged such that this particular crate was not anymore sent to Singapore and was instead shipped back to Cebu from Manila. Upon examination, it was found that two (2) cartons of the forty-two (42) cartons contained in this crate were externally damaged. They were torn at the sides and their top portions or flaps were open. These facts were admitted by all the parties. Defendant-appellees, however, insist that it was only the external packaging that was damaged, and that there was no actual damage to the goods such that would make them liable to the shipper. This theory is erroneous. When the goods are placed at a common carriers possession for delivery to a specified consignee, they are in good order and condition and are supposed to be transported and delivered to the consignee in the same state. In the case herein, the goods were received by defendant-appellee Delbros in Cebu properly packed in cardboard cartons and then placed in wooden crates, for delivery to the consignee in Singapore. However, before the shipment reached Singapore (while it

23

was in Manila) one crate and 2 cartons contained therein were not anymore in their original state. They were no longer fit to be sent to Singapore.

.As We have already found, there is damage suffered by the goods of the shipper. This consists in the destruction of one wooden crate and the tearing of two of the cardboard boxes therein rendering then unfit to be sent to Singapore. Defendant-appellee Sulpicio Lines admits that this crate fell while it was being unloaded at the Manila pier. Falling of the crate was negligence on the part of defendant-appellee Sulpicio Lines under the doctrine of res ipsa loquitur. Defendant-appellee Sulpicio Lines cannot exculpate itself from liability because it failed to prove that it exercised due diligence in the selection and supervision of its employees to prevent the damage.[6]

On 21 June 1999, herein petitioner-carrier filed its Motion for Reconsideration of the decision of the Court of Appeals which was subsequently denied in a Resolution dated 13 October 1999. Hence, the instant petition.

During the pendency of the appeal before this Court, Delbros, Inc. filed a manifestation stating that its appeal[7] filed before this Court had been dismissed for being filed out of time and thus the case as against it was declared closed and terminated. As a consequence, it paid in full the amount of the damages awarded by the appellate court to the respondent-insurer. Before this Court, Delbros, Inc. prays for reimbursement, contribution, or indemnity from its co-defendant, herein petitioner-carrier Sulpicio Lines, Inc. for whatever it had paid to respondent-insurer in consonance with the decision of the appellate court declaring both Delbros, Inc. and petitioner-carrier Sulpicio Lines, Inc. jointly and severally liable.

ISSUES

Petitioner-carrier raises the following issues in its petition:

1. The Court of Appeals erred in not holding that the trial court justly and correctly dismissed the complaint against Sulpicio Lines, which dismissal is already final.

2. The Court of Appeals erred in not dismissing the appeal for failure of appellant to comply with the technical requirement of the Rules of Court.

RULING OF THE COURT

We shall first address the procedural issue raised by petitioner-carrier, Sulpicio Lines, Inc. that the Court of Appeals should have dismissed the appeal for failure of respondent-insurer to attach a copy of the decision of the trial court to its appellants brief in violation of Rule 44, Section 13(h) of the Rules of Civil Procedure.[8]

A perusal of the records will show, however, that in a Resolution[9] dated 13 August 1996, the Court of Appeals required herein respondent-insurer to submit seven (7) copies of the questioned decision within five (5) days from notice. Said Resolution was properly complied with.

As a rule, the right to appeal is a statutory right and one who seeks to avail of that right must comply with the manner required by the pertinent rules for the perfection of an appeal. Nevertheless, this Court has allowed the filing of an appeal upon subsequent compliance with the requirements imposed by law, where a strict application of the technical rules will impair the proper administration of justice. As enunciated by the Court in the case of Jaro v. Court of Appeals:[10]

There is ample jurisprudence holding that the subsequent and substantial compliance of an appellant may call for the relaxation of the rules of procedure. In Cusi-Hernandez vs. Diaz [336 SCRA 113] andPiglas-Kamao vs. National Labor Relations Commission [357SCRA 640], we ruled that the subsequent submission of the missing documents with the motion for reconsideration amounts to substantial compliance. The reasons behind the failure of the petitioners in these two cases to comply with the required attachments were no longer scrutinized.[11]

We see no error, therefore, on the part of the Court of Appeals when it gave due course to the appeal after respondent-insurer had submitted copies of the RTC decision, albeit belatedly.

We now come to the substantial issues alleged by petitioner-carrier. The pivotal question to be considered in the resolution of this issue is whether or not, based on the evidence presented during the trial, the owner of the goods, respondent-insurers predecessor-in-interest, did incur damages, and if so, whether or not petitioner-carrier is liable for the same.

It cannot be denied that the shipment sustained damage while in the custody of

24

petitioner-carrier. It is not disputed that one of the three (3) crates did fall from the cargo hatch to the pier apron while petitioner-carrier was unloading the cargo from its vessel. Neither is it impugned that upon inspection, it was found that two (2) cartons were torn on the side and the top flaps were open and that two (2) cello bags, each of 50 pieces ferri inductors, were missing from the cargo.

Petitioner-carrier contends that its liability, if any, is only to the extent of the cargo damage or loss and should not include the lack of fitness of the shipment for transport to Singapore due to the damaged packing. This is erroneous. Petitioner-carrier seems to belabor under the misapprehension that a distinction must be made between the cargo packaging and the contents of the cargo. According to it, damage to the packaging is not tantamount to damage to the cargo. It must be stressed that in the case at bar, the damage sustained by the packaging of the cargo while in petitioner-carriers custody resulted in its unfitness to be transported to its consignee in Singapore. Such failure to ship the cargo to its final destination because of the ruined packaging, indeed, resulted in damages on the part of the owner of the goods.

The falling of the crate during the unloading is evidence of petitioner-carriers negligence in handling the cargo. As a common carrier, it is expected to observe extraordinary diligence in the handling of goods placed in its possession for transport.[12] The standard of extraordinary diligence imposed upon common carriers is considerably more demanding than the standard of ordinary diligence, i.e., the diligence of a good paterfamilias established in respect of the ordinary relations between members of society.[13] A common carrier is bound to transport its cargo and its passengers safely "as far as human care and foresight can provide, using the utmost diligence of a very cautious person, with due regard to all circumstances.[14] The extraordinary diligence in the vigilance over the goods tendered for shipment requires the common carrier to know and to follow the required precaution for avoiding the damage to, or destruction of, the goods entrusted to it for safe carriage and delivery.[15] It requires common carriers to render service with the greatest skill and foresight and to use all reasonable means to ascertain the nature and characteristic of goods tendered for shipment, and to exercise due care in the handling and stowage, including such methods as their nature requires.[16]

Thus, when the shipment suffered damages as it was being unloaded, petitioner-carrier is presumed to have been negligent in the handling of the damaged cargo. Under Articles 1735[17] and 1752[18] of the Civil Code, common carriers are presumed to have been at fault or to have acted negligently in case the goods transported by them are lost, destroyed or had deteriorated. To overcome the presumption of liability for loss, destruction or deterioration of goods under Article 1735, the common carrier must prove that they observed extraordinary diligence as required in Article 1733[19] of the Civil Code.[20]

Petitioner-carrier miserably failed to adduce any shred of evidence of the required extraordinary diligence to overcome the presumption that it was negligent in transporting the cargo.

Coming now to the issue of the extent of petitioner-carriers liability, it is undisputed that respondent-insurer paid the owner of the goods under the insurance policy the amount of P194,220.31 for the alleged damages the latter has incurred. Neither is there dispute as to the fact that Delbros, Inc. paid P194,220.31 to respondent-insurer in satisfaction of the whole amount of the judgment rendered by the Court of Appeals. The question then is: To what extent is Sulpicio Lines, Inc., as common carrier, liable for the damages suffered by the owner of the goods?

Upon respondent-insurers payment of the alleged amount of loss suffered by the insured (the owner of the goods), the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the common carrier whose negligence or wrongful act caused the loss.[21] Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities.[22] The rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom he is substituted, that is, he cannot acquire any claim, security or remedy the subrogor did not have.[23] In other words, a subrogee cannot succeed to a right not possessed by the subrogor.[24] A subrogee in effect steps into the shoes of the insured and can recover only if the insured likewise could have recovered.[25]

As found by the Court of Appeals, there was damage suffered by the goods which consisted in the destruction of one wooden crate and the tearing of two (2) cardboard boxes therein which

25

rendered them unfit to be sent to Singapore.[26] The falling of the crate was negligence on the part of Sulpicio Lines, Inc. for which it cannot exculpate itself from liability because it failed to prove that it exercised extraordinary diligence.[27]

Hence, we uphold the ruling of the appellate court that herein petitioner-carrier is liable to pay the amount paid by respondent-insurer for the damages sustained by the owner of the goods.

As stated in the manifestation filed by Delbros, Inc., however, respondent-insurer had already been paid the full amount granted by the Court of Appeals, hence, it will be tantamount to unjust enrichment for respondent-insurer to again recover damages from herein petitioner-carrier.

With respect to Delbros, Inc.s prayer contained in its manifestation that, in case the decision in the instant case be adverse to petitioner-carrier, a pronouncement as to the matter of reimbursement, indemnification or contribution in favor of Delbros, Inc. be included in the decision, this Court will not pass upon said issue since Delbros, Inc. has no personality before this Court, it not being a party to the instant case. Notwithstanding, this shall not bar any action Delbros, Inc. may institute against petitioner-carrier Sulpicio Lines, Inc. with respect to the damages the latter is liable to pay.

WHEREFORE, premises considered, the assailed Decision of the Court of Appeals dated 26 May 1999 and its Resolution dated 13 October 1999 are hereby AFFIRMED. No costs.

SO ORDERED.

KEPPEL CEBU V. PIONEER

Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review oncertiorari the Decision[3] dated December 17, 2004 and the Amended Decision[4] dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934. On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a Shiprepair Agreement[5] wherein KCSI would renovate and reconstruct WG&As M/V Superferry 3 using its dry docking facilities pursuant to its restrictive safety and security rules and regulations. Prior to the execution of the

Shiprepair Agreement, Superferry 3 was already insured by WG&A with Pioneer for US$8,472,581.78. The Shiprepair Agreement reads 

SHIPREPAIR AGREEMENT [6]  

Company: WG & A JEBSENS SHIPMANAGEMENT INC.Address: Harbour Center II, Railroad & Chicago Sts.Port Area, City of Manila We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY 3 and KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named vessel ordered by the Owners Authorized Representative shall be carried out under the Keppel Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the parties: 

1.        The Owner shall inform its insurer of Clause 20[7] and 22 (a)[8] (refer at the back hereof) and shall include Keppel Cebu Shipyard as a co-assured in its insurance policy.

2.        The Owner shall waive its right to claim for any loss of profit or loss of use or damages consequential on such loss of use resulting from the delay in the redelivery of the above vessel. 

3.        Owners sub-contractors or workers are not permitted to work in the yard without the written approval of the Vice President Operations. 

4.        In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims, damages, or liabilities arising from death or bodily injuries to Owners workers, or damages to the vessel or other property however caused. 

5.        On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited to attend a conference with our Production, Safety and Security personnel

26

whereby they will be briefed on, and given copies of Shipyard safety regulations.

 6.        An adequate number of officers and

crew must remain on board at all times to ensure the safety of the vessel and compliance of safety regulations by crew and owner employed workmen. 

7.        The ships officers/crew or owner appointed security personnel shall maintain watch against pilferage and acts of sabotage. 

8.        The yard must be informed and instructed to provide the necessary security arrangement coverage should there be inadequate or no crew on board to provide the expressed safety and security enforcement.

 9.        The Owner shall be liable to Keppel Cebu

Shipyard for any death and/or bodily injuries for the [K]eppel Cebu Shipyards employees and/or contract workers; theft and/or damages to Keppel Cebu Shipyards properties and other liabilities which are caused by the workers of the Owner.

 10.    The invoice shall be based on quotation

reference 99-KCSI-211 dated December 20, 1999 tariff dated March 15, 1998. 

11.    Payment term shall be as follows: 

12.    The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may arise under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be submitted for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008 under the auspices of the Philippine Arbitration Commission.

 (Signed)

BARRY CHIA SOO HOCK _________(Signed)__________(Printed Name/Signature Above Name) (Printed Name/Signature Above Name) Vice President Operations Authorized RepresentativeKeppel Cebu Shipyard, Inc. for and in behalf of:WG & A Jebsens Shipmgmt.

 JAN.   26,   2000   .  ________________________Date Date  

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire. Claiming that the extent of the damage was pervasive, WG&A declared the vessels damage as a total constructive loss and, hence, filed an insurance claim with Pioneer. On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt[9] in favor of Pioneer, to wit: 

LOSS AND SUBROGATION RECEIPT

 16 June 2000 Our Claim Ref: MH-NIL-H0-99-00018US$8,472,581.78------------------------------------------------ RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and discharge of all claims for loss and expenses sustained to the vessel SUPERFERRY 3 insured under Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as follows: 

Fire on board at Keppel Cebu Shipyard

on 08 February 2000 

and in consideration of which the undersigned hereby assigns and transfers to the said company each and all claims and demands against any person, persons, corporation or property arising

27

from or connected with such loss or damage and the said company is subrogated in the place of and to the claims and demands of the undersigned against said person, persons, corporation or property in the premises to the extent of the amount above-mentioned. WILLIAM, GOTHONG & ABOITIZ, INC.&/OR ABOITIZ SHIPPING CORP.By: (Signed)______________________________________Witnesses: (Signed)______________________________________(Signed)______________________________________  Armed with the subrogation receipt,

Pioneer tried to collect from KCSI, but the latter denied any responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:

 1.                  To pay to the

claimant Pioneer Insurance and Surety Corporation the sum of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the date of the Loss and Subrogation Receipt on 16 June 2000 or from the date of filing of [the] Request for Arbitration, as may be found proper;

2.                  To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing [of the] Request for Arbitration or date of the arbitral award, as may be found proper;

 3.                  To pay to the

claimants herein the sum of P3,000,000.00 for and as attorneys fees; plus other damages as may be established during the

proceedings, including arbitration fees and other litigation expenses, and the costs of suit.

 It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement (Annex A) as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any legal effect whatsoever.[10]

  KCSI and WG&A reached an amicable

settlement, leading the latter to file a Notice of Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant.

 In the course of the proceedings, Pioneer

and KCSI stipulated, among others, that: (1) on January 26, 2000, M/V Superferry 3 arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on the same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V Superferry 3 on February 8, 2000, while still dry docked in KCSIs shipyard.[11]

 As regards the disputed facts, below are

the respective positions of the parties, viz.: Pioneers Theory of the Case:

 First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of Subrogation. Claimant then proceeded to explain that the Right of Subrogation:

 Is by Operation of Lawexists in Property Insuranceis not Dependent Upon

Privity of Contract.

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 Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the Right of Subrogation Entitles Insurer to Recover from the Liable Party. Second, Respondent Keppel had custody of and control over the M/V Superferry 3 while said vessel was in Respondent Keppels premises. In its Draft Decision, Claimant stated: 

A.                The evidence presented during the hearings indubitably proves that respondent not only took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-docking and repair of the vessel.

B.                 The presence on board the M/V Superferry 3 of its officers and crew does not relieve the respondent of its responsibility for said vessel.

C.                 Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel.

D.                The practice of allowing a shipowner and its sub-contractors to perform maintenance works while the vessel was within respondents premises does not detract from the fact that control and custody over M/V Superferry 3 was transferred to the yard.

 From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V Superferry 3.

 Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over the vessel. Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, the Yard is liable under the ruling laid down by the

Supreme Court in the Manila Citycase. Claimant asserts that said ruling is applicable hereto as The Law of the Case. Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa Loquitur, but from its negligence in this case. Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According to Claimant; 

In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons:

 A.                The Control Test The yard

exercised control over Sevillejo. The power of control is not diminished by the failure to exercise control. 

B.                 There was no independent work contract between Joniga and Sevillejo Joniga was not the employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred. 

C.                 The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owners hot works under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.

 Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant argued that:

 A.                The yard, not Dr. Joniga, gave the

welders their marching orders, and 

B.                 Dr. Jonigas authority to request the execution of owners hot works in the passenger areas was expressly recognized by the Yard Project Superintendent Orcullo. 

29

Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the yard, and the owners hotworks were conducted by welders who remained employees of the yard. Claimant contends that the need, if any, for an owners application for a hot work permit was canceled out by the yards actual knowledge of Sevillejos whereabouts and the fact that he was in deck A doing owners hotworks. Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent Ship Repairer. The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders never became employees of the owner so as to obligate the latter to be responsible for their conduct and performance. Claimant enumerated further badges of yard negligence. According to Claimant: 

A.      Yards water supply was inadequate.

B.      Yard Fire Fighting Efforts and Equipment Were Inadequate.

C.      Yard Safety Practices and Procedures Were Unsafe or Inadequate.

D.      Yard Safety Assistants and Firewatch-Men were Overworked.

 Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented its case against: 

(i)                 Non-removal of the life jackets theory.

(ii)               Hole-in-the[-]floor theory.

(iii)             Need for a plan theory.

(iv)              The unauthorized hot works theory.

(v)                The Marina report theory.

 The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by Respondent.  KCSIs Theory of the Case 1.        The Claimant has no

standing to file the Request for Arbitration and the Tribunal has no jurisdiction over the case:

(a)                There is no valid arbitration agreement between the Yard and the Vessel Owner. On January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC jurisdiction.

(b)               The Claimant is not a real party in interest and has no standing because it has not been subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not been subrogated to any rights which the Vessel may have against the Yard because:

 

30

i.                      The Claimant has not proved payment of the proceeds of the policies to any specific party. As a consequence, it has also not proved payment to the Vessel Owner.

 ii.                    The Claimant had no

legally demandable obligation to pay under the policies and did so only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total Loss unless the expense of recovering and repairing the vessel would exceed the Agreed Value of P360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment was voluntary, and there was no resulting subrogation to the Vessel.

 iii.                  There was

also no subrogation under Article 1236 of the Civil Code. First, if the Claimant asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article 2207 and it does not succeed to the Vessels rights under the Ship [R]epair Agreement and the arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it derived no benefit from the Claimants payment to the Vessel Owner. Third, in any event, the Claimant has not proved payment of the proceeds to the Vessel Owner.

2.        The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the agreement.

3.        The proximate cause of the fire and damage to the Vessel was not any negligence committed by Angelino

Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary, the proximate cause of the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino Sevillejo undertake cutting work in inherently dangerous conditions created by them.

 (a)                The Claimants material

witnesses lied on the record and the Claimant presented no credible proof of any negligence by Angelino Sevillejo.

(b)               Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in extremely hazardous conditions and were the proximate cause of the fire and the resulting damage to the Vessel.

 (c)                The Yards expert witness, Dr.

Eric Mullen gave the only credible account of the cause and the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the bulkhead door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come from the cutting of any of the sides of the door. Consequently, the cutting itself of the bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of the doors bottom edge, was the proximate cause of the fire.

 (d)               The Manila City case is

irrelevant to this dispute and in any

31

case, does not establish governing precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart from the differences in the factual setting of the two cases, the Manila City pronouncements regarding the res ipsa loquitur doctrine are obiter dictawithout value as binding precedent. Furthermore, even if the principle were applied to create a presumption of negligence by the Yard, however, that presumption is conclusively rebutted by the evidence on record.

 (e)                The Vessels deliberate acts

and its negligence created the inherently hazardous conditions in which the cutting work that could otherwise be done safely ended up causing a fire and the damage to the Vessel. The fire was a direct and logical consequence of the Vessels decisions to: (1) take Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for and obtaining a hot work permit in violation of the Yards Safety Rules and without removing the flammable ceiling and life jackets below, contrary to the requirements not only of the Yards Safety Rules but also of the demands of standard safe practice and the Vessels own explicit safety and hot work policies.

 (f)                The vessel has not

presented any proof to show that the Yard was remiss in its fire fighting preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary equipment and trained personnel and employed all those resources immediately and fully to putting out the 8 February 2000 fire. 4.        Even assuming that

Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this circumstance rather than the

extremely hazardous conditions created by Dr. Joniga and the Vessel for that activity caused the fire, the Yard may still not be held liable for the resulting damage.

 (a)                The Yards only contractual

obligation to the Vessel in respect of the 26 January 2000 Work Order was to supply welders for the Promenade Deck restaurant who would then perform welding work per owner[s] instruction. Consequently, once it had provided those welders, including Angelino Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or for damages on account thereof, may be raised against the Yard.

(b)               The Yard is also not liable to the Vessel/Claimant on the basis of quasi-delict. 

                                          i.                        The Vessel exercised supervision and control over Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially when he was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party with actual control over his tasks and is deemed his true and effective employer for purposes of establishing Article 2180 employer liability.

                                       ii.                        Even assuming that the Yard was Angelino Sevillejos employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino Sevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for the Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the Vessel.

                                      iii.                        The

Yard is nonetheless not liable under Article 2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo. 

32

5.        Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid by the Claimant.

 (a)                Under the law, the Yard may

not be held liable to the Claimant, as subrogee, for an amount greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the MV Superferry 3, at the time of the fire.

(b)               Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million a stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable.

 (c)                The Vessel breached its

obligation under Clause 22 (a) of the Yards Standard Terms to name the Yard as co-assured under the policies a breach which makes the Vessel liable for damages. This liability should in turn be set-off against the Claimants claim for damages. The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent enumerated and disputed these as follows: 

1.                  Claimants counsel contends that the cutting of the bulkhead door was covered by the 26 January 2000 Work Order.

2.                  Claimants counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000.

3.                  Claimants counsel contends that under Article 1727 of the Civil Code, The contractor is responsible for the work done by persons employed by him.

4.                  Claimants counsel contends that [t]he second reason why there was no job spec or job order for this cutting work, [is] the cutting work was known to the yard and

coordinated with Mr. Gerry Orcullo, the yard project superintendent.

5.                  Claimants counsel also contends, to make the Vessels unauthorized hot works activities seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety Superintendent, admitted that No hot works could really be hidden from the Yard, your Honors, because the welding cables and the gas hoses emanating from the dock will give these hotworks away apart from the assertion and the fact that there were also safety assistants supposedly going around the vessel. Respondent disputed the above by presenting its own argument in its Final Memorandum.[12]

  On October 28, 2002, the CIAC rendered

its Decision[13] declaring both WG&A and KCSI guilty of negligence, with the following findings and conclusions

 The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork permit, discussing the work in a production meeting, and complying with the conditions of the hotwork permit prior to implementation.By the requirement that all hotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that he was not even a foreman, and that the instructions to him

33

was (sic) by an authorized person. The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no foreman was included in the five welders issued to the Vessel was never raised in this dispute. As discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire that damaged the vessel.[14]

  

Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per annum from the time of the filing of the case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs be imposed on both parties on a pro rata basis.[15]

 Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No. 73934.The cases were consolidated. On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as follows: 

WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioners claims in its entirety. No costs. The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata. SO ORDERED.[16]

  Aggrieved, Pioneer sought reconsideration

of the December 17, 2004 Decision, insisting that it suffered from serious errors in the appreciation

of the evidence and from gross misapplication of the law and jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the same Decision.

 On December 20, 2007, an Amended

Decision was promulgated by the Special Division of Five Former Fifteenth Division of the CA in light of the dissent of Associate Justice Lucas P. Bersamin,[17] joined by Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads

 WHEREFORE, premises

considered, the Court hereby decrees that:

 1. Pioneers Motion for

Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of thisAmended Decision, subject to the following modifications:

 1.1 Pioneers Petition (CA-

G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered to pay Pioneer P25 Million without legal interest;

 2. The Yard is hereby

declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision; and

 3. The rest of the disposition

in the original Decision remains the same.

 SO ORDERED.[18]

  

Hence, these petitions. Pioneer bases its petition on the following grounds:

 I 

THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NON-FACTS LEADING IT TO MAKE FALSE

34

LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII OF THE CONSTITUTION. 

II 

THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO THE SUM OF P50,000,000.00, IN THAT: 

A. STARE DECISIS RENDERS INAPPLICABLE ANY INVOCATION OF LIMITED LIABILITY BY THE YARD.

 B. THE LIMITATION

CLAUSE IS CONTRARY TO PUBLIC POLICY.

 C. THE VESSEL

OWNER DID NOT AGREE THAT THE YARDS LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL ARISING FROM YARDS NEGLIGENCE IS LIMITED TO THE SUM OF P50,000,000.00 ONLY.

 D. IT IS INIQUITOUS

TO ALLOW THE YARD TO LIMIT LIABILITY, IN THAT:

 (i) THE YARD

HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V SUPERFERRY 3) ON 08 FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;

 (ii) THE

DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS EXCLUSIVELY PERFORMED BY YARD WORKERS.

 III 

THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS

CONCURRENTLY NEGLIGENT, CONSIDERING THAT: 

A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER, DID NOT SUPERVISE OR CONTROL THE REPAIRS.

 B. IT WAS THE YARD

THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO THAT SUPERVISED AND CONTROLLED THE REPAIR WORKS.

 C. SINCE ONLY YARD

WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY ALONE COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.

 D. THE YARD

AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO.

 E. THE NEGLIGENCE

OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE LOSS.

 F. WG&A WAS NOT

GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE LOSS.

 IV 

THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS. 

V 

THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR INTEREST.

VI 

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THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR ARBITRATION COSTS.[19]

  

On the other hand, KCSI cites the following grounds for the allowance of its petition, to wit: 

1. ABSENCE OF YARD RESPONSIBILITY

 IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT EXPLANATION, THE CIACS RULING THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE COMPLETELY WRONG AND BASELESS. 2. NO CONSTRUCTIVE TOTAL LOSS

 IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS. 

3. FAILURE OR REFUSAL TO ADDRESS

KEPPELS MOTION FOR RECONSIDERATION

 FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEERS PAYMENTS TO THE VESSEL OWNER IN VIEW OF THE CO-INSURANCE CLAUSE IN THE

SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION. 

4. FAILURE TO CREDIT FOR SALVAGE RECOVERY

 EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.[20]

  

To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the following core issues: 

A. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed? B. Is subrogation proper? If proper, to what extent can subrogation be made? C. Should interest be imposed on the award of damages? If so, how much? D. Who should bear the cost of the arbitration?  To resolve these issues, it is imperative

that we digress from the general rule that in petitions for review under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to revisit the factual circumstances surrounding this controversy.[21]

The Courts Ruling 

A. The issue of negligence 

36

Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A. As established before the CIAC 

The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,[22] p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as he did so, smoke came up from under Deck A. He got another container of water which he also poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B accommodation areas at various locations, where there were combustible materials. Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1-Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]

  

Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of Sevillejos assigned tasks, the same not having been authorized under the Work Order[25] dated January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the life jackets from

the ceiling void, causing the immediate spread of the fire to the other areas of the ship. We rule in favor of Pioneer. First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3, entered into a contract for the dry docking and repair of the vessel under KCSIs Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI. Second. Pursuant to KCSIs rules and regulations on safety and security, only employees of KCSI may undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSIs Vice President for Operations before WG&A could effect any work performed by its own workers or sub-contractors. In the exercise of this authority, KCSIs Vice-President for Operations, in the letter dated January 2, 1997, banned any hot works from being done except by KCSIs workers, viz.: 

The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be carried out only by shipyard workers x x x.[26]

  WG&A recognized and complied with this

restrictive directive such that, during the arrival conference on January 26, 2000, Dr. Joniga, the vessels passage team leader in charge of its hotel department, specifically requested KCSI to finish the hot works started by the vessels contractors on the passenger accommodation decks.[27] This was corroborated by the statements of the vessels hotel manager Marcelo Rabe[28] and the vessels quality control officer Joselito Esteban.[29] KCSI knew of the unfinished hot works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that KCSI was aware that the owners of this vessel (M/V Superferry 3) had undertaken their own (hot) works prior to arrival alongside (sic) on 26th January, and that no hot work permits could thereafter be issued to WG&As own workers because this was not allowed for the Superferry 3.[30] This shows that Dr. Joniga had authority only to request the performance of hot works by KCSIs welders as needed in the repair of the vessel while on dry dock.

37

 Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V Superferry 3, aside from its promenade deck. This was a recognition of Dr. Jonigas authority to request the conduct of hot works even on the passenger accommodation decks, subject to the provision of the January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship. 

At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the protection bars at the tourist dining salon of Deck B,[31] at a rate of P150.00/welder/hour.[32] In fact, Orcullo, Project Superintendent of KCSI, admitted that as early as February 3, 2000 (five days before the fire) [the Yard] had acknowledged Dr. Jonigas authority to order such works or additional jobs.[33]

 It is evident, therefore, that although the

January 26, 2000 Work Order was a special order for the supply of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter. Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latters direct control and supervision. 

Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the power and the right to discharge or substitute him with another welder; providing him and the other welders with its equipment; giving him and the other welders marching orders to work on the vessel; and monitoring and keeping track of his and the other welders activities on board, in view of the delicate nature of their work.[34] Thus, as such employee, aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which specifically provides that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety permit before starting the work he did, including that done on Deck A where the fire started. Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire broke out. 

It was established that no hot works could be hidden from or remain undetected by KCSI because the welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover, KCSI had roving fire watchmen and safety assistants who were moving around the vessel.[36] This was confirmed by Restituto Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted Sevillejo on Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit and telling him to stop until the permit was acquired and the other safety measures were observed, Rebaca left without pulling Sevillejo out of the work area or making sure that the latter did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the deck, until the fire broke out. This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSIs own fire expert, who observed that 

4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric arc welding and hot cutting produce heat at the work area and sparks and incendive material that can travel some distance from the work area. Hence, the safety precautions that are expected to be applied by the supervisor are the same for both types of work. However, the quantity and incendivity of the spray from the hot cutting are much greater than those of sparks from electric arc welding, and it may well be that Angelino Sevillejo would not have a full appreciation of the dangers involved.   This made it all the more important that the supervisor, who should have had such an appreciation, ensured that the appropriate

38

safety precautions were carried out.[37]

  

In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by KCSI to do the hot works on M/V Superferry 3 to the exclusion of other workers, failed to comply with the strict safety standards of KCSI, not only because he worked without the required permit, fire watch, fire buckets, and extinguishers, but also because he failed to undertake other precautionary measures for preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible material may have been in the vicinity would be protected from the sparks caused by the welding torch. He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses, and covered any holes where the sparks may enter. 

Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc welder, Rebaca should have replaced him.

 There is negligence when an act is done

without exercising the competence that a reasonable person in the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to another. Those who undertake any work calling for special skills are required to exercise reasonable care in what they do.[38] Verily, there is an obligation all persons have to take due care which, under ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that care constitutesnegligence. Generally, the degree of care required is graduated according to the danger a person or property may be subjected to, arising from the activity that the actor pursues or the instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary risk demands extraordinary care. Similarly, the more imminent thedanger, the higher degree of care warranted.[39] In this aspect, KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances.

 We cannot subscribe to KCSIs position that

WG&A, through Dr. Joniga, was negligent.

 On the one hand, as discussed above, Dr.

Joniga had authority to request the performance of hot works in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing, but failed to supervise him with the degree of care warranted by the attendant circumstances.

 Neither can Dr. Joniga be faulted for not

removing the life jackets from the ceiling void for two reasons (1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent upon him to remove the same. It was shown during the hearings before the CIAC that the removal of the life jackets would not have made much of a difference. The fire would still have occurred due to the presence of other combustible materials in the area. This was the uniform conclusion of both WG&As[40] and KCSIs[41] fire experts. It was also proven during the CIAC proceedings that KCSI did not see the life jackets as being in the way of the hot works, thus, making their removal from storage unnecessary.[42]

 These circumstances, taken collectively,

yield the inevitable conclusion that Sevillejo was negligent in the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V Superferry 3. As he was then definitely engaged in the performance of his assigned tasks as an employee of KCSI, his negligence gave rise to the vicarious liability of his employer[43] under Article 2180 of the Civil Code, which provides

 Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own act or omission, but also for those of persons for whom one is responsible. x x x x Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. x x x x

39

 The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage.  KCSI failed to prove that it exercised the

necessary diligence incumbent upon it to rebut the legal presumption of its negligence in supervising Sevillejo.[44] Consequently, it is responsible for the damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is proof that the employee has, by his negligence, caused damage to another in order to make the employer responsible for the tortuous act of the former.[45] From the foregoing disquisition, there is ample proof of the employees negligence. B. The right of subrogation Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause found in the Shiprepair Agreement is null and void for being iniquitous and against public policy. KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liability clause up to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair Agreement. KCSI also claims that the salvage value of the vessel should be deducted from whatever amount it will be made to pay to Pioneer. We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V Superferry 3. In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139 of the Insurance Code, which provides 

Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion hereof separately valued by the policy, or otherwise separately insured, and recover for

a total loss thereof, when the cause of the loss is a peril insured against:(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.  

It appears, however, that in the execution of the insurance policies over M/V Superferry 3, WG&A and Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of which reads 

Total Loss In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account. There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and repairing the Vessel would exceed the Agreed Value in policies on   Hull   and Machinery. In making this determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of abandonment shall not be considered if such are to be claimed separately under the Sue and Labor clause. x x x.  In the course of the arbitration

proceedings, Pioneer adduced in evidence the estimates made by three (3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a) P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and

40

(c) P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore Technologies Marine Ltd. All the estimates showed that the repair expense would exceed P270,000,000.00, the amount equivalent to of the vessels insured value of P360,000,000.00. Thus, WG&A opted to abandon M/V Superferry 3 and claimed from Pioneer the full amount of the policies. Pioneer paid WG&As claim, and now demands from KCSI the full amount of P360,000,000.00, by virtue of subrogation.

 KCSI denies the liability because, aside

from its claim that it cannot be held culpable for negligence resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence & Young.

 In the face of this apparent conflict, we

hold that Section 139 of the Insurance Code should govern, because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine insurance policies in question expressly provided the following:

 IMPORTANT This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in the Philippines, in which case if the said laws and customs of England shall be in conflict with the laws of the Republic of the Philippines, then the laws of the Republic of the Philippines shall govern. (Underscoring supplied.)  

The CA held that Section 139 of the Insurance Code is merely permissive on account of the word may in the provision. This is incorrect. Properly considered, the word may in the provision is intended to grant the insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V Superferry 3), or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured against. This option or discretion is expressed as a right in Section 131 of the same Code, to wit: 

Sec. 131. A constructive total loss is one which gives to a person

insured a right to abandon under Section one hundred thirty-nine.  

It cannot be denied that M/V Superferry 3 suffered widespread damage from the fire that occurred on February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from Pioneer. The estimates given by the three disinterested and qualified shipyards show that the damage to the ship would exceed P270,000,000.00, or of the total value of the policies P360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the damage sustained by the vessel. It is significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to the vessel amounted to a constructive total loss and that the claim for P360,000,000.00 under the policies was compensable.[46] It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a constructive total loss. Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation.[47] The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the presumed authority of the signatory to receive such payment. On the matter of subrogation, Article 2207 of the Civil Code provides 

Art. 2207. If the plaintiffs property has been insured and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the

41

insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

  

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.[48]

 We have held that payment by the insurer

to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought to pay.[49]

 We cannot accept KCSIs insistence on

upholding the validity Clause 20, which provides that the limit of its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the insurance policies, as found in the Shiprepair Agreement.

 Clauses 20 and 22(a) of the Shiprepair

Agreement are without factual and legal foundation. They are unfair and inequitable under the premises. It was established during arbitration that WG&A did not voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found, because he did not want WG&A to be bound by them. However, considering that it was

only KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels owned by WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the vessel would not be accepted for dry docking.[50]

 Indeed, the assailed clauses amount to a

contract of adhesion imposed on WG&A on a take-it-or-leave-it basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative of taking it or leaving it, completely depriving such party of the opportunity to bargain on equal footing.[51]

 Clause 20 is also a void and ineffectual

waiver of the right of WG&A to be compensated for the full insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively proved, since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right.[52] This has not been demonstrated in this case.

 Likewise, Clause 20 is a stipulation that

may be considered contrary to public policy. To allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss sustained by the other.[53]

 Along the same vein, Clause 22(a) cannot

be upheld. The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or agreement, because the insurance policy denominates the assured and

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the beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance procured by WG&A from Pioneer named only the former as the assured. There was no manifest intention on the part of WG&A to constitute KCSI as a co-assured under the policies. To have deemed KCSI as a co-assured under the policies would have had the effect of nullifying any claim of WG&A from Pioneer for any loss or damage caused by the negligence of KCSI. No ship owner would agree to make a ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under the policy would be rendered nugatory. WG&A could not have intended such a result.[54]

 Nevertheless, we concur with the position

of KCSI that the salvage value of the damaged M/V Superferry 3 should be taken into account in the grant of any award. It was proven before the CIAC that the machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50, respectively. WG&As claim for the upkeep of the wreck until the same were sold amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering this salvage value in the award would amount to unjust enrichment on the part of Pioneer.

 C. On the imposition of interest Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award in favor of Pioneer in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum from the date the award becomes final and executory until its full satisfaction.D. On the payment for the cost of arbitration It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself

for perceived wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on the part of Pioneer.

 WHEREFORE, the Petition of Pioneer

Insurance and Surety Corporation in G.R. No. 180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and the Amended Decision dated December 20, 2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the amount of P360,000,000.00 less P30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V Superferry 3, or the net total amount of P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until this Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said amount or any balance thereof from the finality of the Decision until the same will have been fully paid. The arbitration costs shall be borne by both parties on a pro rata basis. Costs against KCSI.

 SO ORDERED.