G.R. No. 179337 April 30, 2008JOSEPH SALUDAGA,petitioner,vs.FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU,respondents.

D E C I S I O NYNARES-SANTIAGO,J.:This Petition for Review onCertiorari1under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2of the Court of Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004 Decision3of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the complaint filed by petitioner; as well as its August 23, 2007 Resolution4denying the Motion for Reconsideration.5The antecedent facts are as follows:

Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18, 1996. Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he sustained.6Meanwhile, Rosete was brought to the police station where he explained that the shooting was accidental. He was eventually released considering that no formal complaint was filed against him.

Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their obligation to provide students with a safe and secure environment and an atmosphere conducive to learning. Respondents, in turn, filed a Third-Party Complaint7against Galaxy Development and Management Corporation (Galaxy), the agency contracted by respondent FEU to provide security services within its premises and Mariano D. Imperial (Imperial), Galaxy's President, to indemnify them for whatever would be adjudged in favor of petitioner, if any; and to pay attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial filed a Fourth-Party Complaint against AFP General Insurance.8On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads:

WHEREFORE, from the foregoing, judgment is hereby rendered ordering:

1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally Joseph Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum from the filing of the complaint until fully paid; moral damages of P300,000.00, exemplary damages of P500,000.00, attorney's fees of P100,000.00 and cost of the suit;

2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity as President of FEU) for the above-mentioned amounts;

3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to costs.

SO ORDERED.9Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of which provides,viz:

WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern University and its President in Civil Case No. 98-89483 is DISMISSED.

SO ORDERED.10Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the following grounds:

THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND JURISPRUDENCE IN RULING THAT:

5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;

5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT;

5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF RELATIVITY OF CONTRACTS; and

5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT FEU.11Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe learning environment. The pertinent portions of petitioner's Complaint read:

6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to visit and inquire about his condition. This abject indifference on the part of the defendants continued even after plaintiff was discharged from the hospital when not even a word of consolation was heard from them. Plaintiff waited for more than one (1) year for the defendants to perform their moral obligation but the wait was fruitless. This indifference and total lack of concern of defendants served to exacerbate plaintiff's miserable condition.

x x x x

11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the University premises. And that should anything untoward happens to any of its students while they are within the University's premises shall be the responsibility of the defendants. In this case, defendants, despite being legally and morally bound, miserably failed to protect plaintiff from injury and thereafter, to mitigate and compensate plaintiff for said injury;

12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this contract, defendants are supposed to ensure that adequate steps are taken to provide an atmosphere conducive to study and ensure the safety of the plaintiff while inside defendant FEU's premises. In the instant case, the latter breached this contract when defendant allowed harm to befall upon the plaintiff when he was shot at by, of all people, their security guard who was tasked to maintain peace inside the campus.12InPhilippine School of Business Administration v. Court of Appeals,13we held that:

When an academic institution accepts students for enrollment, there is established a contract between them, resulting in bilateral obligations which both parties are bound to comply with. For its part, the school undertakes to provide the student with an education that would presumably suffice to equip him with the necessary tools and skills to pursue higher education or a profession. On the other hand, the student covenants to abide by the school's academic requirements and observe its rules and regulations.

Institutions of learning must also meet the implicit or "built-in" obligation of providing their students with an atmosphere that promotes or assists in attaining its primary undertaking of imparting knowledge. Certainly, no student can absorb the intricacies of physics or higher mathematics or explore the realm of the arts and other sciences when bullets are flying or grenades exploding in the air or where there looms around the school premises a constant threat to life and limb. Necessarily, the school must ensure that adequate steps are taken to maintain peace and order within the campus premises and to prevent the breakdown thereof.14It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules and regulations of the school. On the other hand, respondent FEU, as a learning institution is mandated to impart knowledge and equip its students with the necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure and take adequate steps to maintain peace and order within the campus.

It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief.15In the instant case, we find that, when petitioner was shot inside the campus by no less the security guard who was hired to maintain peace and secure the premises, there is a prima facie showing that respondents failed to comply with its obligation to provide a safe and secure environment to its students.

In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee;16and that they complied with their obligation to ensure a safe learning environment for their students by having exercised due diligence in selecting the security services of Galaxy.

After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they exercised due diligence in providing a safe learning environment for their students. They failed to prove that they ensured that the guards assigned in the campus met the requirements stipulated in the Security Service Agreement. Indeed, certain documents about Galaxy were presented during trial; however, no evidence as to the qualifications of Rosete as a security guard for the university was offered.

Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned to them actually possess the qualifications required in the Security Service Agreement. It was not proven that they examined the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with Galaxy. Total reliance on the security agency about these matters or failure to check the papers stating the qualifications of the guards is negligence on the part of respondents. A learning institution should not be allowed to completely relinquish or abdicate security matters in its premises to the security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe learning environment for its students.

Consequently, respondents' defense offorce majeuremust fail. In order forforce majeureto be considered, respondents must show that no negligence or misconduct was committed that may have occasioned the loss. An act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a person's participation - whether by active intervention, neglect or failure to act - the whole occurrence is humanized and removed from the rules applicable to acts of God.17Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable for damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment, respondent FEU is liable to petitioner for damages. It is essential in the award of damages that the claimant must have satisfactorily proven during the trial the existence of the factual basis of the damages and its causal connection to defendant's acts.18In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical expenses.19While the trial court correctly imposed interest on said amount, however, the case at bar involves an obligation arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal interest is six percent (6%) per annum of the amount demanded. Such interest shall continue to run from the filing of the complaint until the finality of this Decision.20After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction.

The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a personal assistant while recuperating were however not duly supported by receipts.21In the absence thereof, no actual damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant suffered some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of P20,000.00 as temperate damages is awarded to petitioner.

As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar circumstances.22The testimony of petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the shooting incident23justify the award of moral damages. However, moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against the award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption on the part of the trial court.24We deem it just and reasonable under the circumstances to award petitioner moral damages in the amount of P100,000.00.

Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in view of Article 2208 of the Civil Code.25However, the award of exemplary damages is deleted considering the absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner.

We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. InPowton Conglomerate, Inc. v. Agcolicol,26we held that:

[A] corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.27None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held solidarily liable with respondent FEU.

Incidentally, although the main cause of action in the instant case is the breach of the school-student contract, petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which provides:

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.

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

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.

We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art. 2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy. The instructions issued by respondents' Security Consultant to Galaxy and its security guards are ordinarily no more than requests commonly envisaged in the contract for services entered into by a principal and a security agency. They cannot be construed as the element of control as to treat respondents as the employers of Rosete.28As held inMercury Drug Corporation v. Libunao:29InSoliman, Jr. v. Tuazon,30we held that where the security agency recruits, hires and assigns the works of its watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and not the client, since the latter has no hand in selecting the security guards. Thus, the duty to observe the diligence of a good father of a family cannot be demanded from the said client:

[I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and assigns the work of its watchmen or security guards, the agency is the employer of such guards or watchmen. Liability for illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the clients or customers of such agency. As a general rule, a client or customer of a security agency has no hand in selecting who among the pool of security guards or watchmen employed by the agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the selection of the guards cannot, in the ordinary course of events, be demanded from the client whose premises or property are protected by the security guards.

x x x x

The fact that a client company may give instructions or directions to the security guards assigned to it, does not, by itself, render the client responsible as an employer of the security guards concerned and liable for their wrongful acts or omissions.31We now come to respondents' Third Party Claim against Galaxy. InFirestone Tire and Rubber Company of the Philippines v. Tempengko,32we held that:

The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party nor privy to the act or deed complained of by the plaintiff, may be brought into the case with leave of court, by the defendant, who acts as third-party plaintiff to enforce against such third-party defendant a right for contribution, indemnity, subrogation or any other relief, in respect of the plaintiff's claim. The third-party complaint is actually independent of and separate and distinct from the plaintiff's complaint. Were it not for this provision of the Rules of Court, it would have to be filed independently and separately from the original complaint by the defendant against the third-party. But the Rules permit defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of action in respect of plaintiff's claim against a third-party in the original and principal case with the object of avoiding circuitry of action and unnecessary proliferation of law suits and of disposing expeditiously in one litigation the entire subject matter arising from one particular set of facts.33Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of petitioner's complaint. Evidence duly supports the findings of the trial court that Galaxy is negligent not only in the selection of its employees but also in their supervision. Indeed, no administrative sanction was imposed against Rosete despite the shooting incident; moreover, he was even allowed to go on leave of absence which led eventually to his disappearance.34Galaxy also failed to monitor petitioner's condition or extend the necessary assistance, other than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make good their pledge to reimburse petitioner's medical expenses.

For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for such damages equivalent to the above-mentioned amounts awarded to petitioner.

Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in directing the affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will be shouldered by Galaxy but said representations were not fulfilled because they presumed that petitioner and his family were no longer interested in filing a formal complaint against them.35WHEREFORE, the petition isGRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 87050 nullifying the Decision of the trial court and dismissing the complaint as well as the August 23, 2007 Resolution denying the Motion for Reconsideration areREVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to provide students with a safe and secure learning atmosphere, isAFFIRMEDwith the followingMODIFICATIONS:

a. respondent Far Eastern University (FEU) isORDEREDto pay petitioner actual damages in the amount of P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of this Decision. After this decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction;

b. respondent FEU is alsoORDEREDto pay petitioner temperate damages in the amount of P20,000.00; moral damages in the amount of P100,000.00; and attorney's fees and litigation expenses in the amount of P50,000.00;

c. the award of exemplary damages isDELETED.

The Complaint against respondent Edilberto C. De Jesus isDISMISSED. The counterclaims of respondents are likewiseDISMISSED.Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial areORDEREDto jointly and severally pay respondent FEU damages equivalent to the above-mentioned amounts awarded to petitioner. SO ORDERED.G.R. No. 157658 October 15, 2007PHILIPPINE NATIONAL RAILWAYS and VIRGILIO J. BORJA,Petitioners,vs.COURT OF APPEALS (Second Division), CORAZON C. AMORES, MA. EMILIE A. MOJICA, CECILE C. SISON, DINO C. AMORES, LARISA C. AMORES, ARMAND JINO C. AMORES and JOHN C. AMORES,Respondents.

D E C I S I O N

NACHURA,J.:Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, seeking to annul and set aside the Decision1of the Court of Appeals (CA) in CA-G.R. CV No. 54906 which reversed the Decision2of the Regional Trial Court (RTC) of Manila, Branch 28, in Civil Case No. 92-61987.

The factual antecedents are as follows:

In the early afternoon of April 27, 1992, Jose Amores (Amores) was traversing the railroad tracks in Kahilum II Street, Pandacan, Manila. Before crossing the railroad track, he stopped for a while then proceeded accordingly.3Unfortunately, just as Amores was at the intersection, a Philippine National Railways (PNR) train with locomotive number T-517 turned up and collided with the car.4At the time of the mishap, there was neither a signal nor a crossing bar at the intersection to warn motorists of an approaching train. Aside from the railroad track, the only visible warning sign at that time was the defective standard signboard "STOP, LOOK and LISTEN" wherein the sign "Listen" was lacking while that of "Look" was bent.5No whistle blow from the train was likewise heard before it finally bumped the car of Amores.6After impact, the car was dragged about ten (10) meters beyond the center of the crossing.7Amores died as a consequence thereof.

On July 22, 1992, the heirs of Amores, consisting of his surviving wife and six children, herein respondents, filed a Complaint for Damages8against petitioners PNR and Virgilio J. Borja (Borja), PNRs locomotive driver at the time of the incident, before the RTC of Manila. The case was raffled to Branch 28 and was docketed as Civil Case No. 92-61987. In their complaint, respondents averred that the trains speedometer was defective, and that the petitioners negligence was the proximate cause of the mishap for their failure to take precautions to prevent injury to persons and property despite the dense population in the vicinity. They then prayed for actual and moral damages, as well as attorneys fees.9In their Answer,10the petitioners denied the allegations, stating that the train was railroad-worthy and without any defect. According to them, the proximate cause of the death of Amores was his own carelessness and negligence, and Amores wantonly disregarded traffic rules and regulations in crossing the railroad tracks and trying to beat the approaching train. They admitted that there was no crossing bar at the site of the accident because it was merely a barangay road.11PNR stressed that it exercised the diligence of a good father of a family in the selection and supervision of the locomotive driver and train engineer, Borja, and that the latter likewise used extraordinary diligence and caution to avoid the accident. Petitioners further asserted that respondents had the last clear chance to avoid the accident but recklessly failed to do so.

After trial on the merits, on August 22, 1996, the RTC rendered judgment in favor of the petitioners, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered dismissing the complaint of the plaintiffs and the defendants counterclaim.

The costs shall be halved and paid equally by the parties.

The counsel for the defendants is hereby ordered to inform this court who is the legal representative of the deceased defendant, Virgilio Borja, within ten (10) days from receipt of a copy of this decision.

SO ORDERED.12The RTC rationalized that the proximate cause of the collision was Amores fatal misjudgment and the reckless course of action he took in crossing the railroad track even after seeing or hearing the oncoming train.

On appeal, the CA reversed the RTC decision, as follows:

WHEREFORE, the assailed Decision of the Regional Trial Court of Manila, Branch 28 is hereby REVERSED. The defendants PNR and the estate of Virgilio J. Borja are jointly and severally liable to pay plaintiffs the following:

1) The amount ofP122,300.00 for the cost of damage to the car; and,

2) The amount ofP50,000 as moral damages.

For lack of official receipts for funeral expenses and specimen of the last pay slip of the deceased, the claim for reimbursement of funeral expenses and claim for payment of support is hereby DENIED for lack of basis. Costs against Defendants.

SO ORDERED.13In reversing the trial courts decision, the appellate court found the petitioners negligent. The court based the petitioners negligence on the failure of PNR to install a semaphore or at the very least, to post a flagman, considering that the crossing is located in a thickly populated area. Moreover, the signboard "Stop, Look and Listen" was found insufficient because of its defective condition as described above. Lastly, no negligence could be attributed to Amores as he exercised reasonable diligence in crossing the railroad track.

Aggrieved by this reversal, the petitioners filed the present petition for review on certiorari, raising the following grounds:

I

THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN RENDERING ITS DECISION REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF MANILA BRANCH 28, IN NOT TAKING INTO CONSIDERATION THE PROVISION OF SECTION 42, R.A. 4136 OF THE LAND TRANSPORTATION AND TRAFFIC CODE.

II

THE DECISION OF THE COURT OF APPEALS IS CONTRARY TO THE EVIDENCE ON RECORD ADDUCED IN THE TRIAL ON THE MERIT IN CIVIL CASE NO. 92-61987.14The petitioners insist that Amores must have heard the trains whistle and heeded the warning but, noting that the train was still a distance away and moving slowly, he must have calculated that he could beat it to the other side of the track before the train would arrive at the intersection. The petitioners likewise add that the train was railroad-worthy and that its defective speedometer did not affect the trains operation. Lastly, they insist that evidence showed sufficient warning signs strategically installed at the crossing to alert both motorists and pedestrians.

Respondents, on the other hand, argue that the cause of the accident was petitioners carelessness, imprudence and laxity in failing to provide a crossing bar and keeper at the Kahilum II railway intersection. Considering that Kahilum II Street is in the middle of a thickly populated squatters area, and many pedestrians cross the railroad track, notwithstanding the fact that it is a public street and a main thoroughfare utilized in going to Herran Street, the presence of adequate warning signals would have prevented the untimely death of Amores. Another crucial point raised by the respondents is the manner in which Borja applied the brakes of the train only when the locomotive was already very near Amores car, as admitted by witness Querimit. Finally, respondents claim that Borjas failure to blow the locomotives horn, pursuant to the usual practice of doing the same 100 meters before reaching the Kahilum II crossing point is an earmark of recklessness on the part of the petitioners.

The petition must fail.

The only issue to be resolved in the present case is whether the appellate court was correct in ascribing negligence on the part of the petitioners. It was ascertained beyond quandary that the proximate cause of the collision is the negligence and imprudence of the petitioner PNR and its locomotive driver, Borja, in operating the passenger train.

As the action is predicated on negligence, the relevant provision is Article 2176 of the New Civil Code, which states that:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there was no pre-existing contractual relation between the parties, is called quasi-delict and is governed by the provisions of this chapter.

We have thoroughly reviewed the records of the case and we find no cogent reason to reverse the appellate courts decision. Negligence has been defined as "the failure to observe for the protection of the interests of another person that degree of care, precaution, and vigilance which the circumstances justly demand, whereby such other person suffers injury."15Using the aforementioned philosophy, it may be reliably concluded that there is no hard and fast rule whereby such degree of care and vigilance is calibrated; it is dependent upon the circumstances in which a person finds himself. All that the law requires is that it is perpetually compelling upon a person to use that care and diligence expected of sensible men under comparable circumstances.16We hold that the petitioners were negligent when the collision took place. The transcript of stenographic notes reveals that the train was running at a fast speed because notwithstanding the application of the ordinary and emergency brakes, the train still dragged the car some distance away from the point of impact. Evidence likewise unveils the inadequate precautions taken by petitioner PNR to forewarn the public of the impending danger. Aside from not having any crossing bar, no flagman or guard to man the intersection at all times was posted on the day of the incident. A reliable signaling device in good condition, not just a dilapidated "Stop, Look and Listen" signage because of many years of neglect, is needed to give notice to the public. It is the responsibility of the railroad company to use reasonable care to keep the signal devices in working order. Failure to do so would be an indication of negligence.

As held in the case of Philippine National Railway v. Brunty,17it may broadly be stated that railroad companies owe to the public a duty of exercising a reasonable degree of care to avoid injury to persons and property at railroad crossings, which duties pertain both to the operation of trains and to the maintenance of the crossings. Moreover, every corporation constructing or operating a railway shall make and construct at all points where such railway crosses any public road, good, sufficient, and safe crossings, and erect at such points, at sufficient elevation from such road as to admit a free passage of vehicles of every kind, a sign with large and distinct letters placed thereon, to give notice of the proximity of the railway, and warn persons of the necessity of looking out for trains.18The failure of the PNR to put a cross bar, or signal light, flagman or switchman, or semaphore is evidence of negligence and disregard of the safety of the public, even if there is no law or ordinance requiring it, because public safety demands that said device or equipment be installed.

The petitioners insist that a train has a right-of-way in a railroad crossing under the existing laws. They derive their theory from Section 42 (d), Article III of R.A. 4136, otherwise known as the Land Transportation and Traffic Code, which states that:

The driver of a vehicle upon a highway shall bring to a full stop such vehicle before traversing any "through highway" or railroad crossing: Provided, That when it is apparent that no hazard exists, the vehicle may be slowed down to five miles per hour instead of bringing it to a full stop.

They claim that motorists are enjoined by law to stop, look and listen before crossing railroad tracks and that a heavier responsibility rests upon the motorists in avoiding accidents at level crossings.

It is true that one driving an automobile must use his faculties of seeing and hearing when nearing a railroad crossing.1wphi1However, the obligation to bring to a full stop vehicles moving in public highways before traversing any "through street" only accrues from the time the said "through street" or crossing is so designated and sign-posted. From the records of the case, it can be inferred that Amores exercised all the necessary precautions required of him as to avoid injury to himself and to others.1wphi1The witnesses testimonies showed that Amores slackened his speed, made a full stop, and then proceeded to cross the tracks when he saw that there was no impending danger to his life. Under these circumstances, we are convinced that Amores did everything, with absolute care and caution, to avoid the collision.

It is settled that every person or motorist crossing a railroad track should use ordinary prudence and alertness to determine the proximity of a train before attempting to cross. We are persuaded that the circumstances were beyond the control of Amores for no person would sacrifice his precious life if he had the slightest opportunity to evade the catastrophe. Besides, the authority in this jurisdiction is that the failure of a railroad company to install a semaphore or at the very least, to post a flagman or watchman to warn the public of the passing train amounts to negligence.191wphi1In view of the foregoing, We will now discuss the liability of petitioner PNR. Article 218020of the New Civil Code discusses the liability of the employer once negligence or fault on the part of the employee has been established. The employer is actually liable on the assumption of juris tantum that the employer failed to exercise diligentissimi patris families in

the selection and supervision of its employees. The liability is primary and can only be negated by showing due diligence in the selection and supervision of the employee, a factual matter that has not been demonstrated.21Even the existence of hiring procedures and supervisory employees cannot be incidentally invoked to overturn the presumption of negligence on the part of the employer.22WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated March 31, 2003 in CA-G.R. CV No. 54906 is hereby AFFIRMED.

SO ORDERED.

G.R. Nos. 180880-81 September 25, 2009KEPPEL CEBU SHIPYARD, INC.,Petitioner,vs.PIONEER INSURANCE AND SURETY CORPORATION,Respondent.

x - - - - - - - - - - - - - - - - - - - - - - -x

G.R. Nos. 180896-97PIONEER INSURANCE AND SURETY CORPORATION,Petitioner,vs.KEPPEL CEBU SHIPYARD, INC.,Respondent.

D E C I S I O N

NACHURA,J.:Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety Corporation1(Pioneer) and Keppel Cebu Shipyard, Inc.2(KCSI)to review on certiorari the Decision3dated December 17, 2004 and the Amended Decision4dated 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 Agreement5wherein 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 AGREEMENT6Company: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 207and 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 whereby they will be briefed on, and given copies of Shipyard safety regulations.

(Signed)BARRY CHIA SOO HOCK

(Printed Name/Signature Above Name)(Signed)

(Printed Name/Signature Above Name)

Vice President OperationsKeppel Cebu Shipyard, Inc.Authorized Representativefor and in behalf of:WG & A Jebsens Shipmgmt.

JAN. 26, 2000.

Date

Date

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 reference99-KCSI-211datedDecember 20, 1999tariff datedMarch 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.

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 Receipt9in 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 Shipyardon 08 February 2000and 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 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 ofP500,000,000.00 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 ofP3,000,000.00 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.10KCSI 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.11As 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.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 City" case. 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.

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.1avvphi1The 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:

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" ofP360 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 doesnotsucceed 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 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 dicta without 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.

5. Assuming that the Yard is liable, it cannot be compelled to pay the full amount ofP360 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 toP50 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.12On October 28, 2002, the CIAC rendered its Decision13declaring 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 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.14Holding that the liability for damages was limited toP50,000,000.00, the CIAC ordered KCSI to pay Pioneer the amount ofP25,000,000.00, 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.15Pioneer 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.16Aggrieved, 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,17joined 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 PioneerP25 Million, without legal interest, within 15 days from the finality of this Amended 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 PioneerP25 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 PioneerP25 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.18Hence, 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 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 OFP50,000,000.00, 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 OFP50,000,000.00 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

THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR ARBITRATION COSTS.19On the other hand, KCSI cites the following grounds for the allowance of its petition, to wit:

1.ABSENCE OF YARD RESPONSIBILITYIT 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 LOSSIT 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 ADDRESSKEPPELS MOTION FOR RECONSIDERATIONFINALLY, 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 RECOVERYEVEN 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 TOP9.874 MILLION.20To 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.21The Courts Ruling

A. The issue of negligence

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,22p. 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,23pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).24Pioneer 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 Order25dated 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.26WG&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.27This was corroborated by the statements of the vessels hotel manager Marcelo Rabe28and the vessels quality control officer Joselito Esteban.29KCSI 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."30This 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.

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,31at a rate ofP150.00/welder/hour.32In 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."33It 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.34Thus, 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,"35it 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.36This 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, andit 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 safety precautions were carried out.37In 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.38Verily, 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 constitutes negligence. 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 the danger, the higher degree of care warranted.39In 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&As40and KCSIs41fire 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.42These 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 employer43under 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

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.44Consequently, 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.45From 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 toP50,000,000.00, 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 (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 exceedP270,000,000.00, the amount equivalent to of the vessels insured value ofP360,000,000.00. 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 ofP360,000,000.00, by virtue of subrogation.1avvphi1KCSI 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 orP170,611,260.00, 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:

I M P O R T A N T

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