25-G.R. No.

L-52756 October 12, 1987

MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner, vs. COURT OF APPEALS AND
ZENITH INSURANCE CORPORATION, respondents.
PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979,
ordering petitioner Manila Mahogany Manufacturing Corporation to pay private respondent Zenith
Insurance Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest from 18
January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the
resolution of the same Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's
decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with respondent
insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a truck owned by
San Miguel Corporation. For the damage caused, respondent company paid petitioner five thousand pesos
(P5,000.00) in amicable settlement. Petitioner's general manager executed a Release of Claim, subrogating
respondent company to all its right to action against San Miguel Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement
from San Miguel Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused
reimbursement, alleging that San Miguel Corporation had already paid petitioner P4,500.00 for the
damages to petitioner's motor vehicle, as evidenced by a cash voucher and a Release of Claim executed
by the General Manager of petitioner discharging San Miguel Corporation from "all actions, claims,
demands the rights of action that now exist or hereafter [sic] develop arising out of or as a consequence of
the accident."
Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00
paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit in the City Court
of Manila for the recovery of P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On
appeal the Court of First Instance of Manila affirmed the City Court's decision in toto, which CFI decision
was affirmed by the Court of Appeals, with the modification that petitioner was to pay respondent the total
amount of P5,000.00 that it had earlier received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent
company as the subrogation in the Release of Claim it executed in favor of respondent was conditioned on
recovery of the total amount of damages petitioner had sustained. Since total damages were valued by
petitioner at P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner argues
that it was entitled to go after San Miguel Corporation to claim the additional P4,500.00 eventually paid to
it by the latter, without having to turn over said amount to respondent. Respondent of course disputes this
allegation and states that there was no qualification to its right of subrogation under the Release of Claim
executed by petitioner, the contents of said deed having expressed all the intents and purposes of the
parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner cites Art.
2207 of the Civil Code, which states:
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. 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.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place in
virtue of the partial payment of the same credit.
We find petitioners arguments to be untenable and without merit. In the absence of any other evidence to
support its allegation that a gentlemen's agreement existed between it and respondent, not embodied in
the Release of Claim, such ease of Claim must be taken as the best evidence of the intent and purpose of
the parties. Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating Private respondent to any
right of action it had against San Miguel Corporation did not preclude Manila Mahogany from
filing a deficiency claim against the wrongdoer. Citing Article 2207, New Civil Code, to the
effect that if the amount paid by an insurance company does not fully cover the loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the loss,
petitioner claims a preferred right to retain the amount coming from San Miguel Corporation,
despite the subrogation in favor of Private respondent.
Although petitioners right to file a deficiency claim against San Miguel Corporation is with
legal basis, without prejudice to the insurer's right of subrogation, nevertheless when Manila
Mahogany executed another release claim (Exhibit K) discharging San Miguel Corporation
from "all actions, claims, demands and rights of action that now exist or hereafter arising out
of or as a consequence of the accident" after the insurer had paid the proceeds of the policythe compromise agreement of P5,000.00 being based on the insurance policy-the insurer is
entitled to recover from the insured the amount of insurance money paid (Metropolitan
Casualty Insurance Company of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in
Insurance Code and Insolvency Law with comments and annotations, H.B. Perez 1976, p.
151). Since petitioner by its own acts released San Miguel Corporation, thereby defeating
private respondents, the right of subrogation, the right of action of petitioner against the
insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391)
Otherwise stated: private respondent may recover the sum of P5,000.00 it had earlier paid
to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co.,

If a property is insured and the owner receives the indemnity from the insurer, it is provided
in [Article 2207 of the New Civil Code] that the insurer is deemed subrogated to the rights of
the insured against the wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the deficiency. ... Under this
legal provision, the real party in interest with regard to the portion of the indemnity paid is
the insurer and not the insured 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500.00 as
originally asked for, but P5,000.00, the amount respondent company paid petitioner as insurance, is also in
accord with law and jurisprudence. In disposing of this issue, the Court of Appeals held:

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation under
its clear right to file a deficiency claim for damages incurred, against the wrongdoer, should
the insurance company not fully pay for the injury caused (Article 2207, New Civil
Code). However, when petitioner released San Miguel Corporation from any liability,
petitioner's right to retain the sum of P5,000.00 no longer existed, thereby entitling private
respondent to recover the same. (Emphasis supplied)
As has been observed:
... The right of subrogation can only exist after the insurer has paid the otherwise the insured
will be deprived of his right to full indemnity. If the insurance proceeds are not sufficient to
cover the damages suffered by the insured, then he may sue the party responsible for the
damage for the the [sic] remainder. To the extent of the amount he has already received
from the insurer enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the insured may have, should the
insured, after receiving payment from the insurer, release the wrongdoer who caused the
loss, the insurer loses his rights against the latter. But in such a case, the insurer will be
entitled to recover from the insured whatever it has paid to the latter, unless the release
was made with the consent of the insurer. 4 (Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still, the
respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by the
insurer. The Court of Appeals rightly reasoned as follows:
It is to be noted that private respondent, in its companies, prays for the recovery, not of
P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel Corporation had
paid to petitioner. On this score, We believe the City Court and Court of First Instance erred
in not awarding the proper relief. Although private respondent prays for the reimbursement
of P4,500.00 paid by San Miguel Corporation, instead of P5,000.00 paid under the insurance
policy, the trial court should have awarded the latter, although not prayed for, under the
general prayer in the complaint "for such further or other relief as may be deemed just or
equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ;
Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby
AFFIRMED with costs against petitioner.
SO ORDERED.
Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.

26-G.R. No. 81026

April 3, 1990

PAN MALAYAN INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ERLINDA FABIE
AND HER UNKNOWN DRIVER, respondents.
Regulus E. Cabote & Associates for petitioner.
Benito P. Fabie for private respondents.

CORTES, J.:
Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of
Appeals which upheld an order of the trial court dismissing for no cause of action PANMALAY's complaint
for damages against private respondents Erlinda Fabie and her driver.
The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may
institute an action to recover the amount it had paid its assured in settlement of an insurance claim
against private respondents as the parties allegedly responsible for the damage caused to the insured
vehicle.
On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private
respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt
Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources
Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence"
of the unknown driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in

the amount of P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore,
was subrogated to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda
Fabie; and that, despite repeated demands, defendants, failed and refused to pay the claim of PANMALAY.
Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In
compliance therewith, PANMALAY clarified, among others, that the damage caused to the insured car was
settled under the "own damage", coverage of the insurance policy, and that the driver of the insured car
was, at the time of the accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also
submitted a copy of the insurance policy and the Release of Claim and Subrogation Receipt executed by
CANLUBANG in favor of PANMALAY.
On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause
of action against them. They argued that payment under the "own damage" clause of the insurance policy
precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on
the assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order
dated June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC
denied PANMALAY's motion for reconsideration.
On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27, 1987.
Consequently, PANMALAY filed the present petition for review.
After private respondents filed its comment to the petition, and petitioner filed its reply, the Court
considered the issues joined and the case submitted for decision.
Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition.
PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified
CANLUBANG for the damage to the insured car resulting from a traffic accident allegedly caused by the
negligence of the driver of private respondent, Erlinda Fabie. PANMALAY contended, therefore, that its
cause of action against private respondents was anchored upon Article 2207 of the Civil Code, which
reads:
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 insured against the wrongdoer or the
person who has violated the contract. . . .
PANMALAY is correct.
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property
is destroyed or damaged through the fault or negligence of a party other than the assured, then the
insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from the
wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the assured
operates as an equitable assignment to the former of all remedies which the latter 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 or upon written assignment of claim. It accrues simply
upon payment of the insurance claim by the insurer [Compania Maritima v. Insurance Company of North
America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla
& Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323].
There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the
wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is
defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886);
Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly,
where the insurer pays the assured the value of the lost goods without notifying the carrier who has in

good faith settled the assured's claim for loss, the settlement is binding on both the assured and the
insurer, and the latter cannot bring an action against the carrier on his right of subrogation [McCarthy v.
Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which
is not a risk covered by the policy, thereby effecting "voluntary payment", the former has no right of
subrogation against the third party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee
Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA 12].
None of the exceptions are availing in the present case.
The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally
subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have
any cause of action against private respondents. On the one hand, the trial court held that payment by
PANMALAY of CANLUBANG's claim under the "own damage" clause of the insurance policy was an
admission by the insurer that the damage was caused by the assured and/or its representatives. On the
other hand, the Court of Appeals in applying theejusdem generis rule held that Section III-1 of the policy,
which was the basis for settlement of CANLUBANG's claim, did not cover damage arising from collision or
overturning due to the negligence of third parties as one of the insurable risks. Both tribunals concluded
that PANMALAY could not now invoke Article 2207 and claim reimbursement from private respondents as
alleged wrongdoers or parties responsible for the damage.
The above conclusion is without merit.
It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy
impliesdamage to the insured car caused by the assured itself, instead of third parties, proceeds from an
incorrect comprehension of the phrase "own damage" as used by the insurer. When PANMALAY utilized the
phrase "own damage" a phrase which, incidentally, is not found in the insurance policy to define the
basis for its settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to
reimburse the costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with
Supplementary Motion for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own
damage" coverage under Section III of the insurance policy is differentiated from Sections I and IV-1 which
refer to "Third Party Liability" coverage (liabilities arising from the death of, or bodily injuries suffered by,
third parties) and from Section IV-2 which refer to "Property Damage" coverage (liabilities arising from
damage caused by the insured vehicle to the properties of third parties).
Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1
of the policy does not include to the insured vehicle arising from collision or overturning due to the
negligent acts of the third party. Not only does it stem from an erroneous interpretation of the provisions of
the section, but it also violates a fundamental rule on the interpretation of property insurance contracts.
It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed
according to the sense and meaning of the terms which the parties thereto have used. In the case of
property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and provisions embodied in the policy. It is only when
the terms of the policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree
about the meaning of particular provisions, that the courts will intervene. In such an event, the policy will
be construed by the courts liberally in favor of the assured and strictly against the insurer [Union
Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271;
National Power Corporation v. Court of Appeals, G.R. No. L-43706, November 14, 1986, 145 SCRA 533;
Pacific Banking Corporation v. Court of Appeals, G.R. No. L-41014, November 28, 1988, 168 SCRA
1. Also Articles 1370-1378 of the Civil Code].
Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is
liable to indemnify the assured CANLUBANG against damage to or loss of the insured vehicle, reads as
follows:
SECTION III LOSS OR DAMAGE

1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon:
(a) by accidental collision or overturning, or collision or overturning consequent upon
mechanical breakdown or consequent upon wear and tear;
(b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or theft;
(c) by malicious act;
(d) whilst in transit (including the processes of loading and unloading) incidental to such
transit by road, rail, inland, waterway, lift or elevator.
xxx

xxx

xxx

[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars; Record,
p. 34; Emphasis supplied].
PANMALAY contends that the coverage of insured risks under the above section, specifically Section III1(a), is comprehensive enough to include damage to the insured vehicle arising from collision or
overturning due to the fault or negligence of a third party. CANLUBANG is apparently of the same
understanding. Based on a police report wherein the driver of the insured car reported that after the
vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20], CANLUBANG filed its
claim with PANMALAY for indemnification of the damage caused to its car. It then accepted payment from
PANMALAY, and executed a Release of Claim and Subrogation Receipt in favor of latter.
Considering that the very parties to the policy were not shown to be in disagreement regarding the
meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the
appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to ascribe
meaning contrary to the clear intention and understanding of these parties.
It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental
collision or overturning" found in the first paint of sub-paragraph (a) is untenable. Although the terms
"accident" or "accidental" as used in insurance contracts have not acquired a technical meaning, the Court
has on several occasions defined these terms to mean that which takes place "without one's foresight or
expectation, an event that proceeds from an unknown cause, or is an unusual effect of a known cause and,
therefore, not expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30,
1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November
28, 1989]. Certainly, it cannot be inferred from jurisprudence that these terms, without qualification,
exclude events resulting in damage or loss due to the fault, recklessness or negligence of third parties. The
concept "accident" is not necessarily synonymous with the concept of "no fault". It may be utilized simply
to distinguish intentional or malicious acts from negligent or careless acts of man.
Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured
vehicle due to negligent or careless acts of third parties is not listed under the general and specific
exceptions to the coverage of insured risks which are enumerated in detail in the insurance policy itself
[See Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the
coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that insisted
upon by respondents herein. By arguing that this section covers losses or damages due not only to
malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a more
comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping with the
rationale behind the various rules on the interpretation of insurance contracts favoring the assured or
beneficiary so as to effect the dominant purpose of indemnity or payment [SeeCalanoc v. Court of Appeals,
98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29,
1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA 327].

Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does
not cover damage to the insured vehicle caused by negligent acts of third parties, and that PANMALAY's
settlement of CANLUBANG's claim for damages allegedly arising from a collision due to private
respondents' negligence would amount to unwarranted or "voluntary payment", dismissal of PANMALAY's
complaint against private respondents for no cause of action would still be a grave error of law.
For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its
assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private
respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the
Court ruled that the insurer who may have no rights of subrogation due to "voluntary" payment may
nevertheless recover from the third party responsible for the damage to the insured property under Article
1236 of the Civil Code.
In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely
prays that it be allowed to institute an action to recover from third parties who allegedly caused damage to
the insured vehicle, the amount which it had paid its assured under the insurance policy. Having thus
shown from the above discussion that PANMALAY has a cause of action against third parties whose
negligence may have caused damage to CANLUBANG's car, the Court holds that there is no legal obstacle
to the filing by PANMALAY of a complaint for damages against private respondents as the third parties
allegedly responsible for the damage. Respondent Court of Appeals therefore committed reversible error in
sustaining the lower court's order which dismissed PANMALAY's complaint against private respondents for
no cause of action. Hence, it is now for the trial court to determine if in fact the damage caused to the
insured vehicle was due to the "carelessness, recklessness and imprudence" of the driver of private
respondent Erlinda Fabie.
WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages
against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on
the merits.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

27-G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner, vs. WILLIAM LINES, INC. and
PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, INC., respondents.
PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal
of the decision of the Court of Appeal 1 which affirmed the decision of the trial court of origin finding the
petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and liable for damages to
the private respondent, William Lines, Inc., and to the insurer, Prudential Guarantee Assurance Company,
Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business of
dry-docking and repairing of marine vessels while the private respondent, Prudential Guarantee and
Assurance, Inc. (Prudential), also a domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City, a luxury
passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time of the unfortunate
occurrence sued upon, subject vessel was insured with Prudential for P45,000,000.00 pesos for hull and
machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause covering loss of or damage
to the vessel through the negligence of, among others, ship repairmen. The Policy provided as follows:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to Vessel
directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are
not an Assured hereunder.
xxx xxx xxx
provided such loss or damage has not resulted from want of due diligence by the Assured,
the Owners or Managers of the Vessel, of any of them Masters, Officers, Crew or Pilots are
not to be considered Owners within the meaning of this Clause should they hold shares in
the Vessel. 2
Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's Legal Liability
Insurance Policy. The policy was for P10 million only, under the limited liability clause, to wit:
7. Limit of Liability
The limit of liability under this insurance, in respect of any one accident or series of
accidents, arising out of one occurrence, shall be [P10 million], including liability for costs
and expense which are either:
(a) incurred with the written consent of the underwriters hereon, or
(b) awarded against the Assured. 3
On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in
Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and
CSEW to discuss the work to be undertaken on the M/V Manila City.

The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:
10. The Contractor shall replace at its own work and at its own cost any work or material
which can be shown to be defective and which is communicated in writing within one (1)
month of redelivery of the vessel or if the vessel was not in the Contractor's Possession, the
withdrawal of the Contractor's workmen, or at its option to pay a sum equal to the cost of
such replacement at its own works. These conditions shall apply to any such replacements.
11. Save as provided in Clause 10, the Contractor shall not be under any liability to the
Customer either in contract or for delict or quasi-delict or otherwise except for negligence
and such liability shall itself be subject to the following overriding limitations and exceptions,
namely:
(a) The total liability of the Contractor to the Customer (over and above the
liability to replace under Clause 10) or of any sub-contractor shall be limited in
respect of any defect or event (and a series of accidents arising out of the
same defect or event shall constitute one defect or event) to the sum of Pesos
Philippine Currency One Million only.
(b) In no circumstance whatsoever shall the liability of the Contractor or any
Sub-Contractor include any sum in respect of loss of profit or loss of use of the
vessel or damages consequential on such loss of use
xxx xxx xxx
20. The insurance on the vessel should be maintained by the customer and/or owner of the
vessel during the period the contract is in effect. 4
While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the
master, officers and crew of M/V Manila City stayed in the vessel using their cabins as living quarters.
Other employees hired by William Lines to do repairs and maintenance work on the vessel were also
present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and sank,
resulting to its eventual total loss.
On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the
fire which broke out in M/V Manila City was caused by CSEW's negligence and lack of care.
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter had
paid William Lines, Inc. the value of the hull and machinery insurance on the M/V Manila City. As a result of
such payment Prudential was subrogated to the claim of P45 million, representing the value of the said
insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendant, ordering the latter.

10

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee, the amount
of Forty-five Million (P45 million) Pesos, with interest at the legal rate until full payment is
made.
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven Hundred
Fifteen Thousand (P56,715,000.00) Pesos representing loss of income of M/V MANILA CITY,
with interest at the legal rate until full payment is made.
3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as
payment, in addition to what it received from the insurance company to fully cover the injury
or loss, in order to replace the M/V MANILA CITY, with interest at the legal rate until full
payment is made;
4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven Thousand
Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic) oil on board the vessel when
she was completely gutted by fire at defendant, Cebu Shipyard's quay, with interest at the
legal rate until full payment is made;
5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six
Hundred Seventy-seven Pesos and Ninety-five centavos (P3,054.677.95) as payment for the
spare parts and materials used in the M/V MANILA CITY during dry-docking with interest at
the legal rate until full payment is made;
6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand (P500,000 00)
Pesos in moral damages;
7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million (P10,000.000.00) Pesos
in attorney's fees; and to pay the costs of this suit.
CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency of
the appeal, CSEW and William Lines presented a "Joint Motion for Partial Dismissal" with prejudice, on the
basis of the amicable settlement inked between Cebu Shipyard and William Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and
William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard and
Engineering Works, Inc. to pay the plaintiff Prudential Guarantee and Assurance, Inc., the
subrogee, the sum of P45 Million, with interest at the legal rate until full payment is made,
as contained in the decision of Civil Case No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated February 13,
1998, CSEW found its way to this court via the present petition, contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT CSEW HAD
"MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA CITY AT THE TIME THE
FIRE BROKE OUT.

11

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE DOCTRINE

OFRES IPSA LOQUITUR AGAINST CSEW.
III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY LIABLE FOR
THE LOSS OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT NOT SUPPORTED BY
EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S EXPERT
EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT PRUDENTIAL
HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.
VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT
CSEW WAS NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR
CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING CSEW'S LIABILITY FOR NEGLIGENCE
TO A MAXIMUM OF P 1 MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE RULINGS OF
THIS HONORABLE COURT.
Petitioner's version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave
dock. It was then transferred to the docking quay of CSEW where the remaining repair to be
done was the replating of the top of Water Ballast Tank No. 12 (Tank Top No. 12) which was
subcontracted by CSEW to JNB General Services. Tank Top No. 12 was at the rear section of
the vessel, on level with the flooring of the crew cabins located on the vessel's second deck.
At around seven o'clock in the morning of February 16, 1991, the JNB workers trimmed and
cleaned the tank framing which involved minor hotworks (welding/cutting works). The said
work was completed at about 10:00 a.m. The JNB workers then proceeded to rig the steel
plates, after which they had their lunch break. The rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB workers noticed smoke
coming from the passageway along the crew cabins. When one of the workers, Mr. Casas,
proceeded to the passageway to ascertain the origin of the smoke, he noticed that smoke
was gathering on the ceiling of the passageway but did not see any fire as the crew cabins
on either side of the passageway were locked. He immediately sought out the proprietor of
JNB, Mr. Buenavista, and the Safety officer CSEW, Mr. Aves, who sounded the fire alarm.
CSEW's fire brigade immediately responded as well as the other fire fighting units in Metro
Cebu. However, there were no WLI representative, officer or crew to guide the firemen inside
the vessel.
Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue
Fire Cordova Fire Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW,
the fire was not controlled until 2:00 a.m., of the following day, February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel
and fire again broke out. Then the huge amounts of water pumped into the vessel, coupled
with the strong current, caused the vessel to tilt until it capsized and sank.

12

When M/V Manila City capsized, steel and angle bars were noticed to have been newly
welded along the port side of the hull of the vessel, at the level of the crew cabins. William
Lines did not previously apply for a permit to do hotworks on the said portion of the ship as
it should have done pursuant to its work order with CSEW. 5
Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner:
At around eleven o'clock in the morning of February 16, 1991, the Chief Mate of M/V Manila
City was inspecting the various works being done by CSEW on the vessel, when he saw that
some workers of CSEW were cropping out steel plates Tank Top No. 12 using acetylene,
oxygen and welding torch. He also observed that the rubber insulation wire coming out of
the air-conditioning unit was already burning, prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12.
The vessel's reeferman reported such occurence to the Chief Mate who immediately
assembled the crew members to put out the fire. When it was too hot for them to stay on
board and seeing that the fire cannot be controlled, the vessel's crew were forced to
withdraw from CSEW's docking quay.
In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with
Prudential Guarantee, William Lines filed a claim for constructive loss, and after a thorough
investigation of the surrounding circumstances of the tragedy, Prudential Guaranteed found
the said insurance claim to be meritorious and issued a check in favor of William Lines in the
amount of P 45 million pesos representing the total value of M/V Manila City's hull and
machinery insurance. 6
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for the
respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioner's submission
that the finding of negligence by the Court of Appeals is not supported by the evidence on record, and
contrary to what the Court of Appeals found, petitioner did not have management and control over M/V
Manila City. Although it was brought to the premises of CSEW for annual repair, William Lines, Inc. retained
control over the vessel as the ship captain remained in command and the ship's crew were still present.
While it imposed certain rules and regulations on William Lines, it was in the exercise of due diligence and
not an indication of CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did not
have exclusive control over the M/V Manila City and the trial court and the Court of Appeals erred in
applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the
Court of Appeals are conclusive on the parties and are not reviewable by this Court. They are entitled to
great weight and respect, even finality, especially when, as in this case, the Court of Appeals affirmed the
factual findings arrived at by the trial court. 7 When supported by sufficient evidence, findings of fact by
the Court of Appeals affirming those of the trial court, are not to be disturbed on appeal. The rationale
behind this doctrine is that review of the findings of fact of the Court of Appeals is not a function that the
Supreme Court normally undertakes. 8
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which caused
the total loss of subject M/V Manila City was due to the negligence of the employees and workers of CSEW.
Both courts found that the M/V Manila City was under the custody and control of petitioner CSEW, when
the ill-fated vessel caught fire. The decisions of both the lower court and the Court of Appeals set forth

13

clearly the evidence sustaining their finding of actionable negligence on the part of CSEW. This factual
finding is conclusive on the parties. The court discerns no basis for disturbing such finding firmly anchored
on enough evidence. As held in the case of Roblett Industrial Construction Corporation vs. Court of
Appeals, "in the absence of any showing that the trial court failed to appreciate facts and circumstances of
weight and substance that would have altered its conclusion, no compelling reason exists for the Court to
impinge upon matters more appropriately within its province. 9
Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of
fact cannot be entertained. The finding of negligence by the Court of Appeals is a question which this Court
cannot look into as it would entail going into factual matters on which the finding of negligence was based.
Such an approach cannot be allowed by this Court in the absence of clear showing that the case falls under
any of the exceptions 10 to the well-established principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason
of the negligence of the workers of CSEW, when the said vessel was under the exclusive custody and
control of CSEW is accordingly upheld. Under the circumstances of the case, the doctrine of res ipsa
loquitur applies. For the doctrine of res ipsa loquitur to apply to a given situation, the following conditions
must concur (1) the accident was of a kind which does not ordinarily occur unless someone is negligent;
and (2) that the instrumentality or agency which caused the injury was under the exclusive control of the
person charged with negligence.
The facts and evidence on record reveal the concurrence of said conditions in the case under
scrutiny. First, the fire that occurred and consumed M/V Manila City would not have happened in the
ordinary course of things if reasonable care and diligence had been exercised. In other words, some
negligence must have occurred. Second, the agency charged with negligence, as found by the trial court
and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu Shipyard and
Engineering Works, Inc., which had control over subject vessel when it was docketed for annual repairs. So
also, as found by the regional trial court, "other responsible causes, including the conduct of the plaintiff,
and third persons, are sufficiently eliminated by the evidence. 11
What is more, in the present case the trial court found direct evidence to prove that the workers and/or
employees of CSEW were remiss in their duty of exercising due diligence in the care of subject vessel. The
direct evidence substantiates the conclusion that CSEW was really negligent. Thus, even without applying
the doctrine of res ipsa loquitur, in light of the direct evidence on record, the ineluctable conclusion is that
the petitioner, Cebu Shipyard and Engineering Works, Inc., was negligent and consequently liable for
damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the
inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and origin of the
fire. Petitioner maintains that the Court of Appeals erred in disregarding the testimonies of the fire experts,
Messrs. David Grey and Gregory Michael Southeard, who testified on the probable origin of the fire in M/V
Manila City. Petitioner avers that since the said fire experts were one in their opinion that the fire did not
originate in the area of Tank Top No. 12 where the JNB workers were doing hotworks but on the crew
accommodation cabins on the portside No. 2 deck, the trial court and the Court of Appeals should have
given weight to such finding based on the testimonies of fire experts; petitioner argues.
But courts are not bound by the testimonies of expert witnesses. Although they may have probative value,
reception in evidence of expert testimonies is within the discretion of the court. Section 49, Rule 130 of the
Revised Rules of Court, provides:

14

Sec. 49. Opinion of expert witness. The opinion of a witness on a matter requiring special
knowledge, skill, experience or training which he is shown to possess, may be received in
evidence.
The word "may" signifies that the use of opinion of an expert witness as evidence is a prerogative of
the courts. It is never mandatory for judges to give substantial weight to expert testimonies. If from
the facts and evidence on record, a conclusion is readily ascertainable, there is no need for the
judge to resort to expert opinion evidence. In the case under consideration, the testimonies of the
fire experts were not the only available evidence on the probable cause and origin of the fire. There
were witnesses who were actually on board the vessel when the fire occurred. Between the
testimonies of the fire experts who merely based their findings and opinions on interviews and the
testimonies of those present during the fire, the latter are of more probative value. Verily, the trial
court and the Court of Appeals did not err in giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the
rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk
and (2) it is a co-assured under the Marine Hull Insurance Policy.
It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly excluded from
the coverage of the insurance because the same resulted from "want of due diligence by the Assured,
Owners or Managers" which is not included in the risks insured against. Again, this theory of petitioner is
bereft of any factual or legal basis. It proceeds from a wrong premise that the fire which gutted subject
vessel was caused by the negligence of the employees of William Lines, Inc. To repeat, the issue of who
between the parties was negligent has already been resolved against Cebu Shipyard and Engineering
Works, Inc. Upon proof of payment by Prudential to William Lines, Inc. the former was subrogated to the
right of the latter to indemnification from CSEW. As aptly ruled by the Court of Appeals, the law on the
manner is succinct and clear, to wit:
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 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. 12
Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William
Lines, Inc., paid the latter the total amount covered by its insurance policy, it was subrogated to the right
of the latter to recover the insured loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under
the subject insurance policy. To buttress its stance that it is a co-assured, petitioner placed reliance on
Clause 20 of the Work Order which states:
20 The insurance on the vessel should be maintained by the customer and/or owner of the
vessel during the period the contract is in effect. 13
According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk
of loss of the vessel while under dry-dock or repair and to such extent, it is benefited and effectively
constituted as a co-assured under the policy.

15

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in
the sense that it requires William Lines to maintain insurance on the vessel during the period of drydocking or repair. Concededly, such a stipulation works to the benefit of CSEW as the ship repairer.
However, the fact that CSEW benefits from the said stipulation does not automatically make it as a coassured of William Lines. 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 the beneficiaries of the
insurance. The hull and machinery insurance procured by William Lines, Inc. from Prudential named only
"William Lines, Inc." as the assured. There was no manifestation of any intention of William Lines, Inc. to
constitute CSEW as a co-assured under subject policy. It is axiomatic that when the terms of a contract are
clear its stipulations control. 14 Thus, when the insurance policy involved named only William Lines, Inc. as
the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:
Subject to the conditions of this Policy, this insurance also covers loss of or damage to vessel
directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are
not an Assured hereunder 15 (emphasis supplied).
As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy, it
would nullify any claim of William Lines, Inc. from Prudential for any loss or damage caused by the
negligence of CSEW. Certainly, no shipowner would agree to make a shiprepairer a co-assured under such
insurance policy; otherwise, any claim for loss or damage under the policy would be invalidated. Such
result could not have been intended by William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines Inc., by
stipulation in the Contract or Work Order its liability is limited to One Million (P1,000,000.00) Pesos only,
and Prudential a mere subrogee of William Lines, Inc., should only be entitled to collect the sum stipulated
in the said contract.
Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as
binding as an ordinary contract, the Court recognizes instances when reliance on such contracts cannot be
favored especially where the facts and circumstances warrant that subject stipulations be
disregarded. 16 Thus, in ruling on the validity and applicability of the stipulation limiting the liability of
CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-vis the
nature of the provision sought to be enforced should be considered, bearing in mind the principles of
equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00)
Pesos. To determine the validity and sustainability of the claim of William Lines, Inc., for a total loss,
Prudential conducted its own inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was
found to be beyond economical salvage and repair. 17 The evaluation of the average adjuster also reported
a constructive total loss. 18 The said claim of William Lines, Inc., was then found to be valid and
compensable such that Prudential paid the latter the total value of its insurance claim. Furthermore, it was
ascertained that the replacement cost of the vessel (the price of a vessel similar to M/V Manila City),
amounts to Fifty Million (P 50,000,000.00) Pesos. 19

16

Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has
been sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One
Million Pesos only. As aptly held by the trial court, "it is rather unconscionable if not overstrained." To allow
CSEW to limit its liability to One Million Pesos notwithstanding the fact that the total loss suffered by the
assured and paid for by Prudential amounted to Forty Five Million (P45,000,000.00) Pesos would sanction
the exercise of a degree of diligence short of what is ordinarily required because, then, it would not be
difficult for petitioner to escape liability by the simple expedient of paying an amount very much lower
than the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3, 1997,
and Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement as to
costs.1wphi1.nt
SO ORDERED. Romero, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.
#Footnotes
10 Instances when the findings of fact of the trial court and/or Court of Appeals may be reviewed by
the Supreme Court are (1) when the conclusion is a finding grounded entirely on speculation,
surmises and conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) where there is a grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) where the findings of fact are conflicting; (6) when the Court of
Appeals in making its findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) the findings are contrary to those of the trial court;
(8) when the findings of fact are conclusions without citation of specific evidence on which they are
based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondents and (10) the findings of fact of the Court of Appeals is
premised on the supposed absence of evidence and is contradicted by the evidence on record.
(Misa vs. Court of Appeals, 212 SCRA 217.)
28-G.R. No. 127897

November 15, 2001

DELSAN TRANSPORT LINES, INC., petitioner, vs. THE HON. COURT OF APPEALS and AMERICAN
HOME ASSURANCE CORPORATION, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals in CA-G.R. CV No.
39836 promulgated on June 17, 1996, reversing the decision of the Regional Trial Court of Makati City,
Branch 137, ordering petitioner to pay private respondent the sum of Five Million Ninety-Six Thousand Six
Hundred Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and the Resolution 2 dated
January 21, 1997 which denied the subsequent motion for reconsideration.
The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the
petitioner, Delsan Transport Lines, Inc., for a period of one year whereby the said common carrier agreed
to transport Caltexs industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country.
Under the contract, petitioner took on board its vessel, MT Maysun 2,277.314 kiloliters of industrial fuel oil
of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with the
private respondent, American Home Assurance Corporation.
On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City. Unfortunately, the vessel
sank in the early morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo
of fuel oil.

17

Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred
Thirty-Five Pesos and Fifty-Seven Centavos (P5,096,635.67) representing the insured value of the lost
cargo. Exercising its right of subrogation under Article 2207 of the New Civil Code, the private respondent
demanded of the petitioner the same amount it paid to Caltex.1wphi1.nt
Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint
with the Regional Trial Court of Makati City, Branch 137, for collection of a sum of money. After the trial and
upon analyzing the evidence adduced, the trial court rendered a decision on November 29, 1990
dismissing the complaint against herein petitioner without pronouncement as to cost. The trial court found
that the vessel, MT Maysum, was seaworthy to undertake the voyage as determined by the Philippine
Coast Guard per Survey Certificate Report No. M5-016-MH upon inspection during its annual dry-docking
and that the incident was caused by unexpected inclement weather condition or force majeure, thus
exempting the common carrier (herein petitioner) from liability for the loss of its cargo. 3
The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals. The appellate
court gave credence to the weather report issued by the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA for brevity) which showed that from 2:00 oclock to 8:oo
oclock in the morning on August 16, 1986, the wind speed remained at 10 to 20 knots per hour while the
waves measured from .7 to two (2) meters in height only in the vicinity of the Panay Gulf where the subject
vessel sank, in contrast to herein petitioners allegation that the waves were twenty (20) feet high. In the
absence of any explanation as to what may have caused the sinking of the vessel coupled with the finding
that the same was improperly manned, the appellate court ruled that the petitioner is liable on its
obligation as common carrier4 to herein private respondent insurance company as subrogee of Caltex. The
subsequent motion for reconsideration of herein petitioner was denied by the appellate court.
Petitioner raised the following assignments of error in support of the instant petition, 5 to wit:
I
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT.
II
THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL PRESUMPTION
THAT THE VESSEL MT "MAYSUN" WAS SEAWORTHY.
III
THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN THE
CASE OF HOME INSURANCE CORPORATION V. COURT OF APPEALS.
Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance Code of the
Philippines, which states that in every marine insurance upon a ship or freight, or freightage, or upon any
thin which is the subject of marine insurance there is an implied warranty by the shipper that the ship is
seaworthy. Consequently, the insurer will not be liable to the assured for any loss under the policy in case
the vessel would later on be found as not seaworthy at the inception of the insurance. It theorized that
when private respondent paid Caltex the value of its lost cargo, the act of the private respondent is
equivalent to a tacit recognition that the ill-fated vessel was seaworthy; otherwise, private respondent was
not legally liable to Caltex due to the latters breach of implied warranty under the marine insurance policy
that the vessel was seaworthy.
The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not seaworthy on
the ground that the marine officer who served as the chief mate of the vessel, Francisco Berina, was
allegedly not qualified. Under Section 116 of the Insurance Code of the Philippines, the implied warranty of
seaworthiness of the vessel, which the private respondent admitted as having been fulfilled by its payment
of the insurance proceeds to Caltex of its lost cargo, extends to the vessels complement. Besides,
petitioner avers that although Berina had merely a 2 nd officers license, he was qualified to act as the

18

vessels chief officer under Chapter IV(403), Category III(a)(3)(ii)(aa) of the Philippine Merchant Marine
Rules and Regulations. In fact, all the crew and officers of MT Maysun were exonerated in the
administrative investigation conducted by the Board of Marine Inquiry after the subject accident. 6
In any event, petitioner further avers that private respondent failed, for unknown reason, to present in
evidence during the trial of the instant case the subject marine cargo insurance policy it entered into with
Caltex. By virtue of the doctrine laid down in the case of Home Insurance Corporation vs. CA,7 the failure of
the private respondent to present the insurance policy in evidence is allegedly fatal to its claim inasmuch
as there is no way to determine the rights of the parties thereto.
Hence, the legal issues posed before the Court are:
I
Whether or not the payment made by the private respondent to Caltex for the insured value of the
lost cargo amounted to an admission that the vessel was seaworthy, thus precluding any action for
recovery against the petitioner.
II
Whether or not the non-presentation of the marine insurance policy bars the complaint for recovery
of sum of money for lack of cause of action.
We rule in the negative on both issues.
The payment made by the private respondent for the insured value of the lost cargo operates as waiver of
its (private respondent) right to enforce the term of the implied warranty against Caltex under the marine
insurance policy. However, the same cannot be validly interpreted as an automatic admission of the
vessels seaworthiness by the private respondent as to foreclose recourse against the petitioner for any
liability under its contractual obligation as a common carrier. The fact of payment grants the private
respondent subrogatory right which enables it to exercise legal remedies that would otherwise be available
to Caltex as owner of the lost cargo against the petitioner common carrier. 8 Article 2207 of the New civil
Code provides that:
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 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.
The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is
the mode which equity adopts to compel the ultimate payment of a debt by one who in justice and good
conscience ought to pay.9 It is not dependent upon, nor does it grow out of, any privity of contract or upon
written assignment of claim. It accrues simply upon payment by the insurance company of the insurance
claim.10 Consequently, the payment made by the private respondent (insurer) to Caltex (assured) operates
as an equitable assignment to the former of all the remedies which the latter may have against the
petitioner.
From the nature of their business and for reasons of public policy, common carriers are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of passengers transported by
them, according to all the circumstance of each case. 11 In the event of loss, destruction or deterioration of
the insured goods, common carriers shall be responsible unless the same is brought about, among others,
by flood, storm, earthquake, lightning or other natural disaster or calamity. 12 In all other cases, if the goods
are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence. 13

19

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, petitioner
attributes the sinking of MT Maysun to fortuitous even or force majeure. From the testimonies of Jaime
Jarabe and Francisco Berina, captain and chief mate, respectively of the ill-fated vessel, it appears that a
sudden and unexpected change of weather condition occurred in the early morning of August 16, 1986;
that at around 3:15 oclock in the morning a squall ("unos") carrying strong winds with an approximate
velocity of 30 knots per hour and big waves averaging eighteen (18) to twenty (20) feet high, repeatedly
buffeted MT Maysun causing it to tilt, take in water and eventually sink with its cargo. 14 This tale of strong
winds and big waves by the said officers of the petitioner however, was effectively rebutted and belied by
the weather report15 from the Philippine Atmospheric, Geophysical and Astronomical Services
Administration (PAGASA), the independent government agency charged with monitoring weather and sea
conditions, showing that from 2:00 oclock to 8:00 oclock in the morning on August 16, 1986, the wind
speed remained at ten (10) to twenty (20) knots per hour while the height of the waves ranged from .7 to
two (2) meters in the vicinity of Cuyo East Pass and Panay Gulf where the subject vessel sank. Thus, as the
appellate court correctly ruled, petitioners vessel, MT Maysun, sank with its entire cargo for the reason
that it was not seaworthy. There was no squall or bad weather or extremely poor sea condition in the
vicinity when the said vessel sank.
The appellate court also correctly opined that the petitioners witnesses, Jaime Jarabe and Francisco
Berina, ship captain and chief mate, respectively, of the said vessel, could not be expected to testify
against the interest of their employer, the herein petitioner common carrier.
Neither may petitioner escape liability by presenting in evidence certificates 16 that tend to show that at the
time of dry-docking and inspection by the Philippine Coast Guard, the vessel MT Maysun, was fit for
voyage. These pieces of evidence do not necessarily take into account the actual condition of the vessel at
the time of the commencement of the voyage. As correctly observed by the Court of appeals:
At the time of dry-docking and inspection, the ship may have appeared fit. The certificates issued,
however, do not negate the presumption of unseaworthiness triggered by an unexplained sinking.
Of certificates issued in this regard, authorities are likewise clear as to their probative value, (thus):
Seaworthiness relates to a vessels actual condition. Neither the granting of classification or
the issuance of certificates established seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec.
62).
And also:
Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy
the vessel owners obligation. Also securing the approval of the shipper of the cargo, or his
surveyor, of the condition of the vessel or her stowage does not establish due diligence if
the vessel was in fact unseaworthy, for the cargo owner has no obligation in relation to
seaworthiness. (Ibid.)17
Additionally, the exoneration of MT Maysuns officers and crew by the Board of Marine Inquiry merely
concerns their respective administrative liabilities. It does not in any way operate to absolve the petitioner
common carrier from its civil liabilities. It does not in any way operate to absolve the petitioner common
carrier from its civil liability arising from its failure to observe extraordinary diligence in the vigilance over
the goods it was transporting and for the negligent acts or omissions of its employees, the determination
of which properly belongs to the courts. 18 In the case at bar, petitioner is liable for the insured value of the
lost cargo of industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or
negligence as common carrier19 occasioned by the unexplained sinking of its vessel, MT Maysun, while in
transit.
Anent the second issue, it is our view and so hold that the presentation in evidence of the marine
insurance policy is not indispensable in this case before the insurer may recover from the common carrier
the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by
itself, is sufficient to establish not only the relationship of herein private respondent as insurer and Caltex,
as the assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to settle the

20

insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the
insurance claim.20
The presentation of the insurance policy was necessary in the case of Home Insurance Corporation v.
CA21 (a case cited by petitioner) because the shipment therein (hydraulic engines) passed through several
stages with different parties involved in each stage. First, from the shipper to the port of departure;
second, from the port of departure to the M/S Oriental Statesman; third, from the M/S Oriental Statesman
to the M/S Pacific Conveyor; fourth, from the M/S Pacific Conveyor to the port or arrival; fifth, from the port
of arrival to the arrastre operator; sixth, from the arrastre operator to the hauler, Mabuhay Brokerage Co.,
Inc. (private respondent therein); and lastly, from the hauler to the consignee. We emphasized in that case
that in the absence of proof of stipulations to the contrary, the hauler can be liable only for any damage
that occurred from the time it received the cargo until it finally delivered it to the consignee. Ordinarily, it
cannot be held responsible for the handling of the cargo before it actually received it. The insurance
contract, which was not presented in evidence in that case would have indicated the scope of the insurers
liability, if any, since no evidence was adduced indicating at what stage in the handling process the
damage to the cargo was sustained.
Hence, our ruling on the presentation of the insurance policy in the said case of Home Insurance
Corporation is not applicable to the case at bar. In contrast, there is no doubt that the cargo of industrial
fuel oil belonging to Caltex, in the case at bar, was lost while on board petitioners vessel, MT Maysun,
which sank while in transit in the vicinity of Panay Gulf and Cuyo East Pass in the early morning of August
16, 1986.
WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court of Appeals in
CA-G.R. CV No. 39836 is AFFIRMED. Costs against the petitioner.
SO ORDERED.1wphi1.nt
Bellosillo, Mendoza, Quisumbing, and Buena, JJ., concur.

Footnotes:
11

Article 1733, New Civil Code.

12

Article 1734, New Civil Code.

13

Article 1735, New Civil Code;

21

29-G.R. No. 150094

August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE COMPANY and
PHILAM INSURANCE COMPANY, INC., respondents.
DECISION
PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff
must give the carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention
and/or the airway bill.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4, 2001
Decision2and the September 21, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58208. The
assailed Decision disposed as follows:
"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The
appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 951219,entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS
CORPORATION
and/or
CARGOHAUS,
INC.
(formerly
U-WAREHOUSE,
INC.),' is
hereby AFFIRMED andREITERATED.
"Costs against the [petitioner and Cargohaus, Inc.]."4
The assailed Resolution denied petitioner's Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to
Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a
shipment of 109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French
Overseas Company in Makati City, Metro Manila. The shipment was covered by Burlington Airway
Bill No. 11263825 with the words, 'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp
marked on its face. That same day, Burlington insured the cargoes in the amount of $39,339.00
with American Home Assurance Company (AHAC). The following day, Burlington turned over the
custody of said cargoes to Federal Express which transported the same to Manila. The first
shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT
and was immediately stored at [Cargohaus Inc.'s] warehouse. While the second, consisting of 17
cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-30NRT which was
likewise immediately stored at Cargohaus' warehouse. Prior to the arrival of the cargoes, Federal
Express informed GETC Cargo International Corporation, the customs broker hired by the consignee
to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its
client's cargoes.
"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the cargoes arrived
in Manila, a non-licensed custom's broker who was assigned by GETC to facilitate the release of the
subject cargoes, found out, while he was about to cause the release of the said cargoes, that the
same [were] stored only in a room with two (2) air conditioners running, to cool the place instead of
a refrigerator. When he asked an employee of Cargohaus why the cargoes were stored in the 'cool
room' only, the latter told him that the cartons where the vaccines were contained specifically
indicated therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA,

22

upon instructions from GETC, did not proceed with the withdrawal of the vaccines and instead,
samples of the same were taken and brought to the Bureau of Animal Industry of the Department of
Agriculture in the Philippines by SMITHKLINE for examination wherein it was discovered that the
'ELISA reading of vaccinates sera are below the positive reference serum.'
"As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned
the shipment and, declaring 'total loss' for the unusable shipment, filed a claim with AHAC through
its representative in the Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY
NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the
[petitioner] imputing negligence on either or both of them in the handling of the cargo.
"Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily
liable for the loss as follows:
'WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its
Co-Defendant Cargohaus] are directed to pay [respondents], jointly and severally, the
following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00 with
interest from the time of the filing of the complaint to the time the same is fully paid.
2. Attorney's fees in the amount of P50,000.00 and
3. Costs of suit.
'SO ORDERED.'
"Aggrieved, [petitioner] appealed to [the CA]."5
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection
Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held
that the shipping Receipts were a prima facie proof that the goods had indeed been delivered to the carrier
in good condition. We quote from the ruling as follows:
"Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to
the carrier in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in
a damaged condition, a presumption is raised that the damage occurred through the fault or
negligence of the carrier,and this casts upon the carrier the burden of showing that the goods were
not in good condition when delivered to the carrier, or that the damage was occasioned by some
cause excepting the carrier from absolute liability. This the [petitioner] failed to discharge. x x x." 6
Found devoid of merit was petitioner's claim that respondents had no personality to sue. This argument
was supposedly not raised in the Answer or during trial.
Hence, this Petition.7
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
"I.

23

Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the
Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?
"II.
Is the conclusion of the Honorable Court of Appeals petitioner's claim that respondents have no
personality to sue because the payment was made by the respondents to Smithkline when the
insured under the policy is Burlington Air Express is devoid of merit correct or not?
"III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition,
correct or not?
"IV.
Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?
"V.
Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own admission
that petitioner is not liable? and
"VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?" 8
Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2) Is
Federal Express liable for damage to or loss of the insured goods?
This Court's Ruling
The Petition has merit.
Preliminary
Propriety of Review

Issue:

The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of
law cognizable by the Supreme Court.9
In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the
conclusions drawn from such facts. Hence, this case is a proper subject for review by this Court.
Main
Liability for Damages

Issue:

Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance 10 ("Certificate") that both opposing parties cite in
support of their respective positions. They differ only in their interpretation of what their rights are under
its terms. The determination of those rights involves a question of law, not a question of fact. "As
distinguished from a question of law which exists 'when the doubt or difference arises as to what the law is
on a certain state of facts' -- 'there is a question of fact when the doubt or difference arises as to the truth
or the falsehood of alleged facts'; or when the 'query necessarily invites calibration of the whole evidence

24

considering mainly the credibility of witnesses, existence and relevancy of specific surrounding
circumstance, their relation to each other and to the whole and the probabilities of the situation.'" 11
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x upon
surrender of this Certificate." Such wording conveys the right of collecting on any such damage or loss, as
fully as if the property were covered by a special policy in the name of the holder itself. At the back of the
Certificate appears the signature of the representative of Burlington. This document has thus been duly
indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being
indemnified for loss of or damage to the insured shipment, as fully as if the property were covered by a
special policy in the name of the holder. Hence, being the holder of the Certificate and having an insurable
interest in the goods, Smithkline was the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt 12 in
favor of respondents. The latter were thus authorized "to file claims and begin suit against any such
carrier, vessel, person, corporation or government." Undeniably, the consignee had a legal right to receive
the goods in the same condition it was delivered for transport to petitioner. If that right was violated, the
consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the
insurer's entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a cause of
action in case of a contractual breach or negligence. 13 "Further, the insurer's subrogatory right to sue for
recovery under the bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld." 14
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and
purposes, it stands in the place and in substitution of the consignee. A fortiori, both the insurer and the
consignee are bound by the contractual stipulations under the bill of lading. 15
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that
respondents' claim and right of action are already barred. The latter, and even the consignee, never filed
with the carrier any written notice or complaint regarding its claim for damage of or loss to the subject
cargo within the period required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has
never been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
"6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a
written notice, sufficiently describing the goods concerned, the approximate date of the damage or
loss, and the details of the claim, is presented by shipper or consignee to an office of Burlington
within (14) days from the date the goods are placed at the disposal of the person entitled to
delivery, or in the case of total loss (including non-delivery) unless presented within (120) days from
the date of issue of the [Airway Bill]."16
Relevantly, petitioner's airway bill states:
"12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the
case:

25

12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest
within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the
goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the
issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was
used, or to the first carrier or to the last carrier or to the carrier who performed the transportation
during which the loss, damage or delay took place."17
Article 26 of the Warsaw Convention, on the other hand, provides:
"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint
shall be prima facie evidence that the same have been delivered in good condition and in
accordance with the document of transportation.
(2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after
the discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of
baggage and 7 days from the date of receipt in the case of goods. In case of delay the complaint
must be made at the latest within 14 days from the date on which the baggage or goods have been
placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or by separate
notice in writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the
case of fraud on his part."18
Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually
constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or damage
to the goods.19 The shipper or consignee must allege and prove the fulfillment of the condition. If it fails to
do so, no right of action against the carrier can accrue in favor of the former. The aforementioned
requirement is a reasonable condition precedent; it does not constitute a limitation of action. 20
The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been damaged,
and that it is being charged with liability therefor; and (2) to give it an opportunity to examine the nature
and extent of the injury. "This protects the carrier by affording it an opportunity to make an investigation of
a claim while the matter is fresh and easily investigated so as to safeguard itself from false and fraudulent
claims."21
When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a notice
of claim for loss of or damage to goods shipped and the stipulation is not complied with, its enforcement
can be prevented and the liability cannot be imposed on the carrier. To stress, notice is a condition
precedent, and the carrier is not liable if notice is not given in accordance with the stipulation. 22 Failure to
comply with such a stipulation bars recovery for the loss or damage suffered. 23
Being a condition precedent, the notice must precede a suit for enforcement. 24 In the present case, there is
neither an allegation nor a showing of respondents' compliance with this requirement within the prescribed

26

period. While respondents may have had a cause of action then, they cannot now enforce it for their failure
to comply with the aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner.
We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in
respondents' Complaint below -- has been adjudged by the trial court as liable for, inter alia, "actual
damages in the amount of the peso equivalent of US $39,339." 25 This judgment was affirmed by the Court
of Appeals and is already final and executory.26
WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to
Petitioner Federal Express Corporation. No pronouncement as to costs.
SO ORDERED.
Corona,
and
Sandoval-Gutierrez, J., on leave.

30-G.R. No. 168402

ABOITIZ
SHIPPING
AMERICA, respondent.

Carpio-Morales,

JJ., concur.

August 6, 2008
CORPORATION, petitioner, vs.

INSURANCE

COMPANY

OF

NORTH

DECISION
REYES, R.T., J.:
THE RIGHT of subrogation attaches upon payment by the insurer of the insurance claims by the assured.
As subrogee, the insurer steps into the shoes of the assured and may exercise only those rights that the
assured may have against the wrongdoer who caused the damage.
Before Us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) which reversed
the Decision2 of the Regional Trial Court (RTC). The CA ordered petitioner Aboitiz Shipping Corporation to
pay the sum of P280,176.92 plus interest and attorney's fees in favor of respondent Insurance Company of
North America (ICNA).
The Facts
Culled from the records, the facts are as follows:
On June 20, 1993, MSAS Cargo International Limited and/or Associated and/or Subsidiary Companies
(MSAS) procured a marine insurance policy from respondent ICNA UK Limited of London. The insurance
was for a transshipment of certain wooden work tools and workbenches purchased for the consignee
Science Teaching Improvement Project (STIP), Ecotech Center, Sudlon Lahug, Cebu City, Philippines. 3ICNA
issued an "all-risk" open marine policy,4 stating:
This Company, in consideration of a premium as agreed and subject to the terms and conditions
printed hereon, does insure for MSAS Cargo International Limited &/or Associated &/or Subsidiary
Companies on behalf of the title holder: - Loss, if any, payable to the Assured or order. 5

27

The cargo, packed inside one container van, was shipped "freight prepaid" from Hamburg, Germany on
board M/S Katsuragi. A clean bill of lading6 was issued by Hapag-Lloyd which stated the consignee to be
STIP, Ecotech Center, Sudlon Lahug, Cebu City.
The container van was then off-loaded at Singapore and transshipped on board M/S Vigour Singapore. On
July 18, 1993, the ship arrived and docked at the Manila International Container Port where the container
van was again off-loaded. On July 26, 1993, the cargo was received by petitioner Aboitiz Shipping
Corporation (Aboitiz) through its duly authorized booking representative, Aboitiz Transport System. The bill
of lading7 issued by Aboitiz contained the notation "grounded outside warehouse."
The container van was stripped and transferred to another crate/container van without any notation on the
condition of the cargo on the Stuffing/Stripping Report. 8 On August 1, 1993, the container van was loaded
on board petitioner's vessel, MV Super Concarrier I. The vessel left Manila en route to Cebu City on August
2, 1993.
On August 3, 1993, the shipment arrived in Cebu City and discharged onto a receiving apron of the Cebu
International Port. It was then brought to the Cebu Bonded Warehousing Corporation pending clearance
from the Customs authorities. In the Stripping Report9 dated August 5, 1993, petitioner's checker noted
that the crates were slightly broken or cracked at the bottom.
On August 11, 1993, the cargo was withdrawn by the representative of the consignee, Science Teaching
Improvement Project (STIP) and delivered to Don Bosco Technical High School, Punta Princesa, Cebu City. It
was received by Mr. Bernhard Willig. On August 13, 1993, Mayo B. Perez, then Claims Head of petitioner,
received a telephone call from Willig informing him that the cargo sustained water damage. Perez, upon
receiving the call, immediately went to the bonded warehouse and checked the condition of the container
and other cargoes stuffed in the same container. He found that the container van and other cargoes
stuffed there were completely dry and showed no sign of wetness. 10
Perez found that except for the bottom of the crate which was slightly broken, the crate itself appeared to
be completely dry and had no water marks. But he confirmed that the tools which were stored inside the
crate were already corroded. He further explained that the "grounded outside warehouse" notation in the
bill of lading referred only to the container van bearing the cargo. 11
In a letter dated August 15, 1993, Willig informed Aboitiz of the damage noticed upon opening of the
cargo.12 The letter stated that the crate was broken at its bottom part such that the contents were
exposed. The work tools and workbenches were found to have been completely soaked in water with most
of the packing cartons already disintegrating. The crate was properly sealed off from the inside with
tarpaper sheets. On the outside, galvanized metal bands were nailed onto all the edges. The letter
concluded that apparently, the damage was caused by water entering through the broken parts of the
crate.
The consignee contacted the Philippine office of ICNA for insurance claims. On August 21, 1993, the
Claimsmen Adjustment Corporation (CAC) conducted an ocular inspection and survey of the damage. CAC
reported to ICNA that the goods sustained water damage, molds, and corrosion which were discovered
upon delivery to consignee.13
On September 21, 1993, the consignee filed a formal claim 14 with Aboitiz in the amount of P276,540.00 for
the damaged condition of the following goods:
ten (10) wooden workbenches
three (3) carbide-tipped saw blades
one (1) set of ball-bearing guides
one (1) set of overarm router bits

28

twenty (20) rolls of sandpaper for stroke sander

In a Supplemental Report dated October 20, 1993, 15 CAC reported to ICNA that based on official weather
report from the Philippine Atmospheric, Geophysical and Astronomical Services Administration, it would
appear that heavy rains on July 28 and 29, 1993 caused water damage to the shipment. CAC noted that
the shipment was placed outside the warehouse of Pier No. 4, North Harbor, Manila when it was delivered
on July 26, 1993. The shipment was placed outside the warehouse as can be gleaned from the bill of lading
issued by Aboitiz which contained the notation "grounded outside warehouse." It was only on July 31, 1993
when the shipment was stuffed inside another container van for shipment to Cebu.
Aboitiz refused to settle the claim. On October 4, 1993, ICNA paid the amount of P280,176.92 to
consignee. A subrogation receipt was duly signed by Willig. ICNA formally advised Aboitiz of the claim and
subrogation receipt executed in its favor. Despite follow-ups, however, no reply was received from Aboitiz.
RTC Disposition
ICNA filed a civil complaint against Aboitiz for collection of actual damages in the sum of P280,176.92, plus
interest and attorney's fees.16 ICNA alleged that the damage sustained by the shipment was exclusively
and solely brought about by the fault and negligence of Aboitiz when the shipment was left grounded
outside its warehouse prior to delivery.
Aboitiz disavowed any liability and asserted that the claim had no factual and legal bases. It countered
that the complaint stated no cause of action, plaintiff ICNA had no personality to institute the suit, the
cause of action was barred, and the suit was premature there being no claim made upon Aboitiz.
On November 14, 2003, the RTC rendered judgment against ICNA. The dispositive portion of the
decision17 states:
WHEREFORE, premises considered, the court holds that plaintiff is not entitled to the relief claimed
in the complaint for being baseless and without merit. The complaint is hereby DISMISSED. The
defendant's counterclaims are, likewise, DISMISSED for lack of basis. 18
The RTC ruled that ICNA failed to prove that it is the real party-in-interest to pursue the claim against
Aboitiz. The trial court noted that Marine Policy No. 87GB 4475 was issued by ICNA UK Limited with address
at Cigna House, 8 Lime Street, London EC3M 7NA. However, complainant ICNA Phils. did not present any
evidence to show that ICNA UK is its predecessor-in-interest, or that ICNA UK assigned the insurance policy
to ICNA Phils. Moreover, ICNA Phils.' claim that it had been subrogated to the rights of the consignee must
fail because the subrogation receipt had no probative value for being hearsay evidence. The RTC reasoned:
While it is clear that Marine Policy No. 87GB 4475 was issued by Insurance Company of North
America (U.K.) Limited (ICNA UK) with address at Cigna House, 8 Lime Street, London EC3M 7NA, no
evidence has been adduced which would show that ICNA UK is the same as or the predecessor-ininterest of plaintiff Insurance Company of North America ICNA with office address at Cigna-Monarch
Bldg., dela Rosa cor. Herrera Sts., Legaspi Village, Makati, Metro Manila or that ICNA UK assigned
the Marine Policy to ICNA. Second, the assured in the Marine Policy appears to be MSAS Cargo
International Limited &/or Associated &/or Subsidiary Companies. Plaintiff's witness, Francisco B.
Francisco, claims that the signature below the name MSAS Cargo International is an endorsement of
the marine policy in favor of Science Teaching Improvement Project. Plaintiff's witness, however,
failed to identify whose signature it was and plaintiff did not present on the witness stand or took
(sic) the deposition of the person who made that signature. Hence, the claim that there was an
endorsement of the marine policy has no probative value as it is hearsay.
Plaintiff, further, claims that it has been subrogated to the rights and interest of Science Teaching
Improvement Project as shown by the Subrogation Form (Exhibit "K") allegedly signed by a
representative of Science Teaching Improvement Project. Such representative, however, was not
presented on the witness stand. Hence, the Subrogation Form is self-serving and has no probative
value.19 (Emphasis supplied)

29

The trial court also found that ICNA failed to produce evidence that it was a foreign corporation duly
licensed to do business in the Philippines. Thus, it lacked the capacity to sue before Philippine Courts, to
wit:
Prescinding from the foregoing, plaintiff alleged in its complaint that it is a foreign
insurance company duly authorized to do business in the Philippines. This allegation was,
however, denied by the defendant. In fact, in the Pre-Trial Order of 12 March 1996, one of the issues
defined by the court is whether or not the plaintiff has legal capacity to sue and be sued. Under
Philippine law, the condition is that a foreign insurance company must obtain licenses/authority to
do business in the Philippines. These licenses/authority are obtained from the Securities and
Exchange Commission, the Board of Investments and the Insurance Commission. If it fails to obtain
these licenses/authority, such foreign corporation doing business in the Philippines cannot sue
before Philippine courts. Mentholatum Co., Inc. v. Mangaliman, 72 Phil. 524. (Emphasis supplied)
CA Disposition
ICNA appealed to the CA. It contended that the trial court failed to consider that its cause of action is
anchored on the right of subrogation under Article 2207 of the Civil Code. ICNA said it is one and the same
as the ICNA UK Limited as made known in the dorsal portion of the Open Policy. 20
On the other hand, Aboitiz reiterated that ICNA lacked a cause of action. It argued that the formal claim
was not filed within the period required under Article 366 of the Code of Commerce; that ICNA had no right
of subrogation because the subrogation receipt should have been signed by MSAS, the assured in the open
policy, and not Willig, who is merely the representative of the consignee.
On March 29, 2005, the CA reversed and set aside the RTC ruling, disposing as follows:
WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed decision
of the Regional Trial Court of Makati City in Civil Case No. 94-1590 is hereby REVERSED and SET
ASIDE. A new judgment is hereby rendered ordering defendant-appellee Aboitiz Shipping
Corporation to pay the plaintiff-appellant Insurance Company of North America the sum
of P280,176.92 with interest thereon at the legal rate from the date of the institution of this case
until fully paid, and attorney's fees in the sum of P50,000, plus the costs of suit.21
The CA opined that the right of subrogation accrues simply upon payment by the insurance company of
the insurance claim. As subrogee, ICNA is entitled to reimbursement from Aboitiz, even assuming that it is
an unlicensed foreign corporation. The CA ruled:
At any rate, We find the ground invoked for the dismissal of the complaint as legally untenable.
Even assuming arguendo that the plaintiff-insurer in this case is an unlicensed foreign corporation,
such circumstance will not bar it from claiming reimbursement from the defendant carrier by virtue
of subrogation under the contract of insurance and as recognized by Philippine courts. x x x
xxxx
Plaintiff insurer, whether the foreign company or its duly authorized Agent/Representative in the
country, as subrogee of the claim of the insured under the subject marine policy, is therefore the
real party in interest to bring this suit and recover the full amount of loss of the subject cargo
shipped by it from Manila to the consignee in Cebu City. x x x22
The CA ruled that the presumption that the carrier was at fault or that it acted negligently was not
overcome by any countervailing evidence. Hence, the trial court erred in dismissing the complaint and in
not finding that based on the evidence on record and relevant provisions of law, Aboitiz is liable for the loss
or damage sustained by the subject cargo.
Issues

30

The following issues are up for Our consideration:

(1) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT ICNA
HAS A CAUSE OF ACTION AGAINST ABOITIZ BY VIRTUE OF THE RIGHT OF SUBROGATION BUT
WITHOUT CONSIDERING THE ISSUE CONSISTENTLY RAISED BY ABOITIZ THAT THE FORMAL CLAIM OF
STIP WAS NOT MADE WITHIN THE PERIOD PRESCRIBED BY ARTICLE 366 OF THE CODE OF
COMMERCE; AND, MORE SO, THAT THE CLAIM WAS MADE BY A WRONG CLAIMANT.
(2) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE
SUIT FOR REIMBURSEMENT AGAINST ABOITIZ WAS PROPERLY FILED BY ICNA AS THE LATTER WAS
AN AUTHORIZED AGENT OF THE INSURANCE COMPANY OF NORTH AMERICA (U.K.) ("ICNA UK").
(3) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THERE
WAS PROPER INDORSEMENT OF THE INSURANCE POLICY FROM THE ORIGINAL ASSURED MSAS
CARGO INTERNATIONAL LIMITED ("MSAS") IN FAVOR OF THE CONSIGNEE STIP, AND THAT THE
SUBROGATION RECEIPT ISSUED BY STIP IN FAVOR OF ICNA IS VALID NOTWITHSTANDING THE FACT
THAT IT HAS NO PROBATIVE VALUE AND IS MERELY HEARSAY AND A SELF-SERVING DOCUMENT FOR
FAILURE OF ICNA TO PRESENT A REPRESENTATIVE OF STIP TO IDENTIFY AND AUTHENTICATE THE
SAME.
(4) THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT THE
EXTENT AND KIND OF DAMAGE SUSTAINED BY THE SUBJECT CARGO WAS CAUSED BY THE FAULT OR
NEGLIGENCE OF ABOITIZ.23 (Underscoring supplied)
Elsewise stated, the controversy rotates on three (3) central questions: (a) Is respondent ICNA the real
party-in-interest that possesses the right of subrogation to claim reimbursement from petitioner Aboitiz?
(b) Was there a timely filing of the notice of claim as required under Article 366 of the Code of Commerce?
(c) If so, can petitioner be held liable on the claim for damages?
Our Ruling
We answer the triple questions in the affirmative.
A foreign corporation not licensed to do business in the Philippines is not absolutely
incapacitated from filing a suit in local courts. Only when that foreign corporation is "transacting" or
"doing business" in the country will a license be necessary before it can institute suits. 24 It may, however,
bring suits on isolated business transactions, which is not prohibited under Philippine law. 25 Thus, this Court
has held that a foreign insurance company may sue in Philippine courts upon the marine insurance policies
issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no
license to do business in this country. It is the act of engaging in business without the prescribed license,
and not the lack of license per se, which bars a foreign corporation from access to our courts. 26
In any case, We uphold the CA observation that while it was the ICNA UK Limited which issued the subject
marine policy, the present suit was filed by the said company's authorized agent in Manila. It was the
domestic corporation that brought the suit and not the foreign company. Its authority is expressly provided
for in the open policy which includes the ICNA office in the Philippines as one of the foreign company's
agents.
As found by the CA, the RTC erred when it ruled that there was no proper indorsement of the insurance
policy by MSAS, the shipper, in favor of STIP of Don Bosco Technical High School, the consignee.
The terms of the Open Policy authorize the filing of any claim on the insured goods, to be brought against
ICNA UK, the company who issued the insurance, or against any of its listed agents worldwide. 27 MSAS
accepted said provision when it signed and accepted the policy. The acceptance operated as an
acceptance of the authority of the agents. Hence, a formal indorsement of the policy to the agent in the
Philippines was unnecessary for the latter to exercise the rights of the insurer.

31

Likewise, the Open Policy expressly provides that:

The Company, in consideration of a premium as agreed and subject to the terms and conditions
printed hereon, does insure MSAS Cargo International Limited &/or Associates &/or Subsidiary
Companies in behalf of the title holder: - Loss, if any, payable to the Assured or Order.
The policy benefits any subsequent assignee, or holder, including the consignee, who may file claims on
behalf of the assured. This is in keeping with Section 57 of the Insurance Code which states:
A policy may be so framed that it will inure to the benefit of whosoever, during the continuance of
the risk, may become the owner of the interest insured. (Emphasis added)
Respondent's cause of action is founded on it being subrogated to the rights of the consignee
of the damaged shipment. The right of subrogation springs from Article 2207 of the Civil Code, which
states:
Article 2207. 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. 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. (Emphasis added)
As this Court held in the case of Pan Malayan Insurance Corporation v. Court of Appeals,28 payment by the
insurer to the assured operates as an equitable assignment of all remedies the assured may have against
the third party who caused the damage. Subrogation is not dependent upon, nor does it grow out of, any
privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer.29
Upon payment to the consignee of indemnity for damage to the insured goods, ICNA's entitlement to
subrogation equipped it with a cause of action against petitioner in case of a contractual breach or
negligence.30 This right of subrogation, however, has its limitations. First, both the insurer and the
consignee are bound by the contractual stipulations under the bill of lading. 31 Second, the insurer can be
subrogated only to the rights as the insured may have against the wrongdoer. If by its own acts after
receiving payment from the insurer, the insured releases the wrongdoer who caused the loss from liability,
the insurer loses its claim against the latter.32
The giving of notice of loss or injury is a condition precedent to the action for loss or injury or
the right to enforce the carrier's liability. Circumstances peculiar to this case lead Us to
conclude that the notice requirement was complied with. As held in the case of Philippine American
General Insurance Co., Inc. v. Sweet Lines, Inc.,33 this notice requirement protects the carrier by affording it
an opportunity to make an investigation of the claim while the matter is still fresh and easily investigated.
It is meant to safeguard the carrier from false and fraudulent claims.
Under the Code of Commerce, the notice of claim must be made within twenty four (24) hours from receipt
of the cargo if the damage is not apparent from the outside of the package. For damages that are visible
from the outside of the package, the claim must be made immediately. The law provides:
Article 366. Within twenty four hours following the receipt of the merchandise, the claim against the
carrier for damages or average which may be found therein upon opening the packages, may be
made, provided that the indications of the damage or average which give rise to the claim cannot
be ascertained from the outside part of such packages, in which case the claim shall be admitted
only at the time of receipt.
After the periods mentioned have elapsed, or the transportation charges have been paid, no claim
shall be admitted against the carrier with regard to the condition in which the goods transported
were delivered. (Emphasis supplied)

32

The periods above, as well as the manner of giving notice may be modified in the terms of the bill of
lading, which is the contract between the parties. Notably, neither of the parties in this case presented the
terms for giving notices of claim under the bill of lading issued by petitioner for the goods.
The shipment was delivered on August 11, 1993. Although the letter informing the carrier of the damage
was dated August 15, 1993, that letter, together with the notice of claim, was received by petitioner only
on September 21, 1993. But petitioner admits that even before it received the written notice of claim, Mr.
Mayo B. Perez, Claims Head of the company, was informed by telephone sometime in August 13, 1993. Mr.
Perez then immediately went to the warehouse and to the delivery site to inspect the goods in behalf of
petitioner.34
In the case of Philippine Charter Insurance Corporation (PCIC) v. Chemoil Lighterage Corporation,35the
notice was allegedly made by the consignee through telephone. The claim for damages was denied. This
Court ruled that such a notice did not comply with the notice requirement under the law. There was no
evidence presented that the notice was timely given. Neither was there evidence presented that the notice
was relayed to the responsible authority of the carrier.
As adverted to earlier, there are peculiar circumstances in the instant case that constrain Us to rule
differently from the PCIC case, albeit this ruling is being made pro hac vice, not to be made a precedent for
other cases.
Stipulations requiring notice of loss or claim for damage as a condition precedent to the right of recovery
from a carrier must be given a reasonable and practical construction, adapted to the circumstances of the
case under adjudication, and their application is limited to cases falling fairly within their object and
purpose.36
Bernhard Willig, the representative of consignee who received the shipment, relayed the information that
the delivered goods were discovered to have sustained water damage to no less than the Claims Head of
petitioner, Mayo B. Perez. Immediately, Perez was able to investigate the claims himself and he confirmed
that the goods were, indeed, already corroded.
Provisions specifying a time to give notice of damage to common carriers are ordinarily to be given a
reasonable and practical, rather than a strict construction. 37 We give due consideration to the fact that the
final destination of the damaged cargo was a school institution where authorities are bound by rules and
regulations governing their actions. Understandably, when the goods were delivered, the necessary
clearance had to be made before the package was opened. Upon opening and discovery of the damaged
condition of the goods, a report to this effect had to pass through the proper channels before it could be
finalized and endorsed by the institution to the claims department of the shipping company.
The call to petitioner was made two days from delivery, a reasonable period considering that the goods
could not have corroded instantly overnight such that it could only have sustained the damage during
transit. Moreover, petitioner was able to immediately inspect the damage while the matter was still fresh.
In so doing, the main objective of the prescribed time period was fulfilled. Thus, there was substantial
compliance with the notice requirement in this case.
To recapitulate, We have found that respondent, as subrogee of the consignee, is the real party in interest
to institute the claim for damages against petitioner; and pro hac vice, that a valid notice of claim was
made by respondent.
We now discuss petitioner's liability for the damages sustained by the shipment. The rule as stated in
Article 1735 of the Civil Code is that in cases where the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary diligence required by
law.38 Extraordinary diligence is that extreme measure of care and caution which persons of unusual
prudence and circumspection use for securing and preserving their own property rights. 39 This standard is
intended to grant favor to the shipper who is at the mercy of the common carrier once the goods have
been entrusted to the latter for shipment.40

33

Here, the shipment delivered to the consignee sustained water damage. We agree with the findings of the
CA that petitioner failed to overturn this presumption:
x x x upon delivery of the cargo to the consignee Don Bosco Technical High School by a
representative from Trabajo Arrastre, and the crates opened, it was discovered that the
workbenches and work tools suffered damage due to "wettage" although by then they were already
physically dry. Appellee carrier having failed to discharge the burden of proving that it exercised
extraordinary diligence in the vigilance over such goods it contracted for carriage, the presumption
of fault or negligence on its part from the time the goods were unconditionally placed in its
possession (July 26, 1993) up to the time the same were delivered to the consignee (August 11,
1993), therefore stands. The presumption that the carrier was at fault or that it acted negligently
was not overcome by any countervailing evidence. x x x41 (Emphasis added)
The shipment arrived in the port of Manila and was received by petitioner for carriage on July 26, 1993. On
the same day, it was stripped from the container van. Five days later, on July 31, 1993, it was re-stuffed
inside another container van. On August 1, 1993, it was loaded onto another vessel bound for Cebu. During
the period between July 26 to 31, 1993, the shipment was outside a container van and kept in storage by
petitioner.
The bill of lading issued by petitioner on July 31, 1993 contains the notation "grounded outside
warehouse," suggesting that from July 26 to 31, the goods were kept outside the warehouse. And since
evidence showed that rain fell over Manila during the same period, We can conclude that this was when
the shipment sustained water damage.
To prove the exercise of extraordinary diligence, petitioner must do more than merely show the possibility
that some other party could be responsible for the damage. It must prove that it used "all reasonable
means to ascertain the nature and characteristic of the goods tendered for transport and that it exercised
due care in handling them.42 Extraordinary diligence must include safeguarding the shipment from damage
coming from natural elements such as rainfall.
Aside from denying that the "grounded outside warehouse" notation referred not to the crate for shipment
but only to the carrier van, petitioner failed to mention where exactly the goods were stored during the
period in question. It failed to show that the crate was properly stored indoors during the time when it
exercised custody before shipment to Cebu. As amply explained by the CA:
On the other hand, the supplemental report submitted by the surveyor has confirmed that it was
rainwater that seeped into the cargo based on official data from the PAGASA that there was, indeed,
rainfall in the Port Area of Manila from July 26 to 31, 1993. The Surveyor specifically noted that the
subject cargo was under the custody of appellee carrier from the time it was delivered by the
shipper on July 26, 1993 until it was stuffed inside Container No. ACCU-213798-4 on July 31,
1993. No other inevitable conclusion can be deduced from the foregoing established facts that
damage from "wettage" suffered by the subject cargo was caused by the negligence of appellee
carrier in grounding the shipment outside causing rainwater to seep into the cargoes.
Appellee's witness, Mr. Mayo tried to disavow any responsibility for causing "wettage" to the subject
goods by claiming that the notation "GROUNDED OUTSIDE WHSE." actually refers to the container
and not the contents thereof or the cargoes. And yet it presented no evidence to explain where did
they place or store the subject goods from the time it accepted the same for shipment on July 26,
1993 up to the time the goods were stripped or transferred from the container van to another
container and loaded into the vessel M/V Supercon Carrier I on August 1, 1993 and left Manila for
Cebu City on August 2, 1993. x x x If the subject cargo was not grounded outside prior to shipment
to Cebu City, appellee provided no explanation as to where said cargo was stored from July 26,
1993 to July 31, 1993. What the records showed is that the subject cargo was stripped from the
container van of the shipper and transferred to the container on August 1, 1993 and finally loaded
into the appellee's vessel bound for Cebu City on August 2, 1993. The Stuffing/Stripping Report
(Exhibit "D") at the Manila port did not indicate any such defect or damage, but when the container
was stripped upon arrival in Cebu City port after being discharged from appellee's vessel, it was

34

noted that only one (1) slab was slightly broken at the bottom allegedly hit by a forklift blade
(Exhibit "F").43 (Emphasis added)
Petitioner is thus liable for the water damage sustained by the goods due to its failure to satisfactorily
prove that it exercised the extraordinary diligence required of common carriers.
WHEREFORE, the petition is DENIED and the appealed Decision AFFIRMED.
SO ORDERED.

Footnotes
20

The dorsal portion contained the provision stating that all claims shall be submitted to
the office of the Company or to one (1) of the "Agents" or "Representatives," as per list
which included "Manila, Philippines, Insurance Co. of North America, Legaspi Village,
Makati CCPO Box 482."
24

Corporation Code, Sec. 133. Doing business without a license. - No foreign corporation
transacting business in the Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action, suit or proceeding in any court
or administrative agency of the Philippines, but such corporation may be sued or
proceeded against before Philippine courts or administrative tribunals on any valid
cause of action recognized under Philippine laws. See also European Resources and
Technologies, Inc. v. Ingenieuburo Birkhahn + Nolte, G.R. No. 159586, July 26, 2004, 435
SCRA 246, 255.

35