Insurance Law Cases- Section 1

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G.R. No. 81026 April 3, 1990

PAN MALAYAN INSURANCECORPORATION, petitioner,vs.

COURT OF APPEALS, ERLINDA FABIE AND HERUNKNOWN 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 trialcourt 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 unknowndriver 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 unde

Article 2207 of the Civil Code, since indemnificationthereunder 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 inthe 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


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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 insuredproperty 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. Barbe

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 legallysubrogated 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 insure

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 heldthat 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


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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 underSection 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 construedaccording 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 thecourts 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 accidenta

collision or

overturning, or

collision oroverturning

consequent upon

mechanical

breakdown or

consequent upon wear

and tear;

(b) by fire, externa

explosion, sel

ignition or lightning

or burglary

housebreaking o

theft;

(c) by malicious act;

(d) whilst in transit

(including the

processes of loading

and unloading)

incidental to suchtransit by road, rail

inland, waterway, lift

or elevator.

xxx xxx xxx

[Annex "A-1" of PANMALAY's

Compliance with Supplementary


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Motion for Bill of Particulars; Record,

p. 34; Emphasis supplied].

PANMALAY contends that the coverage of insured

risks under the above section, specifically Section

III-1(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 werenot 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, June30, 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 damagesdue 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.RNo. 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 wouldamount 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


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action against private respondents. In the pertinent

case ofSveriges 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 Courtholds 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.


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G.R. No. 150094 August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner,vs.

AMERICAN HOME ASSURANCE COMPANY andPHILAM INSURANCE COMPANY,INC., respondents.

D E C I S I O N

PANGANIBAN, J.:

Basic is the requirement that before suing torecover 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 Review1under Rule 45 of

the Rules of Court, challenging the June 4, 2001

Decision2and the September 21, 2001

Resolution3of 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. 95-

1219,entitled 'American Home Assurance Co.

and PHILAM Insurance Co., Inc. v. FEDERALEXPRESS 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 o

109 cartons of veterinary biologicals fo

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 INTRANSIT' and 'PERISHABLE' stamp marked

on its face. That same day, Burlington

insured the cargoes in the amount o

$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 theBureau of Customs, of the impending arriva

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
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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, 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 thepositive 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 amountof 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 showsprima 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 damagewas 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.
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Hence, this Petition.7

The Issues

In its Memorandum, petitioner raises the following

issues for our consideration:

"I.

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 thatrespondents 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' ownadmission 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 IssuePropriety of Review

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 wil

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 IssueLiability for Damages

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

Insurance10("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 evidenceconsidering 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
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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

Receipt12in 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 subrogationpro 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 incase 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, sufficientlydescribing 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:

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
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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 thedocument 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 hispart."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.19The 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.22Failure to comply with such a

stipulation bars recovery for the loss or damagesuffered.23

Being a condition precedent, the notice must

precede a suit for enforcement.24In the present

case, there is neither an allegation nor a showing of

respondents' compliance with this requirement

within the prescribed 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."25This judgment was
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11/38

affirmed by the Court of Appeals and is already

final and executory.26

WHEREFORE, the Petition is GRANTED, and theassailed Decision REVERSED insofar as it pertains to

Petitioner Federal Express Corporation. No

pronouncement as to costs.

SO ORDERED.
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12/38


13/38

Jamila was represented in the investigation and (2)

that Jamila did not consent to the subrogation of

Fireman's Fund to Firestone's right to get

reimbursement from Jamila and its surety. The

lower court in its order of dismissal had sustained

the second ground.

Jamila in its motion for the reconsideration of the

order of September 3, 1966 invoked the first

groundwhich had never been passed upon by the

lower court. Firestone and Fireman's Fund in their

opposition joined battle, in a manner of speaking,

on that first ground.

But the lower court in its order of October 18, 1966,

granting Jamila's motion for reconsideration,

completely ignored that first ground. It reverted to

the second groundwhich was relied upon in its

order of September 3, 1966. The lower courtreiterated its order of July 22, 1966 that Fireman's

Fund had no cause of action against Jamila because

Jamila did not consent to the subrogation. The

court did not mention Firestone, the co-plaintiff of

Fireman's Fund.

At this juncture, it may be noted that motions for

reconsideration become interminable when the

court's orders follow a seesaw pattern. That

phenomenon took place in this case.

Firestone and Fireman's Fund filed a motion for the

reconsideration of the lower court's order of

October 18, 1966 on the ground that Fireman's

Fund Insurance Company was suing on the basis

oflegal subrogation whereas the lower court

erroneously predicated its dismissal order on the

theory that there was no conventional subrogation

because the debtor's consent was lacking.

The plaintiffs cited article 2207 of the Civil Codewhich provides that "if the plaintiff's property has

been insured, and he has received indemnity from

the insurance company for the injury or loss arising

out of the wrong or breach of contract complained

of, the insurance company shall be subrogated to

the rights of the insured against the wrongdoer

or the person who has violated the contract".

The lower court denied plaintiffs' motion. They filed

a second motion for reconsideration. In that motion

they sensibly called the lower court's attention to

the fact that the issue of subrogation was of no

moment because Firestone, the subrogor, is a

party-plaintiff and could sue directly Jamila in its

own right. Without resolving that contention, the

lower court denied plaintiffs' second motion fo

reconsideration.

In this appeal Firestone and Fireman's Fund

contend that the trial court's dismissal of their

complaint is contrary to the aforementioned article

2207 which provides for legal subrogation.

Jamila, in reply, stubbornly argues that lega

subrogation under article 2207 requires the

debtor's consent; that legal subrogation takes place

in the cases mentioned in article 1302 of the CiviCode and the instant case is not among the three

cases enumerated in that article, and that there

could be no subrogation in this case because

according to the plaintiffs the contract between

Jamila and Firestone was entered into on June

1, 1965 but the loss complained of occurred on

May 18, 1963.

With respect to the factual point raised by Jamila, it

should be stated that plaintiffs' counsel gratuitously

alleged in their brief that Firestone and Jamila

entered into a "contract of guard services" on June

1, 1965. That allegation, which was uncalled fo

because it is not found in the complaint, created

confusion which heretofore did not exist. No copy

of the contract was annexed to the complaint.

That confusing statement was an obvious error

since it was expressly alleged in the complaint that

the loss occurred on May 18, 1963. The fact that

such an error was committed is another instancesubstantiating our previous observation that

plaintiffs' counsel had not exercised due care in the

presentation of his case.

The issue is whether the complaint of Firestone and

Fireman's Fund states a cause of action against

Jamila.


14/38

We hold that Firestone is really a nominal, party in

this case. It had already been indemnified for the

loss which it had sustained. Obviously, it joined as a

party-plaintiff in order to help Fireman's Fund to

recover the amount of the loss from Jamila and

First Quezon City Insurance Co., Inc. Firestone had

tacitly assigned to Fireman's Fund its cause of

action against Jamila for breach of contract.

Sufficient ultimate facts are alleged in the

complaint to sustain that cause of action.

On the other hand, Fireman's Fund's action against

Jamila is squarely sanctioned by article 2207. As the

insurer, Fireman's Fund is entitled to go after the

person or entity that violated its contractual

commitment to answer for the loss insured against

(Cf. Philippine Air Lines, Inc. vs. Heald Lumber Co.,

101 Phil. 1032; Rizal Surety & Insurance Co. vs.

Manila Railroad Company, L-24043, April 25, 1968,23 SCRA 205).

The trial court erred in applying to this case the

rules on novation. The plaintiffs in alleging in their

complaint that Fireman's Fund "became a party in

interest in this case by virtue of a subrogation right

given in its favor by" Firestone, were not relying on

the novation by change of creditors as

contemplated in articles 1291 and 1300 to 1303 of

the Civil Code but rather on article 2207.

Article 2207 is a restatement of a settled principle

of American jurisprudence. Subrogation has been

referred to as the doctrine of substitution. It "is an

arm of equity that may guide or even force one to

pay a debt for which an obligation was incurred but

which was in whole or in part paid by another" (83

C.J.S. 576, 678, note 16, citing Fireman's Fund

Indemnity Co. vs. State Compensation Insurance

Fund, 209 Pac. 2d 55).

"Subrogation is founded on principles of justice and

equity, and its operation is governed by principles

of equity. It rests on the principle that substantial

justice should be attained regardless of form, that

is, its basis is the doing of complete, essential, and

perfect justice between all the parties without

regard to form"(83 C.J.S. 579- 80)

Subrogation is a normal incident of indemnity

insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530

77 L. ed. 477). Upon payment of the loss, the

insurer is entitled to be subrogatedpro tanto to any

right of action which the insured may have against

the third person whose. negligence or wrongful act

caused the loss (44 Am. Jur. 2nd 745, citing

Standard Marine Ins. Co. vs. Scottish Metropolitan

Assurance Co., 283 U. S. 294, 75 L. ed. 1037).

The right of subrogation is of the highest equity

The loss in the first instance is that of the insured

but after reimbursement or compensation, it

becomes the loss of the insurer (44 Am. Jur. 2d 746

note 16, citing Newcomb vs. Cincinnati Ins. Co., 22

Ohio St. 382).

"Although many policies including policies in the

standard form, now provide for subrogation, andthus determine the rights of the insurer in this

respect, the equitable right of subrogation as the

legal effect of payment inures to the insurer

without any formal assignment or any express

stipulation to that effect in the policy" (44 Am. Jur

2nd 746). Stated otherwise, when the insurance

company pays for the loss, such payment operates

as an equitable assignment to the insurer of the

property and all remedies which the insured may

have for the recovery thereof. That right is notdependent upon, nor does it grow out of, any

privity of contract, or upon written assignment of

claim, and payment to the insured makes the

insurer an assignee in equity (Shambley v. Jobe-

Blackley Plumbing and Heating Co., 264 N. C

456,142 SE 2d 18).

Whether the plaintiffs would be able to prove their

cause of action against Jamila is another question.

Finding the trial court's order of dismissal to belegally untenable, the same is set aside with costs

against defendant-appellee Jamila & Co., Inc.

SO ORDERED.

Barredo, Antonio, Concepcion, Jr. and Martin, JJ.,

concur.

Fernando, J., is on leave.


15/38

Martin, J., was designated to take part in this case.


16/38


17/38

damages to be awarded to plaintiff

should be reduced to P70,000.00 for

the house and P50,000.00 for the

furniture and other fixtures with

legal interest from the date of the

filing of the complaint until full

payment thereof. [CA Decision, p. 7;

Rollo, p. 35.]

A motion for reconsideration was filed on

December 3, 1979 but was denied in a resolution

dated February 18, 1980. Hence, petitioner filed the

instant petition for review on February 22, 1980.

After the comment and reply were filed, the Court

resolved to deny the petition for lack of merit on

June 11, 1980.

However, petitioner filed a motion for

reconsideration, which was granted, and thepetition was given due course on September 12,

1980. After the parties filed their memoranda, the

case was submitted for decision on January 21,

1981.

Petitioner contends that the Court of Appeals erred:

1. In not deducting the sum of P35,000.00, which

private respondents recovered on the insurance on

their house, from the award of damages.

2. In awarding excessive and/or unproved damages.

3. In applying the doctrine ofres ipsa loquiturto the

facts of the instant case.

The pivotal issue in this case is the applicability of

the common law doctrine ofres ipsa loquitur, the

issue of damages being merely consequential. In

view thereof, the errors assigned by petitioner shall

be discussed in the reverse order.

1. The doctrine ofres ipsa loquitur, whose

application to the instant case petitioner objects to,

may be stated as follows:

Where the thing which caused the

injury complained of is shown to be

under the management of the

defendant or his servants and the

accident is such as in the ordinary

course of things does not happen if

those who have its management o

control use proper care, it affords

reasonable evidence, in the absence

of explanation by the defendant

that the accident arose from want o

care. [Africa v. Caltex (Phil.), Inc., G.R

No. L-12986, March 31, 1966, 16

SCRA 448.]

Thus, inAfrica, supra, where fire broke out in a

Caltex service station while gasoline from a tank

truck was being unloaded into an underground

storage tank through a hose and the fire spread to

and burned neighboring houses, this Court

applying the doctrine ofres ipsa loquitur, adjudged

Caltex liable for the loss.

The facts of the case likewise call for the application

of the doctrine, considering that in the norma

course of operations of a furniture manufacturing

shop, combustible material such as wood chips

sawdust, paint, varnish and fuel and lubricants for

machinery may be found thereon.

It must also be noted that negligence or want o

care on the part of petitioner or its employees was

not merely presumed. The Court of Appeals found

that petitioner failed to construct a firewall between

its shop and the residence of private respondents

as required by a city ordinance; that the fire could

have been caused by a heated motor or a lit

cigarette; that gasoline and alcohol were used and

stored in the shop; and that workers sometimes

smoked inside the shop [CA Decision, p. 5; Rollo, p

33.]

Even without applying the doctrine ofres ipsa

loquitur, petitioner's failure to construct a firewall inaccordance with city ordinances would suffice to

support a finding of negligence.

Even then the fire possibly would not

have spread to the neighboring

houses were it not for another

negligent omission on the part of

defendants, namely, their failure to

provide a concrete wall high enough


18/38


19/38

whose negligence or wrongful act caused the loss

[Fireman's Fund Insurance Co. v. Jamila & Co., Inc.,

G.R. No. L-27427, April 7, 1976, 70 SCRA 323.]

Under Article 2207, the real party in interest with

regard to the indemnity received by the insured is

the insurer [Phil. Air Lines, Inc. v. Heald Lumber Co.,

101 Phil. 1031, (1957).] Whether or not the insurer

should exercise the rights of the insured to which it

had been subrogated lies solely within the former's

sound discretion. Since the insurer is not a party to

the case, its identity is not of record and no claim is

made on its behalf, the private respondent's insurer

has to claim his right to reimbursement of the

P35,000.00 paid to the insured.

WHEREFORE, in view of the foregoing, the decision

of the Court of Appeals is hereby AFFIRMED with

the following modifications as to the damagesawarded for the loss of private respondents' house,

considering their receipt of P35,000.00 from their

insurer: (1) the damages awarded for the loss of the

house is reduced to P35,000.00; and (2) the right of

the insurer to subrogation and thus seek

reimbursement from petitioner for the P35,000.00 it

had paid private respondents is recognized.

SO ORDERED.


20/38

G.R. No. L-24043 April 25, 1968

RIZAL SURETY & INSURANCECOMPANY, plaintiff-appellant,vs.

MANILA RAILROAD COMPANY and MANILAPORT SERVICE, defendants-appellees.

Gil R. Carlos and Associates for plaintiff-appellant.

D. F. Macaranas and M. C. Gonzales for defendants-

appellees.

FERNANDO,J.:

In this suit for the recovery of the amount paid by

the plaintiff, Rizal Surety and Insurance Company,

to the consignee based on the applicable Civil Code

provision,1 which speak to the effect that the

Insurance Company "shall be subrogated to therights of the insured," it is its contention that it is

entitled to the amount paid by it in full, by virtue of

the insurance contract. The lower court, however,

relying on the limited liability clause on a

management contract with the defendants, could

not go along with such a theory. Hence, this appeal.

The facts were stipulated. The more pertinent

follows: That on or about November 29, 1960, the

vessel, SS Flying Trader, loaded on board at Genoa,

Italy for shipment to Manila, Philippines, among

other cargoes, 6 cases OMH, Special Single Colour

Offset Press Machine, for which Bill of Lading No. 1

was issued, consigned to Suter Inc.; that such vessel

arrived at the Port of Manila, Philippines on or

about January 16, 1961 and subsequently

discharged complete and in good order the

aforementioned shipment into the custody of

defendant Manila Port Service as arrastre operator;

that in the course of the handling, one of the six

cases identified as Case No. 2143 containing theOMH, Special Single Colour Offset Press, while the

same was being lifted and loaded by the crane of

the Manila Port Service into the consignee's truck, it

was dropped by the crane and as a consequence,

the machine was heavily damaged for which

plaintiff as insurer paid to the consignee, Suter Inc.

the amount of P16,500.00, representing damages

by way of costs of replacement parts and repairs to

put the machine in working condition, plus the sum

of P180.70 which plaintiff paid to the Internationa

Adjustment Bureau as adjuster's fee for the survey

conducted on the damaged cargo or a total of

P16,680.70 representing plaintiff's liability under the

insurance contract; and that the arrastre charges in

this particular shipment was paid on the weight or

measurement basis whichever is higher, and not on

the value thereof.2

Clause 15 of the management contract which as

admitted by the plaintiff, appeared "at the dorsa

part of the Delivery Permit" and was "used in taking

delivery of the subject shipment from the

defendants' (Manila Port Service and Manila

Railroad Co.) custody and control, issued in the

name of consignee's broker," contained what was

referred to as "an important notice." Such permit "is

presented subject to all the terms and conditions of

the Management Contract between the Bureau ofCustoms and Manila Port Service and amendments

thereto or alterations thereof, particularly but not

limited to paragraph 15 thereof limiting the

Company liability to P500.00 per package, unless

the value of the goods is otherwise, specified

declared or manifested and the corresponding

arrastre charges have been paid. . . ."3

On the above facts and relying on Bernabe & Co. v

Delgado Brothers, Inc.,

4

the lower court renderedthe judgment "ordering defendants, jointly and

severally, to pay plaintiff the amount of Five

Hundred Pesos (P500.00), with legal interest

thereon from January 13, 1962, the date of the

filing of the complaint, with costs against said

defendants."5

As noted at the outset, in this appeal, the point is

pressed that under the applicable Civil Code

provision, plaintiff-appellant Insurance Company

could recover in full. The literal language of Article2207, however, does not warrant such an

interpretation. It is there made clear that in the

event that the property has been insured and the

Insurance Company has paid the indemnity for the

injury or loss sustained, it "shall be subrogated to

the rights of the insured against the wrong-doer or

the person who has violated the contract."


21/38

Plaintiff-appellant Insurance Company, therefore,

cannot recover from defendants an amount greater

than that to which the consignee could lawfully lay

claim. The management contract is clear. The

amount is limited to Five Hundred Pesos (P500.00).

Such a stipulation has invariably received the

approval of this Court from the leading case

ofBernabe & Co. v. Delgado Bros., Inc.6 Such a

decision was quoted with approval in the following

subsequent cases:Atlantic Mutual Insurance Co. v.

Manila Port Service,7 Insurance Service Co. of North

America v. Manila Port Service,8 Insurance Company

of North America v. U.S. Lines, Co.,9 and Insurance

Company of North America v. Manila Port Service.10

In one of them,Atlantic Mutual Insurance Company

v. Manila Port Service, this Court, through the then

Justice, now Chief Justice, Concepcion, restated the

doctrine thus: "Plaintiff maintains that, not being aparty to the management contract, the consignee

into whose shoes plaintiff had stepped in

consequence of said payment is not subject to

the provisions of said stipulation, and that the same

is furthermore invalid. The lower court correctly

rejected this pretense because, having taken

delivery of the shipment aforementioned by virtue

of a delivery permit, incorporating thereto, by

reference, the provisions of said management

contract, particularly paragraph 15 thereof, the gistof which was set forth in the permit, the consignee

became bound by said provisions, and because it

could have avoided the application of said

maximum limit of P500.00 per package by stating

the true value thereof in its claim for delivery of the

goods in question, which, admittedly, the consignee

failed to do. . . ."11

Plaintiff-appellant Rizal Surety and Insurance

Company, having been subrogated merely to the

rights of the consignee, its recovery necessarilyshould be limited to what was recoverable by the

insured. The lower court therefore did not err when

in the decision appealed from, it limited the

amount which defendants were jointly and severally

to pay plaintiff-appellants to "Five Hundred Pesos

(P500.00) with legal interest thereon from January

31, 1962, the date of the filing of the complaint, . . .

."

WHEREFORE, the decision appealed from is

affirmed. With costs against Rizal Surety and

Insurance Company.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P.

Zaldivar, Sanchez, Castro and Angeles, JJ.

concur.1wph1.t


22/38

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETYCORPORATION, petitioner,vs.

THE HON. COURT OF APPEALS, BORDERMACHINERY & HEAVY EQUIPMENT, INC.,(BORMAHECO), CONSTANCIO M. MAGLANAand JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,vs.

COURT OF APPEALS, PIONEER INSURANCE ANDSURETY CORPORATION, BORDER MACHINERYand HEAVY EQUIPMENT CO., INC,, FRANCISCOand MODESTO CERVANTES and CONSTANCIO

MAGLANA,respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety

Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S.

Lim.

Renato J. Robles for BORMAHECO, Inc. and

Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions

is the decision of the Court of Appeals in CA-G.R.

CV No. 66195 which modified the decision of the

then Court of First Instance of Manila in Civil Case

No. 66135. The plaintiffs complaint (petitioner inG.R. No. 84197) against all defendants (respondents

in G.R. No. 84197) was dismissed but in all other

respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision

reads as follows:

WHEREFORE, judgment is rendered

against defendant Jacob S. Lim

requiring Lim to pay plaintiff the

amount of P311,056.02, with interest

at the rate of 12% per annum

compounded monthly; plus 15% o

the amount awarded to plaintiff as

attorney's fees from July 2,1966, unti

full payment is made; plus

P70,000.00 moral and exemplary

damages.

It is found in the records that the

cross party plaintiffs incurred

additional miscellaneous expenses

aside from Pl51,000.00,,making a

total of P184,878.74. Defendant

Jacob S. Lim is further required to

pay cross party plaintiff, Bormaheco

the Cervanteses one-half and

Maglana the other half, the amountof Pl84,878.74 with interest from the

filing of the cross-complaints unti

the amount is fully paid; plus mora

and exemplary damages in the

amount of P184,878.84 with interest

from the filing of the cross-

complaints until the amount is fully

paid; plus moral and exemplary

damages in the amount o

P50,000.00 for each of the twoCervanteses.

Furthermore, he is required to pay

P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00

to Constancio B. Maglana as

attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all abovethe complaint of plaintiff Pionee

against defendants Bormaheco, the

Cervanteses and Constancio B

Maglana, is dismissed. Instead

plaintiff is required to indemnify the

defendants Bormaheco and the

Cervanteses the amount o

P20,000.00 as attorney's fees and the

amount of P4,379.21, per year from


23/38

1966 with legal rate of interest up to

the time it is paid.

Furthermore, the plaintiff is required

to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's

fees and costs.

No moral or exemplary damages is

awarded against plaintiff for this

action was filed in good faith. The

fact that the properties of the

Bormaheco and the Cervanteses

were attached and that they were

required to file a counterbond in

order to dissolve the attachment, is

not an act of bad faith. When a man

tries to protect his rights, he should

not be saddled with moral orexemplary damages. Furthermore,

the rights exercised were provided

for in the Rules of Court, and it was

the court that ordered it, in the

exercise of its discretion.

No damage is decided against

Malayan Insurance Company, Inc.,

the third-party defendant, for it only

secured the attachment prayed for

by the plaintiff Pioneer. If an

insurance company would be liable

for damages in performing an act

which is clearly within its power and

which is the reason for its being,

then nobody would engage in the

insurance business. No further claim

or counter-claim for or against

anybody is declared by this Court.

(Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157)

was engaged in the airline business as owner-

operator of Southern Air Lines (SAL) a single

proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic

Airlines (JDA) and Lim entered into and executed a

sales contract (Exhibit A) for the sale and purchase

of two (2) DC-3A Type aircrafts and one (1) set of

necessary spare parts for the total agreed price of

US $109,000.00 to be paid in installments. One DC-

3 Aircraft with Registry No. PIC-718, arrived in

Manila on June 7,1965 while the other aircraft

arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety

Corporation (Pioneer, petitioner in G.R. No. 84197)

as surety executed and issued its Surety Bond No

6639 (Exhibit C) in favor of JDA, in behalf of its

principal, Lim, for the balance price of the aircrafts

and spare parts.

It appears that Border Machinery and Heavy

Equipment Company, Inc. (Bormaheco), Francisco

and Modesto Cervantes (Cervanteses) and

Constancio Maglana (respondents in both petitions

contributed some funds used in the purchase of the

above aircrafts and spare parts. The funds weresupposed to be their contributions to a new

corporation proposed by Lim to expand his airline

business. They executed two (2) separate indemnity

agreements (Exhibits D-1 and D-2) in favor o

Pioneer, one signed by Maglana and the other

jointly signed by Lim for SAL, Bormaheco and the

Cervanteses. The indemnity agreements stipulated

that the indemnitors principally agree and bind

themselves jointly and severally to indemnify and

hold and save harmless Pioneer from and againstany/all damages, losses, costs, damages, taxes

penalties, charges and expenses of whatever kind

and nature which Pioneer may incur in

consequence of having become surety upon the

bond/note and to pay, reimburse and make good

to Pioneer, its successors and assigns, all sums and

amounts of money which it or its representatives

should or may pay or cause to be paid or become

liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under thename and style of SAL executed in favor of Pioneer

as deed of chattel mortgage as security for the

latter's suretyship in favor of the former. It was

stipulated therein that Lim transfer and convey to

the surety the two aircrafts. The deed (Exhibit D)

was duly registered with the Office of the Registe

of Deeds of the City of Manila and with the Civi

Aeronautics Administration pursuant to the Chatte


24/38

Mortgage Law and the Civil Aeronautics Law

(Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment

payments prompting JDA to request payments

from the surety. Pioneer paid a total sum of

P298,626.12.

Pioneer then filed a petition for the extrajudicial

foreclosure of the said chattel mortgage before the

Sheriff of Davao City. The Cervanteses and

Maglana, however, filed a third party claim alleging

that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial

foreclosure with an application for a writ of

preliminary attachment against Lim and

respondents, the Cervanteses, Bormaheco and

Maglana.

In their Answers, Maglana, Bormaheco and the

Cervanteses filed cross-claims against Lim alleging

that they were not privies to the contracts signed

by Lim and, by way of counterclaim, sought for

damages for being exposed to litigation and for

recovery of the sums of money they advanced to

Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered

holding Lim liable to pay Pioneer but dismissed

Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the

trial court's decision in that the plaintiffs complaint

against all the defendants was dismissed. In all

other respects the trial court's decision was

affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety

Corporation avers that:

RESPONDENT COURT OF APPEALS

GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF

PETITIONER ON THE SOLE GROUND

THAT PETITIONER HAD ALREADY

COLLECTED THE PROCEEDS OF THE

REINSURANCE ON ITS BOND IN

FAVOR OF THE JDA AND THAT IT

CANNOT REPRESENT A REINSURER

TO RECOVER THE AMOUNT FROM

HEREIN PRIVATE RESPONDENTS AS

DEFENDANTS IN THE TRIAL COURT

(Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of

the appellate court:

We find no merit in plaintiffs appeal

It is undisputed that plaintiff Pionee

had reinsured its risk of liability

under the surety bond in favor of

JDA and subsequently collected the

proceeds of such reinsurance in the

sum of P295,000.00. Defendants

alleged obligation to Pioneeamounts to P295,000.00, hence

plaintiffs instant action for the

recovery of the amount of

P298,666.28 from defendants will no

longer prosper. Plaintiff Pioneer is

not the real party in interest to

institute the instant action as it does

not stand to be benefited or injured

by the judgment.

Plaintiff Pioneer's contention that it

is representing the reinsurer to

recover the amount from

defendants, hence, it instituted the

action is utterly devoid of merit

Plaintiff did not even present any

evidence that it is the attorney-in-

fact of the reinsurance company

authorized to institute an action for

and in behalf of the latter. To qualify

a person to be a real party in interestin whose name an action must be

prosecuted, he must appear to be

the present real owner of the right

sought to be enforced (Moran, Vol. I

Comments on the Rules of Court

1979 ed., p. 155). It has been held

that the real party in interest is the

party who would be benefited o

injured by the judgment or the party


25/38

entitled to the avails of the suit

(Salonga v. Warner Barnes & Co.,

Ltd., 88 Phil. 125, 131). By real party

in interest is meant a present

substantial interest as distinguished

from a mere expectancy or a future,

contingent, subordinate or

consequential interest (Garcia v.

David, 67 Phil. 27; Oglleaby v.

Springfield Marine Bank, 52 N.E. 2d

1600, 385 III, 414; Flowers v.

Germans, 1 NW 2d 424; Weber v.

City of Cheye, 97 P. 2d 667, 669,

quoting 47 C.V. 35).

Based on the foregoing premises,

plaintiff Pioneer cannot be

considered as the real party in

interest as it has already been paidby the reinsurer the sum of

P295,000.00 the bulk of

defendants' alleged obligation to

Pioneer.

In addition to the said proceeds of

the reinsurance received by plaintiff

Pioneer from its reinsurer, the former

was able to foreclose extra-judicially

one of the subject airplanes and itsspare engine, realizing the total

amount of P37,050.00 from the sale

of the mortgaged chattels. Adding

the sum of P37,050.00, to the

proceeds of the reinsurance

amounting to P295,000.00, it is

patent that plaintiff has been

overpaid in the amount of

P33,383.72 considering that the total

amount it had paid to JDA totals to

only P298,666.28. To allow plaintiffPioneer to recover from defendants

the amount in excess of P298,666.28

would be tantamount to unjust

enrichment as it has already been

paid by the reinsurance company of

the amount plaintiff has paid to JDA

as surety of defendant Lim vis-a-vis

defendant Lim's liability to JDA. Well

settled is the rule that no person

should unjustly enrich himself at the

expense of another (Article 22, New

Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where

respondent court based its finding that petitioner

was paid by its reinsurer in the aforesaid amount, as

this matter has never been raised by any of the

parties herein both in their answers in the court

below and in their respective briefs with responden

court; (Rollo, p. 11) (2) even assuming

hypothetically that it was paid by its reinsurer, stil

none of the respondents had any interest in the

matter since the reinsurance is strictly between the

petitioner and the re-insurer pursuant to section 91

of the Insurance Code; (3) pursuant to the

indemnity agreements, the petitioner is entitled to

recover from respondents Bormaheco and

Maglana; and (4) the principle of unjust enrichmentis not applicable considering that whatever amount

he would recover from the co-indemnitor will be

paid to the reinsurer.

The records belie the petitioner's contention that

the issue on the reinsurance money was never

raised by the parties.

A cursory reading of the trial court's lengthy

decision shows that two of the issues threshed out

were:

xxx xxx xxx

1. Has Pioneer a cause of action

against defendants with respect to

so much of its obligations to JDA as

has been paid with reinsurance

money?

2. If the answer to the precedingquestion is in the negative, has

Pioneer still any claim against

defendants, considering the amount

it has realized from the sale of the

mortgaged properties? (Record on

Appeal, p. 359, Annex B of G.R. No

84157).


26/38

In resolving these issues, the trial court made the

following findings:

It appearing that Pioneer reinsured

its risk of liability under the surety

bond it had executed in favor of JDA,

collected the proceeds of such

reinsurance in the sum of P295,000,

and paid with the said amount the

bulk of its alleged liability to JDA

under the said surety bond, it is plain

that on this score it no longer has

any right to collect to the extent of

the said amount.

On the question of why it is Pioneer,

instead of the reinsurance (sic), that

is suing defendants for the amount

paid to it by the reinsurers,notwithstanding that the cause of

action pertains to the latter, Pioneer

says: The reinsurers opted instead

that the Pioneer Insurance & Surety

Corporation shall pursue alone the

case.. . . . Pioneer Insurance & Surety

Corporation is representing the

reinsurers to recover the amount.' In

other words, insofar as the amount

paid to it by the reinsurers Pioneer issuing defendants as their attorney-

in-fact.

But in the first place, there is not the

slightest indication in the complaint

that Pioneer is suing as attorney-in-

fact of the reinsurers for any amount.

Lastly, and most important of all,

Pioneer has no right to institute and

maintain in its own name an action

for the benefit of the reinsurers. It iswell-settled that an action brought

by an attorney-in-fact in his own

name instead of that of the principal

will not prosper, and this is so even

where the name of the principal is

disclosed in the complaint.

Section 2 of Rule 3 of

the Old Rules of

Court provides that

'Every action must be

prosecuted in the

name of the real party

in interest.' This

provision is

mandatory. The rea

party in interest is the

party who would be

benefitted or injured

by the judgment or is

the party entitled to

the avails of the suit.

This Court has held in

various cases that an

attorney-in-fact is not

a real party in

interest, that there isno law permitting an

action to be brought

by an attorney-in-

fact. Arroyo v

Granada and Gentero

18 Phil. Rep. 484

Luchauco v. Limjuco

and Gonzalo, 19 Phil

Rep. 12; Filipinos

Industrial Corporationv. San Diego G.R. No

L- 22347,1968, 23

SCRA 706, 710-714.

The total amount paid by Pioneer to

JDA is P299,666.29. Since Pionee

has collected P295,000.00 from the

reinsurers, the uninsured portion of

what it paid to JDA is the difference

between the two amounts, or

P3,666.28. This is the amount forwhich Pioneer may sue defendants

assuming that the indemnity

agreement is still valid and effective

But since the amount realized from

the sale of the mortgaged chattels

are P35,000.00 for one of the

airplanes and P2,050.00 for a spare

engine, or a total of P37,050.00

Pioneer is still overpaid by


27/38

P33,383.72. Therefore, Pioneer has

no more claim against defendants.

(Record on Appeal, pp. 360-363).

The payment to the petitioner made by the

reinsurers was not disputed in the appellate court.

Considering this admitted payment, the only issue

that cropped up was the effect of payment made

by the reinsurers to the petitioner. Therefore, the

petitioner's argument that the respondents had no

interest in the reinsurance contract as this is strictly

between the petitioner as insured and the

reinsuring company pursuant to Section 91 (should

be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of

a loss acquires the same rights by

subrogation as are acquired in

similar cases where the originalinsurer pays a loss (Universal Ins. Co.

v. Old Time Molasses Co. C.C.A. La.,

46 F 2nd 925).

The rules of practice in actions on

original insurance policies are in

general applicable to actions or

contracts of reinsurance. (Delaware,

Ins. Co. v. Pennsylvania Fire Ins. Co.,

55 S.E. 330,126 GA. 380, 7 Ann. Con.

1134).

Hence the applicable law is Article 2207 of the new

Civil Code, 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.

Interpreting the aforesaid provision, we ruled in the

case ofPhil. Air Lines, Inc. v. Heald Lumber Co. (101

Phil. 1031 [1957]) which we subsequently applied

in Manila Mahogany Manufacturing Corporation v

Court of Appeals(154 SCRA 650 [1987]):

Note that if a property is insured and

the owner receives the indemnity

from the insurer, it is provided in

said article that the insurer is

deemed subrogated to the rights o

the insured against the wrongdoe

and if the amount paid by the

insurer does not fully cover the loss

then the aggrieved party is the one

entitled to recover thedeficiency. Evidently, under this lega

provision, the real party in interes

with regard to the portion of the

indemnity paid is the insurer and not

the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its

own name and not as an attorney-in-fact of the

reinsurer.

Accordingly, the appellate court did not commit a

reversible error in dismissing the petitioner's

complaint as against the respondents for the

reason that the petitioner was not the real party in

interest in the complaint and, therefore, has no

cause of action against the respondents.

Nevertheless, the petitioner argues that the appea

as regards the counter indemnitors should not have

been dismissed on the premise that the evidence

on record shows that it is entitled to recover fromthe counter indemnitors. It does not, however, cite

any grounds except its allegation that respondent

"Maglanas defense and evidence are certainly

incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we fin

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