Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance and Surety Corporation, G.R. Nos. 180880-8

8/13/2019 Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance and Surety Corporation, G.R. Nos. 180880-8

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THIRD DIVISION

KEPPEL CEBU SHIPYARD, INC.,

Petitioner,

- versus -

PIONEER INSURANCE AND SURETY CORPORATION,

Respondent.

X - - - - - - - - - - - - - - - - - - - - - - - - - - - - X

PIONEER INSURANCE AND SURETY CORPORATION,

Petitioner,

- versus -

KEPPEL CEBU SHIPYARD, INC.,

Respondent.

G.R. Nos. 180880-81

G.R. Nos. 180896-97

Present:

YNARES-SANTIAGO, J.,*

Chairperson,

CHICO-NAZARIO,

VELASCO, JR.,

NACHURA, and

PERALTA, JJ.

Promulgated:

September 25, 2009

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


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DECISION

NACHURA, J.:

Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety

Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review on certiorari the

Decision[3] dated December 17, 2004 and the Amended Decision[4] dated December 20, 2007 of the

Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934.

On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a

Shiprepair Agreement[5] wherein KCSI would renovate and reconstruct WG&As M/V Superferry 3

using its dry docking facilities pursuant to its restrictive safety and security rules and regulations. Prior

to the execution of the Shiprepair Agreement, Superferry 3 was already insured by WG&A with

Pioneer for US$8,472,581.78. The Shiprepair Agreement reads

SHIPREPAIR AGREEMENT[6]

Company: WG & A JEBSENS SHIPMANAGEMENT INC.

Address: Harbour Center II, Railroad & Chicago Sts.

Port Area, City of Manila

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY 3 and KEPPEL CEBU

SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named

vessel ordered by the Owners Authorized Representative shall be carried out under the Keppel Cebu

Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and

security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the

parties:

1. The Owner shall inform its insurer of Clause 20[7] and 22 (a)[8] (refer at the back hereof) and shall

include Keppel Cebu Shipyard as a co-assured in its insurance policy.


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2. The Owner shall waive its right to claim for any loss of profit or loss of use or damages

consequential on such loss of use resulting from the delay in the redelivery of the above vessel.

3. Owners sub-contractors or workers are not permitted to work in the yard without the written

approval of the Vice President Operations.

4. In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the

vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims,

damages, or liabilities arising from death or bodily injuries to Owners workers, or damages to the vessel

or other property however caused.

5. On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited toattend a conference with our Production, Safety and Security personnel whereby they will be briefed on,

and given copies of Shipyard safety regulations.

6. An adequate number of officers and crew must remain on board at all times to ensure the safety

of the vessel and compliance of safety regulations by crew and owner employed workmen.

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

8. The yard must be informed and instructed to provide the necessary security arrangement

coverage should there be inadequate or no crew on board to provide the expressed safety and security

enforcement.

9. The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the

[K]eppel Cebu Shipyards employees and/or contract workers; theft and/or damages to Keppel Cebu

Shipyards properties and other liabilities which are caused by the workers of the Owner.

10. The invoice shall be based on quotation reference 99-KCSI-211 dated December 20, 1999 tariff

dated March 15, 1998.


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11. Payment term shall be as follows:

12. The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may arise

under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be submitted

for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008 under the

auspices of the Philippine Arbitration Commission.

(Signed)

BARRY CHIA SOO HOCK _________(Signed)__________

(Printed Name/Signature Above Name) (Printed Name/Signature Above Name)

Vice President Operations Authorized Representative

Keppel Cebu Shipyard, Inc. for and in behalf of:

WG & A Jebsens Shipmgmt.

JAN. 26, 2000 . ________________________

Date Date

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire. Claiming

that the extent of the damage was pervasive, WG&A declared the vessels damage as a total

constructive loss and, hence, filed an insurance claim with Pioneer.

On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78.

WG&A, in turn, executed a Loss and Subrogation Receipt[9] in favor of Pioneer, to wit:


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LOSS AND SUBROGATION RECEIPT

16 June 2000

Our Claim Ref: MH-NIL-H0-99-00018

US$8,472,581.78

------------------------------------------------

RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS EIGHT MILLION

FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78)equivalent to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction,

compromise and discharge of all claims for loss and expenses sustained to the vessel SUPERFERRY 3

insured under Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as

follows:

Fire on board at Keppel Cebu Shipyard

on 08 February 2000

and in consideration of which the undersigned hereby assigns and transfers to the said company each

and all claims and demands against any person, persons, corporation or property arising from or

connected with such loss or damage and the said company is subrogated in the place of and to the

claims and demands of the undersigned against said person, persons, corporation or property in the

premises to the extent of the amount above-mentioned.

WILLIAM, GOTHONG & ABOITIZ, INC.

&/OR ABOITIZ SHIPPING CORP.

By: (Signed)

______________________________________

Witnesses: (Signed)


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______________________________________

(Signed)

______________________________________

Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any

responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated

demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry

Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:

1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum of

U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from

the date of the Loss and Subrogation Receipt on 16 June 2000 or from the date of filing of [the]

Request for Arbitration, as may be found proper;

2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens

Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing [of the]

Request for Arbitration or date of the arbitral award, as may be found proper;

3. To pay to the claimants herein the sum of P3,000,000.00 for and as attorneys fees; plus

other damages as may be established during the proceedings, including arbitration fees and other

litigation expenses, and the costs of suit.

It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement

(Annex A) as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very

fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any

legal effect whatsoever.[10]

KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal of

Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby


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dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the

remaining claimant.

In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on January 26,

2000, M/V Superferry 3 arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on the

same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V

Superferry 3 on February 8, 2000, while still dry docked in KCSIs shipyard.[11]

As regards the disputed facts, below are the respective positions of the parties, viz.:

Pioneers Theory of the Case:

First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated

to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of

the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of

Subrogation. Claimant then proceeded to explain that the Right of Subrogation:

Is by Operation of Law

exists in Property Insurance

is not Dependent Upon Privity of Contract.

Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the

Right of Subrogation Entitles Insurer to Recover from the Liable Party.

Second, Respondent Keppel had custody of and control over the M/V Superferry 3 while said vessel

was in Respondent Keppels premises. In its Draft Decision, Claimant stated:

A. The evidence presented during the hearings indubitably proves that respondent not only

took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-

docking and repair of the vessel.


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

respondent of its responsibility for said vessel.

C. Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel

inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel.

D. The practice of allowing a shipowner and its sub-contractors to perform maintenance works

while the vessel was within respondents premises does not detract from the fact that control and

custody over M/V Superferry 3 was transferred to the yard.

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

Superferry 3.

Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over

the vessel.

Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant,

the Yard is liable under the ruling laid down by the Supreme Court in the Manila City case. Claimant

asserts that said ruling is applicable hereto as The Law of the Case.

Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa

Loquitur, but from its negligence in this case.

Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder.

According to Claimant;

In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is

solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons:

A. The Control Test The yard exercised control over Sevillejo. The power of control is not

diminished by the failure to exercise control.


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B. There was no independent work contract between Joniga and Sevillejo Joniga was not the

employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.

C. The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owners hot works

under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.

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

argued that:

A. The yard, not Dr. Joniga, gave the welders their marching orders, and

B. Dr. Jonigas authority to request the execution of owners hot works in the passenger areas

was expressly recognized by the Yard Project Superintendent Orcullo.

Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the

yard, and the owners hotworks were conducted by welders who remained employees of the yard.

Claimant contends that the need, if any, for an owners application for a hot work permit was canceled

out by the yards actual knowledge of Sevillejos whereabouts and the fact that he was in deck A doingowners hotworks.

Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard

did so at its own risk, and acted as a Less Than Prudent Ship Repairer.

The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a

disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders

never became employees of the owner so as to obligate the latter to be responsible for their conduct

and performance.

Claimant enumerated further badges of yard negligence.


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According to Claimant:

A. Yards water supply was inadequate.

B. Yard Fire Fighting Efforts and Equipment Were Inadequate.

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

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

Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented

its case against:

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

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

(iii) Need for a plan theory.

(iv) The unauthorized hot works theory.

(v) The Marina report theory.

The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved

in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by

Respondent.

KCSIs Theory of the Case

1. The Claimant has no standing to file the Request for Arbitration and the Tribunal has no

jurisdiction over the case:


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(a) There is no valid arbitration agreement between the Yard and the Vessel Owner. On

January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was

signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping.

Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it

had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel

Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC

jurisdiction.

(b) The Claimant is not a real party in interest and has no standing because it has not been

subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the

Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not

been subrogated to any rights which the Vessel may have against the Yard because:

i. The Claimant has not proved payment of the proceeds of the policies to any specific party.

As a consequence, it has also not proved payment to the Vessel Owner.

ii. The Claimant had no legally demandable obligation to pay under the policies and did so

only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive

Total Loss unless the expense of recovering and repairing the vessel would exceed the Agreed Value of

P360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel

did not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment

was voluntary, and there was no resulting subrogation to the Vessel.

iii. There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant

asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article

2207 and it does not succeed to the Vessels rights under the Ship [R]epair Agreement and the

arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil

law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in

court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it

derived no benefit from the Claimants payment to the Vessel Owner. Third, in any event, the Claimant

has not proved payment of the proceeds to the Vessel Owner.

2. The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and

voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can

invalidate the agreement.


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

Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary,

the proximate cause of the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino

Sevillejo undertake cutting work in inherently dangerous conditions created by them.

(a) The Claimants material witnesses lied on the record and the Claimant presented no credible

proof of any negligence by Angelino Sevillejo.

(b) Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot

work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the

flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut

the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in

extremely hazardous conditions and were the proximate cause of the fire and the resulting damage tothe Vessel.

(c) The Yards expert witness, Dr. Eric Mullen gave the only credible account of the cause and

the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the

bulkhead door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck

floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly

below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could

have come from the cutting of any of the sides of the door. Consequently, the cutting itself of the

bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of thedoors bottom edge, was the proximate cause of the fire.

(d) The Manila City case is irrelevant to this dispute and in any case, does not establish governing

precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault.

Apart from the differences in the factual setting of the two cases, the Manila City pronouncements

regarding the res ipsa loquitur doctrine are obiter dicta without value as binding precedent.

Furthermore, even if the principle were applied to create a presumption of negligence by the Yard,

however, that presumption is conclusively rebutted by the evidence on record.

(e) The Vessels deliberate acts and its negligence created the inherently hazardous conditions

in which the cutting work that could otherwise be done safely ended up causing a fire and the damage

to the Vessel. The fire was a direct and logical consequence of the Vessels decisions to: (1) take

Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require

him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the

requirements for and obtaining a hot work permit in violation of the Yards Safety Rules and without


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removing the flammable ceiling and life jackets below, contrary to the requirements not only of the

Yards Safety Rules but also of the demands of standard safe practice and the Vessels own explicit

safety and hot work policies.

(f) The vessel has not presented any proof to show that the Yard was remiss in its fire fighting

preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary

equipment and trained personnel and employed all those resources immediately and fully to putting out

the 8 February 2000 fire.

4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this

circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for

that activity caused the fire, the Yard may still not be held liable for the resulting damage.

(a) The Yards only contractual obligation to the Vessel in respect of the 26 January 2000 Work

Order was to supply welders for the Promenade Deck restaurant who would then perform welding work

per owner[s] instruction. Consequently, once it had provided those welders, including Angelino

Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or for

damages on account thereof, may be raised against the Yard.

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

i. The Vessel exercised supervision and control over

Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially when he

was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party with

actual control over his tasks and is deemed his true and effective employer for purposes of establishing

Article 2180 employer liability.

ii. Even assuming that the Yard was Angelino Sevillejos

employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino Sevillejo

was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for the

Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the

Vessel.


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iii. The Yard is nonetheless not liable under Article 2180

because it exercised due diligence in the selection and supervision of Angelino Sevillejo.

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

paid by the Claimant.

(a) Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount

greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher

amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the

MV Superferry 3, at the time of the fire.

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

(c) The Vessel breached its obligation under Clause 22 (a) of the Yards Standard Terms to name

the Yard as co-assured under the policies a breach which makes the Vessel liable for damages. This

liability should in turn be set-off against the Claimants claim for damages.

The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondentenumerated and disputed these as follows:

1. Claimants counsel contends that the cutting of the bulkhead door was covered by the 26

January 2000 Work Order.

2. Claimants counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have

Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000.

3. Claimants counsel contends that under Article 1727 of the Civil Code, The contractor is

responsible for the work done by persons employed by him.

4. Claimants counsel contends that [t]he second reason why there was no job spec or job

order for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry

Orcullo, the yard project superintendent.

5. Claimants counsel also contends, to make the Vessels unauthorized hot works activities

seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety


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Superintendent, admitted that No hot works could really be hidden from the Yard, your Honors,

because the welding cables and the gas hoses emanating from the dock will give these hotworks away

apart from the assertion and the fact that there were also safety assistants supposedly going around the

vessel.

Respondent disputed the above by presenting its own argument in its Final Memorandum.[12]

On October 28, 2002, the CIAC rendered its Decision[13] declaring both WG&A and KCSI guilty of

negligence, with the following findings and conclusions

The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and

equipment to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not

a contractual obligation of the Yard. However, by requiring, according to its own regulations, that only

Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders

that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means

that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a

hotwork permit, discussing the work in a production meeting, and complying with the conditions of the

hotwork permit prior to implementation. By the requirement that all hotworks are to be done by the

Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated

in that he was not even a foreman, and that the instructions to him was (sic) by an authorized person.The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no

foreman was included in the five welders issued to the Vessel was never raised in this dispute. As

discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work

order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the

Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire

that damaged the vessel.[14]

Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay

Pioneer the amount of P25,000,000.00, with interest at 6% per annum from the time of the filing of the

case up to the time the decision is promulgated, and 12% interest per annum added to the award, or

any balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration

costs be imposed on both parties on a pro rata basis.[15]


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Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise

filed its own appeal and the same was docketed as CA-G.R. SP No. 73934. The cases were consolidated.

On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as

follows:

WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED

while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioners claims in its

entirety. No costs.

The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata.

SO ORDERED.[16]

Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting that it suffered

from serious errors in the appreciation of the evidence and from gross misapplication of the law and

jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the sameDecision.

On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five Former

Fifteenth Division of the CA in light of the dissent of Associate Justice Lucas P. Bersamin,[17] joined by

Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads

WHEREFORE, premises considered, the Court hereby decrees that:

1. Pioneers Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer P25

Million, without legal interest, within 15 days from the finality of this Amended Decision, subject to the

following modifications:


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1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered to

pay Pioneer P25 Million without legal interest;

2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R. SP

No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25 Million,

without legal interest, within 15 days from the finality of this Amended Decision; and

3. The rest of the disposition in the original Decision remains the same.

SO ORDERED.[18]

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

I

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

MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE THE AMENDED DECISION. THIS

ALSO VIOLATES SECTION 14, ARTICLE VIII OF THE CONSTITUTION.

II

THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO THE SUM OF

P50,000,000.00, IN THAT:

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


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B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC POLICY.

C. THE VESSEL OWNER DID NOT AGREE THAT THE YARDS LIABILITY FOR LOSS OR DAMAGE TO THE

VESSEL ARISING FROM YARDS NEGLIGENCE IS LIMITED TO THE SUM OF P50,000,000.00 ONLY.

D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT LIABILITY, IN THAT:

(i) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V SUPERFERRY 3) ON 08

FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;

(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS EXCLUSIVELY

PERFORMED BY YARD WORKERS.

III

THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS CONCURRENTLY NEGLIGENT,CONSIDERING THAT:

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

REPAIRS.

B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO THAT

SUPERVISED AND CONTROLLED THE REPAIR WORKS.

C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY ALONE

COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.


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D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO.

E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE LOSS.

F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE LOSS.

IV

THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE TOTAL

LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THE VALUE OF THEFULL CONSTRUCTIVE TOTAL LOSS.

V

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

VI

THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR ARBITRATION

COSTS.[19]

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

1. ABSENCE OF YARD RESPONSIBILITY


20/33

IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT EXPLANATION, THE CIACS

RULING THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS

PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF

HAD SHOWN THAT RULING TO BE COMPLETELY WRONG AND BASELESS.

2. NO CONSTRUCTIVE TOTAL LOSS

IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT EXPLANATION,

THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINED WHY THE

VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.

3. FAILURE OR REFUSAL TO ADDRESS

KEPPELS MOTION FOR RECONSIDERATION

FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY DENIED,

WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL MOTION FOR

RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT

SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2)

WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEERS PAYMENTS TO THE VESSEL OWNER INVIEW OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE

SHOULD BEAR THE COSTS OF ARBITRATION.

4. FAILURE TO CREDIT FOR SALVAGE RECOVERY

EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE FOREGOING ISSUES WERE CORRECT AND THE

YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO

PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT

DEDUCTING THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER,

TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.[20]


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

core issues:

A. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed?

B. Is subrogation proper? If proper, to what extent can subrogation be made?

C. Should interest be imposed on the award of damages? If so, how much?

D. Who should bear the cost of the arbitration?

To resolve these issues, it is imperative that we digress from the general rule that in petitions for review

under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the

disparate findings of fact of the CIAC and the CA which led them to different conclusions, we are

constrained to revisit the factual circumstances surrounding this controversy.[21]

The Courts Ruling

A. The issue of negligence

Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo)

on the accommodation area of the vessel, specifically on Deck A. As established before the CIAC

The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,[22] p. 20). Angelino

Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and

as he did so, smoke came up from under Deck A. He got another container of water which he also

poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried

to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the


22/33

ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not

possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was

extremely difficult because the life jackets and the construction materials of the Deck B ceiling were

combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into

the Deck B accommodation areas at various locations, where there were combustible materials.

Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam

mattresses on deck B (Exh. 1-Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]

Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the

time the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot

works done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the

scope of Sevillejos assigned tasks, the same not having been authorized under the Work Order[25]

dated January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself

negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the lifejackets from the ceiling void, causing the immediate spread of the fire to the other areas of the ship.

We rule in favor of Pioneer.

First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3, entered into

a contract for the dry docking and repair of the vessel under KCSIs Standard Conditions of Contract for

Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it saidthat WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of

KCSI.

Second. Pursuant to KCSIs rules and regulations on safety and security, only employees of KCSI

may undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is

supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSIs Vice

President for Operations before WG&A could effect any work performed by its own workers or sub-

contractors. In the exercise of this authority, KCSIs Vice-President for Operations, in the letter dated

January 2, 1997, banned any hot works from being done except by KCSIs workers, viz.:

The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to

be carried out only by shipyard workers x x x.[26]


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WG&A recognized and complied with this restrictive directive such that, during the arrival conference on

January 26, 2000, Dr. Joniga, the vessels passage team leader in charge of its hotel department,

specifically requested KCSI to finish the hot works started by the vessels contractors on the passenger

accommodation decks.[27] This was corroborated by the statements of the vessels hotel manager

Marcelo Rabe[28] and the vessels quality control officer Joselito Esteban.[29] KCSI knew of the

unfinished hot works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug

confirmed that KCSI was aware that the owners of this vessel (M/V Superferry 3) had undertaken their

own (hot) works prior to arrival alongside (sic) on 26th January, and that no hot work permits could

thereafter be issued to WG&As own workers because this was not allowed for the Superferry 3.[30]

This shows that Dr. Joniga had authority only to request the performance of hot works by KCSIs welders

as needed in the repair of the vessel while on dry dock.

Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V

Superferry 3, aside from its promenade deck. This was a recognition of Dr. Jonigas authority torequest the conduct of hot works even on the passenger accommodation decks, subject to the provision

of the January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship.

At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of

KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and

cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the

protection bars at the tourist dining salon of Deck B,[31] at a rate of P150.00/welder/hour.[32] In fact,

Orcullo, Project Superintendent of KCSI, admitted that as early as February 3, 2000 (five days before

the fire) [the Yard] had acknowledged Dr. Jonigas authority to order such works or additional jobs.[33]

It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the

supply of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The

Work Order was only a special arrangement between KCSI and WG&A that meant additional cost to the

latter.

Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latters

direct control and supervision.

Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the power and the right to

discharge or substitute him with another welder; providing him and the other welders with its

equipment; giving him and the other welders marching orders to work on the vessel; and monitoring

and keeping track of his and the other welders activities on board, in view of the delicate nature of their


24/33

work.[34] Thus, as such employee, aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which

specifically provides that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel

without [a] Safety Permit from KCSI Safety Section,[35] it was incumbent upon Sevillejo to obtain the

required hot work safety permit before starting the work he did, including that done on Deck A where

the fire started.

Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire broke out.

It was established that no hot works could be hidden from or remain undetected by KCSI because

the welding cables and the gas hoses emanating from the dock would give the hot works away.

Moreover, KCSI had roving fire watchmen and safety assistants who were moving around the vessel.[36]

This was confirmed by Restituto Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted

Sevillejo on Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire

watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo fromcontinuing the hot work. However, it is noteworthy that, after purportedly scolding Sevillejo for working

without a permit and telling him to stop until the permit was acquired and the other safety measures

were observed, Rebaca left without pulling Sevillejo out of the work area or making sure that the latter

did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the

bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the

door level with the deck, until the fire broke out.

This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of

the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSIs own fire expert, who observedthat

4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not

a cutter. The dangers of ignition occurring as a result of the two processes are similar in that both

electric arc welding and hot cutting produce heat at the work area and sparks and incendive material

that can travel some distance from the work area. Hence, the safety precautions that are expected to

be applied by the supervisor are the same for both types of work. However, the quantity and

incendivity of the spray from the hot cutting are much greater than those of sparks from electric arc

welding, and it may well be that Angelino Sevillejo would not have a full appreciation of the dangers

involved. This made it all the more important that the supervisor, who should have had such an

appreciation, ensured that the appropriate safety precautions were carried out.[37]


25/33

In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized

by KCSI to do the hot works on M/V Superferry 3 to the exclusion of other workers, failed to comply

with the strict safety standards of KCSI, not only because he worked without the required permit, fire

watch, fire buckets, and extinguishers, but also because he failed to undertake other precautionary

measures for preventing the fire. For instance, he could have, at the very least, ensured that whatever

combustible material may have been in the vicinity would be protected from the sparks caused by the

welding torch. He could have easily removed the life jackets from the ceiling void, as well as the foam

mattresses, and covered any holes where the sparks may enter.

Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible

precautionary measures, including those above mentioned, before allowing Sevillejo to continue with

his hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started

yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric

arc welder, Rebaca should have replaced him.

There is negligence when an act is done without exercising the competence that a reasonable person in

the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to

another. Those who undertake any work calling for special skills are required to exercise reasonable

care in what they do.[38] Verily, there is an obligation all persons have to take due care which, under

ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that

care constitutes negligence. Generally, the degree of care required is graduated according to the danger

a person or property may be subjected to, arising from the activity that the actor pursues or the

instrumentality that he uses. The greater the danger, the greater the degree of care required.

Extraordinary risk demands extraordinary care. Similarly, the more imminent the danger, the higher

degree of care warranted.[39] In this aspect,

KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances.

We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was negligent.

On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works

in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work

Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do

the cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was

doing, but failed to supervise him with the degree of care warranted by the attendant circumstances.

Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons

(1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent


26/33

upon him to remove the same. It was shown during the hearings before the CIAC that the removal of

the life jackets would not have made much of a difference. The fire would still have occurred due to the

presence of other combustible materials in the area. This was the uniform conclusion of both

WG&As[40] and KCSIs[41] fire experts. It was also proven during the CIAC proceedings that KCSI did

not see the life jackets as being in the way of the hot works, thus, making their removal from storage

unnecessary.[42]

These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in

the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V

Superferry 3. As he was then definitely engaged in the performance of his assigned tasks as an

employee of KCSI, his negligence gave rise to the vicarious liability of his employer[43] under Article

2180 of the Civil Code, which provides

Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own act oromission, but also for those of persons for whom one is responsible.

x x x x

Employers shall be liable for the damages caused by their employees and household helpers

acting within the scope of their assigned tasks, even though the former are not engaged in any business

or industry.

x x x x

The responsibility treated of in this article shall cease when the persons herein mentioned prove

that they observed all the diligence of a good father of a family to prevent damage.

KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal

presumption of its negligence in supervising Sevillejo.[44] Consequently, it is responsible for the

damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is

needed is proof that the employee has, by his negligence, caused damage to another in order to make


27/33

the employer responsible for the tortuous act of the former.[45] From the foregoing disquisition, there

is ample proof of the employees negligence.

B. The right of subrogation

Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full

amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the

rights of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause

found in the Shiprepair Agreement is null and void for being iniquitous and against public policy.

KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there

is no proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liabilityclause up to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair

Agreement. KCSI also claims that the salvage value of the vessel should be deducted from whatever

amount it will be made to pay to Pioneer.

We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V Superferry

3.

In marine insurance, a constructive total loss occurs under any of the conditions set forth in

Section 139 of the Insurance Code, which provides

Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or

any particular portion hereof separately valued by the policy, or otherwise separately insured, and

recover for a total loss thereof, when the cause of the loss is a peril insured against:

(a) If more than three-fourths thereof in value is actually lost, or would have to be expended

to recover it from the peril;

(b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.


28/33

It appears, however, that in the execution of the insurance policies over M/V Superferry 3,

WG&A and Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss

Provision of which reads

Total Loss

In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as

the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall

be taken into account.

There shall be no recovery for a constructive Total Loss hereunder unless the expense of

recovering and repairing the Vessel would exceed the Agreed Value in policies on Hull and Machinery.

In making this determination, only expenses incurred or to be incurred by reason of a single accident or

a sequence of damages arising from the same accident shall be taken into account, but expenses

incurred prior to tender of abandonment shall not be considered if such are to be claimed separately

under the Sue and Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three

(3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a)

P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000

turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine

currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c)

P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore

Technologies Marine Ltd. All the estimates showed that the repair expense would exceed

P270,000,000.00, the amount equivalent to of the vessels insured value of P360,000,000.00. Thus,

WG&A opted to abandon M/V Superferry 3 and claimed from Pioneer the full amount of the policies.

Pioneer paid WG&As claim, and now demands from KCSI the full amount of P360,000,000.00, by virtue

of subrogation.

KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence

resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only

US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence &

Young.


29/33

In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern,

because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine

insurance policies in question expressly provided the following:

IMPORTANT

This insurance is subject to English jurisdiction, except in the event that loss or losses are payable

in the Philippines, in which case if the said laws and customs of England shall be in conflict with the laws

of the Republic of the Philippines, then the laws of the Republic of the Philippines shall govern.

(Underscoring supplied.)

The CA held that Section 139 of the Insurance Code is merely permissive on account of the word

may in the provision. This is incorrect. Properly considered, the word may in the provision is

intended to grant the insured (WG&A) the option or discretion to choose the abandonment of the thing

insured (M/V Superferry 3), or any particular portion thereof separately valued by the policy, or

otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured

against. This option or discretion is expressed as a right in Section 131 of the same Code, to wit:

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

under Section one hundred thirty-nine.

It cannot be denied that M/V Superferry 3 suffered widespread damage from the fire that

occurred on February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A

from Pioneer. The estimates given by the three disinterested and qualified shipyards show that the

damage to the ship would exceed P270,000,000.00, or of the total value of the policies

P360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the

damage sustained by the vessel. It is significant that these estimates were confirmed by the Adjustment

Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that

Pioneer had enlisted to verify and confirm the extent of the damage. The Adjustment Report verified

and confirmed that the damage to the vessel amounted to a constructive total loss and that the claim

for P360,000,000.00 under the policies was compensable.[46] It is also noteworthy that KCSI did not


30/33

cross-examine Henson Lim, Director of Richards Hogg, whose affidavit-direct testimony submitted to the

CIAC confirmed that the vessel was a constructive total loss.

Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of

its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and

Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this

note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply

because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping

Corporation.[47] The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of

payment of the insurance proceeds to the former, and no controverting evidence was presented by KCSI

to rebut the presumed authority of the signatory to receive such payment.

On the matter of subrogation, Article 2207 of the Civil Code provides

Art. 2207. If the plaintiffs property has been insured and he has received indemnity from the insurance

company for the injury or loss arising out of the wrong or breach of contract complained of, the

insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person

who has violated the contract. If the amount paid by the insurance company does not fully cover the

injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the

loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so

that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its

remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an

insurance policy is entitled to all the rights and remedies belonging to the insured against a third party

with respect to any loss covered by the policy. It contemplates full substitution such that it places the

party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ

to enforce payment.[48]

We have held that payment by the insurer to the insured operates as an equitable assignment to the

insurer of all the remedies that the insured may have against the third party whose negligence or

wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of,

any privity of contract. It accrues simply upon payment by the insurance company of the insurance

claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish


31/33

justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in

justice, equity, and good conscience, ought to pay.[49]

We cannot accept KCSIs insistence on upholding the validity Clause 20, which provides that the limit of

its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the

insurance policies, as found in the Shiprepair Agreement.

Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are

unfair and inequitable under the premises. It was established during arbitration that WG&A did not

voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified

that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were

found, because he did not want WG&A to be bound by them. However, considering that it was only

KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels

owned by WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the ShiprepairAgreement; otherwise, the vessel would not be accepted for dry docking.[50]

Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a take-it-or-leave-

it basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the

other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a

contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant

bargaining party, and its option is reduced to the alternative of taking it or leaving it, completely

depriving such party of the opportunity to bargain on equal footing.[51]

Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full

insured value of the vessel or, at the very least, for its actual market value. There was clearly no

intention on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be

positively proved, since a waiver by implication is not normally countenanced. The norm is that a waiver

must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient

awareness of the relevant circumstances and likely consequences. There must be persuasive evidence

to show an actual intention to relinquish the right.[52] This has not been demonstrated in this case.

Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to

limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss

in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is

ordinarily required. It would not be difficult for a negligent party to escape liability by the simple

expedient of paying an amount very much lower than the actual damage or loss sustained by the

other.[53]


32/33

Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a

co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy

itself and not from any other contract or agreement, because the insurance policy denominates the

assured and the beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance

procured by WG&A from Pioneer named only the former as the assured. There was no manifest

intention on the part of WG&A to constitute KCSI as a co-assured under the policies. To have deemed

KCSI as a co-assured under the policies would have had the effect of nullifying any claim of WG&A from

Pioneer for any loss or damage caused by the negligence of KCSI. No ship owner would agree to make a

ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under

the policy would be rendered nugatory. WG&A could not have intended such a result.[54]

Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V

Superferry 3 should be taken into account in the grant of any award. It was proven before the CIAC

that the machinery and the hull of the vessel were separately sold for P25,290,000.00 (orUS$468,333.33) and US$363,289.50, respectively. WG&As claim for the upkeep of the wreck until the

same were sold amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the

sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to

P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was

filed. Not considering this salvage value in the award would amount to unjust enrichment on the part of

Pioneer.

C. On the imposition of interest

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award in favor of

Pioneer in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the

case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per

annum from the date the award becomes final and executory until its full satisfaction.

D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro rata

basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was

entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer

that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for

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

on the part of Pioneer.


33/33

Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance and Surety Corporation, G.R. Nos. 180880-8

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Transcript of Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance and Surety Corporation, G.R. Nos. 180880-8