No. L-21109. June 26, 1967.

Whereas, after consummation of said contract, only the following amount of steel bars were delivered to
the vendee, as follows:
NATIONAL SHIPYARDS & STEEL CORPORATION, plaintiff-appellee, vs. CABIDAD J.
TORRENTO and MUTUAL SECURITY INSURANCE CORPORATION, defendants-appellants. 20-67 M.T. 3/8" deformed

Syllabus and that there were no more available stock of steel bars of size 3/8" x 20' or 30' deformed.

Guaranty; Suretyship; Solidary obligations; Right of creditor to sue solidary debtors.—The Now therefore, for and in consideration of the foregoing premises, the parties hereby agree to modify
creditor may sue, separately or together, the principal debtor and the surety. and/or amend their said contract as follows:

Same; Appeals; Point not raised in lower court.—Where the principal debtor in the lower court did not 1. That the NASSCO shall sell to the vendee and the vendee shall buy from the NASSCO, 38.50 tons of
question the surety's cross-claim against her, she may not raise that point for the first 'time on appeal. steel bars on credit basis subject to availability of stock in the following sizes and prices, to wit:

Same; Alteration of the contract must be material in order that surety may be released.—For purposes of 25 M.T. — 1/2" x 30 deformed at P440.00 per ton.
releasing a surety's obligation, there must be a material alteration of the contract in connection with
which the bond is given. There must be a change which imposes some new obligation on the party
13.50 M.T. — 5/8" x 30 deformed at P430.00 per ton
promising or which takes away some obligation already imposed, changing the legal effect of the original
contract and not merely the form thereof. A surety is not released by a change in the contract which does
not have the effect of making its obligation more onerous. 2. That aside from the above amendment and/or modification, the said contract shall not be affected,
altered, or modified in any way.
MAKALINTAL, J.:
Pursuant to the contract of purchase and sale and the supplemental contract, NASSCO
delivered to defendant Torrento steel bars in the total value of P25,794.09. The 120-day period for
On December 5, 1958 defendant Caridad J. Torrento applied with the National Shipyards & payment lapsed. Demand letters were sent, but defendant surety made no reply. Defendant Torrento did
Steel Corporation (hereinafter referred to as NASSCO) for the purchase on credit of 60 tons of steel bars, not question her liability, but only asked for a 3-month extension to settle her account.
3/8" deformed or plain, at P430.00 per ton, for a 120-day period.

Action was brought to recover the unpaid contract price from defendant Torrento and her
A contract of purchase and sale was executed on January 13, 1959, but was subsequently surety. On October 18, 1960, the lower court rendered judgment: "ordering the defendants, jointly and
amended when plaintiff exhausted its stock of 3/8" plain steel bars. As amended, the quantity of steel bars severally, to pay the plaintiff the sum of P25,794.09, with interest thereon at the rate of 12% per annum,
stated to be 60 metric tons in the original contract was changed to 59.31 metric tons; the price was from August 29, 1959 until full payment, and the costs of suit. On the cross-claim, judgment is hereby
changed from P430.00 to P435.00 per metric ton; and the specification of the steel bars was also changed rendered, ordering the cross-defendant Caridad J. Torrento to pay the cross-plaintiff Mutual Security
from "plain, round or corrugated" to "deformed." Insurance Corporation whatever sums the latter would pay the plaintiff by virtue of this judgment, with
interest thereon at the rate of 12% per annum, from the date of payment to plaintiff, until full payment,
Pursuant to the stipulation in the contract that the value of steel bars sold to defendant Torrento and the costs of this suit."
should be secured by a surety bond issued by a reputable bonding company, defendant Torrento as
principal and Mutual Security Insurance Corporation, as surety executed in favor of plaintiff a surety bond Defendants interposed an appeal to the Court of Appeals, which later on certified the case to
(S. 1754) on January 23, 1960. When it was noted that the undertaking under the bond was only Us on the ground that the errors assigned raise only questions of law.
P25,000.00, whereas the contract called for the payment of P25,800.00, defendant surety executed a
supplemental bond increasing the amount of P25,800.00.
Appellant Torrento maintains that plaintiff has no cause of action against her for the reason that
inasmuch as she had paid the corresponding premium on the surety bond, the right of action, in case of her
On February 6, 1959, when NASSCO could no longer supply the steel bars called for in the default, is exclusively against her surety. Further, with respect to the cross-claim of the Surety, Torrento
contract of purchase and sale inasmuch as its stock of 3/8" deformed steel bars had been exhausted, the claims that it was error for the lower court to take cognizance of the same even before payment by said
plaintiff and defendant Torrento executed a supplemental agreement, the pertinent provisions of which surety to NASSCO had been made. In other words, Torrento argues that the cause of action alleged in the
read: cross-claim does not arise until after payment has been made by the surety to the plaintiff.

. . . Whereas the NASSCO has agreed to sell to the vendee and the vendee has agreed to buy We find both arguments without merit. The surety bond (Exhibits C and C-1) states in very
from the NASSCO . . . Fifty Nine and thirty one hundredths (59-31) metric tons of steel bars clear terms that both principal and surety are held and firmly bound unto the NASSCO in the sum of
on credit basis for size and price as follows: P25,800.00 for the payment of which they bind themselves, jointly and severally. "If a person binds
himself solidarity with the principal debtor, . . . the contract is called suretyship" (Art. 2047, C.C.) in
3/8 deformed 20 ft or which case the provisions of the Civil Code with respect to joint and solidary obligations apply; and
Article 1216 of the Civil Code provides that "the creditor may proceed against any of the solidary debtors
or all of them simultaneously. . . ." It has been repeatedly held that although as a rule sureties . . . are only
30 ft. at P435.00 per tons subsidiarily liable for an obligation, nevertheless, if they bind themselves jointly and severally, or in
solidum, with the principal debtor, the creditor may bring an action against anyone of them, either alone or Wherefore, the appealed decision is hereby affirmed, with costs against defendants-appellants.
together with the principal debtor (Molina vs. de la Riva, 7 Phil. 345; Chinese Chamber vs. Pua Te Ching,
16 Phil. 406; La Yebana vs. Valenzuela, 67 Phil. 482; Chunaco vs. Tria, 63 Phil. 500).

With respect to the contention that the lower court erred in taking cognizance of the surety's
cross-claim, suffice it to say that this point was not raised in the court a quo and, consequently may not be G.R. No. 174926. August 10, 2011.*
raised for the first time on appeal. Besides, as the lower court also stated in its decision, "defendant
Torrento made no effort to dispute this (cross-claim) of defendant surety and did not even bother to cross- AMERICAN HOME INSURANCE CO. OF NEW YORK, petitioner, vs. F.F. CRUZ & CO., INC.,
examine the witness who identified the said indemnity agreement," which is the basis of the cross-claim. respondent.

For its part, appellant surety company maintains that the execution of the supplemental Syllabus
agreement of February 6, 1959 without its knowledge and consent released it from any liability under the
surety bond as there was a material alteration of the principal contract. We find the contention without
merit. The court a quo analyzed the factual set-up as follow: Appeals; Settled is the rule that points of law, theories, issues, and arguments not adequately
brought to the attention of the trial court need not be, and ordinarily will not be, considered by a
reviewing court.—Settled is the rule that points of law, theories, issues, and arguments not adequately
x x x An examination and comparison of the contract and the supplemental agreement will brought to the attention of the trial court need not be, and ordinarily will not be, considered by a
reveal that the only change or alteration consists of the following: Instead of the original reviewing court. They cannot be raised for the first time on appeal. To allow this would be offensive to the
stipulation for the purchase and sale of 3/8, 20' or 30', deformed steel bars, at P435.00 per ton, basic rules of fair play, justice and due process.
which kind of steel bars were no longer available in stock, the supplemental agreement
provides for the sale by the plaintiff to defendant Torrento of other sizes of deformed steel bars
at prices of P430.00 and P440.00 per metric ton. Specifically, the changes are in the diameter Suretyship; A contract of suretyship is an agreement whereby a party called the surety,
of the steel bars which originally was 3/8", to 1/2 and 5/8"; and the price from P435.00 per ton, guarantees the performance by another party, called the principal or obligor, of an obligation or
to P430.00 per ton for the 1/211 bars. The amount of steel bars to be sold to defendant undertaking in favor of another party called the obligee.—A contract of suretyship is an agreement
Torrento remained the same. The length and the deformed quality of the bars likewise whereby a party called the surety, guarantees the performance by another party, called the principal or
remained unchanged. It is even specifically provided in Par. 2 of the supplemental agreement obligor, of an obligation or undertaking in favor of another party called the obligee. By its very nature,
that "aside from the above amendments and/or modifications, the said contract (referring to the under the laws regulating suretyship, the liability of the surety is joint and several but is limited to the
original contract) shall not be affected, altered or modified in any way." There was no amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship in
alteration in the principal condition of the contract. The period of payment was not changed, relation to the principal contract between the obligor and the obligee.
and the amount of the liability of the principal debtor and of the surety was also untouched.
There was no added burden imposed upon or assumed by the buyer." (Emphasis Supplied) Same; Although the contract of suretyship is secondary only to a valid principal obligation, the
surety’s liability to the creditor is direct, primary, and absolute.—The surety is considered in law as
x x x In short, the supplemental agreement did not result in the principal debtor's assuming possessed of the identity of the debtor in relation to whatever is adjudged touching upon the obligation of
more onerous conditions than those stipulated in the original contract, and for which the surety the latter. Their liabilities are so interwoven as to be inseparable. Although the contract of suretyship is,
furnished the bond. There was consequently, no material or essential alteration of the original in essence, secondary only to a valid principal obligation, the surety’s liability to the creditor is direct,
contract which could result in the release of the surety from the obligation under the said bond. primary, and absolute; he becomes liable for the debt and duty of another although he possesses no direct
or personal interest over the obligations nor does he receive any benefit therefrom.
We see no error in the ruling of the lower court just quoted.
DECISION
In Pacific Tobacco Corporation vs. Lorenzana, et al., G.R. L-8086, October 31, 1961 it was
held: "for purposes of releasing a surety's obligation, there must be a material alteration of the contract in PERALTA, J.:
connection with which the bond is given, a change which imposes some new obligation on the party
promising or takes away some obligation already imposed, changing the legal effect of the original
contract and not merely the form thereof . . . To allow compensated surety companies to collect and retain This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by
premiums for their services and then repudiate their obligations on slight pretexts which have no relation American Home Insurance Co. of New York (American Home) assailing the Court of Appeals (CA)
to the risk, would be most unjust and immoral, and would be a perversion of the wise and just rules Decision1 dated September 29, 2005 and Resolution2 dated September 25, 2006 in CA-G.R. CV No.
designed for the protection of voluntary sureties." 73960. The assailed Decision affirmed the Decision3 of the Regional Trial Court (RTC) of Makati, Branch
137 in Civil Case No. 93-2585, while the assailed Resolution denied American Home’s motion for
reconsideration.
While it is the rule that the liability of a surety is limited by the terms of the surety bond fixing
its liability and that such liability cannot be extended by implication, it should be noted in the present case
that although the technical specifications of the items to be purchased have been changed, it clearly The case stemmed from the following facts:
appears that such changes are not substantial and have not added any other liability to that originally
assumed. A surety is not released by a change in the contract which does not have the effect of making its In June 1990, the Philippine Ports Authority (PPA) conducted a bidding of a project for the
obligation more onerous (Visayan Distributors, Inc. vs. Flores, 92 Phil. 145). dredging of the entrance channel and harbor basin of the Cebu International Port in Cebu City. The PPA
awarded the contract to the winning bidder, F.F. Cruz & Co., Inc. (FF Cruz). Pursuant to their earlier
agreement, FF Cruz and Genaro Reyes Construction, Inc. (hereafter referred to as "G. Reyes") executed a enforcement of the Indemnity Agreement undertaken by G. Reyes in conjunction with FF Cruz’s demand
Sub-Contract Agreement4 whereby the latter agreed to undertake the performance of 50% of the dredging for the payment of the amount of the surety bond.
project’s estimated volume of 600,000 cubic meters. The sub-contract was subject to the following terms
and conditions:
G. Reyes et al., in turn, filed an Answer with Counterclaim and Third-Party
Complaint13 against FF Cruz. G. Reyes denied liability to American Home on the ground that G. Reyes
xxxx did not fail to comply with its obligation to FF Cruz. It explained that its (G. Reyes’) liability would arise
only in case of its failure to comply with the terms and conditions of the sub-contract. It insisted that it
was FF Cruz who was guilty of breach of its obligations. In its Third-Party Complaint against FF Cruz, G.
5. That the SUB-CONTRACTOR shall file immediately upon its receipt of NOTICE TO PROCEED, a
Reyes argued that the siltation problems caused by the former resulted in the reduction of G. Reyes’
PERFORMANCE BOND (callable anytime on demand) from a duly accredited surety company
project accomplishment and failure to finish the project. It also claimed that FF Cruz still has an unpaid
equivalent to 10% of the SUBCONTRACT’S TOTAL COST;
balance of more than ₱5 million as it recognized only the accomplishment of 57,284.44 cubic meters
instead of 184,210 cubic meters claimed by G. Reyes.
6. That the SUB-CONTRACTOR agrees to start to work on the PROJECT within thirty (30) calendar
days or as directed by the PPA, from the date of NOTICE TO PROCEED for the PROJECT, and obligates
In answer to the third-party complaint of G. Reyes, FF Cruz denied that it caused the siltation
itself to finish the work within the contract time stipulated in the contract entered into by the
problems and argued that the former abandoned the project because it was incapable of performing its
CONTRACTOR and PPA;
obligations. It also explained that it had no unpaid obligation to G. Reyes as it paid its accomplishment
based on the report of the PPA.14
x x x x5
FF Cruz thereafter filed a Fourth-Party Complaint against American Home calling on the surety bond it
FF Cruz gave G. Reyes an advance payment of ₱2.2 million guaranteed by a surety bond for provided in favor of G. Reyes.15
the same amount issued by American Home. The surety bond was issued to guarantee payment of the
advance payment made by FF Cruz to G. Reyes for the dredging project in the event that the latter fail to
During the pre-trial, the parties agreed to limit the issues, to wit:
comply with the terms and conditions of the sub-contract.6

1) Is the fourth-party defendant AMERICAN HOME free from liability on the claim of fourth-
As a security for the issuance of the bond, Genaro Reyes, as president of G. Reyes, and his
party plaintiff FF Cruz as set forth in the fourth-party complaint because:
wife Lydia Reyes, executed an Indemnity Agreement where they agreed to jointly and severally indemnify
American Home and keep the latter harmless against all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatever kind and nature which it may sustain or incur as a consequence of a) The provision in American Surety Bond No. 304-67535575 that the same is
having become a surety, or any extension, renewal, substitution or alteration made thereof. 7 They likewise callable anytime on demand is null and void?
undertook to pay, reimburse and make good to American Home all sums which the latter shall pay on
account of the bond.8 It was also agreed upon that their liability attaches as soon as demand is received by
b) Assuming that it is not, is fourth-party defendant AMERICAN HOME free from
American Home from FF Cruz, or as soon as it becomes liable to make payment under the terms of the
liability because Genaro G. Reyes Construction, Inc. had fulfilled all its obligations
surety bond.
under the sub-contract it had with fourth-party plaintiff?

In a letter dated March 6, 1991, FF Cruz informed G. Reyes that the former mobilized its
2) Is AMERICAN HOME free from liability relative to the fourth-party plaintiff claim as set
dredger and started operation on March 3, 1991. In the same letter, FF Cruz requested G. Reyes to
forth in the complaint because the damages suffered by fourth-party plaintiff arose from force
mobilize its equipment on or before March 20, 1991.9
majeure?

On October 21, 1991, G. Reyes complained to the PPA about the great deal of silt and waste
3) If [fourth-party] defendant AMERICAN HOME is liable on the surety bond, what is the
materials that had accumulated in the area which adversely affected its work accomplishment. In
amount and nature of the damages that should be awarded to fourth-party plaintiff?16
December 1991, G. Reyes informed FF Cruz that the equipment used for the project had been
encountering difficulties because of siltation problems. G. Reyes finally admitted that continuing the
project was no longer a wise investment and called on FF Cruz to take over the project. FF Cruz thus took After the presentation of the parties’ respective evidence, the RTC rendered a Decision, 17 the dispositive
over the unfinished project.10 portion of which reads:

Consequently, FF Cruz demanded from American Home the payment of ₱2.2 million WHEREFORE, judgment is hereby rendered ordering plaintiff American Home Insurance
representing the amount of the bond. American Home, in turn, informed G. Reyes of FF Cruz’s demand. Company of New York and third-party plaintiff Genaro G. Reyes Construction, Incorporated, jointly and
As the claim left unheeded, FF Cruz made a final demand on American Home on July 10, 1993. G. Reyes severally, to pay third-party defendant F.F. Cruz and Company the amount of ₱2,200,000.00 representing
likewise ignored American Home’s demand to fulfill its obligation set forth in the Indemnity Agreement it the full amount of the surety bond.
executed in favor of the latter.
The third-party complaint of third-party plaintiff Genaro G. Reyes Construction, Incorporated,
On July 29, 1993, American Home filed a Complaint for Sum of Money11 against G. Reyes, against third-party defendant F.F. Cruz and Company, and the counterclaim for attorney’s fees of third-
Genaro G. Reyes and Lydia A. Reyes for the payment of ₱2,200,000.00 corresponding to the amount of party plaintiff Genaro G. Reyes Construction, Incorporated, against plaintiff American Home Insurance
the bond, plus attorney’s fees and litigation expenses.12 In its complaint, American Home sought the Company of New York, are both dismissed, for lack of sufficient merit.
On the counterclaim of third-party defendant F.F. Cruz and Company, judgment is hereby rendered III.
ordering third-party plaintiff Genaro G. Reyes Construction, Incorporated, to pay said third-party
defendant the following amounts:
ASSUMING, WITHOUT ADMITTING, THAT PETITIONER IS LIABLE UNDER THE
BOND, THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN ADJUDGING
1. ₱310,150.21 representing the overpayment received by third-party plaintiff Genaro G. Reyes PETITIONER LIABLE FOR THE ENTIRE OR FACE VALUE OF THE BOND IN THE
Construction, Incorporated, from third-party defendant F.F. Cruz and Company, with 6% AMOUNT OF ₱2.2 MILLION CONSIDERING THAT THE BOND WAS NOT A
interest per annum from the filing of the third-party complaint on 8 April 1994 until full PERFORMANCE BOND TO GUARANTEE THE COMPLETION OF THE PROJECT BUT
payment; MERELY TO GUARANTEE THE PAYMENT OF THE ADVANCES MADE BY
RESPONDENT TO GENARO G. REYES CONSTRUCTION.22
2. 10% of the above amount as attorney’s fees; and
American Home faults the CA in considering the surety bond as a performance bond. It insists that the
bond guaranteed only the payment of the 15% advance payment made by FF Cruz to G. Reyes amounting
3. costs of suit.
to ₱2.2 million and not the performance of the latter’s obligations nor the completion of the dredging
operations. It also avers that making it (American Home) liable under the bond because of G. Reyes’
On the complaint of plaintiff American Home Insurance Company of New York against abandonment of the project is tantamount to enlarging its liability. American Home also claims that it was
defendants and third-party plaintiff Genaro G. Reyes Construction, Incorporated, Genaro G. Reyes and not informed that G. Reyes already abandoned the project and that FF Cruz took over to complete the
Lydia A. Reyes, judgment is hereby rendered ordering defendants and third-party plaintiffs Genaro G. same. This, according to American Home, is a material alteration of the terms of the surety bond which
Reyes Construction, Incorporated, Genaro G. Reyes and Lydia A. Reyes, jointly and severally, to pay thus discharged it of liability on the surety agreement.
plaintiff American Home Insurance Company of New York the amount of ₱2,200,000.00, representing the
full amount of the indemnity agreement, plus 10% thereof as attorney’s fees and costs of suit.
The petition is without merit.

SO ORDERED.18
The only issue for resolution is whether or not American Home is liable to FF Cruz for ₱2.2 million
representing the face value of the surety bond it issued to G. Reyes.
American Home and G. Reyes et al. appealed to the CA. On September 29, 2005, the appellate
court rendered the assailed decision dismissing their appeal and, consequently, affirming the RTC
We rule in the affirmative.
decision. The CA sustained the findings of the RTC that G. Reyes indeed failed to fulfill its obligation to
dredge 300,000 cubic meters as it only finished dredging 57,000 cubic meters. The court opined that there
was no proof to show that the abandonment of the project by G. Reyes was caused by heavy siltation. It is well to note that G. Reyes’ petition in G.R. No. 174913 has been denied by the Court. Hence, the
Considering that such failure to finish the project constitutes a violation of G. Reyes’ agreement with FF same CA decision and resolution assailed in this present petition have become final and executory as to G.
Cruz, American Home was held liable under the bond it issued to G. Reyes. 19 G. Reyes’ and American Reyes, Genaro Reyes and Lydia A. Reyes and, in that respect, it shall not be disturbed by the Court.
Home’s motions for reconsideration were denied on September 25, 2006. Consequently, their liability to American Home pursuant to the Indemnity Agreement has been settled
with finality. They are, therefore, bound to pay American Home ₱2,200,000.00 representing the full
amount of the Indemnity Agreement, plus 10% thereof as attorney’s fees and costs of suit. Their liability
Aggrieved, G. Reyes assailed the CA decision and resolution before this Court in a petition for review on
to FF Cruz has also been resolved with finality.
certiorari, 20 but the same was denied by the Court in a Minute Resolution21 dated March 5, 2007.

The Court also notes that the issues raised by American Home in this petition were not raised during the
In this petition under consideration, American Home likewise assails the same decision and resolution
trial of the case before the RTC. It must be recalled that the case below was commenced by American
with the following assigned errors:
Home for the collection of sum of money against G. Reyes pursuant to the Indemnity Agreement executed
by the latter. The issue on American Home’s liability to FF Cruz was squarely raised only in the fourth-
I. party complaint filed by the latter against the former.

THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN CONSIDERING THE Settled is the rule that points of law, theories, issues, and arguments not adequately brought to the
BOND ISSUED BY PETITIONER TO BE A PERFORMANCE BOND CONTRARY TO attention of the trial court need not be, and ordinarily will not be, considered by a reviewing court. They
THE EXPRESS TERMS OF THE BOND ITSELF THAT IT WAS TO GUARANTEE cannot be raised for the first time on appeal. To allow this would be offensive to the basic rules of fair
PAYMENT FOR THE 15% ADVANCE PAYMENT MADE BY RESPONDENT TO play, justice and due process.23 In order, however, to remove doubt on its liability to FF Cruz, we will
GENARO G. REYES CONSTRUCTION CORPORATION. discuss the merits of American Home’s arguments.

II. It is undisputed that FF Cruz gave G. Reyes ₱2.2 million as advance payment. As a security thereof, G.
Reyes posted a surety bond issued by American Home in favor of FF Cruz, the pertinent portion of which
reads:
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT DISCHARGING
PETITIONER FROM ITS OBLIGATIONS UNDER THE BOND DUE TO THE
ABANDONMENT OF THE PROJECT BY GENARO G. REYES CONSTRUCTION To guarantee payment for the 15% advance payment made by the obligee [FF Cruz] to the herein principal
CORPORATION AND THE TAKE-OVER BY RESPONDENT WITHOUT PETITIONER’S [G. Reyes] for the Dredging of Entrance Channel and Harbor Basin of Cebu International Port Project in
PRIOR NOTICE AND CONSENT. the event of the principal’s failure to comply with the terms and conditions of the Sub-Contract
Agreement dated June 11, 1990, copy of which is hereto attached and made an integral part hereof; it The surety is considered in law as possessed of the identity of the debtor in relation to whatever is
being expressly understood that the liability of the surety under this bond shall in no case exceed the adjudged touching upon the obligation of the latter. Their liabilities are so interwoven as to be inseparable.
amount of PESOS TWO MILLION TWO HUNDRED THOUSAND ONLY (₱2,200,000.00), Phil. Cy."24 Although the contract of suretyship is, in essence, secondary only to a valid principal obligation, the
surety’s liability to the creditor is direct, primary, and absolute; he becomes liable for the debt and duty of
another although he possesses no direct or personal interest over the obligations nor does he receive any
It is clear from the foregoing that indeed, the surety bond was issued to guarantee the payment of the 15%
benefit therefrom.28
advance payment of ₱2.2 million made by FF Cruz to G. Reyes. The bond was not issued to guarantee the
completion of the project. However, the above provision shows that in order for American Home’s
liability to attach, two conditions must be fulfilled: first, that the advance payment made by FF Cruz to G. As to the amount of American Home’s liability, the RTC found that G. Reyes did not pay back the full
Reyes remains unpaid; and second, G. Reyes fails to comply with any of the terms and conditions set forth amount of ₱2.2 million advance payment. American Home, however, claims (for the first time) that G.
in the sub-contract. Reyes actually reimbursed ₱598,880.52 to FF Cruz. As plaintiff in its complaint and defendant in FF
Cruz’s fourth-party complaint, American Home was duty-bound to prove that it was entitled to its claim
against G. Reyes under the Indemnity Agreement and that it was not liable to FF Cruz under the surety
There may be a dispute as to the amount of liability as will be discussed later, but it has been adequately
bond. Yet, American Home chose not to present its evidence to substantiate its claim and defense. For
established that FF Cruz was not yet reimbursed of the advance payment it made. The fulfillment of the
lack of evidence to show the fact of payment, we find no reason to disturb the findings of the trial court as
first condition is, therefore, settled.
affirmed by the appellate court that ₱2.2 million is due FF Cruz.

In the sub-contract agreement, G. Reyes agreed to finish the work within the time stipulated in the contract
Factual findings of the trial court, particularly when affirmed by the CA, are generally binding on the
between FF Cruz and the PPA. Admittedly, not only did G. Reyes fail to finish the work on time, it did not
Court.29 We have repeatedly held that we are not a trier of facts. We generally rely upon, and are bound
altogether complete the project. If failure to finish the work on time is violation of the sub-contract
by, the conclusions on factual matters made by the lower courts, which are better equipped and have better
agreement, with more reason that abandonment of the work is covered by the stipulation. As held by the
opportunity to assess the evidence first-hand, including the testimony of the witnesses.30
CA:

The Court’s jurisdiction over a petition for review on certiorari is limited to reviewing only errors of law,
By G. REYES’ own claim, it dredged only 184,000 cubic meters. There thus is no dispute that G. REYES
not of facts, unless the factual findings complained of are devoid of support from the evidence on record
failed to dredge the 300,000 cubic meters as agreed in the contract. But even if [w]e are to assume that G.
or the assailed judgment is based on a misapprehension of facts. 31
REYES indeed dredged 184,210 cubic meters, this would still be short of the 300,000 cubic meters it
bound itself under the contract.
With the foregoing disquisition, we need not discuss the other issues raised by American Home.
In the middle of the project, G REYES unilaterally abandoned its dredging work and its obligations under
the Sub-Contract Agreement. Without a doubt, G. REYES failed to fulfill its contractual obligation. x x WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated
x25 September 29, 2005 and Resolution dated September 25, 2006 in CA-G.R. CV No. 73960, are
AFFIRMED.
The appellate court did not also sustain G. Reyes’ explanation that the abandonment of the project was
due to force majeure. We quote with approval the CA ratiocination in this wise: SO ORDERED.

The proffered reason that the abandonment was due to force majeure fails to convince this Court. G.
REYES’ excuse that it was forced to abandon the dredging work due to "heavy siltation" is not supported
by facts on record. There is no evidence of the alleged "heavy siltation." On the contrary, after G REYES
abandoned its dredging work and FF CRUZ took over the dredging, FF CRUZ was still able to finish the G.R. No. 140047. July 13, 2004.*
dredging work on time. There is thus no basis for G REYES’ justification of force majeure. Such was a
lame excuse for the abandonment of the project.26 PHILIPPINE EXPORT AND FOREIGN LOAN GUARANTEE CORPORATION, petitioner, vs. V.P.
EUSEBIO CONSTRUCTION, INC.; 3-PLEX INTERNATIONAL, INC., VICENTE P. EUSEBIO;
With the violation of the sub-contract, which means fulfillment of the second condition, the liability to pay SOPLEDAD C. EUSEBIO; EDUARDO E. SANTOS; ILUMINADA SANTOS; AND FIRST
the advance payment arose. INTEGRATED BONDING AND INSURANCE COMPANY, INC., respondents.

The payment of the ₱2.2 million advanced by FF Cruz is the principal liability of G. Reyes. However, Syllabus
with the issuance of the surety bond, a contract of suretyship was entered into making American Home
equally liable. Civil Law; Contracts; Guaranty; Distinguished from Suretyship; By guaranty a person, called
the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the
A contract of suretyship is an agreement whereby a party called the surety, guarantees the performance by latter should fail to do so; if the person binds himself solidarily with the principal debtor, the contract is
another party, called the principal or obligor, of an obligation or undertaking in favor of another party called suretyship.—By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
called the obligee. By its very nature, under the laws regulating suretyship, the liability of the surety is obligation of the principal debtor in case the latter should fail to do so. If a person binds himself solidarily
joint and several but is limited to the amount of the bond, and its terms are determined strictly by the terms with the principal debtor, the contract is called suretyship. Strictly speaking, guaranty and surety are
of the contract of suretyship in relation to the principal contract between the obligor and the obligee. 27 nearly related, and many of the principles are common to both. In both contracts, there is a promise to
answer for the debt or default of another. However, in this jurisdiction, they may be distinguished thus: 1.
A surety is usually bound with his principal by the same instrument executed at the same time and on the Same; Same; Default; Default or mora on the part of the debtor is the non-fulfillment of an
same consideration. On the other hand, the contract of guaranty is the guarantor’s own separate obligation with respect to time.—Our law, specifically Article 1169, last paragraph, of the Civil Code,
undertaking often supported by a consideration separate from that supporting the contract of the provides: “In reciprocal obligations, neither party incurs in delay if the other party does not comply or is
principal; the original contract of his principal is not his contract; 2. A surety assumes liability as a not ready to comply in a proper manner with what is incumbent upon him.” Default or mora on the part of
regular party to the undertaking; while the liability of a guarantor is conditional depending on the failure the debtor is the delay in the fulfillment of the prestation by reason of a cause imputable to the former. It
of the primary debtor to pay the obligation; 3. The obligation of a surety is primary, while that of a is the non-fulfillment of an obligation with respect to time.
guarantor is secondary; 4. A surety is an original promissor and debtor from the beginning, while a
guarantor is charged on his own undertaking; 5. A surety is, ordinarily, held to know every default of his Same; Same; Same; Requisites; In order that the debtor may be in default it is necessary that
principal; whereas a guarantor is not bound to take notice of the non-performance of his principal; 6. the following requisites be present.—In order that the debtor may be in default it is necessary that the
Usually, a surety will not be discharged either by the mere indulgence of the creditor to the principal or following requisites be present: (1) that the obligation be demandable and already liquidated; (2) that the
by want of notice of the default of the principal, no matter how much he may be injured thereby. A debtor delays performance; and (3) that the creditor requires the performance because it must appear that
guarantor is often discharged by the mere indulgence of the creditor to the principal, and is usually not the tolerance or benevolence of the creditor must have ended.
liable unless notified of the default of the principal.
Same; Same; Same; Demand; Demand is generally necessary even if a period has been fixed in
Same; Same; Same; Conditional Guaranty; That the guarantee issued by the petitioner is the obligation.—Demand is generally necessary even if a period has been fixed in the obligation. And
unconditional and irrevocable does not make the petitioner a surety.—That the guarantee issued by the default generally begins from the moment the creditor demands judicially or extra-judicially the
petitioner is uncon ditional and irrevocable does not make the petitioner a surety. As a guaranty, it is still performance of the obligation. Without such demand, the effects of default will not arise.
characterized by its subsidiary and conditional quality because it does not take effect until the fulfillment
of the condition, namely, that the principal obligor should fail in his obligation at the time and in the form
DECISION
he bound himself. In other words, an unconditional guarantee is still subject to the condition that the
principal debtor should default in his obligation first before resort to the guarantor could be had. A
conditional guaranty, as opposed to an unconditional guaranty, is one which depends upon some DAVIDE, JR., C.J.:
extraneous event, beyond the mere default of the principal, and generally upon notice of the principal’s
default and reasonable diligence in exhausting proper remedies against the principal. This case is an offshoot of a service contract entered into by a Filipino construction firm with the Iraqi
Government for the construction of the Institute of Physical Therapy-Medical Center, Phase II, in
Same; Same; Evidence; Appeals; It is a fundamental and settled rule that the findings of fact of Baghdad, Iraq, at a time when the Iran-Iraq war was ongoing.
the trial court and the Court of Appeals are binding or conclusive upon this Court unless they are not
supported by the evidence or unless strong and cogent reasons dictate otherwise.—It is a fundament and In a complaint filed with the Regional Trial Court of Makati City, docketed as Civil Case No. 91-1906 and
settled rule that the findings of fact of the trial court and the Court of Appeals are binding or conclusive assigned to Branch 58, petitioner Philippine Export and Foreign Loan Guarantee Corporation 1 (hereinafter
Philguarantee) sought reimbursement from the respondents of the sum of money it paid to Al Ahli Bank of
upon this Court unless they are not supported by the evidence or unless strong and cogent reasons dictate
Kuwait pursuant to a guarantee it issued for respondent V.P. Eusebio Construction, Inc. (VPECI).
otherwise. The factual findings of the Court of Appeals are normally not reviewable by us under Rule 45
of the Rules of Court except when they are at variance with those of the trial court. The trial court and the
Court of Appeals were in unison that the respondent contractor cannot be considered to have defaulted in The factual and procedural antecedents in this case are as follows:
its obligations because the cause of the delay was not primarily attributable to it.
On 8 November 1980, the State Organization of Buildings (SOB), Ministry of Housing and Construction,
Same; Same; Lex Contractus; No conflicts rule on essential validity of contracts is expressly Baghdad, Iraq, awarded the construction of the Institute of Physical Therapy–Medical Rehabilitation
provided for in our laws.—No conflicts rule on essential validity of contracts is expressly provided for in Center, Phase II, in Baghdad, Iraq, (hereinafter the Project) to Ajyal Trading and Contracting Company
(hereinafter Ajyal), a firm duly licensed with the Kuwait Chamber of Commerce for a total contract price
our laws. The rule followed by most legal systems, however, is that the intrinsic validity of a contract must
of ID5,416,089/046 (or about US$18,739,668).2
be governed by the lex contractus or “proper law of the contract.” This is the law voluntarily agreed upon
by the parties (the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex
On 7 March 1981, respondent spouses Eduardo and Iluminada Santos, in behalf of respondent 3-Plex
loci intentionis). The law selected may be implied from such factors as substantial connection with the
International, Inc. (hereinafter 3-Plex), a local contractor engaged in construction business, entered into a
transaction, or the nationality or domicile of the parties. Philippine courts would do well to adopt the first joint venture agreement with Ajyal wherein the former undertook the execution of the entire Project, while
and most basic rule in most legal systems, namely, to allow the parties to select the law applicable to their the latter would be entitled to a commission of 4% of the contract price. 3 Later, or on 8 April 1981,
contract, subject to the limitation that it is not against the law, morals, or public policy of the forum and respondent 3-Plex, not being accredited by or registered with the Philippine Overseas Construction Board
that the chosen law must bear a substantive relationship to the transaction. (POCB), assigned and transferred all its rights and interests under the joint venture agreement to VPECI, a
construction and engineering firm duly registered with the POCB. 4 However, on 2 May 1981, 3-Plex and
Same; Same; Foreign Law; Processual Presumption; Where foreign law is not pleaded or, VPECI entered into an agreement that the execution of the Project would be under their joint
management.5
even if pleaded, is not proved, the presumption is that foreign law is the same as ours.—Since that foreign
law was not properly pleaded or proved, the presumption of identity or similarity, otherwise known as the
processual presumption, comes into play. Where foreign law is not pleaded or, even if pleaded, is not The SOB required the contractors to submit (1) a performance bond of ID271,808/610 representing 5% of
proved, the presumption is that foreign law is the same as ours. the total contract price and (2) an advance payment bond of ID541,608/901 representing 10% of the
advance payment to be released upon signing of the contract. 6 To comply with these requirements, that (1) the imposition of penalty would be held in abeyance until the completion of the project; and (2)
respondents 3-Plex and VPECI applied for the issuance of a guarantee with petitioner Philguarantee, a the time extension would be open, depending on the developments on the negotiations for a foreign loan
government financial institution empowered to issue guarantees for qualified Filipino contractors to secure to finance the completion of the project.23 It also wrote SOB protesting the call for lack of factual or legal
the performance of approved service contracts abroad.7 basis, since the failure to complete the Project was due to (1) the Iraqi government's lack of foreign
exchange with which to pay its (VPECI's) accomplishments and (2) SOB's noncompliance for the past
several years with the provision in the contract that 75% of the billings would be paid in US
Petitioner Philguarantee approved respondents' application. Subsequently, letters of guarantee8 were issued
dollars.24 Subsequently, or on 19 November 1986, respondent VPECI advised the petitioner not to pay yet
by Philguarantee to the Rafidain Bank of Baghdad covering 100% of the performance and advance
Al Ahli Bank because efforts were being exerted for the amicable settlement of the Project.25
payment bonds, but they were not accepted by SOB. What SOB required was a letter-guarantee from
Rafidain Bank, the government bank of Iraq. Rafidain Bank then issued a performance bond in favor of
SOB on the condition that another foreign bank, not Philguarantee, would issue a counter-guarantee to On 14 April 1987, the petitioner received another telex message from Al Ahli Bank stating that it had
cover its exposure. Al Ahli Bank of Kuwait was, therefore, engaged to provide a counter-guarantee to already paid to Rafidain Bank the sum of US$876,564 under its letter of guarantee, and demanding
Rafidain Bank, but it required a similar counter-guarantee in its favor from the petitioner. Thus, three reimbursement by the petitioner of what it paid to the latter bank plus interest thereon and related
layers of guarantees had to be arranged.9 expenses.26

Upon the application of respondents 3-Plex and VPECI, petitioner Philguarantee issued in favor of Al Both petitioner Philguarantee and respondent VPECI sought the assistance of some government agencies
Ahli Bank of Kuwait Letter of Guarantee No. 81-194-F 10 (Performance Bond Guarantee) in the amount of of the Philippines. On 10 August 1987, VPECI requested the Central Bank to hold in abeyance the
ID271,808/610 and Letter of Guarantee No. 81-195-F11 (Advance Payment Guarantee) in the amount of payment by the petitioner "to allow the diplomatic machinery to take its course, for otherwise, the
ID541,608/901, both for a term of eighteen months from 25 May 1981. These letters of guarantee were Philippine government , through the Philguarantee and the Central Bank, would become instruments of
secured by (1) a Deed of Undertaking12executed by respondents VPECI, Spouses Vicente P. Eusebio and the Iraqi Government in consummating a clear act of injustice and inequity committed against a Filipino
Soledad C. Eusebio, 3-Plex, and Spouses Eduardo E. Santos and Iluminada Santos; and (2) a surety contractor."27
bond13 issued by respondent First Integrated Bonding and Insurance Company, Inc. (FIBICI). The Surety
Bond was later amended on 23 June 1981 to increase the amount of coverage from P6.4 million to P6.967
On 27 August 1987, the Central Bank authorized the remittance for its account of the amount of
million and to change the bank in whose favor the petitioner's guarantee was issued, from Rafidain Bank
US$876,564 (equivalent to ID271, 808/610) to Al Ahli Bank representing full payment of the
to Al Ahli Bank of Kuwait.14
performance counter-guarantee for VPECI's project in Iraq. 28

On 11 June 1981, SOB and the joint venture VPECI and Ajyal executed the service contract 15 for the
On 6 November 1987, Philguarantee informed VPECI that it would remit US$876,564 to Al Ahli Bank,
construction of the Institute of Physical Therapy – Medical Rehabilitation Center, Phase II, in Baghdad,
and reiterated the joint and solidary obligation of the respondents to reimburse the petitioner for the
Iraq, wherein the joint venture contractor undertook to complete the Project within a period of 547 days or
advances made on its counter-guarantee.29
18 months. Under the Contract, the Joint Venture would supply manpower and materials, and SOB would
refund to the former 25% of the project cost in Iraqi Dinar and the 75% in US dollars at the exchange rate
of 1 Dinar to 3.37777 US Dollars.16 The petitioner thus paid the amount of US$876,564 to Al Ahli Bank of Kuwait on 21 January
1988.30 Then, on 6 May 1988, the petitioner paid to Al Ahli Bank of Kuwait US$59,129.83 representing
interest and penalty charges demanded by the latter bank.31
The construction, which was supposed to start on 2 June 1981, commenced only on the last week of
August 1981. Because of this delay and the slow progress of the construction work due to some setbacks
and difficulties, the Project was not completed on 15 November 1982 as scheduled. But in October 1982, On 19 June 1991, the petitioner sent to the respondents separate letters demanding full payment of the
upon foreseeing the impossibility of meeting the deadline and upon the request of Al Ahli Bank, the joint amount of P47,872,373.98 plus accruing interest, penalty charges, and 10% attorney's fees pursuant to
venture contractor worked for the renewal or extension of the Performance Bond and Advance Payment their joint and solidary obligations under the deed of undertaking and surety bond. 32 When the respondents
Guarantee. Petitioner's Letters of Guarantee Nos. 81-194-F (Performance Bond) and 81-195-F (Advance failed to pay, the petitioner filed on 9 July 1991 a civil case for collection of a sum of money against the
Payment Bond) with expiry date of 25 November 1982 were then renewed or extended to 9 February 1983 respondents before the RTC of Makati City.
and 9 March 1983, respectively.17 The surety bond was also extended for another period of one year, from
12 May 1982 to 12 May 1983.18 The Performance Bond was further extended twelve times with validity of
up to 8 December 1986,19 while the Advance Payment Guarantee was extended three times more up to 24 After due trial, the trial court ruled against Philguarantee and held that the latter had no valid cause of
action against the respondents. It opined that at the time the call was made on the guarantee which was
May 1984 when the latter was cancelled after full refund or reimbursement by the joint venture
contractor.20 The surety bond was likewise extended to 8 May 1987.21 executed for a specific period, the guarantee had already lapsed or expired. There was no valid renewal or
extension of the guarantee for failure of the petitioner to secure respondents' express consent thereto. The
trial court also found that the joint venture contractor incurred no delay in the execution of the Project.
As of March 1986, the status of the Project was 51% accomplished, meaning the structures were already Considering the Project owner's violations of the contract which rendered impossible the joint venture
finished. The remaining 47% consisted in electro-mechanical works and the 2%, sanitary works, which contractor's performance of its undertaking, no valid call on the guarantee could be made. Furthermore,
both required importation of equipment and materials.22 the trial court held that no valid notice was first made by the Project owner SOB to the joint venture
contractor before the call on the guarantee. Accordingly, it dismissed the complaint, as well as the
counterclaims and cross-claim, and ordered the petitioner to pay attorney's fees of P100,000 to
On 26 October 1986, Al Ahli Bank of Kuwait sent a telex call to the petitioner demanding full payment of
respondents VPECI and Eusebio Spouses and P100,000 to 3-Plex and the Santos Spouses, plus costs. 33
its performance bond counter-guarantee.

In its 14 June 1999 Decision,34 the Court of Appeals affirmed the trial court's decision, ratiocinating as
Upon receiving a copy of that telex message on 27 October 1986, respondent VPECI requested Iraq Trade
follows:
and Economic Development Minister Mohammad Fadhi Hussein to recall the telex call on the
performance guarantee for being a drastic action in contravention of its mutual agreement with the latter
 First, appellant cannot deny the fact that it was fully aware of the status of project By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
implementation as well as the problems besetting the contractors, between 1982 to 1985, principal debtor in case the latter should fail to do so. If a person binds himself solidarily with the
having sent some of its people to Baghdad during that period. The successive principal debtor, the contract is called suretyship. 37
renewals/extensions of the guarantees in fact, was prompted by delays, not solely attributable
to the contractors, and such extension understandably allowed by the SOB (project owner)
Strictly speaking, guaranty and surety are nearly related, and many of the principles are common to both.
which had not anyway complied with its contractual commitment to tender 75% of payment in
In both contracts, there is a promise to answer for the debt or default of another. However, in this
US Dollars, and which still retained overdue amounts collectible by VPECI.
jurisdiction, they may be distinguished thus:
…
Second, appellant was very much aware of the violations committed by the SOB of its
contractual undertakings with VPECI, principally, the payment of foreign currency (US$) for 1. A surety is usually bound with his principal by the same instrument executed at the same
75% of the total contract price, as well as of the complications and injustice that will result time and on the same consideration. On the other hand, the contract of guaranty is the
from its payment of the full amount of the performance guarantee, as evident in guarantor's own separate undertaking often supported by a consideration separate from that
PHILGUARANTEE's letter dated 13 May 1987 …. supporting the contract of the principal; the original contract of his principal is not his contract.
…
Third, appellant was fully aware that SOB was in fact still obligated to the Joint Venture and
there was still an amount collectible from and still being retained by the project owner, which 2. A surety assumes liability as a regular party to the undertaking; while the liability of a
guarantor is conditional depending on the failure of the primary debtor to pay the obligation.
amount can be set-off with the sum covered by the performance guarantee.
…
Fourth, well-apprised of the above conditions obtaining at the Project site and cognizant of the 3. The obligation of a surety is primary, while that of a guarantor is secondary.
war situation at the time in Iraq, appellant, though earlier has made representations with the
SOB regarding a possible amicable termination of the Project as suggested by VPECI, made a
complete turn-around and insisted on acting in favor of the unjustified "call" by the foreign 4. A surety is an original promissor and debtor from the beginning, while a guarantor is
banks.35 charged on his own undertaking.

The petitioner then came to this Court via Rule 45 of the Rules of Court claiming that the Court of 5. A surety is, ordinarily, held to know every default of his principal; whereas a guarantor is
Appeals erred in affirming the trial court's ruling that not bound to take notice of the non-performance of his principal.

I 6. Usually, a surety will not be discharged either by the mere indulgence of the creditor to the
principal or by want of notice of the default of the principal, no matter how much he may be
injured thereby. A guarantor is often discharged by the mere indulgence of the creditor to the
…RESPONDENTS ARE NOT LIABLE UNDER THE DEED OF UNDERTAKING THEY principal, and is usually not liable unless notified of the default of the principal. 38
EXECUTED IN FAVOR OF PETITIONER IN CONSIDERATION FOR THE ISSUANCE
OF ITS COUNTER-GUARANTEE AND THAT PETITIONER CANNOT PASS ON TO
RESPONDENTS WHAT IT HAD PAID UNDER THE SAID COUNTER-GUARANTEE. In determining petitioner's status, it is necessary to read Letter of Guarantee No. 81-194-F, which provides
in part as follows:

II
In consideration of your issuing the above performance guarantee/counter-guarantee, we
hereby unconditionally and irrevocably guarantee, under our Ref. No. LG-81-194 F to pay you
…PETITIONER CANNOT CLAIM SUBROGATION. on your first written or telex demand Iraq Dinars Two Hundred Seventy One Thousand Eight
Hundred Eight and fils six hundred ten (ID271,808/610) representing 100% of the performance
III bond required of V.P. EUSEBIO for the construction of the Physical Therapy Institute, Phase
II, Baghdad, Iraq, plus interest and other incidental expenses related thereto.

…IT IS INIQUITOUS AND UNJUST FOR PETITIONER TO HOLD RESPONDENTS

LIABLE UNDER THEIR DEED OF UNDERTAKING.36 In the event of default by V.P. EUSEBIO, we shall pay you 100% of the obligation
unpaid but in no case shall such amount exceed Iraq Dinars (ID) 271,808/610 plus interest and
other incidental expenses…. (Emphasis supplied)39
The main issue in this case is whether the petitioner is entitled to reimbursement of what it paid under
Letter of Guarantee No. 81-194-F it issued to Al Ahli Bank of Kuwait based on the deed of undertaking
Guided by the abovementioned distinctions between a surety and a guaranty, as well as the
and surety bond from the respondents.
factual milieu of this case, we find that the Court of Appeals and the trial court were correct in ruling that
the petitioner is a guarantor and not a surety. That the guarantee issued by the petitioner is unconditional
The petitioner asserts that since the guarantee it issued was absolute, unconditional, and irrevocable the and irrevocable does not make the petitioner a surety. As a guaranty, it is still characterized by its
nature and extent of its liability are analogous to those of suretyship. Its liability accrued upon the failure subsidiary and conditional quality because it does not take effect until the fulfillment of the condition,
of the respondents to finish the construction of the Institute of Physical Therapy Buildings in Baghdad. namely, that the principal obligor should fail in his obligation at the time and in the form he bound
himself.40 In other words, an unconditional guarantee is still subject to the condition that the principal
debtor should default in his obligation first before resort to the guarantor could be had. A conditional
guaranty, as opposed to an unconditional guaranty, is one which depends upon some extraneous event,
beyond the mere default of the principal, and generally upon notice of the principal's default and Our law, specifically Article 1169, last paragraph, of the Civil Code, provides: "In reciprocal
reasonable diligence in exhausting proper remedies against the principal. 41 obligations, neither party incurs in delay if the other party does not comply or is not ready to comply in a
proper manner with what is incumbent upon him."
It appearing that Letter of Guarantee No. 81-194-F merely stated that in the event of default by
respondent VPECI the petitioner shall pay, the obligation assumed by the petitioner was simply that of an Default or mora on the part of the debtor is the delay in the fulfillment of the prestation by
unconditional guaranty, not conditional guaranty. But as earlier ruled the fact that petitioner's guaranty is reason of a cause imputable to the former. 52 It is the non-fulfillment of an obligation with respect to
unconditional does not make it a surety. Besides, surety is never presumed. A party should not be time.53
considered a surety where the contract itself stipulates that he is acting only as a guarantor. It is only when
the guarantor binds himself solidarily with the principal debtor that the contract becomes one of
It is undisputed that only 51.7% of the total work had been accomplished. The 48.3%
suretyship.42
unfinished portion consisted in the purchase and installation of electro-mechanical equipment and
materials, which were available from foreign suppliers, thus requiring US Dollars for their importation.
Having determined petitioner's liability as guarantor, the next question we have to grapple with The monthly billings and payments made by SOB54 reveal that the agreement between the parties was a
is whether the respondent contractor has defaulted in its obligations that would justify resort to the periodic payment by the Project owner to the contractor depending on the percentage of accomplishment
guaranty. This is a mixed question of fact and law that is better addressed by the lower courts, since this within the period. 55 The payments were, in turn, to be used by the contractor to finance the subsequent
Court is not a trier of facts. phase of the work. 56 However, as explained by VPECI in its letter to the Department of Foreign Affairs
(DFA), the payment by SOB purely in Dinars adversely affected the completion of the project; thus:
It is a fundamental and settled rule that the findings of fact of the trial court and the Court of
Appeals are binding or conclusive upon this Court unless they are not supported by the evidence or unless 4. Despite protests from the plaintiff, SOB continued paying the accomplishment billings of the
strong and cogent reasons dictate otherwise.43 The factual findings of the Court of Appeals are normally Contractor purely in Iraqi Dinars and which payment came only after some delays.
not reviewable by us under Rule 45 of the Rules of Court except when they are at variance with those of
the trial court. 44 The trial court and the Court of Appeals were in unison that the respondent contractor
5. SOB is fully aware of the following:
cannot be considered to have defaulted in its obligations because the cause of the delay was not primarily
attributable to it.
5.2 That Plaintiff is a foreign contractor in Iraq and as such, would need foreign currency
(US$), to finance the purchase of various equipment, materials, supplies, tools and to pay for
A corollary issue is what law should be applied in determining whether the respondent
the cost of project management, supervision and skilled labor not available in Iraq and
contractor has defaulted in the performance of its obligations under the service contract. The question of
therefore have to be imported and or obtained from the Philippines and other sources outside
whether there is a breach of an agreement, which includes default or mora,45 pertains to the essential or
Iraq.
intrinsic validity of a contract. 46

5.3 That the Ministry of Labor and Employment of the Philippines requires the remittance into
No conflicts rule on essential validity of contracts is expressly provided for in our laws. The
the Philippines of 70% of the salaries of Filipino workers working abroad in US Dollars;
rule followed by most legal systems, however, is that the intrinsic validity of a contract must be governed
by the lex contractus or "proper law of the contract." This is the law voluntarily agreed upon by the parties
(the lex loci voluntatis) or the law intended by them either expressly or implicitly (the lex loci intentionis). 5.5 That the Iraqi Dinar is not a freely convertible currency such that the same cannot be used
The law selected may be implied from such factors as substantial connection with the transaction, or the to purchase equipment, materials, supplies, etc. outside of Iraq;
nationality or domicile of the parties.47 Philippine courts would do well to adopt the first and most basic
rule in most legal systems, namely, to allow the parties to select the law applicable to their contract,
5.6 That most of the materials specified by SOB in the CONTRACT are not available in Iraq
subject to the limitation that it is not against the law, morals, or public policy of the forum and that the
chosen law must bear a substantive relationship to the transaction. 48 and therefore have to be imported;

5.7 That the government of Iraq prohibits the bringing of local currency (Iraqui Dinars) out of
It must be noted that the service contract between SOB and VPECI contains no express choice
of the law that would govern it. In the United States and Europe, the two rules that now seem to have Iraq and hence, imported materials, equipment, etc., cannot be purchased or obtained using
emerged as "kings of the hill" are (1) the parties may choose the governing law; and (2) in the absence of Iraqui Dinars as medium of acquisition.
such a choice, the applicable law is that of the State that "has the most significant relationship to the
transaction and the parties."49 Another authority proposed that all matters relating to the time, place, and 8. Following the approved construction program of the CONTRACT, upon completion of the
manner of performance and valid excuses for non-performance are determined by the law of the place of civil works portion of the installation of equipment for the building, should immediately
performance or lex loci solutionis, which is useful because it is undoubtedly always connected to the follow, however, the CONTRACT specified that these equipment which are to be installed and
contract in a significant way.50 to form part of the PROJECT have to be procured outside Iraq since these are not being locally
manufactured. Copy f the relevant portion of the Technical Specification is hereto attached as
Annex "C" and made an integral part hereof;
In this case, the laws of Iraq bear substantial connection to the transaction, since one of the
parties is the Iraqi Government and the place of performance is in Iraq. Hence, the issue of whether
respondent VPECI defaulted in its obligations may be determined by the laws of Iraq. However, since that 10. Due to the lack of Foreign currency in Iraq for this purpose, and if only to assist the Iraqi
foreign law was not properly pleaded or proved, the presumption of identity or similarity, otherwise government in completing the PROJECT, the Contractor without any obligation on its part to
known as the processual presumption, comes into play. Where foreign law is not pleaded or, even if do so but with the knowledge and consent of SOB and the Ministry of Housing & Construction
pleaded, is not proved, the presumption is that foreign law is the same as ours. 51 of Iraq, offered to arrange on behalf of SOB, a foreign currency loan, through the facilities of
 Circle International S.A., the Contractor's Sub-contractor and SACE MEDIO CREDITO which Moreover, the petitioner as a guarantor is entitled to the benefit of excussion, that is, it cannot
will act as the guarantor for this foreign currency loan. be compelled to pay the creditor SOB unless the property of the debtor VPECI has been exhausted and all
legal remedies against the said debtor have been resorted to by the creditor. 62 It could also set up
compensation as regards what the creditor SOB may owe the principal debtor VPECI. 63 In this case,
Arrangements were first made with Banco di Roma. Negotiation started in June 1985. SOB is
however, the petitioner has clearly waived these rights and remedies by making the payment of an
informed of the developments of this negotiation, attached is a copy of the draft of the loan
obligation that was yet to be shown to be rightfully due the creditor and demandable of the principal
Agreement between SOB as the Borrower and Agent. The Several Banks, as Lender, and
debtor.
counter-guaranteed by Istituto Centrale Per II Credito A Medio Termine (Mediocredito)
Sezione Speciale Per L'Assicurazione Del Credito All'Exportazione (Sace). Negotiations went
on and continued until it suddenly collapsed due to the reported default by Iraq in the payment As found by the Court of Appeals, the petitioner fully knew that the joint venture contractor
of its obligations with Italian government, copy of the news clipping dated June 18, 1986 is had collectibles from SOB which could be set off with the amount covered by the performance guarantee.
hereto attached as Annex "D" to form an integral part hereof; In February 1987, the OMEAA transmitted to the petitioner a copy of a telex dated 10 February 1987 of
the Philippine Ambassador in Baghdad, Iraq, informing it of the note verbale sent by the Iraqi Ministry of
Foreign Affairs stating that the past due obligations of the joint venture contractor from the petitioner
15. On September 15, 1986, Contractor received information from Circle International S.A.
would "be deducted from the dues of the two contractors."64
that because of the news report that Iraq defaulted in its obligations with European banks, the
approval by Banco di Roma of the loan to SOB shall be deferred indefinitely, a copy of the
letter of Circle International together with the news clippings are hereto attached as Annexes Also, in the project situationer attached to the letter to the OMEAA dated 26 March 1987, the
"F" and "F-1", respectively.57 petitioner raised as among the arguments to be presented in support of the cancellation of the counter-
guarantee the fact that the amount of ID281,414/066 retained by SOB from the Project was more than
enough to cover the counter-guarantee of ID271,808/610; thus:
As found by both the Court of Appeals and the trial court, the delay or the non-completion of
the Project was caused by factors not imputable to the respondent contractor. It was rather due mainly to
the persistent violations by SOB of the terms and conditions of the contract, particularly its failure to pay 6.1 Present the following arguments in cancelling the counterguarantee:
75% of the accomplished work in US Dollars. Indeed, where one of the parties to a contract does not · The Iraqi Government does not have the foreign exchange to fulfill its contractual
perform in a proper manner the prestation which he is bound to perform under the contract, he is not obligations of paying 75% of progress billings in US dollars.
entitled to demand the performance of the other party. A party does not incur in delay if the other party · It could also be argued that the amount of ID281,414/066 retained by SOB from
fails to perform the obligation incumbent upon him. the proposed project is more than the amount of the outstanding counterguarantee. 65

The petitioner, however, maintains that the payments by SOB of the monthly billings in purely In a nutshell, since the petitioner was aware of the contractor's outstanding receivables from SOB, it
Iraqi Dinars did not render impossible the performance of the Project by VPECI. Such posture is quite should have set up compensation as was proposed in its project situationer.
contrary to its previous representations. In his 26 March 1987 letter to the Office of the Middle Eastern
and African Affairs (OMEAA), DFA, Manila, petitioner's Executive Vice-President Jesus M. Tañedo
Moreover, the petitioner was very much aware of the predicament of the respondents. In fact, in its 13
stated that while VPECI had taken every possible measure to complete the Project, the war situation in
May 1987 letter to the OMEAA, DFA, Manila, it stated:
Iraq, particularly the lack of foreign exchange, was proving to be a great obstacle; thus:

VPECI also maintains that the delay in the completion of the project was mainly due to SOB's
VPECI has taken every possible measure for the completion of the project but the war situation
violation of contract terms and as such, call on the guarantee has no basis.
in Iraq particularly the lack of foreign exchange is proving to be a great obstacle. Our
performance counterguarantee was called last 26 October 1986 when the negotiations for a
foreign currency loan with the Italian government through Banco de Roma bogged down While PHILGUARANTEE is prepared to honor its commitment under the guarantee,
following news report that Iraq has defaulted in its obligation with major European banks. PHILGUARANTEE does not want to be an instrument in any case of inequity committed
Unless the situation in Iraq is improved as to allay the bank's apprehension, there is no against a Filipino contractor. It is for this reason that we are constrained to seek your assistance
assurance that the project will ever be completed. 58 not only in ascertaining the veracity of Al Ahli Bank's claim that it has paid Rafidain Bank but
possibly averting such an event. As any payment effected by the banks will complicate matters,
we cannot help underscore the urgency of VPECI's bid for government intervention for the
In order that the debtor may be in default it is necessary that the following requisites be
amicable termination of the contract and release of the performance guarantee. 66
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor delays
performance; and (3) that the creditor requires the performance because it must appear that the tolerance
or benevolence of the creditor must have ended. 59 But surprisingly, though fully cognizant of SOB's violations of the service contract and VPECI's
outstanding receivables from SOB, as well as the situation obtaining in the Project site compounded by the
Iran-Iraq war, the petitioner opted to pay the second layer guarantor not only the full amount of the
As stated earlier, SOB cannot yet demand complete performance from VPECI because it has
performance bond counter-guarantee but also interests and penalty charges.
not yet itself performed its obligation in a proper manner, particularly the payment of the 75% of the cost
of the Project in US Dollars. The VPECI cannot yet be said to have incurred in delay. Even assuming that
there was delay and that the delay was attributable to VPECI, still the effects of that delay ceased upon the This brings us to the next question: May the petitioner as a guarantor secure reimbursement
renunciation by the creditor, SOB, which could be implied when the latter granted several extensions of from the respondents for what it has paid under Letter of Guarantee No. 81-194-F?
time to the former. 60 Besides, no demand has yet been made by SOB against the respondent contractor.
Demand is generally necessary even if a period has been fixed in the obligation. And default generally
begins from the moment the creditor demands judicially or extra-judicially the performance of the As a rule, a guarantor who pays for a debtor should be indemnified by the latter67 and would be
legally subrogated to the rights which the creditor has against the debtor. 68 However, a person who makes
obligation. Without such demand, the effects of default will not arise. 61
payment without the knowledge or against the will of the debtor has the right to recover only insofar as the death was indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, says
payment has been beneficial to the debtor.69 If the obligation was subject to defenses on the part of the that “there is no accident when a deliberate act is performed unless some additional, unexpected,
debtor, the same defenses which could have been set up against the creditor can be set up against the independent and unforeseen happening occurs which produces or brings about their injury or death.”
paying guarantor.70
There was such a happening. This was the firing of the gun, which was the additional unexpected and
independent and unforeseen occurrence that led to the insured person’s death.
From the findings of the Court of Appeals and the trial court, it is clear that the payment made
by the petitioner guarantor did not in any way benefit the principal debtor, given the project status and the Same; Same; Suicide and willful exposure to needless peril are in pari materia because they
conditions obtaining at the Project site at that time. Moreover, the respondent contractor was found to
both signify a disregard for one’s life.—It should be noted at the outset that suicide and willful exposure to
have valid defenses against SOB, which are fully supported by evidence and which have been
meritoriously set up against the paying guarantor, the petitioner in this case. And even if the deed of needless peril are in pari materia because they both signify a disregard for one’s life. The only difference
undertaking and the surety bond secured petitioner's guaranty, the petitioner is precluded from enforcing is in degree, as suicide imports a positive act of ending such life whereas the second act indicates a
the same by reason of the petitioner's undue payment on the guaranty. Rights under the deed of reckless risking of it that is almost suicidal in intent.
undertaking and the surety bond do not arise because these contracts depend on the validity of the
enforcement of the guaranty. Same; Contract; There is nothing in the policy that relieves the insurer of the responsibility to
pay the indemnity agreed upon if the insured is shown to have contributed to his own accident.—Lim was
The petitioner guarantor should have waited for the natural course of guaranty: the debtor unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow
VPECI should have, in the first place, defaulted in its obligation and that the creditor SOB should have from recovering from the insurance policy he obtained precisely against accident. There is nothing in the
first made a demand from the principal debtor. It is only when the debtor does not or cannot pay, in whole policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is
or in part, that the guarantor should pay.71 When the petitioner guarantor in this case paid against the will shown to have contributed to his own accident. Indeed, most accidents are caused by negligence. There
of the debtor VPECI, the debtor VPECI may set up against it defenses available against the creditor SOB
are only four exceptions expressly made in the contract to relieve the insurer from liability, and none of
at the time of payment. This is the hard lesson that the petitioner must learn.
these exceptions is applicable in the case at bar.

As the government arm in pursuing its objective of providing "the necessary support and Same; Same; As a rule, insurance contracts are supposed to be interpreted liberally in favor of
assistance in order to enable … [Filipino exporters and contractors to operate viably under the prevailing
the assured.—It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in
economic and business conditions,"72 the petitioner should have exercised prudence and caution under the
circumstances. As aptly put by the Court of Appeals, it would be the height of inequity to allow the favor of the assured. There is no reason to deviate from this rule, especially in view of the circumstances
petitioner to pass on its losses to the Filipino contractor VPECI which had sternly warned against paying of this case as above analyzed.
the Al Ahli Bank and constantly apprised it of the developments in the Project implementation.
Civil Law; Damages; The Supreme Court holds that the award of moral and exemplary
WHEREFORE, the petition for review on certiorari is hereby DENIED for lack of merit, and the damages and of attorney’s fees is unjust and so must be disapproved.—On the second assigned error,
decision of the Court of appeals in CA-G.R. CV No. 39302 is AFFIRMED. however, the Court must rule in favor of the petitioner. The basic issue raised in this case is, as the
petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good
No pronouncement as to costs. faith when it resisted the private respondent’s claim on the ground that the death of the insured was
SO ORDERED. covered by the exception. The issue was indeed debatable and was clearly not raised only for the purpose
of evading a legitimate obligation. We hold therefore that the award of moral and exemplary damages and
of attorney’s fees is unjust and so must be disapproved.

G.R. No. 92383. July 17, 1992.* CRUZ, J.:

SUN INSURANCE OFFICE, LTD., petitioner, vs. THE HON. COURT OF APPEALS and NERISSA The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of
LIM, respondents. P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his wife
Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed that there was
Syllabus no suicide. It argued, however that there was no accident either.

Insurance Law; Definition of accident.—An accident is an event which happens without any Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6,
human agency or, if happening through human agency, an event which, under the circumstances, is 1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim was
unusual to and not expected by the person to whom it happens. It has also been defined as an injury which in a happy mood (but not drunk) and was playing with his handgun, from which he had previously
removed the magazine. As she watched television, he stood in front of her and pointed the gun at her. She
happens by reason of some violence or casualty to the insured without his design, consent, or voluntary
pushed it aside and said it might he loaded. He assured her it was not and then pointed it to his temple.
cooperation. The next moment there was an explosion and Lim slumped to the floor. He was dead before he fell. 1

Same; Same; Court is convinced that the incident that resulted in Lim’s death was indeed an
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was
accident.—In light of these definitions, the Court is convinced that the incident that resulted in Lim’s sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the face value of the
policy, with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as exemplary damages; The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had
P5,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus the costs of the willfully exposed himself to needless peril and so came under the exception. The theory is that a gun
suit. This decision was affirmed on appeal, and the motion for reconsideration was denied. 3 The petitioner is per se dangerous and should therefore be handled cautiously in every case.
then came to this Court to fault the Court of Appeals for approving the payment of the claim and the
award of damages.
That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the
magazine from the gun and believed it was no longer dangerous. He expressly assured her that the gun
The term "accident" has been defined as follows: was not loaded. It is submitted that Lim did not willfully expose himself to needless peril when he pointed
the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was precisely
intended to assure Nalagon that the gun was indeed harmless.
The words "accident" and "accidental" have never acquired any technical signification in law,
and when used in an insurance contract are to be construed and considered according to the ordinary
understanding and common usage and speech of people generally. In-substance, the courts are practically The contrary view is expressed by the petitioner thus:
agreed that the words "accident" and "accidental" mean that which happens by chance or fortuitously,
without intention or design, and which is unexpected, unusual, and unforeseen. The definition that has
Accident insurance policies were never intended to reward the insured for his
usually been adopted by the courts is that an accident is an event that takes place without one's foresight or
tendency to show off or for his miscalculations. They were intended to provide for
expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known case,
contingencies. Hence, when I miscalculate and jump from the Quezon Bridge into
and therefore not expected. 4
the Pasig River in the belief that I can overcome the current, I have wilfully
exposed myself to peril and must accept the consequences of my act. If I drown I
An accident is an event which happens without any human agency or, if happening through cannot go to the insurance company to ask them to compensate me for my failure to
human agency, an event which, under the circumstances, is unusual to and not expected by the person to swim as well as I thought I could. The insured in the case at bar deliberately put the
whom it happens. It has also been defined as an injury which happens by reason of some violence or gun to his head and pulled the trigger. He wilfully exposed himself to peril.
casualty to the injured without his design, consent, or voluntary co-operation. 5
The Court certainly agrees that a drowned man cannot go to the insurance company to ask for
In light of these definitions, the Court is convinced that the incident that resulted in Lim's death compensation. That might frighten the insurance people to death. We also agree that under the
was indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that circumstances narrated, his beneficiary would not be able to collect on the insurance policy for it is clear
"there is no accident when a deliberate act is performed unless some additional, unexpected, independent that when he braved the currents below, he deliberately exposed himself to a known peril.
and unforeseen happening occurs which produces or brings about their injury or death." There was such a
happening. This was the firing of the gun, which was the additional unexpected and independent and
The private respondent maintains that Lim did not. That is where she says the analogy fails.
unforeseen occurrence that led to the insured person's death.
The petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below
were dangerous. By contrast, Lim did not know that the gun he put to his head was loaded.
The petitioner also cites one of the four exceptions provided for in the insurance contract and
contends that the private petitioner's claim is barred by such provision. It is there stated:
Lim was unquestionably negligent and that negligence cost him his own life. But it should not
prevent his widow from recovering from the insurance policy he obtained precisely against accident.
Exceptions — There is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed
upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by
negligence. There are only four exceptions expressly made in the contract to relieve the insurer from
The company shall not be liable in respect of
liability, and none of these exceptions is applicable in the case at bar. **
1. Bodily injury
xxx xxx xxx
b. consequent upon It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in
i) The insured person attempting to commit suicide or willfully exposing himself to favor of the assured. There is no reason to deviate from this rule, especially in view of the circumstances
needless peril except in an attempt to save human life. of this case as above analyzed.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner On the second assigned error, however, the Court must rule in favor of the petitioner. The basic
contends that the insured willfully exposed himself to needless peril and thus removed himself from the issue raised in this case is, as the petitioner correctly observed, one of first impression. It is evident that
coverage of the insurance policy. the petitioner was acting in good faith then it resisted the private respondent's claim on the ground that the
death of the insured was covered by the exception. The issue was indeed debatable and was clearly not
raised only for the purpose of evading a legitimate obligation. We hold therefore that the award of moral
It should be noted at the outset that suicide and willful exposure to needless peril are in pari
and exemplary damages and of attorney's fees is unjust and so must be disapproved.
materia because they both signify a disregard for one's life. The only difference is in degree, as suicide
imports a positive act of ending such life whereas the second act indicates a reckless risking of it that is
almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters above the In order that a person may be made liable to the payment of moral damages, the law
ground and without any safety device may not actually be intending to commit suicide, but his act is requires that his act be wrongful. The adverse result of an action does not per
nonetheless suicidal. He would thus be considered as "willfully exposing himself to needless peril" within se make the act wrongful and subject the act or to the payment of moral damages.
the meaning of the exception in question. The law could not have meant to impose a penalty on the right to litigate; such right
is so precious that moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. 7
 The fact that the results of the trial were adverse to Barreto did not alone make his something unforeseen occurs in the doing of the act which produces the injury, the resulting death is
act in bringing the action wrongful because in most cases one party will lose; we within the protection of policies insuring against death or injury from accident.
would be imposing an unjust condition or limitation on the right to litigate. We hold
that the award of moral damages in the case at bar is not justified by the facts had Same; Application of the rule.—Where the participation. of the insured in the boxing contest
circumstances as well as the law.
was voluntary, but the injury was sustained when he slid, giving occasion to the infliction by his opponent
of the blow that threw him to the ropes of the ring and without this unfortunate incident, perhaps he could
If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, not have received that blow in the head and would not have died, and his death may be regarded as
since it is not the fact of winning alone that entitles him to recover such damages of
accidental, although boxing is attended with some risks of external injuries.
the exceptional circumstances enumerated in Art. 2208. Otherwise, every time a
defendant wins, automatically the plaintiff must pay attorney's fees thereby putting
a premium on the right to litigate which should not be so. For those expenses, the Same; Liability for risks not enumerated in the contract.—The failure of the defendant
law deems the award of costs as sufficient. 8 insurance company to include death resulting from a boxing match or other sports among the prohibitive
risks leads to the conclusion that it did not intend to limit or exempt itself from liability for such death.
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it (Brams vs. New York Life Ins. Co., 299 Pa. 11, 148 Atl. 855; Jolley vs. Jefferson Standard Life Ins. Co., 95
holds the petitioner liable to the private respondent in the sum of P200,000.00 representing the face value Wash. 683, 294 Pac. 585.)
of the insurance contract, with interest at the legal rate from the date of the filing of the complaint until the
full amount is paid, but MODIFIED with the deletion of all awards for damages, including attorney's fees,
except the costs of the suit. BARRERA, J.:

SO ORDERED. This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision of the
Court of First Instance of Pangasinan (in Civ Case No. U-265), ordering it to indemnify therein plaintiff
Simon de la Cruz for the death of the latter's son, to pay the burial expenses, and attorney's fees.
No. L-21574. June 30, 1966.
Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio, was the
SIMON DE LA CRUZ, plaintiff and appellee, vs. THE CAPITAL INSURANCE & SURETY Co., lNC., holder of an accident insurance policy (No. ITO-BFE-170) underwritten by the Capital Insurance &
defendant and appellant. Surety Co., Inc., for the period beginning November 13, 1956 to November 12, 1957. On January 1, 1957,
in connection with the celebration of the New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing
Syllabus contest for general entertainment wherein the insured Eduardo de la Cruz, a non-professional boxer
participated. In the course of his bout with another person, likewise a non-professional, of the same height,
Insurance; Meaning of “accident” and “accidental".—The terms “accident” and weight, and size, Eduardo slipped and was hit by his opponent on the left part of the back of the head,
causing Eduardo to fall, with his head hitting the rope of the ring. He was brought to the Baguio General
“accidental”, as used in insurance contracts, have not acquired any technical meaning. They are Hospital the following day. The cause of death was reported as hemorrhage, intracranial, left.
construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to
mean that which happens by chance or fortuitously, without intention and design, and which is
Simon de la Cruz, the father of the insured and who was named beneficiary under the policy,
unexpected, unusual and unforeseen. An accident is an event that takes place without one’s foresight or
thereupon filed a claim with the insurance company for payment of the indemnity under the insurance
expectation—an event that proceeds from an unknown cause, or is an unusual effect of a known cause policy. As the claim was denied, De la Cruz instituted the action in the Court of First Instance of
and, therefore, not expected. (29A Am. Jur., pp. 308–309.) Pangasinan for specific performance. Defendant insurer set up the defense that the death of the insured,
caused by his participation in a boxing contest, was not accidental and, therefore, not covered by
Same; Tendency to eliminate distinction between the terms “accidental” and “accidental insurance. After due hearing the court rendered the decision in favor of the plaintiff which is the subject of
means."—The tendency of court decisions in the United States in recent years is to eliminate the fine the present appeal.
distinction between the terms “accidental” and “accidental means” and to consider them as legally
synonymous. (Travelers’ Protective Association vs. Stephens, 185 Ark. 660. 49 S.W. [3d] 364; Equitable It is not disputed that during the ring fight with another non-professional boxer, Eduardo
Life Assurance Company vs. Hemenover, 100 Colo. 231, 67 P. [2d] 80, 110 ALR 1270). slipped, which was unintentional. At this opportunity, his opponent landed on Eduardo's head a blow,
which sent the latter to the ropes. That must have caused the cranial injury that led to his death. Eduardo
Same; Rule as to death or injury resulting from accident or accidental means.—The generally was insured "against death or disability caused by accidental means". Appellant insurer now contends that
while the death of the insured was due to head injury, said injury was sustained because of his voluntary
accepted rule is that death or injury does not result from accident or accidental means within the terms of
participation in the contest. It is claimed that the participation in the boxing contest was the "means" that
an accident-policy if it is the natural result of the insured’s voluntary act, unaccompanied by anything produced the injury which, in turn, caused the death of the insured. And, since his inclusion in the boxing
unforeseen except the death or injury. (Landress vs. Phoenix Mutual Life Insurance Co., 291 U.S. 291, 78 card was voluntary on the part of the insured, he cannot be considered to have met his death by "accidental
L. ed. 934, 54 S. Ct 461, 90 ALR 1382; Davis vs. Jefferson Standard Life Ins. Co:, 73 F. [2d] 330, 96 ALR means"
599.) There is no accident when a deliberate act is performed unless some additional, unexpected,
independent and unforeseen happening occurs which produces or brings about the result of injury or The terms "accident" and "accidental", as used in insurance contracts, have not acquired any
death. (Evans vs, Metropolitan Life Insurance Co., 26 Wash. [2d] 594, 174 P. [2d] 1961.) In other words, technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the
where the death or injury is not the natural or probable result of the insured’s voluntary act, or if terms have been taken to mean that which happen by chance or fortuitously, without intention and design,
and which is unexpected, unusual, and unforeseen. An accident is an event that takes place without one's
foresight or expectation — an event that proceeds from an unknown cause, or is an unusual effect of a of American personal injury law, the collateral source rule was originally applied to tort cases wherein
known cause and, therefore, not expected.1 the defendant is prevented from benefitting from the plaintiff’s receipt of money from other sources. Under
this rule, if an injured person receives compensation for his injuries from a source wholly independent of
Appellant however, would like to make a distinction between "accident or accidental" and the tortfeasor, the payment should not be deducted from the damages which he would otherwise collect
"accidental means", which is the term used in the insurance policy involved here. It is argued that to be from the tortfeasor. In a recent Decision by the Illinois Supreme Court, the rule has been described as “an
considered within the protection of the policy, what is required to be accidental is the means that caused or established exception to the general rule that damages in negligence actions must be compensatory.”
brought the death and not the death itself. It may be mentioned in this connection, that the tendency of
court decisions in the United States in recent years is to eliminate the fine distinction between the terms
The Court went on to explain that although the rule appears to allow a double recovery, the
"accidental" and "accidental means" and to consider them as legally synonymous. 2 But, even if we take
appellant's theory, the death of the insured in the case at bar would still be entitled to indemnification collateral source will have a lien or subrogation right to prevent such a double recovery. In Mitchell v.
under the policy. The generally accepted rule is that, death or injury does not result from accident or Haldar, 883 A.2d 32, 37-38 (Del. 2005), the collateral source rule was rationalized by the Supreme Court
accidental means within the terms of an accident-policy if it is the natural result of the insured's voluntary of Delaware: The collateral source rule is ‘predicated on the theory that a tortfeasor has no interest in,
act, unaccompanied by anything unforeseen except the death or injury.3 There is no accident when a and therefore no right to benefit from monies received by the injured person from sources unconnected
deliberate act is performed unless some additional, unexpected, independent, and unforeseen happening with the defendant.’ According to the collateral source rule, ‘a tortfeasor has no right to any mitigation of
occurs which produces or brings about the result of injury or death. 4 In other words, where the death or damages because of payments or compensation received by the injured person from an independent
injury is not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs
source.’ The rationale for the collateral source rule is based upon the quasi-punitive nature of tort law
in the doing of the act which produces the injury, the resulting death is within the protection of policies
insuring against death or injury from accident. liability. It has been explained as follows: The collateral source rule is designed to strike a balance
between two competing principles of tort law: (1) a plaintiff is entitled to compensation sufficient to make
him whole, but no more; and (2) a defendant is liable for all damages that proximately result from his
In the present case, while the participation of the insured in the boxing contest is voluntary, the
injury was sustained when he slid, giving occasion to the infliction by his opponent of the blow that threw wrong. A plaintiff who receives a double recovery for a single tort enjoys a windfall; a defendant who
him to the ropes of the ring. Without this unfortunate incident, that is, the unintentional slipping of the escapes, in whole or in part, liability for his wrong enjoys a windfall. Because the law must sanction one
deceased, perhaps he could not have received that blow in the head and would not have died. The fact that windfall and deny the other, it favors the victim of the wrong rather than the wrongdoer.
boxing is attended with some risks of external injuries does not make any injuries received in the course of
the game not accidental. In boxing as in other equally physically rigorous sports, such as basketball or Thus, the tortfeasor is required to bear the cost for the full value of his or her negligent
baseball, death is not ordinarily anticipated to result. If, therefore, it ever does, the injury or death can only conduct even if it results in a windfall for the innocent plaintiff. (Citations omitted) As seen, the collateral
be accidental or produced by some unforeseen happening or event as what occurred in this case.
source rule applies in order to place the responsibility for losses on the party causing them. Its
application is justified so that “the wrongdoer should not benefit from the expenditures made by the
Furthermore, the policy involved herein specifically excluded from its coverage — injured party or take advantage of contracts or other relations that may exist between the injured party
and third persons.” Thus, it finds no application to cases involving no-fault insurances under which the
(e) Death or disablement consequent upon the Insured engaging in football, hunting, insured is indemnified for losses by insurance companies, regardless of who was at fault in the incident
pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or motorcycling. generating the losses. Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be obliged to pay
the hospitalization expenses of the dependents of its employees which had already been paid by separate
Death or disablement resulting from engagement in boxing contests was not declared outside health insurance providers of said dependents.
of the protection of the insurance contract. Failure of the defendant insurance company to include death
resulting from a boxing match or other sports among the prohibitive risks leads inevitably to the
conclusion that it did not intend to limit or exempt itself from liability for such death.5 DECISION

Wherefore, in view of the foregoing considerations, the decision appealed from is hereby affirmed, with DEL CASTILLO, J.:
costs against appellant. so ordered.
The Collective Bargaining Agreement (CBA) of the parties in this case provides that the
G.R. No. 175773. June 17, 2013.* company shoulder the hospitalization expenses of the dependents of covered employees subject to certain
limitations and restrictions. Accordingly, covered employees pay part of the hospitalization insurance
premium through monthly salary deduction while the company, upon hospitalization of the covered
MITSUBISHI MOTORS PHlLIPPINES SALARIED EMPLOYEES UNION (MMPSEU), petitioner, vs. employees' dependents, shall pay the hospitalization expenses incurred for the same. The conflict arose
MITSUBISHI MOTORS PHILIPPINES CORPORATION, respondent. when a portion of the hospitalization expenses of the covered employees' dependents were
paid/shouldered by the dependent's own health insurance. While the company refused to pay the portion of
Syllabus the hospital expenses already shouldered by the dependents' own health insurance, the union insists that
the covered employees are entitled to the whole and undiminished amount of said hospital expenses.
Insurance Law; Collateral Source Rule; As part of American personal injury law, the
collateral source rule was originally applied to tort cases wherein the defendant is prevented from By this Petition for Review on Certiorari,1 petitioner Mitsubishi Motors Philippines Salaried
benefitting from the plaintiff’s receipt of money from other sources. Under this rule, if an injured person Employees Union (MMPSEU) assails the March 31, 2006 Decision2 and December 5, 2006 Resolution3 of
receives compensation for his injuries from a source wholly independent of the tortfeasor, the payment the Court of Appeals (CA) in CA-G.R. SP No. 75630, which reversed and set aside the Voluntary
should not be deducted from the damages which he would otherwise collect from the tortfeasor.―As part Arbitrator’s December 3, 2002 Decision4 and declared respondent Mitsubishi Motors Philippines
Corporation (MMPC) to be under no legal obligation to pay its covered employees’ dependents’ On separate occasions, three members of MMPSEU, namely, Ernesto Calida (Calida), Hermie
hospitalization expenses which were already shouldered by other health insurance companies. Juan Oabel (Oabel) and Jocelyn Martin (Martin), filed claims for reimbursement of hospitalization
expenses of their dependents.
Factual Antecedents
MMPC paid only a portion of their hospitalization insurance claims, not the full amount. In the
case of Calida, his wife, Lanie, was confined at Sto. Tomas University Hospital from September 4 to 9,
The parties’ CBA5 covering the period August 1, 1996 to July 31, 1999 provides for the hospitalization
1998 due to Thyroidectomy. The medical expenses incurred totalled ₱29,967.10. Of this amount,
insurance benefits for the covered dependents, thus:
₱9,000.00 representing professional fees was paid by MEDICard Philippines, Inc. (MEDICard) which
provides health maintenance to Lanie.8 MMPC only paid ₱12,148.63.9 It did not pay the ₱9,000.00
SECTION 4. DEPENDENTS’ GROUP HOSPITALIZATION INSURANCE – The COMPANY shall already paid by MEDICard and the ₱6,278.47 not covered by official receipts. It refused to give to Calida
obtain group hospitalization insurance coverage or assume under a self-insurance basis hospitalization for the difference between the amount of medical expenses of ₱27,427.10 10 which he claimed to be entitled to
the dependents of regular employees up to a maximum amount of forty thousand pesos (₱40,000.00) per under the CBA and the ₱12,148.63 which MMPC directly paid to the hospital.
confinement subject to the following:
In the case of Martin, his father, Jose, was admitted at The Medical City from March 26 to 27,
a. The room and board must not exceed three hundred pesos (₱300.00) per day up to a 2000 due to Acid Peptic Disease and incurred medical expenses amounting to ₱9,101.30. 14 MEDICard
maximum of thirty-one (31) days. Similarly, Doctor’s Call fees must not exceed three hundred paid ₱8,496.00.15Consequently, MMPC only paid ₱288.40,16 after deducting from the total medical
pesos (₱300.00) per day for a maximum of thirty-one (31) days. Any excess of this amount expenses the amount paid by MEDICard and the ₱316.90 discount given by the hospital.
shall be borne by the employee.
b. Confinement must be in a hospital designated by the COMPANY. For this purpose, the
Claiming that under the CBA, they are entitled to hospital benefits amounting to ₱27,427.10,
COMPANY shall designate hospitals in different convenient places to be availed of by the
₱6,769.35 and ₱8,123.80, respectively, which should not be reduced by the amounts paid by MEDICard
dependents of employees. In cases of emergency where the dependent is confined without the
and by Prosper, Calida, Oabel and Martin asked for reimbursement from MMPC. However, MMPC
recommendation of the company doctor or in a hospital not designated by the COMPANY, the
denied the claims contending that double insurance would result if the said employees would receive from
COMPANY shall look into the circumstances of such confinement and arrange for the
the company the full amount of hospitalization expenses despite having already received payment of
payment of the amount to the extent of the hospitalization benefit.
portions thereof from other health insurance providers.
c. The limitations and restrictions listed in Annex "B" must be observed.
d. Payment shall be direct to the hospital and doctor and must be covered by actual billings.
This prompted the MMPSEU President to write the MMPC President 17 demanding full
payment of the hospitalization benefits. Alleging discrimination against MMPSEU union members, she
Each employee shall pay one hundred pesos (₱100.00) per month through salary deduction as
pointed out that full reimbursement was given in a similar claim filed by Luisito Cruz (Cruz), a member of
his share in the payment of the insurance premium for the above coverage with the balance of the
the Hourly Union. In a letter-reply,18 MMPC, through its Vice-President for Industrial Relations Division,
premium to be paid by the COMPANY. If the COMPANY is self-insured the one hundred pesos
clarified that the claims of the said MMPSEU members have already been paid on the basis of official
(₱100.00) per employee monthly contribution shall be given to the COMPANY which shall shoulder the
receipts submitted. It also denied the charge of discrimination and explained that the case of Cruz involved
expenses subject to the above level of benefits and subject to the same limitations and restrictions
an entirely different matter since it concerned the admissibility of certified true copies of documents for
provided for in Annex "B" hereof.
reimbursement purposes, which case had been settled through voluntary arbitration.

The hospitalization expenses must be covered by actual hospital and doctor’s bills and any
On August 28, 2000, MMPSEU referred the dispute to the National Conciliation and
amount in excess of the above mentioned level of benefits will be for the account of the employee.
Mediation Board and requested for preventive mediation.19

For purposes of this provision, eligible dependents are the covered employees’ natural parents,
Proceedings before the Voluntary Arbitrator
legal spouse and legitimate or legally adopted or step children who are unmarried, unemployed who have
not attained twenty-one (21) years of age and wholly dependent upon the employee for support.
On October 3, 2000, the case was referred to Voluntary Arbitrator Rolando Capocyan for resolution of the
issue involving the interpretation of the subject CBA provision.20
This provision applies only in cases of actual confinement in the hospital for at least six (6) hours.

MMPSEU alleged that there is nothing in the CBA which prohibits an employee from
Maternity cases are not covered by this section but will be under the next succeeding section on maternity
obtaining other insurance or declares that medical expenses can be reimbursed only upon presentation of
benefits.6
original official receipts. It stressed that the hospitalization benefits should be computed based on the
formula indicated in the CBA without deducting the benefits derived from other insurance providers.
When the CBA expired on July 31, 1999, the parties executed another CBA7 effective August Besides, if reduction is permitted, MMPC would be unjustly benefited from the monthly premium
1, 1999 to July 31, 2002 incorporating the same provisions on dependents’ hospitalization insurance contributed by the employees through salary deduction. MMPSEU added that its members had legitimate
benefits but in the increased amount of ₱50,000.00. The room and board expenses, as well as the doctor’s claims under the CBA and that any doubt as to any of its provisions should be resolved in favor of its
call fees, were also increased to ₱375.00. members. Moreover, any ambiguity should be resolved in favor of labor.21

On the other hand, MMPC argued that the reimbursement of the entire amounts being claimed
by the covered employees, including those already paid by other insurance companies, would constitute
double indemnity or double insurance, which is circumscribed under the Insurance Code. Moreover, a
contract of insurance is a contract of indemnity and the employees cannot be allowed to profit from their MMPC filed a Petition for Review with Prayer for the Issuance of a Temporary Restraining
dependents’ loss.22 Order and/or Writ of Preliminary Injunction28 before the CA. It claimed that the Voluntary Arbitrator
committed grave abuse of discretion in not finding that recovery under both insurance policies constitutes
double insurance as both had the same subject matter, interest insured and risk or peril insured against; in
Meanwhile, the parties separately sought for a legal opinion from the Insurance Commission
relying solely on the unauthorized legal opinion of Atty. Funk; and in not finding that the employees will
relative to the issue at hand. In its letter23 to the Insurance Commission, MMPC requested for confirmation
be benefited twice for the same loss. In its Comment,29 MMPSEU countered that MMPC will unjustly
of its position that the covered employees cannot claim insurance benefits for a loss that had already been
enrich itself and profit from the monthly premiums paid if full reimbursement is not made.
covered or paid by another insurance company. However, the Office of the Insurance Commission opted
not to render an opinion on the matter as the same may become the subject of a formal complaint before
it.24 On the other hand, when queried by MMPSEU,25the Insurance Commission, through Atty. Richard On March 31, 2006, the CA found merit in MMPC’s Petition. It ruled that despite the lack of a
David C. Funk II (Atty. Funk) of the Claims Adjudication Division, rendered an opinion contained in a provision which bars recovery in case of payment by other insurers, the wordings of the subject provision
letter,26 viz: of the CBA showed that the parties intended to make MMPC liable only for expenses actually incurred by
an employee’s qualified dependent. In particular, the provision stipulates that payment should be made
directly to the hospital and that the claim should be supported by actual hospital and doctor’s bills. These
Ms. Cecilia L. ParasPresident
mean that the employees shall only be paid amounts not covered by other health insurance and is more in
Mitsubishi Motors Phils.
keeping with the principle of indemnity in insurance contracts. Besides, a contrary interpretation would
"allow unscrupulous employees to unduly profit from the x x x benefits" and shall "open the floodgates to
[Salaried] Employees Union questionable claims x x x."30
Ortigas Avenue Extension,
Cainta, Rizal
The dispositive portion of the CA Decision31 reads:

Madam:
WHEREFORE, the instant petition is GRANTED. The decision of the voluntary arbitrator
dated December 3, 2002 is REVERSED and SET ASIDE and judgment is rendered declaring that under
We acknowledge receipt of your letter which, to our impression, basically poses the question of whether Art. XI, Sec. 4 of the Collective Bargaining Agreement between petitioner and respondent effective
or not recovery of medical expenses from a Health Maintenance Organization bars recovery of the same August 1, 1999 to July 31, 2002, the former’s obligation to reimburse the Union members for the
reimbursable amount of medical expenses under a contract of health or medical insurance. hospitalization expenses incurred by their dependents is exclusive of those paid by the Union members to
the hospital.
We wish to opine that in cases of claims for reimbursement of medical expenses where there are two
contracts providing benefits to that effect, recovery may be had on both simultaneously. In the absence of SO ORDERED.32
an Other Insurance provision in these coverages, the courts have uniformly held that an insured is entitled
to receive the insurance benefits without regard to the amount of total benefits provided by other
In its Motion for Reconsideration,33 MMPSEU pointed out that the alleged oppression that may
insurance. (INSURANCE LAW, A Guide to Fundamental Principles, Legal Doctrines, and Commercial
be committed by abusive employees is a mere possibility whereas the resulting losses to the employees are
Practices; Robert E. Keeton, Alau I. Widiss, p. 261). The result is consistent with the public policy
real. MMPSEU cited Samsel v. Allstate Insurance Co., 34 wherein the Arizona Supreme Court explicitly
underlying the collateral source rule – that is, x x x the courts have usually concluded that the liability of a
ruled that an insured may recover from separate health insurance providers, regardless of whether one of
health or accident insurer is not reduced by other possible sources of indemnification or compensation.
them has already paid the medical expenses incurred. On the other hand, MMPC argued in its
(ibid).
Comment35 that the cited foreign case involves a different set of facts.

Very truly yours,

The CA, in its Resolution36 dated December 5, 2006, denied MMPSEU’s motion.
Hence, this Petition.
RICHARD DAVID C. FUNK II
Officer-in-Charge
Issues
Claims Adjudication Division

MMPSEU presented the following grounds in support of its Petition:

(SGD.)
Attorney IV
A.
27 THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT REVERSED THE DECISION DATED
On December 3, 2002, the Voluntary Arbitrator rendered a Decision finding MMPC liable to
03 [DECEMBER] 2002 OF THE VOLUNTARY ARBITRATOR BELOW WHEN THE SAME WAS
pay or reimburse the amount of hospitalization expenses already paid by other health insurance
SUPPORTED BY SUBSTANTIAL EVIDENCE, INCLUDING THE OPINION OF THE INSURANCE
companies. The Voluntary Arbitrator held that the employees may demand simultaneous payment from
COMMISSION THAT RECOVERY FROM BOTH THE CBA AND SEPARATE HEALTH CARDS IS
both the CBA and their dependents’ separate health insurance without resulting to double insurance, since
NOT PROHIBITED IN THE ABSENCE OF ANY SPECIFIC PROVISION IN THE CBA.
separate premiums were paid for each contract. He also noted that the CBA does not prohibit
B.
reimbursement in case there are other health insurers.
THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN OVERTURNING THE
DECISION OF THE VOLUNTARY ARBITRATOR WITHOUT EVEN GIVING ANY LEGAL OR
Proceedings before the Court of Appeals JUSTIFIABLE BASIS FOR SUCH REVERSAL.
C.
THE COURT OF APPEALS COMMITTED GRAVE ERROR IN REFUSING TO CONSIDER OR Thus, the tortfeasor is required to bear the cost for the full value of his or her negligent conduct even if it
EVEN MENTION ANYTHING ABOUT THE AMERICAN AUTHORITIES CITED IN THE results in a windfall for the innocent plaintiff. (Citations omitted)
RECORDS THAT DO NOT PROHIBIT, BUT IN FACT ALLOW, RECOVERY FROM TWO
SEPARATE HEALTH PLANS.
As seen, the collateral source rule applies in order to place the responsibility for losses on the party
D.
causing them.43Its application is justified so that "'the wrongdoer should not benefit from the expenditures
THE COURT OF APPEALS GRAVELY ERRED IN GIVING MORE IMPORTANCE TO A
made by the injured party or take advantage of contracts or other relations that may exist between the
POSSIBLE, HENCE MERELY SPECULATIVE, ABUSE BY EMPLOYEES OF THE BENEFITS IF
injured party and third persons."44Thus, it finds no application to cases involving no-fault insurances under
DOUBLE RECOVERY WERE ALLOWED INSTEAD OF THE REAL INJURY TO THE
which the insured is indemnified for losses by insurance companies, regardless of who was at fault in the
EMPLOYEES WHO ARE PAYING FOR THE CBA HOSPITALIZATION BENEFITS THROUGH
incident generating the losses.45 Here, it is clear that MMPC is a no-fault insurer. Hence, it cannot be
MONTHLY SALARY DEDUCTIONS BUT WHO MAY NOT BE ABLE TO AVAIL OF THE SAME
obliged to pay the hospitalization expenses of the dependents of its employees which had already been
IF THEY OR THEIR DEPENDENTS HAVE OTHER HEALTH INSURANCE.37
paid by separate health insurance providers of said dependents.

MMPSEU avers that the Decision of the Voluntary Arbitrator deserves utmost respect and
The Voluntary Arbitrator therefore erred in adopting Atty. Funk’s view that the covered employees are
finality because it is supported by substantial evidence and is in accordance with the opinion rendered by
entitled to full payment of the hospital expenses incurred by their dependents, including the amounts
the Insurance Commission, an agency equipped with vast knowledge concerning insurance contracts. It
already paid by other health insurance companies based on the theory of collateral source rule.
maintains that under the CBA, member-employees are entitled to full reimbursement of medical expenses
incurred by their dependents regardless of any amounts paid by the latter’s health insurance provider.
Otherwise, non-recovery will constitute unjust enrichment on the part of MMPC. It avers that recovery The conditions set forth in the CBA provision indicate an intention to limit MMPC’s liability only to
from both the CBA and other insurance companies is allowed under their CBA and not prohibited by law actual expenses incurred by the employees’ dependents, that is, excluding the amounts paid by
nor by jurisprudence. dependents’ other health insurance providers.

Our Ruling The Voluntary Arbitrator ruled that the CBA has no express provision barring claims for hospitalization
expenses already paid by other insurers. Hence, the covered employees can recover from both. The CA
did not agree, saying that the conditions set forth in the CBA implied an intention of the parties to limit
The Petition has no merit.
MMPC’s liability only to the extent of the expenses actually incurred by their dependents which excludes
the amounts shouldered by other health insurance companies.
Atty. Funk erred in applying the collateral source rule.
We agree with the CA. The condition that payment should be direct to the hospital and doctor implies that
The Voluntary Arbitrator based his ruling on the opinion of Atty. Funk that the employees may MMPC is only liable to pay medical expenses actually shouldered by the employees’ dependents. It
recover benefits from different insurance providers without regard to the amount of benefits paid by each. follows that MMPC’s liability is limited, that is, it does not include the amounts paid by other health
According to him, this view is consistent with the theory of the collateral source rule. insurance providers. This condition is obviously intended to thwart not only fraudulent claims but also
double claims for the same loss of the dependents of covered employees.
As part of American personal injury law, the collateral source rule was originally applied to
tort cases wherein the defendant is prevented from benefiting from the plaintiff’s receipt of money from It is well to note at this point that the CBA constitutes a contract between the parties and as such, it should
other sources.38 Under this rule, if an injured person receives compensation for his injuries from a source be strictly construed for the purpose of limiting the amount of the employer’s liability. 46 The terms of the
wholly independent of the tortfeasor, the payment should not be deducted from the damages which he subject provision are clear and provide no room for any other interpretation. As there is no ambiguity, the
would otherwise collect from the tortfeasor.39 In a recent Decision40 by the Illinois Supreme Court, the rule terms must be taken in their plain, ordinary and popular sense. 47 Consequently, MMPSEU cannot rely on
has been described as "an established exception to the general rule that damages in negligence actions the rule that a contract of insurance is to be liberally construed in favor of the insured. Neither can it rely
must be compensatory." The Court went on to explain that although the rule appears to allow a double on the theory that any doubt must be resolved in favor of labor.
recovery, the collateral source will have a lien or subrogation right to prevent such a double recovery.41 In
Mitchell v. Haldar,42 the collateral source rule was rationalized by the Supreme Court of Delaware:
Samsel v. Allstate Insurance Co. is not on all fours with the case at bar.

The collateral source rule is ‘predicated on the theory that a tortfeasor has no interest in, and
MMPSEU cannot rely on Samsel v. Allstate Insurance Co. where the Supreme Court of Arizona allowed
therefore no right to benefit from monies received by the injured person from sources unconnected with
the insured to enjoy medical benefits under an automobile policy insurance despite being able to also
the defendant’. According to the collateral source rule, ‘a tortfeasor has no right to any mitigation of
recover from a separate health insurer. In that case, the Allstate automobile policy does not contain any
damages because of payments or compensation received by the injured person from an independent
clause restricting medical payment coverage to expenses actually paid by the insured nor does it
source.’ The rationale for the collateral source rule is based upon the quasi-punitive nature of tort law
specifically provide for reduction of medical payments benefits by a coordination of benefits. 48 However,
liability. It has been explained as follows:
in the case before us, the dependents’ group hospitalization insurance provision in the CBA specifically
contains a condition which limits MMPC’s liability only up to the extent of the expenses that should be
The collateral source rule is designed to strike a balance between two competing principles of paid by the covered employee’s dependent to the hospital and doctor. This is evident from the portion
tort law: (1) a plaintiff is entitled to compensation sufficient to make him whole, but no more; and (2) a which states that "payment by MMPC shall be direct to the hospital and doctor."49 In contrast, the Allstate
defendant is liable for all damages that proximately result from his wrong. A plaintiff who receives a automobile policy expressly gives Allstate the authority to pay directly to the insured person or on the
double recovery for a single tort enjoys a windfall; a defendant who escapes, in whole or in part, liability latter’s behalf all reasonable expenses actually incurred. Therefore, reliance on Samsel is unavailing
for his wrong enjoys a windfall. Because the law must sanction one windfall and deny the other, it favors because the facts therein are different and not decisive of the issues in the present case.
the victim of the wrong rather than the wrongdoer.
To allow reimbursement of amounts paid under other insurance policies shall constitute double recovery prove that it is impossible to use those goods which were delivered in good condition without the others,
which is not sanctioned by law. then the entire shipment may be rejected. To reiterate, under Article 365, the nature of damage must be
such that the goods are rendered useless for sale, consumption or intended purpose for the consignee to
MMPSEU insists that MMPC is also liable for the amounts covered under other insurance be able to validly reject them. If the effect of damage on the goods consisted merely of diminution in value,
policies; otherwise, MMPC will unjustly profit from the premiums the employees contribute through the carrier is bound to pay only the difference between its price on that day and its depreciated value as
monthly salary deductions. provided under Article 364.

This contention is unmeritorious. Same; Insurance Law; Right of Subrogation; 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
To constitute unjust enrichment, it must be shown that a party was unjustly enriched in the upon payment of the insurance claim by the insurer.—“The right of subrogation is not dependent upon,
sense that the term unjustly could mean illegally or unlawfully.50 A claim for unjust enrichment fails when nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply
the person who will benefit has a valid claim to such benefit. 51 upon payment of the insurance claim by the insurer.” The right of subrogation is however, not absolute.
“There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases
The CBA has provided for MMPC’s limited liability which extends only up to the amount to the wrongdoer or third party liable for the loss or damage, from liability, the insurer’s right of
be paid to the hospital and doctor by the employees’ dependents, excluding those paid by other insurers. subrogation is defeated. x x x Similarly, where the insurer pays the assured the value of the lost goods
Consequently, the covered employees will not receive more than what is due them; neither is MMPC without notifying the carrier who has in good faith settled the assured’s claim for loss, the settlement is
under any obligation to give more than what is due under the CBA. binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on
his right of subrogation. x x x And where the insurer pays the assured for a loss which is not a risk
Moreover, since the subject CBA provision is an insurance contract, the rights and obligations covered by the policy, thereby effecting ‘voluntary payment,’ the former has no right of subrogation
of the parties must be determined in accordance with the general principles of insurance law.52 Being in against the third party liable for the loss x x x.”
the nature of a non-life insurance contract and essentially a contract of indemnity, the CBA provision
obligates MMPC to indemnify the covered employees’ medical expenses incurred by their dependents but Same; Same; Same; Words and Phrases; Subrogation is the substitution of one person in the
only up to the extent of the expenses actually incurred. 53 This is consistent with the principle of indemnity
which proscribes the insured from recovering greater than the loss. 54 Indeed, to profit from a loss will lead place of another with reference to a lawful claim or right, so that he who is substituted succeeds to the
to unjust enrichment and therefore should not be countenanced. As aptly ruled by the CA, to grant the rights of the other in relation to a debt or claim, including its remedies or securities.—The rights of a
claims of MMPSEU will permit possible abuse by employees. subrogee cannot be superior to the rights possessed by a subrogor. “Subrogation is the substitution of one
person in the place of another with reference to a lawful claim or right, so that he who is substituted
WHEREFORE, the Petition is DENIED. The Decision dated March 31, 2006 and Resolution succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The
dated December 5, 2006 of the Court of Appeals in CA-G.R. SP No. 75630, are AFFIRMED. rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom
he is substituted, that is, he cannot acquire any claim, security or remedy the subrogor did not have. In
SO ORDERED. other words, a subrogee cannot succeed to a right not possessed by the subrogor. A subrogee in effect
steps into the shoes of the insured and can recover only if the insured likewise could have recovered.”

G.R. No. 185565. November 26, 2014.* Same; Same; Same; An insurer indemnifies the insured based on the loss or injury the latter
actually suffered from.—An insurer indemnifies the insured based on the loss or injury the latter actually
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR INTERNATIONAL suffered from. If there is no loss or injury, then there is no obligation on the part of the insurer to
SHIPPING COMPANY, INCORPORATED, petitioners, vs. MALAYAN INSURANCE COMPANY, indemnify the insured. Should the insurer pay the insured and it turns out that indemnification is not due,
INCORPORATED, respondent. or if due, the amount paid is excessive, the insurer takes the risk of not being able to seek recompense
from the alleged wrongdoer. This is because the supposed subrogor did not possess the right to be
Syllabus indemnified and therefore, no right to collect is passed on to the subrogee.

Mercantile Law; Common Carriers; Code of Commerce; If the goods are rendered useless for Civil Law; Damages; Actual Damages; It is axiomatic that actual damages must be proved
sale, consumption or for the intended purpose, the consignee may reject the goods and demand the with reasonable degree of certainty and a party is entitled only to such compensation for the pecuniary
payment of such goods at their market price on that day pursuant to Article 365. In case the damaged loss that was duly proven.—As regards the determination of actual damages, “[i]t is axiomatic that actual
portion of the goods can be segregated from those delivered in good condition, the consignee may reject damages must be proved with reasonable degree of certainty and a party is entitled only to such
those in damaged condition and accept merely those which are in good condition.—If the goods are compensation for the pecuniary loss that was duly proven.”
delivered but arrived at the destination in damaged condition, the remedies to be pursued by the
consignee depend on the extent of damage on the goods. If the goods are rendered useless for sale, Same; Same; Same; The claimant must prove the actual amount of loss with a reasonable
consumption or for the intended purpose, the consignee may reject the goods and demand the payment of degree of certainty premised upon competent proof and on the best evidence obtainable.—“The burden of
such goods at their market price on that day pursuant to Article 365. In case the damaged portion of the proof is on the party who would be defeated if no evidence would be presented on either side. The burden
goods can be segregated from those delivered in good condition, the consignee may reject those in is to establish one’s case by a preponderance of evidence which means that the evidence, as a whole,
damaged condition and accept merely those which are in good condition. But if the consignee is able to adduced by one side, is superior to that of the other. Actual damages are not presumed. The claimant must
prove the actual amount of loss with a reasonable degree of certainty premised upon competent proof and of the acceptance of PASAR’s proposal to take the damaged copper concentrates at a residual value of
on the best evidence obtainable. Specific facts that could afford a basis for measuring whatever US$90,000.00. On December 9, 2000, Loadstar Shipping wrote Malayan requesting for the reversal of its
compensatory or actual damages are borne must be pointed out. Actual damages cannot be anchored on decision to accept PASAR’s proposal and the conduct of a public bidding to allow Loadstar Shipping to
match or top PASAR’s bid by 10%.
mere surmises, speculations or conjectures.”

On January 23, 2001, PASAR signed a subrogation receipt in favor of Malayan. To recover the
DECISION amount paid and in the exercise of its right of subrogation, Malayan demanded reimbursement from
Loadstar Shipping, which refused to comply. Consequently, on September 19, 2001, Malayan instituted
REYES, J.: with the RTC a complaint for damages. The complaint was later amended to include Loadstar
International as party defendant.

This is a Petition for Review on Certiorari1 filed by Loadstai Shipping Company, Incorporated
and Loadstar International Shipping Company, Incorporated (petitioners) against Malayan Insurance In its amended complaint, Malayan mainly alleged that as a direct and natural consequence of
Company, Incorporated (Malayan) seeking to set aside the Decision 2 dated April 14, 2008 and the unseaworthiness of the vessel, PASAR suffered loss of the cargo. It prayed for the amount of
Resolution3 dated December 11, 2008 of the Court of Appeals (CA) in CA-G.R. CV No. 82758, which [P]33,934,948.75, representing actual damages plus legal interest fromdate of filing of the complaint until
reversed and set aside the Decision4 dated March 31, 2004 of the Regional Trial Court of Manila, Branch fully paid, and attorney’s fees in the amount of not less than [P]500,000.00. It also sought to declare the
34, in Civil Case No. 01-101885. bill of lading as void since it violates the provisions of Articles 1734 and 1745 of the Civil Code.

The facts as found by the CA, are as follows: On October 30, 2002, Loadstar Shipping and Loadstar International filed their answer with
counterclaim, denying plaintiff appellant’s allegations and averring as follows: that they are not engaged
in the business as common carriers but as private carriers; that the vessel was seaworthy and defendants-
Loadstar International Shipping, Inc.(Loadstar Shipping) and Philippine Associated Smelting appellees exercised the required diligence under the law; that the entry of water into Cargo Hold No. 2
and Refining Corporation (PASAR) entered into a Contract of Affreightment for domestic bulk transport must have been caused by force majeureor heavy weather; that due to the inherent nature of the cargo and
of the latter’s copper concentrates for a period of one year from November 1, 1998 to October 31, 1999. the use of water in its production process, the same cannot be considered damaged or contaminated; that
The contract was extended up to the end of October 2000. defendants-appellees were denied reasonable opportunity to participate in the salvage sale; that the claim
had prescribed in accordance with the bill of lading provisions and the Code of Commerce; that plaintiff-
On September 10, 2000, 5,065.47 wet metric tons (WMT) of copper concentrates were loaded appellant’s claim is excessive, grossly overstated, unreasonable and unsubstantiated; that their liability, if
any, should not exceed the CIFvalue of the lost/damaged cargo as set forth in the bill of lading, charter
in Cargo Hold Nos. 1 and 2 of MV "Bobcat", a marine vessel owned by Loadstar International Shipping
Co., Inc. (Loadstar International) and operated by Loadstar Shipping under a charter party agreement. The party or customary rules of trade; and that the arbitration clause in the contract of affreightment should be
shipper and consignee under the Bill of Lading are Philex Mining Corporation (Philex) and PASAR, followed.
respectively. The cargo was insured with Malayan Insurance Company, Inc. (Malayan) under Open Policy
No. M/OP/2000/001-582. P & I Association is the third party liability insurer of Loadstar Shipping. After trial, and considering that the billof lading, which was marked as Exhibit "B", is
unreadable, the RTC issued on February 17, 2004 an order directing the counsel for Malayan to furnish it
with a clearer copy of the same within three (3) days from receipt of the order. On February 23, 2004,
On said date (September 10, 2000), MV "Bobcat" sailed from Poro Point, San Fernando, La
Union bound for Isabel, Leyte. On September 12, 2000, while in the vicinity of Cresta de Gallo, the Malayan filed a compliance attaching thereto copy of the bill of lading.
vessel’s chief officer on routine inspection found a crack on starboard sideof the main deck which caused
seawater to enter and wet the cargo inside Cargo Hold No. 2 forward/aft. The cracks at the top deck On March 31, 2004, the RTC rendered a judgment dismissing the complaint as well as the
starboard side of Cargo Hold No. 2, measuring 1.21 meters long x 0.39 meters wide, and at top deck aft counterclaim. The RTC was convinced that the vessel was seaworthy at the time of loading and that the
section starboard side on other point, measuring 0.82 meters long x 0.32 meters wide, were welded. damage was attributable to the perils of the sea (natural disaster) and not due to the fault or negligence of
Loadstar Shipping.
Immediately after the vessel arrived at Isabel, Leyte anchorage area, on September 13, 2000,
PASAR and Philex’s representatives boarded and inspected the vessel and undertook sampling of the The RTC found that although contaminated by seawater, the copper concentrates can still be
copper concentrates. In its preliminary report dated September 15, 2000, the Elite Adjusters and Surveyor, used. Itgave credence to the testimony of Francisco Esguerra, defendants-appellees’ expert witness, that
Inc. (Elite Surveyor) confirmed that samples of copper concentrates from Cargo Hold No. 2 were despite high chlorine content, the copper concentrates remain intact and will not lose their value. The gold
contaminated by seawater. Consequently, PASAR rejected 750 MT of the 2,300 MT cargo discharged and silver remain with the grains/concentrates even if soaked with seawater and does not melt. The RTC
from Cargo Hold No. 2. observed that the purchase agreement between PASAR and Philex contains a penalty clause and has no
rejection clause. Despite this agreement, the parties failed to sit down and assess the penalty.
On November 6, 2000, PASAR sent a formal notice of claim in the amount of
[P]37,477,361.31 to Loadstar Shipping. In its final report dated November 16, 2000, Elite Surveyor The RTC also found that defendants-appellees were not afforded the opportunity to object or
recommended payment to the assured the amount of [P]32,351,102.32 as adjusted. On the basis of such participate or nominate a participant in the sale of the contaminated copper concentrates to lessen the
recommendation, Malayan paid PASAR the amount of [P]32,351,102.32. damages to be paid. No record was presented to show that a public bidding was conducted. Malayan sold
the contaminated copper concentrates to PASAR at a low price then paid PASAR the total value of the
Meanwhile, on November 24, 2000, Malayan wrote Loadstar Shipping informing the latter of a damaged concentrate without deducting anything from the claim.
prospective buyer for the damaged copper concentrates and the opportunity to nominate/refer other
salvage buyers to PASAR. On November 29, 2000, Malayan wrote Loadstar Shipping informing the latter
 Finally, the RTC denied the prayer to declare the Bill of Lading null and void for lack of basis M/V BOBCAT IS A PRIVATE CARRIER, THE HONORABLE COURT HAD NO BASIS IN RULING
because what was attached to Malayan’s compliance was still an unreadable machine copy THAT IT IS A COMMON CARRIER. THE DECISION OF THE TRIAL COURT IS BEREFT OF ANY
thereof.5 (Citations omitted) CATEGORICAL FINDING THAT M/V BOBCAT IS A COMMON CARRIER. 12

Ruling of the CA III.

On April 14, 2008, the CA rendered its Decision,6 the dispositive portion of which reads: THE HONORABLE COURT OFAPPEALS COMMITTED A REVERSIBLE ERROR IN RULING
WHEREFORE, the appeal is GRANTED. The Decision dated March 31, 2004 of the RTC, Branch 34, THAT RESPONDENT’S PAYMENT TO PASAR, ON THE BASIS OF THE LATTER’S
Manila in Civil Case No. 01-101885, is REVERSED and SET ASIDE. In lieu thereof, a new judgment is FRAUDULENT CLAIM, ENTITLED RESPONDENT AUTOMATIC RIGHT OF RECOVERY BY
entered, ORDERING defendants-appellees to pay plaintiff-appellant ₱33,934,948.75 as actual damages, VIRTUE OF SUBROGATION.13
plus legal interest at 6% annually from the date of the trial court’s decision. Upon the finality of the
decision, the total amount of the judgment shall earn annual interest at 12% until full payment.
Ruling of the Court

SO ORDERED.7
I. Proof of actual damages

On December 11, 2008, the CA modified the above decision through a Resolution,8 the fallo thereof
It is not disputed that the copper concentrates carried by M/V Bobcat from Poro Point, La
states:
Union to Isabel, Leyte were indeed contaminated with seawater. The issue lies on whether such
contamination resulted to damage, and the costs thereof, if any,incurred by the insured PASAR.
WHEREFORE, the Motion for Reconsiderationis PARTLY GRANTED. The decision of this
Court dated April 14, 2008 is PARTIALLY RECONSIDERED and MODIFIED. Defendants-appellees
The petitioners argued that the copper concentrates, despite being dampened with seawater, is
are ORDERED to pay to plaintiff-appellant ₱33,934,948.74 as actual damages, less US$90,000.00,
neither subject to penalty nor rejection. Under the Philex Mining Corporation (Philex)-PASAR Purchase
computed at the exchange rate prevailing on November 29, 2000, plus legal interest at 6% annually from
Contract Agreement, there is no rejection clause. Instead, there is a pre-agreed formula for the imposition
the date of the trial court’s decision. Upon the finality of the decision, the total amount of the judgment
of penalty in case other elements exceeding the provided minimum level would be found on the
shall earn annual interest at 12% until full payment.
concentrates.14 Since the chlorine content on the copper concentrates is still below the minimum level
provided under the Philex-PASAR purchase contract, no penalty may be imposed against the petitioners. 15
SO ORDERED.9
Malayan opposed the petitioners’ invocation of the Philex-PASAR purchase agreement, stating
The CA discussed that the amount of US$90,000.00 should have been deducted from that the contract involved in this case is a contract of affreightment between the petitioners and PASAR,
Malayan’s claim against the petitioners in order to prevent undue enrichment on the part of Malayan. not the agreement between Philex and PASAR, which was a contract for the sale of copper concentrates. 16
Otherwise, Malayan would recover from the petitioners not merely the entire amount of 33,934,948.74 as
actual damages, but would also end up unjustly enriching itself in the amount of US$90,000.00 – the
On this score, the Court agrees withMalayan that contrary to the trial court’s disquisition, the
residual value of the subject copper concentrates it sold to Philippine Associated Smelting and Refining
petitioners cannot validly invoke the penalty clause under the Philex-PASAR purchase agreement, where
Corporation (PASAR) on November 29, 2000.10
penalties are to be imposed by the buyer PASAR against the seller Philex if some elements exceeding the
agreed limitations are found on the copper concentrates upon delivery. The petitioners are not privy tothe
Issues contract of sale of the copper concentrates. The contract between PASAR and the petitioners is a contract
of carriage of goods and not a contract of sale. Therefore, the petitioners and PASAR are bound by the
laws on transportation of goods and their contract of affreightment. Since the Contract of
In sum, the grounds presented by the petitioners for the Court’s consideration are the following:
Affreightment17 between the petitioners and PASAR is silent as regards the computation of damages,
whereas the bill of lading presented before the trial court is undecipherable, the New Civil Code and the
I. Code ofCommerce shall govern the contract between the parties.

THE [CA] HAS NO BASIS IN REVERSING THE DECISION OF THE TRIAL COURT. THERE IS Malayan paid PASAR the amount of 32,351,102.32 covering the latter’s claim of damage to
NOTHING IN THE DECISION OF THE HONORABLE COURT THAT REVERSED THE FACTUAL the cargo.18 This is based on the recommendation of Elite Adjustors and Surveyors, Inc. (Elite) which both
FINDINGS AND CONCLUSIONS OF THE TRIAL COURT, THAT THERE WAS NO ACTUAL LOSS Malayan and PASAR agreed to. The computation of Elite is presented as follows:
OR DAMAGE TO THE CARGO OF COPPER CONCENTRATES WHICH WOULD MAKE
LOADSTAR AS THE SHIPOWNER LIABLE FOR A CARGO CLAIM. CONSEQUENTLY, THERE IS
Computation of Loss Payable.We computed for the insured value of the loss and loss payable, based on
NO BASIS FOR THE COURT TO ORDER LOADSTAR TO PAY ACTUAL DAMAGES IN THE
the following pertinent data:
AMOUNT OF PH₱33 MILLION.11

1) Total quantity shipped - 5,065.47 wet metric tons and at risk or (Risk Note and B/L)
II.
4,568.907 dry metric tons
2) Total sum insured - [P]212,032,203.77 (Risk Note and Endorsement)
 3) Quantity damaged: 777.290 wet metric tons or (Pasar Laboratory Cert. & 696.336 dry The same rule shall be applied to merchandise in bales or packages, separating those parcels which appear
metric tons discharge & sampling Cert.dated September 21, 2000) sound.

Computation: From the above-cited provisions, if the goods are delivered but arrived at the destination in
Total sum insured x Qty. damaged= Insured value of damage damaged condition, the remedies to be pursued by the consignee depend on the extent of damage on the
Total Qty. in DMT (DMT) (DMT) goods.
[P] 212,032,203.77 x 696.336 DMT = [P]32,315,312.32
4,568.907 DMT
If the goods are rendered useless for sale, consumption or for the intended purpose, the
Insured value of damage = [P] 32,315,312.3219
consignee may reject the goods and demand the payment of such goods at their marketprice on that day
pursuant to Article 365. In case the damaged portion of the goods can be segregated from those delivered
Based on the preceding computation, the sum of ₱32,315,312.32 represents damages for the in good condition, the consignee may reject those in damaged condition and accept merely those which
total loss ofthat portion of the cargo which were contaminated with seawater and not merely the are in good condition. But if the consignee is able to prove that it is impossible to use those goods which
depreciation in its value. Strangely though, after claiming damages for the total loss of that portion, were delivered in good condition without the others, then the entire shipment may be rejected. To
PASAR bought back the contaminated copper concentrates from Malayan at the price of US$90,000.00. reiterate, under Article 365, the nature of damage must be such that the goods are rendered useless for
The fact of repurchase is enough to conclude that the contamination of the copper concentrates cannot be sale, consumption or intended purpose for the consignee to be able to validly reject them.
considered as total loss on the part of PASAR.
If the effect of damage on the goods consisted merely of diminution in value, the carrier is
The following provisions of the Code of Commerce state how damages on goods delivered by bound to pay only the difference between its price on that day and its depreciated value as provided under
the carrier should be appraised: Article 364.

Article 361. The merchandise shall be transported at the risk and venture of the shipper, if the Malayan, as the insurer of PASAR, neither stated nor proved that the goods are rendered
contrary has not been expressly stipulated. As a consequence, all the losses and deteriorations which the useless or unfit for the purpose intended by PASAR due to contamination with seawater. Hence, there is
goods may suffer during the transportation by reason of fortuitous event, force majeure, or the inherent no basis for the goods’ rejection under Article 365 of the Code of Commerce. Clearly, it is erroneous for
nature and defect of the goods, shall be for the account and risk of the shipper. Proof of these accidents is Malayan to reimburse PASAR as though the latter suffered from total loss of goods in the absence of
incumbent upon the carrier. proof that PASAR sustained such kind of loss. Otherwise, there will be no difference inthe
indemnification of goods which were not delivered at all; or delivered but rendered useless, compared
against those which were delivered albeit, there is diminution in value.
Article 362. Nevertheless, the carrier shall be liable for the losses and damages resulting from
the causes mentioned in the preceding article if it is proved, as against him, that they arose through his
negligence or by reason of his having failed to take the precautions which usage has established among Malayan also failed to establish the legal basis of its decision to sell back the rejected copper
careful persons, unless the shipper has committed fraud in the bill of lading, representing the goods to be concentrates to PASAR. It cannot be ascertained how and when Malayan deemed itself asthe owner of the
of a kind or quality different from what they really were. rejected copper concentrates to have these validly disposed of. If the goods were rejected, it only means
there was no acceptance on the part of PASAR from the carrier. Furthermore, PASAR and Malayan
simply agreed on the purchase price of US$90,000.00 without any allegation or proof that the said price
If, notwithstanding the precautions referred to in this article, the goods transported run the risk
was the depreciated value based on the appraisal of experts as provided under Article 364 of the Code of
of being lost, on account of their nature or by reason of unavoidable accident, there being no time for their
Commerce.
owners to dispose of them, the carrier may proceed to sell them, placing them for this purpose at the
disposal of the judicial authority or of the officials designated by special provisions.
II. Subrogation of Malayan to the rights of PASAR
xxxx
Malayan’s claim against the petitioners is based on subrogation to the rights possessed by
PASAR as consignee of the allegedly damaged goods. The right of subrogation stems from Article 2207
Article 364. If the effect of the damage referred to in Article 361 is merely a diminution in the
of the New Civil Code which states:
value of the goods, the obligation of the carrier shall be reduced to the payment of the amount which, in
the judgment of experts, constitutes such difference in value.
Art. 2207. If the plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the
Article 365. If, in consequence of the damage, the goods are rendered useless for sale and
insurance company shall be subrogated to the rights of the insured against the wrong doer or the person
consumption for the purposes for which they are properly destined, the consignee shall not be bound to
who has violated the contract. If the amount paid by the insurance company does not fully cover the injury
receive them, and he may have them in the hands of the carrier, demanding of the latter their value at the
or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or
current price on that day.
injury.

If among the damaged goods there should be some pieces in good condition and without any
"The right of subrogation is not dependent upon, nor does it grow out of, any privity of
defect, the foregoing provision shall be applicable with respect to those damaged and the consignee shall
contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by
receive those which are sound, this segregation to be made by distinct and separate pieces and without
the insurer."20 The right of subrogation is however, not absolute. "There are a few recognized exceptions
dividing a single object, unless the consignee proves the impossibility of conveniently making use of them
to this rule. For instance, if the assured by his own act releases the wrongdoer or third party liable for the
in this form.
loss or damage, from liability, the insurer’s right of subrogation is defeated. x x x Similarly, where the
insurer pays the assured the value of the lostgoods without notifying the carrier who has in good faith SET ASIDE. The Decision dated March 31, 2004 of the Regional Trial Comi of Manila, Branch 34 in
settled the assured’s claim for loss, the settlement is binding on both the assured and the insurer, and the Civil Case No·. 01-101885 is REINSTATED.
latter cannot bring an action against the carrier on his right of subrogation. x x x And where the insurer
pays the assured for a loss which is not a risk covered by the policy, thereby effecting ‘voluntary
SO ORDERED.
payment,’ the former has no right of subrogation against the third party liable for the loss x x x."21

The rights of a subrogee cannot be superior to the rights possessed by a subrogor. "Subrogation G.R. Nos. 180880-81. September 25, 2009.*
is the substitution of one person in the place of another with reference to a lawful claim or right, so that he
who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies KEPPEL CEBU SHIPYARD, INC., petitioner, vs. PIONEER INSURANCE AND SURETY
or securities. The rights to which the subrogee succeeds are the same as, but not greaterthan, those of the CORPORATION, respondent.
person for whom he is substituted, that is, he cannot acquire any claim, security or remedy the subrogor
did not have. In other words, a subrogee cannot succeed to a right not possessed by the subrogor. A G.R. Nos. 180896-97. September 25, 2009.*
subrogee in effect steps into the shoes of the insured and can recover only ifthe insured likewise could
have recovered."22 Consequently, an insurer indemnifies the insured based on the loss or injury the latter
actually suffered from. If there is no loss or injury, then there is no obligation on the part of the insurer to PIONEER INSURANCE AND SURETY CORPORATION, petitioner, vs. KEPPEL CEBU SHIPYARD,
indemnify the insured. Should the insurer pay the insured and it turns out that indemnification is not due, INC., respondent. Keppel Cebu Shipyard, Inc. vs. Pioneer Insurance and Surety Corporation, 601 SCRA
or if due, the amount paid is excessive, the insurer takes the risk of not being able to seek recompense 96, G.R. Nos. 180880-81 September 25, 2009
from the alleged wrongdoer. This is because the supposed subrogor did not possessthe right to be
indemnified and therefore, no right to collect is passed on to the subrogee. As regards the determination of Syllabus
actual damages, "[i]t is axiomatic that actual damages must be proved with reasonable degree of certainty
and a party is entitled only to such compensation for the pecuniary loss that was duly proven."23 Article
Same; Same; Insurance Law; Statutory Construction; Properly considered, the word “may” in
2199 of the New Civil Code speaks of how actual damages are awarded:
Section 139 of the Insurance Code is intended to grant the insured the option or discretion to choose the
abandonment of the thing insured, or any particular portion thereof separately valued by the policy, or
Art. 2199. Except as provided by law or by stipulation, one is entitled to an adequate compensation only otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured
for such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as actual
against, which option or discretion is expressed as a right in Section 131 of the same Code.—The CA held
or compensatory damages.
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
Whereas the CA modified its Decision dated April 14, 2008 by deducting the amount of
insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V
US$90,000.00 fromthe award, the same is still iniquitous for the petitioners because PASAR and Malayan
never proved the actual damages sustained by PASAR. It is a flawed notion to merely accept that the “Superferry 3”), or any particular portion thereof separately valued by the policy, or otherwise
salvage value of the goods is US$90,000.00, since the price was arbitrarily fixed between PASAR and separately insured, and recover for a total loss when the cause of the loss is a peril insured against. This
Malayan. Actual damages to PASAR, for example, could include the diminution in value as appraised by option or discretion is expressed as a right in Section 131 of the same Code, to wit: Sec. 131. A
experts or the expenses which PASAR incurred for the restoration of the copper concentrates to its former constructive total loss is one which gives to a person insured a right to abandon under Section one
condition, ifthere is damage and rectification is still possible. hundred thirty-nine.

It is also note worthy that when the expert witness for the petitioners, Engineer Francisco Same; Same; Same; Subrogation; Words and Phrases; Subrogation is the substitution of one
Esguerra (Esguerra), testified as regards the lack of any adverse effect of seawater on copper concentrates, person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the
Malayan never presented evidence of its own in refutation to Esguerra’s testimony. And, even if the Court rights of the other in relation to a debt or claim, including its remedies or securities.—Subrogation is the
will disregard the entirety of his testimony, the effect on Malayan’s cause of action is nil. As Malayan is substitution of one person by another with reference to a lawful claim or right, so that he who is
claiming for actual damages, it bears the burden of proof to substantiate its claim.
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
"The burden of proof is on the party who would be defeated if no evidence would be presented is entitled to all the rights and remedies belonging to the insured against a third party with respect to any
on either side. The burden is to establish one’s case by a preponderance of evidence which means that the
loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the
evidence, as a whole, adduced by one side, is superior tothat of the other. Actual damages are not
presumed. The claimant must prove the actual amount of loss with a reasonable degree of certainty shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.
premised upon competent proof and on the best evidence obtainable. Specific facts that could afford a
basis for measuring whatever compensatory or actual damages are borne must be pointed out. Actual Same; Same; Same; Same; The right of subrogation is not dependent upon, nor does it grow
damages cannot be anchored on mere surmises, speculations or conjectures."24 out of, any privity of contract—it accrues simply upon payment by the insurance company of the insurance
claim.—We have held that payment by the insurer to the insured operates as an equitable assignment to
Having ruled that Malayan did not adduce proof of pecuniary loss to PASAR for which the the insurer of all the remedies that the insured may have against the third party whose negligence or
latter was questionably indemnified, there is no necessity to expound further on the other issues raised by wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any
the petitioners and Malayan in this case. privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The
doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is
WHEREFORE, the petition is GRANTED. The Decision dated April 14, 2008 and Resolution the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and
dated December 11, 2008 of the Court of Appeals in CA-G.R. CV No. 82758 are hereby REVERSED and good conscience, ought to pay.
 Same; Same; Same; Same; Contracts of Adhesion; Parties; Although not invalid, per se, a Ship and Shipping; Damages; The salvage value of the vessel should be taken into account in the grant of
contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant any award.—We concur with the position of KCSI that the salvage value of the damaged M/V “Superferry
bargaining party, and its option is reduced to the alternative of “taking it or leaving it,” completely 3” should be taken into account in the grant of any award. It was proven before the CIAC that the
depriving such party of the opportunity to bargain on equal footing.—Clauses 20 and 22(a) of the machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33) and
Shiprepair Agreement are without factual and legal foundation. They are unfair and inequitable under the US$363,289.50, respectively. WG&A’s claim for the upkeep of the wreck until the same were sold
premises. It was established during arbitration that WG&A did not voluntarily and expressly agree to amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the
these provisions. Engr. Elvin F. Bello, WG&A’s fleet manager, testified that he did not sign the fine-print machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, at
portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found, because he did not wan P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering
WG&A to be bound by them. However, considering that it was only KCSI that had shipyard facilities this salvage value in the award would amount to unjust enrichment on the part of Pioneer.
large enough to accommodate the dry docking and repair of big vessels owned by WG&A, such as M/V
“Superferry 3,” in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the Arbitration; Parties; It is only fitting that both parties should share in the burden of the cost of
vessel would not be accepted for dry docking. Indeed, the assailed clauses amount to a contract of arbitration, on a pro rata basis.—It is only fitting that both parties should share in the burden of the cost
adhesion imposed on WG&A on a “take-it-or-leave-it” basis. A contract of adhesion is so-called because of arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against
its terms are prepared by only one party, while the other party merely affixes his signature signifying his KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid to WG&A. However,
adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the weaker party is we disagree with Pioneer that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for
imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative defending itself for perceived wrongful acts and conditions. Otherwise, we would be putting a price on the
of “taking it or leaving it,” completely depriving such party of the opportunity to bargain on equal right to litigate on the part of Pioneer.
footing.

Same; Same; Same; Waivers; 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.—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. This has not been demonstrated in this case.

Same; Same; Same; To allow a ship repair entity to limit its liability to only 50,000,000.00,
notwithstanding the fact that there was a constructive total loss in the amount of 360,000,000.00, would
sanction the exercise of a degree of diligence short of what is ordinarily required.—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.

Same; Same; Same; Ship and Shipping; No ship owner would agree to make a ship repairer a
co-assured under an insurance policy that would render nugatory any claim for loss or damage under the
policy.—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.