Subrogation Article 2027, Civil Code

SECOND DIVISION

[G.R. No. 27427. April 7, 1976.]

FIREMAN’S FUND INSURANCE COMPANY and FIRESTONE TIRE and RUBBER

COMPANY OF THE PHILIPPINES, Plaintiff-Appellants, v. JAMILA & COMPANY,
INC. and FIRST QUEZON CITY INSURANCE CO., INC, Defendants-Appellees.

Conrado R. Ayuyao, for Plaintiffs-Appellants.

Ponciano U. Pitarque for defendant-appellee First Quezon City Insurance Co.,

Inc.

Fernando B. Jamora for defendant-appellee Jamila Co. Inc.

SYNOPSIS

Firestone suffered losses of properties due to the acts of its employees and its security
guards provided under contract by Jamila & Co., Inc. The amount of loss was recovered
from its insurer, the Fireman’s Fund Insurance Co. who, together with the insured, sued
Jamila and its surety, the First Quezon City Insurance Co., Inc. to recover the amount
of loss on the basis of legal subrogation. The trial court dismissed the complaint as to
Jamila on the ground that the plaintiff had no cause of action against it for lack of the
debtor’s consent to the subrogation and as to First Quezon City Insurance Co., Inc., on
the ground of res judicata. On a motion for reconsideration, plaintiff’s contention that
there was no res judicata was sustained. Subsequent motions for reconsideration
became interminable thereby adding delay to the final adjudication of the parties’
controversy.

The petition to review raised the issue as to whether or not the trial court’s order of
dismissal of the complaint was contrary to Article 2207 of the Civil Code which provides
for legal subrogation.

The Supreme Court held that sufficient ultimate facts were alleged in the complaint to
sustain the cause of action against Jamila; that the action is sanctioned by Article 2207
of the Civil Code and that Fireman’s Fund, as the insurer is entitled to go after the
person or entity that violated its contractual commitment to answer for the loss insured
against.

Order of dismissal set aside.

SYLLABUS

1. INSURANCE; RIGHT OF SUBROGATION UNDER ART.. 2207 OF THE CIVIL CODE;

ORIGIN AND NATURE — Article 2207 is a restatement of a settled principle of American
jurisprudence. Subrogation has been referred to as the doctrine of substitution. It is an
arm of equity that may guide or even force one to pay a debt for which an obligation
was incurred but which was in whole or in part paid by another. Subrogation is founded
on principles of justice and equity, and its operation is governed by principles of equity.
It rests on the principle that substantial justice should be attained regardless of form,
that is, its basis is the doing of complete, essential, and perfect justice between all the
parties without regard to form.

2. ID.; ID.; ID.; INURES TO THE INSURER UPON PAYMENT OF THE LOSS. —
Subrogation is a normal incident of indemnity insurance. Upon payment of the loss, the
insurer is entitled to be subrogated pro tanto to any right of action which the insured
may have against the third person whose negligence or wrongful act caused the loss.
The right of subrogation is of the highest equity. The loss in the first instance is that of
the insured but after reimbursement or compensation, it becomes the loss of the
insurer.

3. ID.; ID.; ID.; RIGHT NOT DEPENDENT UPON CONTRACT OR ASSIGNMENT OF CLAIM.
— When the insurance company pays for the loss, such payment operates as an
equitable assignment to the insurer of the property and all remedies which the insured
may have for the recovery thereof. That right is not dependent upon, not does it grow
out of, any privity of contract, or upon written assignment of claim, and payment to the
insured makes the insurer an assignee in equity.

DECISION

AQUINO, J.:

Fireman’s Fund and Insurance Company (Fireman’s Fund for short) and Firestone Tire
and Rubber Company of the Philippines appealed from the order dated October 18,
1966 of the Court of First Instance of Manila, dismissing their complaint against Jamila
& Co., Inc. (hereinafter called Jamila) for the recovery of the sum of P11,925 plus
interest, damages and attorney’s fees (Civil Case No. 65658).

The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security
Agency contracted to supply security guards to Firestone; that Jamila assumed
responsibility for the acts of its security guards; that First Quezon City Insurance Co.,
Inc. executed a bond in the sum of P20,000 to guarantee Jamila’s obligations under
that contract; that on May 18, 1963 properties of Firestone valued at P11,925 were lost
allegedly due to the acts of its employees who connived with Jamila’s security guard;
that Fireman’s Fund, as insurer, paid to Firestone the amount of the loss; that
Fireman’s Fund was subrogated to Firestone’s right to get reimbursement from Jamila,
and that Jamila and its surety, First Quezon City Insurance Co., Inc., failed to pay the
amount of the loss in spite of repeated demands.

Upon defendant’s motions, the lower court in its order of July 22, 1966 dismissed the
complaint as to Jamila on the ground that there was no allegation that it had consented
to the subrogation and, therefore, Fireman’s Fund had no cause of action against it.

In the same order the lower court dismissed the complaint as to First Quezon City
Insurance Co., Inc. on the ground of res judicata. It appears that the same action was
previously filed in Civil Case No. 56311 which was dismissed because of the failure of
the same plaintiffs and their counsel to appear at the pre-trial.

Firestone and Fireman’s Fund moved for the reconsideration of the order of dismissal.
The lower court on September 3, 1966 set aside its order of dismissal. It sustained
plaintiff’s contention that there was no res judicata as to First Quezon City Insurance
Co., Inc. because Civil Case No. 56311 was dismissed without prejudice. Later, First
Quezon City Insurance Co., Inc. filed its answer to the complaint.

However, due to inadvertence, the lower court did not state in its order of September 3,
1966 why it set aside its prior order dismissing the complaint with respect to Jamila.

What is now to be recounted shows the lack of due care on the part of the lower court
and the opposing lawyers in their management of the case. Such lack of due care has
given the case a farcical ambiance and might partially explain the long delay in its
adjudication.

Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory
without any reason therefor, filed a motion for reconsideration. It had originally moved
for the dismissal of the complaint on the ground of lack of cause of action. Its
contention was based on two grounds, to wit: (1) that the complaint did not allege that
Firestone, pursuant to the contractual stipulation quoted in the complaint, had
investigated the loss and that Jamila was represented in the investigation and (2) that
Jamila did not consent to the subrogation of Fireman’s Fund to Firestone’s right to get
reimbursement from Jamila and its surety. The lower court in its order of dismissal had
sustained the second ground.

Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked
the first ground which had never been passed upon by the lower court. Firestone and
Fireman’s Fund in their opposition joined battle, in a manner of speaking, on that first
ground.

But the lower court in its order of October 18, 1966, granting Jamila’s motion for
reconsideration, completely ignored that first ground. It reverted to the second ground
which was relied upon in its order of September 3, 1966. The lower court reiterated its
order of July 22, 1966 that Fireman’s Fund had no cause of action against Jamila
because Jamila did not consent to the subrogation. The court did not mention Firestone,
the co-plaintiff of Fireman’s Fund.

At this juncture, it may be noted that motions for reconsideration become interminable
when the court’s order follow a seesaw pattern. That phenomenon took place in this
case.

Firestone and Fireman’s Fund filed a motion for the reconsideration of the lower court’s
order of October 18, 1966 on the ground that Fireman’s Fund Insurance Company was
suing on the basis of legal subrogation whereas the lower court erroneously predicated
its dismissal order on the theory that there was no conventional subrogation because
the debtor’s consent was lacking.
The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff’s
property has been insured, and he has received indemnity from the insurance company
for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract."

The lower court denied plaintiff’s motion. They filed a second motion for
reconsideration. In that motion they sensibly called the lower court’s attention to the
fact that the issue of subrogation was of no moment because Firestone, the subrogor, is
a party-plaintiff and could sue directly Jamila in its own right. Without resolving that
contention, the lower court denied plaintiffs’ second motion for reconsideration.

In this appeal Firestone and Fireman’s Fund contend that the trial court’s dismissal of
their complaint is contrary to the aforementioned article 2207 which provides for legal
subrogation.

Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires
the debtor’s consent; that legal subrogation takes place in the cases mentioned in
article 1302 of the Civil Code and the instant case is not among the three cases
enumerated in that article, and that there could be no subrogation in this case because
according to the plaintiffs the contract between Jamila and Firestone was entered into
on June 1, 1965 but the loss complained of occurred on May 18, 1963.

With respect to the factual point raised by Jamila, it should be stated that plaintiffs’
counsel gratuitously alleged in their brief that Firestone and Jamila entered into a
"contract of guard services" on June 1, 1965. That allegation, which was uncalled for
because it is not found in the complaint, created confusion which heretofore did not
exist. No copy of the contract was annexed to the complaint.

That confusing statement was an obvious error since it was expressly alleged in the
complaint that the loss occurred on May 18, 1963. The fact that such an error was
committed is another instance substantiating our previous observation that plaintiffs’
counsel had not exercised due care in the presentation of his case.

The issue is whether the complaint of Firestone and Fireman’s Fund states a cause of
action against Jamila.

We hold that Firestone is really a nominal party in this case. It had already been
indemnified for the loss which it had sustained. Obviously, it joined as a party-plaintiff
in order to help Fireman’s Fund to recover the amount of the loss from Jamila and First
Quezon City Insurance Co., Inc. Firestone had tacitly assigned to Fireman’s Fund its
cause of action against Jamila for breach of contract. Sufficient ultimate facts are
alleged in the complaint to sustain that cause of action.

On the other hand, Fireman’s Fund’s action against Jamila is squarely sanctioned by
article 2207. As the insurer, Fireman’s Fund is entitled to go after the person or entity
that violated its contractual commitment to answer for the loss insured against (Cf.
Philippine Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031; Rizal Surety & Insurance
Co. v. Manila Railroad Company, L-24043, April 25, 1968, 23 SCRA 205).
The trial court erred in applying to this case the rules on novation. The plaintiffs in
alleging in their complaint that Fireman’s Fund "became a party in interest in this case
by virtue of a subrogation right given in its favor by" Firestone, were not relying on the
novation by change of creditors as contemplated in articles 1291 and 1300 to 1303 of
the Civil Code but rather on article 2207.

Article 2207 is a restatement of a settled principle of American jurisprudence.

Subrogation has been referred to as the doctrine of substitution. It "is an arm of equity
that may guide or even force one to pay a debt for which an obligation was incurred but
which was in whole or in part paid by another" (83 C.J.S. 576, 578, note 16, citing
Fireman’s Fund Indemnity Co. v. State Compensation Insurance Fund, 209 Pac. 2d 55).

"Subrogation is founded on principles of justice and equity, and its operation is

governed by principles of equity. It rests on the principle that substantial justice should
be attained regardless of form, that is, its basis is the doing of complete, essential, and
perfect justice between all the parties without regard to form" (83 C.J.S. 579-80)

Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. v. Moses,

287 U. S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be
subrogated pro tanto to any right of action which the insured may have against the
third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745,
citing Standard Marine Ins. Co. v. Scottish Metropolitan Assurance Co.; 283 U.S. 284,
75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is that of
the insured but after reimbursement or compensation, it becomes the loss of the
insurer (44 Am. Jur. 2d 746, note 16, citing Newcomb v. Cincinnati Ins. Co., 22 Ohio
St. 382).

"Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the equitable
right of subrogation as the legal effect of payment inures to the insurer without any
formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur.
2nd 746). Stated otherwise, when the insurance company pays for the loss, such
payment operates as an equitable assignment to the insurer of the property and all
remedies which the insured may have for the recovery thereof. That right is not
dependent upon, nor does it grow out of, any privity of contract, or upon written
assignment of claim, and payment to the insured makes the insurer an assignee in
equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N. C. 456, 142 SE 2d
18).

Whether the plaintiffs would be able to prove their cause of action against Jamila is
another question.

Finding the trial court’s order of dismissal to be legally untenable, the same is set aside
with costs against defendant-appellee Jamila & Co., Inc.

SO ORDERED.

Barredo, (Acting Chairman), Antonio, Concepcion, Jr. and Martin, JJ., concur.

Fernando, J., is on official leave.

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

HIRD DIVISION

G.R. No. 81026               April 3, 1990

PAN MALAYAN INSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents.

Regulus E. Cabote & Associates for petitioner.

Benito P. Fabie for private respondents.

CORTES, J.:

Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the
Court of Appeals which upheld an order of the trial court dismissing for no cause of action
PANMALAY's complaint for damages against private respondents Erlinda Fabie and her driver.

The principal issue presented for resolution before this Court is whether or not the insurer
PANMALAY may institute an action to recover the amount it had paid its assured in settlement of an
insurance claim against private respondents as the parties allegedly responsible for the damage
caused to the insured vehicle.

On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against
private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a
Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang
Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness,
recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the
insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed
the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG
against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated
demands, defendants, failed and refused to pay the claim of PANMALAY.

Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion
thereto. In compliance therewith, PANMALAY clarified, among others, that the damage caused to
the insured car was settled under the "own damage", coverage of the insurance policy, and that the
driver of the insured car was, at the time of the accident, an authorized driver duly licensed to drive
the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and
Subrogation Receipt executed by CANLUBANG in favor of PANMALAY.

On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had
no cause of action against them. They argued that payment under the "own damage" clause of the
insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification
thereunder was made on the assumption that there was no wrongdoer or no third party at fault.
After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an
order dated June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19,
1986, the RTC denied PANMALAY's motion for reconsideration.

On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November
27, 1987. Consequently, PANMALAY filed the present petition for review.

After private respondents filed its comment to the petition, and petitioner filed its reply, the Court
considered the issues joined and the case submitted for decision.

Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition.

PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had
indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident
allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie. PANMALAY
contended, therefore, that its cause of action against private respondents was anchored upon Article
2207 of the Civil Code, which reads:

If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the contract. . . .

PANMALAY is correct.

Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured
property is destroyed or damaged through the fault or negligence of a party other than the assured,
then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to
recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the
insurer to the assured operates as an equitable assignment to the former of all remedies which the
latter may have against the third party whose negligence or wrongful act caused the loss. The right
of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written
assignment of claim. It accrues simply upon payment of the insurance claim by the insurer
[Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964,
12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427,
April 7, 1976, 70 SCRA 323].

There are a few recognized exceptions to this rule. For instance, if the assured by his own act
releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of
subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312,
29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co.,
229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the assured's claim for loss, the settlement
is binding on both the assured and the insurer, and the latter cannot bring an action against the
carrier on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)].
And where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby
effecting "voluntary payment", the former has no right of subrogation against the third party liable for
the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September
5, 1967, 21 SCRA 12].

None of the exceptions are availing in the present case.

The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally
subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not
have any cause of action against private respondents. On the one hand, the trial court held that
payment by PANMALAY of CANLUBANG's claim under the "own damage" clause of the insurance
policy was an admission by the insurer that the damage was caused by the assured and/or its
representatives. On the other hand, the Court of Appeals in applying the ejusdem generis rule held
that Section III-1 of the policy, which was the basis for settlement of CANLUBANG's claim, did not
cover damage arising from collision or overturning due to the negligence of third parties as one of
the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207 and
claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the
damage.

The above conclusion is without merit.

It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy
implies damage to the insured car caused by the assured itself, instead of third parties, proceeds
from an incorrect comprehension of the phrase "own damage" as used by the insurer. When
PANMALAY utilized the phrase "own damage" — a phrase which, incidentally, is not found in the
insurance policy — to define the basis for its settlement of CANLUBANG's claim under the policy, it
simply meant that it had assumed to reimburse the costs for repairing the damage to the insured
vehicle [See PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, p. 1;
Record, p. 31]. It is in this sense that the so-called "own damage" coverage under Section III of the
insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability"
coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from
Section IV-2 which refer to "Property Damage" coverage (liabilities arising from damage caused by
the insured vehicle to the properties of third parties).

Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section
III-1 of the policy does not include to the insured vehicle arising from collision or overturning due to
the negligent acts of the third party. Not only does it stem from an erroneous interpretation of the
provisions of the section, but it also violates a fundamental rule on the interpretation of property
insurance contracts.

It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed
according to the sense and meaning of the terms which the parties thereto have used. In the case of
property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the
assured, determine the import of the various terms and provisions embodied in the policy. It is only
when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties
themselves disagree about the meaning of particular provisions, that the courts will intervene. In
such an event, the policy will be construed by the courts liberally in favor of the assured and strictly
against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-
27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No.
L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R.
No. L-41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code].

Section III-1 of the insurance policy which refers to the conditions under which the insurer
PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the
insured vehicle, reads as follows:

SECTION III — LOSS OR DAMAGE

 1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or
damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: —

(a) by accidental collision or overturning, or collision or overturning consequent upon

mechanical breakdown or consequent upon wear and tear;

(b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or

theft;

(c) by malicious act;

(d) whilst in transit (including the processes of loading and unloading) incidental to
such transit by road, rail, inland, waterway, lift or elevator.

x x x           x x x          x x x

[Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars;
Record, p. 34; Emphasis supplied].

PANMALAY contends that the coverage of insured risks under the above section, specifically
Section III-1(a), is comprehensive enough to include damage to the insured vehicle arising from
collision or overturning due to the fault or negligence of a third party. CANLUBANG is apparently of
the same understanding. Based on a police report wherein the driver of the insured car reported that
after the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20],
CANLUBANG filed its claim with PANMALAY for indemnification of the damage caused to its car. It
then accepted payment from PANMALAY, and executed a Release of Claim and Subrogation
Receipt in favor of latter.

Considering that the very parties to the policy were not shown to be in disagreement regarding the
meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the
appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to ascribe
meaning contrary to the clear intention and understanding of these parties.

It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by
accidental collision or overturning" found in the first paint of sub-paragraph (a) is untenable. Although
the terms "accident" or "accidental" as used in insurance contracts have not acquired a technical
meaning, the Court has on several occasions defined these terms to mean that which takes place
"without one's foresight or expectation, an event that proceeds from an unknown cause, or is an
unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance
& Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants Insurance
Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be inferred
from jurisprudence that these terms, without qualification, exclude events resulting in damage or loss
due to the fault, recklessness or negligence of third parties. The concept "accident" is not
necessarily synonymous with the concept of "no fault". It may be utilized simply to distinguish
intentional or malicious acts from negligent or careless acts of man.

Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the
insured vehicle due to negligent or careless acts of third parties is not listed under the general and
specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance
policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of
Particulars, supra.]
The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the
coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that
insisted upon by respondents herein. By arguing that this section covers losses or damages due not
only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a
more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping
with the rationale behind the various rules on the interpretation of insurance contracts favoring the
assured or beneficiary so as to effect the dominant purpose of indemnity or payment [See Calanoc
v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co.,
Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-
35529, July 16, 1984, 130 SCRA 327].

Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy
does not cover damage to the insured vehicle caused by negligent acts of third parties, and that
PANMALAY's settlement of CANLUBANG's claim for damages allegedly arising from a collision due
to private respondents' negligence would amount to unwarranted or "voluntary payment", dismissal
of PANMALAY's complaint against private respondents for no cause of action would still be a grave
error of law.

For even if under the above circumstances PANMALAY could not be deemed subrogated to the
rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of
action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening
v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation
due to "voluntary" payment may nevertheless recover from the third party responsible for the
damage to the insured property under Article 1236 of the Civil Code.

In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee
merely prays that it be allowed to institute an action to recover from third parties who allegedly
caused damage to the insured vehicle, the amount which it had paid its assured under the insurance
policy. Having thus shown from the above discussion that PANMALAY has a cause of action against
third parties whose negligence may have caused damage to CANLUBANG's car, the Court holds
that there is no legal obstacle to the filing by PANMALAY of a complaint for damages against private
respondents as the third parties allegedly responsible for the damage. Respondent Court of Appeals
therefore committed reversible error in sustaining the lower court's order which dismissed
PANMALAY's complaint against private respondents for no cause of action. Hence, it is now for the
trial court to determine if in fact the damage caused to the insured vehicle was due to the
"carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie.

WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for
damages against private respondents is hereby REINSTATED. Let the case be remanded to the
lower court for trial on the merits.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

G.R. No. L-22146             September 5, 1967

SVERIGES ANGFARTYGS ASSURANS FORENING, plaintiff-appellant,

vs.
QUA CHEE GAN, defendant-appellee.
Ross, Selph & Carrascoso for plaintiff-appellant.
Ponce Enrile, S. Reyna, Monticello & Belo for defendant-appellee.

BENGZON, J.P., J.

On August 23 and 24, 1947, defendant Qua Chee Gan, a sole proprietorship, shipped on board the
S.S. NAGARA, as per bills of lading Exhs. A and B, 2,032,000 kilos of bulk copra at Siain, Quezon,
consigned to DAL International Trading Co., in Gdynia, Poland. The vessel first called at the port of
Karlshamn, Sweden, where it unloaded 969,419 kilos of bulk copra. Then, it proceeded to Gdynia
where it unloaded the remaining copra shipment. The actual outturn weights in the latter port
showed that only 1,569,429 kilos were discharged.

Because of the alleged confirmed cargo shortage, the Polish cargo insurers had to indemnify the
consignee for the value thereof. Thereafter, the former sued the shipowner, the Swedish East Asia
Company, in Gothenburg, Sweden. The latter, in turn sued, defendant and had it summoned to
Gothenburg. Defendant, however, refused to submit to that court's jurisdiction and its objection was
sustained.

In March, 1951, a settlement was effected between the Polish cargo insurers and the shipowner.
Plaintiff, as the indemnity insurer for the latter, paid approximately $60,733.53 to the Polish insurers.
On August 16, 1954, claiming to have been subogated to the rights of the carrier, plaintiff sued
defendant before the Court of First Instance of Manila to recover U.S. $60,733.53 plus 17%
exchange tax, with legal interest, as the value of the alleged cargo short shipment, and P10,000 as
attorney's fees. Defendant answered in due time and countered with a P15,000 counterclaim for
attorney's fees.

On August 1, 1955, defendant filed a motion to dismiss on the ground of prescription under the
Carriage of Goods by Sea Act. The lower court sustained the motion and plaintiff appealed here. We
reversed the order of dismissal and remanded the case for further proceedings. 1

After trial, the lower court on September 28, 1963, rendered its decision dismissing the complaint
and awarding P10,000 as attorney's fees to defendant. It ruled (a) that there was no short shipment
on defendant's part; (b) that plaintiff's insurance policy did not cover the short shipment, and (c)
defendant was merely acting as an agent of Louis Dreyfus & Co., who was the real shipper.

Taking issue with all the foregoing, plaintiff has interposed the present appeal to Us on questions of
fact and law, the amount involved exceeding P200,000.00.

Was the non-presentation of the insurance policy fatal to plaintiff's case? The lower court ruled so,
reasoning that unless the same — as the best evidence — were presented, it could not be
conclusively determined if "liability for short shipment" was a covered risk. And the rule is that an
insurer who pays the insured for loss or liability not covered by the policy is not subrogated to the
latter.2 However, even assuming that there was unwarranted — or "volunteer" — payment, plaintiff
could still recover what it paid — in effect — to the carrier from defendant shipper under Art. 1236 of
the Civil Code which allows a third person who pays on behalf of another to recover from the latter,
although there is no subrogation. But since the payment here was without the knowledge and
consent of defendant, plaintiff's right of recovery is defeasible by the former's defenses since the
Code is clear that the recovery is only up to the amount by which the defendant was benefited.
This brings Us to the crux of the case: Was there a short-shipment? To support its case, plaintiff
theorizes that defendant had two shipments at Siain, Quezon province (1) 812,800 kilos for
Karlshamn and (2) 2,032,000 kilos for Gdynia. The Karlshamn shipment was asserted to have been
covered by a separate bill of lading which, however, was allegedly lost subsequently. Thus, the
696,419 kilos of copra unloaded in Karlshamn was not part of the Gdynia shipment and cannot
explain the confirmed shortage at the latter port.

Plaintiff's cause of action suffers from several fatal defects and inconsistencies. The alleged
shipment of 812,800 kilos for Karlshamn is contradicted by plaintiff's admission in paragraphs 2 and
3 of its complaint that defendant shipped only 2,032,000 kilos of copra at Siain, purportedly for both
Gdynia and Karlshamn.3 Needless to state, plaintiff is bound by such judicial admission.4 Moreover,
the alleged existence of the Karlshamn bills of lading is negatived by the fact that Exhibits A and B
— the bills of lading presented by plaintiff — show that the 2,032,000 kilos of copra loaded in Siain
were for Gdynia only. Further destroying its case is the testimony of plaintiff's own witness, Mr. Claro
Pasicolan, who on direct examination affirmed 5 that these two exhibits connstituted the complete set
of documents which the shipping agent in charge of the vessel S.S. NAGARA issued covering the
copra cargo loaded at Siain. In view of this admission and for want of evidentiary support, plaintiff's
belated claim that there is another complete set of documents can not be seriously taken. 1awphîl.nèt

Lastly, if there really was a separate bill of lading for the Karlshamn shipment, plaintiff could not have
failed to present a copy thereof. Mr. Pasicolan testified6 that the shipping agent makes 20 copies of
the documents of which three signed ones are given to the shipper and the rest, marked as non-
negotiable bills of lading — like Exhibits A and B — are kept on its file. For the three signed copies to
be lost, We may believe, but not for all the remaining 17 other copies. Under the circumstances it is
more reasonable to hold that there was no separate shipment intended for Karlshamn, Sweden.

As a corollary to the foregoing conclusion, it stands to reason that the copra unloaded in Karlshamn
formed part of the same — and only — shipment of defendant intended for Gdynia. Now the fact that
the sum total of the cargo unloaded at Karlshamn and Gdynia would exceed what appears to have
been loaded at Siain by as much as 233,848 kilos can only show that defendant really overshipped,
not shortshipped. And while this would not tally with defendant's claim of having weighed the copra
cargo 100% at Siain, thus exposing a flaw in defendant's case, yet it is elementary that plaintiff must
rely on the strength of its own case to recover, and not bank on the weakness of the defense.
Plaintiff here failed to establish its case by preponderance on evidence.

On the question whether defendant is the real shipper or merely an agent of Louis Dreyfus & Co.,
suffice it to say that altho on Exhibits A and B his name appears as the shipper, yet the very loading
certificate, Exhibit 3 [5-Deposition of Horle], issued and signed by the Chief Mate and Master of the
S.S. NAGARA shows that defendant was acting merely for account of Louis Dreyfus & Co. The
other documentary exhibits7 confirm this. Anyway, in whatever capacity defendant is considered, it
cannot be liable since no shortshipment was shown.

Plaintiff's action against defendant cannot, however, be considered as clearly unfounded as to

warrant an award of attorney's fees as damages to defendant under par. 4, Art. 2208 of the Civil
Code. The facts do not show that plaintiff's cause of action was so frivolous or untenable as to
amount to gross and evident bad faith.8

WHEREFORE, but for the award of attorney's fees to defendant which is eliminated, the decision
appealed from is, in all other respects, hereby affirmed.

Costs against plaintiff-appellant. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
Fernando, JJ. concur.

EN BANC

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

RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant,

vs.
MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants-appellees.

Gil R. Carlos and Associates for plaintiff-appellant.

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

FERNANDO, J.:

In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and Insurance Company,
to the consignee based on the applicable Civil Code provision, 1 which speak to the effect that the
Insurance Company "shall be subrogated to the rights of the insured," it is its contention that it is
entitled to the amount paid by it in full, by virtue of the insurance contract. The lower court, however,
relying on the limited liability clause on a management contract with the defendants, could not go
along with such a theory. Hence, this appeal.

The facts were stipulated. The more pertinent follows: That on or about November 29, 1960, the
vessel, SS Flying Trader, loaded on board at Genoa, Italy for shipment to Manila, Philippines,
among other cargoes, 6 cases OMH, Special Single Colour Offset Press Machine, for which Bill of
Lading No. 1 was issued, consigned to Suter Inc.; that such vessel arrived at the Port of Manila,
Philippines on or about January 16, 1961 and subsequently discharged complete and in good order
the aforementioned shipment into the custody of defendant Manila Port Service as arrastre operator;
that in the course of the handling, one of the six cases identified as Case No. 2143 containing the
OMH, Special Single Colour Offset Press, while the same was being lifted and loaded by the crane
of the Manila Port Service into the consignee's truck, it was dropped by the crane and as a
consequence, the machine was heavily damaged for which plaintiff as insurer paid to the consignee,
Suter Inc. the amount of P16,500.00, representing damages by way of costs of replacement parts
and repairs to put the machine in working condition, plus the sum of P180.70 which plaintiff paid to
the International Adjustment Bureau as adjuster's fee for the survey conducted on the damaged
cargo or a total of P16,680.70 representing plaintiff's liability under the insurance contract; and that
the arrastre charges in this particular shipment was paid on the weight or measurement basis
whichever is higher, and not on the value thereof. 2

Clause 15 of the management contract which as admitted by the plaintiff, appeared "at the dorsal
part of the Delivery Permit" and was "used in taking delivery of the subject shipment from the
defendants' (Manila Port Service and Manila Railroad Co.) custody and control, issued in the name
of consignee's broker," contained what was referred to as "an important notice." Such permit "is
presented subject to all the terms and conditions of the Management Contract between the Bureau
of Customs and Manila Port Service and amendments thereto or alterations thereof, particularly but
not limited to paragraph 15 thereof limiting the Company liability to P500.00 per package, unless the
value of the goods is otherwise, specified, declared or manifested and the corresponding arrastre
charges have been paid. . . ."3

On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc.,4 the lower court
rendered the judgment "ordering defendants, jointly and severally, to pay plaintiff the amount of Five
Hundred Pesos (P500.00), with legal interest thereon from January 13, 1962, the date of the filing of
the complaint, with costs against said defendants."5

As noted at the outset, in this appeal, the point is pressed that under the applicable Civil Code
provision, plaintiff-appellant Insurance Company could recover in full. The literal language of Article
2207, however, does not warrant such an interpretation. It is there made clear that in the event that
the property has been insured and the Insurance Company has paid the indemnity for the injury or
loss sustained, it "shall be subrogated to the rights of the insured against the wrong-doer or the
person who has violated the contract."

Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants an amount

greater than that to which the consignee could lawfully lay claim. The management contract is clear.
The amount is limited to Five Hundred Pesos (P500.00). Such a stipulation has invariably received
the approval of this Court from the leading case of Bernabe & Co. v. Delgado Bros., Inc.6 Such a
decision was quoted with approval in the following subsequent cases: Atlantic Mutual Insurance Co.
v. Manila Port Service,7 Insurance Service Co. of North America v. Manila Port Service, 8 Insurance
Company of North America v. U.S. Lines, Co.,9 and Insurance Company of North America v. Manila
Port Service.10

In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this Court, through the
then Justice, now Chief Justice, Concepcion, restated the doctrine thus: "Plaintiff maintains that, not
being a party to the management contract, the consignee — into whose shoes plaintiff had stepped
in consequence of said payment — is not subject to the provisions of said stipulation, and that the
same is furthermore invalid. The lower court correctly rejected this pretense because, having taken
delivery of the shipment aforementioned by virtue of a delivery permit, incorporating thereto, by
reference, the provisions of said management contract, particularly paragraph 15 thereof, the gist of
which was set forth in the permit, the consignee became bound by said provisions, and because it
could have avoided the application of said maximum limit of P500.00 per package by stating the true
value thereof in its claim for delivery of the goods in question, which, admittedly, the consignee failed
to do. . . ."11

Plaintiff-appellant Rizal Surety and Insurance Company, having been subrogated merely to the
rights of the consignee, its recovery necessarily should be limited to what was recoverable by the
insured. The lower court therefore did not err when in the decision appealed from, it limited the
amount which defendants were jointly and severally to pay plaintiff-appellants to "Five Hundred
Pesos (P500.00) with legal interest thereon from January 31, 1962, the date of the filing of the
complaint, . . . ."

WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety and
Insurance Company.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Angeles, JJ.,
concur.1äwphï1.ñët

Footnotes

SECOND DIVISION

[G.R. No. L-27796. March 25, 1976.]

ST. PAUL FIRE & MARINE INSURANCE CO., Plaintiff-Appellant, v. MACONDRAY

 & CO., INC., BARBER STEAMSHIP LINES, INC., WILHELM WILHELMSEN,
MANILA PORT SERVICE and/or MANILA RAILROAD COMPANY, Defendants-
Appellees.

Chiudian Law Office, for Plaintiff-Appellant.

Salcedo, Del Rosario, Bito & Misa for defendants-appellees, Macondray & Co.,
Inc., and Barrier Steamship Line, Inc. and W. Wilhelmsen.

Macaranas & Abrenica for defendants-appellees Manila Port Service and Manila
Railroad Company.

SYNOPSIS

Winthrop Products, Inc. shipped aboard a vessel, owned and operated by Wilhelmsen,
cartons and drums of drugs/medicine. A bill of lading was issued by Barber Steamship
Lines, an agent of Wilhelmsen. The shipment was insured by the shipper against loss
and/or damage with plaintiff-appellant. Upon arrival, some of the goods were in bad
condition, hence, the consignee filed a claim for the C.I.F. value of the damaged goods
against defendants. However, defendants refused to pay. Consequently, the consignee
filed its claim with the insurer and the latter paid the insured the value of the
lost/damaged goods including expenses amounting to $1,134.46.

As subrogee to the rights of the shipper/consignee, the insurer sought the recovery
from defendants of the amount of $1,134.46 plus costs.

The lower court sentenced Macondray and Barber Steamship Lines to pay, jointly and
severally, the sum of P300.00 with legal interest from filing of the complaint until fully
paid, and the Manila Railroad Co. and Manila Port Service to pay, jointly and severally,
the sum P809.67 with legal interest from filing of the complaint.

Contending that it should recover $1,134.46 or its present equivalent and not merely
the C.I.F. value of the goods, the insurer filed a motion for reconsideration which was
denied. Its appeal to the Court of Appeals was certified to the Supreme Court as
questions of law are involved.

The Supreme Court, upholding the validity of the bill of lading, affirmed the lower
court’s decision.

SYLLABUS

1. COMMERCIAL LAW; COMMON CARRIERS; BILL OF LADING; PURPOSE. — The

purpose of the bill of lading is to provide for the rights and liabilities of the parties of
the reference to the contract to carry. The stipulation in the bill of lading limiting the
common carrier’s liability to the value of the goods appearing in the bill unless the
shipper or owner declares a greater value, is valid and binding.

2. ID.; ID.; ID.; VALIDITY OF LIMITATION OF CARRIER’S LIABILITY. — The limitation of

the carrier’s liability is sanctioned by the freedom of the contracting parties to
 established such stipulations, clauses, terms, or conditions as they may deem
convenient, provide they are not contrary to law, morals, good customs and public
policy. A stipulation fixing or limiting the sum that may be recovered from the carrier
on the loss or deterioration of the goods is valid provide it is (a) reasonable and just
under the circumstances, and (b) has been fairly and freely agreed upon.

3. ID.; ID.; ID.; ID.; BINDING EFFECT. — Where, as in the case at bar the liabilities of
the defendants-appellees with respect to the loss or damaged shipment are expressly
limited to the c.i.f. value of the goods as per contract of sea carriage embodied on the
bill of lading, and it is not contended that the conditions therein are unreasonable or
were not freely and fairly agreed upon, the shipper and consignee are bound by the
stipulations.

4. ID.; ID.; CARRIER’S LIABILITY FOR DAMAGES, DATE OF COMMENCEMENT THEREOF.

— The obligation of the carrier to pay for the damage commenced on the date it failed
to deliver the shipment in good condition to the consignee. Thus, it should be
reimbursed for its dollar payments at the rate of exchange existing at that time.

5. INSURANCE; MARINE INSURANCE; RIGHTS OF INSURER AS SUBROGEE TO RIGHTS

OF ASSURED; RESTRICTED BY BILL OF LADING. — The plaintiff-appellant, as insurer,
after paying the claim of the insured for damages under the insurance, is subrogated
merely to the rights of the assured as subrogee, it can recover only the amount that is
recoverable by the latter. Since the right of the assured, in case of loss or damage to
the goods, is limited or restricted by the provisions in the bill of lading, a suit by the
insured as subrogee necessarily is subject to like limitations and restrictions.

DECISION

ANTONIO, J.:

Certified to this Court by the Court of Appeals in its Resolution of May 8, 1967, 1 on the
ground that the appeal involves purely questions of law, thus: (a) whether or not, in
case of loss or damage, the liability of the carrier to the consignee is limited to the
C.I.F. value of the goods which were lost or damaged, and (b) whether the insurer who
has paid the claim in dollars to the consignee should be reimbursed in its peso
equivalent on the date of discharge of the cargo or on the date of the decision.

According to the records, on June 29, 1960, Winthrop Products, Inc., of New York, New
York, U.S.A., shipped aboard the SS "Tai Ping", owned and operated by Wilhelm
Wilhelmsen, 218 cartons and drums of drugs and medicine, with the freight prepaid,
which were consigned to Winthrop-Steams, Inc., Manila, Philippines. Barber Steamship
Lines, Inc., agent of Wilhelm Wilhelmsen issued Bill of Lading No. 34, in the name of
Winthrop Products, Inc. as shipper, with arrival notice in Manila to consignee Winthrop-
Stearns, Inc., Manila, Philippines. The shipment was insured by the shipper against loss
and/or damage with the St. Paul Fire & Marine Insurance Company under its insurance
Special Policy No. OC-173766 dated June 23, 1960 (Exhibit "S").
On August 7, 1960, the SS "Tai Ping" arrived at the Port of Manila and discharged its
aforesaid shipment into the custody of Manila Port Service, the arrastre contractor for
the Port of Manila. The said shipment was discharged complete and in good order with
the exception of one (1) drum and several cartons which were in bad order condition.
Because consignee failed to receive the whole shipment and as several cartons of
medicine were received in bad order condition, the consignee filed the corresponding
claim in the amount of P1,109.67 representing the C.I.F. value of the damaged drum
and cartons of medicine with the carrier, herein defendants-appellees (Exhibits "G" and
"H") and the Manila Port Service (Exhibits "I" & "J"). However, both refused to pay such
claim. Consequently, the consignee filed its claim with the insurer, St. Paul Fire &
Marine Insurance Co. (Exhibit "N"), and the insurance company, on the basis of such
claim, paid to the consignee the insured value of the lost and damaged goods, including
other expenses in connection therewith, in the total amount of $1,134.46 U.S. currency
(Exhibit "U").

On August 5, 1961, as subrogee of the rights of the shipper and/or consignee, the
insurer, St. Paul Fire & Marine Insurance Co., instituted with the Court of First Instance
of Manila the present action 2 against the defendants for the recovery of said amount of
$1,134.46, plus costs.chanrobles law library : red

On August 23, 1961, the defendants Manila Port Service and Manila Railroad Company
resisted the action, contending, among others, that the whole cargo was delivered to
the consignee in the same condition in which it was received from the carrying vessel;
that their rights, duties and obligations as arrastre contractor at the Port of Manila are
governed by and subject to the terms, conditions and limitations contained in the
Management Contract between the Bureau of Customs and Manila Port Service, and
their liability is limited to the invoice value of the goods, but in no case more than
P500.00 per package, pursuant to paragraph 15 of the said Management Contract; and
that they are not the agents of the carrying vessel in the receipt and delivery of cargoes
in the Port of Manila.

On September 7, 1961, the defendants Macondray & Co., Inc., Barber Steamship Lines,
Inc. and Wilhelm Wilhelmsen also contested the claim alleging, among others, that the
carrier’s liability for the shipment ceased upon discharge thereof from the ship’s tackle;
that they and their co-defendant Manila Port Service are not the agents of the vessel;
that the said 218 packages were discharged from the vessel SS "Tai Ping" into the
custody of defendant Manila Port Service as operator of the arrastre service for the Port
of Manila; that if any damage was sustained by the shipment while it was under the
control of the vessel, such damage was caused by insufficiency of packing, force
majeure and/or perils of the sea; and that they, in good faith and for the purpose only
of avoiding litigation without admitting liability to the consignee, offered to settle the
latter’s claim in full by paying the C.I.F. value of 27 lbs. caramel, 4.13 kilos methyl
salicylate and 12 pieces pharmaceutical vials of the shipment, but their offer was
declined by the consignee and/or the plaintiff.

After due trial, the lower court, on March 10, 1965 rendered judgment ordering
defendants Macondray & Co., Inc., Barber Steamship Lines, Inc. and Wilhelm
Wilhelmsen to pay to the plaintiff, jointly and severally, the sum of P300.00, with legal
interest thereon from the filing of the complaint until fully paid, and defendants Manila
Railroad Company and Manila Port Service to pay to plaintiff, jointly and severally, the
sum of P809.67, with legal interest thereon from the filing of the complaint until fully
paid, the costs to be borne by all the said defendants. 3

On April 12, 1965, plaintiff, contending that it should recover the amount of $1,134.46,
or its equivalent in pesos at the rate of P3.90, instead of P2.00, for every US$1.00, filed
a motion for reconsideration, but this was denied by the lower court on May 5, 1965.
Hence, the present appeal.

Plaintiff-appellant argues that, as subrogee of the consignee, it should be entitled to

recover from the defendants-appellees the amount of $1,134.46 which it actually paid
to the consignee (Exhibits "N" & "U") and which represents the value of the lost and
damaged shipment as well as other legitimate expenses such as the duties and cost of
survey of said shipment, and that the exchange rate on the date of the judgment,
which was P3.90 for every US$1.00, should have been applied by the lower court.

Defendants-appellees countered that their liability is limited to the C.I.F. value of the
goods, pursuant to contract of sea carriage embodied in the bill of lading; that the
consignee’s (Winthrop-Steams, Inc.) claim against the carrier (Macondray & Co., Inc.,
Barber Steamship Lines, Inc., Wilhelm Wilhelmsen) and the arrastre operators (Manila
Port Service and Manila Railroad Company) was only for the sum of P1,109.67 (Exhibits
"G", "H", "I" & "J"), representing the C.I.F. value of the loss and damage sustained by
the shipment which was the amount awarded by the lower court to the plaintiff-
appellant; 4 defendants appellees are not insurers of the goods and as such they should
not be made to pay the insured value therefor; the obligation of the defendants-
appellees was established as of the date of discharge, hence the rate of exchange
should be based on the rate existing on that date, i.e., August 7, 1960, 5 and not the
value of the currency at the time the lower court rendered its decision on March 10,
1965.

The appeal is without merit.

The purpose of the bill of lading is to provide for the rights and liabilities of the parties
in reference to the contract to carry. 6 The stipulation in the bill of lading limiting the
common carrier’s liability to the value of the goods appearing in the bill, unless the
shipper or owner declares a greater value, is valid and binding. 7 This limitation of the
carrier’s liability is sanctioned by the freedom of the contracting parties to establish
such stipulations, clauses, terms, or conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs and public policy. 8 A stipulation
fixing or limiting the sum that may be recovered from the carrier on the loss or
deterioration of the goods is valid, provided it is (a) reasonable and just under the
circumstances, 9 and (b) has been fairly and freely agreed upon. 10 In the case at bar,
the liabilities of the defendants-appellees with respect to the lost or damaged
shipments are expressly limited to the C.I.F. value of the goods as per contract of sea
carriage embodied in the bill of lading, which reads: jgc:chanrobles.com.ph

"Whenever the value of the goods is less than $500 per package or other freight unit,
their value in the calculation and adjustment of claims for which the Carrier may be
liable shall for the purpose of avoiding uncertainties and difficulties in fixing value be
deemed to be the invoice value, plus freight and insurance if paid, irrespective of
whether any other value is greater or less.
"The limitation of liability and other provisions herein shall inure not only to the benefit
of the carrier, its agents, servants and employees, but also to the benefit of any
independent contractor performing services including stevedoring in connection with the
goods covered hereunder." (Paragraph 17, Emphasis supplied.).

It is not pretended that those conditions are unreasonable or were not freely and fairly
agreed upon. The shipper and consignee are, therefore, bound by such stipulations
since it is expressly stated in the bill of lading that in "accepting this Bill of Lading, the
shipper, owner and consignee of the goods, and the holder of the Bill of Lading agree to
be bound by all its stipulations, exceptions and conditions, whether written, stamped or
printed, as fully as if they were all signed by such shipper, owner, consignee or holder."
It is obviously for this reason that the consignee filed its claim against the defendants-
appellees on the basis of the C.I.F. value of the lost or damaged goods in the aggregate
amount of P1,109.67 (Exhibits "G", "H", "I" and "J"). 11

The plaintiff-appellant, as insurer, after paying the claim of the insured for damages
under the insurance, is subrogated merely to the rights of the assured. As subrogee, it
can recover only the amount that is recoverable by the latter. Since the right of the
assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to
like limitations and restrictions.
chanrobles lawlibrary : rednad

"The insurer after paying the claim of the insured for damages under the insurance is
subrogated merely to the rights of the insured and therefore can necessarily recover
only that to what was recoverable by the insured." 12

"Upon payment for a total loss of goods insured, the insurance is only subrogated to
such rights of action as the assured has against 3rd persons who caused or are
responsible for the loss. The right of action against another person, the equitable
interest in which passes to the insurer, being only that which the assured has, it follows
that if the assured has no such right of action, none passes to the insurer, and if the
assured’s right of action is limited or restricted by lawful contract between him and the
person sought to be made responsible for the loss, a suit by the insurer, in the right of
the assured, is subject to like limitations or restrictions." 13

Equally untenable is the contention of the plaintiff-appellant that because of

extraordinary inflation, it should be reimbursed for its dollar payments at the rate of
exchange on the date of the judgment and not on the date of the loss or damage. The
obligation of the carrier to pay for the damage commenced on the date it failed to
deliver the shipment in good condition to the consignee.

The C.I.F. Manila value of the goods which were lost or damaged, according to the
claim of the consignee dated September 26, 1960 is $226.37 (for the pilferage, Exhibit
"G") and $324.33 (shortlanded, Exhibit "H") or P456.14 and P653.53, respectively, in
Philippine Currency. The peso equivalent was based by the consignee on the exchange
rate of P2.015 to $1.00 which was the rate existing at that time. We find, therefore,
that the trial court committed no error in adopting the aforesaid rate of exchange.

WHEREFORE, the appealed decision is hereby affirmed, with costs against the plaintiff-
appellant.

Barredo, (Acting Chairman), Aquino, Concepcion, Jr. and Martin, JJ., concur.

Fernando, J., Chairman, is on leave.

Martin, J., was designated to sit in the Second Division.

Endnotes:

SECOND DIVISION

G.R. No. 87958               April 26, 1990

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURG, PA/AMERICAN

INTERNATIONAL UNDERWRITER (PHIL.) INC., petitioners,
vs.
STOLT-NIELSEN PHILIPPINES, INC. and COURT OF APPEALS, respondents.

Fajardo Law Offices for petitioners.

Sycip, Salazar, Hernandez & Gatmaitan for Stolt-Nielsen Phil., Inc.

MELENCIO-HERRERA, J.:

We uphold the ruling of respondent Court of Appeals that the claim or dispute herein is arbitrable.

On 9 January 1985, United Coconut Chemicals, Inc. (hereinafter referred to as SHIPPER) shipped
404.774 metric tons of distilled C6-C18 fatty acid on board MT "Stolt Sceptre," a tanker owned by
Stolt-Nielsen Philippines Inc. (hereinafter referred to as CARRIER), from Bauan, Batangas,
Philippines, consigned to "Nieuwe Matex" at Rotterdam, Netherlands, covered by Tanker Bill of
Lading BL No. BAT-1. The shipment was insured under a marine cargo policy with Petitioner
National Union Fire Insurance Company of Pittsburg (hereinafter referred to as INSURER), a non-life
American insurance corporation, through its settling agent in the Philippines, the American
International Underwriters (Philippines), Inc., the other petitioner herein.

It appears that the Bill of Lading issued by the CARRIER contained a general statement of
incorporation of the terms of a Charter Party between the SHIPPER and Parcel Tankers, Inc.,
entered into in Greenwich, Connecticut, U.S.A.

Upon receipt of the cargo by the CONSIGNEE in the Netherlands, it was found to be discolored and
totally contaminated. The claim filed by the SHIPPER-ASSURED with the CARRIER having been
denied, the INSURER indemnified the SHIPPER pursuant to the stipulation in the marine cargo
policy covering said shipment.

On 21 April 1986, as subrogee of the SHIPPER-ASSURED, the INSURER filed suit against the
CARRIER, before the Regional Trial Court of Makati, Branch 58 (RTC), for recovery of the sum of
P1,619,469.21, with interest, representing the amount the INSURER had paid the SHIPPER-
ASSURED. The CARRIER moved to dismiss/suspend the proceedings on the ground that the RTC
had no jurisdiction over the claim the same being an arbitrable one; that as subrogee of the
SHIPPER-ASSURED, the INSURER is subject to the provisions of the Bill of Lading, which includes
a provision that the shipment is carried under and pursuant to the terms of the Charter Party, dated
21 December 1984, between the SHIPPER-ASSURED and Parcel Tankers, Inc. providing for
arbitration.

The INSURER opposed the dismissal/suspension of the proceedings on the ground that it was not
legally bound to submit the claim for arbitration inasmuch as the arbitration clause provided in the
Charter Party was not incorporated into the Bill of Lading, and that the arbitration clause is void for
being unreasonable and unjust. On 28 July 1987, the RTC   denied the Motion, but subsequently
1

reconsidered its action on 19 November 1987, and deferred resolution on the Motion to
Dismiss/Suspend Proceedings until trial on the merits "since the ground alleged in said motion does
not appear to be indubitable."

The CARRIER then resorted to a Petition for Certiorari and Prohibition with prayer for Preliminary
Injunction and/or Temporary Restraining Order before the respondent Appellate Court seeking the
annulment of the 19 November 1987 RTC Order. On 12 April 1989, the respondent
Court   promulgated the Decision now under review, with the following dispositive tenor:
2

WHEREFORE', the order of respondent Judge dated November 19, 1987 deferring
resolution on petitioner Stolt-Nielsen's Motion to Dismiss/Suspend Proceedings is hereby
SET ASIDE; private respondent NUFIC (the INSURER) is ordered to refer its claims for
arbitration; and respondent Judge is directed to suspend the proceedings in Civil case No.
13498 pending the return of the corresponding arbitral award.

On 21 August 1989, we resolved to give due course and required the parties to submit their
respective Memoranda, which they have done, the last filed having been Noted on 23 October 1989.

First, herein petitioner-INSURER alleges that the RTC Order deferring resolution of the CARRIER's
Motion to Dismiss constitutes an interlocutory order, which can not be the subject of a special civil
action on certiorari and prohibition.

Generally, this would be true. However, the case before us falls under the exception. While a Court
Order deferring action on a motion to dismiss until the trial is interlocutory and cannot be challenged
until final judgment, still, where it clearly appears that the trial Judge or Court is proceeding in excess
or outside of its jurisdiction, the remedy of prohibition would lie since it would be useless and a waste
of time to go ahead with the proceedings (University of Sto. Tomas vs. Villanueva, 106 Phil. 439,
[1959] citing Philippine International Fair, Inc., et al., vs. Ibanez, et al., 94 Phil. 424 [1954]; Enrique
vs. Macadaeg, et al., 84 Phil. 674 [1949]; San Beda College vs. CIR, 97 Phil. 787 [1955]). Even a
cursory reading of the subject Bill of Lading, in relation to the Charter Party, reveals the Court's
patent lack of jurisdiction to hear and decide the claim.

We proceed to the second but more crucial issue: Are the terms of the Charter Party, particularly the
provision on arbitration, binding on the INSURER?

The INSURER postulates that it cannot be bound by the Charter Party because, as insurer, it is
subrogee only with respect to the Bill of Lading; that only the Bill of Lading should regulate the
relation among the INSURER, the holder of the Bill of Lading, and the CARRIER; and that in order to
bind it, the arbitral clause in the Charter Party should have been incorporated into the Bill of Lading.

We rule against that submission.

The pertinent portion of the Bill of Lading in issue provides in part:

This shipment is carried under and pursuant to the terms of the Charter dated December
21st 1984 at Greenwich, Connecticut, U.S.A. between Parcel Tankers. Inc. and United
Coconut Chemicals, Ind. as Charterer and all the terms whatsoever of the said
Charter except the rate and payment of freight specified therein apply to and govern the
rights of the parties concerned in this shipment. Copy of the Charter may be obtained from
the Shipper or Charterer. (Emphasis supplied)

While the provision on arbitration in the Charter Party reads:

H. Special Provisions.

x x x           x x x          x x x

4. Arbitration. Any dispute arising from the making, performance or termination of this
Charter Party shall be settled in New York, Owner and Charterer each appointing an
arbitrator, who shall be a merchant, broker or individual experienced in the shipping
business; the two thus chosen, if they cannot agree, shall nominate a third arbitrator who
shall be an admiralty lawyer. Such arbitration shall be conducted in conformity with the
provisions and procedure of the United States arbitration act, and a judgment of the court
shall be entered upon any award made by said arbitrator. Nothing in this clause shall be
deemed to waive Owner's right to lien on the cargo for freight, deed of freight, or demurrage.

Clearly, the Bill of Lading incorporates by reference the terms of the Charter Party. It is settled law
that the charter may be made part of the contract under which the goods are carried by an
appropriate reference in the Bill of Lading (Wharton Poor, Charter Parties and Ocean Bills of Lading
(5th ed., p. 71). This should include the provision on arbitration even without a specific stipulation to
that effect. The entire contract must be read together and its clauses interpreted in relation to one
another and not by parts. Moreover, in cases where a Bill of Lading has been issued by a carrier
covering goods shipped aboard a vessel under a charter party, and the charterer is also the holder
of the bill of lading, "the bill of lading operates as the receipt for the goods, and as document of title
passing the property of the goods, but not as varying the contract between the charterer and the
shipowner" (In re Marine Sulphur Queen, 460 F 2d 89, 103 [2d Cir. 1972]; Ministry of Commerce vs.
Marine Tankers Corp. 194 F. Supp 161, 163 [S.D.N.Y. 1960]; Greenstone Shipping Co., S.A. vs.
Transworld Oil, Ltd., 588 F Supp [D.El. 1984]). The Bill of Lading becomes, therefore, only a receipt
and not the contract of carriage in a charter of the entire vessel, for the contract is the Charter Party
(Shell Oil Co. vs. M/T Gilda, 790 F 2d 1209, 1212 [5th Cir. 1986]; Home Insurance Co. vs. American
Steamship Agencies, Inc., G.R. No. L-25599, 4 April 1968, 23 SCRA 24), and is the law between the
parties who are bound by its terms and condition provided that these are not contrary to law, morals,
good customs, public order and public policy (Article 1306, Civil Code).

As the respondent Appellate Court found, the INSURER "cannot feign ignorance of the arbitration
clause since it was already charged with notice of the existence of the charter party due to an
appropriate reference thereof in the bill of lading and, by the exercise of ordinary diligence, it could
have easily obtained a copy thereof either from the shipper or the charterer.

We hold, therefore, that the INSURER cannot avoid the binding effect of the arbitration clause. By
subrogation, it became privy to the Charter Party as fully as the SHIPPER before the latter was
indemnified, because as subrogee it stepped into the shoes of the SHIPPER-ASSURED and is
subrogated merely to the latter's rights. It can recover only the amount that is recoverable by the
assured. And since the right of action of the SHIPPER-ASSURED is governed by the provisions of
the Bill of Lading, which includes by reference the terms of the Charter Party, necessarily, a suit by
the INSURER is subject to the same agreements (see St. Paul Fire and Marine Insurance Co. vs.
Macondray, G.R. No. L-27796, 25 March 1976, 70 SCRA 122).

Stated otherwise, as the subrogee of the SHIPPER, the INSURER is contractually bound by the
terms of the Charter party.  Any claim of inconvenience or additional expense on its part should not
1âwphi1

render the arbitration clause unenforceable.

Arbitration, as an alternative mode of settling disputes, has long been recognized and accepted in
our jurisdiction (Chapter 2, Title XIV, Book IV, Civil Code). Republic Act No. 876 (The Arbitration
Law) also expressly authorizes arbitration of domestic disputes. Foreign arbitration as a system of
settling commercial disputes of an international character was likewise recognized when the
Philippines adhered to the United Nations "Convention on the Recognition and the Enforcement of
Foreign Arbitral Awards of 1958," under the 10 May 1965 Resolution No. 71 of the Philippine
Senate, giving reciprocal recognition and allowing enforcement of international arbitration
agreements between parties of different nationalities within a contracting state. Thus, it pertinently
provides:

1. Each Contracting State shall recognize an agreement in writing under which the parties
undertake to submit to arbitration all or any differences which have arisen or which may arise
between them in respect of a defined legal relationship, whether contractual or not,
concerning a subject matter capable of settlement by arbitration.

2. The term "agreement in writing" shall include an arbitral clause in a contract or an

arbitration agreement, signed by the parties or contained in an exchange of letters or
telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which
the parties have made an agreement within the meaning of this article, shall, at the request
of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is
null and void, inoperative or incapable of being performed.

It has not been shown that the arbitral clause in question is null and void, inoperative, or incapable of
being performed. Nor has any conflict been pointed out between the Charter Party and the Bill of
Lading.

In fine, referral to arbitration in New York pursuant to the arbitration clause, and suspension of the
proceedings in Civil Case No. 13498 below, pending the return of the arbitral award, is, indeed
called for.

WHEREFORE, finding no reversible error in respondent Appellate Court's 12 April 1989 Decision,
the instant Petition for Review on certiorari is DENIED and the said judgment is hereby AFFIRMED.
Costs against petitioners.

SO ORDERED.

Padilla, Sarmiento and Regalado JJ., concur. Paras, J., took no part.

THIRD DIVISION

 
G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY,
INC., respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a
reversal of the decision of the Court of Appeal  which affirmed the decision of the trial court of origin
1

finding the petitioner herein, Cebu Shipyard and Engineering Works, Inc. (CSEW) negligent and
liable for damages to the private respondent, William Lines, Inc., and to the insurer, Prudential
Guarantee Assurance Company, Inc.

The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the
business of dry-docking and repairing of marine vessels while the private respondent, Prudential
Guarantee and Assurance, Inc. (Prudential), also a domestic corporation is in the non-life insurance
business.

William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City, a
luxury passenger-cargo vessel, which caught fire and sank on February 16, 1991. At the time of the
unfortunate occurrence sued upon, subject vessel was insured with Prudential for P45,000,000.00
pesos for hull and machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
covering loss of or damage to the vessel through the negligence of, among others, ship repairmen.
The Policy provided as follows:

Subject to the conditions of this Policy, this insurance also covers loss of or damage
to Vessel directly caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or

Repairers are not an Assured hereunder.

xxx xxx xxx

provided such loss or damage has not resulted from want of due diligence by the
Assured, the Owners or Managers of the Vessel, of any of them Masters, Officers,
Crew or Pilots are not to be considered Owners within the meaning of this Clause
should they hold shares in the Vessel.  2

Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's Legal
Liability Insurance Policy. The policy was for P10 million only, under the limited liability clause, to wit:

7. Limit of Liability
 The limit of liability under this insurance, in respect of any one accident or series of
accidents, arising out of one occurrence, shall be [P10 million], including liability for
costs and expense which are either:

(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured. 3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in
Lapulapu City for annual dry-docking and repair.

On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc.
and CSEW to discuss the work to be undertaken on the M/V Manila City.

The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:

10. The Contractor shall replace at its own work and at its own cost any work or
material which can be shown to be defective and which is communicated in writing
within one (1) month of redelivery of the vessel or if the vessel was not in the
Contractor's Possession, the withdrawal of the Contractor's workmen, or at its option
to pay a sum equal to the cost of such replacement at its own works. These
conditions shall apply to any such replacements.

11. Save as provided in Clause 10, the Contractor shall not be under any liability to
the Customer either in contract or for delict or quasi-delict or otherwise except for
negligence and such liability shall itself be subject to the following overriding
limitations and exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and
above the liability to replace under Clause 10) or of any sub-
contractor shall be limited in respect of any defect or event (and a
series of accidents arising out of the same defect or event shall
constitute one defect or event) to the sum of Pesos Philippine
Currency One Million only.

(b) In no circumstance whatsoever shall the liability of the Contractor

or any Sub-Contractor include any sum in respect of loss of profit or
loss of use of the vessel or damages consequential on such loss of
use

xxx xxx xxx

20. The insurance on the vessel should be maintained by the customer and/or owner
of the vessel during the period the contract is in effect.4

While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW,
the master, officers and crew of M/V Manila City stayed in the vessel using their cabins as living
quarters. Other employees hired by William Lines to do repairs and maintenance work on the vessel
were also present during the dry-docking.
On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and
sank, resulting to its eventual total loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that
the fire which broke out in M/V Manila City was caused by CSEW's negligence and lack of care.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the
latter had paid William Lines, Inc. the value of the hull and machinery insurance on the M/V Manila
City. As a result of such payment Prudential was subrogated to the claim of P45 million, representing
the value of the said insurance it paid.

On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as
follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the
defendant, ordering the latter.

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee, the
amount of Forty-five Million (P45 million) Pesos, with interest at the legal rate until full
payment is made.

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven
Hundred Fifteen Thousand (P56,715,000.00) Pesos representing loss of income of
M/V MANILA CITY, with interest at the legal rate until full payment is made.

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million)
as payment, in addition to what it received from the insurance company to fully cover
the injury or loss, in order to replace the M/V MANILA CITY, with interest at the legal
rate until full payment is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven
Thousand Thirty-nine (P927,039.00) Pesos for the loss of fuel and lub (sic) oil on
board the vessel when she was completely gutted by fire at defendant, Cebu
Shipyard's quay, with interest at the legal rate until full payment is made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four
Thousand Six Hundred Seventy-seven Pesos and Ninety-five centavos
(P3,054.677.95) as payment for the spare parts and materials used in the M/V
MANILA CITY during dry-docking with interest at the legal rate until full payment is
made;

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand
(P500,000 00) Pesos in moral damages;

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this suit.

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the
pendency of the appeal, CSEW and William Lines presented a "Joint Motion for Partial Dismissal"
with prejudice, on the basis of the amicable settlement inked between Cebu Shipyard and William
Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW
and William Lines were concerned.

On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling
thus:

WHEREFORE, the judgment of the lower court ordering the defendant, Cebu
Shipyard and Engineering Works, Inc. to pay the plaintiff Prudential Guarantee and
Assurance, Inc., the subrogee, the sum of P45 Million, with interest at the legal rate
until full payment is made, as contained in the decision of Civil Case No. CEB-9935
is hereby AFFIRMED.

With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated February
13, 1998, CSEW found its way to this court via the present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING

THAT CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V
MANILA CITY AT THE TIME THE FIRE BROKE OUT.

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING

THE DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.

III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND

THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED
FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.

IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING

CSEW'S EXPERT EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.

V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING

THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN
INSURED.

VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF

SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE PERFORMANCE
OF ITS OBLIGATIONS UNDER THE SHIPREPAIR CONTRACTS. THE
CONTRACTUAL PROVISIONS LIMITING CSEW'S LIABILITY FOR NEGLIGENCE
TO A MAXIMUM OF P 1 MILLION IS NOT VALID, CONTRARY TO THE
APPLICABLE RULINGS OF THIS HONORABLE COURT.

Petitioner's version of the events that led to the fire runs as follows:

On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its
grave dock. It was then transferred to the docking quay of CSEW where the
remaining repair to be done was the replating of the top of Water Ballast Tank No. 12
(Tank Top No. 12) which was subcontracted by CSEW to JNB General Services.
Tank Top No. 12 was at the rear section of the vessel, on level with the flooring of
the crew cabins located on the vessel's second deck.

At around seven o'clock in the morning of February 16, 1991, the JNB workers
trimmed and cleaned the tank framing which involved minor hotworks
 (welding/cutting works). The said work was completed at about 10:00 a.m. The JNB
workers then proceeded to rig the steel plates, after which they had their lunch break.
The rigging was resumed at 1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers noticed
smoke coming from the passageway along the crew cabins. When one of the
workers, Mr. Casas, proceeded to the passageway to ascertain the origin of the
smoke, he noticed that smoke was gathering on the ceiling of the passageway but
did not see any fire as the crew cabins on either side of the passageway were
locked. He immediately sought out the proprietor of JNB, Mr. Buenavista, and the
Safety officer CSEW, Mr. Aves, who sounded the fire alarm. CSEW's fire brigade
immediately responded as well as the other fire fighting units in Metro Cebu.
However, there were no WLI representative, officer or crew to guide the firemen
inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire Department,
Mandaue Fire Cordova Fire Department, Emergency Rescue Unit Foundation, and
fire brigade of CSEW, the fire was not controlled until 2:00 a.m., of the following day,
February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the flames on the
vessel and fire again broke out. Then the huge amounts of water pumped into the
vessel, coupled with the strong current, caused the vessel to tilt until it capsized and
sank.

When M/V Manila City capsized, steel and angle bars were noticed to have been
newly welded along the port side of the hull of the vessel, at the level of the crew
cabins. William Lines did not previously apply for a permit to do hotworks on the said
portion of the ship as it should have done pursuant to its work order with CSEW. 5

Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner:

At around eleven o'clock in the morning of February 16, 1991, the Chief Mate of M/V
Manila City was inspecting the various works being done by CSEW on the vessel,
when he saw that some workers of CSEW were cropping out steel plates Tank Top
No. 12 using acetylene, oxygen and welding torch. He also observed that the rubber
insulation wire coming out of the air-conditioning unit was already burning, prompting
him to scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank
No. 12. The vessel's reeferman reported such occurence to the Chief Mate who
immediately assembled the crew members to put out the fire. When it was too hot for
them to stay on board and seeing that the fire cannot be controlled, the vessel's crew
were forced to withdraw from CSEW's docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was
insured with Prudential Guarantee, William Lines filed a claim for constructive loss,
and after a thorough investigation of the surrounding circumstances of the tragedy,
Prudential Guaranteed found the said insurance claim to be meritorious and issued a
check in favor of William Lines in the amount of P 45 million pesos representing the
total value of M/V Manila City's hull and machinery insurance. 6
The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for the
respondents, William Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioner's
submission that the finding of negligence by the Court of Appeals is not supported by the evidence
on record, and contrary to what the Court of Appeals found, petitioner did not have management and
control over M/V Manila City. Although it was brought to the premises of CSEW for annual repair,
William Lines, Inc. retained control over the vessel as the ship captain remained in command and
the ship's crew were still present. While it imposed certain rules and regulations on William Lines, it
was in the exercise of due diligence and not an indication of CSEW's exclusive control over subject
vessel. Thus, CSEW maintains that it did not have exclusive control over the M/V Manila City and
the trial court and the Court of Appeals erred in applying the doctrine of res ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that factual findings by
the Court of Appeals are conclusive on the parties and are not reviewable by this Court. They are
entitled to great weight and respect, even finality, especially when, as in this case, the Court of
Appeals affirmed the factual findings arrived at by the trial court.   When supported by sufficient
7

evidence, findings of fact by the Court of Appeals affirming those of the trial court, are not to be
disturbed on appeal. The rationale behind this doctrine is that review of the findings of fact of the
Court of Appeals is not a function that the Supreme Court normally undertakes. 8

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which
caused the total loss of subject M/V Manila City was due to the negligence of the employees and
workers of CSEW. Both courts found that the M/V Manila City was under the custody and control of
petitioner CSEW, when the ill-fated vessel caught fire. The decisions of both the lower court and the
Court of Appeals set forth clearly the evidence sustaining their finding of actionable negligence on
the part of CSEW. This factual finding is conclusive on the parties. The court discerns no basis for
disturbing such finding firmly anchored on enough evidence. As held in the case of Roblett Industrial
Construction Corporation vs. Court of Appeals, "in the absence of any showing that the trial court
failed to appreciate facts and circumstances of weight and substance that would have altered its
conclusion, no compelling reason exists for the Court to impinge upon matters more appropriately
within its province.
9

Furthermore, in petitions for review on certiorari, only questions of law may be put into issue.
Questions of fact cannot be entertained. The finding of negligence by the Court of Appeals is a
question which this Court cannot look into as it would entail going into factual matters on which the
finding of negligence was based. Such an approach cannot be allowed by this Court in the absence
of clear showing that the case falls under any of the exceptions   to the well-established principle.
10

The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by
reason of the negligence of the workers of CSEW, when the said vessel was under the exclusive
custody and control of CSEW is accordingly upheld. Under the circumstances of the case, the
doctrine of res ipsa loquitur applies. For the doctrine of res ipsa loquitur to apply to a given situation,
the following conditions must concur (1) the accident was of a kind which does not ordinarily occur
unless someone is negligent; and (2) that the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence.

The facts and evidence on record reveal the concurrence of said conditions in the case under
scrutiny. First, the fire that occurred and consumed M/V Manila City would not have happened in the
ordinary course of things if reasonable care and diligence had been exercised. In other words, some
negligence must have occurred. Second, the agency charged with negligence, as found by the trial
court and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu Shipyard
and Engineering Works, Inc., which had control over subject vessel when it was docketed for annual
repairs. So also, as found by the regional trial court, "other responsible causes, including the conduct
of the plaintiff, and third persons, are sufficiently eliminated by the evidence. 
11

What is more, in the present case the trial court found direct evidence to prove that the workers
and/or employees of CSEW were remiss in their duty of exercising due diligence in the care of
subject vessel. The direct evidence substantiates the conclusion that CSEW was really negligent.
Thus, even without applying the doctrine of res ipsa loquitur, in light of the direct evidence on record,
the ineluctable conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc., was
negligent and consequently liable for damages to the respondent, William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled
on the inadmissibility of the expert testimonies it (petitioner) introduced on the probable cause and
origin of the fire. Petitioner maintains that the Court of Appeals erred in disregarding the testimonies
of the fire experts, Messrs. David Grey and Gregory Michael Southeard, who testified on the
probable origin of the fire in M/V Manila City. Petitioner avers that since the said fire experts were
one in their opinion that the fire did not originate in the area of Tank Top No. 12 where the JNB
workers were doing hotworks but on the crew accommodation cabins on the portside No. 2 deck, the
trial court and the Court of Appeals should have given weight to such finding based on the
testimonies of fire experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they may have probative
value, reception in evidence of expert testimonies is within the discretion of the court. Section 49,
Rule 130 of the Revised Rules of Court, provides:

Sec. 49. Opinion of expert witness. — The opinion of a witness on a matter requiring

special knowledge, skill, experience or training which he is shown to possess, may
be received in evidence.

The word "may" signifies that the use of opinion of an expert witness as evidence is a
prerogative of the courts. It is never mandatory for judges to give substantial weight to expert
testimonies. If from the facts and evidence on record, a conclusion is readily ascertainable,
there is no need for the judge to resort to expert opinion evidence. In the case under
consideration, the testimonies of the fire experts were not the only available evidence on the
probable cause and origin of the fire. There were witnesses who were actually on board the
vessel when the fire occurred. Between the testimonies of the fire experts who merely based
their findings and opinions on interviews and the testimonies of those present during the fire,
the latter are of more probative value. Verily, the trial court and the Court of Appeals did not
err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to
the rights of William Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an
excluded risk and (2) it is a co-assured under the Marine Hull Insurance Policy.

It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly excluded
from the coverage of the insurance because the same resulted from "want of due diligence by the
Assured, Owners or Managers" which is not included in the risks insured against. Again, this theory
of petitioner is bereft of any factual or legal basis. It proceeds from a wrong premise that the fire
which gutted subject vessel was caused by the negligence of the employees of William Lines, Inc.
To repeat, the issue of who between the parties was negligent has already been resolved against
Cebu Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to William Lines,
Inc. the former was subroga ted to the right of the latter to indemnification from CSEW. As aptly
ruled by the Court of Appeals, the law on the manner is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury. 
12

Thus, when Prudential, after due verification of the merit and validity of the insurance claim of
William Lines, Inc., paid the latter the total amount covered by its insurance policy, it was subrogated
to the right of the latter to recover the insured loss from the liable party, CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured
under the subject insurance policy. To buttress its stance that it is a co-assured, petitioner placed
reliance on Clause 20 of the Work Order which states:

20 The insurance on the vessel should be maintained by the customer and/or owner
of the vessel during the period the contract is in effect. 
13

According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume
the risk of loss of the vessel while under dry-dock or repair and to such extent, it is benefited
and effectively constituted as a co-assured under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is
clear in the sense that it requires William Lines to maintain insurance on the vessel during the period
of dry-docking or repair. Concededly, such a stipulation works to the benefit of CSEW as the ship
repairer. However, the fact that CSEW benefits from the said stipulation does not automatically
make it as a co-assured of William Lines. The intention of the parties to make each other a co-
assured under an insurance policy is to be gleaned principally from the insurance contract or policy
itself and not from any other contract or agreement because the insurance policy denominates the
assured and the beneficiaries of the insurance. The hull and machinery insurance procured by
William Lines, Inc. from Prudential named only "William Lines, Inc." as the assured. There was no
manifestation of any intention of William Lines, Inc. to constitute CSEW as a co-assured under
subject policy. It is axiomatic that when the terms of a contract are clear its stipulations
control.   Thus, when the insurance policy involved named only William Lines, Inc. as the assured
14

thereunder, the claim of CSEW that it is a co-assured is unfounded.

Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:

Subject to the conditions of this Policy, this insurance also covers loss of or damage
to vessel directly caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or

Repairers are not an Assured hereunder   (emphasis supplied).
15
As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the
policy, it would nullify any claim of William Lines, Inc. from Prudential for any loss or damage caused
by the negligence of CSEW. Certainly, no shipowner would agree to make a shiprepairer a co-
assured under such insurance policy; otherwise, any claim for loss or damage under the policy
would be invalidated. Such result could not have been intended by William Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines
Inc., by stipulation in the Contract or Work Order its liability is limited to One Million (P1,000,000.00)
Pesos only, and Prudential a mere subrogee of William Lines, Inc., should only be entitled to collect
the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as
binding as an ordinary contract, the Court recognizes instances when reliance on such contracts
cannot be favored especially where the facts and circumstances warrant that subject stipulations be
disregarded.   Thus, in ruling on the validity and applicability of the stipulation limiting the liability of
16

CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and circumstances vis-a-
vis the nature of the provision sought to be enforced should be considered, bearing in mind the
principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million
(P45,000,000.00) Pesos. To determine the validity and sustainability of the claim of William Lines,
Inc., for a total loss, Prudential conducted its own inquiry. Upon thorough investigation by its hull
surveyor, M/V Manila City was found to be beyond economical salvage and repair.   The evaluation
17

of the average adjuster also reported a constructive total loss.   The said claim of William Lines, Inc.,
18

was then found to be valid and compensable such that Prudential paid the latter the total value of its
insurance claim. Furthermore, it was ascertained that the replacement cost of the vessel (the price of
a vessel similar to M/V Manila City), amounts to Fifty Million (P 50,000,000.00) Pesos. 19

Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner
has been sufficiently proven, it would indeed be unfair and inequitable to limit the liability of petitioner
to One Million Pesos only. As aptly held by the trial court, "it is rather unconscionable if not
overstrained." To allow CSEW to limit its liability to One Million Pesos notwithstanding the fact that
the total loss suffered by the assured and paid for by Prudential amounted to Forty Five Million
(P45,000,000.00) Pesos would sanction the exercise of a degree of diligence short of what is
ordinarily required because, then, it would not be difficult for petitioner to escape liability by the
simple expedient of paying an amount very much lower than the actual damage or loss suffered by
William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September
3, 1997, and Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No
pronouncement as to costs. 1âwphi1.nêt

SO ORDERED.

Romero, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.

#Footnotes

SECOND DIVISION

G.R. No. L-52756 October 12, 1987

MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:

Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979, ordering petitioner
Manila Mahogany Manufacturing Corporation to pay private respondent Zenith Insurance Corporation the sum of Five Thousand Pesos
(P5,000.00) with 6% annual interest from 18 January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and
the resolution of the same Court, dated 8 February 1980, denying petitioner's motion for reconsideration of it's decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a
truck owned by San Miguel Corporation. For the damage caused, respondent company paid
petitioner five thousand pesos (P5,000.00) in amicable settlement. Petitioner's general manager
executed a Release of Claim, subrogating respondent company to all its right to action against San
Miguel Corporation.

On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand

reimbursement from San Miguel Corporation of the amount it had paid petitioner. Insurance
Adjusters, Inc. refused reimbursement, alleging that San Miguel Corporation had already paid
petitioner P4,500.00 for the damages to petitioner's motor vehicle, as evidenced by a cash voucher
and a Release of Claim executed by the General Manager of petitioner discharging San Miguel
Corporation from "all actions, claims, demands the rights of action that now exist or hereafter [sic]
develop arising out of or as a consequence of the accident."

Respondent insurance company thus demanded from petitioner reimbursement of the sum of
P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit
in the City Court of Manila for the recovery of P4,500.00. The City Court ordered petitioner to pay
respondent P4,500.00. On appeal the Court of First Instance of Manila affirmed the City Court's
decision in toto, which CFI decision was affirmed by the Court of Appeals, with the modification that
petitioner was to pay respondent the total amount of P5,000.00 that it had earlier received from the
respondent insurance company.

Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent
company as the subrogation in the Release of Claim it executed in favor of respondent was
conditioned on recovery of the total amount of damages petitioner had sustained. Since total
damages were valued by petitioner at P9,486.43 and only P5,000.00 was received by petitioner from
respondent, petitioner argues that it was entitled to go after San Miguel Corporation to claim the
additional P4,500.00 eventually paid to it by the latter, without having to turn over said amount to
respondent. Respondent of course disputes this allegation and states that there was no qualification
to its right of subrogation under the Release of Claim executed by petitioner, the contents of said
deed having expressed all the intents and purposes of the parties.

To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner
cites Art. 2207 of the Civil Code, which states:

If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of
contract complained of the insurance company shall be subrogated to the rights of
 the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Petitioner also invokes Art. 1304 of the Civil Code, stating.

A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his
place in virtue of the partial payment of the same credit.

We find petitioners arguments to be untenable and without merit. In the absence of any other
evidence to support its allegation that a gentlemen's agreement existed between it and respondent,
not embodied in the Release of Claim, such ease of Claim must be taken as the best evidence of the
intent and purpose of the parties. Thus, the Court of Appeals rightly stated:

Petitioner argues that the release claim it executed subrogating Private respondent
to any right of action it had against San Miguel Corporation did not preclude Manila
Mahogany from filing a deficiency claim against the wrongdoer. Citing Article 2207,
New Civil Code, to the effect that if the amount paid by an insurance company does
not fully cover the loss, the aggrieved party shall be entitled to recover the deficiency
from the person causing the loss, petitioner claims a preferred right to retain the
amount coming from San Miguel Corporation, despite the subrogation in favor of
Private respondent.

Although petitioners right to file a deficiency claim against San Miguel Corporation is
with legal basis, without prejudice to the insurer's right of subrogation, nevertheless
when Manila Mahogany executed another release claim (Exhibit K) discharging San
Miguel Corporation from "all actions, claims, demands and rights of action that now
exist or hereafter arising out of or as a consequence of the accident" after the insurer
had paid the proceeds of the policy- the compromise agreement of P5,000.00 being
based on the insurance policy-the insurer is entitled to recover from the insured the
amount of insurance money paid (Metropolitan Casualty Insurance Company of New
York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and
Insolvency Law with comments and annotations, H.B. Perez 1976, p. 151). Since
petitioner by its own acts released San Miguel Corporation, thereby defeating private
respondents, the right of subrogation, the right of action of petitioner against the
insurer was also nullified. (Sy Keng & Co. vs. Queensland Insurance Co., Ltd., 54
O.G. 391) Otherwise stated: private respondent may recover the sum of P5,000.00 it
had earlier paid to petitioner. 1

As held in Phil. Air Lines v. Heald Lumber Co.,  2

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

... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation
under its clear right to file a deficiency claim for damages incurred, against the
wrongdoer, should the insurance company not fully pay for the injury caused (Article
2207, New Civil Code). However, when petitioner released San Miguel Corporation
from any liability, petitioner's right to retain the sum of P5,000.00 no longer existed,
thereby entitling private respondent to recover the same. (Emphasis supplied)

As has been observed:

... The right of subrogation can only exist after the insurer has paid the otherwise the
insured will be deprived of his right to full indemnity. If the insurance proceeds are
not sufficient to cover the damages suffered by the insured, then he may sue the
party responsible for the damage for the the [sic] remainder. To the extent of the
amount he has already received from the insurer enjoy's [sic] the right of
subrogation.

Since the insurer can be subrogated to only such rights as the insured may
have, should the insured, after receiving payment from the insurer, release the
wrongdoer who caused the loss, the insurer loses his rights against the latter. But in
such a case, the insurer will be entitled to recover from the insured whatever it has
paid to the latter, unless the release was made with the consent of the
insurer.   (Emphasis supplied.)
4

And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still,
the respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by
the insurer. The Court of Appeals rightly reasoned as follows:

It is to be noted that private respondent, in its companies, prays for the recovery, not
of P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel
Corporation had paid to petitioner. On this score, We believe the City Court and
Court of First Instance erred in not awarding the proper relief. Although private
respondent prays for the reimbursement of P4,500.00 paid by San Miguel
Corporation, instead of P5,000.00 paid under the insurance policy, the trial court
should have awarded the latter, although not prayed for, under the general prayer in
the complaint "for such further or other relief as may be deemed just or equitable,
(Rule 6, Sec. 3, Revised Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ;
Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).

WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby
AFFIRMED with costs against petitioner.

SO ORDERED.

THIRD DIVISION

G.R. No. L-52732 August 29, 1988

F.F. CRUZ and CO., INC., petitioner,
vs.
THE COURT OF APPEALS, GREGORIO MABLE as substituted by his wife LUZ ALMONTE
MABLE and children DOMING, LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME,
ANTONIO, and BERNARDO all surnamed MABLE, respondents.

Luis S. Topacio for petitioner.

Mauricio M. Monta for respondents.

CORTES, J.:

This petition to review the decision of the Court of Appeals puts in issue the application of the common law doctrine of res ipsa loquitur.

The essential facts of the case are not disputed.

The furniture manufacturing shop of petitioner in Caloocan City was situated adjacent to the
residence of private respondents. Sometime in August 1971, private respondent Gregorio Mable first
approached Eric Cruz, petitioner's plant manager, to request that a firewall be constructed between
the shop and private respondents' residence. The request was repeated several times but they fell
on deaf ears. In the early morning of September 6, 1974, fire broke out in petitioner's shop.
Petitioner's employees, who slept in the shop premises, tried to put out the fire, but their efforts
proved futile. The fire spread to private respondents' house. Both the shop and the house were
razed to the ground. The cause of the conflagration was never discovered. The National Bureau of
Investigation found specimens from the burned structures negative for the presence of inflammable
substances.

Subsequently, private respondents collected P35,000.00 on the insurance on their house and the
contents thereof.

On January 23, 1975, private respondents filed an action for damages against petitioner, praying for
a judgment in their favor awarding P150,000.00 as actual damages, P50,000.00 as moral damages,
P25,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs. The Court of First
Instance held for private respondents:

WHEREFORE, the Court hereby renders judgment, in favor of plaintiffs, and against
the defendant:

1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for
damages suffered by said plaintiffs for the loss of their house, with interest of 6%
from the date of the filing of the Complaint on January 23, 1975, until fully paid;

2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss
of plaintiffs' furnitures, religious images, silverwares, chinawares, jewelries, books,
kitchen utensils, clothing and other valuables, with interest of 6% from date of the
filing of the Complaint on January 23, 1975, until fully paid;
 3. Ordering the defendant to pay to the plaintiffs the sum of P5,000.00 as moral
damages, P2,000.00 as exemplary damages, and P5,000.00 as and by way of
attorney's fees;

4. With costs against the defendant;

5. Counterclaim is ordered dismissed, for lack of merit. [CA Decision, pp. 1-2; Rollo,
pp. 29-30.]

On appeal, the Court of Appeals, in a decision promulgated on November 19, 1979, affirmed the
decision of the trial court but reduced the award of damages:

WHEREFORE, the decision declaring the defendants liable is affirmed. The

damages to be awarded to plaintiff should be reduced to P70,000.00 for the house
and P50,000.00 for the furniture and other fixtures with legal interest from the date of
the filing of the complaint until full payment thereof. [CA Decision, p. 7; Rollo, p. 35.]

A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution dated
February 18, 1980. Hence, petitioner filed the instant petition for review on February 22, 1980. After
the comment and reply were filed, the Court resolved to deny the petition for lack of merit on June
11, 1980.

However, petitioner filed a motion for reconsideration, which was granted, and the petition was given
due course on September 12, 1980. After the parties filed their memoranda, the case was submitted
for decision on January 21, 1981.

Petitioner contends that the Court of Appeals erred:

1. In not deducting the sum of P35,000.00, which private respondents recovered on the insurance on
their house, from the award of damages.

2. In awarding excessive and/or unproved damages.

3. In applying the doctrine of res ipsa loquitur to the facts of the instant case.

The pivotal issue in this case is the applicability of the common law doctrine of res ipsa loquitur, the
issue of damages being merely consequential. In view thereof, the errors assigned by petitioner shall
be discussed in the reverse order.

1. The doctrine of res ipsa loquitur, whose application to the instant case petitioner objects to, may
be stated as follows:

Where the thing which caused the injury complained of is shown to be under the
management of the defendant or his servants and the accident is such as in the
ordinary course of things does not happen if those who have its management or
control use proper care, it affords reasonable evidence, in the absence of
explanation by the defendant, that the accident arose from want of care. [Africa v.
Caltex (Phil.), Inc., G.R. No. L-12986, March 31, 1966, 16 SCRA 448.]

Thus, in Africa, supra, where fire broke out in a Caltex service station while gasoline from a tank
truck was being unloaded into an underground storage tank through a hose and the fire spread to
and burned neighboring houses, this Court, applying the doctrine of res ipsa loquitur, adjudged
Caltex liable for the loss.

The facts of the case likewise call for the application of the doctrine, considering that in the normal
course of operations of a furniture manufacturing shop, combustible material such as wood chips,
sawdust, paint, varnish and fuel and lubricants for machinery may be found thereon.

It must also be noted that negligence or want of care on the part of petitioner or its employees was
not merely presumed. The Court of Appeals found that petitioner failed to construct a firewall
between its shop and the residence of private respondents as required by a city ordinance; that the
fire could have been caused by a heated motor or a lit cigarette; that gasoline and alcohol were used
and stored in the shop; and that workers sometimes smoked inside the shop [CA Decision, p. 5;
Rollo, p. 33.]

Even without applying the doctrine of res ipsa loquitur, petitioner's failure to construct a firewall in
accordance with city ordinances would suffice to support a finding of negligence.

Even then the fire possibly would not have spread to the neighboring houses were it
not for another negligent omission on the part of defendants, namely, their failure to
provide a concrete wall high enough to prevent the flames from leaping over it. As it
was the concrete wall was only 2-1/2 meters high, and beyond that height it
consisted merely of galvanized iron sheets, which would predictably crumble and
melt when subjected to intense heat. Defendant's negligence, therefore, was not only
with respect to the cause of the fire but also with respect to the spread thereof to the
neighboring houses. [Africa v. Caltex (Phil.), Inc., supra; Emphasis supplied.]

In the instant case, with more reason should petitioner be found guilty of negligence since it had
failed to construct a firewall between its property and private respondents' residence which
sufficiently complies with the pertinent city ordinances. The failure to comply with an ordinance
providing for safety regulations had been ruled by the Court as an act of negligence [Teague v.
Fernandez, G.R. No. L-29745, June 4, 1973, 51 SCRA 181.]

The Court of Appeals, therefore, had more than adequate basis to find petitioner liable for the loss
sustained by private respondents.

2. Since the amount of the loss sustained by private respondents constitutes a finding of fact, such
finding by the Court of Appeals should not be disturbed by this Court [M.D. Transit & Taxi Co., Inc. v.
Court of Appeals, G.R. No. L-23882, February 17, 1968, 22 SCRA 559], more so when there is no
showing of arbitrariness.

In the instant case, both the CFI and the Court of Appeals were in agreement as to the value of
private respondents' furniture and fixtures and personal effects lost in the fire (i.e. P50,000.00). With
regard to the house, the Court of Appeals reduced the award to P70,000.00 from P80,000.00. Such
cannot be categorized as arbitrary considering that the evidence shows that the house was built in
1951 for P40,000.00 and, according to private respondents, its reconstruction would cost
P246,000.00. Considering the appreciation in value of real estate and the diminution of the real
value of the peso, the valuation of the house at P70,000.00 at the time it was razed cannot be said
to be excessive.

3. While this Court finds that petitioner is liable for damages to private respondents as found by the
Court of Appeals, the fact that private respondents have been indemnified by their insurer in the
amount of P35,000.00 for the damage caused to their house and its contents has not escaped the
attention of the Court. Hence, the Court holds that in accordance with Article 2207 of the Civil Code
the amount of P35,000.00 should be deducted from the amount awarded as damages. Said article
provides:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company is subrogated to the rights of the
insured against the wrongdoer or the person who violated the contract. If the amount
paid by the insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing the loss or
injury. (Emphasis supplied.]

The law is clear and needs no interpretation. Having been indemnified by their insurer, private
respondents are only entitled to recover the deficiency from petitioner.

On the other hand, the insurer, if it is so minded, may seek reimbursement of the amount it
indemnified private respondents from petitioner. This is the essence of its right to be subrogated to
the rights of the insured, as expressly provided in Article 2207. Upon payment of the loss incurred by
the insured, the insurer is entitled to be subrogated pro tanto to any right of action which the insured
may have against the third person whose negligence or wrongful act caused the loss [Fireman's
Fund Insurance Co. v. Jamila & Co., Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323.]

Under Article 2207, the real party in interest with regard to the indemnity received by the insured is
the insurer [Phil. Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031, (1957).] Whether or not the
insurer should exercise the rights of the insured to which it had been subrogated lies solely within
the former's sound discretion. Since the insurer is not a party to the case, its identity is not of record
and no claim is made on its behalf, the private respondent's insurer has to claim his right to
reimbursement of the P35,000.00 paid to the insured.

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED
with the following modifications as to the damages awarded for the loss of private respondents'
house, considering their receipt of P35,000.00 from their insurer: (1) the damages awarded for the
loss of the house is reduced to P35,000.00; and (2) the right of the insurer to subrogation and thus
seek reimbursement from petitioner for the P35,000.00 it had paid private respondents is
recognized.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., co