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Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. Nos. 180880-81               September 25, 2009

KEPPEL CEBU SHIPYARD, INC., Petitioner,
vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

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G.R. Nos. 180896-97

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,
vs.
KEPPEL CEBU SHIPYARD, INC., Respondent.

D E C I S I O N

NACHURA, J.:

Before us are the consolidated petitions filed by the parties—Pioneer Insurance and Surety Corporation¹ (Pioneer) and Keppel Cebu Shipyard, Inc.² (KCSI)—to review on certiorari the Decision³ dated December 17, 2004 and the Amended Decision⁴ dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934.

On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a Shiprepair Agreement⁵ wherein KCSI would renovate and reconstruct WG&A’s M/V "Superferry 3" using its dry docking facilities pursuant to its restrictive safety and security rules and regulations. Prior to the execution of the Shiprepair Agreement, "Superferry 3" was already insured by WG&A with Pioneer for US$8,472,581.78. The Shiprepair Agreement reads—

SHIPREPAIR AGREEMENT⁶

Company:	WG & A JEBSENS SHIPMANAGEMENT INC.
Address:	Harbour Center II, Railroad & Chicago Sts. Port Area, City of Manila

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V "SUPERFERRY 3" and KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named vessel ordered by the Owner’s Authorized Representative shall be carried out under the Keppel Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the parties:

1. The Owner shall inform its insurer of Clause 20⁷ and 22 (a)⁸ (refer at the back hereof) and shall include Keppel Cebu Shipyard as a co-assured in its insurance policy.

2. The Owner shall waive its right to claim for any loss of profit or loss of use or damages consequential on such loss of use resulting from the delay in the redelivery of the above vessel.

3. Owner’s sub-contractors or workers are not permitted to work in the yard without the written approval of the Vice President – Operations.

4. In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims, damages, or liabilities arising from death or bodily injuries to Owner’s workers, or damages to the vessel or other property however caused.

5. On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited to attend a conference with our Production, Safety and Security personnel whereby they will be briefed on, and given copies of Shipyard safety regulations.

6. An adequate number of officers and crew must remain on board at all times to ensure the safety of the vessel and compliance of safety regulations by crew and owner employed workmen.

7. The ship’s officers/crew or owner appointed security personnel shall maintain watch against pilferage and acts of sabotage.

8. The yard must be informed and instructed to provide the necessary security arrangement coverage should there be inadequate or no crew on board to provide the expressed safety and security enforcement.

9. The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the [K]eppel Cebu Shipyard’s employees and/or contract workers; theft and/or damages to Keppel Cebu Shipyard’s properties and other liabilities which are caused by the workers of the Owner.

10. The invoice shall be based on quotation reference 99-KCSI-211 dated December 20, 1999 tariff dated March 15, 1998.

11. Payment term shall be as follows:

12. The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may arise under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be submitted for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008 under the auspices of the Philippine Arbitration Commission.

(Signed) BARRY CHIA SOO HOCK (Printed Name/Signature Above Name)		(Signed) (Printed Name/Signature Above Name)
Vice President – Operations Keppel Cebu Shipyard, Inc.		Authorized Representative for and in behalf of: WG & A Jebsens Shipmgmt.
JAN. 26, 2000. Date		Date

On February 8, 2000, in the course of its repair, M/V "Superferry 3" was gutted by fire. Claiming that the extent of the damage was pervasive, WG&A declared the vessel’s damage as a "total constructive loss" and, hence, filed an insurance claim with Pioneer.

On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt⁹ in favor of Pioneer, to wit:

LOSS AND SUBROGATION RECEIPT

16 June 2000

Our Claim Ref: MH-NIL-H0-99-00018
US$8,472,581.78
------------------------------------------------

RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and discharge of all claims for loss and expenses sustained to the vessel "SUPERFERRY 3" insured under Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as follows:

Fire on board at Keppel Cebu Shipyard
on 08 February 2000

and in consideration of which the undersigned hereby assigns and transfers to the said company each and all claims and demands against any person, persons, corporation or property arising from or connected with such loss or damage and the said company is subrogated in the place of and to the claims and demands of the undersigned against said person, persons, corporation or property in the premises to the extent of the amount above-mentioned.

WILLIAM, GOTHONG & ABOITIZ, INC. &/OR ABOITIZ SHIPPING CORP. By: (Signed) ______________________________________ Witnesses: (Signed) ______________________________________ (Signed) ______________________________________

Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:

1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the date of the "Loss and Subrogation Receipt" on 16 June 2000 or from the date of filing of [the] "Request for Arbitration," as may be found proper;

2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens Shipmanagement, Inc. the sum of ₱500,000,000.00 plus interest thereon from the date of filing [of the] "Request for Arbitration" or date of the arbitral award, as may be found proper;

3. To pay to the claimants herein the sum of ₱3,000,000.00 for and as attorney’s fees; plus other damages as may be established during the proceedings, including arbitration fees and other litigation expenses, and the costs of suit.

It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the "Shiprepair Agreement" (Annex "A") as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any legal effect whatsoever.¹⁰

KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant.

In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on January 26, 2000, M/V "Superferry 3" arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on the same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V "Superferry 3" on February 8, 2000, while still dry docked in KCSI’s shipyard.¹¹

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

Pioneer’s Theory of the Case:

First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of Subrogation. Claimant then proceeded to explain that the Right of Subrogation:

Is by Operation of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.

Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the Right of Subrogation Entitles Insurer to Recover from the Liable Party.

Second, Respondent Keppel had custody of and control over the M/V "Superferry 3" while said vessel was in Respondent Keppel’s premises. In its Draft Decision, Claimant stated:

A. The evidence presented during the hearings indubitably proves that respondent not only took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-docking and repair of the vessel.

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

C. Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel.

D. The practice of allowing a shipowner and its sub-contractors to perform maintenance works while the vessel was within respondent’s premises does not detract from the fact that control and custody over M/V Superferry 3 was transferred to the yard.

From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V Superferry 3.

Third, the Vessel’s Safety Manual cannot be relied upon as proof of the Master’s continuing control over the vessel.

Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, the Yard is liable under the ruling laid down by the Supreme Court in the "Manila City" case. Claimant asserts that said ruling is applicable hereto as The Law of the Case.

Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa Loquitur, but from its negligence in this case.

Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According to Claimant;

In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons:

A. The "Control Test" – The yard exercised control over Sevillejo. The power of control is not diminished by the failure to exercise control.

B. There was no independent work contract between Joniga and Sevillejo – Joniga was not the employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.

C. The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owner’s hot works under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.

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

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

B. Dr. Joniga’s authority to request the execution of owner’s hot works in the passenger areas was expressly recognized by the Yard Project Superintendent Orcullo.

Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the yard, and the owner’s hotworks were conducted by welders who remained employees of the yard. Claimant contends that the need, if any, for an owner’s application for a hot work permit was canceled out by the yard’s actual knowledge of Sevillejo’s whereabouts and the fact that he was in deck A doing owner’s hotworks.

Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent Ship Repairer.1avvphi1

The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders never became employees of the owner so as to obligate the latter to be responsible for their conduct and performance.

Claimant enumerated further badges of yard negligence.

According to Claimant:

A. Yard’s water supply was inadequate.

B. Yard Fire Fighting Efforts and Equipment Were Inadequate.

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

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

Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented its case against:

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

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

(iii) Need for a plan theory.

(iv) The unauthorized hot works theory.

(v) The Marina report theory.

The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by Respondent.

KCSI’s Theory of the Case

1. The Claimant has no standing to file the Request for Arbitration and the Tribunal has no jurisdiction over the case:

(a) There is no valid arbitration agreement between the Yard and the Vessel Owner. On January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC jurisdiction.

(b) The Claimant is not a real party in interest and has no standing because it has not been subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not been subrogated to any rights which the Vessel may have against the Yard because:

i. The Claimant has not proved payment of the proceeds of the policies to any specific party. As a consequence, it has also not proved payment to the Vessel Owner.

ii. The Claimant had no legally demandable obligation to pay under the policies and did so only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total Loss "unless the expense of recovering and repairing the vessel would exceed the Agreed Value" of ₱360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment was voluntary, and there was no resulting subrogation to the Vessel.

iii. There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article 2207 and it does not succeed to the Vessel’s rights under the Ship [R]epair Agreement and the arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it derived no benefit from the Claimant’s payment to the Vessel Owner. Third, in any event, the Claimant has not proved payment of the proceeds to the Vessel Owner.

2. The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the agreement.

3. The proximate cause of the fire and damage to the Vessel was not any negligence committed by Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary, the proximate cause of the fire was Dr. Joniga’s and the Vessel’s deliberate decision to have Angelino Sevillejo undertake cutting work in inherently dangerous conditions created by them.

(a) The Claimant’s material witnesses lied on the record and the Claimant presented no credible proof of any negligence by Angelino Sevillejo.

(b) Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in extremely hazardous conditions and were the proximate cause of the fire and the resulting damage to the Vessel.

(c) The Yard’s expert witness, Dr. Eric Mullen gave the only credible account of the cause and the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the bulkhead door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come from the cutting of any of the sides of the door. Consequently, the cutting itself of the bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of the door’s bottom edge, was the proximate cause of the fire.

(d) The Manila City case is irrelevant to this dispute and in any case, does not establish governing precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart from the differences in the factual setting of the two cases, the Manila City pronouncements regarding the res ipsa loquitur doctrine are obiter dicta without value as binding precedent. Furthermore, even if the principle were applied to create a presumption of negligence by the Yard, however, that presumption is conclusively rebutted by the evidence on record.

(e) The Vessel’s deliberate acts and its negligence created the inherently hazardous conditions in which the cutting work that could otherwise be done safely ended up causing a fire and the damage to the Vessel. The fire was a direct and logical consequence of the Vessel’s decisions to: (1) take Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for and obtaining a hot work permit in violation of the Yard’s Safety Rules and without removing the flammable ceiling and life jackets below, contrary to the requirements not only of the Yard’s Safety Rules but also of the demands of standard safe practice and the Vessel’s own explicit safety and hot work policies.

(f) The vessel has not presented any proof to show that the Yard was remiss in its fire fighting preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary equipment and trained personnel and employed all those resources immediately and fully to putting out the 8 February 2000 fire.

4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for that activity caused the fire, the Yard may still not be held liable for the resulting damage.

(a) The Yard’s only contractual obligation to the Vessel in respect of the 26 January 2000 Work Order was to supply welders for the Promenade Deck restaurant who would then perform welding work "per owner[‘s] instruction." Consequently, once it had provided those welders, including Angelino Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or for damages on account thereof, may be raised against the Yard.

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

i. The Vessel exercised supervision and control over Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially when he was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party with actual control over his tasks and is deemed his true and effective employer for purposes of establishing Article 2180 employer liability.

ii. Even assuming that the Yard was Angelino Sevillejo’s employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino Sevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for the Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the Vessel.

iii. The Yard is nonetheless not liable under Article 2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo.

5. Assuming that the Yard is liable, it cannot be compelled to pay the full amount of ₱360 million paid by the Claimant.

(a) Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the MV Superferry 3, at the time of the fire.

(b) Under the Ship [R]epair Agreement, the liability of the Yard is limited to ₱50 million – a stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable.

(c) The Vessel breached its obligation under Clause 22 (a) of the Yard’s Standard Terms to name the Yard as co-assured under the policies – a breach which makes the Vessel liable for damages. This liability should in turn be set-off against the Claimant’s claim for damages.

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

1. Claimant’s counsel contends that the cutting of the bulkhead door was covered by the 26 January 2000 Work Order.

2. Claimant’s counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000.

3. Claimant’s counsel contends that under Article 1727 of the Civil Code, "The contractor is responsible for the work done by persons employed by him."

4. Claimant’s counsel contends that "[t]he second reason why there was no job spec or job order for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry Orcullo, the yard project superintendent."

5. Claimant’s counsel also contends, to make the Vessel’s unauthorized hot works activities seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety Superintendent, admitted that "No hot works could really be hidden from the Yard, your Honors, because the welding cables and the gas hoses emanating from the dock will give these hotworks away apart from the assertion and the fact that there were also safety assistants supposedly going around the vessel."

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

On October 28, 2002, the CIAC rendered its Decision¹³ declaring both WG&A and KCSI guilty of negligence, with the following findings and conclusions—

The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork permit, discussing the work in a production meeting, and complying with the conditions of the hotwork permit prior to implementation. By the requirement that all hotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that he was not even a foreman, and that the instructions to him was (sic) by an authorized person. The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no foreman was included in the five welders issued to the Vessel was never raised in this dispute. As discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire that damaged the vessel.¹⁴

Holding that the liability for damages was limited to ₱50,000,000.00, the CIAC ordered KCSI to pay Pioneer the amount of ₱25,000,000.00, with interest at 6% per annum from the time of the filing of the case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs be imposed on both parties on a pro rata basis.¹⁵

Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No. 73934. The cases were consolidated.

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

WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioner’s claims in its entirety. No costs.

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

SO ORDERED.¹⁶

Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting that it suffered from serious errors in the appreciation of the evidence and from gross misapplication of the law and jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the same Decision.

On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five – Former Fifteenth Division of the CA – in light of the dissent of Associate Justice Lucas P. Bersamin,¹⁷ joined by Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads—

WHEREFORE, premises considered, the Court hereby decrees that:

1. Pioneer’s Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer ₱25 Million, without legal interest, within 15 days from the finality of this Amended Decision, subject to the following modifications:

1.1 – Pioneer’s Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered to pay Pioneer ₱25 Million without legal interest;

2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer ₱25 Million, without legal interest, within 15 days from the finality of this Amended Decision; and

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

SO ORDERED.¹⁸

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

I

THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NON-FACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII OF THE CONSTITUTION.

II

THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO THE SUM OF ₱50,000,000.00, IN THAT:

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

B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC POLICY.

C. THE VESSEL OWNER DID NOT AGREE THAT THE YARD’S LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL ARISING FROM YARD’S NEGLIGENCE IS LIMITED TO THE SUM OF ₱50,000,000.00 ONLY.

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

(i) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V "SUPERFERRY 3") ON 08 FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;

(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS EXCLUSIVELY PERFORMED BY YARD WORKERS.

III

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

A. DR. JONIGA, THE VESSEL’S PASSAGE TEAM LEADER, DID NOT SUPERVISE OR CONTROL THE REPAIRS.

B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO THAT SUPERVISED AND CONTROLLED THE REPAIR WORKS.

C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY ALONE COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.

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

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

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

IV

THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.

V

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

VI

THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR ARBITRATION COSTS.¹⁹

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

1. ABSENCE OF YARD RESPONSIBILITY

IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT EXPLANATION, THE CIAC’S RULING THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE COMPLETELY WRONG AND BASELESS.

2. NO CONSTRUCTIVE TOTAL LOSS

IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.

3. FAILURE OR REFUSAL TO ADDRESS

KEPPEL’S MOTION FOR RECONSIDERATION

FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPEL’S PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEER’S PAYMENTS TO THE VESSEL OWNER IN VIEW OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION.

4. FAILURE TO CREDIT FOR SALVAGE RECOVERY

EVEN IF THE COURT OF APPEAL’S RULINGS ON ALL OF THE FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (₱25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO ₱9.874 MILLION.²⁰

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

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

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

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

D. Who should bear the cost of the arbitration?

To resolve these issues, it is imperative that we digress from the general rule that in petitions for review under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to revisit the factual circumstances surrounding this controversy.²¹

The Court’s Ruling

A. The issue of negligence

Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A. As established before the CIAC –

The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,²² p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as he did so, smoke came up from under Deck A. He got another container of water which he also poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B accommodation areas at various locations, where there were combustible materials. Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1-Mullen,²³ pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).²⁴

Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of Sevillejo’s assigned tasks, the same not having been authorized under the Work Order²⁵ dated January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the life jackets from the ceiling void, causing the immediate spread of the fire to the other areas of the ship.

We rule in favor of Pioneer.

First. The Shiprepair Agreement is clear that WG&A, as owner of M/V "Superferry 3," entered into a contract for the dry docking and repair of the vessel under KCSI’s Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI.

Second. Pursuant to KCSI’s rules and regulations on safety and security, only employees of KCSI may undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSI’s Vice President for Operations before WG&A could effect any work performed by its own workers or sub-contractors. In the exercise of this authority, KCSI’s Vice-President for Operations, in the letter dated January 2, 1997, banned any hot works from being done except by KCSI’s workers, viz.:

The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be carried out only by shipyard workers x x x.²⁶

WG&A recognized and complied with this restrictive directive such that, during the arrival conference on January 26, 2000, Dr. Joniga, the vessel’s passage team leader in charge of its hotel department, specifically requested KCSI to finish the hot works started by the vessel’s contractors on the passenger accommodation decks.²⁷ This was corroborated by the statements of the vessel’s hotel manager Marcelo Rabe²⁸ and the vessel’s quality control officer Joselito Esteban.²⁹ KCSI knew of the unfinished hot works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that KCSI was aware "that the owners of this vessel (M/V ‘Superferry 3’) had undertaken their own (hot) works prior to arrival alongside (sic) on 26th January," and that no hot work permits could thereafter be issued to WG&A’s own workers because "this was not allowed for the Superferry 3."³⁰ This shows that Dr. Joniga had authority only to request the performance of hot works by KCSI’s welders as needed in the repair of the vessel while on dry dock.

Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V "Superferry 3," aside from its promenade deck. This was a recognition of Dr. Joniga’s authority to request the conduct of hot works even on the passenger accommodation decks, subject to the provision of the January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship.

At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the protection bars at the tourist dining salon of Deck B,³¹ at a rate of ₱150.00/welder/hour.³² In fact, Orcullo, Project Superintendent of KCSI, admitted that "as early as February 3, 2000 (five days before the fire) [the Yard] had acknowledged Dr. Joniga’s authority to order such works or additional jobs."³³

It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the supply of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter.

Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latter’s direct control and supervision.

Indeed, KCSI was the employer of Sevillejo—paying his salaries; retaining the power and the right to discharge or substitute him with another welder; providing him and the other welders with its equipment; giving him and the other welders marching orders to work on the vessel; and monitoring and keeping track of his and the other welders’ activities on board, in view of the delicate nature of their work.³⁴ Thus, as such employee, aware of KCSI’s Safety Regulations on Vessels Afloat/Dry, which specifically provides that "(n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety Section,"³⁵ it was incumbent upon Sevillejo to obtain the required hot work safety permit before starting the work he did, including that done on Deck A where the fire started.

Fifth. There was a lapse in KCSI’s supervision of Sevillejo’s work at the time the fire broke out.

It was established that no hot works could be hidden from or remain undetected by KCSI because the welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover, KCSI had roving fire watchmen and safety assistants who were moving around the vessel.³⁶ This was confirmed by Restituto Rebaca (Rebaca), KCSI’s Safety Supervisor, who actually spotted Sevillejo on Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit and telling him to stop until the permit was acquired and the other safety measures were observed, Rebaca left without pulling Sevillejo out of the work area or making sure that the latter did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the deck, until the fire broke out.

This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSI’s own fire expert, who observed that—

4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric arc welding and hot cutting produce heat at the work area and sparks and incendive material that can travel some distance from the work area. Hence, the safety precautions that are expected to be applied by the supervisor are the same for both types of work. However, the quantity and incendivity of the spray from the hot cutting are much greater than those of sparks from electric arc welding, and it may well be that Angelino Sevillejo would not have a full appreciation of the dangers involved. This made it all the more important that the supervisor, who should have had such an appreciation, ensured that the appropriate safety precautions were carried out.³⁷

In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by KCSI to do the hot works on M/V "Superferry 3" to the exclusion of other workers, failed to comply with the strict safety standards of KCSI, not only because he worked without the required permit, fire watch, fire buckets, and extinguishers, but also because he failed to undertake other precautionary measures for preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible material may have been in the vicinity would be protected from the sparks caused by the welding torch. He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses, and covered any holes where the sparks may enter.

Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc welder, Rebaca should have replaced him.

There is negligence when an act is done without exercising the competence that a reasonable person in the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to another. Those who undertake any work calling for special skills are required to exercise reasonable care in what they do.³⁸ Verily, there is an obligation all persons have – to take due care which, under ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that care constitutes negligence. Generally, the degree of care required is graduated according to the danger a person or property may be subjected to, arising from the activity that the actor pursues or the instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary risk demands extraordinary care. Similarly, the more imminent the danger, the higher degree of care warranted.³⁹ In this aspect,

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

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

On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing, but failed to supervise him with the degree of care warranted by the attendant circumstances.

Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons – (1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent upon him to remove the same. It was shown during the hearings before the CIAC that the removal of the life jackets would not have made much of a difference. The fire would still have occurred due to the presence of other combustible materials in the area. This was the uniform conclusion of both WG&A’s⁴⁰ and KCSI’s⁴¹ fire experts. It was also proven during the CIAC proceedings that KCSI did not see the life jackets as being in the way of the hot works, thus, making their removal from storage unnecessary.⁴²

These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V "Superferry 3." As he was then definitely engaged in the performance of his assigned tasks as an employee of KCSI, his negligence gave rise to the vicarious liability of his employer⁴³ under Article 2180 of the Civil Code, which provides—

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

x x x x

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry.

x x x x

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage.

KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal presumption of its negligence in supervising Sevillejo.⁴⁴ Consequently, it is responsible for the damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is proof that the employee has, by his negligence, caused damage to another in order to make the employer responsible for the tortuous act of the former.⁴⁵ From the foregoing disquisition, there is ample proof of the employee’s negligence.

B. The right of subrogation

Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause found in the Shiprepair Agreement is null and void for being iniquitous and against public policy.

KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liability clause up to ₱50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair Agreement. KCSI also claims that the salvage value of the vessel should be deducted from whatever amount it will be made to pay to Pioneer.

We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V "Superferry 3."

In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139 of the Insurance Code, which provides—

Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion hereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against:

(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril;

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

It appears, however, that in the execution of the insurance policies over M/V "Superferry 3," WG&A and Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of which reads—

Total Loss

In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account.

There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and repairing the Vessel would exceed the Agreed Value in policies on Hull and Machinery. In making this determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of abandonment shall not be considered if such are to be claimed separately under the Sue and Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three (3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a) ₱296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) ₱309,780,384.15, based on the Philippine currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c) ₱301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore Technologies Marine Ltd. All the estimates showed that the repair expense would exceed ₱270,000,000.00, the amount equivalent to ¾ of the vessel’s insured value of ₱360,000,000.00. Thus, WG&A opted to abandon M/V "Superferry 3" and claimed from Pioneer the full amount of the policies. Pioneer paid WG&A’s claim, and now demands from KCSI the full amount of ₱360,000,000.00, by virtue of subrogation.1avvphi1

KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only US$3,800,000.00 or ₱170,611,260.00, the amount of repair expense quoted by Simpson, Spence & Young.

In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern, because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine insurance policies in question expressly provided the following:

I M P O R T A N T

This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in the Philippines, in which case if the said laws and customs of England shall be in conflict with the laws of the Republic of the Philippines, then the laws of the Republic of the Philippines shall govern. (Underscoring supplied.)

The CA held that Section 139 of the Insurance Code is merely permissive on account of the word "may" in the provision. This is incorrect. Properly considered, the word "may" in the provision is intended to grant the insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V "Superferry 3"), or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured against. This option or discretion is expressed as a right in Section 131 of the same Code, to wit:

Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under Section one hundred thirty-nine.

It cannot be denied that M/V "Superferry 3" suffered widespread damage from the fire that occurred on February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from Pioneer. The estimates given by the three disinterested and qualified shipyards show that the damage to the ship would exceed ₱270,000,000.00, or ¾ of the total value of the policies – ₱360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the damage sustained by the vessel. It is significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to the vessel amounted to a constructive total loss and that the claim for ₱360,000,000.00 under the policies was compensable.⁴⁶ It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a constructive total loss.

Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation.⁴⁷ The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the presumed authority of the signatory to receive such payment.

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

Art. 2207. If the 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.

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.⁴⁸

We have held that payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought to pay.⁴⁹

We cannot accept KCSI’s insistence on upholding the validity Clause 20, which provides that the limit of its liability is only up to ₱50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the insurance policies, as found in the Shiprepair Agreement.

Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are unfair and inequitable under the premises. It was established during arbitration that WG&A did not voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&A’s fleet manager, testified that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found, because he did not want WG&A to be bound by them. However, considering that it was only KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels owned by WG&A, such as M/V "Superferry 3," in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the vessel would not be accepted for dry docking.⁵⁰

Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a "take-it-or-leave-it" basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative of "taking it or leaving it," completely depriving such party of the opportunity to bargain on equal footing.⁵¹

Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively proved, since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right.⁵² This has not been demonstrated in this case.

Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its liability to only ₱50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of ₱360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss sustained by the other.⁵³

Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or agreement, because the insurance policy denominates the assured and the beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance procured by WG&A from Pioneer named only the former as the assured. There was no manifest intention on the part of WG&A to constitute KCSI as a co-assured under the policies. To have deemed KCSI as a co-assured under the policies would have had the effect of nullifying any claim of WG&A from Pioneer for any loss or damage caused by the negligence of KCSI. No ship owner would agree to make a ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under the policy would be rendered nugatory. WG&A could not have intended such a result.⁵⁴

Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V "Superferry 3" should be taken into account in the grant of any award. It was proven before the CIAC that the machinery and the hull of the vessel were separately sold for ₱25,290,000.00 (or US$468,333.33) and US$363,289.50, respectively. WG&A’s claim for the upkeep of the wreck until the same were sold amounts to ₱8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to ₱30,252,648.09, at ₱44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering this salvage value in the award would amount to unjust enrichment on the part of Pioneer.

C. On the imposition of interest

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,⁵⁵ the award in favor of Pioneer in the amount of ₱350,146,786.89 should earn interest at 6% per annum from the filing of the case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum from the date the award becomes final and executory until its full satisfaction.

D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for perceived wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on the part of Pioneer.

WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and the Amended Decision dated December 20, 2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the amount of ₱360,000,000.00 less ₱30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V "Superferry 3," or the net total amount of ₱329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until this Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said amount or any balance thereof from the finality of the Decision until the same will have been fully paid. The arbitration costs shall be borne by both parties on a pro rata basis. Costs against KCSI.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO*
Acting Chief Justice
Chairperson

MINITA V. CHICO-NAZARIO Associate Justice

PRESBITERO J. VELASCO, JR. Associate Justice

DIOSDADO M. PERALTA
Associate Justice

C E R T I F I C A T I O N

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Acting Chief Justice

Footnotes

* Acting Chief Justice.

¹ Rollo (G.R. Nos. 180896-97), pp. 33-109.

² Rollo (G.R. Nos. 180880-81), pp. 338-378.

³ Rollo (G.R. Nos. 180896-97), pp. 116-144.

⁴ Id. at 146-165.

⁵ Id. at 483-484.

⁶ The Shiprepair Agreement was duly acknowledged by the parties before a notary public.

⁷ 20. The Contractor shall not be under any liability to the Customer either in contract 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 (including the liability to replace under Clause 17) or of any Sub-contractor shall be limited in respect of any and/or defect(s) or event(s) to the sum of Pesos Philippine Currency Fifty Million only x x x.

⁸ 22(a) The Customer shall keep the vessel adequately insured for the vessel’s hull and machinery, her crew and the equipment on board and on other goods owned or held by the Customer against any and all risks and liabilities and ensure that such insurance policies shall include the Contractor as a co-assured.

⁹ Rollo (G.R. Nos. 180896-97), p. 526.

¹⁰ Id. at 167.

¹¹ Id. at 236.

¹² Id. at 236-242.

¹³ Id. at 229-320.

¹⁴ Id. at 286.

¹⁵ Id. at 319.

¹⁶ Id. at 143-144.

¹⁷ Now a member of this Court.

¹⁸ Id. at 163-164.

¹⁹ Rollo (G.R. No. 180896-97), pp. 46-48.

²⁰ Rollo (G.R. Nos. 180880-81), pp. 356-357.

²¹ Prudential Shipping and Management Corporation v. Sta. Rita, G.R. No. 166580, February 8, 2007, 515 SCRA 157.

²² The fire expert presented by Pioneer.

²³ Dr. Eric Mullen, the fire expert presented by KCSI.

²⁴ Rollo (G.R. Nos. 180896-97), p. 262.

²⁵ The Work Order dated January 26, 2000 provided to –

1. Supply of 5 welders & equipment as per Owner’s instructions to promenade deck.

2. JO# 89/99 – Pull-out & clean w/ chemical of Aux. engine blower & change both ball bearing 15 kw, 27 amp, 440 Wtts as required.

3. Renew sleeve on endcover of motor as required.

4. Renew deteriorated side frames & fwd pls as required.

5. Renew deteriorated air vent and sides pls as required.

²⁶ CIAC Decision, p. 28.

²⁷ Dr. Joniga gave this narration under oath:

5. That at the arrival conference on January 26, 2000, x x x we discussed the projected dry docking works and the shipyard safety regulations particularly the restriction that only shipyard workers and welders can perform hot works on board the vessel.

During the said conference, I brought up the need of the hotel department specifically for the yard to provide welders to the passenger accommodations on Deck A, Deck B and Deck C, according to owner’s instructions, meaning, the ship owner through me as the one in charge of the hotel department could request maintenance works in the passenger decks which may be determined and the need for which may arise only in the course of the dry docking and which will require hot works by the yard’s welders subject to shipyard safety and billing regulations.

My aforementioned input was duly taken note of, and on that same date, a Work Order dated January 26, 2000 signed by the Ship Superintendent Manuel Amagsila and KCSI Project Superintendent Gerry Orcullo x x x. (Exhibit "C-Joniga," p. 2)

²⁸ 4. That upon request of Dr. Joniga during said arrival conference, a Work Order dated January 26, 2000 was signed whereby the ship owner could request for some hot work in the passenger decks "as per Owner’s instructions" with the ship’s hotel department indicating certain maintenance or renovation in the course of the dry docking but it will be the yard which will execute the hot works needed. (Exhibit "C-Rabe," p. 2.)

²⁹ 4. x x x I confirm that said Work Order [of 26 January 2000] required the Yard, and the Yard agreed, to supply "5 welders and equipment as per owner’s instructions to promenade deck," because Dr. Joniga wanted that the unfinished hot works in the promenade deck and passenger areas that were started in Manila should be finished, otherwise the dry docking would be useless.

The place mentioned was "to promenade deck" because the bulk of the work was in the promenade deck, but included the unfinished hot works in the tourist and other passenger areas, which the Yard knew because they inspected and went around the vessel when we arrived on January 26, 2000.

The unfinished hot works in the passenger areas were also known to shipyard project superintendent Gerry Orcullo. Without the Yard’s express knowledge or permission, no yard welder will just go to some part of the vessel and do some kind of hot work. As I said only Yard workers performed hot works on board the vessel. (Exhibit "A-Esteban," p. 2.)

³⁰ Cabalhug’s affidavit-direct testimony dated May 24, 2001.

³¹ Exhibit "C-Joniga," par. 6; Exhibit "C-Rabe," par. 4; Exhibit "A-Esteban," par. 7.

³² Per the affidavit of The Yard’s Commercial Manager Khew Kah Khin who said, "Later I saw a copy of the work order for the supply of welders to the owners to carry out the same work and was asked for a quotation for this. I quoted verbally PhP150 per man per hour. This was an unusual arrangement and I cannot recall any other occasion on which the Yard welders were supplied in similar circumstances."

³³ TSN, Gerry Orcullo, May 22, 2002, pp. 167-170.

³⁴ CIAC Decision, p. 58.

³⁵ Id. at 52.

³⁶ TSN, Avelino Aves (on cross-examination).

³⁷ Exhibit 2-Mullen (Supplementary Report on the fire on board Superferry 3).

³⁸ Far Eastern Shipping Company v. CA, 357 Phil. 703 (1998).

⁴⁰ Ms. Aini Ling, WG&A’s fire expert, specifically testified:

"Sir, if there is no life jacket, of course, there is no ignition of life jackets. x x x

That doesn’t mean that they (sic) might not be a fire, your Honor, because there are other combustible materials in the ceiling void." (TSN, May 21, 2002, pp. 319-320, as quoted in the CIAC Decision, p. 38).

⁴¹ The pertinent testimony of Dr. Eric Mullen, The Yard’s fire expert, is as follows:

ATTY. LOMBOS:

Now, you also heard Ms. Ling say that even if she concedes that the removal of the life jackets from under the ceiling void would have made the most likely source of the fire, ah, would have eliminated the most likely source of the fire, her opinion was still that there was a possibility of fire from say, wires or the ceiling material which was plywood she says on top of the Formica. Do you have any views regarding that?

DR. MULLEN:

In so far as my mechanism, which I firmly believe to be the case that the material fell through the holes, it would have made that much difference. Because you have the life jackets would ignite easily, the ceiling itself would ignite easily because the material that is falling down is very incendive (sic) and in some cases has flames on them. So, it wouldn’t have made that much difference had the life jackets been removed, there was still possibility for fire. (TSN, May 23, 2002, pp. 132-133, as quoted in the CIAC Decision, p. 38-39).

⁴² This fact was admitted during cross-examination by Geoff Phoon, The Yard’s president, who testified in this wise:

ATTY. LIM:

Q Did you require the vessel to take out the life jackets and put them somewhere else or some place else on board or on shore?

MR. PHOON:

A We don’t touch the ship property.

Q You, in fact, did not require that?

A It belongs to the ship, You asked me do I require, I said it belongs to the ship.

Q Up to now you do not require despite –

A We don’t touch any item unless it is in the way of the work. (TSN, May 22, 2002, pp. 54-55).

⁴³ Garcia, Jr. v. Salvador, G.R. No. 168512, March 20, 2007, 518 SCRA 568.

⁴⁴ Lapanday Agricultural and Development Corporation (LADECO) v. Angala, G.R. No. 153076, June 21, 2007, 525 SCRA 229.

⁴⁵ Mercury Drug Corporation v. Huang, G.R. No. 172122, June 22, 2007, 525 SCRA 427.

⁴⁶ CIAC Decision, p. 80.

⁴⁷ KCSI’s Petition, pp. 31-32, Rollo (G.R. Nos. 180880-81), pp. 368-369.

⁴⁸ Lorenzo Shipping Corp. v. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004, 431 SCRA 266.

⁴⁹ PHILAMGEN v. Court of Appeals, 339 Phil. 455 (1997).

⁵⁰ Exhibit "E-Bello," pp. 3-4.

⁵¹ ACI Philippines, Inc. v. Coquia, G.R. No. 174466, July 14, 2008, 558 SCRA 300; Development Bank of the Philippines v. Perez, G.R. No. 148541, November 11, 2004, 442 SCRA 238.

⁵² Premiere Development Bank v. Central Surety & Insurance Company, Inc., G.R. No. 176246, February 13, 2009.

⁵³ Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., G.R. No. 132607, May 5, 1999, 306 SCRA 762, 781.

⁵⁴ Id. at 780.

⁵⁵ G.R. No. 97412, July 12, 1994, 234 SCRA 78.

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