THIRD DIVISION

KEPPEL CEBU SHIPYARD, INC.,

Petitioner,

G.R. Nos. 180880-81

- versus PIONEER INSURANCE AND SURETY

CORPORATION,
Respondent.
X----------------------------X
PIONEER INSURANCE AND SURETY
CORPORATION,
Petitioner,

G.R. Nos. 180896-97

Present:
YNARES-SANTIAGO, J.,*
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
NACHURA, and
PERALTA, JJ.

- versus -

Promulgated:
KEPPEL CEBU SHIPYARD, INC.,
Respondent.

September 25, 2009

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:

Before us are the consolidated petitions filed by the partiesPioneer Insurance and
Surety Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review
oncertiorari the Decision[3] dated December 17, 2004 and the Amended

Decision[4] dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP
Nos. 74018 and 73934.
On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A)
executed a Shiprepair Agreement[5] wherein KCSI would renovate and reconstruct
WG&As M/V Superferry 3 using its dry docking facilities pursuant to its
restrictive safety and security rules and regulations. Prior to the execution of the
Shiprepair Agreement, Superferry 3 was already insured by WG&A with Pioneer
for US$8,472,581.78. The Shiprepair Agreement reads
SHIPREPAIR AGREEMENT[6]
Company: WG & A JEBSENS SHIPMANAGEMENT INC.
Address: Harbour Center II, Railroad & Chicago Sts.
Port Area, City of Manila
We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY
3 and KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that
the Drydocking and Repair of the above-named vessel ordered by the Owners
Authorized Representative shall be carried out under the Keppel Cebu Shipyard
Standard Conditions of Contract for Shiprepair, guidelines and regulations on
safety and security issued by Keppel Cebu Shipyard. In addition, the following
are mutually agreed upon by the parties:
The Owner shall inform its insurer of Clause 20 [7] and 22 (a)
(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.
1.

[8]

3.

Owners sub-contractors or workers are not permitted to work

in the yard without the written approval of the Vice President
Operations.

4.

In consideration of Keppel Cebu Shipyard allowing Owner to

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

5.

On arrival, the Owner Representative, Captain, Chief Officer

and Chief Engineer will be invited 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 ships 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 Shipyards
employees and/or contract workers; theft and/or damages to
Keppel Cebu Shipyards properties and other liabilities which
are caused by the workers of the Owner.

10. The invoice shall be based on quotation reference 99-KCSI211 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 _________(Signed)__________
(Printed Name/Signature Above Name) (Printed Name/Signature Above Name)

Vice President Operations Authorized Representative

Keppel Cebu Shipyard, Inc. for and in behalf of:
WG & A Jebsens Shipmgmt.
JAN. 26, 2000 . ________________________

Date Date

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by
fire. Claiming that the extent of the damage was pervasive, WG&A declared the
vessels damage as a total constructive loss and, hence, filed an insurance claim
with Pioneer.
On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of
US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt [9] in
favor of Pioneer, to wit:
LOSS AND SUBROGATION RECEIPT
16 June 2000
Our Claim Ref: MH-NIL-H0-99-00018
US$8,472,581.78
-----------------------------------------------RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the
sum of U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTYTWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$
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 P500,000,000.00 plus interest thereon from the date of filing [of the] Request
for Arbitration or date of the arbitral award, as may be found proper;
3.
To pay to the claimants herein the sum of P3,000,000.00 for and
as attorneys fees; plus other damages as may be established during the
proceedings, including arbitration fees and other litigation expenses, and the costs
of suit.
It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the
Shiprepair Agreement (Annex A) as well as the hardly legible Clauses 20 and 22
(a) and other similar clauses printed in very fine print on the unsigned dorsal page
thereof, be all declared illegal and void ab initio and without any legal effect
whatsoever.[10]

KCSI and WG&A reached an amicable settlement, leading the latter to file a
Notice of Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC
granted the withdrawal on October 22, 2001, thereby 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 LapuLapu City, Cebu, for dry docking and repairs; (2) on the same date, WG&A signed
a ship repair agreement with KCSI; and (3) a fire broke out on board M/V
Superferry 3 on February 8, 2000, while still dry docked in KCSIs shipyard.[11]
As regards the disputed facts, below are the respective positions of the
parties, viz.:
Pioneers Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case and that
Pioneer has been subrogated to the claim of its assured. The Claimant claims that
it has the preponderance of evidence over that of the Respondent. Claimant cited
documentary references on the Statutory Source of the Principle of
Subrogation. Claimant then proceeded to explain that the Right of Subrogation:
Is by Operation of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.
Claimant then argued that Payment Operates as Equitable Assignment of Rights
to Insurer and that the Right of Subrogation Entitles Insurer to Recover from the
Liable Party.
Second, Respondent Keppel had custody of and control over the M/V Superferry
3 while said vessel was in Respondent Keppels premises. In its Draft Decision,
Claimant stated:
A.

B.
C.

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.
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.
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 subcontractors to perform maintenance works while the vessel
was within respondents premises does not detract from the
fact that control and custody over M/V Superferry 3 was
transferred to the yard.

From the preceding statements, Claimant claims that Keppel is clearly

liable for the loss of M/V Superferry 3.
Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters
continuing control over the vessel.
Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa
Loquitur. According to Claimant, the Yard is liable under the ruling laid down by
the Supreme Court in the Manila Citycase. 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 Owners hot works under the 26
January 2000 work order did not make Dr. Joniga the
employer of Sevillejo.

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

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

B.

Dr. Jonigas authority to request the execution of owners

hot works in the passenger areas was expressly recognized
by the Yard Project Superintendent Orcullo.

Seventh, the shipowner had no legal duty to apply for a hotworks permit since it
was not required by the yard, and the owners hotworks were conducted by
welders who remained employees of the yard. Claimant contends that the need, if
any, for an owners application for a hot work permit was canceled out by the
yards actual knowledge of Sevillejos whereabouts and the fact that he was in deck
A doing owners hotworks.
Eight[h], in supplying welders and equipment as per The Work Order Dated 26
January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent
Ship Repairer.
The Claimant then disputed the statements of Manuel Amagsila by claiming that
Amagsila was a disgruntled employee. Nevertheless, Claimant claims that
Amagsila affirmed that the five yard welders never became employees of the
owner so as to obligate the latter to be responsible for their conduct and
performance.
Claimant enumerated further badges of yard negligence.
According to Claimant:
A.
B.
C.
D.

Yards water supply was inadequate.

Yard Fire Fighting Efforts and Equipment Were Inadequate.
Yard Safety Practices and Procedures Were Unsafe or Inadequate.
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)
(ii)
(iii)
(iv)
(v)

Non-removal of the life jackets theory.

Hole-in-the[-]floor theory.
Need for a plan theory.
The unauthorized hot works theory.
The Marina report theory.

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

KCSIs Theory of the Case

1.

The Claimant has no standing to file the Request for Arbitration and the
Tribunal has no jurisdiction over the case:
(a)
There is no valid arbitration agreement between the Yard and the
Vessel Owner. On January 26, 2000, when the ship repair
agreement (which includes the arbitration agreement) was signed
by WG&A Jebsens on behalf of the Vessel, the same was still
owned by Aboitiz Shipping. Consequently, when another firm,
WG&A, authorized WG&A Jebsens to manage the MV Superferry
3, it had no authority to do so. There is, as a result, no binding
arbitration agreement between the Vessel Owner and the Yard to
which the Claimant can claim to be subrogated and which can
support CIAC jurisdiction.
(b)
The Claimant is not a real party in interest and has no standing
because it has not been subrogated to the Vessel Owner. For the
reason stated above, the insurance policies on which the Claimant
bases its right of subrogation were not validly obtained. In any
event, the Claimant has not been subrogated to any rights which
the Vessel may have against the Yard because:
i.

The Claimant has not proved payment of the proceeds of

the policies to any specific party. As a consequence, it has
also not proved payment to the Vessel Owner.

ii.

The Claimant had no legally demandable obligation to

pay under the policies and did so only voluntarily. Under
the policies, the Claimant and the Vessel agreed that there is
no Constructive Total Loss unless the expense of
recovering and repairing the vessel would exceed the
Agreed Value of P360 million assigned by the parties to the
Vessel, a threshold which the actual repair cost for the
Vessel did not reach. Since the Claimant opted to pay
contrary to the provisions of the policies, its payment was
voluntary, and there was no resulting subrogation to the
Vessel.

iii.

There was also no subrogation under Article 1236 of the

Civil Code. First, if the Claimant asserts a right of payment
only by virtue of Article 1236, then there is no legal
subrogation under Article 2207 and it does not succeed to
the Vessels rights under the Ship [R]epair Agreement and
the arbitration agreement. It does not have a right to
demand arbitration and will have only a purely civil law
claim for reimbursement to the extent that its payment
benefited the Yard which should be filed in court. Second,
since the Yard is not liable for the fire and the resulting

2.
3.

damage to the Vessel, then it derived no benefit from the

Claimants payment to the Vessel Owner. Third, in any
event, the Claimant has not proved payment of the proceeds
to the Vessel Owner.
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.
The proximate cause of the fire and damage to the Vessel was not any
negligence committed by Angelino Sevillejo in cutting the bulkhead door or
any other shortcoming by the Yard. On the contrary, the proximate cause of
the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino
Sevillejo undertake cutting work in inherently dangerous conditions created
by them.
(a)
(b)

The Claimants material witnesses lied on the record and the

Claimant presented no credible proof of any negligence by
Angelino Sevillejo.
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 Yards expert witness, Dr. Eric Mullen gave the only credible
account of the cause and the mechanics of ignition of the fire. He
established that: i) the fire started when the cutting of the bulkhead
door resulted in sparks or hot molten slag which fell through preexisting 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 doors 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 dictawithout 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.

4.

(e)

The Vessels deliberate acts and its negligence created the

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

(f)

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

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)

(b)

The Yards only contractual obligation to the Vessel in respect of

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

ii.

iii.

5.

employer for purposes of establishing Article 2180

employer liability.
Even assuming that the Yard was Angelino Sevillejos
employer, the Yard may nevertheless not be held liable
under Article 2180 because Angelino Sevillejo was acting
beyond the scope of his tasks assigned by the Yard (which
was only to do welding for the Promenade Deck restaurant)
when he cut the bulkhead door pursuant to instructions
given by the Vessel.
The Yard is nonetheless not liable under Article 2180
because it exercised due diligence in the selection and
supervision of Angelino Sevillejo.

Assuming that the Yard is liable, it cannot be compelled to pay the full
amount of P360 million paid by the Claimant.
(a)

(b)

(c)

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.
Under the Ship [R]epair Agreement, the liability of the Yard is
limited to P50 million a stipulation which, under the law and
decisions of the Supreme Court, is valid, binding and enforceable.
The Vessel breached its obligation under Clause 22 (a) of the
Yards Standard Terms to name the Yard as co-assured under the
policies a breach which makes the Vessel liable for damages. This
liability should in turn be set-off against the Claimants claim for
damages.

The Respondent listed what it believes the Claimant wanted to impress upon the
Tribunal. Respondent enumerated and disputed these as follows:
1.
2.
3.
4.

Claimants counsel contends that the cutting of the bulkhead door

was covered by the 26 January 2000 Work Order.
Claimants counsel contends that Dr. Joniga told Gerry Orcullo
about his intention to have Angelino Sevillejo do cutting work at
the Deck A bulkhead on the morning of 8 February 2000.
Claimants counsel contends that under Article 1727 of the Civil
Code, The contractor is responsible for the work done by persons
employed by him.
Claimants counsel contends that [t]he second reason why there
was no job spec or job order for this cutting work, [is] the cutting

5.

work was known to the yard and coordinated with Mr. Gerry
Orcullo, the yard project superintendent.
Claimants counsel also contends, to make the Vessels
unauthorized hot works activities seem less likely, that they could
easily be detected because Mr. Avelino Aves, the Yard Safety
Superintendent, admitted that No hot works could really be hidden
from the Yard, your Honors, because the welding cables and the
gas hoses emanating from the dock will give these hotworks away
apart from the assertion and the fact that there were also safety
assistants supposedly going around the vessel.

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

On October 28, 2002, the CIAC rendered its Decision [13] declaring both
WG&A and KCSI guilty of negligence, with the following findings and
conclusions
The Tribunal agrees that the contractual obligation of the Yard is to provide the
welders and equipment to the promenade deck. [The] Tribunal agrees that the
cutting of the bulkhead door was not a contractual obligation of the
Yard. However, by requiring, according to its own regulations, that only Yard
welders are to undertake hotworks, it follows that there are certain qualifications
of Yard welders that would be requisite of yard welders against those of the vessel
welders. To the Tribunal, this means that yard welders are aware of the Yard
safety rules and regulations on hotworks such as applying for a hotwork permit,
discussing the work in a production meeting, and complying with the conditions
of the hotwork permit prior to implementation.By the requirement that all
hotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains a
yard employee. The act of Sevillejo is however mitigated in that he was not even
a foreman, and that the instructions to him was (sic) by an authorized person. The
Tribunal notes that the hotworks permit require[s] a request by at least a
foreman. The fact that no foreman was included in the five welders issued to the
Vessel was never raised in this dispute. As discussed earlier by the Tribunal, with
the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel
is considered equally negligent. This Tribunal finds the concurrent negligence of
the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory
to the cause of the fire that damaged the vessel.[14]

Holding that the liability for damages was limited to P50,000,000.00, the CIAC
ordered KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6%

per annum from the time of the filing of the case up to the time the decision is
promulgated, and 12% interest per annum added to the award, or any balance
thereof, after it becomes final and executory. The CIAC further ordered that the
arbitration costs be imposed on both parties on a pro rata basis.[15]
Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No.
74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R.
SP No. 73934.The cases were consolidated.
On December 17, 2004, the Former Fifteenth Division of the CA rendered its
Decision, disposing as follows:
WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No.
74018) is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is
GRANTED, dismissing petitioners claims in its entirety. No costs.
The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata.
SO ORDERED.[16]

Aggrieved, Pioneer sought reconsideration of the December 17, 2004

Decision, insisting that it suffered from serious errors in the appreciation of the
evidence and from gross misapplication of the law and jurisprudence on
negligence. KCSI, for its part, filed a motion for partial reconsideration of the 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. Pioneers Motion for Reconsideration is PARTIALLY GRANTED,
ordering The Yard to pay Pioneer P25 Million, without legal interest, within 15

days from the finality of thisAmended Decision, subject to the following

modifications:
1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY
GRANTED as the Yard is hereby ordered to pay Pioneer P25 Million without
legal interest;
2. The Yard is hereby declared as equally negligent, thus, the total
GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced
to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25
Million, without legal interest, within 15 days from the finality of this Amended
Decision; and
3. The rest of the disposition in the original Decision remains the same.
SO ORDERED.[18]

Hence, these petitions. Pioneer bases its petition on the following grounds:
I
THE
COURT
OF
APPEALS
ERRED
IN
BASING
ITS
ORIGINAL DECISION ON NON-FACTS LEADING IT TO MAKE FALSE
LEGAL
CONCLUSIONS; NON-FACTS REMAIN
TO
INVALIDATE
THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE
VIII OF THE CONSTITUTION.
II
THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY
OF THE YARD TO THE SUM OF P50,000,000.00, IN THAT:
A. STARE
DECISIS RENDERS
INAPPLICABLE
INVOCATION OF LIMITED LIABILITY BY THE YARD.

ANY

B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC

POLICY.
C. THE VESSEL OWNER DID NOT AGREE THAT THE
YARDS LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL
ARISING FROM YARDS NEGLIGENCE IS LIMITED TO THE SUM
OF P50,000,000.00 ONLY.
D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT
LIABILITY, IN THAT:

(i) THE YARD HAD CUSTODY AND CONTROL OVER

THE VESSEL (M/V SUPERFERRY 3) ON 08 FEBRUARY 2000
WHEN IT WAS GUTTED BY FIRE;
(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN
THE COURSE OF THE REPAIRS EXCLUSIVELY
PERFORMED BY YARD WORKERS.
III
THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS
CONCURRENTLY NEGLIGENT, CONSIDERING THAT:
A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER,
DID NOT SUPERVISE OR CONTROL THE REPAIRS.
B. IT WAS THE YARD THROUGH ITS PROJECT
SUPERINTENDENT GERMINIANO ORCULLO THAT SUPERVISED
AND CONTROLLED THE REPAIR WORKS.
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT
WORKS IT FOLLOWS THAT THEY ALONE COULD BE GUILTY OF
NEGLIGENCE IN DOING THE SAME.
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 CIACS RULING THAT THE YARD WAS
EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT
WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO
SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN
THAT RULING TO BE COMPLETELY WRONG AND BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO
RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS A
CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINED
WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPELS MOTION FOR RECONSIDERATION
FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF
APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT
AND ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL MOTION FOR
RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1)
WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE
VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2)
WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEERS
PAYMENTS TO THE VESSEL OWNER 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 APPEALS RULINGS ON ALL OF THE
FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY
BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND
REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION),

THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE

SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY
THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF
THE YARD TO P9.874 MILLION.[20]

To our minds, these errors assigned by both Pioneer and KCSI may be summed up
in the following core issues:
A. To whom may negligence over the fire that broke out on board M/V Superferry
3 be imputed?
B. Is subrogation proper? If proper, to what extent can subrogation be made?
C. Should interest be imposed on the award of damages? If so, how much?
D. Who should bear the cost of the arbitration?

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

The Courts Ruling

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

Pioneer contends that KCSI should be held liable because Sevillejo was its
employee who, at the time the fire broke out, was doing his assigned task, and that
KCSI was solely responsible for all the hot works done on board the vessel. KCSI
claims otherwise, stating that the hot work done was beyond the scope of
Sevillejos assigned tasks, the same not having been authorized under the Work
Order[25] dated January 26, 2000 or under the Shiprepair Agreement. KCSI further
posits that WG&A was itself negligent, through its crew, particularly Dr.
Raymundo Joniga (Dr. Joniga), for failing to remove the 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 KCSIs
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 KCSIs rules and regulations on safety and security, only
employees of KCSI may undertake hot works on the vessel while it was in the
graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the
Shiprepair Agreement requiring the prior written approval of KCSIs Vice President
for Operations before WG&A could effect any work performed by its own workers
or sub-contractors. In the exercise of this authority, KCSIs Vice-President for
Operations, in the letter dated January 2, 1997, banned any hot works from being
done except by KCSIs workers, viz.:
The Yard will restrict all hot works in the engine room, accommodation cabin, and
fuel oil tanks to be carried out only by shipyard workers x x x.[26]

WG&A recognized and complied with this restrictive directive such that,
during the arrival conference on January 26, 2000, Dr. Joniga, the vessels passage
team leader in charge of its hotel department, specifically requested KCSI to finish
the hot works started by the vessels contractors on the passenger accommodation
decks.[27] This was corroborated by the statements of the vessels hotel manager
Marcelo Rabe[28] and the vessels quality control officer Joselito Esteban. [29] KCSI
knew of the unfinished hot works in the passenger accommodation areas. Its safety
supervisor Esteban Cabalhug confirmed that KCSI was aware that the owners of
this vessel (M/V Superferry 3) had undertaken their own (hot) works prior to
arrival alongside (sic) on 26th January, and that no hot work permits could
thereafter be issued to WG&As own workers because this was not allowed for the
Superferry 3.[30] This shows that Dr. Joniga had authority only to request the
performance of hot works by KCSIs welders as needed in the repair of the vessel
while on dry dock.

Third. KCSI welders covered by the Work Order performed hot works on various
areas of the M/V Superferry 3, aside from its promenade deck. This was a
recognition of Dr. Jonigas authority 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 P150.00/welder/hour.[32] In
fact, Orcullo, Project Superintendent of KCSI, admitted that as early as February 3,
2000 (five days before the fire) [the Yard] had acknowledged Dr. Jonigas authority
to order such works or additional jobs.[33]
It is evident, therefore, that although the January 26, 2000 Work Order was a
special order for the supply of KCSI welders to the promenade deck, it was not
restricted to the promenade deck only. The Work Order was only a special
arrangement between KCSI and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject
to the latters direct control and supervision.
Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the
power and the right to discharge or substitute him with another welder; providing
him and the other welders with its equipment; giving him and the other welders
marching orders to work on the vessel; and monitoring and keeping track of his
and the other welders activities on board, in view of the delicate nature of their
work.[34] Thus, as such employee, aware of KCSIs Safety Regulations on Vessels

Afloat/Dry, which specifically provides that (n)o hotwork (welding/cutting works)

shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety
Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety
permit before starting the work he did, including that done on Deck A where the
fire started.
Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the
fire broke out.
It was established that no hot works could be hidden from or remain undetected by
KCSI because the welding cables and the gas hoses emanating from the dock
would give the hot works away. Moreover, KCSI had roving fire watchmen and
safety assistants who were moving around the vessel.[36] This was confirmed by
Restituto Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted
Sevillejo on Deck A, two hours before the fire, doing his cutting work without a
hot work permit, a fire watchman, or a fire extinguisher. KCSI contends that it did
its duty when it prohibited Sevillejo 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, KCSIs 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 constitutesnegligence. 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 thedanger, the
higher degree of care warranted.[39] In this aspect,

KCSI failed to exercise the necessary degree of caution and foresight called for by
the circumstances.
We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was
negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the
performance of hot works in the other areas of the vessel. These hot works were
deemed included in the January 26, 2000 Work Order and the Shiprepair
Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the
cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what
Sevillejo was doing, but failed to supervise him with the degree of care warranted
by the attendant circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the
ceiling void for two reasons (1) the life jackets were not even contributory to the
occurrence of the fire; and (2) it was not incumbent upon him to remove the
same. It was shown during the hearings before the CIAC that the removal of the
life jackets would not have made much of a difference. The fire would still have
occurred due to the presence of other combustible materials in the area. This was
the uniform conclusion of both WG&As[40] and KCSIs[41] fire experts. It was also
proven during the CIAC proceedings that KCSI did not see the life jackets as being
in the way of the hot works, thus, making their removal from storage unnecessary.
[42]

These circumstances, taken collectively, yield the inevitable conclusion that

Sevillejo was negligent in the performance of his assigned task. His negligence
was the proximate cause of the fire on board M/V Superferry 3. As he was then
definitely engaged in the performance of his assigned tasks as an employee of
KCSI, his negligence gave rise to the vicarious liability of his employer [43] under
Article 2180 of the Civil Code, which provides

Art. 2180. The obligation imposed by article 2176 is demandable not only for
ones own act or omission, but also for those of persons for whom one is
responsible.
xxxx
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.
xxxx
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 employees negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay
WG&A the full amount of the insurance coverage and, by operation of law, it was
entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It
further argues that the limitation of liability clause found in the Shiprepair
Agreement is null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer,
and that there is no proof of payment of the insurance proceeds. KCSI insists on
the validity of the limited-liability clause up to P50,000,000.00, because WG&A
acceded to the provision when it executed the Shiprepair Agreement. KCSI also

claims that the salvage value of the vessel should be deducted from whatever
amount it will be made to pay to Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of
M/V Superferry 3.
In marine insurance, a constructive total loss occurs under any of the conditions set
forth in Section 139 of the Insurance Code, which provides
Sec. 139. A person insured by a contract of marine insurance may abandon the
thing insured, or any particular portion hereof separately valued by the policy, or
otherwise separately insured, and recover for a total loss thereof, when the cause
of the loss is a peril insured against:
(a) If more than three-fourths thereof in value is actually lost, or would have to be
expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths;
x x x.

It appears, however, that in the execution of the insurance policies over M/V
Superferry 3, WG&A and Pioneer incorporated by reference the American Institute
Hull Clauses 2/6/77, the Total Loss Provision of which reads
Total Loss
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value
shall be taken as the repaired value and nothing in respect of the damaged or
break-up value of the Vessel or wreck shall be taken into account.
There shall be no recovery for a constructive Total Loss hereunder unless the
expense of recovering and repairing the Vessel would exceed the Agreed Value in
policies on Hull and Machinery.In making this determination, only expenses
incurred or to be incurred by reason of a single accident or a sequence of damages
arising from the same accident shall be taken into account, but expenses incurred
prior to tender of abandonment shall not be considered if such are to be claimed
separately under the Sue and Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced in evidence the

estimates made by three (3) disinterested and qualified shipyards for the cost of the
repair of the vessel, specifically: (a) P296,256,717.00, based on the Philippine
currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi
Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine
currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore;
and (c) P301,839,974.00, based on the Philippine currency equivalent of the
quotation of Singapore Technologies Marine Ltd. All the estimates showed that the
repair expense would exceed P270,000,000.00, the amount equivalent to of the
vessels insured value of P360,000,000.00. Thus, WG&A opted to abandon M/V
Superferry 3 and claimed from Pioneer the full amount of the policies. Pioneer
paid WG&As claim, and now demands from KCSI the full amount
of P360,000,000.00, by virtue of subrogation.
KCSI denies the liability because, aside from its claim that it cannot be held
culpable for negligence resulting in the destructive fire, there was no constructive
total loss, as the amount of damage was only US$3,800,000.00
or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence &
Young.
In the face of this apparent conflict, we hold that Section 139 of the
Insurance Code should govern, because (1) Philippine law is deemed incorporated
in every locally executed contract; and (2) the marine insurance policies in
question expressly provided the following:
IMPORTANT
This insurance is subject to English jurisdiction, except in the event that loss or
losses are payable in the Philippines, in which case if the said laws and customs of
England shall be in conflict with the laws of the Republic of the Philippines, then
the laws of the Republic of the Philippines shall govern. (Underscoring supplied.)

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

It cannot be denied that M/V Superferry 3 suffered widespread damage from the
fire that occurred on February 8, 2000, a covered peril under the marine insurance
policies obtained by WG&A from Pioneer. The estimates given by the three
disinterested and qualified shipyards show that the damage to the ship would
exceed P270,000,000.00,
or
of
the
total
value
of
the
policies P360,000,000.00. These estimates constituted credible and acceptable
proof of the extent of the damage sustained by the vessel. It is significant that these
estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted
by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had
enlisted to verify and confirm the extent of the damage. The Adjustment Report
verified and confirmed that the damage to the vessel amounted to a constructive
total loss and that the claim for P360,000,000.00 under the policies was
compensable.[46] It is also noteworthy that KCSI did not cross-examine Henson
Lim, Director of Richards Hogg, whose affidavit-direct testimony submitted to the
CIAC confirmed that the vessel was a constructive total loss.
Considering the extent of the damage, WG&A opted to abandon the ship and
claimed the value of its policies. Pioneer, finding the claim compensable, paid the
claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of
the payment of the insurance proceeds from Pioneer. On this note, we find as

unacceptable the claim of KCSI that there was no ample proof of payment simply
because the person who signed the Receipt appeared to be an employee of Aboitiz
Shipping Corporation.[47] The Loss and Subrogation Receipt issued by WG&A to
Pioneer is the best evidence of payment of the insurance proceeds to the former,
and no controverting evidence was presented by KCSI to rebut the presumed
authority of the signatory to receive such payment.
On the matter of subrogation, Article 2207 of the Civil Code provides
Art. 2207. If the plaintiffs property has been insured and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who
has violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.

Subrogation is the substitution of one person by another with reference to a

lawful claim or right, so that he who is substituted succeeds to the rights of the
other in relation to a debt or claim, including its remedies or securities. The
principle covers a situation wherein an insurer has paid a loss under an insurance
policy is entitled to all the rights and remedies belonging to the insured against a
third party with respect to any loss covered by the policy. It contemplates full
substitution such that it places the party subrogated in the shoes of the creditor, and
he may use all means that the creditor could employ to enforce payment.[48]
We have held that payment by the insurer to the insured operates as an
equitable assignment to the insurer of all the remedies that the insured may have
against the third party whose negligence or wrongful act caused the loss. The right
of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its roots in equity. It is designed
to promote and to accomplish justice; and is the mode that equity adopts to compel

the ultimate payment of a debt by one who, in justice, equity, and good conscience,
ought to pay.[49]
We cannot accept KCSIs insistence on upholding the validity Clause 20,
which provides that the limit of its liability is only up to P50,000,000.00; nor of
Clause 22(a), that KCSI stands as a co-assured in the insurance policies, as found
in the Shiprepair Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and
legal foundation. They are unfair and inequitable under the premises. It was
established during arbitration that WG&A did not voluntarily and expressly agree
to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified that he
did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20
and 22(a) were found, because he did not want WG&A to be bound by
them. However, considering that it was only KCSI that had shipyard facilities large
enough to accommodate the dry docking and repair of big vessels owned by
WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the
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 P50,000,000.00,
notwithstanding the fact that there was a constructive total loss in the amount
of P360,000,000.00, would sanction the exercise of a degree of diligence short of
what is ordinarily required. It would not be difficult for a negligent party to escape
liability by the simple expedient of paying an amount very much lower than the
actual damage or loss sustained by the other.[53]
Along the same vein, Clause 22(a) cannot be upheld. The intention of the
parties to make each other a co-assured under an insurance policy is to be gleaned
principally from the insurance contract or policy itself and not from any other
contract or agreement, because the insurance policy denominates the assured and
the beneficiaries of the insurance contract. Undeniably, the hull and machinery
insurance procured by WG&A from Pioneer named only the former as the
assured. There was no manifest intention on the part of WG&A to constitute KCSI
as a co-assured under the policies. To have deemed KCSI as a co-assured under the
policies would have had the effect of nullifying any claim of WG&A from Pioneer
for any loss or damage caused by the negligence of KCSI. No ship owner would
agree to make a ship repairer a co-assured under such insurance policy. Otherwise,
any claim for loss or damage under the policy would be rendered nugatory. WG&A
could not have intended such a result.[54]

Nevertheless, we concur with the position of KCSI that the salvage value of
the damaged M/V Superferry 3 should be taken into account in the grant of any
award. It was proven before the CIAC that the machinery and the hull of the vessel
were separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50,
respectively. WG&As claim for the upkeep of the wreck until the same were sold
amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds
of the sale of the machinery and the hull, for a net recovery of US$673,812.87, or
equivalent to P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when
the Request for Arbitration was filed. Not considering this salvage value in the
award would amount to unjust enrichment on the part of Pioneer.
C. On the imposition of interest
Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the
award in favor of Pioneer in the amount of P350,146,786.89 should earn interest at
6% per annum from the filing of the case until the award becomes final and
executory. Thereafter, the rate of interest shall be 12% per annum from the date the
award becomes final and executory until its full satisfaction.
D. On the payment for the cost of arbitration
It is only fitting that both parties should share in the burden of the cost of
arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute
a suit against KCSI, as it believed that it was entitled to claim reimbursement of
the amount it paid to WG&A. However, we disagree with Pioneer that only KCSI
should shoulder the arbitration costs. KCSI cannot be faulted for defending itself
for perceived wrongful acts and conditions. Otherwise, we would be putting a price
on the right to litigate on the part of Pioneer.
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 P360,000,000.00 less P30,252,648.09,
equivalent to the salvage value recovered by Pioneer from M/V Superferry 3, or
the net total amount of P329,747,351.91, 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 AT 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 Courts Division.

CONSUELO YNARES-SANTIAGO
Acting Chief Justice

Acting Chief Justice.

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 vessels 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.
[1]

[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 Owners 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 owners 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 yards 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 Owners instructions
with the ships 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 owners 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 Yards 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 AEsteban, p. 2.)
[30]
Cabalhugs affidavit-direct testimony dated May 24, 2001.
[31]

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

Per the affidavit of The Yards 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).
[32]

[37]
[38]

[40]

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

Far Eastern Shipping Company v. CA, 357 Phil. 703 (1998).
Ms. Aini Ling, WG&As fire expert, specifically testified:

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

That doesnt 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 Yards 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
wouldnt 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 Yards 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 dont 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 dont 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]
KCSIs 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.
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.
[49]

[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.