THIRD DIVISION

KEPPEL CEBU SHIPYARD, INC.,

Petitioner,

- versus -

PIONEER INSURANCE AND SURETY

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

- versus -

KEPPEL CEBU SHIPYARD, INC.,

Respondent.
G.R. Nos. 180880-81
G.R. Nos. 180896-97

Present:

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

Promulgated:

September 25, 2009

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

DECISION

NACHURA, J.:
!

Before us are the consolidated petitions filed by the

partiesPioneer Insurance and Surety Corporation [if !
supportFootnotes][1][endif] (Pioneer) and Keppel Cebu Shipyard, Inc.
[if !supportFootnotes][2][endif] (KCSI)to review on certiorari the

Decision[if !supportFootnotes][3][endif] dated December 17, 2004 and

the Amended Decision[if !supportFootnotes][4][endif] 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[if !supportFootnotes][5][endif] 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[if !supportFootnotes][6][endif]

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 S U P E R F E R RY 3 a n d K E P P E L C E B U
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:

[if !supportLists]1. [endif]The Owner shall inform its

insurer of Clause 20[if !supportFootnotes][7][endif] and 22 (a)[if !
supportFootnotes][8][endif] (refer at the back hereof) and shall

include Keppel Cebu Shipyard as a co-assured in its

insurance policy.

[if !supportLists]2. [endif]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.

[if !supportLists]3. [endif]Owners sub-contractors or

workers are not permitted to work in the yard without
the written approval of the Vice President Operations.
[if !supportLists]4. [endif]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.

[if !supportLists]5. [endif]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.

[if !supportLists]6. [endif]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.

[if !supportLists]7. [endif]The ships officers/crew or owner

appointed security personnel shall maintain watch
against pilferage and acts of sabotage.
[if !supportLists]8. [endif]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.

[if !supportLists]9. [endif]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.

[if !supportLists]10. [endif]The invoice shall be based on

quotation reference 99-KCSI-211 dated December 20,
1999 tariff dated March 15, 1998.

[if !supportLists]11. [endif]Payment term shall be as follows:

[if !supportLists]12. [endif]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[if !supportFootnotes][9][endif] 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:

[if !supportLists]1. [endif]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;
!
[if !supportLists]2. [endif]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;

[if !supportLists]3. [endif]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.[if !supportFootnotes][10][endif]
 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 KCSIs shipyard.[if !supportFootnotes][11][endif]

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:

[if !supportLists]A. [endif]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.

[if !supportLists]B. [endif]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.

[if !supportLists]C. [endif]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.

[if !supportLists]D. [endif]The practice of allowing a

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

From the preceding statements, Claimant claims that Keppel

is clearly liable for the loss of M/V Superferry
3.

Third, the Vessels Safety Manual cannot be relied upon as

proof of the Masters continuing control over the
vessel.

Fourth, the Respondent Yard is liable under the Doctrine of

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

Fifth, the liability of Respondent does not arise merely from

the application of the Doctrine of Res Ipsa Loquitur,
but from its negligence in this case.

Sixth, the Respondent Yard was the employer responsible for

the negligent acts of the welder. According to
Claimant;

In contemplation of law, Sevillejo was not a loaned servant/

employee. The yard, being his employer, is
solely and exclusively liable for his negligent
acts. Claimant proceeded to enumerate its
reasons:
[if !supportLists]A. [endif]The Control Test The yard
exercised control over Sevillejo. The power of
control is not diminished by the failure to
exercise control.

[if !supportLists]B. [endif]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.

[if !supportLists]C. [endif]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:
[if !supportLists]A. [endif]The yard, not Dr. Joniga, gave
the welders their marching orders, and

[if !supportLists]B. [endif]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:

[if !supportLists]A. [endif]Yards water supply was

inadequate.

[if !supportLists]B. [endif]Yard Fire Fighting Efforts and

Equipment Were Inadequate.
[if !supportLists]C. [endif]Yard Safety Practices and
Procedures Were Unsafe or Inadequate.

[if !supportLists]D. [endif]Yard Safety Assistants and

Firewatch-Men were Overworked.

Finally, Claimant disputed the theories propounded by the

Respondent (The Yard). Claimant presented its case
against:

[if !supportLists](i) [endif]Non-removal of the life

jackets theory.

[if !supportLists](ii) [endif]Hole-in-the[-]floor theory.

[if !supportLists](iii) [endif]Need for a plan theory.

[if !supportLists](iv) [endif]The unauthorized hot works

theory.

[if !supportLists](v) [endif]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

[if !supportLists]1. [endif]The Claimant has no standing to

file the Request for Arbitration and the Tribunal has
no jurisdiction over the case:

[if !supportLists](a) [endif]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.

[if !supportLists](b) [endif]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:

[if !supportLists]i. [endif]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.

[if !supportLists]ii. [endif]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.

[if !supportLists]iii. [endif]There was also no

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

[if !supportLists]2. [endif]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.

[if !supportLists]3. [endif]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.

[if !supportLists](a) [endif]The Claimants material

witnesses lied on the record and the Claimant
presented no credible proof of any negligence by
Angelino Sevillejo.

[if !supportLists](b) [endif]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.

[if !supportLists](c) [endif]The Yards expert witness, Dr.

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

[if !supportLists](d) [endif]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.

[if !supportLists](e) [endif]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.

[if !supportLists](f) [endif]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.

[if !supportLists]4. [endif]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.

[if !supportLists](a) [endif]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.

[if !supportLists](b) [endif]The Yard is also not liable to

the Vessel/Claimant on the basis of quasi-delict.
[if !supportLists] i. [endif]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.

[if !supportLists] ii.

[endif]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.

[if !supportLists] iii. [endif]The

Yard is nonetheless not liable under Article 2180
because it exercised due diligence in the selection and
supervision of Angelino Sevillejo.
[if !supportLists]5. [endif]Assuming that the Yard is liable,
it cannot be compelled to pay the full amount of P360
million paid by the Claimant.

[if !supportLists](a) [endif]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.

[if !supportLists](b) [endif]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.

[if !supportLists](c) [endif]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:

[if !supportLists]1. [endif]Claimants counsel contends

that the cutting of the bulkhead door was covered by
the 26 January 2000 Work Order.

[if !supportLists]2. [endif]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.

[if !supportLists]3. [endif]Claimants counsel contends

that under Article 1727 of the Civil Code, The
contractor is responsible for the work done by persons
employed by him.
[if !supportLists]4. [endif]Claimants counsel contends
that [t]he second reason why there was no job spec or
job order for this cutting work, [is] the cutting work
was known to the yard and coordinated with Mr.
Gerry Orcullo, the yard project superintendent.

[if !supportLists]5. [endif]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.[if !supportFootnotes][12]
[endif]
 On October 28, 2002, the CIAC rendered its Decision[if !
supportFootnotes][13][endif] 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.[if !supportFootnotes][14][endif]
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.[if !supportFootnotes][15][endif]

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.[if !supportFootnotes][16][endif]

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,[if !supportFootnotes][17][endif] joined by Associate
Justice Japar B. Dimaampao. The fallo of the Amended
Decision reads

WHEREFORE, premises considered, the Court hereby decrees that:

1. Pioneers Motion for Reconsideration is

PARTIALLY GRANTED, ordering The Yard to pay
Pioneer P25 Million, without legal interest, within 15
days from the finality of this Amended Decision,
subject to the following modifications:
 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.[if !supportFootnotes][18][endif]
 Hence, these petitions. Pioneer bases its petition on the
following grounds:

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
S E C T I O N 1 4 , A RT I C L E V I I I O F T H E
CONSTITUTION.

II

THE COURT OF APPEALS ERRED IN LIMITING THE

LEGAL LIABILITY OF THE YARD TO THE SUM
OF P50,000,000.00, IN THAT:
 A. STARE DECISIS RENDERS
INAPPLICABLE ANY INVOCATION OF
LIMITED LIABILITY BY THE YARD.

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 ) T H E YA R D H A D
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
C O U R S E O F T H E R E PA I R S
EXCLUSIVELY PERFORMED BY
YARD WORKERS.

III

THE COURT OF APPEALS ERRED IN ITS RULING

T H AT W G & A WA S C O N C U R R E N T LY
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
G E R M I N I A N O O R C U L L O T H AT
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

H O T W O R K O F YA R D W E L D E R
ANGELINO SEVILLEJO.
 E. THE NEGLIGENCE OF
A N G E L I N O S E V I L L E J O WA S T H E
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.[if !supportFootnotes][19][endif]

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

A P P E A L S TO A D O P T, W I T H O U T
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
K E P P E L M AY N O T B E R E Q U I R E D T O
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
I N S U R E R , P I O N E E R , TO R E D U C E A N Y
LIABILITY ON THE PART OF THE YARD TO
P9.874 MILLION.[if !supportFootnotes][20][endif]
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.[if !supportFootnotes][21][endif]

!
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,[if !supportFootnotes][22][endif] 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,[if !supportFootnotes][23][endif] pp. 7-8, 18;
Exh. 2-Mullen, pp. 11-12).[if !supportFootnotes][24][endif]

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[if !supportFootnotes][25]
[endif] 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.[if !supportFootnotes][26]
[endif]
 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.[if !supportFootnotes][27][endif] This
was corroborated by the statements of the vessels hotel
manager Marcelo Rabe[if !supportFootnotes][28][endif] and the vessels
quality control officer Joselito Esteban.[if !supportFootnotes][29][endif]
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.[if !
supportFootnotes][30][endif] 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,[if !
supportFootnotes][31][endif] at a rate of P150.00/welder/hour.[if !
supportFootnotes][32][endif] 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.[if !supportFootnotes]
[33][endif]

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.[if !
supportFootnotes][34][endif] 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,[if !supportFootnotes][35][endif] 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.[if !
supportFootnotes][36][endif] 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.[if !supportFootnotes][37][endif]

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.[if !supportFootnotes][38][endif] 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.[if !supportFootnotes][39][endif] 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[if !supportFootnotes][40][endif]
and KCSIs[if !supportFootnotes][41][endif] 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.[if !supportFootnotes][42][endif]

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[if !supportFootnotes][43][endif] 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.[if !supportFootnotes][44][endif]
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.[if !
supportFootnotes][45][endif] 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.[if !supportFootnotes][46][endif] 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.[if !supportFootnotes][47][endif] 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.[if !supportFootnotes][48]
[endif]

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.[if !supportFootnotes][49]
[endif]

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.[if !supportFootnotes][50][endif]

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.[if !supportFootnotes][51][endif]

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.[if !supportFootnotes][52][endif] 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.[if !supportFootnotes][53]
[endif]

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.[if !
supportFootnotes][54][endif]

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,[if !supportFootnotes][55][endif] 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 FI CAT 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