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Republic of the PhilippinesSUPREME COURT Manila

THIRD DIVISION

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

K EPPEL CEBU SHIPYARD, INC.,


Petitioner,



- versus -



PIONEER INSURANCE AND SURETY

CORPORATION,


Respondent.


X - - - - - - - - - - - - - - - - - - - - - - - - - - - - X


PIONEER INSURANCE AND SURETY

CORPORATION,


Petitioner, chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary



G.R. Nos.

180880-81







G.R. Nos.180896-97





chanroblesvirtuallawlibrary


- versus -






K EPPEL CEBU SHIPYARD, INC.,


Respondent.

Present:



YNARES-SANTIAGO, J.,*


cralawChairperson,


CHICO-NAZARIO,


VELASCO, JR., chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

NACHURA, and


PERALTA, JJ.



Promulgated:



cralawSeptember 25, 2009


cralawx------------------------------------------------------------------------------------x






DECISION



NACHURA, J .:

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Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety Corporation

(Pioneer) and Keppel Cebu Shipyard, Inc. (KCSI)to review on certiorari the Decision dated December

17, 2004 and the Amended Decision 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 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. cralaw Prior to the

execution of the Shiprepair Agreement, Superferry 3 was already insured by WG&A with Pioneer for

US$8,472,581.78. cralawThe Shiprepair Agreement reads

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary SHIPREPAIR AGREEMENT



Company: WG & A JEBSENS SHIPMANAGEMENT INC.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Address: Harbour Center II, Railroad & Chicago Sts.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Port Area, City of Manila

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary We, WG & A JEBSENS SHIPMGMT. cralawOwner/Operator of M/V SUPERFERRY3 and K EPPEL CEBU SHIPYARD, INC. (K CSI) enter into an agreement thatthe Drydocking and Repair of the above-named vessel ordered by the OwnersAuthorized Representative shall be carried out under the Keppel Cebu ShipyardStandard Conditions of Contract for Shiprepair, guidelines and regulations on



safety and security issued by Keppel Cebu Shipyard. cralaw In addition, the followingare mutually agreed upon by the parties:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 1. The Owner shall inform its insurer of Clause 20 and 22 (a)

(refer at the back hereof) and shall include Keppel CebuShipyard as a co-assured in its insurance policy.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary cralaw


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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. Owners sub-contractors or workers are not permitted to work

in the yard without the written approval of the Vice PresidentOperations.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 4. In consideration of Keppel Cebu Shipyard allowing Owner

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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 5. On arrival, the Owner Representative, Captain, Chief Officer

and Chief Engineer will be invited to attend a conference withour Production, Safety and Security personnel whereby theywill be briefed on, and given copies of Shipyard safetyregulations.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 6. An adequate number of officers and crew must remain on

board at all times to ensure the safety of the vessel andcompliance of safety regulations by crew and owner employed

workmen.chanroblesvirtuallawlibrary


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 7. The ships officers/crew or owner appointed security

personnel shall maintain watch against pilferage and acts of sabotage.




chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 8. The yard must be informed and instructed to provide the

necessary security arrangement coverage should there beinadequate or no crew on board to provide the expressed safety

and security enforcement.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 9. The Owner shall be liable to Keppel Cebu Shipyard for any

death and/or bodily injuries for the [K]eppel Cebu Shipyardsemployees and/or contract workers; theft and/or damages toKeppel Cebu Shipyards properties and other liabilities whichare caused by the workers of the Owner.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 10. The invoice shall be based on quotation reference 99-KCSI-

211 dated December 20, 1999 tariff dated March 15, 1998.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 11. Payment term shall be as follows:


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 12. The Owner and Keppel Cebu Shipyard shall endeavor to

settle amicably any dispute that may arise under thisAgreement. cralaw Should all efforts for an amicable settlement fail,the disputes shall be submitted for arbitration in Metro Manilain accordance with provisions of Executive Order No. 1008under the auspices of the Philippine Arbitration Commission.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (Signed)

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary BARRY CHIA SOO HOCK cralaw _________(Signed)__________

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (Printed Name/Signature Above Name) cralaw(Printed Name/Signature Above Name)



Vice President Operations cralawAuthorized Representativechanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

Keppel Cebu Shipyard, Inc. cralawfor and in behalf of:chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

cralawWG & A Jebsens Shipmgmt.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

cralawJAN. cralaw26, cralaw2000 cralaw. cralaw ________________________ chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

cralawDate Date cralaw chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary





On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire. cralaw 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. cralaw

WG&A, in turn, executed a Loss and Subrogation Receipt in favor of Pioneer, to wit: cralaw

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary LOSS AND SUBROGATION RECEIPT


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 16 June 2000

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Our Claim Ref: MH-NIL-H0-99-00018

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary US$8,472,581.78

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ------------------------------------------------

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary RECEIVED from PIONEER INSURANCE & SURETY CORPORATION thesum 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 insuredunder Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169(I.V.) by reason as follows:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Fire on board at K eppel Cebu Shipyard

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary on 08 February 2000




and in consideration of which the undersigned hereby assigns and transfers to thesaid company each and all claims and demands against any person, persons,corporation or property arising from or connected with such loss or damage andthe 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.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary WILLIAM, GOTHONG & ABOITIZ, INC.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary &/OR ABOITIZ SHIPPING CORP.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary By: (Signed)

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ______________________________________


Witnesses: (Signed)chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ______________________________________

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (Signed)

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ______________________________________


Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any

responsibility for the loss of the subject vessel. cralaw 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:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 1. To pay to the claimant Pioneer Insurance and Surety Corporation thesum of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plusinterest thereon computed from the date of the Loss and Subrogation Receipt on16 June 2000 or from the date of filing of [the] Request for Arbitration, as may befound proper;


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporationand WG&A Jebsens Shipmanagement, Inc. the sum of P500,000,000.00 plusinterest thereon from the date of filing [of the] Request for Arbitration or date of the arbitral award, as may be found proper;


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. To pay to the claimants herein the sum of P3,000,000.00 for and asattorneys fees; plus other damages as may be established during the proceedings,

including arbitration fees and other litigation expenses, and the costs of suit.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of theShiprepair 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 pagethereof, be all declared illegal and void ab initio and without any legal effectwhatsoever.


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. cralawThe CIAC granted the withdrawal on October 22, 2001, thereby

dismissing the claim of WG&A against KCSI. cralaw 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.


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




chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Pioneers Theory of the Case:


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary First, Pioneer (as Claimant) is the real party in interest in this case and thatPioneer has been subrogated to the claim of its assured. cralawThe Claimant claims thatit has the preponderance of evidence over that of the Respondent. cralaw Claimant cited

documentary references on the S tatutory S ource of the Principle of S ubrogation.cralaw

Claimant then proceeded to explain that the Right of S ubrogation: chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Is by Operation of Law

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary exists in Property Insurance

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary is not Dependent Upon Privity of Contract.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Claimant then argued that Payment Operates as Equitable Assignment of Rightsto Insurer and that the Right of S ubrogation Entitles Insurer to Recover from the

Liable Party. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

Second, Respondent Keppel had custody of and control over the M/V Superferry3 while said vessel was in Respondent Keppels premises. cralaw In its Draft Decision,

Claimant stated:chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary B. The presence on board the M/V Superferry 3 of its

officers and crew does not relieve the respondent of itsresponsibility for said vessel.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary C. Respondent Keppel assumed responsibility over M/V

Superferry 3 when it brought the vessel inside its gravingdock and applied its own safety rules to the dry-dockingand repairs of the vessel.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary D. The practice of allowing a shipowner and its sub-

contractors to perform maintenance works while the vesselwas within respondents premises does not detract from thefact that control and custody over M/V Superferry 3 wastransferred to the yard.

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Third, the Vessels Safety Manual cannot be relied upon as proof of the Masterscontinuing control over the vessel.


Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur.cralaw

According to Claimant, the Yard is liable under the ruling laid down by theSupreme Court in the Manila City case. cralaw Claimant asserts that said ruling isapplicable hereto as The Law of the Case.

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

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




In contemplation of law, Sevillejo was not a loaned servant/employee. cralawTheyard, being his employer, is solely and exclusively liable for his negligentacts. cralawClaimant proceeded to enumerate its reasons:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary A. cralawThe Control Test The yard exercised control over

Sevillejo. cralaw The power of control is not diminished by the

failure to exercise control.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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 atthe time the loss occurred.



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

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary A. The yard, not Dr. Joniga, gave the welders their

marching orders, andchanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Seventh, the shipowner had no legal duty to apply for a hotworks permit since itwas not required by the yard, and the owners hotworks were conducted bywelders who remained employees of the yard. cralawClaimant contends that the need, if any, for an owners application for a hot work permit was canceled out by theyards actual knowledge of Sevillejos whereabouts and the fact that he was in deck A doing owners hotworks.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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

S hip Repairer. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

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




Claimant enumerated further badges of yard negligence.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

According to Claimant:chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

A. Yards water supply was inadequate.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

B. Yard Fire Fighting Efforts and Equipment Were Inadequate.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

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

D. Yard Safety Assistants and Firewatch-Men were Overworked.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Finally, Claimant disputed the theories propounded by the Respondent (TheYard). cralawClaimant presented its case against:

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ( ii) H ole-in-the[-]floor theory.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ( iii) Need for a plan theory.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ( iv) The unauthorized hot works theory.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ( v) The Marina report theory.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary The Claimant called the attention of the Tribunal (CIAC) on the non-appearanceof the welder involved in the cause of the fire, Mr. Severino Sevillejo. cralaw Claimant

claims that this is suppression of evidence by Respondent.chanroblesvirtuallawlibrary


K CSIs Theory of the Case chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 1. The Claimant has no standing to file the Request for Arbitration and the

Tribunal has no jurisdiction over the case:chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

cralaw chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

(a) cralawThere is no valid arbitration agreement between the Yard andthe Vessel Owner. cralaw 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 stillowned by Aboitiz Shipping. cralaw Consequently, when another firm,WG&A, authorized WG&A Jebsens to manage the MV Superferry

3, it had no authority to do so.cralaw

There is, as a result, no bindingarbitration agreement between the Vessel Owner and the Yard towhich the Claimant can claim to be subrogated and which cansupport CIAC jurisdiction.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (b) The Claimant is not a real party in interest and has no standing

because it has not been subrogated to the Vessel Owner. cralaw For thereason stated above, the insurance policies on which the Claimant bases its right of subrogation were not validly obtained. cralaw In anyevent, the Claimant has not been subrogated to any rights whichthe Vessel may have against the Yard because:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary i. The Claimant has not proved payment of the proceeds

of the policies to any specific party. cralaw As a consequence, ithas also not proved payment to the Vessel Owner.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ii. The Claimant had no legally demandable obligation to

pay under the policies and did so only voluntarily. cralaw Under the policies, the Claimant and the Vessel agreed that thereis 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 theVessel, a threshold which the actual repair cost for theVessel did not reach. cralaw Since the Claimant opted to paycontrary to the provisions of the policies, its payment wasvoluntary, and there was no resulting subrogation to the

Vessel.chanroblesvirtuallawlibrary



iii. There was also no subrogation under Article 1236 of the Civil Code. cralaw First, if the Claimant asserts a right of payment only by virtue of Article 1236, then there is nolegal subrogation under Article 2207 and it does notsucceed to the Vessels rights under the Ship [R]epair Agreement and the arbitration agreement. cralaw It does not havea right to demand arbitration and will have only a purelycivil law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in court. cralaw

Second, since the Yard is not liable for the fire and theresulting damage to the Vessel, then it derived no benefitfrom the Claimants payment to the Vessel Owner. cralawThird, inany event, the Claimant has not proved payment of the proceeds to the Vessel Owner.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 2. The Ship [R]epair Agreement was not imposed upon the Vessel. cralawThe Vessel

knowingly and voluntarily accepted that agreement. cralaw Moreover, there are nosigning or other formal defects that can invalidate the agreement.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. The proximate cause of the fire and damage to the Vessel was not any

negligence committed by Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. cralaw On the contrary, the proximate cause of

the fire was Dr. Jonigas and the Vessels deliberate decision to have AngelinoSevillejo undertake cutting work in inherently dangerous conditions created by them.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (a) The Claimants material witnesses lied on the record and the

Claimant presented no credible proof of any negligence byAngelino Sevillejo.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (b) Uncontroverted evidence proved that Dr. Joniga neglected or

decided not to obtain a hot work permit for the bulkhead cuttingand also neglected or refused to have the ceiling and the flammablelifejackets removed from underneath the area where he instructedAngelino Sevillejo to cut the bulkhead door. cralaw These decisions or oversights guaranteed that the cutting would be done in extremelyhazardous conditions and were the proximate cause of the fire andthe resulting damage to the Vessel.





(c) The Yards expert witness, Dr. Eric Mullen gave the onlycredible account of the cause and the mechanics of ignition of thefire. cralaw He established that: i) the fire started when the cutting of the bulkhead door resulted in sparks or hot molten slag which fellthrough pre-existing holes on the deck floor and came into contact

with and ignited the flammable lifejackets stored in the ceilingvoid directly below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come fromthe cutting of any of the sides of the door. cralaw Consequently, thecutting itself of the bulkhead door under the hazardous conditionscreated by Dr. Joniga, rather than the positioning of the doors bottom edge, was the proximate cause of the fire.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (d) The Manila City case is irrelevant to this dispute and in any

case, does not establish governing precedent to the effect that whena ship is damaged in dry dock, the shipyard is presumed at fault. cralaw

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. cralaw

Furthermore, even if the principle were applied to create a presumption of negligence by the Yard, however, that presumptionis conclusively rebutted by the evidence on record.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (e) The Vessels deliberate acts and its negligence created the

inherently hazardous conditions in which the cutting work thatcould otherwise be done safely ended up causing a fire and thedamage to the Vessel. cralaw The fire was a direct and logical

consequence of the Vessels decisions to: (1) take AngelinoSevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do unauthorized cuttingwork in Deck A; and (2) to have him do that without satisfying therequirements for and obtaining a hot work permit in violation of the Yards Safety Rules and without removing the flammableceiling and life jackets below, contrary to the requirements notonly of the Yards Safety Rules but also of the demands of standardsafe practice and the Vessels own explicit safety and hot work policies.



(f) The vessel has not presented any proof to show that the Yardwas remiss in its fire fighting preparations or in the actual conductof fighting the 8 February 2000 fire. cralaw The Yard had the necessaryequipment and trained personnel and employed all those resourcesimmediately and fully to putting out the 8 February 2000 fire.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the

deck floor, and that this circumstance rather than the extremely hazardous



conditions created by Dr. Joniga and the Vessel for that activity caused thefire, the Yard may still not be held liable for the resulting damage.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (a) cralawThe Yards only contractual obligation to the Vessel in respect

of the 26 January 2000 Work Order was to supply welders for thePromenade Deck restaurant who would then perform welding work

per owner[s] instruction.cralaw

Consequently, once it had provided thosewelders, including Angelino Sevillejo, its obligation to the Vesselwas fully discharged and no claim for contractual breach, or for damages on account thereof, may be raised against the Yard.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (b) The Yard is also not liable to the Vessel/Claimant on the basis

of quasi-delict.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

i. The Vessel exercised supervision andcontrol over Angelino Sevillejo when he was doing work atthe Promenade Deck restaurant and especially when he wasinstructed by Dr. Joniga to cut the bulkhead door. cralaw

Consequently, the Vessel was the party with actual control

over his tasks and is deemed his true and effectiveemployer for purposes of establishing Article 2180employer liability.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary ii. Even assuming that the Yard was

Angelino Sevillejos employer, the Yard may neverthelessnot be held liable under Article 2180 because AngelinoSevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for thePromenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the Vessel.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary iii. The Yard is nonetheless not liable under

Article 2180 because it exercised due diligence in theselection and supervision of Angelino Sevillejo.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 5. Assuming that the Yard is liable, it cannot be compelled to pay the full

amount of P360 million paid by the Claimant.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

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



cralaw



(b) Under the Ship [R]epair Agreement, the liability of the Yard islimited to P50 million a stipulation which, under the law anddecisions of the Supreme Court, is valid, binding and enforceable.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (c) 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. cralawThis



liability should in turn be set-off against the Claimants claim for damages.

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 1. Claimants counsel contends that the cutting of the bulkhead

door was covered by the 26 January 2000 Work Order.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 2. Claimants counsel contends that Dr. Joniga told Gerry Orcullo

about his intention to have Angelino Sevillejo do cutting work atthe Deck A bulkhead on the morning of 8 February 2000.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. Claimants counsel contends that under Article 1727 of the Civil

Code, The contractor is responsible for the work done by personsemployed by him.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 4. Claimants counsel contends that [t]he second reason why there

was no job spec or job order for this cutting work, [is] the cuttingwork was known to the yard and coordinated with Mr. GerryOrcullo, the yard project superintendent.


5. Claimants counsel also contends, to make the Vesselsunauthorized hot works activities seem less likely, that they couldeasily be detected because Mr. Avelino Aves, the Yard SafetySuperintendent, admitted that No hot works could really be hiddenfrom the Yard, your Honors, because the welding cables and thegas hoses emanating from the dock will give these hotworks awayapart from the assertion and the fact that there were also safetyassistants supposedly going around the vessel.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Respondent disputed the above by presenting its own argument in its FinalMemorandum.


On October 28, 2002, the CIAC rendered its Decision declaring both WG&A and KCSI guilty of

negligence, with the following findings and conclusions

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary The Tribunal agrees that the contractual obligation of the Yard is to provide thewelders and equipment to the promenade deck. cralaw [The] Tribunal agrees that thecutting of the bulkhead door was not a contractual obligation of the Yard. cralaw

However, by requiring, according to its own regulations, that only Yard weldersare to undertake hotworks, it follows that there are certain qualifications of Yardwelders that would be requisite of yard welders against those of the vesselwelders. cralaw 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 conditionsof the hotwork permit prior to implementation. cralaw By the requirement that allhotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains ayard employee. cralawThe act of Sevillejo is however mitigated in that he was not evena foreman, and that the instructions to him was (sic) by an authorized person. cralawTheTribunal notes that the hotworks permit require[s] a request by at least a foreman. cralaw

The fact that no foreman was included in the five welders issued to the Vessel



was never raised in this dispute.cralawAs discussed earlier by the Tribunal, with the factthat what was ask (sic) of Sevillejo was outside the work order, the Vessel isconsidered equally negligent. cralawThis Tribunal finds the concurrent negligence of theYard through Sevillejo and the Vessel through Dr. Joniga as both contributory tothe cause of the fire that damaged the vessel.


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. cralaw The CIAC further ordered that the arbitration costs

be imposed on both parties on a pro rata basis.


Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. cralawKCSI likewise filed

its own appeal and the same was docketed as CA-G.R. SP No. 73934. cralawThe cases were consolidated.


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

follows:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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) isGRANTED, dismissing petitioners claims in its entirety.cralaw No costs.

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



SO ORDERED.chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

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.cralaw 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, joined by

Associate Justice Japar B. Dimaampao.cralawThe fallo of the Amended Decision reads

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary WHEREFORE, premises considered, the Court hereby decrees that:





1. cralaw Pioneers Motion for Reconsideration is PARTIALLY GRANTED,ordering The Yard to pay Pioneer P25 Million, without legal interest, within 15days from the finality of this Amended Decision, subject to the followingmodifications:



1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLYGRANTED as the Yard is hereby ordered to pay Pioneer P25 Million withoutlegal interest;


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 2. cralaw The Yard is hereby declared as equally negligent, thus, the total

GRANTING cralaw of its Petition (CA-G.R. SP No. 73934) is now reduced toPARTIALLY 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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. cralawThe rest of the disposition in the original Decision remains the same.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary SO ORDERED.




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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary I


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECI S ION

ON NON-FACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE THE AMENDED DECI S ION . cralawTHISALSO VIOLATES SECTION 14, ARTICLE VIII OF THE CONSTITUTION.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary II


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITYOF THE YARD TO THE SUM OF P50,000,000.00, IN THAT:


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary A. S TARE DECI S I S RENDERS INAPPLICABLE ANY

INVOCATION OF LIMITED LIABILITY BY THE YARD. chanroblesvirtuallawlibrary



B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLICPOLICY.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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 SUMOF P50,000,000.00 ONLY.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT

LIABILITY, IN THAT: chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (i) THE YARD HAD CUSTODY AND CONTROL OVER

THE VESSEL (M/V SUPERFERRY 3) ON 08 FEBRUARY 2000WHEN IT WAS GUTTED BY FIRE;


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (ii) THE DAMAGING FIRE INCIDENT HAPPENED IN

THE COURSE OF THE REPAIRS EXCLUSIVELYPERFORMED BY YARD WORKERS.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary III




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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER,

DID NOT SUPERVISE OR CONTROL THE REPAIRS. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary B. IT WAS THE YARD THROUGH ITS PROJECT

SUPERINTENDENT GERMINIANO ORCULLO THAT SUPERVISEDAND CONTROLLED THE REPAIR WORKS.



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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary D. THE YARD AUTHORIZED THE HOT WORK OF YARD

WELDER ANGELINO SEVILLEJO. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE

PROXIMATE CAUSE OF THE LOSS. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT

DIRECT OR CONTRIBUTORY TO THE LOSS. chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary IV


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary THE COURT OF APPEALS CORRECTLY RULED THAT WG&ASUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT



ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THEVALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary V



THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLEFOR INTEREST.




VI chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELYLIABLE FOR ARBITRATION COSTS.




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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 1. cralawABSENCE OF YARD RESPONSIBILITY


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT,

WITHOUT EXPLANATION, THE CIACS RULING THAT THE YARD WASEQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOTWORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINOSEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWNTHAT RULING TO BE COMPLETELY WRONG AND BASELESS.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 2. cralaw NO CONSTRUCTIVE TOTAL LOSS


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALSTO RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS ACONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINEDWHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 3. cralawFAILURE OR REFUSAL TO ADDRESS

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary KEPPELS MOTION FOR RECONSIDERATION


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OFAPPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING ITAND 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 PIONEERSPAYMENTS TO THE VESSEL OWNER IN VIEW OF THE CO-INSURANCECLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION.


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 4. cralawFAILURE TO CREDIT FOR SALVAGE RECOVERY





EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THEFOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLYBE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL ANDREQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING

THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVEDBY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THEPART OF THE YARD TO P9.874 MILLION.




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

issues:


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


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary B. cralawIs subrogation proper?cralawIf proper, to what extent can subrogation be made?


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary C. cralawShould interest be imposed on the award of damages?cralawIf so, how much?


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary D. cralawWho 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. cralawConsidering 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. cralaw




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. cralawAs established before the CIAC


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. AiniLing, p. 20). cralawAngelino 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 fromunder Deck A. cralaw He got another container of water which he also poured whencethe smoke was coming. cralawIn the meantime, other workers in the immediate vicinitytried to fight the fire by using fire extinguishers and buckets of water. cralawBut 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. cralawFighting the fire was extremelydifficult because the life jackets and the construction materials of the Deck Bceiling were combustible and permitted the fire to spread within the ceiling void. cralaw

From there, the fire dropped into the Deck B accommodation areas at variouslocations, where there were combustible materials. cralaw Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses ondeck B (Exh. 1-Mullen, pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).




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.cralawKCSI 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 dated January 26,

2000 or under the Shiprepair Agreement. cralaw 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.



F irst. cralaw 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. cralawThus, the CA erred when it said that

WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI.


S econd . cralaw 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. cralaw 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. cralaw 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.:


chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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.


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. cralaw This was corroborated by the statements of the vessels hotel manager Marcelo

Rabe and the vessels quality control officer Joselito Esteban. cralaw KCSI knew of the unfinished hot works in

the passenger accommodation areas. cralaw 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. cralawThis 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 . cralaw KCSI welders covered by the Work Order performed hot works on various areas of the M/V

Superferry 3, aside from its promenade deck. cralaw 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. cralaw


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, at a rate of P150.00/welder/hour. cralaw 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.


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. cralaw The Work

Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter.


F ourth. cralaw 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. cralawThus, 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, 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.


F ifth. cralawThere was a lapse in KCSIs supervision of Sevillejos work at the time the fire broke out. cralaw


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. cralaw Moreover,

KCSI had roving fire watchmen and safety assistants who were moving around the vessel. cralaw 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. cralawKCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot

work. cralaw 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. cralaw

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 4.3. cralawThe foregoing would be compounded by Angelino Sevillejo being an electricarc welder, not a cutter. cralaw The dangers of ignition occurring as a result of the two processes are similar in that both electric arc welding and hot cutting produce heatat the work area and sparks and incendive material that can travel some distancefrom the work area. cralawHence, the safety precautions that are expected to be applied by the supervisor are the same for both types of work. cralawHowever, the quantity andincendivity of the spray from the hot cutting are much greater than those of sparksfrom electric arc welding, and it may well be that Angelino Sevillejo would not

have a full appreciation of the dangers involved. cralaw This made it all the moreimportant that the supervisor, who should have had such an appreciation,ensured that the appropriate safety precautions were carried out.


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. cralaw 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. cralaw

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. cralaw


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. cralawIn addition to scolding Sevillejo, Rebaca merely checked that no fire had started yet.

cralaw Nothing more.cralaw Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc

welder, Rebaca should have replaced him. cralaw



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. cralaw

Those who undertake any work calling for special skills are required to exercise reasonable care in what

they do. cralawVerily, 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. cralawThe omission of that care constitutes

negligence. cralaw 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. cralaw The greater the danger, the greater the degree of care required. cralaw Extraordinary risk demands

extraordinary care. cralaw Similarly, the more imminent cralawthe cralawdanger, cralawthe higher degree of care warranted. cralaw 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. cralaw



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. cralawThese hot works were deemed included in the January 26, 2000 Work Order

and the Shiprepair Agreement. cralaw In the exercise of this authority, Dr. Joniga asked Sevillejo to do the

cutting of the bulkhead door near the staircase of Deck A. cralawKCSI 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 incumbentupon him to remove the same. cralawIt was shown during the hearings before the CIAC that the removal of the

life jackets would not have made much of a difference. cralaw The fire would still have occurred due to the

presence of other combustible materials in the area. cralaw This was the uniform conclusion of both WG&As

and KCSIs fire experts. cralaw 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.



These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in the

performance of his assigned task. cralaw His negligence was the proximate cause of the fire on board M/V

Superferry 3. cralawAs 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 under Article 2180 of the Civil

Code, which provides

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Art. 2180. cralaw 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 isresponsible.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary x x x x

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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary x x x x

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary The responsibility treated of in this article shall cease when the persons hereinmentioned prove that they observed all the diligence of a good father of a familyto 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.cralaw Consequently, it is responsible for the damages

caused by the negligent act of its employee, and its liability is primary and solidary. cralawAll 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. cralawFrom the foregoing disquisition, there is ample proof of the

employees negligence. cralaw


B. cralawThe 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.cralawIt 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.cralawKCSI 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. cralaw

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

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


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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary (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

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Total Loss

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary In ascertaining whether the Vessel is a constructive Total Loss the Agreed Valueshall 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.

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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. cralaw In making this determination, only expensesincurred or to be incurred by reason of a single accident or a sequence of damagesarising 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 claimedseparately 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 Philippinecurrency 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. cralawAll 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. cralaw Thus, WG&A opted to abandon M/V



Superferry 3 and claimed from Pioneer the full amount of the policies. cralawPioneer 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. cralaw


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:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary IMPORTANT

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary 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, thenthe 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. cralaw This is incorrect. cralaw 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. cralaw This option or

discretion is expressed as a right in Section 131 of the same Code, to wit:

chanroblesvirtuallawlibrary chanroblesvirtuallawlibrary Sec. 131. cralawA constructive total loss is one which gives to a person insured a rightto 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.

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