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Keppel Cebu Shipyard vs.

Pioneer Insurance and Surety September 25, 2009 Facts: 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. 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 provides, among others, for the following terms: (1) that the owner shall inform its insurer and shall include Keppel Cebu Shipyard as a co-assured in its insurance policy; (2) that the owner shall waive its right to claim for any loss of profit or loss of use or damages consequential on such loss of use resulting from the delay in the redelivery of the above vessel; (3) that 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. 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. Pioneer paid the insurance claim in the amount of US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt in favor of Pioneer. Pioneer then tried to collect from KCSI, but the latter denied any responsibility for the loss of the subject vessel despite repeated demands. Hence, Pioneer, filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) praying for the payment of the amount paid to WG&A, the expenses of the arbitration (P500 million), and damages. It further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement 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. KCSI and WG&A reached an amicable settlement, leading to the dismissal of the claim of WG&A against KCSI and the arbitration to proceed with Pioneer as the remaining claimant. Pioneer alleges that it is the real party in interest and that Keppel had custody of and control over the M/V Superferry 3 while said vessel was in Respondent Keppels premises. It likewise alleged that the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over the vessel ; Yard is liable under the Doctrine of Res Ipsa Loquitur. Moreover , 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. It futher allged that 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. 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. KCI on the other hand allged: 1. that pioneer as claimant has no standing to file the Request for Arbitration and the Tribunal has no jurisdiction over the case. 2. The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the agreement. 3. The proximate cause of the fire and damage to the Vessel was not any negligence committed by Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary, the proximate cause of the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino Sevillejo undertake cutting work in inherently dangerous conditions created by them. 4. Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this circumstance rather than the extremely hazardous conditions created by Dr. Joniga

and the Vessel for that activity caused the fire, the Yard may still not be held liable for the resulting damage. 5. Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid by 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. CIA declared both WG&A and KCSI guilty of negligence. The Court of appeals, in its amended decision ordered the Yard to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of the decision. ISSUES: 1. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed? 2. Is subrogation proper? If proper, to what extent can subrogation be made? Held:

1. KCI should be liable. 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. The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling, [22] p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as he did so, smoke came up from under Deck A. He got another container of water which he also poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B accommodation areas at various locations, where there were combustible materials. Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B. 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. Thus, as such employee, aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which specifically provides that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety permit before starting the work he did, including that done on Deck A where the fire started. 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.

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. Verily, there is an obligation all persons have to take due care which, under ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that care constitutesnegligence. Generally, the degree of care required is graduated according to the danger a person or property may be subjected to, arising from the activity that the actor pursues or the instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary risk demands extraordinary care. Similarly, the more imminent the danger, the higher degree of care warranted. KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal presumption of its negligence in supervising Sevillejo.[44] Consequently, it is responsible for the damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is proof that the employee has, by his negligence, caused damage to another in order to make the employer responsible for the tortuous act of the former. [45] From the foregoing disquisition, there is ample proof of the employees negligence.

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

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 for that the 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. Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation. [47]The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the presumed authority of the signatory to receive such payment. Payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought to pay.[49] Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are unfair and inequitable under the premises. It was established during arbitration that WG&A did not voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found, because he did not want WG&A to be bound by them. However, considering that it was only KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels owned by WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the vessel would not be accepted for dry docking.[50] Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a take-it-orleave-it basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative of taking it or leaving it, completely depriving such party of the opportunity to bargain on equal footing.[51] Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention on the

part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively proved, since a waiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right. [52] This has not been demonstrated in this case. 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 coassured 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. Eastern Shipping Lines vs. Prudential Guarantee September 11, 2009 Facts: Facts: Fifty-six cases of completely knock-down auto parts of Nissan motor vehicle (cargoes) were loaded on board M/V Apollo Tujuh (carrier) at Nagoya, Japan, to be shipped to Manila. The shipment was consigned to Nissan Motor Philippines, Inc. (Nissan) The carrier was owned and operated by petitioner Eastern Shipping Lines, Inc.nThe said carrier arrived at the port of Manila. The shipment was then discharged from the vessel onto the custody of the arrastre operator, Asian Terminals, Inc. (ATI), complete and in good condition, except for four cases. The shipment was withdrawn by Seafront Customs and Brokerage from the pier and delivered to the warehouse of Nissan in Quezon City. A survey of the said shipment was conducted at Nissans warehouse. The surveyor reported that several cargoes were broken and some are missing. The surveyor averred that the "shortage and damage sustained by the shipment were due to pilferage and improper handling, respectively while in the custody of the vessel and/or Arrastre Contractors." As a result, Nissan demanded the sum of P1,047,298.34 representing the cost of the damages sustained by the shipment from petitioner However, the demands were not heeded. Respondent Prudential Guarantee and Assurance Inc., as insurer of the shipment against all risks per Marine Open Policy No. 86-168 and Marine Cargo Risk Note No. 3921/95, paid Nissan the sum ofP1,047,298.34. Thereafter, respondent sued petitioner and ATI for reimbursement of the amount it paid to Nissan before the Regional Trial Court (RTC) of Makati City, Branch 148. Respondent claimed that it was subrogated to the rights of Nissan by virtue of said payment. The RTC ruled in favor PGAI. Both petitioner and ATI appealed to the CA. The CA affirmed the decision of the lower court, saying that ATI and ruled that petitioner was solely responsible for the damages caused to the cargoes. Moreover, the CA ruled that the right of subrogation accrues upon payment by the insurance company of the insurance claim and that the presentation of the insurance policy is not indispensable before the appellee may recover in the exercise of its subrogatory right. Petitioner then filed a motion for reconsideration, which was, however, denied by the CA. Hence, this petition. Issue: Whether the two documents, without the Marine Insurance Policy, are sufficient to prove respondents right of subrogation. Held: The petition is meritorious.

The Court ruled that inadequacy of the Marine Cargo Risk Note for the reasons already stated, it was incumbent on respondent to present in evidence the Marine Insurance Policy, and having failed in doing so, its claim of subrogation must necessarily fail. Petitioner argues that respondent was not properly subrogated because of the non-presentation of the marine insurance policy. In the case at bar, in order to prove its claim, respondent presented a marine cargo risk note and a subrogation receipt. It must be emphasized that a marine risk note is not an insurance policy. It is only an acknowledgment or declaration of the insurer confirming the specific shipment covered by its marine open policy, the evaluation of the cargo and the chargeable premium. It is undisputed that the cargoes were already on board the carrier as early as November 8, 1995 and that the same arrived at the port of Manila on November 16, 1995. It is, however, very apparent that the Marine Cargo Risk Note was issued only on November 16, 1995. The same, therefore, should have raised a red flag, as it would be impossible to know whether said goods were actually insured while the same were in transit from Japan to Manila. Petitioner objected the presentation of the presentation of the Marine Cargo Risk Note for being irrelevant and immaterial as it was executed on November 16, 1995. This means that the cargoes are not specifically covered by any particular insurance at the time of transit. Based on the forgoing, it is already evident why herein petition is meritorious. The Marine Risk Note relied upon by respondent as the basis for its claim for subrogation is insufficient to prove said claim. As previously stated, the Marine Risk Note was issued only on November 16, 1995; hence, without a copy of the marine insurance policy, it would be impossible and simply guesswork to know whether the cargo was insured during the voyage which started on November 8, 1995. Again, without the marine insurance policy, it would be impossible for this Court to know the following: first, the specifics of the "Institute Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168" as alluded to in the Marine Risk Note; second, if the said terms and conditions were actually complied with before respondent paid Nissans claim. Clearly, petitioner was not remiss when it openly objected to the non-presentation of the Marine Insurance Policy. As testified to by respondents witness, they had a copy of the marine insurance policy in their office. Thus, respondent was already apprised of the possible importance of the said document to their cause. It was respondents burden to present the evidence necessary to substantiate its claim. Therefore, other than the marine cargo risk note, respondent should have also presented the marine insurance policy, as the same also served as the basis for its complaint. Section 7, Rule 9 of the 1997 Rules of Civil Procedure.* It is significant that the date when the alleged insurance contract was constituted cannot be established with certainty without the contract itself. Said point is crucial because there can be no insurance on a risk that had already occurred by the time the contract was executed. Surely, the Marine Risk Note on its face does not specify when the insurance was constituted.
*SECTION 7. Action or defense based on document.Whenever an action or defense is based upon a written instrument or document, the substance of such instrument or document shall be set forth in the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said copy may, with like effect, be set forth in the pleading.