International container vs Pionner

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY 3 and KEPPEL CEBU
SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named
vessel ordered by the Owners Authorized Representative shall be carried out under the Keppel Cebu
Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and
security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the
parties:
1.
The Owner shall inform its insurer of Clause 20[7] and 22 (a)[8] (refer at the back hereof) and shall
include Keppel Cebu Shipyard as a co-assured in its insurance policy.
2.
The Owner shall waive its right to claim for any loss of profit or loss of use or damages
consequential on such loss of use resulting from the delay in the redelivery of the above vessel.
3.
Owners sub-contractors or workers are not permitted to work in the yard without the written
approval of the Vice President Operations.
4.
In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the
vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims,
damages, or liabilities arising from death or bodily injuries to Owners workers, or damages to the vessel
or other property however caused.
5.
On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited to
attend a conference with our Production, Safety and Security personnel whereby they will be briefed on,
and given copies of Shipyard safety regulations.
6.
An adequate number of officers and crew must remain on board at all times to ensure the safety
of the vessel and compliance of safety regulations by crew and owner employed workmen.
7.
The ships officers/crew or owner appointed security personnel shall maintain watch against
pilferage and acts of sabotage.
8.
The yard must be informed and instructed to provide the necessary security arrangement
coverage should there be inadequate or no crew on board to provide the expressed safety and security
enforcement.
9.
The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the
[K]eppel Cebu Shipyards employees and/or contract workers; theft and/or damages to Keppel Cebu
Shipyards properties and other liabilities which are caused by the workers of the Owner.
10. The invoice shall be based on quotation reference 99-KCSI-211 dated December 20, 1999 tariff
dated March 15, 1998.
11.

Payment term shall be as follows:

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

BARRY CHIA SOO HOCK _________(Signed)__________

Vice President Operations Authorized Representative
Keppel Cebu Shipyard, Inc. for and in behalf of:
WG & A Jebsens Shipmgmt.

JAN. 26, 2000 . ________________________ Date Date

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire. Claiming that the
extent of the damage was pervasive, WG&A declared the vessels damage as a total constructive loss
and, hence, filed an insurance claim with Pioneer.
On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of
US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt [9] in favor of Pioneer, to wit:
LOSS AND SUBROGATION RECEIPT
16 June 2000 Our Claim Ref: MH-NIL-H0-99-00018 US$8,472,581.78
RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS
EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE &
78/100 (US$ 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)
Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any
responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated
demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry
Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:
1.
To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.
$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the
date of the Loss and Subrogation Receipt on 16 June 2000 or from the date of filing of [the] Request for
Arbitration, as may be found proper;
2.
To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens
Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing [of the]
Request for Arbitration or date of the arbitral award, as may be found proper;

3.
To pay to the claimants herein the sum of P3,000,000.00 for and as attorneys fees; plus
other damages as may be established during the proceedings, including arbitration fees and other
litigation expenses, and the costs of suit.
It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement
(Annex A) as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very fine
print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any legal
effect whatsoever.[10]
KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal of
Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby
dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the
remaining claimant.
In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on January 26,
2000, M/V Superferry 3 arrived at KCSI in 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. [11]
As regards the disputed facts, below are the respective positions of the parties, viz.:
Pioneers Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated
to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the
Respondent. Claimant cited documentary references on the Statutory Source of the Principle of
Subrogation. Claimant then proceeded to explain that the Right of Subrogation: Is by Operation of Law ,
exists in Property Insurance , is not Dependent Upon Privity of Contract.
Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that
the Right of Subrogation Entitles Insurer to Recover from the Liable Party.
Second, Respondent Keppel had custody of and control over the M/V Superferry 3 while said vessel was
in Respondent Keppels premises. In its Draft Decision, Claimant stated:
A.
The evidence presented during the hearings indubitably proves that respondent not only took
custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-docking and
repair of the vessel.
B.
The presence on board the M/V Superferry 3 of its officers and crew does not relieve the
respondent of its responsibility for said vessel.
C.
Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the
vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the
vessel.
D.
The practice of allowing a shipowner and its sub-contractors to perform maintenance works
while the vessel was within respondents premises does not detract from the fact that control and custody
over M/V Superferry 3 was transferred to the yard.
From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V
Superferry 3.

Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over
the vessel.
Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, the
Yard is liable under the ruling laid down by the Supreme Court in the Manila Citycase. Claimant asserts
that said ruling is applicable hereto as The Law of the Case.
Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa
Loquitur, but from its negligence in this case.
Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According
to Claimant;
In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is
solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons:
A.
The Control Test The yard exercised control over Sevillejo. The power of control is not
diminished by the failure to exercise control.
B.
There was no independent work contract between Joniga and Sevillejo Joniga was not the
employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.
C.
The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owners hot works
under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.
Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant argued
that:
A.

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

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

Yards water supply was inadequate.

B.

Yard Fire Fighting Efforts and Equipment Were Inadequate.

C.

Yard Safety Practices and Procedures Were Unsafe or Inadequate.

D.

Yard Safety Assistants and Firewatch-Men were Overworked.

Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented
its case against:
(i)
(ii)
(iii)
(iv)
(v)

Non-removal of the life jackets theory.

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

The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved in
the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by
Respondent.
KCSIs Theory of the Case
1.
The Claimant has no standing to file the Request for Arbitration and the Tribunal has no
jurisdiction over the case:
(a)
There is no valid arbitration agreement between the Yard and the Vessel Owner. On January
26, 2000, when the ship repair agreement (which includes the arbitration agreement) was signed by
WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently,
when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no
authority to do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and
the Yard to which the Claimant can claim to be subrogated and which can support CIAC jurisdiction.
(b)
The Claimant is not a real party in interest and has no standing because it has not been
subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the
Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not been
subrogated to any rights which the Vessel may have against the Yard because:
i.
The Claimant has not proved payment of the proceeds of the policies to any specific
party. As a consequence, it has also not proved payment to the Vessel Owner.
ii.
The Claimant had no legally demandable obligation to pay under the policies and did so
only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total
Loss unless the expense of recovering and repairing the vessel would exceed the Agreed Value of P360
million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did
not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its payment was
voluntary, and there was no resulting subrogation to the Vessel.
iii.
There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant
asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article
2207 and it does not succeed to the Vessels rights under the Ship [R]epair Agreement and the arbitration
agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for

reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second,
since the Yard is not liable for the fire and the resulting 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.
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.
(a)
The Claimants material witnesses lied on the record and the Claimant presented no credible
proof of any negligence by Angelino Sevillejo.
(b)
Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot
work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable
lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead
door. These decisions or oversights guaranteed that the cutting would be done in extremely hazardous
conditions and were the proximate cause of the fire and the resulting damage to the Vessel.
(c)
The 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.
(d)
The Manila City case is irrelevant to this dispute and in any case, does not establish
governing precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at
fault. Apart from the differences in the factual setting of the two cases, the Manila City pronouncements
regarding the res ipsa loquitur doctrine are obiter dictawithout value as binding precedent. Furthermore,
even if the principle were applied to create a presumption of negligence by the Yard, however, that
presumption is conclusively rebutted by the evidence on record.
(e)
The Vessels deliberate acts and its negligence created the inherently hazardous conditions
in which the cutting work that could otherwise be done safely ended up causing a fire and the damage to
the Vessel. The fire was a direct and logical consequence of the Vessels decisions to: (1) take Angelino
Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do
unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for
and obtaining a hot work permit in violation of the Yards Safety Rules and without removing the
flammable ceiling and life jackets below, contrary to the requirements not only of the Yards Safety Rules
but also of the demands of standard safe practice and the Vessels own explicit safety and hot work
policies.
(f)
The vessel has not presented any proof to show that the Yard was remiss in its fire fighting
preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary

equipment and trained personnel and employed all those resources immediately and fully to putting out
the 8 February 2000 fire.
4.
Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this
circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for
that activity caused the fire, the Yard may still not be held liable for the resulting damage.
(a)
The 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.
(b)

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

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

iii.
The Yard is nonetheless not liable under Article
2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo.
5.
Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid
by the Claimant.
(a)
Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount
greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher
amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the MV
Superferry 3, at the time of the fire.
(b)
Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million a
stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable.
(c)
The Vessel breached its obligation under Clause 22 (a) of the Yards Standard Terms to
name the Yard as co-assured under the policies a breach which makes the Vessel liable for
damages. This liability should in turn be set-off against the Claimants claim for damages.
The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent
enumerated and disputed these as follows:

1.
Claimants counsel contends that the cutting of the bulkhead door was covered by the 26
January 2000 Work Order.
2.
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.
3.
Claimants counsel contends that under Article 1727 of the Civil Code, The contractor is
responsible for the work done by persons employed by him.
4.
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.
5.
Claimants counsel also contends, to make the Vessels unauthorized hot works activities
seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety
Superintendent, admitted that No hot works could really be hidden from the Yard, your Honors, because
the welding cables and the gas hoses emanating from the dock will give these hotworks away apart from
the assertion and the fact that there were also safety assistants supposedly going around the vessel.
Respondent disputed the above by presenting its own argument in its Final Memorandum. [12]
On October 28, 2002, the CIAC rendered its Decision [13] declaring both WG&A and KCSI guilty of
negligence, with the following findings and conclusions
The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to
the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual
obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders are
to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be
requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard
welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork
permit, discussing the work in a production meeting, and complying with the conditions of the hotwork
permit prior to implementation. By the requirement that all hotworks are to be done by the Yard, the
Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that he
was not even a foreman, and that the instructions to him was (sic) by an authorized person. The Tribunal
notes that the hotworks permit require[s] a request by at least a foreman. The fact that no foreman was
included in the five welders issued to the Vessel was never raised in this dispute. As discussed earlier by
the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel is
considered equally negligent. This Tribunal finds the concurrent negligence of the Yard through Sevillejo
and the Vessel through Dr. Joniga as both contributory to the cause of the fire that damaged the vessel. [14]
Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay
Pioneer the amount of P25,000,000.00, with interest at 6% per annum from the time of the filing of the
case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any
balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs
be imposed on both parties on a pro rata basis.[15]
Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed
its own appeal and the same was docketed as CA-G.R. SP No. 73934.The cases were consolidated.
On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as
follows:

WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED
while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioners claims in its
entirety. No costs. The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata. SO
ORDERED.[16] Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting
that it suffered from serious errors in the appreciation of the evidence and from gross misapplication of
the law and jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the
same Decision.

On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five Former
Fifteenth Division of the CA in light of the dissent of Associate Justice Lucas P. Bersamin, [17] joined by
Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads
WHEREFORE, premises considered, the Court hereby decrees that:
1. Pioneers Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer P25
Million, without legal interest, within 15 days from the finality of thisAmended Decision, subject to the
following modifications:
1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered
to pay Pioneer P25 Million without legal interest;
2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R.
SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25
Million, without legal interest, within 15 days from the finality of this Amended Decision; and
3. The rest of the disposition in the original Decision remains the same.
SO ORDERED.[18]
Hence, these petitions. Pioneer bases its petition on the following grounds:
I. THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NONFACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE
THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII OF THE
CONSTITUTION.
II. THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO THE
SUM OF P50,000,000.00, IN THAT:
A. STARE DECISIS RENDERS INAPPLICABLE 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) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V SUPERFERRY 3) ON 08
FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;
(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS EXCLUSIVELY
PERFORMED BY YARD WORKERS.
III. THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS CONCURRENTLY
NEGLIGENT, CONSIDERING THAT:
A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER, DID NOT SUPERVISE OR CONTROL THE
REPAIRS.
B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO THAT
SUPERVISED AND CONTROLLED THE REPAIR WORKS.
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY ALONE
COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.
D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO.
E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE LOSS.
F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE LOSS.
IV THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE
TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR
THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.
V THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR INTEREST.
VI THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR
ARBITRATION COSTS.[19]
On the other hand, KCSI cites the following grounds for the allowance of its petition, to wit:
1. ABSENCE OF YARD RESPONSIBILITY
IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT EXPLANATION,
THE CIACS RULING THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO
REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO,
AFTER THE COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE COMPLETELY
WRONG AND BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT
EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF
EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPELS MOTION FOR RECONSIDERATION

FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY
DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL
MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY
PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO
STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE
PIONEERS PAYMENTS TO THE VESSEL OWNER IN VIEW OF THE CO-INSURANCE CLAUSE IN THE
SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF
ARBITRATION.
4. FAILURE TO CREDIT FOR SALVAGE RECOVERY
EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE FOREGOING ISSUES WERE
CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE
VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT
OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL
RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE
PART OF THE YARD TO P9.874 MILLION.[20]
To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the following core
issues:
A. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed?
B. Is subrogation proper? If proper, to what extent can subrogation be made?
C. Should interest be imposed on the award of damages? If so, how much?
D. Who should bear the cost of the arbitration?
To resolve these issues, it is imperative that we digress from the general rule that in petitions for review
under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate
findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to
revisit the factual circumstances surrounding this controversy.[21]
The Courts Ruling
A. The issue of negligence
Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on
the accommodation area of the vessel, specifically on Deck A. As established before the CIAC
The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling, [22] p. 20). Angelino
Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as
he did so, smoke came up from under Deck A. He got another container of water which he also poured
whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the
fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it
was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct
water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult
because the life jackets and the construction materials of the Deck B ceiling were combustible and
permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B
accommodation areas at various locations, where there were combustible materials. Respondent points

to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]
Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time
the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works
done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of
Sevillejos assigned tasks, the same not having been authorized under the Work Order [25] dated January
26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent, through
its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to remove the life jackets from the
ceiling void, causing the immediate spread of the fire to the other areas of the ship.
We rule in favor of Pioneer.
First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3, entered into a
contract for the dry docking and repair of the vessel under KCSIs Standard Conditions of Contract for
Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that
WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI.
Second. Pursuant to KCSIs rules and regulations on safety and security, only employees of KCSI may
undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is
supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSIs Vice
President for Operations before WG&A could effect any work performed by its own workers or subcontractors. In the exercise of this authority, KCSIs Vice-President for Operations, in the letter dated
January 2, 1997, banned any hot works from being done except by KCSIs workers, viz.:
The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be
carried out only by shipyard workers x x x. [26]
WG&A recognized and complied with this restrictive directive such that, during the arrival conference on
January 26, 2000, Dr. Joniga, the vessels passage team leader in charge of its hotel department,
specifically requested KCSI to finish the hot works started by the vessels contractors on the passenger
accommodation decks.[27] This was corroborated by the statements of the vessels hotel manager Marcelo
Rabe[28] and the vessels quality control officer Joselito Esteban. [29] KCSI knew of the unfinished hot works
in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that KCSI was
aware that the owners of this vessel (M/V Superferry 3) had undertaken their own (hot) works prior to
arrival alongside (sic) on 26th January, and that no hot work permits could thereafter be issued to WG&As
own workers because this was not allowed for the Superferry 3. [30] This shows that Dr. Joniga had
authority only to request the performance of hot works by KCSIs welders as needed in the repair of the
vessel while on dry dock.
Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V
Superferry 3, aside from its promenade deck. This was a recognition of Dr. Jonigas authority to request
the conduct of hot works even on the passenger accommodation decks, subject to the provision of the
January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship.
At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of
KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and
cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the
protection bars at the tourist dining salon of Deck B,[31] at a rate of P150.00/welder/hour.[32] In fact, Orcullo,
Project Superintendent of KCSI, admitted that as early as February 3, 2000 (five days before the fire) [the
Yard] had acknowledged Dr. Jonigas authority to order such works or additional jobs. [33]

It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the supply
of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work
Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latters direct
control and supervision.
Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the power and the right to
discharge or substitute him with another welder; providing him and the other welders with its equipment;
giving him and the other welders marching orders to work on the vessel; and monitoring and keeping
track of his and the other welders activities on board, in view of the delicate nature of their work. [34] Thus,
as such employee, aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which specifically provides
that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit
from KCSI Safety Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety permit
before starting the work he did, including that done on Deck A where the fire started.
Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire broke out.
It was established that no hot works could be hidden from or remain undetected by KCSI because the
welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover,
KCSI had roving fire watchmen and safety assistants who were moving around the vessel. [36] This was
confirmed by Restituto Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted Sevillejo on
Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or a
fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot
work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit and
telling him to stop until the permit was acquired and the other safety measures were observed, Rebaca
left without pulling Sevillejo out of the work area or making sure that the latter did as he was
told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at Deck
A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the deck,
until the fire broke out.
This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of the
Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSIs own fire expert, who observed that
4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a
cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric
arc welding and hot cutting produce heat at the work area and sparks and incendive material that can
travel some distance from the work area. Hence, the safety precautions that are expected to be applied
by the supervisor are the same for both types of work. However, the quantity and incendivity of the spray
from the hot cutting are much greater than those of sparks from electric arc welding, and it may well be
that Angelino Sevillejo would not have a full appreciation of the dangers involved. This made it all
the more important that the supervisor, who should have had such an appreciation, ensured that
the appropriate safety precautions were carried out.[37]
In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by KCSI
to do the hot works on M/V Superferry 3 to the exclusion of other workers, failed to comply with the strict
safety standards of KCSI, not only because he worked without the required permit, fire watch, fire
buckets, and extinguishers, but also because he failed to undertake other precautionary measures for
preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible
material may have been in the vicinity would be protected from the sparks caused by the welding

torch. He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses,
and covered any holes where the sparks may enter.
Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible
precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his
hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started
yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc
welder, Rebaca should have replaced him.
There is negligence when an act is done without exercising the competence that a reasonable person in
the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to
another. Those who undertake any work calling for special skills are required to exercise reasonable care
in what they do.[38] Verily, there is an obligation all persons have to take due care which, under ordinary
circumstances of the case, a reasonable and prudent man would take. The omission of that care
constitutesnegligence. Generally, the degree of care required is graduated according to the danger a
person or property may be subjected to, arising from the activity that the actor pursues or the
instrumentality that he uses. The greater the danger, the greater the degree of care
required. Extraordinary risk demands extraordinary care. Similarly, the more imminent thedanger, the
higher degree of care warranted.[39] In this aspect,
KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances.
We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works
in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work
Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the
cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing,
but failed to supervise him with the degree of care warranted by the attendant circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons (1)
the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent upon
him to remove the same. It was shown during the hearings before the CIAC that the removal of the life
jackets would not have made much of a difference. The fire would still have occurred due to the presence
of other combustible materials in the area. This was the uniform conclusion of both WG&As[40] and
KCSIs[41] fire experts. It was also proven during the CIAC proceedings that KCSI did not see the life
jackets as being in the way of the hot works, thus, making their removal from storage unnecessary.[42]
These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in the
performance of his assigned task. His negligence was the proximate cause of the fire on board M/V
Superferry 3. As he was then definitely engaged in the performance of his assigned tasks as an employee
of KCSI, his negligence gave rise to the vicarious liability of his employer [43] under Article 2180 of the Civil
Code, which provides
Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own act or omission,
but also for those of persons for whom one is responsible.
xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged in any business or
industry.
xxxx
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they
observed all the diligence of a good father of a family to prevent damage.
KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal
presumption of its negligence in supervising Sevillejo.[44] Consequently, it is responsible for the damages
caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is
proof that the employee has, by his negligence, caused damage to another in order to make the employer
responsible for the tortuous act of the former.[45] From the foregoing disquisition, there is ample proof of
the employees negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full
amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the rights
of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause found in the
Shiprepair Agreement is null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no
proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liability clause up
to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair
Agreement. KCSI also claims that the salvage value of the vessel should be deducted from whatever
amount it will be made to pay to Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V Superferry 3.
In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139
of the Insurance Code, which provides
Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any
particular portion hereof separately valued by the policy, or otherwise separately insured, and recover for
a total loss thereof, when the cause of the loss is a peril insured against:
(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it
from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.
It appears, however, that in the execution of the insurance policies over M/V Superferry 3, WG&A and
Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of
which reads
Total Loss
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the
repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be
taken into account.

There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and
repairing the Vessel would exceed the Agreed Value in policies on Hull and Machinery.In making this
determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of
damages arising from the same accident shall be taken into account, but expenses incurred prior to
tender of abandonment shall not be considered if such are to be claimed separately under the Sue and
Labor clause. x x x.
In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three
(3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically:
(a) P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000
turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine
currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and
(c) P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore
Technologies Marine Ltd. All the estimates showed that the repair expense would
exceed P270,000,000.00, the amount equivalent to of the vessels insured value
of P360,000,000.00. Thus, WG&A opted to abandon M/V Superferry 3 and claimed from Pioneer the full
amount of the policies. Pioneer paid WG&As claim, and now demands from KCSI the full amount
of P360,000,000.00, by virtue of subrogation.
KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence
resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only
US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence &
Young.
In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern,
because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine
insurance policies in question expressly provided the following:
IMPORTANT
This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in the
Philippines, in which case if the said laws and customs of England shall be in conflict with the laws of the
Republic of the Philippines, then the laws of the Republic of the Philippines shall govern. (Underscoring
supplied.)
The CA held that Section 139 of the Insurance Code is merely permissive on account of the word may in
the provision. This is incorrect. Properly considered, the word may in the provision is intended to grant the
insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V Superferry
3), or any particular portion thereof separately valued by the policy, or otherwise separately insured, and
recover for a total loss when the cause of the loss is a peril insured against. This option or discretion is
expressed as a right in Section 131 of the same Code, to wit:
Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under
Section one hundred thirty-nine.
It cannot be denied that M/V Superferry 3 suffered widespread damage from the fire that occurred on
February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from
Pioneer. The estimates given by the three disinterested and qualified shipyards show that the damage to
the ship would exceed P270,000,000.00, or of the total value of the policies P360,000,000.00. These
estimates constituted credible and acceptable proof of the extent of the damage sustained by the
vessel. It is significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000

submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify
and confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to
the vessel amounted to a constructive total loss and that the claim for P360,000,000.00 under the policies
was compensable.[46] It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of
Richards Hogg, whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a
constructive total loss.
Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its
policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and
Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this
note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply
because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation.
[47]
The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the
insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the
presumed authority of the signatory to receive such payment.
On the matter of subrogation, Article 2207 of the Civil Code provides
Art. 2207. If the plaintiffs property has been insured and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.
Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that
he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy. It contemplates full substitution such that it places the party
subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to
enforce payment.[48]
We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or wrongful
act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine
of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode
that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good
conscience, ought to pay.[49]
We cannot accept KCSIs insistence on upholding the validity Clause 20, which provides that the limit of
its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the
insurance policies, as found in the Shiprepair Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are
unfair and inequitable under the premises. It was established during arbitration that WG&A did not
voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified
that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were
found, because he did not want WG&A to be bound by them. However, considering that it was only KCSI
that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels owned

by WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the Shiprepair
Agreement; otherwise, the vessel would not be accepted for dry docking. [50]
Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a take-it-or-leave-it
basis. A contract of adhesion is so-called because its terms are prepared by only one party, while the
other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a
contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant
bargaining party, and its option is reduced to the alternative of taking it or leaving it, completely depriving
such party of the opportunity to bargain on equal footing. [51]
Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full
insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention
on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively
proved, since a waiver by implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the
relevant circumstances and likely consequences. There must be persuasive evidence to show an actual
intention to relinquish the right.[52] This has not been demonstrated in this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to
limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in
the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is
ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient
of paying an amount very much lower than the actual damage or loss sustained by the other. [53]
Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a
co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy
itself and not from any other contract or agreement, because the insurance policy denominates the
assured and the beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance
procured by WG&A from Pioneer named only the former as the assured. There was no manifest intention
on the part of WG&A to constitute KCSI as a co-assured under the policies. To have deemed KCSI as a
co-assured under the policies would have had the effect of nullifying any claim of WG&A from Pioneer for
any loss or damage caused by the negligence of KCSI. No ship owner would agree to make a ship
repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under the
policy would be rendered nugatory. WG&A could not have intended such a result.[54]
Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V Superferry
3 should be taken into account in the grant of any award. It was proven before the CIAC that the
machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33) and
US$363,289.50, respectively. WG&As claim for the upkeep of the wreck until the same were sold
amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the
machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09,
at P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering
this salvage value in the award would amount to unjust enrichment on the part of Pioneer.
C. On the imposition of interest
Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award in favor of Pioneer
in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the case until
the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum from the
date the award becomes final and executory until its full satisfaction.

D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro
rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it
was entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer
that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for
perceived wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on
the part of Pioneer.
WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and the
Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and the
Amended Decision dated December 20, 2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is
ordered to pay Pioneer the amount of P360,000,000.00 less P30,252,648.09, equivalent to the salvage
value recovered by Pioneer from M/V Superferry 3, or the net total amount of P329,747,351.91, with six
percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until this
Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said amount
or any balance thereof from the finality of the Decision until the same will have been fully paid. The
arbitration costs shall be borne by both parties on a pro rata basis. Costs against KCSI.