ABOITIZ SHIPPPING CORPORATION, petitioner vs GENERAL ACCIDENT FIRE AND LIFE

ASSURANCE CORPORATION, LTD., respondent

GR No. 100446, January 21, 1993

TOPIC: Limited Liability Rule (Hypothecary Rule)

This is a petition for review seeking to annul and set aside the decision of the Court of Appeals
which dismissed the petition for certiorari filed by petitioner Aboitiz questioning the order issued
by the RTC granting private respondent’s prayer for execution for the full amount of the judgment
award.

FACTS:

Petitioner, a corporation organized and operating under Philippine laws, is engaged in the
business of maritime trade as a carrier. It owned the ill-fated M/V P. ABOITIZ, a common-carrier
which sank on voyage from Hongkong to the Philippines on October 31, 1980. Private respondent
General Accident (GAFLAC) is a foreign insurance company pursuing its remedies as a subrogee of
several cargo consignee whose respective cargo sank with the said vessel and for which it has
priorly paid.

The sinking of the vessel gave rise to various suits, including the one filed by GAFLAC. Initial
investigation by the Board of Marine Inquiry (BMI) revealed that the sinking was due to force
majeure and that the subject vessel, at the time of the sinking was seaworthy. Notwithstanding
this administrative finding, the trial court in Civil Case No. 144425 found against the carrier and
that the loss did not occur as a result of force majeure. In said case, GAFLAC was allowed to
prove, and was later awarded its claim.

Other cases have resulted in findings upholding the conclusion of the BMI that the vessel was
seaworthy at the time of the sinking, and that such sinking was due to force majeure. The
Supreme Court is now tasked to reconcile the resulting apparent contrary findings in cases
originating out of a single set of facts.

This instant petition seeks a pronouncement as to the applicability of the doctrine of limited
liability on the totality of the claims vis a vis the losses brought about by the sinking of the vessel,
as based on the real and hypothecary nature of maritime law. In support to this petition,
petitioner submitted the following arguments:

1. The Limited Liability Rule warrants immediate stay of execution of judgment to prevent
impairment of other creditor’s shares.
2. That the findings of unseaworthiness of a vessel is not necessarily attributable to the
shipowner.

On the other hand, private respondent opposes petitioner’s contention, arguing that:

1. There is not limited liability to speak of or applicable real and hypothecary rule under
Articles 587, 590 and 837 of the Code of Commerce in the face of the facts found by the lower
court in Civil Case No. 14425.

Before proceeding to the main issue, the Supreme Court deemed it important to determine first
whether the resolution of the Supreme Court in another case (GR 88159) effectively bars and
precludes the instant petition as argued by respondent GAFLAC. In the examination of such
decision, it shows that the same settles two principal matters; first is that the doctrine of primary
administrative jurisdiction is not appliable therein, and; second is that a limitation of liability in
said case would render inefficacious the extraordinary diligence required by law of common
carriers.

However, the limited liability discussed in said case is not the same one now in issue at bar. The
limited liability settled in GR No. 88159 is that which attaches to cargo by virtue of stipulations in
the Bill of Lading. This is known as package limitation clause. Said resolution did not tackle the
matter of the Limited Liability Rule arising out of the real and hypothecary nature of maritime law,
which was not raised therein, and which is the principal bone of contention in this case. Hence,
the resolution in GR No. 88159 has no bearing in the instant case, other than the factual
similarities.

ISSUE:

Whether the Limited Liability Rule arising out of the real and hypothecary nature of maritime law
should apply in this case.

HELD:

YES. The real and hypothecary nature of maritime law simply means that the liability of the
carrier in connection with losses related to maritime contracts is confined to the vessel, which is
hypothecated for such obligations or which stands as the guaranty for their settlement. It has its
origin by reason of the conditions and risks attending maritime trade in its earliest years when
such trade was replete with innumerable and unknown hazards since vessels had to go through
largely uncharted waters to ply their trade. It was designed to offset such adverse conditions and
to encourage people and entities to venture into maritime commerce despite the risks and the
prohibitive cost of shipbuilding. Thus, the liability of the vessel owner and agent arising from the
operation of such vessel were confined to the vessel itself, its equipment, freight, and insurance, if
any, which limitation served to induce capitalists into effectively wagering their resources against
the consideration of the large profits attainable in the trade.

Philippine maritime law is of Anglo-American extraction, and is governed by adherence to both

international maritime conventions and generally accepted practices relative to maritime trade and
travel. In this jurisdiction, on the other hand, its application has been well-nigh constricted by the
very statute from which it originates. The Limited Liability Rule in the Philippines is taken up in
Book III of the Code of Commerce, particularly in Articles 587, 590, and 837, hereunder quoted in
toto:

ARTICLE 587. The ship agent shall also be civilly liable for the indemnities in favor of third
persons which may arise from the conduct of the captain in the care of the goods which he loaded
on the vessel; but he may exempt himself therefrom by abandoning the vessel with all her
equipment and the freight it may have earned during the voyage.

ARTICLE 590. The co-owners of a vessel shall be civilly liable in the proportion of their
interests in the common fund for the results of the acts of the captain referred to in Art. 587.
"Each co-owner may exempt himself from this liability by the abandonment, before a notary, of
the part of the vessel belonging to him

ARTICLE 837. The civil liability incurred by shipowners in the case prescribed in this section
(on collisions), shall be understood as limited to the value of the vessel with all its appurtenances
and freightage served during the voyage.

Taken together with related articles, the foregoing cover only liability for injuries to
third parties (Art. 587), acts of the captain (Art. 590) and collisions (Art. 837)
We have been consistent in this jurisdiction in holding that the only time the Limited Liability Rule
does not apply is when there is an actual finding of negligence on the part of the vessel owner or
agent. Is there a finding of such negligence on the part of the owner in this case?

A careful reading of the lower court’s decision in Civil Case No. 144425 will show that there has
been no actual finding of negligence on the part of petitioner. The same is true of the decision of
the Supreme Court in GR No. 89757. Indeed, there appears to have been no evidence presented
sufficient to form a conclusion that petitioner shipowner itself was negligent, and no tribunal,
including this Court, will add or subtract to such evidence to justify a conclusion to the contrary.

On this point, it should be stressed that unseaworthiness is not a fault that can be laid squarely on
petitioner's lap, absent a factual basis for such a conclusion. The unseaworthiness found in some
cases where the same has been ruled to exist is directly attributable to the vessel's crew and
captain, more so on the part of the latter since Article 612 of the Code of Commerce provides that
among the inherent duties of a captain is to examine a vessel before sailing and to comply with
the laws of navigation. Such a construction would also put matters to rest relative to the decision
of the Board of Marine Inquiry. While the conclusion therein exonerating the captain and crew of
the vessel was not sustained for lack of basis, the finding therein contained to the effect that the
vessel was seaworthy deserves merit.

Despite appearances, it is not totally incompatible with the findings of the trial court and the Court
of Appeals, whose finding of "unseaworthiness" clearly did not pertain to the structural condition
of the vessel which is the basis of the BMI's findings, but to the condition it was in at the time of
the sinking, which condition was a result of the acts of the captain and the crew.

The rights of a vessel owner or agent under the Limited Liability Rule are akin to those of the
rights of shareholders to limited liability under our corporation law. Both are privileges granted by
statute, and while not absolute, must be swept aside only in the established existence of the most
compelling of reasons. In the absence of such reasons, this Court choosx`es to exercise prudence
and shall not sweep such rights aside on mere whim or surmise, for even in the existence of cause
to do so, such incursion is definitely punitive in nature and must never be taken lightly.

The rights of parties to claim against an agent or owner of a vessel may be compared to those of
creditors against an insolvent corporation whose assets are not enough to satisfy the totality of
claims as against it. In both insolvency of a corporation and the sinking of a vessel, the claimants
or creditors are limited in their recovery to the remaining value of accessible assets. In the case of
an insolvent corporation, these are the residual assets of the corporation left over from its
operations. In the case of a lost vessel, these are the insurance proceeds and pending freightage
for the particular voyage.

In the instant case, there is, therefore, a need to collate all claims preparatory to their satisfaction
from the insurance proceeds on the vessel M/V P. Aboitiz and its pending freightage at the time of
its loss. No claimant can be given precedence over the others by the simple expedience of having
filed or completed its action earlier than the rest. Thus, execution of judgment in earlier
completed cases, even those already final and executory, must be stayed pending completion of
all cases occasioned by the subject sinking. Then and only then can all such claims be
simultaneously settled, either completely or pro-rata should the insurance proceeds and freightage
be not enough to satisfy all claims.

The petition is granted. The orders of the RTC and CA were set aside. The trial court is directed to
desist from executing the judgement in Civil Case No. 144456 pending the determination of the
totality of claims recoverable from the petitioner.