KEPPEL CEBU SHIPYARD INC. vs.

PIONEER INSURANCE AND SURETY CORPORATION

G.R. No. 180880-81 [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 coassured 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 alleged:
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 Repair 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.
ISSUE/S:
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)
If it is injured to such an extent as to reduce its value more than threefourths; 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 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-itor-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.
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.