TRANSPORTATION LAW CASES - 2006

G.R. No. 157481 January 24, 2006

LOADSTAR SHIPPING CO., INC., Petitioner,

vs.
PIONEER ASIA INSURANCE CORP., Respondent.

For review on certiorari are (1) the Decision1 dated October 15, 2002 and (2) the Resolution2
dated February 27, 2003, of the Court of Appeals in CA-G.R. CV No. 40999, which affirmed with
modification the Decision3 dated February 15, 1993 of the Regional Trial Court of Manila, Branch
8 in Civil Case No. 86-37957.

The pertinent facts are as follows: Petitioner Loadstar Shipping Co., Inc. (Loadstar for brevity) is
the registered owner and operator of the vessel M/V Weasel. It holds office at 1294 Romualdez
St., Paco, Manila.

On June 6, 1984, Loadstar entered into a voyage-charter with Northern Mindanao Transport
Company, Inc. for the carriage of 65,000 bags of cement from Iligan City to Manila. The shipper
was Iligan Cement Corporation, while the consignee in Manila was Market Developers, Inc.

On June 24, 1984, 67,500 bags of cement were loaded on board M/V Weasel and stowed in the
cargo holds for delivery to the consignee. The shipment was covered by petitioner’s Bill of
Lading4 dated June 23, 1984.

Prior to the voyage, the consignee insured the shipment of cement with respondent Pioneer
Asia Insurance Corporation for P1,400,000, for which respondent issued Marine Open Policy No.
MOP-006 dated September 17, 1980, covering all shipments made on or after September 30,
1980.5

At 12:50 in the afternoon of June 24, 1984, M/V Weasel left Iligan City for Manila in good weather.
However, at 4:31 in the morning of June 25, 1984, Captain Vicente C. Montera, master of M/V
Weasel, ordered the vessel to be forced aground. Consequently, the entire shipment of cement
was good as gone due to exposure to sea water. Petitioner thus failed to deliver the goods to
the consignee in Manila.

The consignee demanded from petitioner full reimbursement of the cost of the lost shipment.
Petitioner, however, refused to reimburse the consignee despite repeated demands.

Nonetheless, on March 11, 1985, respondent insurance company paid the consignee P1,400,000
plus an additional amount of P500,000, the value of the lost shipment of cement. In return, the
consignee executed a Loss and Subrogation Receipt in favor of respondent concerning the
latter’s subrogation rights against petitioner.

Hence, on October 15, 1986, respondent filed a complaint docketed as Civil Case No. 86-37957,
against petitioner with the Regional Trial Court of Manila, Branch 8. It alleged that: (1) the M/V
Weasel was not seaworthy at the commencement of the voyage; (2) the weather and sea
conditions then prevailing were usual and expected for that time of the year and as such, was an
ordinary peril of the voyage for which the M/V Weasel should have been normally able to cope
with; and (3) petitioner was negligent in the selection and supervision of its agents and
employees then manning the M/V Weasel.

In its Answer, petitioner alleged that no fault nor negligence could be attributed to it because it
exercised due diligence to make the ship seaworthy, as well as properly manned and equipped.
Petitioner insisted that the failure to deliver the subject cargo to the consignee was due to force
majeure. Petitioner claimed it could not be held liable for an act or omission not directly
attributable to it.

On February 15, 1993, the RTC rendered a Decision in favor of respondent, to wit: WHEREFORE,
in view of the foregoing, judgment is hereby rendered in favor of plaintiff and against defendant
Loadstar Shipping Co., Inc. ordering the latter to pay as follows:

1. To pay plaintiff the sum of P1,900,000.00 with legal rate of interest per annum from date of
complaint until fully paid;

2. To pay the sum equal to 25% of the claim as and for attorney’s fees and litigation expenses;
and,

3. To pay the costs of suit.

The RTC reasoned that petitioner, as a common carrier, bears the burden of proving that it
exercised extraordinary diligence in its vigilance over the goods it transported. The trial court
explained that in case of loss or destruction of the goods, a statutory presumption arises that
the common carrier was negligent unless it could prove that it had observed extraordinary
diligence.

Petitioner’s defense of force majeure was found bereft of factual basis. The RTC called attention
to the PAG-ASA report that at the time of the incident, tropical storm "Asiang" had moved away
from the Philippines. Further, records showed that the sea and weather conditions in the area of
Hinubaan, Negros Occidental from 8:00 p.m. of June 24, 1984 to 8:00 a.m. the next day were
slight and smooth. Thus, the trial court concluded that the cause of the loss was not tropical
storm "Asiang" or any other force majeure, but gross negligence of petitioner.

Petitioner appealed to the Court of Appeals.

In its Decision dated October 15, 2002, the Court of Appeals affirmed the RTC Decision with
modification that Loadstar shall only pay the sum of 10% of the total claim for attorney’s fees
and litigation expenses. It ruled,

WHEREFORE, premises considered, the Decision dated February 15, 1993, of the Regional Trial
Court of Manila, National Capital Judicial Region, Branch 8, in Civil Case No. 86-37957 is hereby
AFFIRMED with the MODIFICATION that the appellant shall only pay the sum of 10% of the
total claim as and for attorney’s fees and litigation expenses. Costs against the appellant.

Petitioner’s Motion for Reconsideration was denied.8

The instant petition is anchored now on the following assignments of error:

I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER IS A
COMMON CARRIER UNDER ARTICLE 1732 OF THE CIVIL CODE.

II. ASSUMING ARGUENDO THAT PETITIONER IS A COMMON CARRIER, THE HONORABLE

COURT OF APPEALS ERRED IN HOLDING THAT THE PROXIMATE CAUSE OF THE LOSS
OF CARGO WAS NOT A FORTUITOUS EVENT BUT WAS ALLEGEDLY DUE TO THE
FAILURE OF PETITIONER TO EXERCISE EXTRAORDINARY DILIGENCE.

III. THE HONORABLE COURT OF APPEALS ERRED IN AFFIRMING THE AWARD BY THE TRIAL
COURT OF ATTORNEY’S FEES AND LITIGATION EXPENSES IN FAVOR OF HEREIN
RESPONDENT.9

On the first and second issues, petitioner contends that at the time of the voyage the carrier’s
voyage-charter with the shipper converted it into a private carrier. Thus, the presumption of
negligence against common carriers could not apply. Petitioner further avers that the
stipulation in the voyage-charter holding it free from liability is valid and binds the respondent.
In any event, petitioner insists that it had exercised extraordinary diligence and that the
proximate cause of the loss of the cargo was a fortuitous event.

With regard to the third issue, petitioner points out that the award of attorney’s fees and
litigation expenses appeared only in the dispositive portion of the RTC Decision with nary a
justification. Petitioner maintains that the Court of Appeals thus erred in affirming the award.

For its part, respondent dismisses as factual issues the inquiry on (1) whether the loss of the
cargo was due to force majeure or due to petitioner’s failure to exercise extraordinary diligence;
and (2) whether respondent is entitled to recover attorney’s fees and expenses of litigation.

Respondent further counters that the Court of Appeals was correct when it held that petitioner
was a common carrier despite the charter of the whole vessel, since the charter was limited to
the ship only.

Prefatorily, we stress that the finding of fact by the trial court, when affirmed by the Court of
Appeals, is not reviewable by this Court in a petition for review on certiorari. However, the
conclusions derived from such factual finding are not necessarily pure issues of fact when they
are inextricably intertwined with the determination of a legal issue. In such instances, the
conclusions made may be raised in a petition for review before this Court.10

The threshold issues in this case are: (1) Given the circumstances of this case, is petitioner a
common or a private carrier? and (2) In either case, did petitioner exercise the required diligence
i.e., the extraordinary diligence of a common carrier or the ordinary diligence of a private
carrier?

Article 1732 of the Civil Code defines a "common carrier" as follows:

Article 1732. Common carriers are persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water, or air, for
compensation, offering their services to the public.

Petitioner is a corporation engaged in the business of transporting cargo by water and for
compensation, offering its services indiscriminately to the public. Thus, without doubt, it is a
common carrier. However, petitioner entered into a voyage-charter with the Northern
Mindanao Transport Company, Inc. Now, had the voyage-charter converted petitioner into a
private carrier?

We think not. The voyage-charter agreement between petitioner and Northern Mindanao
Transport Company, Inc. did not in any way convert the common carrier into a private carrier.
We have already resolved this issue with finality in Planters Products, Inc. v. Court of Appeals11
where we ruled that:

It is therefore imperative that a public carrier shall remain as such, notwithstanding the charter
of the whole or portion of a vessel by one or more persons, provided the charter is limited to the
ship only, as in the case of a time-charter or voyage-charter. It is only when the charter includes
both the vessel and its crew, as in a bareboat or demise that a common carrier becomes private,
at least insofar as the particular voyage covering the charter-party is concerned. Indubitably, a
shipowner in a time or voyage charter retains possession and control of the ship, although her
holds may, for the moment, be the property of the charterer.12

Conformably, petitioner remains a common carrier notwithstanding the existence of the

charter agreement with the Northern Mindanao Transport Company, Inc. since the said charter
is limited to the ship only and does not involve both the vessel and its crew. As elucidated in
Planters Products, its charter is only a voyage-charter, not a bareboat charter.

As a common carrier, petitioner is required to observe extraordinary diligence in the vigilance

over the goods it transports.13 When the goods placed in its care are lost, petitioner is presumed
to have been at fault or to have acted negligently. Petitioner therefore has the burden of
proving that it observed extraordinary diligence in order to avoid responsibility for the lost
cargo.14

In Compania Maritima v. Court of Appeals,15 we said: it is incumbent upon the common carrier to
prove that the loss, deterioration or destruction was due to accident or some other
circumstances inconsistent with its liability.

The extraordinary diligence in the vigilance over the goods tendered for shipment requires the
common carrier to know and to follow the required precaution for avoiding damage to, or
destruction of the goods entrusted to it for safe carriage and delivery. It requires common
carriers to render service with the greatest skill and foresight and "to use all reasonable means
to ascertain the nature and characteristics of goods tendered for shipment, and to exercise due
care in the handling and stowage, including such methods as their nature requires."16

Article 1734 enumerates the instances when a carrier might be exempt from liability for the loss
of the goods. These are:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

 (4) The character of the goods or defects in the packing or in the containers; and

(5) Order or act of competent public authority.17

Petitioner claims that the loss of the goods was due to a fortuitous event under paragraph 1.Yet,
its claim is not substantiated. On the contrary, we find supported by evidence on record the
conclusion of the trial court and the Court of Appeals that the loss of the entire shipment of
cement was due to the gross negligence of petitioner.

Records show that in the evening of June 24, 1984, the sea and weather conditions in the
vicinity of Negros Occidental were calm. The records reveal that petitioner took a shortcut route,
instead of the usual route, which exposed the voyage to unexpected hazard. Petitioner has only
itself to blame for its misjudgment.

Petitioner heavily relies on Home Insurance Co. v. American Steamship Agencies, Inc.18 and
Valenzuela Hardwood and Industrial Supply, Inc. v. Court of Appeals.19 The said cases involved a
private carrier, not a common carrier. Moreover, the issue in both cases is not the effect of a
voyage-charter on a common carrier, but the validity of a stipulation absolving the private
carrier from liability in case of loss of the cargo attributable to the negligence of the private
carrier.

Lastly, on the third issue, we find consistent with law and prevailing jurisprudence the Court of
Appeals’ award of attorney’s fees and expenses of litigation equivalent to ten percent (10%) of
the total claim. The contract between the parties in this case contained a stipulation that in case
of suit, attorney’s fees and expenses of litigation shall be limited to only ten percent (10%) of
the total monetary award. Given the circumstances of this case, we deem the said amount just
and equitable.

WHEREFORE, the petition is DENIED. The assailed Decision dated October 15, 2002 and the
Resolution dated February 27, 2003, of the Court of Appeals in CA-G.R. CV No. 40999, are
AFFIRMED. Costs against petitioner. SO ORDERED.
 G.R. No. 156978 May 2, 2006

ABOITIZ SHIPPING CORPORATION, Petitioner,

vs.
NEW INDIA ASSURANCE COMPANY, LTD., Respondent.

For review on certiorari are the Decision1 dated August 29, 2002 of the Court of Appeals in
CA-G.R. CV No. 28770 and its Resolution2 dated January 23, 2003 denying reconsideration. The
Court of Appeals affirmed the Decision3dated November 20, 1989 of the Regional Trial Court of
Manila in Civil Case No. 82-1475, in favor of respondent New India Assurance Company, Ltd.

This petition stemmed from the action for damages against petitioner, Aboitiz Shipping
Corporation, arising from the sinking of its vessel, M/V P. Aboitiz, on October 31, 1980.

The pertinent facts are as follows: Societe Francaise Des Colloides loaded a cargo of textiles and
auxiliary chemicals from France on board a vessel owned by Franco-Belgian Services, Inc. The
cargo was consigned to General Textile, Inc., in Manila and insured by respondent New India
Assurance Company, Ltd. While in Hongkong, the cargo was transferred to M/V P. Aboitiz for
transshipment to Manila.4

Before departing, the vessel was advised by the Japanese Meteorological Center that it was safe
to travel to its destination.5 But while at sea, the vessel received a report of a typhoon moving
within its general path. To avoid the typhoon, the vessel changed its course. However, it was still
at the fringe of the typhoon when its hull leaked. On October 31, 1980, the vessel sank, but the
captain and his crew were saved.

On November 3, 1980, the captain of M/V P. Aboitiz filed his "Marine Protest", stating that the
wind force was at 10 to 15 knots at the time the ship foundered and described the weather as
"moderate breeze, small waves, becoming longer, fairly frequent white horses."6

Thereafter, petitioner notified7 the consignee, General Textile, of the total loss of the vessel and
all of its cargoes. General Textile, lodged a claim with respondent for the amount of its loss.
Respondent paid General Textile and was subrogated to the rights of the latter.8

Respondent hired a surveyor, Perfect, Lambert and Company, to investigate the cause of the
sinking. In its report,9the surveyor concluded that the cause was the flooding of the holds
brought about by the vessel’s questionable seaworthiness. Consequently, respondent filed a
complaint for damages against petitioner Aboitiz, Franco-Belgian Services and the latter’s local
agent, F.E. Zuellig, Inc. (Zuellig). Respondent alleged that the proximate cause of the loss of the
shipment was the fault or negligence of the master and crew of the vessel, its unseaworthiness,
and the failure of defendants therein to exercise extraordinary diligence in the transport of the
goods. Hence, respondent added, defendants therein breached their contract of
carriage.101avvphil.net

Franco-Belgian Services and Zuellig responded, claiming that they exercised extraordinary
diligence in handling the shipment while it was in their possession; its vessel was seaworthy;
and the proximate cause of the loss of cargo was a fortuitous event. They also filed a cross-claim
against petitioner alleging that the loss occurred during the transshipment with petitioner and
so liability should rest with petitioner.
For its part, petitioner also raised the same defense that the ship was seaworthy. It alleged that
the sinking of M/V P. Aboitiz was due to an unforeseen event and without fault or negligence on
its part. It also alleged that in accordance with the real and hypothecary nature of maritime law,
the sinking of M/V P. Aboitiz extinguished its liability on the loss of the cargoes.11

Meanwhile, the Board of Marine Inquiry (BMI) conducted its own investigation to determine
whether the captain and crew were administratively liable. However, petitioner neither
informed respondent nor the trial court of the investigation. The BMI exonerated the captain
and crew of any administrative liability; and declared the vessel seaworthy and concluded that
the sinking was due to the vessel’s exposure to the approaching typhoon.

On November 20, 1989, the trial court, citing the Court of Appeals decision in General Accident
Fire and Life Assurance Corporation v. Aboitiz Shipping Corporation12 involving the same incident,
ruled in favor of respondent. It held petitioner liable for the total value of the lost cargo plus
legal interest, thus:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of New India and
against Aboitiz ordering the latter to pay unto the former the amount of P142,401.60, plus legal
interest thereon until the same is fully paid, attorney’s fees equivalent to fifteen [percent] (15%)
of the total amount due and the costs of suit.

The complaint with respect to Franco and Zuellig is dismissed and their counterclaim against
New India is likewise dismissed.il.net

Petitioner elevated the case to the Court of Appeals and presented the findings of the BMI.
However, on August 29, 2002, the appellate court affirmed in toto the trial court’s decision. It
held that the proceedings before the BMI was only for the administrative liability of the captain
and crew, and was unilateral in nature, hence not binding on the courts. Petitioner moved for
reconsideration but the same was denied on January 23, 2003.

Hence, this petition for review, alleging that the Court of Appeals gravely erred in:

A. DISREGARDING THE RULINGS OF THE HONORABLE SUPREME COURT ON THE

APPLICATION OF THE RULE ON LIMITED LIABILITY UNDER ARTICLE 587, 590 AND 837
OF THE CODE OF COMMERCE TO CASES INVOLVING THE SINKING OF THE M/V "P.
ABOITIZ; NOT APPLYING THE RULINGS IN THE CASES OF MONARCH INSURANCE CO.,
INC. ET AL. V. COURT OF APPEALS ET AL. AND ABOITIZ SHIPPING CORPORATION V.
GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORPORATION, LTD.; RULING THAT
THE ISSUE ON THE APPLICATION OF THE RULE ON LIMITED LIABILITY UNDER
ARTICLES 587, 590 AND 837 OF THE CODE OF COMMERCE HAD BEEN CONSIDERED AND
PASSED UPON IN ITS DECISION;

B. NOT LIMITING THE AWARD OF DAMAGES TO RESPONDENT TO ITS PRO-RATA SHARES

IN THE INSURANCE PROCEEDS FROM THE SINKING OF THE M/V "P. ABOITIZ".14

Stated simply, we are asked to resolve whether the limited liability doctrine, which limits
respondent’s award of damages to its pro-rata share in the insurance proceeds, applies in this
case.
Petitioner, citing Monarch Insurance Co. Inc. v. Court of Appeals, 15 contends that respondent’s
claim for damages should only be against the insurance proceeds and limited to its pro-rata
share in view of the doctrine of limited liability.

Respondent counters that the doctrine of real and hypothecary nature of maritime law is not
applicable in the present case because petitioner was found to have been negligent. Hence,
according to respondent, petitioner should be held liable for the total value of the lost cargo.

It bears stressing that this Court has variedly applied the doctrine of limited liability to the same
incident – the sinking of M/V P. Aboitiz on October 31, 1980. Monarch, the latest ruling, tried to
settle the conflicting pronouncements of this Court relative to the sinking of M/V P. Aboitiz. In
Monarch, we said that the sinking of the vessel was not due to force majeure, but to its
unseaworthy condition.16 Therein, we found petitioner concurrently negligent with the captain
and crew.17 But the Court stressed that the circumstances therein still made the doctrine of
limited liability applicable.18

Our ruling in Monarch may appear inconsistent with the exception of the limited liability
doctrine, as explicitly stated in the earlier part of the Monarch decision. An exception to the
limited liability doctrine is when the damage is due to the fault of the shipowner or to the
concurrent negligence of the shipowner and the captain. In which case, the shipowner shall be
liable to the full-extent of the damage.19 We thus find it necessary to clarify now the
applicability here of the decision in Monarch.

From the nature of their business and for reasons of public policy, common carriers are bound
to observe extraordinary diligence over the goods they transport according to all the
circumstances of each case.20 In the event of loss, destruction or deterioration of the insured
goods, common carriers are responsible, unless they can prove that the loss, destruction or
deterioration was brought about by the causes specified in Article 1734 of the Civil Code.21 In all
other cases, common carriers are presumed to have been at fault or to have acted negligently,
unless they prove that they observed extraordinary diligence.22 Moreover, where the vessel is
found unseaworthy, the shipowner is also presumed to be negligent since it is tasked with the
maintenance of its vessel. Though this duty can be delegated, still, the shipowner must exercise
close supervision over its men.23

In the present case, petitioner has the burden of showing that it exercised extraordinary
diligence in the transport of the goods it had on board in order to invoke the limited liability
doctrine. Differently put, to limit its liability to the amount of the insurance proceeds, petitioner
has the burden of proving that the unseaworthiness of its vessel was not due to its fault or
negligence. Considering the evidence presented and the circumstances obtaining in this case,
we find that petitioner failed to discharge this burden. It initially attributed the sinking to the
typhoon and relied on the BMI findings that it was not at fault. However, both the trial and the
appellate courts, in this case, found that the sinking was not due to the typhoon but to its
unseaworthiness. Evidence on record showed that the weather was moderate when the vessel
sank. These factual findings of the Court of Appeals, affirming those of the trial court are not to
be disturbed on appeal, but must be accorded great weight. These findings are conclusive not
only on the parties but on this Court as well.24

In contrast, the findings of the BMI are not deemed always binding on the courts.25 Besides,
exoneration of the vessel’s officers and crew by the BMI merely concerns their respective
administrative liabilities.26 It does not in any way operate to absolve the common carrier from
its civil liabilities arising from its failure to exercise extraordinary diligence, the determination of
which properly belongs to the courts.27

Where the shipowner fails to overcome the presumption of negligence, the doctrine of limited
liability cannot be applied.28 Therefore, we agree with the appellate court in sustaining the trial
court’s ruling that petitioner is liable for the total value of the lost cargo.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated August 29, 2002 and
Resolution dated January 23, 2003 of the Court of Appeals in CA-G.R. CV No. 28770 are
AFFIRMED. Costs against petitioner. SO ORDERED.
 G.R. No. 144723 February 27, 2006

LARRY ESTACION, Petitioner,

vs.
NOE BERNARDO, thru and his guardian ad litem ARLIE BERNARDO, CECILIA
BANDOQUILLO and GEMINIANO QUINQUILLERA, Respondents.

Before us is a petition for review on certiorari filed by Larry Estacion (petitioner) seeking to
annul the Decision dated April 17, 20001 of the Court of Appeals (CA) in CA-GR CV No. 41447
which affirmed in toto the decision of the Regional Trial Court (RTC) of Dumaguete City, Branch
41, Negros Oriental, holding petitioner and his driver Bienvenido Gerosano (Gerosano) liable for
damages for the injury sustained by Noe Bernardo (respondent Noe). Also assailed is the
appellate court’s Resolution dated August 16, 20002 denying petitioner’s motion for
reconsideration.

In the afternoon of October 16, 1982, respondent Noe was going home to Dumaguete from
Cebu, via Bato and Tampi. At Tampi, he boarded a Ford Fiera passenger jeepney with plate no.
NLD 720 driven by respondent Geminiano Quinquillera (Quinquillera), owned by respondent
Cecilia Bandoquillo (Bandoquillo), and was seated on the extension seat placed at the center of
the Fiera. From San Jose, an old woman wanted to ride, so respondent Noe offered his seat.
Since the Fiera was already full, respondent Noe hung or stood on the left rear carrier of the
vehicle. Somewhere along Barangay Sto. Niño, San Jose, Negros Oriental, between kilometers
13 and 14, the Fiera began to slow down and then stopped by the right shoulder of the road to
pick up passengers. Suddenly, an Isuzu cargo truck, owned by petitioner and driven by
Gerosano, which was traveling in the same direction, hit the rear end portion of the Fiera where
respondent Noe was standing. Due to the tremendous force, the cargo truck smashed
respondent Noe against the Fiera crushing his legs and feet which made him fall to the ground.
A passing vehicle brought him to the Silliman University Medical Center where his lower left leg
was amputated.

Police investigation reports showed that respondent Noe was one of the 11 passengers of the
Fiera who suffered injuries; that when the Fiera stopped to pick up a passenger, the cargo truck
bumped the rear left portion of the Fiera; that only one tire mark from the front right wheel of
the cargo truck was seen on the road. A sketch of the accident was drawn by investigator Mateo
Rubia showing the relative positions of the two vehicles, their distances from the shoulder of
the road and the skid marks of the right front wheel of the truck measuring about 48 feet.

On February 18, 1993, respondent Noe, through his guardian ad litem Arlie Bernardo, filed with
the RTC of Dumaguete City a complaint3 for damages arising from quasi delict against petitioner
as the registered owner of the cargo truck and his driver Gerosano. He alleged that the
proximate cause of his injuries and suffering was the reckless imprudence of Gerosano and
petitioner’s negligence in the selection of a reckless driver and for operating a vehicle that was
not roadworthy. He prayed for actual damages, loss of income, moral and exemplary damages,
attorney’s fees, litigation expenses and costs of suit.

Petitioner and his driver Gerosano filed their Answer4 denying the material allegations in the
complaint. They, in turn, filed a third party complaint5 against respondents Bandoquillo and
Quinquillera, as owner and driver respectively of the Fiera. They alleged that it was the reckless
imprudence of respondent driver Quinquillera and his clear violation of the traffic rules and
regulations which was the proximate cause of the accident and asked for indemnification for
whatever damages they would be sentenced to pay. Respondents Bandoquillo and Quinquillera
filed their Answer to the third party complaint asking for the dismissal of the third party
complaint and for payment of attorney’s fees.

Driver Gerosano was charged criminally for reckless imprudence resulting to multiple physical
injuries with damage to property before the Municipal Circuit Trial Court (MCTC) of
Pamplona-Amlan and San Jose, Negros Oriental. On November 16, 1987, the MCTC rendered its
decision6 finding him guilty of the crime charged and was sentenced to four months and one
day to two years and four months and to pay the costs.

On February 18, 1993, the RTC rendered its judgment in the civil case,7 the dispositive portion of
which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered, ordering defendants

Gerosano and Estacion, to pay plaintiff, jointly or solidarily, the following ₱129,584.20 for actual
damages in the form of medical and hospitalization expenses; ₱50,000.00 for moral damages,
consisting of mental anguish, moral shock, serious anxiety and wounded feelings; ₱10,000.00
for attorney’s fees; and ₱5,000.00 for litigation expenses.

The trial court ruled that the negligence of Gerosano, petitioner’s driver, is the direct and
proximate cause of the incident and of the injuries suffered by respondent Noe; that Gerosano’s
gross negligence and reckless imprudence had been confirmed by the Judgment in Criminal
Case No. 463; that based on the findings of the police investigator, the faulty brakes caused the
cargo truck to bump the Fiera; that the Traffic Accident Report showed that the tire mark of the
cargo truck measuring 48 feet is visibly imprinted on the road where the incident took place
indicating that the said vehicle was speeding fast; that the existence of one tire mark of the
cargo truck proved that the said vehicle had a faulty brake, otherwise, it would have produced
two tire marks on the road; and that the photographs taken right after the incident also showed
who the guilty party was.

The trial court did not give credence to the argument of petitioner and his driver that the truck
was properly checked by a mechanic before it was dispatched for a trip. It found that petitioner
is negligent in maintaining his vehicle in good condition to prevent any accident to happen; that
petitioner is liable under Article 2180 of the Civil Code as employer of driver Gerosano for being
negligent in the selection and supervision of his driver as well as for maintaining and operating a
vehicle that was not roadworthy; and that petitioner and his driver are solidarily liable for all the
natural and probable consequences of their negligent acts or omissions. The trial court
dismissed the third party complaint filed by petitioner and his driver against respondents
Bandoquillo and Quinquillera.

Dissatisfied, only petitioner appealed to the CA. On April 17, 2000, the CA rendered the assailed
decision which affirmed in toto the decision of the trial court. Petitioner’s motion for
reconsideration was denied in a Resolution dated August 16, 2000.

Hence, the herein petition for review. Petitioner submits the following issues for resolution:9

WHETHER THE COURT OF APPEALS ERRED IN NOT FINDING THAT PETITIONER LARRY
ESTACION EXERCISED THE DUE DILIGENCE OF A GOOD FATHER OF A FAMILY TO PREVENT
DAMAGE DESPITE ABUNDANCE OF EVIDENCE TO THAT EFFECT; WHETHER THE COURT OF
APPEALS ERRED IN NOT HOLDING THAT PETITIONER LARRY ESTACION EXERCISED DUE
DILIGENCE IN THE SELECTION AND SUPERVISION OF HIS EMPLOYEE AND IN MAINTAINING
HIS CARGO TRUCK ROADWORTHY AND IN GOOD OPERATING CONDITION; WHETHER THE
COURT OF APPEALS ERRED IN EXONERATING RESPONDENTS CECILIA BANDOQUILLO AND
GEMINIANO QUINQUILLERA.

In his Memorandum, petitioner contends that he was able to establish that he observed the
diligence of a good father of a family not only in the selection of his employees but also in
maintaining his truck roadworthy and in good operating condition; that the CA erred in
exonerating respondents Bandoquillo and Quinquillera, owner and driver, respectively of the
Fiera from liability when their negligence was the proximate cause of respondent Noe’s injuries;
that respondent Noe’s act of standing in the rear carrier of the Fiera is in itself negligence on his
part which was aggravated by the fact that respondent Quinquillera overtook the cargo truck
driven by Gerosano on the curve and suddenly cut into the latter’s lane; that due to the
overloading of passengers, Gerosano was not able to see the brake lights of the Fiera when it
suddenly stopped to pick up passengers; that overloading is in violation of the applicable traffic
rules and regulations and Article 2185 is explicit when it provides that "unless there is proof to
the contrary, it is presumed that a person driving a motor vehicle has been negligent if at the
time of the mishap, he was violating any traffic regulation"; that since the Fiera driver was
negligent, there arises a presumption that respondent Bandoquillo, as owner of the Fiera, is
negligent in the selection and supervision of her employee; that assuming petitioner Estacion
and his driver are not entirely blameless, the negligence of Quinquillera is sufficient basis why
the respective liabilities should be delineated vis-à-vis their degree of negligence consistent
with Article 217910 of the Civil Code.

Respondent Noe filed his Memorandum alleging that the first and second issues raised are
factual in nature which are beyond the ambit of a petition for review; that petitioner failed to
overcome the presumption of negligence thus he is liable for the negligence of his driver
Gerosano; and that the third issue is best addressed to respondents Bandoquillo and
Quinquillera.

Respondents Bandoquillo and Quinquillera failed to file their memorandum despite receipt of
our Resolution requiring them to submit the same.

We find it apropos to resolve first the third issue considering that the extent of the liability of
petitioner and his driver is dependent on whether respondents Bandoquillo and Quinquillera are
the ones negligent in the vehicular mishap that happened in the afternoon of October 16, 1982
where respondent Noe was injured, resulting in the amputation of his left leg.

At the outset, the issue raised is factual in nature. Whether a person is negligent or not is a
question of fact which we cannot pass upon in a petition for review on certiorari, as our
jurisdiction is limited to reviewing errors of law.11As a rule, factual findings of the trial court,
affirmed by the CA, are final and conclusive and may not be reviewed on appeal. The
established exceptions are: (1) when the inference made is manifestly mistaken, absurd or
impossible; (2) when there is grave abuse of discretion; (3) when the findings are grounded
entirely on speculations, surmises or conjectures; (4) when the judgment of the CA is based on
misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the CA, in
making its findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) when the findings of fact are conclusions without
citation of specific evidence on which they are based; (8) when the CA manifestly overlooked
certain relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion; and (9) when the findings of fact of the CA are premised on the
absence of evidence and are contradicted by the evidence on record.12

On the basis of the records of this case, we find that there is cogent reason for us to review the
factual findings of the lower courts to conform to the evidence on record and consider this case
as an exception to the general rule.

The trial court and the appellate court had made a finding of fact that the proximate cause of
the injury sustained by respondent Noe was the negligent and careless driving of petitioner’s
driver, Gerosano, who was driving at a fast speed with a faulty brake when the accident
happened. We see no cogent reason to disturb the trial court’s finding in giving more credence
to the testimony of respondent Noe than the testimony of Gerosano, petitioner’s truck driver.

The correctness of such finding is borne by the records. In his testimony, Gerosano said that he
was driving the truck at a speed of about 40 kilometers per hour;13 that the Fiera was behind
him but upon reaching the curve, i.e.,after passing San Jose going to Dumaguete, the Fiera
overtook him and blocked his way;14 that he was 10 meters from the Fiera prior to the impact15
when he applied the brakes16 and tried to evade the Fiera but he still hit it.17

We agree with the trial court and the appellate court when they found that the truck was
running at a fast speed because if Gerosano was really driving at a speed of 40 kilometers per
hour and considering that the distance between the truck and the Fiera in front was about 10
meters, he had more than enough time to slacken his speed and apply his break to avoid hitting
the Fiera. However, from the way the truck reacted to the application of the brakes, it showed
that Gerosano was driving at a fast speed because the brakes skidded a lengthy 48 feet as
shown in the sketch of police investigator Rubia of the tire marks visibly printed on the road.

Moreover, the photographs taken after the incident and the testimony of Gerosano as to the
extent of damage to the truck, i.e. the truck’s windshield was broken and its hood was damaged
after the impact,18 further support the finding of both courts that Gerosano was driving at a fast
pace.

The accident was further caused by the faulty brakes of the truck. Based on the sketch report,
there was only one tire mark of the right tire of the cargo truck during the incident which, as
testified to by police investigator Rubia, meant that the brakes of the truck were not aligned
otherwise there would be two tire marks impressions on the road.19 Although petitioner
contends that there are other factors to explain why only one skid mark was found at the place
of the incident, such as the angle and edges of the road as well as the balance of the weight of
the cargo laden in the truck, he failed to show that indeed those factors were present to prove
his defense. Such claim cannot be given credence considering that investigator Rubia testified
that the body of the truck was very much on the road, i.e., not over the shoulder of the road,20
and the road was straight.21 Indeed, it is the negligent act of petitioner’s driver of driving the
cargo truck at a fast speed coupled with faulty brakes which was the proximate cause of
respondent Noe’s injury.

Petitioner’s claim that right after overtaking the cargo truck, the Fiera driver suddenly stopped
to pick up three passengers from the side of the road; that the overloading of passengers
prevented his truck driver from determining that the Fiera had pulled over to pick up
passengers as the latter’s brakelights were obstructed by the passengers standing on the rear
portion of the Fiera were not substantiated at all. Respondent Quinquillera, the driver of the
Fiera, testified that the distance from the curve of the road when he stopped and picked up
passengers was estimated to be about 80 to 90 feet.22 In fact, from the sketch drawn by
investigator Rubia, it showed a distance of 145 feet from the curve of the road to the speed tire
mark (which measured about 48 feet) visibly printed on the road to the Fiera. This means that
the Fiera driver did not stop immediately after the curve as what petitioner claims. Moreover,
Gerosano admitted that his truck was at a distance of 10 meters prior to the impact. The
distance between the two vehicles was such that it would be impossible for Gerosano not to
have seen that the Fiera had pulled over to pick up passengers.

However, we agree with petitioner that respondent Noe’s act of standing on the rear carrier of
the Fiera exposing himself to bodily injury is in itself negligence on his part. We find that the trial
court and the CA erred when they failed to consider that respondent Noe was also guilty of
contributory negligence. Contributory negligence is conduct on the part of the injured party,
contributing as a legal cause to the harm he has suffered, which falls below the standard to
which he is required to conform for his own protection. 23

It has been established by the testimony of respondent Noe that he was with four or five other
persons standing on the rear carrier of the Fiera since it was already full. Respondent Noe’s act
of standing on the left rear carrier portion of the Fiera showed his lack of ordinary care and
foresight that such act could cause him harm or put his life in danger. It has been held that "to
hold a person as having contributed to his injuries, it must be shown that he performed an act
that brought about his injuries in disregard of warning or signs of an impending danger to
health and body.24 Respondent Noe’s act of hanging on the Fiera is definitely dangerous to his
life and limb.

We likewise find merit in petitioner’s contention that respondent Quinquillera, the Fiera driver,
was also negligent. There is merit to petitioner’s claim that there was overloading which is in
violation of traffic rules and regulations. Respondent Noe himself had testified that he was
standing at the rear portion of the Fiera because the Fiera was already full. Respondent
Quinquillera should not have taken more passengers than what the Fiera can accommodate. If
the Fiera was not overloaded, respondent Noe would not have been standing on the rear carrier
and sustained such extent of injury.

Furthermore, we find that respondent Quinquillera was negligent in allowing respondent Noe
to stand on the Fiera’s rear portion. Section 32(c) of Article III of Republic Act No. 4136,
otherwise known as "The Land Transportation and Traffic Code" provides: (c) Riding on running
boards – No driver shall allow any person to ride on running board, step board or mudguard of
his motor vehicle for any purpose while the vehicle is in motion.

Respondent Quinquillera’s act of permitting respondent Noe to hang on the rear portion of the
Fiera in such a dangerous position creates undue risk of harm to respondent Noe. Quinquillera
failed to observe that degree of care, precaution and vigilance that the circumstances justly
demand. Thus, respondent Noe suffered injury.25 Since respondent Quinquillera is negligent,
there arises a presumption of negligence on the part of his employer, respondent Bandoquillo,
in supervising her employees properly. Such presumption was not rebutted at all by Bandoquillo.
Thus, the CA erred in affirming the dismissal of the third party complaint filed by petitioner
against respondents Quinquillera and Bandoquillo.

Petitioner contends that he was able to establish that he exercised the due diligence of a good
father of a family in the selection of his employees as well as in the maintenance of his cargo
truck in good operating condition. He claims that in addition to looking at Gerosano’s driver’s
license, he accompanied the latter in his first two trips, during which he ascertained Gerosano’s
competence as a driver, petitioner being a driver himself; that the truck driven by Gerosano has
never figured in any accident prior to the incident involved; that upon his acquisition of the
cargo truck on March 16, 1982, only 7 months prior to the incident, the same was thoroughly
checked up and reconditioned; and that he had in his employ a mechanic who conducted
periodic check-ups of the engine and brake system of the cargo truck.

We are not persuaded. Article 2180 of the Civil Code provides: Art. 2180. The obligation imposed
by Article 2176 is demandable not only for one’s own acts or omissions, but also for those of
persons for whom one is responsible.

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.

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.

As the employer of Gerosano, petitioner is primarily and solidarily liable for the quasi-delict
committed by the former. Petitioner is presumed to be negligent in the selection and
supervision of his employee by operation of law and may be relieved of responsibility for the
negligent acts of his driver, who at the time was acting within the scope of his assigned task,
only if he can show that he observed all the diligence of a good father of a family to prevent
damage.26

In Yambao v. Zuniga,27 we have clarified the meaning of the diligence of a good father of a family,
thus:

The "diligence of a good father" referred to in the last paragraph of the aforecited statute
means diligence in the selection and supervision of employees. Thus, when an employee, while
performing his duties, causes damage to persons or property due to his own negligence, there
arises the juris tantum presumption that the employer is negligent, either in the selection of the
employee or in the supervision over him after the selection. For the employer to avoid the
solidary liability for a tort committed by his employee, an employer must rebut the
presumption by presenting adequate and convincing proof that in the selection and
supervision of his employee, he or she exercises the care and diligence of a good father of a
family.

Petitioner’s claim that she exercised due diligence in the selection and supervision of her driver,
Venturina, deserves but scant consideration. Her allegation that before she hired Venturina
she required him to submit his driver’s license and clearances is worthless, in view of her
failure to offer in evidence certified true copies of said license and clearances. Bare
allegations, unsubstantiated by evidence, are not equivalent to proof under the rules of
evidence. x x x

In any case, assuming arguendo that Venturina did submit his license and clearances when he
applied with petitioner in January 1992, the latter still fails the test of due diligence in the
selection of her bus driver. Case law teaches that for an employer to have exercised the
diligence of a good father of a family, he should not be satisfied with the applicant’s mere
possession of a professional driver’s license; he must also carefully examine the applicant
for employment as to his qualifications, his experience and record of service. Petitioner
failed to present convincing proof that she went to this extent of verifying Venturina’s
qualifications, safety record, and driving history. The presumption juris tantum that there was
negligence in the selection of her bus driver, thus, remains unrebutted.

Nor did petitioner show that she exercised due supervision over Venturina after his selection.
For as pointed out by the Court of Appeals, petitioner did not present any proof that she
drafted and implemented training programs and guidelines on road safety for her
employees. In fact, the record is bare of any showing that petitioner required Venturina to
attend periodic seminars on road safety and traffic efficiency. Hence, petitioner cannot claim
exemption from any liability arising from the recklessness or negligence of Venturina.

In sum, petitioner’s liability to private respondents for the negligent and imprudent acts of her
driver, Venturina, under Article 2180 of the Civil Code is both manifest and clear. Petitioner,
having failed to rebut the legal presumption of negligence in the selection and supervision of
her driver, is responsible for damages, the basis of the liability being the relationship of pater
familias or on the employer’s own negligence.

Petitioner failed to show that he examined driver Gerosano as to his qualifications, experience
and service records. In fact, the testimony of driver Gerosano in his cross-examination showed
the non-observance of these requirements. Gerosano testified that petitioner was his first
employer in Dumaguete and that he was accepted by petitioner on the very day he applied for
the job;29 that his driver’s license was issued in Mindanao where he came from30 and that while
petitioner asked him about his driving record in Mindanao, he did not present any document of
his driving record.31 Such admission clearly established that petitioner did not exercise due
diligence in the selection of his driver Gerosano.

Moreover, the fact that petitioner’s driver Gerosano was driving in an efficient manner when
petitioner was with him in his first two trips would not conclusively establish that Gerosano was
not at all reckless. It could not be considered as due diligence in the supervision of his driver to
exempt petitioner from liability. In the supervision of his driver, petitioner must show that he
had formulated training programs and guidelines on road safety for his driver which the records
failed to show. We find that petitioner failed to rebut the presumption of negligence in the
selection and supervision of his employees.

Moreover, there was also no proof that he exercised diligence in maintaining his cargo truck
roadworthy and in good operating condition. While petitioner’s mechanic driver testified that
he made a routine check up on October 15, 1982, one day before the mishap happened, and
found the truck operational, there was no record of such inspection.

Turning now to the award of damages, since there was contributory negligence on the part of
respondent Noe, petitioner’s liability should be mitigated in accordance with Article 2179 of the
Civil Code which provides:

When the plaintiff’s own negligence was the immediate and proximate cause of his injury, he
cannot recover damages. But if his negligence was only contributory, the immediate and
proximate cause of the injury being the defendant’s lack of due care, the plaintiff may recover
damages, but the courts shall mitigate the damages to be awarded.

The underlying precept of the above article on contributory negligence is that a plaintiff who is
partly responsible for his own injury should not be entitled to recover damages in full but must
bear the consequences of his own negligence. The defendant must thus be held liable only for
the damages actually caused by his negligence.32

In Phoenix Construction, Inc., v. Intermediate Appellate Court,33 where we held that the legal and
proximate cause of the accident and of Dionisio’s injuries was the wrongful and negligent
manner in which the dump truck was parked but found Dionisio guilty of contributory
negligence on the night of the accident, we allocated most of the damages on a 20-80 ratio. In
said case, we required Dionisio to bear 20% of the damages awarded by the appellate court,
except as to the award of exemplary damages, attorney’s fees and costs.

In the present case, taking into account the contributing negligence of respondent Noe, we
likewise rule that the demands of substantial justice are satisfied by distributing the damages
also on a 20-80 ratio excluding attorney’s fees and litigation expenses.34 Consequently, 20%
should be deducted from the actual and moral damages awarded by the trial court in favor of
respondent Noe, that is: 20% of ₱129,584.20 for actual damages is ₱25,916.84 and 20% of
₱50,000.00 for moral damages is ₱10,000.00. Thus, after deducting the same, the award for
actual damages should be ₱103,667.36 and ₱40,000.00 for moral damages or 80% of the
damages so awarded.

Petitioner and respondents Bandoquillo and Quinquillera are jointly and severally liable for the
80% of the damages as well as attorney’s fees and litigation expenses conformably with our
pronouncement in Tiu v. Arriesgado35 where we held:

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and
severally liable for said amount, conformably with the following pronouncement of the Court in
Fabre, Jr. v. Court of Appeals:

The same rule of liability was applied in situations where the negligence of the driver of the bus
on which plaintiff was riding concurred with the negligence of a third party who was the driver
of another vehicle, thus causing an accident. In Anuran v. Buño, Batangas Laguna Tayabas Bus
Co. v. Intermediate Appellate Court, and Metro Manila Transit Corporation v. Court of Appeals,
the bus company, its driver, the operator of the other vehicle and the driver of the vehicle were
jointly and severally held liable to the injured passenger or the latter’s heirs. The basis of this
allocation of liability was explained in Viluan v. Court of Appeals, thus:
"Nor should it make difference that the liability of petitioner [bus owner] springs from contract
while that of respondents [owner and driver of other vehicle] arises from quasi delict. As early as
1913, we already ruled in Gutierrez v. Gutierrez, 56 Phil. 177, that in case of injury to a passenger
due to the negligence of the driver of the bus on which he was riding and of the driver of
another vehicle, the drivers as well as the owners of the two vehicles are jointly and severally
liable for damages. Some members of the Court, though, are of the view that under the
circumstances they are liable on quasi delict."36

WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court
of Appeals dated April 17, 2000 as well as its Resolution dated August 16, 2000 are AFFIRMED
with MODIFICATION to the effect that the dispositive portion of the Decision dated February
18, 1993 of the Regional Trial Court of Dumaguete City in Civil Case No. 8122, should read as
follows:

"WHEREFORE, in view of the foregoing, judgment is hereby rendered, ordering defendants

Gerosano and Estacion, as well as third party defendants Bandoquillo and Quinquillera, to pay
plaintiff, jointly and solidarily, the following: ₱103,667.36 for actual damages in the form of
medical and hospitalization expenses; ₱40,000.00 for moral damages, consisting of mental
anguish, moral shock, serious anxiety and wounded feelings; ₱10,000.00 for attorney’s fees;
and ₱5,000.00 for litigation expenses. SO ORDERED." No pronouncement as to costs.
 G.R. No. 165881 April 19, 2006

OSCAR VILLAMARIA, JR. Petitioner,

vs.
COURT OF APPEALS and JERRY V. BUSTAMANTE, Respondents

Before us is a Petition for Review on Certiorari under Rule 65 of the Revised Rules of Court
assailing the Decision1and Resolution2 of the Court of Appeals (CA) in CA-G.R. SP No. 78720
which set aside the Resolution3 of the National Labor Relations Commission (NLRC) in
NCR-30-08-03247-00, which in turn affirmed the Decision4 of the Labor Arbiter dismissing the
complaint filed by respondent Jerry V. Bustamante.

Petitioner Oscar Villamaria, Jr. was the owner of Villamaria Motors, a sole proprietorship
engaged in assembling passenger jeepneys with a public utility franchise to operate along the
Baclaran-Sucat route. By 1995, Villamaria stopped assembling jeepneys and retained only nine,
four of which he operated by employing drivers on a "boundary basis." One of those drivers was
respondent Bustamante who drove the jeepney with Plate No. PVU-660. Bustamante remitted
P450.00 a day to Villamaria as boundary and kept the residue of his daily earnings as
compensation for driving the vehicle. In August 1997, Villamaria verbally agreed to sell the
jeepney to Bustamante under the "boundary-hulog scheme," where Bustamante would remit to
Villarama P550.00 a day for a period of four years; Bustamante would then become the owner
of the vehicle and continue to drive the same under Villamaria’s franchise. It was also agreed
that Bustamante would make a downpayment of P10,000.00.

On August 7, 1997, Villamaria executed a contract entitled "Kasunduan ng Bilihan ng Sasakyan

sa Pamamagitan ng Boundary-Hulog"5 over the passenger jeepney with Plate No. PVU-660,
Chassis No. EVER95-38168-C and Motor No. SL-26647. The parties agreed that if Bustamante
failed to pay the boundary-hulog for three days, Villamaria Motors would hold on to the vehicle
until Bustamante paid his arrears, including a penalty of P50.00 a day; in case Bustamante failed
to remit the daily boundary-hulog for a period of one week, the Kasunduan would cease to have
legal effect and Bustamante would have to return the vehicle to Villamaria Motors.

Under the Kasunduan, Bustamante was prohibited from driving the vehicle without prior
authority from Villamaria Motors. Thus, Bustamante was authorized to operate the vehicle to
transport passengers only and not for other purposes. He was also required to display an
identification card in front of the windshield of the vehicle; in case of failure to do so, any fine
that may be imposed by government authorities would be charged against his account.
Bustamante further obliged himself to pay for the cost of replacing any parts of the vehicle that
would be lost or damaged due to his negligence. In case the vehicle sustained serious damage,
Bustamante was obliged to notify Villamaria Motors before commencing repairs. Bustamante
was not allowed to wear slippers, short pants or undershirts while driving. He was required to be
polite and respectful towards the passengers. He was also obliged to notify Villamaria Motors in
case the vehicle was leased for two or more days and was required to attend any meetings
which may be called from time to time. Aside from the boundary-hulog, Bustamante was also
obliged to pay for the annual registration fees of the vehicle and the premium for the vehicle’s
comprehensive insurance. Bustamante promised to strictly comply with the rules and
regulations imposed by Villamaria for the upkeep and maintenance of the jeepney.
Bustamante continued driving the jeepney under the supervision and control of Villamaria. As
agreed upon, he made daily remittances of P550.00 in payment of the purchase price of the
vehicle. Bustamante failed to pay for the annual registration fees of the vehicle, but Villamaria
allowed him to continue driving the jeepney.

In 1999, Bustamante and other drivers who also had the same arrangement with Villamaria
Motors failed to pay their respective boundary-hulog. This prompted Villamaria to serve a
"Paalala,"6 reminding them that under the Kasunduan, failure to pay the daily boundary-hulog
for one week, would mean their respective jeepneys would be returned to him without any
complaints. He warned the drivers that the Kasunduan would henceforth be strictly enforced
and urged them to comply with their obligation to avoid litigation.

On July 24, 2000, Villamaria took back the jeepney driven by Bustamante and barred the latter
from driving the vehicle.

On August 15, 2000, Bustamante filed a Complaint7 for Illegal Dismissal against Villamaria and
his wife Teresita. In his Position Paper,8 Bustamante alleged that he was employed by Villamaria
in July 1996 under the boundary system, where he was required to remit P450.00 a day. After
one year of continuously working for them, the spouses Villamaria presented the Kasunduan for
his signature, with the assurance that he (Bustamante) would own the jeepney by March 2001
after paying P550.00 in daily installments and that he would thereafter continue driving the
vehicle along the same route under the same franchise. He further narrated that in July 2000, he
informed the Villamaria spouses that the surplus engine of the jeepney needed to be replaced,
and was assured that it would be done. However, he was later arrested and his driver’s license
was confiscated because apparently, the replacement engine that was installed was taken from
a stolen vehicle. Due to negotiations with the apprehending authorities, the jeepney was not
impounded. The Villamaria spouses took the jeepney from him on July 24, 2000, and he was no
longer allowed to drive the vehicle since then unless he paid them P70,000.00.

Bustamante prayed that judgment be rendered in his favor, thus:

WHEREFORE, in the light of the foregoing, it is most respectfully prayed that judgment be
rendered ordering the respondents, jointly and severally, the following:

a. Reinstate complainant to his former position without loss of seniority rights and execute a
Deed of Sale in favor of the complainant relative to the PUJ with Plate No. PVU-660;

b. Ordering the respondents to pay backwages in the amount of P400.00 a day and other
benefits computed from July 24, 2000 up to the time of his actual reinstatement;

c. Ordering respondents to return the amount of P10,000.00 and P180,000.00 for the
expenses incurred by the complainant in the repair and maintenance of the subject jeep;

d. Ordering the respondents to refund the amount of One Hundred (P100.00) Pesos per day
counted from August 7, 1997 up to June 2000 or a total of P91,200.00;

e. To pay moral and exemplary damages of not less than P200,000.00;

f. Attorney’s fee[s] of not less than 10% of the monetary award.

Other just and equitable reliefs under the premises are also being prayed for.9

In their Position Paper,10 the spouses Villamaria admitted the existence of the Kasunduan, but
alleged that Bustamante failed to pay the P10,000.00 downpayment and the vehicle’s annual
registration fees. They further alleged that Bustamante eventually failed to remit the requisite
boundary-hulog of P550.00 a day, which prompted them to issue the Paalaala. Instead of
complying with his obligations, Bustamante stopped making his remittances despite his daily
trips and even brought the jeepney to the province without permission. Worse, the jeepney
figured in an accident and its license plate was confiscated; Bustamante even abandoned the
vehicle in a gasoline station in Sucat, Parañaque City for two weeks. When the security guard at
the gasoline station requested that the vehicle be retrieved and Teresita Villamaria asked
Bustamante for the keys, Bustamante told her: "Di kunin ninyo." When the vehicle was finally
retrieved, the tires were worn, the alternator was gone, and the battery was no longer working.

Citing the cases of Cathedral School of Technology v. NLRC11 and Canlubang Security Agency
Corporation v. NLRC,12 the spouses Villamaria argued that Bustamante was not illegally
dismissed since the Kasunduan executed on August 7, 1997 transformed the
employer-employee relationship into that of vendor-vendee. Hence, the spouses concluded,
there was no legal basis to hold them liable for illegal dismissal. They prayed that the case be
dismissed for lack of jurisdiction and patent lack of merit.

In his Reply,13 Bustamante claimed that Villamaria exercised control and supervision over the
conduct of his employment. He maintained that the rulings of the Court in National Labor
Union v. Dinglasan,14 Magboo v. Bernardo,15 and Citizen's League of Free Workers v. Abbas16 are
germane to the issue as they define the nature of the owner/operator-driver relationship under
the boundary system. He further reiterated that it was the Villamaria spouses who presented
the Kasunduan to him and that he conformed thereto only upon their representation that he
would own the vehicle after four years. Moreover, it appeared that the Paalala was duly
received by him, as he, together with other drivers, was made to affix his signature on a blank
piece of paper purporting to be an "attendance sheet."

On March 15, 2002, the Labor Arbiter rendered judgment17 in favor of the spouses Villamaria
and ordered the complaint dismissed on the following ratiocination:

Respondents presented the contract of Boundary-Hulog, as well as the PAALALA, to prove their
claim that complainant violated the terms of their contract and afterwards abandoned the
vehicle assigned to him. As against the foregoing, [the] complaint’s (sic) mere allegations to the
contrary cannot prevail.

Not having been illegally dismissed, complainant is not entitled to damages and attorney's
fees.18

Bustamante appealed the decision to the NLRC,19 insisting that the Kasunduan did not
extinguish the employer-employee relationship between him and Villamaria. While he did not
receive fixed wages, he kept only the excess of the boundary-hulog which he was required to
remit daily to Villamaria under the agreement. Bustamante maintained that he remained an
employee because he was engaged to perform activities which were necessary or desirable to
Villamaria’s trade or business.
The NLRC rendered judgment20 dismissing the appeal for lack of merit, thus: WHEREFORE,
premises considered, complainant's appeal is hereby DISMISSED for reasons not stated in the
Labor Arbiter's decision but mainly on a jurisdictional issue, there being none over the subject
matter of the controversy.21

The NLRC ruled that under the Kasunduan, the juridical relationship between Bustamante and
Villamaria was that of vendor and vendee, hence, the Labor Arbiter had no jurisdiction over the
complaint. Bustamante filed a Motion for Reconsideration, which the NLRC resolved to deny on
May 30, 2003.22

Bustamante elevated the matter to the CA via Petition for Certiorari, alleging that the NLRC
erred

I. IN DISMISSING PETITIONER’S APPEAL "FOR REASON NOT STATED IN THE LABOR

ARBITER’S DECISION, BUT MAINLY ON JURISDICTIONAL ISSUE;"

II. IN DISREGARDING THE LAW AND PREVAILING JURISPRUDENCE WHEN IT DECLARED

THAT THE RELATIONSHIP WHICH WAS ESTABLISHED BETWEEN PETITIONER AND THE
PRIVATE RESPONDENT WAS DEFINITELY A MATTER WHICH IS BEYOND THE
PROTECTIVE MANTLE OF OUR LABOR LAWS.23

Bustamante insisted that despite the Kasunduan, the relationship between him and Villamaria
continued to be that of employer-employee and as such, the Labor Arbiter had jurisdiction over
his complaint. He further alleged that it is common knowledge that operators of passenger
jeepneys (including taxis) pay their drivers not on a regular monthly basis but on commission or
boundary basis, or even the boundary-hulog system. Bustamante asserted that he was
dismissed from employment without any lawful or just cause and without due notice.

For his part, Villamaria averred that Bustamante failed to adduce proof of their
employer-employee relationship. He further pointed out that the Dinglasan case pertains to the
boundary system and not the boundary-hulog system, hence inapplicable in the instant case.
He argued that upon the execution of the Kasunduan, the juridical tie between him and
Bustamante was transformed into a vendor-vendee relationship. Noting that he was engaged in
the manufacture and sale of jeepneys and not in the business of transporting passengers for
consideration, Villamaria contended that the daily fees which Bustmante paid were actually
periodic installments for the the vehicle and were not the same fees as understood in the
boundary system. He added that the boundary-hulog plan was basically a scheme to help the
driver-buyer earn money and eventually pay for the unit in full, and for the owner to profit not
from the daily earnings of the driver-buyer but from the purchase price of the unit sold.
Villamaria further asserted that the apparently restrictive conditions in the Kasunduan did not
mean that the means and method of driver-buyer’s conduct was controlled, but were mere
ways to preserve the vehicle for the benefit of both parties: Villamaria would be able to collect
the agreed purchase price, while Bustamante would be assured that the vehicle would still be in
good running condition even after four years. Moreover, the right of vendor to impose certain
conditions on the buyer should be respected until full ownership of the property is vested on the
latter. Villamaria insisted that the parallel circumstances obtaining in Singer Sewing Machine
Company v. Drilon24 has analogous application to the instant issue.
In its Decision25 dated August 30, 2004, the CA reversed and set aside the NLRC decision. The
fallo of the decision reads:

UPON THE VIEW WE TAKE IN THIS CASE, THUS, the impugned resolutions of the NLRC must
be, as they are hereby are, REVERSED AND SET ASIDE, and judgment entered in favor of
petitioner:

1) Sentencing private respondent Oscar Villamaria, Jr. to pay petitioner Jerry Bustamante
separation pay computed from the time of his employment up to the time of termination
based on the prevailing minimum wage at the time of termination; and,

2) Condemning private respondent Oscar Villamaria, Jr. to pay petitioner Jerry Bustamante
back wages computed from the time of his dismissal up to March 2001 based on the
prevailing minimum wage at the time of his dismissal.

The appellate court ruled that the Labor Arbiter had jurisdiction over Bustamante’s complaint.
Under the Kasunduan, the relationship between him and Villamaria was dual: that of
vendor-vendee and employer-employee. The CA ratiocinated that Villamaria’s exercise of
control over Bustamante’s conduct in operating the jeepney is inconsistent with the former’s
claim that he was not engaged in the transportation business. There was no evidence that
petitioner was allowed to let some other person drive the jeepney.

The CA further held that, while the power to dismiss was not mentioned in the Kasunduan, it
did not mean that Villamaria could not exercise it. It explained that the existence of an
employment relationship did not depend on how the worker was paid but on the presence or
absence of control over the means and method of the employee’s work. In this case, Villamaria’s
directives (to drive carefully, wear an identification card, don decent attire, park the vehicle in
his garage, and to inform him about provincial trips, etc.) was a means to control the way in
which Bustamante was to go about his work. In view of Villamaria’s supervision and control as
employer, the fact that the "boundary" represented installment payments of the purchase price
on the jeepney did not remove the parties’ employer-employee relationship.

While the appellate court recognized that a week’s default in paying the boundary-hulog
constituted an additional cause for terminating Bustamante’s employment, it held that the
latter was illegally dismissed. According to the CA, assuming that Bustamante failed to make
the required payments as claimed by Villamaria, the latter nevertheless failed to take steps to
recover the unit and waited for Bustamante to abandon it. It also pointed out that Villamaria
neither submitted any police report to support his claim that the vehicle figured in a mishap nor
presented the affidavit of the gas station guard to substantiate the claim that Bustamante
abandoned the unit.

Villamaria received a copy of the decision on September 8, 2004, and filed, on September 17,
2004, a motion for reconsideration thereof. The CA denied the motion in a Resolution27 dated
November 2, 2004, and Villamaria received a copy thereof on November 8, 2004.

Villamaria, now petitioner, seeks relief from this Court via petition for review on certiorari under
Rule 65 of the Rules of Court, alleging that the CA committed grave abuse of its discretion
amounting to excess or lack of jurisdiction in reversing the decision of the Labor Arbiter and the
NLRC. He claims that the CA erred in ruling that the juridical relationship between him and
respondent under the Kasunduan was a combination of employer-employee and
vendor-vendee relationships. The terms and conditions of the Kasunduan clearly state that he
and respondent Bustamante had entered into a conditional deed of sale over the jeepney; as
such, their employer-employee relationship had been transformed into that of vendor-vendee.
Petitioner insists that he had the right to reserve his title on the jeepney until after the purchase
price thereof had been paid in full.

In his Comment on the petition, respondent avers that the appropriate remedy of petitioner
was an appeal via a petition for review on certiorari under Rule 45 of the Rules of Court and not
a special civil action of certiorari under Rule 65. He argues that petitioner failed to establish that
the CA committed grave abuse of its discretion amounting to excess or lack of jurisdiction in its
decision, as the said ruling is in accord with law and the evidence on record.

Respondent further asserts that the Kasunduan presented to him by petitioner which provides
for a boundary-hulog scheme was a devious circumvention of the Labor Code of the Philippines.
Respondent insists that his juridical relationship with petitioner is that of employer-employee
because he was engaged to perform activities which were necessary or desirable in the usual
business of petitioner, his employer.

In his Reply, petitioner avers that the Rules of Procedure should be liberally construed in his
favor; hence, it behooves the Court to resolve the merits of his petition.

We agree with respondent’s contention that the remedy of petitioner from the CA decision was
to file a petition for review on certiorari under Rule 45 of the Rules of Court and not the
independent action of certiorari under Rule 65. Petitioner had 15 days from receipt of the CA
resolution denying his motion for the reconsideration within which to file the petition under
Rule 45.28 But instead of doing so, he filed a petition for certiorari under Rule 65 on November
22, 2004, which did not, however, suspend the running of the 15-day reglementary period;
consequently, the CA decision became final and executory upon the lapse of the reglementary
period for appeal. Thus, on this procedural lapse, the instant petition stands to be dismissed.29

It must be stressed that the recourse to a special civil action under Rule 65 of the Rules of Court
is proscribed by the remedy of appeal under Rule 45. As the Court elaborated in Tomas Claudio
Memorial College, Inc. v. Court of Appeals:30

We agree that the remedy of the aggrieved party from a decision or final resolution of the CA is
to file a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, on
questions of facts or issues of law within fifteen days from notice of the said resolution.
Otherwise, the decision of the CA shall become final and executory. The remedy under Rule 45
of the Rules of Court is a mode of appeal to this Court from the decision of the CA. It is a
continuation of the appellate process over the original case. A review is not a matter of right but
is a matter of judicial discretion. The aggrieved party may, however, assail the decision of the
CA via a petition for certiorari under Rule 65 of the Rules of Court within sixty days from notice
of the decision of the CA or its resolution denying the motion for reconsideration of the same.
This is based on the premise that in issuing the assailed decision and resolution, the CA acted
with grave abuse of discretion, amounting to excess or lack of jurisdiction and there is no plain,
speedy and adequate remedy in the ordinary course of law. A remedy is considered plain,
speedy and adequate if it will promptly relieve the petitioner from the injurious effect of the
judgment and the acts of the lower court.

The aggrieved party is proscribed from filing a petition for certiorari if appeal is available, for the
remedies of appeal and certiorari are mutually exclusive and not alternative or successive. The
aggrieved party is, likewise, barred from filing a petition for certiorari if the remedy of appeal is
lost through his negligence. A petition for certiorari is an original action and does not interrupt
the course of the principal case unless a temporary restraining order or a writ of preliminary
injunction has been issued against the public respondent from further proceeding. A petition for
certiorari must be based on jurisdictional grounds because, as long as the respondent court
acted within its jurisdiction, any error committed by it will amount to nothing more than an
error of judgment which may be corrected or reviewed only by appeal.31

However, we have also ruled that a petition for certiorari under Rule 65 may be considered as
filed under Rule 45, conformably with the principle that rules of procedure are to be construed
liberally, provided that the petition is filed within the reglementary period under Section 2, Rule
45 of the Rules of Court, and where valid and compelling circumstances warrant that the
petition be resolved on its merits.32 In this case, the petition was filed within the reglementary
period and petitioner has raised an issue of substance: whether the existence of a
boundary-hulog agreement negates the employer-employee relationship between the vendor
and vendee, and, as a corollary, whether the Labor Arbiter has jurisdiction over a complaint for
illegal dismissal in such case.

We resolve these issues in the affirmative.

The rule is that, the nature of an action and the subject matter thereof, as well as, which court
or agency of the government has jurisdiction over the same, are determined by the material
allegations of the complaint in relation to the law involved and the character of the reliefs
prayed for, whether or not the complainant/plaintiff is entitled to any or all of such reliefs.33 A
prayer or demand for relief is not part of the petition of the cause of action; nor does it enlarge
the cause of action stated or change the legal effect of what is alleged.34 In determining which
body has jurisdiction over a case, the better policy is to consider not only the status or
relationship of the parties but also the nature of the action that is the subject of their
controversy.35

Article 217 of the Labor Code, as amended, vests on the Labor Arbiter exclusive original
jurisdiction only over the following: (a) Except as otherwise provided under this Code, the Labor
Arbiters shall have original and exclusive jurisdiction to hear and decide, within thirty (30)
calendar days after the submission of the case by the parties for decision without extension,
even in the absence of stenographic notes, the following cases involving all workers, whether
agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that workers may file
involving wage, rates of pay, hours of work, and other terms and conditions of
employment;
 4. Claims for actual, moral, exemplary and other forms of damages arising from the
employer-employee relations;

5. Cases arising from violation of Article 264 of this Code, including questions involving the
legality of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security, Medicare and maternity
benefits, all other claims, arising from employer-employee relationship, including those of
persons in domestic or household service, involving an amount exceeding five thousand
pesos (P5,000.00) regardless of whether accompanied with a claim for reinstatement.

(b) The Commission shall have exclusive appellate jurisdiction over all cases decided by
Labor Arbiters.

(c) Cases arising from the interpretation or implementation of collective bargaining

agreements, and those arising from the interpretation or enforcement of company
personnel policies shall be disposed of by the Labor Arbiter by referring the same to
the grievance machinery and voluntary arbitration as may be provided in said
agreements.

In the foregoing cases, an employer-employee relationship is an indispensable jurisdictional

requisite.36 The jurisdiction of Labor Arbiters and the NLRC under Article 217 of the Labor Code
is limited to disputes arising from an employer-employee relationship which can only be
resolved by reference to the Labor Code, other labor statutes or their collective bargaining
agreement.37 Not every dispute between an employer and employee involves matters that only
the Labor Arbiter and the NLRC can resolve in the exercise of their adjudicatory or quasi-judicial
powers. Actions between employers and employees where the employer-employee
relationship is merely incidental is within the exclusive original jurisdiction of the regular
courts.38 When the principal relief is to be granted under labor legislation or a collective
bargaining agreement, the case falls within the exclusive jurisdiction of the Labor Arbiter and
the NLRC even though a claim for damages might be asserted as an incident to such claim.39

We agree with the ruling of the CA that, under the boundary-hulog scheme incorporated in the
Kasunduan, a dual juridical relationship was created between petitioner and respondent: that of
employer-employee and vendor-vendee. The Kasunduan did not extinguish the
employer-employee relationship of the parties extant before the execution of said deed.

As early as 1956, the Court ruled in National Labor Union v. Dinglasan40 that the jeepney
owner/operator-driver relationship under the boundary system is that of employer-employee
and not lessor-lessee. This doctrine was affirmed, under similar factual settings, in Magboo v.
Bernardo41 and Lantaco, Sr. v. Llamas,42 and was analogously applied to govern the
relationships between auto-calesa owner/operator and driver,43 bus owner/operator and
conductor,44 and taxi owner/operator and driver.45

The boundary system is a scheme by an owner/operator engaged in transporting passengers as

a common carrier to primarily govern the compensation of the driver, that is, the latter’s daily
earnings are remitted to the owner/operator less the excess of the boundary which represents
the driver’s compensation. Under this system, the owner/operator exercises control and
supervision over the driver. It is unlike in lease of chattels where the lessor loses complete
control over the chattel leased but the lessee is still ultimately responsible for the consequences
of its use. The management of the business is still in the hands of the owner/operator, who,
being the holder of the certificate of public convenience, must see to it that the driver follows
the route prescribed by the franchising and regulatory authority, and the rules promulgated
with regard to the business operations. The fact that the driver does not receive fixed wages but
only the excess of the "boundary" given to the owner/operator is not sufficient to change the
relationship between them. Indubitably, the driver performs activities which are usually
necessary or desirable in the usual business or trade of the owner/operator.46

Under the Kasunduan, respondent was required to remit P550.00 daily to petitioner, an amount
which represented the boundary of petitioner as well as respondent’s partial payment (hulog) of
the purchase price of the jeepney.

Respondent was entitled to keep the excess of his daily earnings as his daily wage. Thus, the
daily remittances also had a dual purpose: that of petitioner’s boundary and respondent’s
partial payment (hulog) for the vehicle. This dual purpose was expressly stated in the
Kasunduan. The well-settled rule is that an obligation is not novated by an instrument that
expressly recognizes the old one, changes only the terms of payment, and adds other
obligations not incompatible with the old provisions or where the new contract merely
supplements the previous one. 47 The two obligations of the respondent to remit to petitioner
the boundary-hulog can stand together.

In resolving an issue based on contract, this Court must first examine the contract itself, keeping
in mind that when the terms of the agreement are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations shall prevail.48 The intention of
the contracting parties should be ascertained by looking at the words used to project their
intention, that is, all the words, not just a particular word or two or more words standing alone.
The various stipulations of a contract shall be interpreted together, attributing to the doubtful
ones that sense which may result from all of them taken jointly.49 The parts and clauses must be
interpreted in relation to one another to give effect to the whole. The legal effect of a contract
is to be determined from the whole read together.50

Under the Kasunduan, petitioner retained supervision and control over the conduct of the
respondent as driver of the jeepney.

The parties expressly agreed that petitioner, as vendor, and respondent, as vendee, entered
into a contract to sell the jeepney on a daily installment basis of P550.00 payable in four years
and that petitioner would thereafter become its owner. A contract is one of conditional sale,
oftentimes referred to as contract to sell, if the ownership or title over the

property sold is retained by the vendor, and is not passed to the vendee unless and until there is
full payment of the purchase price and/or upon faithful compliance with the other terms and
conditions that may lawfully be stipulated.52Such payment or satisfaction of other
preconditions, as the case may be, is a positive suspensive condition, the failure of which is not
a breach of contract, casual or serious, but simply an event that would prevent the obligation of
the vendor to convey title from acquiring binding force.53 Stated differently, the efficacy or
obligatory force of the vendor's obligation to transfer title is subordinated to the happening of a
future and uncertain event so that if the suspensive condition does not take place, the parties
would stand as if the conditional obligation had never existed.54 The vendor may extrajudicially
terminate the operation of the contract, refuse conveyance, and retain the sums or installments
already received, where such rights are expressly provided for.55

Under the boundary-hulog scheme, petitioner retained ownership of the jeepney although its
material possession was vested in respondent as its driver. In case respondent failed to make his
P550.00 daily installment payment for a week, the agreement would be of no force and effect
and respondent would have to return the jeepney to petitioner; the employer-employee
relationship would likewise be terminated unless petitioner would allow respondent to continue
driving the jeepney on a boundary basis of P550.00 daily despite the termination of their
vendor-vendee relationship.

The juridical relationship of employer-employee between petitioner and respondent was not
negated by the foregoing stipulation in the Kasunduan, considering that petitioner retained
control of respondent’s conduct as driver of the vehicle. As correctly ruled by the CA:

The exercise of control by private respondent over petitioner’s conduct in operating the jeepney
he was driving is inconsistent with private respondent’s claim that he is, or was, not engaged in
the transportation business; that, even if petitioner was allowed to let some other person drive
the unit, it was not shown that he did so; that the existence of an employment relation is not
dependent on how the worker is paid but on the presence or absence of control over the means
and method of the work; that the amount earned in excess of the "boundary hulog" is
equivalent to wages; and that the fact that the power of dismissal was not mentioned in the
Kasunduan did not mean that private respondent never exercised such power, or could not
exercise such power.

Moreover, requiring petitioner to drive the unit for commercial use, or to wear an identification
card, or to don a decent attire, or to park the vehicle in Villamaria Motors garage, or to inform
Villamaria Motors about the fact that the unit would be going out to the province for two days
of more, or to drive the unit carefully, etc. necessarily related to control over the means by
which the petitioner was to go about his work; that the ruling applicable here is not Singer
Sewing Machine but National Labor Union since the latter case involved jeepney
owners/operators and jeepney drivers, and that the fact that the "boundary" here represented
installment payment of the purchase price on the jeepney did not withdraw the relationship
from that of employer-employee, in view of the overt presence of supervision and control by
the employer.56

Neither is such juridical relationship negated by petitioner’s claim that the terms and conditions
in the Kasunduan relative to respondent’s behavior and deportment as driver was for his and
respondent’s benefit: to insure that respondent would be able to pay the requisite daily
installment of P550.00, and that the vehicle would still be in good condition despite the lapse of
four years. What is primordial is that petitioner retained control over the conduct of the
respondent as driver of the jeepney.

Indeed, petitioner, as the owner of the vehicle and the holder of the franchise, is entitled to
exercise supervision and control over the respondent, by seeing to it that the route provided in
his franchise, and the rules and regulations of the Land Transportation Regulatory Board are
duly complied with. Moreover, in a business establishment, an identification card is usually
provided not just as a security measure but to mainly identify the holder thereof as a bona fide
employee of the firm who issues it.57

As respondent’s employer, it was the burden of petitioner to prove that respondent’s

termination from employment was for a lawful or just cause, or, at the very least, that
respondent failed to make his daily remittances of P550.00 as boundary. However, petitioner
failed to do so. As correctly ruled by the appellate court:

It is basic of course that termination of employment must be effected in accordance with law.
The just and authorized causes for termination of employment are enumerated under Articles
282, 283 and 284 of the Labor Code.

Parenthetically, given the peculiarity of the situation of the parties here, the default in the
remittance of the boundary hulog for one week or longer may be considered an additional
cause for termination of employment. The reason is because the Kasunduan would be of no
force and effect in the event that the purchaser failed to remit the boundary hulog for one week.
The Kasunduan in this case pertinently stipulates:

13. Na kung ang TAUHAN NG IKALAWANG PANIG ay hindi makapagbigay ng BOUNDARY

HULOG sa loob ng isang linggo ay NANGANGAHULUGAN na ang kasunduang ito ay wala ng
bisa at kusang ibabalik ng TAUHAN NG IKALAWANG PANIG ang nasabing sasakyan sa TAUHAN
NG UNANG PANIG na wala ng paghahabol pa.

Moreover, well-settled is the rule that, the employer has the burden of proving that the
dismissal of an employee is for a just cause. The failure of the employer to discharge this burden
means that the dismissal is not justified and that the employee is entitled to reinstatement and
back wages.

In the case at bench, private respondent in his position paper before the Labor Arbiter, alleged
that petitioner failed to pay the miscellaneous fee of P10,000.00 and the yearly registration of
the unit; that petitioner also stopped remitting the "boundary hulog," prompting him (private
respondent) to issue a "Paalala," which petitioner however ignored; that petitioner even
brought the unit to his (petitioner’s) province without informing him (private respondent) about
it; and that petitioner eventually abandoned the vehicle at a gasoline station after figuring in an
accident. But private respondent failed to substantiate these allegations with solid, sufficient
proof. Notably, private respondent’s allegation viz, that he retrieved the vehicle from the gas
station, where petitioner abandoned it, contradicted his statement in the Paalala that he would
enforce the provision (in the Kasunduan) to the effect that default in the remittance of the
boundary hulog for one week would result in the forfeiture of the unit. The Paalala reads as
follows:

"Sa lahat ng mga kumukuha ng sasakyan

"Sa pamamagitan ng ‘BOUNDARY HULOG’

"Nais ko pong ipaalala sa inyo ang Kasunduan na inyong pinirmahan particular na ang
paragrapo 13 na nagsasaad na kung hindi kayo makapagbigay ng Boundary Hulog sa loob ng
isang linggo ay kusa ninyong ibabalik and nasabing sasakyan na inyong hinuhulugan ng wala ng
paghahabol pa.
"Mula po sa araw ng inyong pagkatanggap ng Paalala na ito ay akin na pong ipatutupad ang
nasabing Kasunduan kaya’t aking pinaaalala sa inyong lahat na tuparin natin ang nakalagay sa
kasunduan upang maiwasan natin ito.

"Hinihiling ko na sumunod kayo sa hinihingi ng paalalang ito upang hindi na tayo makaabot pa
sa korte kung sakaling hindi ninyo isasauli ang inyong sasakyan na hinuhulugan na ang mga
magagastos ay kayo pa ang magbabayad sapagkat ang hindi ninyo pagtupad sa kasunduan ang
naging dahilan ng pagsampa ng kaso.

"Sumasainyo

"Attendance: 8/27/99

"(The Signatures appearing herein

include (sic) that of petitioner’s) (Sgd.)

OSCAR VILLAMARIA, JR."

If it were true that petitioner did not remit the boundary hulog for one week or more, why did
private respondent not forthwith take steps to recover the unit, and why did he have to wait for
petitioner to abandon it?1avvphil.net

On another point, private respondent did not submit any police report to support his claim that
petitioner really figured in a vehicular mishap. Neither did he present the affidavit of the guard
from the gas station to substantiate his claim that petitioner abandoned the unit there.58

Petitioner’s claim that he opted not to terminate the employment of respondent because of
magnanimity is negated by his (petitioner’s) own evidence that he took the jeepney from the
respondent only on July 24, 2000.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED. The decision of the Court of
Appeals in CA-G.R. SP No. 78720 is AFFIRMED. Costs against petitioner. SO ORDERED.
 G.R. No. 149749 July 25, 2006

AGAPITA DIAZ, petitioner,

vs.
COURT OF APPEALS; HEIRS OF SHERLY MONEÑO,1 namely: MAMERTA C. MONEÑO,
JASPHIN M. VILLAMIL, WHELHELMIA M. DECARO, EDDIE MONEÑO, GININA M.
DAQUIPIL, FERNAN C. MONEÑO, ARLENE C. MONEÑO, RICHARD C. MONEÑO and NIKKI
C. MONEÑO, represented by EDDIE C. MONEÑO; TEODORO LANTORIA and ROGELIO
FRANCISCO, respondents.

In this petition for certiorari under Rule 65 of the Rules of Court, petitioner imputes grave abuse
of discretion to the Court of Appeals vis-a-vis its May 30, 2001 decision2 in CA-G.R. CV No. 67017,
the dispositive portion of which read:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of
merit. The Decision (Judgment) dated October 29, 1999 of the Regional Trial Court of
Malaybalay City, Bukidnon, Branch 10 in Civil Case No. 2586-95 is hereby AFFIRMED and
REITERATED.3

The facts follow: Petitioner Agapita Diaz operated a common carrier, a Tamaraw FX taxi plying
the route of Cagayan de Oro City to any point in Region 10. On July 20, 1996, petitioner’s taxi,
driven by one Arman Retes, was moving at an excessive speed when it rammed into the rear
portion of a Hino cargo truck owned by private respondent Teodoro Lantoria and driven by
private respondent Rogelio Francisco. As a result, nine passengers of the taxi died including
Sherly Moneño. On August 13, 1996, the heirs of Sherly Moneño4 filed with the Regional Trial
Court of Malaybalay City, Branch 10,5an action for breach of contract of carriage and damages6
against petitioner and her driver, Arman Retes. On motion,7 petitioner filed a third-party
complaint against private respondents Teodorio Lantoria and Rogelio Francisco.8

The pre-trial conference was initially set on July 11, 1998 but was reset to July 30, 1998 for
petitioner and her counsel’s failure to appear9 despite due notice. Registry receipt number
0436410 showed that notice had been sent to petitioner’s counsel, Atty. Cipriano Lupeba.11 On
scheduled date, petitioner and her counsel again failed to appear, prompting the court to allow
private respondents to present evidence ex parte.

More than seven months after the conclusion12 of private respondents’ ex parte presentation of
evidence, petitioner filed a motion for leave to present evidence on her defense and third-party
complaint.13 The trial court denied this.14

On October 29, 1999, the trial court rendered a decision holding petitioner and Arman Retes
jointly and severally liable to pay private respondent heirs of Sherly Moneño P50,000 for her
death, P50,000 as moral damages, P20,000 as exemplary damages and P20,000 as attorney’s
fees.15

On appeal, the trial court’s decision was affirmed by the Court of Appeals in the assailed May 30,
2001 decision.16The motion for reconsideration was denied.17 Hence, this recourse.

The issues raised by petitioner are: (1) whether or not the Court of Appeals committed grave
abuse of discretion in affirming the trial court’s decision denying petitioner’s motion for leave to
present evidence on her defense and third-party complaint, and (2) whether or not the Court of
Appeals committed grave abuse of discretion in affirming the trial court’s decision holding
petitioner liable for breach of contract.

The petition lacks merit. First, Section 3, Rule 18 of the Rules of Court states that: The notice of
pre-trial shall be served on counsel, or on the party who has no counsel. The counsel served with
such notice is charged with the duty of notifying the party represented by him.

Petitioner was represented by Atty. Cipriano Lupeba to whom the notice was sent.18 It was
incumbent on the latter to advise petitioner accordingly. His failure to do so constituted
negligence which bound petitioner.

Further, Sections 4 and 5 of Rule 18 read: Sec. 4. Appearance of Parties. – It shall be the duty of
the parties and their counsel to appear at the pre-trial. The non-appearance of the party may be
excused only if a valid cause is shown therefore or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement, to submit to alternative modes
of dispute resolution, and to enter into stipulations or admissions of facts and of documents.

Sec. 5. Effect of failure to appear. – The failure of the plaintiff to appear when so required
pursuant to the next preceding section shall be cause for the dismissal of the action. The
dismissal shall be with prejudice, unless otherwise ordered by the court. A similar failure on the
defendant shall be cause to allow the plaintiff to present his evidence ex parte and the court to
render judgment on the basis thereof.

Consequently, it was no error for the trial court to allow private respondents to present their
evidence ex parte when petitioner and her counsel failed to appear for the scheduled pre-trial
conference.

Second, "a common carrier is bound to carry the passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with a due regard for
all the circumstances."19

In a contract of carriage, it is presumed that the common carrier is at fault or is negligent when
a passenger dies or is injured. In fact, there is even no need for the court to make an express
finding of fault or negligence on the part of the common carrier. This statutory presumption
may only be overcome by evidence that the carrier exercised extraordinary diligence.20

In the case at bar, petitioner, as common carrier, failed to establish sufficient evidence to rebut
the presumption of negligence. The findings of the trial court, as affirmed by the Court of
Appeals, showed that the accident which led to the death of Sherly Moneño was caused by the
reckless speed and gross negligence of petitioner’s driver who demonstrated no regard for the
safety of his passengers.21 It was thus correct to hold petitioner guilty of breach of the contract
of carriage. WHEREFORE, this petition is hereby DISMISSED. Costs against petitioner. SO
ORDERED.
 G.R. No. 149019 August 15, 2006

DELSAN TRANSPORT LINES, INC., Petitioner,

vs.
AMERICAN HOME ASSURANCE CORPORATION, Respondent.

By this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Delsan
Transport Lines, Inc. (Delsan hereafter) assails and seeks to set aside the Decision, 1 dated July
16, 2001, of the Court of Appeals (CA) in CA-G.R. CV No. 40951 affirming an earlier decision of
the Regional Trial Court (RTC) of Manila, Branch IX, in two separate complaints for damages
docketed as Civil Case No. 85-29357 and Civil Case No. 85-30559.

The facts: Delsan is a domestic corporation which owns and operates the vessel MT Larusan. On
the other hand, respondent American Home Assurance Corporation (AHAC for brevity) is a
foreign insurance company duly licensed to do business in the Philippines through its agent, the
American-International Underwriters, Inc. (Phils.). It is engaged, among others, in insuring
cargoes for transportation within the Philippines.

On August 5, 1984, Delsan received on board MT Larusan a shipment consisting of 1,986.627 k/l
Automotive Diesel Oil (diesel oil) at the Bataan Refinery Corporation for transportation and
delivery to the bulk depot in Bacolod City of Caltex Phils., Inc. (Caltex), pursuant to a Contract of
Afreightment. The shipment was insured by respondent AHAC against all risks under Inland
Floater Policy No. AH-IF64-1011549P and Marine Risk Note No. 34-5093-6.

On August 7, 1984, the shipment arrived in Bacolod City. Immediately thereafter, unloading
operations commenced. The discharging of the diesel oil started at about 1:30 PM of the same
day. However, at about 10:30 PM, the discharging had to be stopped on account of the
discovery that the port bow mooring of the vessel was intentionally cut or stolen by unknown
persons. Because there was nothing holding it, the vessel drifted westward, dragged and
stretched the flexible rubber hose attached to the riser, broke the elbow into pieces, severed
completely the rubber hose connected to the tanker from the main delivery line at sea bed level
and ultimately caused the diesel oil to spill into the sea. To avoid further spillage, the vessel’s
crew tried water flushing to clear the line of the diesel oil but to no avail. In the meantime, the
shore tender, who was waiting for the completion of the water flushing, was surprised when the
tanker signaled a "red light" which meant stop pumping. Unaware of what happened, the shore
tender, thinking that the vessel would, at any time, resume pumping, did not shut the storage
tank gate valve. As all the gate valves remained open, the diesel oil that was earlier discharged
from the vessel into the shore tank backflowed. Due to non-availability of a pump boat, the
vessel could not send somebody ashore to inform the people at the depot about what
happened. After almost an hour, a gauger and an assistant surveyor from the Caltex’s Bulk
Depot Office boarded the vessel. It was only then that they found out what had happened.
Thereafter, the duo immediately went ashore to see to it that the shore tank gate valve was
closed. The loss of diesel oil due to spillage was placed at 113.788 k/l while some 435,081 k/l
thereof backflowed from the shore tank.

As a result of spillage and backflow of diesel oil, Caltex sought recovery of the loss from Delsan,
but the latter refused to pay. As insurer, AHAC paid Caltex the sum of P479,262.57 for spillage,
pursuant to Marine Risk Note No. 34-5093-6, and P1,939,575.37 for backflow of the diesel oil
pursuant to Inland Floater Policy No. AH-1F64-1011549P.

On February 19, 1985, AHAC, as Caltex’s subrogee, instituted Civil Case No. 85-29357 against
Delsan before the Manila RTC, Branch 9, for loss caused by the spillage. It likewise prayed that it
be indemnified for damages suffered in the amount of P652,432.57 plus legal interest thereon.

Also, on May 5, 1985, in the Manila RTC, Branch 31, AHAC instituted Civil Case No. 85-30559
against Delsan for the loss caused by the backflow. It likewise prayed that it be awarded the
amount of P1,939,575.37 for damages and reasonable attorney’s fees. As counterclaim in both
cases, AHAC prayed for attorney’s fees in the amount of P200,000.00 and P500.00 for every
court appearance.

Since the cause of action in both cases arose out of the same incident and involved the same
issues, the two were consolidated and assigned to Branch 9 of the court.

On August 31, 1989, the trial court rendered its decision 2 in favor of AHAC holding Delsan liable
for the loss of the cargo for its negligence in its duty as a common carrier. Dispositively, the
decision reads:

WHEREFORE, judgment is hereby rendered:

A. In Civil Case No. 85-30559: (1) Ordering the defendant (petitioner Delsan) to pay plaintiff
(respondent AHAC) the sum of P1,939,575.37 with interest thereon at the legal rate from
November 21, 1984 until fully paid and satisfied; and (2) Ordering defendant to pay plaintiff
the sum of P10,000.00 as and for attorney’s fees.

For lack of merit, the counterclaim is hereby dismissed.

B. In Civil Case No. 85-29357: (1) Ordering defendant to pay plaintiff the sum of P479,262.57
with interest thereon at the legal rate from February 6, 1985 until fully paid and satisfied; (2)
Ordering defendant to pay plaintiff the sum of P5,000.00 as and for attorney’s fees. For
lack of merit, the counterclaim is hereby dismissed. Costs against the defendant. SO
ORDERED.

In time, Delsan appealed to the CA whereat its recourse was docketed as CA-G.R. CV No. 40951.

In the herein challenged decision, 3 the CA affirmed the findings of the trial court. In so ruling,
the CA declared that Delsan failed to exercise the extraordinary diligence of a good father of a
family in the handling of its cargo. Applying Article 1736 4 of the Civil Code, the CA ruled that
since the discharging of the diesel oil into Caltex bulk depot had not been completed at the time
the losses occurred, there was no reason to imply that there was actual delivery of the cargo to
Caltex, the consignee. We quote the fallo of the CA decision:

WHEREFORE, premises considered, the appealed Decision of the Regional Trial Court of Manila,
Branch 09 in Civil Case Nos. 85-29357 and 85-30559 is hereby AFFIRMED with a modification
that attorney’s fees awarded in Civil Case Nos. 85-29357 and 85-30559 are hereby DELETED.

Delsan is now before the Court raising substantially the same issues proffered before the CA.
Principally, Delsan insists that the CA committed reversible error in ruling that Article 1734 of
the Civil Code cannot exculpate it from liability for the loss of the subject cargo and in not
applying the rule on contributory negligence against Caltex, the shipper-owner of the cargo,
and in not taking into consideration the fact that the loss due to backflow occurred when the
diesel oil was already completely delivered to Caltex.

We are not persuaded.

In resolving this appeal, the Court reiterates the oft-stated doctrine that factual findings of the
CA, affirmatory of those of the trial court, are binding on the Court unless there is a clear
showing that such findings are tainted with arbitrariness, capriciousness or palpable error. 5

Delsan would have the Court absolve it from liability for the loss of its cargo on two grounds.
First, the loss through spillage was partly due to the contributory negligence of Caltex; and
Second, the loss through backflow should not be borne by Delsan because it was already
delivered to Caltex’s shore tank.

Common carriers are bound to observe extraordinary diligence in the vigilance over the goods
transported by them. They are presumed to have been at fault or to have acted negligently if
the goods are lost, destroyed or deteriorated. 6 To overcome the presumption of negligence in
case of loss, destruction or deterioration of the goods, the common carrier must prove that it
exercised extraordinary diligence. There are, however, exceptions to this rule. Article 1734 of the
Civil Code enumerates the instances when the presumption of negligence does not attach:

Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the
goods, unless the same is due to any of the following causes only:

1) Flood storm, earthquake, lightning, or other natural disaster or calamity;

2) Act of the public enemy in war, whether international or civil;

3) Act or omission of the shipper or owner of the goods;

4) The character of the goods or defects in the packing or in the containers;

5) Order or act of competent public authority.

Both the trial court and the CA uniformly ruled that Delsan failed to prove its claim that there
was a contributory negligence on the part of the owner of the goods – Caltex. We see no reason
to depart therefrom. As aptly pointed out by the CA, it had been established that the proximate
cause of the spillage and backflow of the diesel oil was due to the severance of the port bow
mooring line of the vessel and the failure of the shore tender to close the storage tank gate
valve even as a check on the drain cock showed that there was still a product on the pipeline. To
the two courts below, the actuation of the gauger and the escort surveyor, both personnel from
the Caltex Bulk Depot, negates the allegation that Caltex was remiss in its duties. As we see it,
the crew of the vessel should have promptly informed the shore tender that the port mooring
line was cut off. However, Delsan did not do so on the lame excuse that there was no available
banca. As it is, Delsan’s personnel signaled a "red light" which was not a sufficient warning
because such signal only meant that the pumping of diesel oil had been finished. Neither did
the blowing of whistle suffice considering the distance of more than 2 kilometers between the
vessel and the Caltex Bulk Depot, aside from the fact that it was not the agreed signal. Had the
gauger and the escort surveyor from Caltex Bulk Depot not gone aboard the vessel to make
inquiries, the shore tender would have not known what really happened. The crew of the vessel
should have exerted utmost effort to immediately inform the shore tender that the port bow
mooring line was severed.

To be sure, Delsan, as the owner of the vessel, was obliged to prove that the loss was caused by
one of the excepted causes if it were to seek exemption from responsibility. 7 Unfortunately, it
miserably failed to discharge this burden by the required quantum of proof.

Delsan’s argument that it should not be held liable for the loss of diesel oil due to backflow
because the same had already been actually and legally delivered to Caltex at the time it
entered the shore tank holds no water. It had been settled that the subject cargo was still in the
custody of Delsan because the discharging thereof has not yet been finished when the backflow
occurred. Since the discharging of the cargo into the depot has not yet been completed at the
time of the spillage when the backflow occurred, there is no reason to imply that there was
actual delivery of the cargo to the consignee. Delsan is straining the issue by insisting that when
the diesel oil entered into the tank of Caltex on shore, there was legally, at that moment, a
complete delivery thereof to Caltex. To be sure, the extraordinary responsibility of common
carrier lasts from the time the goods are unconditionally placed in the possession of, and
received by, the carrier for transportation until the same are delivered, actually or constructively,
by the carrier to the consignee, or to a person who has the right to receive them. 8 The
discharging of oil products to Caltex Bulk Depot has not yet been finished, Delsan still has the
duty to guard and to preserve the cargo. The carrier still has in it the responsibility to guard and
preserve the goods, a duty incident to its having the goods transported.

To recapitulate, common carriers, from the nature of their business and for reasons of public
policy, are bound to observe extraordinary diligence in vigilance over the goods and for the
safety of the passengers transported by them, according to all the circumstances of each case. 9
The mere proof of delivery of goods in good order to the carrier, and their arrival in the place of
destination in bad order, make out a prima facie case against the carrier, so that if no
explanation is given as to how the injury occurred, the carrier must be held responsible. It is
incumbent upon the carrier to prove that the loss was due to accident or some other
circumstances inconsistent with its liability.10

All told, Delsan, being a common carrier, should have exercised extraordinary diligence in the
performance of its duties. Consequently, it is obliged to prove that the damage to its cargo was
caused by one of the excepted causes if it were to seek exemption from responsibility. 11 Having
failed to do so, Delsan must bear the consequences.

WHEREFORE, petition is DENIED and the assailed decision of the CA is AFFIRMED in toto.

Cost against petitioner.

SO ORDERED.
 G.R. No. 151890 June 20, 2006

PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner,

vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent.

G.R. No. 151991 June 20, 2006

TRANS-ASIA SHIPPING LINES, INC., petitioner,

vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.

This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner
Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia
Shipping Lines, Inc. (TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated 6
November 2001 of the Court of Appeals in CA G.R. CV No. 68278, which reversed the Judgment2
dated 6 June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City in Civil Case No.
CEB-20709. The 29 January 2002 Resolution3 of the Court of Appeals, denying PRUDENTIAL’s
Motion for Reconsideration and TRANS-ASIA’s Partial Motion for Reconsideration of the 6
November 2001 Decision, is likewise sought to be annulled and set aside.

The material antecedents as found by the court a quo and adopted by the appellate court are as
follows:

Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment
of premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and
machinery arising from perils, inter alia, of fire and explosion for the sum of P40 Million,
beginning [from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine
Policy No. MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the policy was in force,
a fire broke out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. On October
26, 1993 plaintiff [TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This
is evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved
its right to subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim
upon final survey and determination by average adjuster Richard Hogg International (Phil.) of
the damage sustained by reason of fire. An adjuster’s report on the fire in question was
submitted by Richard Hogg International together with the U-Marine Surveyor Report (Exhibits
"4" to "4-115").

On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust
receipt", a portion of which read (sic):

"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION
ONLY (P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable
only in the event and to the extent that any net recovery is made by Trans-Asia Shipping
Corporation, from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable occasioned by the 25 October 1993:
Fire on Board." (Exhibit "4")

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff’s claim (Exhibit "5").
The letter reads: "After a careful review and evaluation of your claim arising from the
above-captioned incident, it has been ascertained that you are in breach of policy conditions,
among them "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED". Accordingly, we
regret to advise that your claim is not compensable and hereby DENIED."

This was followed by defendant’s letter dated 21 July 1997 requesting the return or payment of
the P3,000,000.00 within a period of ten (10) days from receipt of the letter (Exhibit "6").4

Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of
Money against PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709,
wherein TRANS-ASIA sought the amount of P8,395,072.26 from PRUDENTIAL, alleging that
the same represents the balance of the indemnity due upon the insurance policy in the total
amount of P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per annum citing
Section 2436 of Presidential Decreee No. 1460, otherwise known as the "Insurance Code," as
amended.

In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed
the defense that TRANS-ASIA breached insurance policy conditions, in particular:
"WARRANTED VESSEL CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged
that it acted as facts and law require and incurred no liability to TRANS-ASIA; that TRANS-ASIA
has no cause of action; and, that its claim has been effectively waived and/or abandoned, or it is
estopped from pursuing the same. By way of a counterclaim, PRUDENTIAL sought a refund of
P3,000,000.00, which it allegedly advanced to TRANS-ASIA by way of a loan without interest
and without prejudice to the final evaluation of the claim, including the amounts of P500,000.00,
for survey fees and P200,000.00, representing attorney’s fees.

The Ruling of the Trial Court

On 6 June 2000, the court a quo rendered Judgment8 finding for (therein defendant)
PRUDENTIAL. It ruled that a determination of the parties’ liabilities hinged on whether
TRANS-ASIA violated and breached the policy conditions on WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED. It interpreted the provision to mean that TRANS-ASIA is required to
maintain the vessel at a certain class at all times pertinent during the life of the policy.
According to the court a quo, TRANS-ASIA failed to prove compliance of the terms of the
warranty, the violation thereof entitled PRUDENTIAL, the insured party, to rescind the
contract.9

Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that the
concealment made by TRANS-ASIA that the vessel was not adequately maintained to preserve
its class was a material concealment sufficient to avoid the policy and, thus, entitled the injured
party to rescind the contract. The court a quo found merit in PRUDENTIAL’s contention that
there was nothing in the adjustment of the particular average submitted by the adjuster that
would show that TRANS-ASIA was not in breach of the policy. Ruling on the denominated loan
and trust receipt, the court a quo said that in substance and in form, the same is a receipt for a
loan. It held that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as advance
payment, it should have so clearly stated as such.

The court a quo did not award PRUDENTIAL’s claim for P500,000.00, representing expert
survey fees on the ground of lack of sufficient basis in support thereof. Neither did it award
attorney’s fees on the rationalization that the instant case does not fall under the exceptions
stated in Article 220811 of the Civil Code. However, the court a quo granted PRUDENTIAL’s
counterclaim stating that there is factual and legal basis for TRANS-ASIA to return the amount
of P3,000,000.00 by way of loan without interest.

The decretal portion of the Judgment of the RTC reads: WHEREFORE, judgment is hereby
rendered DISMISSING the complaint for its failure to prove a cause of action.

On defendant’s counterclaim, plaintiff is directed to return the sum of P3,000,000.00

representing the loan extended to it by the defendant, within a period of ten (10) days from and
after this judgment shall have become final and executory.12

The Ruling of the Court of Appeals

On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001,
reversed the 6 June 2000 Judgment of the RTC.

On the issue of TRANS-ASIA’s alleged breach of warranty of the policy condition CLASSED AND
CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the
non-compensability of the loss had the burden of proof to show that TRANS-ASIA breached the
warranty, which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of
certification to the effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole
basis for reaching the conclusion that the warranty was breached. The Court of Appeals opined
that the lack of a certification does not necessarily mean that the warranty was breached by
TRANS-ASIA. Instead, the Court of Appeals considered PRUDENTIAL’s admission that at the
time the insurance contract was entered into between the parties, the vessel was properly
classed by Bureau Veritas, a classification society recognized by the industry. The Court of
Appeals similarly gave weight to the fact that it was the responsibility of Richards Hogg
International (Phils.) Inc., the average adjuster hired by PRUDENTIAL, to secure a copy of such
certification to support its conclusion that mere absence of a certification does not warrant
denial of TRANS-ASIA’s claim under the insurance policy.

In the same token, the Court of Appeals found the subject warranty allegedly breached by
TRANS-ASIA to be a rider which, while contained in the policy, was inserted by PRUDENTIAL
without the intervention of TRANS-ASIA. As such, it partakes of a nature of a contract
d’adhesion which should be construed against PRUDENTIAL, the party which drafted the
contract. Likewise, according to the Court of Appeals, PRUDENTIAL’s renewal of the insurance
policy from noon of 1 July 1994 to noon of 1 July 1995, and then again, until noon of 1 July 1996
must be deemed a waiver by PRUDENTIAL of any breach of warranty committed by
TRANS-ASIA.

Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the
transaction between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan.
The Court of Appeals concluded that TRANS-ASIA has no obligation to pay back the amount of
P3,000.000.00 to PRUDENTIAL based on its finding that the aforesaid amount was
PRUDENTIAL’s partial payment to TRANS-ASIA’s claim under the policy. Finally, the Court of
Appeals denied TRANS-ASIA’s prayer for attorney’s fees, but held TRANS-ASIA entitled to
double interest on the policy for the duration of the delay of payment of the unpaid balance,
citing Section 24413 of the Insurance Code.

Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:

WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is
ALLOWED and the Judgment appealed from REVERSED. The P3,000,000.00 initially paid by
appellee Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and covered by a
"Loan and Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the loss
suffered by appellant and covered by Marine Policy No. MH93/1363 issued by appellee. Further,
appellee is hereby ORDERED to pay appellant the additional amount of P8,395,072.26
representing the balance of the loss suffered by the latter as recommended by the average
adjuster Richard Hogg International (Philippines) in its Report, with double interest starting
from the time Richard Hogg’s Survey Report was completed, or on 13 August 1996, until the
same is fully paid.

All other claims and counterclaims are hereby DISMISSED. All costs against appellee.14

Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for
Reconsideration and Partial Motion for Reconsideration thereon, respectively, which motions
were denied by the Court of Appeals in the Resolution dated 29 January 2002.

The Issues: Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as
G.R. No. 151890, relying on the following grounds, viz:

1. THE AWARD IS GROSSLY UNCONSCIONABLE.

2. THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY

TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE
INSURANCE POLICY.

3. THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD

THE BURDEN OF PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL
WARRANTY.

4. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE

EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A MERE RIDER.

5. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE
POLICY CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH OF
THE WARRANTY BY TRANS-ASIA.

6. THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT"
EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS CONSTITUTING
PARTIAL PAYMENT THEREOF.

7. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL

OF THE FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART OF
PRUDENTIAL OF ANY VIOLATION BY TRANS-ASIA OF THE WARRANTY.
8. THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING
THAT PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN ORDERING
PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13
AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for
Review docketed as G.R. No. 151991, raising the following grounds for the allowance of the
petition, to wit:

a. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEY’S FEES

TO PETITIONER TRANS-ASIA ON THE GROUND THAT SUCH CAN ONLY BE AWARDED IN
THE CASES ENUMERATED IN ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO
BAD FAITH ON THE PART OF RESPONDENT PRUDENTIAL IN DENYING HEREIN
PETITIONER TRANS-ASIA’S INSURANCE CLAIM.

b. THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001

SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL
INTEREST OF 12%, OR INTEREST AT THE RATE OF 24% PER ANNUM.16

In our Resolution of 2 December 2002, we granted TRANS-ASIA’s Motion for Consolidation17 of

G.R. Nos. 151890 and 151991;18 hence, the instant consolidated petitions.

In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA
arising from the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to
PRUDENTIAL arising from the transaction between the parties as evidenced by a document
denominated as "Loan and Trust Receipt," dated 29 May 1995; and (3) the amount of interest to
be imposed on the liability, if any, of either or both parties.

Ruling of the Court

Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not
questions of fact, may be raised.19 This rule may be disregarded only when the findings of fact
of the Court of Appeals are contrary to the findings and conclusions of the trial court, or are not
supported by the evidence on record.20 In the case at bar, we find an incongruence between the
findings of fact of the Court of Appeals and the court a quo, thus, in our determination of the
issues, we are constrained to assess the evidence adduced by the parties to make appropriate
findings of facts as are necessary.

I. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy condition
on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in the subject
insurance contract.

In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an

express and material warranty in the subject insurance contract, i.e., Marine Insurance Policy
No. MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that the insured
vessel, "M/V ASIA KOREA" is required to be CLASSED AND CLASS MAINTAINED. According to
PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of the fire, "M/V ASIA
KOREA" was in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery of
TRANS-ASIA under the policy, the violation of which entitled PRUDENTIAL to rescind the
contract under Sec. 7421 of the Insurance Code.

The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIAL’s
Senior Manager of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of
his testimony on direct examination is reproduced hereunder, viz:

ATTY. LIM

Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action
was taken?

A It was eventually determined that there was a breach of the policy condition, and basically
there is a breach of policy warranty condition and on that basis the claim was denied.

Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as
Exhibits "1", "1-A" series, please point to the warranty in the policy which you said was breached
or violated by the plaintiff which constituted your basis for denying the claim as you testified.

A Warranted Vessel Classed and Class Maintained.

ATTY. LIM

Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the
policy below the printed words: "Clauses, Endorsements, Special Conditions and Warranties,"
below this are several typewritten clauses and the witness pointed out in particular the clause
reading: "Warranted Vessel Classed and Class Maintained."

COURT

Q Will you explain that particular phrase?

AYes, a warranty is a condition that has to be complied with by the insured. When we say a class
warranty, it must be entered in the classification society.

COURT

Slowly.

WITNESS

(continued)

A A classification society is an organization which sets certain standards for a vessel to maintain
in order to maintain their membership in the classification society. So, if they failed to meet that
standard, they are considered not members of that class, and thus breaching the warranty, that
requires them to maintain membership or to maintain their class on that classification society.
And it is not sufficient that the member of this classification society at the time of a loss, their
membership must be continuous for the whole length of the policy such that during the
effectivity of the policy, their classification is suspended, and then thereafter, they get
reinstated, that again still a breach of the warranty that they maintained their class (sic). Our
maintaining team membership in the classification society thereby maintaining the standards
of the vessel (sic).

ATTY. LIM

Q Can you mention some classification societies that you know?

A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification
Society, The Philippine Registration of Ships Society, China Classification, NKK and Company
Classification Society, and many others, we have among others, there are over 20 worldwide. 22

At the outset, it must be emphasized that the party which alleges a fact as a matter of defense
has the burden of proving it. PRUDENTIAL, as the party which asserted the claim that
TRANS-ASIA breached the warranty in the policy, has the burden of evidence to establish the
same. Hence, on the part of PRUDENTIAL lies the initiative to show proof in support of its
defense; otherwise, failing to establish the same, it remains self-serving. Clearly, if no evidence
on the alleged breach of TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA
would be successful in claiming on the policy. It follows that PRUDENTIAL bears the burden of
evidence to establish the fact of breach.

In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof
to show proof of loss, and the coverage thereof, in the subject insurance policy. However, in the
course of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or
the burden of evidence shifts to defendant to controvert plaintiff’s prima facie case, otherwise,
a verdict must be returned in favor of plaintiff.23 TRANS-ASIA was able to establish proof of loss
and the coverage of the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of
evidence shifted to PRUDENTIAL to counter TRANS-ASIA’s case, and to prove its special and
affirmative defense that TRANS-ASIA was in violation of the particular condition on CLASSED
AND CLASS MAINTAINED.

We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in
discharging the burden of evidence that TRANS-ASIA breached the subject policy condition on
CLASSED AND CLASS MAINTAINED.

Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio
Fernandez, made a categorical admission that at the time of the procurement of the insurance
contract in July 1993, TRANS-ASIA’s vessel, "M/V Asia Korea" was properly classed by Bureau
Veritas, thus:

Q Kindly examine the records particularly the policy, please tell us if you know whether M/V
Asia Korea was classed at the time (sic) policy was procured perthe (sic) insurance was procured
that Exhibit "1" on 1st July 1993 (sic).

WITNESS

A I recall that they were classed.

ATTY. LIM

Q With what classification society?

A I believe with Bureau Veritas.24

As found by the Court of Appeals and as supported by the records, Bureau Veritas is a
classification society recognized in the marine industry. As it is undisputed that TRANS-ASIA
was properly classed at the time the contract of insurance was entered into, thus, it becomes
incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA as being
properly CLASSED by Bureau Veritas had shifted in violation of the warranty. Unfortunately,
PRUDENTIAL failed to support the allegation.

We are in accord with the ruling of the Court of Appeals that the lack of a certification in
PRUDENTIAL’s records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED AND
CLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the warranty contained in the policy. With more
reason must we sustain the findings of the Court of Appeals on the ground that as admitted by
PRUDENTIAL, it was likewise the responsibility of the average adjuster, Richards Hogg
International (Phils.), Inc., to secure a copy of such certification, and the alleged breach of
TRANS-ASIA cannot be gleaned from the average adjuster’s survey report, or adjustment of
particular average per "M/V Asia Korea" of the 25 October 1993 fire on board.

We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that,
"the violation of a material warranty, or other material provision of a policy on the part of either
party thereto, entitles the other to rescind." It is generally accepted that "[a] warranty is a
statement or promise set forth in the policy, or by reference incorporated therein, the untruth
or non-fulfillment of which in any respect, and without reference to whether the insurer was in
fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the
insurer."25However, it is similarly indubitable that for the breach of a warranty to avoid a policy,
the same must be duly shown by the party alleging the same. We cannot sustain an allegation
that is unfounded. Consequently, PRUDENTIAL, not having shown that TRANS-ASIA breached
the warranty condition, CLASSED AND CLASS MAINTAINED, it remains that TRANS-ASIA must
be allowed to recover its rightful claims on the policy.

B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same.

The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA
breached the warranty provision on CLASSED AND CLASS MAINTAINED, underscored that
PRUDENTIAL can be deemed to have made a valid waiver of TRANS-ASIA’s breach of warranty
as alleged, ratiocinating, thus:

Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2)
consecutive years, from noon of 01 July 1994 to noon of 01 July 1995, and then again until noon
of 01 July 1996. This renewal is deemed a waiver of any breach of warranty.26

PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal
policies are deemed a waiver of TRANS-ASIA’s alleged breach, averring herein that the
subsequent policies, designated as MH94/1595 and MH95/1788 show that they were issued only
on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a request to TRANS-ASIA
that it be furnished a copy of the certification specifying that the insured vessel "M/V Asia
Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL posits that it came to know of
the breach by TRANS-ASIA of the subject warranty clause only on 21 April 1997. On even date,
PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that their claim is not
compensable. In fine, PRUDENTIAL would have this Court believe that the issuance of the
renewal policies cannot be a waiver because they were issued without knowledge of the alleged
breach of warranty committed by TRANS-ASIA.27

We are not impressed. We do not find that the Court of Appeals was in error when it held that
PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive years after the
loss covered by Policy No. MH93/1363, was considered to have waived TRANS-ASIA’s breach of
the subject warranty, if any. Breach of a warranty or of a condition renders the contract
defeasible at the option of the insurer; but if he so elects, he may waive his privilege and power
to rescind by the mere expression of an intention so to do. In that event his liability under the
policy continues as before.28 There can be no clearer intention of the waiver of the alleged
breach than the renewal of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in
MH94/1595 and MH95/1788, issued in the years 1994 and 1995, respectively.

To our mind, the argument is made even more credulous by PRUDENTIAL’s lack of proof to
support its allegation that the renewals of the policies were taken only after a request was made
to TRANS-ASIA to furnish them a copy of the certificate attesting that "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED. Notwithstanding PRUDENTIAL’s claim that no
certification was issued to that effect, it renewed the policy, thereby, evidencing an intention to
waive TRANS-ASIA’s alleged breach. Clearly, by granting the renewal policies twice and
successively after the loss, the intent was to benefit the insured, TRANS-ASIA, as well as to
waive compliance of the warranty.

The foregoing finding renders a determination of whether the subject warranty is a rider, moot,
as raised by the PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively
alter the result for the reasons that: (1) PRUDENTIAL was not able to discharge the burden of
evidence to show that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo
the commission of a breach by TRANS-ASIA, the same was shown to have been waived by
PRUDENTIAL.

II. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction
between the parties evidenced by a document denominated as "Loan and Trust Receipt," dated
29 May 1995 constituted partial payment on the policy.

It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00.

The same was evidenced by a transaction receipt denominated as a "Loan and Trust Receipt,"
dated 29 May 1995, reproduced hereunder:

LOAN AND TRUST RECEIPT

Claim File No. MH-93-025 May 29, 1995

P3,000,000.00
Check No. PCIB066755

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE
MILLION ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353,
repayable only in the event and to the extent that any net recovery is made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993:
Fire on Board.

As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND

ASSURANCE INC. whatever recovery we may make and deliver to it all documents necessary to
prove our interest in said property. We also hereby agree to promptly prosecute suit against
such persons, corporation or corporations through whose negligence the aforesaid loss was
caused or who may otherwise be responsible therefore, with all due diligence, in our own name,
but at the expense of and under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC.

TRANS-ASIA SHIPPING CORPORATION29

PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties
evidenced a loan of P3,000,000.00 which it granted to TRANS-ASIA, and not an advance
payment on the policy or a partial payment for the loss. It further submits that it is a customary
practice for insurance companies in this country to extend loans gratuitously as part of good
business dealing with their assured, in order to afford their assured the chance to continue
business without embarrassment while awaiting outcome of the settlement of their claims.30
According to PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate to it whatever
rights and/or actions TRANS-ASIA may have against third persons, and it cannot by no means
be taken that by virtue thereof, PRUDENTIAL was granted irrevocable power of attorney by
TRANS-ASIA, as the sole power to prosecute lies solely with the latter.

The Court of Appeals held that the real character of the transaction between the parties as
evidenced by the "Loan and Trust Receipt" is that of an advance payment by PRUDENTIAL of
TRANS-ASIA’s claim on the insurance, thus:

The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law
Act No. 2427 of the Philippine Legislature during the American Regime. The Insurance Act was
lifted verbatim from the law of California, except Chapter V thereof, which was taken largely
from the insurance law of New York. Therefore, ruling case law in that jurisdiction is to Us
persuasive in interpreting provisions of our own Insurance Code. In addition, the application of
the adopted statute should correspond in fundamental points with the application in its country
of origin x x x.

Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan
Receipt that the money was intended as a loan does not detract from its real character as
payment of claim, thus:

"The receipt of money by the insured employers from a surety company for losses on account of
forgery of drafts by an employee where no provision or repayment of the money was made
except upon condition that it be recovered from other parties and neither interest nor security
for the asserted debts was provided for, the money constituted the payment of a liability and
not a mere loan, notwithstanding recitals in the written receipt that the money was intended as
a mere loan."

What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that
appellant is obligated to hand over to appellee "whatever recovery (Trans Asia) may make and
deliver to (Prudential) all documents necessary to prove its interest in the said property." For all
intents and purposes therefore, the money receipted is payment under the policy, with
Prudential having the right of subrogation to whatever net recovery Trans-Asia may obtain from
third parties resulting from the fire. In the law on insurance, subrogation is an equitable
assignment to the insurer of all remedies which the insured may have against third person
whose negligence or wrongful act caused the loss covered by the insurance policy, which is
created as the legal effect of payment by the insurer as an assignee in equity. The loss in the
first instance is that of the insured but after reimbursement or compensation, it becomes the
loss of the insurer. It has been referred to as the doctrine of substitution and rests on the
principle that substantial justice should be attained regardless of form, that is, its basis is the
doing of complete, essential, and perfect justice between all the parties without regard to
form.31

We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences
that the real nature of the transaction between the parties was that the amount of
P3,000,000.00 was not intended as a loan whereby TRANS-ASIA is obligated to pay
PRUDENTIAL, but rather, the same was a partial payment or an advance on the policy of the
claims due to TRANS-ASIA.

First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by

PRUDENTIAL, subrogating the former to the extent of "any net recovery made by TRANS ASIA
SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on
account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993:
Fire on Board."32

Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to
"promptly prosecute suit against such persons, corporation or corporations through whose
negligence the aforesaid loss was caused or who may otherwise be responsible therefore, with
all due diligence" in its name, the prosecution of the claims against such third persons are to be
carried on "at the expense of and under the exclusive direction and control of PRUDENTIAL
GUARANTEE AND ASSURANCE INC."33 The clear import of the phrase "at the expense of and
under the exclusive direction and control" as used in the "Loan and Trust Receipt" grants solely
to PRUDENTIAL the power to prosecute, even as the same is carried in the name of
TRANS-ASIA, thereby making TRANS-ASIA merely an agent of PRUDENTIAL, the principal, in
the prosecution of the suit against parties who may have occasioned the loss.

Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay
PRUDENTIAL is highly speculative and contingent, i.e., only in the event and to the extent that
any net recovery is made by TRANS-ASIA from any person on account of loss occasioned by the
fire of 25 October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such that,
if no recovery from third parties is made, PRUDENTIAL cannot be repaid the amount. Verily, we
do not think that this is constitutive of a loan.34 The liberality in the tenor of the "Loan and Trust
Receipt" in favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was
a form of an advance payment on TRANS-ASIA’s claim on MH93/1353.

III. A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing

the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363.

Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid
claims covered by Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.

B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorney’s

fees equivalent to 10% of P8,395,072.26.

The Court of Appeals denied the grant of attorney’s fees. It held that attorney’s fees cannot be
awarded absent a showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIA’s
claim, notwithstanding that the rejection was erroneous. According to the Court of Appeals,
attorney’s fees can be awarded only in the cases enumerated in Article 2208 of the Civil Code
which finds no application in the instant case.

We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorney’s fees and
other expenses incurred by the insured after a finding by the Insurance Commissioner or the
Court, as the case may be, of an unreasonable denial or withholding of the payment of the
claims due. Moreover, the law imposes an interest of twice the ceiling prescribed by the
Monetary Board on the amount of the claim due the insured from the date following the time
prescribed in Section 24235 or in Section 243,36 as the case may be, until the claim is fully
satisfied. Finally, Section 244 considers the failure to pay the claims within the time prescribed
in Sections 242 or 243, when applicable, as prima facie evidence of unreasonable delay in
payment.

To the mind of this Court, Section 244 does not require a showing of bad faith in order that
attorney’s fees be granted. As earlier stated, under Section 244, a prima facie evidence of
unreasonable delay in payment of the claim is created by failure of the insurer to pay the claim
within the time fixed in both Sections 242 and 243 of the Insurance Code. As established in
Section 244, by reason of the delay and the consequent filing of the suit by the insured, the
insurers shall be adjudged to pay damages which shall consist of attorney’s fees and other
expenses incurred by the insured.37

Section 244 reads: In case of any litigation for the enforcement of any policy or contract of
insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a
finding as to whether the payment of the claim of the insured has been unreasonably denied or
withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages
which shall consist of attorney’s fees and other expenses incurred by the insured person by
reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling
prescribed by the Monetary Board of the amount of the claim due the insured, from the date
following the time prescribed in section two hundred forty-two or in section two hundred
forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay
any such claim within the time prescribed in said sections shall be considered prima facie
evidence of unreasonable delay in payment.

Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay
or refusal in the payment of the insurance claims.

In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records
show that there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid
balance of P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the occurrence of
the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the
adjuster, Richards Hogg International (Phils.), Inc., completed its survey report recommending
the amount of P11,395,072.26 as the total indemnity due to TRANS-ASIA.38 On 21 April 1997,
PRUDENTIAL, in a letter39 addressed to TRANS-ASIA denied the latter’s claim for the amount
of P8,395,072.26 representing the balance of the total indemnity. On 21 July 1997,
PRUDENTIAL sent a second letter40 to TRANS-ASIA seeking a return of the amount of
P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of
money against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing the
balance of the proceeds of the insurance claim.

As can be gleaned from the foregoing, there was an unreasonable delay on the part of
PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latter’s right to the insurance claims,
from the time proof of loss was shown and the ascertainment of the loss was made by the
insurance adjuster. Evidently, PRUDENTIAL’s unreasonable delay in satisfying TRANS-ASIA’s
unpaid claims compelled the latter to file a suit for collection.

Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as
attorney’s fees to TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten
percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v. Court of Appeals,41
where a finding of an unreasonable delay under Section 244 of the Insurance Code was made by
this Court, we grant an award of attorney’s fees equivalent to ten percent (10%) of the total
proceeds. We find no reason to deviate from this judicial precedent in the case at bar.

C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest in accordance with Section 244 of the Insurance Code.

Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling
prescribed by the Monetary Board due the insured, from the date following the time prescribed
in Section 242 or in Section 243, as the case may be, until the claim is fully satisfied. In the case
at bar, we find Section 243 to be applicable as what is involved herein is a marine insurance,
clearly, a policy other than life insurance.

Section 243 is hereunder reproduced:

SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any
policy other than life insurance policy, shall be paid within thirty days after proof of loss is
received by the insurer and ascertainment of the loss or damage is made either by agreement
between the insured and the insurer or by arbitration; but if such ascertainment is not had or
made within sixty days after such receipt by the insurer of the proof of loss, then the loss or
damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or
damage within the time prescribed herein will entitle the assured to collect interest on the
proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by
the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim
is fraudulent.

As specified, the assured is entitled to interest on the proceeds for the duration of the delay at
the rate of twice the ceiling prescribed by the Monetary Board except when the failure or
refusal of the insurer to pay was founded on the ground that the claim is fraudulent.

D. The term "double interest" as used in the Decision of the Court of Appeals must be
interpreted to mean 24% per annum.

PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of
TRANS-ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIAL’s stance that the
award is extortionate and grossly unsconscionable. In support thereto, PRUDENTIAL makes a
reference to TRANS-ASIA’s prayer in the Complaint filed with the court a quo wherein the latter
sought, "interest double the prevailing rate of interest of 21% per annum now obtaining in the
banking business or plus 42% per annum pursuant to Article 243 of the Insurance Code x x x."42

The contention fails to persuade. It is settled that an award of double interest is lawful and
justified under Sections 243 and 244 of the Insurance Code.43 In Finman General Assurance
Corporation v. Court of Appeals,44 this Court held that the payment of 24% interest per annum
is authorized by the Insurance Code.45 There is no gainsaying that the term "double interest" as
used in Sections 243 and 244 can only be interpreted to mean twice 12% per annum or 24% per
annum interest, thus:

The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve
per centum per annum (12%) as prescribed by the Monetary Board in C.B. Circular No. 416,
pursuant to P.D. No. 116, amending the Usury Law; so that when Sections 242, 243 and 244 of
the Insurance Code provide that the insurer shall be liable to pay interest "twice the ceiling
prescribed by the Monetary Board", it means twice 12% per annum or 24% per annum interest
on the proceeds of the insurance.46

E. The payment of double interest should be counted from 13 September 1996.

The Court of Appeals, in imposing double interest for the duration of the delay of the payment
of the unpaid balance due TRANS-ASIA, computed the same from 13 August 1996 until such
time when the amount is fully paid. Although not raised by the parties, we find the computation
of the duration of the delay made by the appellate court to be patently erroneous.

To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the
delay at the rate of twice the ceiling prescribed by the Monetary Board. Significantly, Section
243 mandates the payment of any loss or damage for which an insurer may be liable, under any
policy other than life insurance policy, within thirty days after proof of loss is received by the
insurer and ascertainment of the loss or damage is made either by agreement between the
insured and the insurer or by arbitration. It is clear that under Section 243, the insurer has until
the 30th day after proof of loss and ascertainment of the loss or damage to pay its liability
under the insurance, and only after such time can the insurer be held to be in delay, thereby
necessitating the imposition of double interest.

In the case at bar, it was not disputed that the survey report on the ascertainment of the loss
was completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996.
PRUDENTIAL had thirty days from 13 August 1996 within which to pay its liability to
TRANS-ASIA under the insurance policy, or until 13 September 1996. Therefore, the double
interest can begin to run from 13 September 1996 only.

IV. A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability
adjudged in section III herein, computed from the time of finality of judgment until the full
satisfaction thereof in conformity with this Court’s ruling in Eastern Shipping Lines, Inc. v. Court
of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals,47 inscribed the rule of thumb48 in
the application of interest to be imposed on obligations, regardless of their source. Eastern
emphasized beyond cavil that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, regardless of whether the obligation
involves a loan or forbearance of money, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance49 of
credit.

We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the
finality of judgment until the full satisfaction thereof must be imposed on the total amount of
liability adjudged to PRUDENTIAL. It is clear that the interim period from the finality of
judgment until the satisfaction of the same is deemed equivalent to a forbearance of credit,
hence, the imposition of the aforesaid interest.

WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No.
151991 is GRANTED, thus, we award the grant of attorney’s fees and make a clarification that
the term "double interest" as used in the 6 November 2001 Decision of the Court of Appeals in
CA GR CV No. 68278 should be construed to mean interest at the rate of 24% per annum, with a
further clarification, that the same should be computed from 13 September 1996 until fully paid.
The Decision and Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6
November 2001 and 29 January 2002, respectively, are, thus, MODIFIED in the following
manner, to wit:

1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26,

representing the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy
No. MH93/1363;

2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of

attorney’s fees equivalent to 10% of the amount of P8,395,072.26;

3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest at the rate of 24% per annum to be computed from 13 September
1996 until fully paid; and

4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability
adjudged as abovestated in paragraphs (1), (2), and (3) herein, computed from the time of
finality of judgment until the full satisfaction thereof.
 G.R. No. 146426 June 27, 2006

CARGOLIFT SHIPPING, INC.Petitioner,

vs.
L. ACUARIO MARKETING CORP. and SKYLAND BROKERAGE, INC., Respondents.

This is a petition for review on certiorari of the July 6, 2000 Decision1 of the Court of Appeals in
CA-G.R. CV No. 55664, which affirmed the judgment2 of the Regional Trial Court of Caloocan
City, Branch 121, in Civil Case No. C-16120 in so far as it found petitioner Cargolift Shipping, Inc.
("Cargolift") liable, as third-party defendant, for actual damages in the sum of P97,021.20, as
well as the November 28, 2000 Resolution3 denying the motion for reconsideration.

The antecedent facts of the case are as follows:

Sometime in March 1993, respondent L. Acuario Marketing Corp., ("Acuario") and respondent
Skyland Brokerage, Inc., ("Skyland") entered into a time charter agreement4 whereby Acuario
leased to Skyland its L. Acuario II barge for use by the latter in transporting electrical posts from
Manila to Limay, Bataan. At the same time, Skyland also entered into a separate contract5 with
petitioner Cargolift, for the latter’s tugboats to tow the aforesaid barge.

In accordance with the foregoing contracts, petitioner’s tugboat M/T Beejay left the Manila
South Harbor on April 1, 1993 with Acuario’s barge in tow. It reached the port of Limay, Bataan
on April 3, 1993, whereupon M/T Beejay disengaged and once again set sail for Manila.
Petitioner’s other tugboat, the M/T Count, remained in Bataan to secure the barge for
unloading.

Off-loading operations went underway until April 7, 1993, when operations were interrupted for
the next two days to give way to the observance of the lenten season. The unloading of the
cargo was concluded on April 12, 1993, by which time M/T Beejay had gone back to Bataan for
the return trip. The M/T Beejay and the barge returned to the port of Manila on April 13, 1993.

On the same day, the barge was brought to Acuario’s shipyard where it was allegedly
discovered by Acuario’s dry-docking officer, Guillermo Nacu, Jr., that the barge was listing due
to a leak in its hull. According to Nacu, he was informed by the skipper of the tugboat that the
damage was sustained in Bataan. To confirm the same, Nacu ordered an underwater survey of
the barge and prepared a damage report dated April 14, 1993. No representative of Skyland was
present during the inspection although it was furnished with a copy of the said report.

The barge was consequently dry-docked for repairs at the Western Shipyard from April 16 to
April 26, 1993. Acuario spent the total sum of P97,021.20 for the repairs.6

Pursuant to its contract with Skyland which provided that "(a)ny damage or loss on the barge
due to the fault or negligence of charterers shall be the responsibility of the (c)harterer or his
representative,"7 Acuario wrote Skyland seeking reimbursement of its repair costs, failing which,
it filed a complaint for damages against Skyland before the Regional Trial Court of Caloocan City,
where the case was docketed as Civil Case No. C-16120 and raffled to Branch 121.

Skyland, in turn, filed a third-party complaint8 against petitioner alleging that it was responsible
for the damage sustained by the barge.
According to Acuario and its witnesses, the weather in Bataan shifted drastically at dawn of
April 7, 1993 while the barge was docked at the Limay port eight meters away from the stone
wall. Due to strong winds and large waves, the barge repeatedly hit its hull on the wall, thus
prompting the barge patron to alert the tugboat captain of the M/T Count to tow the barge
farther out to sea. However, the tugboat failed to pull the barge to a safer distance due to
engine malfunction, thereby causing the barge to sustain a hole in its hull. Fortunately, no part
of the cargo was lost even if only half of it had been unloaded at that time.9

On the other hand, petitioner and Skyland denied that the barge had been damaged. One of its
witnesses, Salvador D. Ocampo, claimed that he was involved in all aspects of the operation and
that no accident of any sort was brought to his knowledge. He alleged that the barge patron
and tug master made no mention of any maritime casualty during the clearing of the vessels at
the Philippine Ports Authority in Limay, Bataan. The barge was in good condition and was not
damaged when it was turned over to Acuario on April 13, 1993.10

In due course, the trial court promulgated its decision dated June 10, 1996, the dispositive part
of which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant Skyland Brokerage to pay to the plaintiff L. Acuario Marketing
Corporation the cost of repairs of the barge L. Acuario II in the amount of P97,021.20 and to
seek reimbursement from the third-party defendant Cargolift Shipping;

2. Ordering the defendant to pay attorney’s fees in the amount of P24,255.30 and to seek
reimbursement thereof from the third-party defendant; and

3. Ordering the defendant to pay the costs of suit subject to reimbursement from the
third-party defendant.

The trial court gave credence to the testimonies of Acuario’s witnesses that the barge sustained
damage while it was being chartered by Skyland. It held that the positive testimonies of
Acuario’s witnesses, coupled with documentary evidence detailing the nature and extent of the
damage as well as the repairs done on the barge, should prevail over the bare denials of Skyland
and petitioner. It also noted that two of the latter’s three witnesses were not in Limay, Bataan
when the incident happened.

The trial court further held that Skyland was liable under its time charter agreement with
Acuario pursuant to Article 1159 of the Civil Code which states that "contracts have the force of
law between the contracting parties." Skyland must bear the consequences of the tugboat’s
incapacity to respond to the barge’s request for assistance because Acuario had no control in
the selection of the tugboats used by Skyland. But since the ultimate fault lies with petitioner,
justice demands that the latter reimburse Skyland for whatever it may be adjudged to pay
Acuario.12

Both Skyland and petitioner elevated the matter to the Court of Appeals which, on July 6, 2000,
rendered the assailed Decision affirming the trial court, but deleting the award of attorney’s
fees. Upon denial of its motion for reconsideration,13 petitioner brought the instant petition
raising the following issues:
I. WHETHER THE COURT OF APPEALS ERRED IN AFFIRMING THE FINDING OF THE TRIAL
COURT THAT L. ACUARIO II SUSTAINED DAMAGE AND THAT IT WAS SUSTAINED
DURING ITS CHARTER TO RESPONDENT SKYLAND.

II. ASSUMING THAT L. ACUARIO II SUFFERED DAMAGE, WHETHER THE COURT OF

APPEALS ERRED IN UPHOLDING THE TRIAL COURT DECISION HOLDING PETITIONER
LIABLE THEREFOR.14

The petition lacks merit.

On the first assigned error, petitioner is asking this Court to resolve factual issues that have
already been settled by the courts below. The question of whether the barge had been
damaged during its charter to Skyland is a factual matter, the determination of which may not
be generally disturbed on appeal. Questions of fact are not reviewable by this Court except
under certain exceptional circumstances.15 No such exceptional circumstance exists in the case
at bar.

On the contrary, the factual conclusions reached by the courts below are consistent with the
evidence on record. Acuario’s witnesses testified that strong winds and waves caused the barge
to bump into the walls of the pier where it was berthed for unloading. Petitioner’s tugboat failed
to tow it farther away due to engine breakdown, thus causing the barge to sustain a hole in its
hull. These testimonies were duly supported and corroborated by documentary evidence
detailing the damage and repairs done on the barge.16

On the other hand, petitioner and Skyland’s denial that there was inclement weather in the
early hours of April 7, 1993 and that the barge sustained no damage on this occasion were not
supported by evidence to overcome the positive allegations of Acuario’s witnesses who were
present at the place and time of the incident. The categorical declaration of Acuario’s witnesses
regarding the events which led to the damage on the barge shifted the burden of evidence on
petitioner and Skyland. They could have easily disproved Acuario’s claims by presenting
competent proof that there was no weather disturbance on that day or, by presenting the
testimony of individuals who have personal knowledge of the events which transpired.

Moreover, the inability of petitioner’s and Skyland’s witnesses to unequivocally declare that it
was still the M/T Count that secured the barge during the resumption of off-loading operations
casts suspicion on their credibility. As aptly observed by the trial court, such hesitation on the
part of its witnesses is indicative of uncertainty, if not a propensity to withhold information that
could be unfavorable to their cause.17 To our mind, therefore, the trial court rightly concluded
that petitioner’s M/T Count indeed encountered mechanical trouble, as asserted by Acuario. The
fact that petitioner did not categorically deny the allegation of mechanical trouble only serves
to strengthen the trial court’s conclusion.

Petitioner’s assertion that it is contrary to human experience for the barge to have made the
return trip to Manila if it sustained the alleged damage deserves short shrift. The trial court
found that the damage on the barge was not too extensive as to render it incapable of staying
afloat and being used in operation. Neither was it impossible for the barge’s cargo to remain
intact and undamaged during the weather disturbance. Apart from the fact that the cargo
which consisted of wooden electric poles are, by nature, not easily damaged by adverse
weather,18 part of it had already been unloaded when the unfortunate incident occurred.

Consequently, we find no cogent reason to disturb the lower courts’ finding that the barge
sustained a hole in its hull when petitioner’s tugboat failed to tow it to a safer distance as the
weather changed in the port of Limay. This Court is bound by the factual determinations of the
appellate court especially when these are supported by substantial evidence and merely affirm
those of the trial court,19 as in this case. There is no showing here that the inferences made by
the Court of Appeals were manifestly mistaken, or that the appealed judgment was based on a
misapprehension of facts, or that the appellate court overlooked certain relevant, undisputed
facts which, if properly considered, would justify a different conclusion.20 Thus, a reversal of the
factual findings in this case is unwarranted.

As for the second assigned error, petitioner asserts that it could not be held liable for the
damage sustained by Acuario’s barge because the latter sought to recover upon its contract
with Skyland, to which petitioner was not a party. Since it had no contractual relation with
Acuario, only Skyland should be held liable under the contract. Besides, Skyland contractually
assumed the risk that the tugboat might encounter engine trouble when it acknowledged in its
contract with petitioner that the latter’s vessels were in good order and in seaworthy condition.
At any rate, it was neither negligent in the performance of its obligation nor the proximate
cause of the damage.

We do not agree.

It was not Acuario that seeks to hold petitioner liable for the damage to the barge, as the former
in fact sued only Skyland pursuant to their charter agreement. It was Skyland that impleaded
petitioner as third-party defendant considering that Skyland was being held accountable for the
damage attributable to petitioner. In other words, petitioner was not sued under Skyland’s
charter agreement with Acuario, but pursuant to its separate undertaking with Skyland. Strictly
speaking, therefore, petitioner is not being held liable under any charter agreement with
Acuario.

Consequently, it is not correct for petitioner to assert that Acuario could not recover damages
from it due to lack of privity of contract between them. It is not Acuario that is seeking damages
from petitioner but Skyland, with whom it undoubtedly had a juridical tie. While Acuario could
hold Skyland liable under its charter agreement, Skyland in turn could enforce liability on
petitioner based on the latter’s obligation to Skyland. In other words, petitioner is being held
liable by Skyland and not by Acuario.

Thus, in the performance of its contractual obligation to Skyland, petitioner was required to
observe the due diligence of a good father of the family. This much was held in the old but still
relevant case of Baer Senior & Co.’s Successors v. La Compania Maritima21 where the Court
explained that a tug and its owners must observe ordinary diligence in the performance of its
obligation under a contract of towage. The negligence of the obligor in the performance of the
obligation renders him liable for damages for the resulting loss suffered by the obligee. Fault or
negligence of the obligor consists in his failure to exercise due care and prudence in the
performance of the obligation as the nature of the obligation so demands.22

In the case at bar, the exercise of ordinary prudence by petitioner means ensuring that its
tugboat is free of mechanical problems. While adverse weather has always been a real threat to
maritime commerce, the least that petitioner could have done was to ensure that the M/T
Count or any of its other tugboats would be able to secure the barge at all times during the
engagement. This is especially true when considered with the fact that Acuario’s barge was
wholly dependent upon petitioner’s tugboat for propulsion. The barge was not equipped with
any engine and needed a tugboat for maneuvering.23

Needless to say, if petitioner only subjected the M/T Count to a more rigid check-up or
inspection, the engine malfunction could have been discovered or avoided. The M/T Count was
exclusively controlled by petitioner and the latter had the duty to see to it that the tugboat was
in good running condition. There is simply no basis for petitioner’s assertion that Skyland
contractually assumed the risk of any engine trouble that the tugboat may encounter. Skyland
merely procured petitioner’s towing service but in no way assumed any such risk.

That petitioner’s negligence was the proximate cause of the damage to the barge cannot be
doubted. Had its tugboat been serviceable, the barge could have been moved away from the
stone wall with facility. It is too late in the day for petitioner to insist that the proximate cause of
the damage was the barge patron’s negligence in not objecting to the position of the barge by
the stone wall. Aside from the fact that the position of the barge is quite understandable since
off-loading operations were then still underway,24 the alleged negligence of the barge patron is
a matter that is also being raised for the first time before this Court.

Thus, the damage to the barge could have been avoided had it not been for the tugboat’s
inability to tow it away from the stone wall. Considering that a barge has no power of its own
and is totally defenseless against the ravages of the sea, it was incumbent upon petitioner to
see to it that it could secure the barge by providing a seaworthy tugboat. Petitioner’s failure to
do so did not only increase the risk that might have been reasonably anticipated during the
shipside operation but was the proximate cause of the damage.25 Hence, as correctly found by
the courts below, it should ultimately be held liable therefor.

WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals in
CA-G.R. CV No. 55664 dated July 6, 2000 and the Resolution dated November 28, 2000, finding
petitioner Cargolift Shipping, Inc. liable, as third-party defendant, for actual damages in the
sum of P97,021.20, are AFFIRMED.
 G.R. No. 146472 July 27, 2006

EASTERN SHIPPING LINES, INC., petitioner,

vs.
N.V. THE NETHERLANDS INSURANCE COMPANY, respondent.

Assailed via Petition for Review are the Decision dated September 7, 20001 and Resolution
dated December 8, 20002 of the Court of Appeals in CA-G.R. CV No. 44784, N.V. The Netherlands
Insurance Company v. Eastern Shipping Lines, Inc.

On July 4, 1985, Sunglobe International Corporation shipped five cases containing a total of
5,000 pieces of pre-sensitized printing plates from Yokohama, Japan on board the vessel M/S
Eastern Venus, owned and operated by herein petitioner Eastern Shipping Lines, Inc. The
shipment, covered by Bill of Lading No. YMA-14,3 was bound for Manila for delivery to the
consignee, Liwayway Publishing, Inc.

The shipment was insured for P398,118 by respondent N.V. Netherlands Insurance Company
under Marine Risk Insurance Note No. 21.01940.01−P.4

The shipment arrived in Manila on July 20, 19855 and was unloaded from the vessel to the
custody of arrastre operator Metro Port Services, Inc. (Metro Port) from July 21 to July 22, 1985.
Three of the five cases, Cases Nos. 1,2, and 4 were accepted by Metro Port in good order
condition on account of which two Good Order Cargo Receipts were accomplished and signed
by the representative of the vessel and that of Metroport.

As Cases Nos. 3 and 5 were found to be in bad order, Bad Order Cargo Receipt No. 10226 dated
July 21, 19856covering Case No. 3 and Bad Order Cargo Receipt No. 10227 dated July 22, 19857
covering Case No. 5 were accomplished and duly signed also by the representative of the vessel
and that of Metro Port.

On July 23, 1985, Metro Port issued two "Turn Over Survey of Bad Order Cargoes"8 which were
signed by a representative of the vessel and a representative of Metro Port covering Cases Nos.
3 and 5.

Before Cases Nos. 3 and 5 were formally turned over from the vessel to Metro Port or on July 23,
1985, a surveyor engaged by petitioner, R & R Industrial Surveyors, Co., Inc. (R & R Surveyors),
inspected the cargoes covering said cases, following which it issued on even date two
documents denominated as "BAD ORDER CARGO INSPECTEDON BOARD PRIOR TO
DISCHARGE/AFTER LEAVING SHIP'S TACKLE" which were signed by its representative and that
of Metro Port. In the first document covering Case No. 3, R & R Surveyors found its wooden case
to be "broken on sides," albeit the packages inside were "ok," while in the second document
covering Case No. 5, it found its wooden case to be "badly broken," but the packages inside
were "ok."

After the entire shipment was withdrawn from the pier and delivered to the consignee's
warehouse9 on July 26, 1985, the consignee engaged the services of another surveyor, Audemus
Adjustment Corporation, to inspect the shipment. The consignee was later to claim, by letter of
August 30, 1985 addressed to petitioner, damages "for total loss" in the amount of P41,065.88
sustained by Case No. 4.10 The letter read:
 Please be informed that as per survey report of Audemus Adjustment Corporation, two (2)
wooden cases out of the subject shipment arrived in bad order condition. [H]owever, from
damaged case No. 4, Fourteen (14) packages were torn on sides, contents partly exposed.
The entire 15 packages each containing 30 pieces printing plates are not usable for the
purpose intended, hence we are declaring our claim for total loss.

Per commercial invoice, packing list, certificate of weight and measurement, marine risk
note, B.O. turnover Nos. 58744 and 58755 [sic]11 and Bad Order Survey No. 31166 and B/L
No.YMA-14:

14 cartons each of 30 pieces = 420 pcs. "ALMAX"

Nega, AAN 621x915x.30mm @ US$3.62 = US$ 1,520.40

@ exchange rate P18.68= P28,401.07

Add: Proportionate share on:

Customs duty P89,007.00

Compensating tax 44,679.00

Import fee 250.00

Insurance Premium 4,522.98

Brokerage 3,078.73

Doc. Stamp 487.50

P142,025.21
$1,520.40 x P142,025 =
$17,050.00 12,664.81

Our Claim - - - - - - - - - - - P41,065.88

Petitioner denied the consignee's claim by letter of September 30, 198512 as the cargo claimed
to have been damaged was, per its records of discharge, intact and in good condition.

Meanwhile, respondent issued a check in favor of the consignee in the amount of P35,501.38
representing "full and final settlement of the marine cargo claim" covered by the Marine Risk
Insurance Note.13 The consignee thus issued to respondent a Letter of Subrogation ceding its
right to the refund of P35,501.38.14 Respondent failed to get petitioner to settle the said amount,
however, hence, it filed on July 11, 1986 a Complaint for sum of money15 before the RTC of
Makati, docketed as Civil Case No. 14309.

Resolving in the negative the issues of 1) whether Case No. 4 sustained damage while under the
custody and control of petitioner, and 2) whether petitioner is liable for the payment of the
amount of P31,501.38 claimed by respondent,16 the trial court, by Judgment dated October 15,
1993,17 dismissed respondent's complaint.

On appeal by respondent, the appellate court, by the assailed Decision of September 7, 2000,18
reversed the trial court's decision in light of the following observations:

In this case, there is no proof adduced to show that the carrier had indeed exercised the
foresight required by law. Instead, defendant Eastern sought to escape liability on the
defense that the damages attending the shipment occurred, or were discovered, when the
same were already discharged from the vessel and were already in the custody of the
consignee.

A review of the evidence presented shows, however, that contrary to the

defendant's[-herein petitioner's] claim, the two (2) cases of pre-sensitized plates were
damaged while they were under the responsibility of the carrier, and were reported in bad
order at the time they were discharged.

Upon leaving the vessel's tackle, prior to discharging the consignee's property, two cases
containing the imported plates were reported to be in bad order by R and R Industrial
Surveyors Inc., the cargo surveyors employed by defendant Eastern. (Exhibits "9" and "10")
One of the cases were reported as "broken at one side" while the other was "badly broken."
It must be remarked that the cargo inside the broken cases consisted of pre-sensitized
plates used for printing purposes. They are light sensitive, such that any unwanted
exposure to light will render them unsuitable for further use. The slightest damage to their
cases would necessarily result in their damage.

Apart from this, the arrastre operator Metroport Services, Inc. reported that two cases of
the subject shipment "were discharged in bad order from the vessel and loss or damage
arising therefrom is the vessel's responsibility." (Exhibit "F")19 (Underscoring supplied)

Accordingly, the appellate court disposed as follows:

WHEREFORE, premises considered, the instant appeal from the Judgment of the Regional
Trial Court is hereby GRANTED. The defendant-appellee Eastern Shipping Lines is hereby
ORDERED to pay the plaintiff N.V. The Netherlands Insurance Company; (a) the sum of
P35,501.38 with legal interest at the rate of 6% per year counted from the date of entry of
the Court's judgment; and (b) the sum equivalent of 25% of the principal award abovesaid
as attorney's fees.20 (Underscoring supplied)

By Resolution of December 8, 2000,21 the appellate court denied petitioner's Motion for
Reconsideration, hence, the present petition which posits that:
A. THE TRIAL COURT'S D E C I S I O N HAS SOUND FACTUAL AND LEGAL BASES.

B. THE COURT OF APPEALS INCORRECTLY APPLIED THE STATUTORY PRESUMPTION OF

NEGLIGENCE TO THE PRESENT CASE.22

While in a petition for review before this Court, only questions of law may be raised, there are
instances when factual findings of the Court of Appeals may be reviewed. Thus in Insular Life
Assurance Company, Ltd v. Court of Appeals, this Court stressed:

It is a settled rule that in the exercise of the Supreme Court's power of review, the Court is
not a trier of facts and does not normally undertake the re-examination of the evidence
presented by the contending parties during the trial of the case considering that the
findings of facts of the C[ourt of] A[ppeals] are conclusive and binding on the Court.
However, the Court had recognized several exceptions to this rule, to wit: (1) when the
findings are grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse
of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of facts are conflicting; (6) when in making its findings the Court of Appeals went
beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when
the findings are conclusions without citation of specific evidence on which they are based;
(9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs
are not disputed by the respondent; (10) when the findings of fact are premised on the
supposed absence of evidence and contradicted by the evidence on record; and (11) when the
Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties,
which, if properly considered, would justify a different conclusion. x x x23 (Emphasis
supplied; italics in the original.)

Petitioner draws attention to the consignee's demand letter to it which was earlier quoted, it
pointing out that the documents therein mentioned referred to Cases Nos. 3 and 5, not to Case
No. 424 the damage to which is the subject of the present claim.

Further, petitioner points out that the survey conducted by the consignee's designated surveyor
Audemus Adjustment Corporation, which found the contents of Case No. 4 to be damaged, was
done only on July 26, 1985 and at the consignee's warehouse.25

In its Comment,26 respondent alleges that the reports of petitioner's surveyor, R & R Surveyors,
show that the damage was found while the shipment was "on board prior to discharge/after
leaving ship's tackle,"27

To enlighten this Court whether the fault lies on petitioner, a consideration of the cargo receipts
issued by petitioner, the turnover of survey of bad cargoes issued by arrastre operator Metro
Port, and bad order cargo inspection report of petitioner-engaged R & R Surveyors, as reflected
in the following tabulation, is in order:
 Case Issued by Eastern Issued by Metro Port Issued by R & R Surveyors
Number Shipping Lines

Case No. Good Order Cargo

1 Receipt No. 152795
dated July 21, 1985
(Exh. "5")

Case No. Good Order Cargo

2 Receipt No. 152795
dated July 21, 1985
(Exh. "5")28

Case No. Bad Order Cargo Turnover of Surveyof Bad Order Cargo Inspected
3 Receipt No. 10226 Bad Cargoes Receipt on Board Prior to Discharge/
dated July 21, 1985 No. 58744 dated July After Leaving Ship's Tackle
(Exh. "7") 23, 1985 (Exh. "4") dated July 23, 1985 (Exh.
"9")

Case No. Good Order Cargo

4 Receipt No. 152999
dated July 22, 1985
(Exh. "6")

Case No. Bad Order Cargo Turnover of Surveyof Bad Order Cargo Inspected
5 Receipt No. 10227 Bad Cargoes Receipt on Board Prior to Discharge/
dated July 22, 1985 No. 58745 dated July After Leaving Ship's Tackle
(Exh. "8") 23, 1985 (Exh. "3") dated July 23, 1985 (Exh.
"10")

From the above tabulation, Case No. 4 was found by petitioner to be in good order.

Respondent would want this Court to believe, however, that all the Cases, including Case No. 4,
were inspected on board prior to discharge/ after leaving the ship's tackle. In support of
respondent's position, it cites Exhibits "9" and "10"29 issued by R & R Surveyors whose services,
it bears repeating, were engaged by petitioner. From the above tabulation, however, it appears
that Exhs. "9" and "10" refer to the inspection made by the said surveyor firm on Case Nos. 3 and
5. Obviously, there was no need to re-examine or resurvey Cases Nos. 1, 2 and 4, they appearing
to have been unqualifiedly accepted by arrastre operator Metro Port, hence, the absence of any
comment/information thereon, as the above tabulation reflects.

If Case No. 4 was also inspected and found to be in bad order, would not R & R Surveyors have
made a written memorandum thereof? And if R & R Surveyors failed to put in writing any such
findings, would not the representative of Metro Port have demanded from it the issuance of a
Bad Order Cargo Inspected on Board Prior to Discharge/After Leaving Ship's Tackle similar to
Exhibits "9" and "10"?

Respondent demurs to the applicability to the case at bar of this Court's ruling in Summa
Insurance Corporation v. CA30 and in Hartford Fire Insurance Co. v. E. Razon, Inc.31 cited by
petitioner.

In Summa Insurance, the shipment was discharged from the ship to the custody of the arrastre
operator Metro Port. Three good order cargo receipts were issued by the ship owner which were
signed by its checker and the representative of the arrastre operator. When the shipment
arrived and was inspected at the warehouse of the consignee, a bundle-part of the shipment
was missing. The arrastre operator thereupon issued a shortlanded certificate stating that the
bundle was already missing when it received the shipment from the ship.

Relying more on the good order cargo receipts issued by the ship owner than on the
short-landed certificate issued by the arrastre operator, the trial court, still in Summa Insurance,
held:

As between the aforementioned two documentary exhibits, the Court is more inclined to
give credence to the cargo receipts. Said cargo receipts were signed by a checker of
defendant NGSC and a representative of Metro Port. It is safe to presume that the cargo
receipts accurately describe the quantity and condition of the shipment when it was
discharged from the vessel. Metro Port's representative would not have signed the cargo
receipts if only four (4) packages were discharged from the vessel and given to the
possession and custody of the arrastre operator. Having been signed by its representative,
the Metro Port is bound by the contents of the cargo receipts.

On the other hand, the Metro Port's shortlanded certificate could not be given weight
considering that, as correctly argued by counsel for defendant NGSC, it was issued by
Metro Port alone and was not countersigned by the representatives of the shipping
company and the consignee. Besides, the certificate was prepared by Atty. Servillano V.
Dolina, Second Deputy General Manager of Metro Port, and there is no proof on record
that he was present at the time the subject shipment was unloaded from the vessel and
received by the arrastre operator. Moreover, the shortlanded certificate bears the date of
March 15, 1982, more than three months after the discharge of the cargo from the carrying
vessel.32 (Underscoring supplied)

The trial court's above-quoted findings were cited with approval by this Court.

As in the case of Summa Insurance, petitioner-vessel owner issued Good Order Cargo Receipt
No. 15299933 dated July 22, 1985 covering Case No. 4 which was signed by its representative
and countersigned by arrastre operator Metro Port.

The signature of the representative of Metro Port appears under the statement: "Above
described goods checked and received as to quantity, quality and description upon discharge."34

As posited by petitioner, Metro Port's representative would certainly have refused to sign Good
Order Cargo Receipt No. 152999 if Case No. 4 and/or its contents were indeed damaged.35

In Hartford Fire Insurance,36 this Court, in determining the issue of where the damage to the
contents of three drums of brake fluid occurred, took into account the information appearing in
the Request for Bad Order Survey which did not reflect any such damage.

xxxx

Of crucial significance is the condition of the cargo as described in defendant[-arrastre

operator]'s Request for Bad Order Survey prepared before the release of the goods to the
consignee's broker as follows:

"3 drums brake fluid, in apparent good order, contents complete except each dented at
rims."

The said Certificate was signed not only by defendant's inspector but also by the
consignee's representative. It shows that while the rims of the drums were dented the
contents thereof were complete. If, as the marine survey showed, "it was evident that the
contents had leaked as shown by stain marks on various parts of the containers," then,
those stain marks should have been evident as well when defendant's Bad Order Certificate
was prepared. The consignee's representative would surely have noticed it and would have
caused a notation to that effect to have been made in the Bad Order Certificate. The fact
that the Certificate was silent on that point but that instead it specifically indicated that the
contents, as detected upon survey at the consignee's warehouse, must have occurred after
the cargo had left defendant's custody. x x x37 (Italics in the original; underscoring supplied)

As in Hartford Fire Insurance, in the present case, the July 26, 1985 Request for Bad Order
Survey38 issued by Metro Port which was signed by its representative and that of the consignee
did not cover or refer to Case No. 4.

The form Report dated October 31, 1985 of Metro Port39 wherein the blanks therein were, in so
far as they are pertinent, filled up as follows: 2. The two (2) cases covered by our B.O.
Examination Report(s) No. (s) 31166 was/were discharged in bad order from the vessel and loss
or damage arising therefrom is the vessel's responsibility,

cannot be given weight since above-cited B.O. Examination Report No. 31166 refers to Turnover
of Survey of Bad Cargoes Receipt Nos. 58744 and 58745 covering Cases Nos. 3 and 5,
respectively, as the above tabulation clearly shows.

Nor can the Report of Audemus Adjustment Corporation40 be given weight, since it conducted
the inspection only on July 26, 1985, at the consignee's warehouse, and in the absence of any
representative of the shipping company.41

In fine, Case No. 4 was not in a damaged state when petitioner discharged it to arrastre
operator Metro Port. Petitioner cannot thus be held liable for any damages on Case No. 4 that
may have been discovered after its delivery to the consignee.

WHEREFORE, the petition is GRANTED. The assailed Decision dated September 7, 2000 and
Resolution dated December 8, 2000 of the Court of Appeals are REVERSED and SET ASIDE.
The Decision dated October 15, 1993 of the Regional Trial Court (RTC) Branch 64, Makati is, in
light of the foregoing discussions, REINSTATED. SO ORDERED.