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G.R. No. 81026 April 3, 1990 PAN MALAYAN INSURANCE CORPORATION, petitioner, vs.

COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents. Regulus E. Cabote & Associates for petitioner. Benito P. Fabie for private respondents.

Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In compliance therewith, PANMALAY clarified, among others, that the damage caused to the insured car was settled under the "own damage", coverage of the insurance policy, and that the driver of the insured car was, at the time of the accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and Subrogation Receipt executed by CANLUBANG in favor of PANMALAY. On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of action against them. They argued that payment under the "own damage" clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on the assumption that there was no wrongdoer or no third party at fault. After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order dated June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC denied PANMALAY's motion for reconsideration. On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27, 1987. Consequently, PANMALAY filed the present petition for review. After private respondents filed its comment to the petition, and petitioner filed its reply, the Court considered the issues joined and the case submitted for decision. Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition. PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie. PANMALAY contended, therefore, that its cause of action

CORTES, J.: Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of Appeals which upheld an order of the trial court dismissing for no cause of action PANMALAY's complaint for damages against private respondents Erlinda Fabie and her driver. The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may institute an action to recover the amount it had paid its assured in settlement of an insurance claim against private respondents as the parties allegedly responsible for the damage caused to the insured vehicle. On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated demands, defendants, failed and refused to pay the claim of PANMALAY.

against private respondents was anchored upon Article 2207 of the Civil Code, which reads: If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. . . . PANMALAY is correct. Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323]. There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods

without notifying the carrier who has in good faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an action against the carrier on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting "voluntary payment", the former has no right of subrogation against the third party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA 12]. None of the exceptions are availing in the present case. The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have any cause of action against private respondents. On the one hand, the trial court held that payment by PANMALAY of CANLUBANG's claim under the "own damage" clause of the insurance policy was an admission by the insurer that the damage was caused by the assured and/or its representatives. On the other hand, the Court of Appeals in applying theejusdem generis rule held that Section III-1 of the policy, which was the basis for settlement of CANLUBANG's claim, did not cover damage arising from collision or overturning due to the negligence of third parties as one of the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207 and claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the damage. The above conclusion is without merit. It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy impliesdamage to the insured car caused by the assured itself, instead of third parties, proceeds from an incorrect comprehension of the phrase "own damage" as used by the insurer. When PANMALAY utilized the phrase "own damage" a phrase which, incidentally, is not found in the

insurance policy to define the basis for its settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage" coverage under Section III of the insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability" coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from Section IV-2 which refer to "Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to the properties of third parties). Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1 of the policy does not include to the insured vehicle arising from collision or overturning due to the negligent acts of the third party. Not only does it stem from an erroneous interpretation of the provisions of the section, but it also violates a fundamental rule on the interpretation of property insurance contracts. It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to the sense and meaning of the terms which the parties thereto have used. In the case of property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the assured, determine the import of the various terms and provisions embodied in the policy. It is only when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree about the meaning of particular provisions, that the courts will intervene. In such an event, the policy will be construed by the courts liberally in favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No. L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-41014, November 28, 1988, 168 SCRA 1. Also Articles 13701378 of the Civil Code].

Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the insured vehicle, reads as follows: SECTION III LOSS OR DAMAGE 1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, self ignition or lightning or burglary, housebreaking or theft; (c) by malicious act; (d) whilst in transit (including the processes of loading and unloading) incidental to such transit by road, rail, inland, waterway, lift or elevator. xxx xxx xxx [Annex "A-1" of PANMALAY's Compliance with Supplementary

Motion for Bill of Particulars; Record, p. 34; Emphasis supplied]. PANMALAY contends that the coverage of insured risks under the above section, specifically Section III-1(a), is comprehensive enough to include damage to the insured vehicle arising from collision or overturning due to the fault or negligence of a third party. CANLUBANG is apparently of the same understanding. Based on a police report wherein the driver of the insured car reported that after the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20], CANLUBANG filed its claim with PANMALAY for indemnification of the damage caused to its car. It then accepted payment from PANMALAY, and executed a Release of Claim and Subrogation Receipt in favor of latter. Considering that the very parties to the policy were not shown to be in disagreement regarding the meaning and coverage of Section III-1, specifically sub-paragraph (a) thereof, it was improper for the appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to the clear intention and understanding of these parties. It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental collision or overturning" found in the first paint of sub-paragraph (a) is untenable. Although the terms "accident" or "accidental" as used in insurance contracts have not acquired a technical meaning, the Court has on several occasions defined these terms to mean that which takes place "without one's foresight or expectation, an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be inferred from jurisprudence that these terms, without qualification, exclude events resulting in damage or loss due to the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily synonymous with the concept of "no fault". It may be utilized simply to distinguish

intentional or malicious acts from negligent or careless acts of man. Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured vehicle due to negligent or careless acts of third parties is not listed under the general and specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.] The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that insisted upon by respondents herein. By arguing that this section covers losses or damages due not only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping with the rationale behind the various rules on the interpretation of insurance contracts favoring the assured or beneficiary so as to effect the dominant purpose of indemnity or payment [SeeCalanoc v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA 327]. Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does not cover damage to the insured vehicle caused by negligent acts of third parties, and that PANMALAY's settlement of CANLUBANG's claim for damages allegedly arising from a collision due to private respondents' negligence would amount to unwarranted or "voluntary payment", dismissal of PANMALAY's complaint against private respondents for no cause of action would still be a grave error of law. For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of

action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation due to "voluntary" payment may nevertheless recover from the third party responsible for the damage to the insured property under Article 1236 of the Civil Code. In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely prays that it be allowed to institute an action to recover from third parties who allegedly caused damage to the insured vehicle, the amount which it had paid its assured under the insurance policy. Having thus shown from the above discussion that PANMALAY has a cause of action against third parties whose negligence may have caused damage to CANLUBANG's car, the Court holds that there is no legal obstacle to the filing by PANMALAY of a complaint for damages against private respondents as the third parties allegedly responsible for the damage. Respondent Court of Appeals therefore committed reversible error in sustaining the lower court's order which dismissed PANMALAY's complaint against private respondents for no cause of action. Hence, it is now for the trial court to determine if in fact the damage caused to the insured vehicle was due to the "carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie. WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the merits. SO ORDERED. Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

G.R. No. 150094

August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.

The assailed Resolution denied petitioner's Motion for Reconsideration. The Facts The antecedent facts are summarized by the appellate court as follows: "On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French Overseas Company in Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825 with the words, 'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face. That same day, Burlington insured the cargoes in the amount of $39,339.00 with American Home Assurance Company (AHAC). The following day, Burlington turned over the custody of said cargoes to Federal Express which transported the same to Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus Inc.'s] warehouse. While the second, consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-30NRT which was likewise immediately stored at Cargohaus' warehouse. Prior to the arrival of the cargoes, Federal Express informed GETC Cargo International Corporation, the customs broker hired by the consignee to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its client's cargoes. "On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the cargoes arrived in Manila, a non-licensed custom's broker who was assigned by GETC to facilitate the release of the subject cargoes, found out, while he was about to

DECISION

PANGANIBAN, J.: Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff must give the carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention and/or the airway bill. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision2and the September 21, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as follows: "WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 951219,entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly UWAREHOUSE, INC.),' is hereby AFFIRMED andREITERATED. "Costs against the Cargohaus, Inc.]."4 [petitioner and

cause the release of the said cargoes, that the same [were] stored only in a room with two (2) air conditioners running, to cool the place instead of a refrigerator. When he asked an employee of Cargohaus why the cargoes were stored in the 'cool room' only, the latter told him that the cartons where the vaccines were contained specifically indicated therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed with the withdrawal of the vaccines and instead, samples of the same were taken and brought to the Bureau of Animal Industry of the Department of Agriculture in the Philippines by SMITHKLINE for examination wherein it was discovered that the 'ELISA reading of vaccinates sera are below the positive reference serum.' "As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the shipment and, declaring 'total loss' for the unusable shipment, filed a claim with AHAC through its representative in the Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the [petitioner] imputing negligence on either or both of them in the handling of the cargo. "Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily liable for the loss as follows: 'WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its Co-Defendant Cargohaus] are directed to pay [respondents], jointly and severally, the following:

1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from the time of the filing of the complaint to the time the same is fully paid. 2. Attorney's fees in the amount of P50,000.00 and 3. Costs of suit. 'SO ORDERED.' "Aggrieved, [petitioner] appealed to [the CA]."5 Ruling of the Court of Appeals The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held that the shipping Receipts were a prima facie proof that the goods had indeed been delivered to the carrier in good condition. We quote from the ruling as follows: "Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the carrier in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in a damaged condition, a presumption is raised that the damage occurred through the fault or negligence of the carrier,and this casts upon the carrier the burden of showing that the goods were not in good condition when delivered to the carrier, or that the damage was occasioned by some cause excepting the carrier from absolute liability. This the [petitioner] failed to discharge. x x x."6 Found devoid of merit was petitioner's claim that respondents had no personality to sue. This argument was supposedly not raised in the Answer or during trial.

Hence, this Petition.7 The Issues In its Memorandum, petitioner raises the following issues for our consideration: "I. Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure? "II. Is the conclusion of the Honorable Court of Appeals petitioner's claim that respondents have no personality to sue because the payment was made by the respondents to Smithkline when the insured under the policy is Burlington Air Express is devoid of merit correct or not? "III. Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition, correct or not? "IV. Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible? "V. Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own admission that petitioner is not liable? and "VI. Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?"8 Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court?

(2) Is Federal Express liable for damage to or loss of the insured goods? This Court's Ruling The Petition has merit. Preliminary Propriety of Review Issue:

The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of law cognizable by the Supreme Court.9 In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the conclusions drawn from such facts. Hence, this case is a proper subject for review by this Court. Main Liability for Damages Issue:

Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -- because the payment made to Smithkline was erroneous. Pertinent to this issue is the Certificate of Insurance10 ("Certificate") that both opposing parties cite in support of their respective positions. They differ only in their interpretation of what their rights are under its terms. The determination of those rights involves a question of law, not a question of fact. "As distinguished from a question of law which exists 'when the doubt or difference arises as to what the law is on a certain state of facts' -- 'there is a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged facts'; or when the 'query necessarily invites calibration of the whole evidence considering mainly the credibility of witnesses, existence and relevancy of specific surrounding circumstance, their relation to each other and to the whole and the probabilities of the situation.'"11 Proper Payee The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x upon

surrender of this Certificate." Such wording conveys the right of collecting on any such damage or loss, as fully as if the property were covered by a special policy in the name of the holder itself. At the back of the Certificate appears the signature of the representative of Burlington. This document has thus been duly indorsed in blank and is deemed a bearer instrument. Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified for loss of or damage to the insured shipment, as fully as if the property were covered by a special policy in the name of the holder. Hence, being the holder of the Certificate and having an insurable interest in the goods, Smithkline was the proper payee of the insurance proceeds. Subrogation Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt12 in favor of respondents. The latter were thus authorized "to file claims and begin suit against any such carrier, vessel, person, corporation or government." Undeniably, the consignee had a legal right to receive the goods in the same condition it was delivered for transport to petitioner. If that right was violated, the consignee would have a cause of action against the person responsible therefor. Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurer's entitlement to subrogation pro tanto -being of the highest equity -- equips it with a cause of action in case of a contractual breach or negligence.13 "Further, the insurer's subrogatory right to sue for recovery under the bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld."14 In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes, it stands in the place and in substitution of the consignee. A fortiori, both the insurer and the consignee are bound by the contractual stipulations under the bill of lading.15

Prescription of Claim From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents' claim and right of action are already barred. The latter, and even the consignee, never filed with the carrier any written notice or complaint regarding its claim for damage of or loss to the subject cargo within the period required by the Warsaw Convention and/or in the airway bill. Indeed, this fact has never been denied by respondents and is plainly evident from the records. Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states: "6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a written notice, sufficiently describing the goods concerned, the approximate date of the damage or loss, and the details of the claim, is presented by shipper or consignee to an office of Burlington within (14) days from the date the goods are placed at the disposal of the person entitled to delivery, or in the case of total loss (including non-delivery) unless presented within (120) days from the date of issue of the [Airway Bill]."16 Relevantly, petitioner's airway bill states: "12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case: 12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within fourteen (14) days from receipt of the goods; 12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods; 12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and

12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the issue of the air waybill. 12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was used, or to the first carrier or to the last carrier or to the carrier who performed the transportation during which the loss, damage or delay took place."17 Article 26 of the Warsaw Convention, on the other hand, provides: "ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint shall be prima facie evidence that the same have been delivered in good condition and in accordance with the document of transportation. (2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after the discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage and 7 days from the date of receipt in the case of goods. In case of delay the complaint must be made at the latest within 14 days from the date on which the baggage or goods have been placed at his disposal. (3) Every complaint must be made in writing upon the document of transportation or by separate notice in writing dispatched within the times aforesaid. (4) Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the case of fraud on his part."18 Condition Precedent In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or damage to the goods.19 The shipper or consignee

must allege and prove the fulfillment of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former. The aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of action.20 The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. "This protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and easily investigated so as to safeguard itself from false and fraudulent claims."21 When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a notice of claim for loss of or damage to goods shipped and the stipulation is not complied with, its enforcement can be prevented and the liability cannot be imposed on the carrier. To stress, notice is a condition precedent, and the carrier is not liable if notice is not given in accordance with the stipulation.22 Failure to comply with such a stipulation bars recovery for the loss or damage suffered.23 Being a condition precedent, the notice must precede a suit for enforcement.24 In the present case, there is neither an allegation nor a showing of respondents' compliance with this requirement within the prescribed period. While respondents may have had a cause of action then, they cannot now enforce it for their failure to comply with the aforesaid condition precedent. In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner. We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in respondents' Complaint below -- has been adjudged by the trial court as liable for, inter alia, "actual damages in the amount of the peso equivalent of US $39,339."25 This judgment was

affirmed by the Court of Appeals and is already final and executory.26 WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation. No pronouncement as to costs. SO ORDERED.

G.R. No. L-27427 April 7, 1976

Co., Inc., failed to pay the amount of the loss in spite of repeated demands. Upon defendants' motions, the lower court in its order of July 22, 1966 dismissed the complaint as to Jamila on the ground that there was no allegation that it had consented to the subrogation and, therefore, Fireman's Fund had no cause of action against it. In the same order the lower court dismissed the complaint as to First Quezon City Insurance Co., Inc. on the ground of res judicata. It appears that the same action was previously filed in Civil Case No. 56311 which was dismiss because of the failure of the same plaintiffs and their counsel to appear at the pre trial. Firestone and Fireman's Fund moved for the reconsideration of the order of dismissal. The lower court on September 3, 1966 set aside its order of dismissal. It sustained plaintiffs' contention that there was no res judicataas to First Quezon City Insurance Co., Inc. because Civil Case No. 56311 was dismissed without prejudice. Later, First Quezon City Insurance Co., Inc. filed its answer to the complaint. However, due to inadvertence, the lower court did not state in its order of September 3, 1966 why it set aside its prior order dismissing the complaint with respect to Jamila. What is now to be recounted shows the lack of due care on the part of the lower court and the opposing lawyers in their management of the case. Such lack of due care has given the case a farcical ambiance and might partially explain the long delay in its adjudication. Jamila, upon noticing that the order of September 3, 1966 had obliterated its victory without any reason therefor, filed a motion for reconsideration. It had originally moved for the dismissal of the complaint on the ground of lack of cause of action. Its contention was based on two grounds, to wit: (1) that the complaint did not allege that Firestone, pursuant to the contractual stipulation quoted in the complaint, had investigated the loss and that

FIREMAN'S FUND INSURANCE COMPANY and FIRESTONE TIRE AND RUBBER COMPANY OF THE PHILIPPINES, plaintiffs-appellants, vs. JAMILA & COMPANY, INC. and FIRST QUEZON CITY INSURANCE CO., INC., defendants-appellees. Conrado R. Ayuyao for plaintiffs-appellees. Ponciano U. Pitargue for defendant-appellee First quezon City Insurance Co., Inc. Fernando B. Zamora for defendant-appellee Jamila & Company, Inc.

AQUINO, J.: Fireman's Fund and Insurance Company (Fireman's Fund for short) and Firestone Tire and Rubber Company of the Philippines appealed from the order dated October 18, 1966 of the Court of First Instance of Manila, dismissing their complaint against Jamila & Co., Inc. (hereinafter called Jamila) for the recovery of the sum of P11,925.00 plus interest, damages and attorney's fees (Civil Case No. 65658). The gist of the complaint is that Jamila or the Veterans Philippine Scouts Security Agency contracted to supply security guards to Firestone; that Jamila assumed responsibility for the acts of its security guards; that First Quezon City Insurance Co., Inc. executed a bond in the sum of P20,000.00 to guarantee Jamila's obligations under that contract; that on May 18, 1963 properties of Firestone valued at P11,925.00 were lost allegedly due to the acts of its employees who connived with Jamila's security guard; that Fireman's Fund, as insurer, paid to Firestone the amount of the loss; that Fireman's Fund was subrogated to Firestone's right to get reimbursement from Jamila, and that Jamila and its surety, First Quezon City Insurance

Jamila was represented in the investigation and (2) that Jamila did not consent to the subrogation of Fireman's Fund to Firestone's right to get reimbursement from Jamila and its surety. The lower court in its order of dismissal had sustained the second ground. Jamila in its motion for the reconsideration of the order of September 3, 1966 invoked the first ground which had never been passed upon by the lower court. Firestone and Fireman's Fund in their opposition joined battle, in a manner of speaking, on that first ground. But the lower court in its order of October 18, 1966, granting Jamila's motion for reconsideration, completely ignored that first ground. It reverted to the second ground which was relied upon in its order of September 3, 1966. The lower court reiterated its order of July 22, 1966 that Fireman's Fund had no cause of action against Jamila because Jamila did not consent to the subrogation. The court did not mention Firestone, the co-plaintiff of Fireman's Fund. At this juncture, it may be noted that motions for reconsideration become interminable when the court's orders follow a seesaw pattern. That phenomenon took place in this case. Firestone and Fireman's Fund filed a motion for the reconsideration of the lower court's order of October 18, 1966 on the ground that Fireman's Fund Insurance Company was suing on the basis of legal subrogation whereas the lower court erroneously predicated its dismissal order on the theory that there was no conventional subrogation because the debtor's consent was lacking. The plaintiffs cited article 2207 of the Civil Code which provides that "if the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract".

The lower court denied plaintiffs' motion. They filed a second motion for reconsideration. In that motion they sensibly called the lower court's attention to the fact that the issue of subrogation was of no moment because Firestone, the subrogor, is a party-plaintiff and could sue directly Jamila in its own right. Without resolving that contention, the lower court denied plaintiffs' second motion for reconsideration. In this appeal Firestone and Fireman's Fund contend that the trial court's dismissal of their complaint is contrary to the aforementioned article 2207 which provides for legal subrogation. Jamila, in reply, stubbornly argues that legal subrogation under article 2207 requires the debtor's consent; that legal subrogation takes place in the cases mentioned in article 1302 of the Civil Code and the instant case is not among the three cases enumerated in that article, and that there could be no subrogation in this case because according to the plaintiffs the contract between. Jamila and Firestone was entered into on June 1, 1965 but the loss complained of occurred on May 18, 1963. With respect to the factual point raised by Jamila, it should be stated that plaintiffs' counsel gratuitously alleged in their brief that Firestone and Jamila entered into a "contract of guard services" on June 1, 1965. That allegation, which was uncalled for because it is not found in the complaint, created confusion which heretofore did not exist. No copy of the contract was annexed to the complaint. That confusing statement was an obvious error since it was expressly alleged in the complaint that the loss occurred on May 18, 1963. The fact that such an error was committed is another instance substantiating our previous observation that plaintiffs' counsel had not exercised due care in the presentation of his case. The issue is whether the complaint of Firestone and Fireman's Fund states a cause of action against Jamila.

We hold that Firestone is really a nominal, party in this case. It had already been indemnified for the loss which it had sustained. Obviously, it joined as a party-plaintiff in order to help Fireman's Fund to recover the amount of the loss from Jamila and First Quezon City Insurance Co., Inc. Firestone had tacitly assigned to Fireman's Fund its cause of action against Jamila for breach of contract. Sufficient ultimate facts are alleged in the complaint to sustain that cause of action. On the other hand, Fireman's Fund's action against Jamila is squarely sanctioned by article 2207. As the insurer, Fireman's Fund is entitled to go after the person or entity that violated its contractual commitment to answer for the loss insured against (Cf. Philippine Air Lines, Inc. vs. Heald Lumber Co., 101 Phil. 1032; Rizal Surety & Insurance Co. vs. Manila Railroad Company, L-24043, April 25, 1968, 23 SCRA 205). The trial court erred in applying to this case the rules on novation. The plaintiffs in alleging in their complaint that Fireman's Fund "became a party in interest in this case by virtue of a subrogation right given in its favor by" Firestone, were not relying on the novation by change of creditors as contemplated in articles 1291 and 1300 to 1303 of the Civil Code but rather on article 2207. Article 2207 is a restatement of a settled principle of American jurisprudence. Subrogation has been referred to as the doctrine of substitution. It "is an arm of equity that may guide or even force one to pay a debt for which an obligation was incurred but which was in whole or in part paid by another" (83 C.J.S. 576, 678, note 16, citing Fireman's Fund Indemnity Co. vs. State Compensation Insurance Fund, 209 Pac. 2d 55). "Subrogation is founded on principles of justice and equity, and its operation is governed by principles of equity. It 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"(83 C.J.S. 579- 80)

Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose. negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U. S. 294, 75 L. ed. 1037). The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382). "Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon, nor does it grow out of, any privity of contract, or upon written assignment of claim, and payment to the insured makes the insurer an assignee in equity (Shambley v. JobeBlackley Plumbing and Heating Co., 264 N. C. 456,142 SE 2d 18). Whether the plaintiffs would be able to prove their cause of action against Jamila is another question. Finding the trial court's order of dismissal to be legally untenable, the same is set aside with costs against defendant-appellee Jamila & Co., Inc. SO ORDERED. Barredo, Antonio, Concepcion, Jr. and Martin, JJ., concur. Fernando, J., is on leave.

Martin, J., was designated to take part in this case.

G.R. No. L-52732 August 29, 1988 F.F. CRUZ and CO., INC., petitioner, vs. THE COURT OF APPEALS, GREGORIO MABLE as substituted by his wife LUZ ALMONTE MABLE and children DOMING, LEONIDAS, LIGAYA, ELENA, GREGORIO, JR., SALOME, ANTONIO, and BERNARDO all surnamed MABLE, respondents. Luis S. Topacio for petitioner. Mauricio M. Monta for respondents.

On January 23, 1975, private respondents filed an action for damages against petitioner, praying for a judgment in their favor awarding P150,000.00 as actual damages, P50,000.00 as moral damages, P25,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs. The Court of First Instance held for private respondents: WHEREFORE, the Court hereby renders judgment, in favor of plaintiffs, and against the defendant: 1. Ordering the defendant to pay to the plaintiffs the amount of P80,000.00 for damages suffered by said plaintiffs for the loss of their house, with interest of 6% from the date of the filing of the Complaint on January 23, 1975, until fully paid; 2. Ordering the defendant to pay to the plaintiffs the sum of P50,000.00 for the loss of plaintiffs' furnitures, religious images, silverwares, chinawares, jewelries, books, kitchen utensils, clothing and other valuables, with interest of 6% from date of the filing of the Complaint on January 23, 1975, until fully paid; 3. Ordering the defendant to pay to the plaintiffs the sum of P5,000.00 as moral damages, P2,000.00 as exemplary damages, and P5,000.00 as and by way of attorney's fees; 4. With costs against the defendant; 5. Counterclaim is ordered dismissed, for lack of merit. [CA Decision, pp. 1-2; Rollo, pp. 29-30.] On appeal, the Court of Appeals, in a decision promulgated on November 19, 1979, affirmed the decision of the trial court but reduced the award of damages: WHEREFORE, the decision declaring the defendants liable is affirmed. The

CORTES, J.: This petition to review the decision of the Court of Appeals puts in issue the application of the common law doctrine of res ipsa loquitur. The essential facts of the case are not disputed. The furniture manufacturing shop of petitioner in Caloocan City was situated adjacent to the residence of private respondents. Sometime in August 1971, private respondent Gregorio Mable first approached Eric Cruz, petitioner's plant manager, to request that a firewall be constructed between the shop and private respondents' residence. The request was repeated several times but they fell on deaf ears. In the early morning of September 6, 1974, fire broke out in petitioner's shop. Petitioner's employees, who slept in the shop premises, tried to put out the fire, but their efforts proved futile. The fire spread to private respondents' house. Both the shop and the house were razed to the ground. The cause of the conflagration was never discovered. The National Bureau of Investigation found specimens from the burned structures negative for the presence of inflammable substances. Subsequently, private respondents collected P35,000.00 on the insurance on their house and the contents thereof.

damages to be awarded to plaintiff should be reduced to P70,000.00 for the house and P50,000.00 for the furniture and other fixtures with legal interest from the date of the filing of the complaint until full payment thereof. [CA Decision, p. 7; Rollo, p. 35.] A motion for reconsideration was filed on December 3, 1979 but was denied in a resolution dated February 18, 1980. Hence, petitioner filed the instant petition for review on February 22, 1980. After the comment and reply were filed, the Court resolved to deny the petition for lack of merit on June 11, 1980. However, petitioner filed a motion reconsideration, which was granted, and petition was given due course on September 1980. After the parties filed their memoranda, case was submitted for decision on January 1981. for the 12, the 21,

accident is such as in the ordinary course of things does not happen if those who have its management or control use proper care, it affords reasonable evidence, in the absence of explanation by the defendant, that the accident arose from want of care. [Africa v. Caltex (Phil.), Inc., G.R. No. L-12986, March 31, 1966, 16 SCRA 448.] Thus, in Africa, supra, where fire broke out in a Caltex service station while gasoline from a tank truck was being unloaded into an underground storage tank through a hose and the fire spread to and burned neighboring houses, this Court, applying the doctrine of res ipsa loquitur, adjudged Caltex liable for the loss. The facts of the case likewise call for the application of the doctrine, considering that in the normal course of operations of a furniture manufacturing shop, combustible material such as wood chips, sawdust, paint, varnish and fuel and lubricants for machinery may be found thereon. It must also be noted that negligence or want of care on the part of petitioner or its employees was not merely presumed. The Court of Appeals found that petitioner failed to construct a firewall between its shop and the residence of private respondents as required by a city ordinance; that the fire could have been caused by a heated motor or a lit cigarette; that gasoline and alcohol were used and stored in the shop; and that workers sometimes smoked inside the shop [CA Decision, p. 5; Rollo, p. 33.] Even without applying the doctrine of res ipsa loquitur, petitioner's failure to construct a firewall in accordance with city ordinances would suffice to support a finding of negligence. Even then the fire possibly would not have spread to the neighboring houses were it not for another negligent omission on the part of defendants, namely, their failure to provide a concrete wall high enough

Petitioner contends that the Court of Appeals erred: 1. In not deducting the sum of P35,000.00, which private respondents recovered on the insurance on their house, from the award of damages. 2. In awarding excessive and/or unproved damages. 3. In applying the doctrine of res ipsa loquitur to the facts of the instant case. The pivotal issue in this case is the applicability of the common law doctrine of res ipsa loquitur, the issue of damages being merely consequential. In view thereof, the errors assigned by petitioner shall be discussed in the reverse order. 1. The doctrine of res ipsa loquitur, whose application to the instant case petitioner objects to, may be stated as follows: Where the thing which caused the injury complained of is shown to be under the management of the defendant or his servants and the

to prevent the flames from leaping over it. As it was the concrete wall was only 2-1/2 meters high, and beyond that height it consisted merely of galvanized iron sheets, which would predictably crumble and melt when subjected to intense heat. Defendant's negligence, therefore, was not only with respect to the cause of the fire but also with respect to the spread thereof to the neighboring houses. [Africa v. Caltex (Phil.), Inc., supra; Emphasis supplied.] In the instant case, with more reason should petitioner be found guilty of negligence since it had failed to construct a firewall between its property and private respondents' residence which sufficiently complies with the pertinent city ordinances. The failure to comply with an ordinance providing for safety regulations had been ruled by the Court as an act of negligence [Teague v. Fernandez, G.R. No. L-29745, June 4, 1973, 51 SCRA 181.] The Court of Appeals, therefore, had more than adequate basis to find petitioner liable for the loss sustained by private respondents. 2. Since the amount of the loss sustained by private respondents constitutes a finding of fact, such finding by the Court of Appeals should not be disturbed by this Court [M.D. Transit & Taxi Co., Inc. v. Court of Appeals, G.R. No. L-23882, February 17, 1968, 22 SCRA 559], more so when there is no showing of arbitrariness. In the instant case, both the CFI and the Court of Appeals were in agreement as to the value of private respondents' furniture and fixtures and personal effects lost in the fire (i.e. P50,000.00). With regard to the house, the Court of Appeals reduced the award to P70,000.00 from P80,000.00. Such cannot be categorized as arbitrary considering that the evidence shows that the house was built in 1951 for P40,000.00 and, according to private respondents, its reconstruction would cost P246,000.00. Considering the appreciation in value

of real estate and the diminution of the real value of the peso, the valuation of the house at P70,000.00 at the time it was razed cannot be said to be excessive. 3. While this Court finds that petitioner is liable for damages to private respondents as found by the Court of Appeals, the fact that private respondents have been indemnified by their insurer in the amount of P35,000.00 for the damage caused to their house and its contents has not escaped the attention of the Court. Hence, the Court holds that in accordance with Article 2207 of the Civil Code the amount of P35,000.00 should be deducted from the amount awarded as damages. Said article provides: Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company is subrogated to the rights of the insured against the wrongdoer or the person who violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (Emphasis supplied.] The law is clear and needs no interpretation. Having been indemnified by their insurer, private respondents are only entitled to recover the deficiency from petitioner. On the other hand, the insurer, if it is so minded, may seek reimbursement of the amount it indemnified private respondents from petitioner. This is the essence of its right to be subrogated to the rights of the insured, as expressly provided in Article 2207. Upon payment of the loss incurred by the insured, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person

whose negligence or wrongful act caused the loss [Fireman's Fund Insurance Co. v. Jamila & Co., Inc., G.R. No. L-27427, April 7, 1976, 70 SCRA 323.] Under Article 2207, the real party in interest with regard to the indemnity received by the insured is the insurer [Phil. Air Lines, Inc. v. Heald Lumber Co., 101 Phil. 1031, (1957).] Whether or not the insurer should exercise the rights of the insured to which it had been subrogated lies solely within the former's sound discretion. Since the insurer is not a party to the case, its identity is not of record and no claim is made on its behalf, the private respondent's insurer has to claim his right to reimbursement of the P35,000.00 paid to the insured. WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED with the following modifications as to the damages awarded for the loss of private respondents' house, considering their receipt of P35,000.00 from their insurer: (1) the damages awarded for the loss of the house is reduced to P35,000.00; and (2) the right of the insurer to subrogation and thus seek reimbursement from petitioner for the P35,000.00 it had paid private respondents is recognized. SO ORDERED.

G.R. No. L-24043

April 25, 1968

RIZAL SURETY & INSURANCE COMPANY, plaintiff-appellant, vs. MANILA RAILROAD COMPANY and MANILA PORT SERVICE, defendants-appellees. Gil R. Carlos and Associates for plaintiff-appellant. D. F. Macaranas and M. C. Gonzales for defendantsappellees. FERNANDO, J.: In this suit for the recovery of the amount paid by the plaintiff, Rizal Surety and Insurance Company, to the consignee based on the applicable Civil Code provision,1 which speak to the effect that the Insurance Company "shall be subrogated to the rights of the insured," it is its contention that it is entitled to the amount paid by it in full, by virtue of the insurance contract. The lower court, however, relying on the limited liability clause on a management contract with the defendants, could not go along with such a theory. Hence, this appeal. The facts were stipulated. The more pertinent follows: That on or about November 29, 1960, the vessel, SS Flying Trader, loaded on board at Genoa, Italy for shipment to Manila, Philippines, among other cargoes, 6 cases OMH, Special Single Colour Offset Press Machine, for which Bill of Lading No. 1 was issued, consigned to Suter Inc.; that such vessel arrived at the Port of Manila, Philippines on or about January 16, 1961 and subsequently discharged complete and in good order the aforementioned shipment into the custody of defendant Manila Port Service as arrastre operator; that in the course of the handling, one of the six cases identified as Case No. 2143 containing the OMH, Special Single Colour Offset Press, while the same was being lifted and loaded by the crane of the Manila Port Service into the consignee's truck, it was dropped by the crane and as a consequence, the machine was heavily damaged for which plaintiff as insurer paid to the consignee, Suter Inc. the amount of P16,500.00, representing damages by way of costs of replacement parts and repairs to put the machine in working condition, plus the sum

of P180.70 which plaintiff paid to the International Adjustment Bureau as adjuster's fee for the survey conducted on the damaged cargo or a total of P16,680.70 representing plaintiff's liability under the insurance contract; and that the arrastre charges in this particular shipment was paid on the weight or measurement basis whichever is higher, and not on the value thereof.2 Clause 15 of the management contract which as admitted by the plaintiff, appeared "at the dorsal part of the Delivery Permit" and was "used in taking delivery of the subject shipment from the defendants' (Manila Port Service and Manila Railroad Co.) custody and control, issued in the name of consignee's broker," contained what was referred to as "an important notice." Such permit "is presented subject to all the terms and conditions of the Management Contract between the Bureau of Customs and Manila Port Service and amendments thereto or alterations thereof, particularly but not limited to paragraph 15 thereof limiting the Company liability to P500.00 per package, unless the value of the goods is otherwise, specified, declared or manifested and the corresponding arrastre charges have been paid. . . ."3 On the above facts and relying on Bernabe & Co. v. Delgado Brothers, Inc.,4 the lower court rendered the judgment "ordering defendants, jointly and severally, to pay plaintiff the amount of Five Hundred Pesos (P500.00), with legal interest thereon from January 13, 1962, the date of the filing of the complaint, with costs against said defendants."5 As noted at the outset, in this appeal, the point is pressed that under the applicable Civil Code provision, plaintiff-appellant Insurance Company could recover in full. The literal language of Article 2207, however, does not warrant such an interpretation. It is there made clear that in the event that the property has been insured and the Insurance Company has paid the indemnity for the injury or loss sustained, it "shall be subrogated to the rights of the insured against the wrong-doer or the person who has violated the contract."

Plaintiff-appellant Insurance Company, therefore, cannot recover from defendants an amount greater than that to which the consignee could lawfully lay claim. The management contract is clear. The amount is limited to Five Hundred Pesos (P500.00). Such a stipulation has invariably received the approval of this Court from the leading case of Bernabe & Co. v. Delgado Bros., Inc.6 Such a decision was quoted with approval in the following subsequent cases: Atlantic Mutual Insurance Co. v. Manila Port Service,7 Insurance Service Co. of North America v. Manila Port Service,8 Insurance Company of North America v. U.S. Lines, Co.,9 and Insurance Company of North America v. Manila Port Service.10 In one of them, Atlantic Mutual Insurance Company v. Manila Port Service, this Court, through the then Justice, now Chief Justice, Concepcion, restated the doctrine thus: "Plaintiff maintains that, not being a party to the management contract, the consignee into whose shoes plaintiff had stepped in consequence of said payment is not subject to the provisions of said stipulation, and that the same is furthermore invalid. The lower court correctly rejected this pretense because, having taken delivery of the shipment aforementioned by virtue of a delivery permit, incorporating thereto, by reference, the provisions of said management contract, particularly paragraph 15 thereof, the gist of which was set forth in the permit, the consignee became bound by said provisions, and because it could have avoided the application of said maximum limit of P500.00 per package by stating the true value thereof in its claim for delivery of the goods in question, which, admittedly, the consignee failed to do. . . ."11 Plaintiff-appellant Rizal Surety and Insurance Company, having been subrogated merely to the rights of the consignee, its recovery necessarily should be limited to what was recoverable by the insured. The lower court therefore did not err when in the decision appealed from, it limited the amount which defendants were jointly and severally to pay plaintiff-appellants to "Five Hundred Pesos (P500.00) with legal interest thereon from January 31, 1962, the date of the filing of the complaint, . . . ."

WHEREFORE, the decision appealed from is affirmed. With costs against Rizal Surety and Insurance Company. Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro and Angeles, JJ., concur.1wph1.t

G.R. No. 84197 July 28, 1989 PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents. G.R. No. 84157 July 28, 1989 JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents. Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Renato J. Robles for BORMAHECO, Inc. and Cervanteses. Leonardo B. Lucena for Constancio Maglana.

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages. It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses. Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's fees. xxx xxx xxx WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from

GUTIERREZ, JR., J.: The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed. The dispositive portion of the trial court's decision reads as follows: WHEREFORE, judgment is rendered against defendant Jacob S. Lim

1966 with legal rate of interest up to the time it is paid. Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs. No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its discretion. No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within its power and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16) In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owneroperator of Southern Air Lines (SAL) a single proprietorship. On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of

necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965. On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel

Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively. Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12. Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts, On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana. In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question. After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all other respects the trial court's decision was affirmed. We first resolve G.R. No. 84197. Petitioner Pioneer Insurance Corporation avers that: and Surety

REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10) The petitioner questions the following findings of the appellate court: We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be benefited or injured by the judgment. Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-infact of the reinsurance company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be benefited or injured by the judgment or the party

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE

entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35). Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by the reinsurer the sum of P295,000.00 the bulk of defendants' alleged obligation to Pioneer. In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person

should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25). The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer. The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties. A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were: xxx xxx xxx 1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with reinsurance money? 2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings: It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount. On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorneyin-fact. But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-infact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is so even where the name of the principal is disclosed in the complaint. Section 2 of Rule 3 of the Old Rules of

Court provides that 'Every action must be prosecuted in the name of the real party in interest.' This provision is mandatory. The real party in interest is the party who would be benefitted or injured by the judgment or is the party entitled to the avails of the suit. This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law permitting an action to be brought by an attorney-infact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714. The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by

P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363). The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis. In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925). The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134). Hence the applicable law is Article 2207 of the new Civil Code, to wit: Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to

recover the deficiency from the person causing the loss or injury. Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA 650 [1987]): Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied). It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer. Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents. Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention. On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel mortgage. Testimonies of defendants Francisco Cervantes and Modesto Cervantes. Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be cancelled. The following is averred under oath by Pioneer in the original complaint: The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be enforced by this action. This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time

this action was instituted. Sec 2, Rule 129, Revised Rules of Court. Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines. Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover any unpaid balance of the price. SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law. Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have no further action against the purchaser to recover any unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124. The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any liability as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the indemnitors. The principal hereof shall be paid in eight equal successive three months interval installments, the first of which shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x x x of each succeeding three months and the last of which shall be due and payable 26th May 1967. However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA,

modifying the maturity dates of the obligations, as follows: The principal hereof shall be paid in eight equal successive three month interval installments the first of which shall be due and payable 4 September 1965, the remainder of which ... shall be due and payable on the 4th day ... of each succeeding months and the last of which shall be due and payable 4th June 1967. Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last installment being July 15, 1967. These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there would have been the corresponding documents in the form of a written notice to as well as written conformity of these defendants, and there are no such document. The consequence of this

was the extinguishment of the obligations and of the surety bond secured by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538. Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension time referred to herein, (New Civil Code).' Manresa, 4th ed., Vol. 12, pp. 316317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571. Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity. Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or became illegal. These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the instant case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157). We find no cogent reason to reverse or modify these findings. Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious. We now discuss the merits of G.R. No. 84157. Petitioner Jacob S. Lim poses the following issues: l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these fundamental

questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6). These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended corporation, to wit: However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74. We first state the principles. While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules

governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S.

461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied). In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses. It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338). while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint: Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL. Arrangements and negotiations were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel

mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341-342). Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts. WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED. SO ORDERED.

G.R. No. L-18965

October 30, 1964

COMPAIA MARITIMA, petitioner, vs. INSURANCE COMPANY OF NORTH AMERICA, respondent. Rafael Dinglasan for Ozaeta Gibbs & Ozaeta for respondent. BAUTISTA ANGELO, J.: Sometime in October, 1952, Macleod and Company of the Philippines contracted by telephone the services of the Compaia Maritima, a shipping corporation, for the shipment of 2,645 bales of hemp from the former's Sasa private pier at Davao City to Manila and for their subsequent transhipment to Boston, Massachusetts, U.S.A. on board the S.S. Steel Navigator. This oral contract was later on confirmed by a formal and written booking issued by Macleod's branch office in Sasa and handcarried to Compaia Maritima's branch office in Davao in compliance with which the latter sent to Macleod's private wharf LCT Nos. 1023 and 1025 on which the loading of the hemp was completed on October 29, 1952. These two lighters were manned each by a patron and an assistant patron. The patrons of both barges issued the corresponding carrier's receipts and that issued by the patron of Barge No. 1025 reads in part: Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND COMPANY OF PHILIPPINES, Sasa Davao, for transhipment at Manila onto S.S. Steel Navigator. FINAL DESTINATION: Boston. Thereafter, the two loaded barges left Macleod's wharf and proceeded to and moored at the government's marginal wharf in the same place to await the arrival of the S.S. Bowline Knot belonging to Compaia Maritima on which the hemp was to be loaded. During the night of October 29, 1952, or at the early hours of October 30, LCT No. 1025 sank, resulting in the damage or loss of 1,162 bales of hemp loaded therein. On October 30, 1952, petitioner.

Macleod promptly notified the carrier's main office in Manila and its branch in Davao advising it of its liability. The damaged hemp was brought to Odell Plantation in Madaum, Davao, for cleaning, washing, reconditioning, and redrying. During the period from November 1-15, 1952, the carrier's trucks and lighters hauled from Odell to Macleod at Sasa a total of 2,197.75 piculs of the reconditioned hemp out of the original cargo of 1,162 bales weighing 2,324 piculs which had a total value of 116,835.00. After reclassification, the value of the reconditioned hemp was reduced to P84,887.28, or a loss in value of P31,947.72. Adding to this last amount the sum of P8,863.30 representing Macleod's expenses in checking, grading, rebating, and other fees for washing, cleaning and redrying in the amount of P19.610.00, the total loss adds up to P60,421.02. All abaca shipments of Macleod, including the 1,162 bales loaded on the carrier's LCT No. 1025, were insured with the Insurance Company of North America against all losses and damages. In due time, Macleod filed a claim for the loss it suffered as above stated with said insurance company, and after the same had been processed, the sum of P64,018.55 was paid, which was noted down in a document which aside from being a receipt of the amount paid, was a subrogation agreement between Macleod and the insurance company wherein the former assigned to the latter its rights over the insured and damaged cargo. Having failed to recover from the carrier the sum of P60,421.02, which is the only amount supported by receipts, the insurance company instituted the present action on October 28, 1953. After trial, the court a quo rendered judgment ordering the carrier to pay the insurance company the sum of P60,421.02, with legal interest thereon from the date of the filing of the complaint until fully paid, and the costs. This judgment was affirmed by the Court of Appeals on December 14, 1960. Hence, this petition for review. The issues posed before us are: (1) Was there a contract of carriage between the carrier and the shipper even if the loss occurred when the hemp was loaded on a barge owned by the carrier which was loaded free of charge and was not actually loaded on the S.S. Bowline Knot which would carry

the hemp to Manila and no bill of lading was issued therefore?; (2) Was the damage caused to the cargo or the sinking of the barge where it was loaded due to a fortuitous event, storm or natural disaster that would exempt the carrier from liability?; (3) Can respondent insurance company sue the carrier under its insurance contract as assignee of Macleod in spite of the fact that the liability of the carrier as insurer is not recognized in this jurisdiction?; (4) Has the Court of Appeals erred in regarding Exhibit NNN-1 as an implied admission by the carrier of the correctness and sufficiency of the shipper's statement of accounts contrary to the burden of proof rule?; and (5) Can the insurance company maintain this suit without proof of its personality to do so? 1. This issue should be answered in the affirmative. As found by the Court of Appeals, Macleod and Company contracted by telephone the services of petitioner to ship the hemp in question from the former's private pier at Sasa, Davao City, to Manila, to be subsequently transhipped to Boston, Massachusetts, U.S.A., which oral contract was later confirmed by a formal and written booking issued by the shipper's branch office, Davao City, in virtue of which the carrier sent two of its lighters to undertake the service. It also appears that the patrons of said lighters were employees of the carrier with due authority to undertake the transportation and to sign the documents that may be necessary therefor so much so that the patron of LCT No. 1025 signed the receipt covering the cargo of hemp loaded therein as follows: . Received in behalf of S.S. Bowline Knot in good order and condition from MACLEOD AND COMPANY OF PHILIPPINES, Sasa Davao, for transhipment at Manila onto S.S. Steel Navigator. FINAL DESTINATION: Boston. The fact that the carrier sent its lighters free of charge to take the hemp from Macleod's wharf at Sasa preparatory to its loading onto the ship Bowline Knot does not in any way impair the contract of carriage already entered into between the carrier and the shipper, for that preparatory

step is but part and parcel of said contract of carriage. The lighters were merely employed as the first step of the voyage, but once that step was taken and the hemp delivered to the carrier's employees, the rights and obligations of the parties attached thereby subjecting them to the principles and usages of the maritime law. In other words, here we have a complete contract of carriage the consummation of which has already begun: the shipper delivering the cargo to the carrier, and the latter taking possession thereof by placing it on a lighter manned by its authorized employees, under which Macleod became entitled to the privilege secured to him by law for its safe transportation and delivery, and the carrier to the full payment of its freight upon completion of the voyage. The receipt of goods by the carrier has been said to lie at the foundation of the contract to carry and deliver, and if actually no goods are received there can be no such contract. The liability and responsibility of the carrier under a contract for the carriage of goods commence on their actual delivery to, or receipt by, the carrier or an authorized agent. ... and delivery to a lighter in charge of a vessel for shipment on the vessel, where it is the custom to deliver in that way, is a good delivery and binds the vessel receiving the freight, the liability commencing at the time of delivery to the lighter. ... and, similarly, where there is a contract to carry goods from one port to another, and they cannot be loaded directly on the vessel and lighters are sent by the vessel to bring the goods to it, the lighters are for the time its substitutes, so that the bill of landing is applicable to the goods as soon as they are placed on the lighters. (80 C.J.S., p. 901, emphasis supplied) ... The test as to whether the relation of shipper and carrier had been established is, Had the control and possession of the cotton been completely surrendered by the shipper to the railroad company? Whenever the control and possession of goods passes to the carrier and nothing remains to be done by the shipper, then it can be said with

certainty that the relation of shipper and carrier has been established. Railroad Co. v. Murphy, 60 Ark. 333, 30 S.W. 419, 46 A. St. Rep. 202; Pine Bluff & Arkansas River Ry. v. MaKenzie, 74 Ark. 100, 86 S.W. 834; Matthews & Hood v. St. L., I.M. & S.R. Co., 123 Ark. 365, 185 S.W. 461, L.R.A. 1916E, 1194. (W.F. Bogart & Co., et al. v. Wade, et al., 200 S.W. 148). The claim that there can be no contract of affreightment because the hemp was not actually loaded on the ship that was to take it from Davao City to Manila is of no moment, for, as already stated, the delivery of the hemp to the carrier's lighter is in line with the contract. In fact, the receipt signed by the patron of the lighter that carried the hemp stated that he was receiving the cargo "in behalf of S.S. Bowline Knot in good order and condition." On the other hand, the authorities are to the effect that a bill of lading is not indispensable for the creation of a contract of carriage. Bill of lading not indispensable to contract of carriage. As to the issuance of a bill of lading, although article 350 of the Code of Commerce provides that "the shipper as well as the carrier of merchandise or goods may mutua-lly demand that a bill of lading is not indispensable. As regards the form of the contract of carriage it can be said that provided that there is a meeting of the minds and from such meeting arise rights and obligations, there should be no limitations as to form." The bill of lading is not essential to the contract, although it may become obligatory by reason of the regulations of railroad companies, or as a condition imposed in the contract by the agreement of the parties themselves. The bill of lading is juridically a documentary proof of the stipulations and conditions agreed upon by both parties. (Del Viso, pp. 314-315; Robles vs. Santos, 44 O.G. 2268). In other words, the Code does not demand, as necessary requisite in the contract of transportation, the delivery of the bill of lading to the shipper, but gives right to both

the carrier and the shipper to mutually demand of each other the delivery of said bill. (Sp. Sup. Ct. Decision, May 6, 1895). (Martin, Philippine Commercial Laws, Vol. II, Revised Edition, pp. 12-13) The liability of the carrier as common carrier begins with the actual delivery of the goods for transportation, and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance. Even where it is provided by statute that liability commences with the issuance of the bill of lading, actual delivery and acceptance are sufficient to bind the carrier. (13 C.J.S., p. 288) 2. Petitioner disclaims responsibility for the damage of the cargo in question shielding itself behind the claim offorce majeure or storm which occurred on the night of October 29, 1952. But the evidence fails to bear this out. Rather, it shows that the mishap that caused the damage or loss was due, not to force majeure, but to lack of adequate precautions or measures taken by the carrier to prevent the loss as may be inferred from the following findings of the Court of Appeals: Aside from the fact that, as admitted by appellant's own witness, the ill-fated barge had cracks on its bottom (pp. 18-19, t.s.n., Sept. 13, 1959) which admitted sea water in the same manner as rain entered "thru tank man-holes", according to the patron of LCT No. 1023 (exh. JJJ-4) conclusively showing that the barge was not seaworthy it should be noted that on the night of the nautical accident there was no storm, flood, or other natural disaster or calamity. Certainly, winds of 11 miles per hour, although stronger than the average 4.6 miles per hour then prevailing in Davao on October 29, 1952 (exh. 5), cannot be classified as storm. For according to Beaufort's wind scale, a storm has wind velocities of from 64 to 75 miles per hour; and by Philippine Weather Bureau standards

winds should have a velocity of from 55 to 74 miles per hour in order to be classified as storm (Northern Assurance Co., Ltd. vs. Visayan Stevedore Transportation Co., CAG.R. No. 23167-R, March 12, 1959). The Court of Appeals further added: "the report of R. J. del Pan & Co., Inc., marine surveyors, attributes the sinking of LCT No. 1025 to the 'non-water-tight conditions of various buoyancy compartments' (exh. JJJ); and this report finds confirmation on the above-mentioned admission of two witnesses for appellant concerning the cracks of the lighter's bottom and the entrance of the rain water 'thru manholes'." We are not prepared to dispute this finding of the Court of Appeals. 3. There can also be no doubt that the insurance company can recover from the carrier as assignee of the owner of the cargo for the insurance amount it paid to the latter under the insurance contract. And this is so because since the cargo that was damaged was insured with respondent company and the latter paid the amount represented by the loss, it is but fair that it be given the right to recover from the party responsible for the loss. The instant case, therefore, is not one between the insured and the insurer, but one between the shipper and the carrier, because the insurance company merely stepped into the shoes of the shipper. And since the shipper has a direct cause of action against the carrier on account of the damage of the cargo, no valid reason is seen why such action cannot be asserted or availed of by the insurance company as a subrogee of the shipper. Nor can the carrier set up as a defense any defect in the insurance policy not only because it is not a privy to it but also because it cannot avoid its liability to the shipper under the contract of carriage which binds it to pay any loss that may be caused to the cargo involved therein. Thus, we find fitting the following comments of the Court of Appeals: It was not imperative and necessary for the trial court to pass upon the question of whether or not the disputed abaca cargo was covered by Marine Open Cargo Policy No. MK-134 isued by appellee. Appellant was neither a party nor privy to this

insurance contract, and therefore cannot avail itself of any defect in the policy which may constitute a valid reason for appellee, as the insurer, to reject the claim of Macleod, as the insured. Anyway, whatever defect the policy contained, if any, is deemed to have been waived by the subsequent payment of Macleod's claim by appellee. Besides, appellant is herein sued in its capacity as a common carrier, and appellee is suing as the assignee of the shipper pursuant to exhibit MM. Since, as above demonstrated, appellant is liable to Macleod and Company of the Philippines for the los or damage to the 1,162 bales of hemp after these were received in good order and condition by the patron of appellant's LCT No. 1025, it necessarily follows that appellant is likewise liable to appellee who, as assignee of Macleod, merely stepped into the shoes of and substi-tuted the latter in demanding from appellant the payment for the loss and damage aforecited. 4. It should be recalled in connection with this issue that during the trial of this case the carrier asked the lower court to order the production of the books of accounts of the Odell Plantation containing the charges it made for the loss of the damaged hemp for verification of its accountants, but later it desisted therefrom on the claim that it finds their production no longer necessary. This desistance notwithstanding, the shipper however pre-sented other documents to prove the damage it suffered in connection with the cargo and on the strength thereof the court a quo ordered the carrier to pay the sum of P60,421.02. And after the Court of Appeals affirmed this award upon the theory that the desistance of the carrier from producing the books of accounts of Odell Plantation implies an admission of the correctness of the statements of accounts contained therein, petitioner now contends that the Court of Appeals erred in basing the affirmance of the award on such erroneous interpretation. There is reason to believe that the act of petitioner in waiving its right to have the books of accounts of

Odell Plantation presented in court is tantamount to an admission that the statements contained therein are correct and their verification not necessary because its main defense here, as well as below, was that it is not liable for the loss because there was no contract of carriage between it and the shipper and the loss caused, if any, was due to a fortuitous event. Hence, under the carrier's theory, the correctness of the account representing the loss was not so material as would necessitate the presentation of the books in question. At any rate, even if the books of accounts were not produced, the correctness of the accounts cannot now be disputed for the same is supported by the original documents on which the entries in said books were based which were presented by the shipper as part of its evidence. And according to the Court of Appeals, these documents alone sufficiently establish the award of P60,412.02 made in favor of respondent. 5. Finally, with regard to the question concerning the personality of the insurance company to maintain this action, we find the same of no importance, for the attorney himself of the carrier admitted in open court that it is a foreign corporation doing business in the Philippines with a personality to file the present action. WHEREFORE, the decision appealed affirmed, with costs against petitioner. from is