G.R. No. 154514. July 28, 2005WHITE GOLD MARINE SERVICES, INC., Petitioners, vs.PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents.D E C I S I O NQUISUMBING, J.:This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker.The facts are undisputed.White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance.3 Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latter’s unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer violated Sections 299,6 3007 and 3018 in relation to Sections 302 and 303, thereof.The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already superfluous.The Court of Appeals affirmed the decision of the Insurance

Commissioner. In its decision, the appellate court distinguished between P & I Clubs vis-à-vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual.In this petition, petitioner assigns the following errors allegedly committed by the appellate court,FIRST ASSIGNMENT OF ERRORTHE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES.SECOND ASSIGNMENT OF ERRORTHE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.THIRD ASSIGNMENT OF ERRORTHE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.FOURTH ASSIGNMENT OF ERRORTHE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual?The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance Commission.Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties." It stresses that as

a P & I Club, Steamship Mutual’s primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its agent.Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against liabilities incidental to shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.Is Steamship Mutual engaged in the insurance business?Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or "transacting an insurance business". These are:(a) making or proposing to make, as insurer, any insurance contract;(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.. . .The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances under which the performance becomes requisite. It is not by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.14

In particular, a marine insurance undertakes to indemnify the

assured against marine losses, such as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the coverage of marine insurance.Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and where the profits are divided among themselves, in proportion to their interest.17 Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.18

A P & I Club is "a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business.The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance Commission.Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration22 issued by the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority23 issued by the same agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance company doing business in the Philippines or any agent thereof, without first procuring a license so to act from the Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. . .Finally, White Gold seeks revocation of Pioneer’s certificate of authority and removal of its directors and officers. Regrettably, we are not the forum for these issues.WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent, respectively. The petitioner’s prayer for the revocation of Pioneer’s Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents.SO ORDERED.

G.R. No. 169737             February 12, 2008BLUE CROSS HEALTH CARE, INC., petitioner, vs.NEOMI* and DANILO OLIVARES, respondents.D E C I S I O NCORONA, J.:This is a petition for review on certiorari1 of a decision2 and resolution3 of the Court of Appeals (CA) dated July 29, 2005 and September 21, 2005, respectively, in CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial Court (RTC), Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153,4

which in turn reversed the decision of the Metropolitan Trial Court (MeTC), Makati City, Branch 66 dated August 5, 2003 in Civil Case No. 80867.5

Respondent Neomi T. Olivares applied for a health care program with petitioner Blue Cross Health Care, Inc., a health maintenance firm. For the period October 16, 2002 to October 15, 2003,6 she paid the amount of P11,117. For the same period, she also availed of the additional service of limitless consultations for an additional amount of P1,000. She paid these amounts in full on October 17, 2002. The application was approved on October 22, 2002. In the health care agreement, ailments due to "pre-existing conditions" were excluded from the coverage.7

On November 30, 2002, or barely 38 days from the effectivity of her health insurance, respondent Neomi suffered a stroke and was admitted at the Medical City which was one of the hospitals accredited by petitioner. During her confinement, she underwent several laboratory tests. On December 2, 2002, her attending physician, Dr. Edmundo Saniel,8 informed her that she could be discharged from the hospital. She incurred hospital expenses amounting to P34,217.20. Consequently, she requested from the representative of petitioner at Medical City a letter of authorization in order to settle her medical bills. But petitioner refused to issue the letter and suspended payment pending the submission of a certification from her attending physician that the stroke she suffered was not caused by a pre-existing condition.9

She was discharged from the hospital on December 3, 2002. On December 5, 2002, she demanded that petitioner pay her medical bill. When petitioner still refused, she and her husband, respondent Danilo Olivares, were constrained to settle the bill.10 They thereafter filed a complaint for collection of sum of money against petitioner in the MeTC on January 8, 2003.11 In its answer dated

January 24, 2003, petitioner maintained that it had not yet denied respondents' claim as it was still awaiting Dr. Saniel's report.In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares called by phone on January 29, 2003. She stated that she is invoking patient-physician confidentiality. That she no longer has any relationship with [petitioner]. And that I should not release any medical information concerning her neurologic status to anyone without her approval. Hence, the same day I instructed my secretary to inform your office thru Ms. Bernie regarding [respondent's] wishes.xxx       xxx       xxx12

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause of action. It held:xxx the best person to determine whether or not the stroke she suffered was not caused by "pre-existing conditions" is her attending physician Dr. Saniel who treated her and conducted the test during her confinement. xxx But since the evidence on record reveals that it was no less than [respondent Neomi] herself who prevented her attending physician from issuing the required certification, petitioner cannot be faulted from suspending payment of her claim, for until and unless it can be shown from the findings made by her attending physician that the stroke she suffered was not due to pre-existing conditions could she demand entitlement to the benefits of her policy.13

On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the MeTC and ordered petitioner to pay respondents the following amounts: (1) P34,217.20 representing the medical bill in Medical City and P1,000 as reimbursement for consultation fees, with legal interest from the filing of the complaint until fully paid; (2) P20,000 as moral damages; (3) P20,000 as exemplary damages; (4) P20,000 as attorney's fees and (5) costs of suit.14 The RTC held that it was the burden of petitioner to prove that the stroke of respondent Neomi was excluded from the coverage of the health care program for being caused by a pre-existing condition. It was not able to discharge that burden.15

Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in the CA. In a decision promulgated on July 29, 2005, the CA affirmed the decision of the RTC. It denied reconsideration in a resolution promulgated on September 21,

2005. Hence this petition which raises the following issues: (1) whether petitioner was able to prove that respondent Neomi's stroke was caused by a pre-existing condition and therefore was excluded from the coverage of the health care agreement and (2) whether it was liable for moral and exemplary damages and attorney's fees.The health care agreement defined a "pre-existing condition" as:x x x a disability which existed before the commencement date of membership whose natural history can be clinically determined, whether or not the Member was aware of such illness or condition. Such conditions also include disabilities existing prior to reinstatement date in the case of lapse of an Agreement. Notwithstanding, the following disabilities but not to the exclusion of others are considered pre-existing conditions including their complications when occurring during the first year of a Member’s coverage:I. Tumor of Internal OrgansII. Hemorrhoids/Anal FistulaIII. Diseased tonsils and sinus conditions requiring surgeryIV. Cataract/GlaucomaV. Pathological Abnormalities of nasal septum or turbinatesVI. Goiter and other thyroid disordersVII. Hernia/Benign prostatic hypertrophyVIII. EndometriosisIX. Asthma/Chronic Obstructive Lung diseaseX. EpilepsyXI. Scholiosis/Herniated disc and other Spinal column abnormalitiesXII. TuberculosisXIII. CholecysitisXIV. Gastric or Duodenal ulcerXV. Hallux valgusXVI. Hypertension and other Cardiovascular diseasesXVII. CalculiXVIII. Tumors of skin, muscular tissue, bone or any form of blood dyscraciasXIX. Diabetes MellitusXX. Collagen/Auto-Immune diseaseAfter the Member has been continuously covered for 12 months, this pre-existing provision shall no longer be applicable except for illnesses specifically excluded by an endorsement and made part of this Agreement.16

Under this provision, disabilities which existed before the commencement of the agreement are excluded from its coverage if they become manifest within one year from its effectivity. Stated otherwise, petitioner is not liable for pre-existing conditions if they occur within one year from the time the agreement takes effect.Petitioner argues that respondents prevented Dr. Saniel from submitting his report regarding the medical condition of Neomi. Hence, it contends that the presumption that evidence willfully suppressed would be adverse if produced should apply in its favor.17

Respondents counter that the burden was on petitioner to prove that Neomi's stroke was excluded from the coverage of their agreement because it was due to a pre-existing condition. It failed to prove this.18

We agree with respondents.In Philamcare Health Systems, Inc. v. CA,19 we ruled that a health care agreement is in the nature of a non-life insurance.20 It is an established rule in insurance contracts that when their terms contain limitations on liability, they should be construed strictly against the insurer. These are contracts of adhesion the terms of which must be interpreted and enforced stringently against the insurer which prepared the contract. This doctrine is equally applicable to health care agreements.21

Petitioner never presented any evidence to prove that respondent Neomi's stroke was due to a pre-existing condition. It merely speculated that Dr. Saniel's report would be adverse to Neomi, based on her invocation of the doctor-patient privilege. This was a disputable presumption at best.Section 3 (e), Rule 131 of the Rules of Court states:Sec. 3. Disputable presumptions. ― The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence:xxx       xxx       xxx(e) That evidence willfully suppressed would be adverse if produced.Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal of both parties; (b) the suppression was not willful; (c) it is merely corroborative or cumulative and (d) the suppression is an exercise of a privilege.22 Here, respondents' refusal to present or allow the presentation of Dr. Saniel's report was justified. It was privileged communication between physician

and patient.Furthermore, as already stated, limitations of liability on the part of the insurer or health care provider must be construed in such a way as to preclude it from evading its obligations. Accordingly, they should be scrutinized by the courts with "extreme jealousy"23 and "care" and with a "jaundiced eye."24 Since petitioner had the burden of proving exception to liability, it should have made its own assessment of whether respondent Neomi had a pre-existing condition when it failed to obtain the attending physician's report. It could not just passively wait for Dr. Saniel's report to bail it out. The mere reliance on a disputable presumption does not meet the strict standard required under our jurisprudence.Next, petitioner argues that it should not be held liable for moral and exemplary damages, and attorney's fees since it did not act in bad faith in denying respondent Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report and that, based on general medical findings, it had reasonable ground to believe that her stroke was due to a pre-existing condition, considering it occurred only 38 days after the coverage took effect.25

We disagree.The RTC and CA found that there was a factual basis for the damages adjudged against petitioner. They found that it was guilty of bad faith in denying a claim based merely on its own perception that there was a pre-existing condition:[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with [petitioner] over a legitimate claim while [respondent Neomi was] still experiencing the effects of a stroke and forced to pay for her medical bills during and after her hospitalization despite being covered by [petitioner’s] health care program, thereby suffering in the process extreme mental anguish, shock, serious anxiety and great stress. [They] have shown that because of the refusal of [petitioner] to issue a letter of authorization and to pay [respondent Neomi's] hospital bills, [they had] to engage the services of counsel for a fee of P20,000.00. Finally, the refusal of petitioner to pay respondent Neomi's bills smacks of bad faith, as its refusal [was] merely based on its own perception that a stroke is a pre-existing condition. (emphasis supplied)This is a factual matter binding and conclusive on this Court.26 We see no reason to disturb these findings.

WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 84163 are AFFIRMED.Treble costs against petitioner.SO ORDERED.

G.R. No. 125678      March 18, 2002PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs.COURT OF APPEALS and JULITA TRINOS, respondents.YNARES-SANTIAGO, J.:Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services.Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00.After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against petitioners, viz:WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente.4 Petitioner’s motion for reconsideration was denied.5

Hence, petitioner brought the instant petition for review, raising the primary argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under the Insurance Code6 does not apply.1âwphi1.nêtPetitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer,7

petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department

of Health.Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:1. The insured has an insurable interest;2. The insured is subject to a risk of loss by the happening of the designated peril;3. The insurer assumes the risk;4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; and5. In consideration of the insurer’s promise, the insured pays a premium.8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of himself. Section 10 provides:Every person has an insurable interest in the life and health:(1) of himself, of his spouse and of his children;(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and(4) of any person upon whose life any estate or interest vested in him depends.In the case at bar, the insurable interest of respondent’s husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.Petitioner argues that respondent’s husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondent’s husband to sign an express authorization for any person, organization or entity that

has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination.10 Specifically, the Health Care Agreement signed by respondent’s husband states:We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement.11 (Underscoring ours)In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicant’s medical history, thus:I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic copy of this authorization shall be as valid as the original.12

(Underscoring ours)Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented

information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied for.13

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondent’s husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue.14 Thus,(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.15 (Underscoring ours)The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.16

Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance." The right to rescind should be exercised previous to the commencement of an

action on the contract.17 In this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions:1. Prior notice of cancellation to insured;2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract – the insurer.20 By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.21

This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.22

Anent the incontestability of the membership of respondent’s husband, we quote with approval the following findings of the trial court:(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie.23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their

marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceased’s hospitalization, medication and the professional fees of the attending physicians.24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.SO ORDERED.

G.R. No. 167330               September 18, 2009PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.R E S O L U T I O NCORONA, J.:ARTICLE IIDeclaration of Principles and State PoliciesSection 15. The State shall protect and promote the right to health of the people and instill health consciousness among them.ARTICLE XIIISocial Justice and Human RightsSection 11. The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.2

We recall the facts of this case, as follows:Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.x x x           x x x          x x xOn January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxxThe deficiency [documentary stamp tax (DST)] assessment was imposed on petitioner’s health care agreement with the members

of its health care program pursuant to Section 185 of the 1997 Tax Code xxxxx x x           x x x          x x xPetitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments.On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.SO ORDERED.Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that petitioner’s health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code.On August 16, 2004, the CA rendered its decision. It held that petitioner’s health care agreement was in the nature of a non-life insurance contract subject to DST.WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE.Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.SO ORDERED.Petitioner moved for reconsideration but the CA denied it. Hence,

petitioner filed this case.x x x           x x x          x x xIn a decision dated June 12, 2008, the Court denied the petition and affirmed the CA’s decision. We held that petitioner’s health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioner’s contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business.Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments:(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company.(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CA’s disposition that health care services are not in the nature of an insurance business.(c) Section 185 should be strictly construed.(d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002.(e) Assuming arguendo that petitioner’s agreements are contracts of indemnity, they are not those contemplated under Section 185.(f) Assuming arguendo that petitioner’s agreements are akin to health insurance, health insurance is not covered by Section 185.(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185.(h) The June 12, 2008 decision should only apply prospectively.(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8

We find merit in petitioner’s motion for reconsideration.Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it:Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on diet, exercise and other healthy habits, and immunization;Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like andCurative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an injury or sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services are to be provided only by petitioner's physicians, i.e. those directly employed by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for the services rendered, at pre-agreed rates.14

To avail of petitioner’s health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services.

Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time.Health Maintenance Organizations Are Not Engaged In The Insurance BusinessWe said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the transaction of the business.15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious.Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered

surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and nugatory.17

This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute – its every word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance).Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent, frequency or type of services provided.The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not.Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:"a) making or proposing to make, as insurer, any insurance contract;b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety;c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code;d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed

conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,21 have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.Applying the "principal object and purpose test,"22 there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business.The rule was enunciated in Jordan v. Group Health Association23

wherein the Court of Appeals of the District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk.xxx Although Group Health’s activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss

caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered.That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.24 (Emphasis supplied)In California Physicians’ Service v. Garrison,25 the California court felt that, after scrutinizing the plan of operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose.There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more

broadly, is whether, looking at the plan of operation as a whole, ‘service’ rather than ‘indemnity’ is its principal object and purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is ‘service’ of a high order and not ‘indemnity.’26 (Emphasis supplied)American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy.x x x           x x x          x x xThe primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporation’s plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws….A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make

payment directly to the participating provider.28 (Emphasis supplied)Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services as needed, with payment made directly to the provider of these services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business.By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioner’s purpose of providing and arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object.In fact, a substantial portion of petitioner’s services covers preventive and diagnostic medical services intended to keep members from developing medical conditions or diseases.30 As an HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioner’s business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business.It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that petitioner’s operations are identical in every respect to those of the HMOs or health providers which were parties to those

cases. What we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be actually engaged in insurance activities.32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not supervised by the Insurance Commission but by the Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret.36

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997Section 185 states that DST is imposed on "all policies of insurance… or obligations of the nature of indemnity for loss,

damage, or liability…." In our decision dated June 12, 2008, we ruled that petitioner’s health care agreements are contracts of indemnity and are therefore insurance contracts:It is … incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury.Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner.Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.37

We reconsider. We shall quote once again the pertinent portion of Section 185:Section 185. Stamp tax on fidelity bonds and other insurance policies. – On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employer’s liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)In construing this provision, we should be guided by the principle

that tax statutes are strictly construed against the taxing authority.38 This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.39 Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:1. The insured has an insurable interest;2. The insured is subject to a risk of loss by the happening of the designed peril;3. The insurer assumes the risk;4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and5. In consideration of the insurer’s promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements? They do not.First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance

contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyer’s retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied)Second. Not all the necessary elements of a contract of insurance are present in petitioner’s agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioner’s physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment.In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements.Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part.Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician

or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury.In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance.Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts.Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.45

However, assuming that petitioner’s commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioner’s objective is to provide medical services at reduced cost, not to distribute risk like an insurer.In sum, an examination of petitioner’s agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code.There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOsFurthermore, militating in convincing fashion against the

imposition of DST on petitioner’s health care agreements under Section 185 of the NIRC of 1997 is the provision’s legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:ARTICLE XIStamp Taxes on Specified ObjectsSection 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following:x x x           x x x          x x xThird xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employer’s liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained.On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917.Section 1449 (1) eventually became Sec. 222 of Commonwealth

Act No. 466 (the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same.Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became Section 185.On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax.Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 924348 but Section 185 was untouched.On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only

on January 27, 2000, after more than a decade in the business as an HMO.50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.The Power To Tax Is Not The Power To DestroyAs a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its net worth of P259 million.54

Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-productive and ultimately subversive of the nation’s thrust towards a better economy which will ultimately benefit the majority of our people.59

Petitioner’s Tax Liability Was Extinguished Under The Provisions Of RA 9840Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on

December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61

Far from disagreeing with petitioner, respondent manifested in its memorandum:Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.In view of petitioner’s availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.62 (Emphasis supplied)Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.63 There is no other conclusion to draw than that petitioner’s liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480.Is The Court Bound By A Minute Resolution In Another Case?Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST.In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has already become final.67 When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive requirements, the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained.68

But what is its effect on other cases?With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata.69 However, if other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice.Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioner’s liability for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from

the fact that petitioner’s health care agreements are not subject to DST.A Final NoteTaking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage.It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services), including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services.The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs.WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.No costs.SO ORDERED.

G.R. No. 172041             December 18, 2008GATEWAY ELECTRONICS CORPORATION and GERONIMO B. DELOS REYES, JR., petitioners, vs.ASIANBANK CORPORATION, respondent.D E C I S I O NVELASCO, JR., J.:This petition for review under Rule 45 seeks to nullify and set aside the Decision1 dated October 28, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 80734 and its Resolution2 of March 17, 2006 denying petitioners’ motion for reconsideration.The FactsPetitioner Gateway Electronics Corporation (Gateway) is a domestic corporation that used to be engaged in the semi-conductor business. During the period material, petitioner Geronimo B. delos Reyes, Jr. was its president and one Andrew delos Reyes its executive vice-president.On July 23, 1996, Geronimo and Andrew executed separate but almost identical deeds of suretyship for Gateway in favor of respondent Asianbank Corporation (Asianbank), pertinently providing:I/We Geronimo B. de los Reyes, Jr. x x x warrant to the ASIANBANK CORPORATION, x x x due and punctual payment by the following individuals/companies/firms, hereinafter called the DEBTOR(S), of such amounts whether due or not, as indicated opposite their respective names, to wit:

NAME OF DEBTOR(S)GATEWAY ELECTRONICS CORPORATION

*P10,000,000.00*DOMESTIC BILLS[PURCHASED LINE]

owing to the said ASIANBANK CORPORATION, hereafter called the CREDITOR, as evidenced by all notes, drafts, overdrafts and other [credit] obligations of every kind and nature contracted/incurred by said DEBTOR(S) in favor of said CREDITOR.In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebt             nbsp         nbsp         nbsp         nbsp         erein secured at maturity, I/WE BRvs.and severally agree and engage to the CREDITOR, its successors and assigns, the prompt payment, x x x of such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon x x x.

I/WE further warrant the due and faithful performance by the DEBTOR(S) of all obligations to be performed under any contracts evidencing indebtedness/obligations and any supplements, amendments, changes or modifications made thereto, including but not limited to, the due and punctual payment by the said DEBTOR(S).MY/OUR liability on this Deed of Suretyship shall be solidary, direct and immediate and not contingent upon the pursuit by the CREDITOR x x x of whatever remedies it or they may have against the DEBTOR(S) or the securities or liens it or they may possess; and I/WE hereby agree to be and remain bound upon this suretyship, x x x and notwithstanding also that all obligations of the DEBTOR(S) to you outstanding and unpaid at any time may exceed the aggregate principal sum hereinabove stated.3

Later developments saw Asianbank extending to Gateway several export packing loans in the total aggregate amount of USD 1,700,883.48. This loan package was later consolidated with Dollar Promissory Note (PN) No. FCD-0599-27494 for the amount of USD 1,700,883.48 and secured by a chattel mortgage over Gateway’s equipment for USD 2 million.Gateway initially made payments on its loan obligations, but eventually defaulted. Upon Gateway’s request, Asianbank extended the maturity dates of the loan several times. These extensions bore the conformity of three of Gateway’s officers, among them Andrew.On July 15 and 30, 1999, Gateway issued two Philippine Commercial International Bank checks for the amounts of USD 40,000 and USD 20,000, respectively, as payment for its arrearages and interests for the periods June 30 and July 30, 1999; but both checks were dishonored for insufficiency of funds. Asianbank’s demands for payment made upon Gateway and its sureties went unheeded. As of November 23, 1999, Gateway’s obligation to Asianbank, inclusive of principal, interest, and penalties, totaled USD 2,235,452.17.Thus, on December 15, 1999, Asianbank filed with the Regional Trial Court (RTC) in Makati City a complaint for a sum of money against Gateway, Geronimo, and Andrew. The complaint, as later amended, was eventually raffled to Branch 60 of the court and docketed as Civil Case No. 99-2102 entitled Asian Bank Corporation v. Gateway Electronics Corporation, Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes.

In its answer to the amended complaint, Gateway traced the cause of its financial difficulties, described the steps it had taken to address its mounting problem, and faulted Asianbank for trying to undermine its efforts toward recovery.Andrew also filed an answer alleging, among other things, that the deed of suretyship he executed covering the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line did not include PN No. FCD-0599-2749, the payment of which was extended several times without his consent.Geronimo, on the other hand, alleged that the subject deed of suretyship, assuming the authenticity of his signature on it, was signed without his wife’s consent and should, thus, be considered as a mere continuing offer. Like Andrew, Geronimo argued that he ought to be relieved of his liability under the surety agreement inasmuch as he too never consented to the repeated loan maturity date extensions given by Asianbank to Gateway.After due hearing, the RTC rendered judgment dated October 7, 20035 in favor of Gateway, the dispositive portion of which states:WHEREFORE then, in view of the foregoing, judgment is rendered holding defendants Gateway Electronics Corporation, Geronimo De Los Reyes and Andrew De Los Reyes jointly and severally liable to pay the plaintiff the following:a) The sum of $2,235,452.17 United States Currency with interest to be added on at the prevailing market rate over a given thirty day London Interbank Offered Rate (LIBOR) plus a spread of 5.5358 percent or ten and [45,455/100,000] percent per annum for the first 35 days and every thirty days beginning November 23, 1999 until fully paid;b) a penalty charge after November 23, 1999 of two percent (2%) per month until fully paid;c) attorney’s fees of twenty percent (20%) of the total amount due and unpaid; andd) costs of the suit.SO ORDERED.Thereafter, Gateway, Geronimo, and Andrew appealed to the CA, their recourse docketed as CA-G.R. CV No. 80734. Following the filing of its and Geronimo’s joint appellants’ brief, Gateway filed on November 10, 2004 a petition for voluntary insolvency6 with the RTC in Imus, Cavite, Branch 22, docketed as SEC Case No. 037-04, in which Asianbank was listed in the attached Schedule of Obligations as one of the creditors. On March 16, 2005, Metrobank,

as successor-in-interest of Asianbank, via a Notice of Creditor’s Claim, prayed that it be allowed to participate in the Gateways’s creditors’ meeting.In its Decision dated October 28, 2005, the CA affirmed the decision of the Makati City RTC. In time, Gateway and Geronimo interposed a motion for reconsideration. This was followed by a Supplemental Motion for Reconsideration dated January 20, 2006, stating that in SEC Case No. 037-04, the RTC in Imus, Cavite had issued an Order dated December 2, 2004, declaring Gateway insolvent and directing all its creditors to appear before the court on a certain date for the purpose of choosing among themselves the assignee of Gateway’s estate which the court’s sheriff has meanwhile placed in custodia legis.7 Gateway and Geronimo thus prayed that the assailed decision of the Makati City RTC be set aside, the insolvency court having acquired exclusive jurisdiction over the properties of Gateway by virtue of Section 60 of Act No. 1956, without prejudice to Asianbank pursuing its claim in the insolvency proceedings.In its March 17, 2006 Resolution, however, the CA denied the motion for reconsideration and its supplement.Hence, Gateway and Geronimo filed this petition anchored on the following grounds:IThe [CA] erred in disregarding the established rule that an action commenced by a creditor against a judicially declared insolvent for the recovery of his claim should be dismissed and referred to the insolvency court. Where, therefore, as in this case, petitioner GEC [referring to Gateway] has been declared insolvent x x x, respondent Asianbank’s claim for the payment of GEC’s loans should be ventilated before the insolvency court x x x.IIThe [CA] erred in admitting as evidence the Deed of Surety purportedly signed by petitioner GBR [referring to Geronimo] despite the unexplained failure of respondent Asianbank to present the originals of the Deed of Surety during the trial.IIIThe [CA] erred in holding that the repeated extensions granted by respondent Asianbank to GEC without notice to and the express consent of petitioner GBR did not discharge petitioner GBR from his liabilities as surety GEC in that:A. An extension granted to the debtor by the creditor without the

consent of the guarantor extinguishes the guaranty.B. The [CA] interpreted the supposed Deed of Surety of petitioner GBR as "too comprehensive and all encompassing as to amount to absurdity."C. The repeated extensions granted by Asianbank to GEC prevented petitioner GBR from exercising his right of subrogation under Article 2080 of the Civil Code. As such, petitioner GBR should be released from his obligations as surety of GEC.IVIt is a well-settled rule that when a bank deviates from normal banking practice in a transaction and sustains injury as a result thereof, the bank is deemed to have assumed the risk and no right of payment accrues to the latter against any party to the transaction. By repeatedly extending the period for the payment of GEC’s obligations and granting GEC other loans after the suretyship agreement despite GEC’s default and in failing to foreclose the chattel mortgage constituted as security for GEC’s loan contrary to normal banking practices, Asianbank failed to exercise reasonable caution for its own protection and assumed the risk of non-payment through its own acts, and thus has no right to proceed against petitioner GBR as surety for the payment of GEC’s loans.VIn Agcaoili v. GSIS, this Honorable Court had occasion to state that in determining the precise relief to give, the court will "balance the equities" or the respective interests of the parties and take into account the relative hardship that one relief or another may occasion to them. Upon a balancing of interests of both petitioner GBR and respondent Asianbank, greater and irreparable harm and injury would be suffered by petitioner GBR than respondent Asianbank if the assailed Decision and Resolution of the [CA] would be upheld x x x. This Honorable Court x x x should thus exercise its equity jurisdiction in the instant case to the end that it may render complete justice to both parties and declare petitioner GBR as released and discharged from any liability in respect of respondent Asianbank’s claims.8

The Ruling of the CourtGateway May Be Discharged from Liability But Not GeronimoGateway, having been declared insolvent, argues that jurisdiction over all claims against all of its properties and assets properly

pertains to the insolvency court. Accordingly, Gateway adds, citing Sec. 60 of Act No. 1956,9 as amended, or the Insolvency Law, any pending action against its properties and assets must be dismissed, the claimant relegated to the insolvency proceedings for the claimant’s relief.The contention, as formulated, is in a qualified sense meritorious. Under Sec. 18 of Act No. 1956, as couched, the issuance of an order declaring the petitioner insolvent after the insolvency court finds the corresponding petition for insolvency to be meritorious shall stay all pending civil actions against the petitioner’s property. For reference, said Sec. 18, setting forth the effects and contents of a voluntary insolvency order,10 pertinently provides:Section 18. Upon receiving and filing said petition, schedule, and inventory, the court x x x shall make an order declaring the petitioner insolvent, and directing the sheriff of the province or city in which the petition is filed to take possession of, and safely keep, until the appointment of a receiver or assignee, all the deeds, vouchers, books of account, papers, notes, bonds, bills, and securities of the debtor and all his real and personal property, estate and effects x x x. Said order shall further forbid the payment to the creditor of any debts due to him and the delivery to the debtor, or to any person for him, of any property belonging to him, and the transfer of any property by him, and shall further appoint a time and place for a meeting of the creditors to choose an assignee of the estate. Said order shall [be published] x x x. Upon the granting of said order, all civil proceedings pending against the said insolvent shall be stayed. When a receiver is appointed, or an assignee chosen, as provided in this Act, the sheriff shall thereupon deliver to such receiver or assignee, as the case may be all the property, assets, and belongings of the insolvent which have come into his possession x x x. (Emphasis supplied.)Complementing Sec. 18 which appropriately comes into play "upon the granting of [the] order" of insolvency is the succeeding Sec. 60 which properly applies to the period "after the commencement of proceedings in insolvency." The two provisions may be harmonized as follows: Upon the filing of the petition for insolvency, pending civil actions against the property of the petitioner are not ipso facto stayed, but the insolvent may apply with the court in which the actions are pending for a stay of the actions against the insolvent’s property. If the court grants such application, pending

civil actions against the petitioner’s property shall be stayed; otherwise, they shall continue. Once an order of insolvency nevertheless issues, all civil proceedings against the petitioner’s property are, by statutory command, automatically stayed. Sec. 60 is reproduced below:SECTION 60. Creditors proving claims cannot sue; Stay of action.–No creditor, proving his debt or claim, shall be allowed to maintain any suit therefor against the debtor, but shall be deemed to have waived all right of action and suit against him, and all proceedings already commenced, or any unsatisfied judgment already obtained thereon, shall be deemed to be discharged and surrendered thereby; and after the debtor’s discharge, upon proper application and proof to the court having jurisdiction, all such proceedings shall be, dismissed, and such unsatisfied judgments satisfied of record: Provided, x x x. A creditor proving his debt or claim shall not be held to have waived his right of action or suit against the debtor when a discharge has have been refused or the proceedings have been determined to the without a discharge. No creditor whose debt is provable under this Act shall be allowed, after the commencement of proceedings in insolvency, to prosecute to final judgment any action therefor against the debtor until the question of the debtor’s discharge shall have been determined, and any such suit proceeding shall, upon the application of the debtor or of any creditor, or the assignee, be stayed to await the determination of the court on the question of discharge: Provided, That if the amount due the creditor is in dispute, the suit, by leave of the court in insolvency, may proceed to judgment for purpose of ascertaining the amount due, which amount, when adjudged, may be allowed in the insolvency proceedings, but execution shall be stayed aforesaid. (Emphasis supplied.)Applying the aforequoted provisions, it can rightfully be said that the issuance of the insolvency order of December 2, 2004 had the effect of automatically staying the civil action for a sum of money filed by Asianbank against Gateway. In net effect, the proceedings before the CA in CA-G.R. CV No. 80734, but only insofar as the claim against Gateway was concerned, was, or ought to have been, suspended after December 2, 2004, Asianbank having been duly notified of and in fact was a participant in the insolvency proceedings. The Court of course takes stock of the proviso in Sec.

60 of Act No. 1956 which in a way provided the CA with a justifying tool to continue and to proceed to judgment in CA-G.R. CV No. 80734, but only for the purpose of ascertaining the amount due from Gateway. At any event, on the postulate that jurisdiction over the properties of the insolvent-declared Gateway lies with the insolvency court, execution of the CA insolvency judgment against Gateway can only be pursued before the insolvency court. Asianbank, no less, tends to agree to this conclusion when it stated: "[E]ven it if is assumed that the declaration of insolvency of petitioner Gateway can be taken cognizance of, such fact does relieve petitioner Geronimo and/or Andrew delos Reyes from performing their obligations based on the Deeds of Suretyship x x x."11

Geronimo, however, is a different story.Asianbank argues that the stay of the collection suit against Gateway is without bearing on the liability of Geronimo as a surety, adding that claims against a surety may proceed independently from that against the principal debtor. Pursuing the point, Asianbank avers that Geronimo may not invoke the insolvency of Gateway as a defense to evade liability.Geronimo counters with the argument that his liability as a surety cannot be separated from Gateway’s liability. As surety, he continues, he is entitled to avail himself of all the defenses pertaining to Gateway, including its insolvency, suggesting that if Gateway is eventually released from what it owes Asianbank, he, too, should also be so relieved.Geronimo’s above contention is untenable.Suretyship is covered by Article 2047 of the Civil Code, which states:By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.The Court’s disquisition in Palmares v. Court of Appeals on suretyship is instructive, thus:A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid x x x. Stated differently, a surety promises to pay the principal’s debt if the principal will not

pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do so. x x x In other words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default x x x.x x x xA creditor’s right to proceed against the surety exists independently of his right to proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for the creditor to proceed against a principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as that of the principal, then soon as the principal is in default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the principal. Perforce, x x x a surety is primarily liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety are equally bound.12

Clearly, Asianbank’s right to collect payment for the full amount from Geronimo, as surety, exists independently of its right against Gateway as principal debtor;13 it could thus proceed against one of them or file separate actions against them to recover the principal debt covered by the deed on suretyship, subject to the rule prohibiting double recovery from the same cause.14 This legal postulate becomes all the more cogent in case of an insolvency situation where, as here, the insolvency court is bereft of jurisdiction over the sureties of the principal debtor. As Asianbank aptly points out, a suit against the surety, insofar as the surety’s solidary liability is concerned, is not affected by an insolvency proceeding instituted by or against the principal debtor. The same principle holds true with respect to the surety of a corporation in distress which is subject of a rehabilitation proceeding before the

Securities and Exchange Commission (SEC). As we held in Commercial Banking Corporation v. CA, a surety of the distressed corporation can be sued separately to enforce his liability as such, notwithstanding an SEC order declaring the former under a state of suspension of payment.15

Geronimo also states that, as things stand, his liability, as compared to that of Gateway, is contextually more onerous and burdensome, precluded as he is from seeking recourse against the insolvent corporation. From this premise, Geronimo claims that since Gateway cannot, owing to the order of insolvency, be made to pay its obligation, he, too, being just a surety, cannot also be made to pay, obviously having in mind Art. 2054 of the Civil Code, as follows:A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions.Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.The Court is not convinced. The above article enunciates the rule that the obligation of a guarantor may be less, but cannot be more than the obligation of the principal debtor. The rule, however, cannot plausibly be stretched to mean that a guarantor or surety is freed from liability as such guarantor or surety in the event the principal debtor becomes insolvent or is unable to pay the obligation. This interpretation would defeat the very essence of a suretyship contract which, by definition, refers to an agreement whereunder one person, the surety, engages to be answerable for the debt, default, or miscarriage of another known as the principal.16 Geronimo’s position that a surety cannot be made to pay when the principal is unable to pay is clearly specious and must be rejected.The CA Did Not Err in Admittingthe Deed of Suretyship as EvidenceGoing to the next ground, Geronimo maintains that the CA erred in admitting the Deed of Suretyship purportedly signed by him, given that Asianbank failed to present its original copy.This contention is bereft of merit.As may be noted, paragraph 6 of Asianbank’s complaint alleged the following:6. The loan was secured by the Deeds of Suretyship dated July 23, 1996 that were executed by defendants Geronimo B. De Los

Reyes, Jr. and Andrew S. De Los Reyes. Attached as Annexes "B" and "C," respectively, are photocopies of the Deeds of Suretyship executed by defendants Geronimo B. De Los Reyes, Jr. and Andrew S. De Los Reyes. Subsequently, a chattel mortgage over defendant Gateway’s equipment for $2 million, United States currency, was executed.17

Geronimo traversed in his answer the foregoing allegation in the following wise: "2.5. Paragraph 6 is denied, subject to the special and affirmative defenses and allegations hereinafter set forth."The ensuing special and affirmative defenses were raised in Gateway’s answer:15. Granting even that [Geronimo] signed the Deed of Suretyship, his wife x x x had not given her consent thereto. Accordingly, the security created by the suretyship shall be construed only as a continuing offer on the part of [Geronimo] and plaintiff and may only be perfected as a binding contract upon acceptance by Mrs. Delos Reyes. x x x17. Moreover, assuming, gratia argumenti, that [Geronimo] may be bound by the suretyship agreement, there is no showing that he has consented to the repeated extensions made by plaintiff in favor of GEC or to a waiver of notice of such extensions. It should be pointed out that Mr. Geronimo delos Reyes executed the suretyship agreement in his personal capacity and not in his capacity as Chairman of the Board of GEC. His consent, insofar as the continuing application of the suretyship agreement to GEC’s obligations in view of the repeated extension extended by plaintiff [is concerned], is therefore necessary. Obviously, plaintiff cannot now hold him liable as a surety to GEC’s obligations.18

The Rules of Court prescribes, under its Secs. 7 and 8, Rule 8, the procedure should a suit or defense is predicated on a written document, thus:Sec. 7. Action or defense based on document.–Whenever an action or defense is based upon a written instrument or document, the substance of such instrument or document shall be set forth in the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part of the pleading, or said copy may with like effect be set forth in the pleading.Sec. 8. How to contest such documents.–When an action or defense is founded upon a written instrument, copied in or attached to the corresponding pleading as provided in the

preceding section, the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party, under oath, specifically denies them, and sets forth what he claims to be the facts; but the requirement of an oath does not apply when the adverse party does not appear to be a party to the instrument or when compliance with an order for an inspection of the original instrument is refused. (Emphasis supplied.)Given the above perspective, Asianbank, by attaching a photocopy of the Deed of Suretyship to its underlying complaint, hewed to the requirements of the above twin provisions. Asianbank, thus, effectively alleged the due execution and genuineness of the said deed. From that point, Geronimo, if he intended to contest the surety deed, should have specifically denied the due execution and genuineness of the deed in the manner provided by Sec. 10, Rule 8 of the Rules of Court, thus:Sec. 10. Specific denial.–A defendant must specify each material allegation of fact the truth of which he does not admit and, whenever practicable, shall set forth the substance of the matters upon which he relies to support his denial. Where a defendant desires to deny only a part of an averment, he shall specify so much of it as is true and material and shall deny only the remainder. Where a defendant is without knowledge or information sufficient to form a belief as to the truth of a material averment made in the complaint, he shall so state, and this shall have the effect of a denial. (Emphasis supplied.)In the instant case, Geronimo should have categorically stated that he did not execute the Deed of Suretyship and that the signature appearing on it was not his or was falsified. His Answer does not, however, contain any such statement. Necessarily then, Geronimo had not specifically denied, and, thus, is deemed to have admitted, the genuineness and due execution of the deed in question. In this regard, Sec. 11, Rule 8 of the Rules of Court states:Sec. 11. Allegations not specifically denied deemed admitted.–Material averment in the complaint, other than those as to the amount of unliquidated damages, shall be deemed admitted when not specifically denied. x x xOwing to Geronimo’s virtual admission of the genuineness and due execution of the deed of suretyship, Asianbank, contrary to the view of Gateway and Geronimo, need not present the original of the deed during the hearings of the case. Sec. 4, Rule 129 of the

Rules says so:Sec. 4. Judicial admissions.–An admission, verbal or written, made by the party in the course of the proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no such admission was made. (Emphasis supplied.)Geronimo Is Liable for PN No. FCD-0599-2749under His Deed of SuretyshipThis brings us to the third ground which involves the issue of the coverage of the suretyship. Preliminarily, an overview on the process of taking out loans should first be made. Generally, especially for large loans, banks first approve a line or facility out of which a client may avail itself of loans in the form of promissory notes without need of further processing and/or approval every time a draw down is made. In the instant case, Asianbank approved in favor of Gateway the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Asianbank approved these credit lines which were covered by a chattel mortgage as well as the deeds of suretyship, such that loans extended from these lines would already be secured and pre-approved. In other words, these facilities are not financial obligations yet. Asianbank did not yet lend out any money to Gateway with the approval of these lines. The loan transaction occurred or the principal obligation, as secured by a surety agreement, was born after the execution of loan documents, such as PN No. FCD-0599-2749.Geronimo now excepts from the ruling that the deed of suretyship he executed covered PN No. FCD-0599-2749 which embodied several export packing loans issued by Asianbank to Gateway. He claims that the deed only secured the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line. Geronimo describes as absurd the notion that a deed of suretyship would secure a loan obligation contracted three (3) years after the execution of the surety deed.Geronimo’s thesis that the deed in question cannot be accorded prospective application is erroneous. To be sure, the provisions of the subject deed of suretyship indicate a continuing suretyship. In Fortune Motors (Phils.) v. Court of Appeals,19 the Court, citing cases, defined and upheld the validity of a continuing suretyship in this wise:"x x x Of course, a surety is not bound under any particular

principal obligation until that principal obligation is born. But there is no theoretical or doctrinal difficulty inherent in saying that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.Comprehensive or continuing surety agreements are in fact quite commonplace in present day financial and commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company, commonly requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor."20

In Diño vs. Court of Appeals,21 we again had occasion to discourse on continuing guaranty/suretyship thus:"x x x A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. Otherwise stated, a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract, of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period x x x.In other jurisdictions, it has been held that the use of particular words and expressions such as payment of ‘any debt,’ ‘any indebtedness,’ ‘any deficiency,’ or ‘any sum,’ or the guaranty of ‘any transaction’ or money to be furnished the principal debtor ‘at any time,’ or ‘on such time’ that the principal debtor may require,

have been construed to indicate a continuing guaranty." (Emphasis supplied.)By its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan transactions, they are, to borrow from Diño, as cited above, "within the description or contemplation of the contract of guaranty." The Deed of Suretyship Geronimo signed envisaged a continuing suretyship when, by the express terms of the deed, he warranted payment of the PhP 10 million-Domestic Bills Purchased Line and the USD 3 million-Omnibus Credit Line, as evidenced by:x x x notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all expenses which may be incurred by the latter in collecting any or all such instruments.22

Evidently, under the deed of suretyship, Geronimo undertook to secure all obligations obtained under the Domestic Bills Purchased Line and Omnibus Credit Line, without any specification as to the period of the loan.Geronimo’s application of Garcia v. Court of Appeals, a case covering two separate loans, denominated as SWAP Loan and Export Loan, is quite misplaced. There, the Court ruled that the continuing suretyship only covered the SWAP Loan as it was only this loan that was referred to in the continuing suretyship. The Court wrote in Garcia:Particular attention must be paid to the statement appearing on the face of the Indemnity [Suretyship] Agreement x x x "evidenced by those certain loan documents dated April 20, 1982" x x x. From this statement, it is clear that the Indemnity Agreement refers only to the loan document of April 20, 1982 which is the SWAP loan. It did not include the EXPORT loan. Hence, petitioner cannot be held answerable for the EXPORT loan.23

(Emphasis supplied.)The Indemnity Agreement in Garcia specifically identified loan documents evidencing obligations of the debtor that the agreement was intended to secure. In the present case, however, the suretyship Geronimo assumed did not limit itself to a specific loan document to the exclusion of another. The suretyship document merely mentioned the Domestic Bills Purchased Line and Omnibus Credit Line as evidenced by "all notes, drafts x x x

contracted/incurred by [Gateway] in favor of [Asianbank]."24 As explained earlier, such credit facilities are not loans by themselves. Thus, the Deed of Suretyship was intended to secure future loans for which these facilities were opened in the first place.Lest it be overlooked, both the trial and appellate courts found the Omnibus Credit Line referred to in the Deed of Suretyship as covering the export packing credit loans Asianbank extended to Gateway. We agree with this factual determination. By the very use of the term "omnibus," and in practice, an omnibus credit line refers to a credit facility whence a borrower may avail of various kinds of credit loans. Defined as such, an omnibus line is broad enough to refer to or cover an export packing credit loan.Geronimo’s allegation that an export packing credit loan is separate and distinct from an omnibus credit line is but a bare and self-serving assertion bereft of any factual or legal basis. One who alleges something must prove it: a mere allegation is not evidence.25 Geronimo has not discharged his burden of proof. His contention cannot be given any weight.As a final and major ground for his release as surety, Geronimo alleges that Asianbank repeatedly extended the maturity dates of the obligations of Gateway without his knowledge and consent. Pressing this point, he avers that, contrary to the findings of the CA, he did not waive his right to notice of extensions of Gateway’s obligations.Such contention is unacceptable as it glosses over the fact that the waiver to be notified of extensions is embedded in surety document itself, built in the ensuing provision:In case of default by any and/or all of the DEBTOR(S) to pay the whole part of said indebtedness herein secured at maturity, I/WE jointly and severally, agree and engage to the CREDITOR, its successors and assigns, the prompt payment, without demand or notice from said CREDITOR of such notes, drafts, overdrafts and other credit obligations on which the DEBTOR(S) may now be indebted or may hereafter become indebted to the CREDITOR, together with all interests, penalty and other bank charges as may accrue thereon and all expenses which may be incurred by the latter in collecting any or all such instruments.26 (Emphasis supplied.)In light of the above provision, Geronimo verily waived his right to notice of the maturity of notes, drafts, overdraft, and other credit

obligations for which Gateway shall become indebted. This waiver necessarily includes new agreements resulting from the novation of previous agreements due to changes in their maturity dates.Additionally, Geronimo’s lament about losing his right to subrogation is erroneous. He argues that by virtue of the order of insolvency issued by the insolvency court, title and right to possession to all the properties and assets of Gateway were vested upon Gateway’s assignee in accordance with Sec. 32 of the Insolvency Law.The transfer of Gateway’s property to the insolvency assignee, if this be the case, does not negate Geronimo’s right of subrogation, for such right may be had or exercised in the insolvency proceedings. The possibility that he may only recover a portion of the amount he is liable to pay is the risk he assumed as a surety of Gateway. Such loss does not, however, render ineffectual, let alone invalidate, his suretyship.Geronimo’s other arguments to escape liability are puerile and really partake more of a plea for liberality. They need not detain us long. In gist, Geronimo argues: first, that he is a gratuitous surety of Gateway; second, Asianbank deviated from normal banking practice, such as when it extended the period for payment of Gateway’s obligation and when it opted not to foreclose the chattel mortgage constituted as guarantee of Gateway’s loan obligation; and third, implementing the appealed CA’s decision would cause him great harm and injury.Anent the first argument, suffice it to state that Geronimo was then the president of Gateway and, as such, was benefited, albeit perhaps indirectly, by the loan thus granted by Asianbank. And as we said in Security Pacific Assurance Corporation, the surety is liable for the debt of another although the surety possesses no direct or personal interest over the obligation nor does the surety receive any benefit from it.27

Whether or not Asianbank really deviated from normal banking practice by extending the period for Gateway to comply with its loan obligation or by not going after the chattel mortgage adverted to is really of no moment. Banks are primarily in the business of extending loans and earn income from their lending operations by way of service and interest charges. This is why Asianbank opted to give Gateway ample opportunity to pay its obligations instead of foreclosing the chattel mortgage and in the process holding on to assets of which the bank has really no direct use.

The following excerpts from Palmares are in point:We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In other words, mere want of diligence or forbearance does not affect the creditor’s rights vis-à-vis the surety, unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not discharge the surety whether given at the principal’s request or without it, and whether it is yielded by the creditor through sympathy or from an inclination to favor the principal x x x. The neglect of the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the creditor’s mere statement that the creditor will not look to the surety, or that he need not trouble himself. The consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the principal may be lost by lapse of time, are immaterial.28

The Court’s Equity JurisdictionFinds No Application to the Instant CaseGeronimo urges the Court to release and discharge him from any liability arising from Asianbank’s claims if what he terms as "complete justice" is to be served. He cites, as supporting reference, Agcaoili v. GSIS,29 presenting in the same breath the following arguments: first, the Deed of Suretyship is a gratuitous contract from which he did not benefit; second, Asianbank assured him that the deed would not be enforced against him; third, the enforcement of the judgment of the CA would reduce Geronimo and his family to a life of penury; and fourth, Geronimo would be unable to exercise his right of subrogation, Gateway having already been declared as insolvent.The first and last arguments have already been addressed and found to be without merit. The second argument is a matter of defense which has remained unproved and even belied by Asianbank by its filing of the complaint. We see no need to further belabor any of them.As regards the third allegation, suffice it to state that the predicament Geronimo finds himself in is his very own doing. His misfortune is but the result of the implementation of a bona fide

contract he freely executed, the terms of which he is presumed to have thoroughly examined. He was not at all compelled to act as surety; he had a choice. It may be more offensive to public policy or good customs if he be allowed to go back on his undertaking under the surety contract. The Court cannot be a party to the contract’s impairment and relieve a surety from the effects of an unwise but nonetheless a valid surety contract.WHEREFORE, the instant petition is hereby DENIED. The appealed Decision dated October 28, 2005 of the CA and its March 17, 2006 Resolution in CA-G.R. CV No. 80734 are hereby AFFIRMED with the modification that any claim of Asianbank or its successor-in-interest against Gateway, if any, arising from the judgment in this suit shall be pursued before the RTC, Branch 22 in Imus, Cavite as the insolvency court.Costs against petitioners.SO ORDERED.

G.R. No. 179880               January 19, 2009ROBERTO TOTANES, Petitioner, vs.CHINA BANKING CORPORATION, Respondent.R E S O L U T I ONNACHURA, J.:This petition for review on certiorari under Rule 45 of the Rules of Court, filed by petitioner Roberto Totanes against respondent China Banking Corporation, assails the Court of Appeals (CA) Decision1 dated June 26, 2007 and its Resolution2 dated September 19, 2007, in CA-G.R. CV No. 68795.The facts, as found by the appellate court, are as follows:Petitioner and Manuel Antiquera (Antiquera) maintained their individual savings and current accounts with respondent in the latter’s Legaspi City Branch. Petitioner and Antiquera, in conspiracy with respondent’s branch manager Ronnie Lou Marquez (Marquez), allegedly engaged in what is commonly known in banking as "kiting operation," by manipulating the handling and operations of their deposit accounts.3 Petitioner and Antiquera, likewise, effected transfers of funds to each other’s accounts by drawing checks from their respective current accounts and depositing the same with the other’s accounts by way of debit and credit memos, all in connivance with Marquez, to make it appear that their respective accounts were sufficiently funded, when in truth and in fact, they were not.4

On July 9, 1986, Antiquera duly executed and delivered Promissory Note No. 2081 in favor of the respondent, whereby he promised to pay the latter on July 16, 1986, the sum of P150,000.00 with 24% interest per annum until fully paid. On July 29, 1986, Antiquera executed Promissory Note No. 2099 for another P150,000.00, payable on August 5, 1986, with the same rate of interest. Antiquera agreed in both promissory notes that he would pay an additional amount by way of penalty, equivalent to 1/10 of 1% per day of the total amount due from date of default until full payment.5

To secure the aforesaid obligations, a surety agreement form was executed and signed by Antiquera as principal and the petitioner as surety.6 As surety, petitioner bound himself to pay jointly and severally with Antiquera, the latter’s obligation with the respondent. His liability, however, was limited to P300,000.00, plus interest.7

For the alleged acts of defraudation committed by Antiquera,

Marquez and the petitioner; and for failure of Antiquera to pay his obligations covered by the promissory notes, respondent instituted a complaint for sum of money with damages. Antiquera and the petitioner were declared in default, hence, ex parte hearings ensued.After trial, the RTC rendered a Decision8 in favor of the respondent, but dismissed the case as against the petitioner. On motion for reconsideration, the RTC reversed itself but only insofar as it dismissed the case against the petitioner.9 Consequently, petitioner was held jointly and severally liable with Antiquera for P300,000.00 with 22% interest per annum until fully paid.10

Petitioner appealed the aforesaid order to the CA. Petitioner, however, failed to persuade the appellate court which affirmed the RTC’s disposition. The CA sustained the validity of the continuing surety agreement signed by petitioner. The suretyship, according to the CA, was not limited to a single transaction; rather, it contemplated a future course of dealing, covering a series of transactions, generally for an indefinite time or until revoked.11 To buttress its conclusion, the CA cited Atok Finance Corporation v. Court of Appeals,12 which it held to be "on-all-fours" with the instant case. Finally, the CA declared that petitioner’s liability as a surety was not negated by the trial court’s finding that he did not, in any way, participate in the alleged "kiting operations" or connive with Antiquera in committing the acts of defraudation, saying that petitioner’s liability as a surety was separate and distinct from the fraudulent acts of which he was found innocent.13

Petitioner now comes before us in this petition for review on certiorari raising the following errors:1) THE ASSAILED DECISION MISTAKENLY AND UNLAWFULLY HELD PETITIONER LIABLE FOR THE DEBT OF ANOTHER INDIVIDUAL, MANUEL ANTIQUERA. UNDER THE GENERAL RULE ON "RELATIVITY OF CONTRACT," RESPONDENT IS NOT LIABLE FOR THE CONTRACTUAL OBLIGATION OF MANUEL ANTIQUERA. NONE OF THE RECOGNIZED EXCEPTIONS APPLY TO PETITIONER. PETITIONER IS NOT THE MAKER, CO-MAKER, INDORSER, AGENT, BROKER, ACCOMMODATION PARTY, GUARANTOR OR SURETY OF MANUEL ANTIQUERA.2) RESPONDENT IS ESTOPPED FROM ENFORCING THE LOAN TRANSACTIONS (i.e., SURETY AGREEMENT AND PROMISSORY NOTES) RESPONDENT CLAIMS TO BE VOID OR UNAUTHORIZED FOR LACK OF APPROVAL BY RESPONDENT’S BOARD OF DIRECTORS, AS

REQUIRED IN RESPONDENT’S POLICY STATEMENTS DATED OCTOBER 19, 1983 (EXHIBIT E) AND SEPTEMBER 26, 1986 (EXHIBIT F).3) THE ASSAILED DECISION MISINTERPRETED AND MISAPPLIED THE RULING IN "ATOK FINANCE CORPORATION VS. COURT OF APPEALS" WHICH CONCERNED ITSELF WITH THE APPLICABILITY OF THE PERFECTED SURETY AGREEMENT IN RELATION TO FUTURE OBLIGATIONS, WHILE IN THE PRESENT CASE THE ISSUE IS THE PERFECTION OF THE CREDIT LINE AND THE SUPPORTING SURETY AGREEMENT.4) ASSUMING THE CREDIT LINE AND THE SUPPORTING SURETY AGREEMENT EXIST, THE UNILATERAL LOAN EXTENSIONS GRANTED BY RESPONDENT TO MANUEL ANTIQUERA HAD RESULTED IN THE EXTINGUISHMENT OF PETITIONER’S OBLIGATION, IF ANY, UNDER THE SURETY AGREEMENT.14

In fine, the issue for resolution is whether the petitioner may be held jointly and severally liable with Antiquera for the latter’s unsettled obligation with the respondent.We rule in the affirmative.Petitioner’s liability was based on the surety agreement he executed and signed freely and voluntarily. He, however, argues that said agreement was not perfected because the principal obligation, which is the credit line, did not materialize. As such, being a stranger to any contract entered into by Antiquera with the respondent, he should not be held liable.Both the trial and appellate courts recognized the genuineness and due execution of the promissory notes signed by Antiquera. We find no cogent reason to depart from such conclusion. These documents undoubtedly show the perfection of the principal contract, that is, the contract of loan; and consequently, the perfection of the accessory contract of suretyship.We reiterate the well-established principle that factual findings of the trial court are conclusive on the parties and not reviewable by this Court – and they carry even more weight when the CA affirms these findings, as in the present case. We are not duty-bound to analyze and weigh all over again the evidence already considered in the proceedings below.15

From the terms of the contract, it appears that petitioner jointly and severally undertook, bound himself and warranted to the respondent "the prompt payment of all overdrafts, promissory notes, discounts, letters of credit, drafts, bills of exchange, and

other obligations of every kind and nature, including trust receipts and discounts of drafts, bills of exchange, promissory notes, etc. x x x for which the Principal(s) may now be indebted or may hereafter become indebted to the Creditor."16

The fact that the contract of suretyship was signed by the petitioner prior to the execution of the promissory note does not negate the former’s liability. The contract entered into by the petitioner is commonly known as a continuing surety agreement. Of course, a surety is not bound to any particular principal obligation until that principal obligation is born. But there is no theoretical or doctrinal impediment for us to say that the suretyship agreement itself is valid and binding even before the principal obligation intended to be secured thereby is born, any more than there would be in saying that obligations which are subject to a condition precedent are valid and binding before the occurrence of the condition precedent.17

Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day financial and commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company, normally requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor.18

As surety, petitioner’s liability is joint and several. He does not insure the solvency of the debtor, but rather the debt itself.19

Suretyship arises upon the solidary binding of a person – deemed the surety – with the principal debtor, for the purpose of fulfilling an obligation.20 The prestation is not an original and direct obligation for the performance of the surety’s own act, but merely accessory or collateral to the obligation contracted by the principal.21 Although a surety contract is secondary to the principal obligation, the liability of the surety is direct, primary and absolute, or equivalent to that of a regular party to the undertaking. A surety becomes liable for the debt and duty of the principal obligor even without possessing a direct or personal interest in the obligations constituted by the latter.22

WHEREFORE, premises considered, the petition is DENIED for lack

of merit. The Decision of the Court of Appeals dated June 26, 2007 and its Resolution dated September 19, 2007, in CA-G.R. CV No. 68795, are AFFIRMED.SO ORDERED.

G.R. No. 166245             April 9, 2008ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner, vs.THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.D E C I S I O NVELASCO, JR., J.:The CaseCentral to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance application be considered as approval of the application?The FactsOn December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased burial lots from it on installment basis would be insured by Philamlife. The amount of insurance coverage depended upon the existing balance of the purchased burial lots. The policy was to be effective for a period of one year, renewable on a yearly basis.The relevant provisions of the policy are:ELIGIBILITY.Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted for Life Insurance coverage by the Company on its effective date is eligible for insurance under the Policy.EVIDENCE OF INSURABILITY.No medical examination shall be required for amounts of insurance up to P50,000.00. However, a declaration of good health shall be required for all Lot Purchasers as part of the application. The Company reserves the right to require further evidence of insurability satisfactory to the Company in respect of the following:1. Any amount of insurance in excess of P50,000.00.2. Any lot purchaser who is more than 55 years of age.LIFE INSURANCE BENEFIT.The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid balance of his loan (including arrears up to but not exceeding 2 months) as reported by the Assured to

the Company or the sum of P100,000.00, whichever is smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while insured under the Policy.EFFECTIVE DATE OF BENEFIT.The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.3

Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together with a copy of the application of each purchaser, and the amounts of the respective unpaid balances of all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982. One of those included in the list as "new business" was a certain John Chuang. His balance of payments was PhP 100,000. On August 2, 1984, Chuang died.Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for Chuang’s death. Attached to the claim were the following documents: (1) Chuang’s Certificate of Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4) Certificate of Attending Physician; and (5) Assured’s Certificate.In reply, Philamlife wrote Eternal a letter on November 12, 1984,6

requiring Eternal to submit the following documents relative to its insurance claim for Chuang’s death: (1) Certificate of Claimant (with form attached); (2) Assured’s Certificate (with form attached); (3) Application for Insurance accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account showing the unpaid balance of Chuang before his death.Eternal transmitted the required documents through a letter dated November 14, 1984,7 which was received by Philamlife on November 15, 1984.After more than a year, Philamlife had not furnished Eternal with any reply to the latter’s insurance claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on April 25, 1986.8

In response to Eternal’s demand, Philamlife denied Eternal’s insurance claim in a letter dated May 20, 1986,9 a portion of which reads:The deceased was 59 years old when he entered into Contract

#9558 and 9529 with Eternal Gardens Memorial Park in October 1982 for the total maximum insurable amount of P100,000.00 each. No application for Group Insurance was submitted in our office prior to his death on August 2, 1984.In accordance with our Creditor’s Group Life Policy No. P-1920, under Evidence of Insurability provision, "a declaration of good health shall be required for all Lot Purchasers as party of the application." We cite further the provision on Effective Date of Coverage under the policy which states that "there shall be no insurance if the application is not approved by the Company." Since no application had been submitted by the Insured/Assured, prior to his death, for our approval but was submitted instead on November 15, 1984, after his death, Mr. John Uy Chuang was not covered under the Policy. We wish to point out that Eternal Gardens being the Assured was a party to the Contract and was therefore aware of these pertinent provisions.With regard to our acceptance of premiums, these do not connote our approval per se of the insurance coverage but are held by us in trust for the payor until the prerequisites for insurance coverage shall have been met. We will however, return all the premiums which have been paid in behalf of John Uy Chuang.Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of Eternal, the dispositive portion of which reads:WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus legal rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorney’s fees.SO ORDERED.The RTC found that Eternal submitted Chuang’s application for insurance which he accomplished before his death, as testified to by Eternal’s witness and evidenced by the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert."10 It further ruled that due to Philamlife’s inaction from the submission of the requirements of the group insurance on December 29, 1982 to Chuang’s death on August 2, 1984, as well as Philamlife’s acceptance of the premiums during the same period, Philamlife was deemed to have approved

Chuang’s application. The RTC said that since the contract is a group life insurance, once proof of death is submitted, payment must follow.Philamlife appealed to the CA, which ruled, thus:WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.SO ORDERED.11

The CA based its Decision on the factual finding that Chuang’s application was not enclosed in Eternal’s letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no application form, Chuang was not covered by Philamlife’s insurance.Hence, we have this petition with the following grounds:The Honorable Court of Appeals has decided a question of substance, not therefore determined by this Honorable Court, or has decided it in a way not in accord with law or with the applicable jurisprudence, in holding that:I. The application for insurance was not duly submitted to respondent PhilamLife before the death of John Chuang;II. There was no valid insurance coverage; andIII. Reversing and setting aside the Decision of the Regional Trial Court dated May 29, 1996.The Court’s RulingAs a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before the CA and first level courts, considering their findings of facts are conclusive and binding on this Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the [CA] went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the

petitioner’s main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.12

(Emphasis supplied.)In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may review them.Eternal claims that the evidence that it presented before the trial court supports its contention that it submitted a copy of the insurance application of Chuang before his death. In Eternal’s letter dated December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a copy of the insurance application which was signed by Chuang himself and executed before his death.On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that Eternal must present evidence showing that Philamlife received a copy of Chuang’s insurance application.The evidence on record supports Eternal’s position.The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received, states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments. Such receipt is an admission by Philamlife against its own interest.13 The burden of evidence has shifted to Philamlife, which must prove that the letter did not contain Chuang’s insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuang’s insurance application.To reiterate, it was Philamlife’s bounden duty to make sure that before a transmittal letter is stamped as received, the contents of the letter are correct and accounted for.Philamlife’s allegation that Eternal’s witnesses ran out of credibility and reliability due to inconsistencies is groundless. The trial court

is in the best position to determine the reliability and credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses’ demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and conclusive on the appellate court, unless some facts or circumstances of weight and substance have been overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of the case.15

An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no overlooked facts of substance and value.Philamlife primarily claims that Eternal did not even know where the original insurance application of Chuang was, as shown by the testimony of Edilberto Mendoza:Atty. Arevalo:Q Where is the original of the application form which is required in case of new coverage?[Mendoza:]A It is [a] standard operating procedure for the new client to fill up two copies of this form and the original of this is submitted to Philamlife together with the monthly remittances and the second copy is remained or retained with the marketing department of Eternal Gardens.Atty. Miranda:We move to strike out the answer as it is not responsive as counsel is merely asking for the location and does not [ask] for the number of copy.Atty. Arevalo:Q Where is the original?[Mendoza:]A As far as I remember I do not know where the original but when I submitted with that payment together with the new clients all the originals I see to it before I sign the transmittal letter the originals are attached therein.16

In other words, the witness admitted not knowing where the original insurance application was, but believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two insurance application forms were accomplished and the testimony of Mendoza on who actually

filled out the application form, these are minor inconsistencies that do not affect the credibility of the witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the credibility of witnesses, and these may even serve to strengthen their credibility as these negate any suspicion that the testimonies have been rehearsed.17

We reiterated the above ruling in Merencillo v. People:Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecution’s evidence as a whole or reflect on the witnesses’ honesty. The test is whether the testimonies agree on essential facts and whether the respective versions corroborate and substantially coincide with each other so as to make a consistent and coherent whole.18

In the present case, the number of copies of the insurance application that Chuang executed is not at issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternal’s witnesses.However, the question arises as to whether Philamlife assumed the risk of loss without approving the application.This question must be answered in the affirmative.As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:EFFECTIVE DATE OF BENEFIT.The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is not approved by the Company.An examination of the above provision would show ambiguity between its two sentences. The first sentence appears to state that the insurance coverage of the clients of Eternal already became effective upon contracting a loan with Eternal while the second sentence appears to require Philamlife to approve the insurance contract before the same can become effective.It must be remembered that an insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and strictly against the insurer in order to safeguard the latter’s interest. Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:Indemnity and liability insurance policies are construed in

accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with its obligations.19

(Emphasis supplied.)In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above ruling, stating that:When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract, the insurer. By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10, 1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a party’s purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920 on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance application must not work to prejudice the insured; it cannot be interpreted as a termination of the insurance contract. The termination of the insurance contract by the insurer must be explicit and unambiguous.As a final note, to characterize the insurer and the insured as contracting parties on equal footing is inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast

amounts of experience in the industry purposefully used to its advantage. More often than not, insurance contracts are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all understandable to laypersons, that are imposed on those who wish to avail of insurance. As such, insurance contracts are imbued with public interest that must be considered whenever the rights and obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of insurance applicants, insurance companies must be obligated to act with haste upon insurance applications, to either deny or approve the same, or otherwise be bound to honor the application as a valid, binding, and effective insurance contract.21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance Policy of Chuang;(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from the time of extra-judicial demand by Eternal until Philamlife’s receipt of the May 29, 1996 RTC Decision on June 17, 1996;(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000 from June 17, 1996 until full payment of this award; and(4) To pay Eternal attorney’s fees in the amount of PhP 10,000.No costs.SO ORDERED.

G.R. No. 112329           January 28, 2000VIRGINIA A. PEREZ, petitioner, vs.COURT OF APPEALS and BF LIFEMAN INSURANCE CORPORATION, respondents.YNARES-SANTIAGO, J.:A contract of insurance, like all other contracts, must be assented to by both parties, either in person or through their agents and so long as an application for insurance has not been either accepted or rejected, it is merely a proposal or an offer to make a contract.Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CA-G.R. CV 35529 entitled, "BF Lifeman Insurance Corporations; Plaintiff-Appellant versus Virginia A. Perez. Defendant-Appellee," which declared Insurance Policy 056300 for P50,000.00 issued by private respondent corporation in favor of the deceased Primitivo B. Perez, null and void and rescinded, thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch XVI.The facts of the case as summarized by respondent Court of Appeals are not in dispute.Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980 for P20,000.00. Sometime in October 1987, an agent of the insurance corporation, Rodolfo Lalog, visited Perez in Guinayangan, Quezon and convinced him to apply for additional insurance coverage of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid annually.1âwphi1.nêtOn October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivo's wife, paid P2,075.00 to Lalog. The receipt issued by Lalog indicated the amount received was a "deposit."1

Unfortunately, Lalog lost the application form accomplished by Perez and so on October 28, 1987, he asked the latter to fill up another application form.2 On November 1, 1987, Perez was made to undergo the required medical examination, which he passed.3

Pursuant to the established procedure of the company, Lalog forwarded the application for additional insurance of Perez, together with all its supporting papers, to the office of BF Lifeman Insurance Corporation at Gumaca, Quezon which office was supposed to forward the papers to the Manila office.On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a storm. At the time of his death,

his application papers for the additional insurance of P50,000.00 were still with the Gumaca office. Lalog testified that when he went to follow up the papers, he found them still in the Gumaca office and so he personally brought the papers to the Manila office of BF Lifeman Insurance Corporation. It was only on November 27, 1987 that said papers were received in Manila.Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved the application and issued the corresponding policy for the P50,000.00 on December 2, 1987.4

Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00 (double indemnity in case of accident) but the insurance company refused to pay the claim under the additional policy coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a triple indemnity rider on the insurance policy. In its letter' of January 29, 1988 to Virginia A. Perez, the insurance company maintained that the insurance for P50,000.00 had not been perfected at the time of the death of Primitivo Perez. Consequently, the insurance company refunded the amount of P2,075.00 which Virginia Perez had paid.On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint against Virginia A. Perez seeking the rescission and declaration of nullity of the insurance contract in question.Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his prestations under the contract and all the elements of a valid contract are present. She then filed a counterclaim against private respondent for the collection of P150,000.00 as actual damages, P100,000.00 as exemplary damages, P30,000.00 as attorney's fees and P10,000.00 as expenses for litigation.On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads as follows:WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A. Perez, ordering the plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF Lifeman Insurance Policy No. 056300, plus double indemnity under the SARDI or in the total amount of P150,000.00 (any refund made and/or premium deficiency to be deducted therefrom).

SO ORDERED.5

The trial court, in ruling for petitioner, held that the premium for the additional insurance of P50,000.00 had been fully paid and even if the sum of P2,075.00 were to be considered merely as partial payment, the same does not affect the validity of the policy. The trial court further stated that the deceased had fully complied with the requirements of the insurance company. He paid, signed the application form and passed the medical examination. He should not be made to suffer the subsequent delay in the transmittal of his application form to private respondent's head office since these were no longer within his control.The Court of Appeals, however, reversed the decision of the trial court saying that the insurance contract for P50,000.00 could not have been perfected since at the time that the policy was issued, Primitivo was already dead.6 Citing the provision in the application form signed by Primitivo which states that:. . . there shall be no contract of insurance unless and until a policy is issued on this application and that the policy shall not take effect until the first premium has been paid and the policy has been delivered to and accepted by me/us in person while I/we, am/are in good healththe Court of Appeals held that the contract of insurance had to be assented to by both parties and so long as the application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract.Petitioner's motion for reconsideration having been denied by respondent court, the instant petition for certiorari was filed on the ground that there was a consummated contract of insurance between the deceased and BF Lifeman Insurance Corporation and that the condition that the policy issued by the corporation be delivered and received by the applicant in good health, is potestative, being dependent upon the will of the insurance company, and is therefore null and void.The petition is bereft of merit.Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate the other for loss on a specified subject by specified perils.7 A contract, on the other hand, is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service.8 Under Article 1318 of the Civil Code, there is no contract unless the following requisites concur:

(1) Consent of the contracting parties;(2) Object certain which is the subject matter of the contract;(3) Cause of the obligation which is established.Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute.When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his medical examination, his application was subject to the acceptance of private respondent BF Lifeman Insurance Corporation. The perfection of the contract of insurance between the deceased and respondent corporation was further conditioned upon compliance with the following requisites stated in the application form:there shall be no contract of insurance unless and until a policy is issued on this application and that the said policy shall not take effect until the premium has been paid and the policy delivered to and accepted by me/us in person while I/We, am/are in good health.9

The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it merely received the application form and all the requisite supporting papers of the applicant. Its assent was given when it issues a corresponding policy to the applicant. Under the abovementioned provision, it is only when the applicant pays the premium and receives and accepts the policy while he is in good health that the contract of insurance is deemed to have been perfected.It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for additional insurance coverage were still with the branch office of respondent corporation in Gumaca and it was only two days later, or on November 27, 1987, when Lalog personally delivered the application papers to the head office in Manila. Consequently, there was absolutely no way the acceptance of the application could have been communicated to the applicant for the latter to accept inasmuch as the applicant at the time was already dead. In the case of Enriquez vs. Sun Life Assurance Co. of Canada,10 recovery on the life insurance of the deceased was disallowed on the ground that the contract for annuity was not perfected since it had not been proved satisfactorily that the acceptance of the application ever reached the knowledge of the applicant.

Petitioner insists that the condition imposed by respondent corporation that a policy must have been delivered to and accepted by the proposed insured in good health is potestative being dependent upon the will of the corporation and is therefore null and void.We do not agree.A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is considered void. Article 1182 of the New Civil Code states: When the fulfillment of the condition depends upon the sole will the debtor, the conditional obligation shall be void.In the case at bar, the following conditions were imposed by the respondent company for the perfection of the contract of insurance:(a) a policy must have been issued;(b) the premiums paid; and(c) the policy must have been delivered to and accepted by the applicant while he is in good health.The condition imposed by the corporation that the policy must have been delivered to and accepted by the applicant while he is in good health can hardly be considered as a potestative or facultative condition. On the contrary, the health of the applicant at the time of the delivery of the policy is beyond the control or will of the insurance company. Rather, the condition is a suspensive one whereby the acquisition of rights depends upon the happening of an event which constitutes the condition. In this case, the suspensive condition was the policy must have been delivered and accepted by the applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as the applicant was already dead at the time the policy was issued. Hence, the non-fulfillment of the condition resulted in the non-perfection of the contract.As stated above, a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents. So long as an application for insurance has not been either accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding from the date of application, must have been a completed contract, one that leaves nothing to be done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in

agreement.11

Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It should be noted that an application is a mere offer which requires the overt act of the insurer for it to ripen into a contract. Delay in acting on the application does not constitute acceptance even though the insured has forwarded his first premium with his application. The corporation may not be penalized for the delay in the processing of the application papers. Moreover, while it may have taken some time for the application papers to reach the main office, in the case at bar, the same was acted upon less than a week after it was received. The processing of applications by respondent corporation normally takes two to three weeks, the longest being a month.12 In this case, however, the requisite medical examination was undergone by the deceased on November 1, 1987; the application papers were forwarded to the head office on November 27, 1987; and the policy was issued on December 2, 1987. Under these circumstances, we hold that the delay could not be deemed unreasonable so as to constitute gross negligence.A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300 for P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its Resolution of the motion for reconsideration filed by petitioner, thus:Anent the appearance of the word "rescinded" in the dispositive portion of the decision, to which defendant-appellee attaches undue significance and makes capital of, it is clear that the use of the words "and rescinded" is, as it is hereby declared, a superfluity. It is apparent from the context of the decision that the insurance policy in question was found null and void, and did not have to be "rescinded".13

True, rescission presupposes the existence of a valid contract. A contract which is null and void is no contract at all and hence could not be the subject of rescission.WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED insofar as it declared Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance Corporation of no force and effect and hence null and void. No costs.1âwphi1.nêtSO ORDERED.

G.R. No. 147410             February 5, 2004THE INSULAR LIFE ASSURANCE COMPANY, LTD., petitioner vs.ASSET BUILDERS CORPORATION, respondent.D E C I S I O NPANGANIBAN, J.:Where the parties merely exchange offers and counteroffers, no agreement or contract is perfected. A party may withdraw its offer or counteroffer prior to its receipt of the other party's acceptance thereof. To produce an agreement, the offer must be certain and the acceptance timely and absolute.The CaseBefore us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the September 20, 2000 Decision2 and the March 7, 2001 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 61607. The dispositive part of the Decision reads as follows:"IN THE LIGHT OF ALL THE FOREGOING, the appeal of the [petitioner] is DISMISSED. The Decision of the Court a quo is AFFIRMED."4

The assailed Resolution denied petitioner's Motion for Reconsideration.The FactsThe appellate court summarized the facts of the case as follows:"Sometime in November, 1992, the Insular Life Assurance Company, Limited, [petitioner], invited companies/corporations engaged in the building construction business to participate in the bidding of [petitioner's] proposed Insular Life building in Lucena City. [Petitioner] distributed copies of 'Bid Document[s]', including the general construction x x x contract, with the winning bidder and 'Bid Proposal Forms'[,] and furnished copies of the 'Instruction to Bidders' to participating bidders, containing the rules to be followed in the bidding, including the following rules: (a) all bond proposals shall be accompanied with a bid bond from the Insular General Insurance Company, Inc., in an amount equivalent to ten (10) percent of the bid or five (5) percent of the bid in Manager's or Cashier's check payable to Insular Life, which bid bonds will be returned to the bidder after sixty (60) days from opening of bids or after award of the project, whichever date comes first;5 (b) the bid shall be valid for sixty (60) days [after] opening of bids[,] but the owner of the project (the [petitioner]) had the option to request the bidder to extend the bid validity

period after expiration of the original validity period;6 [and] (c) the bidder, whose proposal had been deemed acceptable and complying with the requirements of the owner ([petitioner]) and the project, shall be notified in writing to personally appear to execute the 'Contract Agreements' within five (5) days after the receipt of the 'Notice of Award'[,] and that failure on the part of the winning bidder to execute the contract shall constitute a breach of the agreement, as effected by acceptance of the proposal, resulting in the nullification of the award; and that the bond heretofore, offered by the winning bidder shall be retained by the owner ([petitioner]) as payment due for liquidated damages.7

"Asset Builders Corporation, [respondent], with four (4) other bidders, namely, Q.K. Calderon Construction [Co., Inc.] , Specified Contractors, A.[A.] Alarilla Construction[,] and Serg Construction, submitted their respective bid proposals secured by bid bonds, valid for sixty (60) days.8 Under its 'Proposal Form' which the [respondent] submitted to the [petitioner], [respondent] bound and obliged itself to enter into a 'Contract' with the petitioner within ten (10) days from notice of the award, with good and sufficient securities for the faithful compliance thereof.9

"On November 9, 1993, the respective proposals of the bidders were opened. The [petitioner] forwarded a 'Summary of Bids and Tender Documents' to Adrian Wilson International Associate[s], Inc.10 (AWIA for brevity), [petitioner's] designated 'Project Manager[,]' for the proposed Insular Life Building in Lucena City for its evaluation and analysis. AWIA, in due time, submitted a report of its evaluation to the 'Real Property Division' of the [petitioner]. As [could] be gleaned from the Report of AWIA, [respondent's] P12,962,845.5411 bid was the lowest among the bidders."On January 21, 1994, Engineer Pete S. Espiritu (Espiritu for brevity) of the 'Real Property Department', who was designated as 'Project Coordinator' of the petitioner[,] recommended that [respondent] and the other bidders, 'Q.K. CALDERON [CONSTRUCTION] CO., INC.' AND 'SPECIFIED CONTRACTORS', be subjected to post-qualification proceedings, including the inspection of their respective offices, equipment, as well as past and present projects, and that said bidders be subjected to credit and financial investigations.12

"[Petitioner] concurred with the recommendation of Espiritu and, indeed, post-qualification, inspection[,] and evaluations of [respondent] and Q.K. Calderon Construction Co., Inc. were

effected. On January 25, 1994, [petitioner], with concurrence of [respondent], visited [respondent's] main office at the Tektite Tower and its past and present projects, i.e., the four (4) and two (2) storey Air Transportation buildings in its compound; the Government Service Insurance System (GSIS) Headquarters Complex; and the National Historical Institute Building, and [respondent's] equipment. On February 14, 1994, Espiritu suggested that a bid clarification and negotiation be undertaken with prospective contractors."On February 23, 1994, Abraham Torrijos of [petitioner's] 'Real Property Department' (hereinafter referred to as Torrijos) recommended the approval by the Board of Directors of [petitioner] of the award of the general construction of the Proposed Lucena Building, in favor of [respondent], emphasizing that:'2. Asset Builders Corporation is a (sic) 'AAA' category Contractor. It has extensive experience in vertical and horizontal projects. The company [has been] subjected to a post qualification and credit investigation, the results of which are satisfactory and acceptable, thus making it technically competent and financially capable of contracting the work.'13

"On February 24, 1994, a conference was held by and among the representatives of the [petitioner] and of the [respondent], including [respondent's] Operations Manager, Engineer Ramon Abu, for some clarifications. [Petitioner] proposed that [respondent] adjust its bid from P12,961,845.54 to P13,000,000.00 to accommodate the wage increase brought about by Wage Order No. 03, series of 1993, effective December 3, 1993. However, [respondent's] representatives were noncommittal, declaring that they had [to] report to the management of the [respondent] the proposal of [petitioner's] representatives, for its consideration and approval. Subsequently, the [respondent] agreed to the readjustment of the amount of its bid as proposed by the [petitioner]."On March 9, 1994, Januario L. Flores (Flores for brevity), head of the 'Real Property Department' and Assistant Vice-President of the [petitioner], submitted to Mabini L. Juan, the Chief Operating Officer and Senior Executive Vice-President of the [petitioner], his findings on the post-qualification, evaluation and credit investigation of [respondent], with the recommendation that the award be given to the [respondent]:

'2. On the basis of the above very positive indicators, RPD[,] E.L. Mariano, [F. B.] Mariano Associates and Co.[,] and Adrian Wilson Int'l Associates, [Inc.] recommen[d] to award the Lucena [p]roject to Asset Builders Corporation. We honestly believe that they will do a good job.'3. For your consideratio[n/a]pproval.'14

"On March 14, 1994, [Flores] signed a 'Notice to Proceed', addressed to the [respondent], for the conformity of the latter's President, Rogelio P. Centeno. Under the [ultimate] paragraph of the 'Notice to Proceed', the [respondent] may start its mobilization and proceed with the construction immediately[,] pending execution of the 'Construction Agreement'.15 The [petitioner prepared] a draft of the contract to be executed by the [petitioner] and the [respondent]."On the same day, [Torrijos] informed, by letter, Engineer Bernardo A. Sajorda (Sajorda for brevity's sake), 'Project Manager' of AWIA, that [petitioner] had awarded the general construction contract of the proposed Lucena Building to the [respondent] and advised AWIA to coordinate with [respondent] and inform the latter that a pre-construction meeting [would] be held on March 22, 1994 at the job site.16 A copy of the 'Notice of Award' was appended to said letter.17 Sajorda forthwith informed Rogelio P. Centeno, the President of [respondent], by 'Memorandum' that, pursuant to the AWARD to [respondent], of the general construction of the Proposed Lucena Building, a pre-construction conference [would] be held on March 22, 1994 at the job site, during which the following will be discussed:'1. Contract Amount and completion time2. Role of AWIA3. Project Contractors Key [p]ersonnel [l]ist with [s]ignatures and [p]ositions4. Channel of [c]ommunications among Architect, Insular Life, ASSET and AWIA5. [Contractor submittals i.e. - Work Schedule, Schedule of] Prices, etc.6. As-built[s] drawings7. Submitt[al] of shop drawings prior to use of materials8. Sanitation9. Safety programs (first aid kit and hard hats)10. Night work11. CAR (Contractor's All Ris[k I]nsurance)

12. Owners review of payrolls, vouchers, etc. (sic) payments etc.13. Sub-contracting [for] approval of subs.14. Photographs every month15. Billings based on actual work accomplishments. Undistributed materials not billable16. Security measures17. Tests as required by spec[']s18. Take note of specific requirements before final payment is made'18

"The [respondent] received a copy of the 'Memorandum' of Sajorda, on March 17, 1994. On March 18, 1994, the [petitioner] transmitted to the [respondent] the following documents, evidenced by a 'Transmittal Sheet', received by Roy Roxas, for the [respondent], to enable the latter to secure a 'Building Permit' for the project:'ONE (1) LOT DOCUMENTS/PLANS FOR BUILDING PERMIT4 SETS OF STRUCTURAL COMPUTATION5 SETS OF SPECS FOR GENERAL CONSTRUCTION3 SETS OF ELECTRICAL LOAD COMPUTATION5 COPIES OF PRC ID [&] PTR OF DESIGN ENGRS.6 SETS OF ELMA PLANS5 SETS OF [R]MDA PLANS/SPECS'19

"On March 22, 1994, the 'Pre-Construction Conference' ensued with the representatives of the [petitioner] and its Project Manager and of the [respondent], in the person of its Project Engineer, J.G. Quizon, in attendance:'Attendees: CARLOS M. ESPIRITU -- AWIA Asst. Project ManagerBERNARDO [A]. SAJORDA -- AWIA Project ManagerEDMUNDO C. SABATER -- AWIA Resident EngineerJANUARIO L. FLORES -- IL/RPD ManagerJ.G. QUIZON -- ASSET Project ManagerPETE S. ESPIRITU -- IL/RPD Project CoordinatorABRAHAM P. TORRIJOS -- IL/RPD Asst. Manager'20

"During the conference, the following were discussed and clarified:'1. Contract Amount and Completion Time: Contract is for P13,000,000.00, to be completed within 210 calendar days; day one to be 5 days after receipt of NTP by the Contractor. Actual site mobilization to be first week of April 1994, per Mr. J.G. Quizon. Issuance of building and other permits being worked out by the Contractor.'21

"On March 26, 1994, Jacobo G. Quizon, the Project Manager of

[respondent], sent to AWIA a letter requesting for the TCT lot description for the purpose of relocation of the monuments and the staking out of the building:'We have the honor to request your good office, in relocating the monuments[,] as per TCT lot description[s,] prior to staking out the building[;] likewise, we can do the relocation[,] provided the cost will be reimbursed to the Owner[,] with an approximate fee of P5,000.00 lump sum.'Further, problems may occur regarding structur[al] excavation for footing [and footing] tie beams at Grid Line A & 4. As per plan, the proposed depth [of] excavation of about 2.5[0M] along the existing adjacent building walls will expose the CHB footing.'22

"Thereafter, a Ground Breaking ceremony was held at the project site, with Rogelio B. Centeno, the President of [respondent], [and] Pete S. Espiritu and Januario L. Flores of the [petitioner] in attendance. A billboard announcing the construction of [the] Insular Life Building in Lucena City, with the [respondent] as the General Contractor, was also erected in the project site."However, the [respondent] did not affix its conformity to any 'Notice of Award', much less commence its construction of the project. Neither did it execute any 'Construction Agreement'. Subsequently, the [respondent] wrote the [petitioner] a letter dated April 5, 1994, informing the [petitioner] that the [respondent would] not be able to undertake the project anymore[,] because the prerequisite paper work and attendant processing could not be fast-trac[k]ed and that, since the previous two (2) weeks, prices had escalated, which rendered its bid unattractive.23 On April 25, 1994, the [petitioner] wrote a letter to the [respondent], in response to its April 5, 1994 [letter], informing the [respondent] that, in view of the unjust withdrawal of the [respondent] from the project, despite the award of the project to the [respondent], the [petitioner] was impelled to engage the services of another contractor to complete the project[,] without prejudice to further action of the [petitioner] against the [respondent] for its withdrawal, pursuant to Section 10 of the 'Instruction to Bidders', quoted, infra:'The exact amount of damages to the Owner due to the failure to execute the Contract may be deemed difficult to determine. Failure, thereof, to execute the Contract within five (5) days after the receipt of the Notice of Award shall cause [the] annulment of the award. The amount of bid bond deposited with the proposal

shall be retained by the Owner as payment due for liquidated damages incurred."By way of riposte, the [respondent] sent a letter to the [petitioner] averring that: (a) it never received any written 'Notice of Award' from the [petitioner]; [and] (b) since its bid offer had a lifetime of sixty (60) days from November 9, 1993 or until January 8, 1993 (sic)[,] its offer was automatically withdrawn after said date, since the [petitioner] had not requested the [respondent] for the extension of the lifetime thereof."On December 23, 1994, the [petitioner] filed a complaint24 against the [respondent], with the Regional Trial Court25 of Makati City, for 'Damages ' , x x x:x x x           x x x          x x x"The [petitioner] alleged, inter alia, in its complain[t t]hat the [respondent] was duly notified by AWIA of the award, in its favor, by the [petitioner], of the project[,] but the [respondent] unjustly and arbitrarily withdrew from the project and refused to execute the 'Construction Contract' with the [petitioner,] which impelled the latter to engage the services of another contractor for the project at the price of P14,500,000.00 and that, consequently, the [petitioner] was obliged to pay the amount of P1,500,000.00 which was [the] difference between the contract price of the project with the [respondent] in the amount of P13,000,000.00 and P14,500,000.00, by way of actual damages or, alternatively, by way of liquidated damages. In its Answer26 to the complaint, the [respondent] alleged, inter alia, that it never received any 'Notice of Award' or 'Notice to Proceed'; its bid had expired by January 8, 1994, without the [petitioner] asking the [respondent] for the extension thereof[,] and interposed counterclaims for damages against the [petitioner], praying that, after due proceedings, judgment be rendered in its favor, x x x:x x x           x x x          x x x"After due proceedings, the Court a quo rendered a Decision,27

dated December [5], 1997, in favor of the [respondent] and against the [petitioner], ordering the dismissal of the complaint of the [petitioner] and ordering the latter to pay damages to the [respondent], the dispositive portion of which is quoted, infra:'WHEREFORE, judgment is rendered DISMISSING the Complaint with costs against [petitioner].''On the counter-claim, Insular Life Assurance Co., Ltd., is hereby ordered to pay Asset Builders Corporation the sums of Pesos: Five

Hundred Thousand (P500,000.00) as compensation for the injury to the latter's business standing, and Pesos: Seventy Five Thousand (P75,000.00) by way of attorney's fees and expenses of litigation.'Filing fees on the amount of P2,135,000.00 [respondent] sought in the counter-claim shall constitute a first lien on the recovery from [petitioner].'x x x           x x x          x x x"The [petitioner] interposed its appeal from the Decision of the Court a quo and posed, for [the CA's] resolution, the threshold issues of whether or not: (a) a construction contract was perfected by and between the [petitioner] and the [respondent] for the construction of petitioner's building project in Lucena City; (b) the [respondent] waived Section 9 of the Instruction to Bidders and was estopped from claiming that no construction contract was perfected between it and the [petitioner]; [and] (c) the [respondent] was liable for damages to the [petitioner]."28

Ruling of the Court of AppealsThe CA affirmed the lower court's Decision. According to the appellate court's ruling, the failure of petitioner to prove that it gave respondent a written notice of the former's unqualified acceptance of the latter's bid, as required in the Instruction to Bidders, did not give birth to consent. The appellate court explained that when the exact terms desired were not in the offer, any modification or variation therefrom would annul that offer. Furthermore, estoppel did not apply because of petitioner's own carelessness or want of diligence.Hence this Petition.29

The Issues"I. The Court of Appeals gravely erred in not holding that there exists a valid contract for the construction of the building project between IL30 and ABC.31

"II. The Court of Appeals gravely erred in not holding that IL has notified ABC of the award of the construction of the building project to it before it withdrew its bid proposal."III. The Court of Appeals gravely erred in not holding that ABC's withdrawal from the contract constituted a breach of that contract."IV. The Court of Appeals gravely erred in not holding that the contract had been perfected and that its consummation stage [had] in fact been commenced."V. The Court of Appeals gravely erred in not holding that ABC is

estopped from claiming the contract was not perfected."VI. The Court of Appeals gravely erred in not holding that ABC, instead of IL, is liable for damages[,] and that, at worst, there is no evidence that supported the award in favor of ABC."VII. In any event, there is no basis to penalize IL for going to court."32

There is really only one major issue: Was there a valid contract between petitioner and respondent?The Court's RulingThe Petition is unmeritorious.Sole Issue:Existence of a ContractNo Notice of Award,No ContractIt is elementary that, being consensual,33 a contract34 is perfected35

by mere consent.36 From the moment of a meeting37 of the offer and the acceptance38 upon the object and the cause that would constitute the contract,39 consent arises.40 However, "the offer must be certain"41 and "the acceptance seasonable and absolute;42

if qualified,43 the acceptance44 would merely constitute a counter-offer."45

Equally important are the three distinct stages of a contract -- its "preparation or negotiation, its perfection, and finally, its consummation."46 Negotiation begins when the prospective contracting parties manifest their interest in the contract and ends at the moment of their agreement. The perfection or birth of the contract47 occurs when they agree upon the essential elements thereof.48 The last stage is its consummation, wherein they "fulfill or perform the terms agreed upon in the contract, culminating in the extinguishment thereof."49

In the case at bar, the parties did not get past the negotiation stage. The events that transpired between them were indeed initiated by a formal offer, but this policitación was merely an imperfect promise that could not be considered a binding commitment.50 At any time, either of the prospective contracting parties may stop the negotiation and withdraw the offer.In the present case, in fact, there was only an offer and a counteroffer51 that did not sum up to any final arrangement containing the elements of a contract.52 Clearly, no meeting of minds was established.53 First, only after the bid bond had lapsed were post-qualification proceedings, inspections, and credit

investigations conducted. Second, the inter-office memoranda issued by petitioner, as well as other memoranda between it and its own project manager, were simply documents to which respondent was not privy. Third, petitioner proposed a counteroffer to adjust respondent's bid to accommodate the wage increase of December 3, 1993.In effect, the rule on the concurrence of the offer and its acceptance54 did not apply, because other matters or details -- in addition to the subject matter and the consideration -- would still be stipulated and agreed upon by the parties.55 While there was an initial offer made, there was no acceptance; but when there allegedly came an acceptance that could have had a binding effect, the offer was already lacking. The offer and its acceptance "did not meet to give birth to a contract."56

Moreover, the Civil Code provides that no contract shall arise unless its acceptance is communicated to the offeror.57 That is, the mere determination to accept the proposal of a bidder does not constitute a contract; that decision must be communicated to the bidder.58 Although consent may be either express or implied,59 the Instruction to Bidders prepared by petitioner itself expressly required (1) a formal acceptance and (2) a period within which such acceptance was to be made known to respondent. The effect of giving the Notice of Award to the latter would have been the perfection of the contract.60 No such acceptance was communicated to respondent; therefore, no consent was given. Without that express manifestation, as required by the terms of its proposal, there was no contract. The due execution of documents representing a contract is one thing, but its perfection is another.61

There is no issue as regards the subject of the contract or the cause of the obligation. The controversy lies in the consent -- whether there was an acceptance by petitioner of the offer made by respondent; and, if so, whether that acceptance was communicated to the latter, thereby perfecting the contract. The period given to the former within which to accept the offer was not itself founded upon or supported by any consideration. Therefore, under the law, respondent still had the freedom and the right to withdraw the offer by communicating such withdrawal to petitioner62 before the latter's acceptance of the offer;63 or, if the offer has been accepted,64 before the acceptance came to be known by respondent.65

Petitioner avers that an acceptance was made, but this allegation

has not been proven. Respondent had no knowledge of such acceptance when it communicated its withdrawal to the former. Notably, this right to withdraw was not exercised whimsically or arbitrarily by respondent. It did send a formal letter on April 5, 1994, expressing and explaining its withdrawal. As of that date, the decision to award the contract had not been made according to the terms of the Instruction to Bidders.Besides, the subsequent acts between the parties did not even serve as a confirmation of that decision. The existence of a second proposal -- petitioner's request for an adjustment of the bid to accommodate the wage increase -- in fact belies the perfection of any contract arising from the first.66 To the Court's mind, there was indeed no acceptance of the offer made by respondent. Such failure to comply with a condition imposed for the perfection of a contract resulted in failure of the contract.67

Subsistence of an OfferEven Without a Bid BondCertainly, the "bid bond is an indispensable requirement for the validation of a bid proposal."68 This requisite ensures the good faith of bidders and binds them to enter into a contract with the owner, should their proposal be accepted.69 One who submits a bid not only signifies assent to the terms and conditions of a proposal, but impliedly binds oneself to them, if and when the bid is considered. The Invitation to Bidders even provided that incomplete proposals might be sufficient cause for their rejection.70 If mere insufficiency of a bond required of a bidder is a ground for rejection, a fortiori, all the more so is the total want thereof.The proposal of respondent was merely validated by its bid bond, which was considered by petitioner. The expiration of the bond on January 8, 1994,71 did not mean that the bid also lapsed on the same date. The bond, which was an accessory, merely guaranteed the performance of the principal obligation and could not exist without the latter.72 The former was given for the benefit of petitioner, which could legally waive it. The bid continued without a bond, but still no formal acceptance was made. Again, on that basis, no contract was perfected.In the interpretation of a contract, the literal meaning of its stipulations controls, if their terms are clear and leave no doubt as to the intention of the contracting parties.73 When "there is no ambiguity in the language of a contract, there is no room for construction,74 only compliance."75 This rule applies to the

Instruction to Bidders, which provides that "failure to execute the Contract shall constitute a breach of agreement as effected by acceptance of the proposal."76 The language is clear and, like contracts in general, is the law between the parties.77 The contract must be fulfilled according to its literal sense.78

No EstoppelAs aptly held by the appellate court, respondent's acts subsequent to the expiration of the bid bond did not constitute a waiver of Section 9 of the Instruction to Bidders. To be valid and effective, waivers must be couched in clear and unequivocal terms, leaving no doubt as to the intention of those giving up a right or a benefit that legally pertains to them.79 Respondent, contrary to the claim of petitioner, despite its repeated requests, never received a copy of the Notice of Award. Indeed, the former never adopted an inconsistent position, attitude or course of conduct that caused loss or injury to the latter.80 The attendance of respondent in the pre-construction conference and the ground-breaking ceremony was part of the negotiation process. Thus, petitioner's claim of estoppel against it could not be applied."Estoppel cannot be sustained by mere argument or doubtful inference; it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence."81 It is hardly separable from the waiver of a right.82 The party claiming estoppel must show the following elements: "(1) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (2) reliance, in good faith, upon the conduct or statements of the party to be estopped; and (3) action or inaction based thereon of such character as to change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice."83

None of these elements was proven.First, petitioner had the knowledge and the means of knowledge of the truth as to the facts in question. It had the means of knowing if respondent had been served a copy of the Notice of Award, yet the former did not preserve a copy of such Notice, which supposedly bore the signature of the latter's employee who had received it. Petitioner did not even enter in its corporate logbooks the release to and receipt by respondent of that copy. The latter had every reason to withdraw its bid, given that the "prerequisite paper work and attendant processing could not be fast-tracked."84

Second, respondent's conduct and statements were always consistent and reliable. The manner of acceptance of all bids was

prescribed by petitioner itself. Applying Article 1321 of the Civil Code, such prescription must be complied with,85 yet it did not follow its own rules. Of no moment was its reliance in good faith upon respondent. Good faith is always presumed, unless contrary evidence is adduced.86

Third, the action or inaction of petitioner that caused its own injury was its own fault. The written Notice of Award, which constituted the acceptance of the proposal, was a sine qua non to the perfection of the contract.87 The misplacement of such vital document was inexcusable. Without it, there was no contract. Moreover, the March 14, 1994 Notice to Proceed clearly stated that its issuance would depend upon the execution of the construction agreement.Estoppel is a shield against injustice; the party invoking its protection should not be allowed to use it to conceal its own lack of diligence88 or want of reasonable care and circumspection.89

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED. Costs against petitioner.SO ORDERED.

G.R. No. 181132               June 5, 2009HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN MARAMAG, Petitioners, vs.EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents.D E C I S I O NNACHURA, J.:This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No. 85948, dismissing petitioners’ appeal for lack of jurisdiction.The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch 29, for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer for a temporary restraining order (TRO) and a writ of preliminary injunction.The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2) Eva de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive any proceeds from his insurance policies from Insular Life Assurance Company, Ltd. (Insular)4 and Great Pacific Life Assurance Corporation (Grepalife);5 (3) the illegitimate children of Loreto—Odessa, Karl Brian, and Trisha Angelie—were entitled only to one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and those to be released to Karl Brian and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could not be deprived of their legitimes, which should be satisfied first.In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among others, that part of the insurance proceeds had already been released in favor of Odessa, while the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the appointment of their legal guardian. Petitioners also prayed for the total amount of P320,000.00 as actual litigation expenses and attorney’s fees.In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl Brian, and Trisha Angelie as his

legitimate children, and that they filed their claims for the insurance proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto, it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie, as the remaining designated beneficiaries; and that it released Odessa’s share as she was of age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending submission of letters of guardianship. Insular alleged that the complaint or petition failed to state a cause of action insofar as it sought to declare as void the designation of Eva as beneficiary, because Loreto revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no settlement of Loreto’s estate had been filed nor had the respective shares of the heirs been determined. Insular further claimed that it was bound to honor the insurance policies designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance Code.In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance due to a misrepresentation in his application form that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in September 2001; that the case was premature, there being no claim filed by the legitimate family of Loreto; and that the law on succession does not apply where the designation of insurance beneficiaries is clear.As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their answer. Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated May 7, 2004.During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their respective answers be resolved first. The trial court ordered petitioners to comment within 15 days.In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal – whether the complaint itself was proper or not – and that the designation of a beneficiary

is an act of liberality or a donation and, therefore, subject to the provisions of Articles 7528 and 7729 of the Civil Code.In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally married to Vicenta Pangilinan Maramag.On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads –WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The action shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life and Grepalife.SO ORDERED.10

In so ruling, the trial court ratiocinated thus –Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic) special laws. Matters not expressly provided for in such special laws shall be regulated by this Code. The principal law on insurance is the Insurance Code, as amended. Only in case of deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)The Insurance Code, as amended, contains a provision regarding to whom the insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made, unless otherwise specified in the policy. Since the defendants are the ones named as the primary beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and there is no showing that herein plaintiffs were also included as beneficiary (sic) therein the insurance proceeds shall exclusively be paid to them. This is because the beneficiary has a vested right to the indemnity, unless the insured reserves the right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary succession in order to defeat the right of herein defendants to collect the insurance indemnity. The beneficiary in a contract of insurance is not the donee spoken in

the law of donation. The rules on testamentary succession cannot apply here, for the insurance indemnity does not partake of a donation. As such, the insurance indemnity cannot be considered as an advance of the inheritance which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon Employees’ Association v. Juanita Golpeo, et al., the Honorable Supreme Court made the following pronouncements[:]"With the finding of the trial court that the proceeds to the Life Insurance Policy belongs exclusively to the defendant as his individual and separate property, we agree that the proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual property of the beneficiary and not of the heirs of the person whose life was insured, is the doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of Section 428 of the Code of Commerce x x x."In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De Guzman. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy of the person who cannot make any donation to him, according to said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the insurance contract will still remain valid, but the indemnity must go to the legal heirs and not to the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the improper beneficiary. In such case, the action for the declaration of nullity may be brought by the spouse of the donor or donee, and the guilt of the donor and donee may be proved by preponderance of evidence in the same action (Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil Code,

the insurance indemnity that should be paid to her must go to the legal heirs of the deceased which this court may properly take cognizance as the action for the declaration for the nullity of a void donation falls within the general jurisdiction of this Court.11

Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main, that the petition failed to state a cause of action. Insular further averred that the proceeds were divided among the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already been refunded.Petitioners, in their comment, reiterated their earlier arguments and posited that whether the complaint may be dismissed for failure to state a cause of action must be determined solely on the basis of the allegations in the complaint, such that the defenses of Insular and Grepalife would be better threshed out during trial.1avvphi1On June 16, 2005, the trial court issued a Resolution, disposing, as follows:WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case against them is hereby ordered DISMISSED.SO ORDERED.14

In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to the illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases where there are no beneficiaries designated, or when the only designated beneficiary is disqualified, that the proceeds should be paid to the estate of the insured. As to the claim that the proceeds to be paid to Loreto’s illegitimate children should be reduced based on the rules on legitime, the trial court held that the distribution of the insurance proceeds is governed primarily by the Insurance Code, and the provisions of the Civil Code are irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted that Eva was

never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the illegitimate children. It further held that the matter of Loreto’s misrepresentation was premature; the appropriate action may be filed only upon denial of the claim of the named beneficiaries for the insurance proceeds by Grepalife.Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a cause of action involved a pure question of law. The appellate court also noted that petitioners did not file within the reglementary period a motion for reconsideration of the trial court’s Resolution, dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said Resolution had already attained finality.Hence, this petition raising the following issues:a. In determining the merits of a motion to dismiss for failure to state a cause of action, may the Court consider matters which were not alleged in the Complaint, particularly the defenses put up by the defendants in their Answer?b. In granting a motion for reconsideration of a motion to dismiss for failure to state a cause of action, did not the Regional Trial Court engage in the examination and determination of what were the facts and their probative value, or the truth thereof, when it premised the dismissal on allegations of the defendants in their answer – which had not been proven?c. x x x (A)re the members of the legitimate family entitled to the proceeds of the insurance for the concubine?15

In essence, petitioners posit that their petition before the trial court should not have been dismissed for failure to state a cause of action because the finding that Eva was either disqualified as a beneficiary by the insurance companies or that her designation was revoked by Loreto, hypothetically admitted as true, was raised only in the answers and motions for reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to prosper on that ground, only the allegations in the complaint should be considered. They further contend that, even assuming Insular disqualified Eva as a beneficiary, her share should not have been distributed to her children with Loreto but, instead, awarded to them, being the legitimate heirs of the insured deceased, in accordance with law and jurisprudence.

The petition should be denied.The grant of the motion to dismiss was based on the trial court’s finding that the petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads –SECTION 1. Grounds. – Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made on any of the following grounds:x x x x(g) That the pleading asserting the claim states no cause of action.A cause of action is the act or omission by which a party violates a right of another.16 A complaint states a cause of action when it contains the three (3) elements of a cause of action—(1) the legal right of the plaintiff; (2) the correlative obligation of the defendant; and (3) the act or omission of the defendant in violation of the legal right. If any of these elements is absent, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of action.17

When a motion to dismiss is premised on this ground, the ruling thereon should be based only on the facts alleged in the complaint. The court must resolve the issue on the strength of such allegations, assuming them to be true. The test of sufficiency of a cause of action rests on whether, hypothetically admitting the facts alleged in the complaint to be true, the court can render a valid judgment upon the same, in accordance with the prayer in the complaint. This is the general rule.However, this rule is subject to well-recognized exceptions, such that there is no hypothetical admission of the veracity of the allegations if:1. the falsity of the allegations is subject to judicial notice;2. such allegations are legally impossible;3. the allegations refer to facts which are inadmissible in evidence;4. by the record or document in the pleading, the allegations appear unfounded; or5. there is evidence which has been presented to the court by stipulation of the parties or in the course of the hearings related to the case.18

In this case, it is clear from the petition filed before the trial court that, although petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies issued by Insular and Grepalife. The basis of petitioners’ claim is that Eva,

being a concubine of Loreto and a suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies, and that Eva’s children with Loreto, being illegitimate children, are entitled to a lesser share of the proceeds of the policies. They also argued that pursuant to Section 12 of the Insurance Code,19 Eva’s share in the proceeds should be forfeited in their favor, the former having brought about the death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of Loreto’s illegitimate children should be awarded to them, being the legitimate heirs of Loreto entitled to their respective legitimes.It is evident from the face of the complaint that petitioners are not entitled to a favorable judgment in light of Article 2011 of the Civil Code which expressly provides that insurance contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states—SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy.Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the maturation of the policy.20 The exception to this rule is a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.21

Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular and Grepalife have no legal obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary in one policy and her disqualification as such in another are of no moment considering that the designation of the illegitimate children as beneficiaries in Loreto’s insurance policies remains valid. Because no legal proscription exists in naming as beneficiaries the children of illicit relationships by the insured,22 the shares of Eva in the insurance proceeds, whether forfeited by the court in view of the prohibition on donations under Article 739 of the Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of petitioners. It is only in cases

where the insured has not designated any beneficiary,23 or when the designated beneficiary is disqualified by law to receive the proceeds,24 that the insurance policy proceeds shall redound to the benefit of the estate of the insured.In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of action is a question of law and not of fact, there being no findings of fact in the first place.25

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.SO ORDERED.

G.R. No. L-44059 October 28, 1977THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee, vs.CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants. MARTIN, J.:This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life insurance policy of a legally married man claim the proceeds thereof in case of death of the latter?On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He to her as his wife.On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the coverage in the total amount of P11,745.73, representing the face value of the policy in the amount of P5,882.00 plus the additional benefits for accidental death also in the amount of P5,882.00 and the refund of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and interest thereon due for January and February, 1969, in the sum of P36.27.Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were merely living as husband and wife without the benefit of marriage.Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T. Ebrado.In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April 29, 1970.After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pre-trial order was entered reading as follows: ñé+.£ªwph!1During the pre-trial conference, the parties manifested to the court. that there is no possibility of amicable settlement. Hence, the Court proceeded to have the parties submit their evidence for

the purpose of the pre-trial and make admissions for the purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six — (legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during the lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he was living with his common-wife, Carponia Ebrado, with whom she had 2 children although he was not legally separated from his legal wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced by the death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular Life Assurance Co. which was contested by Pascuala Ebrado who also filed claim for the proceeds of said policy 6) that in view ofthe adverse claims the insurance company filed this action against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of the policy P11,745.73; 8) that the beneficiary designated by the insured in the policy is Carponia Ebrado and the insured made reservation to change the beneficiary but although the insured made the option to change the beneficiary, same was never changed up to the time of his death and the wife did not have any opportunity to write the company that there was reservation to change the designation of the parties agreed that a decision be rendered based on and stipulation of facts as to who among the two claimants is entitled to the policy.Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda from the receipt of this order.SO ORDERED.On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds to the estate of the deceased insured. The trial court held: ñé+.£ªwph!1It is patent from the last paragraph of Art. 739 of the Civil Code

that a criminal conviction for adultery or concubinage is not essential in order to establish the disqualification mentioned therein. Neither is it also necessary that a finding of such guilt or commission of those acts be made in a separate independent action brought for the purpose. The guilt of the donee (beneficiary) may be proved by preponderance of evidence in the same proceeding (the action brought to declare the nullity of the donation).It is, however, essential that such adultery or concubinage exists at the time defendant Carponia T. Ebrado was made beneficiary in the policy in question for the disqualification and incapacity to exist and that it is only necessary that such fact be established by preponderance of evidence in the trial. Since it is agreed in their stipulation above-quoted that the deceased insured and defendant Carponia T. Ebrado were living together as husband and wife without being legally married and that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid and still existing at the time the insurance in question was purchased there is no question that defendant Carponia T. Ebrado is disqualified from becoming the beneficiary of the policy in question and as such she is not entitled to the proceeds of the insurance upon the death of the insured.From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the Appellate Court certified the case to Us as involving only questions of law.We affirm the judgment of the lower court.1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly resolutory of the prime question at hand. Section 50 of the Insurance Act which provides that "(t)he insurance shag be applied exclusively to the proper interest of the person in whose name it is made" 1 cannot be validly seized upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that the provision refers only to the "insured" and not to the beneficiary, since a contract of insurance is personal in character. 2

Otherwise, the prohibitory laws against illicit relationships especially on property and descent will be rendered nugatory, as the same could easily be circumvented by modes of insurance. Rather, the general rules of civil law should be applied to resolve this void in the Insurance Law. Article 2011 of the New Civil Code

states: "The contract of insurance is governed by special laws. Matters not expressly provided for in such special laws shall be regulated by this Code." When not otherwise specifically provided for by the Insurance Law, the contract of life insurance is governed by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a fife insurance policy by the person who cannot make a donation to him. 4 Common-law spouses are, definitely, barred from receiving donations from each other. Article 739 of the new Civil Code provides: ñé+.£ªwph!1The following donations shall be void:1. Those made between persons who were guilty of adultery or concubinage at the time of donation;Those made between persons found guilty of the same criminal offense, in consideration thereof;3. Those made to a public officer or his wife, descendants or ascendants by reason of his office.In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt of the donee may be proved by preponderance of evidence in the same action.2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee, because from the premiums of the policy which the insured pays out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of the new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in the life insurance policy of the person who cannot make the donation. 5 Under American law, a policy of life insurance is considered as a testament and in construing it, the courts will, so far as possible treat it as a will and determine the effect of a clause designating the beneficiary by rules under which wins are interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier between common law spouses in record to Property relations since such hip ultimately encroaches upon the nuptial and filial rights of the legitimate family There is every

reason to hold that the bar in donations between legitimate spouses and those between illegitimate ones should be enforced in life insurance policies since the same are based on similar consideration As above pointed out, a beneficiary in a fife insurance policy is no different from a donee. Both are recipients of pure beneficence. So long as manage remains the threshold of family laws, reason and morality dictate that the impediments imposed upon married couple should likewise be imposed upon extra-marital relationship. If legitimate relationship is circumscribed by these legal disabilities, with more reason should an illicit relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando, said: ñé+.£ªwph!1If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other consort and his descendants because of and undue and improper pressure and influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no se enganen desponjandose el uno al otro por amor que han de consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is very reason to apply the same prohibitive policy to persons living together as husband and wife without the benefit of nuptials. For it is not to be doubted that assent to such irregular connection for thirty years bespeaks greater influence of one party over the other, so that the danger that the law seeks to avoid is correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the condition 6f those who incurred guilt should turn out to be better.' So long as marriage remains the cornerstone of our family law, reason and morality alike demand that the disabilities attached to marriage should likewise attach to concubinage.It is hardly necessary to add that even in the absence of the above pronouncement, any other conclusion cannot stand the test of scrutiny. It would be to indict the frame of the Civil Code for a failure to apply a laudable rule to a situation which in its essentials cannot be distinguished. Moreover, if it is at all to be differentiated the policy of the law which embodies a deeply rooted notion of what is just and what is right would be nullified if such irregular

relationship instead of being visited with disabilities would be attended with benefits. Certainly a legal norm should not be susceptible to such a reproach. If there is every any occasion where the principle of statutory construction that what is within the spirit of the law is as much a part of it as what is written, this is it. Otherwise the basic purpose discernible in such codal provision would not be attained. Whatever omission may be apparent in an interpretation purely literal of the language used must be remedied by an adherence to its avowed objective.4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons who were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides: ñé+.£ªwph!1In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilty of the donee may be proved by preponderance of evidence in the same action.The underscored clause neatly conveys that no criminal conviction for the offense is a condition precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be proved "in the same acting for declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.In the caw before Us, the requisite proof of common-law relationship between the insured and the beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial conference of the case. It case agreed upon and stipulated therein that the deceased insured Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate children; that during his lifetime, the deceased insured was living with his common-law wife, Carponia Ebrado, with whom he has two children. These stipulations are nothing less than judicial admissions which, as a consequence, no longer require proof and cannot be contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly rendered without going through the rigors of a trial for the sole purpose of proving the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed "that a decision be rendered

based on this agreement and stipulation of facts as to who among the two claimants is entitled to the policy."ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds of the policy are hereby held payable to the estate of the deceased insured. Costs against Carponia T. Ebrado.SO ORDERED.

G.R. No. 125678      March 18, 2002PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs.COURT OF APPEALS and JULITA TRINOS, respondents.YNARES-SANTIAGO, J.:Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).1

The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services.Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.2

During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00.After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day.

On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against petitioners, viz:WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.SO ORDERED.3

On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente.4 Petitioner’s motion for reconsideration was denied.5

Hence, petitioner brought the instant petition for review, raising the primary argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under the Insurance Code6 does not apply.1âwphi1.nêtPetitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer,7

petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department

of Health.Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:1. The insured has an insurable interest;2. The insured is subject to a risk of loss by the happening of the designated peril;3. The insurer assumes the risk;4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; and5. In consideration of the insurer’s promise, the insured pays a premium.8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of himself. Section 10 provides:Every person has an insurable interest in the life and health:(1) of himself, of his spouse and of his children;(2) of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest;(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and(4) of any person upon whose life any estate or interest vested in him depends.In the case at bar, the insurable interest of respondent’s husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract.Petitioner argues that respondent’s husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondent’s husband to sign an express authorization for any person, organization or entity that

has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination.10 Specifically, the Health Care Agreement signed by respondent’s husband states:We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement.11 (Underscoring ours)In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicant’s medical history, thus:I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic copy of this authorization shall be as valid as the original.12

(Underscoring ours)Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented

information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied for.13

The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondent’s husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue.14 Thus,(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud.15 (Underscoring ours)The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.16

Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid.Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance." The right to rescind should be exercised previous to the commencement of an

action on the contract.17 In this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions:1. Prior notice of cancellation to insured;2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned;3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.18

None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.19 Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract – the insurer.20 By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.21

This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.22

Anent the incontestability of the membership of respondent’s husband, we quote with approval the following findings of the trial court:(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie.23

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their

marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceased’s hospitalization, medication and the professional fees of the attending physicians.24

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.SO ORDERED.

G.R. No. 124520 August 18, 1997Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners, vs.COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents. PADILLA, J.:This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of respondent Court of Appeals.The undisputed facts of the case are as follows:1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.2. One of the stipulations of the one (1) year lease contract states:18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed at any stall or store or space in the leased premises without first obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own benefit; . . . 1

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by fire the merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written consent of private respondent CKS.4. On the day that the lease contract was to expire, fire broke out inside the leased premises.5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the Cha spouses and United) be paid directly to CKS, based on its lease contract with the Cha spouses.6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit.8. On appeal, respondent Court of Appeals in CA GR CV No. 39328

rendered a decision ** dated 11 January 1996, affirming the trial court decision, deleting however the awards for exemplary damages and attorney's fees. A motion for reconsideration by United was denied on 29 March 1996.In the present petition, the following errors are assigned by petitioners to the Court of Appeals:ITHE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICYIITHE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONERIIITHE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE INSURANCE LAWIVTHE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE RESPONDENT CORPORATION. 2

The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the prior written consent of the latter.It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be contrary to law, morals, good customs, public order or public policy. 3

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured.A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist at the time the insurance takes effect and at the time the loss occurs. 4 The basis of such requirement of insurable interest in property insured is based on sound public policy: to prevent a person from taking out an insurance policy on property upon which he has no insurable interest and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which is void under Section 25 of the Insurance Code, which provides:Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void.In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code which provide:Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss of injury thereof.Therefore, respondent CKS cannot, under the Insurance Code — a special law — be validly a beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over said merchandise remains with the insured, the Cha spouses. The automatic assignment of the policy to CKS under the provision of the lease contract previously quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the property insured.The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a

separate and distinct issue which we do not resolve in this case.WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and Stella Uy-Cha.SO ORDERED.

G.R. No. 147839             June 8, 2006GAISANO CAGAYAN, INC. Petitioner, vs.INSURANCE COMPANY OF NORTH AMERICA, Respondent.D E C I S I O NAUSTRIA-MARTINEZ, J.:Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's motion for reconsideration.The factual background of the case is as follows:Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt endorsements. The insurance policies provide for coverage on "book debts in connection with ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines."2 The policies defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this Policy."3 The policies also provide for the following conditions:1. Warranted that the Company shall not be liable for any unpaid account in respect of the merchandise sold and delivered by the Insured which are outstanding at the date of loss for a period in excess of six (6) months from the date of the covering invoice or actual delivery of the merchandise whichever shall first occur.2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of every calendar month all amount shown in their books of accounts as unpaid and thus become receivable item from their customers and dealers. x x x4

x x x xPetitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the items lost or destroyed in the fire were stocks of

ready-made clothing materials sold and delivered by IMC and LSPI.On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and LSPI filed with respondent their claims under their respective fire insurance policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights against petitioner; that respondent made several demands for payment upon petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable because the property covered by the insurance policies were destroyed due to fortuities event or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never consented to paying the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the merits ensued.On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the fire was purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for purpose of securing the payment of purchase price, the above-described merchandise remains the property of the vendor until the purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bear the loss.Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside the decision of the RTC. The dispositive portion of the decision reads:WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully

paid;2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.With costs against the defendant-appellee.SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to go against petitioner; that, being a fire insurance with book debt endorsements, what was insured was the vendor's interest as a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE OVER CREDIT.THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be over credit since an insurance "on credit" belies not only the nature of fire insurance but the express terms of the policies; that it was not credit that was insured since respondent paid on the occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over credit, there was no loss as the accounts were not yet due since no prior demands were made by IMC and LSPI against

petitioner for payment of the debt and such demands came from respondent only after it had already paid IMC and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the goods.Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between respondent and its insured nor was its consent or approval ever secured; that this lack of privity forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from fire.For its part, respondent counters that while ownership over the ready- made clothing materials was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the ready-made clothing materials since it failed to overcome the presumption of liability under Article 126516 of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide stringent measures of caution, care and maintenance on its property because electric wires do not usually short circuit unless there are defects in their installation or when there is lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing to pay respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the CA is limited to reviewing questions of law which involves no examination of the probative value of the evidence presented by the litigants or any of them.18

The Supreme Court is not a trier of facts; it is not its function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises

or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the CA went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present petition.At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner.The Court disagrees with petitioner's stand.It is well-settled that when the words of a contract are plain and readily understood, there is no room for construction.22 In this case, the questioned insurance policies provide coverage for "book debts in connection with ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is it provided in the questioned insurance policies that the subject of the insurance is the goods sold and delivered to the customers and dealers of the insured.Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment of the purchase price the above described merchandise remains the property of the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that:(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied)x x x xThus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the buyer.27

Accordingly, petitioner bears the risk of loss of the goods delivered.IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title, but whether insured has substantial economic interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite to the existence of such an interest, it is sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed by the peril against which it is insured.29 Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains an insurable interest in the property sold so long as he has any interest therein, in other words, so long as he would suffer by its destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of the loss covered by the policies.The next question is: Is petitioner liable for the unpaid accounts?Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code.Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation consists in the payment of money, the failure of the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his liability.33

The rationale for this is that the rule that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that the object thereof is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class, the loss or destruction of anything of the same kind even without the debtor's fault and before he has incurred in delay will not have the effect of

extinguishing the obligation.35 This rule is based on the principle that the genus of a thing can never perish. Genus nunquan perit.36

An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What is relevant here is whether it has been established that petitioner has outstanding accounts with IMC and LSPI.With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these documents have been properly identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim.41

Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides:Art. 2207. 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. x x xPetitioner failed to refute respondent's evidence.As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case

for recovery of the amount of P535,613.00.WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to respondent is DELETED for lack of factual basis.No pronouncement as to costs.SO ORDERED.

G.R. No. 174116               September 11, 2009EASTERN SHIPPING LINES, INC., Petitioner, vs.PRUDENTIAL GUARANTEE AND ASSURANCE, INC., Respondent.D E C I S I O NDEL CASTILLO, J.:Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, seeking to set aside the April 26, 2006 Decision2 and August 15, 2006 Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 68165.The facts of the case:On November 8, 1995, fifty-six cases of completely knock-down auto parts of Nissan motor vehicle (cargoes) were loaded on board M/V Apollo Tujuh (carrier) at Nagoya, Japan, to be shipped to Manila. The shipment was consigned to Nissan Motor Philippines, Inc. (Nissan) and was covered by Bill of Lading No. NMA-1.4 The carrier was owned and operated by petitioner Eastern Shipping Lines, Inc.On November 16, 1995, the carrier arrived at the port of Manila. On November 22, 1995, the shipment was then discharged from the vessel onto the custody of the arrastre operator, Asian Terminals, Inc. (ATI), complete and in good condition, except for four cases.5

On November 24 to 28, 1995, the shipment was withdrawn by Seafront Customs and Brokerage from the pier and delivered to the warehouse of Nissan in Quezon City.6

A survey of the shipment was then conducted by Tan-Gaute Adjustment Company, Inc. (surveyor) at Nissan’s warehouse. On January 16, 1996, the surveyor submitted its report7 with a finding that there were "short (missing)" items in Cases Nos. 10/A26/T3K and 10/A26/7K and "broken/scratched" and "broken" items in Case No. 10/A26/70K"; and that "(i)n (its) opinion, the "shortage and damage sustained by the shipment were due to pilferage and improper handling, respectively while in the custody of the vessel and/or Arrastre Contractors."8

As a result, Nissan demanded the sum of P1,047,298.349

representing the cost of the damages sustained by the shipment from petitioner, the owner of the vessel, and ATI, the arrastre operator. However, the demands were not heeded.10

On August 21, 1996, as insurer of the shipment against all risks per Marine Open Policy No. 86-168 and Marine Cargo Risk Note No. 3921/95, respondent Prudential Guarantee and Assurance Inc. paid

Nissan the sum of P1,047,298.34.On October 1, 1996, respondent sued petitioner and ATI for reimbursement of the amount it paid to Nissan before the Regional Trial Court (RTC) of Makati City, Branch 148, docketed as Civil Case No. 96-1665, entitled Prudential Guarantee and Assurance, Inc. v. Eastern Shipping Lines, Inc. Respondent claimed that it was subrogated to the rights of Nissan by virtue of said payment.11

On June 21, 1999, the RTC rendered a Decision,12 the dispositive portion of which reads:WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the defendants Eastern Shipping Lines, Inc. and ATI, and said defendants are hereby ordered to pay jointly and solidarily plaintiff the following:1) The claim of P1,047,298.34 with legal interest thereon of 6% per annum from the date of the filing of this complaint until the same is fully paid;2) [Twenty-five (25%)] percent of the principal claim, as and for attorney’s fees;3) Plus costs of suit.Both the counterclaims and crossclaims are without legal basis. The counterclaims and crossclaims are based on the assumption that the other defendant is the one solely liable. However, inasmuch as the solidary liability of the defendants have been established, the counterclaims and crossclaims must be denied.Equal costs against Eastern Shipping Lines, Inc. and Asian Terminals, Inc.SO ORDERED.13

Both petitioner and ATI appealed to the CA.On April 26, 2006, the CA rendered a Decision the dispositive portion of which reads:WHEREFORE, the appealed decision is AFFIRMED with MODIFICATIONS, in that (i) defendant-appellant Eastern Shipping Lines, Inc. is ordered to pay appellee (a) the amount of P904,293.75 plus interest thereon at the rate of 6% per annum from the filing of the complaint up to the finality of this judgment, when the interest shall become 12% per annum until fully paid, and (b) the costs of suit; (ii) the award of attorney’s fees is DELETED; and (iii) the complaint against defendant-appellant Asian Terminals, Inc. is DISMISSED.SO ORDERED.14

The CA exonerated ATI and ruled that petitioner was solely

responsible for the damages caused to the cargoes. Moreover, the CA relying on Delsan Transport Lines, Inc. vs. Court of Appeals,15

ruled that the right of subrogation accrues upon payment by the insurance company of the insurance claim and that the presentation of the insurance policy is not indispensable before the appellee may recover in the exercise of its subrogatory right.16

Petitioner then filed a motion for reconsideration, which was, however, denied by the CA in a Resolution dated August 15, 2006.Hence, herein petition, with petitioner raising the following assignment of errors to wit:I.WHETHER OR NOT THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT FINDING HEREIN PETITIONER LIABLE DESPITE THE FACT THAT RESPONDENT FAILED TO SUBMIT ANY INSURANCE POLICY.II.WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT APPLYING THE US$500.00/PACKAGE/CASE PACKAGE LIMITATION OF LIABILITY IN ACCORDANCE WITH THE CARRIAGE OF GOODS BY SEA ACT.17

The petition is meritorious.The rule in our jurisdiction is that only questions of law may be entertained by this Court in a petition for review on certiorari. This rule, however, is not iron-clad and admits of certain exceptions, one of which is when the CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify a different conclusion.18 In the case at bar, the records of the case contain evidence which justify the application of the exception.Anent the first error, petitioner argues that respondent was not properly subrogated because of the non-presentation of the marine insurance policy. In the case at bar, in order to prove its claim, respondent presented a marine cargo risk note and a subrogation receipt. Thus, the question to be resolved is whether the two documents, without the Marine Insurance Policy, are sufficient to prove respondent’s right of subrogation.Before anything else, it must be emphasized that a marine risk note is not an insurance policy. It is only an acknowledgment or declaration of the insurer confirming the specific shipment covered by its marine open policy, the evaluation of the cargo and the chargeable premium.19 In International Container Terminal Services, Inc. v. FGU Insurance Corporation (International),20 the

nature of a marine cargo risk note was explained, thus:x x x It is the marine open policy which is the main insurance contract. In other words, the marine open policy is the blanket insurance to be undertaken by FGU on all goods to be shipped by RAGC during the existence of the contract, while the marine risk note specifies the particular goods/shipment insured by FGU on that specific transaction, including the sum insured, the shipment particulars as well as the premium paid for such shipment. x x x.21

For clarity, the pertinent portions of the Marine Cargo Risk Note, 22

relied upon by respondent, are hereunder reproduced, to wit:RN NO 39821/95Date: Nov. 16, 1995NISSAN MOTOR PHILS., INC.x x xGentlemen:We have this day noted a Risk in your favor subject to all clauses and condition of the Company’s printed form of Marine Open Policy No. 86-168For PHILIPINE PESOS FOURTEEN MILLION ONE HUNDRED SEVENTY-THREE THOUSAND FORTY-TWO & 91/100 ONLY (P14, 173,042.91) xxxCARGO: 56 CASES NISSAN MOTOR VEHICLE CKD (GC22)CONDITIONS: INSTITUTE CARGO CLAUSES "A"

OTHER TERMS AND CONDITIONS PERMOP-86-168

From: NAGOYATo: MANILA, PHILS.ETD: NOV. 8, 1995 ETA: NOV. 17, 1995CARRIER: "APOLLO TUJUH"B/L NO: NMA-1BANK: BANK OF THE PHILLIPINE ISLANDSL/C NO: 026010051971Shipper/ Consignee: MARUBENI CORPORATIONIt is undisputed that the cargoes were already on board the carrier as early as November 8, 1995 and that the same arrived at the port of Manila on November 16, 1995. It is, however, very apparent that the Marine Cargo Risk Note was issued only on November 16, 1995. The same, therefore, should have raised a red flag, as it would be impossible to know whether said goods were actually insured while the same were in transit from Japan to Manila. On this score, this Court is guided by Malayan Insurance Co., Inc. v. Regis Brokerage Corp.,23 where this Court ruled:Thus, we can only consider the Marine Risk Note in determining

whether there existed a contract of insurance between ABB Koppel and Malayan at the time of the loss of the motors. However, the very terms of the Marine Risk Note itself are quite damning. It is dated 21 March 1995, or after the occurrence of the loss, and specifically states that Malayan "ha[d] this day noted the above-mentioned risk in your favor and hereby guarantee[s] that this document has all the force and effect of the terms and conditions in the Corporation’s printed form of the standard Marine Cargo Policy and the Company’s Marine Open Policy."24

Likewise, the date of the issuance of the Marine Risk Note also caught the attention of petitioner. In petitioner’s Comment/Opposition25 to the formal offer of evidence before the RTC, petitioner made the following manifestations, to wit:Exhibit "B," Marine Cargo Risk Note No. 39821 dated November 16, 1995 is being objected to for being irrelevant and immaterial as it was executed on November 16, 1995. The cargoes arrived in Manila on November 16, 1995. This means that the cargoes are not specifically covered by any particular insurance at the time of transit. The alleged Marine Open Policy was not presented. Marine Open Policy may be subject to Institute Cargo Clauses which may require arbitration prior to the filing of an action in court.26

In addition, petitioner also contended that the Marine Cargo Risk Note referred to "Institute Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168."Based on the forgoing, it is already evident why herein petition is meritorious. The Marine Risk Note relied upon by respondent as the basis for its claim for subrogation is insufficient to prove said claim.As previously stated, the Marine Risk Note was issued only on November 16, 1995; hence, without a copy of the marine insurance policy, it would be impossible and simply guesswork to know whether the cargo was insured during the voyage which started on November 8, 1995. Again, without the marine insurance policy, it would be impossible for this Court to know the following: first, the specifics of the "Institute Cargo Clauses A and other terms and conditions per Marine Open Policy-86-168" as alluded to in the Marine Risk Note; second, if the said terms and conditions were actually complied with before respondent paid Nissan’s claim.

Furthermore, a reading of the transcript of the records clearly show that, at the RTC, petitioner had already objected to the non-presentation of the marine insurance policy, to wit:Q. Are you also the one preparing the Marine Insurance Contract?A. No, sir.Q. Who is the one?A. Our Marine Cargo Underwriting Department.Q. And do you know anybody in that department?A. Yes, sir.Q. And you were aware that this particular cargo of the shipment was insured?A. Yes, sir, per policy issued.Q. And that you are referring to Exhibit?A. The Marine Cargo Risk.Q. Is this the only contract of Insurance between Prudential Guarantee and Nissan?A. Sir, there is a Marine Open Policy.Q. Do you have any copy of that?A. It is in the office.Atty. Alojado Can you produce that copy?Atty. Zapa May we know the request of counsel for producing this Marine Open Policy?Atty. Alojado The basis of the question is the answer of the witness which says that there is another contract of insurance.COURT Yes, that is a Marine Open Policy.Are you familiar with Marine Open Policy?Atty. Alojado Yes, Your Honor.But we would also like to be familiarize with that contract.COURT But you know already a Marine Open PolicyAtty. Alojado Yes, Your Honor.COURT I do not know if you work as a lawyer for several Insurance Company?Atty. Alojado No, Your Honor. Honestly, Your Honor I worked asa Maritime lawyer.COURT Then you should know what is Marine Open Policy.Atty. Alojado I would like to know the specification of theMarine Open Policy in this regard.Atty. Zapa I think your Honor, between the plaintiff and the defendant there is no issue against the insurance.COURT Yes because this witness it not testifying on the Marine Open Policy.

Atty. Alojado We submit.COURT Proceed.Atty. AlojadoQ. But there is a Marine Open PolicyA. Yes, sir.27

x x x xCOURTQ. Is the policy a standing policy, a continuing policy or is it going only for only a year or for a particular shipment or what?A. For this particular consignee, they have Marine Open Policy.Atty. Alojado That was not presented.COURT That’s why I’m asking. So the policy is not only for a particular shipment, but all other shipments that may come?A. Yes, Your Honor.Q. Are covered?A. Yes, Your Honor.Q. Without any specifications?A. Yes, Your Honor.28

Clearly, petitioner was not remiss when it openly objected to the non-presentation of the Marine Insurance Policy. As testified to by respondent’s witness, they had a copy of the marine insurance policy in their office. Thus, respondent was already apprised of the possible importance of the said document to their cause.In addition, this Court takes notice that notwithstanding that the RTC may have denied the repeated manifestation of petitioner of the non-presentation of the marine insurance policy, the same by itself does not exonerate respondent. As plaintiff, it was respondent’s burden to present the evidence necessary to substantiate its claim.In its Complaint,29 respondent alleged: "That the above-described shipment was insured for P14,173,042.91 against all risks under plaintiff’s Marine Cargo Risk Note No. 39821/Marine Open Policy No. 86-168."30 Therefore, other than the marine cargo risk note, respondent should have also presented the marine insurance policy, as the same also served as the basis for its complaint. Section 7, Rule 9 of the 1997 Rules of Civil Procedure, provide:SECTION 7. Action or defense based on document.—Whenever an action or defense is based upon a written instrument or document, the substance of such instrument or document shall be set forth in the pleading, and the original or a copy thereof shall be attached to the pleading as an exhibit, which shall be deemed to be a part

of the pleading, or said copy may, with like effect, be set forth in the pleading.On this score, Malayan is instructive:Malayan’s right of recovery as a subrogee of ABB Koppel cannot be predicated alone on the liability of the respondent to ABB Koppel, even though such liability will necessarily have to be established at the trial for Malayan to recover. Because Malayan’s right to recovery derives from contractual subrogation as an incident to an insurance relationship, and not from any proximate injury to it inflicted by the respondents, it is critical that Malayan establish the legal basis of such right to subrogation by presenting the contract constitutive of the insurance relationship between it and ABB Koppel. Without such legal basis, its cause of action cannot survive.Our procedural rules make plain how easily Malayan could have adduced the Marine Insurance Policy. Ideally, this should have been accomplished from the moment it filed the complaint. Since the Marine Insurance Policy was constitutive of the insurer-insured relationship from which Malayan draws its right to subrogation, such document should have been attached to the complaint itself, as provided for in Section 7, Rule 9 of the 1997 Rules of Civil Procedure: x x x31

Therefore, since respondent alluded to an actionable document in its complaint, the contract of insurance between it and Nissan, as integral to its cause of action against petitioner, the Marine Insurance Policy should have been attached to the Complaint. Even in its formal offer of evidence, respondent alluded to the marine insurance policy which can stand independent of the Marine Cargo Risk Note, to wit:EXH "B" = Marine Cargo Risk Note No. 39821/95 Dated November 16, 1995.Purpose: As proof that the subject shipment was covered by insurance for P14,173, 042.91 under Marine Open Policy No. 86-168.32

It is significant that the date when the alleged insurance contract was constituted cannot be established with certainty without the contract itself. Said point is crucial because there can be no insurance on a risk that had already occurred by the time the contract was executed.33 Surely, the Marine Risk Note on its face does not specify when the insurance was constituted.The importance of the presentation of the Marine Insurance Policy

was also emphasized in Wallem Philippines Shipping, Inc. v. Prudential Guarantee & Assurance, Inc.,34 where this Court ruled:x x x Wallem still cannot be held liable because of the failure of Prudential to present the contract of insurance or a copy thereof. Prudential claims that it is subrogated to the rights of GMC pursuant to their insurance contract. For this purpose, it submitted a subrogation receipt (Exh. J) and a marine cargo risk note (Exh. D). However, as the trial court pointed out, this is not sufficient. As GMC’s subrogee, Prudential can exercise only those rights granted to GMC under the insurance contract. The contract of insurance must be presented in evidence to indicate the extent of its coverage. As there was no determination of rights under the insurance contract, this Court’s ruling in Home Insurance Corporation v. Court of Appeals is applicable:The insurance contract has not been presented. It may be assumed for the sake of argument that the subrogation receipt may nevertheless be used to establish the relationship between the petitioner [Home Insurance Corporation] and the consignee [Nestlé Phil.] and the amount paid to settle the claim. But that is all the document can do. By itself alone, the subrogation receipt is not sufficient to prove the petitioner’s claim holding the respondent [Mabuhay Brokerage Co., Inc.] liable for the damage to the engine.. . . .It is curious that the petitioner disregarded this rule, knowing that the best evidence of the insurance contract was its original copy, which was presumably in the possession of Home itself. Failure to present this original (or even a copy of it), for reasons the Court cannot comprehend, must prove fatal to this petition.35

Finally, there have been cases where this Court ruled that the non-presentation of the marine insurance policy is not fatal, as can be gleaned inInternational, where this Court held:Indeed, jurisprudence has it that the marine insurance policy needs to be presented in evidence before the trial court or even belatedly before the appellate court. In Malayan Insurance Co., Inc. v. Regis Brokerage Corp., the Court stated that the presentation of the marine insurance policy was necessary, as the issues raised therein arose from the very existence of an insurance contract between Malayan Insurance and its consignee, ABB Koppel, even prior to the loss of the shipment. In Wallem Philippines Shipping,

Inc. v. Prudential Guarantee and Assurance, Inc., the Court ruled that the insurance contract must be presented in evidence in order to determine the extent of the coverage. This was also the ruling of the Court in Home Insurance Corporation v. Court of Appeals.However, as in every general rule, there are admitted exceptions. In Delsan Transport Lines, Inc. v. Court of Appeals, the Court stated that the presentation of the insurance policy was not fatal because the loss of the cargo undoubtedly occurred while on board the petitioner's vessel, unlike in Home Insurance in which the cargo passed through several stages with different parties and it could not be determined when the damage to the cargo occurred, such that the insurer should be liable for it.As in Delsan, there is no doubt that the loss of the cargo in the present case occurred while in petitioner's custody. Moreover, there is no issue as regards the provisions of Marine Open Policy No. MOP-12763, such that the presentation of the contract itself is necessary for perusal, not to mention that its existence was already admitted by petitioner in open court. And even though it was not offered in evidence, it still can be considered by the court as long as they have been properly identified by testimony duly recorded and they have themselves been incorporated in the records of the case.36

Although the CA may have ruled that the damage to the cargo occurred while the same was in petitioner’s custody, this Court cannot apply the ruling in International to the case at bar. In contrast, unlike in International where there was no issue as regards the provisions of the marine insurance policy, such that the presentation of the contract itself is necessary for perusal, herein petitioner had repeatedly objected to the non-presentation of the marine insurance policy and had manifested its desire to know the specific provisions thereof. Moreover, and the same is critical, the marine risk note in the case at bar is questionable because: first, it is dated on the same day the cargoes arrived at the port of Manila and not during the duration of the voyage; second, without the Marine Insurance Policy to elucidate on the specifics of the terms and conditions alluded to in the marine risk note, it would be simply guesswork to know if the same were complied with.Lastly, to cast all doubt on the merits of herein petition, this Court is guided by the ruling in Malayan, to wit:It cannot be denied from the only established facts that Malayan

and ABB Koppel comported as if there was an insurance relationship between them and documents exist that evince the presence of such legal relationship. But, under these premises, the very insurance contract emerges as the white elephant in the room – an obdurate presence which everybody reacts to, yet, legally invisible as a matter of evidence since no attempt had been made to prove its corporeal existence in the court of law. It may seem commonsensical to conclude anyway that there was a contract of insurance between Malayan and ABB Koppel since they obviously behaved in a manner that indicates such relationship, yet the same conclusion could be had even if, for example, those parties staged an elaborate charade to impress on the world the existence of an insurance contract when there actually was none. While there is absolutely no indication of any bad faith of such import by Malayan or ABB Koppel, the fact that the "commonsensical" conclusion can be drawn even if there was bad faith that convinces us to reject such line of thinking.1avvphi1The Court further recognizes the danger as precedent should we sustain Malayan’s position, and not only because such a ruling would formally violate the rule on actionable documents. Malayan would have us effectuate an insurance contract without having to consider its particular terms and conditions, and on a blind leap of faith that such contract is indeed valid and subsisting. The conclusion further works to the utter prejudice of defendants such as Regis or Paircargo since they would be deprived the opportunity to examine the document that gives rise to the plaintiff’s right to recover against them, or to raise arguments or objections against the validity or admissibility of such document. If a legal claim is irrefragably sourced from an actionable document, the defendants cannot be deprived of the right to examine or utilize such document in order to intelligently raise a defense. The inability or refusal of the plaintiff to submit such document into evidence constitutes an effective denial of that right of the defendant which is ultimately rooted in due process of law, to say nothing on how such failure fatally diminishes the plaintiff’s substantiation of its own cause of action.37

In conclusion, this Court rules that based on the applicable jurisprudence, because of the inadequacy of the Marine Cargo Risk Note for the reasons already stated, it was incumbent on respondent to present in evidence the Marine Insurance Policy, and having failed in doing so, its claim of subrogation must

necessarily fail.Because of the foregoing, it would be unnecessary to discuss the second error raised by petitioner.WHEREFORE, premises considered, the petition is GRANTED. The April 26, 2006 Decision and August 15, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 68165 are hereby REVERSED and SET ASIDE. The Complaint in Civil Case No. 96-1665 is DISMISSED.SO ORDERED.

G.R. No. 92383 July 17, 1992SUN INSURANCE OFFICE, LTD., petitioner, vs.THE HON. COURT OF APPEALS and NERISSA LIM, respondents. CRUZ, J.:The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two months later, he was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was rejected. The petitioner agreed that there was no suicide. It argued, however that there was no accident either.Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10 o'clock in the evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with his handgun, from which he had previously removed the magazine. As she watched television, he stood in front of her and pointed the gun at her. She pushed it aside and said it might he loaded. He assured her it was not and then pointed it to his temple. The next moment there was an explosion and Lim slumped to the floor. He was dead before he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the face value of the policy, with interest at the legal rate; P10,000.00 as moral damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as attorney's fees, plus the costs of the suit. This decision was affirmed on appeal, and the motion for reconsideration was denied. 3 The petitioner then came to this Court to fault the Court of Appeals for approving the payment of the claim and the award of damages.The term "accident" has been defined as follows:The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an insurance contract are to be construed and considered according to the ordinary understanding and common usage and speech of people generally. In-substance, the courts are practically agreed that the words "accident" and "accidental" mean that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual, and unforeseen. The definition that has usually been adopted by the courts is that an accident is an event

that takes place without one's foresight or expectation — an event that proceeds from an unknown cause, or is an unusual effect of a known case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human agency, an event which, under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been defined as an injury which happens by reason of some violence or casualty to the injured without his design, consent, or voluntary co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an accident. The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6

says that "there is no accident when a deliberate act is performed unless some additional, unexpected, independent and unforeseen happening occurs which produces or brings about their injury or death." There was such a happening. This was the firing of the gun, which was the additional unexpected and independent and unforeseen occurrence that led to the insured person's death.The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the private petitioner's claim is barred by such provision. It is there stated:Exceptions —The company shall not be liable in respect of1. Bodily injuryxxx xxx xxxb. consequent uponi) The insured person attempting to commit suicide or willfully exposing himself to needless peril except in an attempt to save human life.To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy.It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they both signify a disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such life whereas the second act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who walks a tightrope one thousand meters above the ground and without any safety device may not actually be intending to commit suicide, but his act is nonetheless suicidal.

He would thus be considered as "willfully exposing himself to needless peril" within the meaning of the exception in question.The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to needless peril and so came under the exception. The theory is that a gun is per se dangerous and should therefore be handled cautiously in every case.That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the gun and believed it was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that Lim did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he thought it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.The contrary view is expressed by the petitioner thus:Accident insurance policies were never intended to reward the insured for his tendency to show off or for his miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate and jump from the Quezon Bridge into the Pasig River in the belief that I can overcome the current, I have wilfully exposed myself to peril and must accept the consequences of my act. If I drown I cannot go to the insurance company to ask them to compensate me for my failure to swim as well as I thought I could. The insured in the case at bar deliberately put the gun to his head and pulled the trigger. He wilfully exposed himself to peril.The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That might frighten the insurance people to death. We also agree that under the circumstances narrated, his beneficiary would not be able to collect on the insurance policy for it is clear that when he braved the currents below, he deliberately exposed himself to a known peril.The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's hypothetical swimmer knew when he dived off the Quezon Bridge that the currents below were dangerous. By contrast, Lim did not know that the gun he put to his head was loaded.Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from recovering from the insurance policy he obtained precisely against accident. There

is nothing in the policy that relieves the insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly made in the contract to relieve the insurer from liability, and none of these exceptions is applicable in the case at bar. **It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. There is no reason to deviate from this rule, especially in view of the circumstances of this case as above analyzed.On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this case is, as the petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good faith then it resisted the private respondent's claim on the ground that the death of the insured was covered by the exception. The issue was indeed debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We hold therefore that the award of moral and exemplary damages and of attorney's fees is unjust and so must be disapproved.In order that a person may be made liable to the payment of moral damages, the law requires that his act be wrongful. The adverse result of an action does not per se make the act wrongful and subject the act or to the payment of moral damages. The law could not have meant to impose a penalty on the right to litigate; such right is so precious that moral damages may not be charged on those who may exercise it erroneously. For these the law taxes costs. 7

The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the action wrongful because in most cases one party will lose; we would be imposing an unjust condition or limitation on the right to litigate. We hold that the award of moral damages in the case at bar is not justified by the facts had circumstances as well as the law.If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the fact of winning alone that entitles him to recover such damages of the exceptional circumstances enumerated in Art. 2208. Otherwise, every time a defendant wins, automatically the plaintiff must pay attorney's fees thereby putting a premium on the right to litigate which

should not be so. For those expenses, the law deems the award of costs as sufficient. 8WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable to the private respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest at the legal rate from the date of the filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all awards for damages, including attorney's fees, except the costs of the suit.SO ORDERED.

G.R. No. 81026 April 3, 1990PAN 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. 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.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 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 the ejusdem 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 implies damage 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 1370-1378 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 DAMAGE1. 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 [See Calanoc 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.

G.R. No. 137775. March 31, 2005FGU INSURANCE CORPORATION, Petitioners, vs.THE COURT OF APPEALS, SAN MIGUEL CORPORATION, and ESTATE OF ANG GUI, represented by LUCIO, JULIAN, and JAIME, all surnamed ANG, and CO TO, Respondents.G.R. No. 140704. March 31, 2005ESTATE OF ANG GUI, Represented by LUCIO, JULIAN and JAIME, all surnamed ANG, and CO TO, Petitioners, vs.THE HONORABLE COURT OF APPEALS, SAN MIGUEL CORP., and FGU INSURANCE CORP., Respondents.D E C I S I O NCHICO-NAZARIO, J.:Before Us are two separate Petitions for review assailing the Decision1 of the Court of Appeals in CA-G.R. CV No. 49624 entitled, "San Miguel Corporation, Plaintiff-Appellee versus Estate of Ang Gui, represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, Defendants-Appellants, Third–Party Plaintiffs versus FGU Insurance Corporation, Third-Party Defendant-Appellant," which affirmed in toto the decision2 of the Regional Trial Court of Cebu City, Branch 22. The dispositive portion of the Court of Appeals decision reads:WHEREFORE, for all the foregoing, judgment is hereby rendered as follows:1) Ordering defendants to pay plaintiff the sum of P1,346,197.00 and an interest of 6% per annum to be reckoned from the filing of this case on October 2, 1990;2) Ordering defendants to pay plaintiff the sum of P25,000.00 for attorney’s fees and an additional sum of P10,000.00 as litigation expenses;3) With cost against defendants.For the Third-Party Complaint:1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the amount of P632,700.00.3

The FactsEvidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and Co To, was engaged in the shipping business. It owned the M/T ANCO tugboat and the D/B Lucio barge which were operated as common carriers. Since the D/B Lucio had no engine of its own, it could not maneuver by itself and had to be towed by a tugboat for it to move from one place to another.

On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on board the D/B Lucio, for towage by M/T ANCO, the following cargoes:Bill of Lading No. Shipment Destination1 25,000 cases Pale Pilsen Estancia, Iloilo350 cases Cerveza Negra Estancia, Iloilo2 15,000 cases Pale Pilsen San Jose, Antique200 cases Cerveza Negra San Jose, AntiqueThe consignee for the cargoes covered by Bill of Lading No. 1 was SMC’s Beer Marketing Division (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes covered by Bill of Lading No. 2 was SMC’s BMD-San Jose Beer Sales Office, San Jose, Antique.The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose, Antique. The vessels arrived at San Jose, Antique, at about one o’clock in the afternoon of 30 September 1979. The tugboat M/T ANCO left the barge immediately after reaching San Jose, Antique.When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979, the clouds over the area were dark and the waves were already big. The arrastre workers unloading the cargoes of SMC on board the D/B Lucio began to complain about their difficulty in unloading the cargoes. SMC’s District Sales Supervisor, Fernando Macabuag, requested ANCO’s representative to transfer the barge to a safer place because the vessel might not be able to withstand the big waves.ANCO’s representative did not heed the request because he was confident that the barge could withstand the waves. This, notwithstanding the fact that at that time, only the M/T ANCO was left at the wharf of San Jose, Antique, as all other vessels already left the wharf to seek shelter. With the waves growing bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790) cases of beer were discharged into the custody of the arrastre operator.At about ten to eleven o’clock in the evening of 01 October 1979, the crew of D/B Lucio abandoned the vessel because the barge’s rope attached to the wharf was cut off by the big waves. At around midnight, the barge run aground and was broken and the cargoes of beer in the barge were swept away.As a result, ANCO failed to deliver to SMC’s consignee Twenty-Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. The value per case of

Pale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20). The value of a case of Cerveza Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMC’s claim against ANCO amounted to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00).As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage and Damages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent (25%) of the total claim as attorney’s fees.Upon Ang Gui’s death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC filed a second amended complaint which was admitted by the Court impleading the surviving partner, Co To and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang. The substituted defendants adopted the original answer with counterclaim of ANCO "since the substantial allegations of the original complaint and the amended complaint are practically the same."ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the complaint were indeed loaded on the vessel belonging to ANCO. It claimed however that it had an agreement with SMC that ANCO would not be liable for any losses or damages resulting to the cargoes by reason of fortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra were lost by reason of a storm, a fortuitous event which battered and sunk the vessel in which they were loaded, they should not be held liable. ANCO further asserted that there was an agreement between them and SMC to insure the cargoes in order to recover indemnity in case of loss. Pursuant to that agreement, the cargoes to the extent of Twenty Thousand (20,000) cases was insured with FGU Insurance Corporation (FGU) for the total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Policy No. 29591.Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging that before the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the cargoes, to the extent of Twenty Thousand (20,000) cases, were insured with FGU for a total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under Marine Insurance Policy No. 29591. ANCO further alleged that on or about

02 October 1979, by reason of very strong winds and heavy waves brought about by a passing typhoon, the vessel run aground near the vicinity of San Jose, Antique, as a result of which, the vessel was totally wrecked and its cargoes owned by SMC were lost and/or destroyed. According to ANCO, the loss of said cargoes occurred as a result of risks insured against in the insurance policy and during the existence and lifetime of said insurance policy. ANCO went on to assert that in the remote possibility that the court will order ANCO to pay SMC’s claim, the third-party defendant corporation should be held liable to indemnify or reimburse ANCO whatever amounts, or damages, it may be required to pay to SMC.In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of the Insurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of the cargoes covered by the said insurance policy cannot be attributed directly or indirectly to any of the risks insured against in the said insurance policy. According to FGU, it is only liable under the policy to Third-party Plaintiff ANCO and/or Plaintiff SMC in case of any of the following:a) total loss of the entire shipment;b) loss of any case as a result of the sinking of the vessel; orc) loss as a result of the vessel being on fire.Furthermore, FGU alleged that the Third-Party Plaintiff ANCO and Plaintiff SMC failed to exercise ordinary diligence or the diligence of a good father of the family in the care and supervision of the cargoes insured to prevent its loss and/or destruction.Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for actual, moral, and exemplary damages and attorney’s fees.The trial court found that while the cargoes were indeed lost due to fortuitous event, there was failure on ANCO’s part, through their representatives, to observe the degree of diligence required that would exonerate them from liability. The trial court thus held the Estate of Ang Gui and Co To liable to SMC for the amount of the lost shipment. With respect to the Third-Party complaint, the court a quo found FGU liable to bear Fifty-Three Percent (53%) of the amount of the lost cargoes. According to the trial court:. . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, run-aground and was broken and the beer cargoes on the said barge were swept away. It is the sense of this Court that the

risk insured against was the cause of the loss.. . .Since the total cargo was 40,550 cases which had a total amount of P1,833,905.00 and the amount of the policy was only for P858,500.00, defendants as assured, therefore, were considered co-insurers of third-party defendant FGU Insurance Corporation to the extent of 975,405.00 value of the cargo. Consequently, inasmuch as there was partial loss of only P1,346,197.00, the assured shall bear 53% of the loss…4 [Emphasis ours]The appellate court affirmed in toto the decision of the lower court and denied the motion for reconsideration and the supplemental motion for reconsideration.Hence, the petitions.The IssuesIn G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into two: 1) Whether or not respondent Court of Appeals committed grave abuse of discretion in holding FGU liable under the insurance contract considering the circumstances surrounding the loss of the cargoes; and 2) Whether or not the Court of Appeals committed an error of law in holding that the doctrine of res judicata applies in the instant case.In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate court based on the following assignments of error: 1) The Court of Appeals committed grave abuse of discretion in affirming the findings of the lower court that the negligence of the crewmembers of the D/B Lucio was the proximate cause of the loss of the cargoes; and 2) The respondent court acted with grave abuse of discretion when it ruled that the appeal was without merit despite the fact that said court had accepted the decision in Civil Case No. R-19341, as affirmed by the Court of Appeals and the Supreme Court, as res judicata.Ruling of the CourtFirst, we shall endeavor to dispose of the common issue raised by both petitioners in their respective petitions for review, that is, whether or not the doctrine of res judicata applies in the instant case.It is ANCO’s contention that the decision in Civil Case No. R-19341,5 which was decided in its favor, constitutes res judicata with respect to the issues raised in the case at bar.The contention is without merit. There can be no res judicata as between Civil Case No. R-19341 and the case at bar. In order for

res judicata to be made applicable in a case, the following essential requisites must be present: 1) the former judgment must be final; 2) the former judgment must have been rendered by a court having jurisdiction over the subject matter and the parties; 3) the former judgment must be a judgment or order on the merits; and 4) there must be between the first and second action identity of parties, identity of subject matter, and identity of causes of action.6

There is no question that the first three elements of res judicata as enumerated above are indeed satisfied by the decision in Civil Case No. R-19341. However, the doctrine is still inapplicable due to the absence of the last essential requisite of identity of parties, subject matter and causes of action.The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in the instant case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang and Co To as defendants, with the latter merely impleading FGU as third-party defendant.The subject matter of Civil Case No. R-19341 was the insurance contract entered into by ANCO, the owner of the vessel, with FGU covering the vessel D/B Lucio, while in the instant case, the subject matter of litigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio and the resulting failure of ANCO to deliver to SMC’s consignees the lost cargo. Otherwise stated, the controversy in the first case involved the rights and liabilities of the shipowner vis-à-vis that of the insurer, while the present case involves the rights and liabilities of the shipper vis-à-vis that of the shipowner. Specifically, Civil Case No. R-19341 was an action for Specific Performance and Damages based on FGU Marine Hull Insurance Policy No. VMF-MH-13519 covering the vessel D/B Lucio, while the instant case is an action for Breach of Contract of Carriage and Damages filed by SMC against ANCO based on Bill of Lading No. 1 and No. 2, with defendant ANCO seeking reimbursement from FGU under Insurance Policy No. MA-58486, should the former be held liable to pay SMC.Moreover, the subject matter of the third-party complaint against FGU in this case is different from that in Civil Case No. R-19341. In the latter, ANCO was suing FGU for the insurance contract over the vessel while in the former, the third-party complaint arose from the insurance contract covering the cargoes on board the D/B Lucio.

The doctrine of res judicata precludes the re-litigation of a particular fact or issue already passed upon by a court of competent jurisdiction in a former judgment, in another action between the same parties based on a different claim or cause of action. The judgment in the prior action operates as estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was rendered.7 If a particular point or question is in issue in the second action, and the judgment will depend on the determination of that particular point or question, a former judgment between the same parties or their privies will be final and conclusive in the second if that same point or question was in issue and adjudicated in the first suit.8

Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341, only findings with respect to matters passed upon by the court in the former judgment are conclusive in the disposition of the instant case. A careful perusal of the decision in Civil Case No. R-19341 will reveal that the pivotal issues resolved by the lower court, as affirmed by both the Court of Appeals and the Supreme Court, can be summarized into three legal conclusions: 1) that the D/B Lucio before and during the voyage was seaworthy; 2) that there was proper notice of loss made by ANCO within the reglementary period; and 3) that the vessel D/B Lucio was a constructive total loss.Said decision, however, did not pass upon the issues raised in the instant case. Absent therein was any discussion regarding the liability of ANCO for the loss of the cargoes. Neither did the lower court pass upon the issue of the alleged negligence of the crewmembers of the D/B Lucio being the cause of the loss of the cargoes owned by SMC.Therefore, based on the foregoing discussion, we are reversing the findings of the Court of Appeals that there is res judicata.Anent ANCO’s first assignment of error, i.e., the appellate court committed error in concluding that the negligence of ANCO’s representatives was the proximate cause of the loss, said issue is a question of fact assailing the lower court’s appreciation of evidence on the negligence or lack thereof of the crewmembers of the D/B Lucio. As a rule, findings of fact of lower courts, particularly when affirmed by the appellate court, are deemed final and conclusive. The Supreme Court cannot review such findings on appeal, especially when they are borne out by the records or are based on substantial evidence.9 As held in the case of Donato v.

Court of Appeals,10 in this jurisdiction, it is a fundamental and settled rule that findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as to observe the demeanor of the witnesses while testifying in the case.11

It is not the function of this Court to analyze or weigh evidence all over again, unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.12

A careful study of the records shows no cogent reason to fault the findings of the lower court, as sustained by the appellate court, that ANCO’s representatives failed to exercise the extraordinary degree of diligence required by the law to exculpate them from liability for the loss of the cargoes.First, ANCO admitted that they failed to deliver to the designated consignee the Twenty Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra.Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had no engine of its own and could not maneuver by itself. Yet, the patron of ANCO’s tugboat M/T ANCO left it to fend for itself notwithstanding the fact that as the two vessels arrived at the port of San Jose, Antique, signs of the impending storm were already manifest. As stated by the lower court, witness Mr. Anastacio Manilag testified that the captain or patron of the tugboat M/T ANCO left the barge D/B Lucio immediately after it reached San Jose, Antique, despite the fact that there were already big waves and the area was already dark. This is corroborated by defendants’ own witness, Mr. Fernando Macabueg.13

The trial court continued:At that precise moment, since it is the duty of the defendant to exercise and observe extraordinary diligence in the vigilance over the cargo of the plaintiff, the patron or captain of M/T ANCO, representing the defendant could have placed D/B Lucio in a very safe location before they left knowing or sensing at that time the coming of a typhoon. The presence of big waves and dark clouds could have warned the patron or captain of M/T ANCO to insure the safety of D/B Lucio including its cargo. D/B Lucio being a barge, without its engine, as the patron or captain of M/T ANCO knew,

could not possibly maneuver by itself. Had the patron or captain of M/T ANCO, the representative of the defendants observed extraordinary diligence in placing the D/B Lucio in a safe place, the loss to the cargo of the plaintiff could not have occurred. In short, therefore, defendants through their representatives, failed to observe the degree of diligence required of them under the provision of Art. 1733 of the Civil Code of the Philippines.14

Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention of respondents SMC and FGU that "the crewmembers of D/B Lucio should have left port at the onset of the typhoon is like advising the fish to jump from the frying pan into the fire and an advice that borders on madness."15

The argument does not persuade. The records show that the D/B Lucio was the only vessel left at San Jose, Antique, during the time in question. The other vessels were transferred and temporarily moved to Malandong, 5 kilometers from wharf where the barge remained.16 Clearly, the transferred vessels were definitely safer in Malandong than at the port of San Jose, Antique, at that particular time, a fact which petitioners failed to disputeANCO’s arguments boil down to the claim that the loss of the cargoes was caused by the typhoon Sisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their part. In fact, ANCO claims that their crewmembers exercised due diligence to prevent or minimize the loss of the cargoes but their efforts proved no match to the forces unleashed by the typhoon which, in petitioners’ own words was, by any yardstick, a natural calamity, a fortuitous event, an act of God, the consequences of which petitioners could not be held liable for.17

The Civil Code provides:Art. 1733. Common carriers, from the nature of their business and for reasons of public policy are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case.Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734, 1735, and 1745 Nos. 5, 6, and 7 . . .Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only:(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

. . .Art. 1739. In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm, or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods . . . (Emphasis supplied)Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from liability)18 by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which though foreseen, were inevitable. It is therefore not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid.19

In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it unavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to another place, a circumstance which prompted SMC’s District Sales Supervisor to request that the D/B Lucio be likewise transferred, but to no avail. The D/B Lucio had no engine and could not maneuver by itself. Even if ANCO’s representatives wanted to transfer it, they no longer had any means to do so as the tugboat M/T ANCO had already departed, leaving the barge to its own devices. The captain of the tugboat should have had the foresight not to leave the barge alone considering the pending storm.While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCO could not escape liability to respondent SMC. The records clearly show the failure of petitioners’ representatives to exercise the extraordinary degree of diligence mandated by law. To be exempted from responsibility, the natural disaster should have been the proximate and only cause of the loss.20 There must have been no contributory negligence on the part of the common carrier. As held in the case of Limpangco Sons v. Yangco Steamship Co.:21

. . . To be exempt from liability because of an act of God, the tug must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. For, although the immediate or proximate cause of the loss in any given instance may have been what is termed an act of God, yet, if the tug

unnecessarily exposed the two to such accident by any culpable act or omission of its own, it is not excused.22

Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the part of M/T ANCO’s crewmembers, first in leaving the engine-less barge D/B Lucio at the mercy of the storm without the assistance of the tugboat, and again in failing to heed the request of SMC’s representatives to have the barge transferred to a safer place, as was done by the other vessels in the port; thus, making said blatant negligence the proximate cause of the loss of the cargoes.We now come to the issue of whether or not FGU can be held liable under the insurance policy to reimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such loss was occasioned by the blatant negligence of the latter’s employees.One of the purposes for taking out insurance is to protect the insured against the consequences of his own negligence and that of his agents. Thus, it is a basic rule in insurance that the carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer.23 This rule however presupposes that the loss has occurred due to causes which could not have been prevented by the insured, despite the exercise of due diligence.The question now is whether there is a certain degree of negligence on the part of the insured or his agents that will deprive him the right to recover under the insurance contract. We say there is. However, to what extent such negligence must go in order to exonerate the insurer from liability must be evaluated in light of the circumstances surrounding each case. When evidence show that the insured’s negligence or recklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated.In the case of Standard Marine Ins. Co. v. Nome Beach L. & T. Co.,24

the United States Supreme Court held that:The ordinary negligence of the insured and his agents has long been held as a part of the risk which the insurer takes upon himself, and the existence of which, where it is the proximate cause of the loss, does not absolve the insurer from liability. But willful exposure, gross negligence, negligence amounting to misconduct, etc., have often been held to release the insurer from such liability.25 [Emphasis ours]

. . .In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the owners of an insured vessel attempted to put her across the bar at Hatteras Inlet. She struck on the bar and was wrecked. The master knew that the depth of water on the bar was such as to make the attempted passage dangerous. Judge Clifford held that, under the circumstances, the loss was not within the protection of the policy, saying:Authorities to prove that persons insured cannot recover for a loss occasioned by their own wrongful acts are hardly necessary, as the proposition involves an elementary principle of universal application. Losses may be recovered by the insured, though remotely occasioned by the negligence or misconduct of the master or crew, if proximately caused by the perils insured against, because such mistakes and negligence are incident to navigation and constitute a part of the perils which those who engage in such adventures are obliged to incur; but it was never supposed that the insured could recover indemnity for a loss occasioned by his own wrongful act or by that of any agent for whose conduct he was responsible.26 [Emphasis ours]From the above-mentioned decision, the United States Supreme Court has made a distinction between ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the insured’s right to recover under the insurance contract. According to the Court, while mistake and negligence of the master or crew are incident to navigation and constitute a part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract.In the case at bar, both the trial court and the appellate court had concluded from the evidence that the crewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent. To wit:There was blatant negligence on the part of the employees of defendants-appellants when the patron (operator) of the tug boat immediately left the barge at the San Jose, Antique wharf despite the looming bad weather. Negligence was likewise exhibited by the defendants-appellants’ representative who did not heed Macabuag’s request that the barge be moved to a more secure place. The prudent thing to do, as was done by the other sea vessels at San Jose, Antique during the time in question, was to

transfer the vessel to a safer wharf. The negligence of the defendants-appellants is proved by the fact that on 01 October 1979, the only simple vessel left at the wharf in San Jose was the D/B Lucio.27 [Emphasis ours]As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by the lower court, as sustained by the Court of Appeals, that ANCO’s representatives had failed to exercise extraordinary diligence required of common carriers in the shipment of SMC’s cargoes. Such blatant negligence being the proximate cause of the loss of the cargoes amounting to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00)This Court, taking into account the circumstances present in the instant case, concludes that the blatant negligence of ANCO’s employees is of such gross character that it amounts to a wrongful act which must exonerate FGU from liability under the insurance contract.WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February 1999 is hereby AFFIRMED with MODIFICATION dismissing the third-party complaint.SO ORDERED.

G.R. No. 150094             August 18, 2004FEDERAL EXPRESS CORPORATION, petitioner, vs.AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.

D E C I S I O N

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 CaseBefore us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision2 and 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. 95-1219, entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED and REITERATED."Costs against the [petitioner and Cargohaus, Inc.]."4

The assailed Resolution denied petitioner's Motion for Reconsideration.The FactsThe 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 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 and3. Costs of suit.'SO ORDERED.'"Aggrieved, [petitioner] appealed to [the CA]."5

Ruling of the Court of AppealsThe 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 IssuesIn 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 RulingThe Petition has merit.Preliminary Issue:Propriety of ReviewThe 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 Issue:Liability for DamagesPetitioner 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 PayeeThe 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.SubrogationUpon 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 ClaimFrom 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; and12.1.4 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 PrecedentIn 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-57322 June 22, 1987NORMAN NODA, petitioner, vs.HONORABLE GREGORIA CRUZ-ARNALDO, in her capacity as Insurance Commissioner, and ZENITH INSURANCE CORPORATION, respondents.Redentor G. Guyala for petitioner.Carpio, Layawan, Suarez & Associates Law Offices for private respondent ZIC.German C. Alejandria for respondent Insurance Commissioner. FERNAN, J.:This is a petition to review the decision of the Insurance Commissioner in I.C. No. 1070, entitled "Norman Noda vs. Zenith Insurance Corporation" regarding the enforcement of two fire insurance policies.In 1977, petitioner Norman R. Noda obtained from respondent Zenith Insurance Corporation, through its general agent, Alico General Insurance Agency, two fire insurance policies: [1] No. F-03724 with a face value of P30,000 covering the goods and stocks in trade in his business establishment at the market site in Mangagoy, Bislig, Surigao del Sur for the period from March 3, 1977 to March 3, 1978 and [2] No. F-03734 with a face value in the aggregate amount of P100,000 for the period from May 10, 1977 to May 10, 1978 and consisting of Item 1 for P40,000 on household furniture, fixtures, fittings and other personal effects, and Item 2 for P60,000 on stocks in trade usual to petitioner's retail business situated in a two-storey building at 039 Barreda St., also in Mangagoy, Bislig, Surigao del Sur, the ground floor of which the petitioner used as store and the second floor as family quarters. 1While both policies were in force, fire destroyed petitioner's insured properties at the market site on September 5, 1977 and at Barreda St. on November 9, 1977. When petitioner failed to obtain indemnity on his claims from respondent Zenith, he filed a complaint with the Insurance Commission on October 6, 1978 praying that respondent company be ordered to pay him "the sum of P130,000 representing the value of the two [2] policies insured by respondent with interest at 12% per annum, plus damages, attorney's fees and other expenses of litigation. ... 2

In its answer Zenith interposed that petitioner had no cause of action; that Policy No. F-03724 was not in full force and effect at the time of the fire because the premium on the policy was not paid; that Zenith's liability under Policy No. F-03734, if any, was

limited to P15,472.50 in view of the co-insurance; and that petitioner failed to substantiate his claim as to the value of the goods reputedly destroyed by fire and consequently, Zenith could not be held answerable for the same. 3

While the case was pending with the Insurance Commission, Zenith, on March 4, 1980, settled petitioner I s fire loss claim under Item 1 of Policy No. 03734 in the amount of P15,472.50. 4

On March 3, 1981, the Insurance Commissioner rendered the assailed decision. Brushing aside as unfounded Zenith's allegation that Policy No. F-03734 was ineffectual because of non-payment of premium, respondent Commissioner allowed petitioner to recover under said policy and ordered Zenith to pay him the amount of P20,000 with legal interest from the date the complaint was filed, including P1,000 as attorney's fees but excluding the actual, moral and exemplary damages prayed for. 5 As for petitioner's claim under Policy No. F-03734, she held that in view of the payment of P15,472.50 to petitioner, Zenith had fully discharged its liability under said policy which covered furniture, fixtures, fittings and other personal belongings of petitioner.It must be noted that in allowing recovery under Policy No. F-03734, respondent Commissioner placed much weight on the final report prepared by Dela Merced Adjustment Corporation, an independent fire, marine and casualty adjuster contracted by Zenith to investigate the claims of its various policyholders. Said report concluded that "the sound value of P26,666.67 represent[ed] the whole loss and damage" incurred by petitioner, but with the application of the three-fourths loss clause, Zenith's liability was reduced to P20,000. 6

Maintaining that respondent Commissioner failed to take into account that there were two separate items under Policy No. F-03734 and that his P60,000 claim under Item 2, covering stocks in trade at Barreda Street, still remained unresolved despite payment to him of P15,472.50, petitioner asked for a reconsideration. Upon its denial, petitioner filed the instant petition for certiorari contending that the Insurance Commissioner erred [1] in finding that with Zenith's payment of P15,472.50 under Policy No. F-03734, that aspect of petitioner's claim had been fully settled, leaving only the claim of P30,000 under Policy No. 03724 unsatisfied; [2] in denying petitioner's demand for P60,000 under Item 2 of Policy No. F-03734 and [3] in not awarding in favor of petitioner exemplary damages for Zenith's unjustified and wanton

refusal to pay petitioner's claim under the said two insurance contracts. Petitioner did not dispute in his appeal the award of P20,000 under Policy No. F-03724 and the denial of actual and moral damages.Zenith has admitted in its comment on the petition that its payment of P15,472.50 was only in satisfaction of petitioner's claim under Item 1 of Policy No. F-03734. What is now in contention before us is petitioner's claim under Item 2 of that policy which respondent Commissioner rejected because petitioner allegedly relied merely on the report of Zenith's adjuster without bothering to produce supporting documents indicating that he had made several purchases and suffered immense losses by reason of the fire.We find that respondent Commissioner acted with grave abuse of discretion when she denied petitioner's claim for indemnity under Policy No. F-03734 because of what she perceived as insufficient proof.To prove the existence of the stocks in trade covered by Policy No. F-03734, petitioner offered his testimony and that of his wife as well as documentary exhibits. 7 The foregoing evidence for petitioner preponderantly showed the presence of some P590,000 worth of goods in his retail store during the fire of November 9, 1977.While the insurer, and the Insurance Commissioner for that matter, have the right to reject proofs of loss if they are unsatisfactory, they may not set up for themselves an arbitrary standard of satisfaction. Substantial compliance with the requirements will always be deemed sufficient. 8

More significantly, this Court has observed that respondent Zenith introduced in evidence the final report on Policy No. F-03734 submitted by its own adjuster, Dela Merced Adjustment Corporation. 9 Respondent Commissioner however ignored such report, reasoning that with regard to Item 2 of Policy No. F-03734 the claim for loss of the stocks in trade was not successfully proven in view of petitioner's failure to present evidence; that the adjuster's report deserved scant consideration since the allegations therein were not substantiated, and that said report did not even make a recommendation for payment.We disagree. A scrutiny of the abovementioned adjuster's report reveals that together with the formal demand for full indemnity, petitioner submitted his income tax return for 1978, purchase

invoices, certification from his suppliers as to his purchases, and other supporting papers. The report even took into account the appraisals of the other adjusters and concluded that the total loss sustained by petitioner in his household effects and stocks in trade reached P379,302.12. But after apportioning said amount among petitioner's six different in surers [the co-insurance being known to Zenith], the liability of Zenith was placed at P60,592.10. It therefore recommended that Zenith pay the petitioner the amount of P60, 592.10.Indeed, petitioner had every reason to expect that respondent Commissioner would give equal weight and credence to the adjuster's report [on Policy No. F-03734] as she had done with the other. After all, said document was offered as evidence by Zenith itself and could very well be considered as an admission of its liability up to the amount recommended. It would have been pointless for Zenith to have introduced said report as its evidence if it did not agree with its findings and ultimate proposals. Being in the nature of an admission against interest, it is the best evidence which affords the greatest certainty of the facts in dispute. 10 Respondent Commissioner should not have perfunctorily dismissed that particular evidence as a worthless piece of paper.We are convinced that petitioner has satisfactorily established his claim for indemnity under Policy No. F-03734. In that respect, judgment was improperly rendered against him and the same must accordingly be modified.The denial of petitioner's demand for exemplary damages by respondent Commissioner must, however, be sustained. There is no showing that Zenith, in contesting payment, had acted in a wanton, oppressive or malevolent manner to warrant the imposition of corrective damages. 11WHEREFORE, judgment is hereby rendered ordering respondent Zenith Insurance Corporation to pay petitioner Norman R. Noda the sum of P60,592.10 with legal interest from the filing of the complaint until full payment, but deducting therefrom the amount of P15,472.50 which it had earlier paid to petitioner.SO ORDERED.

G.R. No. 171468               August 24, 2011NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner, vs.NYK-FILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP INTERNATIONAL PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC., MARINA PORT SERVICES, INC., SERBROS CARRIER CORPORATION, and SEABOARD-EASTERN INSURANCE CO., INC., Respondents.x - - - - - - - - - - - - - - - - - - - - - - -xG.R. No. 174241NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., Petitioner, vs.SEABOARD-EASTERN INSURANCE CO., INC., Respondent.D E C I S I O NABAD, J.:These consolidated petitions involve a cargo owner’s right to recover damages from the loss of insured goods under the Carriage of Goods by Sea Act and the Insurance Code.The Facts and the CasePetitioner New World International Development (Phils.), Inc. (New World) bought from DMT Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency generator sets worth US$721,500.00.DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International, Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California, where it was loaded on S/S California Luna V59, owned and operated by NYK Fil-Japan Shipping Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued a bill of lading, declaring that it received the goods in good condition.NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also owned and operated. On its journey to Manila, however, ACX Ruby encountered typhoon Kadiang whose captain filed a sea protest on arrival at the Manila South Harbor on October 5, 1993 respecting the loss and damage that the goods on board his vessel suffered.Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator, received the shipment on October 7, 1993. Upon inspection of the three container vans separately carrying the generator sets, two vans bore signs of external damage while the third van appeared unscathed. The

shipment remained at Pier 3’s Container Yard under Marina’s care pending clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs authorities allowed petitioner’s customs broker, Serbros Carrier Corporation (Serbros), to withdraw the shipment and deliver the same to petitioner New World’s job site in Makati City.An examination of the three generator sets in the presence of petitioner New World’s representatives, Federal Builders (the project contractor) and surveyors of petitioner New World’s insurer, Seaboard–Eastern Insurance Company (Seaboard), revealed that all three sets suffered extensive damage and could no longer be repaired. For these reasons, New World demanded recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged receipt of the demand, both denied liability for the loss.Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it a formal claim dated November 16, 1993. Replying on February 14, 1994, Seaboard required petitioner New World to submit to it an itemized list of the damaged units, parts, and accessories, with corresponding values, for the processing of the claim. But petitioner New World did not submit what was required of it, insisting that the insurance policy did not include the submission of such a list in connection with an insurance claim. Reacting to this, Seaboard refused to process the claim.On October 11, 1994 petitioner New World filed an action for specific performance and damages against all the respondents before the Regional Trial Court (RTC) of Makati City, Branch 62, in Civil Case 94-2770.On August 16, 2001 the RTC rendered a decision absolving the various respondents from liability with the exception of NYK. The RTC found that the generator sets were damaged during transit while in the care of NYK’s vessel, ACX Ruby. The latter failed, according to the RTC, to exercise the degree of diligence required of it in the face of a foretold raging typhoon in its path.The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK beyond the one year provided under the Carriage of Goods by Sea Act (COGSA). New World filed its complaint on October 11, 1994 when the deadline for filing the action (on or before October 7, 1994) had already lapsed. The RTC

held that the one-year period should be counted from the date the goods were delivered to the arrastre operator and not from the date they were delivered to petitioner’s job site.1

As regards petitioner New World’s claim against Seaboard, its insurer, the RTC held that the latter cannot be faulted for denying the claim against it since New World refused to submit the itemized list that Seaboard needed for assessing the damage to the shipment. Likewise, the belated filing of the complaint prejudiced Seaboard’s right to pursue a claim against NYK in the event of subrogation.On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006,2 affirming the RTC’s rulings except with respect to Seaboard’s liability. The CA held that petitioner New World can still recoup its loss from Seaboard’s marine insurance policy, considering a) that the submission of the itemized listing is an unreasonable imposition and b) that the one-year prescriptive period under the COGSA did not affect New World’s right under the insurance policy since it was the Insurance Code that governed the relation between the insurer and the insured.Although petitioner New World promptly filed a petition for review of the CA decision before the Court in G.R. 171468, Seaboard chose to file a motion for reconsideration of that decision. On August 17, 2006 the CA rendered an amended decision, reversing itself as regards the claim against Seaboard. The CA held that the submission of the itemized listing was a reasonable requirement that Seaboard asked of New World. Further, the CA held that the one-year prescriptive period for maritime claims applied to Seaboard, as insurer and subrogee of New World’s right against the vessel owner. New World’s failure to comply promptly with what was required of it prejudiced such right.Instead of filing a motion for reconsideration, petitioner instituted a second petition for review before the Court in G.R. 174241, assailing the CA’s amended decision.The Issues PresentedThe issues presented in this case are as follows:a) In G.R. 171468, whether or not the CA erred in affirming the RTC’s release from liability of respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who were at one time or another involved in handling the shipment; andb) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard’s request from petitioner New World for an itemized list

is a reasonable imposition and did not violate the insurance contract between them; and 2) whether or not the CA erred in failing to rule that the one-year COGSA prescriptive period for marine claims does not apply to petitioner New World’s prosecution of its claim against Seaboard, its insurer.The Court’s RulingsIn G.R. 171468 --Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina and Serbros in handling and transporting its shipment from Wisconsin to Manila collectively resulted in the damage to the same, rendering such respondents solidarily liable with NYK, the vessel owner.But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a proper subject of a petition for review on certiorari. And petitioner New World has been unable to make out an exception to this rule.3 Consequently, the Court will not disturb the finding of the RTC, affirmed by the CA, that the generator sets were totally damaged during the typhoon which beset the vessel’s voyage from Hong Kong to Manila and that it was her negligence in continuing with that journey despite the adverse condition which caused petitioner New World’s loss.That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil Code, does not automatically relieve the common carrier of liability. The latter had the burden of proving that the typhoon was the proximate and only cause of loss and that it exercised due diligence to prevent or minimize such loss before, during, and after the disastrous typhoon.4 As found by the RTC and the CA, NYK failed to discharge this burden.In G.R. 174241 --One. The Court does not regard as substantial the question of reasonableness of Seaboard’s additional requirement of an itemized listing of the damage that the generator sets suffered. The record shows that petitioner New World complied with the documentary requirements evidencing damage to its generator sets.The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy insured against all causes of conceivable loss or damage except when otherwise excluded or when the loss or damage was due to fraud or intentional misconduct committed by the insured. The policy covered all losses during the voyage whether or not arising from a marine

peril.5

Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in voyage, or vessels unseaworthiness, among others.6 But Seaboard had been unable to show that petitioner New World’s loss or damage fell within some or one of the enumerated exceptions.What is more, Seaboard had been unable to explain how it could not verify the damage that New World’s goods suffered going by the documents that it already submitted, namely, (1) copy of the Supplier’s Invoice KL2504; (2) copy of the Packing List; (3) copy of the Bill of Lading 01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy of Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and Insurance Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of Received Formal Claim from the following: a) LEP International Philippines, Inc.; b) Marina Port Services, Inc.; and c) Serbros Carrier Corporation.7 Notably, Seaboard’s own marine surveyor attended the inspection of the generator sets.Seaboard cannot pretend that the above documents are inadequate since they were precisely the documents listed in its insurance policy.8 Being a contract of adhesion, an insurance policy is construed strongly against the insurer who prepared it. The Court cannot read a requirement in the policy that was not there.Further, it appears from the exchanges of communications between Seaboard and Advatech that submission of the requested itemized listing was incumbent on the latter as the seller DMT’s local agent. Petitioner New World should not be made to suffer for Advatech’s shortcomings.Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the ship shall be discharged from all liability in case of loss or damage unless the suit is brought within one year after delivery of the goods or the date when the goods should have been delivered.But whose fault was it that the suit against NYK, the common carrier, was not brought to court on time? The last day for filing such a suit fell on October 7, 1994. The record shows that petitioner New World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had the right to take, as early as November 16, 1993 or about 11 months before the suit against NYK would have fallen due.

In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would have been subrogated to petitioner New World’s right to recover from NYK. And it could have then filed the suit as a subrogee. But, as discussed above, Seaboard made an unreasonable demand on February 14, 1994 for an itemized list of the damaged units, parts, and accessories, with corresponding values when it appeared settled that New World’s loss was total and when the insurance policy did not require the production of such a list in the event of a claim.Besides, when petitioner New World declined to comply with the demand for the list, Seaboard against whom a formal claim was pending should not have remained obstinate in refusing to process that claim. It should have examined the same, found it unsubstantiated by documents if that were the case, and formally rejected it. That would have at least given petitioner New World a clear signal that it needed to promptly file its suit directly against NYK and the others. Ultimately, the fault for the delayed court suit could be brought to Seaboard’s doorstep.Section 241 of the Insurance Code provides that no insurance company doing business in the Philippines shall refuse without just cause to pay or settle claims arising under coverages provided by its policies. And, under Section 243, the insurer has 30 days after proof of loss is received and ascertainment of the loss or damage within which to pay the claim. If such ascertainment is not had within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or settle the claim. And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be entitled to interest on the proceeds of the policy for the duration of delay at the rate of twice the ceiling prescribed by the Monetary Board.Notably, Seaboard already incurred delay when it failed to settle petitioner New World’s claim as Section 243 required. Under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created by the failure of the insurer to pay the claim within the time fixed in Section 243.Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary Board. The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of 12% per annum provided in Central Bank Circular 416, pursuant to Presidential Decree 116.9 Section 244 of the Insurance Code also provides for an award of attorney’s

fees and other expenses incurred by the assured due to the unreasonable withholding of payment of his claim.In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,10 the Court regarded as proper an award of 10% of the insurance proceeds as attorney’s fees. Such amount is fair considering the length of time that has passed in prosecuting the claim.11 Pursuant to the Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,12 a 12% interest per annum from the finality of judgment until full satisfaction of the claim should likewise be imposed, the interim period equivalent to a forbearance of credit.1avvphi1Petitioner New World is entitled to the value stated in the policy which is commensurate to the value of the three emergency generator sets or US$721,500.00 with double interest plus attorney’s fees as discussed above.WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of Appeals decision of January 31, 2006 insofar as petitioner New World International Development (Phils.), Inc. is not allowed to recover against respondents DMT Corporation, Advatech Industries, Inc., LEP International Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and Serbros Carrier Corporation.With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and SETS ASIDE the Court of Appeals Amended Decision of August 17, 2006. The Court DIRECTS Seaboard-Eastern Insurance Company, Inc. to pay petitioner New World International Development (Phils.), Inc. US$721,500.00 under Policy MA-HO-000266, with 24% interest per annum for the duration of delay in accordance with Sections 243 and 244 of the Insurance Code and attorney’s fees equivalent to 10% of the insurance proceeds. Seaboard shall also pay, from finality of judgment, a 12% interest per annum on the total amount due to petitioner until its full satisfaction.SO ORDERED.

G.R. No. 147724             June 8, 2004LORENZO SHIPPING CORP., petitioner, vs.CHUBB and SONS, Inc., GEARBULK, Ltd. and PHILIPPINE TRANSMARINE CARRIERS, INC., respondents.D E C I S I O NPUNO, J.:On appeal is the Court of Appeals’ August 14, 2000 Decision1 in CA-G.R. CV No. 61334 and March 28, 2001 Resolution2 affirming the March 19, 1998 Decision3 of the Regional Trial Court of Manila which found petitioner liable to pay respondent Chubb and Sons, Inc. attorney's fees and costs of suit.Petitioner Lorenzo Shipping Corporation (Lorenzo Shipping, for short), a domestic corporation engaged in coastwise shipping, was the carrier of 581 bundles of black steel pipes, the subject shipment, from Manila to Davao City. From Davao City, respondent Gearbulk, Ltd., a foreign corporation licensed as a common carrier under the laws of Norway and doing business in the Philippines through its agent, respondent Philippine Transmarine Carriers, Inc. (Transmarine Carriers, for short), a domestic corporation, carried the goods on board its vessel M/V San Mateo Victory to the United States, for the account of Sumitomo Corporation. The latter, the consignee, is a foreign corporation organized under the laws of the United States of America. It insured the shipment with respondent Chubb and Sons, Inc., a foreign corporation organized and licensed to engage in insurance business under the laws of the United States of America.The facts are as follows:On November 21, 1987, Mayer Steel Pipe Corporation of Binondo, Manila, loaded 581 bundles of ERW black steel pipes worth US$137,912.844 on board the vessel M/V Lorcon IV, owned by petitioner Lorenzo Shipping, for shipment to Davao City. Petitioner Lorenzo Shipping issued a clean bill of lading designated as Bill of Lading No. T-35 for the account of the consignee, Sumitomo Corporation of San Francisco, California, USA, which in turn, insured the goods with respondent Chubb and Sons, Inc.6

The M/V Lorcon IV arrived at the Sasa Wharf in Davao City on December 2, 1987. Respondent Transmarine Carriers received the subject shipment which was discharged on December 4, 1987, evidenced by Delivery Cargo Receipt No. 115090.7 It discovered seawater in the hatch of M/V Lorcon IV, and found the steel pipes submerged in it. The consignee Sumitomo then hired the services

of R.J. Del Pan Surveyors to inspect the shipment prior to and subsequent to discharge. Del Pan’s Survey Report8 dated December 4, 1987 showed that the subject shipment was no longer in good condition, as in fact, the pipes were found with rust formation on top and/or at the sides. Moreover, the surveyor noted that the cargo hold of the M/V Lorcon IV was flooded with seawater, and the tank top was "rusty, thinning, and with several holes at different places." The rusty condition of the cargo was noted on the mate’s receipts and the checker of M/V Lorcon IV signed his conforme thereon.9

After the survey, respondent Gearbulk loaded the shipment on board its vessel M/V San Mateo Victory, for carriage to the United States. It issued Bills of Lading Nos. DAV/OAK 1 to 7,10 covering 364 bundles of steel pipes to be discharged at Oakland, U.S.A., and Bills of Lading Nos. DAV/SEA 1 to 6,11 covering 217 bundles of steel pipes to be discharged at Vancouver, Washington, U.S.A. All bills of lading were marked "ALL UNITS HEAVILY RUSTED."While the cargo was in transit from Davao City to the U.S.A., consignee Sumitomo sent a letter12 of intent dated December 7, 1987, to petitioner Lorenzo Shipping, which the latter received on December 9, 1987. Sumitomo informed petitioner Lorenzo Shipping that it will be filing a claim based on the damaged cargo once such damage had been ascertained. The letter reads:Please be advised that the merchandise herein below noted has been landed in bad order ex-Manila voyage No. 87-19 under B/L No. T-3 which arrived at the port of Davao City on December 2, 1987.The extent of the loss and/or damage has not yet been determined but apparently all bundles are corroded. We reserve the right to claim as soon as the amount of claim is determined and the necessary supporting documents are available.Please find herewith a copy of the survey report which we had arranged for after unloading of our cargo from your vessel in Davao.We trust that you shall make everything in order.On January 17, 1988, M/V San Mateo Victory arrived at Oakland, California, U.S.A., where it unloaded 364 bundles of the subject steel pipes. It then sailed to Vancouver, Washington on January 23, 1988 where it unloaded the remaining 217 bundles. Toplis and Harding, Inc. of San Franciso, California, surveyed the steel pipes, and also discovered the latter heavily rusted. When the steel pipes

were tested with a silver nitrate solution, Toplis and Harding found that they had come in contact with salt water. The survey report,13

dated January 28, 1988 states:x x xWe entered the hold for a close examination of the pipe, which revealed moderate to heavy amounts of patchy and streaked dark red/orange rust on all lifts which were visible. Samples of the shipment were tested with a solution of silver nitrate revealing both positive and occasional negative chloride reactions, indicating pipe had come in contact with salt water. In addition, all tension applied metal straps were very heavily rusted, and also exhibited chloride reactions on testing with silver nitrate.x x xIt should be noted that subject bills of lading bore the following remarks as to conditions of goods: "ALL UNITS HEAVILY RUSTED." Attached herein is a copy of a survey report issued by Del Pan Surveyors of Davao City, Philippines dated, December 4, 1987 at Davao City, Philippines, which describes conditions of the cargo as sighted aboard the vessel "LORCON IV," prior to and subsequent to discharge at Davao City. Evidently, the aforementioned rust damages were apparently sustained while the shipment was in the custody of the vessel "LORCON IV," prior to being laden on board the vessel "SAN MATEO VICTORY" in Davao.Due to its heavily rusted condition, the consignee Sumitomo rejected the damaged steel pipes and declared them unfit for the purpose they were intended.14 It then filed a marine insurance claim with respondent Chubb and Sons, Inc. which the latter settled in the amount of US$104,151.00.15

On December 2, 1988, respondent Chubb and Sons, Inc. filed a complaint16 for collection of a sum of money, docketed as Civil Case No. 88-47096, against respondents Lorenzo Shipping, Gearbulk, and Transmarine. Respondent Chubb and Sons, Inc. alleged that it is not doing business in the Philippines, and that it is suing under an isolated transaction.On February 21, 1989, respondents Gearbulk and Transmarine filed their answer17 with counterclaim and cross-claim against petitioner Lorenzo Shipping denying liability on the following grounds: (a) respondent Chubb and Sons, Inc. has no capacity to sue before Philippine courts; (b) the action should be dismissed on the ground of forum non conveniens; (c) damage to the steel pipes was due to the inherent nature of the goods or to the insufficiency

of packing thereof; (d) damage to the steel pipes was not due to their fault or negligence; and, (e) the law of the country of destination, U.S.A., governs the contract of carriage.Petitioner Lorenzo Shipping filed its answer with counterclaim on February 28, 1989, and amended it on May 24, 1989. It denied liability, alleging, among others: (a) that rust easily forms on steel by mere exposure to air, moisture and other marine elements; (b) that it made a disclaimer in the bill of lading; (c) that the goods were improperly packed; and, (d) prescription, laches, and extinguishment of obligations and actions had set in.The Regional Trial Court ruled in favor of the respondent Chubb and Sons, Inc., finding that: (1) respondent Chubb and Sons, Inc. has the right to institute this action; and, (2) petitioner Lorenzo Shipping was negligent in the performance of its obligations as a carrier. The dispositive portion of its Decision states:WHEREFORE, the judgment is hereby rendered ordering Defendant Lorenzo Shipping Corporation to pay the plaintiff the sum of US$104,151.00 or its equivalent in Philippine peso at the current rate of exchange with interest thereon at the legal rate from the date of the institution of this case until fully paid, the attorney’s fees in the sum of P50,000.00, plus the costs of the suit, and dismissing the plaintiff’s complaint against defendants Gearbulk, Ltd. and Philippine Transmarine Carriers, Inc., for lack of merit, and the two defendants’ counterclaim, there being no showing that the plaintiff had filed this case against said defendants in bad faith, as well as the two defendants’ cross-claim against Defendant Lorenzo Shipping Corporation, for lack of factual basis.18

Petitioner Lorenzo Shipping appealed to the Court of Appeals insisting that: (a) respondent Chubb and Sons does not have capacity to sue before Philippine courts; and, (b) petitioner Lorenzo Shipping was not negligent in the performance of its obligations as carrier of the goods. The appellate court denied the petition and affirmed the decision of the trial court.The Court of Appeals likewise denied petitioner Lorenzo Shipping’s Motion for Reconsideration19 dated September 3, 2000, in a Resolution20 promulgated on March 28, 2001.Hence, this petition. Petitioner Lorenzo Shipping submits the following issues for resolution:(1) Whether or not the prohibition provided under Art. 133 of the Corporation Code applies to respondent Chubb, it being a mere

subrogee or assignee of the rights of Sumitomo Corporation, likewise a foreign corporation admittedly doing business in the Philippines without a license;(2) Whether or not Sumitomo, Chubb’s predecessor-in-interest, validly made a claim for damages against Lorenzo Shipping within the period prescribed by the Code of Commerce;(3) Whether or not a delivery cargo receipt without a notation on it of damages or defects in the shipment, which created a prima facie presumption that the carrier received the shipment in good condition, has been overcome by convincing evidence;(4) Assuming that Lorenzo Shipping was guilty of some lapses in transporting the steel pipes, whether or not Gearbulk and Transmarine, as common carriers, are to share liability for their separate negligence in handling the cargo.21

In brief, we resolve the following issues:(1) whether respondent Chubb and Sons has capacity to sue before the Philippine courts; and,(2) whether petitioner Lorenzo Shipping is negligent in carrying the subject cargo.Petitioner argues that respondent Chubb and Sons is a foreign corporation not licensed to do business in the Philippines, and is not suing on an isolated transaction. It contends that because the respondent Chubb and Sons is an insurance company, it was merely subrogated to the rights of its insured, the consignee Sumitomo, after paying the latter’s policy claim. Sumitomo, however, is a foreign corporation doing business in the Philippines without a license and does not have capacity to sue before Philippine courts. Since Sumitomo does not have capacity to sue, petitioner then concludes that, neither the subrogee-respondent Chubb and Sons could sue before Philippine courts.We disagree with petitioner.In the first place, petitioner failed to raise the defense that Sumitomo is a foreign corporation doing business in the Philippines without a license. It is therefore estopped from litigating the issue on appeal especially because it involves a question of fact which this Court cannot resolve. Secondly, assuming arguendo that Sumitomo cannot sue in the Philippines, it does not follow that respondent, as subrogee, has also no capacity to sue in our jurisdiction.Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right, so that he who is

substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities.22 The principle covers the situation under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.23 It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means which the creditor could employ to enforce payment.24

The rights to which the subrogee succeeds are the same as, but not greater than, those of the person for whom he is substituted – he cannot acquire any claim, security, or remedy the subrogor did not have.25 In other words, a subrogee cannot succeed to a right not possessed by the subrogor.26 A subrogee in effect steps into the shoes of the insured and can recover only if insured likewise could have recovered.However, when the insurer succeeds to the rights of the insured, he does so only in relation to the debt. The person substituted (the insurer) will succeed to all the rights of the creditor (the insured), having reference to the debt due the latter.27 In the instant case, the rights inherited by the insurer, respondent Chubb and Sons, pertain only to the payment it made to the insured Sumitomo as stipulated in the insurance contract between them, and which amount it now seeks to recover from petitioner Lorenzo Shipping which caused the loss sustained by the insured Sumitomo. The capacity to sue of respondent Chubb and Sons could not perchance belong to the group of rights, remedies or securities pertaining to the payment respondent insurer made for the loss which was sustained by the insured Sumitomo and covered by the contract of insurance. Capacity to sue is a right personal to its holder. It is conferred by law and not by the parties. Lack of legal capacity to sue means that the plaintiff is not in the exercise of his civil rights, or does not have the necessary qualification to appear in the case, or does not have the character or representation he claims. It refers to a plaintiff’s general disability to sue, such as on account of minority, insanity, incompetence, lack of juridical personality, or any other disqualifications of a party.28 Respondent Chubb and Sons who was plaintiff in the trial court does not possess any of these disabilities. On the contrary, respondent Chubb and Sons has satisfactorily proven its capacity to sue, after having shown that it is not doing business in the Philippines, but is

suing only under an isolated transaction, i.e., under the one (1) marine insurance policy issued in favor of the consignee Sumitomo covering the damaged steel pipes.The law on corporations is clear in depriving foreign corporations which are doing business in the Philippines without a license from bringing or maintaining actions before, or intervening in Philippine courts. Art. 133 of the Corporation Code states:Doing business without a license. – No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on an isolated transaction.29 As held by this Court in the case of Marshall-Wells Company vs. Elser & Company:30

The object of the statute (Secs. 68 and 69, Corporation Law) was not to prevent the foreign corporation from performing single acts, but to prevent it from acquiring a domicile for the purpose of business without taking the steps necessary to render it amenable to suit in the local courts . . . the implication of the law (being) that it was never the purpose of the legislature to exclude a foreign corporation which happens to obtain an isolated order for business for the Philippines, from seeking redress in the Philippine courts.Likewise, this Court ruled in Universal Shipping Lines, Inc. vs. Intermediate Appellate Court31 that:. . . The private respondent may sue in the Philippine courts upon the marine insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country, for it is not the lack of the prescribed license (to do business in the Philippines) but doing business without such license, which bars a foreign corporation from access to our courts.We reject the claim of petitioner Lorenzo Shipping that respondent Chubb and Sons is not suing under an isolated transaction because the steel pipes, subject of this case, are covered by two (2) bills of lading; hence, two transactions. The stubborn fact remains that

these two (2) bills of lading spawned from the single marine insurance policy that respondent Chubb and Sons issued in favor of the consignee Sumitomo, covering the damaged steel pipes. The execution of the policy is a single act, an isolated transaction. This Court has not construed the term "isolated transaction" to literally mean "one" or a mere single act. In Eriks Pte. Ltd. vs. Court of Appeals, this Court held that:32

. . . What is determinative of "doing business" is not really the number or the quantity of the transactions, but more importantly, the intention of an entity to continue the body of its business in the country. The number and quantity are merely evidence of such intention. The phrase "isolated transaction" has a definite and fixed meaning, i.e. a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of the business organization. Whether a foreign corporation is "doing business" does not necessarily depend upon the frequency of its transactions, but more upon the nature and character of the transactions. [Emphasis supplied.]In the case of Gonzales vs. Raquiza, et al.,33 three contracts, hence three transactions were challenged as void on the ground that the three American corporations which are parties to the contracts are not licensed to do business in the Philippines. This Court held that "one single or isolated business transaction does not constitute doing business within the meaning of the law. Transactions which are occasional, incidental, and casual — not of a character to indicate a purpose to engage in business — do not constitute the doing or engaging in business as contemplated by law. Where the three transactions indicate no intent by the foreign corporation to engage in a continuity of transactions, they do not constitute doing business in the Philippines."Furthermore, respondent insurer Chubb and Sons, by virtue of the right of subrogation provided for in the policy of insurance,34 is the real party in interest in the action for damages before the court a quo against the carrier Lorenzo Shipping to recover for the loss sustained by its insured. Rule 3, Section 2 of the 1997 Rules of Civil Procedure defines a real party in interest as one who is entitled to the avails of any judgment rendered in a suit, or who stands to be benefited or injured by it. Where an insurance company as subrogee pays the insured of the entire loss it suffered, the insurer-subrogee is the only real party in interest and

must sue in its own name35 to enforce its right of subrogation against the third party which caused the loss. This is because the insurer in such case having fully compensated its insured, which payment covers the loss in full, is subrogated to the insured’s claims arising from such loss. The subrogated insurer becomes the owner of the claim and, thus entitled to the entire fruits of the action.36 It then, thus possesses the right to enforce the claim and the significant interest in the litigation.37 In the case at bar, it is clear that respondent insurer was suing on its own behalf in order to enforce its right of subrogation.On the second issue, we affirm the findings of the lower courts that petitioner Lorenzo Shipping was negligent in its care and custody of the consignee’s goods.The steel pipes, subject of this case, were in good condition when they were loaded at the port of origin (Manila) on board petitioner Lorenzo Shipping’s M/V Lorcon IV en route to Davao City. Petitioner Lorenzo Shipping issued clean bills of lading covering the subject shipment. A bill of lading, aside from being a contract38 and a receipt,39 is also a symbol40 of the goods covered by it. A bill of lading which has no notation of any defect or damage in the goods is called a "clean bill of lading."41 A clean bill of lading constitutes prima facie evidence of the receipt by the carrier of the goods as therein described.42

The case law teaches us that mere proof of delivery of goods in good order to a carrier and the subsequent arrival in damaged condition at the place of destination raises a prima facie case against the carrier.43 In the case at bar, M/V Lorcon IV of petitioner Lorenzo Shipping received the steel pipes in good order and condition, evidenced by the clean bills of lading it issued. When the cargo was unloaded from petitioner Lorenzo Shipping’s vessel at the Sasa Wharf in Davao City, the steel pipes were rusted all over. M/V San Mateo Victory of respondent Gearbulk, Ltd, which received the cargo, issued Bills of Lading Nos. DAV/OAK 1 to 7 and Nos. DAV/SEA 1 to 6 covering the entire shipment, all of which were marked "ALL UNITS HEAVILY RUSTED." R.J. Del Pan Surveyors found that the cargo hold of the M/V Lorcon IV was flooded with seawater, and the tank top was rusty, thinning and perforated, thereby exposing the cargo to sea water. There can be no other conclusion than that the cargo was damaged while on board the vessel of petitioner Lorenzo Shipping, and that the damage was due to the latter’s negligence. In the case at bar, not only did the

legal presumption of negligence attach to petitioner Lorenzo Shipping upon the occurrence of damage to the cargo.44 More so, the negligence of petitioner was sufficiently established. Petitioner Lorenzo Shipping failed to keep its vessel in seaworthy condition. R.J. Del Pan Surveyors found the tank top of M/V Lorcon IV to be "rusty, thinning, and with several holes at different places." Witness Captain Pablo Fernan, Operations Manager of respondent Transmarine Carriers, likewise observed the presence of holes at the deck of M/V Lorcon IV.45 The unpatched holes allowed seawater, reaching up to three (3) inches deep, to enter the flooring of the hatch of the vessel where the steel pipes were stowed, submerging the latter in sea water.46 The contact with sea water caused the steel pipes to rust. The silver nitrate test, which Toplis and Harding employed, further verified this conclusion.47

Significantly, petitioner Lorenzo Shipping did not even attempt to present any contrary evidence. Neither did it offer any proof to establish any of the causes that would exempt it from liability for such damage.48 It merely alleged that the: (1) packaging of the goods was defective; and (2) claim for damages has prescribed.To be sure, there is evidence that the goods were packed in a superior condition. John M. Graff, marine surveyor of Toplis and Harding, examined the condition of the cargo on board the vessel San Mateo Victory. He testified that the shipment had superior packing "because the ends were covered with plastic, woven plastic. Whereas typically they would not go to that bother ... Typically, they come in with no plastic on the ends. They might just be banded, no plastic on the ends ..."49

On the issue of prescription of respondent Chubb and Sons’ claim for damages, we rule that it has not yet prescribed at the time it was made.Art. 366 of the Code of Commerce states:Within the twenty-four hours following the receipt of the merchandise, the claim against the carrier for damage or average, which may be found therein upon the opening of the packages, may be made, provided that the indications of the damage or average which gives rise to the claim cannot be ascertained from the outside part of such package, in which case the claim shall be admitted only at the time of the receipt.After the periods mentioned have elapsed, or transportation charges have been paid, no claim shall be admitted against the carrier with regard to the condition in which the goods transported

were delivered.A somewhat similar provision is embodied in the Bill of Lading No. T-3 which reads:50

NOTE: No claim for damage or loss shall be honored twenty-four (24) hours after delivery.(Ref. Art. 366 C Com.)The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within which claims must be presented does not begin to run until the consignee has received such possession of the merchandise that he may exercise over it the ordinary control pertinent to ownership.51 In other words, there must be delivery of the cargo by the carrier to the consignee at the place of destination.52 In the case at bar, consignee Sumitomo has not received possession of the cargo, and has not physically inspected the same at the time the shipment was discharged from M/V Lorcon IV in Davao City. Petitioner Lorenzo Shipping failed to establish that an authorized agent of the consignee Sumitomo received the cargo at Sasa Wharf in Davao City. Respondent Transmarine Carriers as agent of respondent Gearbulk, Ltd., which carried the goods from Davao City to the United States, and the principal, respondent Gearbulk, Ltd. itself, are not the authorized agents as contemplated by law. What is clear from the evidence is that the consignee received and took possession of the entire shipment only when the latter reached the United States’ shore. Only then was delivery made and completed. And only then did the 24-hour prescriptive period start to run.Finally, we find no merit to the contention of respondents Gearbulk and Transmarine that American law governs the contract of carriage because the U.S.A. is the country of destination. Petitioner Lorenzo Shipping, through its M/V Lorcon IV, carried the goods from Manila to Davao City. Thus, as against petitioner Lorenzo Shipping, the place of destination is Davao City. Hence, Philippine law applies.IN VIEW THEREOF, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 61334 dated August 14, 2000 and its Resolution dated March 28, 2001 are hereby AFFIRMED. Costs against petitioner.SO ORDERED.

G.R. No. 82036 May 22, 1997TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner, vs.HON. COURT OF APPEALS and VICENTE MENDOZA, respondents. HERMOSISIMA, JR., J.:The petition herein seeks the review and reversal of the decision 1

of respondent Court of Appeals 2 affirming in toto the judgment 3 of the Regional Trial Court 4 in an action for damages 5 filed by private respondent Vicente Mendoza, Jr. as heir of his mother who was killed in a vehicular accident.Before the trial court, the complainant lumped the erring taxicab driver, the owner of the taxicab, and the alleged insurer of the vehicle which featured in the vehicular accident into one complaint. The erring taxicab was allegedly covered by a third-party liability insurance policy issued by petitioner Travellers Insurance & Surety Corporation.The evidence presented before the trial court established the following facts:At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman by the name of Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman Cathedral. While walking along Tayuman corner Gregorio Perfecto Streets, she was bumped by a taxi that was running fast. Several persons witnessed the accident, among whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After the bumping, the old woman was seen sprawled on the pavement. Right away, the good Samaritan that he was, Mavilla ran towards the old woman and held her on his lap to inquire from her what had happened, but obviously she was already in shock and could not talk. At this moment, a private jeep stopped. With the driver of that vehicle, the two helped board the old woman on the jeep and brought her to the Mary Johnston Hospital in Tondo.. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It was on his return trip from Rizal Avenue when Lopez saw the plaintiff and his brother who were crying near the scene of the accident. Upon learning that the two were the sons of the old woman, Lopez told them what had happened. The Mendoza brothers were then able to trace their mother at the Mary Johnston Hospital where they were advised by

the attending physician that they should bring the patient to the National Orthopedic Hospital because of her fractured bones. Instead, the victim was brought to the U.S.T. Hospital where she expired at 9:00 o'clock that same morning. Death was caused by "traumatic shock" as a result of the severe injuries she sustained . . .. . . The evidence shows that at the moment the victim was bumped by the vehicle, the latter was running fast, so much so that because of the strong impact the old woman was thrown away and she fell on the pavement. . . . In truth, in that related criminal case against defendant Dumlao . . . the trial court found as a fact that therein accused "was driving the subject taxicab in a careless, reckless and imprudent manner and at a speed greater than what was reasonable and proper without taking the necessary precaution to avoid accident to persons . . . considering the condition of the traffic at the place at the time aforementioned" . . . Moreover, the driver fled from the scene of the accident and without rendering assistance to the victim. . . .. . . Three (3) witnesses who were at the scene at the time identified the taxi involved, though not necessarily the driver thereof. Marvilla saw a lone taxi speeding away just after the bumping which, when it passed by him, said witness noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage bar attached on the baggage compartment and with an antenae [sic] attached at the right rear side. The same descriptions were revealed by Ernesto Lopez, who further described the taxi to have . . . reflectorized decorations on the edges of the glass at the back . . . A third witness in the person of Eulogio Tabalno . . . made similar descriptions although, because of the fast speed of the taxi, he was only able to detect the last digit of the plate number which is "8". . . . [T]he police proceeded to the garage of Lady Love Taxi and then and there they took possession of such a taxi and later impounded it in the impounding area of the agency concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to that Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.. . . During the investigation, defendant Armando Abellon, the registered owner of Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact "that the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao. . ." . . . It was on the basis of this affidavit of the registered owner that caused the police to

apprehend Rodrigo Dumlao, and consequently to have him prosecuted and eventually convicted of the offense . . . . . . . [S]aid Dumlao absconded in that criminal case, specially at the time of the promulgation of the judgment therein so much so that he is now a fugitive from justice. 6

Private respondent filed a complaint for damages against Armando Abellon as the owner of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that bumped private respondent's mother. Subsequently, private respondent amended his complaint to include petitioner as the compulsory insurer of the said taxicab under Certificate of Cover No. 1447785-3.After trial, the trial court rendered judgment in favor of private respondent, the dispositive portion of which reads:WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more particularly the "Heirs of the late Feliza Vineza de Mendoza," and against defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and Surety Corporation, by ordering the latter to pay, jointly and severally, the former the following amounts:(a) The sum of P2,924.70, as actual and compensatory damages, with interest thereon at the rate of 12% per annum from October 17, 1980, when the complaint was filed, until the said amount is fully paid;(b) P30,000.00 as death indemnity;(c) P25,000.00 as moral damages;(d) P10,000.00 as by way of corrective or exemplary damages; and(e) Another P10,000.00 by way of attorney's fees and other litigation expenses.Defendants are further ordered to pay, jointly and severally, the costs of this suit.SO ORDERED. 7

Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The decision of the trial court was affirmed by respondent appellate court. Petitioner's Motion for Reconsideration 8 of September 22, 1987 was denied in a Resolution 9 dated February 9, 1988.Hence this petition.Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer of the Lady Love Taxi and that, assuming arguendo that it had indeed covered said taxicab for third-party liability insurance, private respondent failed to file a written notice

of claim with petitioner as required by Section 384 of P.D. No. 612, otherwise known as the Insurance Code.We find the petition to be meritorious.IWhen private respondent filed his amended complaint to implead petitioner as party defendant and therein alleged that petitioner was the third-party liability insurer of the Lady Love taxicab that fatally hit private respondent's mother, private respondent did not attach a copy of the insurance contract to the amended complaint. Private respondent does not deny this omission.It is significant to point out at this juncture that the right of a third person to sue the insurer depends on whether the contract of insurance is intended to benefit third persons also or only the insured.[A] policy . . . whereby the insurer agreed to indemnify the insured "against all sums . . . which the Insured shall become legally liable to pay in respect of: a. death of or bodily injury to any person . . . is one for indemnity against liability; from the fact then that the insured is liable to the third person, such third person is entitled to sue the insurer.The right of the person injured to sue the insurer of the party at fault (insured), depends on whether the contract of insurance is intended to benefit third persons also or on the insured And the test applied has been this: Where the contract provides for indemnity against liability to third persons, then third persons to whom the insured is liable can sue the insurer. Where the contract is for indemnity against actual loss or payment, then third persons cannot proceed against the insurer, the contract being solely to reimburse the insured for liability actually discharged by him thru payment to third persons, said third persons' recourse being thus limited to the insured alone. 10

Since private respondent failed to attach a copy of the insurance contract to his complaint, the trial court could not have been able to apprise itself of the real nature and pecuniary limits of petitioner's liability. More importantly, the trial court could not have possibly ascertained the right of private respondent as third person to sue petitioner as insurer of the Lady Love taxicab because the trial court never saw nor read the insurance contract and learned of its terms and conditions.Petitioner, understandably, did not volunteer to present any insurance contract covering the Lady Love taxicab that fatally hit

private respondent's mother, considering that petitioner precisely presented the defense of lack of insurance coverage before the trial court. Neither did the trial court issue a subpoena duces tecum to have the insurance contract produced before it under pain of contempt.We thus find hardly a basis in the records for the trial court to have validly found petitioner liable jointly and severally with the owner and the driver of the Lady Love taxicab, for damages accruing to private respondent.Apparently, the trial court did not distinguish between the private respondent's cause of action against the owner and the driver of the Lady Love taxicab and his cause of action against petitioner. The former is based on torts and quasi-delicts while the latter is based on contract. Confusing these two sources of obligations as they arise from the same act of the taxicab fatally hitting private respondent's mother, and in the face of overwhelming evidence of the reckless imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its ignorance of the terms and conditions of the insurance contract and forthwith found all three — the driver of the taxicab, the owner of the taxicab, and the alleged insurer of the taxicab — jointly and severally liable for actual, moral and exemplary damages as well as attorney's fees and litigation expenses. This is clearly a misapplication of the law by the trial court, and respondent appellate court grievously erred in not having reversed the trial court on this ground.While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, however, the direct liability of the insurer under indemnity contracts against third-party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. 11

Applying this principle underlying solidary obligation and insurance contracts, we ruled in one case that:In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event."In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable

to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,103.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio Choy for indemnity against third-party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary is an evident breach of the concept of a solidary obligation. 12

The above principles take on more significance in the light of the counter-allegation of petitioner that, assuming arguendo that it is the insurer of the Lady Love taxicab in question, its liability is limited to only P50,000.00, this being its standard amount of coverage in vehicle insurance policies. It bears repeating that no copy of the insurance contract was ever proffered before the trial court by the private respondent, notwithstanding knowledge of the fact that the latter's complaint against petitioner is one under a written contract. Thus, the trial court proceeded to hold petitioner liable for an award of damages exceeding its limited liability of P50,000.00. This only shows beyond doubt that the trial court was under the erroneous presumption that petitioner could be found liable absent proof of the contract and based merely on the proof of reckless imprudence on the part of the driver of the Lady Love taxicab that fatally hit private respondent's mother.IIPetitioner did not tire in arguing before the trial court and the respondent appellate court that, assuming arguendo that it had issued the insurance contract over the Lady Love taxicab, private respondent's cause of action against petitioner did not successfully accrue because he failed to file with petitioner a written notice of claim within six (6) months from the date of the accident as required by Section 384 of the Insurance Code.At the time of the vehicular incident which resulted in the death of private respondent's mother, during which time the Insurance Code had not yet been amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as follows:Any person having any claim upon the policy issued pursuant to this chapter shall, without any unnecessary delay, present to the

insurance company concerned a written notice of claim setting forth the amount of his loss, and/or the nature, extent and duration of the injuries sustained as certified by a duly licensed physician. Notice of claim must be filed within six months from date of the accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commission or the Courts within one year from date of accident, otherwise the claimant's right of action shall prescribe [emphasis supplied].In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman, 13 we ruled that the one year prescription period to bring suit in court against the insurer should be counted from the time that the insurer rejects the written claim filed therewith by the insured, the beneficiary or the third person interested under the insurance policy. We explained:It is very obvious that petitioner company is trying to use Section 384 of the Insurance Code as a cloak to hide itself from its liabilities. The facts of these cases evidently reflect the deliberate efforts of petitioner company to prevent the filing of a formal action against it. Bearing in mind that if it succeeds in doing so until one year lapses from the date of the accident it could set up the defense of prescription, petitioner company made private respondents believe that their claims would be settled in order that the latter will not find it necessary to immediately bring suit. In violation of its duties to adopt and implement reasonable standards for the prompt investigation of claims and to effectuate prompt, fair and equitable settlement of claims, and with manifest bad faith, petitioner company devised means and ways of stalling the settlement proceeding . . . [N]o steps were taken to process the claim and no rejection of said claim was ever made even if private respondent had already complied with all the requirements. . . .This Court has made the observation that some insurance companies have been inventing excuses to avoid their just obligations and it is only the State that can give the protection which the insuring public needs from possible abuses of the insurers. 14

It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to categorically provide that "action or suit for recovery of damage due to loss or injury must be brought in proper cases, with the Commissioner or the Courts within one

year from denial of the claim, otherwise the claimant's right of action shall prescribe" [emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring suit in court under an insurance policy, begins to run from the date of the insurer's rejection of the claim filed by the insured, the beneficiary or any person claiming under an insurance contract. This ruling is premised upon the compliance by the persons suing under an insurance contract, with the indispensable requirement of having filed the written claim mandated by Section 384 of the insurance Code before and after its amendment. Absent such written claim filed by the person suing under an insurance contract, no cause of action accrues under such insurance contract, considering that it is the rejection of that claim that triggers the running of the one-year prescriptive period to bring suit in court, and there can be no opportunity for the insurer to even reject a claim if none has been filed in the first place, as in the instant case.The one-year period should instead be counted from the date of rejection by the insurer as this is the time when the cause of action accrues. . . .In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:The plaintiff's cause of action did not accrue until his claim was finally rejected by the insurance company. This is because, before such final rejection, there was no real necessity for bringing suit.The philosophy of the above pronouncement was pointed out in the case of ACCFA vs. Alpha Insurance and Surety Co., viz:Since a cause of action requires, as essential elements, not only a legal right of the plaintiff and a correlative obligation of the defendant but also an act or omission of the defendant in violation of said legal right, the cause of action does not accrue until the party obligated refuses, expressly or impliedly, to comply with its duty. 16

When petitioner asseverates, thus, that no written claim was filed by private respondent and rejected by petitioner, and private respondent does not dispute such asseveration through a denial in his pleadings, we are constrained to rule that respondent appellate court committed reversible error in finding petitioner liable under an insurance contract the existence of which had not at all been proven in court. Even if there were such a contract, private respondent's cause of action can not prevail because he failed to file the written claim mandated by Section 384 of the Insurance

Code. He is deemed, under this legal provision, to have waived his rights as against petitioner-insurer.WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case No. 135486 are REVERSED and SET ASIDE insofar as Travelers Insurance & Surety Corporation was found jointly and severally liable to pay actual, moral and exemplary damages, death indemnity, attorney's fees and litigation expenses in Civil Case No. 135486. The complaint against Travellers Insurance & Surety Corporation in said case is hereby ordered dismissed.No pronouncement as to costs.SO ORDERED.

G.R. No. 83122 October 19, 1990ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, petitioners, vs.THE HONORABLE COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E. PARNELL, CARLOS K. CATOLICO and THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.Albino B. Achas for petitioners.Angara, Abello, Concepcion, Regala & Cruz for private respondents. GUTIERREZ, JR., J.:This is a petition for review of the January 29, 1988 decision of the Court of Appeals and the April 27, 1988 resolution denying the petitioners' motion for reconsideration, which decision and resolution reversed the decision dated June 23,1986 of the Court of First Instance of Manila, Branch 34 in Civil Case No. 121126 upholding the petitioners' causes of action and granting all the reliefs prayed for in their complaint against private respondents.The antecedent facts of the case are as follows:Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private respondent Philippine American General Insurance Company, Inc. (Philamgen for short) since 1965. As such, he was authorized to solicit and sell in behalf of Philamgen all kinds of non-life insurance, and in consideration of services rendered was entitled to receive the full agent's commission of 32.5% from Philamgen under the scheduled commission rates (Exhibits "A" and "1"). From 1973 to 1975, Valenzuela solicited marine insurance from one of his clients, the Delta Motors, Inc. (Division of Electronics Airconditioning and Refrigeration) in the amount of P4.4 Million from which he was entitled to a commission of 32% (Exhibit "B"). However, Valenzuela did not receive his full commission which amounted to P1.6 Million from the P4.4 Million insurance coverage of the Delta Motors. During the period 1976 to 1978, premium payments amounting to P1,946,886.00 were paid directly to Philamgen and Valenzuela's commission to which he is entitled amounted to P632,737.00.In 1977, Philamgen started to become interested in and expressed its intent to share in the commission due Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit "C"). Valenzuela refused (Exhibit "D").On February 8, 1978 Philamgen and its President, Bienvenido M.

Aragon insisted on the sharing of the commission with Valenzuela (Exhibit E). This was followed by another sharing proposal dated June 1, 1978. On June 16,1978, Valenzuela firmly reiterated his objection to the proposals of respondents stating that: "It is with great reluctance that I have to decline upon request to signify my conformity to your alternative proposal regarding the payment of the commission due me. However, I have no choice for to do otherwise would be violative of the Agency Agreement executed between our goodselves." (Exhibit B-1)Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido Aragon, Carlos Catolico and Robert E. Parnell took drastic action against Valenzuela. They: (a) reversed the commission due him by not crediting in his account the commission earned from the Delta Motors, Inc. insurance (Exhibit "J" and "2"); (b) placed agency transactions on a cash and carry basis; (c) threatened the cancellation of policies issued by his agency (Exhibits "H" to "H-2"); and (d) started to leak out news that Valenzuela has a substantial account with Philamgen. All of these acts resulted in the decline of his business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on December 27, 1978, Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3, Decision Trial Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition).The petitioners sought relief by filing the complaint against the private respondents in the court a quo (Complaint of January 24, 1979, Annex "F" Petition). After due proceedings, the trial court found:xxx xxx xxxDefendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent by making it appear that plaintiff Arturo P. Valenzuela has a substantial account with defendant PHILAMGEN particularly Delta Motors, Inc.'s Account, thereby prejudicing defendant PHILAMGEN's interest (Exhibits 6,"11","11- "12- A"and"13-A").Defendants also invoked the provisions of the Civil Code of the Philippines (Article 1868) and the provisions of the General Agency Agreement as their basis for terminating plaintiff Arturo P. Valenzuela as one of their General Agents.That defendants' position could have been justified had the termination of plaintiff Arturo P. Valenzuela was (sic) based solely on the provisions of the Civil Code and the conditions of the

General Agency Agreement. But the records will show that the principal cause of the termination of the plaintiff as General Agent of defendant PHILAMGEN was his refusal to share his Delta commission.That it should be noted that there were several attempts made by defendant Bienvenido M. Aragon to share with the Delta commission of plaintiff Arturo P. Valenzuela. He had persistently pursued the sharing scheme to the point of terminating plaintiff Arturo P. Valenzuela, and to make matters worse, defendants made it appear that plaintiff Arturo P. Valenzuela had substantial accounts with defendant PHILAMGEN.Not only that, defendants have also started (a) to treat separately the Delta Commission of plaintiff Arturo P. Valenzuela, (b) to reverse the Delta commission due plaintiff Arturo P. Valenzuela by not crediting or applying said commission earned to the account of plaintiff Arturo P. Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's agency transactions on a "cash and carry basis", (d) sending threats to cancel existing policies issued by plaintiff Arturo P. Valenzuela's agency, (e) to divert plaintiff Arturo P. Valenzuela's insurance business to other agencies, and (f) to spread wild and malicious rumors that plaintiff Arturo P. Valenzuela has substantial account with defendant PHILAMGEN to force plaintiff Arturo P. Valenzuela into agreeing with the sharing of his Delta commission." (pp. 9-10, Decision, Annex 1, Petition).xxx xxx xxxThese acts of harrassment done by defendants on plaintiff Arturo P. Valenzuela to force him to agree to the sharing of his Delta commission, which culminated in the termination of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent, do not justify said termination of the General Agency Agreement entered into by defendant PHILAMGEN and plaintiff Arturo P. Valenzuela.That since defendants are not justified in the termination of plaintiff Arturo P. Valenzuela as one of their General Agents, defendants shall be liable for the resulting damage and loss of business of plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the Philippines). (Ibid, p. 11)The court accordingly rendered judgment, the dispositive portion of which reads:WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against defendants ordering the latter to reinstate plaintiff

Arturo P. Valenzuela as its General Agent, and to pay plaintiffs, jointly and severally, the following:1. The amount of five hundred twenty-one thousand nine hundred sixty four and 16/100 pesos (P521,964.16) representing plaintiff Arturo P. Valenzuela's Delta Commission with interest at the legal rate from the time of the filing of the complaint, which amount shall be adjusted in accordance with Article 1250 of the Civil Code of the Philippines;2. The amount of seventy-five thousand pesos (P75,000.00) per month as compensatory damages from 1980 until such time that defendant Philamgen shall reinstate plaintiff Arturo P. Valenzuela as one of its general agents;3. The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff as moral damages;4. The amount of seventy-five thousand pesos (P75,000.00) as and for attorney's fees;5. Costs of the suit. (Ibid., P. 12)From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell, Carlos K. Catolico and PHILAMGEN respondents herein, and defendants-appellants below, interposed an appeal on the following:ASSIGNMENT OF ERRORSITHE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA HAD NO OUTSTANDING ACCOUNT WITH DEFENDANT PHILAMGEN AT THE TIME OF THE TERMINATION OF THE AGENCY.IITHE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA IS ENTITLED TO THE FULL COMMISSION OF 32.5% ON THE DELTA ACCOUNT.IIITHE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF PLAINTIFF ARTURO P. VALENZUELA WAS NOT JUSTIFIED AND THAT CONSEQUENTLY DEFENDANTS ARE LIABLE FOR ACTUAL AND MORAL DAMAGES, ATTORNEYS FEES AND COSTS.IVASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST DEFENDANT PHILAMGEN WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES EVEN AGAINST THE INDIVIDUAL DEFENDANTS WHO ARE MERE CORPORATE AGENTS ACTING

WITHIN THE SCOPE OF THEIR AUTHORITY.VASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF PLAINTIFF ARTURO P. VALENZUELA WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES IN FAVOR OF HOSPITALITA VALENZUELA, WHO, NOT BEING THE REAL PARTY IN INTEREST IS NOT TO OBTAIN RELIEF.On January 29, 1988, respondent Court of Appeals promulgated its decision in the appealed case. The dispositive portion of the decision reads:WHEREFORE, the decision appealed from is hereby modified accordingly and judgment is hereby rendered ordering:1. Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one million nine hundred thirty two thousand five hundred thirty-two pesos and seventeen centavos (P1,902,532.17), with legal interest thereon from the date of finality of this judgment until fully paid.2. Both plaintiff-appellees to pay jointly and severally defendants-appellants the sum of fifty thousand pesos (P50,000.00) as and by way of attorney's fees.No pronouncement is made as to costs. (p. 44, Rollo)There is in this instance irreconcilable divergence in the findings and conclusions of the Court of Appeals, vis-a-vis those of the trial court particularly on the pivotal issue whether or not Philamgen and/or its officers can be held liable for damages due to the termination of the General Agency Agreement it entered into with the petitioners. In its questioned decision the Court of Appeals observed that:In any event the principal's power to revoke an agency at will is so pervasive, that the Supreme Court has consistently held that termination may be effected even if the principal acts in bad faith, subject only to the principal's liability for damages (Danon v. Antonio A. Brimo & Co., 42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158 and Infante V. Cunanan, 93 Phil. 691, cited in Paras, Vol. V, Civil Code of the Philippines Annotated [1986] 696).The lower court, however, thought the termination of Valenzuela as General Agent improper because the record will show the principal cause of the termination of the plaintiff as General Agent of defendant Philamgen was his refusal to share his Delta commission. (Decision, p. 9; p. 13, Rollo, 41)Because of the conflicting conclusions, this Court deemed it

necessary in the interest of substantial justice to scrutinize the evidence and records of the cases. While it is an established principle that the factual findings of the Court of Appeals are final and may not be reviewed on appeal to this Court, there are however certain exceptions to the rule which this Court has recognized and accepted, among which, are when the judgment is based on a misapprehension of facts and when the findings of the appellate court, are contrary to those of the trial court (Manlapaz v. Court of Appeals, 147 SCRA 236 [1987]); Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the findings of the Court of Appeals and the trial court are contrary to each other, this Court may scrutinize the evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v. Court of Appeals, 156 SCRA 597 [1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the conclusion of the Court of Appeals is grounded entirely on speculation, surmises or conjectures, or when the inference made is manifestly mistaken, absurd or impossible, or when there is grave abuse of discretion, or when the judgment is based on a misapprehension of facts, and when the findings of facts are conflict the exception also applies (Malaysian Airline System Bernad v. Court of Appeals, 156 SCRA 321 [1987]).After a painstaking review of the entire records of the case and the findings of facts of both the court a quo and respondent appellate court, we are constrained to affirm the trial court's findings and rule for the petitioners.We agree with the court a quo that the principal cause of the termination of Valenzuela as General Agent of Philamgen arose from his refusal to share his Delta commission. The records sustain the conclusions of the trial court on the apparent bad faith of the private respondents in terminating the General Agency Agreement of petitioners. It is axiomatic that the findings of fact of a trial judge are entitled to great weight (People v. Atanacio, 128 SCRA 22 [1984]) and should not be disturbed on appeal unless for strong and cogent reasons, because the trial court is in a better position to examine the evidence as well as to observe the demeanor of the witnesses while testifying (Chase v. Buencamino, Sr., 136 SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag Trans., Inc. v. Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the findings and conclusions of the trial court are supported by substantial evidence and there appears to be no cogent reason to disturb them (Mendoza v. Court

of Appeals. 156 SCRA 597 [1987]).As early as September 30,1977, Philamgen told the petitioners of its desire to share the Delta Commission with them. It stated that should Delta back out from the agreement, the petitioners would be charged interests through a reduced commission after full payment by Delta.On January 23, 1978 Philamgen proposed reducing the petitioners' commissions by 50% thus giving them an agent's commission of 16.25%. On February 8, 1978, Philamgen insisted on the reduction scheme followed on June 1, 1978 by still another insistence on reducing commissions and proposing two alternative schemes for reduction. There were other pressures. Demands to settle accounts, to confer and thresh out differences regarding the petitioners' income and the threat to terminate the agency followed. The petitioners were told that the Delta commissions would not be credited to their account (Exhibit "J"). They were informed that the Valenzuela agency would be placed on a cash and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26, 1979, pp. 54-57). Existing policies were threatened to be cancelled (Exhibits "H" and "14"; TSN., March 26, 1979, pp. 29-30). The Valenzuela business was threatened with diversion to other agencies. (Exhibit "NNN"). Rumors were also spread about alleged accounts of the Valenzuela agency (TSN., January 25, 1980, p. 41). The petitioners consistently opposed the pressures to hand over the agency or half of their commissions and for a treatment of the Delta account distinct from other accounts. The pressures and demands, however, continued until the agency agreement itself was finally terminated.It is also evident from the records that the agency involving petitioner and private respondent is one "coupled with an interest," and, therefore, should not be freely revocable at the unilateral will of the latter.In the insurance business in the Philippines, the most difficult and frustrating period is the solicitation and persuasion of the prospective clients to buy insurance policies. Normally, agents would encounter much embarrassment, difficulties, and oftentimes frustrations in the solicitation and procurement of the insurance policies. To sell policies, an agent exerts great effort, patience, perseverance, ingenuity, tact, imagination, time and money. In the case of Valenzuela, he was able to build up an Agency from scratch in 1965 to a highly productive enterprise with gross billings

of about Two Million Five Hundred Thousand Pesos (P2,500,000.00) premiums per annum. The records sustain the finding that the private respondent started to covet a share of the insurance business that Valenzuela had built up, developed and nurtured to profitability through over thirteen (13) years of patient work and perseverance. When Valenzuela refused to share his commission in the Delta account, the boom suddenly fell on him.The private respondents by the simple expedient of terminating the General Agency Agreement appropriated the entire insurance business of Valenzuela. With the termination of the General Agency Agreement, Valenzuela would no longer be entitled to commission on the renewal of insurance policies of clients sourced from his agency. Worse, despite the termination of the agency, Philamgen continued to hold Valenzuela jointly and severally liable with the insured for unpaid premiums. Under these circumstances, it is clear that Valenzuela had an interest in the continuation of the agency when it was unceremoniously terminated not only because of the commissions he should continue to receive from the insurance business he has solicited and procured but also for the fact that by the very acts of the respondents, he was made liable to Philamgen in the event the insured fail to pay the premiums due. They are estopped by their own positive averments and claims for damages. Therefore, the respondents cannot state that the agency relationship between Valenzuela and Philamgen is not coupled with interest. "There may be cases in which an agent has been induced to assume a responsibility or incur a liability, in reliance upon the continuance of the authority under such circumstances that, if the authority be withdrawn, the agent will be exposed to personal loss or liability" (See MEC 569 p. 406).Furthermore, there is an exception to the principle that an agency is revocable at will and that is when the agency has been given not only for the interest of the principal but for the interest of third persons or for the mutual interest of the principal and the agent. In these cases, it is evident that the agency ceases to be freely revocable by the sole will of the principal (See Padilla, Civil Code Annotated, 56 ed., Vol. IV p. 350). The following citations are apropos:The principal may not defeat the agent's right to indemnification by a termination of the contract of agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32 ALR 196).Where the principal terminates or repudiates the agent's

employment in violation of the contract of employment and without cause ... the agent is entitled to receive either the amount of net losses caused and gains prevented by the breach, or the reasonable value of the services rendered. Thus, the agent is entitled to prospective profits which he would have made except for such wrongful termination provided that such profits are not conjectural, or speculative but are capable of determination upon some fairly reliable basis. And a principal's revocation of the agency agreement made to avoid payment of compensation for a result which he has actually accomplished (Hildendorf v. Hague, 293 NW 2d 272; Newhall v. Journal Printing Co., 105 Minn 44,117 NW 228; Gaylen Machinery Corp. v. Pitman-Moore Co. [C.A. 2 NY] 273 F 2d 340)If a principal violates a contractual or quasi-contractual duty which he owes his agent, the agent may as a rule bring an appropriate action for the breach of that duty. The agent may in a proper case maintain an action at law for compensation or damages ... A wrongfully discharged agent has a right of action for damages and in such action the measure and element of damages are controlled generally by the rules governing any other action for the employer's breach of an employment contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419; Tiffin Glass Co. v. Stoehr, 54 Ohio 157, 43 NE 2798)At any rate, the question of whether or not the agency agreement is coupled with interest is helpful to the petitioners' cause but is not the primary and compelling reason. For the pivotal factor rendering Philamgen and the other private respondents liable in damages is that the termination by them of the General Agency Agreement was tainted with bad faith. Hence, if a principal acts in bad faith and with abuse of right in terminating the agency, then he is liable in damages. This is in accordance with the precepts in Human Relations enshrined in our Civil Code that "every person must in the exercise of his rights and in the performance of his duties act with justice, give every one his due, and observe honesty and good faith: (Art. 19, Civil Code), and every person who, contrary to law, wilfully or negligently causes damages to another, shall indemnify the latter for the same (Art. 20, id). "Any person who wilfully causes loss or injury to another in a manner contrary to morals, good customs and public policy shall compensate the latter for the damages" (Art. 21, id.).As to the issue of whether or not the petitioners are liable to

Philamgen for the unpaid and uncollected premiums which the respondent court ordered Valenzuela to pay Philamgen the amount of One Million Nine Hundred Thirty-Two Thousand Five Hundred Thirty-Two and 17/100 Pesos (P1,932,532,17) with legal interest thereon until fully paid (Decision-January 20, 1988, p. 16; Petition, Annex "A"), we rule that the respondent court erred in holding Valenzuela liable. We find no factual and legal basis for the award. Under Section 77 of the Insurance Code, the remedy for the non-payment of premiums is to put an end to and render the insurance policy not binding —Sec. 77 ... [N]otwithstanding any agreement to the contrary, no policy or contract of insurance is valid and binding unless and until the premiums thereof have been paid except in the case of a life or industrial life policy whenever the grace period provision applies (P.D. 612, as amended otherwise known as the Insurance Code of 1974)In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979]) we held that the non-payment of premium does not merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract. And in Arce v. The Capital Insurance and Surety Co. Inc. (117 SCRA 63, [1982]), we reiterated the rule that unless premium is paid, an insurance contract does not take effect. Thus:It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9 SCRA 177 [1963] was decided in the light of the Insurance Act before Sec. 72 was amended by the underscored portion. Supra. Prior to the Amendment, an insurance contract was effective even if the premium had not been paid so that an insurer was obligated to pay indemnity in case of loss and correlatively he had also the right to sue for payment of the premium. But the amendment to Sec. 72 has radically changed the legal regime in that unless the premium is paid there is no insurance. " (Arce v. Capitol Insurance and Surety Co., Inc., 117 SCRA 66; Emphasis supplied)In Philippine Phoenix Surety case, we held:Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums and invalid for the purpose of indemnity. (Citing Insurance Law and Practice by John Alan Appleman, Vol. 15, p. 331; Emphasis supplied)The foregoing findings are buttressed by Section 776 of the insurance Code (Presidential Decree No. 612, promulgated on

December 18, 1974), which now provides that no contract of Insurance by an insurance company is valid and binding unless and until the premium thereof has been paid, notwithstanding any agreement to the contrary (Ibid., 92 SCRA 425)Perforce, since admittedly the premiums have not been paid, the policies issued have lapsed. The insurance coverage did not go into effect or did not continue and the obligation of Philamgen as insurer ceased. Hence, for Philamgen which had no more liability under the lapsed and inexistent policies to demand, much less sue Valenzuela for the unpaid premiums would be the height of injustice and unfair dealing. In this instance, with the lapsing of the policies through the nonpayment of premiums by the insured there were no more insurance contracts to speak of. As this Court held in the Philippine Phoenix Surety case, supra "the non-payment of premiums does not merely suspend but puts an end to an insurance contract since the time of the payment is peculiarly of the essence of the contract."The respondent appellate court also seriously erred in according undue reliance to the report of Banaria and Banaria and Company, auditors, that as of December 31, 1978, Valenzuela owed Philamgen P1,528,698.40. This audit report of Banaria was commissioned by Philamgen after Valenzuela was almost through with the presentation of his evidence. In essence, the Banaria report started with an unconfirmed and unaudited beginning balance of account of P1,758,185.43 as of August 20, 1976. But even with that unaudited and unconfirmed beginning balance of P1,758,185.43, Banaria still came up with the amount of P3,865.49 as Valenzuela's balance as of December 1978 with Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December 31, 1977, Valenzuela had no unpaid account with Philamgen (Ref: Annexes "D", "D-1", "E", Petitioner's Memorandum). But even disregarding these annexes which are records of Philamgen and addressed to Valenzuela in due course of business, the facts show that as of July 1977, the beginning balance of Valenzuela's account with Philamgen amounted to P744,159.80. This was confirmed by Philamgen itself not only once but four (4) times on different occasions, as shown by the records.On April 3,1978, Philamgen sent Valenzuela a statement of account with a beginning balance of P744,159-80 as of July 1977.On May 23, 1978, another statement of account with exactly the same beginning balance was sent to Valenzuela.

On November 17, 1978, Philamgen sent still another statement of account with P744,159.80 as the beginning balance.And on December 20, 1978, a statement of account with exactly the same figure was sent to Valenzuela.It was only after the filing of the complaint that a radically different statement of accounts surfaced in court. Certainly, Philamgen's own statements made by its own accountants over a long period of time and covering examinations made on four different occasions must prevail over unconfirmed and unaudited statements made to support a position made in the course of defending against a lawsuit.It is not correct to say that Valenzuela should have presented its own records to refute the unconfirmed and unaudited finding of the Banaria auditor. The records of Philamgen itself are the best refutation against figures made as an afterthought in the course of litigation. Moreover, Valenzuela asked for a meeting where the figures would be reconciled. Philamgen refused to meet with him and, instead, terminated the agency agreement.After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of credits representing the commission due from Delta and other accounts, Valenzuela had overpaid Philamgen the amount of P530,040.37 as of November 30, 1978. Philamgen cannot later be heard to complain that it committed a mistake in its computation. The alleged error may be given credence if committed only once. But as earlier stated, the reconciliation of accounts was arrived at four (4) times on different occasions where Philamgen was duly represented by its account executives. On the basis of these admissions and representations, Philamgen cannot later on assume a different posture and claim that it was mistaken in its representation with respect to the correct beginning balance as of July 1977 amounting to P744,159.80. The Banaria audit report commissioned by Philamgen is unreliable since its results are admittedly based on an unconfirmed and unaudited beginning balance of P1,758,185.43 as of August 20,1976.As so aptly stated by the trial court in its decision:Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after the controversy has started. In fact, after hearing plaintiffs have already rested their case.The results of said audit were presented in Court to show plaintiff Arturo P. Valenzuela's accountability to defendant PHILAMGEN.

However, the auditor, when presented as witness in this case testified that the beginning balance of their audit report was based on an unaudited amount of P1,758,185.43 (Exhibit 46-A) as of August 20, 1976, which was unverified and merely supplied by the officers of defendant PHILAMGEN.Even defendants very own Exhibit 38- A-3, showed that plaintiff Arturo P. Valenzuela's balance as of 1978 amounted to only P3,865.59, not P826,128.46 as stated in defendant Bienvenido M. Aragon's letter dated December 20,1978 (Exhibit 14) or P1,528,698.40 as reflected in defendant's Exhibit 46 (Audit Report of Banaria dated December 24, 1980).These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela to defendant PHILAMGEN only lends credence to the claim of plaintiff Arturo P. Valenzuela that he has no outstanding account with defendant PHILAMGEN when the latter, thru defendant Bienvenido M. Aragon, terminated the General Agency Agreement entered into by plaintiff (Exhibit A) effective January 31, 1979 (see Exhibits "2" and "2-A"). Plaintiff Arturo P. Valenzuela has shown that as of October 31, 1978, he has overpaid defendant PHILAMGEN in the amount of P53,040.37 (Exhibit "EEE", which computation was based on defendant PHILAMGEN's balance of P744,159.80 furnished on several occasions to plaintiff Arturo P. Valenzuela by defendant PHILAMGEN (Exhibits H-1, VV, VV-1, WW, WW-1 , YY , YY-2 , ZZ and , ZZ-2).Prescinding from the foregoing, and considering that the private respondents terminated Valenzuela with evident mala fide it necessarily follows that the former are liable in damages. Respondent Philamgen has been appropriating for itself all these years the gross billings and income that it unceremoniously took away from the petitioners. The preponderance of the authorities sustain the preposition that a principal can be held liable for damages in cases of unjust termination of agency. In Danon v. Brimo, 42 Phil. 133 [1921]), this Court ruled that where no time for the continuance of the contract is fixed by its terms, either party is at liberty to terminate it at will, subject only to the ordinary requirements of good faith. The right of the principal to terminate his authority is absolute and unrestricted, except only that he may not do so in bad faith.The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand Pesos (P75,000,00) per month as

compensatory damages from June 1980 until its decision becomes final and executory. This award is justified in the light of the evidence extant on record (Exhibits "N", "N-10", "0", "0-1", "P" and "P-1") showing that the average gross premium collection monthly of Valenzuela over a period of four (4) months from December 1978 to February 1979, amounted to over P300,000.00 from which he is entitled to a commission of P100,000.00 more or less per month. Moreover, his annual sales production amounted to P2,500,000.00 from where he was given 32.5% commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain."The circumstances of the case, however, require that the contractual relationship between the parties shall be terminated upon the satisfaction of the judgment. No more claims arising from or as a result of the agency shall be entertained by the courts after that date.ACCORDINGLY, the petition is GRANTED. The impugned decision of January 29, 1988 and resolution of April 27, 1988 of respondent court are hereby SET ASIDE. The decision of the trial court dated January 23, 1986 in Civil Case No. 121126 is REINSTATED with the MODIFICATIONS that the amount of FIVE HUNDRED TWENTY ONE THOUSAND NINE HUNDRED SIXTY-FOUR AND 16/100 PESOS (P521,964.16) representing the petitioners Delta commission shall earn only legal interests without any adjustments under Article 1250 of the Civil Code and that the contractual relationship between Arturo P. Valenzuela and Philippine American General Insurance Company shall be deemed terminated upon the satisfaction of the judgment as modified.SO ORDERED.

G.R. No. 102253 June 2, 1995SOUTH SEA SURETY AND INSURANCE COMPANY, INC., petitioner, vs.HON. COURT OF APPEALS and VALENZUELA HARDWOOD AND INDUSTRIAL SUPPLY, INC., respondents.R E S O L U T I O N VITUG, J.:Two issues on the subject of insurance are raised in this petition, that assails the decision, that assails the decision of the Court of Appeals. (in CA-G.R. NO. CV-20156), the first dealing on the requirement of premium payment and the second relating to the agency relationship of parties under that contract.The court litigation started when Valenzuela Hardwood and Industrial Supply, Inc. ("Hardwood"), filed with the Regional, Trial Court of the National Capital Judicial Region, Branch l71 in Valenzuela, Metro Manila, a complaint for the recovery of the value of lost logs and freight charges from Seven Brothers Shipping Corporation or, to the extent of its alleged insurance cover, from South Sea Surety and insurance Company.The factual backdrop is described briefly by the appellate court thusly:It appears that on 16 January 1984, plaintiff [Valenzuela Hardwood and Industrial Supply, Inc.] entered into an agreement with the defendant Seven Brothers whereby the latter undertook to load on board its vessel M/V Seven Ambassador the former's lauan round logs numbering 940 at the port of Maconacon, Isabela for shipment to Manila.On 20 January 1984, plaintiff insured the logs, against loss and/or, damage with defendant South Sea Surety and Insurance Co., Inc. for P2,000,000.00 end the latter issued its Marine Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said date.On 24 January 1984, the plaintiff gave the check in payment of the premium on the insurance policy to Mr. Victorio Chua.In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984 resulting in the loss of the plaintiffs insured logs.On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the premium and documentary stamps due on the policy was tendered to the insurer but was not accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance policy it issued as of the date of inception for non-payment of the premium due in accordance with Section 77 of the

Insurance Code.On 2 February 1984, plaintiff demanded from defendant South Sea Surety and Insurance Co., Inc. the payment of the proceeds of the policy but the latter denied liability under the policy. Plaintiff likewise filed a formal claim with defendant Seven Brothers Shipping Corporation for the value of the lost logs but the latter denied the claim. 1

In its decision, dated 11 May 1988, the trial court rendered judgment in favor of plaintiff Hardwood.On appeal perfected by both the shipping firm and the insurance company, the Court of Appeals affirmed the judgment of the court a quo only against the insurance corporation; in absolving the shipping entity from liability, the appellate court ratiocinated:The primary issue to be resolved before us is whether defendants shipping corporation and the surety company are liable to the plaintiff for the latter's lost logs.It appears that there is a stipulation in the charter party that the ship owner would be exempted from liability in case of loss.The court a quo erred in applying the provisions of the Civil Code on common carriers to establish the liability of the shipping corporation. The provisions on common carriers should not be applied where the carrier is not acting as such but as a private carrier.Under American jurisprudence, a common carrier undertaking to carry a special or chartered to a special person only, becomes a private carrier.As a private carrier, a stipulation exempting the owner from liability even for the negligence of its agent is valid (Home Insurance Company, Inc. vs. American Steamship Agencies, Inc., 23 SCRA 24).The shipping corporation should not therefore be held liable for the loss of the logs. 2

In this petition for review on certiorari brought by South Sea Surety and Insurance Co., Inc., petitioner argues that it likewise should have been freed from any liability to Hardwood. It faults the appellate court (a) for having Supposedly disregarded Section 77 of the insurance Code and (b) for holding Victorio Chua to have been an authorized representative of the insurer.Section 77 of the Insurance Code provides:Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against.

Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.Undoubtedly, the payment of the premium is a condition precedent to, and essential for, the efficaciousness of the contract. The only two statutorily provided exceptions are (a) in case the insurance coverage relates to life or industrial life (health) insurance when a grace period applies and (b) when the insurer makes a written acknowledgment of the receipt of premium, this acknowledgment being declared by law to be then conclusive evidence of the premium payment (Secs. 77-78, Insurance Code). The appellate court, contrary to what the petition suggests, did not make any pronouncement to the contrary. Indeed, it has said:Concerning the issue as to whether there is a valid contract of insurance between plaintiff-appellee and defendant-appellant South Sea Surety and Insurance Co., Inc., Section 77 of the Insurance Code explicitly provides that notwithstanding any agreement to the contrary, no policy issued by an insurance company is valid and binding unless and until premium thereof has been paid. It is therefore important to determine whether at the time of the loss, the premium was already paid. 3

No attempt becloud the issues can disguise the fact that the sole question raised in the instant petition is really evidentiary in nature, i.e., whether or not Victorio Chua, in receiving the check for the insurance premium prior to the occurrence of the risk insured against has so acted as an agent of petitioner. The appellate court, like the trial court, has found in the affirmative. Said the appellate court:In the instant case, the Marine Cargo Insurance Policy No. 84/24229 was issued by defendant insurance company on 20 January 1984. At the time the vessel sank on 25 January 1984 resulting in the loss of the insured logs, the insured had already delivered to Victorio Chua the check in payment of premium. But, as Victorio Chua testified, it was only in the morning of 30 January 1984 or 5 days after the vessel sank when his messenger tendered the check to defendant South Sea Surety and Insurance Co., Inc. (TSN, pp. 3-27, 16-17, 22 October 1985).The pivotal issue to be resolved to determine the liability, of the surety corporation is whether Mr. Chua acted as an agent of the

surety company or of the insured when he received the check for insurance premiums.Appellant surety company insists that Mr. Chua is an administrative assistant for the past ten years and an agent for less than ten years of the Columbia Insurance Brokers, Ltd. He is paid a salary as a administrative assistant and a commission as agent based on the premiums he turns over to the broker. Appellant therefore argues that Mr. Chua, having received the insurance premiums as an agent of the Columbia Insurance Broker, acted as an agent of the insured under Section 301 of the Insurance Code which provides as follows:Sec. 301. Any person who for any compensation, commission or other thing of value, acts, or aids in soliciting, negotiating or procuring the making of any insurance contract or in placing risk or taking out insurance, on behalf of an insured other than himself, shall be an insurance broker within the intent of this Code, and shall thereby become liable to all the duties requirements, liabilities and penalties to which an insurance broker is subject.The appellees, upon the other hand, claim that the second paragraph of Section 306 of the Insurance Code provide as follows:Sec. 306. . . . Any insurance company which delivers to an insurance agent or insurance broker a policy or contract of insurance shall be deemed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy of contract of insurance at the time of its issuance or delivery or which becomes due thereon.On cross-examination in behalf of South Sea Surety and Insurance Co., Inc. Mr. Chua testified that the marine cargo insurance policy for the plaintiff's logs was delivered to him on 21 January 1984 at his office to be delivered to the plaintiff.When the appellant South Sea Surety and Insurance Co., Inc. delivered to Mr. Chua the marine cargo insurance policy for the plaintiffs logs, he is deemed to have been authorized by the South Sea Surety and Insurance Co., Inc. to receive the premium which is due on its behalf.When therefore the insured logs were lost, the insured had already paid the premium to an agent of the South Sea Surety and Insurance Co., Inc., which is consequently liable to pay the insurance proceeds under the policy it issued to the insured. 4

We see no valid reason to discard the factual conclusions of the appellate court. Just as so correctly pointed out by private

respondent, it is not the function of this Court to assess and evaluate all over again the evidence, testimonial and documentary, adduced by the parties particularly where, such as here, the findings of both the trial court and the appellate court on the matter coincide.WHEREFORE, the resolution, dated 01 February 1993, granting due course to the petition is RECALLED, and the petition is DENIED. Costs against petitioner.SO ORDERED.

G.R. No. 107062 February 21, 1994PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner, vs.THE COURT OF APPEALS, (Fourteenth Division) and GEGROCO, INC., respondents.Ocampo, Dizon & Domingo and Rey Nathaniel C. Ifurung for petitioner.A.M. Sison, Jr. & Associates for private respondent. NOCON, J.:Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to get a favorable decision from the Regional Trial Court and then again in the Court of Appeals. 1 These are non-appearance during the pre-trial despite due notice, and non-payment of docket fees upon filing of its third-party complaint. Just how strict should these rules be applied is a crucial issue in this present dispute.Petitioner, Interworld Assurance Corporation (the company now carries the corporate name Philippine Pryce Assurance Corporation), was the butt of the complaint for collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc. before the Makati Regional Trial Court, Branch 138. The complaint alleged that petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037, dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00) PESOS, respectively.On June 16, 1988, summons, together with the copy of the complaint, was served on petitioner. Within the reglementary period, two successive motions were filed by petitioner praying for a total of thirty (30) days extention within which to file a responsible pleading.In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner admitted having executed the said bonds, but denied liability because allegedly 1) the checks which were to pay for the premiums bounced and were dishonored hence there is no contract to speak of between petitioner and its supposed principal; and 2) that the bonds were merely to guarantee payment of its principal's obligation, thus, excussion is necessary. After the issues had been joined, the case was set for pre-trial conference on September 29, 1988. the petitioner received its notice on September 9, 1988, while the notice addressed to its counsel was

returned to the trial court with the notation "Return to Sender, Unclaimed." 2

On the scheduled date for pre-trial conference, only the counsel for petitioner appeared while both the representative of respondent and its counsel were present. The counsel for petitioner manifested that he was unable to contract the Vice-President for operations of petitioner, although his client intended to file a third party complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3

On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party Complaint" with the Third-Party Complaint attached. On this same day, in the presence of the representative for both petitioner and respondent and their counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on November 29, 1988, the court admitted the Third Party Complaint and ordered service of summons on third party defendants. 4

On scheduled conference in December, petitioner and its counsel did not appear notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to February 1, 1989. However, when the case was called for pre-trial conference on February 1, 1989, petitioner was again nor presented by its officer or its counsel, despite being duly notified. Hence, upon motion of respondent, petitioner was considered as in default and respondent was allowed to present evidence ex-parte, which was calendared on February 24, 1989. 6 Petitioner received a copy of the Order of Default and a copy of the Order setting the reception of respondent's evidence ex-parte, both dated February 1, 1989, on February 16, 1989. 7

On March 6, 1989, a decision was rendered by the trial court, the dispositive portion reads:WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant Interworld Assurance Corporation to pay the amount of P1,500,000.00 representing the principal of the amount due, plus legal interest thereon from April 7, 1988, until date of payment; and P20,000.00 as and for attorney's fees. 8

Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having been denied it elevated its case to the Court of Appeals which however, affirmed the decision of the trial court as well as the latter's order denying petitioner's motion for reconsideration.Before us, petitioner assigns as errors the following:

I. The respondent Court of Appeals gravely erred in declaring that the case was already ripe for pre-trial conference when the trial court set it for the holding thereof.II. The respondent Court of Appeals gravely erred in affirming the decision of the trial court by relying on the ruling laid down by this Honorable Court in the case of Manchester Development Corporation v. Court of Appeals, 149 SCRA 562, and disregarding the doctrine laid down in the case of Sun Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274.III. The respondent Court of Appeals gravely erred in declaring that it would be useless and a waste of time to remand the case for further proceedings as defendant-appellant has no meritorious defense.We do not find any reversible error in the conclusion reached by the court a quo.Relying on Section 1, Rule 20 of the Rules of court, petitioner argues that since the last pleading, which was supposed to be the third-party defendant's answer has not been filed, the case is not yet ripe for pre-trial. This argument must fail on three points. First, the trial court asserted, and we agree, that no answer to the third party complaint is forthcoming as petitioner never initiated the service of summons on the third party defendant. The court further said:. . . Defendant's claim that it was not aware of the Order admitting the third-party complaint is preposterous. Sec. 8, Rule 13 of the Rules, provides:Completeness of service — . . . Service by registered mail is complete upon actual receipt by the addressee, but if he fails to claim his mail from the post office within five (5) days from the date of first notice of the postmaster, service shall take effect at the expiration of such time. 9

Moreover, we observed that all copies of notices and orders issued by the court for petitioner's counsel were returned with the notation "Return to Sender, Unclaimed." Yet when he chose to, he would appear in court despite supposed lack of notice.Second, in the regular course of events, the third-party defendant's answer would have been regarded as the last pleading referred to in Sec. 1, Rule 20. However, petitioner cannot just disregard the court's order to be present during the pre-trial and give a flimsy excuse, such as that the answer has yet to be filed.The pre-trial is mandatory in any action, the main objective being

to simplify, abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its mandatory character the Rules oblige not only the lawyers but the parties as well to appear for this purpose before the Court 10 and when a party fails to appear at a pre-trial conference he may be non-suited or considered as in default. 11

Records show that even at the very start, petitioner could have been declared as in default since it was not properly presented during the first scheduled pre-trial on September 29, 1988. Nothing in the record is attached which would show that petitioner's counsel had a special authority to act in behalf of his client other than as its lawyer.We have said that in those instances where a party may not himself be present at the pre-trial, and another person substitutes for him, or his lawyer undertakes to appear not only as an attorney but in substitution of the client's person, it is imperative for that representative or the lawyer to have "special authority" to enter into agreements which otherwise only the client has the capacity to make. 12

Third, the court of Appeals properly considered the third-party complaint as a mere scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the court a quo:A third-party complaint is one of the pleadings for which Clerks of court of Regional Trial Courts are mandated to collect docket fees pursuant to Section 5, Rule 141 of the Rules of Court. The record is bereft of any showing tha(t) the appellant paid the corresponding docket fees on its third-party complaint. Unless and until the corresponding docket fees are paid, the trial court would not acquire jurisdiction over the third-party complaint (Manchester Development Corporation vs. Court of Appeals, 149 SCRA 562). The third-party complaint was thus reduced to a mere scrap of paper not worthy of the trial court's attention. Hence, the trial court can and correctly set the case for pre-trial on the basis of the complaint, the answer and the answer to the counterclaim. 13

It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd. (SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential pronouncements on the effect of non-payment of docket fees. 16 In previous cases, we have consistently ruled that the court cannot acquire jurisdiction over the subject matter of a case, unless the

docket fees are paid.Moreover, the principle laid down in Manchester could have very well been applied in Sun Insurance. We then said:The principle in Manchester [Manchester Development Corp. v. C.A., 149 SCRA 562 (1987)] could very well be applied in the present case. The pattern and the intent to defraud the government of the docket fee due it is obvious not only in the filing of the original complaint but also in the filing of the second amended complaint.xxx xxx xxxIn the present case, a more liberal interpretation of the rules is called for considering that, unlike Manchester, private respondent demonstrated his willingness to abide by the rules by paying the additional docket fees as required. The promulgation of the decision in Manchester must have had that sobering influence on private respondent who thus paid the additional docket fee as ordered by the respondent court. It triggered his change of stance by manifesting his willingness to pay such additional docket fees as may be ordered. 17

Thus, we laid down the rules as follows:1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the prescribed docket fee, that vests a trial court with jurisdiction over the subject-matter or nature of the action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the court may allow payment of the fee within a reasonable time, but in no case beyond the applicable prescriptive or reglamentary period.2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may also allow payment of said fee within a prescriptive or reglementary period.3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and payment of the prescribed filing fee, but subsequently, the judgment awards a claim nor specified in the pleading, or if specified the same has not been left for determination by the court, the additional filing fee therefor shall constitute a lien on the judgment. It shall be the responsibility of the clerk of court or his duly authorized deputy to enforce said lien and assess and collect the additional fee. 18

It should be remembered that both in Manchester and Sun

Insurance plaintiffs therein paid docket fees upon filing of their respective pleadings, although the amount tendered were found to be insufficient considering the amounts of the reliefs sought in their complaints. In the present case, petitioner did not and never attempted to pay the requisite docket fee. Neither is there any showing that petitioner even manifested to be given time to pay the requisite docket fee, as in fact it was not present during the scheduled pre-trial on December 1, 1988 and then again on February 1, 1989. Perforce, it is as if the third-party complaint was never filed.Finally, there is reason to believe that partitioner does not really have a good defense. Petitioner hinges its defense on two arguments, namely: a) that the checks issued by its principal which were supposed to pay for the premiums, bounced, hence there is no contract of surety to speak of; and 2) that as early as 1986 and covering the time of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet authorized by the insurance Commission to issue such bonds.The Insurance Code states that:Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety. . . . (emphasis added)The above provision outrightly negates petitioner's first defense. In a desperate attempt to escape liability, petitioner further asserts that the above provision is not applicable because the respondent allegedly had not accepted the surety bond, hence could not have delivered the goods to Sagum Enterprises. This statement clearly intends to muddle the facts as found by the trial court and which are on record.In the first place, petitioner, in its answer, admitted to have issued the bonds subject matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman, witness for the respondent, reveals the following:Q. What are the conditions and terms of sales you extended to Sagum General Merchandise?A. First, we required him to submit to us Surety Bond to guaranty

payment of the spare parts to be purchased. Then we sell to them on 90 days credit. Also, we required them to issue post-dated checks.Q. Did Sagum General merchandise comply with your surety bond requirement?A. Yes. They submitted to us and which we have accepted two surety bonds.Q Will you please present to us the aforesaid surety bonds?A. Interworld Assurance Corp. Surety Bond No. 0029 for P500,000 dated July 24, 1987 and Interworld Assurance Corp. Surety Bond No. 0037 for P1,000.000 dated October 7, 1987. 20

Likewise attached to the record are exhibits C to C-18 21 consisting of delivery invoices addressed to Sagum General Merchandise proving that parts were purchased, delivered and received.On the other hand, petitioner's defense that it did not have authority to issue a Surety Bond when it did is an admission of fraud committed against respondent. No person can claim benefit from the wrong he himself committed. A representation made is rendered conclusive upon the person making it and cannot be denied or disproved as against the person relying thereon. 22

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals dismissing the petition before them and affirming the decision of the trial court and its order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The present petition is DISMISSED for lack of merit.SO ORDERED.

G.R. No. 95546 November 6, 1992MAKATI TUSCANY CONDOMINIUM CORPORATION, petitioner, vs.THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by American International Underwriters (Phils.), Inc., respondent. BELLOSILLO, J.:This case involves a purely legal question: whether payment by installment of the premiums due on an insurance policy invalidates the contract of insurance, in view of Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which provides:Sec. 77. An insurer is entitled to the payment of the premium as soon as the thing is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.Sometime in early 1982, private respondent American Home Assurance Co. (AHAC), represented by American International Underwriters (Phils.), Inc., issued in favor of petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No. AH-CPP-9210452 on the latter's building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982 and 16 November 1982, all of which were accepted by private respondent.On 10 February 1983, private respondent issued to petitioner Insurance Policy No. AH-CPP-9210596, which replaced and renewed the previous policy, for a term covering 1 March 1983 to 1 March 1984. The premium in the amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9 September 1983, and 21 November 1983. All payments were likewise accepted by private respondent.On 20 January 1984, the policy was again renewed and private respondent issued to petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985. On this renewed policy, petitioner made two installment payments, both accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the balance of the premium.

Consequently, private respondent filed an action to recover the unpaid balance of P314,103.05 for Insurance Policy No. AH-CPP-9210651.In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy No. AH-CPP-9210651. It explained that it discontinued the payment of premiums because the policy did not contain a credit clause in its favor and the receipts for the installment payments covering the policy for 1984-85, as well as the two (2) previous policies, stated the following reservations:2. Acceptance of this payment shall not waive any of the company rights to deny liability on any claim under the policy arising before such payments or after the expiration of the credit clause of the policy; and3. Subject to no loss prior to premium payment. If there be any loss such is not covered.Petitioner further claimed that the policy was never binding and valid, and no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of P924,206.10 representing the premium payments for 1982-85.After some incidents, petitioner and private respondent moved for summary judgment.On 8 October 1987, the trial court dismissed the complaint and the counterclaim upon the following findings:While it is true that the receipts issued to the defendant contained the aforementioned reservations, it is equally true that payment of the premiums of the three aforementioned policies (being sought to be refunded) were made during the lifetime or term of said policies, hence, it could not be said, inspite of the reservations, that no risk attached under the policies. Consequently, defendant's counterclaim for refund is not justified.As regards the unpaid premiums on Insurance Policy No. AH-CPP-9210651, in view of the reservation in the receipts ordinarily issued by the plaintiff on premium payments the only plausible conclusion is that plaintiff has no right to demand their payment after the lapse of the term of said policy on March 1, 1985. Therefore, the defendant was justified in refusing to pay the same. 1

Both parties appealed from the judgment of the trial court. Thereafter, the Court of Appeals rendered a decision 2 modifying

that of the trial court by ordering herein petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or P314,103.05 plus legal interest until fully paid, and affirming the denial of the counterclaim. The appellate court thus explained —The obligation to pay premiums when due is ordinarily as indivisible obligation to pay the entire premium. Here, the parties herein agreed to make the premiums payable in installments, and there is no pretense that the parties never envisioned to make the insurance contract binding between them. It was renewed for two succeeding years, the second and third policies being a renewal/replacement for the previous one. And the insured never informed the insurer that it was terminating the policy because the terms were unacceptable.While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the insurance contract valid and binding without payment of premiums, there is nothing in said section which suggests that the parties may not agree to allow payment of the premiums in installment, or to consider the contract as valid and binding upon payment of the first premium. Otherwise, we would allow the insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by a basic considerations of fairness and equity.To our mind, the insurance contract became valid and binding upon payment of the first premium, and the plaintiff could not have denied liability on the ground that payment was not made in full, for the reason that it agreed to accept installment payment. . . . 3

Petitioner now asserts that its payment by installment of the premiums for the insurance policies for 1982, 1983 and 1984 invalidated said policies because of the provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions stipulated by the insurer in its receipts, disclaiming liability for loss for occurring before payment of premiums.It argues that where the premiums is not actually paid in full, the policy would only be effective if there is an acknowledgment in the policy of the receipt of premium pursuant to Sec. 78 of the Insurance Code. The absence of an express acknowledgment in the policies of such receipt of the corresponding premium payments, and petitioner's failure to pay said premiums on or

before the effective dates of said policies rendered them invalid. Petitioner thus concludes that there cannot be a perfected contract of insurance upon mere partial payment of the premiums because under Sec. 77 of the Insurance Code, no contract of insurance is valid and binding unless the premium thereof has been paid, notwithstanding any agreement to the contrary. As a consequence, petitioner seeks a refund of all premium payments made on the alleged invalid insurance policies.We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that petitioner and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepared in full.We therefore sustain the Court of Appeals. We quote with approval the well-reasoned findings and conclusion of the appellate court contained in its Resolution denying the motion to reconsider its Decision —While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer, would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon, the Insurance Code, at p. 175). So is an understanding to allow

insured to pay premiums in installments not so proscribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted. 4

The reliance by petitioner on Arce vs. Capital Surety and InsuranceCo. 5 is unavailing because the facts therein are substantially different from those in the case at bar. In Arce, no payment was made by the insured at all despite the grace period given. In the case before Us, petitioner paid the initial installment and thereafter made staggered payments resulting in full payment of the 1982 and 1983 insurance policies. For the 1984 policy, petitioner paid two (2) installments although it refused to pay the balance.It appearing from the peculiar circumstances that the parties actually intended to make three (3) insurance contracts valid, effective and binding, petitioner may not be allowed to renege on its obligation to pay the balance of the premium after the expiration of the whole term of the third policy (No. AH-CPP-9210651) in March 1985. Moreover, as correctly observed by the appellate court, where the risk is entire and the contract is indivisible, the insured is not entitled to a refund of the premiums paid if the insurer was exposed to the risk insured for any period, however brief or momentary.WHEREFORE, finding no reversible error in the judgment appealed from, the same is AFFIRMED. Costs against petitioner.SO ORDERED.

G.R. No. 137172            April 4, 2001UCPB GENERAL INSURANCE CO., INC., petitioner, vs.MASAGANA TELAMART, INC., respondent.R E S O L U T I O NDAVIDE, JR., C.J.:In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's properties; (b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-replacement policies. The modification consisted in the (1) deletion of the trial court's declaration that three of the policies were in force from August 1991 to August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of the total amount due the Respondent.The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals in its assailed decision as follows:Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila] . . . .All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made its formal demand for indemnification for the burned insured properties. On the same day, defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on the following grounds:"a) Said policies expired last May 22, 1992 and were not renewed for another term;b) Defendant had put plaintiff and its alleged broker on notice of

non-renewal earlier; andc) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or before tender of premium payment."(Record, p. 5)Hence Masagana filed this case.The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as provided under Policy Condition No. 26, which states:26. Renewal Clause. — Unless the company at least forty five days in advance of the end of the policy period mails or delivers to the assured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the assured shall be entitled to renew the policy upon payment of the premium due on the effective date of renewal.Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the renewal of the policies. Such a practice had existed up to the time the claims were filed. Thus:Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks

from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10, 1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1").Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no timely notice of non-renewal was made by Petitioner:(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or within 45 days from the expiry dates of the policies as provided under Policy Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt for, the premium payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254).In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by petitioner to the respondent covering the period from May 22, 1991 to May 22,

1992 . . . had been extended or renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence of the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of Appeals.Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we had made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court of Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May 1992, or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the 60- to 90-day credit term.Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit terms in premium payment has been the prevalent practice in the insurance industry. Most insurance companies, including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of a policy notwithstanding non-payment of premiums.Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and habitually accepting payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor of the insurance policy and in effect waived the provision therein that it would pay only for the loss or damage in case the same occurred after payment of the premium.Petitioner filed an opposition to the Respondent's motion for

reconsideration. It argues that both the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on the effective date of renewal should first be made. Respondent's argument that Section 77 is not a prohibitive provision finds no authoritative support.Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed duly established:1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually renewed.2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on the renewed policies.3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the notice sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was ever transmitted to Respondent.4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's cashier.The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for the payment of premiums.Section 77 of the Insurance Code of 1978 provides:SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies.This Section is a reproduction of Section 77 of P.D. No. 612 (The

Insurance Code) promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read:SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid. (Italic supplied)It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement to extend the period to pay the premium. But are there exceptions to Section 77?The answer is in the affirmative.The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace period provision applies.The second is that covered by Section 78 of the Insurance Code, which provides:SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid.A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss. We said therein, thus:We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that the petitioners and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on

installments, and later deny liability on the lame excuse that the premiums were not prepaid in full.Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its Resolution denying the motion for reconsideration of its decision:While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted.By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term.Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term within which to pay the premiums. That agreement is not against the law, morals, good customs, public order or public policy. The agreement binds the parties. Article 1306 of the Civil Code provides:ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77.WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible error was committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto.No pronouncement as to cost.SO ORDERED.

G.R. No. 150094             August 18, 2004FEDERAL EXPRESS CORPORATION, petitioner, vs.AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.

D E C I S I O N

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 CaseBefore us is a Petition for Review1 under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision2 and 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. 95-1219, entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.),' is hereby AFFIRMED and REITERATED."Costs against the [petitioner and Cargohaus, Inc.]."4

The assailed Resolution denied petitioner's Motion for Reconsideration.The FactsThe 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 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 and3. Costs of suit.'SO ORDERED.'"Aggrieved, [petitioner] appealed to [the CA]."5

Ruling of the Court of AppealsThe 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 IssuesIn 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 RulingThe Petition has merit.Preliminary Issue:Propriety of ReviewThe 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 Issue:Liability for DamagesPetitioner 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 PayeeThe 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.SubrogationUpon 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 ClaimFrom 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; and12.1.4 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 PrecedentIn 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-41014 November 28, 1988PACIFIC BANKING CORPORATION, petitioner, vs.COURT OF APPEALS and ORIENTAL ASSURANCE CORPORATION, respondents.Flores, Ocampo, Dizon and Domingo Law Office for petitioner.Cabochan and Reyes Law Office for respondents. PARAS, J.:This is a petition for review on certiorari of the decision of respondent Court of Appeals * in CA-G.R. No. 41735-R, entitled "Pacific Banking Corporation vs. Oriental Assurance Corporation", which set aside the decision of the Court of First Instance (CFI) of Manila, ** which had in turn granted the complaint for a sum of money in Civil Case No. 56889.As gathered from the records, the undisputed facts of this case are as follows:On October 21,1963, Fire Policy No. F-3770 (Exhibit "A"), an open policy, was issued to the Paramount Shirt Manufacturing Co. (hereinafter referred to as the insured, for brevity), by which private respondent Oriental Assurance Corporation bound itself to indemnify the insured for any loss or damage, not exceeding P61,000.00, caused by fire to its property consisting of stocks, materials and supplies usual to a shirt factory, including furniture, fixtures, machinery and equipment while contained in the ground, second and third floors of the building situated at number 256 Jaboneros St., San Nicolas, Manila, for a period of one year commencing from that date to October 21, 1964.The insured was at the time of the issuance of the policy and is up to this time, a debtor of petitioner in the amount of not less than Eight Hundred Thousand Pesos (P800,000.00) and the goods described in the policy were held in trust by the insured for the petitioner under thrust receipts (Record on Appeal, p. 4).Said policy was duly endorsed to petitioner as mortgagee/ trustor of the properties insured, with the knowledge and consent of private respondent to the effect that "loss if any under this policy is payable to the Pacific Banking Corporation".On January 4, 1964, while the aforesaid policy was in full force and effect, a fire broke out on the subject premises destroying the goods contained in its ground and second floors (Record on Appeal, p.5)On January 24, 1964, counsel for the petitioner sent a letter of

demand to private respondent for indemnity due to the loss of property by fire under the endorsement of said policy (Brief for Plaintiff-Appellee, pp. 16-17).On January 28, 1964, private respondent informed counsel for the petitioner that it was not yet ready to accede to the latter's demand as the former is awaiting the final report of the insurance adjuster, H.H. Bayne Adjustment Company (Brief for Plaintiff-Appellee, pp. 17-18).On March 25, 1964, the said insurance adjuster notified counsel for the petitioner that the insured under the policy had not filed any claim with it, nor submitted proof of loss which is a clear violation of Policy Condition No.11, and for which reason, determination of the liability of private respondent could not be had (Supra, pp. 19-20).On April 24, 1964, petitioner's counsel replied to aforesaid letter asking the insurance adjuster to verify from the records of the Bureau of Customs the entries of merchandise taken into the customs bonded warehouse razed by fire as a reliable proof of loss (Supra, pp. 21-22). For failure of the insurance company to pay the loss as demanded, petitioner (plaintiff therein) on April 28, 1 964, filed in the court a quo an action for a sum of money against the private respondent, Oriental Assurance Corporation, in the principal sum of P61,000.00 issued in favor of Paramount Shirt Manufacturing Co. (Record on Appeal, pp. 1-36).On May 25, 1964, private respondent raised the following defenses in its answer to wit: (a) lack of formal claim by insured over the loss and (b) premature filing of the suit as neither plaintiff nor insured had submitted any proof of loss on the basis of which defendant would determine its liability and the amount thereof, either to the private respondent or its ad . adjuster H.H. Bayne Adjustment Co., both in violation of Policy Condition No.11 (Record on Appeal, pp. 37-38).At the trial, petitioner presented in evidence Exhibit "H", which is a communication dated December 22, 1965 of the insurance adjuster, H.H. Bayne Adjustment Co. to Asian Surety Insurance Co., Inc., revealing undeclared co-insurances with the following: P30,000.00 with Wellington Insurance; P25,000. 00 with Empire Surety and P250,000.00 with Asian Surety; undertaken by insured Paramount on the same property covered by its policy with private respondent whereas the only co-insurances declared in the subject policy are those of P30,000.00 with Malayan P50,000.00 with

South Sea and P25.000.00 with Victory (Brief for the Defendant pp. 13-14).It will be noted that the defense of fraud and/or violation of Condition No. 3 in the Policy, in the form of non-declaration of co-insurances which was not pleaded in the answer was also not pleaded in the Motion to Dismiss.At any rate, on June 30, 1967, the trial court denied private respondent's motion on the ground that the defense of lack of proof of loss or defects therein was raised for the first time after the commencement of the suit and that it must be deemed to have waived the requirement of proof of loss (Sections 83 and 84, Insurance Act; Record on Appeal, p. 61).On September 9, 1967, the case was considered submitted for decision from which order private respondent filed a motion for reconsideration to set the case or further reception of private respondent's additional evidence, "in order to prove that 'insured has committed a violation of condition No. 3 of the policy in relation to the other Insurance Clause.' " (Record on Appeal, pp. 61-69).On September 30,1967, the case was set for the continuation of the hearing for the reception merely of the testimony of Alejandro Tan Gatue, Manager of the Adjustment Co., over the vehement opposition of the petitioner (Record on Appeal, p. 129).On April 18, 1 968, the trial court rendered a decision adjudging private respondent liable to the petitioner under the said contract of insurance, the dispositive portion of which reads:WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff P61,000.00, with interest at the rate of 8% per annum from January 4, 1964, to April 28, 1964, and 12% from April 29, 1964, until the amount is fully paid, P6,100.00, as attorney's fees, and the costs.SO ORDERED. (Record on Appeal, pp. 140-141)On appeal, the Court of Appeals reversed the decision of the trial court (Decision promulgated on April 23, 1975, Rollo, pp. 21-33).Petitioner filed a motion for reconsideration of the said decision of the respondent Court of Appeals, but this was denied on July 3,1975 for lack of merit (Rollo, pp. 54-67), resulting in this petition with the following assigned errors;IRESPONDENT COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN CONCLUDING FRAUD FROM THE BARE FACT THAT THE

INSURED PARAMOUNT PROCURED ADDITIONAL INSURANCES OTHER THAN THOSE STATED IN THE POLICY IN SPITE OF THE EXISTENCE OF CONTRARY PRESUMPTIONS AND ADMITTED FACT AND CIRCUMSTANCES WHICH NEGATE THE CORRECTNESS OF SAID CONCLUSION.(a) The respondent Court did not consider the legal presumption against the existence of fraud, which should be established with such quantum of proof as is required for any crime.(b) The record of the case is bereft of proof of such fraud.(c) The private respondent insurer did not even plead or in anywise raise fraud as a defense in its answer or motion to dismiss and, therefore, it should have been considered waived.(d) The total amount of insurance procured by the insured from the different companies amounted to hardly onehalf (½) of the value of the goods insured.IIRESPONDENT COURT ERRED IN NOT HOLDING THAT CONSIDERING THE VOTING ON THE PARTICULAR QUESTION OF FRAUD, THE FINDING OF THE TRIAL COURT THEREON SHOULD BE CONSIDERED AFFIRMED.IIITHE CONCURRING OPINION OF MR. JUSTICE CHANCO IS LEGALLY ERRONEOUS IN HOLDING THAT THE ACTION WAS PREMATURELY BROUGHT BECAUSE THE REQUIRED CLAIM UNDER THE INSURANCE LAW HAS NOT BEEN FILED, NOTWITHSTANDING THE LETTER, (EXHIBIT "C") OF PETITIONER-APPELLANT'S LAWYER WHICH IS A SUBSTANTIAL COMPLIANCE OF THE LEGAL REQUIREMENTS AND NOT HOLDING THAT PRIVATE RESPONDENT INSURER HAD ALREADY WAIVED THE SUPPOSED DEFECTS IN THE CLAIM FILED BY PETITIONER-APPELLANT FOR ITS FAILURE TO CALL THE ATTENTION OF THE LAYER TO SUCH ALLEGED DEFECTS AND FOR ENDORSING THE CLAIM TO ITS ADJUSTER FOR PROCESSING.IVRESPONDENT COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN NOT INTERPRETING THE PROVISIONS OF THE POLICY LIBERALLY IN FAVOR OF THE HEREIN PETITIONER-APPELLANT, WHO IS NOT THE INSURED BUT ONLY THE ASSIGNEE/MORTGAGEE OF THE PROPERTY INSURED.VRESPONDENT COURT OF APPEALS COMMITTED A GRAVE ERROR OF LAW IN DISMISSING THE CASE AND IN NOT AFFIRMING THE

APPEALED DECISION OF THE TRIAL COURT. (Brief for Petitioners, pp. 1-3)The crux of the controversy centers on two points: (a) unrevealed co-insurances which violated policy conditions No. 3 and (b) failure of the insured to file the required proof of loss prior to court action. Policy Condition No. 3 explicitly provides:3. The Insured shall give notice to the Company of any insurance already effected, or which may subsequently be effected, covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefit under this policy shall be forfeited. (Record on Appeal, p. 12)It is not disputed that the insured failed to reveal before the loss three other insurances. As found by the Court of Appeals, by reason of said unrevealed insurances, the insured had been guilty of a false declaration; a clear misrepresentation and a vital one because where the insured had been asked to reveal but did not, that was deception. Otherwise stated, had the insurer known that there were many co-insurances, it could have hesitated or plainly desisted from entering into such contract. Hence, the insured was guilty of clear fraud (Rollo, p. 25).Petitioner's contention that the allegation of fraud is but a mere inference or suspicion is untenable. In fact, concrete evidence of fraud or false declaration by the insured was furnished by the petitioner itself when the facts alleged in the policy under clauses "Co-Insurances Declared" and "Other Insurance Clause" are materially different from the actual number of co-insurances taken over the subject property. Consequently, "the whole foundation of the contract fails, the risk does not attach and the policy never becomes a contract between the parties. Representations of facts are the foundation of the contract and if the foundation does not exist, the superstructure does not arise. Falsehood in such representations is not shown to vary or add to the contract, or to terminate a contract which has once been made, but to show that no contract has ever existed (Tolentino, Commercial Laws of the Philippines, p. 991, Vol. II, 8th Ed.) A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been entered into, and which cannot be validated either by time or by ratification Tongoy v. C.A., 123 SCRA 99 [1983]; Avila v. C.A. 145 SCRA [1986]).

As the insurance policy against fire expressly required that notice should be given by the insured of other insurance upon the same property, the total absence of such notice nullifies the policy (Sta. Ana v. Commercial Union Assurance Co., 55 Phil. 333 [1930]; Union Manufacturing Co., Inc. vs. Philippine Guaranty Co., Inc., 47 SCRA 276 [1972]; Pioneer Ins. & Surety Corp., v. Yap, 61 SCRA 432 [1974]).The argument that notice of co-insurances may be made orally is preposterous and negates policy condition No. 20 which requires every notice and other communications to the insurer to be written or printed.Petitioner points out that Condition No. 3 in the policy in relation to the "other insurance clause" supposedly to have been violated, cannot certainly defeat the right of the petitioner to recover the insurance as mortgagee/assignee. Particularly referring to the mortgage clause of the policy, petitioner argues that considering the purpose for which the endorsement or assignment was made, that is, to protect the mortgagee/assignee against any untoward act or omission of the insured, it would be absurd to hold that petitioner is barred from recovering the insurance on account of the alleged violation committed by the insured (Rollo, Brief for the petitioner, pp, 33-35).It is obvious that petitioner has missed all together the import of subject mortgage clause which specifically provides:Mortgage ClauseLoss, if any, under this policy, shall be payable to the PACIFIC BANKING CORPORATION Manila mortgagee/trustor as its interest may appear, it being hereby understood and agreed that this insurance as to the interest of the mortgagee/trustor only herein, shall not be invalidated by any act or neglect—except fraud or misrepresentation, or arson—of the mortgagor or owner/trustee of the property insured; provided, that in case the mortgagor or owner/ trustee neglects or refuses to pay any premium, the mortgagee/ trustor shall, on demand pay the same. (Rollo, p. 26)The paragraph clearly states the exceptions to the general rule that insurance as to the interest of the mortgagee, cannot be invalidated; namely: fraud, or misrepresentation or arson. As correctly found by the Court of Appeals, concealment of the aforecitedco-insurances can easily be fraud, or in the very least, misrepresentation (Rollo, p. 27).Undoubtedly, it is but fair and just that where the insured who is

primarily entitled to receive the proceeds of the policy has by its fraud and/or misrepresentation, forfeited said right, with more reason petitioner which is merely claiming as indorsee of said insured, cannot be entitled to such proceeds.Petitioner further stressed that fraud which was not pleaded as a defense in private respondent's answer or motion to dismiss, should be deemed to have been waived.It will be noted that the fact of fraud was tried by express or at least implied consent of the parties. Petitioner did not only object to the introduction of evidence but on the contrary, presented the very evidence that proved its existence.Be that as it may, it is established that the Supreme Court has ample authority to give beyond the pleadings where in the interest of justice and the promotion of public policy, there is a need to make its own finding to support its conclusion. Otherwise stated, the Court can consider a fact which surfaced only after trial proper (Maharlika Publishing Corp. v. Tagle, 142 SCRA 561 [1986]).Generally, the cause of action on the policy accrues when the loss occurs, But when the policy provides that no action shall be brought unless the claim is first presented extrajudicially in the manner provided in the policy, the cause of action will accrue from the time the insurer finally rejects the claim for payment (Eagle Star Insurance v. Chia Yu, 55 Phil 701 [1955]).In the case at bar, policy condition No. 11 specifically provides that the insured shall on the happening of any loss or damage give notice to the company and shall within fifteen (15) days after such loss or damage deliver to the private respondent (a) a claim in writing giving particular account as to the articles or goods destroyed and the amount of the loss or damage and (b) particulars of all other insurances, if any. Likewise, insured was required "at his own expense to produce, procure and give to the company all such further particulars, plans, specifications, books, vouchers, invoices, duplicates or copies thereof, documents, proofs and information with respect to the claim". (Record on Appeal, pp. 18-20).The evidence adduced shows that twenty-four (24) days after the fire, petitioner merely wrote letters to private respondent to serve as a notice of loss, thereafter, the former did not furnish the latter whatever pertinent documents were necessary to prove and estimate its loss. Instead, petitioner shifted upon private respondent the burden of fishing out the necessary information to

ascertain the particular account of the articles destroyed by fire as well as the amount of loss. It is noteworthy that private respondent and its adjuster notified petitioner that insured had not yet filed a written claim nor submitted the supporting documents in compliance with the requirements set forth in the policy. Despite the notice, the latter remained unheedful. Since the required claim by insured, together with the preliminary submittal of relevant documents had not been complied with, it follows that private respondent could not be deemed to have finally rejected petitioner's claim and therefore the latter's cause of action had not yet arisen. Compliance with condition No. 11 is a requirement sine qua non to the right to maintain an action as prior thereto no violation of petitioner's right can be attributable to private respondent. This is so, as before such final rejection, there was no real necessity for bringing suit. Petitioner should have endeavored to file the formal claim and procure all the documents, papers, inventory needed by private respondent or its adjuster to ascertain the amount of loss and after compliance await the final rejection of its claim. Indeed, the law does not encourage unnecessary litigation (Eagle Star Insurance Co., Ltd., et al. v. Chia Yu, p. 701, supra).<äre||anº•1àw>Verily, petitioner prematurely filed Civil Case No. 56889 and dismissal thereof was warranted under the circumstances. While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly as against the insurer company (Eagle Star Insurance Co., Ltd., et al. v. Chia Yu, p. 702, supra; Taurus Taxi Co., Inc. v. The Capital Ins. & Surety Co., Inc., 24 SCRA 458 [1968]; National Power Corp. v. CA, 145 SCRA 533 [1986]), yet, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense (Young v. Midland Textile Ins. Co., 30 Phil. 617 [1919]; Union Manufacturing Co., Inc. v. Phil. Guaranty Co., Inc., p. 277 supra; Pichel v. Alonzo, III SCRA 341 [1982]; Gonzales v. CA, 124 SCRA 630 [1983]; GSIS v. CA, 145 SCRA 311 [1986]; Herrera v. Petrophil Corp., 146 SCRA 385 [1986]).Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right to impose such reasonable conditions at the time of the making of

the contract as they may deem wise and necessary. The agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer's liability, and in order to recover, the insured must show himself within those terms. The compliance of the insured with the terms of the policy is a condition precedent to the light of recovery (Stokes v. Malayan Insurance Co., Inc., 127 SCRA 766 [1984]).It appearing that insured has violated or failed to perform the conditions under No. 3 and 11 of the contract, and such violation or want of performance has not been waived by the insurer, the insured cannot recover, much less the herein petitioner. Courts are not permitted to make contracts for the parties; the function and duty of the courts is simply to enforce and carry out the contracts actually made (Young v. Midland Textile Ins. Co., 30 Phil. 617 [1915]; Union Manufacturing Co. Inc. v. Phil. Guaranty Co. Inc., p. 276 supra).Finally, the established rule in this jurisdiction that findings of fact of the Court of Appeals when supported by substantial evidence, are not reviewable on appeal by certiorari, deserves reiteration. Said findings of the appellate court are final and cannot be disturbed by the Supreme Court except in certain cases Lereos v. CA, 117 SCRA 395 [1985]; Dalida v. CA, 117 SCRA 480 [1982] Director of Lands v. CA, 117 SCRA 346 [1982]; Montesa v. CA, 117 SCRA 770 [1982]; Sacay v. Sandiganbayan, 142 SCRA 609 [1986]; Guita v. CA, 139 SCRA 576 [1985]; Manlapaz v. CA, 147 SCRA 238-239 [1987]).PREMISES CONSIDERED, the petition is DISMISSED for lack of merit, and the decision appealed from is AFFIRMED. No costs.SO ORDERED.

G.R. No. L-36232 December 19, 1974PIONEER INSURANCE AND SURETY CORPORATION, petitioner-appellant, vs.OLIVA YAP, represented by her attorney-in-fact, CHUA SOON POON respondent-appellee.Eriberto D. Ignacio for petitioner-appellant.Paculdo, Miranda, Marquez, Sibal & Associates for respondent-appellee. FERNANDEZ, J.:pThis is an appeal by certiorari from the decision of the Court of Appeals dated December 16, 1972, in CA-G.R. No. 36669-R, affirming the judgment of the Court of First Instance of Manila (Branch VI) in Civil Case No. 54508, which latter court declared plaintiff Oliva Yap, herein respondent, entitled to recover from defendant Pioneer Insurance & Surety Corporation, herein petitioner, the full amount of the damage inquired in Policy No. 4219, which is P25,000.00, plus 12% of said sum from the date of filing of the complaint until full payment, in addition to the sum of P6,000.00 for attorney's fees, and costs.Respondent Oliva Yap was the owner of a store in a two-storey building located at No. 856 Juan Luna Street, Manila, where in 1962 she sold shopping bags and footwear, such as shoes, sandals and step-ins. Chua Soon Poon Oliva Yap's son-in-law, was in charge of the store.On April 19, 1962, respondent Yap took out Fire Insurance Policy No. 4216 from petitioner Pioneer Insurance & Surety Corporation with a face value of P25,000.00 covering her stocks, office furniture, fixtures and fittings of every kind and description. Among the conditions in the policy executed by the parties are the following:The Insured shall give notice to the Company of any insurance or insurances already effected, or which may subsequently be effected, covering any of the property hereby insured, and unless such notice be given and the particulars of such insurance or insurances be stated in, or endorsed on this Policy by or on behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall be forfeited. (emphasis supplied)It is understood that, except as may be stated on the face of this policy there is no other insurance on the property hereby covered and no other insurance is allowed except by the consent of the Company endorsed hereon. Any false declaration or breach or this

condition will render this policy null and void.At the time of the insurance on April 19, 1962 of Policy No. 4219 in favor of respondent Yap, an insurance policy for P20,000.00 issued by the Great American Insurance Company covering the same properties was noted on said policy as co-insurance (Annex "1-E"). Later, on August 29, 1962, the parties executed Exhibit "1-K", as an endorsement on Policy No. 4219, stating:It is hereby declared and agreed that the co-insurance existing at present under this policy is as follows: P20,000.00 — Northwest Ins., and not as originally stated. (emphasis supplied)Except as varied by this endorsement, all other terms and conditions remain unchanged.Still later, or on September 26, 1962, respondent Oliva Yap took out another fire insurance policy for P20,000.00 covering the same properties, this time from the Federal Insurance Company, Inc., which new policy was, however, procured without notice to and the written consent of petitioner Pioneer Insurance & Surety Corporation and, therefore, was not noted as a co-insurance in Policy No. 4219.At dawn on December 19, 1962, a fire broke out in the building housing respondent Yap's above-mentioned store, and the said store was burned. Respondent Yap filed an insurance claim, but the same was denied in petitioner's letter of May 17, 1963 (Exhibit "G"), on the ground of "breach and/or violation of any and/or all terms and conditions" of Policy No. 4219.On July 17, 1963, Oliva Yap filed with the Court of First Instance of Manila the present complaint, asking, among others, for payment of the face value of her fire insurance policy. In its answer, petitioner alleged that no property belonging to plaintiff Yap and covered by the insurance policy was destroyed by the fire; that Yap's claim was filed out of time; and that Yap took out an insurance policy from another insurance company without petitioner's knowledge and/or endorsement, in violation of the express stipulations in Policy No. 4219, hence, all benefits accruing from the policy were deemed forfeited.As already stated at the beginning of this opinion, the trial court decided for plaintiff Oliva Yap; and its judgment was affirmed in full by the Court of Appeals.The vital issue in this appeal is whether or not petitioner should be absolved from liability on Fire Insurance Policy No. 4219 on account of any violation by respondent Yap of the co-insurance

clause therein. In resolving this problem, the Court of Appeals stated in its decision:5. The plaintiff-appellee has not violated the other insurance clause (Exhibit 1-F) of the insurance Policy No. 4219 that would justify the defendant-appellant, as insurer, to avoid its liability thereunder. It appears on the face of said policy that a co-insurance in the amount of P20,000.00 was secured from the Great American Insurance and was declared by the plaintiff-appellee and recognized by the defendant-appellant. This was later on substituted for the same amount and secured by the Federal Insurance Company. Chua Soon Poon on being cross-examined by counsel for the defendant-appellant, declared that the Great American Insurance policy was cancelled because of the difference in the premium and the same was changed for that of the Federal (t.s.n., hearing of December 1, 1964, pp. 35-36). Contrary to the assertion of the defendant-appellant, the Great American Insurance policy was not substituted by the Northwest Insurance policy. As admitted by the defendant-appellant in its brief (p. 48), the fire insurance policy issued by the Great American Insurance Company for P20,000.00 (Exhibit 1-E) was cancelled on August 29, 1962. On the other hand, the fire insurance policy issued by the Northwest Insurance & Surety Company for P20,000.00 (Exhibit 1-K) was taken out on July 23, 1962. How then can the Northwest Insurance policy issued on July 23, 1962, be considered as having substituted the Great American policy which was cancelled only on August 29, 1962? The defendant-appellant can be considered to have waived the formal requirement of indorsing the policy of co-insurance since there was absolutely no showing that it was not aware of said substitution and preferred to continue the policy (Gonzales La O vs. Yek Tong Lin Fire and Marine Insurance Co., 55 Phil. 386). Even assuming that the defendant-appellant did not indorse the Federal Insurance policy, there is no question that the same was only a substitution and did not in any way increase the amount of the declared co-insurance. In other words, there was no increase in the risk assumed by the defendant-appellant.We do not agree with the conclusion of the Court of Appeals.There was a violation by respondent Oliva Yap of the co-insurance clause contained in Policy No. 4219 that resulted in the avoidance of petitioner's liability. The insurance policy for P20,000.00 issued by the Great American Insurance Company covering the same properties of respondent Yap and duly noted on Policy No. 4219 as

c-insurance, ceased, by agreement of the parties (Exhibit "1-L"), to be recognized by them as a co-insurance policy. The Court of Appeals says that the Great American Insurance policy was substituted by the Federal Insurance policy for the same amount, and because it was a mere case of substitution, there was no necessity for its endorsement on Policy No. 4219. This finding, as well as reasoning, suffers from several flaws. There is no evidence to establish and prove such a substitution. If anything was substituted for the Great American Insurance policy, it could only be the Northwest Insurance policy for the same amount of P20,000.00. The endorsement (Exhibit "1-K") quoted above shows the clear intention of the parties to recognize on the date the endorsement was made (August 29, 1962), the existence of only one co-insurance, and that is the Northwest Insurance policy, which according to the stipulation of the parties during the hearing, was issued on August 20, 1962 (t.s.n., January 12, 1965, pp. 3-4) and endorsed only on August 20, 1962. The finding of the Court of Appeals that the Great American Insurance policy was substituted by the Federal Insurance policy is unsubstantiated by the evidence of record and indeed contrary to said stipulation and admission of respondent, and is grounded entirely on speculation, surmises or conjectures, hence, not binding on the Supreme Court. 1

The Court of Appeals would consider petitioner to have waived the formal requirement of endorsing the policy of co-insurance "since there was absolutely no showing that it was not aware of said substitution and preferred to continue the policy." The fallacy of this argument is that, contrary to Section 1, Rule 131 of the Revised Rules of Court, which requires each party to prove his own allegations, it would shift to petitioner, respondent's burden of proving her proposition that petitioner was aware of the alleged substitution, and with such knowledge preferred to continue the policy. Respondent Yap cites Gonzales La O vs. Yek Tong Lin Fire and Marine Insurance Co., Ltd. 2 to justify the assumption but in that case, unlike here, there was knowledge by the insurer of violations of the contract, to wit: "If, with the knowledge of the existence of other insurances which the defendant deemed violations of the contract, it has preferred to continue the policy, its action amounts to a waiver of the annulment of the contract ..." A waiver must be express. If it is to be implied from conduct mainly, said conduct must be clearly indicative of a clear intent to

waive such right. Especially in the case at bar where petitioner is assumed to have waived a valuable right, nothing less than a clear, positive waiver, made with full knowledge of the circumstances, must be required.By the plain terms of the policy, other insurance without the consent of petitioner would ipso facto avoid the contract. It required no affirmative act of election on the part of the company to make operative the clause avoiding the contract, wherever the specified conditions should occur. Its obligations ceased, unless, being informed of the fact, it consented to the additional insurance.The validity of a clause in a fire insurance policy to the effect that the procurement of additional insurance without the consent of the insurer renders ipso facto the policy void is well-settled:In Milwaukee Mechanids' Lumber Co., vs. Gibson, 199 Ark. 542, 134 S. W. 2d 521, 522, a substantially identical clause was sustained and enforced, the court saying: "The rule in this state and practically all of the states is to the effect that a clause in a policy to the effect that the procurement of additional insurance without the consent of the insurer renders the policy void is a valid provision. The earlier cases of Planters Mutual Insurance Co., vs. Green, 72 Ark. 305, 80 S.W. 92, are to the same effect." And see Vance, Insurance, 2nd Ed., 725. (Reach vs. Arkansas Farmers Mut. Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S. W. 2d 48, 49.)2. Where a policy contains a clause providing that the policy shall be void if insured has or shall procure any other insurance on the property, the procurement of additional insurance without the consent of the insurer avoids the policy." (Planters' Mut. Ins. Ass'n vs. Green [Supreme Court of Arkansas, March 19, 1904] 80 S.W. 151.)3. The policy provided that it should be void in case of other insurance "without notice and consent of this company. ..." It also authorized the company to terminate the contract at any time, at its option, by giving notice and refunding a ratable proportion of the premium. Held, that additional insurance, unless consented to, or unless a waiver was shown, ipso facto avoided the contract, and the fact that the company had not, after notice of such insurance, cancelled the policy, did not justify the legal conclusion that it had elected to allow it to continue in force." (Johnson vs. American Fire Ins., Co., [Supreme Court of Minnesota, Aug. 12, 1889] 43 N.W., 59)

The aforecited principles have been applied in this jurisdiction in General Insurance & Surety Corporation vs. Ng Hua 3. There, the policy issued by the General Insurance & Surety Corporation in favor of respondent Ng Hua contained a provision identical with the provisions in Policy No. 4219 quoted above. 4 This Court, speaking thru Justice Cesar P. Bengson, in reversing the judgment of the Court of Appeals and absolving the insurer from liability under the policy, held:... And considering the terms of the policy which required the insured to declare other insurances, the statement in question must be deemed to be a statement (warranty) binding on both insurer and insured, that there were no other insurance on the property. ...The annotation then, must be deemed to be a warranty that the property was not insured by any other policy. Violation thereof entitled the insurer to rescind. (Sec. 69, Insurance Act.) Such misrepresentation is fatal in the light of our views in Santa Ana vs. Commercial Union Assurance Company, Ltd., 55 Phil. 329. The materiality of non-disclosure of other insurance policies is not open to doubt.Furthermore, even if the annotations were overlooked the defendant insurer would still be free from liability because there is no question that the policy issued by General Indemnity has not been stated in nor endorsed on Policy No. 471 of defendant. And as stipulated in the above-quoted provisions of such policy "all benefit under this policy shall be forfeited. (Emphasis supplied)The obvious purpose of the aforesaid requirement in the policy is to prevent over-insurance and thus avert the perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in which a fire would be profitable to the insured. According to Justice Story: "The insured has no right to complain, for he assents to comply with all the stipulation on his side, in order to entitle himself to the benefit of the contract, which, upon reason or principle, he has no right to ask the court to dispense with the performance of his own part of the agreement, and yet to bind the other party to obligations, which, but for those stipulation would not have been entered into." 5

In view of the above conclusion, We deem it unnecessary to consider the other defenses interposed by petitioner.WHEREFORE, the appealed judgment of the Court of Appeals is reversed and set aside, and the petitioner absolved from all

liability under the policy. Costs against private respondent.SO ORDERED.

G.R. No. L-17436             January 31, 1962EQUITABLE INSURANCE AND CASUALTY COMPANY, INC., plaintiff-appellee, vs.RURAL INSURANCE AND SURETY COMPANY, INC., defendant-appellant.K. V. Faylona and M. R. Nadres for plaintiff-appellee.Gunlao, Laxamana and Aquino for defendant-appellant.BARRERA, J.:On May 26, 1959, plaintiff Equitable Insurance and Casualty Company, Inc. filed with the Court of First Instance of Manila a complaint (Civil Case No. 40282) against defendant Rural Insurance and Surety Company, Inc. alleging, as first cause of action, that on November 11, 1957, plaintiff and defendant entered into a reciprocal facultative reinsurance agreement, wherein they agreed to cede to each other, by way of facultative reinsurance on policies of insurance or reinsurance issued by their respective fire insurance departments on risks situated in the Philippines, subject to the stipulations of the agreement; that pursuant to said agreement, plaintiff on January 29, 1958, reinsured for P2,000.00 with defendant as per Reinsurance Application No. 58/038 and accepted by defendant on the same date, the stock covered by fire insurance Policy No. 5880 issued by plaintiff in behalf of Messrs. Jaen Bermers' Cooperative Marketing Association, Inc.: that on July 4, 1958, the stock insured and covered by said Policy No. 5880 was burned, and the share of the loss assumed by defendant as per reinsurance agreement was computed at P2,024.87 including adjuster's fee, for which plaintiff sent to defendant for payment by the latter, a statement of account dated March 12, 1959; that despite repeated demands by plaintiff, defendant refused and failed to pay the sum of P2,024.87. On the second cause of action, plaintiff on March 24, 1958 reinsured in the sum of P2,000.00 with defendant as per Reinsurance Application No. 58/115 and accepted by defendant on the same date, stock covered by fire insurance Policy No. 6026, issued by plaintiff in behalf of Electric and Lamp Supplies (Mr. Pedro Casipe); that on October 13, 1958, said stock was burned and the share of loss assumed by defendant as per reinsurance agreement with plaintiff was computed at P1,334.80 including adjuster's fee, for which plaintiff likewise sent a statement of account dated February 4, 1959, to defendant with the request that the same be paid; that notwithstanding repeated demands, defendant refused and failed to pay plaintiffs; and that for

defendant's failure to pay its share of the losses assumed by it, plaintiff has been compelled to institute the present action and to incur attorney's fees and expenses of litigation amounting to P500.00. Plaintiff prayed for judgment ordering the defendant to pay said sums of P2,024.80 and P1,334.80 with legal interest thereon from the date of the filing of the complaint until fully paid, P500.00 as attorney's fees, and the costs of the suit.On June 9, 1959, defendant filed a motion to dismiss said complaint, on the ground that it states no cause of action, as pursuant to Article VIII of the Reinsurance Agreement between the parties, before a court action can be brought, the parties agreed to submit all disputes to a board of arbitrators. To this motion, plaintiff duly filed an opposition. On June 16, 1959, the court denied said motion to dismiss for lack of merit and required defendant to answer.On June 20, 1959, defendant flied its answer alleging as affirmative defenses that paragraph 3, Article III of the Reciprocal Reinsurance Agreement between the parties is controlled by Article VIII thereof, that the nature of the agreement is "self-liquidating between the parties" the reinsurer becoming a reinsured, and the reinsured becoming reinsurer; and that said agreement has not yet been abrogated, so that plaintiff's liability to defendant is not yet known, nor the liability of defendant to plaintiff. Defendant prayed that the complaint be dismissed and that plaintiff be ordered to pay to it attorney's fees in the sum of P700.00 and the costs of the suit.1äwphï1.ñëtOn July 8, 1959, plaintiff filed a motion for judgment on the pleadings, which was opposed by defendant on July 13. On July 15, 1959, the court issued an order denying said motion.Instead of going into a formal hearing, the parties on August 12, 1959, submitted the case for decision on the following stipulation of facts:1. That the defendant admits the allegations contained in paragraphs 1, 2, 3, 4 and all other allegations of the complaint, including the letter of the Assistant Insurance Commissioner, addressed to Miss Anunciacion Aznar, President of the Rural Insurance & Surety Co., dated May 4, 1959, which reads as follows: ."MADAM:"We are enclosing herewith copy of the self-explanatory letter of Mr. S. A. Santos, General Manager of the above-subject company,

dated April 11, 1959, with the request that we be favored with your comments thereon at an early date."Kindly give your preferential attention hereto."2. That plaintiff admits that the issues and/or dispute subject of the present complaint were not submitted to a Board of Arbitrators and umpire, as provided in paragraph VIII of Annex 'A' to the complaint, but instead the matter was referred to the Insurance Commissioner as evidenced by the letter of said office quoted above." (Emphasis supplied.) .On October 16, 1959, the court rendered a decision the dispositive part of which reads: .IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in favor of the plaintiff Equitable Insurance & Casualty Co., Inc. and against the defendant Rural Insurance & Surety Co., Inc., ordering the latter to pay to the former the sum of P2,024.87, under the first cause of action, with legal interest from the date of the filing of the complaint until fully paid; the sum of P1,334.80, under the second cause of action with legal interest from the date of the filing of the complaint, until fully paid; plus the further sum of P500.00 as attorney's fees and the costs of the suit.From this decision, defendant appealed to the Court of Appeals which elevated the case to us, no question of fact being involved.Under his first assignment of error, defendant-appellant insists that the trial court erred in failing to rule that plaintiff-appellee has no causes of action against it, the matter not having been referred to the decision of two arbitrators or umpire, which, it is claimed, is the condition precedent agreed upon in Article VIII of the Reinsurance Agreement entered into between the parties, to wit: .ARTICLE VIIIIn the event of any question arising as to the meaning of, or any way connected with or relating to this Agreement, whether before or after its termination, the parties shall endeavor to arrive at a satisfactory compromise by amicable settlement rather than by court action. The dispute shall be referred to the decision of two arbitrators, of whom one shall be appointed in writing by each of the parties within thirty (30) days after having been required so to do by the other party in writing, and in case of disagreement between the arbitrators, to the decision of the umpire to be appointed by them in writing before entering on the reference. Each party shall submit its case with all particulars within thirty days after their appointment. The seat of arbitration shall be in

Manila, Philippines, and the expenses of arbitration shall be borne in equal proportion by the parties. The decision of the arbitrators or umpire, as the case may be, shall be final and binding on both the Company and the Reinsurer. The arbitrators and umpire shall not be bound by the strict rules of evidence and by judicial formalities in making the award.It is contended that this agreement, not being contrary to law, moral or public policy but, on the other hand, dictated by 'wisdom and propriety in insurance contracts because losses by fire can duly be determined by competent men who have technical knowledge on how to determine losses by fire", non-compliance therewith is fatal to the claim of plaintiff-appellee.We find no merit in this contention. Under the abovequoted provision of the Reinsurance Agreement, it would seem clear that the requirement of submitting for decision to two arbitrators or an umpire the matter of losses by fire or the liability of the parties thereto arises only if and when the same is disputed by one of the parties. It does not appear in the instant case that appellant did dispute appellee's claims. Consequently, appellant may not invoke said provision in avoidance of its liability to appellee. On this point, the trial court correctly made the following observations, to which we fully agree and adopt as our own: .It is true that paragraph (Article VIII) of said Reciprocal Facultative Reinsurance Agreement required that 'in the event of any question arising as to the meaning of, or any way connected with or relating to this Agreement, whether before or after its termination, the parties shall endeavor to arrive at a satisfactory compromise by amicable settlement rather than by court action'; and that the dispute should be referred to the decision of two arbitrators and umpire, as provided, therein. However, in this particular case, there is absolutely no dispute between the two parties, because in the stipulation of facts, the defendant has admitted that plaintiff has paid its liability to the insured as per its fire insurance policies specified in the two causes of action of the complaint. Defendant has, likewise, admitted its liability as reinsurer under the Reciprocal Facultative Reinsurance Agreement (Annex "A" to the complaint) to pay to the plaintiff its proportional shares, the amounts of which are not disputed. Indeed, according to the complaint as admitted by the defendant, statements of account as to the amounts of its share as reinsurer and, for all that appears, said defendant has never questioned the correctness of said

amounts. It is, likewise, admitted by the defendant in the stipulation of facts, that because of its failure to pay said amounts, the plaintiff, on April 11, 1959, complained to the Assistant Insurance Commissioner, for official intervention, but said defendant has continued to ignore plaintiff's demands for reimbursement under the reinsurance policies.Moreover, as decided by the Court of Appeals in the case of Buenaventura Maligad v. United Assurance Co., Inc., 55 O.G. 6041:If in the course of the settlement of a loss, the action of the company or its agents amounts to a refusal to pay, the company will be deemed to have waived the condition precedent with reference to arbitration and a suit upon the policy will lie. (Chang v. Assurance Corporation, 8 Phil. 399.) Emphasis supplied.In the second and last assignment of error, appellant claims that "the court a quo erred in failing to rule that in a facultative obligation the right to choose an alternative remedy lies only with the debtor, who in this case is the herein defendant-appellant", and in support thereof, cites Article 1206 of the new Civil Code.We find no connection whatsoever between this article and the agreement subject of this action, except the word "facultative" used in both. The term "facultative" is used in reinsurance contracts, and it is so used in this particular case, merely to define the right of the reinsurer to accept or not to accept participation in the risk insured. But once the share is accepted, as it was in the case at bar, the obligation is absolute and the liability assumed thereunder can be discharged by one and only way — payment of the share of the losses. There is no alternative nor substitute prestation.WHEREFORE, finding no error in the judgment appealed from of the trial court, the same is hereby affirmed, with costs against the defendant-appellant. So ordered.

G.R. No. L-16163             February 28, 1963IGNACIO SATURNINO, in his own behalf and as the JUDICIAL GUARDIAN OF CARLOS SATURNINO, minor, plaintiffs-appellants, vs.THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, defendant-appellee.Eleazaro A. Samson for plaintiffs-appellants.Abello & Macias for defendant-appellee.MAKALINTAL, J.:Plaintiffs, now appellants, filed this action in the Court of First Instance of Manila to recover the sum of P5,000.00, corresponding to the face value of an insurance policy issued by defendant on the life of Estefania A. Saturnino, and the sum of P1,500.00 as attorney's fees. Defendant, now appellee, set up special defenses in its answer, with a counterclaim for damages allegedly sustained as a result of the unwarranted presentation of this case. Both the complaint and the counterclaim were dismissed by the trial court; but appellants were declared entitled to the return of the premium already paid; plus interest at 6% up to January 8, 1959, when a check for the corresponding amount — P359.65 — was sent to them by appellee.The policy sued upon is one for 20-year endowment non-medical insurance. This kind of policy dispenses with the medical examination of the applicant usually required in ordinary life policies. However, detailed information is called for in the application concerning the applicant's health and medical history. The written application in this case was submitted by Saturnino to appellee on November 16, 1957, witnessed by appellee's agent Edward A. Santos. The policy was issued on the same day, upon payment of the first year's premium of P339.25. On September 19, 1958 Saturnino died of pneumonia, secondary to influenza. Appellants here, who are her surviving husband and minor child, respectively, demanded payment of the face value of the policy. The claim was rejected and this suit was subsequently instituted.It appears that two months prior to the issuance of the policy or on September 9, 1957, Saturnino was operated on for cancer, involving complete removal of the right breast, including the pectoral muscles and the glands found in the right armpit. She stayed in the hospital for a period of eight days, after which she was discharged, although according to the surgeon who operated on her she could not be considered definitely cured, her ailment being of the malignant type.

Notwithstanding the fact of her operation Estefania A. Saturnino did not make a disclosure thereof in her application for insurance. On the contrary, she stated therein that she did not have, nor had she ever had, among other ailments listed in the application, cancer or other tumors; that she had not consulted any physician, undergone any operation or suffered any injury within the preceding five years; and that she had never been treated for nor did she ever have any illness or disease peculiar to her sex, particularly of the breast, ovaries, uterus, and menstrual disorders. The application also recites that the foregoing declarations constituted "a further basis for the issuance of the policy."The question at issue is whether or not the insured made such false representations of material facts as to avoid the policy. There can be no dispute that the information given by her in her application for insurance was false, namely, that she had never had cancer or tumors, or consulted any physician or undergone any operation within the preceding period of five years. Are the facts then falsely represented material? The Insurance Law (Section 30) provides that "materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the proposed contract, or in making his inquiries." It seems to be the contention of appellants that the facts subject of the representation were not material in view of the "non-medical" nature of the insurance applied for, which does away with the usual requirement of medical examination before the policy is issued. The contention is without merit. If anything, the waiver of medical examination renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. It is logical to assume that if appellee had been properly apprised of the insured's medical history she would at least have been made to undergo medical examination in order to determine her insurability.Appellants argue that due information concerning the insured's previous illness and operation had been given to appellees agent Edward A. Santos, who filled the application form after it was signed in blank by Estefania A. Saturnino. This was denied by Santos in his testimony, and the trial court found such testimony to

be true. This is a finding of fact which is binding upon us, this appeal having been taken upon questions of law alone. We do not deem it necessary, therefore, to consider appellee's additional argument, which was upheld by the trial court, that in signing the application form in blank and leaving it to Edward A. Santos to fill (assuming that to be the truth) the insured in effect made Santos her agent for that purpose and consequently was responsible for the errors in the entries made by him in that capacity.In the application for insurance signed by the insured in this case, she agreed to submit to a medical examination by a duly appointed examiner of appellee if in the latter's opinion such examination was necessary as further evidence of insurability. In not asking her to submit to a medical examination, appellants maintain, appellee was guilty of negligence, which precluded it from finding about her actual state of health. No such negligence can be imputed to appellee. It was precisely because the insured had given herself a clean bill of health that appellee no longer considered an actual medical checkup necessary.Appellants also contend there was no fraudulent concealment of the truth inasmuch as the insured herself did not know, since her doctor never told her, that the disease for which she had been operated on was cancer. In the first place the concealment of the fact of the operation itself was fraudulent, as there could not have been any mistake about it, no matter what the ailment. Secondly, in order to avoid a policy it is not necessary to show actual fraud on the part of the insured. In the case of Kasprzyk v. Metropolitan Insurance Co., 140 N.Y.S. 211, 214, it was held:Moreover, if it were the law that an insurance company could not depend a policy on the ground of misrepresentation, unless it could show actual knowledge on the part of the applicant that the statements were false, then it is plain that it would be impossible for it to protect itself and its honest policyholders against fraudulent and improper claims. It would be wholly at the mercy of any one who wished to apply for insurance, as it would be impossible to show actual fraud except in the extremest cases. It could not rely on an application as containing information on which it could act. There would be no incentive to an applicant to tell the truth.Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to

prove their case not covered by this stipulation of facts. 1äwphï1.ñëtIn this jurisdiction a concealment, whether intentional or unintentional, entitles the insurer to rescind the contract of insurance, concealment being defined as "negligence to communicate that which a party knows and ought to communicate" (Sections 24 & 26, Act No. 2427). In the case of Argente v. West Coast Life Insurance Co., 51 Phil. 725, 732, this Court said, quoting from Joyce, The Law of Insurance, 2nd ed., Vol. 3:"The basis of the rule vitiating the contract in cases of concealment is that it misleads or deceives the insurer into accepting the risk, or accepting it at the rate of premium agreed upon. The insurer, relying upon the belief that the assured will disclose every material fact within his actual or presumed knowledge, is misled into a belief that the circumstance withheld does not exist, and he is thereby induced to estimate the risk upon a false basis that it does not exist."The judgment appealed from, dismissing the complaint and awarding the return to appellants of the premium already paid, with interest at 6% up to January 29, 1959, affirmed, with costs against appellants.

G.R. No. L-31845 April 30, 1979GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner, vs.HONORABLE COURT OF APPEALS, respondents.G.R. No. L-31878 April 30, 1979LAPULAPU D. MONDRAGON, petitioner, vs.HON. COURT OF APPEALS and NGO HING, respondents.Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company.Voltaire Garcia for petitioner Mondragon.Pelaez, Pelaez & Pelaez for respondent Ngo Hing. DE CASTRO, J.:The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar relief, through these petitions for certiorari by way of appeal, from the amended decision of respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance of Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without interest.It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life of his one-year old daughter Helen Go. Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the data on the application form which was signed by private respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as his commission for being a duly authorized agebt of Pacific Life. Upon the payment of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the application form his strong recommendation for the approval of the insurance application. Then on April 30, 1957, Mondragon

received a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The letter stated that the said life insurance application for 20-year endowment plan is not available for minors below seven years old, but Pacific Life can consider the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company.The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the approval of the 20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4-M).It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of the same before the Court of First Instance of Cebu, which rendered the adverse decision as earlier refered to against both petitioners.The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract of the life insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health and physical condition of Helen Go, which rendered void the aforesaid Exhibit E.1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT. These conditions state that:A. If the Company or its agent, shan have received the premium deposit ... and the insurance application, ON or PRIOR to the date of medical examination ... said insurance shan be in force and in effect from the date of such medical examination, for such period as is covered by the deposit ..., PROVIDED the company shall be satisfied that on said date the applicant was insurable on standard rates under its rule for the amount of insurance and the kind of policy requested in the application.D. If the Company does not accept the application on standard rate for the amount of insurance and/or the kind of policy requested in the application but issue, or offers to issue a policy for a different plan and/or amount ..., the insurance shall not be in force and in

effect until the applicant shall have accepted the policy as issued or offered by the Company and shall have paid the full premium thereof. If the applicant does not accept the policy, the deposit shall be refunded.E. If the applicant shall not have been insurable under Condition A above, and the Company declines to approve the application the insurance applied for shall not have been in force at any time and the sum paid be returned to the applicant upon the surrender of this receipt. (Emphasis Ours).The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a provisional or temporary insurance contract and only upon compliance of the following conditions: (1) that the company shall be satisfied that the applicant was insurable on standard rates; (2) that if the company does not accept the application and offers to issue a policy for a different plan, the insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble according to the standard rates, and the company disapproves the application, the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the applicant.Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an acknowledgment, on behalf of the company, that the latter's branch office had received from the applicant the insurance premium and had accepted the application subject for processing by the insurance company; and that the latter will either approve or reject the same on the basis of whether or not the applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the insurance application of respondent Ngo Hing, the binding deposit receipt in question had never become in force at any time.Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure outright. As held by this Court, where an agreement is made between the applicant and the agent, no liability shall attach until the principal approves the risk and a receipt is given by the agent. The acceptance is merely conditional and is subordinated to the act of the company in approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).

It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the insurance application in question on the ground that it is not offering the twenty-year endowment insurance policy to children less than seven years of age. What it offered instead is another plan known as the Juvenile Triple Action, which private respondent failed to accept. In the absence of a meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the latter's one-year old daughter, and with the non-compliance of the abovequoted conditions stated in the disputed binding deposit receipt, there could have been no insurance contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be refunded by Pacific Life.As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents ... The contract, to be binding from the date of the application, must have been a completed contract, one that leaves nothing to be dione, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement."We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to him the rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between the parties who had no meeting of their minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware that said company does not offer the life insurance applied for. When he filed the insurance application in dispute, private respondent was, therefore, only taking the chance that Pacific Life will approve the recommendation of Mondragon for the acceptance and approval of the application in question along with his proposal that the insurance company starts to offer the 20-year endowment insurance plan for children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected the proposal and recommendation. Secondly, having an insurable interest on the life of his one-year old daughter, aside from being an insurance agent

and an offense associate of petitioner Mondragon, private respondent Ngo Hing must have known and followed the progress on the processing of such application and could not pretend ignorance of the Company's rejection of the 20-year endowment life insurance application.At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court which completely reversed the original decision, the following:Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the desire for applicant's father to have the application considered as one for a 20-year endowment plan was ever duly communicated to Ngo; Hing, father of the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of the applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate" and that it was the latter who "insisted that the plan be placed on the 20-year endowment plan." Under these circumstances, it is inconceivable that the progress in the processing of the application was not brought home to his knowledge. He must have been duly apprised of the rejection of the application for a 20-year endowment plan otherwise Mondragon would not have asserted that it was Ngo Hing himself who insisted on the application as originally filed, thereby implictly declining the offer to consider the application under the Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was, Ngo Hing should only be presumed to know what kind of policies are available in the company for minors below 7 years old. What he and Mondragon were apparently trying to do in the premises was merely to prod the company into going into the business of issuing endowment policies for minors just as other insurance companies allegedly do. Until such a definite policy is however, adopted by the company, it can hardly be said that it could have been bound at all under the binding slip for a plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp- 52-53).2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had deliberately

concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit supplied the required essential data for the insurance application form, he was fully aware that his one-year old daughter is typically a mongoloid child. Such a congenital physical defect could never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad faith, withheld the fact materal to the risk to be assumed by the insurance compary. As an insurance agent of Pacific Life, he ought to know, as he surely must have known. his duty and responsibility to such a material fact. Had he diamond said significant fact in the insurance application fom Pacific Life would have verified the same and would have had no choice but to disapprove the application outright.The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor or openness and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or unintentional the concealment entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof.We are thus constrained to hold that no insurance contract was perfected between the parties with the noncompliance of the conditions provided in the binding receipt, and concealment, as legally defined, having been comraitted by herein private respondent.WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by respondent Court and ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private respondent.SO ORDERED.

G.R. No. 105135 June 22, 1995SUNLIFE ASSURANCE COMPANY OF CANADA, petitioner, vs.The Hon. COURT OF APPEALS and Spouses ROLANDO and BERNARDA BACANI, respondents. QUIASON, J.:This is a petition for review for certiorari under Rule 45 of the Revised Rules of Court to reverse and set aside the Decision dated February 21, 1992 of the Court of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April 22, 1992, denying reconsideration thereof.We grant the petition.IOn April 15, 1986, Robert John B. Bacani procured a life insurance contract for himself from petitioner. He was issued Policy No. 3-903-766-X valued at P100,000.00, with double indemnity in case of accidental death. The designated beneficiary was his mother, respondent Bernarda Bacani.On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani filed a claim with petitioner, seeking the benefits of the insurance policy taken by her son. Petitioner conducted an investigation and its findings prompted it to reject the claim.In its letter, petitioner informed respondent Bernarda Bacani, that the insured did not disclose material facts relevant to the issuance of the policy, thus rendering the contract of insurance voidable. A check representing the total premiums paid in the amount of P10,172.00 was attached to said letter.Petitioner claimed that the insured gave false statements in his application when he answered the following questions:5. Within the past 5 years have you:a) consulted any doctor or other health practitioner?b) submitted to:EGG?X-rays?blood tests?other tests?c) attended or been admitted to any hospital or other medical facility?6. Have you ever had or sought advice for:xxx xxx xxxb) urine, kidney or bladder disorder? (Rollo, p. 53)The deceased answered question No. 5(a) in the affirmative but limited his answer to a consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese General Hospital on February 1986, for

cough and flu complications. The other questions were answered in the negative (Rollo, p. 53).Petitioner discovered that two weeks prior to his application for insurance, the insured was examined and confined at the Lung Center of the Philippines, where he was diagnosed for renal failure. During his confinement, the deceased was subjected to urinalysis, ultra-sonography and hematology tests.On November 17, 1988, respondent Bernarda Bacani and her husband, respondent Rolando Bacani, filed an action for specific performance against petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila. Petitioner filed its answer with counterclaim and a list of exhibits consisting of medical records furnished by the Lung Center of the Philippines.On January 14, 1990, private respondents filed a "Proposed Stipulation with Prayer for Summary Judgment" where they manifested that they "have no evidence to refute the documentary evidence of concealment/misrepresentation by the decedent of his health condition (Rollo, p. 62).Petitioner filed its Request for Admissions relative to the authenticity and due execution of several documents as well as allegations regarding the health of the insured. Private respondents failed to oppose said request or reply thereto, thereby rendering an admission of the matters alleged.Petitioner then moved for a summary judgment and the trial court decided in favor of private respondents. The dispositive portion of the decision is reproduced as follows:WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, condemning the latter to pay the former the amount of One Hundred Thousand Pesos (P100,000.00) the face value of insured's Insurance Policy No. 3903766, and the Accidental Death Benefit in the amount of One Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the concept of reasonable attorney's fees and costs of suit.Defendant's counterclaim is hereby Dismissed (Rollo, pp. 43-44).In ruling for private respondents, the trial court concluded that the facts concealed by the insured were made in good faith and under a belief that they need not be disclosed. Moreover, it held that the health history of the insured was immaterial since the insurance policy was "non-medical".Petitioner appealed to the Court of Appeals, which affirmed the decision of the trial court. The appellate court ruled that petitioner

cannot avoid its obligation by claiming concealment because the cause of death was unrelated to the facts concealed by the insured. It also sustained the finding of the trial court that matters relating to the health history of the insured were irrelevant since petitioner waived the medical examination prior to the approval and issuance of the insurance policy. Moreover, the appellate court agreed with the trial court that the policy was "non-medical" (Rollo, pp. 4-5).Petitioner's motion for reconsideration was denied; hence, this petition.IIWe reverse the decision of the Court of Appeals.The rule that factual findings of the lower court and the appellate court are binding on this Court is not absolute and admits of exceptions, such as when the judgment is based on a misappreciation of the facts (Geronimo v. Court of Appeals, 224 SCRA 494 [1993]).In weighing the evidence presented, the trial court concluded that indeed there was concealment and misrepresentation, however, the same was made in "good faith" and the facts concealed or misrepresented were irrelevant since the policy was "non-medical". We disagree.Section 26 of The Insurance Code is explicit in requiring a party to a contract of insurance to communicate to the other, in good faith, all facts within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has no means of ascertaining. Said Section provides:A neglect to communicate that which a party knows and ought to communicate, is called concealment.Materiality is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom communication is due, in forming his estimate of the disadvantages of the proposed contract or in making his inquiries (The Insurance Code, Sec. 31).The terms of the contract are clear. The insured is specifically required to disclose to the insurer matters relating to his health.The information which the insured failed to disclose were material and relevant to the approval and issuance of the insurance policy. The matters concealed would have definitely affected petitioner's action on his application, either by approving it with the corresponding adjustment for a higher premium or rejecting the

same. Moreover, a disclosure may have warranted a medical examination of the insured by petitioner in order for it to reasonably assess the risk involved in accepting the application.In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that materiality of the information withheld does not depend on the state of mind of the insured. Neither does it depend on the actual or physical events which ensue.Thus, "goad faith" is no defense in concealment. The insured's failure to disclose the fact that he was hospitalized for two weeks prior to filing his application for insurance, raises grave doubts about his bonafides. It appears that such concealment was deliberate on his part.The argument, that petitioner's waiver of the medical examination of the insured debunks the materiality of the facts concealed, is untenable. We reiterate our ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316 (1963), that " . . . the waiver of a medical examination [in a non-medical insurance contract] renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not . . . "Moreover, such argument of private respondents would make Section 27 of the Insurance Code, which allows the injured party to rescind a contract of insurance where there is concealment, ineffective (See Vda. de Canilang v. Court of Appeals, supra).Anent the finding that the facts concealed had no bearing to the cause of death of the insured, it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed insurance policy or in making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G. No. 48 [1960]).We, therefore, rule that petitioner properly exercised its right to rescind the contract of insurance by reason of the concealment employed by the insured. It must be emphasized that rescission was exercised within the two-year contestability period as recognized in Section 48 of The Insurance Code.WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is REVERSED and SET ASIDE.SO ORDERED.

G.R. No. 92492 June 17, 1993THELMA VDA. DE CANILANG, petitioner, vs.HON. COURT OF APPEALS and GREAT PACIFIC LIFE ASSURANCE CORPORATION, respondents.Simeon C. Sato for petitioner.FELICIANO, J.:On 18 June 1982, Jaime Canilang consulted Dr. Wilfredo B. Claudio and was diagnosed as suffering from "sinus tachycardia." The doctor prescribed the following fro him: Trazepam, a tranquilizer; and Aptin, a beta-blocker drug. Mr. Canilang consulted the same doctor again on 3 August 1982 and this time was found to have "acute bronchitis."On next day, 4 August 1982, Jaime Canilang applied for a "non-medical" insurance policy with respondent Great Pacific Life Assurance Company ("Great Pacific") naming his wife, Thelma Canilang, as his beneficiary. 1 Jaime Canilang was issued ordinary life insurance Policy No. 345163, with the face value of P19,700, effective as of 9 August 1982.On 5 August 1983, Jaime Canilang died of "congestive heart failure," "anemia," and "chronic anemia." 2 Petitioner, widow and beneficiary of the insured, filed a claim with Great Pacific which the insurer denied on 5 December 1983 upon the ground that the insured had concealed material information from it.Petitioner then filed a complaint against Great Pacific with the Insurance Commission for recovery of the insurance proceeds. During the hearing called by the Insurance Commissioner, petitioner testified that she was not aware of any serious illness suffered by her late husband 3 and that, as far as she knew, her husband had died because of a kidney disorder. 4 A deposition given by Dr. Wilfredo Claudio was presented by petitioner. There Dr. Claudio stated that he was the family physician of the deceased Jaime Canilang 5 and that he had previously treated him for "sinus tachycardia" and "acute bronchitis." 6 Great Pacific for its part presented Dr. Esperanza Quismorio, a physician and a medical underwriter working for Great Pacific. 7 She testified that the deceased's insurance application had been approved on the basis of his medical declaration. 8 She explained that as a rule, medical examinations are required only in cases where the applicant has indicated in his application for insurance coverage that he has previously undergone medical consultation and hospitalization. 9

In a decision dated 5 November 1985, Insurance Commissioner

Armando Ansaldo ordered Great Pacific to pay P19,700 plus legal interest and P2,000.00 as attorney's fees after holding that:1. the ailment of Jaime Canilang was not so serious that, even if it had been disclosed, it would not have affected Great Pacific's decision to insure him;2. Great Pacific had waived its right to inquire into the health condition of the applicant by the issuance of the policy despite the lack of answers to "some of the pertinent questions" in the insurance application;3. there was no intentional concealment on the part of the insured Jaime Canilang as he had thought that he was merely suffering from a minor ailment and simple cold; 10 and4. Batas Pambansa Blg. 847 which voids an insurance contract, whether or not concealment was intentionally made, was not applicable to Canilang's case as that law became effective only on 1 June 1985.On appeal by Great Pacific, the Court of Appeals reversed and set aside the decision of the Insurance Commissioner and dismissed Thelma Canilang's complaint and Great Pacific's counterclaim. The Court of Appealed found that the use of the word "intentionally" by the Insurance Commissioner in defining and resolving the issue agreed upon by the parties at pre-trial before the Insurance Commissioner was not supported by the evidence; that the issue agreed upon by the parties had been whether the deceased insured, Jaime Canilang, made a material concealment as the state of his health at the time of the filing of insurance application, justifying respondent's denial of the claim. The Court of Appeals also found that the failure of Jaime Canilang to disclose previous medical consultation and treatment constituted material information which should have been communicated to Great Pacific to enable the latter to make proper inquiries. The Court of Appeals finally held that the Ng Gan Zee case which had involved misrepresentation was not applicable in respect of the case at bar which involves concealment.Petitioner Thelma Canilang is now before this Court on a Petition for Review on Certiorari alleging that:1. . . . the Honorable Court of Appeals, speaking with due respect, erred in not holding that the issue in the case agreed upon between the parties before the Insurance Commission is whether or not Jaime Canilang "intentionally" made material concealment in stating his state of health;

2. . . . at any rate, the non-disclosure of certain facts about his previous health conditions does not amount to fraud and private respondent is deemed to have waived inquiry thereto. 11

The medical declaration which was set out in the application for insurance executed by Jaime Canilang read as follows:MEDICAL DECLARATIONI hereby declare that:(1) I have not been confined in any hospital, sanitarium or infirmary, nor receive any medical or surgical advice/attention within the last five (5) years.(2) I have never been treated nor consulted a physician for a heart condition, high blood pressure, cancer, diabetes, lung, kidney, stomach disorder, or any other physical impairment.(3) I am, to the best of my knowledge, in good health.EXCEPTIONS:________________________________________________________________________________GENERAL DECLARATIONI hereby declare that all the foregoing answers and statements are complete, true and correct. I hereby agree that if there be any fraud or misrepresentation in the above statements material to the risk, the INSURANCE COMPANY upon discovery within two (2) years from the effective date of insurance shall have the right to declare such insurance null and void. That the liabilities of the Company under the said Policy/TA/Certificate shall accrue and begin only from the date of commencement of risk stated in the Policy/TA/Certificate, provided that the first premium is paid and the Policy/TA/Certificate is delivered to, and accepted by me in person, when I am in actual good health.Signed at Manila his 4th day of August, 1992.Illegible——————————Signature of Applicant. 12

We note that in addition to the negative statements made by Mr. Canilang in paragraph 1 and 2 of the medical declaration, he failed to disclose in the appropriate space, under the caption "Exceptions," that he had twice consulted Dr. Wilfredo B. Claudio who had found him to be suffering from "sinus tachycardia" and "acute bronchitis."The relevant statutory provisions as they stood at the time Great Pacific issued the contract of insurance and at the time Jaime Canilang died, are set out in P.D. No. 1460, also known as the Insurance Code of 1978, which went into effect on 11 June 1978.

These provisions read as follows:Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is called a concealment.xxx xxx xxxSec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all factors within his knowledge which are material to the contract and as to which he makes no warranty, and which the other has not the means of ascertaining. (Emphasis supplied)Under the foregoing provisions, the information concealed must be information which the concealing party knew and "ought to [have] communicate[d]," that is to say, information which was "material to the contract." The test of materiality is contained in Section 31 of the Insurance Code of 1978 which reads:Sec. 31. Materially is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the disadvantages of the proposed contract, or in making his inquiries. (Emphasis supplied)"Sinus tachycardia" is considered present "when the heart rate exceeds 100 beats per minute." 13 The symptoms of this condition include pounding in the chest and sometimes faintness and weakness of the person affected. The following elaboration was offered by Great Pacific and set out by the Court of Appeals in its Decision:Sinus tachycardia is defined as sinus-initiated; heart rate faster than 100 beats per minute. (Harrison' s Principles of Internal Medicine, 8th ed. [1978], p. 1193.) It is, among others, a common reaction to heart disease, including myocardial infarction, and heart failure per se. (Henry J.L. Marriot, M.D., Electrocardiography, 6th ed., [1977], p. 127.) The medication prescribed by Dr. Claudio for treatment of Canilang's ailment on June 18, 1982, indicates the condition that said physician was trying to manage. Thus, he prescribed Trazepam, (Philippine Index of Medical Specialties (PIMS), Vol. 14, No. 3, Dec. 1985, p. 112) which is anti-anxiety, anti-convulsant, muscle-relaxant; and Aptin, (Idem, p. 36) a cardiac drug, for palpitations and nervous heart. Such treatment could have been a very material information to the insurer in determining the action to be take on Canilang's application for life insurance coverage. 14

We agree with the Court of Appeals that the information which

Jaime Canilang failed to disclose was material to the ability of Great Pacific to estimate the probable risk he presented as a subject of life insurance. Had Canilang disclosed his visits to his doctor, the diagnosis made and medicines prescribed by such doctor, in the insurance application, it may be reasonably assumed that Great Pacific would have made further inquiries and would have probably refused to issue a non-medical insurance policy or, at the very least, required a higher premium for the same coverage. 15 The materiality of the information withheld by Great Pacific did not depend upon the state of mind of Jaime Canilang. A man's state of mind or subjective belief is not capable of proof in our judicial process, except through proof of external acts or failure to act from which inferences as to his subjective belief may be reasonably drawn. Neither does materiality depend upon the actual or physical events which ensue. Materiality relates rather to the "probable and reasonable influence of the facts" upon the party to whom the communication should have been made, in assessing the risk involved in making or omitting to make further inquiries and in accepting the application for insurance; that "probable and reasonable influence of the facts" concealed must, of course, be determined objectively, by the judge ultimately.The insurance Great Pacific applied for was a "non-medical" insurance policy. In Saturnino v. Philippine-American Life Insurance Company, 16 this Court held that:. . . if anything, the waiver of medical examination [in a non-medical insurance contract] renders even more material the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not . . . . 17 (Emphasis supplied)The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain information to the insurer was not "intentional" in nature, for the reason that Jaime Canilang believed that he was suffering from minor ailment like a common cold. Section 27 of the Insurance Code of 1978 as it existed from 1974 up to 1985, that is, throughout the time range material for present purposes, provided that:Sec. 27. A concealment entitles the injured party to rescind a contract of insurance.The preceding statute, Act No. 2427, as it stood from 1914 up to

1974, had provided:Sec. 26. A concealment, whether intentional or unintentional, entitles the injured party to rescind a contract of insurance. (Emphasis supplied)Upon the other hand, in 1985, the Insurance Code of 1978 was amended by B.P. Blg. 874. This subsequent statute modified Section 27 of the Insurance Code of 1978 so as to read as follows:Sec. 27. A concealment whether intentional or unintentional entitles the injured party to rescind a contract of insurance. (Emphasis supplied)The unspoken theory of the Insurance Commissioner appears to have been that by deleting the phrase "intentional or unintentional," the Insurance Code of 1978 (prior to its amendment by B.P. Blg. 874) intended to limit the kinds of concealment which generate a right to rescind on the part of the injured party to "intentional concealments." This argument is not persuasive. As a simple matter of grammar, it may be noted that "intentional" and "unintentional" cancel each other out. The net result therefore of the phrase "whether intentional or unitentional" is precisely to leave unqualified the term "concealment." Thus, Section 27 of the Insurance Code of 1978 is properly read as referring to "any concealment" without regard to whether such concealment is intentional or unintentional. The phrase "whether intentional or unintentional" was in fact superfluous. The deletion of the phrase "whether intentional or unintentional" could not have had the effect of imposing an affirmative requirement that a concealment must be intentional if it is to entitle the injured party to rescind a contract of insurance. The restoration in 1985 by B.P. Blg. 874 of the phrase "whether intentional or unintentional" merely underscored the fact that all throughout (from 1914 to 1985), the statute did not require proof that concealment must be "intentional" in order to authorize rescission by the injured party.In any case, in the case at bar, the nature of the facts not conveyed to the insurer was such that the failure to communicate must have been intentional rather than merely inadvertent. For Jaime Canilang could not have been unaware that his heart beat would at times rise to high and alarming levels and that he had consulted a doctor twice in the two (2) months before applying for non-medical insurance. Indeed, the last medical consultation took place just the day before the insurance application was filed. In all probability, Jaime Canilang went to visit his doctor precisely

because of the discomfort and concern brought about by his experiencing "sinus tachycardia."We find it difficult to take seriously the argument that Great Pacific had waived inquiry into the concealment by issuing the insurance policy notwithstanding Canilang's failure to set out answers to some of the questions in the insurance application. Such failure precisely constituted concealment on the part of Canilang. Petitioner's argument, if accepted, would obviously erase Section 27 from the Insurance Code of 1978.It remains only to note that the Court of Appeals finding that the parties had not agreed in the pretrial before the Insurance Commission that the relevant issue was whether or not Jaime Canilang had intentionally concealed material information from the insurer, was supported by the evidence of record, i.e., the Pre-trial Order itself dated 17 October 1984 and the Minutes of the Pre-trial Conference dated 15 October 1984, which "readily shows that the word "intentional" does not appear in the statement or definition of the issue in the said Order and Minutes." 18

WHEREFORE, the Petition for Review is DENIED for lack of merit and the Decision of the Court of Appeals dated 16 October 1989 in C.A.-G.R. SP No. 08696 is hereby AFFIRMED. No pronouncement as to the costs.SO ORDERED.

JAMES STOKES vs. MALAYAN INSURANCE CO., INC.G.R. No. L-34768, 24 February 1984127 SCRA 766

FACTS:Daniel Adolfson had a subsist ing Malayan car insurance pol icywith coverage against own damage as well as 3rdparty liabilitywhen his car f igured in a vehicular accident with another car,r e s u l t i n g t o d a m a g e t o b o t h v e h i c l e s . A t t h e t i m e o f t h eaccident, Adolfson’s car was being driven by James Stokes, whow a s a u t h o r i z e d t o d o s o b y A d o l f s o n . S t o k e s , a n I r i s h t o u r i s twho had been in the Phi l ippines for only 90 days, had a val ida n d s u b s i s t i n g I r i s h d r i v e r ’ s l i c e n s e b u t w i t h o u t a P h i l i p p i n edriver’s license.Adolfson filed a claim with Malayan but the latter refused to paycontending that Stokes was not an authorized driver under the“Authorized Driver” clause of the insurance policy in relation toSection 21 of the Land Transportation Office.

ISSUE:Whether or not Malayan is l iable to pay the insurance claim of  Adolfson

HELD:NO. A contract of insurance is a contract of indemnity upon thet e r m s a n d c o n d i t i o n s s p e c i f i e d t h e r e i n . W h e n t h e i n s u r e r i scalled upon to pay in case of loss or damage, he has the right toi n s i s t u p o n c o m p l i a n c e w i t h t h e t e r m s o f t h e c o n t r a c t . I f t h einsured cannot bring himself within the terms and conditions of the contract, he is not entit led as a rule to recover for

the lossor damage suffered. For the terms of the contract constitute themeasure of the insurer’s liability, and compliance therewith is acondition precedent to the right of recovery.At the t ime of the accident, Stokes had been in the Phi l ippinesfor more than 90 days. Hence, under the law, he could not drivea m o t o r v e h i c l e w i t h o u t a P h i l i p p i n e d r i v e r ’ s l i c e n s e . H e w a st h e r e f o r e n o t a n “ a u t h o r i z e d d r i v e r ” u n d e r t h e t e r m s o f t h einsurance policy in question, and Malayan was right in denyingthe claim of the insured.A c c e p t a n c e o f p r e m i u m w i t h i n t h e s t i p u l a t e d p e r i o d f o rpayment thereof, including the agreed period of grace, merelya s s u r e s c o n t i n u e d e f f e c t i v i t y o f t h e i n s u r a n c e p o l i c y i naccordance with its terms. Such acceptance does not estop theinsurer from interposing any val id defense under the terms of  the insurance policy. The principle of estoppel is an equitable principle rooted uponnatural justice which prevents a person from going back on hisown acts and representations to the prejudice of another whomhe has led to rely upon them. The principle does not apply tot h e i n s t a n t c a s e . I n a c c e p t i n g t h e p r e m i u m p a y m e n t o f t h ei n s u r e d , M a l a y a n w a s n o t g u i l t y o f a n y i n e q u i t a b l e a c t o rr e p r e s e n t a t i o n . T h e r e i s n o t h i n g i n c o n s i s t e n t b e t w e e nacceptance of premium due under an insurance policy and theenforcement of its terms.WHEREFORE, the appealed judgment is reversed. The complaintis dismissed. Costs against appellees

G.R. No. L-34200 September 30, 1982REGINA L. EDILLON, as assisted by her husband, MARCIAL EDILLON, petitioners-appellants, vs.MANILA BANKERS LIFE INSURANCE CORPORATION and the COURT OF FIRST INSTANCE OF RIZAL, BRANCH V, QUEZON CITY, respondents-appellees.K.V. Faylona for petitioners-appellants.L. L. Reyes for respondents-appellees. VASQUEZ, J.:The question of law raised in this case that justified a direct appeal from a decision of the Court of First Instance Rizal, Branch V, Quezon City, to be taken directly to the Supreme Court is whether or not the acceptance by the private respondent insurance corporation of the premium and the issuance of the corresponding certificate of insurance should be deemed a waiver of the exclusionary condition of overage stated in the said certificate of insurance.The material facts are not in dispute. Sometime in April 1969, Carmen O, Lapuz applied with respondent insurance corporation for insurance coverage against accident and injuries. She filled up the blank application form given to her and filed the same with the respondent insurance corporation. In the said application form which was dated April 15, 1969, she gave the date of her birth as July 11, 1904. On the same date, she paid the sum of P20.00 representing the premium for which she was issued the corresponding receipt signed by an authorized agent of the respondent insurance corporation. (Rollo, p. 27.) Upon the filing of said application and the payment of the premium on the policy applied for, the respondent insurance corporation issued to Carmen O. Lapuz its Certificate of Insurance No. 128866. (Rollo, p. 28.) The policy was to be effective for a period of 90 days.On May 31, 1969 or during the effectivity of Certificate of Insurance No. 12886, Carmen O. Lapuz died in a vehicular accident in the North Diversion Road.On June 7, 1969, petitioner Regina L. Edillon, a sister of the insured and who was the named beneficiary in the policy, filed her claim for the proceeds of the insurance, submitting all the necessary papers and other requisites with the private respondent. Her claim having been denied, Regina L. Edillon instituted this action in the

Court of First Instance of Rizal on August 27, 1969.In resisting the claim of the petitioner, the respondent insurance corporation relies on a provision contained in the Certificate of Insurance, excluding its liability to pay claims under the policy in behalf of "persons who are under the age of sixteen (16) years of age or over the age of sixty (60) years ..." It is pointed out that the insured being over sixty (60) years of age when she applied for the insurance coverage, the policy was null and void, and no risk on the part of the respondent insurance corporation had arisen therefrom.The trial court sustained the contention of the private respondent and dismissed the complaint; ordered the petitioner to pay attorney's fees in the sum of ONE THOUSAND (P1,000.00) PESOS in favor of the private respondent; and ordered the private respondent to return the sum of TWENTY (P20.00) PESOS received by way of premium on the insurancy policy. It was reasoned out that a policy of insurance being a contract of adhesion, it was the duty of the insured to know the terms of the contract he or she is entering into; the insured in this case, upon learning from its terms that she could not have been qualified under the conditions stated in said contract, what she should have done is simply to ask for a refund of the premium that she paid. It was further argued by the trial court that the ruling calling for a liberal interpretation of an insurance contract in favor of the insured and strictly against the insurer may not be applied in the present case in view of the peculiar facts and circumstances obtaining therein.We REVERSE the judgment of the trial court. The age of the insured Carmen 0. Lapuz was not concealed to the insurance company. Her application for insurance coverage which was on a printed form furnished by private respondent and which contained very few items of information clearly indicated her age of the time of filing the same to be almost 65 years of age. Despite such information which could hardly be overlooked in the application form, considering its prominence thereon and its materiality to the coverage applied for, the respondent insurance corporation received her payment of premium and issued the corresponding certificate of insurance without question. The accident which resulted in the death of the insured, a risk covered by the policy, occurred on May 31, 1969 or FORTY-FIVE (45) DAYS after the insurance coverage was applied for. There was sufficient time for the private respondent to process the application and to notice

that the applicant was over 60 years of age and thereby cancel the policy on that ground if it was minded to do so. If the private respondent failed to act, it is either because it was willing to waive such disqualification; or, through the negligence or incompetence of its employees for which it has only itself to blame, it simply overlooked such fact. Under the circumstances, the insurance corporation is already deemed in estoppel. It inaction to revoke the policy despite a departure from the exclusionary condition contained in the said policy constituted a waiver of such condition, as was held in the case of "Que Chee Gan vs. Law Union Insurance Co., Ltd.,", 98 Phil. 85. This case involved a claim on an insurance policy which contained a provision as to the installation of fire hydrants the number of which depended on the height of the external wan perimeter of the bodega that was insured. When it was determined that the bodega should have eleven (11) fire hydrants in the compound as required by the terms of the policy, instead of only two (2) that it had, the claim under the policy was resisted on that ground. In ruling that the said deviation from the terms of the policy did not prevent the claim under the same, this Court stated the following:We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that knowing fully an that the number of hydrants demanded therein never existed from the very beginning, the appellant nevertheless issued the policies in question subject to such warranty, and received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured to allow appellant to claim now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective.The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Que Chee Gan and two others nearby, owned by the municipality of Tabaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made it moreover rendered probable by its being a prerequisite for the fixing of the

discount on the premium to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See"'Scale of Allowances" to which the policies were expressly made subject). The law, supported by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the known facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to execute a valid contract in return for the premium received; and when the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken is money without consideration.' (29 Am. Jur., Insurance, section 807, at pp. 611-612.)The reason for the rule is not difficult to find.The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to be abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the premium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543544).A similar view was upheld in the case of Capital Insurance & Surety Co., Inc. vs. Plastic Era Co., Inc., 65 SCRA 134, which involved a violation of the provision of the policy requiring the payment of premiums before the insurance shall become effective. The

company issued the policy upon the execution of a promissory note for the payment of the premium. A check given subsequent by the insured as partial payment of the premium was dishonored for lack of funds. Despite such deviation from the terms of the policy, the insurer was held liable.Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the insurance premium within thirty (30) days from the effective date of policy. By so doing, it has impliedly agreed to modify the tenor of the insurance policy and in effect, waived the provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the insurance policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted the promissory note in payment of the premium. This rendered the policy immediately operative on the date it was delivered. The view taken in most cases in the United States:... is that although one of conditions of an insurance policy is that "it shall not be valid or binding until the first premium is paid", if it is silent as to the mode of payment, promissory notes received by the company must be deemed to have been accepted in payment of the premium. In other words, a requirement for the payment of the first or initial premium in advance or actual cash may be waived by acceptance of a promissory note...WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. In lieu thereof, the private respondent insurance corporation is hereby ordered to pay to the petitioner the sum of TEN THOUSAND (P10,000.00) PESOS as proceeds of Insurance Certificate No. 128866 with interest at the legal rate from May 31, 1969 until fully paid, the further sum of TWO THOUSAND (P2,000.00) PESOS as and for attorney's fees, and the costs of suit.

G.R. No. 48049 June 29, 1989EMILIO TAN, JUANITO TAN, ALBERTO TAN and ARTURO TAN, petitioners, vs.THE COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondents.O.F. Santos & P.C. Nolasco for petitioners.Ferry, De la Rosa and Associates for private respondent. GUTIERREZ, JR., J.:This is a petition for review on certiorari of the Court of Appeals' decision affirming the decision of the Insurance Commissioner which dismissed the petitioners' complaint against respondent Philippine American Life Insurance Company for the recovery of the proceeds from their late father's policy. The facts of the case as found by the Court of Appeals are:Petitioners appeal from the Decision of the Insurance Commissioner dismissing herein petitioners' complaint against respondent Philippine American Life Insurance Company for the recovery of the proceeds of Policy No. 1082467 in the amount of P 80,000.00.On September 23,1973, Tan Lee Siong, father of herein petitioners, applied for life insurance in the amount of P 80,000.00 with respondent company. Said application was approved and Policy No. 1082467 was issued effective November 6,1973, with petitioners the beneficiaries thereof (Exhibit A).On April 26,1975, Tan Lee Siong died of hepatoma (Exhibit B). Petitioners then filed with respondent company their claim for the proceeds of the life insurance policy. However, in a letter dated September 11, 1975, respondent company denied petitioners' claim and rescinded the policy by reason of the alleged misrepresentation and concealment of material facts made by the deceased Tan Lee Siong in his application for insurance (Exhibit 3). The premiums paid on the policy were thereupon refunded .Alleging that respondent company's refusal to pay them the proceeds of the policy was unjustified and unreasonable, petitioners filed on November 27, 1975, a complaint against the former with the Office of the Insurance Commissioner, docketed as I.C. Case No. 218.After hearing the evidence of both parties, the Insurance Commissioner rendered judgment on August 9, 1977, dismissing petitioners' complaint. (Rollo, pp. 91-92)The Court of Appeals dismissed ' the petitioners' appeal from the

Insurance Commissioner's decision for lack of meritHence, this petition.The petitioners raise the following issues in their assignment of errors, to wit:A. The conclusion in law of respondent Court that respondent insurer has the right to rescind the policy contract when insured is already dead is not in accordance with existing law and applicable jurisprudence.B. The conclusion in law of respondent Court that respondent insurer may be allowed to avoid the policy on grounds of concealment by the deceased assured, is contrary to the provisions of the policy contract itself, as well as, of applicable legal provisions and established jurisprudence.C. The inference of respondent Court that respondent insurer was misled in issuing the policy are manifestly mistaken and contrary to admitted evidence. (Rollo, p. 7)The petitioners contend that the respondent company no longer had the right to rescind the contract of insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of action.The contention is without merit.The pertinent section in the Insurance Code provides:Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract.After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent.According to the petitioners, the Insurance Law was amended and the second paragraph of Section 48 added to prevent the insurance company from exercising a right to rescind after the death of the insured.The so-called "incontestability clause" precludes the insurer from raising the defenses of false representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least two years during the insured's lifetime. The phrase "during the lifetime"

found in Section 48 simply means that the policy is no longer considered in force after the insured has died. The key phrase in the second paragraph of Section 48 is "for a period of two years."As noted by the Court of Appeals, to wit:The policy was issued on November 6,1973 and the insured died on April 26,1975. The policy was thus in force for a period of only one year and five months. Considering that the insured died before the two-year period had lapsed, respondent company is not, therefore, barred from proving that the policy is void ab initio by reason of the insured's fraudulent concealment or misrepresentation. Moreover, respondent company rescinded the contract of insurance and refunded the premiums paid on September 11, 1975, previous to the commencement of this action on November 27,1975. (Rollo, pp. 99-100)xxx xxx xxxThe petitioners contend that there could have been no concealment or misrepresentation by their late father because Tan Lee Siong did not have to buy insurance. He was only pressured by insistent salesmen to do so. The petitioners state:Here then is a case of an assured whose application was submitted because of repeated visits and solicitations by the insurer's agent. Assured did not knock at the door of the insurer to buy insurance. He was the object of solicitations and visits.Assured was a man of means. He could have obtained a bigger insurance, not just P 80,000.00. If his purpose were to misrepresent and to conceal his ailments in anticipation of death during the two-year period, he certainly could have gotten a bigger insurance. He did not.Insurer Philamlife could have presented as witness its Medical Examiner Dr. Urbano Guinto. It was he who accomplished the application, Part II, medical. Philamlife did not.Philamlife could have put to the witness stand its Agent Bienvenido S. Guinto, a relative to Dr. Guinto, Again Philamlife did not. (pp. 138139, Rollo)xxx xxx xxxThis Honorable Supreme Court has had occasion to denounce the pressure and practice indulged in by agents in selling insurance. At one time or another most of us have been subjected to that pressure, that practice. This court took judicial cognizance of the whirlwind pressure of insurance selling-especially of the agent's practice of 'supplying the information, preparing and answering

the application, submitting the application to their companies, concluding the transactions and otherwise smoothing out all difficulties.We call attention to what this Honorable Court said in Insular Life v. Feliciano, et al., 73 Phil. 201; at page 205:It is of common knowledge that the selling of insurance today is subjected to the whirlwind pressure of modern salesmanship.Insurance companies send detailed instructions to their agents to solicit and procure applications.These agents are to be found all over the length and breadth of the land. They are stimulated to more active efforts by contests and by the keen competition offered by the other rival insurance companies.They supply all the information, prepare and answer the applications, submit the applications to their companies, conclude the transactions, and otherwise smooth out all difficulties.The agents in short do what the company set them out to do.The Insular Life case was decided some forty years ago when the pressure of insurance salesmanship was not overwhelming as it is now; when the population of this country was less than one-fourth of what it is now; when the insurance companies competing with one another could be counted by the fingers. (pp. 140-142, Rollo)xxx xxx xxxIn the face of all the above, it would be unjust if, having been subjected to the whirlwind pressure of insurance salesmanship this Court itself has long denounced, the assured who dies within the two-year period, should stand charged of fraudulent concealment and misrepresentation." (p. 142, Rollo)The legislative answer to the arguments posed by the petitioners is the "incontestability clause" added by the second paragraph of Section 48.The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the policy, whether or not, the insured still lives within such period. After two years, the defenses of concealment or misrepresentation, no matter how patent or well founded, no longer lie. Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability. The petitioners' interpretation would give rise to the incongruous situation where the beneficiaries of an insured who dies right after taking out and paying for a life insurance policy, would be allowed

to collect on the policy even if the insured fraudulently concealed material facts.The petitioners argue that no evidence was presented to show that the medical terms were explained in a layman's language to the insured. They state that the insurer should have presented its two medical field examiners as witnesses. Moreover, the petitioners allege that the policy intends that the medical examination must be conducted before its issuance otherwise the insurer "waives whatever imperfection by ratification."We agree with the Court of Appeals which ruled:On the other hand, petitioners argue that no evidence was presented by respondent company to show that the questions appearing in Part II of the application for insurance were asked, explained to and understood by the deceased so as to prove concealment on his part. The same is not well taken. The deceased, by affixing his signature on the application form, affirmed the correctness of all the entries and answers appearing therein. It is but to be expected that he, a businessman, would not have affixed his signature on the application form unless he clearly understood its significance. For, the presumption is that a person intends the ordinary consequence of his voluntary act and takes ordinary care of his concerns. [Sec. 5(c) and (d), Rule 131, Rules of Court].The evidence for respondent company shows that on September 19,1972, the deceased was examined by Dr. Victoriano Lim and was found to be diabetic and hypertensive; that by January, 1973, the deceased was complaining of progressive weight loss and abdominal pain and was diagnosed to be suffering from hepatoma, (t.s.n. August 23, 1976, pp. 8-10; Exhibit 2). Another physician, Dr. Wenceslao Vitug, testified that the deceased came to see him on December 14, 1973 for consolation and claimed to have been diabetic for five years. (t.s.n., Aug. 23,1976, p. 5; Exhibit 6) Because of the concealment made by the deceased of his consultations and treatments for hypertension, diabetes and liver disorders, respondent company was thus misled into accepting the risk and approving his application as medically standard (Exhibit 5- C) and dispensing with further medical investigation and examination (Exhibit 5-A). For as long as no adverse medical history is revealed in the application form, an applicant for insurance is presumed to be healthy and physically fit and no further medical investigation or examination is conducted by

respondent company. (t.s.n., April 8,1976, pp. 6-8). (Rollo, pp. 96-98)There is no strong showing that we should apply the "fine print" or "contract of adhesion" rule in this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361 [1978]). The petitioners cite:It is a matter of common knowledge that large amounts of money are collected from ignorant persons by companies and associations which adopt high sounding titles and print the amount of benefits they agree to pay in large black-faced type, following such undertakings by fine print conditions which destroy the substance of the promise. All provisions, conditions, or exceptions which in any way tend to work a forfeiture of the policy should be construed most strongly against those for whose benefit they are inserted, and most favorably toward those against whom they are meant to operate. (Trinidad v. Orient Protective Assurance Assn., 67 Phil. 184)There is no showing that the questions in the application form for insurance regarding the insured's medical history are in smaller print than the rest of the printed form or that they are designed in such a way as to conceal from the applicant their importance. If a warning in bold red letters or a boxed warning similar to that required for cigarette advertisements by the Surgeon General of the United States is necessary, that is for Congress or the Insurance Commission to provide as protection against high pressure insurance salesmanship. We are limited in this petition to ascertaining whether or not the respondent Court of Appeals committed reversible error. It is the petitioners' burden to show that the factual findings of the respondent court are not based on substantial evidence or that its conclusions are contrary to applicable law and jurisprudence. They have failed to discharge that burden.WHEREFORE, the petition is hereby DENIED for lack of merit. The questioned decision of the Court of Appeals is AFFIRMED.SO ORDERED.

G.R. No. L-5715 December 20, 1910E. M. BACHRACH, plaintiff-appellee, vs.BRITISH AMERICAN ASSURANCE COMPANY, a corporation, defendant-appellant.Haussermann, Ortigas, Cohn and Fisher, for appellantKincaid & Hurd and Thomas L. Hartigan, for appellee. JOHNSON, J.:On the 13th of July, 1908, the plaintiff commenced an action against the defendant to recover the sum of P9,841.50, the amount due, deducting the salvage, upon the following fire insurance policy issued by the defendant to the plaintiff:[Fire policy No. 3007499.]This policy of insurance witnesseth, that E. M. Bachrach, esq., Manila (hereinafter called the insured), having paid to the undersigned, as authorized agent of the British American Assurance Company (hereinafter called the company), the sum of two thousand pesos Philippine currency, for insuring against loss or damage by fire, as hereinafter mentioned, the property hereinafter described, in the sum of several sums following, viz:Ten thousand pesos Philippine currency, on goods, belonging to a general furniture store, such as iron and brass bedsteads, toilet tables, chairs, ice boxes, bureaus, washstands, mirrors, and sea-grass furniture (in accordance with warranty "D" of the tariff attached hereto) the property of the assured, in trust, on commission or for which he is responsible, whilst stored in the ground floor and first story of house and dwelling No. 16 Calle Martinez, district 3, block 70, Manila, built, ground floor of stone and or brick, first story of hard wood and roofed with galvanized iron — bounded in the front by the said calle, on one side by Calle David and on the other two sides by buildings of similar construction and occupation.Co-insurance allowed, particulars of which to be declared in the event of loss or claim.The company hereby agrees with the insured (but subject to the conditions on the back hereof, which are to be taken as a part of this policy) that if the property above described, or any part thereof, shall be destroyed or damaged by fire, at any time between the 21st day of February, 1908, and 4 o'clock in the afternoon of the 21st day of February, 1909, or (in case of the renewal of this policy) at any time afterwards, so long as, and during the period in respect of which the insured shall have paid to

the company, and they shall have accepted, the sum required for the renewal of this policy, the company will, out of their capital stock, and funds, pay or make good to the insured the value of the property so destroyed, or the amount of such damage thereto, to any amount not exceeding, in respect of each or any of the several matters above specified, the sum set opposite thereto, respectively, and not exceeding in the whole the sum of ten thousand pesos, and also not exceeding, in any case, the amount of the insurable interest therein of the insured at the time of the happening of such fire.In witness whereof, the British American Assurance Company has accused these presents to be signed this 21st day of February, in the year of our Lord 1908.For the company.W. F. STEVENSON & Co. LTD.,"By...............................................,"Manager Agents."And indorsed on the back the following:The within policy and includes a "Calalac" automobile to the extent of (P1,250) twelve hundred and fifty pesos Philippine currency.Memo: Permission is hereby granted for the use of gasoline not to exceed 10 gallons for the above automobile, but only whilst contained in the reservoir of the car. It is further warranted that the car be neither filled nor emptied in the within-described building or this policy be null and void.Manila, 27th February, 1908."W. F. STEVENSON & Co. LTD.,"By.......................................................,"Manager Agents."The defendant answered the complaint, admitting some of the facts alleged by the plaintiff and denying others. The defendant also alleged certain facts under which it claimed that it was released from all obligations whatever under said policy. These special facts are as follows:First. That the plaintiff maintained a paint and varnish shop in the said building where the goods which were insured were stored.Second. That the plaintiff transferred his interest in and to the property covered by the policy to H. W. Peabody & Co. to secure certain indebtedness due and owing to said company, and also that the plaintiff had transferred his interest in certain of the goods covered by the said policy to one Macke, to secure certain obligations assumed by the said Macke for and on behalf of the insured. That the sanction of the said defendant had not been

obtained by the plaintiff, as required by the said policy.Third. That the plaintiff, on the 18th of April, 1908, and immediately preceding the outbreak of the alleged fire, willfully placed a gasoline can containing 10 gallons of gasoline in the upper story of said building in close proximity to a portion of said goods, wares, and merchandise, which can was so placed by the plaintiff as to permit the gasoline to run on the floor of said second story, and after so placing said gasoline, he, the plaintiff, placed in close proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire.Fourth. That the plaintiff made no proof of the loss within the time required by condition five of said policy, nor did the insured file a statement with he municipal or any other judge or court of the goods alleged to have been in said building at the time of the alleged fire, nor of the goods saved, nor the loss suffered.The plaintiff, after denying nearly all of the facts set out in the special answer of the defendant, alleged:First. That he had been acquitted in a criminal action against him, after a trial duly and regularly had, upon a charge of arson, based upon the same alleged facts set out in the answer of the defendant.Second. That her had made no proof of the loss set up in his complaint for the reason that immediately after he had, on the 20th of April, 1908, given the defendant due notice in writing of said loss, the defendant, on the 21st of April, 1908, and thereafter on other occasions, had waived all right to require proof of said loss by denying all liability under the policy and by declaring said policy to be null and void.After hearing the evidence adduced during the trial of the cause, the lower court found that the defendant was liable to the plaintiff and rendered a judgment against the defendant for the sum of P9,841.50, with interest for a period of one year at 6 per cent, making a total of P10,431.99, with costs.From that decision the defendant appealed and made the following assignments of error:1. The court erred in failing to hold that the use of the building, No. 16 Calle Martinez, as a paint and varnish shop annulled the policy of insurance.2. The court erred in failing to hold the execution of the chattel mortgages without the knowledge and consent of the insurance company annulled the policy of insurance.

3. The court erred in holding that the keeping of gasoline and alcohol not in bottles in the building No. 16 Calle Martinez was not such a violation of the conditions of the policy as to render the same null and void.4. The court erred in failing to find as a fact that E. M. Bachrach, the insured, willfully placed a gasoline can containing about 10 gallons of gasoline in the upper story of said building, No. 16 Calle Martinez, in close proximity to a portion of the goods, wares, and merchandise stored therein, and that said can was so placed by said Bachrach as to permit the gasoline to run on the floor of said second story.5. The court erred in failing to find as a fact that E. M. Bachrach, after placing said gasoline can in close proximity to the goods, wares, and merchandise covered by the policy of insurance, the he (Bachrach) placed in close proximity to said escaping gasoline a lighted lamp containing alcohol, thereby greatly increasing the risk of fire.6. The court erred in holding that the policy of insurance was in force at the time of said fire, and that the acts or omissions on the part of the insured which cause, or tended to cause, the forfeiture of the policy, were waived by the defendant.7. The court erred in holding the defendant liable for the loss under the policy.lawphil.net8. The court erred in refusing to deduct from the loss sustained by Bachrach the value of the automobile, which was saved without damage.9. The court erred in refusing to grant the motion for a new trial.10. The court erred in refusing to enter judgment in favor of the defendant and against the plaintiff.With reference to the first above assignment of error, the lower court in its decision said:It is claimed that either gasoline or alcohol was kept in violation of the policy in the bodega containing the insured property. The testimony on this point is somewhat conflicting, but conceding all of the defendant's claims, the construction given to this claim by American courts would not justify the forfeiture of the policy on that ground. The property insured consisted mainly of household furniture kept for the purpose of sale. The preservation of the furniture in a salable condition by retouching or otherwise was incidental to the business. The evidence offered by the plaintiff is to the effect that alcohol was used in preparing varnish for the

purpose of retouching, though he also says that the alcohol was kept in store and not in the bodega where the furniture was. It is well settled that the keeping of inflammable oils on the premises, though prohibited by the policy, does not void it if such keeping is incidental to the business. Thus, where a furniture factory keeps benzine for the purposes of operation (Davis vs. Pioneer Furniture Company, 78 N. W. Rep., 596; Faust vs. American Fire Insurance Company, 91 Wis., 158), or where it is used for the cleaning machinery (Mears vs. Humboldt Insurance Company, 92 Pa. St., 15; 37 Am. Rep., 647), the insurer can not on that ground avoid payment of loss, though the keeping of the benzine on the premises is expressly prohibited. These authorities also appear sufficient to answer the objection that the insured automobile contained gasoline and that the plaintiff on one occasion was seen in the bodega with a lighted lamp. The first was incidental to the use of the insured article and the second being a single instance falls within the doctrine of the case last cited.It may be added that there was no provision in the policy prohibiting the keeping of paints and varnishes upon the premises where the insured property was stored. If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.With reference to the second above assignment of error, the defendant and appellant contends that the lower court erred in failing to hold that the execution of the said chattel mortgage, without the knowledge and consent of the insurance company and without receiving the sanction of said company, annulled the said policy of insurance.With reference to this assignment of error, upon reading the policy of insurance issued by the defendant to the plaintiff, it will be noted that there is no provision in said policy prohibiting the plaintiff from placing a mortgage upon the property insured, but, admitting that such a provision was intended, we think the lower court has completely answered this contention of the defendant. He said, in passing upon this question as it was presented:It is claimed that the execution of a chattel mortgage on the insured property violated what is known as the "alienation clause," which is now found in most policies, and which is expressed in the policies involved in cases 6496 and 6497 by a purchase imposing forfeiture if the interest in the property pass from the insured. (Cases 6496 and 6497, in which are involved other action against

other insurance companies for the same loss as in the present action.)This clause has been the subject of a vast number of judicial decisions (13 Am. & Eng. Encyc. of Law, 2d ed., pp. 239 et seq.), and it is held by the great weight of authority that the interest in property insured does not pass by the mere execution of a chattel mortgage and that while a chattel mortgage is a conditional sale, there is no alienation within the meaning of the insurance law until the mortgage acquires a right to take possession by default under the terms of the mortgage. No such right is claimed to have accrued in the case at bar, and the alienation clause is therefore inapplicable.With reference to the third assignment of error above noted, upon a reading of the decision of the lower court it will be found that there is nothing in the decision of the lower court relating to the facts stated in this assignment of error, neither is there any provision in the policy relating to the facts alleged in said assignment of error.Assignment of error numbers 4 and 5 above noted may be considered together.The record discloses that some time prior to the commencement of this present action, a criminal action was commenced against the plaintiff herein in the Court of First Instance of the city of Manila, in which he was charged with willfully and maliciously burning the property covered by the policy in the present case. At the conclusion of the criminal action and after hearing the evidence adduced during the trial, the lower court, with the assistance of two assessors, found that the evidence was insufficient to show beyond peradventure of doubt that the defendant was guilty of the crime. The evidence adduced during the trial of the criminal cause was introduced as evidence in the present cause. While the evidence shows some very peculiar and suspicious circumstances concerning the burning of the goods covered by the said policy, yet, nevertheless, in view of the findings of the lower court and in view of the apparent conflict in the testimony, we can not find that there is a preponderance of evidence showing that the plaintiff did actually set fire or cause fire to be set to the goods in question. The lower court, in discussing this question, said:As to the claim that the loss occurred through the voluntary act of the insured, we consider it unnecessary to review the evidence in

detail. That was done by another branch of this court in disposing of the criminal prosecution brought against the insured, on the same ground, based mainly on the same evidence. And regardless of whether or not the judgment in that proceeding is res adjudicata as to anything here, we are at least of the opinion that the evidence to establish this defense should not be materially less convincing than that required in order to convict the insured of the crime of arson. (Turtell vs. Beamount, 25 Rev. Rep., 644.) In order to find that the defense of incendiarism was established here, we would be obliged, therefore, in effect to set aside the findings of the judge and assessors in the criminal cause, and this we would be loath to do even though the evidence now produced were much stronger than it is.With reference to the sixth assignment of error above noted, to wit:itc@alf That the court erred in holding that the policy of insurance was in force at the time of said fire and that the acts or omissions on the part of the insured which caused or tended to cause a forfeiture of the policy were waived by the defendant, the lower court, in discussing this question, said:Regardless of the question whether the plaintiff's letter of April 20 (Exhibit B) was a sufficient compliance with the requirement that he furnish notice of loss, the fact remains that on the following day the insurers replied by a letter (Exhibit C) declaring that the "policies were null and void," and in effect denying liability. It is well settled by a preponderance of authorities that such a denial is a waiver of notice of loss, because if the "policies are null and void," the furnishing of such notice would be vain and useless. (13 Am. & Eng. Encyc. of Law, 347, 348, 349.) Besides, "immediate notice" is construed to mean only within a reasonable time.Much the same may be said as to the objection that the insured failed to furnish to the insurers his books and papers or to present a detailed statement to the "juez municipal," in accordance with article 404 of the Code of Commerce. The last-named provision is similar to one appearing in many American policies requiring a certificate from a magistrate nearest the loss regarding the circumstance thereof. A denial of liability on other grounds waives this requirement (O'Niel vs. Buffalo Fire Insurance Company, 3 N. Y., 122; Peoria Marine Ins. Co. vs. Whitehill, 25 Ill., 382), as well as that relating to the production of books and papers (Ga. Home Ins. Co. vs. Goode & Co., 95 Va., 751; 66 Jur. Civ., 16). Besides, the insured might have had difficulty in attempting to comply with this

clause, for there is no longer an official here with the title of "juez municipal."Besides the foregoing reasons, it may be added that there was no requirement in the policy in question that such notice be given.With reference to the assignments of error numbers 7, 9, and 10, they are too general in their character to merit consideration.With reference to the eight assignment of error above noted, the defendant and appellant contends that he was entitled to have the amount of his responsibility reduced by the full value (P1,250) of the said automobile.It does not positively appear of record that the automobile in question was not included in the other policies. It does appear that the automobile was saved and was considered as a part of the salvaged. It is alleged that the salvage amounted to P4,000, including the automobile. This amount (P4,000) was distributed among the different insurers and the amount of their responsibility was proportionately reduced. The defendant and appellant in the present case made no objection at any time in the lower court to that distribution of the salvage. The claim is now made for the first time. No reason is given why the objection was not made at the time of the distribution of the salvage, including the automobile, among all of the insurers. The lower court had no opportunity to pass upon the question now presented for the first time. The defendant stood by and allowed the other insurers to share in the salvage, which he claims now wholly belonged to him. We think it is now too late to raise the question.For all the foregoing reasons, we are of the opinion that the judgment of the lower court should be affirmed, and it is hereby ordered that judgment be entered against the defendant and in favor of the plaintiff for the sum of P9,841.50, with interest at the rate of 6 per cent from the 13th of July, 1908, with costs. So ordered.

G.R. No. L-15862             July 31, 1961PAULO ANG and SALLY C. ANG, plaintiffs-appellees, vs.FULTON FIRE INSURANCE CO., ET AL., defendants.FULTON FIRE INSURANCE CO., defendant-appellant.Santiago Ranada for plaintiffs-appellees.Benjamin S. Valte for defendant-appellant.LABRADOR, J.:The present action was instituted by the spouses Paulo Ang and Sally C. Ang against the Fulton Fire Insurance Company and the Paramount Surety and Insurance Company, Inc. to recover from them the face value of a fire insurance policy issued in plaintiffs' favor covering a store owned and operated by them in Laoag, Ilocos Norte. From a judgment of the court ordering the defendant Fulton Fire Insurance Co. to pay the plaintiffs the sum of P10,000.00, with interest, and an additional sum of P2,000.00 as attorney's fees, and costs, the defendants have appealed directly to this Court.On September 9, 1953, defendant Fulton Fire Insurance Company issued a policy No. F-4730340, in favor of P. & S Department Store (Sally C. Ang) over stocks of general merchandise, consisting principally of dry goods, contained in a building occupied by the plaintiffs at Laoag, Ilocos Norte. The premium is P500.00 annually. The insurance was issued for one year, but the same was renewed for another year on September 31, 1954. On December 17, 1954, the store containing the goods insured was destroyed by fire. On December 30, following, plaintiffs executed the first claim form. The claim together with all the necessary papers relating thereto, were forwarded to he Manila Adjustment Company, the defendants' adjusters and received by the latter on Jane 8, 1955. On January 12, 1955, the Manila Adjustment Company accepted receipt of the claim and requested the submission of the books of accounts of the insured for the year 1953-1954 and a clearance from the Philippine Constabulary and the police. On April 6, 1956, the Fulton Fire Insurance Company wrote the plaintiffs that their claim was denied. This denial of the claim was received by the plaintiffs on April 19, 1956. On January 13, 1955, plaintiff Paulo Ang and ten others were charged for arson in Criminal Case No. 1429 in the Justice of the Peace Court of Laoag, Ilocos Norte. The case was remanded for trial to the Court of First Instance of Ilocos Norte and there docketed as Criminal Case No. 2017. The said court in a decision dated December 9, 1957, acquitted plaintiff

Paulo Ang of the crime of arson.The present action was instituted on May 5, 1958. The action was originally instituted against both the Fulton Fire Insurance Company and the Paramount Surety and Insurance Company, Inc., but on June 16, 1958, upon motion of the Paramount Surety, the latter was dropped from the complaint.On May 26, 1958, the defendant Fulton Fire Insurance Company filed an answer to the complaint, admitting the existence of the contract of insurance, its renewal and the loss by fire of the department store and the merchandise contained therein, but denying that the loss by the fire was accidental, alleging that it was occasioned by the willful act of the plaintiff Paulo Ang himself. It claims that under paragraph 13 of the policy, if the loss or damage is occasioned by the willful act of the insured, or if the claim is made and rejected but no action is commenced within 12 months after such rejection, all benefits under the policy would be forfeited, and that since the claim of the plaintiffs was denied and plaintiffs received notice of denial on April 18, 1956, and they brought the action only on May 5, 1958, all the benefits under the policy have been forfeited.On February 12, 1959, plaintiffs filed a reply to the above answer of the Fulton Fire Insurance, alleging that on May 11, 1956, plaintiffs had instituted Civil Case No. 2949 in the Court of First Instance of Manila, to assert the claim; that this case was dismissed without prejudice on September 3, 1957 and that deducting the period within which said action was pending, the present action was still within the 12 month period from April 12, 1956. The court below held that the bringing of the action in the Court of First Instance of Manila on May 11, 1956, tolled the running of the 12 month period within which the action must be filed. Said the court on this point:True, indeed, plaintiffs committed a procedural mistake in first suing the agent instead of its principal, the herein defendant, as correctly pointed out by counsel for the defendant, for 'Un agente residente de una compania de seguros extranjera que comercia en las Islas Filipinos no es responsable como mandante ni como mandatario, en virtud de contratas de seguro expendidos a nombre de la compania', (Macias & Co. vs. Warner, Barnes & Co., 43 Phil. 161). But the mistake being merely procedural, and the defendant not having been misled by the error, 'There is nothing sacred about process or pleadings, their forms or contents. Their

sole purpose is to facilitate the application of justice to the rival claims of contending parties. They were created not to hinder and delay, but to facilitate and promote the administration of justice (Alonso vs. Villamor, 16 Phil 578.)The complaint, Exh. 'C', was dismissed by the Court without prejudice (Exh. 'H-1') on September 3, 1957, and motion for reconsideration dated September 21, 1957. The instant complaint was filed on May 8, 1958. The Rules of Court (See 132 thereof) is applicable in the computation of time. Now, as correctly pointed out by the plaintiffs' counsel, by simple mathematical computation, the present action was filed leas thin nine (9) months after the notice of rejection received by plaintiffs on April 19, 1956, because the filing of the original complaint stopped the running of the period." (Decision, pp. 42-43, R.O.A.)In view of the reasons thus above quoted, the court rendered decision in favor of the plaintiffs.On the appeal before this Court, defendant-appellant argues that the court below erred in holding that the filing of the previous suit tolled or suspended the running of the prescriptive period.The clause subject of the issue is paragraph 13 of the policy, which reads as follows:13. If the claim be in any respect fraudulent, or if any false declaration is made or used in support thereof, or if any fraudulent means or devices are used by the Insured or any one acting on his behalf to obtain any benefit under this Policy, or, if the loss or damage be occasioned by the willful act or with connivance of the Insured, or, if the claim be made and rejected and an action or suit be not commenced within twelve months after such rejection or (in case of arbitration place in pursuance of the 18th condition of this Policy) within twelve months after the arbitrator or arbitrators or umpire shall have made their award, all benefits under this Policy shall be forfeited. (Emphasis supplied). (Decision. p. 10, R.O.A.).The appellant cites in support of its contention the cases of E. Macias & Co. vs. Warner, Barnes & Co., Ltd., 43 Phil 155; E. Macias & Co. vs. China Fire Insurance Co., 46 Phil. 345 and Castillo etc. vs. Metropolitan Insurance Co., 47 O.G. (September, 1951).In answer to appellant's contention, counsel for appellees contend that the action of the plaintiffs against the defendant had not yet prescribed at the time of the bringing of the action, because the period of prescription was interrupted by the filing of the first action against the Paramount Surety & Insurance Co., in

accordance with Article 1155 of the Civil Code. Counsel further argues that the basis of prescription of an action is the abandonment by a person of his right of action or claim, so that any act of said person tending to show his intention not to abandon his right of action or claim, as the filing of the previous action in the case at bar, interrupts the period of prescription. Furthermore, counsel argues, the dismissal of the previous action is without prejudice, which means that plaintiffs have the right to file another complaint against the principal.The basic error committed by the trial court is its view that the filing of the action against the agent of the defendant company was "merely a procedural mistake of no significance or consequence, which may be overlooked." The condition contained in the insurance policy that claims must be presented within one year after rejection is not merely a procedural requirement. The condition is an important matter, essential to a prompt settlement of claims against insurance companies, as it demands that insurance suits be brought by the insured while the evidence as to the origin and cause of destruction have not yet disappeared. It is in the nature of a condition precedent to the liability of the insurer, or in other terms, a resolutory cause, the purpose of which is to terminate all liabilities in case the action is not filed by the insured within the period stipulated.The bringing of the action against the Paramount Surety & Insurance Company, the agent of the defendant Company cannot have any legal effect except that of notifying the agent of the claim. Beyond such notification, the filing of the action can serve no other purpose. There is no law giving any effect to such action upon the principal. Besides, there is no condition in the policy that the action must be filed against the agent, and this Court can not by interpretation, extend the clear scope of the agreement beyond what is agreed upon by the parties.The case of E. Macias & Co. vs. China Fire Insurance Co. has settled the issue presented by the appellees in the case at bar definitely against their claim. In that case, We declared that the contractual station in an insurance policy prevails over the statutory limitation, as well as over the exceptions to the statutory limitations that the contract necessarily supersedes the statute (of limitations) and the limitation is in all phases governed by the former. (E. Macias & Co. vs. China Fire Insurance & Co., 46 Phil. pp. 345-353). As stated in said case and in accordance with the

decision of the Supreme Court of the United States in Riddlesbarger vs. Hartford Fire Insurance Co. (7 Wall., 386), the rights of the parties flow from the contract of insurance, hence they are not bound by the statute of limitations nor by exemptions thereto. In the words of our own law, their contract is the law between the parties, and their agreement that an action on a claim denied by the insurer must be brought within one year from the denial, governs, not the rules on the prescription of actions.The judgment appealed from is hereby set aside and the case dismissed, with costs against the plaintiffs-appellees.

G.R. No. 119176      March 19, 2002COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents.KAPUNAN, J.:This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.The facts of the case are undisputed.Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured.In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00. Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book value.1âwphi1.nêtSubsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as follows:On Policies Issued:Total policy issued during the year P1,360,054,000.00Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 multiplied by

 P 2,380,094.50

P0.35)Less: Payment P 1,915,495.75Deficiency P 464,598.75Add: Compromise Penalty 300.00

-----------------------TOTAL AMOUNT DUE & COLLECTIBLE P 464,898.75Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTA’s decision reads:WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn.SO ORDERED.1

Petitioner appealed the CTA’s decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision affirming the CTA’s decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals’ decision states:IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement.SO ORDERED.2

A motion for reconsideration of the decision having been denied,3

both the Commissioner of Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private

respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the Court of Appeals’ decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors:THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4

Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part:The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part:

Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy.Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order.The Court of Appeals sustained the CTA’s ruling that there was only one transaction involved in the issuance of the insurance policy and that the "automatic increase clause" is an integral part of that policy.The petition is impressed with merit.Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of insurance.The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a certain age.It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and the tax base for the computation of documentary stamp taxes

on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement.7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract.Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause because it was already determinable at the time the transaction was entered into and formed part of the policy.The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the insurance sold to which private respondent was liable for the payment of the documentary stamp tax.The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy."Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy.WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to the

increase in 1984 of the sum under the policy issued by respondent.1âwphi1.nêtSO ORDERED

G.R. No. L-66935 November 11, 1985ISABELA ROQUE, doing busines under the name and style of Isabela Roque Timber Enterprises and ONG CHIONG, petitioners, vs.HON. INTERMEDIATE APPELATE COURT and PIONEER INSURANCE AND SURETY CORPORATION, respondent. GUTIERREZ, JR., J.:This petition for certiorari asks for the review of the decision of the Intermediate Appellate Court which absolved the respondent insurance company from liability on the grounds that the vessel carrying the insured cargo was unseaworthy and the loss of said cargo was caused not by the perils of the sea but by the perils of the ship.On February 19, 1972, the Manila Bay Lighterage Corporation (Manila Bay), a common carrier, entered into a contract with the petitioners whereby the former would load and carry on board its barge Mable 10 about 422.18 cubic meters of logs from Malampaya Sound, Palawan to North Harbor, Manila. The petitioners insured the logs against loss for P100,000.00 with respondent Pioneer Insurance and Surety Corporation (Pioneer).On February 29, 1972, the petitioners loaded on the barge, 811 pieces of logs at Malampaya Sound, Palawan for carriage and delivery to North Harbor, Port of Manila, but the shipment never reached its destination because Mable 10 sank with the 811 pieces of logs somewhere off Cabuli Point in Palawan on its way to Manila. As alleged by the petitioners in their complaint and as found by both the trial and appellate courts, the barge where the logs were loaded was not seaworthy such that it developed a leak. The appellate court further found that one of the hatches was left open causing water to enter the barge and because the barge was not provided with the necessary cover or tarpaulin, the ordinary splash of sea waves brought more water inside the barge.On March 8, 1972, the petitioners wrote a letter to Manila Bay demanding payment of P150,000.00 for the loss of the shipment plus P100,000.00 as unrealized profits but the latter ignored the demand. Another letter was sent to respondent Pioneer claiming the full amount of P100,000.00 under the insurance policy but respondent refused to pay on the ground that its hability depended upon the "Total loss by Total Loss of Vessel only". Hence, petitioners commenced Civil Case No. 86599 against Manila Bay

and respondent Pioneer.After hearing, the trial court found in favor of the petitioners. The dispositive portion of the decision reads:FOR ALL THE FOREGOING, the Court hereby rendered judgment as follows:(a) Condemning defendants Manila Bay Lighterage Corporation and Pioneer Insurance and Surety Corporation to pay plaintiffs, jointly and severally, the sum of P100,000.00;(b) Sentencing defendant Manila Bay Lighterage Corporation to pay plaintiff, in addition, the sum of P50,000.00, plus P12,500.00, that the latter advanced to the former as down payment for transporting the logs in question;(c) Ordering the counterclaim of defendant Insurance against plaintiffs, dismissed, for lack of merit, but as to its cross-claim against its co-defendant Manila Bay Lighterage Corporation, the latter is ordered to reimburse the former for whatever amount it may pay the plaintiffs as such surety;(d) Ordering the counterclaim of defendant Lighterage against plaintiffs, dismissed for lack of merit;(e) Plaintiffs' claim of not less than P100,000.00 and P75,000.00 as exemplary damages are ordered dismissed, for lack of merits; plaintiffs' claim for attorney's fees in the sum of P10,000.00 is hereby granted, against both defendants, who are, moreover ordered to pay the costs; and(f) The sum of P150,000.00 award to plaintiffs, shall bear interest of six per cent (6%) from March 25, 1975, until amount is fully paid.Respondent Pioneer appealed to the Intermediate Appellate Court. Manila Bay did not appeal. According to the petitioners, the transportation company is no longer doing business and is without funds.During the initial stages of the hearing, Manila Bay informed the trial court that it had salvaged part of the logs. The court ordered them to be sold to the highest bidder with the funds to be deposited in a bank in the name of Civil Case No. 86599.On January 30, 1984, the appellate court modified the trial court's decision and absolved Pioneer from liability after finding that there was a breach of implied warranty of seaworthiness on the part of the petitioners and that the loss of the insured cargo was caused by the "perils of the ship" and not by the "perils of the sea". It ruled that the loss is not covered by the marine insurance policy.

After the appellate court denied their motion for reconsideration, the petitioners filed this petition with the following assignments of errors:ITHE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT IN CASES OF MARINE CARGO INSURANCE, THERE IS A WARRANTY OF SEAWORTHINESS BY THE CARGO OWNER.IITHE INTERMEDIATE APPELLATE COURT ERRED IN HOLDING THAT THE LOSS OF THE CARGO IN THIS CASE WAS CAUSED BY "PERILS OF THE SHIP" AND NOT BY "PERILS OF THE SEA."IIITHE INTERMEDIATE APPELLATE COURT ERRED IN NOT ORDERING THE RETURN TO PETITIONER OF THE AMOUNT OF P8,000.00 WHICH WAS DEPOSITED IN THE TRIAL COURT AS SALVAGE VALUE OF THE LOGS THAT WERE RECOVERED.In their first assignment of error, the petitioners contend that the implied warranty of seaworthiness provided for in the Insurance Code refers only to the responsibility of the shipowner who must see to it that his ship is reasonably fit to make in safety the contemplated voyage.The petitioners state that a mere shipper of cargo, having no control over the ship, has nothing to do with its seaworthiness. They argue that a cargo owner has no control over the structure of the ship, its cables, anchors, fuel and provisions, the manner of loading his cargo and the cargo of other shippers, and the hiring of a sufficient number of competent officers and seamen. The petitioners' arguments have no merit.There is no dispute over the liability of the common carrier Manila Bay. In fact, it did not bother to appeal the questioned decision. However, the petitioners state that Manila Bay has ceased operating as a firm and nothing may be recovered from it. They are, therefore, trying to recover their losses from the insurer.The liability of the insurance company is governed by law. Section 113 of the Insurance Code provides:In every marine insurance upon a ship or freight, or freightage, or upon any thing which is the subject of marine insurance, a warranty is implied that the ship is seaworthy.Section 99 of the same Code also provides in part.Marine insurance includes:(1) Insurance against loss of or damage to:

(a) Vessels, craft, aircraft, vehicles, goods, freights, cargoes, merchandise, ...From the above-quoted provisions, there can be no mistaking the fact that the term "cargo" can be the subject of marine insurance and that once it is so made, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo whether he be the shipowner or not.As we have ruled in the case of Go Tiaoco y Hermanos v. Union Insurance Society of Canton (40 Phil. 40):The same conclusion must be reached if the question be discussed with reference to the seaworthiness of the ship. It is universally accepted that in every contract of insurance upon anything which is the subject of marine insurance, a warranty is implied that the ship shall be seaworthy at the time of the inception of the voyage. This rule is accepted in our own Insurance Law (Act No. 2427, sec. 106). ...Moreover, the fact that the unseaworthiness of the ship was unknown to the insured is immaterial in ordinary marine insurance and may not be used by him as a defense in order to recover on the marine insurance policy.As was held in Richelieu and Ontario Nav. Co. v. Boston Marine, Inc., Co. (136 U.S. 406):There was no look-out, and both that and the rate of speed were contrary to the Canadian Statute. The exception of losses occasioned by unseaworthiness was in effect a warranty that a loss should not be so occasioned, and whether the fact of unseaworthiness were known or unknown would be immaterial.Since the law provides for an implied warranty of seaworthiness in every contract of ordinary marine insurance, it becomes the obligation of a cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. The shipper of cargo may have no control over the vessel but he has full control in the choice of the common carrier that will transport his goods. Or the cargo owner may enter into a contract of insurance which specifically provides that the insurer answers not only for the perils of the sea but also provides for coverage of perils of the ship.We are constrained to apply Section 113 of the Insurance Code to the facts of this case. As stated by the private respondents:In marine cases, the risks insured against are "perils of the sea" (Chute v. North River Ins. Co., Minn—214 NW 472, 55 ALR 933). The purpose of such insurance is protection against contingencies

and against possible damages and such a policy does not cover a loss or injury which must inevitably take place in the ordinary course of things. There is no doubt that the term 'perils of the sea' extends only to losses caused by sea damage, or by the violence of the elements, and does not embrace all losses happening at sea. They insure against losses from extraordinary occurrences only, such as stress of weather, winds and waves, lightning, tempests, rocks and the like. These are understood to be the "perils of the sea" referred in the policy, and not those ordinary perils which every vessel must encounter. "Perils of the sea" has been said to include only such losses as are of extraordinary nature, or arise from some overwhelming power, which cannot be guarded against by the ordinary exertion of human skill and prudence. Damage done to a vessel by perils of the sea includes every species of damages done to a vessel at sea, as distinguished from the ordinary wear and tear of the voyage, and distinct from injuries suffered by the vessel in consequence of her not being seaworthy at the outset of her voyage (as in this case). It is also the general rule that everything which happens thru the inherent vice of the thing, or by the act of the owners, master or shipper, shall not be reputed a peril, if not otherwise borne in the policy. (14 RCL on Insurance, Sec. 384, pp. 1203- 1204; Cia. de Navegacion v. Firemen's Fund Ins. Co., 277 US 66, 72 L. ed. 787, 48 S. Ct. 459).With regard to the second assignment of error, petitioners maintain, that the loss of the cargo was caused by the perils of the sea, not by the perils of the ship because as found by the trial court, the barge was turned loose from the tugboat east of Cabuli Point "where it was buffeted by storm and waves." Moreover, petitioners also maintain that barratry, against which the cargo was also insured, existed when the personnel of the tugboat and the barge committed a mistake by turning loose the barge from the tugboat east of Cabuli Point. The trial court also found that the stranding and foundering of Mable 10 was due to improper loading of the logs as well as to a leak in the barge which constituted negligence.On the contention of the petitioners that the trial court found that the loss was occasioned by the perils of the sea characterized by the "storm and waves" which buffeted the vessel, the records show that the court ruled otherwise. It stated:xxx xxx xxx

... The other affirmative defense of defendant Lighterage, 'That the supposed loss of the logs was occasioned by force majeure... "was not supported by the evidence. At the time Mable 10 sank, there was no typhoon but ordinary strong wind and waves, a condition which is natural and normal in the open sea. The evidence shows that the sinking of Mable 10 was due to improper loading of the logs on one side so that the barge was tilting on one side and for that it did not navigate on even keel; that it was no longer seaworthy that was why it developed leak; that the personnel of the tugboat and the barge committed a mistake when it turned loose the barge from the tugboat east of Cabuli point where it was buffeted by storm and waves, while the tugboat proceeded to west of Cabuli point where it was protected by the mountain side from the storm and waves coming from the east direction. ..."In fact, in the petitioners' complaint, it is alleged that "the barge Mable 10 of defendant carrier developed a leak which allowed water to come in and that one of the hatches of said barge was negligently left open by the person in charge thereof causing more water to come in and that "the loss of said plaintiffs' cargo was due to the fault, negligence, and/or lack of skill of defendant carrier and/or defendant carrier's representatives on barge Mable 10."It is quite unmistakable that the loss of the cargo was due to the perils of the ship rather than the perils of the sea. The facts clearly negate the petitioners' claim under the insurance policy. In the case of Go Tiaoco y Hermanos v. Union Ins. Society of Canton, supra, we had occasion to elaborate on the term "perils of the ship." We ruled:It must be considered to be settled, furthermore, that a loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the "peril of the ship." The insurer undertakes to insure against perils of the sea and similar perils, not against perils of the ship. As was well said by Lord Herschell in Wilson, Sons & Co. v. Owners of Cargo per the Xantho ([1887], 12 A. C., 503, 509), there must, in order to make the insurer liable, be some casualty, something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents

which may happen, not against events which must happen.In the present case the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly results from simple unseaworthiness than to that which result from the perils of the sea.xxx xxx xxxSuffice it to say that upon the authority of those cases there is no room to doubt the liability of the shipowner for such a loss as occurred in this case. By parity of reasoning the insurer is not liable; for generally speaking, the shipowner excepts the perils of the sea from his engagement under the bill of lading, while this is the very perils against which the insurer intends to give protection. As applied to the present case it results that the owners of the damaged rice must look to the shipowner for redress and not to the insurer.Neither can petitioners allege barratry on the basis of the findings showing negligence on the part of the vessel's crew.Barratry as defined in American Insurance Law is "any willful misconduct on the part of master or crew in pursuance of some unlawful or fraudulent purpose without the consent of the owners, and to the prejudice of the owner's interest." (Sec. 171, U.S. Insurance Law, quoted in Vance, Handbook on Law of Insurance, 1951, p. 929.)Barratry necessarily requires a willful and intentional act in its commission. No honest error of judgment or mere negligence, unless criminally gross, can be barratry. (See Vance on Law of Insurance, p. 929 and cases cited therein.)In the case at bar, there is no finding that the loss was occasioned by the willful or fraudulent acts of the vessel's crew. There was only simple negligence or lack of skill. Hence, the second assignment of error must likewise be dismissed.Anent the third assignment of error, we agree with the petitioners that the amount of P8,000.00 representing the amount of the salvaged logs should have been awarded to them. However, this should be deducted from the amounts which have been adjudicated against Manila Bay Lighterage Corporation by the trial court.WHEREFORE, the decision appealed from is AFFIRMED with the

modification that the amount of P8,000.00 representing the value of the salvaged logs which was ordered to be deposited in the Manila Banking Corporation in the name of Civil Case No. 86599 is hereby awarded and ordered paid to the petitioners. The liability adjudged against Manila Bay Lighterage Corporation in the decision of the trial court is accordingly reduced by the same amount.SO ORDERED.

G.R. No. 85141 November 28, 1989FILIPINO MERCHANTS INSURANCE CO., INC., petitioner, vs.COURT OF APPEALS and CHOA TIEK SENG, respondents.Balgos & Perez Law Offices for petitioner.Lapuz Law office for private respondent. REGALADO, J.:This is a review of the decision of the Court of Appeals, promulgated on July 19,1988, the dispositive part of which reads:WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant Filipino Merchants Insurance Company to pay the plaintiff the sum of P51,568.62 with interest at legal rate from the date of filing of the complaint, and is modified with respect to the third party complaint in that (1) third party defendant E. Razon, Inc. is ordered to reimburse third party plaintiff the sum of P25,471.80 with legal interest from the date of payment until the date of reimbursement, and (2) the third-party complaint against third party defendant Compagnie Maritime Des Chargeurs Reunis is dismissed. 1

The facts as found by the trial court and adopted by the Court of Appeals are as follows:This is an action brought by the consignee of the shipment of fishmeal loaded on board the vessel SS Bougainville and unloaded at the Port of Manila on or about December 11, 1976 and seeks to recover from the defendant insurance company the amount of P51,568.62 representing damages to said shipment which has been insured by the defendant insurance company under Policy No. M-2678. The defendant brought a third party complaint against third party defendants Compagnie Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking judgment against the third (sic) defendants in case Judgment is rendered against the third party plaintiff. It appears from the evidence presented that in December 1976, plaintiff insured said shipment with defendant insurance company under said cargo Policy No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to Manila against all risks under warehouse to warehouse terms. Actually, what was imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The fishmeal in 666 new gunny bags were unloaded from the ship on December 11, 1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's

surveyor ascertained and certified that in such discharge 105 bags were in bad order condition as jointly surveyed by the ship's agent and the arrastre contractor. The condition of the bad order was reflected in the turn over survey report of Bad Order cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which are also Exhibits 4, 5 and 6- Razon. The cargo was also surveyed by the arrastre contractor before delivery of the cargo to the consignee and the condition of the cargo on such delivery was reflected in E. Razon's Bad Order Certificate No. 14859, 14863 and 14869 covering a total of 227 bags in bad order condition. Defendant's surveyor has conducted a final and detailed survey of the cargo in the warehouse for which he prepared a survey report Exhibit F with the findings on the extent of shortage or loss on the bad order bags totalling 227 bags amounting to 12,148 kilos, Exhibit F-1. Based on said computation the plaintiff made a formal claim against the defendant Filipino Merchants Insurance Company for P51,568.62 (Exhibit C) the computation of which claim is contained therein. A formal claim statement was also presented by the plaintiff against the vessel dated December 21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company refused to pay the claim. Consequently, the plaintiff brought an action against said defendant as adverted to above and defendant presented a third party complaint against the vessel and the arrastre contractor. 2

The court below, after trial on the merits, rendered judgment in favor of private respondent, the decretal portion whereof reads:WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the plaintiff and against the defendant Filipino Merchant's (sic) Insurance Co., ordering the defendants to pay the plaintiff the following amount:The sum of P51,568.62 with interest at legal rate from the date of the filing of the complaint;On the third party complaint, the third party defendant Compagnie Maritime Des Chargeurs Reunis and third party defendant E. Razon, Inc. are ordered to pay to the third party plaintiff jointly and severally reimbursement of the amounts paid by the third party plaintiff with legal interest from the date of such payment until the date of such reimbursement.Without pronouncement as to costs. 3

On appeal, the respondent court affirmed the decision of the lower court insofar as the award on the complaint is concerned and

modified the same with regard to the adjudication of the third-party complaint. A motion for reconsideration of the aforesaid decision was denied, hence this petition with the following assignment of errors:1. The Court of Appeals erred in its interpretation and application of the "all risks" clause of the marine insurance policy when it held the petitioner liable to the private respondent for the partial loss of the cargo, notwithstanding the clear absence of proof of some fortuitous event, casualty, or accidental cause to which the loss is attributable, thereby contradicting the very precedents cited by it in its decision as well as a prior decision of the same Division of the said court (then composed of Justices Cacdac, Castro-Bartolome, and Pronove);2. The Court of Appeals erred in not holding that the private respondent had no insurable interest in the subject cargo, hence, the marine insurance policy taken out by private respondent is null and void;3. The Court of Appeals erred in not holding that the private respondent was guilty of fraud in not disclosing the fact, it being bound out of utmost good faith to do so, that it had no insurable interest in the subject cargo, which bars its recovery on the policy. 4

On the first assignment of error, petitioner contends that an "all risks" marine policy has a technical meaning in insurance in that before a claim can be compensable it is essential that there must be "some fortuity, " "casualty" or "accidental cause" to which the alleged loss is attributable and the failure of herein private respondent, upon whom lay the burden, to adduce evidence showing that the alleged loss to the cargo in question was due to a fortuitous event precludes his right to recover from the insurance policy. We find said contention untenable.The "all risks clause" of the Institute Cargo Clauses read as follows:5. This insurance is against all risks of loss or damage to the subject-matter insured but shall in no case be deemed to extend to cover loss, damage, or expense proximately caused by delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be payable irrespective of percentage. 5

An "all risks policy" should be read literally as meaning all risks whatsoever and covering all losses by an accidental cause of any kind. The terms "accident" and "accidental", as used in insurance

contracts, have not acquired any technical meaning. They are construed by the courts in their ordinary and common acceptance. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention and design, and which is unexpected, unusual and unforeseen. An accident is an event that 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. 6

The very nature of the term "all risks" must be given a broad and comprehensive meaning as covering any loss other than a willful and fraudulent act of the insured. 7 This is pursuant to the very purpose of an "all risks" insurance to give protection to the insured in those cases where difficulties of logical explanation or some mystery surround the loss or damage to property. 8 An "all asks" policy has been evolved to grant greater protection than that afforded by the "perils clause," in order to assure that no loss can happen through the incidence of a cause neither insured against nor creating liability in the ship; it is written against all losses, that is, attributable to external causes. 9

The term "all risks" cannot be given a strained technical meaning, the language of the clause under the Institute Cargo Clauses being unequivocal and clear, to the effect that it extends to all damages/losses suffered by the insured cargo except (a) loss or damage or expense proximately caused by delay, and (b) loss or damage or expense proximately caused by the inherent vice or nature of the subject matter insured.Generally, the burden of proof is upon the insured to show that a loss arose from a covered peril, but under an "all risks" policy the burden is not on the insured to prove the precise cause of loss or damage for which it seeks compensation. The insured under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage. 10 As we held in Paris-Manila Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance company has the burden of proving that the loss is caused by the risk excepted and for want of such proof, the company is liable.Coverage under an "all risks" provision of a marine insurance policy creates a special type of insurance which extends coverage to risks not usually contemplated and avoids putting upon the

insured the burden of establishing that the loss was due to the peril falling within the policy's coverage; the insurer can avoid coverage upon demonstrating that a specific provision expressly excludes the loss from coverage. 12 A marine insurance policy providing that the insurance was to be "against all risks" must be construed as creating a special insurance and extending to other risks than are usually contemplated, and covers all losses except such as arise from the fraud of the insured. 13 The burden of the insured, therefore, is to prove merely that the goods he transported have been lost, destroyed or deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss was due to excepted perils. To impose on the insured the burden of proving the precise cause of the loss or damage would be inconsistent with the broad protective purpose of "all risks" insurance.In the present case, there being no showing that the loss was caused by any of the excepted perils, the insurer is liable under the policy. As aptly stated by the respondent Court of Appeals, upon due consideration of the authorities and jurisprudence it discussed —... it is believed that in the absence of any showing that the losses/damages were caused by an excepted peril, i.e. delay or the inherent vice or nature of the subject matter insured, and there is no such showing, the lower court did not err in holding that the loss was covered by the policy.There is no evidence presented to show that the condition of the gunny bags in which the fishmeal was packed was such that they could not hold their contents in the course of the necessary transit, much less any evidence that the bags of cargo had burst as the result of the weakness of the bags themselves. Had there been such a showing that spillage would have been a certainty, there may have been good reason to plead that there was no risk covered by the policy (See Berk vs. Style [1956] cited in Marine Insurance Claims, Ibid, p. 125). Under an 'all risks' policy, it was sufficient to show that there was damage occasioned by some accidental cause of any kind, and there is no necessity to point to any particular cause. 14

Contracts of insurance are contracts of indemnity upon the terms and conditions specified in the policy. The agreement has the force of law between the parties. The terms of the policy constitute the measure of the insurer's liability. If such terms are clear and unambiguous, they must be taken and understood in their plain,

ordinary and popular sense. 15

Anent the issue of insurable interest, we uphold the ruling of the respondent court that private respondent, as consignee of the goods in transit under an invoice containing the terms under "C & F Manila," has insurable interest in said goods.Section 13 of the Insurance Code defines insurable interest in property as every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured. In principle, anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction whether he has or has not any title in, or lien upon or possession of the property y. 16 Insurable interest in property may consist in (a) an existing interest; (b) an inchoate interest founded on an existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. 17

Herein private respondent, as vendee/consignee of the goods in transit has such existing interest therein as may be the subject of a valid contract of insurance. His interest over the goods is based on the perfected contract of sale. 18 The perfected contract of sale between him and the shipper of the goods operates to vest in him an equitable title even before delivery or before be performed the conditions of the sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this case, is immaterial in the determination of whether the vendee has an insurable interest or not in the goods in transit. The perfected contract of sale even without delivery vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance.Further, Article 1523 of the Civil Code provides that where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for, the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer, the exceptions to said rule not obtaining in the present case. The Court has heretofore ruled that the delivery of the goods on board the carrying vessels partake of the nature of actual delivery since, from that time, the foreign buyers assumed the risks of loss of the goods and paid the insurance premium covering them. 20

C & F contracts are shipment contracts. The term means that the price fixed includes in a lump sum the cost of the goods and

freight to the named destination. 21 It simply means that the seller must pay the costs and freight necessary to bring the goods to the named destination but the risk of loss or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. 22

Moreover, the issue of lack of insurable interest was not among the defenses averred in petitioners answer. It was neither an issue agreed upon by the parties at the pre-trial conference nor was it raised during the trial in the court below. It is a settled rule that an issue which has not been raised in the court a quo cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair play, justice and due process. 23 This is but a permuted restatement of the long settled rule that when a party deliberately adopts a certain theory, and the case is tried and decided upon that theory in the court below, he will not be permitted to change his theory on appeal because, to permit him to do so, would be unfair to the adverse party. 24

If despite the fundamental doctrines just stated, we nevertheless decided to indite a disquisition on the issue of insurable interest raised by petitioner, it was to put at rest all doubts on the matter under the facts in this case and also to dispose of petitioner's third assignment of error which consequently needs no further discussion.WHEREFORE, the instant petition is DENIED and the assailed decision of the respondent Court of Appeals is AFFIRMED in toto.SO ORDERED.

G.R. No. 116940 June 11, 1997THE PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., petitioner, vs.COURT OF APPEALS and FELMAN SHIPPING LINES, respondents. BELLOSILLO, J.:This case deals with the liability, if any, of a shipowner for loss of cargo due to its failure to observe the extraordinary diligence required by Art. 1733 of the Civil Code as well as the right of the insurer to be subrogated to the rights of the insured upon payment of the insurance claim.On 6 July 1983 Coca-Cola Bottlers Philippines, Inc., loaded on board "MV Asilda," a vessel owned and operated by respondent Felman Shipping Lines (FELMAN for brevity), 7,500 cases of 1-liter Coca-Cola softdrink bottles to be transported from Zamboanga City to Cebu City for consignee Coca-Cola Bottlers Philippines, Inc., Cebu. 1

The shipment was insured with petitioner Philippine American General Insurance Co., Inc. (PHILAMGEN for brevity), under Marine Open Policy No. 100367-PAG."MV Asilda" left the port of Zamboanga in fine weather at eight o'clock in the evening of the same day. At around eight forty-five the following morning, 7 July 1983, the vessel sank in the waters of Zamboanga del Norte bringing down her entire cargo with her including the subject 7,500 cases of 1-liter Coca-Cola softdrink bottles.On 15 July 1983 the consignee Coca-Cola Bottlers Philippines, Inc., Cebu plant, filed a claim with respondent FELMAN for recovery of damages it sustained as a result of the loss of its softdrink bottles that sank with "MV Asilda." Respondent denied the claim thus prompting the consignee to file an insurance claim with PHILAMGEN which paid its claim of P755,250.00.Claiming its right of subrogation PHILAMGEN sought recourse against respondent FELMAN which disclaimed any liability for the loss. Consequently, on 29 November 1983 PHILAMGEN sued the shipowner for sum of money and damages.In its complaint PHILAMGEN alleged that the sinking and total loss of "MV Asilda" and its cargo were due to the vessel's unseaworthiness as she was put to sea in an unstable condition. It further alleged that the vessel was improperly manned and that its officers were grossly negligent in failing to take appropriate measures to proceed to a nearby port or beach after the vessel

started to list.On 15 February 1985 FELMAN filed a motion to dismiss based on the affirmative defense that no right of subrogation in favor of PHILAMGEN was transmitted by the shipper, and that, in any event, FELMAN had abandoned all its rights, interests and ownership over "MV Asilda" together with her freight and appurtenances for the purpose of limiting and extinguishing its liability under Art. 587 of the Code of Commerce. 2

On 17 February 1986 the trial court dismissed the complaint of PHILAMGEN. On appeal the Court of Appeals set aside the dismissal and remanded the case to the lower court for trial on the merits. FELMAN filed a petition for certiorari with this Court but it was subsequently denied on 13 February 1989.On 28 February 1992 the trial court rendered judgment in favor of FELMAN. 3 It ruled that "MV Asilda" was seaworthy when it left the port of Zamboanga as confirmed by certificates issued by the Philippine Coast Guard and the shipowner's surveyor attesting to its seaworthiness. Thus the loss of the vessel and its entire shipment could only be attributed to either a fortuitous event, in which case, no liability should attach unless there was a stipulation to the contrary, or to the negligence of the captain and his crew, in which case, Art. 587 of the Code of Commerce should apply.The lower court further ruled that assuming "MV Asilda" was unseaworthy, still PHILAMGEN could not recover from FELMAN since the assured (Coca-Cola Bottlers Philippines, Inc.) had breached its implied warranty on the vessel's seaworthiness. Resultantly, the payment made by PHILAMGEN to the assured was an undue, wrong and mistaken payment. Since it was not legally owing, it did not give PHILAMGEN the right of subrogation so as to permit it to bring an action in court as a subrogee.On 18 March 1992 PHILAMGEN appealed the decision to the Court of Appeals. On 29 August 1994 respondent appellate court rendered judgment finding "MV Asilda" unseaworthy for being top-heavy as 2,500 cases of Coca-Cola softdrink bottles were improperly stowed on deck. In other words, while the vessel possessed the necessary Coast Guard certification indicating its seaworthiness with respect to the structure of the ship itself, it was not seaworthy with respect to the cargo. Nonetheless, the appellate court denied the claim of PHILAMGEN on the ground that the assured's implied warranty of seaworthiness was not complied with. Perfunctorily, PHILAMGEN was not properly subrogated to the

rights and interests of the shipper. Furthermore, respondent court held that the filing of notice of abandonment had absolved the shipowner/agent from liability under the limited liability rule.The issues for resolution in this petition are: (a) whether "MV Asilda" was seaworthy when it left the port of Zamboanga; (b) whether the limited liability under Art. 587 of the Code of Commerce should apply; and, (c) whether PHILAMGEN was properly subrogated to the rights and legal actions which the shipper had against FELMAN, the shipowner."MV Asilda" was unseaworthy when it left the port of Zamboanga. In a joint statement, the captain as well as the chief mate of the vessel confirmed that the weather was fine when they left the port of Zamboanga. According to them, the vessel was carrying 7,500 cases of 1-liter Coca-Cola softdrink bottles, 300 sacks of seaweeds, 200 empty CO2 cylinders and an undetermined quantity of empty boxes for fresh eggs. They loaded the empty boxes for eggs and about 500 cases of Coca-Cola bottles on deck. 4 The ship captain stated that around four o'clock in the morning of 7 July 1983 he was awakened by the officer on duty to inform him that the vessel had hit a floating log. At that time he noticed that the weather had deteriorated with strong southeast winds inducing big waves. After thirty minutes he observed that the vessel was listing slightly to starboard and would not correct itself despite the heavy rolling and pitching. He then ordered his crew to shift the cargo from starboard to portside until the vessel was balanced. At about seven o'clock in the morning, the master of the vessel stopped the engine because the vessel was listing dangerously to portside. He ordered his crew to shift the cargo back to starboard. The shifting of cargo took about an hour afterwhich he rang the engine room to resume full speed.At around eight forty-five, the vessel suddenly listed to portside and before the captain could decide on his next move, some of the cargo on deck were thrown overboard and seawater entered the engine room and cargo holds of the vessel. At that instance, the master of the vessel ordered his crew to abandon ship. Shortly thereafter, "MV Asilda" capsized and sank. He ascribed the sinking to the entry of seawater through a hole in the hull caused by the vessel's collision with a partially submerged log. 5

The Elite Adjusters, Inc., submitted a report regarding the sinking of "MV Asilda." The report, which was adopted by the Court of Appeals, reads —

We found in the course of our investigation that a reasonable explanation for the series of lists experienced by the vessel that eventually led to her capsizing and sinking, was that the vessel was top-heavy which is to say that while the vessel may not have been overloaded, yet the distribution or stowage of the cargo on board was done in such a manner that the vessel was in top-heavy condition at the time of her departure and which condition rendered her unstable and unseaworthy for that particular voyage.In this connection, we wish to call attention to the fact that this vessel was designed as a fishing vessel . . . and it was not designed to carry a substantial amount or quantity of cargo on deck. Therefore, we believe strongly that had her cargo been confined to those that could have been accommodated under deck, her stability would not have been affected and the vessel would not have been in any danger of capsizing, even given the prevailing weather conditions at that time of sinking.But from the moment that the vessel was utilized to load heavy cargo on its deck, the vessel was rendered unseaworthy for the purpose of carrying the type of cargo because the weight of the deck cargo so decreased the vessel's metacentric height as to cause it to become unstable.Finally, with regard to the allegation that the vessel encountered big waves, it must be pointed out that ships are precisely designed to be able to navigate safely even during heavy weather and frequently we hear of ships safely and successfully weathering encounters with typhoons and although they may sustain some amount of damage, the sinking of ship during heavy weather is not a frequent occurrence and is not likely to occur unless they are inherently unstable and unseaworthy . . . .We believe, therefore, and so hold that the proximate cause of the sinking of the M/V "Asilda" was her condition of unseaworthiness arising from her having been top-heavy when she departed from the Port of Zamboanga. Her having capsized and eventually sunk was bound to happen and was therefore in the category of an inevitable occurrence (emphasis supplied). 6

We subscribe to the findings of the Elite Adjusters, Inc., and the Court of Appeals that the proximate cause of the sinking of "MV Asilda" was its being top-heavy. Contrary to the ship captain's allegations, evidence shows that approximately 2,500 cases of softdrink bottles were stowed on deck. Several days after "MV Asilda" sank, an estimated 2,500 empty Coca-Cola plastic cases

were recovered near the vicinity of the sinking. Considering that the ship's hatches were properly secured, the empty Coca-Cola cases recovered could have come only from the vessel's deck cargo. It is settled that carrying a deck cargo raises the presumption of unseaworthiness unless it can be shown that the deck cargo will not interfere with the proper management of the ship. However, in this case it was established that "MV Asilda" was not designed to carry substantial amount of cargo on deck. The inordinate loading of cargo deck resulted in the decrease of the vessel's metacentric height 7 thus making it unstable. The strong winds and waves encountered by the vessel are but the ordinary vicissitudes of a sea voyage and as such merely contributed to its already unstable and unseaworthy condition.On the second issue, Art. 587 of the Code of Commerce is not applicable to the case at bar. 8 Simply put, the ship agent is liable for the negligent acts of the captain in the care of goods loaded on the vessel. This liability however can be limited through abandonment of the vessel, its equipment and freightage as provided in Art. 587. Nonetheless, there are exceptional circumstances wherein the ship agent could still be held answerable despite the abandonment, as where the loss or injury was due to the fault of the shipowner and the captain. 9 The international rule is to the effect that the right of abandonment of vessels, as a legal limitation of a shipowner's liability, does not apply to cases where the injury or average was occasioned by the shipowner's own fault. 10 It must be stressed at this point that Art. 587 speaks only of situations where the fault or negligence is committed solely by the captain. Where the shipowner is likewise to be blamed, Art. 587 will not apply, and such situation will be covered by the provisions of the Civil Code on common carrier. 11

It was already established at the outset that the sinking of "MV Asilda" was due to its unseaworthiness even at the time of its departure from the port of Zamboanga. It was top-heavy as an excessive amount of cargo was loaded on deck. Closer supervision on the part of the shipowner could have prevented this fatal miscalculation. As such, FELMAN was equally negligent. It cannot therefore escape liability through the expedient of filing a notice of abandonment of the vessel by virtue of Art. 587 of the Code of Commerce.Under Art 1733 of the Civil Code, "(c)ommon carriers, from the nature of their business and for reasons of public policy, are bound

to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case . . ." In the event of loss of goods, common carriers are presumed to have acted negligently. FELMAN, the shipowner, was not able to rebut this presumption.In relation to the question of subrogation, respondent appellate court found "MV Asilda" unseaworthy with reference to the cargo and therefore ruled that there was breach of warranty of seaworthiness that rendered the assured not entitled to the payment of is claim under the policy. Hence, when PHILAMGEN paid the claim of the bottling firm there was in effect a "voluntary payment" and no right of subrogation accrued in its favor. In other words, when PHILAMGEN paid it did so at its own risk.It is generally held that in every marine insurance policy the assured impliedly warrants to the assurer that the vessel is seaworthy and such warranty is as much a term of the contract as if expressly written on the face of the policy. 12 Thus Sec. 113 of the Insurance Code provides that "(i)n every marine insurance upon a ship or freight, or freightage, or upon anything which is the subject of marine insurance, a warranty is implied that the ship is seaworthy." Under Sec. 114, a ship is "seaworthy when reasonably fit to perform the service, and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy." Thus it becomes the obligation of the cargo owner to look for a reliable common carrier which keeps its vessels in seaworthy condition. He may have no control over the vessel but he has full control in the selection of the common carrier that will transport his goods. He also has full discretion in the choice of assurer that will underwrite a particular venture.We need not belabor the alleged breach of warranty of seaworthiness by the assured as painstakingly pointed out by FELMAN to stress that subrogation will not work in this case. In policies where the law will generally imply a warranty of seaworthiness, it can only be excluded by terms in writing in the policy in the clearest language. 13 And where the policy stipulates that the seaworthiness of the vessel as between the assured and the assurer is admitted, the question of seaworthiness cannot be raised by the assurer without showing concealment or misrepresentation by the assured. 14

The marine policy issued by PHILAMGEN to the Coca-Cola bottling

firm in at least two (2) instances has dispensed with the usual warranty of worthiness. Paragraph 15 of the Marine Open Policy No. 100367-PAG reads "(t)he liberties as per Contract of Affreightment the presence of the Negligence Clause and/or Latent Defect Clause in the Bill of Lading and/or Charter Party and/or Contract of Affreightment as between the Assured and the Company shall not prejudice the insurance. The seaworthiness of the vessel as between the Assured and the Assurers is hereby admitted." 15

The same clause is present in par. 8 of the Institute Cargo Clauses (F.P.A.) of the policy which states "(t)he seaworthiness of the vessel as between the Assured and Underwriters in hereby admitted . . . ." 16

The result of the admission of seaworthiness by the assurer PHILAMGEN may mean one or two things: (a) that the warranty of the seaworthiness is to be taken as fulfilled; or, (b) that the risk of unseaworthiness is assumed by the insurance company. 17 The insertion of such waiver clauses in cargo policies is in recognition of the realistic fact that cargo owners cannot control the state of the vessel. Thus it can be said that with such categorical waiver, PHILAMGEN has accepted the risk of unseaworthiness so that if the ship should sink by unseaworthiness, as what occurred in this case, PHILAMGEN is liable.Having disposed of this matter, we move on to the legal basis for subrogation. PHILAMGEN's action against FELMAN is squarely sanctioned by Art. 2207 of the Civil Code which provides:Art. 2207. 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. 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.In Pan Malayan Insurance Corporation v. Court of Appeals, 18 we said that payment by the assurer to the assured operates as an equitable assignment to the assurer of all the remedies which the assured 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 payment by the insurance company of the insurance claim. It accrues simply upon payment by the insurance company of the insurance claim.The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode which equity adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience ought to pay. 19 Therefore, the payment made by PHILAMGEN to Coca-Cola Bottlers Philippines, Inc., gave the former the right to bring an action as subrogee against FELMAN. Having failed to rebut the presumption of fault, the liability of FELMAN for the loss of the 7,500 cases of 1-liter Coca-Cola softdrink bottles is inevitable.WHEREFORE, the petition is GRANTED. Respondent FELMAN SHIPPING LINES is ordered to pay petitioner PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., Seven Hundred Fifty-five Thousand Two Hundred and Fifty Pesos (P755,250.00) plus legal interest thereon counted from 29 November 1983, the date of judicial demand, pursuant to Arts. 2212 and 2213 of the Civil Code. 20

SO ORDERED.

G.R. No. 106999 June 20, 1996PHILIPPINE HOME ASSURANCE CORPORATION, petitioner, vs.COURT OF APPEALS and EASTERN SHIPPING LINES, INC., respondents. KAPUNAN, J.:pEastern Shipping Lines, Inc. (ESLI) loaded on board SS Eastern Explorer in Kobe, Japan, the following shipment for carriage to Manila and Cebu, freight pre-paid and in good order and condition, viz: (a) two (2) boxes internal combustion engine parts, consigned to William Lines, Inc. under Bill of Lading No. 042283; (b) ten (l0) metric ton. (334 bags) ammonium chloride, consigned to Orca's Company under Bill of Lading No. KCE-I2; (c) two hundred (200) bags Glue 300, consigned to Pan Oriental Match Company under Bill of Lading No. KCE-8; and (d) garments, consigned to Ding Velayo under Bills of Lading Nos. KMA-73 and KMA-74.While the vessel was off Okinawa, Japan, a small flame was detected on the acetylene cylinder located in the accommodation area near the engine room on the main deck level. As the crew was trying to extinguish the fire, the acetylene cylinder suddenly exploded sending a flash of flame throughout the accommodation area, thus causing death and severe injuries to the crew and instantly setting fire to the whole superstructure of the vessel. The incident forced the master and the crew to abandon the ship.Thereafter, SS Eastern Explorer was found to be a constructive total loss and its voyage was declared abandoned.Several hours later, a tugboat under the control of Fukuda Salvage Co. arrived near the vessel and commenced to tow the vessel for the port of Naha, Japan.Fire fighting operations were again conducted at the said port. After the fire was extinguished, the cargoes which were saved were loaded to another vessel for delivery to their original ports of destination. ESLI charged the consignees several amounts corresponding to additional freight and salvage charges, as follows: (a) for the goods covered by Bill of Lading No. 042283, ESLI charged the consignee the sum of P1,927.65, representing salvage charges assessed against the goods; (b) for the goods covered by Bill of Lading No. KCE-12, ESLI charged the consignee the sum of P2,980.64 for additional freight and P826.14 for salvage charges against the goods; (c) for the goods covered by Bill of Lading No. KCE-8, ESLI charged the consignee the sum of

P3,292.26 for additional freight and P4,130.68 for salvage charges against the goods; and (d) for the goods under Bills of Lading Nos. KMA-73 and KMA-74, ESLI charged the consignee the sum of P8,337.06 for salvage charges against the goods.The charges were all paid by Philippine Home Assurance Corporation (PHAC) under protest for and in behalf of the consignees.PHAC, as subrogee of the consignees, thereafter filed a complaint before the Regional Trial Court of Manila, Branch 39, against ESLI to recover the sum paid under protest on the ground that the same were actually damages directly brought about by the fault, negligence, illegal act and/or breach of contract of ESLI.In its answer, ESLI contended that it exercised the diligence required by law in the handling, custody and carriage of the shipment; that the fire was caused by an unforeseen event; that the additional freight charges are due and demandable pursuant to the Bill of Lading; 1 and that salvage charges are properly collectible under Act No. 2616, known as the Salvage Law.The trial court dismissed PHAC's complaint and ruled in favor of ESLI ratiocinating thus:The question to be resolved is whether or not the fire on the vessel which was caused by the explosion of an acetylene cylinder loaded on the same was the fault or negligence of the defendant.Evidence has been presented that the SS "Eastern Explorer" was a seaworthy vessel (Deposition of Jumpei Maeda, October 23, 1980, p. 3) and before the ship loaded the Acetylene Cylinder No. NCW 875, the same has been tested, checked and examined and was certified to have complied with the required safety measures and standards (Deposition of Senjei Hayashi, October 23, 1980, pp. 2-3). When the fire was detected by the crew, fire fighting operations was immediately conducted but due to the explosion of the acetylene cylinder, the crew were unable to contain the fire and had to abandon the ship to save their lives and were saved from drowning by passing vessels in the vicinity. The burning of the vessel rendering it a constructive total loss and incapable of pursuing its voyage to the Philippines was, therefore, not the fault or negligence of defendant but a natural disaster or calamity which nobody would like to happen. The salvage operations conducted by Fukuda Salvage Company (Exhibits "4-A" and "6-A") was perfectly a legal operation and charges made on the goods recovered were legitimate charges.

Act No. 2616, otherwise known as the Salvage Law, is thus applicable to the case at bar. Section 1 of Act No. 2616 states:Sec 1. When in case of shipwreck, the vessel or its cargo shall be beyond the control of the crew, or shall have been abandoned by them, and picked up and conveyed to a safe place by other persons, the latter shall be entitled to a reward for the salvage.Those who, not being included in the above paragraph, assist in saving a vessel or its cargo from shipwreck, shall be entitled to like reward.In relation to the above provision, the Supreme Court has ruled in Erlanger & Galinger v. Swedish East Asiatic Co., Ltd., 34 Phil. 178, that three elements are necessary to a valid salvage claim, namely (a)a marine peril (b) service voluntarily rendered when not required as an existing duty or from a special contract and (c) success in whole or in part, or that the service rendered contributed to such success.The above elements are all present in the instant case. Salvage charges may thus be assessed on the cargoes saved from the vessel. As provided for in Section 13 of the Salvage Law, "The expenses of salvage, as well as the reward for salvage or assistance, shall be a charge on the things salvaged or their value." In Manila Railroad Co. v. Macondray Co., 37 Phil. 583, it was also held that "when a ship and its cargo are saved together, the salvage allowance should be charged against the ship and cargo in the proportion of their respective values, the same as in a case of general average . . ." Thus, the "compensation to be paid by the owner of the cargo is in proportion to the value of the vessel and the value of the cargo saved." (Atlantic Gulf and Pacific Co. v. Uchida Kisen Kaisha, 42 Phil. 321). (Memorandum for Defendant, Records, pp. 212-213).With respect to the additional freight charged by defendant from the consignees of the goods, the same are also validly demandable.As provided by the Civil Code:Art. 1174. Except in cases expressly specified by law, or when it is otherwise declared by stipulation, or when the nature of the obligation require the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable.Art 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible

without the fault of the obligor."The burning of "EASTERN EXPLORER" while off Okinawa rendered it physically impossible for defendant to comply with its obligation of delivering the goods to their port of destination pursuant to the contract of carriage. Under Article 1266 of the Civil Code, the physical impossibility of the prestation extinguished defendant's obligation..It is but legal and equitable for the defendant therefore, to demand additional freight from the consignees for forwarding the goods from Naha, Japan to Manila and Cebu City on board another vessel, the "EASTERN MARS." This finds support under Article 844 of the Code of Commerce which provides as follows:Art. 844. A captain who may have taken on board the goods saved from the wreck shall continue his course to the port of destination; and on arrival should deposit the same, with judicial intervention at the disposal of their legitimate owners. . . .The owners of the cargo shall defray all the expenses of this arrival as well as the payment of the freight which, after taking into consideration the circumstances of the case, may be fixed by agreement or by a judicial decision.Furthermore, the terms and conditions of the Bill of Lading authorize the imposition of additional freight charges in case of forced interruption or abandonment of the voyage. At the dorsal portion of the Bills of Lading issued to the consignees is this stipulation:12. All storage, transshipment, forwarding or other disposition of cargo at or from a port of distress or other place where there has been a forced interruption or abandonment of the voyage shall be at the expense of the owner, shipper, consignee of the goods or the holder of this bill of lading who shall be jointly and severally liable for all freight charges and expenses of every kind whatsoever, whether payable in advance or not that may be incurred by the cargo in addition to the ordinary freight, whether the service be performed by the named carrying vessel or by carrier's other vessels or by strangers. All such expenses and charges shall be due and payable day by day immediately when they are incurred.The bill of lading is a contract and the parties are bound by its terms (Gov't of the Philippine Islands vs. Ynchausti and Co., 40 Phil. 219). The provision quoted is binding upon the consignee.Defendant therefore, can validly require payment of additional

freight from the consignee. Plaintiff can not thus recover the additional freight paid by the consignee to defendant. (Memorandum for Defendant, Record, pp. 215-216). 2

On appeal to the Court of Appeals, respondent court affirmed the trial court's findings and conclusions, 3 hence, the present petition for review before this Court on the following errors:I. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL COURT'S FINDINGS THAT THE BURNING OF THE SS "EASTERN EXPLORER", RENDERING ET A CONSTRUCTIVE TOTAL LOSS, IS A NATURAL DISASTER OR CALAMITY WHICH NOBODY WOULD LIKE TO HAPPEN, DESPITE EXISTING JURISPRUDENCE TO THE CONTRARY.II. THE RESPONDENT COURT ARBITRARILY RULED THAT THE BURNING OF THE SS "EASTERN EXPLORER" WAS NOT THE FAULT AND NEGLIGENCE OF RESPONDENT EASTERN SHIPPING LINES.III. THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION IN RULING THAT DEFENDANT HAD EXERCISED THE EXTRAORDINARY DILIGENCE IN THE VIGILANCE OVER THE GOODS AS REQUIRED BY LAW.IV. THE RESPONDENT COURT ARBITRARILY RULED THAT THE MARINE NOTE OF PROTEST AND STATEMENT OF FACTS ISSUED BY THE VESSEL'S MASTER ARE NOT HEARSAY DESPITE THE FACT THAT THE VESSEL'S MASTER, CAPT. LICAYLICAY WAS NOT PRESENTED COURT, WITHOUT EXPLANATION WHATSOEVER FOR HIS NON-PRESENTATION, THUS, PETITIONER WAS DEPRIVED OF ITS RIGHT TO CROSS- EXAMINE THE AUTHOR THEREOF.V. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL COURT'S CONCLUSION THAT THE EXPENSES OR AVERAGES INCURRED IN SAVING THE CARGO CONSTITUTE GENERAL AVERAGE.VI. THE RESPONDENT COURT ERRONEOUSLY ADOPTED THE TRIAL COURT'S RULING THAT PETITIONER WAS LIABLE TO RESPONDENT CARRIER FOR ADDITIONAL FREIGHT AND SALVAGE CHARGES. 4

It is quite evident that the foregoing assignment of errors challenges the findings of fact and the appreciation of evidence made by the trial court and later affirmed by respondent court. While it is a well-settled rule that only questions of law may be raised in a petition for review under Rule 45 of the Rules of Court, it is equally well-settled that the same admits of the following exceptions, namely: (a) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (b) when the

inference made is manifestly mistaken, absurd or impossible; (c) where there is a grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of fact are conflicting; (f) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (g) when the findings of the Court of Appeals are contrary to those of the trial court; (h) when the findings of fact are conclusions without citation of specific evidence on which they are based; (i) when the facts set forth in the petition as well as in the petitioners' main and reply briefs are not disputed by the respondents; and (j) when the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by the evidence on record. 5 Thus, if there is a showing, as in the instant case, that the findings complained of are totally devoid of support in the records, or that they are so glaringly erroneous as to constitute grave abuse of discretion, the same may be properly reviewed and evaluated by this Court.It is worthy to note at the outset that the goods subject of the present controversy were neither lost nor damaged in transit by the fire that razed the carrier. In fact, the said goods were all delivered to the consignees, even if the transshipment took longer than necessary. What is at issue therefore is not whether or not the carrier is liable for the loss, damage, or deterioration of the goods transported by them but who, among the carrier, consignee or insurer of the goods, is liable for the additional charges or expenses incurred by the owner of the ship in the salvage operations and in the transshipment of the goods via a different carrier.In absolving respondent carrier of any liability, respondent Court of Appeals sustained the trial court's finding that the fire that gutted the ship was a natural disaster or calamity. Petitioner takes exception to this conclusion and we agree.In our jurisprudence, fire may not be considered a natural disaster or calamity since it almost always arises from some act of man or by human means.It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to human agency. 6

In the case at bar, it is not disputed that a small flame was detected on the acetylene cylinder and that by reason thereof, the same exploded despite efforts to extinguish the fire. Neither is

there any doubt that the acetylene cylinder, obviously fully loaded, was stored in the accommodation area near the engine room and not in a storage area considerably far, and in a safe distance, from the engine room. Moreover, there was no showing, and none was alleged by the parties, that the fire was caused by a natural disaster or calamity not attributable to human agency. On the contrary, there is strong evidence indicating that the acetylene cylinder caught fire because of the fault and negligence of respondent ESLI, its captain and its crew.First, the acetylene cylinder which was fully loaded should not have been stored in the accommodation area near the engine room where the heat generated therefrom could cause the acetylene cylinder to explode by reason of spontaneous combustion. Respondent ESLI should have easily foreseen that the acetylene cylinder, containing highly inflammable material was in real danger of exploding because it was stored in close proximity to the engine room.Second, respondent ESLI should have known that by storing the acetylene cylinder in the accommodation area supposed to be reserved for passengers, it unnecessarily exposed its passengers to grave danger and injury. Curious passengers, ignorant of the danger the tank might have on humans and property, could have handled the same or could have lighted and smoked cigarettes while repairing in the accommodation area.Third, the fact that the acetylene cylinder was checked, tested and examined and subsequently certified as having complied with the safety measures and standards by qualified experts 7 before it was loaded in the vessel only shows to a great extent that negligence was present in the handling of the acetylene cylinder after it was loaded and while it was on board the ship. Indeed, had the respondent and its agents not been negligent in storing the acetylene cylinder near the engine room, then the same would not have leaked and exploded during the voyage.Verily, there is no merit in the finding of the trial court to which respondent court erroneously agreed that the fire was not the fault or negligence of respondent but a natural disaster or calamity. The records are simply wanting in this regard.Anent petitioner's objection to the admissibility of Exhibits "4'' and ''5", the Statement of Facts and the Marine Note of Protest issued by Captain Tiburcio A. Licaylicay, we find the same impressed with merit because said documents are hearsay evidence. Capt.

Licaylicay, Master of S.S. Eastern Explorer who issued the said documents, was not presented in court to testify to the truth of the facts he stated therein; instead, respondent ESLI presented Junpei Maeda, its Branch Manager in Tokyo and Yokohama, Japan, who evidently had no personal knowledge of the facts stated in the documents at issue. It is clear from Section 36, Rule 130 of the Rules of Court that any evidence, whether oral or documentary, is hearsay if its probative value is not based on the personal knowledge of the witness but on the knowledge of some other person not on the witness stand. Consequently, hearsay evidence, whether objected to or not, has no probative value unless the proponent can show that the evidence falls within the exceptions to the hearsay evidence rule. 8 It is excluded because the party against whom it is presented is deprived of his right and opportunity to cross-examine the persons to whom the statements or writings are attributed.On the issue of whether or not respondent court committed an error in concluding that the expenses incurred in saving the cargo are considered general average, we rule in the affirmative. As a rule, general or gross averages include all damages and expenses which are deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real and known risk 9 While the instant case may technically fall within the purview of the said provision, the formalities prescribed under Articles 813 10 and 814 11 of the Code of Commerce in order to incur the expenses and cause the damage corresponding to gross average were not complied with. Consequently, respondent ESLI's claim for contribution from the consignees of the cargo at the time of the occurrence of the average turns to naught.Prescinding from the foregoing premises, it indubitably follows that the cargo consignees cannot be made liable to respondent carrier for additional freight and salvage charges. Consequently, respondent carrier must refund to herein petitioner the amount it paid under protest for additional freight and salvage charges in behalf of the consignees.WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. Respondent Eastern Shipping Lines, Inc. is ORDERED to return to petitioner Philippine Home Assurance Corporation the amount it paid under protest in behalf of the consignees herein.SO ORDERED.

G.R. No. 156571               July 9, 2008INTRA-STRATA ASSURANCE CORPORATION and PHILIPPINE HOME ASSURANCE CORPORATION, Petitioners, vs.REPUBLIC OF THE PHILIPPINES, represented by the BUREAU OF CUSTOMS, Respondent.D E C I S I O NBRION, J.:Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Intra-Strata Assurance Corporation (Intra-Strata) and Philippine Home Assurance Corporation (PhilHome), collectively referred to as "petitioners."The petition seeks to set aside the decision dated November 26, 2002 of the Court of Appeals1 (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case No. 83-15071.2 In its ruling, the RTC found the petitioners liable as sureties for the customs duties, internal revenue taxes, and other charges due on the importations made by the importer, Grand Textile Manufacturing Corporation (Grand Textile).3

BACKGROUND FACTSGrand Textile is a local manufacturing corporation. In 1974, it imported from different countries various articles such as dyestuffs, spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type reciprocating compressor, and trevira filament. Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse No. 462. As computed by the Bureau of Customs, the customs duties, internal revenue taxes, and other charges due on the importations amounted to P2,363,147.00. To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code (Code),4 Intra-Strata and PhilHome each issued general warehousing bonds in favor of the Bureau of Customs. These bonds, the terms of which are fully quoted below, commonly provide that the goods shall be withdrawn from the bonded warehouse "on payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject."5

Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew the imported goods from storage.6 The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The government responded on January 14, 1983 by

filing a collection suit against the parties with the RTC of Manila.LOWER COURT DECISIONSAfter hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer) and the petitioners (as sureties) liable for the taxes, duties, and charges due on the imported articles. The dispositive portion of this decision states: 7

WHEREFORE, premises considered, the Court RESOLVES directing:(1) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus interests at the legal rate from the filing of the Complaint until fully paid;(2) the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly and severally, with defendant Grand, the sum of P2,319,211.00 plus interest from the filing of the Complaint until fully paid; and the defendant Philippine Home Assurance Corporation to pay plaintiff the sum of P43,936.00 plus interests to be computed from the filing of the Complaint until fully paid;(3) the forfeiture of all the General Warehousing Bonds executed by Intra-Strata and PhilHome; and(4) all the defendants to pay the costs of suit.SO ORDERED.The CA fully affirmed the RTC decision in its decision dated November 26, 2002. From this CA decision, the petitioners now come before this Court through a petition for review on certiorari alleging that the CA decided the presented legal questions in a way not in accord with the law and with the applicable jurisprudence.ASSIGNED ERRORSThe petitioners present the following points as the conclusions the CA should have made:1. that they were released from their obligations under their bonds when Grand Textile withdrew the imported goods without payment of taxes, duties, and other charges; and2. that their non-involvement in the active handling of the warehoused items from the time they were stored up to their withdrawals substantially increased the risks they assumed under the bonds they issued, thereby releasing them from liabilities under these bonds.8

In their arguments, they essentially pose the legal issue of whether the withdrawal of the stored goods, wares, and merchandise – without notice to them as sureties – released them from any liability for the duties, taxes, and charges they committed to pay

under the bonds they issued. They additionally posit that they should be released from any liability because the Bureau of Customs, through the fault or negligence of its employees, allowed the withdrawal of the goods without the payment of the duties, taxes, and other charges due.The respondent, through the Solicitor General, maintains the opposite view.THE COURT’S RULINGWe find no merit in the petition and consequently affirm the CA decision.Nature of the Surety’s ObligationsSection 175 of the Insurance Code defines a contract of suretyship as an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of another party called the obligee, and includes among its various species bonds such as those issued pursuant to Section 1904 of the Code.9 Significantly, "pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship."10 By its very nature under the terms of the laws regulating suretyship, the liability of the surety is joint and several but limited to the amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.11

The definition and characteristics of a suretyship bring into focus the fact that a surety agreement is an accessory contract that introduces a third party element in the fulfillment of the principal obligation that an obligor owes an obligee. In short, there are effectively two (2) contracts involved when a surety agreement comes into play – a principal contract and an accessory contract of suretyship. Under the accessory contract, the surety becomes directly, primarily, and equally bound with the principal as the original promissor although he possesses no direct or personal interest over the latter’s obligations and does not receive any benefit therefrom.12

The Bonds Under ConsiderationThat the bonds under consideration are surety bonds (and hence are governed by the above laws and rules) is not disputed; the petitioners merely assert that they should not be liable for the reasons summarized above. Two elements, both affecting the

suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement; the terms of the suretyship agreement constitute the second.A feature of the petitioners’ bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that applicable laws form part of and are read into the contract without need for any express reference. This feature proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule:It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They may, according to Article 1306 of the Civil Code "establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy." The law thus sets limits. It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."13

Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs Code which provide that:Sec 101. Imported Items Subject to Duty – All articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in clear laws.x x x xSec. 1204. Liability of Importer for Duties – Unless relieved by laws or regulations, the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the control of the government.The obligation to pay, principally by the importer, is shared by the

latter with a willing third party under a suretyship agreement under Section 1904 of the Code which itself provides:Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond – After articles declared in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation.We point these out to stress the legal basis for the submission of the petitioners’ bonds and the conditions attaching to these bonds. As heretofore mentioned, there is, firstly, a principal obligation belonging to the importer-obligor as provided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a surety agreement, directly, primarily, and equally bind them to the obligee to pay the obligor’s obligation.The second element to consider in a suretyship agreement relates to the terms of the bonds themselves, under the rule that the terms of the suretyship are determined by the suretyship contract itself.14 The General Warehousing Bond15 that is at the core of the present dispute provides:KNOW ALL MEN BY THESE PRESENTS:That I/we GRAND TEXTILE MANUFACTURING CORPORATION – Km. 21, Marilao, Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, as Surety, are held and firmly bound unto the Republic of the Philippines, in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and assigns, jointly and severally, firmly by these presents:WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and special import tax or

internal revenue taxes or both;WHEREAS, the above principal in making application for storing merchandise in customs-internal revenue bonded warehouse as above stated, will file this in his name as principal, which bond shall be approved by the Collector of Customs or his Deputy; andWHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond.NOW THEREFORE, the condition of this obligation is such that if within six (6) months from the date of arrival of the importing vessel in any case, the goods, wares, and merchandise shall be regularly and lawfully withdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject; or if at any time within six (6) months from the said date of arrival, or within nine (9) months if the time is extended for a period of three (3) months, as provided in Section 1903 of the Tariff and Customs Code of the Philippines, said importation shall be so withdrawn for consumption, then the above obligation shall be void, otherwise, to remain in full force and effect.Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the corresponding Collector of Customs to refuse to accept further liabilities under this general bond, whenever, in his opinion, conditions warrant doing so.IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20th day of September, 1974 at Makati, Rizal, Philippines.Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds shall subsist – that is, "shall remain in full force and effect" – unless the imported articles are "regularly and lawfully withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall be subject…." Fully fleshed out, the obligation to pay the duties, taxes, and other charges primarily rested on the principal Grand Textile; it was allowed to warehouse the imported articles without need for prior payment of the amounts due, conditioned on the filing of a bond that shall remain in full force and effect until the payment of the duties, taxes, and charges due. Under these terms, the fact that a withdrawal has been made and its circumstances are not material to the sureties’ liability, except to signal both the principal’s default and the

elevation to a due and demandable status of the sureties’ solidary obligation to pay. Under the bonds’ plain terms, this solidary obligation subsists for as long as the amounts due on the importations have not been paid. Thus, it is completely erroneous for the petitioners to say that they were released from their obligations under their bond when Grand Textile withdrew the imported goods without payment of taxes, duties, and charges. From a commonsensical perspective, it may well be asked: why else would the law require a surety when such surety would be bound only if the withdrawal would be regular due to the payment of the required duties, taxes, and other charges?We note in this regard the rule that a surety is released from its obligation when there is a material alteration of the contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. A surety, however, is not released by a change in the contract which does not have the effect of making its obligation more onerous.16

We find under the facts of this case no significant or material alteration in the principal contract between the government and the importer, nor in the obligation that the petitioners assumed as sureties. Specifically, the petitioners never assumed, nor were any additional obligation imposed, due to any modification of the terms of importation and the obligations thereunder. The obligation, and one that never varied, is – on the part of the importer, to pay the customs duties, taxes, and charges due on the importation, and on the part of the sureties, to be solidarily bound to the payment of the amounts due on the imported goods upon their withdrawal or upon expiration of the given terms. The petitioners’ lack of consent to the withdrawal of the goods, if this is their complaint, is a matter between them and the principal Grand Textile; it is a matter outside the concern of government whose interest as creditor-obligee in the importation transaction is the payment by the importer-obligor of the duties, taxes, and charges due before the importation process is concluded. With respect to the sureties who are there as third parties to ensure that the amounts due are paid, the creditor-obligee's active concern is to enforce the sureties’ solidary obligation that has become due and demandable. This matter is further and more fully explored below.The Need for Notice to Bondsmen

To support the conclusion that they should be released from the bonds they issued, the petitioners argue that upon the issuance and acceptance of the bonds, they became direct parties to the bonded transaction entitled to participate and actively intervene, as sureties, in the handling of the imported articles; that, as sureties, they are entitled to notice of any act of the bond obligee and of the bond principal that would affect the risks secured by the bond; and that otherwise, the door becomes wide open for possible fraudulent conspiracy between the bond obligee and principal to defraud the surety.17

In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact that two types of relationships are involved, that is, the underlying principal relationship between the creditor (government) and the debtor (importer), and the accessory surety relationship whereby the surety binds itself, for a consideration paid by the debtor, to be jointly and solidarily liable to the creditor for the debtor’s default. The creditor in this latter relationship accepts the surety’s solidary undertaking to pay if the debtor does not pay.18 Such acceptance, however, does not change in any material way the creditor’s relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. The contract of surety simply gives rise to an obligation on the part of the surety in relation with the creditor and is a one-way relationship for the benefit of the latter.19

In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-debtor relationship; its role becomes alive only upon the debtor’s default, at which time it can be directly held liable by the creditor for payment as a solidary obligor. A surety contract is made principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the sureties’ undertaking.20

Under these terms, the surety is not entitled as a rule to a separate notice of default,21 nor to the benefit of excussion,22 and may be sued separately or together with the principal debtor.23

The words of this Court in Palmares v. CA24 are worth noting:Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal’s default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere

failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal’s default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship.Significantly, nowhere in the petitioners’ bonds does it state that prior notice is required to fix the sureties’ liabilities. Without such express requirement, the creditor’s right to enforce payment cannot be denied as the petitioners became bound as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of the collection suit was sufficient notice to the sureties of their principal’s default.The petitioners’ reliance on Visayan Surety and Insurance Corporation v. Pascual25 and Aguasin v. Velasquez26 does not appear to us to be well taken as these cases do not squarely apply to the present case. These cases relate to bonds issued as a requirement for the issuance of writs of replevin. The Rules of Court expressly require that before damages can be claimed against such bonds, notice must be given to the sureties to bind them to the award of damages. No such requirement is evident in this case as neither the Tariff and Customs Code nor the issued bonds require prior notice to sureties.The petitioners’ argument focusing on the additional risks they incur if they cannot intervene in the handling of the warehoused articles must perforce fail in light of what we have said above regarding the nature of their obligation as sureties and the relationships among the parties where a surety agreement exists. We add that the petitioners have effectively waived as against the creditor (the government) any such claim in light of the provision of the bond that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond."27 Any such claim including those arising from the withdrawal of the warehoused articles without the payment of the requisite duties, taxes and charges is for the principal and the sureties to thresh out between or among themselves.Government is Not Bound by EstoppelAs its final point, the petitioners argue that they cannot be held liable for the unpaid customs duties, taxes, and other charges because it is the Bureau of Customs’ duty to ensure that the duties

and taxes are paid before the imported goods are released from its custody and they cannot be made to pay for the error or negligence of the Bureau’s employees in authorizing the unlawful and irregular withdrawal of the goods.It has long been a settled rule that the government is not bound by the errors committed by its agents. Estoppel does not also lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers.28 This is particularly true in the collection of legitimate taxes due where the collection has to be made whether or not there is error, complicity, or plain neglect on the part of the collecting agents.29 In CIR v. CTA,30 we pointedly said:It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes.lawphi1 Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay.We see no reason to deviate from this rule and we shall not do so now.WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision of the Court of Appeals. Costs against the petitioners.SO ORDERED.

[G.R. No. 80201, November 20, 1990]

ANTONIO GARCIA, JR., PETITIONER, VS. COURT OF APPEALS, LASAL DEVELOPMENT CORPORATION, RESPONDENTS.

D E C I S I O N

CRUZ, J.:

On April 15, 1977, the Western Minolco Corporation (WMC) obtained from the Philippine Investments Systems Organization (PISO) two loans for P2,500,000.00 and P1,000,000.00 for which it issued the corresponding promissory notes payable on May 30, 1977.  On the same date, Antonio Garcia and Ernest Kahn executed a surety agreement binding themselves jointly and severally for the payment of the loan of P2,500,000.00 on due date.Upon failure of WMC to pay after repeated demands, demand was made on Garcia pursuant to the surety agreement.  Garcia also failed to pay.  Hence, on April 5, 1983, Lasal Development Corporation (to which the credit had been assigned earlier by PISO) sued Garcia for recovery of the debt in the Regional Trial Court of Makati.On May 18, 1983, Garcia moved to dismiss on the grounds that:  (a) the complaint stated no cause of action; (b) the suit would result in unjust enrichment of the plaintiff because he had not received any consideration from PISO; (c) the surety agreement violated the doctrine of the limited liability of corporations; and (d) the principal obligation had been novated.After considering the arguments and evidence of the parties, the trial court granted the motion and dismissed the complaint on the ground that the surety agreement was invalid for absence of consideration.The plaintiff moved for reconsideration and when this was denied elevated the matter to the Court of Appeals.  In a decision dated June 23, 1987, the respondent court reversed Judge Jesus M. EIbinias and remanded the records of the case for trial on the merits.  Garcia then came to this Court in this petition for review on certiorari, pleading the same arguments raised in the trial court.

The petitioner's first ground is that, as found by the trial court, the surety agreement was invalid because no consideration had been paid to him by PISO for executing the contract and that the amount of the entire loan had been received and enjoyed by WMC.  He cites the following articles of the Civil Code in support of his contention that lack of consideration was a personal defense available to him as surety:Art. 2047.  By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.If a person binds himself solidarity with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this Book shall be observed.  In such case the contract is called a suretyship.Art. 1222.  A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share.  With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible.The point is not well taken in view of the nature and purpose of a surety agreement.Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal.  The surety's obligation is not an original and direct one for the performance of his own act, but merely accessory or collateral to the obligation contracted by the principal.  Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the principal is said to be direct, primary and absolute; [1] in other words, he is directly and equally bound with the principal.  The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligations nor does he receive any benefit therefrom.[2]

The peculiar nature of a surety agreement is that it is regarded as valid despite the absence of any direct consideration received by the surety either from the principal obligor or from the creditor.  A contract of surety, like any other contract, must generally be supported by a sufficient consideration.  However, the consideration necessary to support a surety obligation need not pass directly to the surety; a consideration moving to the principal

alone will suffice.It has been held that if the delivery of the original contract is contemporaneous with the delivery of the surety's obligation, each contract becomes completed at the same time, and the consideration which supports the principal contract likewise supports the subsidiary one.[3] And this is the kind of surety contract to which the rule of strict construction applies as opposed to a compensated surety contract undertaken by surety corporations which are organized for the purpose of conducting an indemnity business at established rates and compensation unlike an ordinary surety agreement where the surety binds his name through motives of friendship and accommodation.[4]

It follows from the above principles that Lasal would not be unjustly enriched if the petitioner were to be held liable for the obligation contracted by WMC.  The creditor would only be recovering the amount of its loan plus its increments.  The petitioner, for his part, can still go against WMC for the amount he may have to pay Lasal as assignee of the PISO credit.Regarding the petitioner's claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he signed the same not in representation of WMC or as its president but in his personal capacity.  He is therefore personally bound.  There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt.  While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the corporate debts.  The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.Concerning the issue of novation, we note first the following provisions of the memorandum of agreement supposedly entered into by WMC and its creditors which the petitioner argues had the effect of releasing him from the surety agreement:IV. Release of JSSThe CREDITORS expressly agree to release and hereby release the Joint and Several Signatories (JSS) of MINOLCO's officers from any liability whatsoever on the obligations which they have personally guaranteed or secured.  Any action therefore against all the aforesaid signatories are waived in view of the promissory notes to be issued by NDC which are fully and unconditionally guaranteed

by the Philippine Government, in payment of MINOLCO's obligations to said CREDITORS.x          x          xVI. The CREDITORS who have filed cases in court against MINOLCO and who are signatories to this Agreement agree to dismiss the case  with prejudice, accepting the repayment scheme set fourth in paragraph II as a just and equitable procedure for collecting their credits.Significantly, however, the agreement (Annex 5) was signed only by Don M. Ferry as chairman of the board of directors of WMC and does not carry the signature of any of the creditors.[5] Hence, it has no binding force whatsoever on such creditors.The petitioner cites other developments or transactions between the parties to the original loans that he contends had the effect of novating the said contracts and consequently extinguished the surety agreement.  Among these are the extension of the original period of payment and the compounding of the interest on the principal obligations, both of which operated to the prejudice of the petitioner.The petitioner invokes Article 2079 of the Civil Code, which provides: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 of time referred to herein.However, Paragraphs 5 of the surety agreement clearly stipulated as follows:The sureties expressly waive all rights to demand payment and notice of non-payment and protest, and agree that the securities of every kind, that now or may hereafter be left with the lender, its successors, indorsees or assigns, as collateral, for the said loan, or any evidence of debt or obligations, or upon which a lien may exist may be withdrawn or surrendered at any time, and the time of payment thereof extended, without notice to or consent by the sureties, and the liability on this suretyship shall be solidary, direct and immediate and not contingent upon any pursuit by the lender, its successors, indorsees or assigns, of whatever remedies the lender may have against the principal or the securities or liens it may possess.  (Emphasis supplied.)Since in the surety contract, the petitioner not only consented to

an extension in the payment of the obligation but even waived his right to be notified of such extension, he cannot now claim that he has been released from his undertaking because of the extension granted to the principal.As for the compounded interest, we apply by analogy the case of Bank of the Philippine Islands v. Gooch and Redfern,[6] which was affirmed in the later case of the Bank of the Philippine Islands v. Albaladejo & Cia[7] In the said cases, the respective sureties claimed that since the creditor changed the rate of interest in the principal obligation without their knowledge or consent, they were relieved from liability under their contract.  It was held, however, that the change in the rate of interest was merely a collateral agreement between the creditor bank and the principal debtor that did not affect the surety.  When the debtor promised to pay the extra rate of interest on demand of the plaintiff, the liability he assumed was his alone and was separate and apart from the original contract.  His agreement to pay the additional rate of interest was an additional burden upon him and him only.  That obligation in no way affected the original contract of the surety, whose liability remained unchanged.[8]

Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded interest, as stipulated in the promissory note, that is, 17% per annum, with a penalty charge of 2 1/2% per month until full payment.The petitioner cites other supposed agreements in support of his theory of novation such as the prepayment of the restructured loans of WMC before the distribution of dividends to the common stockholders, the proposed sale on installments of its assets to Negros Occidental Copperfield Mines, and the preference given to other creditors of WMC over PISO.  But we do not think these are material as, to be so the alteration must change the legal effects of the original contract.  The alleged alterations do not have that effect.It is axiomatic, and only fair, that the creditors of a corporation must be paid first before dividends may be distributed among the stockholders.  Unsecured creditors are given preference in bankruptcy or insolvency proceedings because secured creditors can after all go against the security given by the debtor.  As for the installment sale of WMC's assets to Negros Occidental Copperfield Mines, which might make it difficult for the petitioner to recover any amount it may have to pay on the loan of WMC, this was a risk

he took when he signed the surety agreement.  As it did not prohibit the alienation of the properties of the principal debtor, the sale to Negros cannot be considered a novation of the original agreement.  In fact, the proposed sale was intended precisely to enable WMC to meet its pending obligations.The most important argument against the alleged novation is the failure of the petitioner to establish the validity of the new contract, an essential requisite for the novation of a previous valid obligation.  Petitioner insists that the various communications made by WMC with DBP, together with the memorandum of agreement (Annexes 1 to 7), are sufficient to establish the new undertaking made by WMC with all its creditors, including DBP.  We do not think so.It is true that as a general rule no form of words or writing is necessary to give effect to a novation.[9] Nevertheless, since the parties involved here are corporations, it must first be proved that the contracts, assuming they were made, were executed by the persons possessing the proper authority to bind their respective principals.  Annexes 1-4 are a mere exchange of correspondence between the officers of WMC and DBP.  Although they contain the provisions and proposals that, according to petitioner, should suffice to establish that the original contract between WMC and PISO has been materially altered, they cannot be considered per se sufficient to give rise to a valid new obligation.  WMC was in fact directed by Joseph W. Edralin, the Assistant Executive Officer of the DBP, to communicate with Atty. Hilario Oraolino of the Office of the Chief Legal Counsel for the preparation and execution of the necessary legal documents to cover the approval and confirmation of the several proposals made.  No such documents, as duly signed by the parties, were ever presented in court.  Annexes 5 to 7[10] are also incomplete documents and not binding without the signatures of the supposed contracting parties.The argument of subrogation cannot be considered at this stage as it is being invoked only now.  It is settled that an issue not raised in the court a quo cannot be raised for the first time on appeal because this would be offensive to the basic rules of fair play.[11]

As for the alleged substitution of debtors, nowhere in the record can we find evidence of this claim.  The commitment made by DBP to the creditors of WMC was that, although they had a first mortgage lien over substantially all the assets of WMC (which if foreclosed would leave most of its creditors without recourse),

they would nevertheless defer proceedings against those assets and instead allow their sale to NDC (with better terms) to enable WMC to meet the obligations.[12] In effect, what DBP did was merely to restructure its credit with WMC and make additional accommodations in the form of investments on preferred and common shares of stock of WMC.  It was clearly an effort to assist WMC perform its obligations with its creditors.  But not more than that.Concerning the promissory notes supposedly issued by NDC to the creditors of WMC and with the full and unconditional guaranty of the Philippine Government as contained in Annex 5, suffice it to repeat that such Annex 5 (memorandum of agreement between WMC and DBP), as well as Annex 6 (addendum to Annex 5, making NOCOMIN, instead of NDC as the buyer) and Annex 7 (contract of sale between WMC and NOCOMIN), are all not signed by the contracting parties and therefore have no evidentiary weight or binding force.We approve the following observations made by the Court of Appeals:Novation of contract cannot be presumed.  In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other (Art. 1292, Civil Code).  In every novation there are four essential requisites:  (1) a previous valid obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of the old contract; and (4) validity of the new one.  Novation requires the creation of new contractual relations as well as the extinguishment of the old.  There must be a consent of all the parties to the substitution, resulting in the extinction of the old obligation and the creation of a valid new one (Tiu Siuco v. Habana, 45 Phil. 707).  The acceptance of the promissory note by the plaintiff is not novation of the contract.  The legal doctrine is that an obligation to pay a sum of money is not novated in a new instrument by changing the term of payment and adding other obligations not incompatible with the old one (Inchausti & Co. v. Yulo, 34 Phil. 978).  It is not proper to consider an obligation novated as in the case at bar by the mere granting of extension of payment which did not even alter its essence.  To sustain novation necessitates that the same be so declared in unequivocal terms or that there is complete and substantial

incompatibility between the two obligations (Sandico v. Paquing, 42 SCRA 322).  An obligation to pay a sum of money is not novated in a new instrument wherein the old is ratified by changing only the terms of payment and adding other obligations not incompatible with the old one or wherein the old contract is merely supplementing the new one (Dungo v. Lopeña, L-19377, Dec. 29, 1962, 6 SCRA 1007; Magdalena Estates, Inc. v. Rodriguez, 18 SCRA 967; Rizal Commercial Banking Corp. v. Militante, AC GR CV 04077, Sept. 20, 1985; Investors Finance Corp. v. Cruz, AC GR CV 04710, Nov. 27, 1985).WHEREFORE, the petition is DENIED and the challenged decision of the respondent court AFFIRMED, with costs against the petitioner.SO ORDERED.

G.R. No. 124049 June 30, 1999RODOLFO P. VELASQUEZ, petitioner, vs.COURT OF APPEALS, and PHILIPPINE COMMERCIAL INTERNATIONAL BANK, INC., respondent. BELLOSILLO, J.:This petition for review on certiorari prays for reversal of the Decision of the Court of Appeals promulgated 28 September 1995 which affirmed the summary judgment of 20 June 1990 of the Regional Trial Court of Makati City, a default judgment against petitioner, and its 19 February 1996 Resolution denying petitioner's motion for reconsideration.The case arose from a complaint for a sum of money with preliminary attachment filed with the Regional Trial Court of Makati City by private respondent Philippine Commercial International Bank (PCIB) against petitioner Rodolfo P. Velasquez together with Mariano N. Canilao Jr., Inigo A. Nebrida, Cesar R. Dean and Artemio L. Raymundo. 1

Sometime in December 1994 the Pick-up Fresh Farms, Inc. (PUFFI), of which petitioner Velasquez was an officer and stockholder, filed an application for a loan of P7,500,000.00 with PCIB under the government's Guarantee Fund for Small Medium Enterprises (GFSME). 2 On 16 April 1985 the parties executed the corresponding loan agreement. As security for the loan, promissory notes numbered TL 121231 and TL 121258 for the amounts of P4,000,000.00 and P3,500,000.00, respectively, were signed by Inigo A. Nebrida and Mariano Canilao, Jr. as officers of and for both PUFFI and Aircon Refrigeration Industries, Inc. (ARII). 3

A chattel mortgage was also executed by ARII over its equipment and machineries in favor of PCIB. Petitioner along with Nebrida and Canilao, Jr. also executed deeds of suretyship in favor of PCIB. Separate deeds of suretyship were further executed by Cesar R. Dean and Artemio L. Raymundo. 4

When PUFFI defaulted in the payment of its obligations PCIB foreclosed the chattel mortgage. The proceeds of the sale amounted to P678,000.00. 5 Thus, PCIB filed an action to recover the remaining balance of the entire obligation including interests, penalties and other charges. Exemplary damages and attorney's fees of 25% of the total amount due were also sought. On 9 October 1989 a writ of preliminary attachment was granted by the trial court. 6

Petitioner and Canilao filed their joint answer with counterclaim denying personal liability and interposing the defense of novation. At the pre-trial on 11 April 1989 petitioner and counsel failed to appear despite due notice. On 11 April 1989, upon motion of PCIB, petitioner was declared as in default and the trial court granted the motion for summary judgment as against Canilao. 7 Both PCIB and Canilao submitted their respective position papers. Petitioner, who was still in default as he did not move to lift the order of default, adopted Canilao's position paper through an ex parte manifestation. 8 On 8 November 1989 an ex parte hearing was conducted as against petitioner. 9

On 20 June 1990 the trial court rendered a summary judgment in favor of PCIB holding petitioner and Canilao solidarily liable to pay P7,227,624.48 plus annual interest of 17%, and P700,000.00 as attorney's fees and the costs of suit. The case was dismissed without prejudice with regard to the other defendants as they were not properly served with summons. 10

On 31 July 1990 petitioner filed a motion for reconsideration praying that the order of default be lifted and that the summary judgment be set aside. 11 On 13 September 1991 the trial court denied the motion for lack of merit. 12 On appeal, the Court of Appeals on 28 September 1995 affirmed in toto the RTC judgment. 13 Petitioner's motion for reconsideration was thereafter denied. Hence this petition which maintains that the appellate court committed reversible error in sustaining or affirming the summary judgment despite the existence of genuine triable issues of facts and in refusing to set aside the default order against petitioner.We are not persuaded. Petitioner, in raising the first error, invokes our ruling in Viajar v. Estenzo 14 that a party who moves for a summary proceeding has the burden of demonstrating clearly the absence of any genuine issue of fact, or that the issue posed in the complaint is so patently unsubstantial as not to constitute a genuine issue for trial, and any doubt as to the existence of such an issue is resolved against the movant.While this rule is true in the summary proceedings under Rule 34 of the Revised Rules of Court, it does not apply to summary proceedings under Rule 35. A different rationale operates in the latter for it arises out of facts already established or admitted during the pre-trial held beforehand, unlike in the former where the judge merely relies on the merits of the movant's allegations. 15 Rule 34 pertains to a judgment on the pleadings while Rule 35

relates to a summary judgment which was the holding in this case.Petitioner further insists that there are triable issues of fact raised in his answer, namely: (a) the denial of personal liability on his part in the deed of suretyship since he signed thereon as an officer of ARII; (b) PCIB's acceptance of royalties coming from the Franchise Agreement between PUFFI and Arturo Rosales who novated the loan agreement between PUFFI and PCIB; and, (c) the propriety of payment of the entire debt. According to petitioner, the fact that the addresses stated under the names of petitioner and fellow surety signors were those of ARII implies that they signed as officers of the corporation, otherwise, their personal addresses would have been used. Petitioner further avers that any ambiguity in the contract should be decided against PCIB under the contract of adhesion doctrine.A mere perusals of the deed of suretyship readily shows petitioner's personal liability under the loan contract, hence, proper for summary judgment. Moreover, the more appropriate doctrine in this case is that of the "complementary contracts construed together" doctrine which we enunciated in National Power Corporation v. CA 16 —The surety bond must be read in its entirety and together with the contract between the NPC and the contractors. The provisions must be construed together to arrive at their true meaning. Certain stipulations cannot be segregated and then made to control.That the "complementary contracts construed together" doctrine applies in this case finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, which in this case was the loan agreement. This doctrine closely adheres to the spirit of Art. 1374 of the Civil Code which states that —Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.Applying the "complementary contracts construed together" doctrine leaves no doubt that it was the intention of the parties that petitioner would be personally liable in the deed of suretyship because the loan agreement, among others, provided 17 —Art. 3. LOAN SECURITY. — . . . . 3.4 Suretyship. — To further secure the obligations of the BORROWER to the LENDER, Messrs. Nebrida, Raymundo, Canilao, Dean and Velasquez and Aircon and

Refrigeration Ind. Inc. shall each execute a suretyship agreement in favor of the LENDER in form and substance acceptable to the LENDER.It would have been a different matter had petitioner properly contested the deed of suretyship under Sec. 8, Rule 8, of the Rules of Court. But he did not. The omission, as properly noted by the trial court, was fatal for it resulted in petitioner's admission of the due execution and genuineness of the contract. The admission effectively eliminated any defense relating to the authenticity and due execution of the document, e.g., that the document was spurious, counterfeit, or of different import on its face as the one executed by the parties; or that the signatures appearing thereon were forgeries; or that the signatures were unauthorized. 18

Petitioner also claims that PCIB's acceptance of royalty fees which were the fruits of the Franchising Agreement between PUFFI and Arturo Rosales 19 constituted a novation of the loan agreement and deeds of suretyship, therefore, a genuine issue of fact.This contention is untenable. Extinctive novation has these requisites: (a) the existence of a previous valid obligation; (b) the agreement of all the parties to the new contract; (c) the extinguishment of the old obligation or contract; and, (d) the validity of the new one. Thus, novation is effected only when a new contract has extinguished an earlier contract between the same parties. 20 Necessarily, there is no novation when the new contract is not between the same parties as in the old contract.The franchise agreement was only between PUFFI and Rosales. PCIB was never mentioned therein; neither was there any reference to the subject loan agreement. What PCIB simply did was to accept royalty payments out of the franchise — an act which was already beyond the scope of the franchise agreement but which was not in conflict with the payment arrangement in the loan agreement. Our ruling in the Magdalena Estates Inc. v. Rodriguez is instructive, to wit 21 —An obligation to pay a sum of money is not novated, in a new instrument wherein the old is ratified, by changing only the terms of payment and adding other obligations not incompatible with the old one, or wherein the old contract is merely supplemented by the new one. The mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a

novation, and the creditor can still enforce the obligation against the original debtor.As regards the defense of overpayment, since it is being raised for the first time we need not discuss it for it is deemed waived pursuant to Sec. 2, Rule 9, of the Rules of Court.At this point, it must be stressed that insofar as petitioner is concerned, the RTC decision was not a summary judgment but a judgment default as hearing was held ex parte against him. Even so, the RTC decision is still without grave abuse of discretion. Thus, the CA could not be in error in upholding it despite claims by petitioner that the default order should have been set aside because he could not be bound by the negligence of his counsel.Petitioner attempts to avoid any personal blame by claiming that a special power of attorney in favor of his lawyer was drawn up because he could not attend the pre-trial due to previous commitments abroad. The lawyer, however, failed to attend thereby prejudicing his interest. However, the findings of the Court of Appeals, as fully substantiated by the records, showed that the lawyer was not the only one negligent, thus 22 —Velasquez appears to have appointed his counsel, Atty. Rodolfo Vega, as his attorney-in-fact to represent him at the pre-trial but the said lawyer failed to appear, hence Velasquez was declared as in default. The records show that the Order of April 11, 1984 declaring him as in default was sent to his counsel and was received by the latter as early as May 10, 1989. No steps were taken to have the said Order lifted or reconsidered. This is binding on Velasquez who is himself guilty of negligence when, after executing the special power of attorney in favor of his lawyer, he left for abroad and apparently paid no further attention to his case until he received the decision. There is therefore no fraud, accident, mistake or excusable negligence which will warrant a lifting of the Order of Default.As a general rule, a client is bound by the mistakes of his counsel; 23 more so by the result of his own negligence.WHEREFORE, the petition is DENIED. The Decision of 28 September 1995 of the Court of Appeals affirming the 20 June 1990 judgment of the RTC- Br. 61, Makati City, ordering petitioner Rodolfo P. Velasquez and Mariano N. Canilao, Jr. to solidarily pay respondent Philippine Commercial and Industrial Bank (PCIB) the amount of P7,227,624.48 with annual interest of 17% and attorney's fees of P700,000.00 plus cost of suits as well as its Resolution of 19

February 1995 denying reconsideration, is AFFIRMED.1âwphi1.nêtSO ORDERED.

G.R. No. 136423            August 20, 2002SPOUSES EFREN N. RIGOR and ZOSIMA D. RIGOR, for themselves and as owners of CHIARA CONSTRUCTION, petitioners, vs.CONSOLIDATED ORIX LEASING and FINANCE CORPORATION, respondent.CARPIO, J.:The CaseThis is a petition for review of the decision1 of the Court of Appeals in CA-G.R. SP No. 48415 affirming the orders2 dated June 3, 1998 and July 15, 1998 of the Regional Trial Court of Dagupan City, Branch 41. These orders denied for lack of merit the motion to dismiss filed by petitioner Chiara Construction, owned by the spouses Efren and Zosima Rigor ("Petitioners" for brevity), in Civil Case No. 98-02067 of the same Regional Trial Court.The FactsPetitioners obtained a loan from private respondent Consolidated Orix Leasing and Finance Corporation3 ("Private Respondent" for brevity) in the amount of P1,630,320.00. Petitioners executed a promissory note on July 31, 1996 promising to pay the loan in 24 equal monthly installments of P67,930.00 every fifth day of the month commencing on September 5, 1996.4 The promissory note also provides that default in paying any installment renders the entire unpaid amount due and payable. To secure payment of the loan, petitioners executed in favor of private respondent a deed of chattel mortgage over two dump trucks.5

Petitioners failed to pay several installments despite demand from private respondent. On January 5, 1998, private respondent sought to foreclose the chattel mortgage by filing a complaint for Replevin with Damages against petitioners before the Regional Trial Court of Dagupan City ("Dagupan trial court" for brevity). After service of summons, petitioners moved to dismiss the complaint on the ground of improper venue based on a provision in the promissory note which states that, "x x x all legal actions arising out of this note or in connection with the chattels subject hereof shall only be brought in or submitted to the proper court in Makati City, Philippines."Private respondent opposed the motion to dismiss and argued that venue was properly laid in Dagupan City where it has a branch office based on a provision in the deed of chattel mortgage which states that, "x x x in case of litigation arising out of the transaction that gave rise to this contract, complete jurisdiction is given the

proper court of the city of Makati or any proper court within the province of Rizal, or any court in the city, or province where the holder/mortgagee has a branch office, waiving for this purpose any proper venue."After a further exchange of pleadings, the Dagupan trial court denied petitioners’ motion to dismiss in an Order dated June 3, 1998.6 On July 15, 1998, the Dagupan trial court denied their motion to reconsider the Order of June 3, 1998.7

Not satisfied with the orders, petitioners filed a petition for certiorari before the Court of Appeals imputing grave abuse of discretion by the Dagupan trial court in denying the motion to dismiss. On October 19, 1998, the Court of Appeals rendered the decision denying due course and dismissing the petition. On November 27, 1998, the Court of Appeals issued a resolution denying the motion for reconsideration.Hence, the instant petition.The Ruling of the Court of AppealsIn dismissing the petition, the Court of Appeals ruled as follows:"Records reveal that Chiara executed the Promissory Note in favor of Consolidated secured by a Chattel Mortgage over two (2) motor vehicles. Conformably, failure to comply with the obligations under the Promissory Note entitles Consolidated to the possession of the mortgaged chattels or motor vehicles for purposes of foreclosure to satisfy the loan obligation. It is for this reason that the action commenced by Consolidated is for Replevin and damages with an alternative prayer for the defendants to pay the outstanding amount in the event manual delivery of the motor vehicles involved cannot be effected. In plain language, the action commenced before the respondent court is principally based both on the Promissory Note and the Chattel Mortgage, so much so, that it becomes essentially imperative to interpret and give effect to all the provisions of the two actionable documents.In this wise, both the Promissory Note and the Chattel Mortgage should be treated as a singular contract with one complementing the other. Appropriately, Article 1374 provides:‘Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.’And in giving meaning to the contract, an interpretation of all its provisions must be adopted as will give effect to all. The stipulations of the contract shall be interpreted together attributing

to the doubtful ones that sense which may result from all of them taken jointly [Layug vs. Intermediate Appellate Court, 167 SCRA 627 (1988)]. Tolentino, in his Civil Code of the Philippines, Vol. 4, 1995 Reprint, pp. 563-564 said:‘xxx The whole contract must be interpreted or read together in order to arrive at its true meaning. Certain stipulations cannot be segregated and then made to control; neither do particular words or phrases necessarily determine the character of a contract. The legal effect of the contract is not to be determined alone by any particular provision disconnected from all others, but in the ruling intention of the parties as gathered from all the language they have used; and from their contemporaneous and subsequent acts.Provisions of a contract are to be given a reasonable and practical interpretation so as to be efficacious. Titles given to sections of a contract may be resorted to in interpreting its scope. An interpretation that gives effect to the contract as a whole should be adopted.’By and large, it was therefore not an error or grave abuse of discretion when the controversial Motion to Dismiss was denied by the respondent court. Indeed, venue is properly laid in the case at bar under the provisions of the Chattel Mortgage in issue."8

The IssueIn petitioners’ memorandum, the sole issue posed is:"WHETHER VENUE WAS PROPERLY LAID UNDER THE PROVISIONS OF THE CHATTEL MORTGAGE CONTRACT IN THE LIGHT OF ARTICLE 1374 OF THE CIVIL CODE."The controversy stems from the conflicting provisions on venue in the promissory note and the deed of chattel mortgage. Consequently, the decisive issue is the correct interpretation of the venue provisions in the two contracts. The venue provision in the promissory note reads as follows:"It expressly (sic) agreed that all legal actions arising out of this note or in connection with the chattels subject hereof shall only be brought in or submitted to the proper court in Makati City, Philippines."On the other hand, the venue provision in the deed of chattel mortgage reads:"VENUE. The payment herein mentioned whether covered by notes or not, are payable at the office address of the MORTGAGEE or its assignee and in case of litigation arising out of the transaction that gave rise to this contract, complete

jurisdiction is given the proper court of the city of Makati or any proper court within the province of Rizal, or any court in the city, or province where the holder/mortgagee has a branch office, waiving for this purpose any proper venue."Petitioners argue that the promissory note should prevail over the deed of chattel mortgage because this is the principal contract being sued upon while the deed of chattel mortgage "merely accompanies" the promissory note. According to petitioners, the words "shall only" in the promissory note makes exclusive and restricts venue to the proper court in Makati City. Petitioners contend that the venue provision in the promissory note does not contain qualifying words that the parties intended the venue provision in the deed of chattel mortgage to be a modification of the venue in the promissory note. Petitioners maintain that the Court of Appeals erroneously applied Article 1374 of the Civil Code in construing the promissory note and the deed of chattel mortgage. According to petitioners, this article applies only to conflicting provisions in one and the same contract and not to those found in two distinct and entirely separate contracts such as in the instant case. Petitioners further assert that any ambiguity should be decided against private respondent under the contract of adhesion doctrine.Private respondent counters that the alternative venues provided under the deed of chattel mortgage may not be disregarded as meaningless verbiage. While the promissory note confines venue to the proper court in Makati City, the deed of chattel mortgage has modified this. Private respondent points out that petitioners’ loan under the promissory note as secured by the deed of chattel mortgage was negotiated and concluded by the parties in Dagupan City, and booked at private respondent’s Dagupan branch office. Further, the seizure of the mortgaged vehicles in Dagupan City, as allowed by the deed of chattel mortgage, constitutes private respondent’s cause of action in the Dagupan trial court. Private respondent maintains that the convenience of the parties is the overriding consideration in determining venue. This is best achieved by laying the same in Dagupan City where private respondent has a branch office, while petitioners reside in nearby Tarlac. Private respondent bewails that petitioners filed the motion to dismiss as a dilatory tactic.The Court’s Ruling

The petition is bereft of merit. The Court finds no reversible error in the Court of Appeals’ conclusion that venue was properly laid in the Dagupan trial court.The issue presented in this case is not novel.As a general rule, all personal actions may be commenced and tried where the plaintiff or any of the principal plaintiffs resides, or where the defendant or any of the principal defendants resides, at the election of the plaintiff.9 However, by written agreement of the parties, the venue of an action may be changed or transferred from one place to another.10

Under the promissory note, petitioners are obliged to pay private respondent the loan in accordance with the agreed schedule. To secure the promissory note, petitioners constituted a chattel mortgage in favor of private respondent over two dump trucks. Both contracts contain venue provisions.There is no dispute that the words "shall only" preceding the designation of venue in the promissory note, standing alone, is mandatory and restrictive. However, the deed of chattel mortgage executed to secure the loan obligation provides alternative venues. Should we disregard the venue provision in the deed of chattel mortgage as mere surplusage as contended by petitioners?The answer is in the negative.The chattel mortgage constituted over the two dump trucks is an accessory contract to the loan obligation as embodied in the promissory note.11 The chattel mortgage cannot exist as an independent contract since its consideration is the same as that of the principal contract.12 A principal obligation is an indispensable condition for the existence of an accessory contract. Indeed, contracts may be classified according to the degree of dependence.13 Loans, sales or leases are classified as principal contracts while pledges, mortgages and suretyships are classified as accessory contracts because their existence is dependent upon the principal obligations they guarantee or secure.14

The Court held in National Power Corporation vs. Court of Appeals15 that the provisions of an accessory contract such as a surety bond must be read in its entirety and together with the principal contract between the parties. We quote the pertinent portion of the decision thus:"The surety bond must be read in its entirety and together with the contract between NPC and the contractors. The provisions must be construed together to arrive at their true meaning. Certain

stipulations cannot be segregated and then made to control."This rule was reiterated in Velasquez vs. Court of Appeals16 as the "complementary contracts construed together" doctrine. The Court explained that the doctrine –"x x x finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, which x x x was the loan agreement. This doctrine closely adheres to the spirit of Art. 1374 of the Civil Code which states that –Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly.xxx."Applying the doctrine to the instant case, we cannot sustain petitioners’ contentions. The promissory note and the deed of chattel mortgage must be construed together. Private respondent explained that its older standard promissory notes confined venue in Makati City where it had its main office. After it opened a branch office in Dagupan City, private respondent made corrections in the deed of chattel mortgage, but due to oversight, failed to make the corresponding corrections in the promissory notes. Petitioners affixed their signatures in both contracts.We apply the presumption that a person takes ordinary care of his concerns.17 It is presumed that petitioners did not sign the deed of chattel mortgage without informing themselves of its contents. As aptly stated in a case, "they being of age and businessmen of experience, it must be presumed that they acted with due care and have signed the documents in question with full knowledge of their import and the obligation they were assuming thereby."18

In any event, petitioners did not contest the deed of chattel mortgage under Section 8, Rule 8 of the Revised Rules of Civil Procedure.19 As held in Velasquez,20 this omission "effectively eliminated any defense relating to the authenticity and due execution of the deed, e.g. that the document was spurious, counterfeit, or of different import on its face as the one executed by the parties; or that the signatures appearing thereon were forgeries; or that the signatures were unauthorized."Clearly, the Court of Appeals did not err in ruling that venue was properly laid in Dagupan City as provided in the deed of chattel mortgage. We hold that private respondent is not barred from filing its case against petitioners in Dagupan City where private

respondent has a branch office as provided for in the deed of chattel mortgage.The rules on venue are intended to assure convenience for the plaintiff and his witnesses and to promote the ends of justice.21 As correctly pointed out by private respondent, Dagupan City is the more convenient venue for both parties considering that private respondent has a branch office in the city while petitioners reside in nearby Tarlac. From this standpoint, petitioners’ futile insistence on an exclusive venue in Makati City smacks of a dilatory tactic to evade or at the very least, prolong the payment of a just obligation. The case has been pending for four years on account of the question of venue to the detriment of private respondent which is simply collecting on an outstanding loan obligation.Finally, private respondent claims that petitioners are guilty of forum shopping. Petitioner filed another petition before the Court of Appeals22 assailing the denial of their motion to dismiss on the ground of improper venue involving different promissory notes and deeds of chattel mortgages with the same venue provisions. We are not in a position to determine the presence of the elements of forum shopping and to resolve this issue on the basis of private respondent’s bare allegations. This matter should be brought to the attention of the Court of Appeals where the petition which allegedly raises the same issues is pending.WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated October 19, 1998, as well as its Resolution dated November 27, 1998 denying reconsideration, is AFFIRMED.SO ORDERED.

[G.R. No. 138544. October 3, 2000]SECURITY BANK AND TRUST COMPANY, Inc., petitioner, vs. RODOLFO M. CUENCA, respondent.D E C I S I O NPANGANIBAN, J.:

Being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor. The fundamental rules of fair play require the creditor to obtain the consent of the surety to any material alteration in the principal loan agreement, or at least to notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for loans obtained in excess of the amount or beyond the period stipulated in the original agreement, absent any clear stipulation showing that the latter waived his right to be notified thereof, or to give consent thereto. This is especially true where, as in this case, respondent was no longer the principal officer or major stockholder of the corporate debtor at the time the later obligations were incurred. He was thus no longer in a position to compel the debtor to pay the creditor and had no more reason to bind himself anew to the subsequent obligations.The Case

This is the main principle used in denying the present Petition for Review under Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998 Decision[1] of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive portion of which reads as follows:“WHEREFORE, the judgment appealed from is hereby amended in the sense that defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED from liability to pay any amount stated in the judgment.“Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is hereby DISMISSED for lack of merit.“In all other respect[s], the decision appealed from is AFFIRMED.”[2]

Also challenged is the April 14, 1999 CA Resolution,[3] which denied petitioner’s Motion for Reconsideration.

Modified by the CA was the March 6, 1997 Decision[4] of the Regional Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as follows:“WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly

and severally, plaintiff Security Bank & Trust Company the sum of P39,129,124.73 representing the balance of the loan as of May 10, 1994 plus 12% interest per annum until fully paid, and the sum of P100,000.00 as attorney’s fees and litigation expenses and to pay the costs.SO ORDERED.”The Facts

The facts are narrated by the Court of Appeals as follows:[5]“The antecedent material and relevant facts are that defendant-appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in logging operations. It was a holder of a Timber License Agreement issued by the Department of Environment and Natural Resources (‘DENR’).“On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the additional capitalization requirements of its logging operations.“The Credit Approval Memorandum expressly stated that the P8M Credit Loan Facility shall be effective until 30 November 1981:‘JOINT CONDITIONS:‘1. Against Chattel Mortgage on logging trucks and/or inventories (except logs) valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.‘2. Submission of an appropriate Board Resolution authorizing the borrowings, indicating therein the company’s duly authorized signatory/ies;‘3. Reasonable/compensating deposit balances in current account shall be maintained at all times; in this connection, a Makati account shall be opened prior to availment on lines;‘4. Lines shall expire on November 30, 1981; and‘5. The bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.’ (Emphasis supplied.)“To secure the payment of the amounts drawn by appellant SIMC from the above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23 December 1980 (Exhibit ‘A’) over some of its machinery and equipment in favor of [Petitioner] SBTC. As additional security for the payment of the loan, [Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17 December 1980 (Exhibit ‘B’) in favor of [Petitioner] SBTC whereby

he solidarily bound himself with SIMC as follows:x x x x x x x x x‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with the client (SIMC) in favor of the bank for the payment, upon demand and without the benefit of excussion of whatever amount x x x the client may be indebted to the bank x x x by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s) x x x .’ (Emphasis supplied).“On 26 November 1981, four (4) days prior to the expiration of the period of effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).“Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were sold at a public auction relative to Civil Case No. 18021 entitled ‘Adolfo A. Angala vs. Universal Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by Adolfo Angala who was the highest bidder during the public auction.“Subsequently, appellant SIMC repeatedly availed of its credit line and obtained six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and DLS/74/47/86 to cover the amounts of the abovementioned additional loans against the credit line.“Appellant SIMC, however, encountered difficulty[6] in making the amortization payments on its loans and requested [Petitioner] SBTC for a complete restructuring of its indebtedness. SBTC accommodated appellant SIMC’s request and signified its approval in a letter dated 18 February 1988 (Exhibit ‘G’) wherein SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of [Respondent] Cuenca, agreed to restructure the past due obligations of defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to defendant-appellant Sta. Ines

the following loans:a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos (P8,800,000.00), to be applied to liquidate the principal portion of defendant-appellant Sta. Ines[‘] total outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, et Vol I, pp. 33 to 34) andb. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos (P3,400,000.00), to be applied to liquidate the past due interest and penalty portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente, at Vol. II, p. 33 to 34).’“It should be pointed out that in restructuring defendant-appellant Sta. Ines’ obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos (P6,100,000.00), which was the only loan incurred prior to the expiration of the P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the Indemnity Agreement dated 19 December 1980 (Exhibit ‘3-Cuenca’, Expediente, at Vol. II, p. 331), was not segregated from, but was instead lumped together with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits ‘D’, ‘E’, and ‘F’, Expediente, at Vol. II, pp. 333 to 335) obtained by defendant-appellant Sta. Ines which were not secured by said Indemnity Agreement.“Pursuant to the agreement to restructure its past due obligations to [Petitioner] Security Bank, defendant-appellant Sta. Ines thus executed the following promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security Bank:PROMISSORY NOTE NO. AMOUNTRL/74/596/88 P8,800,000.00RL/74/597/88 P3,400,000.00-------------------TOTAL P12,200,000.00(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343).“To formalize their agreement to restructure the loan obligations of defendant-appellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines executed a Loan Agreement dated 31 October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement dated 31 October

1989 provides:‘1.01 Amount - The Lender agrees to grant loan to the Borrower

in the aggregate amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the ‘Loan’). The loan shall be released in two (2) tranches of P8,800,000.00 for the first tranche (the ‘First Loan’) and P3,400,000.00 for the second tranche (the ‘Second Loan’) to be applied in the manner and for the purpose stipulated hereinbelow.

‘1.02. Purpose - The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding indebtedness to the Lender (the ‘indebtedness’) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.’ (Underscoring supplied.) (cf. p. 1 of Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33)“From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-GG-SIMC’, Expediente, at Vol. II, pp. 38, 70 to 165)“Appellant SIMC defaulted in the payment of its restructured loan obligations to [Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA, the last of which were made through separate letters dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991 (Exhibit ‘L’), respectively.“Appellants individually and collectively refused to pay the [Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993, resulting after trial on the merits in a decision by the court a quo, x x x from which [Respondent] Cuenca appealed.”Ruling of the Court of Appeals

In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan Agreement had novated the 1980 credit accommodation earlier granted by the bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity Agreement, by which Cuenca, who was then the Board chairman and president of Sta. Ines, had bound himself solidarily liable for the payment of the loans secured by that credit accommodation. It noted that the 1989 Loan Agreement had been executed without notice to, much less consent from, Cuenca who at the time was no longer a stockholder of the corporation.

The appellate court also noted that the Credit Approval

Memorandum had specified that the credit accommodation was for a total amount of P8 million, and that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was liable only for loans obtained prior to November 30, 1981, and only for an amount not exceeding P8 million.

It further held that the restructuring of Sta. Ines’ obligation under the 1989 Loan Agreement was tantamount to a grant of an extension of time to the debtor without the consent of the surety. Under Article 2079 of the Civil Code, such extension extinguished the surety.

The CA also opined that the surety was entitled to notice, in case the bank and Sta. Ines decided to materially alter or modify the principal obligation after the expiry date of the credit accommodation.

Hence, this recourse to this Court.[7]The Issues

In its Memorandum, petitioner submits the following for our consideration:[8]

“A. Whether or not the Honorable Court of Appeals erred in releasing Respondent Cuenca from liability as surety under the Indemnity Agreement for the payment of the principal amount of twelve million two hundred thousand pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March 1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties and other charges due thereon;

i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent Cuenca’s liability under the Indemnity Agreement covered only availments on SIMC’s credit line to the extent of eight million pesos (P8,000,000.00) and made on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the restructuring of SIMC’s indebtedness under the P8 million credit accommodation was tantamount to an extension granted to SIMC without Respondent Cuenca’s consent, thus extinguishing his liability under the Indemnity Agreement pursuant to Article 2079 of the Civil Code;

iii. Whether or not the Honorable Court of appeals erred in ruling that the restructuring of SIMC’s indebtedness under the P8 million credit accommodation constituted a novation of the principal obligation, thus extinguishing Respondent Cuenca’s liability under the indemnity agreement;

B. Whether or not Respondent Cuenca’s liability under the Indemnity Agreement was extinguished by the payments made by SIMC;

C. Whether or not petitioner’s Motion for Reconsideration was pro-forma;

D. Whether or not service of the Petition by registered mail sufficiently complied with Section 11, Rule 13 of the 1997 Rules of Civil Procedure.”

Distilling the foregoing, the Court will resolve the following issues: (a) whether the 1989 Loan Agreement novated the original credit accommodation and Cuenca’s liability under the Indemnity Agreement; and (b) whether Cuenca waived his right to be notified of and to give consent to any substitution, renewal, extension, increase, amendment, conversion or revival of the said credit accommodation. As preliminary matters, the procedural questions raised by respondent will also be addressed.The Court’s Ruling

The Petition has no merit.Preliminary Matters: Procedural QuestionsMotion for Reconsideration Not Pro Forma

Respondent contends that petitioner’s Motion for Reconsideration of the CA Decision, in merely rehashing the arguments already passed upon by the appellate court, was pro forma; that as such, it did not toll the period for filing the present Petition for Review.[9] Consequently, the Petition was filed out of time.[10]

We disagree. A motion for reconsideration is not pro forma just because it reiterated the arguments earlier passed upon and rejected by the appellate court. The Court has explained that a movant may raise the same arguments, precisely to convince the court that its ruling was erroneous.[11]

Moreover, there is no clear showing of intent on the part of petitioner to delay the proceedings. In Marikina Valley Development Corporation v. Flojo,[12] the Court explained that a pro forma motion had no other purpose than to gain time and to delay or impede the proceedings. Hence, “where the circumstances of a case do not show an intent on the part of the movant merely to delay the proceedings, our Court has refused to characterize the motion as simply pro forma.” It held:“We note finally that because the doctrine relating to pro forma motions for reconsideration impacts upon the reality and substance of the statutory right of appeal, that doctrine should be

applied reasonably, rather than literally. The right to appeal, where it exists, is an important and valuable right. Public policy would be better served by according the appellate court an effective opportunity to review the decision of the trial court on the merits, rather than by aborting the right to appeal by a literal application of the procedural rules relating to pro forma motions for reconsideration.”Service by Registered Mail Sufficiently Explained

Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:“SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the service and filing of pleadings and other papers shall be done personally. Except with respect to papers emanating from the court, a resort to other modes must be accompanied by a written explanation why the service or filing was not done personally. A violation of this Rule may be cause to consider the paper as not filed.”

Respondent maintains that the present Petition for Review does not contain a sufficient written explanation why it was served by registered mail.

We do not think so. The Court held in Solar Entertainment v. Ricafort[13] that the aforecited rule was mandatory, and that “only when personal service or filing is not practicable may resort to other modes be had, which must then be accompanied by a written explanation as to why personal service or filing was not practicable to begin with.”

In this case, the Petition does state that it was served on the respective counsels of Sta. Ines and Cuenca “by registered mail in lieu of personal service due to limitations in time and distance.”[14] This explanation sufficiently shows that personal service was not practicable. In any event, we find no adequate reason to reject the contention of petitioner and thereby deprive it of the opportunity to fully argue its cause.First Issue: Original Obligation Extinguished by Novation

An obligation may be extinguished by novation, pursuant to Article 1292 of the Civil Code, which reads as follows:“ART. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other.”

Novation of a contract is never presumed. It has been held

that “[i]n the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point.”[15] Indeed, the following requisites must be established: (1) there is a previous valid obligation; (2) the parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new contract.[16]

Petitioner contends that there was no absolute incompatibility between the old and the new obligations, and that the latter did not extinguish the earlier one. It further argues that the 1989 Agreement did not change the original loan in respect to the parties involved or the obligations incurred. It adds that the terms of the 1989 Contract were “not more onerous.”[17] Since the original credit accomodation was not extinguished, it concludes that Cuenca is still liable under the Indemnity Agreement.

We reject these contentions. Clearly, the requisites of novation are present in this case. The 1989 Loan Agreement extinguished the obligation[18] obtained under the 1980 credit accomodation. This is evident from its explicit provision to “liquidate” the principal and the interest of the earlier indebtedness, as the following shows:“1.02. Purpose. The First Loan shall be applied to liquidate the principal portion of the Borrower’s present total outstanding Indebtedness to the Lender (the “Indebtedness”) while the Second Loan shall be applied to liquidate the past due interest and penalty portion of the Indebtedness.”[19] (Italics supplied.)

The testimony of an officer[20] of the bank that the proceeds of the 1989 Loan Agreement were used “to pay-off” the original indebtedness serves to strengthen this ruling.[21]

Furthermore, several incompatibilities between the 1989 Agreement and the 1980 original obligation demonstrate that the two cannot coexist. While the 1980 credit accommodation had stipulated that the amount of loan was not to exceed P8 million,[22] the 1989 Agreement provided that the loan was P12.2 million. The periods for payment were also different.

Likewise, the later contract contained conditions, “positive covenants” and “negative covenants” not found in the earlier obligation. As an example of a positive covenant, Sta. Ines undertook “from time to time and upon request by the Lender, [to] perform such further acts and/or execute and deliver such additional documents and writings as may be necessary or proper

to effectively carry out the provisions and purposes of this Loan Agreement.”[23] Likewise, SIMC agreed that it would not create any mortgage or encumbrance on any asset owned or hereafter acquired, nor would it participate in any merger or consolidation.[24]

Since the 1989 Loan Agreement had extinguished the original credit accommodation, the Indemnity Agreement, an accessory obligation, was necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which provides:“ART. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.”Alleged Extension

Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension of the P8 million original accommodation; it was not a novation.[25]

This argument must be rejected. To begin with, the 1989 Loan Agreement expressly stipulated that its purpose was to “liquidate,” not to renew or extend, the outstanding indebtedness. Moreover, respondent did not sign or consent to the 1989 Loan Agreement, which had allegedly extended the original P8 million credit facility. Hence, his obligation as a surety should be deemed extinguished, pursuant to Article 2079 of the Civil Code, which specifically states that “[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty. x x x.” In an earlier case,[26] the Court explained the rationale of this provision in this wise:“The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety’s consent would deprive the surety of his right to pay the creditor and to be immediately subrogated to the creditor’s remedies against the principal debtor upon the maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period.”Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit Approval Memorandum in holding that the credit accommodation was only for P8 million, and that it was for a period of one year ending on November 30, 1981. Petitioner

objects to the appellate court’s reliance on that document, contending that it was not a binding agreement because it was not signed by the parties. It adds that it was merely for its internal use.

We disagree. It was petitioner itself which presented the said document to prove the accommodation. Attached to the Complaint as Annex A was a copy thereof “evidencing the accommodation.”[27] Moreover, in its Petition before this Court, it alluded to the Credit Approval Memorandum in this wise:“4.1 On 10 November 1980, Sta. Ines Melale Corporation (“SIMC”) was granted by the Bank a credit line in the aggregate amount of Eight Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional capitalization requirements for its logging operations. For this purpose, the Bank issued a Credit Approval Memorandum dated 10 November 1980.”

Clearly, respondent is estopped from denying the terms and conditions of the P8 million credit accommodation as contained in the very document it presented to the courts. Indeed, it cannot take advantage of that document by agreeing to be bound only by those portions that are favorable to it, while denying those that are disadvantageous.Second Issue: Alleged Waiver of Consent

Pursuing another course, petitioner contends that Respondent Cuenca “impliedly gave his consent to any modification of the credit accommodation or otherwise waived his right to be notified of, or to give consent to, the same.”[28] Respondent’s consent or waiver thereof is allegedly found in the Indemnity Agreement, in which he held himself liable for the “credit accommodation including [its] substitutions, renewals, extensions, increases, amendments, conversions and revival.” It explains that the novation of the original credit accommodation by the 1989 Loan Agreement is merely its “renewal,” which “connotes cessation of an old contract and birth of another one x x x.”[29]

At the outset, we should emphasize that an essential alteration in the terms of the Loan Agreement without the consent of the surety extinguishes the latter’s obligation. As the Court held in National Bank v. Veraguth,[30] “[i]t is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.”

In this case, petitioner’s assertion - that respondent

consented to the alterations in the credit accommodation -- finds no support in the text of the Indemnity Agreement, which is reproduced hereunder:“Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for and in consideration of the credit accommodation in the total amount of eight million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST COMPANY, a commercial bank duly organized and existing under and by virtue of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the stipulated interests and charges thereon, evidenced by that/those certain PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in favor of the BANK hereby bind(s) himself/themselves jointly and severally with the CLIENT in favor of the BANK for the payment , upon demand and without benefit of excussion of whatever amount or amounts the CLIENT may be indebted to the BANK under and by virtue of aforesaid credit accommodation(s) including the substitutions, renewals, extensions, increases, amendment, conversions and revivals of the aforesaid credit accommodation(s), as well as of the amount or amounts of such other obligations that the CLIENT may owe the BANK, whether direct or indirect, principal or secondary, as appears in the accounts, books and records of the BANK, plus interest and expenses arising from any agreement or agreements that may have heretofore been made, or may hereafter be executed by and between the parties thereto, including the substitutions, renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor of the BANK for the faithful compliance of all the terms and conditions contained in the aforesaid credit accommodation(s), all of which are incorporated herein and made part hereof by reference.”

While respondent held himself liable for the credit accommodation or any modification thereof, such clause should be understood in the context of the P8 million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines any license to modify the nature and scope of the original credit accommodation, without informing or getting the consent of respondent who was

solidarily liable. Taking the bank’s submission to the extreme, respondent (or his successors) would be liable for loans even amounting to, say, P100 billion obtained 100 years after the expiration of the credit accommodation, on the ground that he consented to all alterations and extensions thereof.

Indeed, it has been held that a contract of surety “cannot extend to more than what is stipulated. It is strictly construed against the creditor, every doubt being resolved against enlarging the liability of the surety.”[31] Likewise, the Court has ruled that “it is a well-settled legal principle that if there is any doubt on the terms and conditions of the surety agreement, the doubt should be resolved in favor of the surety x x x. Ambiguous contracts are construed against the party who caused the ambiguity.”[32] In the absence of an unequivocal provision that respondent waived his right to be notified of or to give consent to any alteration of the credit accommodation, we cannot sustain petitioner’s view that there was such a waiver.

It should also be observed that the Credit Approval Memorandum clearly shows that the bank did not have absolute authority to unilaterally change the terms of the loan accommodation. Indeed, it may do so only upon notice to the borrower, pursuant to this condition:“5. The Bank reserves the right to amend any of the aforementioned terms and conditions upon written notice to the Borrower.”[33]

We reject petitioner’s submission that only Sta. Ines as the borrower, not respondent, was entitled to be notified of any modification in the original loan accommodation.[34] Following the bank’s reasoning, such modification would not be valid as to Sta. Ines if no notice were given; but would still be valid as to respondent to whom no notice need be given. The latter’s liability would thus be more burdensome than that of the former. Such untenable theory is contrary to the principle that a surety cannot assume an obligation more onerous than that of the principal.[35]

The present controversy must be distinguished from Philamgen v. Mutuc,[36] in which the Court sustained a stipulation whereby the surety consented to be bound not only for the specified period, “but to any extension thereafter made, an extension x x x that could be had without his having to be notified.”

In that case, the surety agreement contained this

unequivocal stipulation: “It is hereby further agreed that in case of any extension of renewal of the bond, we equally bind ourselves to the Company under the same terms and conditions as herein provided without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of the bond which may be granted under this indemnity agreement.”

In the present case, there is no such express stipulation. At most, the alleged basis of respondent’s waiver is vague and uncertain. It confers no clear authorization on the bank or Sta. Ines to modify or extend the original obligation without the consent of the surety or notice thereto.Continuing Surety

Contending that the Indemnity Agreement was in the nature of a continuing surety, petitioner maintains that there was no need for respondent to execute another surety contract to secure the 1989 Loan Agreement.

This argument is incorrect. That the Indemnity Agreement is a continuing surety does not authorize the bank to extend the scope of the principal obligation inordinately.[37] In Dino v. CA,[38] the Court held that “a continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof.”

To repeat, in the present case, the Indemnity Agreement was subject to the two limitations of the credit accommodation: (1) that the obligation should not exceed P8 million, and (2) that the accommodation should expire not later than November 30, 1981. Hence, it was a continuing surety only in regard to loans obtained on or before the aforementioned expiry date and not exceeding the total of P8 million.

Accordingly, the surety of Cuenca secured only the first loan of P6.1 million obtained on November 26, 1991. It did not secure the subsequent loans, purportedly under the 1980 credit accommodation, that were obtained in 1986. Certainly, he could not have guaranteed the 1989 Loan Agreement, which was executed after November 30, 1981 and which exceeded the stipulated P8 million ceiling.

Petitioner, however, cites the Dino ruling in which the Court found the surety liable for the loan obtained after the payment of the original one, which was covered by a continuing surety

agreement. At the risk of being repetitious, we hold that in Dino, the surety Agreement specifically provided that “each suretyship is a continuing one which shall remain in full force and effect until this bank is notified of its revocation.” Since the bank had not been notified of such revocation, the surety was held liable even for the subsequent obligations of the principal borrower.

No similar provision is found in the present case. On the contrary, respondent’s liability was confined to the 1980 credit accommodation, the amount and the expiry date of which were set down in the Credit Approval Memorandum.Special Nature of the JSS

It is a common banking practice to require the JSS (“joint and solidary signature”) of a major stockholder or corporate officer, as an additional security for loans granted to corporations. There are at least two reasons for this. First, in case of default, the creditor’s recourse, which is normally limited to the corporate properties under the veil of separate corporate personality, would extend to the personal assets of the surety. Second, such surety would be compelled to ensure that the loan would be used for the purpose agreed upon, and that it would be paid by the corporation.

Following this practice, it was therefore logical and reasonable for the bank to have required the JSS of respondent, who was the chairman and president of Sta. Ines in 1980 when the credit accommodation was granted. There was no reason or logic, however, for the bank or Sta. Ines to assume that he would still agree to act as surety in the 1989 Loan Agreement, because at that time, he was no longer an officer or a stockholder of the debtor-corporation. Verily, he was not in a position then to ensure the payment of the obligation. Neither did he have any reason to bind himself further to a bigger and more onerous obligation.

Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of respondent, without even informing him, smacks of negligence on the part of the bank and bad faith on that of the principal debtor. Since that Loan Agreement constituted a new indebtedness, the old loan having been already liquidated, the spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a surety for the new loan.

In the same vein, a little prudence should have impelled the bank to insist on the JSS of one who was in a position to ensure the payment of the loan. Even a perfunctory attempt at credit investigation would have revealed that respondent was no longer

connected with the corporation at the time. As it is, the bank is now relying on an unclear Indemnity Agreement in order to collect an obligation that could have been secured by a fairly obtained surety. For its defeat in this litigation, the bank has only itself to blame.

In sum, we hold that the 1989 Loan Agreement extinguished by novation the obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity Agreement, which had been an accessory to the 1980 credit accommodation, was also extinguished. Furthermore, we reject petitioner’s submission that respondent waived his right to be notified of, or to give consent to, any modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan obtained before the expiry date of the credit accommodation has been paid.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.SO ORDERED.

G.R. No. L-26833             April 1, 1927PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs.EUGENIO VERAGUTH, ET AL., defendants-appellee.Roman J. Lacson for appellant.Jose F. Orozco for the appellee Eugenio Veraguth.R. Nolan, Feria & La O, Sumulong, Lavides & Hilado and Ortiz & Ortiz for other appellees.VILLAMOR, J.:Plaintiff Philippine National Bank seeks to recover from the defendants jointly and severally the sum of P41,432.55, plus interest on the sum of P34,241.77, at 8 per cent per annum from February 16, 1925, until fully paid. It is alleged, as grounds for this action, that on January 18, 1919, "La Union de Agricultores de Negros y Panay, Inc.," asked for and obtained from said plaintiff a credit of P40,000 in current account, payment of which was secured by the defendants by means of a bond Exhibit A; that on September 11, 1919, the same plaintiff granted the "La Union de Negros y Panay, Inc.," another credit of P30,000 in current account at 8 per cent per annum, in addition to the former credit of P40,000, payment of which was secured by bond Exhibit B; that on June 30, 1922, when "La Union de Agricultores de Negros y Panay, Inc.," discontinued business relations with the plaintiff, the former had an overdraft of P34,241.77 in its current account which to this date has not been paid to the plaintiff, which overdraft, together with interest thereon, amounts to the P41,432.55 claimed in the complaint.The defendants, in their respective answer, deny being indebted to the plaintiff in the sum claimed, and as special defenses allege that the obligation of P40,000 plus interest at 8 per cent per annum, secured by Exhibit A, has already been extinguished by the payments made by the "La Union de Agricultores de Negros y Panay, Inc.," and that, not having subscribed to the second bond for P30,000, Exhibit B, they cannot be held liable for said obligation.1. That "La Union de Agricultores de Negros y Panay, Inc.," obtained a credit in current account from the plaintiff, as specified in annex A of the complaint. It is also admitted that annex A was duly signed by those whose signatures appear thereon.2. It is likewise admitted that annex B of the complaint contains a true statement of the facts noted therein, and that it was signed by the persons whose signatures appear at the bottom thereof.3. That the only amounts involved in the transactions had between

said Union and the plaintiff are the sums appearing in the debt and credit of the document marked Exhibit C.4. That the sums referred to in annexes A and B were obtained from the plaintiff by virtue of a resolution of the board of directors of the said Union.5. The parties are agreed that some of the sureties named in annexes A and B whose names are mentioned below, executed promissory notes and solidary contracts in favor of the plaintiff on account of the sum which is the subject-matter of the complaint, as follows:Ruperto Montinola ................................................................ P6,341.72Tito Silverio ............................................................................... 6,341.72Jose Gaston ............................................................................. 2,959.46Carlos L. Locsin ...................................................................... 6,341.72Albino Jison .............................................................................. 2,959.47Teodulo M. Infante ................................................................... 2,959.47Esteban de la Rama .............................................................. 3,382.25 Total ......................................................................................... 31,285.816. That from February 7,1919 to January 10, 1921, the plaintiff granted the sum of P128,425.96 in current account, payable in monthly installments to the said Union. That on June 30, 1922, the said Union was indebted to the plaintiff for the principal and interest, in the sum total of P140,214.43 as appears in the debit of Exhibit C. That from march 3, 1919 to September 11, 1924, as appears in the credit in Exhibit C, the said Union paid the plaintiff in partial payments and on account of said P140,214.43, the sum of P105,972.66, leaving a balance of P34,241.77 due from the Union.7. That a demand was made upon the herein defendants to pay the sum which is the subject of the complaint.In view of this statement of facts, and of the oral evidence introduced at the trial, which evidence has not been forwarded to this court, the trial court absolved the defendants Ricardo Nola, Eugenio Veraguth and Emilio Gaston from the complaint, without express finding as to costs.Plaintiff appealed from said decision, and assigns several errors as committed by the trial court as grounds for his petition that the

judgment appealed from be reversed.The first and, indeed, the most important question presented by the appellant is whether or not bond Exhibit B is an alteration of bond Exhibit A.It is admitted by both parties that the granting of credit by plaintiff of P30,000 in current account to the "Union de Agricultores de Negros y Panay, Inc." on September 13, 1919 is an increase of the credit of P40,000 previously granted and that the payment of said increase was secured jointly and severally by the bond Exhibit B, by Tito Silverio, Ruperto Montinola, Jose Gaston, Agustin Amenabar, Teodulo Infante, Carlos L. Locsin and Albino Jison who bound themselves to pay the Philippine National Bank, upon the date of maturity, the sum of P30,000 in addition to the credit of P40,000 with interest or such part of said amounts and interest as may be due from the "La Union de Agricultores de Negros y Panay, Inc.," on the date of maturity. This being so, and considering the facts, the extent of the liability assumed by the defendants as solidary sureties of the said debt of P40,000 must now be determined. Article 1827 of the Civil Code provides: "Guaranty shall not be presumed; it must be express and cannot be extended beyond its specified limits." It appearing from Exhibit A that the herein defendants guaranteed the payment of a credit in current account not to exceed of P40,000 at 8 per cent per annum granted by plaintiff to "La Union de Agricultores de Negros y Panay, Inc., and it further appearing from Exhibit B that defendants did not sign a bond for the additional credit of P30,000 obtained by the said "Union de Agricultores," their liability can in no way be extended to the payment of the said additional credit of P30,000.Besides, the increase in the credit of P40,000 secured by the defendants by an additional P30,000 without their consent, constitutes a material change in the principal contract and, as we held in the case of Asiatic Petroleum Co. vs. Hizon and David (45 Phil., 532) "A material alteration of the principal contract, effected by the creditor and principal debtor without the knowledge and consent of the surety, completely discharges the surety from all liability on the contract of suretyship." In the course of this decision the court said: "It is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability. (21 R. C. L., 1004) This principle is equally valid under the civil as

under the common law; and though not specifically expressed in the Civil Code, it may be deduced, so far as its application to the facts of this case is concerned, from the second paragraph of article 1822 in relation with article 1143 of the same Code. . . . "On the other hand, it appears from Exhibit C that from March 3, 1919 until September 11, 1924, "La Union de Agricultores de Negros y Panay, Inc.," had made partial payments to the plaintiff amounting to P105,972.66, on the debt of P140,214.43, which was principal and interest from February 7, 1919 until June 30, 1922. The question now raised is whether or not the principal debtor, "La Union de Agricultores de Negros y Panay, Inc.," has already paid its debt of P40,000, payment of which was secured by the defendants, because if so, the obligation of the latter has been extinguished. (Art. 1847, Civil Code.) Exhibits A and B are two independent contracts evidenced by two public documents, we believe article 1924, No. 3, is applicable to the case in the sense that said credits shall have preference among themselves in the order of priority of dates of the documents. Manresa, in his commentaries on said article 1924, among other things, says: "This number of the article under examination means credits appearing in a public instrument or final judgment without any special preference. . . ."These credits have preference among themselves in the order of priority of the dates of the documents and judgments in which they are stated or acknowledged. It is so provided in the last paragraph of the present article, which does no more than restate the settled rule laid down by the Supreme Court, based on the juridical principle prior tempore potium jure, according to which all other legal conditions being equal, the oldest of scriptory credits (known also by the name of chirographs) has preference as among themselves. (See also, among others, the decision of May 1, 1896.) (Vol. XII, 2d. ed., pp. 714-715.)The same rule is more expressly stated, and with special reference to the case now before us, in 21 R. C. L., p. 103:110. RUNNING ACCOUNTS. — In cases of running accounts with many debits and credits and no balances other than for the mere purpose of making rests, payments ought to be applied to extinguish the debts according to the priority of time; so that the credits are to be deemed payments pro tanto of the debts antecedently due. This is done because it is most just and equitable between the parties, as being in accordance with the

ordinary and usual course of dealing. And between banker and depositor the general rule of appropriation of payments is ordinarily applicable, and indeed it has been held that in the case of a banking account, there is no room for any other appropriation than that which arises from the order in which the receipts and payments take place and are carried into the account. Presumbaly it is the sum first paid in that is first drawn out, the first item on the debit side that is discharged by the first item on the credit side. The general rule is applicable only to open accounts, and does not apply where the account has been closed.In view of Exhibit C and of the authorities cited, we are of opinion that the credit of P40,000 secured by the appellees and evidenced by a public instrument of prior date, has already been settled by the principal debtor, and therefore the solidary sureties have already been relieved of the obligation contracted by them in Exhibit A.In virtue of the foregoing, the judgment appealed from must be, as it is hereby, affirmed with costs against the appellant. So ordered.

G.R. No. L-34959 March 18, 1988PHILIPPINE COMMERCIAL and INDUSTRIAL BANK petitioner, vs.THE HONORABLE COURT OF APPEALS & ALPHA INSURANCE and SURETY COMPANY, INC., respondents. CORTES, J.:On January 7, 1966, Philippine Commercial and Industrial Bank (PCIB) filed a complaint against Alpha Insurance and Surety Co., Inc., (ALPHA), Community Builders, Inc. and Filadelfo Rojas in the Court of First Instance (CFI) of Manila. The complaint alleged that Community Builders and Rojas borrowed P 150,000 from PCIB, that ALPHA issued Surety Bond No. G-1689 in the amount of P 50,000 to guarantee payment of the loan, and that upon maturity the defendants failed to pay.In its answer with cross-claim against Community Builders and Rojas, ALPHA admitted having issued Surety Bond No. G-1689 but alleged that the P 150,000 debt had been paid by virtue of the assignment by Rojas to PCIB of his receivables from the Armed Forces of the Philippines. As special defense, ALPHA alleged that the promissory note evidencing the loan is dated later than the surety bond which was issued for an amount less than the debt. (The promissory note is dated September 26, 1962 while the surety bond is dated August 22, 1960.)During the pre-trial, Rojas and Community Builders failed to appear; hence, they were declared as in default. ALPHA reiterated its defenses stated above, namely, (1) that the bond was issued for less than the amount of the debt, (2) that it was issued earlier, and (3) that the debt had been paid.These were reflected in the following pre-trial order dictated by the trial judge in open court:At the pre-trial conference, the parties agreed that the defendant defendants Filadelfo Rojas and Community Builders Co., Inc. secured a loan from the plaintiff in the amount of P 150,000 for which they executed a promissory note dated September 26, 1962. In order to secure the payment of this obligation which was to mature January 24, 1963, the defendants assigned their receivables based on three contracts which they had with the Armed Forces of the Philippines, plus the surety bond issued by the defendant Alpha Insurance & Surety Co., Inc. in the amount of P 50,000. Notwithstanding repeated demands and the expiration of the promissory note, the defendants failed to pay their obligation.

The defendants Filadelfo Rojas and Community Builders have been declared as in default for failure to appear at the pre-trial conference.The remaining defendant Alpha Insurance and Surety Co., Inc. now contends that it is not bound by the surety bond for the reason that it was issued for less than the amount of the plaintiffs claim and that the same was issued prior to the execution of the promissory note, and that the obligation had already been fully paid by the assignment of the receivables.The issue, therefore, is whether the defendants have already paid the amount stated in the promissory note by virtue of the assignment aforesaid.On the basis of this issue, let the trial hereof on the merits be, as it is hereby, set for December 19, 1966, at 8:30 a.m.SO ORDERED.After trial, the CFI rendered judgment in favor of PCIB and against Rojas, Community Builders and ALPHA, ordering them to pay P50,000 plus attorney's fees and costs. The Court further ordered defendants Rojas and Community Builders to pay the remaining P100,000.Rojas and Community Builders appealed to the Court of Appeals. However, since their counsel could not be served with the notice to file brief, their appeal was dismissed.ALPHA likewise appealed to the appellate court which reversed the decision of the CFI on the ground that it was not shown that the surety bond bears any relation to the promissory note. Hence, this petition, PCIB raising a purely procedural issue. Petitioner contends that the appellate court erred in ruling in favor of ALPHA on the basis of a question of fact which had not been raised before the CFI and which is not within the issues raised in the pleadings, nor in the pre-trial order.The issue raised calls for a determination of whether or not the relation of the surety bond to the promissory note was ever raised as an issue in the Answer filed by ALPHA or in the pretrial conference held between the parties.The pertinent allegation in PCIB's complaint reads:3. That in conjunction with the aforesaid promissory note entered into by and between the plaintiff and the defendants Filadelfo Rojas and Community Builders Co., Inc., as principals and the Alpha Insurance and Surety Co., Inc., as surety, executed jointly and severally in the City of Manila, Philippines, Alpha Bond No. G-

1689 in the amount of P50,000 to guarantee the payment by the said principals of their obligation to the plaintiff in accordance with the terms and conditions recited in the said promissory note, copy of the surety bond is attached hereto as Annex "B" and made integral part hereof by reference;while the corresponding denial in the answer of ALPHA states:3. (Defendant) ADMITS the material allegations of paragraph 3 of the complaint in so far as the same refers to its surety bond (Annex "B") only; that it has no knowledge nor information sufficient to form a belief as to the truth of the rest of the averments therein concerning the promissory note (Annex "A") hence, it specifically denies the rest of the allegations having reference to the promissory note;PCIB contends that paragraph (3) of the complaint states three material facts which are separable from each other, to wit(a) That defendants Filadelfo Rojas and Community Builders Co., Inc., as principals, and respondent Alpha Insurance and Surety Co., Inc., as surety, executed Surety Bond No. G-1689 (Annex "B" of the complaint);(b) That the said surety was executed to guarantee the payment of the promissory note (Annex "A" of the complaint); and(c) That the guarantee thus made secures the performance of the obligations of Filadelfo Rojas and Community Builders Co., Inc. as set forth or recited in the promissory note (Annex "A" of the complaint).It is asserted that since the answer of ALPHA "admits the allegations of paragraph (3) of the complaint in so far as the same refers to its surety bond," then what was admitted was not only the execution of the surety bond but also that the surety bond was issued to secure the promissory note. Hence, the answer did not raise any issue as to the relation of the security bond to the promissory note.One basic rule in interpretation of pleadings is that "pleadings (should) be liberally construed to do substantial justice." [Rule 6, Sec. 15] Constructions which result in absurdity must also be avoided. If we construe paragraph 3 of the answer together with paragraph 2 in which ALPHA denied knowledge of the debt contracted by Rojas and Community Builders, which debt was evidenced by the promissory note, it is clear that ALPHA could not have admit ted that the surety bond it issued secured the payment of the debt. It would have been inconsistent for ALPHA to claim in

paragraph 2 that it was unaware of the debt, and then to admit in paragraph 3 that the surety bond it issued was executed to secure the debt. In fact, a reading of the suretyship contract readily shows that it was executed on August 22, 1960 to secure the P 50,000 discounting line credit accommodation granted by PCIB to Community Builders. At the time Surety Bond G-1689 was executed, the promissory note for P 150,000 dated September 26, 1962 was not yet executed. The Court thus rules that paragraph 3 of the answer of ALPHA merely admitted the execution of Surety Bond No. G-1689, but did not admit, nay, denied, that said bond secured the debt of Rojas and Community Builders. In view of the specific denial, the relation of the bond to the debt was properly raised as an issue in the Answer.We next consider the pre-trial order.PCIB calls the attention of this Court to that portion of the pre-trial order which reads:The issue, therefore, is whether the defendants have already paid the amount stated in the promissory note by virtue of the assignment aforesaid.and contends that since the trial court has so limited the issue, then ALPHA can no longer raise the defense that the bond bears no relation to the promissory note.The pertinent provision of the Rules of Court provides:Sec. 4. Record of pre-trial results. — After the pre-trial the court shall make an order which recites the action taken at the conference, the amendments allowed to the pleadings, and the agreements made by the parties as to any of the matters considered. Such order shall limit the issues for trial to those not disposed of by admissions or agreements of counsel and when entered controls the subsequent course of action, unless modified before trial to prevent manifest injustice. (Emphasis supplied.)While the rule provides that the pre-trial order of the court "controls the subsequent course of action," it is categorical that the issues for trial must be limited to "those not, disposed of by admissions or agreements of counsel." In other words, the court has no discretion to exclude from trial issues not resolved by voluntary agreement between the parties.The pre-trial order clearly states that ALPHA claimed that "it is not bound by the surety bond for the reason that it was issued for less than the amount of the plaintiff s claim and that the same was issued prior to the execution of the promissory note." This

particular issue not having been disposed of by admissions or agreements during the pre-trial, it remained a proper subject of litigation. In fact, this particular issue was raised by respondent ALPHA not only in its brief filed with the Court of Appeals, but even before the trial court, in its Memorandum and Motion for Reconsideration.One other important aspect of this case compels the Court to affirm the decision of the Court of Appeals insofar as it absolves ALPHA from any liability to PCIB. Even as appellate courts do not normally consider those errors not properly assigned or specified, the rule is not, without qualification. As the Court stated in Insular Life Assurance Co., Ltd. Employees Association- NATU v. Insular Life Assurance Co., Ltd., et al [G.R. No. L-25291, March 10, 1977, 76 SCRA 50, 61-62]:. . (T)he Supreme Court has ample authority to review and resolve matters not assigned and specified as errors by either of the parties in the appeal if it finds the consideration and determination of the same essential and indispensable in order to arrive at a just decision in the case. This Court, thus, has the authority to waive the lack of proper assignment of errors if the unassigned errors closely relate to errors properly pinpointed out or if the unassigned errors refer to matters upon which the determination of the questions raised by the errors properly assigned depend.The same also applies to issues not specifically raised by the parties. The Supreme Court, likewise, has broad discretionary powers, in the resolution of a controversy, to take into consideration matters on record which the parties fail to submit to the Court as specific questions for determination. Where the issues raised also rest on other issues not specifically presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the Court has authority to include them in its discussion of the controversy as well as to pass upon them. In brief, in those cases wherein questions not particularly raised by the parties surface as necessary for the complete adjudication of the rights and obligations of the parties and such questions fall within the issues already framed by the parties, the interests of justice dictate that the Court consider and resolve them.This qualification applies to the instant case.It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein.

The extent of a surety's liability is determined only by the clause of the contract of suretyship. It cannot be extended by implication, beyond the terms of the contract. [Zenith Insurance Corp. v. CA et al., No. 57957, December 29, 1982, 119 SCRA 485.]In the case at bar, Surety Bond No. G-1689 was executed to secure a discounting line of credit accommodation granted by PCIB to Community Builders Co., Inc. in the amount of P50.000.PCIB contends that the loan evidenced by the promissory note signed by Filadelfo Rojas, both in his personal capacity and as President of Community Builders, was granted in line with the credit accommodation secured by the surety bond; hence, ALPHA is liable for the debt.Note however that by the express terms of Surety Bond No. G-1689, ALPHA bound itself to pay the discounting line of Community Builders only which has a personality distinct and separate from Rojas. The promissory note, on the other hand, was signed both by Rojas and by Community Builders. Also, the amount of the credit line which ALPHA agreed to secure was only P50,000; whereas, the promissory note was for P150,000. Clearly therefore, the debt on which PCIB bases its action is not within the purview of the Surety Bond No. G-1689. Thus, even granting that Rojas and Community Builders offered Surety Bond No. G-1689 as security for the P150,000 debt, ALPHA, which merely undertook to secure a P50,000 credit line of Community Builders, cannot be held answerable for the debt.WHEREFORE, the petition is hereby DENIED. The appealed decision is AFFIRMED.SO ORDERED.G.R. No. 121879 August 14, 1998EMPIRE INSURANCE COMPANY, petitioners, vs.NATIONAL LABOR RELATIONS COMMISSION and MONERA ANDAL, respondents. PURISIMA, J.:This is a Petition of a surety company disowning solidary liability with its principal, a recruitment agency, on the monetary claims of an overseas contract worker for illegal dismissal, non-payment and underpayment of salaries.The antecedent facts and proceedings can be capsulized, as follows:Private respondent Monera Andal applied with G & M Phils., Inc. for

an overseas employment as a domestic helper in Riyadh, Kingdom of Saudi Arabia. She was hired for a term of two years at a monthly basic salary of US $200.00.She left for the said jobsite on May 17, 1991 and worked for a certain Abdullah Al Basha. But on January 11, 1992, she was repatriated. Upon her repatriation, she lost no time in bringing her complaint before the Philippine Overseas Employment Agency (POEA) for illegal dismissal, non-payment and underpayment of salaries. Impleaded as a co-respondent in the complaint was the herein petitioner, Empire Insurance Company, in its capacity as the surety of G & M Phils.Subject complaint averred, inter alia, that:. . . she was not paid for four months and underpaid for four months; that she was forced to preterminate her contract due to unbearable treatment in the hands of her employer and the non-payment and underpayment of her salaries; and that she was constructively dismissed from employment. In her affidavit, she alleged that she was unpaid for 3 1/2 months; that for four months she was paid only US $150.00 instead of the agreed rate of US $200.00; that her employer resented her effort to collect her delayed salaries and, in retaliation, made her work long hours, allowing her to sleep only five hours daily and requiring her to render services for his relatives and friends without giving her additional compensation; that after serving her employer for 7 1/2 months, she sought the help of the Philippine Embassy; that her employer terminated her employment due to her insistent demand for the payment of her claims; and that she was repatriated at her own expense. On May 14, 1992, she testified that the wife of her employer always beat her and that her employer gave her US $450.00 representing her salaries for three (3) months. In her position paper, she reiterated the sufferings she allegedly underwent in the course of her employment and alleged, further, that the efforts of the Philippine Embassy to mediate and/or to settle her claims failed; that her services were abruptly terminated by her employer; and she was forced to depart at her own expense (arriving in the Philippines with only whatever clothing she had on). (pp. 2-4, NLRC decision dated November 22, 1994)Empire Insurance Company, now the petitioner, theorized that the complainant, Monera Andal, was without any cause of action against it for the alleged reason that the liability of its principal and co-respondent had not been established. It further argued that

its liability, if any, for the money claims sued upon was merely subsidiary.In its answer to the complaint, respondent G & M (Phil.), Inc., stated that it had no knowledge of complainant's unpaid and underpaid salaries, her working conditions and of the proceedings at the Philippine Embassy. It denied the charge of illegal dismissal, reasoning out that the complainant abandoned her job. In its position paper, it contended that the complainant's money claims in dispute are not meritorious as the same are not supported by substantial evidence. It also capitalized on what it branded as the inconsistencies in the complainant's pleadings with her admission that the Philippine Embassy mediated her claims, which development could have meant that subject claims had been settled.On July 13, 1993, POEA Administrator Felicisimo O. Joson decided the claims in question; disposing, as follows:WHEREFORE, in the light of the foregoing premises, respondents are hereby ordered to pay complainant the following:1. US $200.00 or its peso equivalent representing complainant's salary differentials for four (4) months for the period May 17, 1991 to September 17, 1991 computed at US $50.00 a month;2. US $3,300.00 or its peso equivalent representing the payment of salaries for 16.5 months as the unexpired portion of the contract.SO ORDERED.From the aforesaid decision adverse to it, petitioner Empire Insurance Company appealed to the National Labor Relations Commission; posing as issues, that:1. Complainant (Monera Andal) had no cause of action against petitioner because the liability of petitioner's principal and co-respondent (G&M) had not been established.2. Petitioner's liability, if any, was merely subsidiary.On November 22, 1994, the NLRC came out with a judgment of affirmance, upholding the POEA, and holding, thus:The argument that respondent Empire Insurance Company is only subsidiarily liable for the judgment award is unmeritorious. It is settled that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. . . .WHEREFORE, the decision appealed from is hereby AFFIRMED.

SO ORDERED.Undaunted by the denial of its motion for reconsideration, petitioner found its way to this court via the present petition, raising the pivotal issue of whether or not respondent NLRC erred in adjudging it (petitioner) jointly liable with its principal, G & M Phils., Inc., for the payment of private respondent's monetary claims.Petitioner faults respondent NLRC for holding that G & M Phils., Inc. failed to comply with the rules and regulations of the Department of Labor and Employment. It is petitioner's submission that there is no basis for holding it liable as surety under the premises.Although it concedes that the burden of proof in cases of illegal dismissal rests on the employer, petitioner argues that when private respondent Monera Andal asked the Philippine Embassy in Riyadh, Saudi Arabia to mediate her claims with her employer, such a move on the part of private respondent shifted the onus probandi to her to substantiate her claim.Private respondent's Comment sought the dismissal of the petition for being a wrong mode of appeal from the NLRC decision. It is private respondent's stance that appeal from decisions of the National Labor Relations Commission to the Supreme Court is by a special civil action for certiorari under Rule 65 of the Revised Rules of Court. Not a petition for review under Rule 45.The Solicitor General, as counsel for respondent NLRC, joined private respondent in stressing on such procedural defect. Furthermore, the Solicitor General pointed out that the errors assigned by petitioner deal primarily with factual findings and, as such, are unavailing under the well-entrenched rule that findings of fact by administrative agencies and quasi-judicial bodies are generally accorded not only respect but finality, and are not to be disturbed on appeal.We find for respondents.Before delving into the merits of the petition, the procedural objection of respondents should first be resolved. Private respondent and the Solicitor General have correctly pointed out the elementary rule of procedure with regard to review of decisions rendered by the National Labor Relations Commission. The only way a labor case may reach the Supreme Court is through a petition for certiorari under Rule 65 of the Revised Rules of Court. 1 A petition for certiorari which is a special civil action under Rule 65 should be distinguished from a petition for review

on certiorari which is a mode of appeal under Rule 45. Under Rule 65, only questions of jurisdiction or grave abuse of discretion amounting to lack or excess of jurisdiction may be entertained by the reviewing court. Therefore, only decisions of the National Labor Relations Commission tainted with grave abuse of discretion or jurisdictional errors may be elevated to this court.Findings and/or conclusions of fact cannot be assailed in a petition for certiorari. 2 The inquiry in such a petition is limited exclusively to the issue of whether or not the respondent official acted without or in excess of jurisdiction. Consequently, petitioner cannot assail the finding arrived at by public respondent NLRC that the employer involved violated pertinent POEA rules and regulations.However, while an appeal to the Supreme Court from decisions of the National Labor Relations Commission should be pursued as a special civil action for certiorari, in a number of cases this court has treated as special civil actions for certiorari petitions erroneously captioned as petitions for review on certiorari "in the interest of justice." 3

In the case of People's Security, Inc. vs. NLRC, 4 this Court held that:Dismissal of appeal purely on technical grounds is frowned upon where the policy of the courts is to encourage hearings of appeal on their merits. The rules of procedure ought not to be applied in a very rigid technical sense, rules of procedure are used only to help secure, not override substantial justice. If a technical and rigid enforcement of the rules is made, their aim would be defeated. (Tamayo v. Court of Appeals, 209 SCRA 518, 522 [1992] citing Gregorio v. Court of Appeals, 72 SCRA 120 [1976]). Consequently, in the interest of justice, the instant petition for review shall be treated as a special civil action on certiorari.The single issue posed for resolution by this court here is — whether or not the petitioning surety company is jointly liable with its principal, G & M Phils, Inc., a recruitment agency, for the payment of respondent employee's monetary claims in litigation.We rule in the affirmative. Petitioner is solidarily liable with its principal, G & M Phils., Inc., under the attendant facts and circumstances.Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be answerable for the debt, default or miscarriage of another, known as the principal. 5

Where the surety bound itself solidarily with the principal obligor,

the former is so dependent on the principal debtor such that the surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. 6

The surety's liability is solidary but the nature of its undertaking is such that unless and until the principal debtor is held liable it does not incur liability.When the herein petitioner, Empire Insurance Company, entered into a suretyship agreement with G & M Phils., Inc., it bound itself to answer for the debt or default of the latter. And, since the POEA and NLRC found the said recruitment agency liable to private respondent, petitioner's liability likewise proceeds from such a finding. As a surety, petitioner is primarily liable to private respondent, as judgment creditor, for her monetary claims against its principal, G & M Phils., Inc., and is immediately bound to pay and satisfy the same.Time and again, this court has pronounced that claims of overseas workers should be acted upon with sympathy, and allowed if warranted, conformably to the constitutional mandate for the protection of the working class 7. Private employment agencies are held to be jointly and severally liable with the foreign-based employer for any violation of the recruitment agreement or contract of employment. 8

POEA has thus promulgated a rule requiring private recruitment agencies to set up cash and surety bonds. The purpose of the required surety bond is to insure that if the rights of overseas workers are violated by their employer, recourse would still be available to them against the local companies that recruited them for the foreign principal. 9

It bears stressing that surety companies may be ordered impleaded by the Philippine Overseas Employment Administration (POEA) in administrative complaints against recruitment agencies, on surety bonds posted, and are bound by the judgment of POEA. 10 This Court discerns no reason why the said rule should not apply to herein petitioner.WHEREOF, the petition under consideration is hereby DISMISSED and the appealed of respondent NLRC AFFIRMED. No pronouncement as to costs.SO ORDERED.

G.R. No. 160732             June 21, 2004METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, petitioner, vs.HON. REYNALDO B. DAWAY, in his capacity as Presiding Judge of the Regional Trial Court of Quezon City, Branch 90 and Maynilad Water Services, Inc., respondentsD E C I S I O NAZCUNA, J.:On November 17, 2003, the Regional Trial Court (RTC) of Quezon City, Branch 90, made a determination that the Petition for Rehabilitation with Prayer for Suspension of Actions and Proceedings filed by Maynilad Water Services, Inc. (Maynilad) conformed substantially to the provisions of Sec. 2, Rule 4 of the Interim Rules of Procedure on Corporate Rehabilitation (Interim Rules). It forthwith issued a Stay Order1 which states, in part, that the court was thereby:x x x           x x x           x x x2. Staying enforcement of all claims, whether for money or otherwise and whether such enforcement is by court action or otherwise, against the petitioner, its guarantors and sureties not solidarily liable with the petitioner;3. Prohibiting the petitioner from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business;4. Prohibiting the petitioner from making any payment of its liabilities, outstanding as at the date of the filing of the petition;x x x           x x x           x x xSubsequently, on November 27, 2003, public respondent, acting on two Urgent Ex Parte motions2 filed by respondent Maynilad, issued the herein questioned Order3 which stated that it thereby:"1. DECLARES that the act of MWSS in commencing on November 24, 2003 the process for the payment by the banks of US$98 million out of the US$120 million standby letter of credit so the banks have to make good such call/drawing of payment of US$98 million by MWSS not later than November 27, 2003 at 10:00 P. M. or any similar act for that matter, is violative of the above-quoted sub-paragraph 2.) of the dispositive portion of this Court’s Stay Order dated November 17, 2003.2. ORDERS MWSS through its officers/officials to withdraw under pain of contempt the written certification/notice of draw to Citicorp International Limited dated November 24, 2003 and DECLARES void any payment by the banks to MWSS in the event such written

certification/notice of draw is not withdrawn by MWSS and/or MWSS receives payment by virtue of the aforesaid standby letter of credit."Aggrieved by this Order, petitioner Manila Waterworks & Sewerage System (MWSS) filed this petition for review by way of certiorari under Rule 65 of the Rules of Court questioning the legality of said order as having been issued without or in excess of the lower court’s jurisdiction or that the court a quo acted with grave abuse of discretion amounting to lack or excess of jurisdiction.4

ANTECEDENTS OF THE CASEOn February 21, 1997, MWSS granted Maynilad under a Concession Agreement a twenty-year period to manage, operate, repair, decommission and refurbish the existing MWSS water delivery and sewerage services in the West Zone Service Area, for which Maynilad undertook to pay the corresponding concession fees on the dates agreed upon in said agreement5 which, among other things, consisted of payments of petitioner’s mostly foreign loans.To secure the concessionaire’s performance of its obligations under the Concession Agreement, Maynilad was required under Section 6.9 of said contract to put up a bond, bank guarantee or other security acceptable to MWSS.In compliance with this requirement, Maynilad arranged on July 14, 2000 for a three-year facility with a number of foreign banks, led by Citicorp International Limited, for the issuance of an Irrevocable Standby Letter of Credit6 in the amount of US$120,000,000 in favor of MWSS for the full and prompt performance of Maynilad’s obligations to MWSS as aforestated.Sometime in September 2000, respondent Maynilad requested MWSS for a mechanism by which it hoped to recover the losses it had allegedly incurred and would be incurring as a result of the depreciation of the Philippine Peso against the US Dollar. Failing to get what it desired, Maynilad issued a Force Majeure Notice on March 8, 2001 and unilaterally suspended the payment of the concession fees. In an effort to salvage the Concession Agreement, the parties entered into a Memorandum of Agreement (MOA)7 on June 8, 2001 wherein Maynilad was allowed to recover foreign exchange losses under a formula agreed upon between them. Sometime in August 2001 Maynilad again filed another Force Majeure Notice and, since MWSS could not agree with the terms of said Notice, the matter was referred on August 30, 2001 to the

Appeals Panel for arbitration. This resulted in the parties agreeing to resolve the issues through an amendment of the Concession Agreement on October 5, 2001, known as Amendment No. 1,8

which was based on the terms set down in MWSS Board of Trustees Resolution No. 457-2001, as amended by MWSS Board of Trustees Resolution No. 487-2001,9 which provided inter alia for a formula that would allow Maynilad to recover foreign exchange losses it had incurred or would incur under the terms of the Concession Agreement.As part of this agreement, Maynilad committed, among other things, to:a) infuse the amount of UD$80.0 million as additional funding support from its stockholders;b) resume payment of the concession fees; andc) mutually seek the dismissal of the cases pending before the Court of Appeals and with Minor Dispute Appeals Panel.However, on November 5, 2002, Maynilad served upon MWSS a Notice of Event of Termination, claiming that MWSS failed to comply with its obligations under the Concession Agreement and Amendment No. 1 regarding the adjustment mechanism that would cover Maynilad’s foreign exchange losses. On December 9, 2002, Maynilad filed a Notice of Early Termination of the concession, which was challenged by MWSS. This matter was eventually brought before the Appeals Panel on January 7, 2003 by MWSS.10 On November 7, 2003, the Appeals Panel ruled that there was no Event of Termination as defined under Art. 10.2 (ii) or 10.3 (iii) of the Concession Agreement and that, therefore, Maynilad should pay the concession fees that had fallen due.The award of the Appeals Panel became final on November 22, 2003. MWSS, thereafter, submitted a written notice11 on November 24, 2003, to Citicorp International Limited, as agent for the participating banks, that by virtue of Maynilad’s failure to perform its obligations under the Concession Agreement, it was drawing on the Irrevocable Standby Letter of Credit and thereby demanded payment in the amount of US$98,923,640.15.Prior to this, however, Maynilad had filed on November 13, 2003, a petition for rehabilitation before the court a quo which resulted in the issuance of the Stay Order of November 17, 2003 and the disputed Order of November 27, 2003.12

PETITIONER’S CASEPetitioner hereby raises the following issues:

1. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR AND/OR ACT PATENTLY WITHOUT JURISDICTION OR IN EXCESS OF JURISDICTION OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN CONSIDERING THE PERFORMANCE BOND OR ASSETS OF THE ISSUING BANKS AS PART OR PROPERTY OF THE ESTATE OF THE PRIVATE RESPONDENT MAYNILAD SUBJECT TO REHABILITATION.2. DID THE HONORABLE PRESIDING JUDGE ACT WITH LACK OR EXCESS OF JURISDICTION OR COMMIT A GRAVE ERROR OF LAW IN HOLDING THAT THE PERFORMANCE BOND OBLIGATIONS OF THE BANKS WERE NOT SOLIDARY IN NATURE.3. DID THE HONORABLE PRESIDING JUDGE GRAVELY ERR IN ALLOWING MAYNILAD TO IN EFFECT SEEK A REVIEW OR APPEAL OF THE FINAL AND BINDING DECISION OF THE APPEALS PANEL.In support of the first issue, petitioner maintains that as a matter of law, the US$120 Million Standby Letter of Credit and Performance Bond are not property of the estate of the debtor Maynilad and, therefore, not subject to the in rem rehabilitation jurisdiction of the trial court.Petitioner argues that a call made on the Standby Letter of Credit does not involve any asset of Maynilad but only assets of the banks. Furthermore, a call on the Standby Letter of Credit cannot also be considered a "claim" falling under the purview of the stay order as alleged by respondent as it is not directed against the assets of respondent Maynilad.Petitioner concludes that the public respondent erred in declaring and holding that the commencement of the process for the payment of US$98 million is a violation of the order issued on November 17, 2003.RESPONDENT MAYNILAD’S CASERespondent Maynilad seeks to refute this argument by alleging that:a) the order objected to was strictly and precisely worded and issued after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or creditors Chinatrust Commercial Bank and Suez in relation to admissions, pleadings and/or pertinent records13 and that public respondent had the authority to issue the same;b) public respondent never considered nor held that the Performance bond or assets of the issuing banks are part or property of the estate of respondent Maynilad subject to

rehabilitation and which respondent Maynilad has not and has never claimed to be;14

c) what is relevant is not whether the performance bond or assets of the issuing banks are part of the estate of respondent Maynilad but whether the act of petitioner in commencing the process for the payment by the banks of US$98 million out of the US$120 million performance bond is covered and/or prohibited under sub-paragraphs 2.) and 4.) of the stay order dated November 17, 2003;d) the jurisdiction of public respondent extends not only to the assets of respondent Maynilad but also over persons and assets of "all those affected by the proceedings x x x upon publication of the notice of commencement;15" ande) the obligations under the Standby Letter of Credit are not solidary and are not exempt from the coverage of the stay order.OUR RULINGWe will discuss the first two issues raised by petitioner as these are interrelated and make up the main issue of the petition before us which is, did the rehabilitation court sitting as such, act in excess of its authority or jurisdiction when it enjoined herein petitioner from seeking the payment of the concession fees from the banks that issued the Irrevocable Standby Letter of Credit in its favor and for the account of respondent Maynilad?The public respondent relied on Sec. 1, Rule 3 of the Interim Rules on Corporate Rehabilitation to support its jurisdiction over the Irrevocable Standby Letter of Credit and the banks that issued it. The section reads in part "that jurisdiction over those affected by the proceedings is considered acquired upon the publication of the notice of commencement of proceedings in a newspaper of general circulation" and goes further to define rehabilitation as an in rem proceeding. This provision is a logical consequence of the in rem nature of the proceedings, where jurisdiction is acquired by publication and where it is necessary that the assets of the debtor come within the court’s jurisdiction to secure the same for the benefit of creditors. The reference to "all those affected by the proceedings" covers creditors or such other persons or entities holding assets belonging to the debtor under rehabilitation which should be reflected in its audited financial statements. The banks do not hold any assets of respondent Maynilad that would be material to the rehabilitation proceedings nor is Maynilad liable to the banks at this point.Respondent Maynilad’s Financial Statement as of December 31,

2001 and 2002 do not show the Irrevocable Standby Letter of Credit as part of its assets or liabilities, and by respondent Maynilad’s own admission it is not. In issuing the clarificatory order of November 27, 2003, enjoining petitioner from claiming from an asset that did not belong to the debtor and over which it did not acquire jurisdiction, the rehabilitation court acted in excess of its jurisdiction.Respondent Maynilad insists, however, that it is Sec. 6 (b), Rule 4 of the Interim Rules that supports its claim that the commencement of the process to draw on the Standby Letter of Credit is an enforcement of claim prohibited by and under the Interim Rules and the order of public respondent.Respondent Maynilad would persuade us that the above provision justifies a leap to the conclusion that such an enforcement is prohibited by said section because it is a "claim against the debtor, its guarantors and sureties not solidarily liable with the debtor" and that there is nothing in the Standby Letter of Credit nor in law nor in the nature of the obligation that would show or require the obligation of the banks to be solidary with the respondent Maynilad.We disagree.First, the claim is not one against the debtor but against an entity that respondent Maynilad has procured to answer for its non-performance of certain terms and conditions of the Concession Agreement, particularly the payment of concession fees.Secondly, Sec. 6 (b) of Rule 4 of the Interim Rules does not enjoin the enforcement of all claims against guarantors and sureties, but only those claims against guarantors and sureties who are not solidarily liable with the debtor. Respondent Maynilad’s claim that the banks are not solidarily liable with the debtor does not find support in jurisprudence.We held in Feati Bank & Trust Company v. Court of Appeals16 that the concept of guarantee vis-à-vis the concept of an irrevocable letter of credit are inconsistent with each other. The guarantee theory destroys the independence of the bank’s responsibility from the contract upon which it was opened and the nature of both contracts is mutually in conflict with each other. In contracts of guarantee, the guarantor’s obligation is merely collateral and it arises only upon the default of the person primarily liable. On the other hand, in an irrevocable letter of credit, the bank undertakes a primary obligation. We have also defined a letter of credit as an

engagement by a bank or other person made at the request of a customer that the issuer shall honor drafts or other demands of payment upon compliance with the conditions specified in the credit.17

Letters of credit were developed for the purpose of insuring to a seller payment of a definite amount upon the presentation of documents18 and is thus a commitment by the issuer that the party in whose favor it is issued and who can collect upon it will have his credit against the applicant of the letter, duly paid in the amount specified in the letter.19 They are in effect absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty.20 What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it.21

They are definite undertakings to pay at sight once the documents stipulated therein are presented.Letters of Credits have long been and are still governed by the provisions of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce. In the 1993 Revision it provides in Art. 2 that "the expressions Documentary Credit(s) and Standby Letter(s) of Credit mean any arrangement, however made or described, whereby a bank acting at the request and on instructions of a customer or on its own behalf is to make payment against stipulated document(s)" and Art. 9 thereof defines the liability of the issuing banks on an irrevocable letter of credit as a "definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated bank or the issuing bank and the terms and conditions of the Credit are complied with, to pay at sight if the Credit provides for sight payment."22

We have accepted, in Feati Bank and Trust Company v. Court of Appeals23 and Bank of America NT & SA v. Court of Appeals,24 to the extent that they are pertinent, the application in our jurisdiction of the international credit regulatory set of rules known as the Uniform Customs and Practice for Documentary Credits (U.C.P) issued by the International Chamber of Commerce, which we said in Bank of the Philippine Islands v. Nery25 was justified under Art. 2 of the Code of Commerce, which states:

"Acts of commerce, whether those who execute them be merchants or not, and whether specified in this Code or not should be governed by the provisions contained in it; in their absence, by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the civil law."The prohibition under Sec 6 (b) of Rule 4 of the Interim Rules does not apply to herein petitioner as the prohibition is on the enforcement of claims against guarantors or sureties of the debtors whose obligations are not solidary with the debtor. The participating banks’ obligation are solidary with respondent Maynilad in that it is a primary, direct, definite and an absolute undertaking to pay and is not conditioned on the prior exhaustion of the debtor’s assets. These are the same characteristics of a surety or solidary obligor.Being solidary, the claims against them can be pursued separately from and independently of the rehabilitation case, as held in Traders Royal Bank v. Court of Appeals26 and reiterated in Philippine Blooming Mills, Inc. v. Court of Appeals,27 where we said that property of the surety cannot be taken into custody by the rehabilitation receiver (SEC) and said surety can be sued separately to enforce his liability as surety for the debts or obligations of the debtor. The debts or obligations for which a surety may be liable include future debts, an amount which may not be known at the time the surety is given.The terms of the Irrevocable Standby Letter of Credit do not show that the obligations of the banks are not solidary with those of respondent Maynilad. On the contrary, it is issued at the request of and for the account of Maynilad Water Services, Inc., in favor of the Metropolitan Waterworks and Sewerage System, as a bond for the full and prompt performance of the obligations by the concessionaire under the Concession Agreement28 and herein petitioner is authorized by the banks to draw on it by the simple act of delivering to the agent a written certification substantially in the form Annex "B" of the Letter of Credit. It provides further in Sec. 6, that for as long as the Standby Letter of Credit is valid and subsisting, the Banks shall honor any written Certification made by MWSS in accordance with Sec. 2, of the Standby Letter of Credit regardless of the date on which the event giving rise to such Written Certification arose.29

Taking into consideration our own rulings on the nature of letters of credit and the customs and usage developed over the years in

the banking and commercial practice of letters of credit, we hold that except when a letter of credit specifically stipulates otherwise, the obligation of the banks issuing letters of credit are solidary with that of the person or entity requesting for its issuance, the same being a direct, primary, absolute and definite undertaking to pay the beneficiary upon the presentation of the set of documents required therein.The public respondent, therefore, exceeded his jurisdiction, in holding that he was competent to act on the obligation of the banks under the Letter of Credit under the argument that this was not a solidary obligation with that of the debtor. Being a solidary obligation, the letter of credit is excluded from the jurisdiction of the rehabilitation court and therefore in enjoining petitioner from proceeding against the Standby Letters of Credit to which it had a clear right under the law and the terms of said Standby Letter of Credit, public respondent acted in excess of his jurisdiction.ADDITIONAL ISSUESWe proceed to consider the other issues raised in the oral arguments and included in the parties’ memoranda:1. Respondent Maynilad argues that petitioner had a plain, speedy and adequate remedy under the Interim Rules itself which provides in Sec. 12, Rule 4 that the court may on motion or motu proprio, terminate, modify or set conditions for the continuance of the stay order or relieve a claim from coverage thereof. We find, however, that the public respondent had already accomplished this during the hearing set for the two Urgent Ex Parte motions filed by respondent Maynilad on November 21 and 24, 2003,30 where the parties including the creditors, Suez and Chinatrust Commercial "presented their respective arguments."31 The public respondent then ruled, "after carefully considering/evaluating the import of the arguments and documents referred to by Maynilad, MWSS and/or the creditors Chinatrust Commercial Bank and Suez in relation to the admissions, the pleadings, and/or pertinent portions of the records, this court is of the considered and humble view that the issue must perforce be resolved in favor of Maynilad."32 Hence to pursue their opposition before the same court would result in the presentation of the same arguments and issues passed upon by public respondent.Furthermore, Sec. 5, Rule 3 of the Interim Rules would preclude any other effective remedy questioning the orders of the rehabilitation court since they are immediately executory and a

petition for review or an appeal therefrom shall not stay the execution of the order unless restrained or enjoined by the appellate court." In this situation, it had no other remedy but to seek recourse to us through this petition for certiorari.In Silvestre v. Torres and Oben,33 we said that it is not enough that a remedy is available to prevent a party from making use of the extraordinary remedy of certiorari but that such remedy be an adequate remedy which is equally beneficial, speedy and sufficient, not only a remedy which at some time in the future may offer relief but a remedy which will promptly relieve the petitioner from the injurious acts of the lower tribunal. It is the inadequacy -- not the mere absence -- of all other legal remedies and the danger of failure of justice without the writ, that must usually determine the propriety of certiorari.34

2. Respondent Maynilad argues that by commencing the process for payment under the Standby Letter of Credit, petitioner violated an immediately executory order of the court and, therefore, comes to Court with unclean hands and should therefore be denied any relief.It is true that the stay order is immediately executory. It is also true, however, that the Standby Letter of Credit and the banks that issued it were not within the jurisdiction of the rehabilitation court. The call on the Standby Letter of Credit, therefore, could not be considered a violation of the Stay Order.3. Respondent’s claim that the filing of the petition pre-empts the original jurisdiction of the lower court is without merit. The purpose of the initial hearing is to determine whether the petition for rehabilitation has merit or not. The propriety of the stay order as well as the clarificatory order had already been passed upon in the hearing previously had for that purpose. The determination of whether the public respondent was correct in enjoining the petitioner from drawing on the Standby Letter of Credit will have no bearing on the determination to be made by public respondent whether the petition for rehabilitation has merit or not. Our decision on the instant petition does not pre-empt the original jurisdiction of the rehabilitation court.WHEREFORE, the petition for certiorari is granted. The Order of November 27, 2003 of the Regional Trial Court of Quezon City, Branch 90, is hereby declared NULL AND VOID and SET ASIDE. The status quo Order herein previously issued is hereby LIFTED. In view of the urgency attending this case, this decision is

immediately executory.No costs.SO ORDERED.

G.R. No. 100970 September 2, 1992FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs.THE HONORABLE COURT OF APPEALS and JULIA SURPOSA, respondents.Aquino and Associates for petitioner.Public Attorney's Office for private respondent. NOCON, J.:This is a petition for certiorari with a prayer for the issuance of a restraining order and preliminary mandatory injunction to annul and set aside the decision of the Court of Appeals dated July 11, 1991, 1 affirming the decision dated March 20, 1990 of the Insurance Commission 2 in ordering petitioner Finman General Assurance Corporation to pay private respondent Julia Surposa the proceeds of the personal accident Insurance policy with interest.It appears on record that on October 22, 1986, deceased, Carlie Surposa was insured with petitioner Finman General Assurance Corporation under Finman General Teachers Protection Plan Master Policy No. 2005 and Individual Policy No. 08924 with his parents, spouses Julia and Carlos Surposa, and brothers Christopher, Charles, Chester and Clifton, all surnamed, Surposa, as beneficiaries. 3

While said insurance policy was in full force and effect, the insured, Carlie Surposa, died on October 18, 1988 as a result of a stab wound inflicted by one of the three (3) unidentified men without provocation and warning on the part of the former as he and his cousin, Winston Surposa, were waiting for a ride on their way home along Rizal-Locsin Streets, Bacolod City after attending the celebration of the "Maskarra Annual Festival."Thereafter, private respondent and the other beneficiaries of said insurance policy filed a written notice of claim with the petitioner insurance company which denied said claim contending that murder and assault are not within the scope of the coverage of the insurance policy.On February 24, 1989, private respondent filed a complaint with the Insurance Commission which subsequently rendered a decision, the pertinent portion of which reads:In the light of the foregoing. we find respondent liable to pay complainant the sum of P15,000.00 representing the proceeds of the policy with interest. As no evidence was submitted to prove the claim for mortuary aid in the sum of P1,000.00, the same

cannot be entertained.WHEREFORE, judgment is hereby rendered ordering respondent to pay complainant the sum of P15,000.00 with legal interest from the date of the filing of the complaint until fully satisfied. With costs. 4

On July 11, 1991, the appellate court affirmed said decision.Hence, petitioner filed this petition alleging grove abuse of discretion on the part of the appellate court in applying the principle of "expresso unius exclusio alterius" in a personal accident insurance policy since death resulting from murder and/or assault are impliedly excluded in said insurance policy considering that the cause of death of the insured was not accidental but rather a deliberate and intentional act of the assailant in killing the former as indicated by the location of the lone stab wound on the insured. Therefore, said death was committed with deliberate intent which, by the very nature of a personal accident insurance policy, cannot be indemnified.We do not agree.The terms "accident" and "accidental" as used in insurance contracts have not acquired any technical meaning, and are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happen by chance or fortuitously, without intention and design, and which is unexpected, unusual, and unforeseen. An accident is an event that 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.. . . The generally accepted rule is that, death or injury does not result from accident or accidental means within the terms of an accident-policy if it is the natural result of the insured's voluntary act, unaccompanied by anything unforeseen except the death or injury. There is no accident when a deliberate act is performed unless some additional, unexpected, independent, and unforeseen happening occurs which produces or brings about the result of injury or death. In other words, where the death or injury is not the natural or probable result of the insured's voluntary act, or if something unforeseen occurs in the doing of the act which produces the injury, the resulting death is within the protection of the policies insuring against death or injury from accident. 5

As correctly pointed out by the respondent appellate court in its decision:

In the case at bar, it cannot be pretended that Carlie Surposa died in the course of an assault or murder as a result of his voluntary act considering the very nature of these crimes. In the first place, the insured and his companion were on their way home from attending a festival. They were confronted by unidentified persons. The record is barren of any circumstance showing how the stab wound was inflicted. Nor can it be pretended that the malefactor aimed at the insured precisely because the killer wanted to take his life. In any event, while the act may not exempt the unknown perpetrator from criminal liability, the fact remains that the happening was a pure accident on the part of the victim. The insured died from an event that took place without his foresight or expectation, an event that proceeded from an unusual effect of a known cause and, therefore, not expected. Neither can it be said that where was a capricious desire on the part of the accused to expose his life to danger considering that he was just going home after attending a festival. 6

Furthermore, the personal accident insurance policy involved herein specifically enumerated only ten (10) circumstances wherein no liability attaches to petitioner insurance company for any injury, disability or loss suffered by the insured as a result of any of the stimulated causes. The principle of " expresso unius exclusio alterius" — the mention of one thing implies the exclusion of another thing — is therefore applicable in the instant case since murder and assault, not having been expressly included in the enumeration of the circumstances that would negate liability in said insurance policy cannot be considered by implication to discharge the petitioner insurance company from liability for, any injury, disability or loss suffered by the insured. Thus, the failure of the petitioner insurance company to include death resulting from murder or assault among the prohibited risks leads inevitably to the conclusion that it did not intend to limit or exempt itself from liability for such death.Article 1377 of the Civil Code of the Philippines provides that:The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity.Moreover,it is well settled that contracts of insurance are to be construed liberally in favor of the insured and strictly against the insurer. Thus ambiguity in the words of an insurance contract should be interpreted in favor of its beneficiary. 7

WHEREFORE, finding no irreversible error in the decision of the respondent Court of Appeals, the petition for certiorari with restraining order and preliminary injunction is hereby DENIED for lack of merit.SO ORDERED.

G.R. No. L-25579 March 29, 1972EMILIA T. BIAGTAN, JUAN T. BIAGTAN, JR., MIGUEL T. BIAGTAN, GIL T. BIAGTAN and GRACIA T. BIAGTAN, plaintiffs-appellees, vs.THE INSULAR LIFE ASSURANCE COMPANY, LTD., defendant-appellant.Tanopo, Millora, Serafica, and Sañez for plaintiff-appellees.Araneta, Mendoza and Papa for defendant-appellant. MAKALINTAL, J.:pThis is an appeal from the decision of the Court of First Instance of Pangasinan in its Civil Case No. D-1700.The facts are stipulated. Juan S. Biagtan was insured with defendant InsularLife Assurance Company under Policy No. 398075 for the sum of P5,000.00 and, under a supplementary contract denominated "Accidental Death Benefit Clause, for an additional sum of P5,000.00 if "the death of the Insured resulted directly from bodily injury effected solely through external and violent means sustained in an accident ... and independently of all other causes." The clause, however,expressly provided that it would not apply where death resulted from an injury"intentionally inflicted by another party."On the night of May 20, 1964, or during the first hours of the following day a band of robbers entered the house of the insured Juan S. Biagtan. What happened then is related in the decision of the trial court as follows:...; that on the night of May 20, 1964 or the first hours of May 21, 1964, while the said life policy and supplementary contract were in full force and effect, the house of insured Juan S. Biagtan was robbed by a band of robbers who were charged in and convicted by the Court of First Instance of Pangasinan for robbery with homicide; that in committing the robbery, the robbers, on reaching the staircase landing on the second floor, rushed towards the door of the second floor room, where they suddenly met a person near the door of oneof the rooms who turned out to be the insured Juan S. Biagtan who received thrusts from their sharp-pointed instruments, causing wounds on the body of said Juan S. Biagtan resulting in his death at about 7 a.m. on the same day, May 21, 1964;Plaintiffs, as beneficiaries of the insured, filed a claim under the policy. The insurance company paid the basic amount of P5,000.00 but refused to pay the additional sum of P5,000.00 under the

accidental death benefit clause, on the ground that the insured's death resulted from injuries intentionally inflicted by third parties and therefore was not covered. Plaintiffs filed suit to recover, and after due hearing the court a quo rendered judgment in their favor. Hence the present appeal by the insurer.The only issue here is whether under the facts are stipulated and found by the trial court the wounds received by the insured at the hands of the robbers — nine in all, five of them mortal and four non-mortal — were inflicted intentionally. The court, in ruling negatively on the issue, stated that since the parties presented no evidence and submitted the case upon stipulation, there was no "proof that the act of receiving thrust (sic) from the sharp-pointed instrument of the robbers was intended to inflict injuries upon the person of the insured or any other person or merely to scare away any person so as to ward off any resistance or obstacle that might be offered in the pursuit of their main objective which was robbery."The trial court committed a plain error in drawing the conclusion it did from the admitted facts. Nine wounds were inflicted upon the deceased, all by means of thrusts with sharp-pointed instruments wielded by the robbers. This is a physical fact as to which there is no dispute. So is the fact that five of those wounds caused the death of the insured. Whether the robbers had the intent to kill or merely to scare the victim or to ward off any defense he might offer, it cannot be denied that the act itself of inflicting the injuries was intentional. It should be noted that the exception in the accidental benefit clause invoked by the appellant does not speak of the purpose — whether homicidal or not — of a third party in causing the injuries, but only of the fact that such injuries have been "intentionally" inflicted — this obviously to distinguish them from injuries which, although received at the hands of a third party, are purely accidental. This construction is the basic idea expressed in the coverage of the clause itself, namely, that "the death of the insured resulted directly from bodily injury effected solely through external and violent means sustained in an accident ... and independently of all other causes." A gun which discharges while being cleaned and kills a bystander; a hunter who shoots at his prey and hits a person instead; an athlete in a competitive game involving physical effort who collides with an opponent and fatally injures him as a result: these are instances where the infliction of the injury is unintentional and therefore would be

within the coverage of an accidental death benefit clause such as thatin question in this case. But where a gang of robbers enter a house and coming face to face with the owner, even if unexpectedly, stab him repeatedly, it is contrary to all reason and logic to say that his injuries are not intentionally inflicted, regardless of whether they prove fatal or not. As it was, in the present case they did prove fatal, and the robbers have been accused and convicted of the crime of robbery with homicide.The case of Calanoc vs. Court of Appeals, 98 Phil. 79, is relied upon by the trial court in support of its decision. The facts in that case, however, are different from those obtaining here. The insured there was a watchman in a certain company, who happened to be invited by a policeman to come along as the latter was on his way to investigate a reported robbery going on in a private house. As the two of them, together with the owner of the house, approached and stood in front of the main gate, a shot was fired and it turned out afterwards that the watchman was hit in the abdomen, the wound causing his death. Under those circumstances this Court held that it could not be said that the killing was intentional for there was the possibility that the malefactor had fired the shot to scare people around for his own protection and not necessarrily to kill or hit the victim. A similar possibility is clearly ruled out by the facts in the case now before Us. For while a single shot fired from a distance, and by a person who was not even seen aiming at the victim, could indeed have been fired without intent to kill or injure, nine wounds inflicted with bladed weapons at close range cannot conceivably be considered as innocent insofar as such intent is concerned. The manner of execution of the crime permits no other conclusion.Court decisions in the American jurisdiction, where similar provisions in accidental death benefit clauses in insurance policies have been construed, may shed light on the issue before Us. Thus, it has been held that "intentional" as used in an accident policy excepting intentional injuries inflicted by the insured or any other person, etc., implies the exercise of the reasoning faculties, consciousness and volition. 1 Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. 2 If the injuries suffered by the insured clearly resulted from the intentional act of a third person the insurer is relieved from liability as stipulated. 3

In the case of Hutchcraft's Ex'r v. Travelers' Ins. Co., 87 Ky. 300, 8

S.W. 570, 12 Am. St. Rep. 484, the insured was waylaid and assassinated for the purpose of robbery. Two (2) defenses were interposed to the action to recover indemnity, namely: (1) that the insured having been killed by intentional means, his death was not accidental, and (2) that the proviso in the policy expressly exempted the insurer from liability in case the insured died from injuries intentionally inflicted by another person. In rendering judgment for the insurance company the Court held that while the assassination of the insured was as to him an unforeseen event and therefore accidental, "the clause of the proviso that excludes the (insurer's) liability, in case death or injury is intentionally inflicted by another person, applies to this case."In Butero v. Travelers' Acc. Ins. Co., 96 Wis. 536, 65 Am. St. Rep. 61, 71 S.W. 811, the insured was shot three times by a person unknown late on a dark and stormy night, while working in the coal shed of a railroad company. The policy did not cover death resulting from "intentional injuries inflicted by the insured or any other person." The inquiry was as to the question whether the shooting that caused the insured's death was accidental or intentional; and the Court found that under the facts, showing that the murderer knew his victim and that he fired with intent to kill, there could be no recovery under the policy which excepted death from intentional injuries inflicted by any person.WHEREFORE, the decision appealed from is reversed and the complaint dismissed, without pronouncement as to costs.

G.R. No. 78848 November 14, 1988SHERMAN SHAFER, petitioner, vs.HON. JUDGE, REGIONAL TRIAL COURT OF OLONGAPO CITY, BRANCH 75, and MAKATI INSURANCE COMPANY, INC., respondents.R.M. Blanco for petitioner.Camacho and Associates for respondents. PADILLA, J.:This is a petition for review on certiorari of the Order * of the Regional Trial Court, Olongapo City, Branch 75, dated 24 April 1986 dismissing petitioner's third party complaint filed in Criminal Case No. 381-85, a prosecution for reckless imprudence resulting in damage to property and serious physical injuries. 1

On 2 January 1985, petitioner Sherman Shafer obtained a private car policy, GA No. 0889, 2 over his Ford Laser car with Plate No. CFN-361 from Makati Insurance Company, Inc., for third party liability (TPL).<äre||anº•1àw> During the effectivity of the policy, an information 3 for reckless imprudence resulting in damage to property and serious physical injuries was filed against petitioner. The information reads as follows:That on or about the seventeeth (17th) day of May 1985, in the City of Olongapo, Philippines, and within the jurisdiction of this Honorable Court, the above-named accused, being then the driver and in actual physical control of a Ford Laser car bearing Plate No. CFN-361, did then and there wilfully, unlawfully and criminally drive, operate and manage the said Ford Laser car in a careless, reckless and imprudent manner without exercising reasonable caution, diligence and due care to avoid accident to persons and damage to property and in disregard of existing traffic rules and regulations, causing by such carelessness, recklessness and imprudence the said Ford Laser car to hit and bump a Volkswagen car bearing Plate No. NJE-338 owned and driven by Felino llano y Legaspi, thereby causing damage in the total amount of P12,345.00 Pesos, Philippine Currency, and as a result thereof one Jovencio Poblete, Sr. who was on board of the said Volkswagen car sustained physical injuries, to wit:1. 2 cm. laceration of left side of tongue.2. 6 cm. laceration with partial transection of muscle (almost full thickness) left side of face.3. Full thickness laceration of lower lip and adjacent skin.which injuries causing [sic] deformity on the face. 4

The owner of the damaged Volkswagen car filed a separate civil action against petitioner for damages, while Jovencio Poblete, Sr., who was a passenger in the Volkswagen car when allegedly hit and bumped by the car driven by petitioner, did not reserve his right to file a separate civil action for damages. Instead, in the course of the trial in the criminal case, Poblete, Sr. testified on his claim for damages for the serious physical injuries which he claimed to have sustained as a result of the accident.Upon motion, petitioner was granted leave by the former presiding judge of the trail court to file a third party complaint against the herein private respondent, Makati Insurance Company, Inc. Said insurance company, however, moved to vacate the order granting leave to petitioner to file a third party complaint against it and/or to dismiss the same. 5

On 24 April 1987, the court a quo issued an order dismissing the third party complaint on the ground that it was premature, based on the premise that unless the accused (herein petitioner) is found guilty and sentenced to pay the offended party (Poblete Sr.) indemnity or damages, the third party complaint is without cause of action. The court further stated that the better procedure is for the accused (petitioner) to wait for the outcome of the criminal aspect of the case to determine whether or not the accused, also the third party plaintiff, has a cause of action against the third party defendant for the enforcement of its third party liability (TPL) under the insurance contract. 6 Petitioner moved for reconsideration of said order, but the motion was denied; 7 hence, this petition.It is the contention of herein petitioner that the dismissal of the third party complaint amounts to a denial or curtailment of his right to defend himself in the civil aspect of the case. Petitioner further raises the legal question of whether the accused in a criminal action for reckless imprudence, where the civil action is jointly prosecuted, can legally implead the insurance company as third party defendant under its private car insurance policy, as one of his modes of defense in the civil aspect of said proceedings.On the other hand, the insurance company submits that a third party complaint is, under the rules, available only if the defendant has a right to demand contribution, indemnity, subrogation or any other relief in respect of plaintiff's claim, to minimize the number of lawsuits and avoid the necessity of bringing two (2) or more suits involving the same subject matter. The insurance company

further contends that the contract of motor vehicle insurance, the damages and attorney's fees claimed by accused/third party plaintiff are matters entirely different from his criminal liability in the reckless imprudence case, and that petitioner has no cause of action against the insurer until petitioner's liability shall have been determined by final judgment, as stipulated in the contract of insurance. 8

Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily intended to provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of a negligent operation and use of motor vehicles. 9

The victims and/or their dependents are assured of immediate financial assistance, regardless of the financial capacity of motor vehicle owners.The liability of the insurance company under the Compulsory Motor Vehicle Liability Insurance is for loss or damage. Where an insurance policy insures directly against liability, the insurer's liability accrues immediately upon the occurrence of the injury or event upon which the liability depends, and does not depend on the recovery of judgment by the injured party against the insured. 10

The injured for whom the contract of insurance is intended can sue directly the insurer. The general purpose of statutes enabling an injured person to proceed directly against the insurer is to protect injured persons against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy, and statutes are to be liberally construed so that their intended purpose may be accomplished. It has even been held that such a provision creates a contractual relation which inures to the benefit of any and every person who may be negligently injured by the named insured as if such injured person were specifically named in the policy. 11

In the event that the injured fails or refuses to include the insurer as party defendant in his claim for indemnity against the insured, the latter is not prevented by law to avail of the procedural rules intended to avoid multiplicity of suits. Not even a "no action" clause under the policy-which requires that a final judgment be first obtained against the insured and that only thereafter can the person insured recover on the policy can prevail over the Rules of Court provisions aimed at avoiding multiplicity of suits. 12

In the instant case, the court a quo erred in dismissing petitioner's

third party complaint on the ground that petitioner had no cause of action yet against the insurance company (third party defendant). There is no need on the part of the insured to wait for the decision of the trial court finding him guilty of reckless imprudence. The occurrence of the injury to the third party immediately gave rise to the liability of the insurer under its policy.A third party complaint is a device allowed by the rules of procedure by which the defendant can bring into the original suit a party against whom he will have a claim for indemnity or remuneration as a result of a liability established against him in the original suit. 13 Third party complaints are allowed to minimize the number of lawsuits and avoid the necessity of bringing two (2) or more actions involving the same subject matter. They are predicated on the need for expediency and the avoidance of unnecessary lawsuits. If it appears probable that a second action will result if the plaintiff prevails, and that this result can be avoided by allowing the third party complaint to remain, then the motion to dismiss the third party complaint should be denied. 14

Respondent insurance company's contention that the third party complaint involves extraneous matter which will only clutter, complicate and delay the criminal case is without merit. An offense causes two (2) classes of injuries the first is the social injury produced by the criminal act which is sought to be repaired thru the imposition of the corresponding penalty, and the second is the personal injury caused to the victim of the crime, which injury is sought to be compensated thru indemnity, which is civil in nature. 15

In the instant case, the civil aspect of the offense charged, i.e., serious physical injuries allegedly suffered by Jovencio Poblete, Sr., was impliedly instituted with the criminal case. Petitioner may thus raise all defenses available to him insofar as the criminal and civil aspects of the case are concerned. The claim of petitioner for payment of indemnity to the injured third party, under the insurance policy, for the alleged bodily injuries caused to said third party, arose from the offense charged in the criminal case, from which the injured (Jovencio Poblete, Sr.) has sought to recover civil damages. Hence, such claim of petitioner against the insurance company cannot be regarded as not related to the criminal action.WHEREFORE, the instant petition is GRANTED. The questioned order dated 24 April 1987 is SET ASIDE and a new one entered admitting petitioner's third party complaint against the private

respondent Makati Insurance Company, Inc.SO ORDERED.

G.R. No. 101439 June 21, 1999GOVERNMENT SERVICE INSURANCE SYSTEM (GSIS), petitioner, vs.COURT OF APPEALS (former Tenth Division), VICTORIA JAIME VDA. DE KHO, for herself and minor ROY ROLAND, GLORIA KHO VDA. DE CALABIA for herself and minors MARY GRACE, WILLIE, JR., VOLTAIRE, GLENN, and MAY, all surnamed CALABIA, DANIEL KHO, JOSEFINA KHO, EMERITA KHO APEGO, ANTONIO KHO and TERESITA KHO, respondents. QUISUMBING, J.:pIn this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Government Service Insurance System (GSIS) assails the January 15, 1991 Decision 1 of the Court of Appeals in CA-G.R. No. 19849, which affirmed in toto the judgment of the Regional Trial Court of Butuan City, Branch II, dated April 30, 1985, stating in part:WHEREFORE, judgment is hereby rendered, as follows:xxx xxx xxxIn Civil Case No. 2256:a) Dismissing the complaint against defendant Victor Uy;b) Ordering defendants Mabuhay Insurance and Guaranty Company, Inc., Guillermo Corbeta, NFA and GSIS to pay jointly and severally the following sums of money:i. to pay plaintiff Gloria Kho Vda. de Calabia, the sum of P8,935.06 for doctor's fees, medicines, hospitalizations and medical expenses; P2,319.00 for transportation expenses; and P53.30 for telegrams; P10,000.00 for the injuries she sustained; P12,000.00 loss of income for six months.ii. to plaintiff Victoria Kho, the sum P832.00 for hospitalization and medicines; P10,000.00 for the injuries she sustained;iii. to the heirs of Wellie [Willie] Calabia, Roland Kho and Maxima Uhmad [Ugmad] Vda. de Kho, the sum of P7,500.00 as funeral expenses less P5,000.00 advanced by defendant Victor Uy.iv. to the heirs of Wellie [Willie] Calabia, Sr., heirs of Roland Kho and heirs of Maxima Ugmad Vda. de Kho; P30,000.00 each as compensatory damages.c) To pay plaintiff the sum of P10,000.00 as attorney's fees and expenses of litigation;d) Dismissing defendants counterclaim, and cross-claim; ande) To pay the costs.

That this decision is without prejudice as to the right Mabuhay Insurance & Guaranty Co., Inc., and NFA to recover from Guillermo Corbeta and GSIS the amounts they may have paid by virtue hereof. 2

For purposes of this review, we deem as also assailed the disposition by the trial court in its Order issued on July 12, 1985, modifying its original decision, by awarding moral damages to the heirs of the deceased victims, as follows:Considering that the dispositive portion of the decision in this case, an award of P10,000.00 each made to plaintiffs Gloria Kho Vda. de Calabia . . ., for injuries they sustained, this award, through [sic] not clearly stated in the decision, is the moral damages the instant motion seeks to obtain. However, the prayer for moral damages for the death of the three (3) persons above-mentioned is proper. (citation omitted)In view of the foregoing, the prayer of plaintiffs Gloria Kho Vda. de Calabia and Victoria Kho for an award of moral damages in their favor is hereby denied. However, as for the death of Wellie [Willie] Calabia, Sr., Rolando Kho and Maxima Ugmad Vda. de Kho, an award of moral damages is hereby made, and ordering and directing defendants Mabuhay Insurance and Guaranty Company Inc., Guillermo Corbeta, National Food Authority and Government Service Insurance System to pay jointly and severally the following sums to wit :P10,000.00 to the heirs of Wellie [Willie]Calabia, Sr.P10,000.00 to the heirs of Rolando Kho andP10,000.00 to the heirs of Maxima Ugmad Vda. de Kho.xxx xxx xxxIT IS SO ORDERED. 3

The relevant facts as found by the trial court are as follows:National Food Authority (NFA, formerly National Grains Authority) was the owner of a Chevrolet truck which was insured against liabilities for death of and injuries to third persons with the GSIS.On May 9, 1979, at about 7:00 in the evening at Tabon-Tabon, Butuan City, the said truck driven by Guillermo Corbeta collided with a public utility vehicle, a Toyota Tamaraw. The Toyota Tamaraw was owned and operated by Victor Uy, under the name and style of "Victory Line." The Tamaraw was a total wreck.All the collision victims were passengers of the Toyota Tamaraw. Five (5) passengers died 4 while ten (10) others sustained bodily injuries. Among those injured were private respondents, Victoria

Jaime Vda. de Kho and Gloria Kho Vda. de Calabia. Among the dead were Maxima Ugmad Vda. de Kho, Roland Kho and Willie Calabia, Sr.Three (3) cases were filed with the Court of First Instance of Agusan del Norte and Butuan City. The first, Civil Case No. 2196 for quasi-delict, damages and attorney's fees, was commenced by Uy on June 5, 1979 against NFA and Corbeta. On August 27, 1979, the second, Civil Case No. 2225 for damages, was filed by an injured passenger, Librado Taer, against Uy, the operator of the public utility vehicle, and insurer, Mabuhay Insurance and Guaranty Co. (MIGC). In turn, Uy filed a cross-claim against MIGC and a third-party complaint against Corbeta and NFA. The third, Civil Case No. 2256, was instituted by herein private respondents on November 26, 1979 against the following: NFA and Corbeta for damages due to quasi-delict; GSIS as insurer of the truck; Uy for breach of contract of carriage; and MIGC as insurer of the Toyota Tamaraw. These cases were consolidated and partially tried by Judge Fortunate A. Vailoces, of the then Court of First Instance of Agusan del Norte and Butuan City.These cases were later on transferred to Branch II of the Regional Trial Court of Butuan City. Trial ensued and on April 30, 1985, the court rendered its decision 5 holding that Corbeta's negligence was the proximate cause of the collision. The findings of the trial court stated that the truck which crossed over to the other lane was speeding because after the collision, its left front wheel was detached and the truck traveled for about fifty (50) meters and fell into a ravine. 6 Likewise, the court concluded that if both vehicles had traveled in their respective lanes, the incident would not have occurred. 7 However, the Chevy cargo truck had crossed over to the other lane which, under traffic rules, was the lane of the Toyota Tamaraw. 8

In Civil Case No. 2196, the trial court awarded Uy the total amount of one hundred nine thousand one hundred (P109,100.00) pesos for damages. In Civil Case No. 2225, said court dismissed the case against Uy and ordered MIGC, Corbeta and NFA to pay plaintiff Taer, jointly and severally, the total amount of forty thousand five hundred fifty-nine pesos and ninety four centavos (P40,559.94) for actual, compensatory, and moral damages plus attorney's fees. Damages were likewise awarded to the herein private respondents in Civil Case No. 2256, as earlier mentioned.Corbeta and NFA appealed the decision of the trial court in Civil

Case Nos. 2196, 2225, and 2256 to the Court of Appeals. GSIS also elevated the decision in Civil Case No. 2256 to the same appellate court. The appeals were docketed as C.A.-G.R. Nos. 19847, 19848, and 19849.The Court of Appeals agreed with the conclusions of the trial court and ruled as follows:WHEREFORE, in view of the foregoing considerations, and finding no reversible error, the decisions of the Court a quo in Civil Cases Nos. 2196, 2225 and 2256 are hereby AFFIRMED in toto, with costs against the appellants.SO ORDERED. 9

On February 5 and 6, 1991, GSIS and NFA filed their motions for reconsideration respectively, which were denied by the respondent court in its Resolution 10 dated August 13, 1991.On October 4, 1991, only GSIS filed this petition for review on certiorari based on the following assigned errors:1. The respondent court erred in holding GSIS solidarily liable with NFA.2. The respondent court erred in holding GSIS liable beyond the terms and conditions of the contract of insurance and the limitations under Insurance Memorandum Circular (IMC) No. 5-78.3. The respondent court erred in holding GSIS liable without proof that a notice of claim had been filed within six (6) months from the date of the accident.We find pertinent the following issues:1) Whether the respondent court erred in holding GSIS solidarily liable with the negligent insured/owner-operator of the Chevrolet truck for damages awarded to private respondents which are beyond the limitations of the insurance policy and the Insurance Memorandum Circular No. 5-78.2) Whether the respondent court failed to consider that the private respondents have no cause of action against the petitioner, allegedly for failure of the victims to file an insurance claim within six (6) months from the date of the accident.Petitioner denies solidary liability with the NFA or the negligent operator of the cargo truck because it claims that they are liable under different obligations. It asserts that the NFA's liability is based on quasi-delict, while petitioner's liability is based on the contract of insurance. Citing articles 1207 11 and 1208 12 of the Civil Code of the Philippines, petitioner states that when there are two or more debtors or two or more creditors, the obligation as a

general rule is joint. It claims that the only exceptions are: (1) when there is a stipulation for solidary obligation; (2) when the nature of the obligation requires solidary liability; and (3) when the law declares the obligation to be solidary. However, since neither the provision of the contract nor the insurance law provides for solidary liability, petitioner asserts that the presumption is that its obligation arising from a contract of insurance is joint.Petitioner's position insofar as joint liability is concerned is not tenable. It is now established that the injured or the heirs of a deceased victim of a vehicular accident may sue directly the insurer of the vehicle. Note that common carriers are required to secure Compulsory Motor Vehicle Liability Insurance [CMVLI] coverage as provided under Sec. 374 13 of the Insurance Code, precisely for the benefit of victims of vehicular accidents and to extend them immediate relief. 14 As this Court held in Shafter vs. Judge, RTC of Olongapo City, Br. 75: 15

Compulsory Motor Vehicle Liability Insurance (third party liability, or TPL) is primarily intended to provide compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of a negligent operation and use of motor vehicles. The victims and/or their defendants [dependents] are assured of immediate financial assistance, regardless of the financial capacity of motor vehicle owners.xxx xxx xxxThe injured for whom the contract of insurance is intended can sue directly the insurer. The general purpose of statutes enabling an injured person to proceed directly against the insurer is to protect injured persons against the insolvency of the insured who causes such injury, and to give such injured person a certain beneficial interest in the proceeds of the policy, and statutes are to be liberally construed so that their intended purpose may be accomplished. It has even been held that such a provision creates a contractual relation which injures to the benefit of any and every person who may be negligently injured by the named insured as if such injured person were specifically named in the policy. (S 449 7 Am. Jur., 2d, pp. 118-119) 16

However, although the victim may proceed directly against the insurer for indemnity, the third party liability is only up to the extent of the insurance policy and those required by law. While it is true that where the insurance contract provides for indemnity against liability to third persons, and such third persons can

directly 17 sue the insurer, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held liable in solidum with the insured and/or the other parties found at fault. 18 For the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on tort. 19 The liability of GSIS based on the insurance contract is direct, but not solidary with that of the NFA. The latter's liability is based separately on Article 2180 20 of the Civil Code. 21

Obviously, the insurer could be held liable only up to the extent of what was provided for by the contract of insurance, in accordance with CMVLI law. At the time of the incident, the schedule of indemnities for death and/or bodily injuries, professional fees, hospital and other charges payable under a CMVLI coverage was provided under the Insurance Memorandum Circular (IMC) No. 5-78 which was approved on November 10, 1978. As therein provided, the maximum indemnity for death was twelve thousand (P12,000.00) pesos per victim. 22 The schedules for medical expenses were also provided by said IMC, specifically in paragraphs (C) to (G).Consequently, heirs of the victims who died in the May 9, 1979 vehicular incident, could proceed (1) against GSIS for the indemnity of P12,000 for each dead victim, and against NFA and Guillermo Corbeta for any other damages or expenses claimed; or (2) against NFA and Corbeta to pay them all their claims in full.It follows also that injured victims, Gloria Kho Vda. de Calabia and Victoria Kho, could claim their medical expenses for eight thousand nine hundred thirty-five pesos and six centavos (P8,935.06) and eight hundred thirty-two (P832.00) pesos, from any of the following: GSIS, NFA, or Corbeta. As to the other damages, only NFA or Corbeta may be held liable therefor.Computation of hospital charges and fees for the services rendered to the injured victims was conclusively established by the trial court. The petitioner failed to object to the evidence thereon, when presented by the private respondents during the trial. Thus, these factual bases for the award of damages may no longer be attacked. For generally, findings of the judge who tried the case and heard the witnesses could not be disturbed on appeal, unless there are substantial facts and particular circumstances which have been overlooked but which, if properly considered, might affect the result of the case. 23 Thus, considering the evidence on record including the schedule of indemnities provided under IMC

No. 5-78, we find no cogent reason to disturb the computation of medical charges and expenses that justify the award of damages by the trial court.As to the second issue, the petitioner contends that it cannot be held liable without proof nor allegation that the private respondents filed before its office a notice of claim within six (6) months from the date of the accident. This requirement, according to the petitioner, gives the insurer the opportunity to investigate the veracity of the claim, and non-compliance therewith constitutes waiver. Since the claim was not reported to the insurer, the petitioner avers that the presumption is that the victim opted to pursue his claim against the motor vehicle owner or against the tortfeasor.However, in this case the records reveal that on September 7, 1979, the private respondents sent a notice of loss to the petitioner informing the latter of the accident. Included as "Exihibit J'' 24 in the records, this notice constitutes evidence of the loss they suffered by reason of the vehicular collision. They stressed further that the petitioner did not deny receipt of notice of claim during the trial, and it would be too late now to state otherwise.Although merely factual, we need to emphasize that the alleged delay in reporting the loss by the insured and/or by the beneficiaries must be promptly raised by the insurer 25 in objecting to the claims. When the insured presented proof of loss before the trial court, the insurer failed to object to said presentation. The petitioner should have promptly interposed the defense of delay, or belated compliance, concerning the notice of claim. Moreover, the petitioner merely waited for the victims or beneficiaries to file their complaint. As matters stand now, the defense of laches or prescription is deemed waived because of petitioner's failure to raise it not only before but also during the hearing. 26

To recapitulate, petitioner seeks a definitive ruling only on the extent of its liability, as insurer of NFA, to those injured or killed in the May 9, 1979 vehicular collision.As found by the trial court, the driver (Guillermo Corbeta), the operator (NFA), and MIGC, are solidarily liable for damages as computed below:SCHEDULE AI. For the Injured Victims.1) Gloria Kho Vda. de Calabia.a) Medical expenses P8,935.06

b) Transportation and Telegraph Expenses 2,372.30c) Other Compensatory/Moral Damages 10,000.00d) Loss of Income 12,000.00—————Total P33,307.36=========2) Victoria Kho.a) Medical expenses P832.00b) Other Compensatory/Moral Damages 10,000.00—————Total P10,832.00=========II. For the Heirs of the Deceased Victims:Compensatory/Funeral Death MoralExpenses Indemnity Damages Total———— ———— ———— ———1) Heirs of Willie Calabia, Sr. P2,500.00 P30,000.00 P10,000.00 42,500.002) Heirs of Roland Kho 2,500.00 30,000.00 10,000.00 42,500.003) Heirs of Maxima Ugmad Vda.de Kho 2,500.00 30,000.00 10,000.00 42,500.00———— ———— ———— ————Sub-Total P7,500.00 P90,000.00 P30,000.00 P127,500.00Less: Advances by Victor Uy (5,000.00) NIL (5,000.00)________ _________ _________ _________Balance P2,500.00 P90,000.00 P30,000.00 122,500.00======== ======== ======== ========III. Total Amount of Attorney's Fees P10,000.00—————Note that, the petitioner (GSIS) was impleaded as insurer of NFA. But under the CMVLI law, the petitioner could only be held liable under its contract of insurance. And pursuant to the CMVLI law, its liability is primary, and not dependent on the recovery of judgment from the insured. Hence, GSIS is directly liable to the private respondents, in the following amounts.SCHEDULE BI. Injured Victims Medical Expenses——————— —————————1) Victoria Jaime Vda. de Kho P832.002) Gloria Kho Vda. de Calabia P8,935.00

II. Heirs of Deceased Victims Death Indemnity———————————— ————————1) Heirs of Willie Calabia, Sr. P12,000.002) Heirs of Roland Kho P12,000.003) Heirs of Maxima Ugmad Vda. de Kho P12,000.00The balance of the private respondents' claims as shown on Schedule A above, must be paid by Corbeta or NFA, or MIGC, the parties found solidarily liable. 27

WHEREFORE, the instant petition is hereby GRANTED, but the decision of the trial court as affirmed by the Court of Appeals is hereby. MODIFIED, as follows:1. Petitioner Government Service Insurance System is ordered to pay (a) twelve thousand pesos (P12,000.00) as death indemnity to each group of heirs of the deceased, Willie Calabia Sr., Roland Kho and Maxima Ugmad Vda. de Kho; (b) eight hundred thirty-two (P832.00) pesos for medical expenses of Victoria Jaime Vda. de Kho; and (c) eight thousand, nine hundred thirty-five pesos and six centavos (P8,935.06) for medical expenses of Gloria Kho Vda. de Calabia.2. Guillermo Corbeta, National Foods Authority, and Mabuhay Insurance & Guaranty Co., Inc., jointly and severally, are ordered to pay private respondents' claims 28 as adjudged by the Regional Trial Court of Butuan City, minus the amounts that GSIS must pay to the injured victims and the heirs of the deceased victims as above stated.This decision is immediately executory. No pronouncement as to cost.SO ORDERED.

G.R. No. 144274             September 20, 2004NOSTRADAMUS VILLANUEVA, petitioner, vs.PRISCILLA R. DOMINGO and LEANDRO LUIS R. DOMINGO, respondents.D E C I S I O NCORONA, J.:This is a petition to review the decision1 of the Court of Appeals in CA-G.R. CV No. 52203 affirming in turn the decision of the trial court finding petitioner liable to respondent for damages. The dispositive portion read:WHEREFORE, the appealed decision is hereby AFFIRMED except the award of attorney’s fees including appearance fees which is DELETED.SO ORDERED.2

The facts of the case, as summarized by the Court of Appeals, are as follows:[Respondent] Priscilla R. Domingo is the registered owner of a silver Mitsubishi Lancer Car model 1980 bearing plate No. NDW 781 ’91 with [co-respondent] Leandro Luis R. Domingo as authorized driver. [Petitioner] Nostradamus Villanueva was then the registered "owner" of a green Mitsubishi Lancer bearing Plate No. PHK 201 ’91.On 22 October 1991 at about 9:45 in the evening, following a green traffic light, [respondent] Priscilla Domingo’s silver Lancer car with Plate No. NDW 781 ’91 then driven by [co-respondent] Leandro Luis R. Domingo was cruising along the middle lane of South Superhighway at moderate speed from north to south. Suddenly, a green Mitsubishi Lancer with plate No. PHK 201 ’91 driven by Renato Dela Cruz Ocfemia darted from Vito Cruz Street towards the South Superhighway directly into the path of NDW 781 ’91 thereby hitting and bumping its left front portion. As a result of the impact, NDW 781 ’91 hit two (2) parked vehicles at the roadside, the second hitting another parked car in front of it.Per Traffic Accident Report prepared by Traffic Investigator Pfc. Patrocinio N. Acido, Renato dela Cruz Ocfemia was driving with expired license and positive for alcoholic breath. Hence, Manila Assistant City Prosecutor Oscar A. Pascua recommended the filing of information for reckless imprudence resulting to (sic) damage to property and physical injuries.The original complaint was amended twice: first, impleading Auto Palace Car Exchange as commercial agent and/or buyer-seller and second, impleading Albert Jaucian as principal defendant doing

business under the name and style of Auto Palace Car Exchange.Except for Ocfemia, all the defendants filed separate answers to the complaint. [Petitioner] Nostradamus Villanueva claimed that he was no longer the owner of the car at the time of the mishap because it was swapped with a Pajero owned by Albert Jaucian/Auto Palace Car Exchange. For her part, Linda Gonzales declared that her presence at the scene of the accident was upon the request of the actual owner of the Mitsubishi Lancer (PHK 201 ’91) [Albert Jaucian] for whom she had been working as agent/seller. On the other hand, Auto Palace Car Exchange represented by Albert Jaucian claimed that he was not the registered owner of the car. Moreover, it could not be held subsidiary liable as employer of Ocfemia because the latter was off-duty as utility employee at the time of the incident. Neither was Ocfemia performing a duty related to his employment.3

After trial, the trial court found petitioner liable and ordered him to pay respondent actual, moral and exemplary damages plus appearance and attorney’s fees:WHEREFORE, judgment is hereby rendered for the plaintiffs, ordering Nostradamus Villanueva to pay the amount of P99,580 as actual damages, P25,000.00 as moral damages, P25,000.00 as exemplary damages and attorney’s fees in the amount of P10,000.00 plus appearance fees of P500.00 per hearing with legal interest counted from the date of judgment. In conformity with the law on equity and in accordance with the ruling in First Malayan Lending and Finance Corporation vs. Court of Appeals (supra), Albert Jaucian is hereby ordered to indemnify Nostradamus Villanueva for whatever amount the latter is hereby ordered to pay under the judgment.SO ORDERED.4

The CA upheld the trial court’s decision but deleted the award for appearance and attorney’s fees because the justification for the grant was not stated in the body of the decision. Thus, this petition for review which raises a singular issue:MAY THE REGISTERED OWNER OF A MOTOR VEHICLE BE HELD LIABLE FOR DAMAGES ARISING FROM A VEHICULAR ACCIDENT INVOLVING HIS MOTOR VEHICLE WHILE BEING OPERATED BY THE EMPLOYEE OF ITS BUYER WITHOUT THE LATTER’S CONSENT AND KNOWLEDGE?5

Yes.We have consistently ruled that the registered owner of any

vehicle is directly and primarily responsible to the public and third persons while it is being operated.6 The rationale behind such doctrine was explained way back in 1957 in Erezo vs. Jepte7:The principle upon which this doctrine is based is that in dealing with vehicles registered under the Public Service Law, the public has the right to assume or presume that the registered owner is the actual owner thereof, for it would be difficult for the public to enforce the actions that they may have for injuries caused to them by the vehicles being negligently operated if the public should be required to prove who the actual owner is. How would the public or third persons know against whom to enforce their rights in case of subsequent transfers of the vehicles? We do not imply by his doctrine, however, that the registered owner may not recover whatever amount he had paid by virtue of his liability to third persons from the person to whom he had actually sold, assigned or conveyed the vehicle.Under the same principle the registered owner of any vehicle, even if not used for a public service, should primarily be responsible to the public or to third persons for injuries caused the latter while the vehicle is being driven on the highways or streets. The members of the Court are in agreement that the defendant-appellant should be held liable to plaintiff-appellee for the injuries occasioned to the latter because of the negligence of the driver, even if the defendant-appellant was no longer the owner of the vehicle at the time of the damage because he had previously sold it to another. What is the legal basis for his (defendant-appellant’s) liability?There is a presumption that the owner of the guilty vehicle is the defendant-appellant as he is the registered owner in the Motor Vehicles Office. Should he not be allowed to prove the truth, that he had sold it to another and thus shift the responsibility for the injury to the real and actual owner? The defendant holds the affirmative of this proposition; the trial court held the negative.The Revised Motor Vehicle Law (Act No. 3992, as amended) provides that no vehicle may be used or operated upon any public highway unless the same is property registered. It has been stated that the system of licensing and the requirement that each machine must carry a registration number, conspicuously displayed, is one of the precautions taken to reduce the danger of injury to pedestrians and other travelers from the careless management of automobiles. And to furnish a means of

ascertaining the identity of persons violating the laws and ordinances, regulating the speed and operation of machines upon the highways (2 R.C.L. 1176). Not only are vehicles to be registered and that no motor vehicles are to be used or operated without being properly registered for the current year, but that dealers in motor vehicles shall furnish thee Motor Vehicles Office a report showing the name and address of each purchaser of motor vehicle during the previous month and the manufacturer’s serial number and motor number. (Section 5(c), Act No. 3992, as amended.)Registration is required not to make said registration the operative act by which ownership in vehicles is transferred, as in land registration cases, because the administrative proceeding of registration does not bear any essential relation to the contract of sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of the vehicle upon any public highway (section 5 [a], Act No. 3992, as amended). The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or that any damage or injury is caused by the vehicle on the public highways, responsibility therefore can be fixed on a definite individual, the registered owner. Instances are numerous where vehicles running on public highways caused accidents or injuries to pedestrians or other vehicles without positive identification of the owner or drivers, or with very scant means of identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle registration is primarily ordained, in the interest of the determination of persons responsible for damages or injuries caused on public highways:One of the principal purposes of motor vehicles legislation is identification of the vehicle and of the operator, in case of accident; and another is that the knowledge that means of detection are always available may act as a deterrent from lax observance of the law and of the rules of conservative and safe operation. Whatever purpose there may be in these statutes, it is subordinate at the last to the primary purpose of rendering it certain that the violator of the law or of the rules of safety shall not escape because of lack of means to discover him. The purpose of the statute is thwarted, and the displayed number becomes a "share and delusion," if courts would entertain such defenses as that put forward by appellee in this case. No responsible person or

corporation could be held liable for the most outrageous acts of negligence, if they should be allowed to pace a "middleman" between them and the public, and escape liability by the manner in which they recompense servants. (King vs. Brenham Automobile Co., Inc. 145 S.W. 278, 279.)With the above policy in mind, the question that defendant-appellant poses is: should not the registered owner be allowed at the trial to prove who the actual and real owner is, and in accordance with such proof escape or evade responsibility by and lay the same on the person actually owning the vehicle? We hold with the trial court that the law does not allow him to do so; the law, with its aim and policy in mind, does not relieve him directly of the responsibility that the law fixes and places upon him as an incident or consequence of registration. Were a registered owner allowed to evade responsibility by proving who the supposed transferee or owner is, it would be easy for him, by collusion with others or otherwise, to escape said responsibility and transfer the same to an indefinite person, or to one who possesses no property with which to respond financially for the damage or injury done. A victim of recklessness on the public highways is usually without means to discover or identify the person actually causing the injury or damage. He has no means other than by a recourse to the registration in the Motor Vehicles Office to determine who is the owner. The protection that the law aims to extend to him wouldbecome illusory were the registered owner given the opportunity to escape liability by disproving his ownership. If the policy of the law is to be enforced and carried out, the registered owner should not be allowed to prove the contrary to the prejudice of the person injured, that is, to prove that a third person or another has become the owner, so that he may thereby be relieved of the responsibility to the injured person.The above policy and application of the law may appear quite harsh and would seem to conflict with truth and justice. We do not think it is so. A registered owner who has already sold or transferred a vehicle has the recourse to a third-party complaint, in the same action brought against him to recover for the damage or injury done, against the vendee or transferee of the vehicle. The inconvenience of the suit is no justification for relieving him of liability; said inconvenience is the price he pays for failure to comply with the registration that the law demands and requires.

In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily responsible for the damage caused to the vehicle of the plaintiff-appellee, but he (defendant-appellant) has a right to be indemnified by the real or actual owner of the amount that he may be required to pay as damage for the injury caused to the plaintiff-appellant.8

Petitioner insists that he is not liable for damages since the driver of the vehicle at the time of the accident was not an authorized driver of the new (actual) owner of the vehicle. He claims that the ruling in First Malayan Leasing and Finance Corporation vs. CA9

implies that to hold the registered owner liable for damages, the driver of the vehicle must have been authorized, allowed and permitted by its actual owner to operate and drive it. Thus, if the vehicle is driven without the knowledge and consent of the actual owner, then the registered owner cannot be held liable for damages.He further argues that this was the underlying theory behind Duavit vs. CA10 wherein the court absolved the registered owner from liability after finding that the vehicle was virtually stolen from the owner’s garage by a person who was neither authorized nor employed by the owner. Petitioner concludes that the ruling in Duavit and not the one in First Malayan should be applicable to him.Petitioner’s argument lacks merit. Whether the driver is authorized or not by the actual owner is irrelevant to determining the liability of the registered owner who the law holds primarily and directly responsible for any accident, injury or death caused by the operation of the vehicle in the streets and highways. To require the driver of the vehicle to be authorized by the actual owner before the registered owner can be held accountable is to defeat the very purpose why motor vehicle legislations are enacted in the first place.Furthermore, there is nothing in First Malayan which even remotely suggests that the driver must be authorized before the registered owner can be held accountable. In First Malayan, the registered owner, First Malayan Corporation, was held liable for damages arising from the accident even if the vehicle involved was already owned by another party:This Court has consistently ruled that regardless of who the actual owner is of a motor vehicle might be, the registered owner is the operator of the same with respect to the public and third persons,

and as such, directly and primarily responsible for the consequences of its operation. In contemplation of law, the owner/operator of record is the employer of the driver, the actual operator and employer being considered merely as his agent (MYC-Agro-Industrial Corporation vs. Vda. de Caldo, 132 SCRA 10, citing Vargas vs. Langcay, 6 SCRA 174; Tamayo vs. Aquino, 105 Phil. 949).‘We believe that it is immaterial whether or not the driver was actually employed by the operator of record. It is even not necessary to prove who the actual owner of the vehicle and the employer of the driver is. Granting that, in this case, the father of the driver is the actual owner and that he is the actual employer, following the well-settled principle that the operator of record continues to be the operator of the vehicle in contemplation of law, as regards the public and third person, and as such is responsible for the consequences incident to its operation, we must hold and consider such owner-operator of record as the employer, in contemplation of law, of the driver. And, to give effect to this policy of law as enunciated in the above cited decisions of this Court, we must now extend the same and consider the actual operator and employer as the agent of the operator of record.’11

Contrary to petitioner’s position, the First Malayan ruling is applicable to him since the case involves the same set of facts ― the registered owner had previously sold the vehicle to someone else and was being driven by an employee of the new (actual) owner. Duavit is inapplicable since the vehicle there was not transferred to another; the registered and the actual owner was one and the same person. Besides, in Duavit, the defense of the registered owner, Gilberto Duavit, was that the vehicle was practically stolen from his garage by Oscar Sabiano, as affirmed by the latter:Defendant Sabiano, in his testimony, categorically admitted that he took the jeep from the garage of defendant Duavit without the consent and authority of the latter. He testified further that Duavit even filed charges against him for the theft of the jeep but which Duavit did not push through as his (Sabiano’s) parents apologized to Duavit on his behalf.12

As correctly pointed out by the CA, the Duavit ruling is not applicable to petitioner’s case since the circumstance of unauthorized use was not present. He in fact voluntarily delivered his car to Albert Jaucian as part of the downpayment for a vehicle

he purchased from Jaucian. Thus, he could not claim that the vehicle was stolen from him since he voluntarily ceded possession thereof to Jaucian. It was the latter, as the new (actual) owner, who could have raised the defense of theft to prove that he was not liable for the acts of his employee Ocfemia. Thus, there is no reason to apply the Duavit ruling to this case.The ruling in First Malayan has been reiterated in BA Finance Corporation vs. CA13 and more recently in Aguilar, Sr. vs. Commercial Savings Bank.14 In BA Finance, we held the registered owner liable even if, at the time of the accident, the vehicle was leased by another party and was driven by the lessee’s employee. In Aguilar, the registered owner-bank answered for damages for the accident even if the vehicle was being driven by the Vice-President of the Bank in his private capacity and not as an officer of the Bank, as claimed by the Bank. We find no reason to deviate from these decisions.The main purpose of vehicle registration is the easy identification of the owner who can be held responsible for any accident, damage or injury caused by the vehicle. Easy identification prevents inconvenience and prejudice to a third party injured by one who is unknown or unidentified. To allow a registered owner to escape liability by claiming that the driver was not authorized by the new (actual) owner results in the public detriment the law seeks to avoid.Finally, the issue of whether or not the driver of the vehicle during the accident was authorized is not at all relevant to determining the liability of the registered owner. This must be so if we are to comply with the rationale and principle behind the registration requirement under the motor vehicle law.WHEREFORE, the petition is hereby DENIED. The January 26, 2000 decision of the Court of Appeals is AFFIRMED.SO ORDERED.

G.R. No. 161946             November 14, 2008MEDARDO AG. CADIENTE, petitioner, vs.BITHUEL MACAS, respondent.D E C I S I O NQUISUMBING, Acting C.J.:For review on certiorari are the Decision1 dated September 16, 2002 and the Resolution2 dated December 18, 2003 of the Court of Appeals in CA-G.R. CV No. 64103, which affirmed the Decision3 of the Regional Trial Court (RTC) of Davao City, Branch 10, in Civil Case No. 23,723-95.The facts are undisputed.Eyewitness Rosalinda Palero testified that on July 19, 1994, at about 4:00 p.m., at the intersection of Buhangin and San Vicente Streets in Davao City, 15-year old high school student Bithuel Macas, herein respondent, was standing on the shoulder of the road. She was about two and a half meters away from the respondent when he was bumped and run over by a Ford Fiera, driven by Chona C. Cimafranca. Rosalinda and another unidentified person immediately came to the respondent's rescue and told Cimafranca to take the victim to the hospital. Cimafranca rushed the respondent to the Davao Medical Center.Dr. Hilario Diaz, the orthopedic surgeon who attended to the respondent, testified that the respondent suffered severe muscular and major vessel injuries, as well as open bone fractures in both thighs and other parts of his legs. In order to save his life, the surgeon had to amputate both legs up to the groins.4

Cimafranca had since absconded and disappeared. Records showed that the Ford Fiera was registered in the name of herein petitioner, Atty. Medardo Ag. Cadiente. However, Cadiente claimed that when the accident happened, he was no longer the owner of the Ford Fiera. He alleged that he sold the vehicle to Engr. Rogelio Jalipa on March 28, 1994,5 and turned over the Certificate of Registration and Official Receipt to Jalipa, with the understanding that the latter would be the one to cause the transfer of the registration.The victim's father, Samuel Macas, filed a complaint6 for torts and damages against Cimafranca and Cadiente before the RTC of Davao City, Branch 10. Cadiente later filed a third-party complaint7

against Jalipa.In answer, Jalipa claimed that he was no longer the owner of the Ford Fiera at the time of the accident. He alleged that he sold the

vehicle to Abraham Abubakar on June 20, 1994.8 He thus filed a fourth-party complaint9 against Abubakar.After trial, the court ruled:WHEREFORE, judgment is rendered in favor of the plaintiff declaring Atty. Medardo Ag. Cadiente and Engr. Rogelio Jalipa jointly and severally liable for damages to the plaintiff for their own negligence as stated above, and ordering them to indemnify the plaintiff jointly and severally as follows:(a) P300,000.00 as compensatory damages for the permanent and almost total disability being suffered by him;(b) P150,000.00 for moral damages;(c) P18,982.85 as reimbursement of medical expenses;(d) P30,000.00 for attorney's fees; and(e) costs of suit.SO ORDERED.10

On appeal, the Court of Appeals held that the findings of the trial court were in accordance with the established facts and was supported by the evidence on record. Thus, it decreed as follows:WHEREFORE, premises considered, the instant appeal is DENIED and the decision of the Regional Trial Court of Davao City in Civil Case No. 23723-95 is hereby AFFIRMED.SO ORDERED.11

From the aforequoted decision of the Court of Appeals and the subsequent denial of the motion for reconsideration, only Cadiente appealed to this Court.The instant petition alleges that the Court of Appeals committed serious errors of law in affirming the decision of the trial court. Petitioner Cadiente raises the following as issues:I.WAS THERE … CONTRIBUTORY NEGLIGENCE ON THE PART OF THE INJURED PARTY?II.ARE BOTH DEFENDANT CADIENTE AND THIRD-PARTY DEFENDANT JOINTLY AND SEVERALLY LIABLE TO THE INJURED PARTY?III.THE HONORABLE COURT OF APPEAL[S] COMMIT[T]ED GRAVE LEGAL ERROR IN ORDERING DEFENDANT CADIENTE AND THIRD-PARTY DEFENDANT JALIPA JOINTLY AND SEVERALLY LIABLE.12

Essentially, the issues to be resolved are: (1) Whether there was contributory negligence on the part of the victim; and (2) whether the petitioner and third-party defendant Jalipa are jointly and

severally liable to the victim.The petitioner contends that the victim's negligence contributed to his own mishap. The petitioner theorizes that if witness Rosalinda Palero, who was only two and a half meters away from the victim, was not hit by the Ford Fiera, then the victim must have been so negligent as to be bumped and run over by the said vehicle.13

The petitioner further argues that having filed a third-party complaint against Jalipa, to whom he had sold the Ford Fiera, the Court of Appeals should have ordered the latter to reimburse him for any amount he would be made to pay the victim, instead of ordering him solidarily liable for damages.14

The respondent, for his part, counters that the immediate and proximate cause of the injuries he suffered was the recklessly driven Ford Fiera, which was registered in the petitioner's name. He insists that when he was hit by the vehicle, he was standing on the uncemented portion of the highway, which was exactly where pedestrians were supposed to be.15

The respondent stresses that as the registered owner of the Ford Fiera which figured in the accident, the petitioner is primarily liable for the injury caused by the said vehicle. He maintains that the alleged sale of the vehicle to Jalipa was tainted with irregularity, which indicated collusion between the petitioner and Jalipa.16

After a careful consideration of the parties' submissions, we find the petition without merit.Article 2179 of the Civil Code provides:When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendant's lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded.The underlying precept on contributory negligence is that a plaintiff who is partly responsible for his own injury should not be entitled to recover damages in full, but must proportionately bear the consequences of his own negligence. The defendant is thus held liable only for the damages actually caused by his negligence.17

In this case, records show that when the accident happened, the victim was standing on the shoulder, which was the uncemented portion of the highway. As noted by the trial court, the shoulder was intended for pedestrian use alone. Only stationary vehicles,

such as those loading or unloading passengers may use the shoulder. Running vehicles are not supposed to pass through the said uncemented portion of the highway. However, the Ford Fiera in this case, without so much as slowing down, took off from the cemented part of the highway, inexplicably swerved to the shoulder, and recklessly bumped and ran over an innocent victim. The victim was just where he should be when the unfortunate event transpired.Cimafranca, on the other hand, had no rightful business driving as recklessly as she did. The respondent cannot be expected to have foreseen that the Ford Fiera, erstwhile speeding along the cemented part of the highway would suddenly swerve to the shoulder, then bump and run him over. Thus, we are unable to accept the petitioner's contention that the respondent was negligent.Coming now to the second and third issues, this Court has recently reiterated in PCI Leasing and Finance, Inc. v. UCPB General Insurance Co., Inc.,18 that the registered owner of any vehicle, even if he had already sold it to someone else, is primarily responsible to the public for whatever damage or injury the vehicle may cause. We explained,…Were a registered owner allowed to evade responsibility by proving who the supposed transferee or owner is, it would be easy for him, by collusion with others or otherwise, to escape said responsibility and transfer the same to an indefinite person, or to one who possesses no property with which to respond financially for the damage or injury done. A victim of recklessness on the public highways is usually without means to discover or identify the person actually causing the injury or damage. He has no means other than by a recourse to the registration in the Motor Vehicles Office to determine who is the owner. The protection that the law aims to extend to him would become illusory were the registered owner given the opportunity to escape liability by disproving his ownership.19

In the case of Villanueva v. Domingo,20 we said that the policy behind vehicle registration is the easy identification of the owner who can be held responsible in case of accident, damage or injury caused by the vehicle. This is so as not to inconvenience or prejudice a third party injured by one whose identity cannot be secured.21

Therefore, since the Ford Fiera was still registered in the

petitioner's name at the time when the misfortune took place, the petitioner cannot escape liability for the permanent injury it caused the respondent, who had since stopped schooling and is now forced to face life with nary but two remaining limbs.WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated September 16, 2002 and Resolution dated December 18, 2003 of the Court of Appeals in CA-G.R. CV No. 64103 are hereby AFFIRMED. Costs against the petitioner.SO ORDERED.

G.R. No. 162267             July 4, 2008PCI LEASING AND FINANCE, INC., petitioner, vs.UCPB GENERAL INSURANCE CO., INC., respondent.D E C I S I O NAUSTRIA-MARTINEZ, J.:Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking a reversal of the Decision1 of the Court of Appeals (CA) dated December 12, 2003 affirming with modification the Decision of the Regional Trial Court (RTC) of Makati City which ordered petitioner and Renato Gonzaga (Gonzaga) to pay, jointly and severally, respondent the amount of P244,500.00 plus interest; and the CA Resolution2 dated February 18, 2004 denying petitioner's Motion for Reconsideration.The facts, as found by the CA, are undisputed:On October 19, 1990 at about 10:30 p.m., a Mitsubishi Lancer car with Plate Number PHD-206 owned by United Coconut Planters Bank was traversing the Laurel Highway, Barangay Balintawak, Lipa City. The car was insured with plantiff-appellee [UCPB General Insurance Inc.], then driven by Flaviano Isaac with Conrado Geronimo, the Asst. Manager of said bank, was hit and bumped by an 18-wheeler Fuso Tanker Truck with Plate No. PJE-737 and Trailer Plate No. NVM-133, owned by defendants-appellants PCI Leasing & Finance, Inc. allegedly leased to and operated by defendant-appellant Superior Gas & Equitable Co., Inc. (SUGECO) and driven by its employee, defendant appellant Renato Gonzaga.The impact caused heavy damage to the Mitsubishi Lancer car resulting in an explosion of the rear part of the car. The driver and passenger suffered physical injuries. However, the driver defendant-appellant Gonzaga continued on its [sic] way to its [sic] destination and did not bother to bring his victims to the hospital.Plaintiff-appellee paid the assured UCPB the amount of P244,500.00 representing the insurance coverage of the damaged car.As the 18-wheeler truck is registered under the name of PCI Leasing, repeated demands were made by plaintiff-appellee for the payment of the aforesaid amounts. However, no payment was made. Thus, plaintiff-appellee filed the instant case on March 13, 1991.3

PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held liable for the collision, since the driver of the truck, Gonzaga, was not its employee, but that of its co-

defendant Superior Gas & Equitable Co., Inc. (SUGECO).4 In fact, it was SUGECO, and not petitioner, that was the actual operator of the truck, pursuant to a Contract of Lease signed by petitioner and SUGECO.5 Petitioner, however, admitted that it was the owner of the truck in question.6

After trial, the RTC rendered its Decision dated April 15, 1999,7 the dispositive portion of which reads:WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff UCPB General Insurance [respondent], ordering the defendants PCI Leasing and Finance, Inc., [petitioner] and Renato Gonzaga, to pay jointly and severally the former the following amounts: the principal amount of P244,500.00 with 12% interest as of the filing of this complaint until the same is paid; P50,000.00 as attorney's fees; and P20,000.00 as costs of suit.SO ORDERED.8

Aggrieved by the decision of the trial court, petitioner appealed to the CA.In its Decision dated December 12, 2003, the CA affirmed the RTC's decision, with certain modifications, as follows:WHEREFORE, the appealed decision dated April 15, 1999 is hereby AFFIRMED with modification that the award of attorney's fees is hereby deleted and the rate of interest shall be six percent (6%) per annum computed from the time of the filing of the complaint in the trial court until the finality of the judgment. If the adjudged principal and the interest remain unpaid thereafter, the interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes final and executory until it is fully satisfied.SO ORDERED.9

Petitioner filed a Motion for Reconsideration which the CA denied in its Resolution dated February 18, 2004.Hence, herein Petition for Review.The issues raised by petitioner are purely legal:Whether petitioner, as registered owner of a motor vehicle that figured in a quasi-delict may be held liable, jointly and severally, with the driver thereof, for the damages caused to third parties.Whether petitioner, as a financing company, is absolved from liability by the enactment of Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998.Anent the first issue, the CA found petitioner liable for the damage caused by the collision since under the Public Service Act, if the

property covered by a franchise is transferred or leased to another without obtaining the requisite approval, the transfer is not binding on the Public Service Commission and, in contemplation of law, the grantee continues to be responsible under the franchise in relation to the operation of the vehicle, such as damage or injury to third parties due to collisions.10

Petitioner claims that the CA's reliance on the Public Service Act is misplaced, since the said law applies only to cases involving common carriers, or those which have franchises to operate as public utilities. In contrast, the case before this Court involves a private commercial vehicle for business use, which is not offered for service to the general public.11

Petitioner's contention has partial merit, as indeed, the vehicles involved in the case at bar are not common carriers, which makes the Public Service Act inapplicable.However, the registered owner of the vehicle driven by a negligent driver may still be held liable under applicable jurisprudence involving laws on compulsory motor vehicle registration and the liabilities of employers for quasi-delicts under the Civil Code.The principle of holding the registered owner of a vehicle liable for quasi-delicts resulting from its use is well-established in jurisprudence. Erezo v. Jepte,12 with Justice Labrador as ponente, wisely explained the reason behind this principle, thus:Registration is required not to make said registration the operative act by which ownership in vehicles is transferred, as in land registration cases, because the administrative proceeding of registration does not bear any essential relation to the contract of sale between the parties (Chinchilla vs. Rafael and Verdaguer, 39 Phil. 888), but to permit the use and operation of the vehicle upon any public highway (section 5 [a], Act No. 3992, as amended.) The main aim of motor vehicle registration is to identify the owner so that if any accident happens, or that any damage or injury is caused by the vehicle on the public highways, responsibility therefor can be fixed on a definite individual, the registered owner. Instances are numerous where vehicles running on public highways caused accidents or injuries to pedestrians or other vehicles without positive identification of the owner or drivers, or with very scant means of identification. It is to forestall these circumstances, so inconvenient or prejudicial to the public, that the motor vehicle registration is primarily ordained, in the interest of the determination of persons responsible for damages or injuries

caused on public highways."'One of the principal purposes of motor vehicles legislation is identification of the vehicle and of the operator, in case of accident; and another is that the knowledge that means of detection are always available may act as a deterrent from lax observance of the law and of the rules of conservative and safe operation. Whatever purpose there may be in these statutes, it is subordinate at the last to the primary purpose of rendering it certain that the violator of the law or of the rules of safety shall not escape because of lack of means to discover him.' The purpose of the statute is thwarted, and the displayed number becomes a 'snare and delusion,' if courts would entertain such defenses as that put forward by appellee in this case. No responsible person or corporation could be held liable for the most outrageous acts of negligence, if they should be allowed to place a 'middleman' between them and the public, and escape liability by the manner in which they recompense their servants." (King vs. Brenham Automobile Co., 145 S.W. 278, 279.)With the above policy in mind, the question that defendant-appellant poses is: should not the registered owner be allowed at the trial to prove who the actual and real owner is, and in accordance with such proof escape or evade responsibility and lay the same on the person actually owning the vehicle? We hold with the trial court that the law does not allow him to do so; the law, with its aim and policy in mind, does not relieve him directly of the responsibility that the law fixes and places upon him as an incident or consequence of registration. Were a registered owner allowed to evade responsibility by proving who the supposed transferee or owner is, it would be easy for him, by collusion with others or otherwise, to escape said responsibility and transfer the same to an indefinite person, or to one who possesses no property with which to respond financially for the damage or injury done. A victim of recklessness on the public highways is usually without means to discover or identify the person actually causing the injury or damage. He has no means other than by a recourse to the registration in the Motor Vehicles Office to determine who is the owner. The protection that the law aims to extend to him would become illusory were the registered owner given the opportunity to escape liability by disproving his ownership. If the policy of the law is to be enforced and carried out, the registered owner should not be allowed to prove the contrary to the prejudice

of the person injured, that is, to prove that a third person or another has become the owner, so that he may thereby be relieved of the responsibility to the injured person.The above policy and application of the law may appear quite harsh and would seem to conflict with truth and justice. We do not think it is so. A registered owner who has already sold or transferred a vehicle has the recourse to a third-party complaint, in the same action brought against him to recover for the damage or injury done, against the vendee or transferee of the vehicle. The inconvenience of the suit is no justification for relieving him of liability; said inconvenience is the price he pays for failure to comply with the registration that the law demands and requires.In synthesis, we hold that the registered owner, the defendant-appellant herein, is primarily responsible for the damage caused to the vehicle of the plaintiff-appellee, but he (defendant-appellant) has a right to be indemnified by the real or actual owner of the amount that he may be required to pay as damage for the injury caused to the plaintiff-appellant.13

The case is still good law and has been consistently cited in subsequent cases.14 Thus, there is no good reason to depart from its tenets.For damage or injuries arising out of negligence in the operation of a motor vehicle, the registered owner may be held civilly liable with the negligent driver either 1) subsidiarily, if the aggrieved party seeks relief based on a delict or crime under Articles 100 and 103 of the Revised Penal Code; or 2) solidarily, if the complainant seeks relief based on a quasi-delict under Articles 2176 and 2180 of the Civil Code. It is the option of the plaintiff whether to waive completely the filing of the civil action, or institute it with the criminal action, or file it separately or independently of a criminal action;15 his only limitation is that he cannot recover damages twice for the same act or omission of the defendant.16

In case a separate civil action is filed, the long-standing principle is that the registered owner of a motor vehicle is primarily and directly responsible for the consequences of its operation, including the negligence of the driver, with respect to the public and all third persons.17 In contemplation of law, the registered owner of a motor vehicle is the employer of its driver, with the actual operator and employer, such as a lessee, being considered as merely the owner's agent.18 This being the case, even if a sale has been executed before a tortious incident, the sale, if

unregistered, has no effect as to the right of the public and third persons to recover from the registered owner.19 The public has the right to conclusively presume that the registered owner is the real owner, and may sue accordingly.20

In the case now before the Court, there is not even a sale of the vehicle involved, but a mere lease, which remained unregistered up to the time of the occurrence of the quasi-delict that gave rise to the case. Since a lease, unlike a sale, does not even involve a transfer of title or ownership, but the mere use or enjoyment of property, there is more reason, therefore, in this instance to uphold the policy behind the law, which is to protect the unwitting public and provide it with a definite person to make accountable for losses or injuries suffered in vehicular accidents.21 This is and has always been the rationale behind compulsory motor vehicle registration under the Land Transportation and Traffic Code and similar laws, which, as early as Erezo, has been guiding the courts in their disposition of cases involving motor vehicular incidents. It is also important to emphasize that such principles apply to all vehicles in general, not just those offered for public service or utility.22

The Court recognizes that the business of financing companies has a legitimate and commendable purpose.23 In earlier cases, it considered a financial lease or financing lease a legal contract,24

though subject to the restrictions of the so-called Recto Law or Articles 1484 and 1485 of the Civil Code.25 In previous cases, the Court adopted the statutory definition of a financial lease or financing lease, as:[A] mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property, x x x but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract. 26

Petitioner presented a lengthy discussion of the purported trend in other jurisdictions, which apparently tends to favor absolving

financing companies from liability for the consequences of quasi-delictual acts or omissions involving financially leased property.27

The petition adds that these developments have been legislated in our jurisdiction in Republic Act (R.A.) No. 8556,28 which provides:Section 12. Liability of lessors. - Financing companies shall not be liable for loss, damage or injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or other property leased to a third person or entity except when the motor vehicle, aircraft, vessel, equipment or other property is operated by the financing company, its employees or agents at the time of the loss, damage or injury.1avvphi1Petitioner's argument that the enactment of R.A. No. 8556, especially its addition of the new Sec. 12 to the old law, is deemed to have absolved petitioner from liability, fails to convince the Court.These developments, indeed, point to a seeming emancipation of financing companies from the obligation to compensate claimants for losses suffered from the operation of vehicles covered by their lease. Such, however, are not applicable to petitioner and do not exonerate it from liability in the present case.The new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not supersede or repeal the law on compulsory motor vehicle registration. No part of the law expressly repeals Section 5(a) and (e) of R.A. No. 4136, as amended, otherwise known as the Land Transportation and Traffic Code, to wit:Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer of any type used or operated on or upon any highway of the Philippines must be registered with the Bureau of Land Transportation (now the Land Transportation Office, per Executive Order No. 125, January 30, 1987, and Executive Order No. 125-A, April 13, 1987) for the current year in accordance with the provisions of this Act.x x x x(e) Encumbrances of motor vehicles. - Mortgages, attachments, and other encumbrances of motor vehicles, in order to be valid against third parties must be recorded in the Bureau (now the Land Transportation Office). Voluntary transactions or voluntary encumbrances shall likewise be properly recorded on the face of all outstanding copies of the certificates of registration of the vehicle concerned.

Cancellation or foreclosure of such mortgages, attachments, and other encumbrances shall likewise be recorded, and in the absence of such cancellation, no certificate of registration shall be issued without the corresponding notation of mortgage, attachment and/or other encumbrances.x x x x (Emphasis supplied)Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is frowned upon, unless there is clear showing that the later statute is so irreconcilably inconsistent and repugnant to the existing law that they cannot be reconciled and made to stand together.29 There is nothing in R.A. No. 4136 that is inconsistent and incapable of reconciliation.Thus, the rule remains the same: a sale, lease, or financial lease, for that matter, that is not registered with the Land Transportation Office, still does not bind third persons who are aggrieved in tortious incidents, for the latter need only to rely on the public registration of a motor vehicle as conclusive evidence of ownership.30 A lease such as the one involved in the instant case is an encumbrance in contemplation of law, which needs to be registered in order for it to bind third parties.31 Under this policy, the evil sought to be avoided is the exacerbation of the suffering of victims of tragic vehicular accidents in not being able to identify a guilty party. A contrary ruling will not serve the ends of justice. The failure to register a lease, sale, transfer or encumbrance, should not benefit the parties responsible, to the prejudice of innocent victims.The non-registration of the lease contract between petitioner and its lessee precludes the former from enjoying the benefits under Section 12 of R.A. No. 8556.This ruling may appear too severe and unpalatable to leasing and financing companies, but the Court believes that petitioner and other companies so situated are not entirely left without recourse. They may resort to third-party complaints against their lessees or whoever are the actual operators of their vehicles. In the case at bar, there is, in fact, a provision in the lease contract between petitioner and SUGECO to the effect that the latter shall indemnify and hold the former free and harmless from any "liabilities, damages, suits, claims or judgments" arising from the latter's use of the motor vehicle.32 Whether petitioner would act against SUGECO based on this provision is its own option.The burden of registration of the lease contract is minuscule

compared to the chaos that may result if registered owners or operators of vehicles are freed from such responsibility. Petitioner pays the price for its failure to obey the law on compulsory registration of motor vehicles for registration is a pre-requisite for any person to even enjoy the privilege of putting a vehicle on public roads.WHEREFORE, the petition is DENIED. The Decision dated December 12, 2003 and Resolution dated February 18, 2004 of the Court of Appeals are AFFIRMED.

G.R. No. L-49699 August 8, 1988PERLA COMPANIA de SEGUROS, INC., petitioner, vs.HON. CONSTANTE A. ANCHETA, Presiding Judge of the Court of First instance of Camarines Norte, Branch III, ERNESTO A. RAMOS and GOYENA ZENAROSA-RAMOS, for themselves and as Guardian Ad Litem for Minors JOBET, BANJO, DAVID and GRACE all surnamed RAMOS, FERNANDO M. ABCEDE, SR., for himself and Guardian Ad Litem for minor FERNANDO G. ABCEDE, JR., MIGUEL JEREZ MAGO as Guardian Ad Litem for minors ARLEEN R. MAGO, and ANACLETA J. ZENAROSA., respondents.Jose B. Sanez for petitioner.James B. Pajares for private respondents. CORTES, J.:The instant petition for certiorari and prohibition with preliminary injunction concerns the ability of insurers under the "no fault indemnity" provision of the Insurance Code. *On December 27, 1977, in a collision between the IH Scout in which private respondents were riding and a Superlines bus along the national highway in Sta. Elena, Camarines Norte, private respondents sustained physics injuries in varying degrees of gravity. Thus, they filed with the Court of First Instance of Camarines Norte on February 23,1978 a complaint for damages against Superlines, the bus driver and petitioner, the insurer of the bus [Rollo, pp. 27-39.] The bus was insured with petitioner for the amount of P50,000.00 as and for passenger liability and P50,000.00 as and for third party liability. The vehicle in which private respondents were riding was insured with Malayan Insurance Co.Even before summons could be served, respondent judge issued an order dated March 1, 1978 [Rollo, pp. 40-41], the pertinent portion of which stated:The second incident is the prayer for an order of this court for the Insurance Company, Perla Compania de Seguros, Inc., to pay immediately the P5,000.00 under the "no fault clause" as provided for under Section 378 of the Insurance Code, and finding that the requisite documents to be attached in the record, the said Insurance Company is therefore directed to pay the plaintiffs (private respondents herein) within five (5) days from receipt of this order.

Petitioner denied in its Answer its alleged liability under the "no fault indemnity" provision [Rollo, p. 44] and likewise moved for the reconsideration of the order. Petitioner held the position that under Sec. 378 of the Insurance Code, the insurer liable to pay the P5,000.00 is the insurer of the vehicle in which private respondents were riding, not petitioner, as the provision states that "[i]n the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from." Respondent judge, however, denied reconsideration. A second motion for reconsideration was filed by petitioner. However, in an order dated January 3, 1979, respondent judge denied the second motion for reconsideration and ordered the issuance of a writ of execution [Rollo, p. 69.] Hence, the instant petition praying principally for the annulment and setting aside of respondent judge's orders dated March 1, 1978 and January 3, 1979.The Court issued a temporary restraining order on January 24,1979 [Rollo pp. 73-74.]The sole issue raised in this petition is whether or not petitioner is the insurer liable to indemnify private respondents under Sec. 378 of the Insurance Code.The key to the resolution of the issue is of courts e Sec. 378, which provides:Sec. 378. Any claim for death or injury to any passenger or third party pursuant to the provision of this chapter shall be paid without the necessity of proving fault or negligence of any kind. Provided, That for purposes of this section —(i) The indemnity in respect of any one person shall not exceed five thousand pesos;(ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim:(a) Police report of accident, and(b) Death certificate and evidence sufficient to establish the proper payee, or(c) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed;(iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of

the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. [Emphasis supplied.]From a reading of the provision, which is couched in straight-forward and unambiguous language, the following rules on claims under the "no fault indemnity" provision, where proof of fault or negligence is not necessary for payment of any claim for death Or injury to a passenger or a third party, are established:1. A claim may be made against one motor vehicle only.2. If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle. in which he is riding, mounting or dismounting from.3. In any other case (i.e. if the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle.4. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained.The law is very clear — the claim shall lie against the insurer of the vehicle in which the "occupant" ** is riding, and no other. The claimant is not free to choose from which insurer he will claim the "no fault indemnity," as the law, by using the word "shall, makes it mandatory that the claim be made against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from.That said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying the claim under Sec. 378 may recover against the owner of the vehicle responsible for the accident. This is precisely the essence of "no fault indemnity" insurance which was introduced to and made part of our laws in order to provide victims of vehicular accidents or their heirs immediate compensation, although in a limited amount, pending final determination of who is responsible for the accident and liable for the victims'injuries or death. In turn, the "no fault indemnity" provision is part and parcel of the Insurance Code provisions on compulsory motor vehicle ability insurance [Sec. 373-389] and should be read together with the requirement for compulsory passenger and/or third party liability insurance [Sec. 377] which was mandated in order to ensure ready compensation for victims of vehicular accidents.Irrespective of whether or not fault or negligence lies with the

driver of the Superlines bus, as private respondents were not occupants of the bus, they cannot claim the "no fault indemnity" provided in Sec. 378 from petitioner. The claim should be made against the insurer of the vehicle they were riding. This is very clear from the law. Undoubtedly, in ordering petitioner to pay private respondents the 'no fault indemnity,' respondent judge gravely abused his discretion in a manner that amounts to lack of jurisdiction. The issuance of the corrective writ of certiorari is therefore warranted.WHEREFORE, the petition is GRANTED and respondent judge's order dated March 1, 1978, requiring petitioner to pay private respondents the amount of P5,000.00 as "no fault indemnity' under Sec. 378 of the Insurance Code, and that of January 3, 1979, denying the second motion for reconsideration and issuing a writ of execution, are ANNULLED and SET ASIDE. The temporary restraining order issued by the Court on January 24, 1979 is made permanent.SO ORDERED.