G.R. No.
114427 February 6, 1995
ARMANDO GEAGONIA, petitioner,
vs.
COURT OF APPEALS and COUNTRY
BANKERS INSURANCE
CORPORATION, respondents.
DAVIDE, JR., J.:
Four our review under Rule 45 of the Rules of
Court is the decision1 of the Court of Appeals in
CA-G.R. SP No. 31916, entitled "Country
Bankers Insurance Corporation versus Armando
Geagonia," reversing the decision of the
Insurance Commission in I.C. Case No. 3340
which awarded the claim of petitioner Armando
Geagonia against private respondent Country
Bankers Insurance Corporation.
The petitioner is the owner of Norman's Mart
located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he
obtained from the private respondent fire
insurance policy No. F-146222 for P100,000.00.
The period of the policy was from 22 December
1989 to 22 December 1990 and covered the
following: "Stock-in-trade consisting principally of
dry goods such as RTW's for men and women
wear and other usual to assured's business."
The petitioner declared in the policy under the
subheading entitled CO-INSURANCE that
Mercantile Insurance Co., Inc. was the co-insurer
for P50,000.00. From 1989 to 1990, the petitioner
had in his inventory stocks amounting to
P392,130.50.
The policy contained the following condition:
3. The insured shall give notice
to the Company of any insurance
or insurances already affected,
or which may subsequently be
effected, covering any of the
property or properties consisting
of stocks in trade, goods in
process and/or inventories only
hereby insured, and unless such
notice be given and the
particulars of such insurance or
insurances be stated therein or
endorsed in this policy pursuant
to Section 50 of the Insurance
Code, by or on behalf of the
Company before the occurrence
of any loss or damage, all
benefits under this policy shall be
deemed forfeited, provided
however, that this condition shall
not apply when the total
insurance or insurances in force
at the time of the loss or damage
is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke
out at around 7:30 p.m. at the public market of
San Francisco, Agusan del Sur. The petitioner's
insured stock-in-trade were completely destroyed
prompting him to file with the private respondent
a claim under the policy. On 28 December 1990,
the private respondent denied the claim because
it found that at the time of the loss the petitioner's
stocks-in-trade were likewise covered by fire
insurance policies No. GA-28146 and No. GA-
28144, for P100,000.00 each, issued by the Cebu
Branch of the Philippines First Insurance Co., Inc.
(hereinafter PFIC). 3 These policies indicate that
the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" with a mortgage
clause reading:
MORTGAGE: Loss, if any shall
be payable to Messrs. Cebu
Tesing Textiles, Cebu City as
their interest may appear subject
to the terms of this policy. CO-
INSURANCE DECLARED:
P100,000. — Phils. First CEB/F
24758.4
The basis of the private respondent's denial was
the petitioner's alleged violation of Condition 3 of
the policy.
The petitioner then filed a complaint 5 against the
private respondent with the Insurance
Commission (Case No. 3340) for the recovery of
P100,000.00 under fire insurance policy No. F-
14622 and for attorney's fees and costs of
litigation. He attached as Annex "AM"6 thereof his
letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the
said letter that at the time he obtained the private
respondent's fire insurance policy he knew that
the two policies issued by the PFIC were already
in existence; however, he had no knowledge of
the provision in the private respondent's policy
requiring him to inform it of the prior policies; this
requirement was not mentioned to him by the
private respondent's agent; and had it been
mentioned, he would not have withheld such
information. He further asserted that the total of
the amounts claimed under the three policies was
below the actual value of his stocks at the time of
loss, which was P1,000,000.00.
In its answer,7 the private respondent specifically
denied the allegations in the complaint and set up
as its principal defense the violation of Condition
3 of the policy.
In its decision of 21 June 1993,8 the Insurance
Commission found that the petitioner did not
violate Condition 3 as he had no knowledge of the
existence of the two fire insurance policies
obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without
informing him or securing his consent; and that
Cebu Tesing Textile, as his creditor, had
insurable interest on the stocks. These findings
were based on the petitioner's testimony that he
came to know of the PFIC policies only when he
filed his claim with the private respondent and that
Cebu Tesing Textile obtained them and paid for
their premiums without informing him thereof. The
Insurance Commission then decreed:
WHEREFORE, judgment is
hereby rendered ordering the
respondent company to pay
complainant the sum
P100,000.00 with legal interest
from the time the complaint was
filed until fully satisfied plus the
amount of P10,000.00 as
attorney's fees. With costs. The
compulsory counterclaim of
respondent is hereby dismissed.
Its motion for the reconsideration of the
decision 9 having been denied by the Insurance
Commission in its resolution of 20 August
1993, 10 the private respondent appealed to the
Court of Appeals by way of a petition for review.
The petition was docketed as CA-G.R. SP No.
31916.
In its decision of 29 December 1993, 11 the Court
of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner
knew of the existence of the two other policies
issued by the PFIC. It said:
It is apparent from the face of
Fire Policy GA 28146/Fire Policy
No. 28144 that the insurance
was taken in the name of private
respondent [petitioner herein].
The policy states that
"DISCOUNT MART (MR.
ARMANDO GEAGONIA,
PROP)" was the assured and
that "TESING TEXTILES" [was]
only the mortgagee of the goods.
In addition, the premiums on
both policies were paid for by
private respondent, not by the
Tesing Textiles which is alleged
to have taken out the other
insurance without the knowledge
of private respondent. This is
shown by Premium Invoices nos.
46632 and 46630. (Annexes M
and N). In both invoices, Tesing
Textiles is indicated to be only
the mortgagee of the goods
insured but the party to which
they were issued were the
"DISCOUNT MART (MR.
ARMANDO GEAGONIA)."
In is clear that it was the private
respondent [petitioner herein]
of who took out the policies on the
same property subject of the
insurance with petitioner. Hence,
in failing to disclose the
existence of these insurances
private respondent violated
Condition No. 3 of Fire Policy No.
1462. . . .
Indeed private respondent's
allegation of lack of knowledge of
the provisions insurances is
belied by his letter to petitioner
[of 18 January 1991. The body of
the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of
the provision requiring me to inform your office
about my
prior insurance under FGA-28146 and F-CEB-
24758. Your representative did not mention about
said requirement at the time he was convincing
me to insure with you. If he only die or even
inquired if I had other existing policies covering
my establishment, I would have told him so. You
will note that at the time he talked to me until I
decided to insure with your company the two
policies aforementioned were already in effect.
Therefore I would have no reason to withhold
such information and I would have desisted to
part with my hard earned peso to pay the
insurance premiums [if] I know I could not recover
anything.
Sir, I am only an ordinary businessman interested
in protecting my investments. The actual value of
my stocks damaged by the fire was estimated by
the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex
"A"). My Income Statement as of December 31,
1989 or five months before the fire, shows my
merchandise inventory was already some
P595,455.75. . . . These will support my claim that
the amount claimed under the three policies are
much below the value of my stocks lost.
xxx xxx xxx
The letter contradicts private
respondent's pretension that he
did not know that there were
other insurances taken on the
stock-in-trade and seriously puts
in question his credibility.
His motion to reconsider the adverse decision
having been denied, the petitioner filed the instant
petition. He contends therein that the Court of
Appeals acted with grave abuse of discretion
amounting to lack or excess of jurisdiction:
A — . . . WHEN IT REVERSED THE FINDINGS
OF FACTS OF THE INSURANCE
COMMISSION, A QUASI-JUDICIAL BODY
CHARGED WITH THE DUTY OF
DETERMINING INSURANCE CLAIM AND
WHOSE DECISION IS ACCORDED RESPECT
AND EVEN FINALITY BY THE COURTS;
B — . . . WHEN IT
CONSIDERED AS EVIDENCE
MATTERS WHICH WERE NOT
PRESENTED AS EVIDENCE
DURING THE HEARING OR
TRIAL; AND
C — . . . WHEN IT DISMISSED
THE CLAIM OF THE
PETITIONER HEREIN
AGAINST THE PRIVATE
RESPONDENT.
The chief issues that crop up from the first and
third grounds are (a) whether the petitioner had
prior knowledge of the two insurance policies
issued by the PFIC when he obtained the fire
insurance policy from the private respondent,
thereby, for not disclosing such fact, violating
Condition 3 of the policy, and (b) if he had,
whether he is precluded from recovering
therefrom.
The second ground, which is based on the Court
of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without
merit. The petitioner claims that the said letter
was not offered in evidence and thus should not
have been considered in deciding the case.
However, as correctly pointed out by the Court of
Appeals, a copy of this letter was attached to the
petitioner's complaint in I.C. Case No. 3440 as
Annex "M" thereof and made integral part of the
complaint. 12 It has attained the status of a judicial
admission and since its due execution and
authenticity was not denied by the other party, the
petitioner is bound by it even if it were not
introduced as an independent evidence. 13
As to the first issue, the Insurance Commission
found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals
disagreed and found otherwise in view of the
explicit admission by the petitioner in his letter to
the private respondent of 18 January 1991, which
was quoted in the challenged decision of the
Court of Appeals. These divergent findings of fact
constitute an exception to the general rule that in
petitions for review under Rule 45, only questions
of law are involved and findings of fact by the
Court of Appeals are conclusive and binding upon
this Court. 14
We agree with the Court of Appeals that the
petitioner knew of the prior policies issued by the
PFIC. His letter of 18 January 1991 to the private
respondent conclusively proves this knowledge.
His testimony to the contrary before the
Insurance Commissioner and which the latter
relied upon cannot prevail over a written
admission made ante litem motam. It was,
indeed, incredible that he did not know about the
prior policies since these policies were not new or
original. Policy No. GA-28144 was a renewal of
Policy No. F-24758, while Policy No. GA-28146
had been renewed twice, the previous policy
being F-24792.
Condition 3 of the private respondent's Policy No.
F-14622 is a condition which is not proscribed by
law. Its incorporation in the policy is allowed by
Section 75 of the Insurance Code 15 which
provides that "[a] policy may declare that a
violation of specified provisions thereof shall
avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a
condition is a provision which invariably appears
in fire insurance policies and is intended to
prevent an increase in the moral hazard. It is
commonly known as the additional or "other
insurance" clause and has been upheld as valid
and as a warranty that no other insurance exists.
Its violation would thus avoid the
policy. 16 However, in order to constitute a
violation, the other insurance must be upon same
subject matter, the same interest therein, and the
same risk.17
As to a mortgaged property, the mortgagor and
the mortgagee have each an independent
insurable interest therein and both interests may
be one policy, or each may take out a separate
policy covering his interest, either at the same or
at separate times. 18 The mortgagor's insurable
interest covers the full value of the mortgaged
property, even though the mortgage debt is
equivalent to the full value of the property. 19 The
mortgagee's insurable interest is to the extent of
the debt, since the property is relied upon as
security thereof, and in insuring he is not insuring
the property but his interest or lien thereon. His
insurable interest is prima facie the value
mortgaged and extends only to the amount of the
debt, not exceeding the value of the mortgaged
property. 20 Thus, separate insurances covering
different insurable interests may be obtained by
the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance
for the benefit of the mortgagee, which is the
usual practice. The mortgagee may be made the
beneficial payee in several ways. He may
become the assignee of the policy with the
consent of the insurer; or the mere pledgee
without such consent; or the original policy may
contain a mortgage clause; or a rider making the
policy payable to the mortgagee "as his interest
may appear" may be attached; or a "standard
mortgage clause," containing a collateral
independent contract between the mortgagee
and insurer, may be attached; or the policy,
though by its terms payable absolutely to the
mortgagor, may have been procured by a
mortgagor under a contract duty to insure for the
mortgagee's benefit, in which case the mortgagee
acquires an equitable lien upon the proceeds. 21
In the policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as
such by the insurer but not made a party to the
contract himself. Hence, any act of the mortgagor
which defeats his right will also defeat the right of
the mortgagee. 22 This kind of policy covers only
such interest as the mortgagee has at the issuing
of the policy.23
On the other hand, a mortgagee may also procure
a policy as a contracting party in accordance with
the terms of an agreement by which the
mortgagor is to pay the premiums upon such
insurance. 24 It has been noted, however, that
although the mortgagee is himself the insured, as
where he applies for a policy, fully informs the
authorized agent of his interest, pays the
premiums, and obtains on the assurance that it
insures him, the policy is in fact in the form used
to insure a mortgagor with loss payable clause. 25
The fire insurance policies issued by the PFIC
name the petitioner as the assured and contain a
mortgage clause which reads:
Loss, if any, shall be payable to
MESSRS. TESING TEXTILES,
Cebu City as their interest may
appear subject to the terms of
this policy.
This is clearly a simple loss payable clause, not a
standard mortgage clause.
It must, however, be underscored that unlike the
"other insurance" clauses involved in General
Insurance and Surety Corp. vs. Ng Hua 26 or
in Pioneer Insurance & Surety
Corp. vs. Yap, 27 which read:
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.
or in the 1930 case of Santa Ana vs. Commercial
Union Assurance
Co. 28 which provided "that any outstanding
insurance upon the whole or a portion of the
objects thereby assured must be declared by the
insured in writing and he must cause the
company to add or insert it in the policy, without
which such policy shall be null and void, and the
insured will not be entitled to indemnity in case of
loss," Condition 3 in the private respondent's
policy No. F-14622 does not absolutely declare
void any violation thereof. It expressly provides
that the condition "shall not apply when the total
insurance or insurances in force at the time of the
loss or damage is not more than P200,000.00."
It is a cardinal rule on insurance that a policy or
insurance contract is to be interpreted liberally in
favor of the insured and strictly against the
company, the reason being, undoubtedly, to
afford the greatest protection which the insured
was endeavoring to secure when he applied for
insurance. It is also a cardinal principle of law that
forfeitures are not favored and that any
construction which would result in the forfeiture of
the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to
construe the policy in a manner which would
permit recovery, as, for example, by finding a
waiver for such forfeiture. 29 Stated differently,
provisions, conditions or exceptions in policies
which tend to work a forfeiture of insurance
policies should be construed most strictly against
those for whose benefits they are inserted, and
most favorably toward those against whom they
are intended to operate. 30 The reason for this is
that, except for riders which may later be inserted,
the insured sees the contract already in its final
form and has had no voice in the selection or
arrangement of the words employed therein. On
the other hand, the language of the contract was
carefully chosen and deliberated upon by experts
and legal advisers who had acted exclusively in
the interest of the insurers and the technical
language employed therein is rarely understood
by ordinary laymen. 31
With these principles in mind, we are of the
opinion that Condition 3 of the subject policy is
not totally free from ambiguity and must, perforce,
be meticulously analyzed. Such analysis leads us
to conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy
shall only be to the extent exceeding
P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of
the condition referring to other insurance
"covering any of the property or properties
consisting of stocks in trade, goods in process
and/or inventories only hereby insured," and the
portion regarding the insured's declaration on the
subheading CO-INSURANCE that the co-insurer
is Mercantile Insurance Co., Inc. in the sum of
P50,000.00. A double insurance exists where the
same person is insured by several insurers
separately in respect of the same subject and
interest. As earlier stated, the insurable interests
of a mortgagor and a mortgagee on the
mortgaged property are distinct and separate.
Since the two policies of the PFIC do not cover
the same interest as that covered by the policy of
the private respondent, no double insurance
exists. The non-disclosure then of the former
policies was not fatal to the petitioner's right to
recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself
that such condition shall not apply if the total
insurance in force at the time of loss does not
exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to
a loss not exceeding P200,000.00. What it had in
mind was to discourage over-insurance. Indeed,
the rationale behind the incorporation of "other
insurance" clause in fire policies is to prevent
over-insurance and thus avert the perpetration of
fraud. When a property owner obtains insurance
policies from two or more insurers in a total
amount that exceeds the property's value, the
insured may have an inducement to destroy the
property for the purpose of collecting the
insurance. The public as well as the insurer is
interested in preventing a situation in which a fire
would be profitable to the insured.32
G.R. No. L-5915 March 31, 1955
EAGLE STAR INSURANCE CO., LTD., KURR
STEAMSHIP CO., INC., ROOSEVELT
STEAMSHIP AGENCY, INC., and LEIF HOEGH
& COMPANY, A/S., petitioners,
vs.
CHIA YU, respondent.
Ross, Selph, Carrascoso and Janda and Delfin L.
Gonzales for petitioner.
Nabong and Sese for respondent.
REYES, A., J.:
On January 15, 1946, Atkin, Kroll & Co., loaded
on the S. S. Roeph Silverlight owned and
operated by Leigh Hoegh & Co., A/S, of San
Francisco California, 14 bales of assorted
underwear valued at P8,085.23 consigned to
Chia Yu in the City of Manila. The shipment was
insured against all risks by Eagle Star Ins. Co. of
San Francisco, California, under a policy issued
to the shipper and by the latter assigned to the
consignee. The vessel arrived in Manila on
February 10, 1946, and on March 4 started
discharging its cargo into the custody of the
Manila Terminal Co., Inc., which was then
operating the arrastre service for the Bureau of
Customs. But the 14 bales consigned to Chia Yu
only 10 were delivered to him as the remaining 3
could not be found. Three of those delivered were
also found damaged to the extent of 50 per cent.
Chia Yu claimed indemnity for the missing and
damaged bales. But the claim was declined, first,
by the carrier and afterward by the insurer,
whereupon Chia Yu brought the present action
against both, including their respective agents in
the Philippines. Commenced in the Court of First
Instance of Manila on November 16, 1948, or
more than two years after delivery of the
damaged bales and the date when the missing
bales should have been delivered, the action was
resisted by the defendants principally on the
ground of prescription. But the trial court found for
plaintiff and rendered judgment in his favor for the
sum claimed plus legal interest and costs. The
judgment was affirmed by the Court of Appeals,
and the case is now before us on appeal
by certiorari.
Except for the controversy as to the amount for
which the carrier could be held liable under the
terms of the bill of lading, the only question
presented for determination is whether plaintiff's
action has prescribed.
On the part of the carrier the defense of
prescription is made to rest on the following
stipulation of the bill of lading:
In any event the carrier and the ship shall
be discharged from all liability in respect
of loss or damage unless suit is brought
within one year after the delivery of the
goods or the date when the goods should
have been delivered.
The stipulation is but a repetition of a provision
contained in section 3 (6) of the United States
Carriage of Goods by Sea, Act of 1936, which
was adopted and made applicable to the
Philippines by Commonwealth Act 65 and by
express agreement incorporated by reference in
the bill of lading. Following our decision in Chua
Kuy vs. Everett Steamship Corporation,1 G. R.
No L-5554 (May 27, 1953) and in E. R. Elser, Inc.,
et al., vs. Court of Appeals,. et al.,2 G. R. No. L-
6517 (November 29, 1954) giving force and effect
to this kind of stipulation in bills of lading covering
shipments from the United States to the
Philippines, we have to hold that plaintiff's failure
to bring his action "within one year after the
delivery of the goods or the date when the goods
should have been delivered" discharged the
carrier from all liability. This dispenses with the
necessity of deciding how much could be
recovered from the carrier under the terms of the
bill of lading.
The case for the insurer stands on a different
footing, for its claim of prescription is founded
upon the terms of the policy and not upon the bill
of lading. Under our law the time limit for bringing
a civil action upon a written contract is ten years
after the right of action accrues. (Sec. 43, Act 190;
Art. 1144, New Civil Code.) But counsel for the
insurer claim that this statutory in the policy:
No suit action on this Policy, for the
recovery of any claim, shall be
sustainable in any Court of law or equity
unless the insured shall have fully
complied with all the terms and
conditions of this Policy nor unless
commenced with twelve (12) months
next after the happening of the loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire
Insurance & Co., Ltd., et al., 46 Phil. 345, relied
upon by the insurer, this Court held that a clause
in an insurance policy providing that an action
upon the policy by the insured must be brought
within a certain time is, if reasonable, valid and
will prevail over statutory limitations of the action.
That decision, however, was rendered before the
passage of Act 4101, which amended the
Insurance Act by inserting the following section in
chapter one thereof:
SEC. 61-A. — Any condition, stipulation
or agreement in any policy of insurance,
limiting the time for commencing an
action thereunder to a period of less than
one year from the time when the cause of
action accrues, is void.
As "matters respecting a remedy, such as the
bringing of suit, admissibility of evidence, and
statute of limitations, depend upon the law of the
place where the suit is brought" (Insular
Government vs. Frank, 13 Phil. 236), any policy
clause repugnant to this amendment to the
Insurance Act cannot be given effect in an action
in our courts.
Examining the policy sued upon in the present
case, we find that its prescriptive clause, if given
effect in accordance with the terms of the policy,
would reduce the period allowed the insured for
bringing his action to less than one year. This is
so because the said clause makes the
prescriptive period begin from the happening of
the loss and at the same time provides that the no
suit on the policy shall be sustainable in any court
unless the insured shall have first fully complied
with all the terms and conditions of the policy,
among them that which requires that, as so as the
loss is determined, written claim therefor be filed
with the carrier and that the letter to the carrier
and the latter's reply should be attached to the
claim papers to be sent to the insurer. It is obvious
that compliance with this condition precedent will
necessarily consume time and thus shorten the
period for bringing suit to less than one year if the
period is to begin, as stated in the policy, from
"the happening of the loss." Being contrary to the
law of the forum, such stipulation cannot be given
effect.
It may perhaps be suggested that the policy
clause relied on by the insurer for defeating
plaintiff's action should be given the construction
that would harmonize it with section 61-A of the
Insurance Act by taking it to mean that the time
given the insured for bringing his suit is twelve
months after the cause of action accrues. But the
question then would be: When did the cause of
action accrue? On that question we agree with
the court below that 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. As the policy provides that the
insured should file his claim, first, with the carrier
and then with the insurer, he had a right to wait
for his claim to be finally decided before going to
court. The law does not encourages unnecessary
litigation.
At this junction it should be explained that while
the decision of the Court of Appeals states that
the claim against the insurance company "was
finally rejected o April 22, 1947, as correctly
concluded by the court below," it is obvious from
the context and we find it to be a fact that the date
meant was April 22, 1948, for this was the date
when, according to the finding of the trial court,
the insurance company in London rejected the
claim. The trial court's decision says:
On September 21, 1946, after Roosevelt
Steamship Agency Inc., and Manila
Terminal Co., Inc., denied plaintiff's
claim, a formal insurance claim was filed
with Kerr & Co., Ltd., local agents of
Eagle Star Insurance Co., Ltd., (Exh.
L.)Kerr & Co., Ltd., referred the insurance
claim to Eagle Star Insurance Co., Ltd. in
London but the latter, after insistent
request of plaintiffs for action, rejected
the claim on April 22, 1948, giving as its
reasons the lapse of the expiry day of the
risks covered by the policy and returned
the claim documents only in August of
1948. (pp. 87-88, Record on Appeal.)
Furthermore, there is nothing in the record to
show that the claim was rejected in the year 1947,
either by the insurance company in London or its
settling agents in the Philippines, while on the
other hand defendant's own Exhibit L-1 is
indisputable proof that it was on 22nd April 1948"
that the settling agents informed the claimant
"that after due and careful consideration, our
Principals confirm our declination of this claim." It
not appearing that the settling agents' decision on
claims against their principals were not subject to
reversal or modification by the latter, while on the
contrary the insurance policy expressly
stipulates, under the heading "Important Notice,"
that the said agents "have authority to certify only
as to the nature, cause and extent of the
damage," and it furthermore appearing that a
reiteration of plaintiffs claim was made to the
principals and the latter gave it due course since
only "after due and careful consideration" did they
confirm the action taken by the agents, we
conclude that, for the purpose of the present
action, we should consider plaintiff's claim to have
been finally rejected by the insurer on April 22,
1948. Having been filed within twelve months
form that date, the action cannot be deemed to
have prescribed even on the supposition that the
period given the insured for bringing suit under
the prescriptive clause of the policy is twelve
months after the accrual of the cause of action.
In concluding, we may state that contractual
limitations contained in insurance policies are
regarded with extreme jealousy by courts and will
be strictly construed against the insurer and
should not be permitted to prevent a recovery
when their just and honest application would not
produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is
reversed with respect to the carrier and its agents
but affirmed with respect to the insurance
company and its agents, with costs against the
latter.
G.R. No. L-24566 July 29, 1968
AGRICULTURAL CREDIT & COOPERATIVE
FINANCING ADMINISTRATION
(ACCFA), plaintiff-appellant,
vs.
ALPHA INSURANCE & SURETY CO.,
INC., defendant-appellee,
RICARDO A. LADINES, ET AL., third party-
defendants-appellees.
Deogracias E. Lerma and Esmeraldo U. Guloy for
plaintiff-appellant.
L. L. Reyes for defendant-appellee.
Geronimo F. Abellera for third party defendants-
appellees.
REYES, J.B.L., J.:
Appeal, on points of law, against a decision of the
Court of First Instance of Manila, in its Case No.
43372, upholding a motion to dismiss.
At issue is the question whether or not the
provision of a fidelity bond that no action shall be
had or maintained thereon unless commenced
within one year from the making of a claim for the
loss upon which the action is based, is valid or
void, in view of Section 61-A of the Insurance Act
invalidating stipulations limiting the time for
commencing an action thereon to less than one
year from the time the cause of action accrues.
Material to this decision are the following
facts: 1äwphï1.ñët
According to the allegations of the complaint, in
order to guarantee the Asingan Farmers'
Cooperative Marketing Association, Inc.
(FACOMA) against loss on account of "personal
dishonesty, amounting to larceny or estafa of its
Secretary-Treasurer, Ricardo A. Ladines, the
appellee, Alpha Insurance & Surety Company
had issued, on 14 February 1958, its bond, No.
P-FID-15-58, for the sum of Five Thousand
Pesos (P5,000.00) with said Ricardo Ladines as
principal and the appellee as solidary surety. On
the same date, the Asingan FACOMA assigned
its rights to the appellant, Agricultural Credit
Cooperative and Financing Administration
(ACCFA for short), with approval of the principal
and the surety.
During the effectivity of the bond, Ricardo
Ladines converted and misappropriated, to his
personal benefit, some P11,513.22 of the
FACOMA funds, of which P6,307.33 belonged to
the ACCFA. Upon discovery of the loss, ACCFA
immediately notified in writing the survey
company on 10 October 1958, and presented the
proof of loss within the period fixed in the bond;
but despite repeated demands the surety
company refused and failed to pay. Whereupon,
ACCFA filed suit against appellee on 30 May
1960.
Defendant Alpha Insurance & Surety Co., Inc.,
(now appellee) moved to dismiss the complaint
for failure to state a cause of action, giving as
reason that (1) the same was filed more than one
year after plaintiff made claim for loss, contrary to
the eighth condition of the bond, providing as
follows: .
EIGHT LIMITATION OF ACTION
No action, suit or proceeding shall be had
or maintained upon this Bond unless the
same be commenced within one year
from the time of making claim for the loss
upon which such action, suit or
proceeding, is based, in accordance with
the fourth section hereof.
(2) the complaint failed to show that plaintiff had
filed civil or criminal action against Ladines, as
required by conditions 4 and 11 of the bond; and
(3) that Ladines was a necessary and
indispensable party but had not been joined as
such.
At first, the Court of First Instance denied
dismissal; but, upon reconsideration, the court
reversed its original stand, and dismissed the
complaint on the ground that the action was filed
beyond the contractual limitation period (Record
on Appeal, pages 56-59).
Hence, this appeal.
We find the appeal meritorious.
A fidelity bond is, in effect, in the nature of a
contract of insurance against loss from
misconduct, and is governed by the same
principles of interpretation: Mechanics Savings
Bank & Trust Co. vs. Guarantee Company, 68
Fed. 459; Pao Chan Wei vs. Nemorosa, 103 Phil.
57. Consequently, the condition of the bond in
question, limiting the period for bringing action
thereon, is subject to the provisions of Section 61-
A of the Insurance Act (No. 2427), as amended
by Act 4101 of the pre-Commonwealth Philippine
Legislature, prescribing that —
SEC. 61-A — A condition, stipulation or
agreement in any policy of insurance,
limiting the time for commencing an
action thereunder to a period of less than
one year from the time when the cause of
action accrues is void.
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" (Maao Sugar Central vs.
Barrios, 79 Phil. 666), the cause of action does
not accrue until the party obligated refuses,
expressly or impliedly, to comply with its duty (in
this case, to pay the amount of the bond). The
year for instituting action in court must be
reckoned, therefore, from the time of appellee's
refusal to comply with its bond; it can not be
counted from the creditor's filing of the claim of
loss, for that does not import that the surety
company will refuse to pay. In so far, therefore,
as condition eight of the bond requires action to
be filed within one year from the filing of the claim
for loss, such stipulation contradicts the public
policy expressed in Section 61-A of the Philippine
Insurance Act. Condition eight of the bond,
therefore, is null and void, and the appellant is not
bound to comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil.
696, 701, this Court ruled: .1äwphï1.ñët
It may perhaps be suggested that the
policy clause relied on by the insurer for
defeating plaintiff's action should be
given the construction that would
harmonize it with section 61-A of the
Insurance Act by taking it to mean that
the time given the insured for bringing his
suit is twelve months after the cause of
action accrues. But the question then
would be: When did the cause of action
accrue? On that question we agree with
the court below that 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. As the policy
provides that the insured should file his
claim, first, with the carrier and then with
the insurer, he had a right to wait for his
claim to be finally decided before going to
court. The law does not encourage
unnecessary litigation.

The discouraging of unnecessary litigation must

be deemed a rule of public policy, considering the
unrelieved congestion in the courts.

As a consequence of the foregoing, condition

eight of the Alpha bond is null and void, and
action may be brought within the statutory period
of limitation for written contracts (New Civil Code,
Article 1144). The case of Ang vs. Fulton Fire
Insurance Co., 2 S.C.R.A. 945 (31 July 1961),
relied upon by the Court a quo, is no authority
against the views herein expressed, since the
effect of Section 61-A of the Insurance Law on the
terms of the Policy or contract was not there
considered.

The condition of previous conviction (paragraph

b, clause 4, of the contract) having been deleted
by express agreement and the surety having
assumed solidary liability, the other grounds of
the motion to dismiss are equally untenable. A
creditor may proceed against any one of the
solidary debtors, or some or all of them
simultaneously (Article 1216, New Civil Code).

WHEREFORE, the appealed order granting the

motion to dismiss is reversed and set aside, and
the records are remanded to the Court of First
Instance, with instructions to require defendant to
answer and thereafter proceed in conformity with
the law and the Rules of Court. Costs against
appellee. So ordered.
TRAVELLERS INSURANCE & SURETY
CORPORATION, petitioner, vs. HON.
COURT OF APPEALS and VICENTE
MENDOZA, respondents.
DECISION
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 oclock 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, Marvilla 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.
x x x 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
oclock that same morning. Death was caused by
traumatic shock as a result of the severe injuries
she sustained x x x x.
x x x 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. x x x In truth, in that
related criminal case against defendant Dumlao x
x x 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 x x x considering the
condition of the traffic at the place at the time
aforementioned x x x. Moreover, the driver fled
from the scene of the accident and
without rendering assistance to the victim. x x x
x x x 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 x x x reflectorized
decorations on the edges of the glass at the back.x
x x A third witness in the person of Eulogio
Tabalno x x x 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. x x x [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. x x x [T]he eyewitnesses x x x were
unanimous in pointing to that Lady Love Taxi with
Plate No. 438, obviously the vehicle involved
herein.
x x x 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 x x x x x x 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 x x x. x x x [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 respondents 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 attorneys 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. PetitionersMotion 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.
I
When 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 respondents
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 x x x whereby the insurer agreed to
indemnify the insured against all sums x x x which
the Insured shall become legally liable to pay in
respect of: a. death of or bodily injury to any
person x x x 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
petitioners 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
respondents 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 respondents 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 respondents 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 attorneys 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
petitioners 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
latters 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 respondents
mother.
II
Petitioner 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 respondents 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
respondents 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 claimants right of action shall
prescribe [emphasis and underscoring 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 proceedings. x x x [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. x x x
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 claimants 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 insurers 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. x x x
In Eagle Star Insurance Co., Ltd., et al. vs. Chia
Yu, this Court ruled:
The plaintiffs 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 respondents 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 Travellers Insurance & Surety
Corporation was found jointly and severally liable
to pay actual, moral and exemplary damages,
death indemnity, attorneys 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. 114167 July 12, 1995
COASTWISE LIGHTERAGE
CORPORATION, petitioner,
vs.
COURT OF APPEALS and the PHILIPPINE
GENERAL INSURANCE
COMPANY, respondents.
RESOLUTION
FRANCISCO, R., J.:
This is a petition for review of a Decision rendered
by the Court of Appeals, dated December 17,
1993, affirming Branch 35 of the Regional Trial
Court, Manila in holding that herein petitioner is
liable to pay herein private respondent the
amount of P700,000.00, plus legal interest
thereon, another sum of P100,000.00 as
attorney's fees and the cost of the suit.
The factual background of this case is as follows:
Pag-asa Sales, Inc. entered into a contract to
transport molasses from the province of Negros
to Manila with Coastwise Lighterage Corporation
(Coastwise for brevity), using the latter's dumb
barges. The barges were towed in tandem by the
tugboat MT Marica, which is likewise owned by
Coastwise.
Upon reaching Manila Bay, while approaching
Pier 18, one of the barges, "Coastwise 9", struck
an unknown sunken object. The forward
buoyancy compartment was damaged, and water
gushed in through a hole "two inches wide and
twenty-two inches long"1 As a consequence, the
molasses at the cargo tanks were contaminated
and rendered unfit for the use it was intended.
This prompted the consignee, Pag-asa Sales,
Inc. to reject the shipment of molasses as a total
loss. Thereafter, Pag-asa Sales, Inc. filed a
formal claim with the insurer of its lost cargo,
herein private respondent, Philippine General
Insurance Company (PhilGen, for short) and
against the carrier, herein petitioner, Coastwise
Lighterage. Coastwise Lighterage denied the
claim and it was PhilGen which paid the
consignee, Pag-asa Sales, Inc., the amount of
P700,000.00, representing the value of the
damaged cargo of molasses.
In turn, PhilGen then filed an action against
Coastwise Lighterage before the Regional Trial
Court of Manila, seeking to recover the amount of
P700,000.00 which it paid to Pag-asa Sales, Inc.
for the latter's lost cargo. PhilGen now claims to
be subrogated to all the contractual rights and
claims which the consignee may have against the
carrier, which is presumed to have violated the
contract of carriage.
The RTC awarded the amount prayed for by
PhilGen. On Coastwise Lighterage's appeal to
the Court of Appeals, the award was affirmed.
Hence, this petition.
There are two main issues to be resolved herein.
First, whether or not petitioner Coastwise
Lighterage was transformed into a private carrier,
by virtue of the contract of affreightment which it
entered into with the consignee, Pag-asa Sales,
Inc. Corollarily, if it were in fact transformed into a
private carrier, did it exercise the ordinary
diligence to which a private carrier is in turn
bound? Second, whether or not the insurer was
subrogated into the rights of the consignee
against the carrier, upon payment by the insurer
of the value of the consignee's goods lost while
on board one of the carrier's vessels.
On the first issue, petitioner contends that the
RTC and the Court of Appeals erred in finding that
it was a common carrier. It stresses the fact that
it contracted with Pag-asa Sales, Inc. to transport
the shipment of molasses from Negros Oriental to
Manila and refers to this contract as a "charter
agreement". It then proceeds to cite the case
of Home Insurance Company vs. American
Steamship Agencies, Inc.2 wherein this Court
held: ". . . a common carrier undertaking to carry
a special cargo or chartered to a special person
only becomes a private carrier."
Petitioner's reliance on the aforementioned case
is misplaced. In its entirety, the conclusions of the
court are as follows:
Accordingly, the charter party
contract is one of affreightment
over the whole vessel, rather
than a demise. As such, the
liability of the shipowner for acts
or negligence of its captain and
crew, would remain in the
absence of stipulation.3
The distinction between the two kinds of charter
parties (i.e. bareboat or demise and contract of
affreightment) is more clearly set out in the case
of Puromines, Inc. vs. Court of Appeals,4 wherein
we ruled:
Under the demise or bareboat
charter of the vessel, the
charterer will generally be
regarded as the owner for the
voyage or service stipulated. The
charterer mans the vessel with
his own people and becomes the
owner pro hac vice, subject to
liability to others for damages
caused by negligence. To create
a demise, the owner of a vessel
must completely and exclusively
relinquish possession, command
and navigation thereof to the
charterer, anything short of such
a complete transfer is a contract
of affreightment (time or voyage
charter party) or not a charter
party at all.
On the other hand a contract of
affreightment is one in which the
owner of the vessel leases part
or all of its space to haul goods
for others. It is a contract for
special service to be rendered by
the owner of the vessel and
under such contract the general
owner retains the possession,
command and navigation of the
ship, the charterer or freighter
merely having use of the space
in the vessel in return for his
payment of the charter hire. . . . .
 . . . . An owner who retains
possession of the ship though
the hold is the property of the
charterer, remains liable as
carrier and must answer for any
breach of duty as to the care,
loading and unloading of the
cargo. . . .
Although a charter party may transform a
common carrier into a private one, the same
however is not true in a contract of affreightment
on account of the aforementioned distinctions
between the two.
Petitioner admits that the contract it entered into
with the consignee was one of affreightment.5 We
agree. Pag-asa Sales, Inc. only leased three of
petitioner's vessels, in order to carry cargo from
one point to another, but the possession,
command and navigation of the vessels remained
with petitioner Coastwise Lighterage.
Pursuant therefore to the ruling in the
aforecited Puromines case, Coastwise
Lighterage, by the contract of affreightment, was
not converted into a private carrier, but remained
a common carrier and was still liable as such.
The law and jurisprudence on common carriers
both hold that the mere proof of delivery of goods
in good order to a carrier and the subsequent
arrival of the same goods at the place of
destination in bad order makes for a prima
facie case against the carrier.
It follows then that the presumption of negligence
that attaches to common carriers, once the goods
it transports are lost, destroyed or deteriorated,
applies to the petitioner. This presumption, which
is overcome only by proof of the exercise of
extraordinary diligence, remained unrebutted in
this case.
The records show that the damage to the barge
which carried the cargo of molasses was caused
by its hitting an unknown sunken object as it was
heading for Pier 18. The object turned out to be a
submerged derelict vessel. Petitioner contends
that this navigational hazard was the efficient
cause of the accident. Further it asserts that the
fact that the Philippine Coastguard "has not
exerted any effort to prepare a chart to indicate
the location of sunken derelicts within Manila
North Harbor to avoid navigational
accidents"6 effectively contributed to the
happening of this mishap. Thus, being unaware
of the hidden danger that lies in its path, it
became impossible for the petitioner to avoid the
same. Nothing could have prevented the event,
making it beyond the pale of even the exercise of
extraordinary diligence.
However, petitioner's assertion is belied by the
evidence on record where it appeared that far
from having rendered service with the greatest
skill and utmost foresight, and being free from
fault, the carrier was culpably remiss in the
observance of its duties.
Jesus R. Constantino, the patron of the vessel
"Coastwise 9" admitted that he was not licensed.
The Code of Commerce, which subsidiarily
governs common carriers (which are primarily
governed by the provisions of the Civil Code)
provides:
Art. 609. — Captains, masters,
or patrons of vessels must be
Filipinos, have legal capacity to
contract in accordance with this
code, and prove the skill capacity
and qualifications necessary to
command and direct the vessel,
as established by marine and
navigation laws, ordinances or
regulations, and must not be
disqualified according to the
same for the discharge of the
duties of the position. . . .
Clearly, petitioner Coastwise Lighterage's
embarking on a voyage with an unlicensed patron
violates this rule. It cannot safely claim to have
exercised extraordinary diligence, by placing a
person whose navigational skills are
questionable, at the helm of the vessel which
eventually met the fateful accident. It may also
logically, follow that a person without license to
navigate, lacks not just the skill to do so, but also
the utmost familiarity with the usual and safe
routes taken by seasoned and legally authorized
ones. Had the patron been licensed, he could be
presumed to have both the skill and the
knowledge that would have prevented the
vessel's hitting the sunken derelict ship that lay
on their way to Pier 18.
As a common carrier, petitioner is liable for
breach of the contract of carriage, having failed to
overcome the presumption of negligence with the
loss and destruction of goods it transported, by
proof of its exercise of extraordinary diligence.
On the issue of subrogation, which petitioner
contends as inapplicable in this case, we once
more rule against the petitioner. We have already
found petitioner liable for breach of the contract of
carriage it entered into with Pag-asa Sales, Inc.
However, for the damage sustained by the loss of
the cargo which petitioner-carrier was
transporting, it was not the carrier which paid the
value thereof to Pag-asa Sales, Inc. but the
latter's insurer, herein private respondent
PhilGen.
Article 2207 of the Civil Code is explicit on this
point:
Art. 2207. If the plaintiffs property
has been insured, and he has
received indemnity from the
insurance company for the injury
or loss arising out of the wrong or
breach of contract complained
of, the insurance company shall
be subrogated to the rights of the
insured against the wrongdoer or
the person who violated the
contract. . . .
This legal provision containing the equitable
principle of subrogation has been applied in a
long line of cases including Compania Maritima v.
Insurance Company of North
America;7 Fireman's Fund Insurance Company v.
Jamilla & Company, Inc.,8 and Pan Malayan
Insurance Corporation v. Court of
Appeals,9 wherein this Court explained:
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.
Undoubtedly, upon payment by respondent
insurer PhilGen of the amount of P700,000.00 to
Pag-asa Sales, Inc., the consignee of the cargo
of molasses totally damaged while being
transported by petitioner Coastwise Lighterage,
the former was subrogated into all the rights
which Pag-asa Sales, Inc. may have had against
the carrier, herein petitioner Coastwise
Lighterage.
WHEREFORE, premises considered, this petition
is DENIED and the appealed decision affirming
the order of Branch 35 of the Regional Trial Court
of Manila for petitioner Coastwise Lighterage to
pay respondent Philippine General Insurance
Company the "principal amount of P700,000.00
plus interest thereon at the legal rate computed
from March 29, 1989, the date the complaint was
filed until fully paid and another sum of
P100,000.00 as attorney's fees and costs"10 is
likewise hereby AFFIRMED
SO ORDERED.

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 operated as an
equitable assignment to the

SERVICEWIDE SPECIALISTS,
INC., petitioner, vs. COURT OF
APPEALS, SPOUSES EDUARDO and
FELISA TOLOSA, BIAN MOTOR
SALES CORPORATION, and
EDUARDO GARCIA, respondents.
DECISION
PUNO, J.:
Petitioner Servicewide Specialists, Inc.
seeks a review of the Decision of the Court of
Appeals in CA-G. R. CV No. 20921[1] modifying
the Decision of the Regional Trial Court, Branch
LIV, Manila in Civil Case No. 81-604.[2]
The records show that on December 15,
1981, petitioner Servicewide Specialists, Inc.
(Servicewide) filed a complaint for replevin and/or
sum of money with damages before the then
Court of First Instance of Manila, Branch V
against private respondents Eduardo and Felisa
Tolosa (Tolosa spouses) and one John
Doe.[3] Servicewide alleged that on January 15,
1981, the Tolosa spouses purchased from
Amante Motor Works one (1) Isuzu passenger-
type jeepney with Motor No. C240-317331 and
Serial No. CMCI-81063-C for the sum of
P48,432.00 to be paid in 24 monthly
installments;[4] that the spouses executed a
promissory note and drew a deed of chattel
mortgage over the vehicle in favor of Amante
Motor Works; that on the same day, Amante
Motor Works, with notice to the Tolosas, assigned
the promissory note and chattel mortgage to
Filinvest Finance and Leasing Corporation, that
Filinvest Finance and Leasing Corporation also
assigned its rights and interest in said promissory
note and chattel mortgage to Filinvest Credit
Corporation; that Servicewide later acquired the
rights and interests of Filinvest Credit Corporation
over said note and mortgage; that the Tolosa
spouses failed to pay the installments due on the
purchase price despite several demands. In its
prayer, Servicewide demanded from the spouses
and John Doe, the person in possession of the
vehicle, the return of the vehicle or the payment
of the balance of P34,224.78 and damages.[5]
On January 13, 1982, the trial court issued
an order for the seizure of the vehicle subject of
the complaint.[6]
The Tolosa spouses filed their Answer on
March 22, 1982. They claimed that they
purchased one jeepney unit from Bian Motor
Sales Corporation (Bian Motors), not Amante
Motors Works; that in January 1981, they ordered
another unit from the same corporation through
the proddings of its President and General
Manager, Eduardo Garcia; that Garcia informed
the spouses that the additional unit shall be
"house financed" by Bian Motors; that Eduardo
Tolosa noticed that the vendor indicated in the
deed of sale was not Bian Motors but Amante
Motor Works; that Garcia explained to Tolosa that
he (Garcia) was to make full payment on the
jeepney to Amante Motor Works and that he
(Tolosa) was to pay Garcia the monthly
installments thereon; that Tolosa never received
any notice from Bian Motors about the jeepney
unit he ordered; that on December 17, 1981,
Tolosa received a receipt from Filinvest Finance
and Leasing Corporation about the payment he
allegedly made on a jeepney unit he purchased
from Amante Motor Works; that Garcia informed
him he was in possession of the jeepney and said
that he made the initial payment on the vehicle
and that he himself would pay its monthly
amortization; that Garcia prepared and executed
a "Deed of Sale with Assumption of Mortgage"
where it appears that Tolosa sold and transferred
to Garcia the said jeepney.[7]
On June 10, 1982, Servicewide amended its
complaint by adding Eduardo Garcia as the
defendant in place of John Doe. Servicewide
alleged that the Tolosa spouses, without
Servicewide's knowledge and consent, executed
and delivered to Eduardo Garcia a "Deed of Sale
with Assumption of Mortgage" over the jeepney
sought to be recovered.[8]
On June 16, 1982, the trial court admitted
the amended complaint and ordered the issuance
of summons on Garcia as additional defendant.
On October 28, 1982, the Tolosa spouses
filed an "Amended Answer with Third-Party
Complaint impleading as third-party defendants
Bian Motors and Eduardo Garcia.The trial court
ordered service of summons on the third-party
defendants.
On January 18, 1983, the sheriff seized the
subject vehicle from the possession of one
Lourdes Bartina.[9] Three days later, Bartina filed
a "Third Party Claim" and "Urgent Motion for
Release" alleging ownership of the jeepney. She
claimed that she purchased the vehicle from Bian
Motors and regularly paid its subsequent
installments to the Commercial Credit
Corporation of Las Pias.[10]
On February 21, 1983, the trial court
released the vehicle to Bartina on an indemnity
bond of P34,000.00. The court found that the
documents supporting Bartina's ownership of the
jeepney were in due form and executed prior to
the documents of the Tolosa spouses.
On March 2, 1983, Bian Motors and Eduardo
Garcia filed their "Answer to Third-Party
Complaint" claiming that the third party plaintiffs
(Tolosa spouses) had no cause of action against
them as it was Amante Motor Works that invoiced
the vehicle; that the Tolosa spouses purchased a
jeepney unit from them but their check for
downpayment bounced; that they initiated a
complaint for violation of the Bouncing Checks
Law against Eduardo Tolosa for which an
information was filed on December 2, 1982; that
if the Tolosa spouses were prejudiced it was
because of their unreasonable neglect to make
good their initial payment on the vehicle.[11] A
reply was filed by the Tolosa spouses.
Despite the court's order of February 21,
1983, the subject jeepney was not released to
Bartina. Thus, on June 14, 1984, Bartina filed her
"Complaint in Intervention."[12]Third-party
defendants Garcia and Bian Motors filed their
"Answer to Complaint in Intervention." They
claimed that they acquired the subject vehicle
from the Tolosas "in consideration of the value of
one Celeste jeepney in the amount of
P56,000.00" but that the Tolosas failed to pay the
downpayment on the vehicle; that they came to
court with clean hands and that they are actually
the victims of the Tolosas.[13] Servicewide
manifested that it was adopting its complaint in
the principal case as its comment or answer to
the complaint-in-intervention.[14]
At the pre-trial conference of November 7,
1984, the trial court noted that summons and
copy of the amended complaint had not been
served on Eduardo Garcia as additional
defendant. It deferred the pretrial until such
service shall have been effected.[15]
On January 10, 1985, the trial court ordered
Servicewide to turn over possession of the
subject jeepney to Bartina upon filing of the
increased bond of P55,000.00. Pretrial was again
scheduled on February 27, 1985 but for one
reason or another, was postponed several times
until October 7, 1985.
On October 7, 1985, all parties, through their
respective counsels, appeared except the
Tolosas and their counsel. The trial court
declared the Tolosas as in default with respect to
the principal complaint and scheduled the
reception of evidence for Servicewide. The
Tolosas were likewise declared nonsuited with
respect to their third-party complaint against Bian
Motors and Garcia. With regard to the complaint-
in-intervention, the trial court scheduled a pretrial
conference, thus:
"When this case was called for pretrial, Atty.
Ocaya, for plaintiff, Atty. Alfred Juntilla for
Intervenor-Tolosas (sic)[16] and Atty. Manuel
Ramirez for third-party defendants
appeared. However, defendants Eduardo and
Felisa Tolosa failed to appear notwithstanding
due notice. For failure on the part of defendants
to appear notwithstanding due notice, upon
motion of the plaintiff, defendants are hereby
declared as in default and let the reception of
evidence insofar as said defendants are
concerned be reset on November 7, 1985 at 8:30
a.m.
"Due to the absence of the defendant third-party
plaintiff notwithstanding due notice, upon motion
of the Third-party defendant, the third-party
complaint in so far as the third-party defendant is
concerned is hereby dismissed and likewise, said
defendant being third-party plaintiff is declared
nonsuited without special pronouncement as to
costs.
"In so far as the intervention is concerned which
is directed against the Plaintiff and considering
that there is an on-going possibility of settlement
between the Intervenor and the Plaintiff, the pre-
trial in so far as the Intervenor and Plaintiff are
concerned is hereby cancelled and reset on
November 7, 1985 at 8:30 a.m.
Atty. Ocaya, Atty. A. Juntilla and Atty. Manuel
Ramirez are notified of this order in open Court
and let a copy of this order be furnished
defendants Tolosas.
SO ORDERED.
Manila, October 7, 1985.
(SGD.) ERNESTO S. TENGCO
(Pairing Judge)"[17]
At the hearing of February 4, 1986 for
reception of Servicewide's evidence, the Tolosas
again failed to appear despite due
notice. Servicewide presented its legal accounts
analyst, Ms. Nannette Navea, who testified on the
outstanding obligation of the Tolosas and
Garcia.[18] It also presented several documents
consisting of the promissory note, deed of chattel
mortgage, the deed of assignment of the Tolosas'
credit by Filinvest Finance and Leasing
Corporation, and the notice and demand letter to
the Tolosas.[19] Servicewide then submitted the
case for decision.
Pretrial for the complaint-in-intervention
originally scheduled on November 7, 1985 was
postponed several times until March 1, 1988. The
Tolosas were notified but again failed to appear
on said date. For the second time, the trial court
declared them to have waived their right to
present evidence as against the complaint and
dismissed with prejudice their third-party
complaint against Garcia and Bian Motors. The
court also declared them as in default with
respect to the complaint-in-intervention of Bartina
and scheduled the reception of Bartina's
evidence accordingly. The order reads as follows:
"O R D E R
"Considering that counsel for the intervenor
arrived in Court although late and pre-trial
proceedings were had as between the intervenor
and the plaintiff; considering the non-appearance
of the defendants Eduardo and Felisa Tolosa, the
said two defendants are deemed to have waived
their right to present evidence as against the
Complaint and also they are deemed to be as in
default with respect to the Complaint-in-
Intervention of Lourdes Bartina; the Third-Party
Complaint against Eduardo Garcia is dismissed
with prejudice and with costs against the said
defendants; this case is set for trial for the
reception of intervenor's evidence on April 27,
1988 and May 5, 1988 at 9: 00 o'clock in the
morning.
Notify Eduardo and Felisa Tolosa at their
respective addresses it appearing that their
counsel has already withdrawn his appearance.
SO ORDERED.
Given in open Court, March 1, 1988.
(SGD.) MANUEL T. MURO
Judge"[20]
On April 27, 1988, at the hearing for
reception of evidence on Bartina's complaint-in-
intervention, the Tolosas again did not appear
despite due notice. Intervenor Bartina testified
that the vehicle subject of the complaint was sold
to her by Bian Motors owned by Eduardo Garcia
and that the vehicle was in her possession when
it was seized by the sheriff and thereafter turned
over to Servicewide.[21] Bartina thereafter
identified and offered various documents proving
her ownership of the subject vehicle.[22]
On May 23, 1988, Bartina and the
defendants-in-intervention Eduardo Garcia and
Bian Motors, with the assistance of their
respective counsels, moved to dismiss the
complaint-in intervention. They alleged that they
had "arrived at an amicable settlement of their
claims."[23] The court granted the motion on May
24, 1988.[24]
On August 3, 1988, a decision was rendered
by the trial court. It ruled in favor of Servicewide
granting it the right to either foreclose the
mortgage on the subject vehicle or to demand
from defendants, jointly and severally, payment of
P34,224.78 plus interest and damages. The court
held:
"WHEREFORE, judgment is hereby rendered in
the alternative, for the plaintiff to either foreclose
the mortgage on the motor vehicle subject matter
of this case which is in its possession or to have
the defendants jointly and severally pay plaintiff
the sum of P34,224.78; plus interest at 24% per
annum from December 3, 1981 until fully paid,
and in either case, for said defendants to pay
plaintiff also jointly and severally the sum of
P18,385.68 as attorney's fees, liquidated
damages, bonding fees and other expenses
incurred as well as the costs of the suit."[25]
Defendant Eduardo Garcia moved for
reconsideration and clarification of the decision
on the ground that he was not one of the
defendants in the principal case. He claimed that
the court did not acquire jurisdiction over his
person because he was never served nor did he
receive summons on the amended complaint
naming him as an additional defendant.
In an order dated September 9, 1988, the
trial court denied the motion for reconsideration. It
however amended the dispositive portion of the
decision to include Eduardo Garcia as one of the
defendants liable to Servicewide, to wit:
"Re 'Motion for Reconsideration and Clarification'
dated August 20, 1988:
1. The dispositive portion of the
Decision controls over the narration
of facts and discussion, hence all
defendants are liable as per such
dispositive portion;
2. The tenth line on page 2 of the
Decision is hereby corrected to
include Eduardo Garcia, the
omission of his name being thru
inadvertence."[26]
Eduardo Garcia appealed to the Court of
Appeals.[27] In a decision dated October 27, 1994,
the appellate court found that no summons on the
amended complaint had been served on Garcia
however, since Garcia filed several pleadings as
a third-party defendant in the trial court, he was
deemed to have submitted himself to its
jurisdiction.Nonetheless, it found no sufficient
evidence to hold Garcia solidarily liable with the
Tolosa spouses on the principal complaint. The
Court of Appeals therefore modified the trial
court's decision and relieved Garcia from liability.
Hence, this petition.
Before us, petitioner submits that:
"1. IT IS A SERIOUS ERROR FOR THE PUBLIC
RESPONDENT COURT OF APPEALS TO
DWELL ON QUESTIONS NOT RAISED AS AN
ERROR ON APPEAL BY THE APPELLANT;
2. THE HONORABLE COURT OF APPEALS
PALPABLY ERRED IN HOLDING THAT THERE
IS NO EVIDENCE ADDUCED TO HOLD
EDUARDO GARCIA LIABLE IN THIS CASE;
3. THE HONORABLE COURT OF APPEALS
PALPABLY ERRED IN DISREGARDING THE
EVIDENCE ADDUCED BY INTERVENOR
LOURDES BARTINA IN DECIDING THE
INSTANT CASE."[28]
It is petitioner's claim that in releasing
Eduardo Garcia from liability, the appellate court
decided an issue that was never raised by Garcia
himself. On appeal, Garcia only contended that
the trial court erred "in finding him one of the
defendants referred to in the dispositive portion of
the decision" because he was not a defendant in
the principal complaint, jurisdiction not having
been acquired over him.[29] According to
petitioner, the appellate court should have
confined itself to the sole issue of jurisdiction over
Garcia's person and should not have determined
his liability.[30]
We reject petitioner's submission.
An appellate court is clothed with ample
authority to review rulings even if they are not
assigned as errors in the appeal. This is
especially so if the court finds that their
consideration is necessary in arriving at a just
decision of the case before it. We have
consistently held that an unassigned error closely
related to an error properly assigned or upon
which a determination of the question raised by
the error properly assigned is dependent, will be
considered by the appellate court notwithstanding
the failure to assign it as an error.[31]
In ruling on the liability of Garcia, the
respondent appellate court can hardly be said to
have treated an issue unrelated to those litigated
before the trial court. On the basis of the records,
the appellate court found that Eduardo Garcia
had submitted himself voluntarily to the
jurisdiction of the trial court. To avoid dispensing
piecemeal justice, it proceeded to determine
whether Garcia was indeed liable on the
obligation. The procedure followed by respondent
court is in accord with the desideratum that calls
for a complete adjudication of a case to speed up
the dispensation of justice.
We come now to the main issue of whether
there is sufficient evidence on record to hold
Garcia, together with the Tolosa spouses,
solidarily liable to petitioner for the return of the
subject motor vehicle or payment of its equivalent
value in money.
Petitioner insists that there is enough
evidence to prove Garcia's liability, viz.: (1) the
pleadings filed by Garcia and Bian Motors,
specifically, the "Answer" to the complaint and the
"Answer to Complaint in Intervention" where
Garcia admitted selling the mortgaged vehicle to
the Tolosas which also show that he sold the
same vehicle to Bartina during the effectivity of
the mortgage; (2) the testimony of Lourdes
Bartina where she declared that the same
mortgaged vehicle was indeed sold to her by
Garcia and Bian Motors; (3) Garcia's subsequent
compromise with Bartina which proves his liability
for the obligation.
We do not agree.
Garcia and Bian Motors did not file an
"Answer" to the complaint. The records of the
case do not show that both or either of them were
served any summons on the amended
complaint. This is precisely why Garcia raised the
issue of lack of jurisdiction. Garcia and Bian
Motors however filed an "Answer to Third Party
Complaint" and "Answer to Complaint in
Intervention."
It must be stressed that the third-party
complaint filed by the Tolosas was dismissed
twice by the trial court - first at the pretrial of
October 7,1985 for the principal complaint and
second at the pretrial of March 1, 1988 for the
complaint-in-intervention. The second dismissal
was with prejudice. The complaint-in-intervention
was, upon motion of the parties-in-intervention,
also dismissed by the trial court on May 24, 1988.
A dismissal or discontinuance of an action
operates to annul orders, rulings or judgments
previously made in the case.[32] It also annuls all
proceedings had in connection therewith and
renders all pleadings ineffective.[33] A dismissal or
nonsuit leaves the situation as though no suit had
ever been brought. Further proceedings in the
action are arrested and what has been done
therein is also annulled, so that the action is as if
it had never been.[34] It carries down with it
previous proceeding and orders in the action, and
all pleadings of both parties, and all issues with
respect to the plaintiff's claim.[35]
The records do not show that petitioner
adopted the "Answer to Third Party Complaint"
and the "Answer to Complaint in Intervention"
filed by Bian Motors and Garcia, and the
testimony of Bartina as part of its evidence in the
trial court. It cannot rely on them on appeal for
evidence not formally offered before the trial court
cannot be considered.[36] To consider them at this
stage will deny the other parties their right to rebut
them.
Assuming arguendo that the said pleadings
of Garcia and Bian Motors and the evidence of
Bartina can be considered in favor of petitioner,
still, they do not sufficiently prove Garcia's liability
on the matter.
For one, the motor vehicle described in the
"Answer to Third-Party Complaint" has different
motor and serial numbers from the vehicle
subject of the complaint. The subject vehicle is a
galvanized silver jeepney with Motor No. C240-
317331 and Serial No. CMCI-81063-C while the
vehicle in said pleading is a red stainless jeepney
with Motor No. C-221-443144 and Serial No.
CMCI-81795-C.[37] What Garcia and Bian Motors
admittedly sold to the Tolosas was not the subject
vehicle.
In the "Answer to the Complaint in
Intervention," Garcia and Bian Motors admitted
that they acquired from the Tolosas the "vehicle
subject of the complaint in consideration of one
Celeste jeepney valued at P56,000.00." The
vehicle subject of the complaint was the one
found in the possession of Bartina. Under the two
pleadings, however, what Garcia and Bian
Motors sold to the Tolosa spouses was a different
vehicle from the one they acquired from said
spouses and which they allegedly sold to
Bartina. A double sale of the same jeepney could
not rise because there appears to be two different
jeepneys in the pleadings.
Even in the "Deed of Sale with Assumption
of Mortgage" where the Tolosa spouses allegedly
sold to Garcia the jeepney subject of the
complaint the vehicle described therein had
different motor and chassis number. The deed
reveals that what the Tolosas sold to Garcia was
a red jeepney with Motor No. C240-32833 and
Chassis No. CMCI-82062-C.[38]
The documentary evidence of Bartina
merely shows that the jeepney subject of the
complaint was indeed sold to her by Bian Motors
represented by Juliet Garcia, Eduardo Garcia's
daughter. There is nothing to show that Eduardo
Garcia sold to Bartina the same vehicle that he
previously sold to the Tolosas.
We also hold that the compromise between
Bartina and Garcia and Bian Motors cannot be
taken as an admission of Garcia's liability. In civil
cases, an offer of compromise is not an
admission of any liability.[39] With more reason, a
compromise agreement should not be treated as
an admission of liability on the part of the parties
vis-a-vis a third person. The compromise
settlement of a claim or cause of action is not an
admission that the claim is valid, but merely
admits that there is a dispute, and that an amount
is paid to be rid of the controversy,[40] nor is a
compromise with one person an admission of any
liability to someone else.[41] The policy of the law
should be, and is, to encourage
compromises.[42] When they are made, the rights
of third parties are not in any way affected
thereby.[43]
On the whole, petitioner's evidence consists
of the promissory note, the deed of chattel
mortgage and the deed of assignment and the
notice and demand letter. The promissory note in
favor of Amante Motor Works was signed by the
Tolosa spouses.[44] This same promissory note
provides that any payment thereon shall be made
"to the order of Filinvest Finance and Leasing
Corporation.[45] Both spouses also signed as
mortgagors the deed of chattel mortgage of the
said jeepney in favor of Amante Motor
Works. Amante Motor Works assigned in the
same deed all its rights over the chattel mortgage
to Filinvest Finance and Leasing
Corporation.[46] Filinvest Finance and Leasing
Corporation likewise assigned its rights and
interest over the promissory note and deed of
chattel mortgage to Filinvest Credit Corporation
which in turn assigned it to petitioner.[47] The
Tolosa spouses defaulted on the obligation and
refused to pay the installments due despite notice
to them. By no stretch of logic can they prove
Garcia's solidary liability.
IN VIEW WHEREOF, the petition is denied
and the Decision dated October 27, 1994 of the
Court of Appeals in CA-G.R. CV No. 20921 is
affirmed.
SO ORDERED.