Insurance Case Digest (Marine-Fire).docx

FEDEX vs. AHAC and PHILAM INSURANCE COMPANY, INC

HELD: petition granted. Assailed decision reversed insofar as it pertains to FEDEX

G.R. No. 150094

Prescription of Claim

August 18, 2004

From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents‟ claim and right of action are already barred. Indeed, this fact has never

FACTS: shipper SMITHKLINE USA delivered to carrier Burlington Air Express

been denied by respondents and is plainly evident from the records.

(BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French Overseas Company in Makati City. The shipment was covered by Burlington Airway Bill No. 11263825 with the words, „REFRIGERATE WHEN NOT IN TRANSIT‟ and „PERISHABLE‟ stamp marked on its face. That same day, Burlington insured the cargoes with American Home Assurance Company (AHAC). The following day, Burlington turned over the custody of said cargoes to FEDEX which transported the same to Manila. The shipments arrived in Manila and was immediately stored at [Cargohaus Inc.‟s] warehouse. Prior to the arrival of the cargoes, FEDEX informed GETC Cargo International Corporation, the customs broker hired by the consignee to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its client‟s cargoes. 12 days after the cargoes arrived in Manila, DIONEDA, a non-licensed custom‟s broker who was assigned by GETC, found out, while he was about to cause the release of the said cargoes, that the same [were] stored only in a room with 2 air conditioners running, to cool the place instead of a refrigerator. DIONEDA, upon instructions from GETC, did not proceed with the withdrawal of the vaccines and instead, samples of the same were taken and brought to the Bureau of Animal Industry of the Department of Agriculture in the Philippines by SMITHKLINE for examination wherein it was discovered that the „ELISA reading of vaccinates sera are below the positive reference serum.‟ As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the shipment and, declaring „total loss‟ for the unusable shipment, filed a claim with AHAC through its representative in the Philippines, the Philam Insurance Co., Inc. (PHILAM)

Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states: “6.

No action shall be maintained in the case of damage to or partial loss of the shipment

unless a written notice, sufficiently describing the goods concerned, the approximate date of the damage or loss, and the details of the claim, is presented by shipper or consignee to an office of Burlington within (14) days from the date the goods are placed at the disposal of the person entitled to delivery, or in the case of total loss (including non-delivery) unless presented within (120) days from the date of issue of the [Airway Bill]. xxx Relevantly, petitioner‟s airway bill states: “12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case: 12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within fourteen (14) days from receipt of the goods; xxx Article 26 of the Warsaw Convention, on the other hand, provides: Xxx (2)

In case of damage, the person entitled to delivery must complain to the carrier

forthwith after the discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage and 7 days from the date of receipt in the case of goods. xx (3)

Every complaint must be made in writing upon the document of transportation or by

separate notice in writing dispatched within the times aforesaid.

which recompensed SMITHKLINE for the whole insured amount. Thereafter, PHILAM filed an

(4)

action for damages against the FEDEX imputing negligence on either or both of them in the

the case of fraud on his part.” xxx

Failing complaint within the times aforesaid, no action shall lie against the carrier, save in

handling of the cargo.

Condition Precedent Trial ensued and ultimately concluded with the FEDEX being held solidarily liable for the loss.

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor

Aggrieved, petitioner appealed to the CA. The appellate court ruled in favor of PHILAM and held

actually constitutes a condition precedent to the accrual of a right of action against a carrier for

that the shipping Receipts were a prima facie proof that the goods had indeed been delivered to

loss of or damage to the goods. The shipper or consignee must allege and prove the fulfillment

the carrier in good condition.

of the condition. If it fails to do so, no right of action against the carrier can accrue in favor of

ISSUE: Is FEDEX liable for damage to or loss of the insured goods

the former. The aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of action.

The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. “This protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and

On Sept. 30, 1991, a fire broke out and gutted and consumed the new oil mill. American Home rejected the claim for the insurance proceeds on the ground that no policy was issued by it covering the burned oil mill. It stated that the new oil mill was under Building No. 15 while the insurance coverage extended only to the oil mill under Building No. 5. ISSUE:

easily investigated so as to safeguard itself from false and fraudulent claims.

 NOTES: as to proper payee:

Whether or not the new oil mill is covered by the fire insurance policy HELD:

The Certificate specifies that loss of or damage to the insured cargo is “payable to order x x x

In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect to the insurance. In view of the custom of insurance agents to examine buildings before writing policies upon them, and since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the description may be.

upon surrender of this Certificate.” Such wording conveys the right of collecting on any such damage or loss, as fully as if the property were covered by a special policy in the name of the holder itself. At the back of the Certificate appears the signature of the representative of Burlington. This document has thus been duly indorsed in blank and is deemed a bearer instrument.

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties manifestly intended to insure was the new oil mill.

Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified for loss of or damage to the insured shipment, as fully as if the property

If the parties really intended to protect the first oil mill, then there is no need to specify it as new. Indeed, it would be absurd to assume that the respondent would protect its first oil mill for different amounts and leave uncovered its second one.

were covered by a special policy in the name of the holder. Hence, being the holder of the Certificate and having an insurable interest in the goods, Smithkline was the proper payee of the insurance proceeds.

DELSAN TRANSPORT vs. CA

Subrogation Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation

FACTS

Receipt in favor of respondents. The latter were thus authorized “to file claims and begin suit

Caltex engaged into a contract of affreightment with the petitioner, Delsan Transport Lines, Inc.(Delsan), for a period of one year whereby the said common carrier agreed to transport Caltex‟s industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner took on board its vessel, MT Maysun, 2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the Caltex Oil Terminal in Zamboanga City. The shipment was insured with private respondent, American Home Assurance Corporation (American Home)

against any such carrier, vessel, person, corporation or government.” Undeniably, the consignee had a legal right to receive the goods in the same condition it was delivered for transport to petitioner. If that right was violated, the consignee would have a cause of action against the person responsible therefor.

American Home Assurance v. Tantuco G.R. No. 138941, 8 Oct. 2001



INSURANCE LAW: Liberality is the rule of construction in insurance contracts.

FACTS: Tantuco Enterprises, Inc. is a coconut oil milling and refining company. It owned two mills (the first oil mill and a new one), both located at its factory compound at Iyam, Lucena City. The two oil mills are separately covered by fireinsurance policies issued by American Home Assurance Co.

The vessel sank in the early morning of August 15, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel oil. Subsequently, American Home paid Caltex the sum of Php 5,096,635.57 representing the insured value of the cargo. Exercising its right to subrogation under Article 2207 of the New Civil Code, the American Home demanded the Delsan the same amount it paid to Caltex. Due to its failure to collect from Delsan despite prior demand, American Home filed a complaint with the RTC of Makati for collection of a sum of money. The trial court dismissed the complaint against Delsan. It ruled that the vessel, MT Maysun, was seaworthy and that the incident was caused by unexpected inclement weather condition or force majeure, thus exempting the common carrier from liability for the loss of its cargo.

The CA reversed. It gave credence to the weather report issued by PAGASA which stated that the waves were only .7 to 2 meters in height in the vicinity of the Panay Gulf at the day the ship sank, in contrast to the claim of the crew of the ship that the waves were 20 feet high. Delsan contends the following 1. Delsan theorized that when the American Home paid Caltex the value of its lost cargo, the act of American Home is equivalent to a tacit recognition that the illfated vessel was seaworthy; otherwise, American Home was not legally liable to Caltex due to the latter‟s breach of implied warranty under the marine insurance policy that the vessel was seaworthy. 2. Delsan avers that although chief officer had merely a 2 nd officer‟s license, he was qualified to act as the vessel‟s chief officer. In fact, all the crew and officers of MTT Maysun were exonerated in the administrative investigation.

determination of which properly belongs to the courts. In the case at bar, Delsan is liable for the insured value of the lost cargo of industrial fuel oil belonging to Caltex for its failure to rebut the presumption of fault or negligence as common carrier occasioned by the unexplained sinking of its vessel, MT Maysun, while in transit. Second Issue: It is the view of the SC that the presentation in evidence of the marine insurance policy is not indispensable in this case before the insurer may recover from the common carrier the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the relationship of American Home as insurer and Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim.

ISSUES 1. 2.

W/N the payment made by American Home to Caltex for the insured value of the lost cargo amounted to an admission that the vessel was seaworthy, thus precluding any action for recovery against the petitioner. NO W/N the non-presentation of the marine insurance policy bars the complaint for recovery of sum of money for lack of cause of action. NO

RULING First Issue: The payment made by American Home for the insured value of the lost cargo operates as waiver of its right to enforce the term of the implied warranty against Caltex under the marine insurance policy. However, the same cannot be validly interpreted as an automatic admission of the vessel‟s seaworthiness by American Home as to foreclose recourse against Delsan for any liability under its contractual obligation as a common carrier. The fact of payment grants American Home subrogatory right which enables it to exercise legal remedies that would otherwise be available to Caltex as owner of the lost cargo against Delsan, the common carrier. From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of passengers transported by them, according to all the circumstances of each case. In the event of loss, destruction or deterioration of the insured goods, common carriers shall be responsible unless the same is brought about, among others, by flood, storm, earthquake, lightning or other natural disaster or calamity. In all other cases, if the goods are lost, destroyed or deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove they observed extraordinary diligence. In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, Delsan attributes the sinking of MT Maysun to fortuitous event or force majeure. Although the testimony of the captain and chief mate that there were strong winds and waves 20 feet high was effectively rebutted and belied by the weather report of PAGASA. Thus, as the CA correctly ruled, Delsan‟s vessel, MT Maysun, sank with its entire cargo for the reason that it was not seaworthy. There was no squall or bad weather or extremely poor sea condition in the vicinity where the said vessel sank. Additionally, the exoneration of MT Maysun‟s officers and crew merely concern their respective administrative liabilities. It does not in any way operate to absolve Delsan the common carrier from its civil liability arising from its failure to observe extraordinary diligence in the vigilance over the goods it was transporting and for the negligent acts or omissions of its employees, the

Go Tiaco vs Union Ins. Society of Canton Facts: A cargo of rice belonging to the Go Tiaoco Brothers, was transported in the early days of May, 1915, on the steamship Hondagua from the port of Saigon to Cebu. On discharging the rice from one of the compartments in the after hold, upon arrival at Cebu, it wasdiscovered that 1,473 sacks had been damaged by sea water. The loss so resulting to theowners of rice, after proper deduction had been made for the portion saved, was P3,875. The policy of insurance, covering the shipment, was signed upon a form long in use among companies engaged in maritime insurance. It purports to insure the cargo from the following among other risks: "Perils . . . of the seas, men, of war, fire, enemies, pirates, rovers, thieves,.jettisons, . . . barratry of the master and mariners, and of all other perils, losses, and misfortunes that have or shall come to the hurt, detriment, or damage of the said goods and merchandise or any part thereof." It was found out that the drain pipe which served as a discharge from the water closet passed down through the compartment where the rice in question was stowed and thence out to sea through the wall of the compartment, which wasa part of the wall of the ship. The joint or elbow where the pipe changed its direction was of cast iron; and in course of time it had become corroded and abraded until a longitudinal opening had appeared in the pipe about one inch in length. This hole had been in existence before the voyage was begun, and an attempt had been made to repair it by filling with cement and bolting over it a strip of iron. The effect of loading the boat was to submerge the vent, or orifice, of the pipe until it was about 18 inches or 2 feet below the level of the sea. As a consequence the sea water rose in the pipe. Navigation under these conditions resulted in the washing out of the cement-filling from the action of the sea water, thus permitting the continued flow of the salt water into the compartment of rice. An action on a policy of marine insurance issued by the Union Insurance Society of Canton, Ltd., upon the cargo of rice belonging to the Go Tiaoco Brothers was filed. The trial court found that the inflow of the seawater during the voyage was due to a defect in one of the drain pipes of the ship and concluded that the loss was not covered by the policy of insurance. Judgment was accordingly entered in favor of Union Insurance and Go Tiaoco Brothers appealed. Issue 1: Whether perils of the sea includes “entrance of water into the ship‟s hold through a defective pipe.” Held 1: NO. It is determined that the words "all other perils, losses, and misfortunes" are to be interpreted as covering risks which are of like kind (ejusdem generis) with the particular risks

which are enumerated in the preceding part of the same clause of the contract. According to the ordinary rules of construction these words must be interpreted with reference to the words which immediately precede them. They were no doubt inserted in order to prevent disputes founded on nice distinctions. Their office is to cover in terms whatever may be within the spirit of the cases previously enumerated, and so they have a greater or less effect as a narrower or broader view is taken of those cases. For example, if the expression "perils of the seas" is given its widest sense the general words have little or no effect as applied to that case. If on the other hand that expression is to receive a limited construction and loss by perils of the seas is to be confined to loss ex marine tempestatisdiscrimine, the general words become most important. But still, when they first became the subject of judicial construction, they have always been held or assumed to be restricted to cases "akin to" or "resembling" or "of the same kind as" those specially mentioned. I see no reason for departing from this settled rule. In marine insurance it is above all things necessary to abide by settled rules and to avoid anything like novel refinements or a new departure. It must be considered to be settled, furthermore, that a loss which, in the ordinary course of events, results from the natural and inevitable action of the sea, from the ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions, is not a peril of the sea. Such a loss is rather due to what has been aptly called the "peril of the ship." The insurer undertakes to insure against perils of the sea and similar perils, not against perils of the ship. There must, in order to make the insurer liable, be "some casualty, something which could not be foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to secure an indemnity against accidents which may happen, not against events which must happen." Herein, the entrance of the sea water into the ship's hold through the defective pipe already described was not due to any accident which happened during the voyage, but to the failure of the ship's owner properly to repair a defect of the existence of which he was apprised. The loss was therefore more analogous to that which directly resultsfrom simple unseaworthiness than to that which results from perils of the sea. Issue 2: Whether there is an implied warranty on the seaworthy of the vessel in every marine insurance contract. Held 2: YES. It is universally accepted that in every contract of insurance upon anything which is the subject of marine insurance, a warranty is implied that the ship shall be seaworthy at the time of the inception of the voyage. This rule is accepted in our own Insurance Law (Act No. 2427, sec. 106). It is also well settled that a ship which is seaworthy for the purpose of insurance upon the ship may yet be unseaworthy for the purpose ofinsurance upon the cargo (Act No. 2427, sec. 106)

Petitioner filed suit due to Malayan‟s reticence to pay. Malayan claimed that arrest by civil authorities wasn‟t covered by the policy. The trial court ruled in TKC‟s favor with damages to boot. The appellate court affirmed the decision under the reason that clause 12 of the policy regarding an excepted risk due to arrest by civil authorities was deleted by Section 1.1 of the Institute WarClauses which covered ordinary arrests by civil authorities. Failure of the cargo to arrive was also covered by the Theft, Pilferage, and Non-delivery Clause of the contract. Hence this petition. Issues: 1. WON the arrest of the vessel was a risk covered under the subject insurance policies. 2. WON the insurance policies must strictly construed against the insurer. Held: Yes. Yes. Petition dismissed. Ratio: 1. Section 12 or the "Free from Capture & Seizure Clause" states: "Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of any attempt thereat… Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of this insurance.” This was really replaced by the subsection 1.1 of section 1 of Institute War Clauses (Cargo) which included “the risks excluded from the standard form of English Marine Policy by the clausewarranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof of hostilities or warlike operations, whether there be a declaration of war or not.”

Malayan Insurance Corp vs CA G.R. 119599 March 20, 1997

The petitioner‟s claim that the Institute War Clauses can be operative in case of hostilities or

J. Romero

warlike operations on account of its heading "Institute War Clauses" is not tenable. It reiterated

Facts: TKC Marketing imported 3,000 metric tons of soya from Brazil to Manila. It was insured by Malayan at the value of almost 20 million pesos. The vessel, however, was stranded on South Africa because of a lawsuit regarding the possession of the soya. TKC consulted Malayan on

the CA‟s stand that “its interpretation in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the clause.” This interpretation was regardless of the fact whether the arrest was in war or by civil authorities. The petitioner was said to have confused the Institute War clauses and the F.C.S. in English law.

recovery of the amount, but the latter claimed that it wasn‟t covered by the policy. The soya

“It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to

was sold in Africa for Php 10 million, but TKC wanted Malayan to shoulder the remaining value

eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause applies even

of 10 million as well.

if there be no war or warlike operations. In the same vein, it contended that subsection 1.1 of

Section 1 of the Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result of hostilities or warlike operations." The court found that the insurance agency tried to interpret executive and political acts as those not including ordinary arrests in the exceptions of the FCS clause , and claims that the WarClauses now included executive and political acts without including ordinary arrests in the new stipulation. “A strained interpretation which is unnatural and forced, as to lead to an absurd conclusion or to render the policy nonsensical, should, by all means, be avoided.” 2. Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of insurance, being a contract of adhesion, means that any ambiguity should be resolved against the insurer.

Allied Banking Corporation vs Cheng Yong and Lilia Gaw Before us are these two (2) petitions for review on certiorari under Rule 45 of the Rules of Court to nullify and set aside the following issuances of the Court of Appeals (CA) in CA-G.R. CV 41280, to wit: 1. Decision dated 11 December 2001,[1] partially reversing and setting aside an earlier decision of the Regional Trial Court at Makati, Branch 145, in its Civil Case No. 10947; and 2.

Resolution dated 01 July 2002,[2] denying Cheng Yong and Lilia Gaw‟s motion for reconsideration.

The material facts: Sometime before 1981, Philippine Pacific Fishing Company, Inc. (Philippine Pacific), through its then Vice-Chairman of the Board and concurrent President Marilyn Javier, obtained from Allied Banking Corporation (Allied Bank), a packing credit accommodation amounting to One Million Seven Hundred Fifty Two Thousand Pesos (P1,752,000.00). To secure the obligation, Marilyn Javier and the spouses Cheng Yong and Lilia Gaw (spouses Cheng, for short), executed a Continuing Guaranty/Comprehensive Surety bearing date 27 March 1981.[3] Later, Philippine Pacific, due to business reverses and alleged misuse of corporate funds by its operating officers, defaulted in the payment of said obligation. An intra-corporate dispute among its stockholders followed, prompting the filing against Philippine Pacific of a petition for receivership before the Securities and Exchange Commission (SEC), which petition was docketed as SEC Case No. 2042. Likewise, a criminal case for Estafa was filed against Marilyn Javier. Thereafter, the corporation was reorganized, following which the spouses Cheng Yong and Lilia Gaw were elected as its president and treasurer, respectively. The spouses Cheng also hold similar positions in another company, the Glee Chemicals Phils., Inc. (GCPI), which, incidentally, also had a credit line with Allied Bank. Meanwhile, on 27 July 1981, the parties in SEC Case No. 2042 agreed to create and constitute a management committee, instead of placing Philippine Pacific under receivership. Hence, in an order dated 14 August 1981, the SEC formally created a management committee whose functions, include, among others, the following: 1.

To take custody and possession of all assets, funds, properties and records of the corporation and to prepare an inventory thereof;

2.

To administer, manage and preserve such assets, funds and records; xxx

7.

xxx

xxx

To acquire, lease, sell, mortgage or otherwise encumber such assets with the prior approval of the Commission.[4]

It appears, however, that two (2) days prior to the constitution of the management committee, Allied Bank and Philippine Pacific agreed to restructure and convert the packing credit accommodation into a simple loan. Accordingly, Philippine Pacific executed in favor of

Allied Bank a promissory note dated 12 August 1981[5] in the same amount as the packing credit accommodation. Aside from affixing their signatures on the same promissory note in their capacity as officers of Philippine Pacific, the spouses Cheng also signed the note in their personal capacities and as co-makers thereof. As it turned out, Philippine Pacific failed to pay according to the schedule of payments set out in the promissory note of 12 August 1981, prompting the spouses Cheng to secure the note with substantial collateral by executing a deed of chattel mortgage in favor of Allied Bank over a fishing vessel, “Jean III”, a Japanese- manufactured vessel with refrigerated hatches and glass freezers, owned by the spouses and registered in their names. Philippine Pacific again defaulted payment. Hence, on 18 September 1984, Allied Bank filed with the sheriff of Navotas an application for extra-judicial foreclosure of the chattel mortgage constituted on “Jean III”. Pursuant thereto, notices of extra-judicial sale dated 21 September 1981 were served on the concerned parties by the Ex-Officio sheriff of Malabon while the vessel was moored at the Navotas Fishing Port Complex and under a charter contract with Lig Marine Products, Inc. On 27 September 1984, the spouses Cheng, to prevent the auction sale of the vessel, filed with the Regional Trial Court at Quezon City an action for declaratory relief with prayer for injunctive remedies. Initially, that court issued a writ of preliminary injunction restraining the sale but later lifted it upon dismissal of the main case for declaratory relief on 29 March 1985. In the meantime, the vessel sank at the port of Navotas on 22 June 1985, resulting to its total loss. As per certification of the Harbor Master of the Philippine Fisheries Development Authority, the vessel sank due to unnoticed defects caused by its prolonged stay in the fish port and the abandonment thereof. Shortly before the loss, charterer Lig Marine Products, Inc. offered to purchase the vessel for Four Million Pesos (P4,000,000.00). On 26 June 1985, the spouses Cheng filed with the Regional Trial Court at Makati a complaint for Injunction, Annulment of Contracts and Damages with the provisional remedy of Preliminary Injunction, against Allied Bank and the Ex-Officio Sheriff of Malabon, therein praying, inter alia, that the promissory note dated 12 August 1981 be declared void and unenforceable because it was executed without the prior approval or ratification of the SECcreated management committee in SEC Case No. 2042, and to declare invalid the deed of chattel mortgage over the vessel “Jean III” for having been constituted to secure a void or unenforceable obligation. The complaint was docketed asCivil Case No. 10947 and raffled to Branch 145 of the court. Meanwhile, on 02 August 1985, Allied Bank filed with the Ex-Officio Sheriff of Pasig an application for extrajudicial foreclosure of the real estate mortgage [6] constituted by the Cheng spouses over their parcel of land covered by TCT No. (222143) 23843, located in San Juan, Metro Manila (hereinafter referred to as the San Juan property), together with the improvement thereon, consisting of a two-storey building belonging to GCPI. It appears that said property was mortgaged by the spouses in favor of Allied Bank on 31 May 1983 to partially secure the payment of the time loan granted by the Bank to GCPI. Despite GCPI‟s full payment of said loan, Allied Bank refused to release the mortgage on the San Juan property, theorizing that it also secured the obligation of the spouses Cheng as Philippine Pacific‟s co-makers of the promissory note dated 12 August 1981, in accordance with the stipulation in the deed of mortgage extending coverage of the guaranty to “any other obligation owing to the mortgagee”. On 22 August 1985, the spouses Cheng filed in Civil Case No. 10947 an amended complaint praying, among others, that: (a) the promissory note of 12 August 1981 be declared void and unenforceable; (b) the vessel be declared a total loss; and (c) Allied Bank be ordered

to pay them the value of the loss. And, in order to prevent Allied Bank and the Ex-Officio Sheriff of Pasig from foreclosing the real estate mortgage over their San Juan property, the spouses Cheng filed a supplemental complaint with an application for a writ of preliminary injunction. A writ of preliminary injunction was, thereafter, issued by the trial court. On 17 October 1985, Allied Bank filed a motion to dismiss the amended as well as the supplemental complaints. In its order of 12 March 1986, the trial court denied the motion with respect to the amended complaint, for lack of merit, while deferring the resolution thereof as regards the supplemental complaint until after trial because the ground alleged did not appear to be indubitable. Eventually, in a decision dated 08 February 1989,[7] the trial court declared both the promissory note dated 12 August 1981 and the deed of chattel mortgage over the vessel “ Jean III” invalid and unenforceable. Dispositively, the decision reads: WHEREFORE, premises considered, the Court renders judgment declaring both the promissory Note (Exh. “M”) and the Deed of Chattel Mortgage (Exh. “5”) not valid and unenforceable; permanently enjoining defendants Allied Banking Corporation and the ex-officio sheriff of Malabon and his deputies, agents and representatives from proceeding with the foreclosure and auction sale of the fishing vessel “JEAN III”; permanently enjoining the defendants-bank and ex-officio sheriff of Pasig from proceeding with the foreclosure and auction sale of the plaintiffs‟ real property covered by TCT No. (222143) 23843 including the building thereon owned by Glee Chemicals Philippines, Inc.; ordering defendant bank to pay plaintiffs the sum of Four Million Pesos (P4,000,000.00), Philippine Currency, for the loss of the aforementioned vessel, the sum of Thirty Thousand Pesos (P30,000.00), Philippine Currency as moral and exemplary damages, the further sum of Thirty Thousand Pesos (P30,000.00), Philippine Currency, as attorney‟s fees; and the costs of the suit. The motion to dismiss the supplemental complaint filed by defendant is denied for lack of merit. Finally, within three (3) days from the finality of this decision, defendant bank is hereby compelled to execute the necessary release or cancellation of mortgage covering the aforesaid parcels of land, and deliver the two torrens titles in its possession to herein plaintiffs. SO ORDERED. Therefrom, Allied Bank went to the Court of Appeals (CA) via ordinary appeal under Rule 41 of the Rules of Court, which appellate recourse was docketed as CA-G.R. CV No. 41280. As stated at the outset hereof, the Court of Appeals, in its Decision dated 11 December 2001, partially reversed and set aside the appealed decision of the trial court insofar as it (a) declared the promissory note as not valid and unenforceable and (b) ordered Allied Bank to pay the spouses Cheng the amount of Four Million Pesos (P4,000,000.00) for the loss of the fishing vessel and the sum of Thirty Thousand Pesos (P30,000.00) as moral and exemplary damages. In all other respects, the appellate court affirmed the trial court, thus:

WHEREFORE, the foregoing considered, the appealed decision is REVERSED and SET ASIDE insofar as it (1) DECLARED the Promissory Note dated 12 August 1981 as NOT VALID and unenforceable, and (2) ORDERED appellant Bank to pay to appellee-spouses Cheng the amount of Four Million Pesos (P4,000,000.00) for the loss of the fishing vessel “JEAN III” and the amount of Thirty Thousand Pesos (P30,000.00) for moral and exemplary damages. In all other respects, the decision is AFFIRMED. SO ORDERED. Dissatisfied, Allied Bank immediately filed with this Court its petition for review on certiorari in G.R. No. 151040, seeking to set aside and reverse only that portion of the appellate court‟s decision which affirmed certain aspects of the trial court‟s decision, i.e., (a) enjoining Allied Bank and the Ex-Officio Sheriff of Pasig from proceeding with the foreclosure of the Real Estate Mortgage over the San Juan property; (b) ordering Allied Bank to execute a release of the same mortgage in favor of the spouses Cheng; (c) ordering Allied Bank to deliver the two (2) torrens titles in favor of the spouses; and (d) ordering Allied Bank to pay attorney‟s fees and costs. In short, Allied Bank faults the Court of Appeals for not reversing the trial court‟s decision in its entirety. More specifically, it submits: In General, THE HONORABLE COURT OF APPEALS GRAVELY ERRED WHEN IT DID NOT REVERSE AND SET ASIDE THE DECISION OF THE REGIONAL TRIAL COURT OF MAKATI CITY, BRANCH 145 IN ITS ENTIRETY. In Particular, THE HONORABLE COURT OF APPEALS PATENTLY ERRED WHEN IT UPHELD RESPONDENTS‟ ASSERTION THAT THE REAL ESTATE MORTGAGE DATED MAY 31, 1983 CANNOT BE FORECLOSED WITH RESPECT TO THE OBLIGATION OF PHILIPPINE PACIFIC TO PETITIONER. For their part, the spouses Cheng filed with the Court of Appeals a motion for reconsideration, disputing the appellate court‟s pronouncement that the August 12, 1981 promissory note and the deed of chattel mortgage over the fishing vessel “Jean III” are valid and enforceable and that the loss of said vessel must be borne by them. In its resolution of 1 July 2002, the appellate court denied the motion. Hence, the spouses Cheng‟s own petition for review on certiorari in G.R. No. 154109, seeking the reversal and setting aside of both the appellate court‟s decision of 11 December 2001 and resolution of 01 July 2002, it being their submission that said court committed a grave and serious reversible error in not holding that: 1. the subject Promissory Note is not valid and enforceable for non-fulfillment of a suspensive condition and consequently, the Deed of Chattel Mortgage, being a mere accessory agreement, is likewise not valid and enforceable in the absence of a valid principal contract; and 2. the Loss of the mortgaged Fishing Vessel “Jean III” must be borne by the respondent bank considering that the vessel was in its possession and control at the time of the loss.

Per this Court‟s Resolution dated 20 November 2002,[8] the two (2) separate petitions were ordered consolidated, involving, as they do, the same decision of the appellate court. As we see it, the common issues to be resolved are: I.

Whether or not the promissory note dated 12 August 1981 is valid;

II.

Whether or not the chattel mortgage over the fishing vessel “Jean III” can be foreclosed for Philippine Pacific‟s failure to comply with its obligation under the promissory note dated 12 August 1981; and

III.

Whether or not the real estate mortgage constituted over spouses Cheng‟s parcel of land covered by TCT No. (222143) 23843 [San Juan property] also secured the spouses‟ obligation as co-makers of the promissory note dated 12 August 1981.

In justifying its reversal of the trial court‟s finding that the validity and effectivity of the promissory note dated 12 August 1981 were conditioned upon the ratification thereof by the SEC-created management committee in SEC Case No. 2042, the appellate court explained that the terms of the subject promissory note are clear and leave no doubt upon the intention of the parties. On this score, it ruled that the parole evidence introduced by the Cheng spouses to the effect that the validity and enforceability of the note are conditioned upon its approval and ratification by the management committee should have been discarded by the trial court, consistent with the parole evidence rule embodied in Rule 130, Section 9 of the Rules of Court.[9] Says the appellate court in its challenged decision: Instead, We agree with [Allied Bank] that there is no evidence to support the court a quo‟s finding that the effectivity of the promissory note was dependent upon the prior ratification or confirmation of the management committee formed by the SEC in SEC Case No. 2042. To begin with, there is nothing on the face of the promissory note requiring said prior ratification for it to become valid. Basic is the rule that if the terms of the contract are clear and leave no doubt upon the intention of the parties, the literal meaning of its stipulations shall control (Article 1370, Civil Code; Honrado, Jr. vs. CA, 198 SCRA 326). This basic rule notwithstanding, the court a quo admitted in evidence the alleged verbal stipulation made by [the spouses Cheng] to the effect that the validity of the promissory note was dependent upon its ratification by the management committee. Such parole evidence should not have been allowed as it had the effect of altering the provisions of the promissory note which are in clear and unequivocal terms. Under the parole evidence rule, the terms of a contract are conclusive upon the parties and evidence which shall vary a complete and enforceable agreement embodied in a document is inadmissible (Magellan Manufacturing Corporation vs. CA, 201 SCRA 106).[10] (Words in bracket ours). We agree.

The appellate court is correct in declaring that under the parole evidence rule, when the parties have reduced their agreement into writing, they are deemed to have intended such written agreement to be the sole repository and memorial of everything that they have agreed upon. All their prior and contemporaneous agreements are deemed to be merged in the written document so that, as between them and their successors-in-interest, such writing becomes exclusive evidence of the terms thereof and any verbal agreement which tends to vary, alter or modify the same is not admissible.[11] Here, the terms of the subject promissory note and the deed of chattel mortgage are clear and explicit and devoid of any conditionality upon which its validity depends. To be sure, Allied Bank was not a party to SEC Case No. 2042 where the management committee was ordered created; hence, it would not be correct to presume that it had notice of the existence of the management committee which, incidentally, was still to be created when the subject promissory note was executed on 12 August 1981. Notably, while the parties in SEC Case No. 2042 agreed to form the management committee on 27 July 1981, it was only on 14 August 1981 when the committee was actually created and its members appointed. Clearly then, the subject promissory note was outside the realm of authority of the management committee. Corollarily, the chattel mortgage accessory to it is likewise valid. We thus declare and so hold that Allied Bank‟s foreclosure of the chattel mortgage constituted over the vessel “Jean III” was justified. On this score, we also rule that the loss of the mortgaged chattel brought about by its sinking must be borne not by Allied Bank but by the spouses Cheng. As owners of the fishing vessel, it was incumbent upon the spouses to insure it against loss. Thus, when the vessel sank before the chattel mortgage could be foreclosed, uninsured as it is, its loss must be borne by the spouses Cheng. We proceed to the third issue. Both the trial court and the appellate court are unanimous in finding that the real estate mortgage executed by the spouses Cheng over their San Juan property to secure the loan of GCPI cannot be held to secure the spouses‟ obligation as co-makers of the promissory note dated 12 August 1981. We see no reason to depart from the findings of the two courts below. Article 2126 of the Civil Code is explicit: ART. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. The agreement between the Cheng spouses and Allied Bank as evidenced by the receipt signed by Allied Bank‟s representative is that the San Juan property shall collateralize the approved loan of GCPI, thus indicating the specific loan to be secured and nothing else. To be sure, the obligation of GCPI was already paid in full. Hence the real estate mortgage accessory to it was inevitably extinguished. All told, we find no reversible error committed by the appellate court in rendering the assailed 11 December 2001 Decision and subsequent 01 July 2002 Resolution in CA-G.R. CV 41280. WHEREFORE, the consolidated petitions are DENIED and the challenged decision and resolution of the Court of Appeals AFFIRMEDin toto. SO ORDERED.

G.R. No. L-22738

December 2, 1924

ONG GUAN CAN and THE BANK OF THE PHILIPPINE ISLANDS, plaintiffs-appellees, vs. THE CENTURY INSURANCE CO., LTD., defendant-appellant.

Eiguren & Razon for appellant. Aurelio Montinola and Jose M. Hontiverso for appellees.

VILLAMOR, J.: On April 19, 1924, the Court of First Instance of Iloilo rendered a judgment in favor of the plaintiff, sentencing the defendant company to pay him the sum of P45,000, the value of certain policies of fire insurance, with legal interest thereon from February 28, 1923, until payment, with the costs. The defendant company appealed from this judgment, and now insists that the same must be modified and that it must be permitted to rebuild the house burnt, subject to the alignment of the street where the building was erected, and that the appellant be relieved from the payment of the sum in which said building was insured. A building of the plaintiff was insured against fire by the defendant in the sum of P30,000, as well as the goods and merchandise therein contained in the sum of P15,000. The house and merchandise insured were burnt early in the morning of February 28, 1923, while the policies issued by the defendant in favor of the plaintiff were in force. The appellant contends that under clause 14 of the conditions of the policies, it may rebuild the house burnt, and although the house may be smaller, yet it would be sufficient indemnity to the insured for the actual loss suffered by him. The clause cites by the appellant is as follows:lawphi1.net The Company may at its option reinstate or replace the property damaged or destroyed, or any part thereof, instead of paying the amount of the loss of damages, or may join with any other Company or insurers in so doing, but the Company shall not be bound to reinstate exactly or completely, but only as circumstances permit and in reasonable sufficient manner, and in no case shall the Company be bound to expend more in reinstatement that it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage, nor more than the sum insured by the Company thereon. If this clause of the policies is valid, its effect is to make the obligation of the insurance company an alternative one, that is to say, that it may either pay the insured value of house, or rebuild it. It must be noted that in alternative obligations, the debtor, the insurance company in this case, must notify the creditor of his election, stating which of the two prestations he is disposed to fulfill, in accordance with article 1133 of the Civil Code. The object of this notice is to give the creditor, that is, the plaintiff in the instant case, opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court. In the instance case, the record shows that the appellant company did not give a formal notice of its election to rebuild, and while the witnesses, Cedrun and Cacho,

speak of the proposed reconstruction of the house destroyed, yet the plaintiff did not give his assent to the proposition, for the reason that the new house would be smaller and of materials of lower kind than those employed in the construction of the house destroyed. Upon this point the trial judge very aptly says in his decision: "It would be an imposition unequitable, as well as unjust, to compel the plaintiff to accept the rebuilding of a smaller house than the one burnt, with a lower kind of materials than those of said house, without offering him an additional indemnity for the difference in size between the two house, which circumstances were taken into account when the insurance applied for by the plaintiff was accepted by the defendant." And we may add: Without tendering either the insured value of the merchandise contained in the house destroyed, which amounts to the sum of P15,000.itc@alf We find in the record nothing to justify the reversal of the finding of the trial judge, holding that the election alleged by the appellant to rebuild the house burnt instead of paying the value of the insurance is improper. To our mind, the judgment appealed from is in accordance with the merits of the case and the law, and must be, as is hereby, affirmed with the cost against the appellant. So ordered.