**Facts:** On January 26, 2000, Keppel Cebu Shipyard, Inc. (KCSI) and WG&A Jebsens Shipmanagement, Inc. (WG&A) entered a Shiprepair Agreement for the renovation and reconstruction of M/V “Superferry 3”, with stringent safety and security provisions outlined by KCSI. Prior to this contract, “Superferry 3” was insured by WG&A with Pioneer Insurance for US$8,472,581.78. Following a fire incident on February 8, 2000, which caused substantial damage to the vessel, WG&A claimed a total constructive loss and was compensated by Pioneer Insurance based on their insurance agreement. Unable to directly recover losses from KCSI, Pioneer Insurance, having been subrogated the rights of WG&A, sought compensation from KCSI through arbitration before the Construction Industry Arbitration Commission (CIAC), claiming negligence on KCSI’s part for the fire outbreak.
**Procedural Posture:** After CIAC rendered a decision finding both parties negligent and limiting KCSI’s liability, both Pioneer Insurance and KCSI filed separate appeals in the Court of Appeals (CA). The CA initially dismissed Pioneer’s petition but later, upon reconsideration, partially granted it—holding KCSI equally negligent and liable to pay Pioneer P25 Million, without interest. Subsequently, both parties sought review from the Supreme Court, raising issues around negligence, subrogation, liability limits, and arbitration costs.
**Issues:**
1. Whose negligence contributed to the fire outbreak on M/V “Superferry 3”?
2. Is Pioneer Insurance properly subrogated to the rights of WG&A against KCSI?
3. Should the liability of KCSI be limited to P50,000,000.00 as stipulated in the Shiprepair Agreement?
4. Should interest be imposed on the award of damages, and if so, at what rate?
5. Who bears the cost of arbitration?
**Court’s Decision:** The Supreme Court held KCSI accountable for negligence, finding that the immediate cause of the fire was the hot work done by KCSI’s employee under unsafe conditions. Subrogation of Pioneer Insurance to WG&A’s rights was upheld, enabling Pioneer to recover the damages from KCSI. The limitation of liability clause (P50,000,000.00) in the contract was declared void for being contrary to public policy and iniquitous. The Court modified the CA’s decision, ordering KCSI to pay the insurance claim amount less the salvage value recovered by Pioneer, with interest at 6% per annum from the filing of the Request for Arbitration until becoming final and executory, then 12% per annum until full payment. Arbitration costs were to be shared pro rata by both parties.
**Doctrine:** The decision reinforced doctrines on the negligence of the custodian party in cases of property under repair, subrogation rights of the insurer, ineffectiveness of unfair contract terms limiting liability for negligence, and the criteria for imposing and calculating legal interest and arbitration costs.
**Class Notes:**
1. **Negligence:** The custodian of a property (e.g., a ship in dry dock) is expected to exercise due diligence and care to prevent harm to the property. Failure to supervise or take necessary precautions can result in negligence.
2. **Subrogation:** An insurer that pays out an insurance claim becomes subrogated to the rights of the insured to recover the amount paid from any third party responsible for the damage.
3. **Inequitable Contract Terms:** Clauses that limit liability in a contract of adhesion, especially when they exempt a party from the consequences of its own negligence, may be considered void for being contrary to public policy.
4. **Interest on Damages:** Interest can be imposed on damages awarded for breach or wrongful acts, starting from the time a claim is made until full payment. The legal rates are 6% (pre-judgment) and 12% (post-judgment) per annum.
5. **Arbitration Costs:** In adjudicating arbitration fees, courts may order costs to be shared when both parties share responsibility in the dispute’s materialization.
**Historical Background:** This case is a prime example of the legal complexities surrounding ship repair contracts, insurance subrogation rights, and the limits of liability clauses in the Philippines. It highlights the judiciary’s role in balancing contractual freedoms with protections against unfair practices and negligence.
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