BONIFACIO BROS., INC., ET AL., PLAINTIFFS-APPELLANTS, VS. ENRIQUE MORA, ET AL., DEFENDANTS-APPELLEES.

Bonifacio Brothers versus Mora

The Case

This is a civil case about who is entitled to the proceeds of a motor car insurance policy after the insured vehicle figured in an accident. Bonifacio Brothers, Incorporated and Ayala Auto Parts Company, a repair shop and a supplier of materials, sued Enrique Mora and the State Bonding and Insurance Company to collect the cost of repairs and parts. The H.S. Reyes, Incorporated, the mortgagee named as beneficiary in the policy, was brought in to interplead. The case matters because it is the classic Philippine ruling on stipulation pour autrui, a provision in favor of a third person not a party to the contract, and on the principle that a policy of insurance is a distinct and independent contract that third persons cannot ordinarily reach.

Procedural History

The Bonifacio Brothers, Incorporated and the Ayala Auto Parts Company filed a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding and Insurance Company for the collection of the sum of 2,002.73 pesos. The insurance company answered with a counterclaim for interpleader, requiring the Bonifacio Brothers, Incorporated and the H.S. Reyes, Incorporated to interplead to determine who had the better right to the proceeds. Enrique Mora was declared in default, and evidence against him was received ex parte. On a stipulation of facts, the Municipal Court rendered judgment declaring the H.S. Reyes, Incorporated as having a better right to the disputed amount and ordering the insurance company to pay it that sum. The appellants elevated the case to the Court of First Instance of Manila, which affirmed the Municipal Court. Their motion for reconsideration was denied, and the case went up to the Supreme Court on appeal.

Facts

Enrique Mora owned an Oldsmobile sedan, model 1956. He mortgaged it to the H.S. Reyes, Incorporated, on the condition that he would insure the automobile with the latter as beneficiary. The automobile was thereafter insured with the State Bonding and Insurance Company, and a motor car insurance policy was issued. The policy contained a clause stating that loss, if any, was payable to the H.S. Reyes, Incorporated as mortgagee.

During the effectivity of the insurance contract, the car met with an accident. The insurance company assigned the accident to the H.H. Bayne Adjustment Company for investigation and appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Incorporated, authorized the Bonifacio Brothers, Incorporated to furnish the labor and materials, some of which were supplied by the Ayala Auto Parts Company. Enrique Mora was billed 2,102.73 pesos through the adjustment company. The insurance company, after claiming a franchise of 100 pesos, drew a check for 2,002.73 pesos as proceeds of the policy, payable to the order of Enrique Mora or H.S. Reyes, Incorporated, and entrusted it to the adjustment company for delivery to the proper party.

In the meantime, the car was delivered to Enrique Mora without the consent of the H.S. Reyes, Incorporated and without payment to the Bonifacio Brothers, Incorporated and the Ayala Auto Parts Company of the cost of repairs and materials. On the theory that the insurance proceeds should be paid directly to them, the repair shop and the supplier filed the complaint.

Issues

• Whether or not there is privity of contract between the Bonifacio Brothers, Incorporated and the Ayala Auto Parts Company on the one hand and the insurance company on the other, such that the former may recover the insurance proceeds directly from the insurer.
• Whether or not the insurance contract contains a stipulation pour autrui, a provision clearly and deliberately conferring a favor upon the repairmen and materialmen.
• Whether or not the right of the H.S. Reyes, Incorporated to the insurance proceeds arises only upon loss and not upon mere damage.

Applicable Provisions

Article 1311 of the Civil Code of the Philippines provides:

Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.

This is the general rule of relativity of contracts on which the Court rests its holding that the appellants, who are not parties to the insurance contract, cannot sue upon it.

Section 50 of the Insurance Act provides:

The insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the policy.

This provision confirms that the proceeds must be applied to the interest of the person in whose name the insurance was made, as specified in the policy.

Section 120 of the Insurance Act, as discussed by the Court, provides that a loss may be either total or partial. The Court uses this to reject the distinction between loss and damage.

Ruling

On the first issue, the Court held that there is no privity of contract between the appellants and the insurance company. The appellants' alleged cause of action rests exclusively upon the terms of the insurance contract, and they are not mentioned in the contract as parties thereto. The Court laid down the rule that contracts take effect only between the parties thereto, except in specific instances provided by law where the contract contains a stipulation in favor of a third person. That stipulation is known as stipulation pour autrui. Under this doctrine, a third person may avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon him. A third person not a party to the contract has no action against the parties thereto and cannot generally demand its enforcement.

On the second issue, the Court held that the insurance contract contains no stipulation pour autrui in favor of the appellants. The fairest test is the intention of the parties as disclosed by their contract. The insurance contract contains no words or clauses disclosing an intent to benefit any repairmen or materialmen. The loss payable clause stipulates that loss, if any, is payable to the H.S. Reyes, Incorporated, indicating that it was only that entity which the parties intended to benefit. The Court also noted that the insurer vehemently opposed the claim of privity, and that if it had intended to make itself liable to the repair shop or materialmen, it could have easily inserted a stipulation to that effect. Paragraph 4 of the policy, invoked by the appellants, merely establishes the procedure the insured must follow to be entitled to indemnity for repair, and does not create a right of action in favor of the appellants.

The Court further held that a policy of insurance is a distinct and independent contract between the insured and the insurer, and third persons have no right in a court of equity or in a court of law to the proceeds of it, unless there be some contract of trust, expressed or implied, by the insured and the third person. No such contract of trust exists here. The appellants' claim, if at all, is merely equitable in nature and must be made effective through Enrique Mora, who entered into a contract with the Bonifacio Brothers, Incorporated.

On the third issue, the Court held that any attempt to draw a distinction between loss and damage is uncalled for, because the word loss in insurance law embraces injury or damage. A loss may be either total or partial.

Doctrine

A contract binds only the parties to it, their assigns and heirs, save in specific instances provided by law. One such instance is the stipulation pour autrui, a provision in favor of a third person not a party to the contract. For a third person to enforce such a stipulation, the contracting parties must have clearly and deliberately conferred a favor upon him. The fairest test is the intention of the parties as disclosed by the contract. A mere incidental interest does not suffice. A policy of insurance is a distinct and independent contract between the insured and the insurer, and third persons have no right to its proceeds unless there is a contract of trust, expressed or implied. Under Section 50 of the Insurance Act, the insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the policy. In insurance law, loss embraces injury or damage, and a loss may be total or partial.

Disposition

The Supreme Court affirmed the judgment appealed from, at the appellants' cost, holding that the H.S. Reyes, Incorporated has the better right to the insurance proceeds of 2,002.73 pesos.

Remember This

The single line worth memorizing is that a stipulation pour autrui must be clearly and deliberately conferred by the contracting parties, and the fairest test is their intention as disclosed by the contract. Examiners like to use this case to test the requisites of stipulation pour autrui, the relativity of contracts under Article 1311, and the rule that third persons cannot reach insurance proceeds absent a contract of trust.