G.R. No.

124050 June 19, 1997

MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT SUPPLIES

DEPARTMENT, petitioners,
vs.
COURT OF APPEALS, SOUTH SEA SURETY AND INSURANCE CO., INC. and the CHARTER
INSURANCE CORPORATION, respondents.

PUNO, J.:

This is a petition for review on certiorari to annul and set aside the Decision of respondent Court of
Appeals dated December 14, 1995 and its Resolution dated February 22, 1996 in CA-G.R. CV No.
1 2

45805 entitled Mayer Steel Pipe Corporation and Hongkong Government Supplies Department
v. South Sea Surety Insurance Co., Inc. and The Charter Insurance Corporation. 3

In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted petitioner

Mayer Steel Pipe Corporation (Mayer) to manufacture and supply various steel pipes and fittings.
From August to October, 1983, Mayer shipped the pipes and fittings to Hongkong as evidenced by
Invoice Nos. MSPC-1014, MSPC-1015, MSPC-1025, MSPC-1020, MSPC-1017 and MSPC-1022. 4

Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private
respondents South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp.
(Charter). The pipes and fittings covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a total
amount of US$212,772.09 were insured with respondent South Sea, while those covered by Invoice
Nos. 1020, 1017 and 1022 with a total amount of US$149,470.00 were insured with respondent
Charter.

Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as third-
party inspector to examine whether the pipes and fittings are manufactured in accordance with the
specifications in the contract. Industrial Inspection certified all the pipes and fittings to be in good
order condition before they were loaded in the vessel. Nonetheless, when the goods reached
Hongkong, it was discovered that a substantial portion thereof was damaged.

Petitioners filed a claim against private respondents for indemnity under the insurance contract.
Respondent Charter paid petitioner Hongkong the amount of HK$64,904.75. Petitioners demanded
payment of the balance of HK$299,345.30 representing the cost of repair of the damaged pipes.
Private respondents refused to pay because the insurance surveyor's report allegedly showed that
the damage is a factory defect.

On April 17, 1986, petitioners filed an action against private respondents to recover the sum of
HK$299,345.30. For their defense, private respondents averred that they have no obligation to pay
the amount claimed by petitioners because the damage to the goods is due to factory defects which
are not covered by the insurance policies.

The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to
manufacturing defects. It also noted that the insurance contracts executed by petitioner Mayer and
private respondents are "all risks" policies which insure against all causes of conceivable loss or
damage. The only exceptions are those excluded in the policy, or those sustained due to fraud or
intentional misconduct on the part of the insured. The dispositive portion of the decision states:
 WHEREFORE, judgment is hereby rendered ordering the defendants jointly and
severally, to pay the plaintiffs the following:

1. the sum equivalent in Philippine currency of HK$299,345.30, with legal rate of

interest as of the filing of the complaint;

2. P100,000.00 as and for attorney's fees; and

3. costs of suit.

SO ORDERED. 5

Private respondents elevated the case to respondent Court of Appeals.

Respondent court affirmed the finding of the trial court that the damage is not due to factory defect
and that it was covered by the "all risks" insurance policies issued by private respondents to
petitioner Mayer. However, it set aside the decision of the trial court and dismissed the complaint on
the ground of prescription. It held that the action is barred under Section 3(6) of the Carriage of
Goods by Sea Act since it was filed only on April 17, 1986, more than two years from the time the
goods were unloaded from the vessel. Section 3(6) of the Carriage of Goods by Sea Act provides
that "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 delivery of the goods or the date when the goods should have
been delivered." Respondent court ruled that this provision applies not only to the carrier but also to
the insurer, citing Filipino Merchants Insurance Co., Inc. v. Alejandro. 6

Hence this petition with the following assignments of error:

1. The respondent Court of Appeals erred in holding that petitioners' cause of action
had already prescribed on the mistaken application of the Carriage of Goods by Sea
Act and the doctrine of Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and

2. The respondent Court of Appeals committed an error in dismissing the complaint. 7

The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the Carriage
of Goods by Sea Act.

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be
discharged from all liability for loss or damage to the goods if no suit is filed within one year after
delivery of the goods or the date when they should have been delivered. Under this provision, only
the carrier's liability is extinguished if no suit is brought within one year. But the liability of the insurer
is not extinguished because the insurer's liability is based not on the contract of carriage but on the
contract of insurance. A close reading of the law reveals that the Carriage of Goods by Sea Act
governs the relationship between the carrier on the one hand and the shipper, the consignee and/or
the insurer on the other hand. It defines the obligations of the carrier under the contract of carriage. It
does not, however, affect the relationship between the shipper and the insurer. The latter case is
governed by the Insurance Code.

Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro and the other cases cited therein
8 9

does not support respondent court's view that the insurer's liability prescribes after one year if no
action for indemnity is filed against the carrier or the insurer. In that case, the shipper filed a
complaint against the insurer for recovery of a sum of money as indemnity for the loss and damage
sustained by the insured goods. The insurer, in turn, filed a third-party complaint against the carrier
for reimbursement of the amount it paid to the shipper. The insurer filed the third-party complaint on
January 9, 1978, more than one year after delivery of the goods on December 17, 1977. The court
held that the insurer was already barred from filing a claim against the carrier because under the
Carriage of Goods by Sea Act, the suit against the carrier must be filed within one year after delivery
of the goods or the date when the goods should have been delivered. The court said that "the
coverage of the Act includes the insurer of the goods." 10

The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the insurer
which filed a claim against the carrier for reimbursement of the amount it paid to the shipper. In the
case at bar, it was the shipper which filed a claim against the insurer. The basis of the shipper's
claim is the "all risks" insurance policies issued by private respondents to petitioner Mayer.

The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the
shipper, the consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of
the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the shipper,
may no longer file a claim against the carrier beyond the one-year period provided in the law. But it
does not mean that the shipper may no longer file a claim against the insurer because the basis of
the insurer's liability is the insurance contract. An insurance contract is a contract whereby one party,
for a consideration known as the premium, agrees to indemnify another for loss or damage which he
may suffer from a specified peril. An "all risks" insurance policy covers all kinds of loss other than
11

those due to willful and fraudulent act of the insured. Thus, when private respondents issued the
12

"all risks" policies to petitioner Mayer, they bound themselves to indemnify the latter in case of loss
or damage to the goods insured. Such obligation prescribes in ten years, in accordance with Article
1144 of the New Civil Code. 13

IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals dated
December 14, 1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE and the
Decision of the Regional Trial Court is hereby REINSTATED. No costs.

SO ORDERED.
FACTS:

 1983: Hongkong Government Supplies Department (Hongkong) contracted Mayer

Steel Pipe Corporation (Mayer) to manufacture and supply various steel pipes and
fittings
 August to October, 1983: Mayer shipped the pipes and fittings to Hongkong as
evidenced by Invoice Nos. MSPC-1014, MSPC-1015, MSPC-1025, MSPC-1020,
MSPC-1017 and MSPC-1022
 Prior to the shipping, Mayer insured the pipes and fittings against all risks with
South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp.
(Charter)
 South Sea:Invoice Nos. MSPC-1014, 1015 and 1025 for US$212,772.09
 Charter: Invoice Nos. 1020, 1017 and 1022 for US$149,470.00
 Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as
third-party inspector to examine whether the pipes and fittings are manufactured in
accordance with the specifications in the contract
 Industrial Inspection certified all the pipes and fittings to be in good order condition
before they were loaded in the vessel
 When the goods reached Hongkong, it was discovered that a substantial portion
thereof was damaged
 Mayer and Hongkong a claim against private respondents for indemnity under the
insurance contract
 Charter paid petitioner Hongkong the amount of HK$64,904.75
 demanded payment of the balance of HK$299,345.30 which was refused
 April 17, 1986: filed an action to recover HK$299,345.30
 Defense: insurance surveyor's report allegedly showed that the damage is a factory
defect
 Trial Court: in favor of Mayer and Hongkong
 CA: reversed
 affirmed the finding of the trial court that the damage is not due to factory defect
and that it was covered by the "all risks" insurance policies
 BUT held that Section 3(6) of the Carriage of Goods by Sea Act provides that "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 delivery of the goods or the date when
the goods should have been delivered
 applies not only to the carrier but also to the insurer
ISSUE: W/N Section 3(6) of the Carriage of Goods by Sea also applies to insurer

HELD: NO. Petition is granted. CA reversed. RTC reinstated

 Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship
shall be discharged from all liability for loss or damage to the goods if no suit is filed
within one year after delivery of the goods or the date when they should have been
delivered. Under this provision, only the carrier's liability is extinguished if no suit is
brought within one year. But the liability of the insurer is not extinguished because
the insurer's liability is based not on the contract of carriage but on the contract of
insurance - governed by the Insurance Code
 An insurance contract is a contract whereby one party, for a consideration known as
the premium, agrees to indemnify another for loss or damage which he may suffer
from a specified peril
 "all risks" insurance policy covers all kinds of loss other than those due to willful and
fraudulent act of the insured
 prescribes in ten years, in accordance with Article 1144 of the New Civil Code
Summary:
In 1983, Hongkong Government Supplies Department (Hongkong) contracted
Mayer Steel Pipe Corp (Mayer) to manufacture and supply steel pipes and
fittings. Prior to their shipping, Mayer insured the pipes and fittings against all
risks with South Sea Surety & Insurance Co Inc (South Sea) and Charter
Insurance Corp (Charter). On arrival, the goods were found to be damaged.

The regional trial Court (RTC) ruled in favour of Hongkong and Mayer. It found
that the damage to the goods was not due to manufacturing defects. It also
noted that the relevant insurance contracts were all risks policies, which insure
against all causes of conceivable loss or damage. The only exceptions were
those excluded in the policy, or those sustained due to fraud or intentional
misconduct on the part of the insured. South Sea and Charter appealed to the
Court of Appeals (CA).

The CA affirmed the finding of the RTC that the damage was not due to a factory
defect, and that it was covered by the policies issued by South Sea and Charter
to Mayer. However, it set aside the decision of the RTC and dismissed the
complaint on the ground of prescription. It held that the action was barred under
s 3(6) of the Carriage of Goods by Sea Act (COGSA) since it was filed only on 17
April 1986, more than two years from the time the goods were unloaded from the
vessel. Section 3(6) of COGSA provides that '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 delivery of the goods or the date when the goods should
have been delivered'. The CA ruled that this provision applies not only to the
carrier, but also to the insurer, citing Filipino Merchants Insurance Co Inc v
Alejandro 145 SCRA 42 (1986). Mayer and Hongkong appealed to the Supreme
Court.

Held: The petition is granted. The CA judgment is set aside and the judgment of
the RTC is reinstated.

Section 3(6) of COGSA states that the carrier and the ship shall be discharged
from all liability for loss or damage to the goods if no suit is filed within one year
after delivery of the goods or the date when they should have been delivered.
Under this provision, only the carrier's liability is extinguished if no suit is
brought within one year. But the liability of the insurer is not extinguished,
because the insurer's liability is based not on the contract of carriage, but on the
contract of insurance. A close reading of the law reveals that COGSA governs
the relationship between the carrier on the one hand, and the shipper, the
consignee and/or the insurer on the other hand. It defines the obligations of the
carrier under the contract of carriage. It does not, however, affect the
relationship between the shipper and the insurer. The latter case is governed by
the Insurance Code.

The Court's ruling in Filipino Merchants and the other cases cited therein do
not support the CA's view that the insurer's liability prescribes after one year if
no action for indemnity is filed against the carrier or the insurer. In that case, the
shipper filed a complaint against the insurer for recovery of a sum of money as
indemnity for the loss and damage sustained by the insured goods. The insurer,
in turn, filed a third-party complaint against the carrier for reimbursement of the
amount it paid to the shipper. The insurer filed the third-party complaint on 9
January 1978, more than one year after delivery of the goods on 17 December
1977. This Court held that the insurer was already barred from filing a claim
against the carrier because under COGSA, the suit against the carrier must be
filed within one year after delivery of the goods or the date when the goods
should have been delivered. The Court said that 'the coverage of the Act
includes the insurer of the goods'.

The Filipino Merchants case differs from this case. In Filipino Merchants, it
was the insurer which filed a claim against the carrier for reimbursement of the
amount it paid to the shipper. Here, it was the shipper which filed a claim
against the insurer. The basis of the shipper's claim is the all risks insurance
policies issued by South Sea and Charter to Mayer. The ruling in Filipino
Merchants should apply only to suits against the carrier filed either by the
shipper, the consignee or the insurer. When this Court said in Filipino
Merchants that s 3(6) of COGSA applies to the insurer, it meant that the insurer,
like the shipper, may no longer file a claim against the carrier beyond the one-
year period provided in the law. But it does not mean that the shipper may no
longer file a claim against the insurer, because the basis of the insurer's liability
is the insurance contract. An insurance contract is a contract whereby one
party, for a consideration known as the premium, agrees to indemnify another for
loss or damage which it may suffer from a specified peril. Such obligation
prescribes in 10 years, in accordance with art 1144 of the New Civil Code.