G.R. No. 132607 - Cebu Shipyard and Engineering Works, Inc. vs. William Lines, Inc.

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in dry-docking and repair of marine vessels.
William Lines, Inc. (WLI) is engaged in shipping and owner of M/V Manila City, a luxury passenger-cargo vessel.
Prudential Guarantee and Assurance Company, Inc. (Prudential) is a domestic non-life insurance company.

On February 16, 1991, M/V Manila City caught fire and sank while docked at CSEW’s facilities during annual dry-docking and repair.
The vessel was insured with Prudential for P45 million covering hull and machinery, including an “Additional Perils (INCHMAREE)” clause covering losses due to negligence of repairers who were not assured under the policy.
CSEW was also insured by Prudential under a Shiprepairer's Legal Liability Insurance Policy with a P10 million limit for third-party liability in any one accident.

On February 6, 1991, WLI and CSEW held an arrival conference and executed Work Orders stipulating:

Contractor’s obligation to replace defective work or pay cost of replacement within one month after vessel redelivery.
Liability limited to negligence and capped at P1 million per defect or event, excluding loss of profit or consequential damages.
Insurance on the vessel to be maintained by the customer/owner during contract period.

During dry-docking, WLI's master, officers, and crew stayed aboard; WLI also hired employees for repairs and maintenance.

On February 16, 1991, after transferring M/V Manila City to docking quay, a fire broke out causing the vessel to sink.
WLI filed a complaint for damages against CSEW alleging negligence caused the fire.
Prudential was impleaded as co-plaintiff after paying WLI the insurance proceeds and became subrogated to WLI’s claim.
Trial court rendered judgment ordering CSEW to pay Prudential P45 million (insurance payout) and WLI various damages totaling more than P70 million, including moral damages and attorney’s fees.
CSEW appealed; during the pendency, WLI and CSEW settled amicably and moved for partial dismissal, granted by the Court of Appeals (CA) July 31, 1996.
On September 3, 1997, the CA affirmed the trial court ruling in favor of Prudential for P45 million plus legal interest.

CSEW argued it did not have management or supervisory control of the vessel when the fire broke out.
The doctrine of res ipsa loquitur was improperly applied.
The finding of negligence was not supported by evidence.
The Court of Appeals erred in disregarding petitioner’s expert testimonies on the fire’s origin.
Prudential had no right of subrogation against CSEW as it was a co-assured and the fire was an excluded risk.
Liability is contractually limited to P1 million under the Work Order and the limitation should be upheld.

Petitioner’s account: JNB General Services subcontracted for replating Tank Top No. 12 on vessel’s rear second deck; minor hotworks (welding/cutting) were done in morning of February 16, paused for lunch, then resumed.
Smoke was seen along crew cabins’ passageway; fire alarm was sounded; fire brigade and local fire units responded but fire was controlled only early next day.
Vessel capsized and sank after rekindling of fire and pumping of water.
No WLI representatives were present to guide firemen during firefighting.
Prudential’s account: fire started from area near air-conditioning unit’s burning wire during welding; Chief Mate observed sparks causing fire; crew fought fire but abandoned ship when fire persisted.
Prudential found WLI’s insurance claim meritorious after investigation and paid the full insurance amount.

Whether CSEW had management and supervisory control over M/V Manila City at the time of the fire.
Whether the doctrine of res ipsa loquitur properly applies to the circumstances of the fire causing the loss of the vessel.
Whether the finding of negligence against CSEW is supported by evidence.
Whether the Court of Appeals erred in disregarding petitioner’s expert testimonies on the fire’s probable cause and origin.
Whether Prudential has the right of subrogation against CSEW, its insured or co-assured.
Whether the contractual limitation of liability of CSEW to P1 million is binding and valid in this case.