INSURABLE INTEREST (FULL TEXT)

G.R. No. 124520 August 18, 1997

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners,
vs.
COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.
PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a
decision of respondent Court of Appeals.
The undisputed facts of the case are as follows:
1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract
with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October
1988.
2. One of the stipulations of the one (1) year lease contract states:
18. . . . The LESSEE shall not insure against fire the chattels, mechandise, textiles, goods
and effects placed at any stall or store or space in the leased premises without first obtaining the
written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof
without the consent of the LESSOR then the policy is deemed assigned and transferred to the
LESSOR for its own benefit; . . .1
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured
against loss by fire the merchandise inside the leased premises for Five Hundred Thousand
(P500,000.00) with the United Insurance Co., Inc. (hereinafter United) without the written consent
of private respondent CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the insurance
contract (between the Cha spouses and United) be paid directly to CKS, based on its lease
contract with the Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses
and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering
therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to
pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit.
8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision **
dated 11 January 1996, affirming the trial court decision, deleting however the awards for
exemplary damages and attorney's fees. A motion for reconsideration by United was denied on
29 March 1996.
INSURABLE INTEREST (FULL TEXT)

In the present petition, the following errors are assigned by petitioners to the Court of Appeals:
I
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE
STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLIC
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT
OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE
QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF THE
RESPONDENT CORPORATION.2
The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the
lease contract entered into between CKS and the Cha spouses is valid insofar as it provides that
any fire insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the
leased premises is deemed assigned or transferred to the lessor (CKS) if said policy is obtained
without he prior written consent of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot
be contrary to law, morals, good customs, public order or public policy.3
Sec. 18 of the Insurance Code provides:
Sec. 18. No contract or policy of insurance on property shall be enforceable except for the
benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must
exist at the time the insurance takes effect and at the time the loss occurs.4 The basis of such
requirement of insurable interest in property insured is based on sound public policy: to prevent
a person from taking out an insurance policy on property upon which he has no insurable interest
and collecting the proceeds of said policy in case of loss of the property. In such a case, the
contract of insurance is a mere wager which is void under Section 25 of the Insurance Code,
which provides:
INSURABLE INTEREST (FULL TEXT)

Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the
person insured has or has not any interest in the property insured, or that the policy shall be
received as proof of such interest, and every policy executed by way of gaming or wagering, is
void.
In the present case, it cannot be denied that CKS has no insurable interest in the goods and
merchandise inside the leased premises under the provisions of Section 17 of the Insurance Code
which provide:
Sec. 17. The measure of an insurable interest in property is the extent to which the insured
might be damnified by loss of injury thereof.
Therefore, respondent CKS cannot, under the Insurance Code — a special law — be validly a
beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise.
This insurable interest over said merchandise remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance
policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners).
The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses
obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a
separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and
a new decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners
Nilo Cha and Stella Uy-Cha.
SO ORDERED.
INSURABLE INTEREST (FULL TEXT)

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of
the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August
31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and
upheld the causes of action for damages of Insurance Company of North America (respondent)
against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which
denied petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss
& Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt
endorsements. The insurance policies provide for coverage on "book debts in connection with
ready-made clothing materials which have been sold or delivered to various customers and
dealers of the Insured anywhere in the Philippines."2 The policies defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the
loss covered under this Policy."3 The policies also provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the
merchandise sold and delivered by the Insured which are outstanding at the date of loss for a
period in excess of six (6) months from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close
of every calendar month all amount shown in their books of accounts as unpaid and thus become
receivable item from their customers and dealers. x x x4
INSURABLE INTEREST (FULL TEXT)

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the
Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by
fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials
sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that
IMC and LSPI filed with respondent their claims under their respective fire insurance policies with
book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the
sale and delivery of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI
it was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof,
respondent was subrogated to their rights against petitioner; that respondent made several
demands for payment upon petitioner but these went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held
liable because the property covered by the insurance policies were destroyed due to fortuities
event or force majeure; that respondent's right of subrogation has no basis inasmuch as there
was no breach of contract committed by it since the loss was due to fire which it could not prevent
or foresee; that IMC and LSPI never communicated to it that they insured their properties; that it
never consented to paying the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on
the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held
that the fire was purely accidental; that the cause of the fire was not attributable to the negligence
of the petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI;
that since the sales invoices state that "it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the property of the vendor
until the purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods
and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision
setting aside the decision of the RTC. The dispositive portion of the decision reads:
INSURABLE INTEREST (FULL TEXT)

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE
and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the
insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully
paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the
insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature,
quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner
since the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil
Code, to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the
owner of the thing at the time the loss under the principle of res perit domino; that petitioner's
obligation to IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid
account and as such the obligation to pay is not extinguished, even if the fire is considered a
fortuitous event; that by subrogation, the insurer has the right to go against petitioner; that, being
a fire insurance with book debt endorsements, what was insured was the vendor's interest as a
creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated
April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.
INSURABLE INTEREST (FULL TEXT)

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed
to be over credit since an insurance "on credit" belies not only the nature of fire insurance but the
express terms of the policies; that it was not credit that was insured since respondent paid on the
occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner
of any obligation; that, even if the insurance is deemed as one over credit, there was no loss as
the accounts were not yet due since no prior demands were made by IMC and LSPI against
petitioner for payment of the debt and such demands came from respondent only after it had
already paid IMC and LSPI under the fire insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC
and LSPI assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent
as no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred
to petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or
the payment between respondent and its insured nor was its consent or approval ever secured;
that this lack of privity forecloses any real interest on the part of respondent in the obligation to
pay, limiting its interest to keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials
was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods
as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is
liable for loss of the ready-made clothing materials since it failed to overcome the presumption of
liability under Article 126516 of the Civil Code; that the fire was caused through petitioner's
negligence in failing to provide stringent measures of caution, care and maintenance on its
property because electric wires do not usually short circuit unless there are defects in their
installation or when there is lack of proper maintenance and supervision of the property; that
petitioner is guilty of gross and evident bad faith in refusing to pay respondent's valid claim and
should be liable to respondent for contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it
from the CA is limited to reviewing questions of law which involves no examination of the probative
value of the evidence presented by the litigants or any of them.18 The Supreme Court is not a
INSURABLE INTEREST (FULL TEXT)

trier of facts; it is not its function to analyze or weigh evidence all over again.19 Accordingly,
findings of fact of the appellate court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (1) when the findings are grounded entirely on speculation,
surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its
findings the CA went beyond the issues of the case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8)
when the findings are conclusions without citation of specific evidence on which they are based;
(9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are
not disputed by the respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the
present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the
CA erred in construing a fire insurance policy on book debts as one covering the unpaid accounts
of IMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold
and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no
room for construction.22 In this case, the questioned insurance policies provide coverage for
"book debts in connection with ready-made clothing materials which have been sold or delivered
to various customers and dealers of the Insured anywhere in the Philippines."23 ; and defined
book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days
after the time of the loss covered under this Policy."24 Nowhere is it provided in the questioned
insurance policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt
to read into it any alleged intention of the parties, the terms are to be understood literally just as
they appear on the face of the contract.25 Thus, what were insured against were the accounts of
IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not
the loss or destruction of the goods delivered.
INSURABLE INTEREST (FULL TEXT)

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of
securing the payment of the purchase price the above described merchandise remains the
property of the vendor until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller merely
to secure performance by the buyer of his obligations under the contract, the goods are at the
buyer's risk from the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of
loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until
full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino,
where ownership is the basis for consideration of who bears the risk of loss, in property insurance,
one's interest is not determined by concept of title, but whether insured has substantial economic
interest in the property.28

Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether
real or personal, or any relation thereto, or liability in respect thereof, of such nature that a
contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the
same Code, an insurable interest in property may consist in: (a) an existing interest; (b) an
inchoate interest founded on existing interest; or (c) an expectancy, coupled with an existing
interest in that out of which the expectancy arises.
INSURABLE INTEREST (FULL TEXT)

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a
lien upon, or possession of, the subject matter of the insurance, and neither the title nor a
beneficial interest is requisite to the existence of such an interest, it is sufficient that the insured
is so situated with reference to the property that he would be liable to loss should it be injured or
destroyed by the peril against which it is insured.29 Anyone has an insurable interest in property
who derives a benefit from its existence or would suffer loss from its destruction.30 Indeed, a
vendor or seller retains an insurable interest in the property sold so long as he has any interest
therein, in other words, so long as he would suffer by its destruction, as where he has a vendor's
lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts
appearing in their Books of Account 45 days after the time of the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432
of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of
the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but
for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the CA,
where the obligation consists in the payment of money, the failure of the debtor to make the
payment even by reason of a fortuitous event shall not relieve him of his liability.33 The rationale
for this is that the rule that an obligor should be held exempt from liability when the loss occurs
thru a fortuitous event only holds true when the obligation consists in the delivery of a determinate
thing and there is no stipulation holding him liable even in case of fortuitous event. It does not
apply when the obligation is pecuniary in nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same class, the loss or
destruction of anything of the same kind even without the debtor's fault and before he has incurred
in delay will not have the effect of extinguishing the obligation.35 This rule is based on the principle
that the genus of a thing can never perish. Genus nunquan perit.36 An obligation to pay money
is generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this
case. What is relevant here is whether it has been established that petitioner has outstanding
accounts with IMC and LSPI.
INSURABLE INTEREST (FULL TEXT)

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-
22"38 show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00.
Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation
receipt executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these
documents have been properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, 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.41
Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil Code
which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained
of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer
or the person who has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from
petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's
unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of
P535,613.00 in the fire that razed petitioner's building on February 25, 1991.
Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt
was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any
right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is
fatal to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000
and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are
AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.

No pronouncement as to costs.

SO ORDERED.
INSURABLE INTEREST (FULL TEXT)

G.R. No. 168115 June 8, 2007

VICENTE ONG LIM SING, JR., petitioner,

DECISION

NACHURA, J.:

This is a petition for review on certiorari assailing the Decision1 dated March 15, 2005 and the
Resolution2 dated May 23, 2005 of the Court of Appeals (CA) in CA-G.R. CV No. 77498.

The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease3 of
equipment and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong
Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement4 with FEB to guarantee the
prompt and faithful performance of the terms and conditions of the aforesaid lease agreement.
Corresponding Lease Schedules with Delivery and Acceptance Certificates5 over the equipment
and motor vehicles formed part of the agreement. Under the contract, JVL was obliged to pay
FEB an aggregate gross monthly rental of One Hundred Seventy Thousand Four Hundred Ninety-
Four Pesos (₱170,494.00).

JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears,
including penalty charges and insurance premiums, amounted to Three Million Four Hundred
Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (₱3,414,468.75). On August 23,
2000, FEB sent a letter to JVL demanding payment of the said amount. However, JVL failed to
pay.6

On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila, docketed
as Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and
John Doe.
INSURABLE INTEREST (FULL TEXT)

In the Amended Answer,8 JVL and Lim admitted the existence of the lease agreement but
asserted that it is in reality a sale of equipment on installment basis, with FEB acting as the
financier. JVL and Lim claimed that this intention was apparent from the fact that they were made
to believe that when full payment was effected, a Deed of Sale will be executed by FEB as vendor
in favor of JVL and Lim as vendees.9 FEB purportedly assured them that documenting the
transaction as a lease agreement is just an industry practice and that the proper documentation
would be effected as soon as full payment for every item was made. They also contended that
the lease agreement is a contract of adhesion and should, therefore, be construed against the
party who prepared it, i.e., FEB.

In upholding JVL and Lim’s stance, the trial court stressed the contradictory terms it found in the
lease agreement. The pertinent portions of the Decision dated November 22, 2002 read:

A profound scrutiny of the provisions of the contract which is a contract of adhesion at once
exposed the use of several contradictory terms. To name a few, in Section 9 of the said contract
– disclaiming warranty, it is stated that the lessor is not the manufacturer nor the latter’s agent
and therefore does not guarantee any feature or aspect of the object of the contract as to its
merchantability. Merchantability is a term applied in a contract of sale of goods where conditions
and warranties are made to apply. Article 1547 of the Civil Code provides that unless a contrary
intention appears an implied warranty on the part of the seller that he has the right to sell and to
pass ownership of the object is furnished by law together with an implied warranty that the thing
shall be free from hidden faults or defects or any charge or encumbrance not known to the buyer.

In an adhesion contract which is drafted and printed in advance and parties are not given a real
arms’ length opportunity to transact, the Courts treat this kind of contract strictly against their
architects for the reason that the party entering into this kind of contract has no choice but to
accept the terms and conditions found therein even if he is not in accord therewith and for that
matter may not have understood all the terms and stipulations prescribed thereat. Contracts of
this character are prepared unilaterally by the stronger party with the best legal talents at its
disposal. It is upon that thought that the Courts are called upon to analyze closely said contracts
so that the weaker party could be fully protected.

Another instance is when the alleged lessee was required to insure the thing against loss, damage
or destruction.

In property insurance against loss or other accidental causes, the assured must have an insurable
interest, 32 Corpus Juris 1059.

xxxx
INSURABLE INTEREST (FULL TEXT)

It has also been held that the test of insurable interest in property is whether the assured has a
right, title or interest therein that he will be benefited by its preservation and continued existence
or suffer a direct pecuniary loss from its destruction or injury by the peril insured against. If the
defendants were to be regarded as only a lessee, logically the lessor who asserts ownership will
be the one directly benefited or injured and therefore the lessee is not supposed to be the assured
as he has no insurable interest.

There is also an observation from the records that the actual value of each object of the contract
would be the result after computing the monthly rentals by multiplying the said rentals by the
number of months specified when the rentals ought to be paid.

Still another observation is the existence in the records of a Deed of Absolute Sale by and
between the same parties, plaintiff and defendants which was an exhibit of the defendant where
the plaintiff sold to the same defendants one unit 1995 Mitsubishi L-200 STRADA DC PICK UP
and in said Deed, The Court noticed that the same terms as in the alleged lease were used in
respect to warranty, as well as liability in case of loss and other conditions. This action of the
plaintiff unequivocally exhibited their real intention to execute the corresponding Deed after the
defendants have paid in full and as heretofore discussed and for the sake of emphasis the
obscurity in the written contract cannot favor the party who caused the obscurity.

Based on substantive Rules on Interpretation, if the terms are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulations shall control. If the words
appear to be contrary to the evident intention of the parties, their contemporaneous and
subsequent acts shall be principally considered. If the doubts are cast upon the principal object
of the contract in such a way that it cannot be known what may have been the intention or will of
the parties, the contract shall be null and void.10

Thus, the court concluded with the following disposition:

In this case, which is held by this Court as a sale on installment there is no chattel mortgage on
the thing sold, but it appears amongst the Complaint’s prayer, that the plaintiff elected to exact
fulfillment of the obligation.

For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because
of the previous payments made by the defendants for the reasonable use of the units, specially
so, as it appears, these returned vehicles were sold at auction and that the plaintiff can apply the
proceeds to the balance. However, with respect to the unreturned units and machineries still in
the possession of the defendants, it is this Court’s view and so hold that the defendants are liable
INSURABLE INTEREST (FULL TEXT)

therefore and accordingly are ordered jointly and severally to pay the price thereof to the plaintiff
together with attorney’s fee and the costs of suit in the sum of Php25,000.00.

SO ORDERED.11

On December 27, 2002, FEB filed its Notice of Appeal.12 Accordingly, on January 17, 2003, the
court issued an Order13 elevating the entire records of the case to the CA. FEB averred that the
trial court erred:

A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal
properties on installment and not of lease;

B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not
R.A. No. 8556;

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the price
because of the previous payments made by the defendants for the reasonable use of the units;

D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of Vicente Ong
Lim, Jr. to the Plaintiff-Appellant.14

On March 15, 2005, the CA issued its Decision15 declaring the transaction between the parties
as a financial lease agreement under Republic Act (R.A.) No. 8556.16 The fallo of the assailed
Decision reads:

WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November
2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is
REVERSED and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL
Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty
Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per
annum starting from the date of judicial demand on 06 December 2000, until full payment thereof.
Costs against appellees.

SO ORDERED.17
INSURABLE INTEREST (FULL TEXT)

Lim filed the instant Petition for Review on Certiorari under Rule 45

contending that:

The Honorable Court of Appeals erred when it failed to consider that the undated complaint was
filed by Saturnino J. Galang, Jr., without any authority from respondent’s Board of Directors and/or
Secretary’s Certificate.

II

The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the
1997 Rules of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004).

III

The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent
to file on time its appellant’s brief and to separately rule on the petitioner’s motion to dismiss.

IV

The Honorable Court of Appeals erred in finding that the contract between the parties is one of a
financial lease and not of a contract of sale.

The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the
respondent are "rentals" and not installments paid for the purchase price of the subject motor
vehicles, heavy machines and equipment.

VI
INSURABLE INTEREST (FULL TEXT)

The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the
pick-up vehicle is of no consequence.

VII

The Honorable Court of Appeals failed to take into consideration that the contract of lease, a
contract of adhesion, concealed the true intention of the parties, which is a contract of sale.

VIII

The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable
interest over the subject personal properties.

IX

The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage
of the term merchantability.18

We affirm the ruling of the appellate court.

First, Lim can no longer question Galang’s authority as FEB’s authorized representative in filing
the suit against Lim. Galang was the representative of FEB in the proceedings before the trial
court up to the appellate court. Petitioner never placed in issue the validity of Galang’s
representation before the trial and appellate courts. Issues raised for the first time on appeal are
barred by estoppel. Arguments not raised in the original proceedings cannot be considered on
review; otherwise, it would violate basic principles of fair play.19

Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters
agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of FEB to
file its brief on time, or in not ruling separately on the petitioner’s motion to dismiss.

Courts have the prerogative to relax procedural rules of even the most mandatory character,
mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties’
right to due process. In numerous cases, this Court has allowed liberal construction of the rules
INSURABLE INTEREST (FULL TEXT)

when to do so would serve the demands of substantial justice and equity.20 In Aguam v. Court of
Appeals , the Court explained:

The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power
conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in
accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in
each case." Technicalities, however, must be avoided. The law abhors technicalities that impede
the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a
game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance and chief
enemy, deserves scant consideration from courts." Litigations must be decided on their merits
and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper
and just determination of his cause, free from the unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is
to encourage hearings of appeals on their merits and the rules of procedure ought not to be
applied in a very rigid, technical sense; rules of procedure are used only to help secure, not
override substantial justice. It is a far better and more prudent course of action for the court to
excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends
of justice rather than dispose of the case on technicality and cause a grave injustice to the parties,
giving a false impression of speedy disposal of cases while actually resulting in more delay, if not
a miscarriage of justice.21

Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract
is not void per se. It is as binding as any ordinary contract. A party who enters into an adhesion
contract is free to reject the stipulations entirely.22 If the terms thereof are accepted without
objection, then the contract serves as the law between the parties.

In Section 23 of the lease contract, it was expressly stated that:

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement
between them, and that no representations have been made other than as set forth herein. This
Agreement shall not be amended or altered in any manner, unless such amendment be made in
writing and signed by the parties hereto.

Petitioner’s claim that the real intention of the parties was a contract of sale of personal property
on installment basis is more likely a mere afterthought in order to defeat the rights of the
respondent.
INSURABLE INTEREST (FULL TEXT)

The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease within the purview of R.A. No. 8556. Section 3(d)
thereof defines "financial leasing" as:

[A] mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles,
appliances, business and office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years during
which the lessee has the right to hold and use the leased property with the right to expense the
lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on his part to purchase the leased property
from the owner-lessor at the end of the lease contract.

FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly
periodic payment of ₱170,494.00. The periodic payment by petitioner is sufficient to amortize at
least 70% of the purchase price or acquisition cost of the said movables in accordance with the
Lease Schedules with Delivery and Acceptance Certificates. "The basic purpose of a financial
leasing transaction is to enable the prospective buyer of equipment, who is unable to pay for such
equipment in cash in one lump sum, to lease such equipment in the meantime for his use, at a
fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses and
a margin of profit for the financial lessor) with the expectation that at the end of the lease period
the buyer/financial lessee will be able to pay any remaining balance of the purchase price."23

The allegation of petitioner that the rent for the use of each movable constitutes the value of the
vehicle or equipment leased is of no moment. The law on financial lease does not prohibit such a
circumstance and this alone does not make the transaction between the parties a sale of personal
property on installment. In fact, the value of the lease, usually constituting the value or amount of
the property involved, is a benefit allowed by law to the lessor for the use of the property by the
lessee for the duration of the lease. It is recognized that the value of these movables depreciates
through wear and tear upon use by the lessee. In Beltran v. PAIC Finance Corporation,24 we
stated that:

Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading
company. Neither is it an ordinary leasing company; it does not make its profit by buying
equipment and repeatedly leasing out such equipment to different users thereof. But a financial
lease must be preceded by a purchase and sale contract covering the equipment which becomes
the subject matter of the financial lease. The financial lessor takes the role of the buyer of the
equipment leased. And so the formal or documentary tie between the seller and the real buyer of
the equipment, i.e., the financial lessee, is apparently severed. In economic reality, however, that
INSURABLE INTEREST (FULL TEXT)

relationship remains. The sale of the equipment by the supplier thereof to the financial lessor and
the latter's legal ownership thereof are intended to secure the repayment over time of the
purchase price of the equipment, plus financing charges, through the payment of lease rentals;
that legal title is the upfront security held by the financial lessor, a security probably superior in
some instances to a chattel mortgagee's lien.25

Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered
into the lease contract with full knowledge of its terms and conditions. The contract was in force
for more than four years. Since its inception on March 9, 1995, JVL and Lim never questioned its
provisions. They only attacked the validity of the contract after they were judicially made to answer
for their default in the payment of the agreed rentals.

It is settled that the parties are free to agree to such stipulations, clauses, terms, and conditions
as they may want to include in a contract. As long as such agreements are not contrary to law,
morals, good customs, public policy, or public order, they shall have the force of law between the
parties.26 Contracting parties may stipulate on terms and conditions as they may see fit and these
have the force of law between them.27

The stipulation in Section 1428 of the lease contract, that the equipment shall be insured at the
cost and expense of the lessee against loss, damage, or destruction from fire, theft, accident, or
other insurable risk for the full term of the lease, is a binding and valid stipulation. Petitioner, as a
lessee, has an insurable interest in the equipment and motor vehicles leased. Section 17 of the
Insurance Code provides that the measure of an insurable interest in property is the extent to
which the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will
be directly damnified in case of loss, damage, or destruction of any of the properties leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the
merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is stated
as:

9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES
THAT IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT
THERE ARE NO WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR
INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON
BEHALF OF THE LESSOR AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY
PART THEREOF, OR AS TO ITS FITNESS, SUITABILITY, CAPACITY, CONDITION OR
MERCHANTABILITY, NOR AS TO WHETHER THE EQUIPMENT WILL MEET THE
REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR CONTRACT WHICH PROVIDE
FOR SPECIFIC MACHINERY OR APPARATUS OR SPECIAL METHODS.29
INSURABLE INTEREST (FULL TEXT)

In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case of defect of
any kind that will be found by the lessee in any of the equipment, recourse should be made to the
manufacturer. "The financial lessor, being a financing company, i.e., an extender of credit rather
than an ordinary equipment rental company, does not extend a warranty of the fitness of the
equipment for any particular use. Thus, the financial lessee was precisely in a position to enforce
such warranty directly against the supplier of the equipment and not against the financial lessor.
We find nothing contra legem or contrary to public policy in such a contractual arrangement."30

Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a
contract of sale on installment in the same manner that a previous transaction between the parties
over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was initially covered by an agreement
denominated as a lease and eventually became the subject of a Deed of Absolute Sale.

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be
read into the terms of the lease agreement would expand the coverage of the agreement, in
violation of Article 1372 of the New Civil Code. 31 The lease contract subject of the complaint
speaks only of a lease. Any agreement between the parties after the lease contract has ended is
a different transaction altogether and should not be included as part of the lease. Furthermore, it
is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave
no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall
control. No amount of extrinsic aid is necessary in order to determine the parties' intent.32

WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in
CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

ANTONIO EDUARDO B. NACHU