G.R. No.

147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.

INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DEC SION

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

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

1
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:

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:

2
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE
OVER CREDIT.

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 SUBROGATION UNDER
ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

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 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

3
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.

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.

4
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.

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.

5
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.

COMMERCIAL UNION ASSURANCE COMPANY LIMITED and NORTH BRITISH & MERCANTILE
INSURANCE CO., LTD., Petitioners, v. LEPANTO CONSOLIDATED MINING COMPANY and COURT OF
APPEALS, Respondents.

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos, for Petitioners.

Sycip, Salazar, Feliciano, Hernandez & Castillo for Private Respondent.

SYNOPSIS

Respondent company shipped to a consignee in the United States certain cargoes covered by two
"all risks" marine insurance policies issued by petitioners containing express stipulations that
respondent company has an interest therein. The shipments, which were undertaken in accordance
with the instructions of the insurers surveyor, sustained damage in transit prompting private
respondent to file the corresponding insurance claims which were rejected. Consequently,
respondent company filed with the Court of First Instance a complaint for recovery of damages
which was dismissed for lack of cause of action. On appeal, the Court of Appeals reversed the

6
Commercial Union Assurance Company Limited, Et. Al. v. Lepanto Consolidated Mining Company, Et.
Al. trial courts order of dismissal. Hence, this petition for certiorari (herein treated as an appeal)
wherein petitioners contend, among others, that respondent company is not the real party in
interest and has no personality to sue and that respondents complaint has no cause of action
against the insurers.

On review, the Supreme Court, without prejudging the merits of respondents case and petitioners
affirmative defenses, held that there is prima facie showing in respondents complaint and pleadings
that it is a real party in interest under the policies and that it has a cause of action against petitioners
as insurers.

Judgment of the Court of Appeals, affirmed.

YLLABUS

REMEDIAL LAW; ACTIONS; PARTIES; RESPONDENT IN CASE AT BAR PRIMA FACIE SHOWN A REAL
PARTY IN INTEREST. Where, based (1) on express stipulation in the two subject marine insurance
policies that respondent company has an interest therein and (2) on the facts that it was the shipper
(and presumably the owner) of the insured cargoes, that the shipments were undertaken in
accordance with the instructions of the insurers marine surveyor and that it was respondent
company that filed the corresponding claim with the adjuster when the cargoes were damaged, the
Supreme Court, without prejudging the merits of respondent companys case and petitioners
affirmative defenses, ruled that there is prima facie showing in respondents complaint and
pleadings that it is a real party in interest under the policies and that it has a cause of action against
the petitioners as insurers.

DECISION

AQUINO, J.:

This is a marine insurance case. Lepanto Consolidated Mining Company alleged in its complaint of
February 7, 1974 that on November 8 and 23, 1971 it shipped (for smelting) copper ore concentrates
on board the vessels M/S Hermosa and M/S General Aguinaldo from Poro Point, San Fernando, La
Union to Tacoma, Washington, U.S.A.chanroblesvirtual|awlibrary

The first shipment is known as No. 167 and the other shipment as Nos. 168 and 168-A. The copper
ore concentrates were stored on board the carrying vessels under the supervision and approval of a
marine surveying firm designated by the insurer (pp. 8-9, Record on Appeal). American Smelting and
Refining Co., Ltd. (Asarco) was the consignee. The ore was to be discharged at the wharf of Asarcos
smelter at Tacoma (pp. 75-76, 98-9, Record on Appeal).

The shipments were covered by two "all risks" marine insurance policies issued to Asarco by North
British & Mercantile Insurance Company Limited, a subsidiary of Commercial Union Assurance
Company Limited. The first policy was for US$4,509,014 or 80% of the agreed total value of
US$5,636,268 while the second policy was for US$6,230,591.03 or 80% of the agreed total value of
US$7,788,233.79. The 20% balance was covered by insurance policies issued by Malayan Insurance
Co., Inc.

Both policies contain this stipulation: "It is hereby noted and agreed that Lepanto Consolidated
Mining Co. have (has) an interest on this Policy" (pp. 22 and 58, Record on Appeal). From the
opening clause of the policies (couched in Chaucerian English), it may be inferred that Asarco and all
persons having an interest in the shipments were covered by the insurance (pp. 20-21, 45-46, Record
on Appeal).

7
Because the two shipments were damaged in transit, Lepanto filed claims under the policies.
Commercial Union Assurance and North British denied the claims.chanrobles law library : red

On February 8, 1974, Lepanto filed a complaint in the Court of First Instance of Rizal, Pasig Branch
22, against Commercial Union Assurance and North British wherein it prayed that they be ordered to
pay Lepanto the sums of US$523,139.20 and US$553,564.80, representing 80% of the damages
suffered by Lepanto plus interest, litigation expenses and attorneys fees.

On motion to dismiss filed by the defendants, the lower court dismissed the complaint for lack of
cause of action. Lepanto appealed to the Court of Appeals which in its decision dated September 27,
1979 reversed the order of dismissal (CA-G.R. No. 55948-R).

In a resolution dated November 12, 1979, it denied the motion for reconsideration filed by
Commercial Union Assurance and North British. A copy of that resolution was received by their
lawyers on November 19. Twelve days later, or on December 1, they filed a special civil action of
certiorari in this Court wherein they alleged that the Court of Appeals acted without jurisdiction in
entertaining Lepantos appeal. The certiorari petition was treated as an appeal. As directed, the
parties filed their briefs.

The petitioners contend in their first assignment of error that the Court of Appeals had no
jurisdiction over Lepantos appeal because it raised only a pure question of
law.chanroblesvirtuallawlibrary

That contention is devoid of merit because Lepanto in its notice of appeal expressly stated that it
was appealing on questions of fact and law and because in its assignment of errors it contended that
the trial court erred in finding that the marine policies were issued solely in favor of Asarco, in not
finding that Lepanto was insured under the said policies and in not finding that the insurers were
estopped to deny that Lepanto was an insured party.

The ventilation of those factual issues would explain why the Court of Appeals did not certify the
case to this Court as a case involving a pure question of law.

The petitioners in their other assignments of error argue that the Court of Appeals gravely abused its
discretion in taking into account Lepantos manifestation which is not a part of its complaint; in
finding that Lepanto claimed ownership of the cargo covered by the marine insurance policies; in not
finding that Lepanto is not the real party in interest and has no personality to sue and in not finding
that under the ultimate facts alleged in Lepantos complaint Lepanto has no cause of action against
the insurers.chanrobles.com : virtual law library

The issue is the correctness of the trial courts conclusion that Lepanto has no right to sue the
insurers since it has no cause of action against them (p. 119, Record on Appeal), or, as stated by the
Appellate Court, whether Lepanto can legally sue on the marine insurance policies.

We hold, without prejudging the merits of Lepantos case and petitioners affirmative defenses, that
there is a prima facie showing in Lepantos complaint and pleadings that it is a real party in interest
under the policies and that it has a cause of action against the petitioners as insurers.

This holding is based (1) on the stipulation (already quoted) in the two policies that it has an interest
therein and (2) on the facts that it was the shipper (and presumably the owner) of the insured
cargoes, that the shipments were undertaken in accordance with the instructions of the insurers
marine surveyor and that it was Lepanto that filed the corresponding claim with the adjuster when
the cargoes were damaged (pp. 34-37, Record on Appeal).

8
It is noteworthy that when Commercial Union Assurance Company Limited rejected Lepantos claims
it did not question Lepantos right and personality to file the claims nor did it state that Lepanto had
no interest in the marine policies and that it was not an insured party. Commercial Union rejected
the claims, not on those grounds, but because "both cargoes were inherently vicious" (pp. 37-45,
Record on Appeal).

To say that Lepanto has no interest under the policies would render meaningless the said stipulation
in its favor. To say that Lepanto as shipper of the insured property had no proprietary interest
therein before its delivery at Asarcos wharf in Tacoma is to imply that the insured property was res
nullius. These conclusions are preposterous.chanrobles.com:cralaw:red

Hence, the trial court erred in dismissing the complaint. Whether after hearing the parties it would
appear that Lepantos claims for damages are justified or not is an issue on which we make no
anticipatory and premature finding.

WHEREFORE, the decision of the Court of Appeals is affirmed. Costs against the petitioners.

SO ORDERED.

Barredo, De Castro, Ericta and Escolin, JJ., concur.

Concepcion Jr. and Abad Santos, JJ., took no part.

G.R. No. L-52027 April 27, 1982 - COMMERCIAL UNION ASSURANCE CO. LIMITED, ET AL. v. LEPANTO
CONSOLIDATED MINING CO., ET AL.<br /><br />199 Phil. 205

G.R. No. L-9401 March 30, 1915

ANTONINA LAMPANO, plaintiff-appellee,

vs.

PLACIDA A. JOSE, ET AL., defendants-appellants.

D. R. Williams for appellants.

C. W. O'Brien for appellee.

TRENT, J.:

The defendant, Mariano R. Barretto, constructed a house for the other defendant, Placida A. Jose,
on land described as No. 72, plot F. Estate of Nagtahan, district of Sampaloc, city of Manila, for the
agreed price of P6,000. Subsequent thereto and on November 12, 1912, Placida A. Jose sold the
house to the plaintiff, Antonina Lampano, for the sum of P6,000. On March 22, 1913, the house was
destroyed by fire. At the time of the fire Antonina Lampano still owed Placida A. Jose the sum of
P2,000, evidenced by a promissory note, and Placida A. Jose still owed Mariano R. Barretto on the
cost of the construction the sum of P2,000. After the completion of the house and sometime before
it was destroyed, Mariano R. Barretto took out an insurance policy upon it in his own name, with the
consent of Placida A. Jose, for the sum of P4,000. After its destruction, he collected P3,600 from the
insurance company, having paid in premiums the sum of P301.50.

9
The plaintiff alleged in her complaint that there was a verbal agreement between her and Placida A.
Jose, at the time of the purchase and sale of the house, to the effect that the latter agreed to deliver
to her the insurance policy on the building; that she did not learn that the policy was in the name of
Barretto until after the fire; and the neither Placida A. Jose nor Mariano R. Barretto has any right to
the insurance or to the money received therefrom. She prayed for judgment against each of them
for the sum of P3,600, the amount of the insurance collected.

To this complaint the defendant, Placida A. Jose, answered, denying that she agreed to transfer the
policy of insurance to the plaintiff and alleging (a) that the insurance was taken out and paid for by
Barretto before the sale of the house to the plaintiff; (b) that Barretto did this because he had
constructed the house and she was owing him therefor; and (c) that the insurance was entirely for
the personal account and in the exclusive interest of Barretto. In her cross-complaint she asked for
judgment against the plaintiff for the sum of P2,000, the balance due on the purchase price. Barretto
answered, reciting the facts giving rise to his taking out the insurance on the house and denying any
obligation to the plaintiff in connection therewith.

Judgment was entered against Barretto and in favor of Placida A. Jose for the sum of P1,298.50,
being the difference between the amount collected by Barretto on the insurance and the amount
yet due him for the construction of the house, including the premiums paid. Judgment was also
entered in favor of the defendant, Placida A. Jose, against the plaintiff for the sum of P2,000, being
the balance of the purchase price of the house. The plaintiff was authorized to offset this judgment
against her for P2,000 by the P2,000 which the court declared had been paid the defendant, Placida
A. Jose, by Barretto out of the insurance money. A final judgment was entered in favor of the
plaintiff against the defendant, Placida A. Jose, for the sum of P1,298.50, being the amount of the
judgment against Barretto. From this judgment Barretto alone appealed.

The court found that there was no privity of contract between the plaintiff and the defendant
Barretto. In consequence, no judgment was entered in favor of the plaintiff against the defendant.
The court decided the respective rights of the two defendants to the insurance money and entered
judgment against Barretto and in favor of Placida A. Jose for the sum of P1,298.50. This was done
upon the theory that the insurance policy was held in trust for Placida A. Jose, and that any balance,
resulting after deducting the amount owing upon the construction contract and paid for premiums,
belonged to her. Neither by the pleading nor upon the trial was there any claim made by Placida A.
Jose against Barretto for the insurance money, nor for any participation therein. Placida A. Jose's
answer specifically alleged that such insurance was for Barretto's personal account and in his
exclusive rights. Her testmony is equally positive upon this point. She says:

Q. Was the house insured when you sold it to Antonina Lampano?

A. It was insured by Mariano Barretto because he is the one constructed that house.

Q. Did you have any interest in that insurance?

A. I was indebted to him and he insured the house in his own name from 1911.

Q. Did you have any right, interest or participation in that insurance?

A. I have none.

Q. Who was paying the premiums on that insurance?

A. M. Barretto.

10
The result is that there was no controversy between the defendants concerning this insurance, nor
was any issue presented which required an adjudication of their respective rights thereto. So far as
Barretto was concerned, the only issue raised, either by the pleadings or at the trial, was, Has the
plaintiff any right to recover from Barretto any portion of the insurance money?

The plaintiff sought to recover from Barretto all of the P3,600, but she is now contented with a
judgment against Placida A. Jose for P1,298.50. Her right to recover this amount of the insurance
rests upon an alleged verbal agreement between herself and Placida A. Jose to the effect that the
latter agreed, at the time of the purchase and sale of the house, to transfer to her the insurance
policy, the policy being held in trust by Barretto for the benefit of the Jose woman. The plaintiff does
not contend that Barretto participated in this sale, or even had any knowledge of it, until sometime
after it was consummated. Placida A. Jose denies that she agreed to transfer the policy to the
plaintiff, and the deed of purchase and sale makes no mention of such an agreement. The policy is
not mentioned in this document, although it was agreed that the vendor would transfer to the
vendee all of the former's right, title, and interest in the leasehold to the land upon which the house
was built. It would seem that if the vendor agreed to transfer the policy, this agreement would have
been inserted in the document of purchase and sale, the same as that with reference to the lease.
The trial court did not find that such an agreement existed and we think the plaintiff has failed to
establish this verbal agreement.

If Barretto had an insurable interest in the house, he could insure this interest for his sole protection.
The policy was in the name of Barretto alone. It was, therefore, a personal contract between him
and the company and not a contract which ran with the property. According to this personal
contract the insurance policy was payable to the insured without regard to the nature and extent of
his interest in the property, provided that he had, as we have said, an insurable interest at the time
of the making of the contract, and also at the time of the fire. Where different persons have
different interests in the same property, the insurance taken by one in his own right and in his own
interest does not in any way insure to the benefit of another. This is the general rule prevailing in the
United States and we find nothing different in this jurisdiction. (19 Cyc., 883.)

In the case of Shadgett vs. Phillips and Crew Co., reported in 56 L. R. A., 461, Mrs. Shagett received a
piano as a gift from her husband and insured it. She knew that it was the obligation of her husband
to insure he piano for the benefit of the vendor. The court held, however, that the vendor
(mortgagee) was not entitled to the proceeds of the insurance as "there was no undertaking on the
part of Mrs. Shadgett to either insure for complainant's benefit, or to assume her husband's
obligation to so insure, and mere knowledge of that obligation did not impose it upon her."

The court further said: "The contract of insurance was wholly between the defendant and the
insurance company, and was personal, in the sense that the money agreed to be paid in case of loss
was not to stand in the place of the piano itself, but was a mere indemnity against the loss of
defendant's interest therein. If her interest was small, on account of incumbrances existing in favor
of the complainant, that fact was for the consideration only of the insurer and defendant, for
complaint has no concern with the adjustment of the loss between them. We know of no principle,
either of law or equity, which would bind defendant to carry out her donor's contract to insure, in
the absence of any agreement on her part to do so, even though the property in her hands was
subject to complainant's rights therein as a conditional vendor."

11
The court further says: "A contract of insurance made for the insurer's (insured) indemnity only, as
where there is no agreement, express or implied, that it shall be for the benefit of a third person,
does not attach to or run with the title to the insured property on a transfer thereof personal as
between the insurer and the insured. In such case strangers to the contract cannot require in their
own right any interest in the insurance money, except through an assignment or some contract with
which they are connected."

In Vandergraf vs. Medlock (3 Porter, 389; 29 Am. Dec., 256), it was held that the mortgage is not
entitled to the proceeds of an insurance policy procured by the mortgages, there being no
agreement that such insurance should be effected by the latter for the benefit of the former. The
court says: "It is well settled that a policy of insurance is a distinct independent contract between
the insured and insurers, and third person have no right either in a court of equity, or in a court of
law, to the proceeds of it, unless there be some contract or trust, expressed or implied, between the
insured and third persons."

In Burlingane vs. Goodspeed (10 L. R. A., 495), the court says that where a mortgage at his own
expense and without any agreement or understanding with he mortgagor obtains insurance upon
his interest as a mortgage and collects the money from the insurer after a loss, he is not bound to
account for it to the mortgagor

In the case at bar Barretto assumed the responsibility for the insurance. The premiums, as we have
indicated, were paid by him without any agreement or right to recoup the amount paid therefor
should no loss result to the property. It would not, therefore, be in accordance with t he law and his
contractual obligations to compel him to account for the insurance money, or any par thereof, to the
plaintiff, who assumed no risk whatever.

That Barretto had an insurable interest in the house, we think there can be no question. He
construed the building, furnishing all the materials and supplies, and insured it after it had been
completed (pars. 3 and 5, art. 1923, Civil Code; Manresa, Vol. 12, pp. 692-695; citing decision of the
supreme court of Spain of December 30, 1896).

For the foregoing reasons the judgment appealed from, in so far as it affects the appellant, is
reversed and he is absolved. Without costs. So ordered.

Arellano, C.J., Torres, Johnson, Moreland and Araullo, JJ., concur.

The Lawphil Project - Arellano Law Foundation

THIRD DIVISION

VICENTE ONG LIM SING, JR.,

Petitioner,

12
- versus -

FEB LEASING & FINANCE CORPORATION,

Respondent.

G.R. No. 168115

Present:

YNARES-SANTIAGO, J.,

Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO, and

NACHURA, JJ.

Promulgated:

June 8, 2007

x------------------------------------------------------------------------------------x

DECISION

13
NACHURA, J.:

This is a petition for review on certiorari assailing the Decision[1] dated March 15, 2005 and the
Resolution[2] 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 lease[3] of equipment
and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim)
executed an Individual Guaranty Agreement[4] 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 Certificates[5] 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 (P170,494.00).

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 (P3,414,468.75). 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 Complaint[7] 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.

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 Lims 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:

14
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 latters 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

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

15
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 Complaints 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 Courts view and so hold that the defendants are liable
therefore and accordingly are ordered jointly and severally to pay the price thereof to the plaintiff
together with attorneys 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 Order[13] 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;

16
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 Decision[15] 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]

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
RESPONDENTS BOARD OF DIRECTORS AND/OR SECRETARYS CERTIFICATE.

II

17
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 APPELLANTS BRIEF AND TO SEPARATELY RULE ON THE
PETITIONERS 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

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.

18
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 Galangs authority as FEBs 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 Galangs 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 petitioners 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
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

19
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.

Petitioners 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.

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

20
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 P170,494.00. 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
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.

21
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 14[28] 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]

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.

22
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.

23