GR 132607; (May, 1999) (Digest)
G.R. No. 132607 May 5, 1999
Cebu Shipyard and Engineering Works, Inc., petitioner, vs. William Lines, Inc. and Prudential Guarantee and Assurance Company, Inc., respondents.
FACTS
William Lines, Inc. brought its vessel, M/V Manila City, to Cebu Shipyard and Engineering Works, Inc. (CSEW) for dry-docking and repairs. The parties signed Work Orders containing a clause limiting CSEW’s liability for any defect or event to One Million Pesos, and excluding liability for consequential damages like loss of profit. While the vessel was at CSEW’s docking quay, it caught fire and sank, resulting in its total loss. William Lines was insured by Prudential Guarantee, which paid the hull claim of P45 million and was subrogated to the owner’s rights. William Lines and Prudential sued CSEW for damages arising from negligence.
ISSUE
Whether the contractual limitation of liability to One Million Pesos is valid and enforceable under the circumstances of the case.
RULING
No, the limitation clause is void. The Supreme Court affirmed the lower courts’ findings that CSEW was negligent, which was the proximate cause of the fire and total loss of the vessel. The legal logic proceeds from the principle that while parties may ordinarily establish stipulations in their contracts, such agreements must not be contrary to law, morals, good customs, public order, or public policy. A stipulation that seeks to limit liability for one’s own negligence is strictly construed against the party asserting it. The Court found the P1 million limitation to be unconscionable and contrary to public policy, as it would effectively allow CSEW to escape meaningful liability for its own gross negligence by paying a sum drastically lower than the actual damage caused. Such an arrangement would sanction a degree of diligence short of what is ordinarily required by law, as it removes the incentive to exercise due care. Consequently, CSEW is liable for the full actual damages, including the P45 million paid by the insurer and other proven losses, as its negligence was the direct and proximate cause of the vessel’s loss. The contractual limitation is deemed a waiver of right contrary to law and public policy and is therefore invalid.