2016 (Mercantile Law) Bar Exam Questions: Question 6

[Answer/discuss the question below, or see 2016 bar exam Mercantile Law Instructions; 2016 Mercantile Law Questions: 1234578910111213141516171819 and 20; See also 2016 Bar Exam: Information, Discussions, Tips, Questions and Results]


Nautica Shipping Lines (Nautica) bought a second hand passenger ship from Japan. It modified the design o f the bulkhead of the deck o f the ship to accommodate more passengers. The ship sunk with its passengers in Tablas Strait due to heavy rains brought by the monsoon. The heirs of the passengers sued Nautica for its liability as a common carrier based on the reconfiguration of the bulkhead which may have compromised the stability of the ship. Nautica raised the defense that the monsoon is a fortuitous event and, at most, its liability is prescribed by the Limited Liability Rule. Decide with reasons. (5%)


  1. Nautica Shipping Lines liability is prescribed by the Limited Liability Rule:

    If the ship owner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. (Yangco vs. Laserna, et al., supra).

    The rationale therefor has been explained as follows:

    The real and hypothecary nature of the liability of the ship owner or agent embodied in the provisions of the Maritime Law, Book III, Code of Commerce, had its origin in the prevailing conditions of the maritime trade and sea voyages during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions and to encourage ship building and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of a ship to the vessel, equipment, and freight, or insurance, if any, so that if the ship owner or agent abandoned the ship, equipment, and freight, his liability was extinguished. (Abueg vs. San Diego, 77 Phil. 730 [1946])

    Without the principle of limited liability, a ship owner and investor in maritime commerce would run the risk of being ruined by the bad faith or negligence of his captain, and the apprehension of this would be fatal to the interest of navigation.” Yangco vs. Lasema, supra).

    As evidence of this real nature of the maritime law we have (1) the limitation of the liability of the agents to the actual value of the vessel and the freight money, and (2) the right to retain the cargo and the embargo and detention of the vessel even in cases where the ordinary civil law would not allow more than a personal action against the debtor or person liable. It will be observed that these rights are correlative, and naturally so, because if the agent can exempt himself from liability by abandoning the vessel and freight money, thus avoiding the possibility of risking his whole fortune in the business, it is also just that his maritime creditor may for any reason attach the vessel itself to secure his claim without waiting for a settlement of his rights by a final judgment, even to the prejudice of a third person. (Phil. Shipping Co. vs. Vergara, 6 Phil. 284 [1906]).

    The limited liability rule, however, is not without exceptions, namely: (1) where the injury or death to a passenger is due either to the fault of the ship owner, or to the concurring negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs. Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen’s compensation claims Abueg vs. San Diego, supra). In this case, there is nothing in the records to show that the loss of the cargo was due to the fault of the private respondent as shipowners, or to their concurrent negligence with the captain of the vessel.

    What about the provisions of the Civil Code on common carriers? Considering the “real and hypothecary nature” of liability under maritime law, these provisions would not have any effect on the principle of limited liability for ship owners or ship agents. As was expounded by this Court:

    In arriving at this conclusion, the fact is not ignored that the illfated, Nautica, as a vessel engaged in interisland trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the exclusively ‘real and hypothecary nature of maritime law operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. (Yangco vs. Laserila, et al., supra).

    Moreover, Article 1766 of the Civil Code provides:

    Art. 1766. In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws.

    In other words, the primary law is the Civil Code (Arts. 1732-1766) and in default thereof, the Code of Commerce and other special laws are applied. Since the Civil Code contains no provisions regulating liability of ship owners or agents in the event of total loss or destruction of the vessel, it is the provisions of the Code of Commerce, more particularly Article 587, that govern in this case.

    Article 587 of the Code of Commerce provides:

    Art. 587. “The ship agent shall also be civilly liable for the indemnities in favor of third persons which may arise from the conduct of the captain in the care of the goods which he loaded on the vessel; but he may exempt himself therefrom by abandoning the vessel with all the equipment and the freight it may have earned during the voyage.”

    In sum, it will have to be held that since the ship agent’s or ship owner’s liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction (Yangco vs. Laserna, supra), and none of the exceptions to the rule on limited liability being present, the liability of private respondents for the loss of the cargo of copra must be deemed to have been extinguished. There is no showing that the vessel was insured in this case.

  2. limited liability is not applicable because ship owner is at fault. what is applicable is the rule on common carrier under the Civil Code

  3. this is an exception to the limited liability rule. One, the monsoon rain is not a fortuitous event considering that the monsoon rain is predictable, second the change in the configuration of the ship had made the ship not sea worthy for the travel.

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