FACTS:

Caltex Philippines entered into a contract of affreightment with the petitioner, Delsan Transport Lines, Inc., for a period of 1 year whereby the said common carrier agreed to transport Caltex’s industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country.

Under the contract, petitioner took on board its vessel, MT Maysun, industrial fuel oil of Caltex to be delivered tothe Caltex Oil Terminal in Zamboanga City. The shipment was insured with the private respondent, American Home Assurance Corporation.

The vessel sank taking with it the entire cargo of fuel oil. Private respondent paid Caltex the sum of P5,096,635.57 representing the insured value of the lost cargo. Exercising its right of subrogation the private respondent demanded of the petitioner the sameamount it paid to Caltex.

Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint with the RTC for collection of a sum of money. The trial court dismissed the complaint against herein petitioner. The trial court found that the vessel, MT Maysun, was seaworthy to undertake the voyage as determined by the Philippine Coast Guard per Survey Certificate Report No. M5-016-MH upon inspection during its annual dry-docking and that the incident was caused by unexpected inclement weather condition or force majeure, thus exempting the common carrier (herein petitioner) from liability for the loss of its cargo.

The decision of the trial court was reversed by the Court of Appeals. In the absence of any explanation as to what may have caused the sinking of the vessel coupled with the finding that the same was improperly manned, the appellate court ruled that the petitioner is liable on its obligation as common carrier to herein private respondent insurance company as subrogee of Caltex.

ISSUE:

Whether the payment made by the private respondent to Caltex for the insured value of the lost cargo amounted to an admission that the vessel was seaworthy, thus precluding any action for recovery against the petitioner.

RULING:

NO. The payment made by the private respondent for the insured value of the lost cargo operates as waiver of its (private respondent) right to enforce the term of the implied warranty against Caltex under the marine insurance policy. However, the same cannot be validly interpreted as an automatic admission of the vessel’s seaworthiness by the private respondent as to foreclose recourse against the petitioner for any liability under its contractual obligation as a common carrier. The fact of payment grants the private respondent subrogatory right which enables it to exercise