Candano Shipping Lines, Inc. vs. Sugata-on

An employer is liable under Article 1711 of the New Civil Code for the death of an employee arising out of and in the course of employment even if caused by a fortuitous event, and the claimant’s actual damages for loss of earning capacity are computed under the Villa Rey formula—life expectancy × (gross annual income – reasonable and necessary living expenses)—not under Article 194 of the Labor Code.

Candano Shipping, a domestic corporation engaged in coastwise trading, employed Melquiades Sugata-on as Third Marine Engineer on board M/V David, Jr., with a monthly salary of ₱7,800.00. Florentina J. Sugata-on is Melquiades’s wife. The statutory backdrop is Article 1711 of the New Civil Code, which obliges employers to pay compensation for death or injury arising out of and in the course of employment even if the event is accidental or fortuitous. Article 194 of the Labor Code, which governs SSS death benefits, was also invoked in the proceedings.

Candano Shipping Lines, Inc. was a domestic corporation engaged in coastwise trading within the Philippines. It employed Melquiades Sugata-on as Third Marine Engineer on board its cargo vessel, M/V David, Jr., at a monthly salary of ₱7,800.00, with his employment beginning on 7 March 1994.

On 25 March 1996, M/V David, Jr. left the port of Davao City with its cargo and 20 crew members. The voyage was initially uneventful until around seven o’clock in the evening of 27 March 1996, when the vessel encountered rough seas and strong winds while traversing the waters of Lianga Bay, Surigao del Sur, causing it to tilt at three degrees on its starboard side. Violent waves continuously hammered the tilting vessel, and seawaters slowly swallowed up the main deck, worsening the tilt to 30 degrees. In an effort to salvage the vessel, the ship captain changed course from north to south, but the tilting continued to grow to a dangerously high level and rendered the vessel beyond control. The ship captain then ordered the crew members to abandon the vessel. Despite the crew’s efforts to save the vessel, M/V David, Jr. sank with her cargo at around eleven o’clock in the evening at Bakulin Point, Lianga Bay, Surigao del Sur.

Among the 20 crew members, twelve survived, one died, and seven were missing. Melquiades was one of the missing, as shown in the List of Surviving Crew of the Ill-Fated David, Jr. prepared by Candano Shipping. Upon learning of Melquiades’s fate, Florentina J. Sugata-on, his wife, immediately went to Candano Shipping’s office in Manila to claim her husband’s death benefits, but Candano Shipping refused to pay.

The refusal prompted Florentina to institute on 31 January 1997 an action seeking indemnity for her husband’s death against Candano Shipping before the RTC of Manila, Branch 20. She grounded the case on Article 1711 of the New Civil Code, which imposes upon the employer liability for the death of an employee in the course of employment even if the death is caused by a fortuitous event, and prayed for actual, moral, and exemplary damages, including attorney’s fees. In its Answer, Candano Shipping countered that Florentina had no cause of action because Melquiades’s death was not yet an established fact since he was merely reported missing upon the sinking of M/V David, Jr.; the filing was premature, and she should have waited until the body was recovered or until the lapse of time that would render Article 391 of the New Civil Code on presumptive death operative.

The RTC resolved the controversy in favor of Florentina, reasoning that Article 391’s presumption of death had become operative because four years had elapsed since Melquiades was reported missing in the sinking on 27 March 1996. Both the RTC and the CA found that the non-recovery of Melquiades’s body for four years from 27 March 1996 created a presumption that he was already dead and that his death was caused by a fortuitous event; these factual findings were not controverted by the parties in the petition.

• Article 194 of the Labor Code: Candano Shipping argued that the CA erred in applying Article 194 of the Labor Code to determine the death compensation claimed by the deceased employee’s heir against the employer under Article 1711, because Article 194 applies only to death compensation paid by the Social Security System to the beneficiaries of a deceased member.
• Villa Rey Formula: Candano Shipping argued that the Villa Rey formula for life expectancy cannot be automatically applied without proof of the basis for the expected length of life of a Filipino.
• CA’s Authority on Ordinary Appeal: Candano Shipping raised that the CA, on ordinary appeal, was not permitted to apply Article 194 of the Labor Code to a claim for death compensation filed and tried before the regular courts on the basis of Article 1711 of the Civil Code and the Villa Rey doctrine.
• Jurisdiction: Candano Shipping raised that the application of Article 194 of the Labor Code to the claim for death compensation ousts the regular courts, including the CA, of jurisdiction over the case.
• Entitlement Under Respondent’s Theory: Candano Shipping raised that, if the SC sets aside the CA’s application of Article 194, respondent should recover death compensation only in accordance with her theory as alleged, argued, and tried before the trial court.

• Applicability of Article 194 of the Labor Code: Whether Article 194 of the Labor Code’s formula for death compensation applies to a claim by the deceased employee’s heir against the employer under Article 1711 of the New Civil Code.
• CA’s Power on Ordinary Appeal: Whether the CA, on ordinary appeal, may apply Article 194 of the Labor Code to a claim for death compensation filed and tried before regular courts under Article 1711 and the Villa Rey doctrine.
• Jurisdiction: Whether applying Article 194 of the Labor Code to the claim ousts the regular courts, including the CA, of jurisdiction.
• Entitlement Under Respondent’s Theory: Whether, if the CA’s application of Article 194 is set aside, respondent is entitled to recover death compensation from petitioner under her theory as alleged, argued, and tried before the trial court.

• Applicability of Article 194 of the Labor Code: No. Article 194 of the Labor Code governs death compensation paid by the Social Security System to beneficiaries of a deceased member; it does not supply the measure for a civil claim against the employer under Article 1711 of the New Civil Code.
• CA’s Power on Ordinary Appeal: No. Since Article 194 does not govern the claim, the CA erred in applying it on ordinary appeal; the governing measure is the New Civil Code’s damages provisions implemented by the Villa Rey formula.
• Jurisdiction: No. The claim was validly filed under the New Civil Code and tried before the regular courts; Article 194’s inapplicability does not oust the regular courts, including the CA, of jurisdiction.
• Entitlement Under Respondent’s Theory: Yes. Respondent is entitled to actual damages for loss of earning capacity under Article 1711, computed under the Villa Rey formula at ₱748,800.00, plus 10% attorney’s fees and costs; moral and exemplary damages are deleted.

• Applicability of Article 194 of the Labor Code: Article 194 of the Labor Code directs the System to pay death benefits to primary beneficiaries upon the death of a covered employee; it is a Social Security System measure. Candano Shipping argued it applies only to death compensation paid by the SSS, and Florentina conceded this; the SC agreed. The claim was filed under Article 1711 of the New Civil Code, which obliges employers to pay compensation for the death of employees even if the event is purely accidental or due to a fortuitous cause, provided the death arose out of and in the course of employment. The SC recognized the remedy under the New Civil Code in Floresca vs. Philex Mining Corporation, where employees may invoke either the Workmen’s Compensation Act or the Civil Code, subject to the rule that the choice of one remedy excludes the other and acceptance of compensation under the chosen remedy excludes the other, except for supervening facts after opting for the first remedy. Because Florentina was forced to institute the civil suit after Candano Shipping refused to compensate her husband’s death, the civil claim under Article 1711 was proper. Since the right arose from the contract of employment and the obligation imposed by the New Civil Code, the provisions of the same code on damages, Articles 2199 and 2200, govern the extent of the employer’s liability. Article 194 of the Labor Code therefore does not apply.
• CA’s Power on Ordinary Appeal: The CA applied Article 194 of the Labor Code and reduced the actual damages to ₱608,400.00. That application was erroneous because Article 194 is not the governing measure for a civil claim under Article 1711; the New Civil Code’s damages provisions govern. The proper computation is the Villa Rey formula for loss of earning capacity, which the SC adopted to transform Articles 2199 and 2200 into a tangible mathematical form. The CA’s use of Article 194 on ordinary appeal cannot stand, and the SC corrected the award to ₱748,800.00.
• Jurisdiction: The action was instituted before the RTC of Manila, Branch 20, under Article 1711 of the New Civil Code. The SC recognized that the remedy availed of by Sugata-on in filing the claim under the New Civil Code has been validly recognized by prevailing jurisprudence. Since Article 194 of the Labor Code does not apply to the claim, its application cannot oust the regular courts, including the CA, of jurisdiction. The regular courts properly exercised jurisdiction over the civil action for indemnity under Article 1711.
• Entitlement Under Respondent’s Theory: The factual findings that the non-recovery of Melquiades’s body for four years from 27 March 1996 created a presumption that he was already dead and that his death was caused by a fortuitous event were settled and not controverted. Under Article 1711, Candano Shipping is liable for the death of Melquiades arising out of and in the course of employment even if the death was caused by a fortuitous event. The indemnity may partake of actual, moral, nominal, temperate, liquidated, or exemplary damages depending on the facts; here, only actual damages for unearned income are warranted because the death was a fortuitous event for which Candano Shipping cannot be faulted. The formula is Net Earning Capacity = life expectancy × (gross annual income – reasonable and necessary living expenses), with life expectancy = 2/3 × [80 – age at death]. Melquiades was 56 at the time of death, so life expectancy is 2/3 × [80 – 56] = 16. His monthly income was ₱7,800.00, or ₱93,600.00 gross annual income. Living expenses are pegged at 50% of gross annual income absent a showing of a smaller percentage, so reasonable and necessary living expenses are ₱46,800.00, leaving net annual income of ₱46,800.00. Net earning capacity is 16 × ₱46,800.00 = ₱748,800.00. Candano Shipping’s argument that the Villa Rey formula cannot be automatically applied without proof of the basis for Filipino life expectancy does not merit consideration; the formula has been repeatedly adopted, and reductions for medical history or dangerous activity require proof not present here. Moral and exemplary damages are deleted, but attorney’s fees and costs are proper.

• Employer liability under Article 1711 of the New Civil Code — Owners of enterprises and other employers are obliged to pay compensation for the death of or injuries to their employees even though the event may have been purely accidental or entirely due to a fortuitous cause, if the death or personal injury arose out of and in the course of employment. The employer is not liable if the mishap was due to the employee’s own notorious negligence, voluntary act, or drunkenness; compensation is equitably reduced when the employee’s lack of due care contributed to the death or injury. The SC applied this to hold Candano Shipping liable for Melquiades’s death during the sinking, which arose out of and in the course of employment and was caused by a fortuitous event.
• Election of remedies / exclusivity of remedies — Employees may invoke either the Workmen’s Compensation Act or the provisions of the Civil Code, subject to the consequence that the choice of one remedy excludes the other and that acceptance of compensation under the remedy chosen excludes the other remedy. The exception is where the claimant who had already been paid under the Workmen’s Compensation Act may still sue for damages under the Civil Code on the basis of supervening facts or developments occurring after he opted for the first remedy. The SC applied this in recognizing Florentina’s civil suit under the New Civil Code after Candano Shipping refused to compensate her husband’s death.
• Computation of actual damages for loss of earning capacity (Villa Rey formula) — Net Earning Capacity = life expectancy × (gross annual income – reasonable and necessary living expenses). Life expectancy is computed as 2/3 × [80 – age of deceased at the time of death]. Living expenses are pegged at 50% of gross annual income when there is no showing that they constituted the smaller percentage. The SC applied this to Melquiades: age 56, life expectancy 16; monthly income ₱7,800.00; gross annual income ₱93,600.00; living expenses ₱46,800.00; net annual income ₱46,800.00; net earning capacity ₱748,800.00.
• Presumptive death under Article 391 of the New Civil Code — A person on board a vessel lost during a sea voyage who has not been heard for four years since the loss of the vessel is presumed dead for all purposes, including the division of the estate among the heirs. The SC treated as settled the finding that the non-recovery of Melquiades’s body for four years from 27 March 1996 created the presumption that he was already dead.
• Damages under the New Civil Code for employer liability — Since the right of the claimant arose from the contract of employment and the corresponding obligation imposed by the New Civil Code upon the employer to indemnify for death and injury of the employee, the provisions of the same code on damages govern the extent of the employer’s liability. The indemnity may partake of actual, moral, nominal, temperate, liquidated, or exemplary damages depending on the facts. The SC applied this by awarding only actual damages for unearned income because the death was a fortuitous event for which Candano Shipping cannot be faulted, and by deleting moral and exemplary damages.

• “The remedy availed by Sugata-on in filing the claim under the New Civil Code has been validly recognized by the prevailing jurisprudence on the matter.” — The SC used this to affirm that a civil claim for indemnity under the New Civil Code was proper despite the existence of Article 194 of the Labor Code.
• “Given that the right of the claimant arose from the contract of employment and the corresponding obligation imposed by the New Civil Code upon the employer to indemnify the former for death and injury of the employee circumstanced by his employment, necessarily, the provisions of the same code on damages shall govern the extent of the employer’s liability.” — This is the SC’s core ruling that the New Civil Code, not Article 194 of the Labor Code, supplies the measure of damages for a claim under Article 1711.
• “Net Earning Capacity = life expectancy x (gross annual income - reasonable and necessary living expenses).” — The SC adopted this formula from Villa Rey to compute actual damages for loss of earning capacity.
• “In computing the third factor, the necessary living expense, a survey of more recent jurisprudence shows that this Court consistently pegged the amount at 50% of the gross annual income.” — The SC applied this rule to fix Melquiades’s living expenses at half of his gross annual income.

• Floresca vs. Philex Mining Corporation, 220 Phil. 533, 547-548 (1985) — Controlling precedent; employees may invoke either the Workmen’s Compensation Act or the Civil Code, and the choice of one remedy excludes the other, except for supervening facts after opting for the first remedy.
• Ysmael Maritime Corporation vs. Avelino, G.R. No. L-43674, 30 June 1987, 151 SCRA 333, 337 — Followed Floresca; a claimant who elected and accepted benefits under one remedy is barred from pursuing the alternative remedy.
• Philippine Air Lines, Inc. vs. Court of Appeals, 193 Phil. 560, 577 (1981) — Relied on to validate Article 1711 and hold the employer liable for injury suffered by an employee in the course of employment.
• Valencia vs. Manila Yacht Club, Inc., 138 Phil. 761, 765-766 (1969) — Relied on for the rule that Article 1711 imposes on the employer the obligation to compensate the employee for injury or sickness occasioned by employment.
• Villa Rey Transit, Inc. vs. Court of Appeals, G.R. No. L-25499, 18 February 1970, 31 SCRA 511 — Controlling precedent; adopted for the formula for loss of earning capacity and the rule that only net earnings, not gross earnings, are recoverable.
• Smith Bell Dodwell Shipping Agency Corp. vs. Borja, 432 Phil. 913, 925 (2002) — Followed; when there is no showing that living expenses constituted the smaller percentage of gross income, living expenses are fixed at half of gross income.
• Magbanua vs. Tabusares, Jr., G.R. No. 152134, 4 June 2004, 431 SCRA 99, 104 — Cited for the computation of net earnings by deducting necessary expenses and living expenses from gross earnings.
• Lambert vs. Heirs of Ray Castillon, G.R. No. 160709, 23 February 2005, 452 SCRA 285, 294 — Cited for the life expectancy formula adopted from the American Expectancy Table of Mortality or the Actuarial of Combined Experience Table of Mortality.

• Article 1711, New Civil Code — Owners of enterprises and other employers are obliged to pay compensation for death or injuries to employees even if the event is purely accidental or due to a fortuitous cause, if the death or personal injury arose out of and in the course of employment; the employer is not liable if the mishap was due to the employee’s own notorious negligence, voluntary act, or drunkenness, and compensation is equitably reduced when the employee’s lack of due care contributed. Applied: Candano Shipping was held liable for Melquiades’s death during the sinking, which arose out of and in the course of employment and was caused by a fortuitous event.
• Article 391, New Civil Code — A person on board a vessel lost during a sea voyage who has not been heard for four years since the loss of the vessel is presumed dead for all purposes, including the division of the estate among heirs. Applied: Melquiades was missing after M/V David, Jr. sank on 27 March 1996; after four years, the presumption of death was operative.
• Article 194, Labor Code — The System shall pay primary beneficiaries upon the death of a covered employee an amount equivalent to the monthly income benefit plus 10% for each dependent child, not exceeding five, with a guaranteed five-year monthly income benefit and a minimum monthly death benefit. Applied: The SC held it applies only to SSS death compensation and not to the civil claim under Article 1711; the CA erred in using it.
• Articles 2199 and 2200, New Civil Code — One is entitled to adequate compensation only for pecuniary loss duly proved, referred to as actual or compensatory damages; indemnification comprehends the value of the loss suffered and the profits the obligee failed to obtain. Applied: These provisions governed the extent of Candano Shipping’s liability and supplied the basis for actual damages.
• Article 2197, New Civil Code — Damages may be actual or compensatory, moral, nominal, temperate or moderate, liquidated, or exemplary or corrective. Applied: The indemnity under Article 1711 may take any of these forms depending on the facts; only actual damages were warranted here.
• Article 1700, New Civil Code — Relations between capital and labor are not merely contractual and are impressed with public interest; labor contracts must yield to the common good and are subject to special laws on labor. Applied: The employment contract was imbued with public interest, supporting the employer’s liability under Article 1711.
• Rule 45, Revised Rules of Court — Petition for review on certiorari. Applied: The procedural vehicle by which Candano Shipping brought the case to the SC.