Federal Phoenix Assurance Co., Ltd. vs. Fortune Sea Carrier, Inc.

A charter party denominated as a "time charter" is in reality a bareboat or demise charter — converting the vessel into a private carrier — where the agreement shows that the charterer assumed operational control for the dispatch and direction of the voyage, the master and crew were placed under the charterer's orders, and the shipowner completely and exclusively relinquished possession, command, and navigation of the vessel to the charterer.

Fortune Sea Carrier, Inc. is a corporation engaged in the business of transporting cargo by water for compensation, offering its services to the public, and is therefore a common carrier. Federal Phoenix Assurance Co., Ltd. is an insurance company that insured a shipment of abaca fibers carried aboard Fortune Sea's vessel M/V Ricky Rey and, after paying the consignee's insurance claim, was subrogated to the consignee's rights. Northern Mindanao Transport Co., Inc. was the charterer of the vessel under a Time Charter Party agreement with Fortune Sea. The dispute arose from damage to the abaca shipment during discharge at the Iligan City port, which prompted the subrogated insurer to pursue a claim against the shipowner as a common carrier.

On March 9, 1994, Fortune Sea agreed to lease its vessel M/V Ricky Rey to Northern Mindanao Transport Co., Inc. under a Time Charter Party agreement, providing that the vessel would be leased to Northern Transport for 90 days to carry bags of cement to different ports of destination. The parties later extended the lease period for another 90 days. Fortune Sea is a corporation engaged in the business of transporting cargo by water for compensation, offering its services to the public, and is thus a common carrier.

Sometime in June 1994, Northern Transport ordered 2,069 bales of abaca fibers to be shipped on board M/V Ricky Rey by shipper Manila Hemp Trading Corporation, for delivery to consignee Newtech Pulp Inc. in Iligan City. The shipment was covered by Bill of Lading No. 1 and was insured by Federal Phoenix Assurance Co., Ltd. Upon arrival of M/V Ricky Rey at the Iligan City port on June 16, 1994, stevedores began discharging the abaca shipment the following day. At about 3:00 p.m. on June 18, 1994, the stevedores noticed smoke coming from the cargo haul where the bales of abaca were located. The fire was extinguished by the Iligan City Fire Department, but investigation revealed that 60 bales of abaca were damaged. The cause of the fire was traced to cigarette butts improperly disposed of by one of the stevedores unloading the cargo — stevedores who were not employed by Fortune Sea but by a stevedoring company.

As a result of the losses, Newtech filed an insurance claim for ₱260,000.00 with Federal Phoenix. After evaluation, Federal Phoenix paid Newtech ₱162,419.25 for the losses incurred due to the damaged and undelivered bales of abaca. Upon payment, Federal Phoenix was subrogated to the rights of Newtech and pursued its claim against Fortune Sea. Despite several demands, Federal Phoenix's claims were not settled, prompting the insurer to file a Complaint for Sum of Money against Fortune Sea before the RTC of Makati.

For its defense, Fortune Sea insisted that it was acting as a private carrier at the time the incident occurred, alleging that the Time Charter Party agreement expressly provided that M/V Ricky Rey would be under the orders and complete control of Northern Transport. The RTC found Fortune Sea liable and ordered it to pay ₱260,000.00 as actual damages, attorney's fees, and cost of suit. The CA reversed, finding the agreement to be a bareboat or demise charter that converted the vessel into a private carrier. The testimony of Captain Alfredo Canon of M/V Ricky Rey confirmed that Northern Transport gave direct orders regarding what cargo to carry and that the stevedores involved in the incident were not under Fortune Sea's employment.

• Private Carrier Status: Respondent Fortune Sea insisted that it was acting as a private carrier at the time the incident occurred, alleging that the Time Charter Party agreement expressly provided that M/V Ricky Rey would be under the orders and complete control of Northern Transport.

• Nature of Charter Party: Whether the CA erred in declaring that Fortune Sea was converted into a private carrier by virtue of the charter party agreement it entered into with Northern Transport.

• Nature of Charter Party: No. The CA did not err. The Time Charter Party agreement was in reality a bareboat or demise charter, because Fortune Sea had completely and exclusively relinquished possession, command, and navigation of M/V Ricky Rey to Northern Transport, including operational control over the vessel's crew.

• Nature of Charter Party: In determining the nature of a contract, courts are not bound by the title or name given by the parties; the decisive factor is the intention of the parties as shown by their conduct, words, actions, and deeds prior to, during, and immediately after executing the agreement. A perspicacious scrutiny of the Time Charter Party disclosed provisions evincing that Northern Transport became the owner pro hac vice of M/V Ricky Rey during the whole period of the voyage: Northern Transport assumed operational control for the dispatch and direction of the voyage; the Master was placed under the orders of Northern Transport as regards employment and other arrangements; and Northern Transport was to furnish the Master with all instructions and sailing directions. The testimony of Captain Alfredo Canon confirmed that Northern Transport gave direct orders to load and transport the abaca fibers, and that the stevedores who caused the fire were not under Fortune Sea's employment. Although the master and crew were those of the shipowner, Fortune Sea had completely relinquished possession, command, and navigation of the vessel to Northern Transport, making the master and crew subject to the charterer's direct control and supervision. The agreement, despite its denomination as a Time Charter, undoubtedly reflected the parties' intention to enter into a bareboat charter agreement. As a private carrier, Fortune Sea could not be held liable under the standards applicable to common carriers, and the complaint was properly dismissed.

• Intention of the Parties over Contract Title — In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor is the intention of the parties, as shown not necessarily by the terminology used in the contract but by their conduct, words, actions, and deeds prior to, during, and immediately after executing the agreement. The Court applied this doctrine to hold that the Time Charter Party was in reality a bareboat charter, because the conduct and provisions of the agreement demonstrated a complete transfer of possession, command, and navigation to the charterer.

• Bareboat or Demise Charter — A bareboat or demise charter is one where the charterer becomes the owner pro hac vice of the vessel during the period of the charter, such that the shipowner completely and exclusively relinquishes possession, command, and navigation of the vessel to the charterer. The key indicia are: (a) the charterer assumes operational control for the dispatch and direction of the voyage; (b) the Master is placed under the orders of the charterer; and (c) the charterer furnishes the Master with all instructions and sailing directions. Where these elements are present, the vessel is converted into a private carrier notwithstanding the denomination of the agreement as a time charter.

• "In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor in evaluating an agreement is the intention of the parties, as shown, not necessarily by the terminology used in the contract but by their conduct, words, actions and deeds prior to, during and immediately alter executing the agreement." — This passage articulates the controlling principle for contract characterization, which the Court applied to reclassify the Time Charter Party as a bareboat charter.

• "M/V Ricky Rey was converted into a private carrier notwithstanding the existence of the Time Charter Party agreement with Northern Transport since the said agreement was not limited to the ship only but extends even to the control of its crew." — This passage states the ratio decidendi: the transfer of control over both vessel and crew, not merely the vessel itself, is what converts a common carrier into a private carrier.

• "The Time Charier Part[y] unequivocally established that appellant Fortune Sea had completely and exclusively relinquished possession, command and navigation of M/V Ricky Rey to Northern Transport." — This passage defines the operative test for a bareboat or demise charter: complete and exclusive relinquishment of possession, command, and navigation to the charterer.

• Aguirre vs. CA, 380 Phil. 736 (2000) — Cited as controlling authority for the principle that courts are not bound by the title given to a contract by the parties, but must look to their intention as shown by conduct, words, actions, and deeds. The Court relied on this to reclassify the Time Charter Party as a bareboat charter.

• Zamora vs. CA, 328 Phil. 1106 (1996) — Cited as the original source, through Aguirre vs. CA, of the principle that the nature of a contract is determined by the intention of the parties rather than the terminology used.

Velasco, Jr. (Chairperson), Peralta, Bersamin, and Villarama, Jr., JJ., concurred.