In 1983, Hongkong Government Supplies Department (Hongkong) contracted Mayer Steel Pipe Corp (Mayer) to manufacture and supply steel pipes and fittings. Prior to their shipping, Mayer insured the pipes and fittings against all risks with South Sea Surety & Insurance Co Inc (South Sea) and Charter Insurance Corp (Charter). On arrival, the goods were found to be damaged.

The regional trial Court (RTC) ruled in favour of Hongkong and Mayer. It found that the damage to the goods was not due to manufacturing defects. It also noted that the relevant insurance contracts were all risks policies, which insure against all causes of conceivable loss or damage. The only exceptions were those excluded in the policy, or those sustained due to fraud or intentional misconduct on the part of the insured. South Sea and Charter appealed to the Court of Appeals (CA).

The CA affirmed the finding of the RTC that the damage was not due to a factory defect, and that it was covered by the policies issued by South Sea and Charter to Mayer. However, it set aside the decision of the RTC and dismissed the complaint on the ground of prescription. It held that the action was barred under s 3(6) of the Carriage of Goods by Sea Act (COGSA) since it was filed only on 17 April 1986, more than two years from the time the goods were unloaded from the vessel. Section 3(6) of COGSA provides that 'the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered'. The CA ruled that this provision applies not only to the carrier, but also to the insurer, citing Filipino Merchants Insurance Co Inc v Alejandro 145 SCRA 42 (1986). Mayer and Hongkong appealed to the Supreme Court.

Held: The petition is granted. The CA judgment is set aside and the judgment of the RTC is reinstated.

Section 3(6) of COGSA states that the carrier and the ship shall be discharged from all liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date when they should have been delivered. Under this provision, only the carrier's liability is extinguished if no suit is brought within one year. But the liability of the insurer is not extinguished, because the insurer's liability is based not on the contract of carriage, but on the contract of insurance. A close reading of the law reveals that COGSA governs the relationship between the carrier on the one hand, and the shipper, the consignee and/or the insurer on the other hand. It defines the obligations of the carrier under the contract of carriage. It does not, however, affect the relationship between the shipper and the insurer. The latter case is governed by the Insurance Code.

The Court's ruling in Filipino Merchants and the other cases cited therein do not support the CA's view that the insurer's liability prescribes after one year if no action for indemnity is filed against the carrier or the insurer. In that case, the shipper filed a complaint against the insurer for recovery of a sum of money as indemnity for the loss and damage sustained by the insured goods. The insurer, in turn, filed a third-party complaint against the carrier for reimbursement of the amount it paid to the shipper. The insurer filed the third-party complaint on 9 January 1978, more than one year after delivery of the goods on 17 December 1977. This Court held that the insurer was already barred from filing a claim against the carrier because under COGSA, the suit against the carrier must be filed within one year after delivery of the goods or the date when the goods should have been delivered. The Court said that 'the coverage of the Act includes the insurer of the goods'.

The Filipino Merchants case differs from this case. In Filipino Merchants, it was the insurer which filed a claim against the carrier for reimbursement of the amount it paid to the shipper. Here, it was the shipper which filed a claim against the insurer. The basis of the shipper's claim is the all risks insurance policies issued by South Sea and Charter to Mayer. The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the shipper, the consignee or the insurer. When this Court said in Filipino Merchants that s 3(6) of COGSA applies to the insurer, it meant that the insurer, like the shipper, may no longer file a claim against the carrier beyond the one-year period provided in the law. But it does not mean that the shipper may no longer file a claim against the insurer, because the basis of the insurer's liability is the insurance contract. An insurance contract is a contract whereby one party, for a consideration known as the premium, agrees to indemnify another for loss or damage which it may suffer from a specified peril. Such obligation prescribes in 10 years, in accordance with art 1144 of the New Civil Code.