Republic of the Philippines Subsequent negotiations between the parties eventually led to the formulation of an arbitration
SUPREME COURT agreement which, among others, provides:
Manila
THIRD DIVISION
G.R. No. 96283 February 25, 1992
CHUNG FU INDUSTRIES (PHILIPPINES) INC., its Directors and Officers namely: HUANG
KUO-CHANG, HUANG AN-CHUNG, JAMES J.R. CHEN, TRISTAN A. CATINDIG, VICENTE B.
AMADOR, ROCK A.C. HUANG, JEM S.C. HUANG, MARIA TERESA SOLIVEN and VIRGILIO
M. DEL ROSARIO, petitioners,
vs.
COURT OF APPEALS, HON. FRANCISCO X. VELEZ (Presiding Judge, Regional Trail Court
of Makati [Branch 57]) and ROBLECOR PHILIPPINES, INC., respondents.
ROMERO, J.:
This is a special civil action for certiorari seeking to annul the Resolutions of the Court of
Appeals* dated October 22, 1990 and December 3, 1990 upholding the Orders of July 31, 1990
and August 23, 1990 of the Regional Trial Court of Makati, Branch 57, in Civil Case No. 90-1335.
Respondent Court of Appeals affirmed the ruling of the trial court that herein petitioners, after
submitting themselves for arbitration and agreeing to the terms and conditions thereof, providing
that the arbitration award shall be final and unappealable, are precluded from seeking judicial
review of subject arbitration award.
It appears that on May 17, 1989, petitioner Chung Fu Industries (Philippines) (Chung Fu for
brevity) and private respondent Roblecor Philippines, Inc. (Roblecor for short) forged a
construction agreement 1 whereby respondent contractor committed to construct and finish on
December 31, 1989, petitioner corporation's industrial/factory complex in Tanawan, Tanza, Cavite
for and in consideration of P42,000,000.00. In the event of disputes arising from the performance
of subject contract, it was stipulated therein that the issue(s) shall be submitted for resolution
before a single arbitrator chosen by both parties.
Apart from the aforesaid construction agreement, Chung Fu and Roblecor entered into two (2)
other ancillary contracts, to wit: one dated June 23, 1989, for the construction of a dormitory and
support facilities with a contract price of P3,875,285.00, to be completed on or before October 31,
1989; 2 and the other dated August 12, 1989, for the installation of electrical, water and hydrant
systems at the plant site, commanding a price of P12.1 million and requiring completion thereof
one month after civil works have been finished. 3
However, respondent Roblecor failed to complete the work despite the extension of time allowed
it by Chung Fu. Subsequently, the latter had to take over the construction when it had become
evident that Roblecor was not in a position to fulfill its obligation.
Claiming an unsatisfied account of P10,500,000.00 and unpaid progress billings of
P2,370,179.23, Roblecor on May 18, 1990, filed a petition for Compulsory Arbitration with prayer
for Temporary Restraining Order before respondent Regional Trial Court, pursuant to the
arbitration clause in the construction agreement. Chung Fu moved to dismiss the petition and
further prayed for the quashing of the restraining order.
2. The parties mutually agree that the arbitration shall proceed in accordance
with the following terms and conditions: —
xxx xxx xxx
d. The parties mutually agree that they will abide by the
decision of the arbitrator including any amount that may
be awarded to either party as compensation,
consequential damage and/or interest thereon;
e. The parties mutually agree that the decision of the
arbitrator shall be final and unappealable.
Therefore, there shall be no further judicial recourse if
either party disagrees with the whole or any part of the
arbitrator's award.
f. As an exception to sub-paragraph (e) above, the parties
mutually agree that either party is entitled to seek judicial
assistance for purposes of enforcing the arbitrator's
award;
xxx xxx xxx 4
(Emphasis supplied)
Respondent Regional Trial Court approved the arbitration agreement thru its Order of May 30,
1990. Thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator.
On June 30, 1990, Arbitrator Asuncion ordered petitioners to immediately pay respondent
contractor, the sum of P16,108,801.00. He further declared the award as final and unappealable,
pursuant to the Arbitration Agreement precluding judicial review of the award.
Consequently, Roblecor moved for the confirmation of said award. On the other hand, Chung Fu
moved to remand the case for further hearing and asked for a reconsideration of the judgment
award claiming that Arbitrator Asuncion committed twelve (12) instances of grave error by
disregarding the provisions of the parties' contract.
Respondent lower court denied Chung Fu's Motion to Remand thus compelling it to seek
reconsideration therefrom but to no avail. The trial court granted Roblecor's Motion for
Confirmation of Award and accordingly, entered judgment in conformity therewith. Moreover, it
granted the motion for the issuance of a writ of execution filed by respondent.
Chung Fu elevated the case via a petition for certiorari to respondent Court of Appeals. On
October 22,1990 the assailed resolution was issued. The respondent appellate court concurred
with the findings and conclusions of respondent trial court resolving that Chung Fu and its officers,
as signatories to the Arbitration Agreement are bound to observe the stipulations thereof
providing for the finality of the award and precluding any appeal therefrom.
A motion for reconsideration of said resolution was filed by petitioner, but it was similarly denied
by respondent Court of Appeals thru its questioned resolution of December 3, 1990.
Hence, the instant petition anchored on the following grounds:
First
 Respondents Court of Appeals and trial Judge gravely abused their discretion
and/or exceeded their jurisdiction, as well as denied due process and
substantial justice to petitioners, — (a) by refusing to exercise their judicial
authority and legal duty to review the arbitration award, and (b) by declaring
that petitioners are estopped from questioning the arbitration award allegedly
in view of the stipulations in the parties' arbitration agreement that "the
decision of the arbitrator shall be final and unappealable" and that "there shall
be no further judicial recourse if either party disagrees with the whole or any
part of the arbitrator's award."
Second
Respondent Court of Appeals and trial Judge gravely abused their discretion
and/or exceeded their jurisdiction, as well as denied due process and
substantial justice to petitioner, by not vacating and annulling the award dated
30 June 1990 of the Arbitrator, on the ground that the Arbitrator grossly
departed from the terms of the parties' contracts and misapplied the law, and
thereby exceeded the authority and power delegated to him. (Rollo, p. 17)
Allow us to take a leaf from history and briefly trace the evolution of arbitration as a mode of
dispute settlement.
Because conflict is inherent in human society, much effort has been expended by men and
institutions in devising ways of resolving the same. With the progress of civilization, physical
combat has been ruled out and instead, more specific means have been evolved, such as
recourse to the good offices of a disinterested third party, whether this be a court or a private
individual or individuals.
Legal history discloses that "the early judges called upon to solve private conflicts were primarily
the arbiters, persons not specially trained but in whose morality, probity and good sense the
parties in conflict reposed full trust. Thus, in Republican Rome, arbiter and judge (judex) were
synonymous. The magistrate or praetor, after noting down the conflicting claims of litigants, and
clarifying the issues, referred them for decision to a private person designated by the parties, by
common agreement, or selected by them from an apposite listing (the album judicium) or else by
having the arbiter chosen by lot. The judges proper, as specially trained state officials endowed
with own power and jurisdiction, and taking cognizance of litigations from beginning to end, only
appeared under the Empire, by the so-called cognitio extra ordinem." 5
Such means of referring a dispute to a third party has also long been an accepted alternative to
litigation at common law. 6
Sparse though the law and jurisprudence may be on the subject of arbitration in the Philippines, it
was nonetheless recognized in the Spanish Civil Code; specifically, the provisions on
compromises made applicable to arbitrations under Articles 1820 and 1821.7 Although said
provisions were repealed by implication with the repeal of the Spanish Law of Civil
Procedure, 8 these and additional ones were reinstated in the present Civil Code. 9
Arbitration found a fertile field in the resolution of labor-management disputes in the Philippines.
Although early on, Commonwealth Act 103 (1936) provided for compulsory arbitration as the state
policy to be administered by the Court of Industrial Relations, in time such a modality gave way to
voluntary arbitration. While not completely supplanting compulsory arbitration which until today is
practiced by government officials, the Industrial Peace Act which was passed in 1953 as Republic
Act No. 875, favored the policy of free collective bargaining, in general, and resort to grievance
procedure, in particular, as the preferred mode of settling disputes in industry. It was accepted
and enunciated more explicitly in the Labor Code, which was passed on November 1, 1974 as
Presidential Decree No. 442, with the amendments later introduced by Republic Act No. 6715
(1989).
Whether utilized in business transactions or in employer-employee relations, arbitration was
gaining wide acceptance. A consensual process, it was preferred to orders imposed by
government upon the disputants. Moreover, court litigations tended to be time-consuming, costly,
and inflexible due to their scrupulous observance of the due process of law doctrine and their
strict adherence to rules of evidence.
As early as the 1920's, this Court declared:
In the Philippines fortunately, the attitude of the courts toward arbitration
agreements is slowly crystallizing into definite and workable form. . . . The rule
now is that unless the agreement is such as absolutely to close the doors of
the courts against the parties, which agreement would be void, the courts will
look with favor upon such amicable arrangements and will only with great
reluctance interfere to anticipate or nullify the action of the arbitrator. 10
That there was a growing need for a law regulating arbitration in general was acknowledged when
Republic Act No. 876 (1953), otherwise known as the Arbitration Law, was passed. "Said Act was
obviously adopted to
supplement — not to supplant — the New Civil Code on arbitration. It expressly declares that "the
provisions of chapters one and two, Title XIV, Book IV of the Civil Code shall remain in force." 11
In recognition of the pressing need for an arbitral machinery for the early and expeditious
settlement of disputes in the construction industry, a Construction Industry Arbitration
Commission (CIAC) was created by Executive Order No. 1008, enacted on February 4, 1985.
In practice nowadays, absent an agreement of the parties to resolve their disputes via a particular
mode, it is the regular courts that remain the fora to resolve such matters. However, the parties
may opt for recourse to third parties, exercising their basic freedom to "establish such stipulation,
clauses, terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy." 12 In such a case, resort to the
arbitration process may be spelled out by them in a contract in anticipation of disputes that may
arise between them. Or this may be stipulated in a submission agreement when they are actually
confronted by a dispute. Whatever be the case, such recourse to an extrajudicial means of
settlement is not intended to completely deprive the courts of jurisdiction. In fact, the early cases
on arbitration carefully spelled out the prevailing doctrine at the time, thus: ". . . a clause in a
contract providing that all matters in dispute between the parties shall be referred to arbitrators
and to them alone is contrary to public policy and cannot oust the courts of Jurisdiction." 13
But certainly, the stipulation to refer all future disputes to an arbitrator or to submit an ongoing
dispute to one is valid. Being part of a contract between the parties, it is binding and enforceable
in court in case one of them neglects, fails or refuses to arbitrate. Going a step further, in the
event that they declare their intention to refer their differences to arbitration first before taking
court action, this constitutes a condition precedent, such that where a suit has been instituted
prematurely, the court shall suspend the same and the parties shall be directed forthwith to
proceed to arbitration. 14
A court action may likewise be proven where the arbitrator has not been selected by the
parties. 15
Under present law, may the parties who agree to submit their disputes to arbitration further
provide that the arbitrators' award shall be final, unappealable and executory?
Article 2044 of the Civil Code recognizes the validity of such stipulation, thus:
Any stipulation that the arbitrators' award or decision shall be final is valid,
without prejudice to Articles 2038, 2039 and 2040.
Similarly, the Construction Industry Arbitration Law provides that the arbitral award "shall be final
and inappealable except on questions of law which shall be appealable to the Supreme Court." 16
Under the original Labor Code, voluntary arbitration awards or decisions were final, unappealable
and executory. "However, voluntary arbitration awards or decisions on money claims, involving an
amount exceeding One Hundred Thousand Pesos (P100,000.00) or forty-percent (40%) of the
paid-up capital of the respondent employer, whichever is lower, maybe appealed to the National
Labor Relations Commission on any of the following grounds: (a) abuse of discretion; and (b)
gross incompetence." 17 It is to be noted that the appeal in the instances cited were to be made to
the National Labor Relations Commission and not to the courts.
With the subsequent deletion of the above-cited provision from the Labor Code, the voluntary
arbitrator is now mandated to render an award or decision within twenty (20) calendar days from
the date of submission of the dispute and such decision shall be final and executory after ten (10)
calendar days from receipt of the copy of the award or decision by the parties. 18
Where the parties agree that the decision of the arbitrator shall be final and unappealable as in
the instant case, the pivotal inquiry is whether subject arbitration award is indeed beyond the
ambit of the court's power of judicial review.
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of
the arbitrators' award is not absolute and without exceptions. Where the conditions described in
Articles 2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the
arbitrators' award may be annulled or rescinded. 19 Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating, modifying or rescinding an arbitrator's
award. 20 Thus, if and when the factual circumstances referred to in the above-cited provisions are
present, judicial review of the award is properly warranted.
What if courts refuse or neglect to inquire into the factual milieu of an arbitrator's award to
determine whether it is in accordance with law or within the scope of his authority? How may the
power of judicial review be invoked?
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to
be borne in mind, however, that this action will lie only where a grave abuse of discretion or an act
without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown. For "the
writ of certiorari is an extra-ordinary remedy and that certiorari jurisdiction is not to be equated
with appellate jurisdiction. In a special civil action of certiorari, the Court will not engage in a
review of the facts found nor even of the law as interpreted or applied by the arbitrator unless the
supposed errors of fact or of law are so patent and gross and prejudicial as to amount to a grave
abuse of discretion or an exces de pouvoir on the part of the arbitrator." 21
Even decisions of administrative agencies which are declared "final" by law are not exempt from
judicial review when so warranted. Thus, in the case of Oceanic Bic Division (FFW), et al. v.
Flerida Ruth P. Romero, et al., 22 this Court had occasion to rule that:
. . . Inspite of statutory provisions making "final" the decisions of certain
administrative agencies, we have taken cognizance of petitions questioning
these decisions where want of jurisdiction, grave abuse of discretion, violation
of due process, denial of substantial justice or erroneous interpretation of the
lawwere brought to our attention . . . 23 (Emphasis ours).
It should be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-
judicial capacity. 24 It stands to reason, therefore, that their decisions should not be beyond the
scope of the power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which
allege error on the part of the arbitrator in granting compensation for various items which
apparently are disputed by said petitioners:
1. The Honorable Arbitrator committed grave error in failing to apply the terms
and conditions of the Construction Agreement, Dormitory Contract and
Electrical Contract, and in using instead the "practices" in the construction
industry;
2. The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss of productivity due to adverse weather
conditions;
3. The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss due to delayed payment of progress
billings;
4. The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for loss of productivity due to the cement crisis;
5. The Honorable Arbitrator committed grave error in granting extra
compensation to Roblecor for losses allegedly sustained on account of the
failed coup d'état;
6. The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing the alleged unpaid billings of Chung Fu;
7. The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing the alleged extended overhead expenses;
8. The Honorable Arbitrator committed grave error in granting to Roblecor the
amount representing expenses for change order for site development outside
the area of responsibility of Roblecor;
9. The Honorable Arbitrator committed grave error in granting to Roblecor the
cost of warehouse No. 2;
10. The Honorable Arbitrator committed grave error in granting to Roblecor
extra compensation for airduct change in dimension;
11. The Honorable Arbitrator committed grave error in granting to Roblecor
extra compensation for airduct plastering; and
12. The Honorable Arbitrator committed grave error in awarding to Roblecor
attorney's fees.
After closely studying the list of errors, as well as petitioners' discussion of the same in their
Motion to Remand Case For Further Hearing and Reconsideration and Opposition to Motion for
Confirmation of Award, we find that petitioners have amply made out a case where the voluntary
arbitrator failed to apply the terms and provisions of the Construction Agreement which forms part
of the law applicable as between the parties, thus committing a grave abuse of discretion.
Furthermore, in granting unjustified extra compensation to respondent for several items, he
exceeded his powers — all of which would have constituted ground for vacating the award under
Section 24 (d) of the Arbitration Law.
But the respondent trial court's refusal to look into the merits of the case, despite prima
facie showing of the existence of grounds warranting judicial review, effectively deprived
petitioners of their opportunity to prove or substantiate their allegations. In so doing, the trial court
itself committed grave abuse of discretion. Likewise, the appellate court, in not giving due course
to the petition, committed grave abuse of discretion. Respondent courts should not shirk from
exercising their power to review, where under the applicable laws and jurisprudence, such power
may be rightfully exercised; more so where the objections raised against an arbitration award may
properly constitute grounds for annulling, vacating or modifying said award under the laws on
arbitration.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated October
22, 1990 and December 3, 1990 as well as the Orders of respondent Regional Trial Court dated
July 31, 1990 and August 23, 1990, including the writ of execution issued pursuant thereto, are
hereby SET ASIDE. Accordingly, this case is REMANDED to the court of origin for further hearing
on this matter. All incidents arising therefrom are reverted to the status quo ante until such time as
the trial court shall have passed upon the merits of this case. No costs.
SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur.
CHUNG FU INDUSTRIES V. CA (G.R. NO. 96283)
Facts:
Petitioner Chung Fu Industries (Philippines) and private respondent Roblecor Philippines, Inc.
forged a construction agreement whereby respondent contractor committed to construct and
finish petitioner corporation’s industrial/factory complex. In the event of disputes arising from the
performance of subject contract, it was stipulated therein that the issue(s) shall be submitted for
resolution before a single arbitrator chosen by both parties. Roblecor filed a petition for
Compulsory Arbitration with prayer for Temporary Restraining Order before respondent RTC to
claim the unsatisfied account and unpaid progress billings. Chung Fu moved to dismiss the
petition and further prayed for the quashing of the restraining order. Subsequent negotiations
between the parties eventually led to the formulation of an arbitration agreement which, among
others, provides: The parties mutually agree that the decision of the arbitrator shall be final and
unappealable. Therefore, there shall be no further judicial recourse if either party disagrees with
the whole or any part of the arbitrator’s award. Respondent RTC approved the arbitration
agreement and thereafter, Engr. Willardo Asuncion was appointed as the sole arbitrator. Arbitrator
Asuncion ordered petitioner to immediately pay respondent contractor and further declared the
award as final and unappealable. Roblecor then moved for the confirmation of said award which
was accordingly confirmed and a writ of execution granted to it. Meanwhile, Chung Fu moved to
remand the case for further hearing and asked for a reconsideration of the judgment award
claiming that Arbitrator Asuncion committed twelve (12) instances of grave error by disregarding
the provisions of the parties’ contract. Chung Fu’s Motion was denied and similarly its motion for
reconsiderationn. Chung Fu elevated the case via a petition for certiorari to respondent CA. The
respondent appellate court concurred with the findings and conclusions of respondent trial court.
A motion for reconsideration of said resolution was filed by petitioner, but was similarly denied.
Issue:
Whether or not petitioners are estopped from questioning the arbitration award allegedly in view
of the stipulations in the parties’ arbitration agreement that “the decision of the arbitrator shall be
final and unappealable” and that “there shall be no further judicial recourse if either party
disagrees with the whole or any part of the arbitrator’s award.”
Ruling:
We rule in the negative. It is stated explicitly under Art. 2044 of the Civil Code that the finality of
the arbitrators’ award is not absolute and without exceptions. Where the conditions described in
Articles 2038, 2039 and 2040 applicable to both compromises and arbitrations are obtaining, the
arbitrators’ award may be annulled or rescinded. Additionally, under Sections 24 and 25 of the
Arbitration Law, there are grounds for vacating, modifying or rescinding an arbitrator’s award.
Thus, if and when the factual circumstances referred to in the above-cited provisions are present,
judicial review of the award is properly warranted.
This is where the proper remedy is certiorari under Rule 65 of the Revised Rules of Court. It is to
be borne in mind, however, that this action will lie only where a grave abuse of discretion or an act
without or in excess of jurisdiction on the part of the voluntary arbitrator is clearly shown. It should
be stressed, too, that voluntary arbitrators, by the nature of their functions, act in a quasi-judicial
capacity. It stands to reason, therefore, that their decisions should not be beyond the scope of the
power of judicial review of this Court.
In the case at bar, petitioners assailed the arbitral award on the following grounds, most of which
allege error on the part of the arbitrator in granting compensation for various items which
apparently are disputed by said petitioners. After closely studying the list of errors, as well as
petitioners’ discussion of the same in their Motion to Remand Case For Further Hearing and
Reconsideration and Opposition to Motion for Confirmation of Award, we find that petitioners have
amply made out a case where the voluntary arbitrator failed to apply the terms and provisions of
the Construction Agreement which forms part of the law applicable as between the parties, thus
committing a grave abuse of discretion. Furthermore, in granting unjustified extra compensation to
respondent for several items, he exceeded his powers — all of which would have constituted
ground for vacating the award under Section 24 (d) of the Arbitration Law.
Wherefore, the petition is granted. The Resolutions of the CA as well as the Orders of respondent
RTC are hereby SET ASIDE. Accordingly, this case is REMANDED to the court of origin for
further hearing on this matter. All incidents arising therefrom are reverted to the status quo
ante until such time as the trial court shall have passed upon the merits of this case.
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 91228. March 22, 1993.
PUROMINES, INC., petitioner, vs. COURT OF APPEAL and PHILIPP BROTHERS OCEANIC,
INC., respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS OF VENDOR; DAMAGES ARISING FROM CARRIAGE AND
DELIVERY. — We agree with the court a quo that the sales contract is comprehensive enough to
include claims for damages arising from carriage and delivery of the goods. As a general rule, the
seller has the obligation to transmit the goods to the buyer, and concomitant thereto, the
contracting of a carrier to deliver the same.
2. COMMERCIAL LAW; MARITIME TRANSPORTATION; MARITIME COMMERCE; CHARTER
PARTIES, CONSTRUED. — American jurisprudence defines charter party as a contract by which
an entire ship or some principal part thereof is let by the owner to another person for a specified
time or use. Charter or charter parties are of two kinds. Charter of demise or bareboat and
contracts of affreightment.
3. ID.; ID.; ID.; ID.; KINDS; CHARTER OF DEMISE, CONSTRUED. — Under the demise or
bareboat charter of the vessel, the charterer will generally be considered as owner for the voyage
or service stipulated. The charterer mans the vessel with his own people and becomes, in effect,
the owner pro hac vice, subject to liability to others for damages caused by negligence. To create
a demise the owner of a vessel must completely and exclusively relinquish possession, anything
short of such a complete transfer is a contract of affreightment (time or voyage charter party) or
not a charter party at all.
4. ID.; ID.; ID.; ID.; ID.; CONTRACT OF AFFREIGNMENT, CONSTRUED. — A contract of
affreightment is in which the owner of the vessel leases part or all of its space to haul goods for
others. It is a contract for a special service to be rendered by the owner of the vessel and under
such contract the general owner retains the possession, command and navigation of the ship, the
charterer or freighter merely having use of the space in the vessel in return for his payment of the
charter hire. If the charter is a contract of affreightment, which leaves the general owner in
possession of the ship as owner for the voyage, the rights, responsibilities of ownership rest on
the owner and the charterer is usually free from liability to third persons in respect of the ship.
5. ID.; ID.; ID.; ID.; LIABILITY TO THIRD PERSONS FOR GOODS SHIPPED ON BOARD A
VESSEL. — Responsibility to third persons for goods shipped on board a vessel follows the
vessel's possession and employment; and if possession is transferred to the charterer by virtue of
a demise, the charterer, and not the owner, is liable as carrier on the contract of affreightment
made by himself or by the master with third persons, and is answerable for loss, damage or non-
delivery of goods received for transportation. An owner who retains possession of the ship,
though the hold is the property of the charterer, remains liable as carrier and must answer for any
breach of duty as to the care, loading or unloading of the cargo.
6. ID.; ID.; ID.; ID.; BILLS OF LADING; ARBITRATION PROVISION THEREOF, CONSIDERED
AND RESPECTED. — Whether the liability of respondent should be based on the same contract
or that of the bill of lading, the parties are nevertheless obligated to respect the arbitration
provisions on the sales contract and/or the bill of lading. Petitioner being a signatory and party to
the sales contract cannot escape from his obligation under the arbitration clause as stated
therein. Arbitration has been held valid and constitutional. Even before the enactment of Republic
Act No. 876, this Court has countenanced the settlement of disputes through arbitration. The rule
now is that unless the agreement is such as absolutely to close the doors of the courts against the
parties, which agreement would be void, the courts will look with favor upon such amicable
arrangements and will only interfere with great reluctance to anticipate or nullify the action of the
arbitrator. As pointed out in the case of Mindanao Portland Cement Corp. v. McDough
Construction Company of Florida 18 wherein the plaintiff sued defendant for damages arising
from a contract, the Court said: "Since there obtains herein a written provision for arbitration as
well as failure on respondent's part to comply therewith, the court a quo rightly ordered the parties
to proceed to their arbitration in accordance with the terms of their agreement (Sec. 6 Republic
Act 876). Respondent's arguments touching upon the merits of the dispute are improperly raised
herein. They should be addressed to the arbitrators. This proceeding is merely a summary
remedy to enforce the agreement to arbitrate. The duty of the court in this case is not to resolve
the merits of the parties' claims but only to determine if they should proceed to arbitration or not.
And although it has been ruled that a privolous or patently baseless claim should not be ordered
to arbitration it is also recognized that the mere fact that a defense exist against a claim does not
make it frivolous or baseless."
7. REMEDIAL LAW; CIVIL PROCEDURE; PLEADINGS; COMPLAINT; ANNEXES ATTACHED
THEREOF, PART OF THE RECORD. — Petitioner contend that the arbitration provision in the
bills of lading should not have been discussed as an issue in the decision of the Court of Appeals
since it was not raised as a special or affirmative defense. The three bills of lading were attached
to the complaint as Annexes "A," "B," and "C," and are therefore parts thereof and may be
considered as evidence although not introduced as such. Hence, it was then proper for the court
a quo to discuss the contents of the bills of lading, having been made part of the record.
DECISION
NOCON, J p:
This is a special civil action for certiorari and prohibition to annul and set aside the Decision of the
respondent Court of Appeals dated November 16, 1989 1 reversing the order of the trial court and
dismissing petitioner's compliant in Civil Case No. 89-47403, entitled Puromines, Inc. v. Maritime
Factors, Inc. and Philipp Brothers Oceanic, Inc.
Culled from the records of this case, the facts show that petitioner, Puromines, Inc. (Puromines
for brevity) and Makati Agro Trading, Inc. (not a party in this case) entered into a contract with
private respondents Philipp Brothers Oceanic, Inc. for the sale of prilled Urea in bulk. The Sales
Contract No. S151.8.01018 provided, among others an arbitration clause which states, thus:
"9. Arbitration
"Any disputes arising under this contract shall be settled by arbitration in London in accordance
with the Arbitration Act 1950 and any statutory amendment or modification thereof. Each party is
to appoint an Arbitrator, and should they be unable to agree, the decision of an Umpire appointed
by them to be final. The Arbitrators and Umpire are all to be commercial men and resident in
London. This submission may be made a rule of the High Court of Justice in England by either
party." 2
On or about May 22, 1988, the vessel M/V "Liliana Dimitrova" loaded on board at Yuzhny, USSR
a shipment of 15,500 metric tons prilled Urea in bulk complete and in good order and condition for
transport to Iloilo and Manila, to be delivered to petitioner. Three bills of lading were issued by the
ship-agent in the Philippines, Maritime Factors Inc., namely: Bill of Lading No. dated May 12,
1988 covering 10,000 metric tons for discharge Manila; Bill of Lading No. 2 of even date covering
4,000 metric tons for unloading in Iloilo City; and Bill of Lading No. 3, also dated May 12, 1988,
covering 1,500 metric tons likewise for discharged in Manila
The shipment covered by Bill of Lading No. 2 was discharged in Iloilo City complete and in good
order and condition. However, the shipments covered by Bill of Lading Nos. 1 and 3 were
discharged in Manila in bad order and condition, caked, hardened and lumpy, discolored and
contaminated with rust and dirt. Damages were valued at P683, 056. 29 including additional
discharging expenses.
Consequently, petitioner filed a complaint 3 with the trial court 4 for breach of contract of carriage
against Maritime Factors Inc. (which was not included as respondent in this petition) as ship-
agent in the Philippines for the owners of the vessel MV "Liliana Dimitrova," while private
respondent, Philipp Brothers Oceanic Inc., was impleaded as charterer of the said vessel and
proper party to accord petitioner complete relief. Maritime Factors, Inc. filed its Answer 5 to the
complaint, while private respondent filed a motion to dismiss, dated February 9, 1989, on the
grounds that the complaint states no cause of action; that it was prematurely filed; and that
petitioner should comply with the arbitration clause in the sales contract. 6
The motion to dismiss was opposed by petitioner contending the inapplicability of the arbitration
clause inasmuch as the cause of action did not arise from a violation of the terms of the sales
contract but rather for claims of cargo damages where there is no arbitration agreement. On April
26, 1989, the trial court denied respondent's motion to dismiss in this wise:
"The sales contract in question states in part:
'Any disputes arising under this contract shall be settled by arbitration . . .(emphasis supplied)
"A perusal of the facts alleged in the complaint upon which the question of sufficiency of the
cause of action of the complaint arose from a breach of contract of carriage by the vessel
chartered by the defendant Philipp Brothers Oceanic, Inc. Thus, the aforementioned arbitration
clause cannot apply to the dispute in the present action which concerns plaintiff's claim for cargo
loss/damage arising from breach of contract of carriage.
"That the defendant is not the ship owner or common carrier and therefore plaintiff does not have
legal right against it since every action must be brought against the real party in interest has no
merit either for by the allegations in the complaint the defendant herein has been impleaded as
charterer of the vessel, hence, a proper party." 7
Elevating the matter to the Court of Appeals, petitioner's complaint was dismissed. The appellate
court found that the arbitration provision in the sales contract and/or the bills of lading is
applicable in the present case. Said the court:
"An examination of the sales contract No. S151.8.01018 shows that it is broad enough to include
the claim for damages arising from the carriage and delivery of the goods subject-matter thereof.
"It is also noted that the bills of lading attached as Annexes 'A', 'B' and 'C' to the complaint state,
in part, 'any dispute arising under this Bill of Lading shall be referred to arbitration of the Maritime
Arbitration Commission at the USSR Chamber of Commerce and Industry, 6 Kuibyshevskaia Str.,
Moscow, USSR, in accordance with the rules of procedure of said commission.'
Considering that the private respondent was one of the signatories to the sales contract . . . all
parties are obliged o respect the terms and conditions of the said sales contract, including the
provision thereof on 'arbitration.' "
Hence, this petition The issue raised is: Whether the phrase "any dispute arising under this
contract" in the arbitration clause of the sales contract covers a cargo claim against the vessel
(owner and/or charterers) for breach of contract of carriage.
Petitioner states in its complainants that Philipp Brothers "was the charterer of the vessel MV
'Liliana Dimitrova' which transported the shipment from Yuzhny USSR to Manila." Petitioner
further alleged that the caking and hardening, wetting and melting, and contamination by rust and
dirt of the damaged portions of the shipment were due to the improper ventilation and inadequate
storage facilities of the vessel; that the wetting of the cargo was attributable to the failure of the
crew to close the hatches before and when it rained while the shipment was being unloaded in the
Port of Manila; and that as a direct and natural consequence of the unseaworthiness and
negligence of the vessel (sic), petitioner suffered damages in the total amount of P683, 056.29
Philippine currency." 8 (Emphasis supplied)
Moreover, in its Opposition to the Motion to Dismiss, petitioner said that "[t]he cause of action of
the complaint arose from breach of contract of carriage by the vessel that was chartered by
defendant Philipp Brothers." 9
In the present petition, petitioner argues that the sales contract does not include the contract of
carriage which is a different contract entered into by the carrier with the cargo owners. That it was
an error for the respondent court to touch upon the arbitration provision of the bills lading in its
decision inasmuch as the same was not raised as an issue by private respondent who was not a
party in the bills of lading (emphasis Ours). Petitioner contradicts itself.
We agree with the court a quo that the sales contract is comprehensive enough to include claims
for damages arising from carriage and delivery of the goods. As a general rule, the seller has the
obligation to transmit the goods to the buyer, and concomitant thereto, the contracting of a carrier
to deliver the same. Art. 1523 of the Civil Code provides:
"Art. 1523. Where in pursuance of a contract of sale, the seller in authorized or required to send
the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for
the purpose of transmission to the buyer is deemed to be a delivery of the goods to the buyer,
except in the cases provided for in article 1503, first, second and third paragraphs, or unless a
contrary intent appear.
"Unless otherwise authorized by the buyer, the seller must take such contract with the carrier on
behalf of the buyer as may be reasonable, having regard to the nature of the goods and the other
circumstances of the case. If the seller omit so to do, and the goods are lost or damaged in
course of transit, the buyer may decline to treat the delivery to the carrier as a delivery to himself,,
or may hold the seller responsible in damages."
xxx xxx xxx
The disputed sales contact provides for conditions relative to the delivery of goods, such as date
of shipment, demurrage, weight as determined by the bill of lading at load port and more
particularly the following provisions:
"3. Intention is to ship in one bottom, approximately 5,000 metrics tons to Puromines and
approximately 15,000 metric tons to Makati Agro. However, Sellers to have right to ship material
as partial shipment or co-shipment in addition to above. In the event of co-shipment to a third
party within Philippines same to be discussed with and acceptable to both Puromines and Makati
Agro.
"4. Sellers to appoint neutral survey for Seller's account to conduct initial draft survey at first
discharge port and final survey at last discharge port. Surveyors results to be binding and final. In
the event draft survey results show a quantity less than the combined Bills of Lading quantity for
both Puromines and Makati Agro, Sellers to refund the difference. In the event that draft survey
results show a quantity in excess of combined Bills of Lading of quantity of both Puromines and
Makati Agro then Buyers to refund the difference.
"5. It is expressly and mutually agreed that neither Sellers nor vessel's Owners have any liability
to separate cargo or to deliver cargo separately or to deliver minimum/maximum quantities stated
on individual Bills of Lading. At each port vessel is to discharge in accordance with Buyers local
requirements and it is Buyer's responsibility to separate individual quantities required by each of
them at each port during or after discharged."
As argued by respondent on its motion to dismiss, "the (petitioner) derives his right to the cargo
from the bill of lading which is the contract of affreightment together with the sales contract.
Consequently, the (petitioner) is bound by the provisions and terms of said bill of lading and of the
arbitration clause incorporated in the sales contract."
Assuming arguendo that the liability of respondent is not based on the sales contract, but rather
on the contract of carriage, being the charterer of the vessel MV "Liliana Dimitrova," it would,
therefore, be material to show what kind of charter party the respondent had with the shipowner to
determine respondent's liability.
American jurisprudence defines charter party as a contract by which an entire ship or some
principal part thereof is let by the owner to another person for a specified time or use. 10 Charter
or charter parties are of two kinds. Charter of demise or bareboat and contracts of affreightment.
Under the demise or bareboat charter of the vessel, the charterer will generally be considered as
owner for the voyage or service stipulated. The charterer mans the vessel with his own people
and becomes, in effect, the owner pro hac vice, subject to liability to others for damages caused
by negligence. 11 To create a demise the owner of a vessel must completely and exclusively
relinquish possession, anything short of such a complete transfer is a contract of affreightment
(time or voyage charter party) or not a charter party at all.
On the other hand, a contract of affreightment is in which the owner of the vessel leases part or all
of its space to haul goods for others. It is a contract for a special service to be rendered by the
owner of the vessel 12 and under such contract the general owner retains the possession,
command and navigation of the ship, the charterer or freighter merely having use of the space in
the vessel in return for his payment of the charter hire. 13 If the charter is a contract of
affreightment, which leaves the general owner in possession of the ship as owner for the voyage,
the rights, responsibilities of ownership rest on the owner and the charterer is usually free from
liability to third persons in respect of the ship. 14
Responsibility to third persons for goods shipped on board a vessel follows the vessel's
possession and employment; and if possession is transferred to the charterer by virtue of a
demise, the charterer, and not the owner, is liable as carrier on the contract of affreightment made
by himself or by the master with third persons, and is answerable for loss, damage or non-delivery
of goods received for transportation. An owner who retains possession of the ship, though the
hold is the property of the charterer, remains liable as carrier and must answer for any breach of
duty as to the care, loading or unloading of the cargo. 15
Assuming that in the present case, the charter party is a demise or bareboat charter, then Philipp
Brothers is liable to Puromines, Inc., subject to the terms and conditions of the sales contract. On
the other hand, if the contract between respondent and the owner of the vessel MV "Liliana
Dimitrova" was merely that of affreightment, then it cannot be held liable for the damages caused
by the breach of contract of carriage, the evidence of which is the bills of lading
In any case, whether the liability of respondent should be based on the same contract or that of
the bill of lading, the parties are nevertheless obligated to respect the arbitration provisions on the
sales contract and/or the bill of lading. Petitioner being a signatory and party to the sales contract
cannot escape from his obligation under the arbitration clause as stated therein.
Neither can petitioner contend that the arbitration provision in the bills of lading should not have
been discussed as an issue in the decision of the Court of Appeals since it was not raised as a
special or affirmative defense. The three bills of lading were attached to the complaint as Annexes
"A," "B," and "C," and are therefore parts thereof and may be considered as evidence although
not introduced as such. 16 Hence, it was then proper for the court a quo to discuss the contents
of the bills of lading, having been made part of the record.
Going back to the main subject of this case, arbitration has been held valid and constitutional.
Even before the enactment of Republic Act No. 876, this Court has countenanced the settlement
of disputes through arbitration. The rule now is that unless the agreement is such as absolutely to
close the doors of the courts against the parties, which agreement would be void, the courts will
look with favor upon such amicable arrangements and will only interfere with great reluctance to
anticipate or nullify the action of the arbitrator. 17
As pointed out in the case of Mindanao Portland Cement Corp. v. McDonough Construction
Company of Florida 18 wherein the plaintiff sued defendant for damages arising from a contract,
the Court said:
"Since there obtains herein a written provision for arbitration as well as failure on respondent's
part to comply therewith, the court a quo rightly ordered the parties to proceed to their arbitration
in accordance with the terms of their agreement (Sec. 6 Republic Act 876). Respondent's
arguments touching upon the merits of the dispute are improperly raised herein. They should be
addressed to the arbitrators. This proceeding is merely a summary remedy to enforce the
agreement to arbitrate. The duty of the court in this case is not to resolve the merits of the parties'
claims but only to determine if they should proceed to arbitration or not. And although it has been
ruled that a frivolous or patently baseless claim should not be ordered to arbitration it is also
recognized that the mere fact that a defense exist against a claim does not make it frivolous or
baseless." 19
In the case of Bengson v. Chan, 20 We upheld the provision of a contract which required the
parties to submit their disputes to arbitration and We held as follows:
"The trial court sensibly said that 'all the causes of action alleged in the plaintiffs amended
complaint are based upon the supposed violations committed by the defendants of the 'Contract
of Construction of a Building' and that 'the provisions of paragraph 15 hereof leave a very little
room for doubt that the said causes of action are embraced within the phrase 'any and all
questions, disputes or differences between the parties hereto relative to the construction of the
building,' which must be determined by arbitration of two persons and such determination by the
arbitrators shall be 'final, conclusive and binding upon both parties unless they to court, in which
the case the determination by arbitration is a condition precedent 'for taking any court action."
xxx xxx xxx
"We hold that the terms of paragraph 15 clearly express the intention of the parties that all
disputes between them should first be arbitrated before court action can be taken by the
aggrieved party." 21
Premises considered, We uphold the validity and applicability of the arbitration clause as stated in
Sales Contract No. S151.8.01018 to the present dispute.
WHEREFORE, petition is hereby DISMISSED and decision of the court a quo is AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-12283 July 25, 1918
ARTHUR F. ALLEN, plaintiff-appellee,
vs.
THE PROVINCE OF TAYABAS, defendant-appellant.
Provincial Fiscal of Tayabas Crispin Oben for appellant.
Lawrence & Ross for appellee.
MALCOLM, J.:
On April 18, 1914, the Province of Tayabas, represented by the Director of Public Works, and
Arthur F, Allen, contractor, entered into a contract whereby the contractor agreed to construct five
reenforced concrete bridges for P39,200. This contract was in the usual form. One provision was
that the bridges were to be constructed "in accordance with the said advertisements, instructions
to bidders, general conditions, plans, specifications, proposal, and this agreement." Other
paragraphs of the contract concerned the method and rate of payment for extras.
Four of the bridges were accepted by the Government and paid for. The dispute between the
parties arose as to the fifth bridge, No. 53.3 and as to certain extras. As to this bridge, the
Province of Tayabas paid to the contractor P4,360 on account of the contract price thereof, but
refused to pay the balance of P2,840 because plaintiff had deviated from the specifications and
because the work was defective. The province further refused to pay for certain extras. To
recover the balance upon the contract was the purpose of the contractor in bringing action for
P9,685 (amended complaint), alleged to be due him by the Province of Tayabas. The common
averments of the six causes of action were: (1) Residence; (2) the contract; (3) the faithful
compliance "with all the terms and conditions of the said contract" on the part of the contractor,
and completion and delivery of the bridges in question; (4) refusal of defendant to pay plaintiff the
balance due for bridge No. 53.3 for certain extras, and as damages, although frequently
requested to do so. Defendant demurred to the complaint on the ground that it did not state facts
sufficient to constitute a cause of action, because: (a) The approval of the Governor-General to
the contract had not been given as contemplated by section 2 of the Provincial Government Act
(No. 83) and (b) the certificate for payment had not been accomplished by the Director of Public
Works or the district engineer as provided by section 6, of Act No. 1401, as amended. The
demurrer was overruled. Thereupon defendant answered, renewing as a special defense the
grounds of the demurrer, alleging defective work on the part of the plaintiff, and admitting a total
of P2,454.78, the amount certified by the Director of Public Works and the district engineer, as
due the plaintiff. The trial court gave judgment for the plaintiff-contractor for P4,905, with legal
interest from July 14, 1914, and costs. Defendant moved for a new trial, which was denied, duly
excepted and perfected a bill of exceptions to this court.
Appellant's assignments of error relate to the findings of fact and two main issues of law. We pass
the facts for the moment, and two main issues of law. We pass the facts for the moment, to
discuss the legal questions.
The first contention of appellant is that the Province of Tayabas is not obligated to pay the
contractor anything because the contract was not approved by the Governor-General. This
position is absolutely untenable. The law in force when the contract entered into and when the
action was tried, section 2, Act No. 83, as amended by Act No. 1600, made the approval of the
Governor-General a prerequisite only to the purchase and conveyance of real estate by a
province. The grammatical construction of the English text, which is controlling, makes this
perfectly clear. Moreover, the law now in force (Administrative Code of 1917, section 2068) has
removed any possibility of doubt and has at the same time revealed legislative intention, by
placing the requirement for the Governor-General's approval of transfers of real estate by
provinces in a section separate and distinct from the section of the Code giving the corporate
powers of provinces.
The remaining legal issue merits more extended consideration. Appellant's contention is that the
certificate by the district engineer and the Director of Public Works must be obtained before suit
can be brought on a contract; that the findings of these officials are conclusive; and that the
complaint must contain an averment to this effect. Appellee's reply must contain an averment to
this effect. Appellee's reply is that neither the law nor the contract requires the submission to
arbitration of disputes between the Government and the contractor, and that a mere
administrative procedure incident to payment has been established.
Act No. 1401, as amended by Act No. 1752, was in force when this action was instituted. The
same provisions are now found in slightly altered phraseology in section 1917-1923 of the
Administrative Code of 1917. The law gives a district engineer supervision over all contacts
connected with public works, which exceed the estimated cost of P500. Section 6 of Act No.
1401, as amended by section 3 of Act No. 1752, reads:
No payments, partial or final, shall be made on any public works without a certificate on
the vouchers therefor to the effect that the work for which payment is contemplated has
been accomplished, inspected, and accepted. Such certificate for work under the
supervision of the district engineer shall be signed by him or his duly authorized
representative. For work not under his supervision such certificate shall be signed by
the provincial treasurer.
Section 1922 of the Administrative Code of 1917, reads:
No payment, partial or final, shall be made on any public work of construction or repair
without a certificate on the voucher therefor to the effect that the work for which
payment is contemplated has been accomplished in accordance with the terms of the
contract and has been duly inspected and accepted. Such certificate shall be signed by
 a duly authorized representative of the Director of Public Works having full knowledge
of the facts in the case.
Contractors are of course bound to take notice of the provisions of the law relating to contracts.
Statutory requirements cannot be departed from for the accommodation of either party to a
contract. As a matter of acts, in the present instance, this obligation is intensified in so far as the
contractor is concerned for the instructions to bidders contains this clause: "The contractor shall
comply with all existing or future laws, the municipal or provincial building ordinances and
regulations in so far as the same are binding upon or affect the parties hereto, the work, or those
engaged thereon." (No. 23).
The instructions to bidders, a part of the contract, under the heading of "Payments," also contains
the following:
51. Payments will be made monthly, based upon the estimates of work satisfactorily
completed and accepted by the Director during the preceding month. Upon such
estimates the Province of Tayabas, P.I. shall pay to the contractor a sum equal to ninety
(90) per cent thereof up to and until such time as the total work shall have been
completed or the contract canceled, as herein provided.
52. The acceptance of the work from time to time for the purpose of making partial
payments, shall not be considered as a final acceptance of the work in question.
53. Whenever the contract, in the opinion of the Director, shall be completely performed
on the part of the contractor, the Director shall proceed promptly to measure the work
and shall make out and certify the final estimates and acceptance for the same. The
province shall then, excepting for cause herein specified, pay to the contractor promptly
after the execution of said certificate the remainder which shall be found due, excepting
therefrom such sum or sums as may be lawfully retained under any of the provisions of
this contract; Provided, That nothing herein contained shall be construed to waive the
right of the Director, hereby reserved, to reject the whole or any portion of the aforesaid
work should the same be found to have been constructed in violation of any of the
conditions or covenant of this contract.
Both the law and the contract provide in mandatory language for a certificate of acceptance by the
Director of Public Works or his representative before any payment shall be made on any public
work for the Government.
Contracts of this character, giving into the hands of a third person or of the purchaser the power
of acceptance or non-acceptance, are not unusual. Courts have frequently upheld them. The law
regards the parties as competent to contract in this manner. Municipal and provincial contracts,
being on the same footing as those of natural persons, may not be breached with impunity. That
mutuality exists in undoubted. The party who deliberately enters into such an agreement, whether
wisely or unwisely, must abide by it. The public corporation, in the absence of a showing of fraud
or concealment, is estopped by the approval of its officer who is authorized to accept the work,
from contesting the contractor's right to the contract price. (City of Omaha vs. Hammond [1876],
94 U.S., 98; City Street Improvement Co. vs. City of Marysville, [1909], 155 cal., 419.) Likewise,
the contractor must not only deliver a product with which the party of the second party ought to be
satisfied, but with which he must be satisfied, or he is not bound to accept it. The rule is well-
settled that in the absence of fraud or of such gross mistake as would necessarily imply bad faith,
contractors with public corporations are concluded by the decisions of engineers or like officers
where the contract contains such a stipulation. The public corporation can rely on the provision in
a contract that performance by the other party shall be approved by or satisfactory to it, or a
particular officer, board or committee. (Second Nat. Bank vs. Pan-American Bridge Co. [1910],
183 Fed., 391, reviewing Federal decisions; Silsby Manuf'g Co. vs. Town of Chico [1885], 24
Fed., 893; 23 L.R.A. [1910], 322, Notes.)
A leading example is the case of Sweeney vs. United States ([1883], 109 U.S., 618), in which a
contractor sought to recover from the United States the price of wall built by him around the
National Cemetery. The contract provided that the wall shall be received and become the property
of the United States after the officer or civil engineer, to be designated by the Government to
inspect the work, should certify that it was in all respects such as the contractor agreed to
construct. The officer designated for that purpose refused to so certify on the ground that neither
the material nor the workmanship was such as the contract required. As the officer exercised an
honest judgment in making his inspection and as there was on his part neither fraud nor such
grave mistake as implied bad faith, it was adjudged that the contractor had no cause of action on
the contract against the United States.
The old common law rule required a strict or literal performance of contracts. The modern rule
sanctions a substantial performance of contractual relations. The law now looks to the spirit of the
contract and not to its letter. Even though a plaintiff is not entirely free from fault or omission, the
courts will not turn him away if he has in good faith mad substantial performance. Of course the
terms of the contract may be such that the contract has agreed that the another shall have the
absolute and unreviewable right to reject the article or work if not satisfied with it; in such case the
contractor shall abide by his word. But when the terms, or the nature of the contract, or the
circumstances are such as to make it doubtful, whether the contractor has made any such unwise
agreement, the courts will ordinarily construe the contract as an "agreement to do the thing in
such way as reasonably ought to satisfy the defendant." (Parlin & Orendorff Co. vs. City of
Greenville [1904], 127 Fed., 55; Swain vs. Seamens [1870], 9 Wall., 254.) Thus, it has been held
that the provision of a contract to perform work for the city requiring the contractor to obtain the
certificate of the city engineer that the work has been done in accordance with the contract and
the approval of such work by certain boards or committees, before he is entitled to payment
therefor, does not deprive him of the right to recover for the work, if it has been done in
substantial conformity to the contract, because the city's officers arbitrarily or unreasonably refuse
the certificate and approval called for. (City of Elizabeth vs.Fitzgerald [1902], 200 U.S., 611.)
Substantial performance and the unfounded refusal of the certificate of approval can be proved in
various ways. Thus, acceptance and occupancy of the building by the owner amounts to an
acknowledgment that the work has been performed substantially as required by the contract.
(Campbell and Go-Tauco vs. Behn, Meyer & co. [1904], 3 Phil., 590 affirmed on appeal to the
United States Supreme Court [1905], 200 U.S., 611.) Other circumstances, as partial payment,
also show acquiescence on the part of purchaser.
Appellee speaks of the provisions of the law and the portions of the contract in questions as
possibly constituting an arbitration agreement. We deem these provisions to be more correctly
labeled a condition precedent to the contractor's right to obtain payment; the condition is for the
satisfaction of the Government. Nevertheless, considered as species of abitration, it was a
convenient and proper method, duly agreed upon between the parties, to determine questions
that would necessarily arise in the performance of the contract, about which men might honestly
differ. It would be highly improper, for courts out of untoward jealousy of their jurisdiction. The
New York theory of refusal to uphold such agreements, because of the opinion that they violate
the spirit of the laws creating the courts, is hardly agreed to by more progressive jurisdictions.
(See U.S. Asphalt Refining Co. vs. Trinidad Lake Petroleum Co. [1915], 222 Fed., 1006.) Unless or bad faith not having been proved. Thus, we have P2,840, plus P269.10, plus P214.80, plus P6,
the agreement is such as absolutely to close the doors of the courts against the parties, which plus P25, or P3,354.90 due plaintiff.
agreement would be void (Wahl and Wahl vs. Donaldson, Sims & Co. [1903], 2 Phil., 301), courts One point made by appellant is that the demurrer to the complaint was improperly overruled. An
will look with favor upon such amicable arrrangements and will only with great reluctance interfere elementary principle of pleading heretofore approved by this court in Government of Philippine
to anticipate or nullify the action of the arbitrator. For instance, a policy of fire insurance, Islands vs. Inchausti & Co. ([1913], 24 Phil., 315) is brought to our notice, namely: "If the plaintiff's
contained a clause providing that in the event of a loss under the policy, unless the company shall right of action depends upon a condition precedent he must allege and prove the fulfillment of the
deny all liability, as a condition precedent to the bringing of any suit by the insured upon the condition or a legal excuse for its non-fulfillment. And if he omits such allegation, his declaration,
policy, the latter should first submit the question of liability and indemnity to arbitration. Such a complaint, or petition, will be bad on demurrer." Undoubtedly, the complaint should have alleged
condition, the Supreme Court of the Philippines held in Chang vs. Royal Exchange Assurance either the performance of the condition precedent, approval by the Director of Public Works or the
Corporation of London ([1907], 8 Phil., 399), is a valid one in law, and unless it be first complied District Engineer, or a good and sufficient excuse for not obtaining it. It is possible that if sitting in
with, no action can be brought. first instance, we would so hold with defendant, but on appeal such a backward sweep would
What then are the remedies of the contractor? In the first place he has his administrative remedy, avail nothing but delay. Moreover, the complaint contains the general averment that the plaintiff
which is to complete the work substantially according to the contract and ask for the approval of fully and faithfully complied with all the terms and conditions of the said contract, while some
the proper official. If such officer refuse or culpably neglect to perform a ministerial duty, such as months subsequent to the filing of the complaint but previous to the trial, the defendant accepted
making out the warrant, it is possible that mandamus will lie to coerce the officer. A stipulation the bridge. A failure to allege a condition precedent or a legal reason for dispensing with it may be
requiring the approval of some one as a condition to a recovery by the contractor would not bar cured by the issues tendered by the answer and the proof. (Donegan vs. Houston [1907], 5 Cal.
the party of his remedies by action at law. The right to redress in the courts where substantial App., 626.)
compliance with the terms of a contract are set forth, and where the proof discloses the To summarize, we are of opinion and so hold that the law makes the approval of the Governor-
withholding of the certificate by an officer for insufficient reasons, should not be taken away by General a prerequisite only to the purchase or conveyance of real property by a province; that the
inference or anything short of a district agreement to waive it. (Aetna Indemnity Co. vs. Waters provisions of the law and the form of the contract, usually followed in this jurisdiction, providing for
[1909], 110 Md., 673.) As a condition precedent to action by the courts, fraud or bad faith on the the certificate of approval by the Director of Public Works or his representative, are in the nature
part of the responsible Government official, or arbitrary or unreasonable refusal of the certificate of a condition precedent, which must be alleged and proved, and that this certificate is conclusive
or approval must be alleged and proved. in the absence of a showing of fraud or bad faith.
To concentrate our facts and legal principles — we find the contractor supported by one expert Judgment shall be modified so that the plaintiff shall recover from the defendant P3,354.90 with
insisting that the work and the materials actually conform to the specifications; and we have this legal interest thereon from July 14, 1914, until paid, without special finding as to costs in either
as resolutely denied by competent Government engineers. We find substantial performance of the instance. So ordered.
contract not proved to the satisfaction of the Government's technical adviser, but proved to the
Torres, Johnson and Fisher, JJ., concur.
satisfaction of the trial court. Ordinarily, we would not review the facts unless the findings of the
trial court are plainly and manifestly contrary to the proof. But here it was incumbent on the trial
court to take about the same view of the findings of the Government's engineers as the appellate
court would take of the findings of the trial court, or that any court would take of the findings of
customs boards, assessors, and the like. In order to set aside the action of the Director of Public
Works or his authorized representative, fraud or bad faith on the part of these engineers must be
established. Has this been proved? The judge in the course of his decision incidentally remarked:
"It may as well be said here that there appears to have been a great deal of ill-feeling between
plaintiff and the engineer in charge of this construction." Is this observation in connection with the
testimony of the plaintiff and of one engineer sufficient to demonstrate fraud or bad faith? We
think not. In other words we believe that the contractor cannot maintain an action for the
stipulated price when the engineer has in good faith, in pursuance of the contract, withheld his
certificate. The decision of the responsible engineer cannot be subjected to the revisory power of
the courts without doing violence to the terms of the contract and the law.
The Province of Tayabas, having accepted bridge No. 53.2, should of course pay the balance
due, or P2,840. It should not be permitted to deduct the cost of the test of the bridge, P900.12, for
this is a legal question for resolution by the courts, and the contract contains no such stipulation.
(See Ripley vs. U.S. [1912], 223 U.S., 695.) But the findings of the Government engineers on all
the other points covered by causes of action 2, 3, 4, 5 and 6 are deemed to be conclusive, fraud