Republic of the Philippines

Congress of the Philippines

Metro Manila

Twelfth Congress
Third Regular Session

Begun and held in Metro Manila, on Monday, the twenty-eight day of July, two thousand three.

Republic Act No. 9285 April 2, 2004

AN ACT TO INSTITUTIONALIZE THE USE OF AN ALTERNATIVE DISPUTE RESOLUTION

SYSTEM IN THE PHILIPPINES AND TO ESTABLISH THE OFFICE FOR ALTERNATIVE
DISPUTE RESOLUTION, AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress

assembled:

CHAPTER 1 - GENERAL PROVISIONS

SECTION 1. Title. - This act shall be known as the "Alternative Dispute Resolution Act of 2004."

SEC. 2. Declaration of Policy. - it is hereby declared the policy of the State to actively promote
party autonomy in the resolution of disputes or the freedom of the party to make their own
arrangements to resolve their disputes. Towards this end, the State shall encourage and actively
promote the use of Alternative Dispute Resolution (ADR) as an important means to achieve speedy
and impartial justice and declog court dockets. As such, the State shall provide means for the use of
ADR as an efficient tool and an alternative procedure for the resolution of appropriate cases.
Likewise, the State shall enlist active private sector participation in the settlement of disputes
through ADR. This Act shall be without prejudice to the adoption by the Supreme Court of any ADR
system, such as mediation, conciliation, arbitration, or any combination thereof as a means of
achieving speedy and efficient means of resolving cases pending before all courts in the Philippines
which shall be governed by such rules as the Supreme Court may approve from time to time.

SEC. 3. Definition of Terms. - For purposes of this Act, the term:

(a) "Alternative Dispute Resolution System" means any process or procedure used to
resolve a dispute or controversy, other than by adjudication of a presiding judge of a court or
an officer of a government agency, as defined in this Act, in which a neutral third party
participates to assist in the resolution of issues, which includes arbitration, mediation,
conciliation, early neutral evaluation, mini-trial, or any combination thereof;

(b) "ADR Provider" means institutions or persons accredited as mediator, conciliator,

arbitrator, neutral evaluator, or any person exercising similar functions in any Alternative
Dispute Resolution system. This is without prejudice to the rights of the parties to choose
nonaccredited individuals to act as mediator, conciliator, arbitrator, or neutral evaluator of
their dispute.
Whenever reffered to in this Act, the term "ADR practitioners" shall refer to individuals acting
as mediator, conciliator, arbitrator or neutral evaluator;

(c) "Authenticate" means to sign, execute or adopt a symbol, or encrypt a record in whole or
in part, intended to identity the authenticating party and to adopt, accept or establish the
authenticity of a record or term;

(d) "Arbitration" means a voluntary dispute resolution process in which one or more
arbitrators, appointed in accordance with the agreement of the parties, or rules promulgated
pursuant to this Act, resolve a dispute by rendering an award;

(e) "Arbitrator" means the person appointed to render an award, alone or with others, in a
dispute that is the subject of an arbitration agreement;

(f) "Award" means any partial or final decision by an arbitrator in resolving the issue in a
controversy;

(g) "Commercial Arbitration" An arbitration is "commercial if it covers matter arising from all
relationships of a commercial nature, whether contractual or not;

(h) "Confidential information" means any information, relative to the subject of mediation or
arbitration, expressly intended by the source not to be disclosed, or obtained under
circumstances that would create a reasonable expectation on behalf of the source that the
information shall not be disclosed. It shall include (1) communication, oral or written, made in
a dispute resolution proceedings, including any memoranda, notes or work product of the
neutral party or non-party participant, as defined in this Act; (2) an oral or written statement
made or which occurs during mediation or for purposes of considering, conducting,
participating, initiating, continuing of reconvening mediation or retaining a mediator; and (3)
pleadings, motions manifestations, witness statements, reports filed or submitted in an
arbitration or for expert evaluation;

(i) "Convention Award" means a foreign arbitral award made in a Convention State;

(j) "Convention State" means a State that is a member of the New York Convention;

(k) "Court" as referred to in Article 6 of the Model Law shall mean a Regional Trial Court;

(l) "Court-Annexed Mediation" means any mediation process conducted under the auspices
of the court, after such court has acquired jurisdiction of the dispute;

(m) "Court-Referred Mediation" means mediation ordered by a court to be conducted in

accordance with the Agreement of the Parties when as action is prematurely commenced in
violation of such agreement;

(n) "Early Neutral Evaluation" means an ADR process wherein parties and their lawyers are
brought together early in a pre-trial phase to present summaries of their cases and receive a
nonbinding assessment by an experienced, neutral person, with expertise in the subject in
the substance of the dispute;
(o) "Government Agency" means any government entity, office or officer, other than a court,
that is vested by law with quasi-judicial power to resolve or adjudicate dispute involving the
government, its agencies and instrumentalities, or private persons;

(p) "International Party" shall mean an entity whose place of business is outside the
Philippines. It shall not include a domestic subsidiary of such international party or a
coventurer in a joint venture with a party which has its place of business in the Philippines.

The term foreigner arbitrator shall mean a person who is not a national of the Philippines.

(q) "Mediation" means a voluntary process in which a mediator, selected by the disputing
parties, facilitates communication and negotiation, and assist the parties in reaching a
voluntary agreement regarding a dispute.

(r) "Mediator" means a person who conducts mediation;

(s) "Mediation Party" means a person who participates in a mediation and whose consent is
necessary to resolve the dispute;

(t) "Mediation-Arbitration" or Med-Arb is a step dispute resolution process involving both

mediation and arbitration;

(u) "Mini-Trial" means a structured dispute resolution method in which the merits of a case
are argued before a panel comprising senior decision makers with or without the presence of
a neutral third person after which the parties seek a negotiated settlement;

(v) "Model Law" means the Model Law on International Commercial Arbitration adopted by
the United Nations Commission on International Trade Law on 21 June 1985;

(w) "New York Convention" means the United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards approved in 1958 and ratified by the Philippine
Senate under Senate Resolution No. 71;

(x) "Non-Convention Award" means a foreign arbitral award made in a State which is not a
Convention State;

(y) "Non-Convention State" means a State that is not a member of the New York Convention.

(z) "Non-Party Participant" means a person, other than a party or mediator, who participates
in a mediation proceeding as a witness, resource person or expert;

(aa) "Proceeding" means a judicial, administrative, or other adjudicative process, including

related pre-hearing motions, conferences and discovery;

(bb) "Record" means an information written on a tangible medium or stored in an electronic

or other similar medium, retrievable form; and

(cc) "Roster" means a list of persons qualified to provide ADR services as neutrals or to
serve as arbitrators.
SEC. 4. Electronic Signatures in Global and E-Commerce Act. - The provisions of the Electronic
Signatures in Global and E-Commerce Act, and its implementing Rules and Regulations shall apply
to proceeding contemplated in this Act.

SEC. 5. Liability of ADR Provider and Practitioner. - The ADR providers and practitioners shall
have the same civil liability for the Acts done in the performance of then duties as that of public
officers as provided in Section 38 (1), Chapter 9, Book of the Administrative Code of 1987.

SEC. 6. Exception to the Application of this Act. - The provisions of this Act shall not apply to
resolution or settlement of the following: (a) labor disputes covered by Presidential Decree No. 442,
otherwise known as the Labor Code of the Philippines, as amended and its Implementing Rules and
Regulations; (b) the civil status of persons; (c) the validity of a marriage; (d) any ground for legal
separation; (e) the jurisdiction of courts; (f) future legitime; (g) criminal liability; and (h) those which
by law cannot be compromised.

CHAPTER 2 - MEDIATION

SEC. 7. Scope. - The provisions of this Chapter shall cover voluntary mediation, whether ad hoc or
institutional, other than court-annexed. The term "mediation' shall include conciliation.

SEC. 8. Application and Interpretation. - In applying construing the provisions of this Chapter,
consideration must be given to the need to promote candor or parties and mediators through
confidentiality of the mediation process, the policy of fostering prompt, economical, and amicable
resolution of disputes in accordance with the principles of integrity of determination by the parties,
and the policy that the decision-making authority in the mediation process rests with the parties.

SEC. 9. Confidentiality of Information. - Information obtained through mediation proceedings shall

be subject to the following principles and guidelines:

(a) Information obtained through mediation shall be privileged and confidential.

(b) A party, a mediator, or a nonparty participant may refuse to disclose and may prevent any
other person from disclosing a mediation communication.

(c) Confidential Information shall not be subject to discovery and shall be inadmissible if any
adversarial proceeding, whether judicial or quasi-judicial, However, evidence or information
that is otherwise admissible or subject to discovery does not become inadmissible or
protected from discovery solely by reason of its use in a mediation.

(d) In such an adversarial proceeding, the following persons involved or previously involved
in a mediation may not be compelled to disclose confidential information obtained during
mediation: (1) the parties to the dispute; (2) the mediator or mediators; (3) the counsel for the
parties; (4) the nonparty participants; (5) any persons hired or engaged in connection with
the mediation as secretary, stenographer, clerk or assistant; and (6) any other person who
obtains or possesses confidential information by reason of his/her profession.

(e) The protections of this Act shall continue to apply even of a mediator is found to have
failed to act impartially.
 (f) a mediator may not be called to testify to provide information gathered in mediation. A
mediator who is wrongfully subpoenaed shall be reimbursed the full cost of his attorney's
fees and related expenses.

SEC. 10. Waiver of Confidentiality. - A privilege arising from the confidentiality of information may
be waived in a record, or orally during a proceeding by the mediator and the mediation parties.

A privilege arising from the confidentiality of information may likewise be waived by a nonparty
participant if the information is provided by such nonparty participant.

A person who discloses confidential information shall be precluded from asserting the privilege
under Section 9 of this Chapter to bar disclosure of the rest of the information necessary to a
complete understanding of the previously disclosed information. If a person suffers loss or damages
in a judicial proceeding against the person who made the disclosure.

A person who discloses or makes a representation about a mediation is preclude from asserting the
privilege under Section 9, to the extent that the communication prejudices another person in the
proceeding and it is necessary for the person prejudiced to respond to the representation of
disclosure.

SEC. 11. Exceptions to Privilege. -

(a) There is no privilege against disclosure under Section 9 if mediation communication is:

(1) in an agreement evidenced by a record authenticated by all parties to the

agreement;

(2) available to the public or that is made during a session of a mediation which is
open, or is required by law to be open, to the public;

(3) a threat or statement of a plan to inflict bodily injury or commit a crime of violence;

(4) internationally used to plan a crime, attempt to commit, or commit a crime, or

conceal an ongoing crime or criminal activity;

(5) sought or offered to prove or disprove abuse, neglect, abandonment, or

exploitation in a proceeding in which a public agency is protecting the interest of an
individual protected by law; but this exception does not apply where a child protection
matter is referred to mediation by a court or a public agency participates in the child
protection mediation;

(6) sought or offered to prove or disprove a claim or complaint of professional

misconduct or malpractice filed against mediator in a proceeding; or

(7) sought or offered to prove or disprove a claim of complaint of professional

misconduct of malpractice filed against a party, nonparty participant, or
representative of a party based on conduct occurring during a mediation.

(b) There is no privilege under Section 9 if a court or administrative agency, finds, after a
hearing in camera, that the party seeking discovery of the proponent of the evidence has
shown that the evidence is not otherwise available, that there is a need for the evidence that
 substantially outweighs the interest in protecting confidentiality, and the mediation
communication is sought or offered in:

(1) a court proceeding involving a crime or felony; or

(2) a proceeding to prove a claim or defense that under the law is sufficient to reform
or avoid a liability on a contract arising out of the mediation.

(c) A mediator may not be compelled to provide evidence of a mediation communication or

testify in such proceeding.

(d) If a mediation communication is not privileged under an exception in subsection (a) or (b),
only the portion of the communication necessary for the application of the exception for
nondisclosure may be admitted. The admission of particular evidence for the limited purpose
of an exception does not render that evidence, or any other mediation communication,
admissible for any other purpose.

SEC. 12. Prohibited Mediator Reports. - A mediator may not make a report, assessment,
evaluation, recommendation, finding, or other communication regarding a mediation to a court or
agency or other authority that make a ruling on a dispute that is the subject of a mediation, except:

(a) Where the mediation occurred or has terminated, or where a settlement was reached.

(b) As permitted to be disclosed under Section 13 of this Chapter.

SEC. 13. Mediator's Disclosure and Conflict of Interest. - The mediation shall be guided by the
following operative principles:

(a) Before accepting a mediation, an individual who is requested to serve as a mediator

shall:

(1) make an inquiry that is reasonable under the circumstances to determinate

whether there are any known facts that a reasonable individual would consider likely
to affect the impartiality of the mediator, including a financial or personal interest in
the outcome of the mediation and any existing or past relationship with a party or
foreseeable participant in the mediation; and

(2) disclosure to the mediation parties any such fact known or learned as soon as is
practical before accepting a mediation.

(b) If a mediation learns any fact described in paragraph (a) (1) of this section after accepting
a mediation, the mediator shall disclose it as soon as practicable.

At the request of a mediation party, an individual who is requested to serve as mediator shall
disclose his/her qualifications to mediate a dispute.

This Act does not require that a mediator shall have special qualifications by background or
profession unless the special qualifications of a mediator are required in the mediation agreement or
by the mediation parties.
SEC. 14. Participation in Mediation. - Except as otherwise provided in this Act, a party may
designate a lawyer or any other person to provide assistance in the mediation. A lawyer of this right
shall be made in writing by the party waiving it. A waiver of participation or legal representation may
be rescinded at any time.

SEC. 15. Place of Mediation. - The parties are free to agree on the place of mediation. Failing such
agreement, the place of mediation shall be any place convenient and appropriate to all parties.

SEC. 16. Effect of Agreement to Submit Dispute to Mediation Under Institutional Rules. - An
agreement to submit a dispute to mediation by any institution shall include an agreement to be
bound by the internal mediation and administrative policies of such institution. Further, an agreement
to submit a dispute to mediation under international mediation rule shall be deemed to include an
agreement to have such rules govern the mediation of the dispute and for the mediator, the parties,
their respective counsel, and nonparty participants to abide by such rules.

In case of conflict between the institutional mediation rules and the provisions of this Act, the latter
shall prevail.

SEC. 17. Enforcement of Mediated Settlement Agreement. - The mediation shall be guided by
the following operative principles:

(a) A settlement agreement following successful mediation shall be prepared by the parties
with the assistance of their respective counsel, if any, and by the mediator.

The parties and their respective counsels shall endeavor to make the terms and condition
thereof complete and make adequate provisions for the contingency of breach to avoid
conflicting interpretations of the agreement.

(b) The parties and their respective counsels, if any, shall sign the settlement agreement.
The mediator shall certify that he/she explained the contents of the settlement agreement to
the parties in a language known to them.

(c) If the parties so desire, they may deposit such settlement agreement with the appropriate
Clerk of a Regional Trial Court of the place where one of the parties resides. Where there is
a need to enforce the settlement agreement, a petition may be filed by any of the parties with
the same court, in which case, the court shall proceed summarily to hear the petition, in
accordance with such rules of procedure as may be promulgated by the Supreme Court.

(d) The parties may agree in the settlement agreement that the mediator shall become a sole
arbitrator for the dispute and shall treat the settlement agreement as an arbitral award which
shall be subject to enforcement under Republic Act No. 876, otherwise known as the
Arbitration Law, notwithstanding the provisions of Executive Order No. 1008 for mediated
dispute outside of the CIAC.

CHAPTER 3 - OTHER ADR FORMS

SEC. 18. Referral of Dispute to other ADR Forms. - The parties may agree to refer one or more or
all issues arising in a dispute or during its pendency to other forms of ADR such as but not limited to
(a) the evaluation of a third person or (b) a mini-trial, (c) mediation-arbitration, or a combination
thereof.
For purposes of this Act, the use of other ADR forms shall be governed by Chapter 2 of this Act
except where it is combined with arbitration in which case it shall likewise be governed by Chapter 5
of this Act.

CHAPTER 4 - INTERNATIONAL COMMERCIAL ARBITRATION

SEC. 19. Adoption of the Model Law on International Commercial Arbitration. - International
commercial arbitration shall be governed by the Model Law on International Commercial Arbitration
(the "Model Law") adopted by the United Nations Commission on International Trade Law on June
21, 1985 (United Nations Document A/40/17) and recommended approved on December 11, 1985,
copy of which is hereto attached as Appendix "A".

SEC. 20. Interpretation of Model Law. - In interpreting the Model Law, regard shall be had to its
international origin and to the need for uniformity in its interpretation and resort may be made to
the travaux preparatories and the report of the Secretary General of the United Nations Commission
on International Trade Law dated March 25, 1985 entitled, "International Commercial Arbitration:
Analytical Commentary on Draft Trade identified by reference number A/CN. 9/264."

SEC. 21. Commercial Arbitration. - An arbitration is "commercial" if it covers matters arising from
all relationships of a commercial nature, whether contractual or not. Relationships of a transactions:
any trade transaction for the supply or exchange of goods or services; distribution agreements;
construction of works; commercial representation or agency; factoring; leasing, consulting;
engineering; licensing; investment; financing; banking; insurance; joint venture and other forms of
industrial or business cooperation; carriage of goods or passengers by air, sea, rail or road.

SEC. 22. Legal Representation in International Arbitration. - In international arbitration

conducted in the Philippines, a party may be presented by any person of his choice. Provided, that
such representative, unless admitted to the practice of law in the Philippines, shall not be authorized
to appear as counsel in any Philippine court, or any other quasi-judicial body whether or not such
appearance is in relation to the arbitration in which he appears.

SEC. 23. Confidential of Arbitration Proceedings. - The arbitration proceedings, including the
records, evidence and the arbitral award, shall be considered confidential and shall not be published
except (1) with the consent of the parties, or (2) for the limited purpose of disclosing to the court of
relevant documents in cases where resort to the court is allowed herein. Provided, however, that the
court in which the action or the appeal is pending may issue a protective order to prevent or prohibit
disclosure of documents or information containing secret processes, developments, research and
other information where it is shown that the applicant shall be materially prejudiced by an authorized
disclosure thereof.

SEC. 24. Referral to Arbitration. - A court before which an action is brought in a matter which is the
subject matter of an arbitration agreement shall, if at least one party so requests not later that the
pre-trial conference, or upon the request of both parties thereafter, refer the parties to arbitration
unless it finds that the arbitration agreement is null and void, inoperative or incapable of being
performed.

SEC. 25. Interpretation of the Act. - In interpreting the Act, the court shall have due regard to the
policy of the law in favor of arbitration. Where action is commenced by or against multiple parties,
one or more of whom are parties who are bound by the arbitration agreement although the civil
action may continue as to those who are not bound by such arbitration agreement.
SEC. 26. Meaning of "Appointing Authority.". - "Appointing Authority" as used in the Model Law
shall mean the person or institution named in the arbitration agreement as the appointing authority;
or the regular arbitration arbitration institution under whose rules the arbitration is agreed to be
conducted. Where the parties have agreed to submit their dispute to institutional arbitration rules,
and unless they have agreed to a different procedure, they shall be deemed to have agreed to
procedure under such arbitration rules for the selection and appointment of arbitrators. In ad hoc
arbitration, the default appointment of an arbitrator shall be made by the National President of the
Integrated Bar of the Philippines (IBP) or his duly authorized representative.

SEC. 27. What Functions May be Performed by Appointing Authority. - The functions referred to
in Articles 11(3), 11(4), 13(3) and 14(1) of the Model Law shall be performed by the Appointing
Authority, unless the latter shall fail or refuse to act within thirty (30) days from receipt of the request
in which case the applicant may renew the application with the Court.

SEC. 28. Grant of Interim Measure of Protection. -

(a) It is not incompatible with an arbitration agreement for a party to request, before
constitution of the tribunal, from a Court an interim measure of protection and for the Court to
grant such measure. After constitution of the arbitral tribunal and during arbitral proceedings,
a request for an interim measure of protection or modification thereof, may be made with the
arbitral tribunal or to the extent that the arbitral tribunal has no power to act or is unable to
act effectively, the request may be made with the Court. The arbitral tribunal is deemed
constituted when the sole arbitrator or the third arbitrator who has been nominated, has
accepted the nomination and written communication of said nomination and acceptance has
been received by the party making request.

(b) The following rules on interim or provisional relief shall be observed:

(1) Any party may request that provision relief be granted against the adverse party:

(2) Such relief may be granted:

(i) to prevent irreparable loss or injury:

(ii) to provide security for the performance of any obligation;

(iii) to produce or preserve any evidence; or

(iv) to compel any other appropriate act or omission.

(3) The order granting provisional relief may be conditioned upon the provision of
security or any act or omission specified in the order.

(4) Interim or provisional relief is requested by written application transmitted by

reasonable means to the Court or arbitral tribunal as the case may be and the party
against whom the relief is sought, describing in appropriate detail the precise relief,
the party against whom the relief is requested, the grounds for the relief, and
evidence supporting the request.

(5) The order shall be binding upon the parties.

 (6) Either party may apply with the Court for assistance in Implementing or enforcing
an interim measure ordered by an arbitral tribunal.

(7) A party who does not comply with the order shall be liable for all damages
resulting from noncompliance, including all expenses, and reasonable attorney's
fees, paid in obtaining the order's judicial enforcement.

SEC. 29. Further Authority for Arbitrator to Grant Interim Measure of Protection. - Unless
otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, order any party to
take such interim measures of protection as the arbitral tribunal may consider necessary in respect
of the subject matter of the dispute following the rules in Section 28, paragraph 2. Such interim
measures may include but shall not be limited to preliminary injuction directed against a party,
appointment of receivers or detention, preservation, inspection of property that is the subject of the
dispute in arbitration. Either party may apply with the Court for assistance in implementing or
enforcing an interim measures ordered by an arbitral tribunal.

SEC. 30. Place of Arbitration. - The parties are free to agree on the place of arbitration. Failing
such agreement, the place of arbitration shall be in Metro Manila, unless the arbitral tribunal, having
regard to the circumstances of the case, including the convenience of the parties shall decide on a
different place of arbitration.

The arbitral tribunal may, unless otherwise agreed by the parties, meet at any place it considers
appropriate for consultation among its members, for hearing witnesses, experts, or the parties, or for
inspection of goods, other property or documents.

SEC. 31. Language of the Arbitration. - The parties are free to agree on the language or
languages to be used in the arbitral proceedings. Failing such agreement, the language to be used
shall be English in international arbitration, and English or Filipino for domestic arbitration, unless the
arbitral tribunal shall determine a different or another language or languages to be used in the
proceedings. This agreement or determination, unless otherwise specified therein, shall apply to any
written statement by a party, any hearing and any award, decision or other communication by the
arbitral tribunal.

The arbitral tribunal may order that any documentary evidence shall be accompanied by a
translation into the language or languages agreed upon by the parties or determined in accordance
with paragraph 1 of this section.

CHAPTER 5 - DOMESTIC ARBITRATION

SEC. 32. Law Governing Domestic Arbitration. - Domestic arbitration shall continue to be
governed by Republic Act No. 876, otherwise known as "The Arbitration Law" as amended by this
Chapter. The term "domestic arbitration" as used herein shall mean an arbitration that is not
international as defined in Article (3) of the Model Law.

SEC. 33. Applicability to Domestic Arbitration. - Article 8, 10, 11, 12, 13, 14, 18 and 19 and 29 to
32 of the Model Law and Section 22 to 31 of the preceding Chapter 4 shall apply to domestic
arbitration.

CHAPTER 6 - ARBITRATION OF CONSTRUCTION DISPUTES

SEC. 34. Arbitration of Construction Disputes: Governing Law. - The arbitration of construction
disputes shall be governed by Executive Order No. 1008, otherwise known as the Constitution
Industry Arbitration Law.

SEC. 35. Coverage of the Law. - Construction disputes which fall within the original and exclusive
jurisdiction of the Construction Industry Arbitration Commission (the "Commission") shall include
those between or among parties to, or who are otherwise bound by, an arbitration agreement,
directly or by reference whether such parties are project owner, contractor, subcontractor, quantity
surveyor, bondsman or issuer of an insurance policy in a construction project.

The Commission shall continue to exercise original and exclusive jurisdiction over construction
disputes although the arbitration is "commercial" pursuant to Section 21 of this Act.

SEC. 36. Authority to Act as Mediator or Arbitrator. - By written agreement of the parties to a
dispute, an arbitrator may act as mediator and a mediator may act as arbitrator. The parties may
also agree in writing that, following a successful mediation, the mediator shall issue the settlement
agreement in the form of an arbitral award.

SEC. 37. Appointment of Foreign Arbitrator. - The Construction Industry Arbitration Commission
(CIAC) shall promulgate rules to allow for the appointment of a foreign arbitrator or coarbitrator or
chairman of a tribunal a person who has not been previously accredited by CIAC: Provided, That:

(a) the dispute is a construction dispute in which one party is an international party

(b) the person to be appointed agreed to abide by the arbitration rules and policies of CIAC;

(c) he/she is either coarbitrator upon the nomination of the international party; or he/she is
the common choice of the two CIAC-accredited arbitrators first appointed one of whom was
nominated by the international party; and

(d) the foreign arbitrator shall be of different nationality from the international party.

SEC. 38. Applicability to Construction Arbitration. - The provisions of Sections 17 (d) of Chapter
2, and Section 28 and 29 of this Act shall apply to arbitration of construction disputes covered by this
Chapter.

SEC. 39. Court to Dismiss Case Involving a Construction Dispute. - A regional trial court which
a construction dispute is filed shall, upon becoming aware, not later than the pretrial conference, that
the parties had entered into an arbitration to be conducted by the CIAC, unless both parties, assisted
by their respective counsel, shall submit to the regional trial court a written agreement exclusive for
the Court, rather than the CIAC, to resolve the dispute.

CHAPTER 7 - JUDICIAL REVIEW OF ARBITRAL AWARDS

A. DOMESTIC AWARDS

SEC. 40. Confirmation of Award. - The confirmation of a domestic arbitral award shall be governed
by Section 23 of R.A. 876.

A domestic arbitral award when confirmed shall be enforced in the same manner as final and
executory decisions of the Regional Trial Court.
The confirmation of a domestic award shall be made by the regional trial court in accordance with
the Rules of Procedure to be promulgated by the Supreme Court.

A CIAC arbitral award need not be confirmed by the regional trial court to be executory as provided
under E.O. No. 1008.

SEC. 41. Vacation Award. - A party to a domestic arbitration may question the arbitral award with
the appropriate regional trial court in accordance with the rules of procedure to be promulgated by
the Supreme Court only on those grounds enumerated in Section 25 of Republic Act No. 876. Any
other ground raised against a domestic arbitral award shall be disregarded by the regional trial court.

B. FOREIGN ARBITRAL AWARDS

SEC. 42. Application of the New York Convention. - The New York Convention shall govern the
recognition and enforcement of arbitral awards covered by the said Convention.

The recognition and enforcement of such arbitral awards shall be filled with regional trial court in
accordance with the rules of procedure to be promulgated by the Supreme Court. Said procedural
rules shall provide that the party relying on the award or applying for its enforcement shall file with
the court the original or authenticated copy of the award and the arbitration agreement. If the award
or agreement is not made in any of the official languages, the party shall supply a duly certified
translation thereof into any of such languages.

The applicant shall establish that the country in which foreign arbitration award was made is a party
to the New York Convention.

If the application for rejection or suspension of enforcement of an award has been made, the
regional trial court may, if it considers it proper, vacate its decision and may also, on the application
of the party claiming recognition or enforcement of the award, order the party to provide appropriate
security.

SEC. 43. Recognition and Enforcement of Foreign Arbitral Awards Not Covered by the New
York Convention. - The recognition and enforcement of foreign arbitral awards not covered by the
New York Convention shall be done in accordance with procedural rules to be promulgated by the
Supreme Court. The Court may, grounds of comity and reciprocity, recognize and enforce a
nonconvention award as a convention award.

SEC. 44. Foreign Arbitral Award Not Foreign Judgment. - A foreign arbitral award when
confirmed by a court of a foreign country, shall be recognized and enforced as a foreign arbitral
award and not a judgment of a foreign court.

A foreign arbitral award, when confirmed by the regional trial court, shall be enforced as a foreign
arbitral award and not as a judgment of a foreign court.

A foreign arbitral award, when confirmed by the regional trial court, shall be enforced in the same
manner as final and executory decisions of courts of law of the Philippines.

SEC. 45. Rejection of a Foreign Arbitral Award. - A party to a foreign arbitration proceeding may
oppose an application for recognition and enforcement of the arbitral award in accordance with the
procedural rules to be promulgated by the Supreme Court only on those grounds enumerated under
Article V of the New York Convention. Any other ground raised shall be disregarded by the regional
trial court.

SEC. 46. Appeal from Court Decisions on Arbitral Awards. - A decision of the regional trial court
confirming, vacating, setting aside, modifying or correcting an arbitral award may be appealed to the
Court of Appeals in accordance with the rules of procedure to be promulgated by the Supreme
Court.

The losing party who appeals from the judgment of the court confirming an arbitral award shall
required by the appealant court to post counterbond executed in favor of the prevailing party equal to
the amount of the award in accordance with the rules to be promulgated by the Supreme Court.

SEC. 47. Venue and Jurisdiction. - Proceedings for recognition and enforcement of an arbitration
agreement or for vacation, setting aside, correction or modification of an arbitral award, and any
application with a court for arbitration assistance and supervision shall be deemed as special
proceedings and shall be filled with the regional trial court (i) where arbitration proceedings are
conducted; (ii) where the asset to be attached or levied upon, or the act to be enjoined is located; (iii)
where any of the parties to the dispute resides or has his place of business; or (iv) in the National
Judicial Capital Region, at the option of the applicant.

SEC. 48. Notice of Proceeding to Parties. - In a special proceeding for recognition and
enforcement of an arbitral award, the Court shall send notice to the parties at their address of record
in the arbitration, or if any party cannot be served notice at such address, at such party's last known
address. The notice shall be sent at least fifteen (15) days before the date set for the initial hearing
of the application.

CHAPTER 8 - MISCELLANEOUS PROVISIONS

SEC. 49. Office for Alternative Dispute Resolution. - There is hereby established the Office for
Alternative Dispute Resolution as an attached agency to the Department of Justice (DOJ) which
shall have a Secretariat to be headed by an executive director. The executive director shall be
appointed by the President of the Philippines.

The objective of the office are:

(a) to promote, develop and expand the use of ADR in the private and public sectors; and

To assist the government to monitor, study and evaluate the use by the public and the private sector
of ADR, and recommend to Congress needful statutory changes to develop. Strengthen and improve
ADR practices in accordance with world standards.

SEC. 50. Powers and Functions of the Office for Alternative Dispute Resolution. - The Office
for Alternative Dispute Resolution shall have the following powers and functions:

(a) To formulate standards for the training of the ADR practitioners and service providers;

(b) To certify that such ADR practitioners and ADR service providers have undergone the
professional training provided by the office;

(c) To coordinate the development, implementation, monitoring, and evaluation of

government ADR programs;
 (d) To charge fees for their services; and

(e) To perform such acts as may be necessary to carry into effect the provisions of this Act.

SEC. 51. Appropriations. - The amount necessary to carry out the provisions of this Act shall be
included in the General Appropriations Act of the year following its enactment into law and
thereafter.

SEC. 52. Implementing Rules and Regulations (IRR). - Within one (1) month after the approval of
this Act, the secretary of justice shall convene a committee that shall formulate the appropriate rules
and regulations necessary for the implementation of this Act. The committee, composed of
representatives from:

(a) the Department of Justice;

(b) the Department of Trade and Industry;

(c) the Department of the Interior and Local Government;

(d) the president of the Integrated Bar of the Philippines;

(e) A representative from the arbitration profession; and

(f) A representative from the mediation profession; and

(g) A representative from the ADR organizations

shall within three (3) months after convening, submit the IRR to the Joint Congressional Oversight
Committee for review and approval. The Oversight Committee shall be composed of the chairman of
the Senate Committee on Justice and Human Rights, chairman of the House Committee on Justice,
and one (1) member each from the majority and minority of both Houses.

The Joint Oversight Committee shall become functus officio upon approval of the IRR.

SEC. 53. Applicability of the Katarungan Pambarangay. - This Act shall not be interpreted to
repeal, amend or modify the jurisdiction of the Katarungan Pambarangay under Republic Act No.
7160, otherwise known as the Local Government Code of 1991.

SEC. 54. Repealing Clause. - All laws, decrees, executive orders, rules and regulations which are
inconsistent with the provisions of this Act are hereby repealed, amended or modified accordingly.

SEC. 55. Separability Clause. - If for any reason or reasons, any portion or provision of this Act
shall be held unconstitutional or invalid, all other parts or provisions not affected shall thereby
continue to remain in full force and effect.

SEC. 56. Effectivity. - This act shall take effect fifteen days (15) after its publication in at least two
(2) national newspapers of general circulation.

SPECIAL SECOND DIVISION

JORGE GONZALES and G.R. No. 161957
PANEL OF ARBITRATORS,
Petitioners, Present:

PUNO, C. J.,
Chairperson,
- versus AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
NAZARIO, JJ.
CLIMAX MINING LTD.,
CLIMAX-ARIMCO MINING CORP.,
and AUSTRALASIAN PHILIPPINES Promulgated:
MINING INC.,
Respondents. January 22, 2007

x--------------------------------------------------------------------------------- x

JORGE GONZALES, G.R. No. 167994

Petitioner,

- versus

HON. OSCAR B. PIMENTEL, in his

capacity as PRESIDING JUDGE of BR. 148
of the REGIONAL TRIAL COURT of
MAKATI CITY, and CLIMAX-ARIMCO
MINING CORPORATION,
Respondents.
x-------------------------- --------------------------------------------------- x

R E S O L U T I ON
TINGA, J.:

This is a consolidation of two petitions rooted in the same disputed Addendum

Contract entered into by the parties. In G.R. No. 161957, the Court in its Decision
of 28 February 2005[1] denied the Rule 45 petition of petitioner Jorge Gonzales
(Gonzales). It held that the DENR Panel of Arbitrators had no jurisdiction over the
complaint for the annulment of the Addendum Contract on grounds of fraud and
violation of the Constitution and that the action should have been brought before the
regular courts as it involved judicial issues. Both parties filed separate motions for
reconsideration. Gonzales avers in his Motion for Reconsideration[2] that the Court
erred in holding that the DENR Panel of Arbitrators was bereft of jurisdiction,
reiterating its argument that the case involves a mining dispute that properly falls
within the ambit of the Panels authority. Gonzales adds that the Court failed to rule
on other issues he raised relating to the sufficiency of his complaint before the DENR
Panel of Arbitrators and the timeliness of its filing.

Respondents Climax Mining Ltd., et al., (respondents) filed their Motion for Partial
Reconsideration and/or Clarification[3] seeking reconsideration of that part of the
Decision holding that the case should not be brought for arbitration under Republic
Act (R.A.) No. 876, also known as the Arbitration Law.[4] Respondents, citing
American jurisprudence[5] and the UNCITRAL Model Law,[6] argue that the
arbitration clause in the Addendum Contract should be treated as an agreement
independent of the other terms of the contract, and that a claimed rescission of the
main contract does not avoid the duty to arbitrate. Respondents add that Gonzaless
argument relating to the alleged invalidity of the Addendum Contract still has to be
proven and adjudicated on in a proper proceeding; that is, an action separate from
the motion to compel arbitration. Pending judgment in such separate action, the
Addendum Contract remains valid and binding and so does the arbitration clause
therein.Respondents add that the holding in the Decision that the case should not be
brought under the ambit of the Arbitration Law appears to be premised on Gonzaless
having impugn[ed] the existence or validity of the addendum contract. If so, it
supposedly conveys the idea that Gonzaless unilateral repudiation of the contract or
mere allegation of its invalidity is all it takes to avoid arbitration. Hence, respondents
submit that the courts holding that the case should not be brought under the ambit of
the Arbitration Law be understood or clarified as operative only where the challenge
to the arbitration agreement has been sustained by final judgment.

Both parties were required to file their respective comments to the other partys
motion for reconsideration/clarification.[7] Respondents filed their Comment on 17
August 2005,[8] while Gonzales filed his only on 25 July 2006.[9]

On the other hand, G.R. No. 167994 is a Rule 65 petition filed on 6 May 2005,
or while the motions for reconsideration in G.R. No. 161957[10] were pending,
wherein Gonzales challenged the orders of the Regional Trial Court (RTC) requiring
him to proceed with the arbitration proceedings as sought by Climax-Arimco Mining
Corporation (Climax-Arimco).

On 5 June 2006, the two cases, G.R. Nos. 161957 and 167994, were consolidated
upon the recommendation of the Assistant Division Clerk of Court since the cases
are rooted in the same Addendum Contract.

We first tackle the more recent case which is G.R. No. 167994. It stemmed from the
petition to compel arbitration filed by respondent Climax-Arimco before the RTC of
Makati City on 31 March 2000 while the complaint for the nullification of the
Addendum Contract was pending before the DENR Panel of Arbitrators. On 23
March 2000, Climax-Arimco had sent Gonzales a Demand for Arbitration pursuant
to Clause 19.1[11] of the Addendum Contract and also in accordance with Sec. 5 of
R.A. No. 876. The petition for arbitration was subsequently filed and Climax-
Arimco sought an order to compel the parties to arbitrate pursuant to the said
arbitration clause. The case, docketed as Civil Case No. 00-444, was initially raffled
to Br. 132 of the RTC of Makati City, with Judge Herminio I. Benito as Presiding
Judge. Respondent Climax-Arimco filed on 5 April 2000 a motion to set the
application to compel arbitration for hearing.

On 14 April 2000, Gonzales filed a motion to dismiss which he however failed to

set for hearing. On 15 May 2000, he filed an Answer with
Counterclaim,[12]questioning the validity of the Addendum Contract containing the
arbitration clause. Gonzales alleged that the Addendum Contract containing the
arbitration clause is void in view of Climax-Arimcos acts of fraud, oppression and
violation of the Constitution. Thus, the arbitration clause, Clause 19.1, contained in
the Addendum Contract is also null and void ab initio and legally inexistent.

On 18 May 2000, the RTC issued an order declaring Gonzaless motion to dismiss
moot and academic in view of the filing of his Answer with Counterclaim.[13]

On 31 May 2000, Gonzales asked the RTC to set the case for pre-trial.[14] This the
RTC denied on 16 June 2000, holding that the petition for arbitration is a special
proceeding that is summary in nature.[15] However, on 7 July 2000, the RTC granted
Gonzaless motion for reconsideration of the 16 June 2000 Order and set the case for
pre-trial on 10 August 2000, it being of the view that Gonzales had raised in his
answer the issue of the making of the arbitration agreement.[16]

Climax-Arimco then filed a motion to resolve its pending motion to compel

arbitration. The RTC denied the same in its 24 July 2000 order.

On 28 July 2000, Climax-Arimco filed a Motion to Inhibit Judge Herminio I. Benito

for not possessing the cold neutrality of an impartial judge.[17] On 5 August 2000,
Judge Benito issued an Order granting the Motion to Inhibit and ordered the re-
raffling of the petition for arbitration.[18] The case was raffled to the sala of public
respondent Judge Oscar B. Pimentel of Branch 148.

On 23 August 2000, Climax-Arimco filed a motion for reconsideration of the 24 July

2000 Order.[19] Climax-Arimco argued that R.A. No. 876 does not authorize a pre-
trial or trial for a motion to compel arbitration but directs the court to hear the motion
summarily and resolve it within ten days from hearing. Judge Pimentel granted the
motion and directed the parties to arbitration. On 13 February 2001, Judge Pimentel
issued the first assailed order requiring Gonzales to proceed with arbitration
proceedings and appointing retired CA Justice Jorge Coquia as sole arbitrator.[20]

Gonzales moved for reconsideration on 20 March 2001 but this was denied in the
Order dated 7 March 2005.[21]

Gonzales thus filed the Rule 65 petition assailing the Orders dated 13
February 2001 and 7 March 2005 of Judge Pimentel. Gonzales contends that public
respondent Judge Pimentel acted with grave abuse of discretion in immediately
ordering the parties to proceed with arbitration despite the proper, valid, and timely
raised argument in his Answer with Counterclaim that the Addendum Contract,
containing the arbitration clause, is null and void. Gonzales has also sought a
temporary restraining order to prevent the enforcement of the assailed orders
directing the parties to arbitrate, and to direct Judge Pimentel to hold a pre-trial
conference and the necessary hearings on the determination of the nullity of the
Addendum Contract.

In support of his argument, Gonzales invokes Sec. 6 of R.A. No. 876:

SEC. 6. Hearing by court.A party aggrieved by the failure, neglect

or refusal of another to perform under an agreement in writing providing
for arbitration may petition the court for an order directing that such
arbitration proceed in the manner provided for in such agreement. Five
days notice in writing of the hearing of such application shall be served
either personally or by registered mail upon the party in default. The
court shall hear the parties, and upon being satisfied that the making of
the agreement or such failure to comply therewith is not in issue, shall
make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement. If the making of the
agreement or default be in issue the court shall proceed to summarily
hear such issue. If the finding be that no agreement in writing providing
for arbitration was made, or that there is no default in the proceeding
thereunder, the proceeding shall be dismissed. If the finding be that a
written provision for arbitration was made and there is a default in
proceeding thereunder, an order shall be made summarily directing the
parties to proceed with the arbitration in accordance with the terms
thereof.

The court shall decide all motions, petitions or applications filed

under the provisions of this Act, within ten (10) days after such motions,
petitions, or applications have been heard by it.

Gonzales also cites Sec. 24 of R.A. No. 9285 or the Alternative Dispute
Resolution Act of 2004:
 SEC. 24. Referral to Arbitration.A court before which an action
is brought in a matter which is the subject matter of an arbitration
agreement shall, if at least one party so requests not later than the pre-
trial conference, or upon the request of both parties thereafter, refer the
parties to arbitration unless it finds that the arbitration agreement is null
and void, inoperative or incapable of being performed.

According to Gonzales, the above-quoted provisions of law outline the procedure to

be followed in petitions to compel arbitration, which the RTC did not follow. Thus,
referral of the parties to arbitration by Judge Pimentel despite the timely and properly
raised issue of nullity of the Addendum Contract was misplaced and without legal
basis. Both R.A. No. 876 and R.A. No. 9285 mandate that any issue as to the nullity,
inoperativeness, or incapability of performance of the arbitration clause/agreement
raised by one of the parties to the alleged arbitration agreement must be determined
by the court prior to referring them to arbitration. They require that the trial court
first determine or resolve the issue of nullity, and there is no other venue for this
determination other than a pre-trial and hearing on the issue by the trial court which
has jurisdiction over the case. Gonzales adds that the assailed 13 February
2001 Order also violated his right to procedural due process when the trial court
erroneously ruled on the existence of the arbitration agreement despite the absence
of a hearing for the presentation of evidence on the nullity of the Addendum
Contract.

Respondent Climax-Arimco, on the other hand, assails the mode of review availed
of by Gonzales. Climax-Arimco cites Sec. 29 of R.A. No. 876:

SEC. 29. Appeals.An appeal may be taken from an order made in a

proceeding under this Act, or from a judgment entered upon an award
through certiorari proceedings, but such appeals shall be limited to
questions of law. The proceedings upon such an appeal, including the
judgment thereon shall be governed by the Rules of Court in so far as
they are applicable.

Climax-Arimco mentions that the special civil action for certiorari employed by
Gonzales is available only where there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law against the challenged orders or
acts. Climax-Arimco then points out that R.A. No. 876 provides for an appeal from
such orders, which, under the Rules of Court, must be filed within 15 days from
notice of the final order or resolution appealed from or of the denial of the motion
for reconsideration filed in due time. Gonzales has not denied that the relevant 15-
day period for an appeal had elapsed long before he filed this petition for
certiorari. He cannot use the special civil action of certiorari as a remedy for a lost
appeal.

Climax-Arimco adds that an application to compel arbitration under Sec. 6 of R.A.

No. 876 confers on the trial court only a limited and special jurisdiction, i.e., a
jurisdiction solely to determine (a) whether or not the parties have a written contract
to arbitrate, and (b) if the defendant has failed to comply with that
contract.Respondent cites La Naval Drug Corporation v. Court of Appeals,[22] which
holds that in a proceeding to compel arbitration, [t]he arbitration law explicitly
confines the courts authority only to pass upon the issue of whether there is or there
is no agreement in writing providing for arbitration, and [i]n the affirmative, the
statute ordains that the court shall issue an order summarily directing the parties to
proceed with the arbitration in accordance with the terms thereof.[23] Climax-Arimco
argues that R.A. No. 876 gives no room for any other issue to be dealt with in such
a proceeding, and that the court presented with an application to compel arbitration
may order arbitration or dismiss the same, depending solely on its finding as to those
two limited issues. If either of these matters is disputed, the court is required to
conduct a summary hearing on it. Gonzaless proposition contradicts both the trial
courts limited jurisdiction and the summary nature of the proceeding itself.

Climax-Arimco further notes that Gonzaless attack on or repudiation of the

Addendum Contract also is not a ground to deny effect to the arbitration clause in
the Contract. The arbitration agreement is separate and severable from the contract
evidencing the parties commercial or economic transaction, it stresses. Hence, the
alleged defect or failure of the main contract is not a ground to deny enforcement of
the parties arbitration agreement. Even the party who has repudiated the main
contract is not prevented from enforcing its arbitration provision. R.A. No. 876 itself
treats the arbitration clause or agreement as a contract separate from the commercial,
economic or other transaction to be arbitrated. The statute, in particular paragraph 1
of Sec. 2 thereof, considers the arbitration stipulation an independent contract in its
own right whose enforcement may be prevented only on grounds which legally make
the arbitration agreement itself revocable, thus:

SEC. 2. Persons and matters subject to arbitration.Two or more persons

or parties may submit to the arbitration of one or more arbitrators any
controversy existing, between them at the time of the submission and
which may be the subject of an action, or the parties to any contract may
in such contract agree to settle by arbitration a controversy thereafter
arising between them. Such submission or contract shall be valid,
enforceable and irrevocable, save upon such grounds as exist at law for
the revocation of any contract.

xxxx

The grounds Gonzales invokes for the revocation of the Addendum Contractfraud
and oppression in the execution thereofare also not grounds for the revocation of the
arbitration clause in the Contract, Climax-Arimco notes. Such grounds may only be
raised by way of defense in the arbitration itself and cannot be used to frustrate or
delay the conduct of arbitration proceedings. Instead, these should be raised in a
separate action for rescission, it continues.

Climax-Arimco emphasizes that the summary proceeding to compel arbitration

under Sec. 6 of R.A. No. 876 should not be confused with the procedure in Sec. 24
of R.A. No. 9285. Sec. 6 of R.A. No. 876 refers to an application to compel
arbitration where the courts authority is limited to resolving the issue of whether
there is or there is no agreement in writing providing for arbitration, while Sec. 24
of R.A. No. 9285 refers to an ordinary action which covers a matter that appears to
be arbitrable or subject to arbitration under the arbitration agreement. In the latter
case, the statute is clear that the court, instead of trying the case, may, on request of
either or both parties, refer the parties to arbitration, unless it finds that the arbitration
agreement is null and void, inoperative or incapable of being performed. Arbitration
may even be ordered in the same suit brought upon a matter covered by an arbitration
agreement even without waiting for the outcome of the issue of the validity of the
arbitration agreement. Art. 8 of the UNCITRAL Model Law[24] states that where a
court before which an action is brought in a matter which is subject of an arbitration
agreement refers the parties to arbitration, the arbitral proceedings may proceed even
while the action is pending.

Thus, the main issue raised in the Petition for Certiorari is whether it was proper for
the RTC, in the proceeding to compel arbitration under R.A. No. 876, to order the
parties to arbitrate even though the defendant therein has raised the twin issues of
validity and nullity of the Addendum Contract and, consequently, of the arbitration
clause therein as well. The resolution of both Climax-Arimcos Motion for Partial
Reconsideration and/or Clarification in G.R. No. 161957 and Gonzaless Petition for
Certiorari in G.R. No. 167994 essentially turns on whether the question of validity
of the Addendum Contract bears upon the applicability or enforceability of the
arbitration clause contained therein. The two pending matters shall thus be jointly
resolved.

We address the Rule 65 petition in G.R. No. 167994 first from the remedial
law perspective. It deserves to be dismissed on procedural grounds, as it was filed in
lieu of appeal which is the prescribed remedy and at that far beyond the reglementary
period. It is elementary in remedial law that the use of an erroneous mode of appeal
is cause for dismissal of the petition for certiorari and it has been repeatedly stressed
that a petition for certiorari is not a substitute for a lost appeal. As its nature, a
petition for certiorari lies only where there is no appeal, and no plain, speedy and
adequate remedy in the ordinary course of law.[25] The Arbitration Law specifically
provides for an appeal by certiorari, i.e., a petition for review under certiorari under
Rule 45 of the Rules of Court that raises pure questions of law.[26] There is no merit
to Gonzaless argument that the use of the permissive term may in Sec. 29, R.A. No.
876 in the filing of appeals does not prohibit nor discount the filing of a petition for
certiorari under Rule 65.[27] Proper interpretation of the aforesaid provision of law
shows that the term may refers only to the filing of an appeal, not to the mode of
review to be employed. Indeed, the use of may merely reiterates the principle that
the right to appeal is not part of due process of law but is a mere statutory privilege
to be exercised only in the manner and in accordance with law.

Neither can BF Corporation v. Court of Appeals[28] cited by Gonzales support

his theory. Gonzales argues that said case recognized and allowed a petition for
certiorari under Rule 65 appealing the order of the Regional Trial Court disregarding
the arbitration agreement as an acceptable remedy.[29] The BF Corporation case had
its origins in a complaint for collection of sum of money filed by therein petitioner
BF Corporation against Shangri-la Properties, Inc. (SPI). SPI moved to suspend the
proceedings alleging that the construction agreement or the Articles of Agreement
between the parties contained a clause requiring prior resort to arbitration before
judicial intervention. The trial court found that an arbitration clause was
incorporated in the Conditions of Contract appended to and deemed an integral part
of the Articles of Agreement. Still, the trial court denied the motion to suspend
proceedings upon a finding that the Conditions of Contract were not duly executed
and signed by the parties. The trial court also found that SPI had failed to file any
written notice of demand for arbitration within the period specified in the arbitration
clause. The trial court denied SPI's motion for reconsideration and ordered it to file
its responsive pleading. Instead of filing an answer, SPI filed a petition for certiorari
under Rule 65, which the Court of Appeals, favorably acted upon. In a petition for
review before this Court, BF Corporation alleged, among others, that the Court of
Appeals should have dismissed the petition for certiorari since the order of the trial
court denying the motion to suspend proceedings is a resolution of an incident on
the merits and upon the continuation of the proceedings, the trial court would
eventually render a decision on the merits, which decision could then be elevated to
a higher court in an ordinary appeal.[30]

The Court did not uphold BF Corporations argument. The issue raised before
the Court was whether SPI had taken the proper mode of appeal before the Court of
Appeals. The question before the Court of Appeals was whether the trial court had
prematurely assumed jurisdiction over the controversy. The question of jurisdiction
in turn depended on the question of existence of the arbitration clause which is one
of fact. While on its face the question of existence of the arbitration clause is a
question of fact that is not proper in a petition for certiorari, yet since the
determination of the question obliged the Court of Appeals as it did to interpret the
contract documents in accordance with R.A. No. 876 and existing jurisprudence, the
question is likewise a question of law which may be properly taken cognizance of in
a petition for certiorari under Rule 65, so the Court held.[31]

The situation in B.F. Corporation is not availing in the present petition. The
disquisition in B.F. Corporation led to the conclusion that in order that the question
of jurisdiction may be resolved, the appellate court had to deal first with a question
of law which could be addressed in a certiorari proceeding. In the present case,
Gonzaless petition raises a question of law, but not a question of jurisdiction. Judge
Pimentel acted in accordance with the procedure prescribed in R.A. No. 876 when
he ordered Gonzales to proceed with arbitration and appointed a sole arbitrator after
making the determination that there was indeed an arbitration agreement. It has been
held that as long as a court acts within its jurisdiction and does not gravely abuse its
discretion in the exercise thereof, any supposed error committed by it will amount
to nothing more than an error of judgment reviewable by a timely appeal and not
assailable by a special civil action of certiorari.[32] Even if we overlook the
employment of the wrong remedy in the broader interests of justice, the petition
would nevertheless be dismissed for failure of Gonzalez to show grave abuse of
discretion.

Arbitration, as an alternative mode of settling disputes, has long been recognized

and accepted in our jurisdiction. The Civil Code is explicit on the matter.[33] R.A.
No. 876 also expressly authorizes arbitration of domestic disputes. Foreign
arbitration, as a system of settling commercial disputes of an international character,
was likewise recognized when the Philippines adhered to the United Nations
"Convention on the Recognition and the Enforcement of Foreign Arbitral Awards
of 1958," under the 10 May 1965 Resolution No. 71 of the Philippine Senate, giving
reciprocal recognition and allowing enforcement of international arbitration
agreements between parties of different nationalities within a contracting
state.[34] The enactment of R.A. No. 9285 on 2 April 2004 further institutionalized
the use of alternative dispute resolution systems, including arbitration, in the
settlement of disputes.

Disputes do not go to arbitration unless and until the parties have agreed to abide by
the arbitrators decision. Necessarily, a contract is required for arbitration to take
place and to be binding. R.A. No. 876 recognizes the contractual nature of the
arbitration agreement, thus:

SEC. 2. Persons and matters subject to arbitration.Two or more persons

or parties may submit to the arbitration of one or more arbitrators
any controversy existing, between them at the time of the submission
and which may be the subject of an action, or the parties to any contract
may in such contract agree to settle by arbitration a controversy
thereafter arising between them. Such submission or contract shall be
 valid, enforceable and irrevocable, save upon such grounds as exist
at law for the revocation of any contract.

Such submission or contract may include question arising out of

valuations, appraisals or other controversies which may be collateral,
incidental, precedent or subsequent to any issue between the parties.

A controversy cannot be arbitrated where one of the parties to the

controversy is an infant, or a person judicially declared to be
incompetent, unless the appropriate court having jurisdiction approve a
petition for permission to submit such controversy to arbitration made
by the general guardian or guardian ad litem of the infant or of the
incompetent.[Emphasis added.]

Thus, we held in Manila Electric Co. v. Pasay Transportation Co.[35] that a

submission to arbitration is a contract. A clause in a contract providing that all
matters in dispute between the parties shall be referred to arbitration is a
contract,[36] and in Del Monte Corporation-USA v. Court of Appeals[37] that [t]he
provision to submit to arbitration any dispute arising therefrom and the relationship
of the parties is part of that contract and is itself a contract. As a rule, contracts are
respected as the law between the contracting parties and produce effect as between
them, their assigns and heirs.[38]

The special proceeding under Sec. 6 of R.A. No. 876 recognizes the
contractual nature of arbitration clauses or agreements. It provides:

SEC. 6. Hearing by court.A party aggrieved by the failure, neglect

or refusal of another to perform under an agreement in writing
providing for arbitration may petition the court for an order directing
that such arbitration proceed in the manner provided for in such
agreement. Five days notice in writing of the hearing of such application
shall be served either personally or by registered mail upon the party in
default. The court shall hear the parties, and upon being satisfied that
the making of the agreement or such failure to comply therewith is
not in issue, shall make an order directing the parties to proceed to
arbitration in accordance with the terms of the agreement. If the making
of the agreement or default be in issue the court shall proceed to
 summarily hear such issue. If the finding be that no agreement in
writing providing for arbitration was made, or that there is no default
in the proceeding thereunder, the proceeding shall be dismissed. If the
finding be that a written provision for arbitration was made and there
is a default in proceeding thereunder, an order shall be made summarily
directing the parties to proceed with the arbitration in accordance with
the terms thereof.

The court shall decide all motions, petitions or applications filed

under the provisions of this Act, within ten days after such motions,
petitions, or applications have been heard by it. [Emphasis added.]

This special proceeding is the procedural mechanism for the enforcement of the
contract to arbitrate. The jurisdiction of the courts in relation to Sec. 6 of R.A. No.
876 as well as the nature of the proceedings therein was expounded upon in La Naval
Drug Corporation v. Court of Appeals.[39] There it was held that R.A. No. 876
explicitly confines the court's authority only to the determination of whether or not
there is an agreement in writing providing for arbitration. In the affirmative, the
statute ordains that the court shall issue an order "summarily directing the parties to
proceed with the arbitration in accordance with the terms thereof." If the court, upon
the other hand, finds that no such agreement exists, "the proceeding shall be
dismissed."[40] The cited case also stressed that the proceedings are summary in
nature.[41] The same thrust was made in the earlier case of Mindanao Portland
Cement Corp. v. McDonough Construction Co. of Florida[42] which held, thus:

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 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. x x x x[43]
 Implicit in the summary nature of the judicial proceedings is the separable or
independent character of the arbitration clause or agreement. This was highlighted
in the cases of Manila Electric Co. v. Pasay Trans. Co.[44] and Del Monte
Corporation-USA v. Court of Appeals.[45]

The doctrine of separability, or severability as other writers call it, enunciates

that an arbitration agreement is independent of the main contract. The arbitration
agreement is to be treated as a separate agreement and the arbitration agreement does
not automatically terminate when the contract of which it is part comes to an end.[46]

The separability of the arbitration agreement is especially significant to the

determination of whether the invalidity of the main contract also nullifies the
arbitration clause. Indeed, the doctrine denotes that the invalidity of the main
contract, also referred to as the container contract, does not affect the validity of the
arbitration agreement. Irrespective of the fact that the main contract is invalid, the
arbitration clause/agreement still remains valid and enforceable.[47]

The separability of the arbitration clause is confirmed in Art. 16(1) of the

UNCITRAL Model Law and Art. 21(2) of the UNCITRAL Arbitration Rules.[48]

The separability doctrine was dwelt upon at length in the U.S. case of Prima
Paint Corp. v. Flood & Conklin Manufacturing Co.[49] In that case, Prima Paint and
Flood and Conklin (F & C) entered into a consulting agreement whereby F & C
undertook to act as consultant to Prima Paint for six years, sold to Prima Paint a list
of its customers and promised not to sell paint to these customers during the same
period. The consulting agreement contained an arbitration clause. Prima Paint did
not make payments as provided in the consulting agreement, contending that F & C
had fraudulently misrepresented that it was solvent and able for perform its contract
when in fact it was not and had even intended to file for bankruptcy after executing
the consultancy agreement. Thus, F & C served Prima Paint with a notice of
intention to arbitrate. Prima Paint sued in court for rescission of the consulting
agreement on the ground of fraudulent misrepresentation and asked for the issuance
of an order enjoining F & C from proceeding with arbitration. F & C moved to stay
the suit pending arbitration. The trial court granted F & Cs motion, and the U.S.
Supreme Court affirmed.
 The U.S. Supreme Court did not address Prima Paints argument that it had
been fraudulently induced by F & C to sign the consulting agreement and held that
no court should address this argument. Relying on Sec. 4 of the Federal Arbitration
Actwhich provides that if a party [claims to be] aggrieved by the alleged failure x x
x of another to arbitrate x x x, [t]he court shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the failure to comply
therewith is not in issue, the court shall make an order directing the parties
to proceed to arbitration x x x. If the making of the arbitration agreement or the
failure, neglect, or refusal to perform the same be in issue, the court shall proceed
summarily to the trial thereofthe U.S. High Court held that the court should not order
the parties to arbitrate if the making of the arbitration agreement is in issue. The
parties should be ordered to arbitration if, and only if, they have contracted to submit
to arbitration. Prima Paint was not entitled to trial on the question of whether an
arbitration agreement was made because its allegations of fraudulent inducement
were not directed to the arbitration clause itself, but only to the consulting agreement
which contained the arbitration agreement.[50] Prima Paint held that arbitration
clauses are separable from the contracts in which they are embedded, and that where
no claim is made that fraud was directed to the arbitration clause itself, a broad
arbitration clause will be held to encompass arbitration of the claim that the contract
itself was induced by fraud.[51]

There is reason, therefore, to rule against Gonzales when he alleges that Judge
Pimentel acted with grave abuse of discretion in ordering the parties to proceed with
arbitration. Gonzaless argument that the Addendum Contract is null and void and,
therefore the arbitration clause therein is void as well, is not tenable. First, the
proceeding in a petition for arbitration under R.A. No. 876 is limited only to the
resolution of the question of whether the arbitration agreement exists. Second, the
separability of the arbitration clause from the Addendum Contract means that
validity or invalidity of the Addendum Contract will not affect the enforceability of
the agreement to arbitrate. Thus, Gonzaless petition for certiorari should be
dismissed.

This brings us back to G.R. No. 161957. The adjudication of the petition in
G.R. No. 167994 effectively modifies part of the Decision dated 28 February 2005 in
G.R. No. 161957. Hence, we now hold that the validity of the contract containing
the agreement to submit to arbitration does not affect the applicability of the
arbitration clause itself. A contrary ruling would suggest that a partys mere
repudiation of the main contract is sufficient to avoid arbitration. That is exactly the
situation that the separability doctrine, as well as jurisprudence applying it, seeks to
avoid. We add that when it was declared in G.R. No. 161957 that the case should
not be brought for arbitration, it should be clarified that the case referred to is the
case actually filed by Gonzales before the DENR Panel of Arbitrators, which was
for the nullification of the main contract on the ground of fraud, as it had already
been determined that the case should have been brought before the regular courts
involving as it did judicial issues.

The Motion for Reconsideration of Gonzales in G.R. No. 161957 should also
be denied. In the motion, Gonzales raises the same question of jurisdiction, more
particularly that the complaint for nullification of the Addendum Contract pertained
to the DENR Panel of Arbitrators, not the regular courts. He insists that the subject
of his complaint is a mining dispute since it involves a dispute concerning rights to
mining areas, the Financial and Technical Assistance Agreement (FTAA) between
the parties, and it also involves claimowners. He adds that the Court failed to rule on
other issues he raised, such as whether he had ceded his claims over the mineral
deposits located within the Addendum Area of Influence; whether the complaint
filed before the DENR Panel of Arbitrators alleged ultimate facts of fraud; and
whether the action to declare the nullity of the Addendum Contract on the ground of
fraud has prescribed.

These are the same issues that Gonzales raised in his Rule 45 petition in G.R.
No. 161957 which were resolved against him in the Decision of 28 February
2005.Gonzales does not raise any new argument that would sway the Court even a
bit to alter its holding that the complaint filed before the DENR Panel of Arbitrators
involves judicial issues which should properly be resolved by the regular courts. He
alleged fraud or misrepresentation in the execution of the Addendum Contract which
is a ground for the annulment of a voidable contract. Clearly, such allegations entail
legal questions which are within the jurisdiction of the courts.
 The question of whether Gonzales had ceded his claims over the mineral
deposits in the Addendum Area of Influence is a factual question which is not proper
for determination before this Court. At all events, moreover, the question is
irrelevant to the issue of jurisdiction of the DENR Panel of Arbitrators. It should be
pointed out that the DENR Panel of Arbitrators made a factual finding in its Order
dated 18 October 2001, which it reiterated in its Order dated 25 June 2002, that
Gonzales had, through the various agreements, assigned his interest over the mineral
claims all in favor of [Climax-Arimco] as well as that without the complainant
[Gonzales] assigning his interest over the mineral claims in favor of [Climax-
Arimco], there would be no FTAA to speak of.[52] This finding was affirmed by the
Court of Appeals in its Decision dated 30 July 2003 resolving the petition for
certiorari filed by Climax-Arimco in regard to the 18 October 2001 Order of the
DENR Panel.[53]

The Court of Appeals likewise found that Gonzaless complaint alleged fraud
but did not provide any particulars to substantiate it. The complaint repeatedly
mentioned fraud, oppression, violation of the Constitution and similar conclusions
but nowhere did it give any ultimate facts or particulars relative to the allegations.[54]

Sec. 5, Rule 8 of the Rules of Court specifically provides that in all averments
of fraud, the circumstances constituting fraud must be stated with particularity. This
is to enable the opposing party to controvert the particular facts allegedly
constituting the same. Perusal of the complaint indeed shows that it failed to state
with particularity the ultimate facts and circumstances constituting the alleged
fraud. It does not state what particulars about Climax-Arimcos financial or technical
capability were misrepresented, or how the misrepresentation was
done. Incorporated in the body of the complaint are verbatim reproductions of the
contracts, correspondence and government issuances that reportedly explain the
allegations of fraud and misrepresentation, but these are, at best, evidentiary matters
that should not be included in the pleading.

As to the issue of prescription, Gonzaless claims of fraud and

misrepresentation attending the execution of the Addendum Contract are grounds
for the annulment of a voidable contract under the Civil Code.[55] Under Art. 1391
of the Code, an action for annulment shall be brought within four years, in the case
of fraud, beginning from the time of the discovery of the same. However, the time
of the discovery of the alleged fraud is not clear from the allegations of Gonzaless
complaint. That being the situation coupled with the fact that this Court is not a trier
of facts, any ruling on the issue of prescription would be uncalled for or even
unnecessary.

WHEREFORE, the Petition for Certiorari in G.R. No. 167994 is

DISMISSED. Such dismissal effectively renders superfluous formal action on the
Motion for Partial Reconsideration and/or Clarification filed by Climax Mining Ltd.,
et al. in G.R. No. 161957.

The Motion for Reconsideration filed by Jorge Gonzales in G.R. No. 161957
is DENIED WITH FINALITY.

SO ORDERED.

EN BANC

[G.R. No. 155001. May 5, 2003]

DEMOSTHENES P. AGAN, JR., JOSEPH B. CATAHAN, JOSE MARI B.

REUNILLA, MANUEL ANTONIO B. BOE, MAMERTO S. CLARA,
REUEL E. DIMALANTA, MORY V. DOMALAON, CONRADO G.
DIMAANO, LOLITA R. HIZON, REMEDIOS P. ADOLFO,
BIENVENIDO C. HILARIO, MIASCOR WORKERS UNION -
NATIONAL LABOR UNION (MWU-NLU), and PHILIPPINE
AIRLINES EMPLOYEES ASSOCIATION (PALEA), petitioners,
vs. PHILIPPINE INTERNATIONAL AIR TERMINALS CO., INC.,
MANILA INTERNATIONAL AIRPORT AUTHORITY, DEPARTMENT
OF TRANSPORTATION AND COMMUNICATIONS and
SECRETARY LEANDRO M. MENDOZA, in his capacity as Head of
the Department of Transportation and
Communications, respondents,
MIASCOR GROUNDHANDLING CORPORATION, DNATA-WINGS
AVIATION SYSTEMS CORPORATION, MACROASIA-EUREST
SERVICES, INC., MACROASIA-MENZIES AIRPORT SERVICES
 CORPORATION, MIASCOR CATERING SERVICES
CORPORATION, MIASCOR AIRCRAFT MAINTENANCE
CORPORATION, and MIASCOR LOGISTICS
CORPORATION, petitioners-in-intervention,

[G.R. No. 155547. May 5, 2003]

SALACNIB F. BATERINA, CLAVEL A. MARTINEZ and CONSTANTINO

G. JARAULA, petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, DEPARTMENT OF PUBLIC WORKS AND
HIGHWAYS, SECRETARY LEANDRO M. MENDOZA, in his
capacity as Head of the Department of Transportation and
Communications, and SECRETARY SIMEON A. DATUMANONG,
in his capacity as Head of the Department of Public Works and
Highways, respondents,
JACINTO V. PARAS, RAFAEL P. NANTES, EDUARDO C. ZIALCITA,
WILLY BUYSON VILLARAMA, PROSPERO C. NOGRALES,
PROSPERO A. PICHAY, JR., HARLIN CAST ABAYON, and
BENASING O. MACARANBON, respondents-intervenors,

[G.R. No. 155661. May 5, 2003]

CEFERINO C. LOPEZ, RAMON M. SALES, ALFREDO B. VALENCIA, MA.

TERESA V. GAERLAN, LEONARDO DE LA ROSA, DINA C. DE
LEON, VIRGIE CATAMIN RONALD SCHLOBOM, ANGELITO
SANTOS, MA. LUISA M. PALCON and SAMAHANG
MANGGAGAWA SA PALIPARAN NG PILIPINAS
(SMPP), petitioners, vs. PHILIPPINE INTERNATIONAL AIR
TERMINALS CO., INC., MANILA INTERNATIONAL AIRPORT
AUTHORITY, DEPARTMENT OF TRANSPORTATION AND
COMMUNICATIONS, SECRETARY LEANDRO M. MENDOZA, in his
 capacity as Head of the Department of Transportation and
Communications, respondents.

DECISION
PUNO, J.:

Petitioners and petitioners-in-intervention filed the instant petitions for

prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the
Manila International Airport Authority (MIAA) and the Department of
Transportation and Communications (DOTC) and its Secretary from
implementing the following agreements executed by the Philippine Government
through the DOTC and the MIAA and the Philippine International Air Terminals
Co., Inc. (PIATCO): (1) the Concession Agreement signed on July 12, 1997, (2)
the Amended and Restated Concession Agreement dated November 26, 1999,
(3) the First Supplement to the Amended and Restated Concession Agreement
dated August 27, 1999, (4) the Second Supplement to the Amended and
Restated Concession Agreement dated September 4, 2000, and (5) the Third
Supplement to the Amended and Restated Concession Agreement dated June
22, 2001 (collectively, the PIATCO Contracts).
The facts are as follows:
In August 1989, the DOTC engaged the services of Aeroport de Paris (ADP)
to conduct a comprehensive study of the Ninoy Aquino International Airport
(NAIA) and determine whether the present airport can cope with the traffic
development up to the year 2010. The study consisted of two parts: first, traffic
forecasts, capacity of existing facilities, NAIA future requirements, proposed
master plans and development plans; and second, presentation of the
preliminary design of the passenger terminal building. The ADP submitted a
Draft Final Report to the DOTC in December 1989.
Some time in 1993, six business leaders consisting of John Gokongwei,
Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George Ty and Alfonso Yuchengco
met with then President Fidel V. Ramos to explore the possibility of investing in
the construction and operation of a new international airport terminal. To signify
their commitment to pursue the project, they formed the Asias Emerging Dragon
Corp. (AEDC) which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to the
Government through the DOTC/MIAA for the development of NAIA
International Passenger Terminal III (NAIA IPT III) under a build-operate-and-
transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT
Law).[1]

On December 2, 1994, the DOTC issued Dept. Order No. 94-832

constituting the Prequalification Bids and Awards Committee (PBAC) for the
implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia endorsed the
proposal of AEDC to the National Economic and Development Authority
(NEDA). A revised proposal, however, was forwarded by the DOTC to NEDA
on December 13, 1995. On January 5, 1996, the NEDA Investment
Coordinating Council (NEDA ICC) Technical Board favorably endorsed the
project to the ICC Cabinet Committee which approved the same, subject to
certain conditions, on January 19, 1996. On February 13, 1996, the NEDA
passed Board Resolution No. 2 which approved the NAIA IPT III project.
On June 7, 14, and 21, 1996, DOTC/MIAA caused the publication in two
daily newspapers of an invitation for competitive or comparative proposals on
AEDCs unsolicited proposal, in accordance with Sec. 4-A of RA 6957, as
amended. The alternative bidders were required to submit three (3) sealed
envelopes on or before 5:00 p.m. of September 20, 1996. The first envelope
should contain the Prequalification Documents, the second envelope the
Technical Proposal, and the third envelope the Financial Proposal of the
proponent.
On June 20, 1996, PBAC Bulletin No. 1 was issued, postponing the
availment of the Bid Documents and the submission of the comparative bid
proposals. Interested firms were permitted to obtain the Request for Proposal
Documents beginning June 28, 1996, upon submission of a written application
and payment of a non-refundable fee ofP50,000.00 (US$2,000).
The Bid Documents issued by the PBAC provided among others that the
proponent must have adequate capability to sustain the financing requirement
for the detailed engineering, design, construction, operation, and maintenance
phases of the project. The proponent would be evaluated based on its ability to
provide a minimum amount of equity to the project, and its capacity to secure
external financing for the project.
On July 23, 1996, the PBAC issued PBAC Bulletin No. 2 inviting all bidders
to a pre-bid conference on July 29, 1996.
On August 16, 1996, the PBAC issued PBAC Bulletin No. 3 amending the
Bid Documents. The following amendments were made on the Bid Documents:
a. Aside from the fixed Annual Guaranteed Payment, the proponent shall include in its
financial proposal an additional percentage of gross revenue share of the Government,
as follows:

i. First 5 years 5.0%

ii. Next 10 years 7.5%

iii. Next 10 years 10.0%

b. The amount of the fixed Annual Guaranteed Payment shall be subject of the price
challenge. Proponent may offer an Annual Guaranteed Payment which need not be of
equal amount, but payment of which shall start upon site possession.

c. The project proponent must have adequate capability to sustain the financing
requirement for the detailed engineering, design, construction, and/or operation and
maintenance phases of the project as the case may be. For purposes of pre-
qualification, this capability shall be measured in terms of:

i. Proof of the availability of the project proponent and/or the consortium to provide
the minimum amount of equity for the project; and

ii. a letter testimonial from reputable banks attesting that the project proponent and/or
the members of the consortium are banking with them, that the project proponent
and/or the members are of good financial standing, and have adequate resources.

d. The basis for the prequalification shall be the proponents compliance with the
minimum technical and financial requirements provided in the Bid Documents and the
IRR of the BOT Law. The minimum amount of equity shall be 30% of the Project
Cost.

e. Amendments to the draft Concession Agreement shall be issued from time to

time. Said amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.

On August 29, 1996, the Second Pre-Bid Conference was held where
certain clarifications were made. Upon the request of prospective bidder
Peoples Air Cargo & Warehousing Co., Inc (Paircargo), the PBAC warranted
that based on Sec. 11.6, Rule 11 of the Implementing Rules and Regulations
of the BOT Law, only the proposed Annual Guaranteed Payment submitted by
the challengers would be revealed to AEDC, and that the challengers technical
and financial proposals would remain confidential. The PBAC also clarified that
the list of revenue sources contained in Annex 4.2a of the Bid Documents was
merely indicative and that other revenue sources may be included by the
proponent, subject to approval by DOTC/MIAA. Furthermore, the PBAC
clarified that only those fees and charges denominated as Public Utility Fees
would be subject to regulation, and those charges which would be actually
deemed Public Utility Fees could still be revised, depending on the outcome of
PBACs query on the matter with the Department of Justice.
In September 1996, the PBAC issued Bid Bulletin No. 5, entitled Answers
to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10,
1996. Paircargos queries and the PBACs responses were as follows:

1. It is difficult for Paircargo and Associates to meet the required minimum equity
requirement as prescribed in Section 8.3.4 of the Bid Documents considering that the
capitalization of each member company is so structured to meet the requirements and
needs of their current respective business undertaking/activities. In order to comply
with this equity requirement, Paircargo is requesting PBAC to just allow each
member of (sic) corporation of the Joint Venture to just execute an agreement that
embodies a commitment to infuse the required capital in case the project is awarded
to the Joint Venture instead of increasing each corporations current authorized
capital stock just for prequalification purposes.

In prequalification, the agency is interested in ones financial capability at the time of

prequalification, not future or potential capability.

A commitment to put up equity once awarded the project is not enough to establish
that present financial capability. However, total financial capability of all member
companies of the Consortium, to be established by submitting the respective
companies audited financial statements, shall be acceptable.

2. At present, Paircargo is negotiating with banks and other institutions for the
extension of a Performance Security to the joint venture in the event that the
Concessions Agreement (sic) is awarded to them. However, Paircargo is being
required to submit a copy of the draft concession as one of the documentary
requirements. Therefore, Paircargo is requesting that theyd (sic) be furnished copy of
the approved negotiated agreement between the PBAC and the AEDC at the soonest
possible time.

A copy of the draft Concession Agreement is included in the Bid Documents. Any
material changes would be made known to prospective challengers through bid
bulletins. However, a final version will be issued before the award of contract.
 The PBAC also stated that it would require AEDC to sign Supplement C of
the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin
Project) and to submit the same with the required Bid Security.
On September 20, 1996, the consortium composed of Peoples Air Cargo
and Warehousing Co., Inc. (Paircargo), Phil. Air and Grounds Services, Inc.
(PAGS) and Security Bank Corp. (Security Bank) (collectively, Paircargo
Consortium) submitted their competitive proposal to the PBAC. On September
23, 1996, the PBAC opened the first envelope containing the prequalification
documents of the Paircargo Consortium. On the following day, September 24,
1996, the PBAC prequalified the Paircargo Consortium.
On September 26, 1996, AEDC informed the PBAC in writing of its
reservations as regards the Paircargo Consortium, which include:

a. The lack of corporate approvals and financial capability of PAIRCARGO;

b. The lack of corporate approvals and financial capability of PAGS;

c. The prohibition imposed by RA 337, as amended (the General Banking Act) on the
amount that Security Bank could legally invest in the project;

d. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture, for

prequalification purposes; and

e. The appointment of Lufthansa as the facility operator, in view of the Philippine

requirement in the operation of a public utility.

The PBAC gave its reply on October 2, 1996, informing AEDC that it had
considered the issues raised by the latter, and that based on the documents
submitted by Paircargo and the established prequalification criteria, the PBAC
had found that the challenger, Paircargo, had prequalified to undertake the
project. The Secretary of the DOTC approved the finding of the PBAC.
The PBAC then proceeded with the opening of the second envelope of the
Paircargo Consortium which contained its Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly with respect
to Paircargos financial capability, in view of the restrictions imposed by Section
21-B of the General Banking Act and Sections 1380 and 1381 of the Manual
Regulations for Banks and Other Financial Intermediaries. On October 7, 1996,
AEDC again manifested its objections and requested that it be furnished with
excerpts of the PBAC meeting and the accompanying technical evaluation
report where each of the issues they raised were addressed.
 On October 16, 1996, the PBAC opened the third envelope submitted by
AEDC and the Paircargo Consortium containing their respective financial
proposals. Both proponents offered to build the NAIA Passenger Terminal III
for at least $350 million at no cost to the government and to pay the
government: 5% share in gross revenues for the first five years of operation,
7.5% share in gross revenues for the next ten years of operation, and 10%
share in gross revenues for the last ten years of operation, in accordance with
the Bid Documents. However, in addition to the foregoing, AEDC offered to pay
the government a total of P135 million as guaranteed payment for 27 years
while Paircargo Consortium offered to pay the government a total of P17.75
billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted the price
proposal submitted by the Paircargo Consortium, and gave AEDC 30 working
days or until November 28, 1996 within which to match the said bid, otherwise,
the project would be awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period, then DOTC
Secretary Amado Lagdameo, on December 11, 1996, issued a notice to
Paircargo Consortium regarding AEDCs failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into Philippine
International Airport Terminals Co., Inc. (PIATCO).
AEDC subsequently protested the alleged undue preference given to
PIATCO and reiterated its objections as regards the prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession agreement for the
second-pass approval of the NEDA-ICC.
On April 16, 1997, AEDC filed with the Regional Trial Court of Pasig a
Petition for Declaration of Nullity of the Proceedings, Mandamus and Injunction
against the Secretary of the DOTC, the Chairman of the PBAC, the voting
members of the PBAC and Pantaleon D. Alvarez, in his capacity as Chairman
of the PBAC Technical Committee.
On April 17, 1997, the NEDA-ICC conducted an ad referendum to facilitate
the approval, on a no-objection basis, of the BOT agreement between the
DOTC and PIATCO. As the ad referendum gathered only four (4) of the
required six (6) signatures, the NEDA merely noted the agreement.
On July 9, 1997, the DOTC issued the notice of award for the project to
PIATCO.
On July 12, 1997, the Government, through then DOTC Secretary Arturo T.
Enrile, and PIATCO, through its President, Henry T. Go, signed the Concession
Agreement for the Build-Operate-and-Transfer Arrangement of the Ninoy
Aquino International Airport Passenger Terminal III (1997 Concession
Agreement). The Government granted PIATCO the franchise to operate and
maintain the said terminal during the concession period and to collect the fees,
rentals and other charges in accordance with the rates or schedules stipulated
in the 1997 Concession Agreement. The Agreement provided that the
concession period shall be for twenty-five (25) years commencing from the in-
service date, and may be renewed at the option of the Government for a period
not exceeding twenty-five (25) years. At the end of the concession period,
PIATCO shall transfer the development facility to MIAA.
On November 26, 1998, the Government and PIATCO signed an Amended
and Restated Concession Agreement (ARCA). Among the provisions of the
1997 Concession Agreement that were amended by the ARCA were: Sec. 1.11
pertaining to the definition of certificate of completion; Sec. 2.05 pertaining to
the Special Obligations of GRP; Sec. 3.02 (a) dealing with the exclusivity of the
franchise given to the Concessionaire; Sec. 4.04 concerning the assignment by
Concessionaire of its interest in the Development Facility; Sec. 5.08 (c) dealing
with the proceeds of Concessionaires insurance; Sec. 5.10 with respect to the
temporary take-over of operations by GRP; Sec. 5.16 pertaining to the taxes,
duties and other imposts that may be levied on the Concessionaire; Sec. 6.03
as regards the periodic adjustment of public utility fees and charges; the entire
Article VIII concerning the provisions on the termination of the contract; and
Sec. 10.02 providing for the venue of the arbitration proceedings in case a
dispute or controversy arises between the parties to the agreement.
Subsequently, the Government and PIATCO signed three Supplements to
the ARCA. The First Supplement was signed on August 27, 1999; the Second
Supplement on September 4, 2000; and the Third Supplement on June 22,
2001 (collectively, Supplements).
The First Supplement to the ARCA amended Sec. 1.36 of the ARCA
defining Revenues or Gross Revenues; Sec. 2.05 (d) of the ARCA referring to
the obligation of MIAA to provide sufficient funds for the upkeep, maintenance,
repair and/or replacement of all airport facilities and equipment which are
owned or operated by MIAA; and further providing additional special obligations
on the part of GRP aside from those already enumerated in Sec. 2.05 of the
ARCA. The First Supplement also provided a stipulation as regards the
construction of a surface road to connect NAIA Terminal II and Terminal III in
lieu of the proposed access tunnel crossing Runway 13/31; the swapping of
obligations between GRP and PIATCO regarding the improvement of Sales
Road; and the changes in the timetable. It also amended Sec. 6.01 (c) of the
ARCA pertaining to the Disposition of Terminal Fees; Sec. 6.02 of the ARCA by
inserting an introductory paragraph; and Sec. 6.02 (a) (iii) of the ARCA referring
to the Payments of Percentage Share in Gross Revenues.
The Second Supplement to the ARCA contained provisions concerning the
clearing, removal, demolition or disposal of subterranean structures uncovered
or discovered at the site of the construction of the terminal by the
Concessionaire. It defined the scope of works; it provided for the procedure for
the demolition of the said structures and the consideration for the same which
the GRP shall pay PIATCO; it provided for time extensions, incremental and
consequential costs and losses consequent to the existence of such structures;
and it provided for some additional obligations on the part of PIATCO as regards
the said structures.
Finally, the Third Supplement provided for the obligations of the
Concessionaire as regards the construction of the surface road connecting
Terminals II and III.
Meanwhile, the MIAA which is charged with the maintenance and operation
of the NAIA Terminals I and II, had existing concession contracts with various
service providers to offer international airline airport services, such as in-flight
catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing, and other services, to several
international airlines at the NAIA. Some of these service providers are the
Miascor Group, DNATA-Wings Aviation Systems Corp., and the MacroAsia
Group. Miascor, DNATA and MacroAsia, together with Philippine Airlines
(PAL), are the dominant players in the industry with an aggregate market share
of 70%.
On September 17, 2002, the workers of the international airline service
providers, claiming that they stand to lose their employment upon the
implementation of the questioned agreements, filed before this Court a petition
for prohibition to enjoin the enforcement of said agreements. [2]

On October 15, 2002, the service providers, joining the cause of the
petitioning workers, filed a motion for intervention and a petition-in-intervention.
On October 24, 2002, Congressmen Salacnib Baterina, Clavel Martinez and
Constantino Jaraula filed a similar petition with this Court. [3]

On November 6, 2002, several employees of the MIAA likewise filed a

petition assailing the legality of the various agreements. [4]

On December 11, 2002. another group of Congressmen, Hon. Jacinto V.

Paras, Rafael P. Nantes, Eduardo C. Zialcita, Willie B. Villarama, Prospero C.
Nograles, Prospero A. Pichay, Jr., Harlin Cast Abayon and Benasing O.
Macaranbon, moved to intervene in the case as Respondents-
Intervenors. They filed their Comment-In-Intervention defending the validity of
the assailed agreements and praying for the dismissal of the petitions.
During the pendency of the case before this Court, President Gloria
Macapagal Arroyo, on November 29, 2002, in her speech at the 2002 Golden
Shell Export Awards at Malacaang Palace, stated that she will not honor
(PIATCO) contracts which the Executive Branchs legal offices have concluded
(as) null and void.
[5]

Respondent PIATCO filed its Comments to the present petitions on

November 7 and 27, 2002. The Office of the Solicitor General and the Office of
the Government Corporate Counsel filed their respective Comments in behalf
of the public respondents.
On December 10, 2002, the Court heard the case on oral argument. After
the oral argument, the Court then resolved in open court to require the parties
to file simultaneously their respective Memoranda in amplification of the issues
heard in the oral arguments within 30 days and to explore the possibility of
arbitration or mediation as provided in the challenged contracts.
In their consolidated Memorandum, the Office of the Solicitor General and
the Office of the Government Corporate Counsel prayed that the present
petitions be given due course and that judgment be rendered declaring the 1997
Concession Agreement, the ARCA and the Supplements thereto void for being
contrary to the Constitution, the BOT Law and its Implementing Rules and
Regulations.
On March 6, 2003, respondent PIATCO informed the Court that on March
4, 2003 PIATCO commenced arbitration proceedings before the International
Chamber of Commerce, International Court of Arbitration (ICC) by filing a
Request for Arbitration with the Secretariat of the ICC against the Government
of the Republic of the Philippines acting through the DOTC and MIAA.
In the present cases, the Court is again faced with the task of resolving
complicated issues made difficult by their intersecting legal and economic
implications. The Court is aware of the far reaching fall out effects of the ruling
which it makes today. For more than a century and whenever the exigencies of
the times demand it, this Court has never shirked from its solemn duty to
dispense justice and resolve actual controversies involving rights which are
legally demandable and enforceable, and to determine whether or not there has
been grave abuse of discretion amounting to lack or excess of jurisdiction. To[6]

be sure, this Court will not begin to do otherwise today.

We shall first dispose of the procedural issues raised by respondent
PIATCO which they allege will bar the resolution of the instant controversy.
Petitioners Legal Standing to File
the present Petitions
a. G.R. Nos. 155001 and 155661
In G.R. No. 155001 individual petitioners are employees of various service
providers having separate concession contracts with MIAA and continuing
[7]

service agreements with various international airlines to provide in-flight

catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing and other services. Also
included as petitioners are labor unions MIASCOR Workers Union-National
Labor Union and Philippine Airlines Employees Association. These petitioners
filed the instant action for prohibition as taxpayers and as parties whose rights
and interests stand to be violated by the implementation of the PIATCO
Contracts.
Petitioners-Intervenors in the same case are all corporations organized and
existing under Philippine laws engaged in the business of providing in-flight
catering, passenger handling, ramp and ground support, aircraft maintenance
and provisions, cargo handling and warehousing and other services to several
international airlines at the Ninoy Aquino International Airport. Petitioners-
Intervenors allege that as tax-paying international airline and airport-related
service operators, each one of them stands to be irreparably injured by the
implementation of the PIATCO Contracts. Each of the petitioners-intervenors
have separate and subsisting concession agreements with MIAA and with
various international airlines which they allege are being interfered with and
violated by respondent PIATCO.
In G.R. No. 155661, petitioners constitute employees of MIAA and
Samahang Manggagawa sa Paliparan ng Pilipinas - a legitimate labor union
and accredited as the sole and exclusive bargaining agent of all the employees
in MIAA. Petitioners anchor their petition for prohibition on the nullity of the
contracts entered into by the Government and PIATCO regarding the build-
operate-and-transfer of the NAIA IPT III. They filed the petition as taxpayers
and persons who have a legitimate interest to protect in the implementation of
the PIATCO Contracts.
Petitioners in both cases raise the argument that the PIATCO Contracts
contain stipulations which directly contravene numerous provisions of the
Constitution, specific provisions of the BOT Law and its Implementing Rules
and Regulations, and public policy. Petitioners contend that the DOTC and the
MIAA, by entering into said contracts, have committed grave abuse of discretion
amounting to lack or excess of jurisdiction which can be remedied only by a writ
of prohibition, there being no plain, speedy or adequate remedy in the ordinary
course of law.
In particular, petitioners assail the provisions in the 1997 Concession
Agreement and the ARCA which grant PIATCO the exclusive right to operate a
commercial international passenger terminal within the Island of Luzon, except
those international airports already existing at the time of the execution of the
agreement. The contracts further provide that upon the commencement of
operations at the NAIA IPT III, the Government shall cause the closure of Ninoy
Aquino International Airport Passenger Terminals I and II as international
passenger terminals. With respect to existing concession agreements between
MIAA and international airport service providers regarding certain services or
operations, the 1997 Concession Agreement and the ARCA uniformly provide
that such services or operations will not be carried over to the NAIA IPT III and
PIATCO is under no obligation to permit such carry over except through a
separate agreement duly entered into with PIATCO. [8]

With respect to the petitioning service providers and their employees, upon
the commencement of operations of the NAIA IPT III, they allege that they will
be effectively barred from providing international airline airport services at the
NAIA Terminals I and II as all international airlines and passengers will be
diverted to the NAIA IPT III. The petitioning service providers will thus be
compelled to contract with PIATCO alone for such services, with no assurance
that subsisting contracts with MIAA and other international airlines will be
respected. Petitioning service providers stress that despite the very competitive
market, the substantial capital investments required and the high rate of fees,
they entered into their respective contracts with the MIAA with the
understanding that the said contracts will be in force for the stipulated period,
and thereafter, renewed so as to allow each of the petitioning service providers
to recoup their investments and obtain a reasonable return thereon.
Petitioning employees of various service providers at the NAIA Terminals I
and II and of MIAA on the other hand allege that with the closure of the NAIA
Terminals I and II as international passenger terminals under the PIATCO
Contracts, they stand to lose employment.
The question on legal standing is whether such parties have alleged such a
personal stake in the outcome of the controversy as to assure that concrete
adverseness which sharpens the presentation of issues upon which the court
so largely depends for illumination of difficult constitutional
questions. Accordingly, it has been held that the interest of a person assailing
[9]

the constitutionality of a statute must be direct and personal. He must be able

to show, not only that the law or any government act is invalid, but also that he
sustained or is in imminent danger of sustaining some direct injury as a result
of its enforcement, and not merely that he suffers thereby in some indefinite
way. It must appear that the person complaining has been or is about to be
denied some right or privilege to which he is lawfully entitled or that he is about
to be subjected to some burdens or penalties by reason of the statute or act
complained of. [10]

We hold that petitioners have the requisite standing. In the above-

mentioned cases, petitioners have a direct and substantial interest to protect by
reason of the implementation of the PIATCO Contracts. They stand to lose their
source of livelihood, a property right which is zealously protected by the
Constitution. Moreover, subsisting concession agreements between MIAA and
petitioners-intervenors and service contracts between international airlines and
petitioners-intervenors stand to be nullified or terminated by the operation of the
NAIA IPT III under the PIATCO Contracts. The financial prejudice brought about
by the PIATCO Contracts on petitioners and petitioners-intervenors in these
cases are legitimate interests sufficient to confer on them the requisite standing
to file the instant petitions.
b. G.R. No. 155547
In G.R. No. 155547, petitioners filed the petition for prohibition as members
of the House of Representatives, citizens and taxpayers. They allege that as
members of the House of Representatives, they are especially interested in the
PIATCO Contracts, because the contracts compel the Government and/or the
House of Representatives to appropriate funds necessary to comply with the
provisions therein. They cite provisions of the PIATCO Contracts which
[11]

require disbursement of unappropriated amounts in compliance with the

contractual obligations of the Government. They allege that the Government
obligations in the PIATCO Contracts which compel government expenditure
without appropriation is a curtailment of their prerogatives as legislators,
contrary to the mandate of the Constitution that [n]o money shall be paid out of
the treasury except in pursuance of an appropriation made by law. [12]

Standing is a peculiar concept in constitutional law because in some cases,

suits are not brought by parties who have been personally injured by the
operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Although we are not
unmindful of the cases of Imus Electric Co. v. Municipality of
Imus and Gonzales v. Raquiza wherein this Court held that appropriation
[13] [14]

must be made only on amounts immediately demandable, public interest

demands that we take a more liberal view in determining whether the
petitioners suing as legislators, taxpayers and citizens have locus
standi to file the instant petition. In Kilosbayan, Inc. v. Guingona, this [15]

Court held [i]n line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and non-
profit civic organizations were allowed to initiate and prosecute actions before
this Court to question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or
instrumentalities. Further, insofar as taxpayers' suits are concerned . . . (this
[16]

Court) is not devoid of discretion as to whether or not it should be

entertained. As such . . . even if, strictly speaking, they [the petitioners] are not
[17]

covered by the definition, it is still within the wide discretion of the Court to waive
the requirement and so remove the impediment to its addressing and resolving
the serious constitutional questions raised. In view of the serious legal
[18]

questions involved and their impact on public interest, we resolve to grant

standing to the petitioners.
Other Procedural Matters
Respondent PIATCO further alleges that this Court is without jurisdiction to
review the instant cases as factual issues are involved which this Court is ill-
equipped to resolve. Moreover, PIATCO alleges that submission of this
controversy to this Court at the first instance is a violation of the rule on
hierarchy of courts. They contend that trial courts have concurrent jurisdiction
with this Court with respect to a special civil action for prohibition and hence,
following the rule on hierarchy of courts, resort must first be had before the trial
courts.
After a thorough study and careful evaluation of the issues involved, this
Court is of the view that the crux of the instant controversy involves
significant legal questions. The facts necessary to resolve these legal
questions are well established and, hence, need not be determined by a trial
court.
The rule on hierarchy of courts will not also prevent this Court from
assuming jurisdiction over the cases at bar. The said rule may be relaxed when
the redress desired cannot be obtained in the appropriate courts or where
exceptional and compelling circumstances justify availment of a remedy
within and calling for the exercise of this Courts primary jurisdiction. [19]

It is easy to discern that exceptional circumstances exist in the cases at

bar that call for the relaxation of the rule. Both petitioners and respondents
agree that these cases are of transcendental importance as they involve the
construction and operation of the countrys premier international airport.
Moreover, the crucial issues submitted for resolution are of first impression and
they entail the proper legal interpretation of key provisions of the Constitution,
the BOT Law and its Implementing Rules and Regulations. Thus, considering
the nature of the controversy before the Court, procedural bars may be lowered
to give way for the speedy disposition of the instant cases.
Legal Effect of the Commencement
of Arbitration Proceedings by
PIATCO
There is one more procedural obstacle which must be overcome. The Court
is aware that arbitration proceedings pursuant to Section 10.02 of the ARCA
have been filed at the instance of respondent PIATCO. Again, we hold that the
arbitration step taken by PIATCO will not oust this Court of its jurisdiction over
the cases at bar.
In Del Monte Corporation-USA v. Court of Appeals, even after finding
[20]

that the arbitration clause in the Distributorship Agreement in question is valid

and the dispute between the parties is arbitrable, this Court affirmed the trial
courts decision denying petitioners Motion to Suspend Proceedings pursuant
to the arbitration clause under the contract. In so ruling, this Court held that as
contracts produce legal effect between the parties, their assigns and heirs, only
the parties to the Distributorship Agreement are bound by its terms, including
the arbitration clause stipulated therein. This Court ruled that arbitration
proceedings could be called for but only with respect to the parties to the
contract in question. Considering that there are parties to the case who are
neither parties to the Distributorship Agreement nor heirs or assigns of the
parties thereto, this Court, citing its previous ruling in Salas, Jr. v. Laperal
Realty Corporation, held that to tolerate the splitting of proceedings by
[21]

allowing arbitration as to some of the parties on the one hand and trial for the
others on the other hand would, in effect, result in multiplicity of suits,
duplicitous procedure and unnecessary delay. Thus, we ruled that
[22]

the interest of justice would best be served if the trial court hears and
adjudicates the case in a single and complete proceeding.
It is established that petitioners in the present cases who have presented
legitimate interests in the resolution of the controversy are not parties to the
PIATCO Contracts. Accordingly, they cannot be bound by the arbitration
clause provided for in the ARCA and hence, cannot be compelled to submit to
arbitration proceedings. A speedy and decisive resolution of all the critical
issues in the present controversy, including those raised by petitioners,
cannot be made before an arbitral tribunal. The object of arbitration is
precisely to allow an expeditious determination of a dispute. This objective
would not be met if this Court were to allow the parties to settle the cases by
arbitration as there are certain issues involving non-parties to the PIATCO
Contracts which the arbitral tribunal will not be equipped to resolve.
Now, to the merits of the instant controversy.
I

Is PIATCO a qualified bidder?

Public respondents argue that the Paircargo Consortium, PIATCOs
predecessor, was not a duly pre-qualified bidder on the unsolicited proposal
submitted by AEDC as the Paircargo Consortium failed to meet the financial
capability required under the BOT Law and the Bid Documents. They allege
that in computing the ability of the Paircargo Consortium to meet the minimum
equity requirements for the project, the entire net worth of Security Bank, a
member of the consortium, should not be considered.
PIATCO relies, on the other hand, on the strength of the Memorandum
dated October 14, 1996 issued by the DOTC Undersecretary Primitivo C. Cal
stating that the Paircargo Consortium is found to have a combined net worth
of P3,900,000,000.00, sufficient to meet the equity requirements of the project.
The said Memorandum was in response to a letter from Mr. Antonio Henson of
AEDC to President Fidel V. Ramos questioning the financial capability of the
Paircargo Consortium on the ground that it does not have the financial
resources to put up the required minimum equity of P2,700,000,000.00. This
contention is based on the restriction under R.A. No. 337, as amended or the
General Banking Act that a commercial bank cannot invest in any single
enterprise in an amount more than 15% of its net worth. In the said
Memorandum, Undersecretary Cal opined:

The Bid Documents, as clarified through Bid Bulletin Nos. 3 and 5, require that
financial capability will be evaluated based on total financial capability of all the
member companies of the [Paircargo] Consortium. In this connection, the Challenger
was found to have a combined net worth of P3,926,421,242.00 that could support a
project costing approximately P13 Billion.

It is not a requirement that the net worth must be unrestricted. To impose that as a
requirement now will be nothing less than unfair.

The financial statement or the net worth is not the sole basis in establishing financial
capability. As stated in Bid Bulletin No. 3, financial capability may also be
established by testimonial letters issued by reputable banks. The Challenger has
complied with this requirement.
To recap, net worth reflected in the Financial Statement should not be taken as the
amount of the money to be used to answer the required thirty percent (30%) equity of
the challenger but rather to be used in establishing if there is enough basis to believe
that the challenger can comply with the required 30% equity. In fact, proof of
sufficient equity is required as one of the conditions for award of contract (Section
12.1 IRR of the BOT Law) but not for pre-qualification (Section 5.4 of the same
document). [23]

Under the BOT Law, in case of a build-operate-and-transfer arrangement,

the contract shall be awarded to the bidder who, having satisfied the minimum
financial, technical, organizational and legal standards required by the law,
has submitted the lowest bid and most favorable terms of the project. Further,
[24]

the 1994 Implementing Rules and Regulations of the BOT Law provide:

Section 5.4 Pre-qualification Requirements.

c. Financial Capability: The project proponent must have adequate capability to

sustain the financing requirements for the detailed engineering design, construction
and/or operation and maintenance phases of the project, as the case may be. For
purposes of pre-qualification, this capability shall be measured in terms of (i) proof of
the ability of the project proponent and/or the consortium to provide a minimum
amount of equity to the project, and (ii) a letter testimonial from reputable banks
attesting that the project proponent and/or members of the consortium are
banking with them, that they are in good financial standing, and that they have
adequate resources. The government agency/LGU concerned shall determine on a
project-to-project basis and before pre-qualification, the minimum amount of equity
needed. (emphasis supplied)

Pursuant to this provision, the PBAC issued PBAC Bulletin No. 3 dated
August 16, 1996 amending the financial capability requirements for pre-
qualification of the project proponent as follows:

6. Basis of Pre-qualification

The basis for the pre-qualification shall be on the compliance of the proponent to the
minimum technical and financial requirements provided in the Bid Documents and in
the IRR of the BOT Law, R.A. No. 6957, as amended by R.A. 7718.

The minimum amount of equity to which the proponents financial capability will be
based shall be thirty percent (30%) of the project cost instead of the twenty
percent (20%) specified in Section 3.6.4 of the Bid Documents. This is to correlate
with the required debt-to-equity ratio of 70:30 in Section 2.01a of the draft concession
agreement. The debt portion of the project financing should not exceed 70% of the
actual project cost.

Accordingly, based on the above provisions of law, the Paircargo

Consortium or any challenger to the unsolicited proposal of AEDC has to show
that it possesses the requisite financial capability to undertake the project
in the minimum amount of 30% of the project cost through (i) proof of the
ability to provide a minimum amount of equity to the project, and (ii) a letter
testimonial from reputable banks attesting that the project proponent or
members of the consortium are banking with them, that they are in good
financial standing, and that they have adequate resources.
As the minimum project cost was estimated to be US$350,000,000.00 or
roughly P9,183,650,000.00, the Paircargo Consortium had to show to the
[25]

satisfaction of the PBAC that it had the ability to provide the minimum equity for
the project in the amount of at least P2,755,095,000.00.
Paircargos Audited Financial Statements as of 1993 and 1994 indicated that
it had a net worth of P2,783,592.00 and P3,123,515.00 respectively. PAGS [26]

Audited Financial Statements as of 1995 indicate that it has

approximately P26,735,700.00 to invest as its equity for the project. Security [27]

Banks Audited Financial Statements as of 1995 show that it has a net worth
equivalent to its capital funds in the amount of P3,523,504,377.00. [28]

We agree with public respondents that with respect to Security Bank,

the entire amount of its net worth could not be invested in a single undertaking
or enterprise, whether allied or non-allied in accordance with the provisions of
R.A. No. 337, as amended or the General Banking Act:

Sec. 21-B. The provisions in this or in any other Act to the contrary notwithstanding,
the Monetary Board, whenever it shall deem appropriate and necessary to further
national development objectives or support national priority projects, may authorize
a commercial bank, a bank authorized to provide commercial banking services,
as well as a government-owned and controlled bank, to operate under an
expanded commercial banking authority and by virtue thereof exercise, in
addition to powers authorized for commercial banks, the powers of
an Investment House as provided in Presidential Decree No. 129, invest in the
equity of a non-allied undertaking, or own a majority or all of the equity in a
financial intermediary other than a commercial bank or a bank authorized to
provide commercial banking services: Provided, That (a) the total investment in
equities shall not exceed fifty percent (50%) of the net worth of the bank; (b) the
equity investment in any one enterprise whether allied or non-allied shall not
exceed fifteen percent (15%) of the net worth of the bank; (c) the equity
investment of the bank, or of its wholly or majority-owned subsidiary, in a single non-
allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the
enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in
that enterprise; and (d) the equity investment in other banks shall be deducted from
the investing bank's net worth for purposes of computing the prescribed ratio of net
worth to risk assets.

Further, the 1993 Manual of Regulations for Banks provides:

SECTION X383. Other Limitations and Restrictions. The following limitations and
restrictions shall also apply regarding equity investments of banks.

a. In any single enterprise. The equity investments of banks in any single enterprise
shall not exceed at any time fifteen percent (15%) of the net worth of the investing
bank as defined in Sec. X106 and Subsec. X121.5.

Thus, the maximum amount that Security Bank could validly invest in the
Paircargo Consortium is only P528,525,656.55, representing 15% of its entire
net worth. The total net worth therefore of the Paircargo Consortium, after
considering the maximum amounts that may be validly invested by each of its
members is P558,384,871.55 or only 6.08% of the project cost, an amount [29]

substantially less than the prescribed minimum equity investment required for
the project in the amount of P2,755,095,000.00 or 30% of the project cost.
The purpose of pre-qualification in any public bidding is to determine, at the
earliest opportunity, the ability of the bidder to undertake the project. Thus, with
respect to the bidders financial capacity at the pre-qualification stage, the law
requires the government agency to examine and determine the ability of the
bidder to fund the entire cost of the project by considering the maximum
amounts that each bidder may invest in the project at the time of pre-
qualification.
The PBAC has determined that any prospective bidder for the construction,
operation and maintenance of the NAIA IPT III project should prove that it has
the ability to provide equity in the minimum amount of 30% of the project cost,
in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid
Documents. Thus, in the case of Paircargo Consortium, the PBAC should
determine the maximum amounts that each member of the consortium may
commit for the construction, operation and maintenance of the NAIA IPT III
project at the time of pre-qualification. With respect to Security Bank,
the maximum amount which may be invested by it would only be 15% of its
net worth in view of the restrictions imposed by the General Banking Act.
Disregarding the investment ceilings provided by applicable law would not result
in a proper evaluation of whether or not a bidder is pre-qualified to undertake
the project as for all intents and purposes, such ceiling or legal restriction
determines the true maximum amount which a bidder may invest in the
project.
Further, the determination of whether or not a bidder is pre-qualified to
undertake the project requires an evaluation of the financial capacity of the said
bidder at the time the bid is submitted based on the required documents
presented by the bidder. The PBAC should not be allowed to speculate on
the future financial ability of the bidder to undertake the project on the basis
of documents submitted. This would open doors to abuse and defeat the very
purpose of a public bidding. This is especially true in the case at bar which
involves the investment of billions of pesos by the project proponent. The
relevant government authority is duty-bound to ensure that the awardee of the
contract possesses the minimum required financial capability to complete the
project. To allow the PBAC to estimate the bidders future financial
capability would not secure the viability and integrity of the project. A restrictive
and conservative application of the rules and procedures of public bidding is
necessary not only to protect the impartiality and regularity of the proceedings
but also to ensure the financial and technical reliability of the project. It has been
held that:

The basic rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the
foundation of a fair and competitive public bidding would be defeated. Strict
observance of the rules, regulations, and guidelines of the bidding process is the
only safeguard to a fair, honest and competitive public bidding. [30]

Thus, if the maximum amount of equity that a bidder may invest in the
project at the time the bids are submitted falls short of the minimum amounts
required to be put up by the bidder, said bidder should be properly disqualified.
Considering that at the pre-qualification stage, the maximum amounts which
the Paircargo Consortium may invest in the project fell short of the minimum
amounts prescribed by the PBAC, we hold that Paircargo Consortium was not
a qualified bidder. Thus the award of the contract by the PBAC to the Paircargo
Consortium, a disqualified bidder, is null and void.
While it would be proper at this juncture to end the resolution of the instant
controversy, as the legal effects of the disqualification of respondent PIATCOs
predecessor would come into play and necessarily result in the nullity of all the
subsequent contracts entered by it in pursuance of the project, the Court feels
that it is necessary to discuss in full the pressing issues of the present
controversy for a complete resolution thereof.
II

Is the 1997 Concession Agreement valid?

Petitioners and public respondents contend that the 1997 Concession
Agreement is invalid as it contains provisions that substantially depart from the
draft Concession Agreement included in the Bid Documents. They maintain that
a substantial departure from the draft Concession Agreement is a violation of
public policy and renders the 1997 Concession Agreement null and void.
PIATCO maintains, however, that the Concession Agreement attached to
the Bid Documents is intended to be a draft, i.e., subject to change, alteration
or modification, and that this intention was clear to all participants, including
AEDC, and DOTC/MIAA. It argued further that said intention is expressed in
Part C (6) of Bid Bulletin No. 3 issued by the PBAC which states:

6. Amendments to the Draft Concessions Agreement

Amendments to the Draft Concessions Agreement shall be issued from time to time.
Said amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.

By its very nature, public bidding aims to protect the public interest by giving
the public the best possible advantages through open competition. Thus:

Competition must be legitimate, fair and honest. In the field of government contract
law, competition requires, not only `bidding upon a common standard, a common
basis, upon the same thing, the same subject matter, the same undertaking,' but also
that it be legitimate, fair and honest; and not designed to injure or defraud the
government. [31]

An essential element of a publicly bidded contract is that all bidders must

be on equal footing. Not simply in terms of application of the procedural rules
and regulations imposed by the relevant government agency, but more
importantly, on the contract bidded upon. Each bidder must be able to bid
on the same thing. The rationale is obvious. If the winning bidder is allowed to
later include or modify certain provisions in the contract awarded such that the
contract is altered in any material respect, then the essence of fair competition
in the public bidding is destroyed. A public bidding would indeed be a farce if
after the contract is awarded, the winning bidder may modify the contract and
include provisions which are favorable to it that were not previously made
available to the other bidders. Thus:

It is inherent in public biddings that there shall be a fair competition among the
bidders. The specifications in such biddings provide the common ground or basis for
the bidders. The specifications should, accordingly, operate equally or
indiscriminately upon all bidders.[32]

The same rule was restated by Chief Justice Stuart of the Supreme Court
of Minnesota:

The law is well settled that where, as in this case, municipal authorities can only let a
contract for public work to the lowest responsible bidder, the proposals and
specifications therefore must be so framed as to permit free and full competition. Nor
can they enter into a contract with the best bidder containing substantial
provisions beneficial to him, not included or contemplated in the terms and
specifications upon which the bids were invited. [33]

In fact, in the PBAC Bid Bulletin No. 3 cited by PIATCO to support its
argument that the draft concession agreement is subject to amendment, the
pertinent portion of which was quoted above, the PBAC also clarified that [s]aid
amendments shall only cover items that would not materially affect the
preparation of the proponents proposal.
While we concede that a winning bidder is not precluded from modifying or
amending certain provisions of the contract bidded upon, such changes must
not constitute substantial or material amendments that would alter the
basic parameters of the contract and would constitute a denial to the
other bidders of the opportunity to bid on the same terms. Hence, the
determination of whether or not a modification or amendment of a contract
bidded out constitutes a substantial amendment rests on whether the contract,
when taken as a whole, would contain substantially different terms and
conditions that would have the effect of altering the technical and/or financial
proposals previously submitted by other bidders. The alterations and
modifications in the contract executed between the government and the winning
bidder must be such as to render such executed contract to be an entirely
different contract from the one that was bidded upon.
In the case of Caltex (Philippines), Inc. v. Delgado Brothers, Inc., this [34]

Court quoted with approval the ruling of the trial court that an amendment to a
contract awarded through public bidding, when such subsequent amendment
was made without a new public bidding, is null and void:
The Court agrees with the contention of counsel for the plaintiffs that the due
execution of a contract after public bidding is a limitation upon the right of the
contracting parties to alter or amend it without another public bidding, for
otherwise what would a public bidding be good for if after the execution of a
contract after public bidding, the contracting parties may alter or amend the
contract, or even cancel it, at their will? Public biddings are held for the protection
of the public, and to give the public the best possible advantages by means of open
competition between the bidders. He who bids or offers the best terms is awarded
the contract subject of the bid, and it is obvious that such protection and best
possible advantages to the public will disappear if the parties to a contract
executed after public bidding may alter or amend it without another previous
public bidding. [35]

Hence, the question that comes to fore is this: is the 1997 Concession
Agreement the same agreement that was offered for public bidding, i.e.,
the draft Concession Agreement attached to the Bid Documents? A close
comparison of the draft Concession Agreement attached to the Bid Documents
and the 1997 Concession Agreement reveals that the documents differ in at
least two material respects:
a. Modification on the Public
Utility Revenues and Non-Public
Utility Revenues that may be
collected by PIATCO
The fees that may be imposed and collected by PIATCO under the draft
Concession Agreement and the 1997 Concession Agreement may be classified
into three distinct categories: (1) fees which are subject to periodic adjustment
of once every two years in accordance with a prescribed parametric formula
and adjustments are made effective only upon written approval by MIAA; (2)
fees other than those included in the first category which maybe adjusted by
PIATCO whenever it deems necessary without need for consent of
DOTC/MIAA; and (3) new fees and charges that may be imposed by PIATCO
which have not been previously imposed or collected at the Ninoy Aquino
International Airport Passenger Terminal I, pursuant to Administrative Order
No. 1, Series of 1993, as amended. The glaring distinctions between the draft
Concession Agreement and the 1997 Concession Agreement lie in the types of
fees included in each category and the extent of the supervision and regulation
which MIAA is allowed to exercise in relation thereto.
For fees under the first category, i.e., those which are subject to periodic
adjustment in accordance with a prescribed parametric formula and effective
only upon written approval by MIAA, the draft Concession
Agreement includes the following: [36]

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) groundhandling fees;

(4) rentals and airline offices;

(5) check-in counter rentals; and

(6) porterage fees.

Under the 1997 Concession Agreement, fees which are subject to

adjustment and effective upon MIAA approval are classified as Public Utility
Revenues and include: [37]

(1) aircraft parking fees;

(2) aircraft tacking fees;

(3) check-in counter fees; and

(4) Terminal Fees.

The implication of the reduced number of fees that are subject to MIAA
approval is best appreciated in relation to fees included in the second
category identified above. Under the 1997 Concession Agreement, fees
which PIATCO may adjust whenever it deems necessary without need for
consent of DOTC/MIAA are Non-Public Utility Revenues and is defined as all
other income not classified as Public Utility Revenues derived from operations
of the Terminal and the Terminal Complex. Thus, under the 1997 Concession
[38]

Agreement, groundhandling fees, rentals from airline offices and porterage fees
are no longer subject to MIAA regulation.
Further, under Section 6.03 of the draft Concession Agreement, MIAA
reserves the right to regulate (1) lobby and vehicular parking fees and (2) other
new fees and charges that may be imposed by PIATCO. Such regulation may
be made by periodic adjustment and is effective only upon written approval of
MIAA. The full text of said provision is quoted below:
Section 6.03. Periodic Adjustment in Fees and Charges. Adjustments in the aircraft
parking fees, aircraft tacking fees, groundhandling fees, rentals and airline offices,
check-in-counter rentals and porterage fees shall be allowed only once every two
years and in accordance with the Parametric Formula attached hereto as Annex F.
Provided that adjustments shall be made effective only after the written express
approval of the MIAA. Provided, further, that such approval of the MIAA, shall be
contingent only on the conformity of the adjustments with the above said parametric
formula. The first adjustment shall be made prior to the In-Service Date of the
Terminal.

The MIAA reserves the right to regulate under the foregoing terms and
conditions the lobby and vehicular parking fees and other new fees and charges
as contemplated in paragraph 2 of Section 6.01 if in its judgment the users of the
airport shall be deprived of a free option for the services they cover. [39]

On the other hand, the equivalent provision under the 1997 Concession
Agreement reads:
Section 6.03 Periodic Adjustment in Fees and Charges.
.

(c) Concessionaire shall at all times be judicious in fixing fees and charges
constituting Non-Public Utility Revenues in order to ensure that End Users are not
unreasonably deprived of services. While the vehicular parking fee, porterage fee
and greeter/well wisher fee constitute Non-Public Utility Revenues of
Concessionaire, GRP may intervene and require Concessionaire to explain and
justify the fee it may set from time to time, if in the reasonable opinion of GRP the
said fees have become exorbitant resulting in the unreasonable deprivation of End
Users of such services.[40]

Thus, under the 1997 Concession Agreement, with respect to (1)

vehicular parking fee, (2) porterage fee and (3) greeter/well wisher fee, all that
MIAA can do is to require PIATCO to explain and justify the fees set by
PIATCO. In the draft Concession Agreement, vehicular parking fee is subject
to MIAA regulation and approval under the second paragraph of Section 6.03
thereof while porterage fee is covered by the first paragraph of the same
provision. There is an obvious relaxation of the extent of control and regulation
by MIAA with respect to the particular fees that may be charged by PIATCO.
Moreover, with respect to the third category of fees that may be imposed
and collected by PIATCO, i.e., new fees and charges that may be imposed by
PIATCO which have not been previously imposed or collected at the Ninoy
Aquino International Airport Passenger Terminal I, under Section 6.03 of
the draft Concession Agreement MIAA has reserved the right to regulate the
same under the same conditions that MIAA may regulate fees under the first
category, i.e., periodic adjustment of once every two years in accordance with
a prescribed parametric formula and effective only upon written approval by
MIAA. However, under the 1997 Concession Agreement, adjustment of fees
under the third category is not subject to MIAA regulation.
With respect to terminal fees that may be charged by PIATCO, as shown
[41]

earlier, this was included within the category of Public Utility Revenues under
the 1997 Concession Agreement. This classification is significant because
under the 1997 Concession Agreement, Public Utility Revenues are subject to
an Interim Adjustment of fees upon the occurrence of certain extraordinary
events specified in the agreement. However, under the draft Concession
[42]

Agreement, terminal fees are not included in the types of fees that may be
subject to Interim Adjustment. [43]

Finally, under the 1997 Concession Agreement, Public Utility Revenues,

except terminal fees, are denominated in US Dollars while payments to the
[44]

Government are in Philippine Pesos. In the draft Concession Agreement, no

such stipulation was included. By stipulating that Public Utility Revenues will be
paid to PIATCO in US Dollars while payments by PIATCO to the Government
are in Philippine currency under the 1997 Concession Agreement, PIATCO is
able to enjoy the benefits of depreciations of the Philippine Peso, while being
effectively insulated from the detrimental effects of exchange rate fluctuations.
When taken as a whole, the changes under the 1997 Concession
Agreement with respect to reduction in the types of fees that are subject to
MIAA regulation and the relaxation of such regulation with respect to other fees
are significant amendments that substantially distinguish the draft Concession
Agreement from the 1997 Concession Agreement. The 1997 Concession
Agreement, in this respect, clearly gives PIATCO more favorable terms
than what was available to other bidders at the time the contract was
bidded out. It is not very difficult to see that the changes in the 1997
Concession Agreement translate to direct and concrete financial
advantages for PIATCO which were not available at the time the contract was
offered for bidding. It cannot be denied that under the 1997 Concession
Agreement only Public Utility Revenues are subject to MIAA regulation.
Adjustments of all other fees imposed and collected by PIATCO are
entirely within its control. Moreover, with respect to terminal fees, under the
1997 Concession Agreement, the same is further subject to Interim
Adjustments not previously stipulated in the draft Concession Agreement.
Finally, the change in the currency stipulated for Public Utility Revenues under
the 1997 Concession Agreement, except terminal fees, gives PIATCO an
added benefit which was not available at the time of bidding.
b. Assumption by the
Government of the liabilities of
PIATCO in the event of the latters
default thereof
Under the draft Concession Agreement, default by PIATCO of any of its
obligations to creditors who have provided, loaned or advanced funds for the
NAIA IPT III project does not result in the assumption by the Government of
these liabilities. In fact, nowhere in the said contract does default of PIATCOs
loans figure in the agreement. Such default does not directly result in any
concomitant right or obligation in favor of the Government.
However, the 1997 Concession Agreement provides:
Section 4.04 Assignment.
.

(b) In the event Concessionaire should default in the payment of an Attendant

Liability, and the default has resulted in the acceleration of the payment due date of
the Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall,
within one hundred eighty (180) Days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified,
to be substituted as concessionaire and operator of the Development Facility in
accordance with the terms and conditions hereof, or designate a qualified operator
acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development Facility
with the concomitant assumption of Attendant Liabilities.

(c) If GRP should, by written notice, allow the Unpaid Creditors to be substituted as
concessionaire, the latter shall form and organize a concession company qualified to
take over the operation of the Development Facility. If the concession company
should elect to designate an operator for the Development Facility, the concession
company shall in good faith identify and designate a qualified operator acceptable to
GRP within one hundred eighty (180) days from receipt of GRPs written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end of
the 180-day period take over the Development Facility and assume Attendant
Liabilities.

The term Attendant Liabilities under the 1997 Concession Agreement is

defined as:

Attendant Liabilities refer to all amounts recorded and from time to time outstanding
in the books of the Concessionaire as owing to Unpaid Creditors who have
provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities, reimbursements
and other related expenses, and further including amounts owed by Concessionaire to
its suppliers, contractors and sub-contractors.

Under the above quoted portions of Section 4.04 in relation to the definition
of Attendant Liabilities, default by PIATCO of its loans used to finance the
NAIA IPT III project triggers the occurrence of certain events that leads to
the assumption by the Government of the liability for the loans. Only in
one instance may the Government escape the assumption of PIATCOs
liabilities, i.e., when the Government so elects and allows a qualified operator
to take over as Concessionaire. However, this circumstance is dependent
on the existence and availability of a qualified operator who is willing to
take over the rights and obligations of PIATCO under the contract, a
circumstance that is not entirely within the control of the Government.
Without going into the validity of this provision at this juncture, suffice it to
state that Section 4.04 of the 1997 Concession Agreement may be considered
a form of security for the loans PIATCO has obtained to finance the project, an
option that was not made available in the draft Concession Agreement. Section
4.04 is an important amendment to the 1997 Concession Agreement because
it grants PIATCO a financial advantage or benefit which was not previously
made available during the bidding process. This financial advantage is a
significant modification that translates to better terms and conditions for
PIATCO.
PIATCO, however, argues that the parties to the bidding procedure
acknowledge that the draft Concession Agreement is subject to amendment
because the Bid Documents permit financing or borrowing. They claim that it
was the lenders who proposed the amendments to the draft Concession
Agreement which resulted in the 1997 Concession Agreement.
We agree that it is not inconsistent with the rationale and purpose of the
BOT Law to allow the project proponent or the winning bidder to obtain financing
for the project, especially in this case which involves the construction, operation
and maintenance of the NAIA IPT III. Expectedly, compliance by the project
proponent of its undertakings therein would involve a substantial amount of
investment. It is therefore inevitable for the awardee of the contract to seek
alternate sources of funds to support the project. Be that as it may, this Court
maintains that amendments to the contract bidded upon should always conform
to the general policy on public bidding if such procedure is to be faithful to its
real nature and purpose. By its very nature and characteristic, competitive
public bidding aims to protect the public interest by giving the public the best
possible advantages through open competition. It has been held that the three
[45]

principles in public bidding are (1) the offer to the public; (2) opportunity for
competition; and (3) a basis for the exact comparison of bids. A regulation of
the matter which excludes any of these factors destroys the distinctive character
of the system and thwarts the purpose of its adoption. These are the basic
[46]

parameters which every awardee of a contract bidded out must conform to,
requirements of financing and borrowing notwithstanding. Thus, upon a
concrete showing that, as in this case, the contract signed by the government
and the contract-awardee is an entirely different contract from the contract
bidded, courts should not hesitate to strike down said contract in its entirety for
violation of public policy on public bidding. A strict adherence on the principles,
rules and regulations on public bidding must be sustained if only to preserve
the integrity and the faith of the general public on the procedure.
Public bidding is a standard practice for procuring government contracts for
public service and for furnishing supplies and other materials. It aims to secure
for the government the lowest possible price under the most favorable terms
and conditions, to curtail favoritism in the award of government contracts and
avoid suspicion of anomalies and it places all bidders in equal footing. Any[47]

government action which permits any substantial variance between the

conditions under which the bids are invited and the contract executed
after the award thereof is a grave abuse of discretion amounting to lack
or excess of jurisdiction which warrants proper judicial action.
In view of the above discussion, the fact that the foregoing substantial
amendments were made on the 1997 Concession Agreement renders the
same null and void for being contrary to public policy. These amendments
convert the 1997 Concession Agreement to an entirely different
agreement from the contract bidded out or the draft Concession Agreement. It
is not difficult to see that the amendments on (1) the types of fees or charges
that are subject to MIAA regulation or control and the extent thereof and (2) the
assumption by the Government, under certain conditions, of the liabilities of
PIATCO directly translates concrete financial advantages to PIATCO that
were previously not available during the bidding process. These
amendments cannot be taken as merely supplements to or implementing
provisions of those already existing in the draft Concession Agreement. The
amendments discussed above present new terms and conditions which provide
financial benefit to PIATCO which may have altered the technical and financial
parameters of other bidders had they known that such terms were available.
III

Direct Government Guarantee

Article IV, Section 4.04(b) and (c), in relation to Article 1.06, of the 1997
Concession Agreement provides:
Section 4.04 Assignment
.

(b) In the event Concessionaire should default in the payment of an Attendant

Liability, and the default resulted in the acceleration of the payment due date of the
Attendant Liability prior to its stated date of maturity, the Unpaid Creditors and
Concessionaire shall immediately inform GRP in writing of such default. GRP shall
within one hundred eighty (180) days from receipt of the joint written notice of the
Unpaid Creditors and Concessionaire, either (i) take over the Development Facility
and assume the Attendant Liabilities, or (ii) allow the Unpaid Creditors, if qualified
to be substituted as concessionaire and operator of the Development facility in
accordance with the terms and conditions hereof, or designate a qualified operator
acceptable to GRP to operate the Development Facility, likewise under the terms and
conditions of this Agreement; Provided, that if at the end of the 180-day period GRP
shall not have served the Unpaid Creditors and Concessionaire written notice of its
choice, GRP shall be deemed to have elected to take over the Development
Facility with the concomitant assumption of Attendant Liabilities.

(c) If GRP, by written notice, allow the Unpaid Creditors to be substituted as

concessionaire, the latter shall form and organize a concession company qualified to
takeover the operation of the Development Facility. If the concession company should
elect to designate an operator for the Development Facility, the concession company
shall in good faith identify and designate a qualified operator acceptable to GRP
within one hundred eighty (180) days from receipt of GRPs written notice. If the
concession company, acting in good faith and with due diligence, is unable to
designate a qualified operator within the aforesaid period, then GRP shall at the end
of the 180-day period take over the Development Facility and assume Attendant
Liabilities.

.
Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts recorded and from time to time
outstanding in the books of the Concessionaire as owing to Unpaid Creditors who
have provided, loaned or advanced funds actually used for the Project, including all
interests, penalties, associated fees, charges, surcharges, indemnities,
reimbursements and other related expenses, and further including amounts owed
by Concessionaire to its suppliers, contractors and sub-contractors.
[48]

It is clear from the above-quoted provisions that Government, in the event

that PIATCO defaults in its loan obligations, is obligated to pay all amounts
recorded and from time to time outstanding from the books of PIATCO which
the latter owes to its creditors. These amounts include all interests, penalties,
[49]

associated fees, charges, surcharges, indemnities, reimbursements and other

related expenses. This obligation of the Government to pay PIATCOs
[50]

creditors upon PIATCOs default would arise if the Government opts to take over
NAIA IPT III. It should be noted, however, that even if the Government chooses
the second option, which is to allow PIATCOs unpaid creditors operate NAIA
IPT III, the Government is still at a risk of being liable to PIATCOs creditors
should the latter be unable to designate a qualified operator within the
prescribed period. In effect, whatever option the Government chooses to
[51]

take in the event of PIATCOs failure to fulfill its loan obligations, the
Government is still at a risk of assuming PIATCOs outstanding loans. This
is due to the fact that the Government would only be free from assuming
PIATCOs debts if the unpaid creditors would be able to designate a qualified
operator within the period provided for in the contract. Thus, the Governments
assumption of liability is virtually out of its control. The Government under
the circumstances provided for in the 1997 Concession Agreement is at the
mercy of the existence, availability and willingness of a qualified operator. The
above contractual provisions constitute a direct government guarantee which is
prohibited by law.
One of the main impetus for the enactment of the BOT Law is the lack of
government funds to construct the infrastructure and development projects
necessary for economic growth and development. This is why private sector
resources are being tapped in order to finance these projects. The BOT law
allows the private sector to participate, and is in fact encouraged to do so by
way of incentives, such as minimizing the unstable flow of returns, provided
[52]

that the government would not have to unnecessarily expend scarcely available
funds for the project itself. As such, direct guarantee, subsidy and equity by the
government in these projects are strictly prohibited. This is but logical for if
[53]

the government would in the end still be at a risk of paying the debts
incurred by the private entity in the BOT projects, then the purpose of the
law is subverted.

Section 2(n) of the BOT Law defines direct guarantee as follows:

(n) Direct government guarantee An agreement whereby the government or any of its
agencies or local government units assume responsibility for the repayment of debt
directly incurred by the project proponent in implementing the project in case of a
loan default.

Clearly by providing that the Government assumes the attendant liabilities,

which consists of PIATCOs unpaid debts, the 1997 Concession Agreement
provided for a direct government guarantee for the debts incurred by PIATCO
in the implementation of the NAIA IPT III project. It is of no moment that the
relevant sections are subsumed under the title of assignment. The provisions
providing for direct government guarantee which is prohibited by law is clear
from the terms thereof.
The fact that the ARCA superseded the 1997 Concession Agreement did
not cure this fatal defect. Article IV, Section 4.04(c), in relation to Article I,
Section 1.06, of the ARCA provides:
Section 4.04 Security
.

(c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith
and enter into direct agreement with the Senior Lenders, or with an agent of such
Senior Lenders (which agreement shall be subject to the approval of the Bangko
Sentral ng Pilipinas), in such form as may be reasonably acceptable to both GRP and
Senior Lenders, with regard, inter alia, to the following parameters:

(iv) If the Concessionaire [PIATCO] is in default under a payment obligation

owed to the Senior Lenders, and as a result thereof the Senior Lenders have become
entitled to accelerate the Senior Loans, the Senior Lenders shall have the right to
notify GRP of the same, and without prejudice to any other rights of the Senior
Lenders or any Senior Lenders agent may have (including without limitation under
security interests granted in favor of the Senior Lenders), to either in good faith
identify and designate a nominee which is qualified under sub-clause (viii)(y) below
to operate the Development Facility [NAIA Terminal 3] or transfer the
Concessionaires [PIATCO] rights and obligations under this Agreement to a
transferee which is qualified under sub-clause (viii) below;

(vi) if the Senior Lenders, acting in good faith and using reasonable efforts, are unable
to designate a nominee or effect a transfer in terms and conditions satisfactory to the
Senior Lenders within one hundred eighty (180) days after giving GRP notice as
referred to respectively in (iv) or (v) above, then GRP and the Senior Lenders shall
endeavor in good faith to enter into any other arrangement relating to the
Development Facility [NAIA Terminal 3] (other than a turnover of the Development
Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180)
days. If no agreement relating to the Development Facility [NAIA Terminal 3] is
arrived at by GRP and the Senior Lenders within the said 180-day period, then at the
end thereof the Development Facility [NAIA Terminal 3] shall be transferred by
the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a
termination payment to Concessionaire [PIATCO] equal to the Appraised Value
(as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the
sum of the Attendant Liabilities, if greater. Notwithstanding Section 8.01(c) hereof,
this Agreement shall be deemed terminated upon the transfer of the Development
Facility [NAIA Terminal 3] to GRP pursuant hereto;

Section 1.06. Attendant Liabilities

Attendant Liabilities refer to all amounts in each case supported by verifiable

evidence from time to time owed or which may become owing by Concessionaire
[PIATCO] to Senior Lenders or any other persons or entities who have provided,
loaned, or advanced funds or provided financial facilities to Concessionaire
[PIATCO] for the Project [NAIA Terminal 3], including, without limitation, all
principal, interest, associated fees, charges, reimbursements, and other related
expenses (including the fees, charges and expenses of any agents or trustees of such
persons or entities), whether payable at maturity, by acceleration or otherwise, and
further including amounts owed by Concessionaire [PIATCO] to its professional
consultants and advisers, suppliers, contractors and sub-contractors.[54]

It is clear from the foregoing contractual provisions that in the event that
PIATCO fails to fulfill its loan obligations to its Senior Lenders, the Government
is obligated to directly negotiate and enter into an agreement relating to NAIA
IPT III with the Senior Lenders, should the latter fail to appoint a qualified
nominee or transferee who will take the place of PIATCO. If the Senior Lenders
and the Government are unable to enter into an agreement after the prescribed
period, the Government must then pay PIATCO, upon transfer of NAIA IPT III
to the Government, termination payment equal to the appraised value of the
project or the value of the attendant liabilities whichever is
greater. Attendant liabilities as defined in the ARCA includes all amounts owed
or thereafter may be owed by PIATCO not only to the Senior Lenders with whom
PIATCO has defaulted in its loan obligations but to all other persons who may
have loaned, advanced funds or provided any other type of financial facilities to
PIATCO for NAIA IPT III. The amount of PIATCOs debt that the Government
would have to pay as a result of PIATCOs default in its loan obligations -- in
case no qualified nominee or transferee is appointed by the Senior Lenders and
no other agreement relating to NAIA IPT III has been reached between the
Government and the Senior Lenders -- includes, but is not limited to, all
principal, interest, associated fees, charges, reimbursements, and other related
expenses . . . whether payable at maturity, by acceleration or otherwise. [55]

It is clear from the foregoing that the ARCA provides for a direct
guarantee by the government to pay PIATCOs loans not only to its Senior
Lenders but all other entities who provided PIATCO funds or services
upon PIATCOs default in its loan obligation with its Senior Lenders. The
fact that the Governments obligation to pay PIATCOs lenders for the latters
obligation would only arise after the Senior Lenders fail to appoint a qualified
nominee or transferee does not detract from the fact that, should the conditions
as stated in the contract occur, the ARCA still obligates the Government to pay
any and all amounts owed by PIATCO to its lenders in connection with NAIA
IPT III.Worse, the conditions that would make the Government liable for
PIATCOs debts is triggered by PIATCOs own default of its loan obligations to
its Senior Lenders to which loan contracts the Government was never a party
to. The Government was not even given an option as to what course of action
it should take in case PIATCO defaulted in the payment of its senior loans. The
Government, upon PIATCOs default, would be merely notified by the Senior
Lenders of the same and it is the Senior Lenders who are authorized to appoint
a qualified nominee or transferee. Should the Senior Lenders fail to make such
an appointment, the Government is then automatically obligated to directly deal
and negotiate with the Senior Lenders regarding NAIA IPT III. The only way the
Government would not be liable for PIATCOs debt is for a qualified nominee or
transferee to be appointed in place of PIATCO to continue the construction,
operation and maintenance of NAIA IPT III. This pre-condition, however, will not
take the contract out of the ambit of a direct guarantee by the government as
the existence, availability and willingness of a qualified nominee or transferee
is totally out of the governments control. As such the Government is virtually
at the mercy of PIATCO (that it would not default on its loan obligations to its
Senior Lenders), the Senior Lenders (that they would appoint a qualified
nominee or transferee or agree to some other arrangement with the
Government) and the existence of a qualified nominee or transferee who is able
and willing to take the place of PIATCO in NAIA IPT III.
The proscription against government guarantee in any form is one of
the policy considerations behind the BOT Law. Clearly, in the present case,
the ARCA obligates the Government to pay for all loans, advances and
obligations arising out of financial facilities extended to PIATCO for the
implementation of the NAIA IPT III project should PIATCO default in its loan
obligations to its Senior Lenders and the latter fails to appoint a qualified
nominee or transferee. This in effect would make the Government liable for
PIATCOs loans should the conditions as set forth in the ARCA arise. This is a
form of direct government guarantee.
The BOT Law and its implementing rules provide that in order for an
unsolicited proposal for a BOT project may be accepted, the following
conditions must first be met: (1) the project involves a new concept in
technology and/or is not part of the list of priority projects, (2) no direct
government guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by publication other
interested parties to a public bidding and conducted the same. The failure to
[56]

meet any of the above conditions will result in the denial of the proposal. It is
further provided that the presence of direct government guarantee, subsidy or
equity will necessarily disqualify a proposal from being treated and accepted as
an unsolicited proposal. The BOT Law clearly and strictly prohibits direct
[57]

government guarantee, subsidy and equity in unsolicited proposals that the

mere inclusion of a provision to that effect is fatal and is sufficient to deny the
proposal. It stands to reason therefore that if a proposal can be denied by
reason of the existence of direct government guarantee, then its inclusion in the
contract executed after the said proposal has been accepted is likewise
sufficient to invalidate the contract itself.A prohibited provision, the inclusion of
which would result in the denial of a proposal cannot, and should not, be allowed
to later on be inserted in the contract resulting from the said proposal. The basic
rules of justice and fair play alone militate against such an occurrence and must
not, therefore, be countenanced particularly in this instance where the
government is exposed to the risk of shouldering hundreds of million of dollars
in debt.
This Court has long and consistently adhered to the legal maxim that those
that cannot be done directly cannot be done indirectly. To declare the
[58]

PIATCO contracts valid despite the clear statutory prohibition against a

direct government guarantee would not only make a mockery of what the
BOT Law seeks to prevent -- which is to expose the government to the
risk of incurring a monetary obligation resulting from a contract of loan
between the project proponent and its lenders and to which the
Government is not a party to -- but would also render the BOT Law useless
for what it seeks to achieve - to make use of the resources of the private
sector in the financing, operation and maintenance of infrastructure and
development projects which are necessary for national growth and
[59]

development but which the government, unfortunately, could ill-afford to

finance at this point in time.
IV

Temporary takeover of business affected with public interest

Article XII, Section 17 of the 1987 Constitution provides:

Section 17. In times of national emergency, when the public interest so requires, the
State may, during the emergency and under reasonable terms prescribed by it,
temporarily take over or direct the operation of any privately owned public utility or
business affected with public interest.

The above provision pertains to the right of the State in times of national
emergency, and in the exercise of its police power, to temporarily take over the
operation of any business affected with public interest. In the 1986
Constitutional Commission, the term national emergency was defined to include
threat from external aggression, calamities or national disasters, but not strikes
unless it is of such proportion that would paralyze government service. The [60]

duration of the emergency itself is the determining factor as to how long the
temporary takeover by the government would last. The temporary takeover by
[61]

the government extends only to the operation of the business and not to the
ownership thereof. As such the government is not required to compensate
the private entity-owner of the said business as there is no transfer of
ownership, whether permanent or temporary. The private entity-owner
affected by the temporary takeover cannot, likewise, claim just compensation
for the use of the said business and its properties as the temporary takeover by
the government is in exercise of its police power and not of its power of
eminent domain.
Article V, Section 5.10 (c) of the 1997 Concession Agreement provides:
Section 5.10 Temporary Take-over of operations by GRP.
.
(c) In the event the development Facility or any part thereof and/or the operations of
Concessionaire or any part thereof, become the subject matter of or be included in any
notice, notification, or declaration concerning or relating to acquisition, seizure or
appropriation by GRP in times of war or national emergency, GRP shall, by written
notice to Concessionaire, immediately take over the operations of the Terminal and/or
the Terminal Complex. During such take over by GRP, the Concession Period shall be
suspended; provided, that upon termination of war, hostilities or national emergency,
the operations shall be returned to Concessionaire, at which time, the Concession
period shall commence to run again. Concessionaire shall be entitled to reasonable
compensation for the duration of the temporary take over by GRP, which
compensation shall take into account the reasonable cost for the use of the
Terminal and/or Terminal Complex, (which is in the amount at least equal to the
debt service requirements of Concessionaire, if the temporary take over should
occur at the time when Concessionaire is still servicing debts owed to project lenders),
any loss or damage to the Development Facility, and other consequential damages. If
the parties cannot agree on the reasonable compensation of Concessionaire, or on the
liability of GRP as aforesaid, the matter shall be resolved in accordance with Section
10.01 [Arbitration]. Any amount determined to be payable by GRP to Concessionaire
shall be offset from the amount next payable by Concessionaire to GRP. [62]

PIATCO cannot, by mere contractual stipulation, contravene the

Constitutional provision on temporary government takeover and obligate
the government to pay reasonable cost for the use of the Terminal and/or
Terminal Complex. Article XII, section 17 of the 1987 Constitution envisions
[63]

a situation wherein the exigencies of the times necessitate the government to

temporarily take over or direct the operation of any privately owned public utility
or business affected with public interest. It is the welfare and interest of the
public which is the paramount consideration in determining whether or not to
temporarily take over a particular business. Clearly, the State in effecting the
temporary takeover is exercising its police power. Police power is the most
essential, insistent, and illimitable of powers. Its exercise therefore must not
[64]

be unreasonably hampered nor its exercise be a source of obligation by the

government in the absence of damage due to arbitrariness of its
exercise. Thus, requiring the government to pay reasonable compensation for
[65]

the reasonable use of the property pursuant to the operation of the business
contravenes the Constitution.
V

Regulation of Monopolies
A monopoly is a privilege or peculiar advantage vested in one or more
persons or companies, consisting in the exclusive right (or power) to carry on a
particular business or trade, manufacture a particular article, or control the sale
of a particular commodity. The 1987 Constitution strictly regulates
[66]

monopolies, whether private or public, and even provides for their prohibition
if public interest so requires. Article XII, Section 19 of the 1987 Constitution
states:

Sec. 19. The state shall regulate or prohibit monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be allowed.

Clearly, monopolies are not per se prohibited by the Constitution but may
be permitted to exist to aid the government in carrying on an enterprise or to
aid in the performance of various services and functions in the interest of the
public. Nonetheless, a determination must first be made as to whether public
[67]

interest requires a monopoly. As monopolies are subject to abuses that can

inflict severe prejudice to the public, they are subject to a higher level of State
regulation than an ordinary business undertaking.
In the cases at bar, PIATCO, under the 1997 Concession Agreement and
the ARCA, is granted the exclusive right to operate a commercial international
passenger terminal within the Island of Luzon at the NAIA IPT III. This is with
[68]

the exception of already existing international airports in Luzon such as those

located in the Subic Bay Freeport Special Economic Zone (SBFSEZ), Clark
Special Economic Zone (CSEZ) and in Laoag City. As such, upon [69]

commencement of PIATCOs operation of NAIA IPT III, Terminals 1 and 2 of

NAIA would cease to function as international passenger terminals. This,
however, does not prevent MIAA to use Terminals 1 and 2 as domestic
passenger terminals or in any other manner as it may deem appropriate except
those activities that would compete with NAIA IPT III in the latters operation as
an international passenger terminal. The right granted to PIATCO
[70]

to exclusively operate NAIA IPT III would be for a period of twenty-five (25)
years from the In-Service Date and renewable for another twenty-five (25)
[71]

years at the option of the government. Both the 1997 Concession

[72]

Agreement and the ARCA further provide that, in view of the exclusive
right granted to PIATCO, the concession contracts of the service
providers currently servicing Terminals 1 and 2 would no longer be
renewed and those concession contracts whose expiration are
subsequent to the In-Service Date would cease to be effective on the said
date.[73]

The operation of an international passenger airport terminal is no doubt an

undertaking imbued with public interest. In entering into a BuildOperate-and-
Transfer contract for the construction, operation and maintenance of NAIA IPT
III, the government has determined that public interest would be served better
if private sector resources were used in its construction and an exclusive right
to operate be granted to the private entity undertaking the said project, in this
case PIATCO. Nonetheless, the privilege given to PIATCO is subject to
reasonable regulation and supervision by the Government through the MIAA,
which is the government agency authorized to operate the NAIA complex, as
well as DOTC, the department to which MIAA is attached. [74]

This is in accord with the Constitutional mandate that a monopoly which is

not prohibited must be regulated. While it is the declared policy of the BOT
[75]

Law to encourage private sector participation by providing a climate of minimum

government regulations, the same does not mean that Government must
[76]

completely surrender its sovereign power to protect public interest in the

operation of a public utility as a monopoly. The operation of said public utility
can not be done in an arbitrary manner to the detriment of the public which it
seeks to serve. The right granted to the public utility may be exclusive but the
exercise of the right cannot run riot. Thus, while PIATCO may be authorized to
exclusively operate NAIA IPT III as an international passenger terminal, the
Government, through the MIAA, has the right and the duty to ensure that it is
done in accord with public interest. PIATCOs right to operate NAIA IPT III
cannot also violate the rights of third parties.
Section 3.01(e) of the 1997 Concession Agreement and the ARCA provide:

3.01 Concession Period

(e) GRP confirms that certain concession agreements relative to certain services
and operations currently being undertaken at the Ninoy Aquino International Airport
passenger Terminal I have a validity period extending beyond the In-Service
Date. GRP through DOTC/MIAA, confirms that these services and operations shall
not be carried over to the Terminal and the Concessionaire is under no legal
obligation to permit such carry-over except through a separate agreement duly
entered into with Concessionaire. In the event Concessionaire becomes involved in
any litigation initiated by any such concessionaire or operator, GRP undertakes and
hereby holds Concessionaire free and harmless on full indemnity basis from and
against any loss and/or any liability resulting from any such litigation, including the
cost of litigation and the reasonable fees paid or payable to Concessionaires counsel
of choice, all such amounts shall be fully deductible by way of an offset from any
amount which the Concessionaire is bound to pay GRP under this Agreement.

During the oral arguments on December 10, 2002, the counsel for the
petitioners-in-intervention for G.R. No. 155001 stated that there are two service
providers whose contracts are still existing and whose validity extends beyond
the In-Service Date. One contract remains valid until 2008 and the other until
2010.[77]

We hold that while the service providers presently operating at NAIA

Terminal 1 do not have an absolute right for the renewal or the extension of
their respective contracts, those contracts whose duration extends beyond
NAIA IPT IIIs In-Service-Date should not be unduly prejudiced. These contracts
must be respected not just by the parties thereto but also by third
parties. PIATCO cannot, by law and certainly not by contract, render a valid and
binding contract nugatory. PIATCO, by the mere expedient of claiming an
exclusive right to operate, cannot require the Government to break its
contractual obligations to the service providers. In contrast to the arrastre and
stevedoring service providers in the case of Anglo-Fil Trading Corporation v.
Lazaro whose contracts consist of temporary hold-over permits, the affected
[78]

service providers in the cases at bar, have a valid and binding contract with the
Government, through MIAA, whose period of effectivity, as well as the other
terms and conditions thereof, cannot be violated.
In fine, the efficient functioning of NAIA IPT III is imbued with public
interest. The provisions of the 1997 Concession Agreement and the ARCA did
not strip government, thru the MIAA, of its right to supervise the operation of the
whole NAIA complex, including NAIA IPT III. As the primary government agency
tasked with the job, it is MIAAs responsibility to ensure that whoever by
[79]

contract is given the right to operate NAIA IPT III will do so within the bounds of
the law and with due regard to the rights of third parties and above all, the
interest of the public.
VI

CONCLUSION
In sum, this Court rules that in view of the absence of the requisite financial
capacity of the Paircargo Consortium, predecessor of respondent PIATCO, the
award by the PBAC of the contract for the construction, operation and
maintenance of the NAIA IPT III is null and void. Further, considering that the
1997 Concession Agreement contains material and substantial amendments,
which amendments had the effect of converting the 1997 Concession
Agreement into an entirely different agreement from the contract bidded upon,
the 1997 Concession Agreement is similarly null and void for being contrary to
public policy. The provisions under Sections 4.04(b) and (c) in relation to
Section 1.06 of the 1997 Concession Agreement and Section 4.04(c) in relation
to Section 1.06 of the ARCA, which constitute a direct government guarantee
expressly prohibited by, among others, the BOT Law and its Implementing
Rules and Regulations are also null and void. The Supplements, being
accessory contracts to the ARCA, are likewise null and void.
WHEREFORE, the 1997 Concession Agreement, the Amended and
Restated Concession Agreement and the Supplements thereto are set aside
for being null and void.
SO ORDERED.
SECOND DIVISION

[G.R. No. 114323. July 23, 1998]

OIL AND NATURAL GAS COMMISSION, petitioner, vs. COURT OF

APPEALS and PACIFIC CEMENT COMPANY, INC. respondents.

DECISION
MARTINEZ, J.:

This proceeding involves the enforcement of a foreign judgment rendered by the Civil
Judge of Dehra Dun, India in favor of the petitioner, OIL AND NATURAL GAS
COMMISSION and against the private respondent, PACIFIC CEMENT COMPANY,
INCORPORATED.
The petitioner is a foreign corporation owned and controlled by the Government of
India while the private respondent is a private corporation duly organized and existing
under the laws of the Philippines. The present conflict between the petitioner and the
private respondent has its roots in a contract entered into by and between both parties on
February 26, 1983 whereby the private respondent undertook to supply the petitioner
FOUR THOUSAND THREE HUNDRED (4,300) metric tons of oil well cement. In
consideration therefor, the petitioner bound itself to pay the private respondent the
amount of FOUR HUNDRED SEVENTY-SEVEN THOUSAND THREE HUNDRED U.S.
DOLLARS ($477,300.00) by opening an irrevocable, divisible, and confirmed letter of
credit in favor of the latter. The oil well cement was loaded on board the ship MV
SURUTANA NAVA at the port of Surigao City, Philippines for delivery at Bombay and
Calcutta, India. However, due to a dispute between the shipowner and the private
respondent, the cargo was held up in Bangkok and did not reach its point of destination.
Notwithstanding the fact that the private respondent had already received payment and
despite several demands made by the petitioner, the private respondent failed to deliver
the oil well cement. Thereafter, negotiations ensued between the parties and they agreed
that the private respondent will replace the entire 4,300 metric tons of oil well cement with
Class G cement cost free at the petitioners designated port. However, upon inspection,
the Class G cement did not conform to the petitioners specifications. The petitioner then
informed the private respondent that it was referring its claim to an arbitrator pursuant to
Clause 16 of their contract which stipulates:

Except where otherwise provided in the supply order/contract all questions

and disputes, relating to the meaning of the specification designs, drawings
and instructions herein before mentioned and as to quality of workmanship of
the items ordered or as to any other question, claim, right or thing whatsoever,
in any way arising out of or relating to the supply order/contract design,
drawing, specification, instruction or these conditions or otherwise concerning
the materials or the execution or failure to execute the same during
stipulated/extended period or after the completion/abandonment thereof shall
be referred to the sole arbitration of the persons appointed by Member of the
Commission at the time of dispute. It will be no objection to any such
appointment that the arbitrator so appointed is a Commission employer (sic)
that he had to deal with the matter to which the supply or contract relates and
that in the course of his duties as Commissions employee he had expressed
views on all or any of the matter in dispute or difference.

The arbitrator to whom the matter is originally referred being transferred or

vacating his office or being unable to act for any reason the Member of the
Commission shall appoint another person to act as arbitrator in acordance
with the terms of the contract/supply order. Such person shall be entitled to
proceed with reference from the stage at which it was left by his predecessor.
Subject as aforesaid the provisions of the Arbitration Act, 1940, or any
Statutary modification or re-enactment there of and the rules made there
under and for the time being in force shall apply to the arbitration proceedings
under this clause.

The arbitrator may with the consent of parties enlarge the time, from time to
time, to make and publish the award.

The venue for arbitration shall be at Dehra dun. [1]

On July 23, 1988, the chosen arbitrator, one Shri N.N. Malhotra, resolved the dispute
in petitioners favor setting forth the arbitral award as follows:

NOW THEREFORE after considering all facts of the case, the evidence, oral
and documentarys adduced by the claimant and carefully examining the
various written statements, submissions, letters, telexes, etc. sent by the
respondent, and the oral arguments addressed by the counsel for the
claimants, I, N.N. Malhotra, Sole Arbitrator, appointed under clause 16 of the
supply order dated 26.2.1983, according to which the parties, i.e. M/S Oil and
Natural Gas Commission and the Pacific Cement Co., Inc. can refer the
dispute to the sole arbitration under the provision of the Arbitration Act. 1940,
do hereby award and direct as follows:-

The Respondent will pay the following to the claimant :-

1. Amount received by the Respondent

against the letter of credit No. 11/19
dated 28.2.1983 - - - US $ 477,300.00

2. Re-imbursement of expenditure incurred

by the claimant on the inspection teams
visit to Philippines in August 1985 - - - US$ 3,881.00

3. L. C. Establishment charges incurred

by the claimant - - - US $ 1,252.82

4. Loss of interest suffered by claimant

from 21.6.83 to 23.7.88 - - - US $ 417,169.95

Total amount of award - - - US $ 899,603.77

In addition to the above, the respondent would also be liable to pay to the
claimant the interest at the rate of 6% on the above amount, with effect from
24.7.1988 upto the actual date of payment by the Respondent in full
settlement of the claim as awarded or the date of the decree, whichever is
earlier.

I determine the cost at Rs. 70,000/- equivalent to US $5,000 towards the

expenses on Arbitration, legal expenses, stamps duly incurred by the
claimant. The cost will be shared by the parties in equal proportion.

Pronounced at Dehra Dun to-day, the 23rd of July 1988. [2]

To enable the petitioner to execute the above award in its favor, it filed a Petition before
the Court of the Civil Judge in Dehra Dun, India (hereinafter referred to as the foreign
court for brevity), praying that the decision of the arbitrator be made the Rule of Court in
India. The foreign court issued notices to the private respondent for filing objections to the
petition. The private respondent complied and sent its objections dated January 16, 1989.
Subsequently, the said court directed the private respondent to pay the filing fees in order
that the latters objections could be given consideration. Instead of paying the required
filing fees, the private respondent sent the following communication addressed to the Civil
Judge of Dehra Dun:
 The Civil Judge
Dehra Dun (U.P.) India
Re: Misc. Case No. 5 of 1989
M/S Pacific Cement Co.,
Inc. vs. ONGC Case

Sir:

1. We received your letter dated 28 April 1989 only last 18 May 1989.

2. Please inform us how much is the court fee to be paid. Your letter did
not mention the amount to be paid.

3. Kindly give us 15 days from receipt of your letter advising us how

much to pay to comply with the same.

Thank you for your kind consideration.

Pacific Cement Co., Inc.
By:
Jose Cortes, Jr.

President" [3]

Without responding to the above communication, the foreign court refused to admit
the private respondents objections for failure to pay the required filing fees, and thereafter
issued an Order on February 7, 1990, to wit:
ORDER

Since objections filed by defendant have been rejected through Misc. Suit No.
5 on 7.2.90, therefore, award should be made Rule of the Court.

ORDER

Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the
basis of conditions of award decree is passed. Award Paper No. 3/B-1 shall
be a part of the decree. The plaintiff shall also be entitled to get from
defendant (US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand six
hundred and three point seventy seven only) alongwith 9% interest per annum
till the last date of realisation. [4]

Despite notice sent to the private respondent of the foregoing order and several
demands by the petitioner for compliance therewith, the private respondent refused to
pay the amount adjudged by the foreign court as owing to the petitioner. Accordingly, the
petitioner filed a complaint with Branch 30 of the Regional Trial Court (RTC) of Surigao
City for the enforcement of the aforementioned judgment of the foreign court. The private
respondent moved to dismiss the complaint on the following grounds: (1) plaintiffs lack of
legal capacity to sue; (2) lack of cause of action; and (3) plaintiffs claim or demand has
been waived, abandoned, or otherwise extinguished. The petitioner filed its opposition to
the said motion to dismiss, and the private respondent, its rejoinder thereto. On January
3, 1992, the RTC issued an order upholding the petitioners legal capacity to sue, albeit
dismissing the complaint for lack of a valid cause of action. The RTC held that the rule
prohibiting foreign corporations transacting business in the Philippines without a license
from maintaining a suit in Philippine courts admits of an exception, that is, when the
foreign corporation is suing on an isolated transaction as in this case.[5] Anent the issue of
the sufficiency of the petitioners cause of action, however, the RTC found the referral of
the dispute between the parties to the arbitrator under Clause 16 of their contract
erroneous. According to the RTC,

[a] perusal of the above-quoted clause (Clause 16) readily shows that the
matter covered by its terms is limited to ALL QUESTIONS AND DISPUTES,
RELATING TO THE MEANING OF THE SPECIFICATION, DESIGNS,
DRAWINGS AND INSTRUCTIONS HEREIN BEFORE MENTIONED and as
to the QUALITY OF WORKMANSHIP OF THE ITEMS ORDERED or as to
any other questions, claim, right or thing whatsoever, but qualified to IN ANY
WAY ARISING OR RELATING TO THE SUPPLY ORDER/CONTRACT,
DESIGN, DRAWING, SPECIFICATION, etc., repeating the enumeration in the
opening sentence of the clause.

The court is inclined to go along with the observation of the defendant that the
breach, consisting of the non-delivery of the purchased materials, should have
been properly litigated before a court of law, pursuant to Clause No. 15 of the
Contract/Supply Order, herein quoted, to wit:

JURISDICTION

All questions, disputes and differences, arising under out of or in connection

with this supply order, shall be subject to the EXCLUSIVE JURISDICTION OF
THE COURT, within the local limits of whose jurisdiction and the place from
which this supply order is situated. [6]

The RTC characterized the erroneous submission of the dispute to the arbitrator as a
mistake of law or fact amounting to want of jurisdiction. Consequently, the proceedings
had before the arbitrator were null and void and the foreign court had therefore, adopted
no legal award which could be the source of an enforceable right. [7]
The petitioner then appealed to the respondent Court of Appeals which affirmed the
dismissal of the complaint. In its decision, the appellate court concurred with the RTCs
ruling that the arbitrator did not have jurisdiction over the dispute between the parties,
thus, the foreign court could not validly adopt the arbitrators award. In addition, the
appellate court observed that the full text of the judgment of the foreign court contains the
dispositive portion only and indicates no findings of fact and law as basis for the award.
Hence, the said judgment cannot be enforced by any Philippine court as it would violate
the constitutional provision that no decision shall be rendered by any court without
expressing therein clearly and distinctly the facts and the law on which it is based.[8] The
appellate court ruled further that the dismissal of the private respondents objections for
non-payment of the required legal fees, without the foreign court first replying to the
private respondents query as to the amount of legal fees to be paid, constituted want of
notice or violation of due process. Lastly, it pointed out that the arbitration proceeding was
defective because the arbitrator was appointed solely by the petitioner, and the fact that
the arbitrator was a former employee of the latter gives rise to a presumed bias on his
part in favor of the petitioner.[9]
A subsequent motion for reconsideration by the petitioner of the appellate courts
decision was denied, thus, this petition for review on certiorari citing the following as
grounds in support thereof:

RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

AFFIRMING THE LOWER COURTS ORDER OF DISMISSAL SINCE:

A. THE NON-DELIVERY OF THE CARGO WAS A MATTER PROPERLY

COGNIZABLE BY THE PROVISIONS OF CLAUSE 16 OF THE
CONTRACT;
B. THE JUDGMENT OF THE CIVIL COURT OF DEHRADUN, INDIA
WAS AN AFFIRMATION OF THE FACTUAL AND LEGAL FINDINGS OF
THE ARBITRATOR AND THEREFORE ENFORCEABLE IN THIS
JURISDICTION;
C. EVIDENCE MUST BE RECEIVED TO REPEL THE EFFECT OF A
PRESUMPTIVE RIGHT UNDER A FOREIGN JUDGMENT. [10]

The threshold issue is whether or not the arbitrator had jurisdiction over the dispute
between the petitioner and the private respondent under Clause 16 of the contract. To
reiterate, Clause 16 provides as follows:

Except where otherwise provided in the supply order/contract all questions

and disputes, relating to the meaning of the specification designs, drawings
and instructions herein before mentioned and as to quality of workmanship of
the items ordered or as to any other question, claim, right or thing whatsoever,
in any way arising out of or relating to the supply order/contract design,
drawing, specification, instruction or these conditions or otherwise concerning
the materials or the execution or failure to execute the same during
stipulated/extended period or after the completion/abandonment thereof shall
be referred to the sole arbitration of the persons appointed by Member of the
Commission at the time of dispute. It will be no objection to any such
appointment that the arbitrator so appointed is a Commission employer (sic)
that he had to deal with the matter to which the supply or contract relates and
that in the course of his duties as Commissions employee he had expressed
views on all or any of the matter in dispute or difference. [11]

The dispute between the parties had its origin in the non-delivery of the 4,300 metric
tons of oil well cement to the petitioner. The primary question that may be posed,
therefore, is whether or not the non-delivery of the said cargo is a proper subject for
arbitration under the above-quoted Clause 16. The petitioner contends that the same was
a matter within the purview of Clause 16, particularly the phrase, x x x or as to any other
questions, claim, right or thing whatsoever, in any way arising or relating to the supply
order/contract, design, drawing, specification, instruction x x x.[12] It is argued that the
foregoing phrase allows considerable latitude so as to include non-delivery of the cargo
which was a claim, right or thing relating to the supply order/contract. The contention is
bereft of merit. First of all, the petitioner has misquoted the said phrase, shrewdly inserting
a comma between the words supply order/contract and design where none actually
exists. An accurate reproduction of the phrase reads, x x x or as to any other question,
claim, right or thing whatsoever, in any way arising out of or relating to the supply
order/contract design, drawing, specification, instruction or these conditions x x x. The
absence of a comma between the words supply order/contract and design indicates that
the former cannot be taken separately but should be viewed in conjunction with the words
design, drawing, specification, instruction or these conditions. It is thus clear that to fall
within the purview of this phrase, the claim, right or thing whatsoever must arise out of or
relate to the design, drawing, specification, or instruction of the supply order/contract. The
petitioner also insists that the non-delivery of the cargo is not only covered by the
foregoing phrase but also by the phrase, x x x or otherwise concerning the materials or the
execution or failure to execute the same during the stipulated/extended period or after
completion/abandonment thereof x x x.
The doctrine of noscitur a sociis, although a rule in the construction of statutes, is
equally applicable in the ascertainment of the meaning and scope of vague contractual
stipulations, such as the aforementioned phrase. According to the maxim noscitur a
sociis, where a particular word or phrase is ambiguous in itself or is equally susceptible
of various meanings, its correct construction may be made clear and specific by
considering the company of the words in which it is found or with which it is associated,
or stated differently, its obscurity or doubt may be reviewed by reference to associated
words.[13] A close examination of Clause 16 reveals that it covers three matters which may
be submitted to arbitration namely,
(1) all questions and disputes, relating to the meaning of the specification designs,
drawings and instructions herein before mentioned and as to quality of workmanship
of the items ordered; or
(2) any other question, claim, right or thing whatsoever, in any way arising out of or
relating to the supply order/contract design, drawing, specification, instruction or
these conditions; or
 (3) otherwise concerning the materials or the execution or failure to execute the same
during stipulated/extended period or after the completion/abandonment thereof.
The first and second categories unmistakably refer to questions and disputes relating
to the design, drawing, instructions, specifications or quality of the materials of the
supply/order contract. In the third category, the clause, execution or failure to execute the
same, may be read as execution or failure to execute the supply order/contract. But in
accordance with the doctrine of noscitur a sociis, this reference to the supply
order/contract must be construed in the light of the preceding words with which it is
associated, meaning to say, as being limited only to the design, drawing, instructions,
specifications or quality of the materials of the supply order/contract. The non-delivery of
the oil well cement is definitely not in the nature of a dispute arising from the failure to
execute the supply order/contract design, drawing, instructions, specifications or quality
of the materials. That Clause 16 should pertain only to matters involving the technical
aspects of the contract is but a logical inference considering that the underlying purpose
of a referral to arbitration is for such technical matters to be deliberated upon by a person
possessed with the required skill and expertise which may be otherwise absent in the
regular courts.
This Court agrees with the appellate court in its ruling that the non-delivery of the oil
well cement is a matter properly cognizable by the regular courts as stipulated by the
parties in Clause 15 of their contract:

All questions, disputes and differences, arising under out of or in connection

with this supply order, shall be subject to the exclusive jurisdiction of the court,
within the local limits of whose jurisdiction and the place from which this
supply order is situated. [14]

The following fundamental principles in the interpretation of contracts and other

instruments served as our guide in arriving at the foregoing conclusion:

"ART. 1373. If some stipulation of any contract should admit of several

meanings, it shall be understood as bearing that import which is most
adequate to render it effectual." [15]

ART. 1374. The various stipulations of a contract shall be interpreted together,

attributing to the doubtful ones that sense which may result from all of them
taken jointly.[16]

Sec. 11. Instrument construed so as to give effect to all provisions. In the

construction of an instrument, where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect
to all.
[17]

Thus, this Court has held that as in statutes, the provisions of a contract should not
be read in isolation from the rest of the instrument but, on the contrary, interpreted in the
light of the other related provisions.[18] The whole and every part of a contract must be
considered in fixing the meaning of any of its parts and in order to produce a harmonious
whole. Equally applicable is the canon of construction that in interpreting a statute (or a
contract as in this case), care should be taken that every part thereof be given effect, on
the theory that it was enacted as an integrated measure and not as a hodge-podge of
conflicting provisions. The rule is that a construction that would render a provision
inoperative should be avoided; instead, apparently inconsistent provisions should be
reconciled whenever possible as parts of a coordinated and harmonious whole. [19]
The petitioners interpretation that Clause 16 is of such latitude as to contemplate
even the non-delivery of the oil well cement would in effect render Clause 15 a mere
superfluity. A perusal of Clause 16 shows that the parties did not intend arbitration to be
the sole means of settling disputes. This is manifest from Clause 16 itself which is prefixed
with the proviso, Except where otherwise provided in the supply order/contract x x x, thus
indicating that the jurisdiction of the arbitrator is not all encompassing, and admits of
exceptions as may be provided elsewhere in the supply order/contract. We believe that
the correct interpretation to give effect to both stipulations in the contract is for Clause 16
to be confined to all claims or disputes arising from or relating to the design, drawing,
instructions, specifications or quality of the materials of the supply order/contract, and for
Clause 15 to cover all other claims or disputes.
The petitioner then asseverates that granting, for the sake of argument, that the non-
delivery of the oil well cement is not a proper subject for arbitration, the failure of the
replacement cement to conform to the specifications of the contract is a matter clearly
falling within the ambit of Clause 16. In this contention, we find merit. When the 4,300
metric tons of oil well cement were not delivered to the petitioner, an agreement was
forged between the latter and the private respondent that Class G cement would be
delivered to the petitioner as replacement. Upon inspection, however, the replacement
cement was rejected as it did not conform to the specifications of the contract. Only after
this latter circumstance was the matter brought before the arbitrator. Undoubtedly, what
was referred to arbitration was no longer the mere non-delivery of the cargo at the first
instance but also the failure of the replacement cargo to conform to the specifications of
the contract, a matter clearly within the coverage of Clause 16.
The private respondent posits that it was under no legal obligation to make
replacement and that it undertook the latter only in the spirit of liberality and to foster good
business relationship.[20] Hence, the undertaking to deliver the replacement cement and
its subsequent failure to conform to specifications are not anymore subject of the supply
order/contract or any of the provisions thereof. We disagree.
As per Clause 7 of the supply order/contract, the private respondent undertook to
deliver the 4,300 metric tons of oil well cement at BOMBAY (INDIA) 2181 MT and
CALCUTTA 2119 MT.[21] The failure of the private respondent to deliver the cargo to the
designated places remains undisputed. Likewise, the fact that the petitioner had already
paid for the cost of the cement is not contested by the private respondent. The private
respondent claims, however, that it never benefited from the transaction as it was not able
to recover the cargo that was unloaded at the port of Bangkok.[22] First of all, whether or
not the private respondent was able to recover the cargo is immaterial to its subsisting
duty to make good its promise to deliver the cargo at the stipulated place of delivery.
Secondly, we find it difficult to believe this representation. In its Memorandum filed before
this Court, the private respondent asserted that the Civil Court of Bangkok had already
ruled that the non-delivery of the cargo was due solely to the fault of the carrier. [23] It is,
therefore, but logical to assume that the necessary consequence of this finding is the
eventual recovery by the private respondent of the cargo or the value thereof. What
inspires credulity is not that the replacement was done in the spirit of liberality but that it
was undertaken precisely because of the private respondents recognition of its duty to do
so under the supply order/contract, Clause 16 of which remains in force and effect until
the full execution thereof.
We now go to the issue of whether or not the judgment of the foreign court is
enforceable in this jurisdiction in view of the private respondents allegation that it is bereft
of any statement of facts and law upon which the award in favor of the petitioner was
based. The pertinent portion of the judgment of the foreign court reads:

ORDER

Award dated 23.7.88, Paper No. 3/B-1 is made Rule of the Court. On the
basis of conditions of award decree is passed. Award Paper No. 3/B-1 shall
be a part of the decree. The plaintiff shall also be entitled to get from
defendant ( US$ 899, 603.77 (US$ Eight Lakhs ninety nine thousand six
hundred and three point seventy seven only) alongwith 9% interest per annum
till the last date of realisation. [24]

As specified in the order of the Civil Judge of Dehra Dun, Award Paper No. 3/B-1
shall be a part of the decree. This is a categorical declaration that the foreign court
adopted the findings of facts and law of the arbitrator as contained in the latters Award
Paper. Award Paper No. 3/B-1, contains an exhaustive discussion of the respective
claims and defenses of the parties, and the arbitrators evaluation of the same. Inasmuch
as the foregoing is deemed to have been incorporated into the foreign courts judgment
the appellate court was in error when it described the latter to be a simplistic decision
containing literally, only the dispositive portion.[25]
The constitutional mandate that no decision shall be rendered by any court without
expressing therein clearly and distinctly the facts and the law on which it is based does
not preclude the validity of memorandum decisions which adopt by reference the findings
of fact and conclusions of law contained in the decisions of inferior tribunals. In Francisco
v. Permskul,[26] this Court held that the following memorandum decision of the Regional
Trial Court of Makati did not transgress the requirements of Section 14, Article VIII of the
Constitution:

MEMORANDUM DECISION

After a careful perusal, evaluation and study of the records of this case, this
Court hereby adopts by reference the findings of fact and conclusions of law
contained in the decision of the Metropolitan Trial Court of Makati, Metro
Manila, Branch 63 and finds that there is no cogent reason to disturb the
same.

WHEREFORE, judgment appealed from is hereby affirmed in

toto. (Underscoring supplied.)
[27]

This Court had occasion to make a similar pronouncement in the earlier case of Romero
v. Court of Appeals,[28] where the assailed decision of the Court of Appeals adopted the
findings and disposition of the Court of Agrarian Relations in this wise:

We have, therefore, carefully reviewed the evidence and made a re-

assessment of the same, and We are persuaded, nay compelled, to affirm the
correctness of the trial courts factual findings and the soundness of its
conclusion. For judicial convenience and expediency, therefore, We hereby
adopt by way of reference, the findings of facts and conclusions of the court a
quo spread in its decision, as integral part of this Our decision. (Underscoring
[29]

supplied)

Hence, even in this jurisdiction, incorporation by reference is allowed if only to avoid the
cumbersome reproduction of the decision of the lower courts, or portions thereof, in the
decision of the higher court.[30] This is particularly true when the decision sought to be
incorporated is a lengthy and thorough discussion of the facts and conclusions arrived at,
as in this case, where Award Paper No. 3/B-1 consists of eighteen (18) single spaced
pages.
Furthermore, the recognition to be accorded a foreign judgment is not necessarily
affected by the fact that the procedure in the courts of the country in which such judgment
was rendered differs from that of the courts of the country in which the judgment is relied
on.[31] This Court has held that matters of remedy and procedure are governed by the lex
fori or the internal law of the forum.[32] Thus, if under the procedural rules of the Civil Court
of Dehra Dun, India, a valid judgment may be rendered by adopting the arbitrators
findings, then the same must be accorded respect. In the same vein, if the procedure in
the foreign court mandates that an Order of the Court becomes final and executory upon
failure to pay the necessary docket fees, then the courts in this jurisdiction cannot
invalidate the order of the foreign court simply because our rules provide otherwise.
The private respondent claims that its right to due process had been blatantly
violated, first by reason of the fact that the foreign court never answered its queries as to
the amount of docket fees to be paid then refused to admit its objections for failure to pay
the same, and second, because of the presumed bias on the part of the arbitrator who
was a former employee of the petitioner.
Time and again this Court has held that the essence of due process is to be found in
the reasonable opportunity to be heard and submit any evidence one may have in support
of ones defense[33] or stated otherwise, what is repugnant to due process is the denial of
opportunity to be heard.[34] Thus, there is no violation of due process even if no hearing
was conducted, where the party was given a chance to explain his side of the controversy
and he waived his right to do so.[35]
In the instant case, the private respondent does not deny the fact that it was notified
by the foreign court to file its objections to the petition, and subsequently, to pay legal
fees in order for its objections to be given consideration. Instead of paying the legal fees,
however, the private respondent sent a communication to the foreign court inquiring about
the correct amount of fees to be paid. On the pretext that it was yet awaiting the foreign
courts reply, almost a year passed without the private respondent paying the legal fees.
Thus, on February 2, 1990, the foreign court rejected the objections of the private
respondent and proceeded to adjudicate upon the petitioners claims. We cannot
subscribe to the private respondents claim that the foreign court violated its right to due
process when it failed to reply to its queries nor when the latter rejected its objections for
a clearly meritorious ground. The private respondent was afforded sufficient opportunity
to be heard. It was not incumbent upon the foreign court to reply to the private
respondents written communication. On the contrary, a genuine concern for its cause
should have prompted the private respondent to ascertain with all due diligence the
correct amount of legal fees to be paid. The private respondent did not act with prudence
and diligence thus its plea that they were not accorded the right to procedural due process
cannot elicit either approval or sympathy from this Court.[36]
The private respondent bewails the presumed bias on the part of the arbitrator who
was a former employee of the petitioner. This point deserves scant consideration in view
of the following stipulation in the contract:
x x x. It will be no objection to any such appointment that the arbitrator so appointed
is a Commission employer (sic) that he had to deal with the matter to which the supply or
contract relates and that in the course of his duties as Commissions employee he had
expressed views on all or any of the matter in dispute or difference.[37] (Underscoring
supplied.)
Finally, we reiterate hereunder our pronouncement in the case of Northwest Orient
Airlines, Inc. v. Court of Appeals[38] that:

A foreign judgment is presumed to be valid and binding in the country from

which it comes, until the contrary is shown. It is also proper to presume the
regularity of the proceedings and the giving of due notice therein.

Under Section 50, Rule 39 of the Rules of Court, a judgment in an action in

personam of a tribunal of a foreign country having jurisdiction to pronounce
the same is presumptive evidence of a right as between the parties and their
successors-in-interest by a subsequent title. The judgment may, however, be
assailed by evidence of want of jurisdiction, want of notice to the party,
collusion, fraud, or clear mistake of law or fact. Also, under Section 3 of Rule
131, a court, whether of the Philippines or elsewhere, enjoys the presumption
that it was acting in the lawful exercise of jurisdiction and has regularly
performed its official duty. [39]

Consequently, the party attacking a foreign judgment, the private respondent herein, had
the burden of overcoming the presumption of its validity which it failed to do in the instant
case.
The foreign judgment being valid, there is nothing else left to be done than to order
its enforcement, despite the fact that the petitioner merely prays for the remand of the
case to the RTC for further proceedings. As this Court has ruled on the validity and
enforceability of the said foreign judgment in this jurisdiction, further proceedings in the
RTC for the reception of evidence to prove otherwise are no longer necessary.
WHEREFORE, the instant petition is GRANTED, and the assailed decision of the
Court of Appeals sustaining the trial courts dismissal of the OIL AND NATURAL GAS
COMMISSIONs complaint in Civil Case No. 4006 before Branch 30 of the RTC of Surigao
City is REVERSED, and another in its stead is hereby rendered ORDERING private
respondent PACIFIC CEMENT COMPANY, INC. to pay to petitioner the amounts
adjudged in the foreign judgment subject of said case.
SO ORDERED.